NewtekOne Inc (NEWT) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Newtek Business Services Q1 2017 Earnings Conference Call.

(Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Barry Sloane, President, Chief Executive Officer.

Sir, you may begin.

Thank you very much, and everyone, welcome to our first quarter 2017 financial results conference call.

Presenting here today with me is Jennifer Eddelson, EVP and Chief Accounting Officer.

I'd like to welcome all of you to please follow along on our newly launched website, newtekone.com, and if you go to the Investor Relations section under Events & Presentations, you'll be able to see our PowerPoint presentation.

From that presentation, I'd like you to turn to Slide #1 on the note regarding forward-looking statements.

I'd like everybody to have an opportunity to read through that.

We're not going to recite that.

We've done it for about 14 years, and hopefully everybody could read through that for themselves.

I'd like to ask everybody to go to Slide #2 in the presentation and talk about our stock's performance.

Newtek's total return on its equity for the first quarter of 2017, including reinvested dividends, was 9.1%.

Our 1-year return for the last year was 27.7%.

You could see the returns over time, 5 years, 3 years and in 2015 quite stellar.

Going to Slide #3, the financial highlights looking at the first quarter of 2017.

Our NAV increased approximately 21% and that percentage increase is primarily on the gross dollars.

We had a 17.8% increase in NAV of $209 million and that's versus the December 31, 2016, number.

Our net investment loss of $2.1 million or $0.13 a share for the 3 months ended March 31, 2017, a lot of that net investment loss is based upon the fact that for GAAP reporting, there are no capital gains.

For most BDCs, that is relevant.

We've had capital gains for over 14 years when the reoccurring nature of selling government guaranteed SBA 7(a) loans into the marketplace.

Therefore, we do report an adjusted net investment income of $6.5 million or $0.40 a share for 3 months.

That was an increase of 32.6% over the $4.9 million for the 3 months ended March 31, 2016.

We had an increase in total investment income of 32.4%.

Our debt-to-equity ratio at the end of the quarter was 70.8%, and total investment portfolio increased by 4% from March 31, 2017, from December 31, 2016.

On Slide #4, our dividend activity, we paid out first quarter 2017 dividend of $0.36 on March 31, and our board recently declared, we announced that this morning, a second quarter 2017 cash dividend of $0.40 per share.

The $0.40 per share declaration represents a 14% increase over the prior quarter in the prior year.

If you look at the first 6 months of the year, we paid out $0.76 per share.

That's an 8.6% increase to the first 6 months of the year.

Over the full year, we're forecasting a 2.5% increase.

There are some onetime events that we experienced in the first quarter that Jenny will allude to.

We also try to be extremely conservative in our forecasting.

We feel very good about our forecasted annual cash dividend which we're maintaining at $1.57.

We also want to note that approximately 47% of our cash dividends paid qualified for preferential tax treatment because those are cash flow and income coming up for the portfolio companies which are already taxed.

Jenny will talk about that from a forecast for the full year.

It's important to note, obviously, that in almost 50% of the dividend that we paid to shareholders is not taxed at ordinary income rates but is taxed at qualified rates.

That makes our dividend income, we think, more valuable than a typical BDC.

Going to Slide #5, we had some SBA lending highlights.

Our funding for the first quarter, up 40%, $70.86 million (sic) [$78.6 million] in the first quarter of 2017.

Newtek Business Credit, a controlled portfolio company, funded $3.5 million of SBA 504 loans.

Our servicing portfolio was approximately a little over $1 billion, an increase of 25% over the 3 months ended March 31, 2016.

Our referrals coming in through the first quarter, $2.8 billion, a 38% increase over the 3 months.

Throughout the company's 14-year lending history, we've approved over 3,000 SBA 7(a) loans totaling over $2 billion.

We anticipate $400 million in 7(a) and 504 loans, and that would represent a 26% increase in total SBA loan fundings over 2016.

Moving to Slide #6, we think it's important to sort of note we're clearly a different BDC.

And while we believe our business model is better, we know we look at our business model versus our competitors.

We think we offer attractive returns without excessive amount of risk inherent in the assets or an excessive amount of leverage on the portfolio.

