NewtekOne Inc (NEWT) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Newtek Business Services fourth quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded. I'd now like to turn the conference over to Barry Sloane, President and CEO. Sir, you may begin.

Good morning, everyone, and welcome to our full year 2016 financial results conference call. Presenting today, Barry Sloane, President, CEO of Newtek Business Services Corporation and Jenny Eddelson, Chief Accounting Officer.

For those of you who want to follow the PowerPoint presentation, please go to our website, Newtekone.com. Go to the Investor Relations section and presentations, and you'll be able to follow along with the PowerPoint presentation. Jenny, could you please read the note regarding forward-looking statements?

Sure. The matters discussed in this presentation, as well as in future oral and written statements by management of Newtek Business Services Corporation. 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, expect, plans, anticipates, could, intend, target, 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.

The forward-looking statements contained in this presentation include statements as to our future operating results, our business prospects and the prospects of our prospective portfolio companies, the impacts of investments that we expect to make, our informal relationships with third-parties, the dependence of our future success on the general economy and its impacts on the industries in which we invest, our ability to access debt markets and equity markets, the ability of our portfolio companies to achieve their objectives, our expected financings and investments, our regulatory structure and tax status, our ability to operate as a BDC and a RIC.

The adequacy of our cash resources and working capital, the timing of cash flows if any from the operations of our portfolio companies, the timing, form, and amount of any dividend distributions, the impact of fluctuations in interest rates on our business, the valuation of any investments in portfolio companies, particularly those having no liquid trading market, and our ability to recover unrealized losses. The following discussions should be read in conjunction with our consolidated financial statements, and related notes and other financial information appearing in our quarterly and annual reports filed with the US SEC.

Thank you, Jenny. And for those following along, we're on slide 2 of the presentation. We're going to move into, what we think are three reasons why Newtek Business Service Corp. stock symbol NEWT represents a attractive investment.

On slide number 2, you can look at the Company's historical stock performance, five year total return including reinvestment of dividends, 307%, three year return, 49.1%. Last year's return, these are all based on calendar years including reinvested dividends, 27.7%. And clearly, you could see by the chart, that we have outperformed the S&P 500, Russell 2000, and NASDAQ composite.

On slide number 3, we take a look at where Newtek as a business development corporation, (inaudible) that company which is internally managed, compares itself to other internally managed BDCs. We closed, as of March 3 at 1.16[%] to NAV. The average of our primary competitors of internally managed BDCs, [1.59].

We believe that the delta between us and the other participants is reflective of the size of our organization and the longevity of the dividend history. We do believe that potentially there clearly is room for growth in NAV expansion.

Slide number 4, we take a look at our dividend distribution, and the quality of our dividends. In 2016, approximately 47% of the total quarterly cash and annual dividends paid qualified for preferential tax treatment. That's because this is income that basically has been upstreamed from our portfolio companies where we are taxed.

Therefore, approximately 47% of the dividend that would have a max tax rate of approximately 20%, versus ordinary income which is 39% and a fraction up. So in actuality, if you look at the dividend, it's almost apples-to-apples almost 1% better, because half of our dividend is taxed at a low rate. So when you take a look at our organization from an investment opportunity, we hope to be able to provide investors with growth in dividends over time. We hope to be able to provide them with growth in NAV.

We're forecasting paying an annual cash dividend of $1.57 in 2017. That will be a 2.6% increase over the 2016 dividend of $1.53. Net asset value came in at $209 million or $14.30 a share at [Dec] 31, 2016, which was up also 2.6% over the NAV of $203 million of [Dec] 31, 2015.

We really had a very good year across many different metrics, whether it was investment income, total portfolio size. We finished the year debt-to-equity, 82%. It is difficult for many people to follow that debt-to-equity number, because a significant part of our asset base does fluctuate, as we create SBA 7(a) loans with government guaranteed pieces, typically liquidated within 10 days upon creation of them. So that the debt-to-equity ratio can fluctuate, but it's very manageable for us from an investment perspective.

Moving on to slide number 6. In 2016, we completed our seventh and largest securitization of uninsured loan participations out of Newtek Small Business Finance. The notes were once again rated by S&P, and that transaction was led by Deutsche Bank with assistance from Capital One Bank.