First off, we do not pay a 4% -- we call it a 4% external management fee.

Many BDCs are externally managed or internally managed so we don't pay the 2% and 20% fee to an external manager.

We're primarily investing in senior secured loans that are actually originated through the BDC.

So we're not purchasing other people's packaged products from Wall Street or intermediaries.

We're actually originating the loans.

We believe that our portfolio companies do have potential in net asset value upside as the portfolio companies grow, and we move towards private valuations to larger public company valuations.

Looking at our average loan size, 178,000, that is the average of the unguaranteed -- uninsured unguaranteed pieces that remain in our books.

So we have a fairly large portfolio of geographically diversified, industry diversified and credit diversified loans that are floating rate without a cap.

In a rising rate environment, obviously, that will benefit us because we only have the maximum 1:1 leverage.

You can see a lot of that portfolio doesn't have any debt against it, so as those rates rise, that will accrue and be beneficial to our shareholders.

From an alignment-of-interest standpoint, approximately 5.8 million outstanding shares.

I do think it benefits all the shareholders.

My interest is very much aligned with all shareholders.

We typically are not putting our capital into loans that are 10% to 14% rate of interest with equity kicker.

We don't have any SBIC leverage.

No derivative securities in our BDC.

It's a very unlevered asset.

It is a senior secured loan portfolio.

We have our NAV invested in businesses that we owned, operated and managed through the portfolio companies for over 10

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CDO equity.

We get the types of returns that we've experienced in the market to benefit our shareholders.

On Slide #7, we wanted to talk a little bit of our capital markets activity.

We did a capital raise in the first quarter on January 30.

KBW, Raymond James and UBS were book-running managers.

Important to note, many of you are aware of the fact that we do have an active ATM, at-the-money ability to pull down shares off of their shelf.

We executed none off their shelf in the first quarter.

And on the lending side, Newtek Small Business Finance has entered into an agreement with Capital One Bank to increase our facility from $50 million to $100 million.

The SBA has given us verbal approval.

I think we are probably a week away from finally consummating this deal and announcing it officially.

We will also have a rate reduction of 1.25 point on the government guaranteed spread and 1 1/8 of a point on the uninsured spread.

So I think it's important to note that we are raising capital on the equity side and the premium to NAV, the stocks trading at a premium to NAV.

Our debt costs are coming down.

We've also negotiated an increase at our Goldman Sachs credit facility from $50 million to $38 million (sic) [to $50 million from $38 million] and there will be a rate reduction on that as well, approximately 1% when the deal gets consummated and then further rate reduction if we go to lower leverage amounts, which could be up to 2%.

The current Goldman Sachs line is $22 million drawn.

There's about $14.5 million currently available.

If we up it to $50 million, we'll have $20 million of availability under that line.

On Slide #8, we always look to compare ourselves to other internally managed BDCs.

As of May 3, we're trading at a 14% premium.

The primary internally managed BDCs, Triangle, Main Street, Hercules and KCAP, they average 1.37.

Obviously, we think we traded at a discount because we're different.

We're a little smaller and we're newer.

I also think some of the complexities, for example, when we report our net income, it comes out as negative because of the capital gains.

There are certain things that our ratios don't match up or stand up against some of the other internally managed BDCs so we're little less known.

I think that's just a function of time, but obviously there's clearly value in looking at our NAV to the other internally managed BDCs, particularly when you look at our returns, and we believe the level of inherent risk that compromise and make up our NAV.

When you go to Slide #9, one of our strategies, in addition to the Small Business Lending, is our investments and growth in our controlled portfolio of companies.

On July 23, 2015, we acquired payments for a little over $16 million, 6x EBITDA purchase.

On June 24, 2016, we acquired banc-serv Partners, a little over 4x EBITDA purchase.

We acquired ITAS and Deer Valley Data, small acquisition primarily of clients accounts, a little bit under 1x gross revenues.

And on April 6, 2017, we completed an investment in IPM, an information technology consulting company, that is a new wholly-owned controlled portfolio company.

We're very excited about the IPM acquisition.

We acquired 45 IT professionals that will help companies out in the marketplace, very large enterprise companies and SMBs, grab the more competitive cloud computing strategy.

IPM, in addition with Newtek Managed Technology Solutions, will be able to go into large and small enterprises and consult; meaning, work with the client to map out what they have; two, strategize what they need to do going forward, particularly in the new area of new hardware, new software and technological innovations, particularly the movement of cloud; three, sell them the new hardware and software; four, deploy and implement the software on their hardware and work with the organization to get it ready; five, manage service provider, be a long-term managed service provider, 24/7, helpdesk recovery and use the capability that we've established in our Phoenix facility.

When you look at our strategy of making acquisitions, obviously, we're looking to continue to grow the size of our portfolio of companies, expand to more publicly traded market multiples.

We're obviously looking at continued growth in loan originations, which we clearly evidence that in the first quarter of this year and last year and obviously make strategic investments within the business solutions footprint.

On Slide #10, you could take a look at our pipeline.

We're currently looking at an ISO with about $2 billion of annualized payment processing volume.

We're looking at a PEO, professional employment organization, with approximately $3 million of EBITDA.

By the way, ISO, independent selling organization, that's a merchant services company, for those who aren't familiar with the term ISO.

And three, we're looking at a cloud computing hosting company with $4 million of EBITDA.

These are the ones we're a little bit deeper into the process, and as I mentioned, we just closed on IPM.

On Slide #11, we get a lot of questions, particularly with the new President, new administration.

What is going on in Washington that can affect BDCs in general and also could affect our BDC.

I want to point out that there has been talk for several years about changing the cap of leverage on BDCs.

BDCs are currently limited to 1:1 leverage.

We closed out our last quarter at about 70%.

There is discussion in the House and in the Senate, particularly around Jeb Hensarling and him sponsoring a bill to potentially increase the leverage ratio to 2:1.

Given the change of the SEC Chair and the fact that Lending and Small Business Lending in particular happens to be a bipartisan opportunity, which is kind of rare in Washington, other industry participants and various research firms have pointed out that there is a potential likelihood of an increase in the leverage bill from 1:1 to 2:1.

It's possible this might come under the Financial CHOICE Act, and there's also broader capital formation bills that are being discussed in House and in the Senate.

Some of this activity could happen in the second half of '17, maybe in early '18.

I think the important aspect to note here is that if leverage is increased from 1:1 to 2:1 or even to 1.5:1, but on 1:1 to 2:1, in our case, rather than issue equity for the next $150 million or $200 million, we may be actually be able to issue debt.

That would be, we think, beneficial to shareholders.

Obviously, issuing debt takes on more risk, but we think that, that would be viewed as a positive aspect to all BDCs, particularly our BDC.

I would like to note that if this happened today, and it's not, but if this happened today, we have certain covenants in our baby bonds that would need to be addressed.

I would also add the fact that our big baby bond issue, NEWTL, is currently callable at the current moment.

So I don't really view the opportunity that might present itself with additional leverage to be constraining upon us, but I did want to point that out that we would need to make some changes in some of our capital structure.

However, if this occurred, we would embrace it and look to take on some more debt which we think would be beneficial to shareholders.

Second item, acquired funds and expenses, AAFE.

This is primarily an SEC issue.

For those of you that are BDC followers, in the summer of 2014, many BDCs were thrown out of the S&P 500 and the Russell 2000 Index.

There's no BDC that sits in that index today, primarily because of how the SEC counts the term acquired funds and expenses.

It is a key issue.

It is reasonable to conclude that a more favorable SEC Chairman might look to enforce this issue differently.

And if that is the case, then it is conceivable BDCs will get put back into the Russell 2000 and possibly the S&P 500.

We think that could be very beneficial.

We actually had a large mutual fund that owned our stock for over 10 years.

After converting to a BDC, they actually have to divest because of how our expense ratio is calculated in their fund.

Current administration's tax reform initiative.

I think the biggest issue here, number one, is that the Trump plan, if it ever went through, in part or whole, would be viewed as constructive to small businesses.

In addition, 47% of our historic dividend has been paid out of our portfolio companies.

Those portfolio -- controlled portfolio companies are currently taxed at 38% to 40%.