We made an acquisition in 2016 in banc-serv Partners. That transaction is working out well, banc-serv Partners is a portfolio company of Newtek Business Services Corporation. We also issued a little in excess of $40 million of corporate notes. These notes have a stock symbol NEWTL and they trade on the NASDAQ Global. All of our notes, including NEWTZ trade at a premium.

On slide number 7, it gives you a good snapshot of our small business lending platform, the SBA 7(a) lender. We funded $309 million of loans. That was a 27.5% increase. We also had some success in funding 504 loans which we think is an important growth position for the Company. The 504 loan activity flows through Newtek Business Credit, NBC. That is a portfolio Company, and we look for larger loan originations and benefits from our 504 business in 2017.

In January of 2017 for the month, the Company received $932 million in loan referrals, a 79% increase over the January 2016 number. So our pipeline of opportunities continues to grow, enables us to be selective and pick really good credits, and grow our business without having to sacrifice any credit quality. We anticipate funding $400 million in SBA 7(a) loans and 504 loans in 2017. That would represent approximately a 26% increase over 2016.

On slide number 8, many of you that have followed our Company are familiar with this slide. It's why we believe, if you're comparing Newtek Business Service Corp. to other BDCs, why we're better.

As an internally managed BDC, we do not pay what, I consider a 4% external management fee, the 2% base fee plus 2% of the profits above hurdle rate, or above zero in many cases. Therefore, in order for us to get our dividend, we don't start off down negative 4%.

Our competitors, in order to get that market clearing dividend, we believe have to invest in riskier levered asset classes, and to put more leverage on the books. When you look at our loan portfolio, the average loan size $179,000. These are floating rate notes without a cap, tied to prime, and quarterly adjust.

From an alignment of interest standpoint, President and CEO own 7% of the outstanding shares, management's interest very much aligned with shareholders. We don't make investments in CDOs. There's currently no SBIC leverage, which is hidden leverage from a BDC perspective. Yes, it's real debt, but doesn't count for the leverage test. We don't currently have that leverage. There's no derivative securities in our BDCs, and there's no direct lending exposure to oil and gas.

On slide number 9, in 2016 we closed an underwritten offering of 2.5 million shares of common stock, $15.25 was the raise -- I apologize that wasn't 2016, that was 2017. Time flies. Jenny is looking at me, and that deal was priced at $15.25. I'd say, it was traded very well. Our underwriters did a really nice job on it. We never closed below the price break, and we obviously have traded up very nicely, since those shares have cleared.

KBW, Raymond James, and for the first time, UBS' investment bank joined in acting as book [rate] managers. We look forward to hopefully UBS being more involved with us in the future as well, as all of the other underwriters that have done a really good job in working with us.

That deal was well oversubscribed. We gained new institutional shareholders. I think it's important to note, you can look at our organization, prospectively using ATM strategies and structures going forward to raise future equity offerings, where we hope to be able to raise money on a more consistent basis without the steep discounts.

That might be necessary, if you have a big transaction that we need to fund, but on a going forward basis, I think you can look forward to us using the ATM structure which typically has approximately a 2% fee, and being able to liquidate shares at the market.

On slide number 10, we talk about our credit facilities. We have signed a letter of intent to increase our existing facility through Capital One Bank, $75 million. We have a syndicate loan partner in that, which we will announce once the SBA approves it, and the deal hopefully will close.

Our Goldman Sachs facility of $[38] million is still underdrawn. We only have $22 million against it. There's still $14.1 million that is available, and we're currently in discussions with Goldman to increase the size of that facility, as well as to reduce our interest rates. I think it's important to note that you could see our cost of capital, whether equity or debt continues to improve.

Moving to slide number 11, when you look at our organization, we're clearly not a typical BDC. And for those of you that are familiar with our model, what you're basically investing in as a Company that has done a very good job historically in growing its loan origination business. We've had tremendous loan growth in the BDC. That's worked well.

We've had [organic] growth in our portfolio companies, and we've done strategic acquisitions within the business services footprint. So our ability to generate real attractive returns on equity and our lending business, we hope and anticipate that will continue in the future, as well as continue to make strategic acquisitions within the business services footprint.

Since converting to a BDC, we acquired Premier Payments. That was a payment processor that allowed us to move significant resources to our Lake Success New York facility. That was completed, and done almost a year and a half ago, time flies. And that was done at about 6 times EBITDA. We made an investment in banc-serve Partners. That was done on a little bit at over 4 times EBITDA, that's worked out well.

We anticipate reporting some really good results from banc-serv Partners this year, and we also did a small acquisition of some technology assets and accounts from an entity ITAS and Deer Valley Data. I believe we will have, come close to getting 100% return of our investment within the calendar year or there above. So hopefully, we can continue to do these types of attractive acquisitions.

With that said, let's go to slide number 12, and look at our pipeline. There's not one of these single transactions that makes or breaks us. I think that's important to note, as all my targeted candidates probably listening to my conference call today, but we hope and anticipate that we will close some of these.

We actually have a technology professional services organization with $2.7 million of EBITDA, that we think will significantly help our presence in the tech space. We have an ISO that has about $2 billion in annualized payment processing volume that we're fairly close to.

We've recently had meetings with a factoring company that would bolster our own business and Newtek Business Credit. We've opened up discussions with a professional employment organization with $3 million of EBITDA. We think that would certainly help our payroll benefits and HR Solutions opportunities, offering these types of services to many of our alliance partners.

We are in preliminary discussions with an SBIC fund and management company that would give us the ability to do a drop down SBIC. And six and seven, I won't go into, but you could see we're constantly looking at transactions, picking up the best ones that make the most sense for our shareholders, and that really bring us attractive cash flows, and a good synergy to get towards public comps in some of the business services spaces.

On slide number 13, for those that of you that aren't that familiar with the Company, we acquire business opportunities cost effectively, through the use of our proprietary financial technology platform called NewTracker. We've received a patent on NewTracker, not only just for the software, but the operational methodology.

We've got in excess of 570,000 business referrals from NewTracker in our history, and this is kind of the secret sauce of why we believe we're very good in all these different business lines. We acquire clients more cost effectively than our competitors that are typically using feet on the street reps.

We believe NewTracker is a disruptive technology, that's similar to the salesforce.com for a business referral process, and gives us complete transparency with referring partners. Entities such as AIG, Amalgamated Bank, Credit Union National Association, The Hartford, Morgan Stanley, UBS, New York Community Bank, et cetera. We've recently added Raymond James and their 7,000 broker dealer network, Meineke Mufflers Trade Association, and True Value Hardware stores to give us additional alliance partner relationships.

On slide number 14, we're always expense conscience, as a Company that's been bootstrapped since the day we opened up our doors in 1998. We took new headquarters in Lake Success, New York, and we vacated our space previously at West Hempstead, which was a drag on earnings.

And as Jenny will report, we actually took a GAAP charge to that, however, we have recently subletted the Hempstead space. We're happy to say, we should receive approximately $750,000 of rental income over the next two, three years.

We have announced plans to close our Brownsville, Texas office, which at one point had 60 or 70 people. That office will be closed, and many of the staff will be relocated to other locations. That should happen in June. That should reduce expense there as well. In our West Allis unit, we have approximately 12,000 to 13,000 square feet. That's going to be reduced down to 3,000. That should also save us somewhere in the area of a $100,000 a year. So we're always very focused on cost reduction.

On slide number 15, we're also focused on upgrading and recruiting and hiring some great talent. Here's a list of some of the people that recently joined our organization in 2016, and we will continue to look at enhancing, recruiting, and upgrading the best available talent for our strategy and business plan.

On slide number 16, these are some nice highlights for those of you that are not quite familiar with our pedigree in SBA 7(a) lending. We're the largest non-bank SBA lender in the marketplace today. We're the seventh largest SBA lender including banks, with a14 year history -- excuse me -- of the full frequency and severity statistics in making loans to small businesses in all 50 states.

We've issued seven S&P rated securitizations. We have an outstanding track record in that particular area. Our average loan size, $179,000. So when you compare our average loan size to some of the average loan size of other BDCs that are $5 million, $10 million, $15 million, $20 million, you [can't] compare with respect to the diversification issues.

Moving to slide number 17, you could see our growth in this particular market. Referrals that we received have increased by approximately 67% in the last calendar year. So we went from $5.1 billion to $8.5 billion, very, very pleased about that growth. We talked about the increase in January of $932 million of referrals in that month alone.

Units are also increasing. It's really important. The units increased by 56% in the year, and closed units 38%. So I think it's important to note, just from a processing perspective, we're getting more efficient.