If, in fact, Trump's bill pass and corporate tax rate was lowered to 15% to 20%, number one, that would improve interim cash flow, improve our dividend; number two, it would also change our valuation process because our after-tax cash flow yields will be significantly higher.

That would be particularly bullish for us.

Four, Linda McMahon is now the named Small Business Administration Chief.

I was actually at a NAGGL conference yesterday, National Association of Government Guaranteed Lenders in Indiana.

I was fortunate enough to hear administrator McMahon address the crowd and audience.

Very constructive on the 7(a) program.

She actually has been speaking to the Chair of the household business community who has indicated that he would like to give her the ability to provide that the program remains a 0 subsidy to be able to increase the amount of guaranteed that's available by 20% at her discretion.

She actually went in and testified again for 15.

[Lydia Velazquez], who is one of the senior members of that committee, went back to her and suggested 20 in a memo.

So very constructive for small business, things that are happening in Washington these days.

On Slide #12, I would like to point out, we continue to add to our senior management team, upgrade staff.

We have made a hire who will be joining us on Monday.

Jesse Davis will be joining us as Director of Information Technology.

Jesse has over 30 years of experience in this particular area.

He is a Co-Founder and President of Creative Mobile Technologies.

So for those of you that are taxicab riders, most -- while many taxicabs in New York and major metropolitan areas have got this technology in the backseat that has a TV screen back there and connects to the front end of the cab meter to the back and be able to make payments.

This was a product that Jesse created.

We welcome him joining us.

I think he's going to be really important and instrumental to our ability to take our basic business processes and enhance the customer experience directly with enhanced technological solutions and make our in-house processing for our clients in terms of booking and binding of customer service significantly more efficient.

Tom Wesner joined us this week as Chief Operating Officer of Newtek Technology Solutions, working with John Raven out in Arizona.

Over 20 years of experience managing technology engineers and development professionals.

Came to us from the Xerox Corporation.

We're very excited to have Tom working for us out of our Phoenix office.

On Slide #13, many of you are obviously familiar with our expertise in the SBA 7(a) market.

We're the largest nonbank government guaranteed lender in the United States.

Looking at banks with this lending banking.

We're the seventh-largest lender.

We've been doing this for over 14 years.

We've got a terrific track record of default history and severity.

We have an average loan size, which we talked about earlier, of $178,000.

There is not a BDC in the marketplace that has an average loan size that low with that type of diversification.

That is all floating rate without any caps.

We've issued 7 S&P-rated securitizations.

We recently announced the 2 of our deals in the market are on S&P credit watch for an upgrade.

Looking at Slide #14, this just give you a feel for our businesses growing.

Our funded loans in the first quarter, up 40%.

Our pipeline going forward up 63%.

We looked to $2.8 billion of loan referrals in Q1, up 38%.

Regarding pricing on Slide #15.

The topic of conversation for the last 18 months has been what are you going to do if rates rise?

Well, guess what, rates have risen.

As a matter of fact, they've risen about 50 basis points on the short end in the last 4 or 5 months.

And lo and behold, prices are still holding.

As I have had many conversations with analysts and investors, the pricing function is a function of prepayment speeds.

Yes, rates are a part of that; meaning that rates going higher in the case greater amount of economic activity which might increase greater prepayment speeds.

What I'm telling the market today, our first quarter gain on sale netted us 112 decimal 0 3 (sic) [12.03%].

You can see in this chart, it's fairly steady over the course of 5 years.

These are floating rate instrument that our government guaranteed without a cap and the yield investors approximately plus 65 to plus 70 over LIBOR.

This is an attractive investment.

If the concept of voluntary but involuntary prepayments are going to change, that will affect the price.

Another important aspect of the price is supply and demand.

Prices do tend to sag in the fourth quarter and tend to elevate in the first quarter because a lot of banking institutions that participate in this market are bigger sellers in Q4.

And when the pipeline is blown out, there tends to be less supply and prices rise in Q1.

We're very pleased with the prices that we've been able to get on our securities.

Looking at our credit quality on Slide #16.

Nonperforming loans as a percentage of the portfolio, 3.7%.

On Slide #17, charge-offs for the first quarter as a percentage of the outstanding portfolio, 44 basis points.