I give tremendous kudos to Peter Downs, our Chief Lending Officer, his technology team of Nilesh Joshi and Dan Hendel, as well as his management team, really focusing on efficiencies which will continue to make us better, particularly as we look to add new lending programs in addition to our flagship SBA 7(a) loan program, our line of credit for inventory non-SBA, our line of credit for accounts receivables non-SBA, and the 504 loan program.

When you look at slide number 18, further demonstrating our increasing pipeline, both in bar charts and charts, slide number 19. For those of you that are familiar with our model, know that when we create a 7(a) loan, we sell the government guaranteed piece to the secondary market. Here's the history of net premium trends on the transactions with a five year average. You could see it has been fairly stable.

I will add, that even with the recent conversation about increases of rates, with respect to the Federal Reserve Chairman, with the 10 year backing up to 2.5%, prices in this quarter have been strong. They're actually improved over the fourth quarter. And for those of you that really try to track what's going on in this market for us, increases of rates do not necessarily reflect a declining premium on a government guaranteed floating rate instrument. I think it's important to note that the primary driver will be changes in prepayments.

Another important (inaudible) statistic is supply and demand. In institutions that create the government guaranteed bonds tend to sell them at the end of quarters, and tend to sell them particularly in the fourth quarter at the end of the year, when they need gain on sale. So first quarter prices from a supply and demand standpoint, holding everything else constant, there is typically less supply in Q1 than demand. And right, now there's a very significant appetite for government guaranteed floaters.

On slide number 20, this is an important slide for us. We always look at the credit quality of our portfolio, fairly steady, fairly stable, sitting at about 4% of the total portfolio size. And charge-offs for the calendar year December 31, 2016 as a percentage of the outstanding loan balance 4.8%. I got to tell you, we're very proud of that. I think, we've done a very good job.

Slide number 22 and 23 are our basic slides, showing the cash flows and accounting treatment for a 7(a) loan. I won't repeat that. Slide number 24, a discussion of the 504 loan program, which currently is a growing business for us, an important business for us, particularly at Newtek Business Credit.

We believe that we will start to provide some more information on the progress of Newtek Business Credit in 2017, beginning in Q1. This is a program where we are allowed to make the loan to a business owner, that can collateralize the loan by commercial real estate, which could be for a acquisition or refinance. It's a 90% LTV. The government provides a 40% second debenture and gets taken out. We're left with a 50% first, which you could see on slide number 25, which we typically sell into the secondary market.

And on slide number 26, you could see the cash that's created on 504 loans, and you could also see the accounting treatment. The important aspect and difference of the 504 business is when a loan is made, the entire loan balance comes off our books. We do keep a servicing asset, and we get gain on sale treatment. There's nothing that sits on our books with respect to 504 loans.

The junior debt is taken out by the CDC through government debentures, and the conventional first is sold into a secondary market, that is not like the government guaranteed 7(a) market, but is primarily driven by banks that are looking for attractive three and five year type paper with call protection on them.

Moving to slide number 27, we get into the portfolio companies. Our electronic payment processing business today is primarily driven by Newtek Merchant Solutions and Premier Payments. We're close to $6 billion of processing. With the new acquisition hopefully, we'll get close to $8 billion of processing.

As you start to get to those bigger numbers, you start to move towards entities like [Vantiv Global], First Data and CardConnect is probably a better comparison, that we should add to this in future presentations. Our volume will be closer to theirs, but you could see the public comps traded fairly high multiples, in terms of A, being public versus private, and you've got the size, the size factor there as well.

In the meantime, we get to grow our business, add to acquisitions. The Premier deal was done at 6 times. We like multiples in that area, in that range, 6 times EBITDA. You put a little bit of debt on it, you're now looking at a 20% pre-tax cash on cash return. Those are things that are valuable to us. It enables us to upstream money, pay an attractive dividend, grow the size of the business, and move towards public multiples.

You could see that the value of our business this year, we grew revenue high single-digits. We grew adjusted EBITDA 17.6%. If you took Premier payments, which we only owned for about 1/2 year, and you reduced that factor, we'd still be in low double-digits. Frankly, those are increases that I'm proud of, and I think work for our shareholders.

When you look at slide number 28, there's a lot of opportunities in the payment processing space. It's a technological solution.

Today, it's not really a pricing comparison, whether you're trying to differentiate yourself through EMV compliance, offering programs like AMEX OptBlue, mobile payments, better solutions for e-commerce, this is a great space for us to be in. We need to be nimble. We need to bring the best technological solution to our customers every day.

In our technology sector, this is a business that is in transformation. We are aggressively adopting hyper convergent solutions to our customers, that give us the ability to take multiple business applications, run them in our cloud, give them disaster recovery, reduce their licensing fees, reduce the cost of boxes, reduce the power consumption, reduce the bandwidth consumption, reduce the space in the data center, reduce the amount of labor that they have.

Hyper convergent technologies and the changes that are going to occur in the IT world are huge, and they're huge amongst Fortune 1000, and they're huge amongst SMBs. We want to be very well-positioned. So as we move forward, and you've got products like desktop as a service, security as a service, infrastructure as a service, we think this is a major opportunity. We look at this opportunity similar to the opportunity, that we saw in 2008, 2009 in lending.

There's a major shift going on in the dollars that are going to be spent in IT, and the way those dollars are going be spent, and we plan on taking advantage of it. Some of our acquisitions will be very helpful to this particular sector that we have in the BDC.

Moving on to slide number 31. I just want to state, this is a bit of an awkward chart for us, in the sense that adjusted EBITDA over the whole Company isn't necessarily the best way to look at our cash flows, particularly given the lender. However, we just really want to try to demonstrate what piece of our business is lending versus business services.

So obviously, we're still looking at about 65% of EBITDA. But when you look at it from a dividending perspective, you're more like 55/45. And I think that's probably a decent balance for us. We want to make sure that our portfolio of companies do account for that, and obviously interest expense is an important part of a lender.

On slide number 32, to wrap things up from a summary standpoint, before I pass the call over to Jenny. We have a differentiated business model. We believe we offer a great dividend with less risks than our BDC counterparties. We believe we offer an alignment of interest with our shareholders, with management and the Board, owning significant stock positions.

We don't purchase repackaged loans like other BDCs. We originate them on a true retail basis, which we think is a very nice feel to our lending business. Our lending business as part of NAV is valued at a discount to face on the notes. Prospectively, our lending business has a lot of other intrinsic things that prospectively can bring value down the road to public shareholders.

We're forecasting an annual dividend of $1.57 in 2017, that's up 2.6%. We're not a newbie. We've been around since 2000 as a publicly traded company. And we're very, very appreciative of our shareholder base, and the investment and good faith that you've made in our Company historically, and look forward to producing really good earnings reports and future successes. Jenny, would you like to do the financial review?

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

I'd like to start with some financial highlights from our 2016 consolidated statement of operations. Please turn to slide 34.

In total, we had investment income of $31 million, an 18.8% increase over $26.1 million in 2016. The majority of this increase was from the growth in income from interest, servicing, and other income on our non-affiliated investments year-over-year.

The increase in interest income was attributable to the average outstanding performing portfolio of SBA loans increasing to $176.2 million from $137 million for the years ended December 31, 2016 and 2015, respectively, as well as the increase in the prime rate from 3.25% to 3.5% in December 2015.

We recognized servicing income of $6.2 million in 2016, as compared to $4.6 million in 2015. The increase was the result of the increased size of the SBA loan portfolio for which we earn servicing income, increasing from $520.8 million to $633.1 million year-over-year. Other income which relates primarily to legal, packaging, and other loan-related fees increased by approximately 40.7% from $1.9 million in 2015 to $2.7 million in 2016, as a result of an increase in loan origination volume year-over-year.

Dividend income in 2016 was $10.6 million versus $10.2 million in 2015. For the 2016 period, our dividend income consisted of approximately $6.8 million from Newtek Merchant Solutions, $1.7 million from Premier Payments, $700,000 from Small Business Lending, $990,000 from Newtek Technology Solutions, and $300,000 from banc-serv Partners, a new controlled investment that we added to our portfolio this past June. It's important to note also that in 2015, we had approximately $2.3 million in non-recurring dividends from other controlled portfolio companies that did not re-occur in 2016.

Total expenses increased by $8 million year-over-year. Salaries and benefits increased by $2.5 million, which included $577,000 of stock-based compensation expense incurred during the year-ended December 31, 2016, related to the issuance of restricted stock awards to employees, beginning in the latter half of 2016.

The remaining increase in salaries and benefits of approximately $1.9 million year-over-year related to increases in salaries primarily at NSCF, and is commensurate with the increases in loan originations, underwriting, closing and servicing activities required to manage a growing portfolio.