Slide #18 and 19, kind of depict the cash flow aspects and revenue recognition of the 7(a) loan.

Most of our listeners are fairly well attuned to these slides.

I will go right through them.

On Slide #20, we talk about the 504 program.

Obviously, we've been looking to build this business.

We hope to fund $40 million of 504 loans.

We are hopeful that you'll see some gain on sale from 504 loans that we have funded that are sitting in our pipeline.

We have bids raising from 103 to 105 on these loans.

We're in the process of closing them out.

And we have a really nice pipeline going forward of SBA 504 loans, approximately $33 million that are sitting there in the pipeline.

Slide #21 gives you the typical math of what a 504 loan looks like.

It is a loan that is used to acquire real estate or refinance real estate.

It's a 90% loan to value.

The government takes out the 40% second debenture.

We're left with about 50% conventional first that we sell into the marketplace.

And on Slide #22, that's the income and cash flow aspects of making an SBA 504 loan.

Very attractive return on equity of approximately 38.5%.

Moving to Slide #23, our payments business continues to track very nicely.

It's a great business for us.

We've been in this business over 12 years.

Our revenue for the 3 months ended March 31, 2017, versus March 31, 2016, up about 9.5%.

Our adjusted EBITDA, up almost 12%.

This business is valued on our books at approximately $85 million.

That's a multiple of 6.3x EBITDA.

You could see the public comps significantly higher to the right with comps ranging from 10x to 15x adjusted EBITDA.

A lot of good opportunity in the payment space.

Obviously, we believe that the payments opportunity over the course of time is going to lead more towards e-commerce solutions.

Our ability to host website, design websites, use our own payments gateway and obviously our own merchant services entity are very attractive.

It's a business we've been it for a long time.

We've got a great operating team.

We're happy with our growth and look to propel it further.

On Slide #25, this is our Managed Tech Solutions business.

I believe what you will see from us in the next quarter is this segment will be a combined look at our Managed Tech Solutions business in Arizona and IPM together.

We believe these businesses, over the course of time, will intersect very nicely.

We have no plan on merging them in the near future, the foreseeable future.

However, the customer base that is acquiring hardware and software, that is acquiring professional services, also has to put their hardware and software somewhere.

They can put it in Amazon's cloud or Azure's cloud, they could put it on-prem or they can put it into a private cloud with us in our data center footprint in Singapore, the U.K, New Jersey, Scottsdale or Denver.

Here's the important aspect.

We could manage our clients' hardware and software and do 24/7 remotely in any location, anywhere, at anytime.

This is the move of the future.

Small- and medium-sized businesses, large businesses and enterprise businesses are going to find over the course of time, it is much more cost effective to outsource the management of their services, and that is how we are positioned.

The acquisition of IPM to have the upfront intellect to coach, consult, strategize, deploy, implement is an outstanding acquisition for us.

It's an acquisition we bought at 4x.

Part of that is earned out over the next 24 months.

We're excited about the acquisition of IPM to add to our technology strategy.

Fast forwarding to 27 as a summation, Newtek Business Services Corp.

differentiated business model.

We don't pay 4% management fees out the door.

Therefore, the things that we invest in are able to generate the types of return to shareholders without separating a 4% fee.

We are internally managed, fully expensed.

We've owned and operated our portfolio of companies for the most part over 10 years.

We have forecasted $1.57 per share dividend in 2017.

This is a company with a proven track that was established in '98 and then publicly traded since September of 2000.

We have a 14-year history in making loans to small- and medium-sized businesses.

That 14-year history gives us a history of default frequency and severity.

Our loans are primarily floating rate which is extremely attractive in a rate environment, particularly given that we have less than 1:1 leverage on that portfolio.

Management's interest, very much aligned with shareholders, myself and the board and other managers, probably a little under 10% at this point in time.

I, myself, have a 5.8% of the outstanding shares, very much aligned with shareholders.

And with that, I'd like to turn the rest of the presentation over to Jenny Eddelson.

Thanks, Barry.

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

Please turn to Slide 29 to review our first quarter results.

In total, investment income was $9 million, a 32.4% increase over $6.8 million from Q1 2016.