Interest expense increased by approximately $2 million year-over-year. The increase was due primarily to a $2.7 million increase in interest on the notes due 2022 and notes due 2021 that were issued in September 2015 and April 2016. This increase was offset by a $361,000 decrease in interest expense on related party notes payable, as well as a decrease of $564,000 in interest expense on a term loan that was paid off in June 2015.

Other general and administrative expenses increased approximately $3.6 million year-over-year, and included an $899,000 increase in rent expense of which $604,000 was to recognize the remaining West Hempstead, New York lease liability. Other G&A also increased by an increase in referral fees and loan processing costs of approximately $1.7 million, which was commensurate with the increase in loan originations year-over-year. IT expenses also increased year-over-year by approximately $370,000, as a result in part of increased IT projects related to various enhancements to our systems and new IT initiatives.

Overall, we had a net investment loss of $9.3 million, as compared to a net investment loss of $6.2 million year-over-year. Adjusted net investment income for the year was $23.2 million or $1.60 per share. Our adjusted net investment income for the fourth quarter of 2016 was $6.7 million or $0.46 per share.

Net realized and unrealized gains totaled a positive $36.6 million, and primarily represents gain on the sale of the guaranteed portions of SBA loans sold during the year. In 2016, we originated 402 loans totaling $309.1 million, and sold 379 loans for $226.4 million generating $32.4 million in realized gains.

These gains were offset by realized losses of $925,000 for the year. The average sale price as a percentage of the principal balance was 111.91%.

During 2015, we originated 292 loans totaling $242.5 million, and sold 304 loans for $211.1 million, generating $29.6 million in realized gains at an average sale price of 111.72%. The 2015 realized gains were offset by realized losses of $1.2 million for the year.

Overall, our operating results for the year resulted in increase in net assets of $27.3 million or $1.88 per share. I would now like to turn the call back to Barry.

Thank you, Jenny. Operator, we'll take questions now?

(Operator Instructions)

Our first question comes from Arren Cyganovich with D.A. Davidson.

Thanks, good morning.

Good morning, Arren. How are you?

Good, thanks. The referral activity continues to grow very fast, with respect to the SBA program, and the funding guidance is still very high, but not nearly as high as the referrals. I think you touched a little bit on this in the commentary, but are you being more selective? Are you getting a higher quality amount of, or a higher quality level of referrals, or is it just some of the stuff is just not fitting into the SBA program?

Arren, I think you've -- there's no one dominant factor that you've outlined that can answer that question. They're all an important part of it. So a couple of things to take from this. One of the things we emphasize is, an investment in Newtek is an investment in an organization that has done a very good job of figuring out using technology, how to acquire cost effectively opportunities in credit that work and make sense.

So some of the things we're looking to do is develop other programs, outside of the four that we are currently in, to make utilization of those opportunities. Number two, we do want to be selective. We want to pick the best credits that we have.

Number three, a lot of financial services concerns, specialty finance companies, bond bank lenders, they all get excited and say, hey, gee, I could grow 50%, I could grow 100%. And it's real easy to do, if you've got the money and the debt lines. But this is still very much of a human business, where you've got human interaction and controlled growth is important.

That's why we've been a lender for 13 years, now, God willing, we won't step on any land mines. I hope I'm not jinxing myself today, but I think that we want to continue to let shareholders know that we're prudent. We aren't just trying to put numbers on the books, because in the lending market, the problems always show up two, three, four years down the road. So I think that the way for you and investors to look at us is, the Company is doing what makes sense.

They're creating a large funnel, they're picking through the funnel, they're looking to add other loan programs on to make utilization of some of those other lead flows. They're diversified, their average balance is going down, and they're kind of not getting carried away with themselves at this point. We wake up every morning thinking about, who's going beat us at our game, who's going to knock us off?

Thanks. That's good to know. I appreciate that. And then, the $400 million of fundings for the guidance for this year, how much of that is broken down between 7(a) and 504 loans?

We would state -- obviously, this is public, approximately $360 million of 7(a) and $40 million of 504. And I would use those as a marker between now and the end of the year. We may be making adjustments to that.

Okay, that's fair. And then, just lastly on the salaries and benefits line rose, and I think Jennifer talked about this a little bit. Is that expected to rise more on a variable basis, along with the SBA activity, or are there other factors at work there?

Yes, I think that, it's not linear. I think that the way this works -- it sort of jumps, and then it levels, and it jumps again. So we've always got to make sure we try to stay ahead of the game, ahead of the referral opportunities. So I think that we did a lot of increases last year in labor, and I think we're in pretty good shape going into this year, given the volumes. So I would expect, this would probably be a good year for us to recoup that.

Okay, all right. Thank you very much.

Thank you.

Our next question is from Lisa Springer with Singular Research.

Thank you, and good morning. My question concerns the expanded revolver credit facility through Capital One. You mentioned that's going to be at a reduced borrowing rate. I wonder if you could give us a little more color around that, and also when do you expect to be able to close this?

Sure. I think that we would like to be able to close this by, I'll say April, maybe it may roll into May, and we think we'll probably be able to reduce our borrowing cost by as much as 1%.

Oh, great. Thank you.

Thank you.

Thank you. Our next question comes from Casey Alexander with Compass Point.

Hi, good morning, and thanks for taking my questions. First of all, well, you answered the question about the mix of SBA 7(a) versus 504. I'm curious with $35 million in 504 loans in the pipeline at the end of the year, and you expect it to do maybe $40 million for the year, how does that translate? Are you -- are those $35 million SBA 504 loans in the pipeline still in the screening stage, and you're going to screen that out?

It's a good question, Casey. I think that from our perspective, yes, until they get to approved pending closing, it's -- you're still dealing with ratios. I would expect that we should be able to close on half of those loans, maybe 60% of those loans as I sit here today, and we'll keep building off the pipeline, and we try to be conservative in our forecasting.

The other thing I think that's important to note, from your financial models, or for income purposes, at least in 2017, you need to make a loan, fully fund it, season it for a quarter or two, and then you're selling the conventional piece out for the gain on sale.

The fees that you're booking for points, the interest income, that all flows through, but the primary income characteristic would be the sale of the conventional piece. So we try to be as conservative, and we realize that we have a lot of people out there looking at things and forecasting. But I think that from your perspective, some assumption around the $30 million to $40 million for the gain on sale is probably okay. But that's going to come in at a portfolio company, and would wind up maybe, or maybe not getting dividended up.

Right. So I mean, that was going to be my next question, is if this sits in the portfolio Company, so we're actually not going to see necessarily this income, unless it gets dividended up from the portfolio company on the traditional sort of BDC income statement, is that correct?

That is correct, sir, yes.

Okay, great. That helps my understanding a lot, thank you. Secondly, I understand in the referral program, how the traditional financial institutions can be sources of loan referrals. I'm a little curious how a Meineke Muffler or True Value Hardware would work in that vein?

Sure. So for a Meineke Muffler, I think there's close to 750 Meineke Muffler dealers in the association, and these are dealers that are in disparate markets, all over the United States. And a typical Meineke Muffler dealer takes payments, has payroll, may have a local website, needs health insurance for its employees, needs workman's comp, and in many cases, needs a business loan. Maybe to refinance bank debt, maybe to do acquisitions of other dealer associations.

So we've recently started an outbound calling unit, that's headed up by a gentleman by the name of [Andy Cholis], who now works at our Lake Success unit, and he's adding to his staff, to be able to take on these types of opportunities, make outbound calls to members of these associations, introduce Newtek to them as a preferred partner. And let all of these entities know that we're here for them today and into the future, as to what we can do for them.

This is -- we've needed to get into this type of facility, this type of staffing, and bring in these types of relationships. True Value is interesting. Obviously, there's payments, there's loans. A lot of contractors go into True Value Hardware store, they have house accounts, there's factoring of receivables for lines of credit backed by accounts receivable.

A lot of opportunities in these associations for SMBs, and these are entities that typically don't know what their options are. They don't run around looking for SBA loan. They just want to finance it.

Okay, great. I get it. That's helpful. Lastly, I understand, that the 504 loans ultimately are completely removed from the balance sheet. There's no residual holding piece. But you do hold them longer than the SBA 7(a)s, and there is a period where they do stay on the balance sheet. So as that business ramps, shouldn't -- or wouldn't the amount that's still being held on [New] Business Credit's balance sheet tend to increase over time, and what's their financial capability in terms of how much they can carry at this point in time?