The majority of this increase was from the growth of in income from interest and servicing year-over-year.

Interest income increased by $1.8 million period-over-period and was attributable to a few factors, including an increase in the primary and the average outstanding performance portfolio of SBA loans increasing to $207.4 million as of March 31, 2017, from $158.1 million for the quarter ended March 31, 2016.

In addition, interest was favorably impacted in Q1 2017 by $641,000 of interest income related to accrued nonperforming interest owed by 1 borrower that paid their balance in full.

Our total servicing asset value at quarter end was approximately $17.1 million as compared to $16.2 million as of December 31, 2016.

Servicing income increased by $275,000 quarter-over-quarter as the total portfolio that we earned servicing income from increased from $591 million to $727 million year-over-year.

SBA guaranteed loan sales totaled $59.8 million in the first quarter of 2017 as compared to $42.5 million during the first quarter of 2016.

The net realized gain on sale was $8.7 million compared to $6.3 million for the 3 months ended March 31, 2017, and '16, respectively, a 38.4% increase.

The weighted average premium declined slightly to 12.03% versus 12.41% quarter-over-quarter.

Looking at the credit quality on our SBA loan portfolio.

Realized losses are charged off as a percentage of the average outstanding loan portfolio with 0.44%, a 4 basis point reduction from December 31.

Total nonperforming SBA loans totaled $8.1 million, representing 3.7% of the total unguaranteed SBA loan portfolio at quarter end as compared to $8.6 million or 4.1% of the total loan portfolio as of year-end 2016.

Dividend income in Q1 2017 was $2.3 million or flat in total versus the same quarter of 2016 and represented $1.75 million from Newtek Merchant Solutions, $450,000 from Premier Payments and $100,000 from Small Business Lending.

As a reminder, approximately 47% of our 2016 dividends was generated by dividends from our portfolio of companies which are taxed at qualified tax rates.

We expect similar results this year for the 2017 tax year.

Total expenses increased by $2.9 million year-over-year.

Salaries and benefits increased by $1.3 million.

$385,000 of this increase was attributable to stock-based compensation incurred in Q1 2017 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 $900,000 quarter-over-quarter, primarily represented increases in headcount and payroll expenses at the lending division and its commensurate with the increases in loan originations, underwriting, closing and servicing activities required to manage the growing portfolio.

Interest expense increased by approximately $1 million quarter-over-quarter.

The increase was due primarily to a $790,000 increase in interest on the notes due 2021 as those notes were issued in April 2016 and a $452,000 increase in interest from issuance of securitization notes in the fourth quarter of 2016.

Interest expense on our warehouse line of credit declined by $80,000 quarter-over-quarter as we utilized excess liquidity to keep our borrowing costs low.

Other G&A expenses increased approximately $515,000 quarter-over-quarter, primarily due to increases in referral fees and loan processing cost, commensurate with the increase in loan originations year-over-year.

In addition, Q1 of 2016 benefited from a real estate tax refund of approximately $150,000.

Overall, we had a net increase in net assets of $5.9 million for the quarter as compared to $5.6 million from Q1 2016 or a 5.4% increase.

Back to you, Barry.

Thank you, Jenny.

Operator, we like to open up the call for questions.

(Operator Instructions) Our first question comes from the line of Leslie Vandegrift of Raymond James.

Quick question.

On the SBA volume originated in the quarter, obviously this is the second quarter in a row where you've had high volume for that in the 7(a) program.

But, obviously it's a good thing, but if you're looking for an outlook there for the year, are we adding new higher steady-state or just a bit of hyperactivity in the fourth and the first quarter?

Leslie, we're forecasting still 25%, 30% growth.

Obviously, we're a little higher in Q1.

We just feel more comfortable at lower levels.

Although to be honest with you, we have the funding, we have the capital and we're getting pretty good opportunities.

I just came from a NAGGL conference, National Association of Government Guaranteed Lenders, and one of the interesting things that's come out of that conference is, without naming names, but the big banks of the United States, and there's 4 of them, 2 of them are actually significant SBA lenders.

Their SBA volume is down year-over-year.