Sure. The current facility that we have for Newtek Business Credit which is with Sterling Bank and Bank United is a $35 million facility. I believe, on the 504 piece, the advance is up to 90% of the loan amount. So we have decent room there. And I think -- don't anticipate if we needed more, that would be problematic for us to get more.

There is positive carry, while the loans are held in the warehouse, and there's significant fee income that we receive on 504 lending. A lot of that is written out in one of the slides in the PowerPoint.

But we feel very good about the 504 business, particularly given, that it's really -- obviously, not a bankable product. And business owners, all they know is they have a piece of commercial real estate. And frankly, as you may be aware, a small business owner walking into a local community bank, these banks will do income producing loans, but they typically do them on investor properties, not owner occupied properties. So this is an interesting program, that we have an ability and an expertise in. And I think that it could be a very nice complement to our overall lending platform going forward.

Okay, great. Thanks for taking my questions.

Thank you.

Thank you.

(Operator Instructions)

Our next question comes from the line of Leslie Vandegrift with Raymond James.

Good morning, and thank you for taking my questions.

Thanks, Leslie.

A quick question. I know, Jennifer, you went through the dividend income for the year. I just missed the banc-serv number, if I can grab that?

Sure. That was $300,000.

Perfect. Thank you. And then, you were talking about the funding through the quarter and for the year in general on the 7(a) loan side, and the premium obviously was in there with that. But on the sales, it seems like maybe we're slightly below the 75% average of loans funded? So are we getting some first quarter hold over there? Like you said the supply seems to be a bit less than demand? So maybe getting some better pricing on those in the first quarter to sell them?

I think that -- I think, one of your questions is, how does the Q1 pricing compare to Q4 of last year? And we think it's so far, and obviously, the quarter is not over, but that looks pretty good. I think your other question might have been on the cost to acquire we paid a third party. It's typically about 75 basis points. Jenny, what was it?

Correct.

Was it -- that was that for the Fourth Quarter?

About, yes.

Yes. So Leslie, part of that number -- we get some deals that we don't pay any referral fees on. So there is a bit of a blend there. Hopefully, that's helpful.

I've got internal salespeople, external salespeople (multiple speakers) but I think you could use the 75% mark, which has been pretty consistent over the last couple of years. We're using that in our business model, and we would suggest you use that too.

Okay. So there was no late fundings in the quarter that you held to first quarter, because you saw that -- (multiple speakers)

Oh, I'm sorry, carryover.

Yes, carryover, sorry.

We had some carryover.

Okay. And then, a final question. You have the slide about investment pipeline, looking at the other businesses, and one of them was the SBIC fund. Can you give a little bit of color there?

Sure. This is pretty premature. This is an opportunity we haven't issued a term sheet on. But obviously, the benefits of the SBIC fund, are sort of near and dear to many BDCs. It enables you to get some additional leverage beyond one-to-one, because the SBIC debt doesn't count.

We are looking at -- put it this way. I do not think you'll see us have a drop down SBIC in 2017. But we may look to make an investment with an SBIC, where it would just be an investment in the fund, that prospectively might give us rights down the road, in a unique area of lending, where frankly some of our additional opportunities that Casey pointed out, would be useful,

However, the one situation we're looking at, is sort of an unique area of lending, that we think has some good risk characteristics. So it's early, it's an early discussion. And I would guess, most of my [targets] are listening in on my phone calls. So I try not to get too over exuberant about these things.

Okay. Well, thank you for answering my questions.

Thank you.

Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to Barry Sloane for closing remarks.

Great. Yes, thank you very much. Just one more before we sign off, I have one question that was e-mailed in last night, from Nick Grant from KBW. How did the interest income increase so much in fourth quarter?

We had a delta in the fourth quarter. We had one loan recovery that came back. Jeff or Jen, a couple hundred thousand of additional interest?

$400,000.

$400,000 of additional interest that we were able to recapture. We do have these circumstances. This is not an anomaly. It's not reoccurring income, but this does happen to us in many cases where, we will wind up repositioning a loan and a work-out, where we recapture interest, because of the excess collateral. So that's what happened in Q4. And we appreciate Nick's question from KBW.

So with that said, it's a wrap up. I want to thank everybody for joining the call and participating, and we look forward to our first quarter call. We announced our quarterly dividend yesterday, and we look forward to increasing and improving second, third, and fourth quarter results.

Thank you very much. Have a great day. Bye-bye.

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