And a lot of that has to do with some of the problems they've had in not wanting to do loans for their branches because of the problems that have shown up in The Wall Street Journal.

So we may be seeing more and more of that.

The industry average right now for SBA business is up 9% or 10%.

So we feel pretty good about where we are.

We just like staying at these conservative numbers, and that's probably what we'll stick to for the time being.

Okay.

And then -- Well, on to that point, if there's a bit of bank hesitation from, I guess, like you said stories in the Journal, et cetera, for regulation reasons or are there -- do you see an issue with premium then, not from repayment activities just that, but from banks just wanting to get off of the bad bit?

Well, I think overall loan volume for 7(a) is higher, it's up 10%.

And there definitely appears to be an interest in the program.

We're not seeing it from a competitive perspective.

We're prime plus 2 or 3 quarters, we don't have to cut our rate.

We're not losing deals at the approval level.

I think it's a strange market.

I mean, you've got talk in Washington about breaking up big banks, Glass-Steagall.

I think that from our standpoint, I like the marketplace to look at what we do as different and unique.

I think the acquisition of banc-serv very valuable, so we're now able to go into smaller community banks and say, hey, we can assemble, underwrite and service and we can -- see a lot of these community banks, they have loans that are outside of their footprint, they're outside of their size limitations, they may not like a particular category.

They're referring those loans to us.

When they're not referring to us, banc-serv is getting the fees from those businesses.

So we're doing things in the marketplace that are totally different than any of our competitors in the particular space.

We've signed up some new alliance partners, Raymond James was one of those, so we're getting more leads in.

We like the model that we're involved with.

We're seeing really good credits, lot of opportunities.

And I -- as a target, we say 25%, 30%.

Now the reality is, if we really good credits that are coming in and we see, it looks like we are on a $10 billion, $11 billion referral pace for the year, that's up from $8.5 billion last year.

We may wind up beating these numbers.

But it's not because we're cutting credit.

It's not because we're paying bigger brokerage fees to third parties.

It's because the business model is very leverageable and we're accelerating into it.

Okay.

So you're not seeing a pullback on the sales side though because of that.

So you're not having issue with banks who want to purchase these off of you?

No, no, no.

And that's why the referral volume is -- continues to go in the right direction.

We're not seeing banks, and I want to refer you all and do them myself.

We're not seeing that.

Okay.

All right.

And then last question on one of your slides, you obviously have the slide about why our model is better.

The top bullet on that slide is about you beat an internally managed BDC.

Obviously, another BDC in the space last night suggested going over to an external structure, and curious if that would ever fit your structure.

No, no.

We're very happy.

Very happy, my team is happy, we're all good.

No.

Our next question comes from the line of Arren Cyganovich of D.A. Davidson.

The referrals into the NewTracker system continue to come in at a very high level.

Is that from new alliance partners that you're adding?

Is it coming from penetration of the existing partners?

Just some thoughts around that.

I would say the bigger growth are probably from new participants.

We'll be a little bit careful there because sometimes new participants aren't necessarily the best.

But I think we're getting more from the core book, more from new.

And it's a good mix and it's a good blend.

Part of it is to work with the existing alliance partners to get more out of them.

We do that on a regular basis in addition to signing up new.

Do you have a lot of repeat from the same referring sources after they have a successful, let me do track, the repeat business from your -- from existing referrals?

We do, we do.

And we work those relationships.

We have 11 regional vice presidents in all the major markets, Texas, California, Florida, New York, that go out and meet with alliance relationship, whether it's branches, whether it's bankers, whether it's working with call centers, whether it's tombstoning various participants that can give us deals.

We do that on a regular basis.

And in terms of the payments processing business, I think I saw a fairly large expectation and increase of volume.

What's driving -- was it like $5.8 billion to $8 billion, what's driving that expectation?

Well, the potential acquisition.

Without the acquisition, that's not happening.

Okay.

And then just lastly, the operating costs have come up a bit with your high growth.

Can you frame the amount of growth in operating expenses you're expecting over the next year?

I would say -- I'm going to let Jenny elaborate on this.

I think it's modest.

I say that right now, in -- so the stuff comes and goes.

Like a couple of things.

Right now, we've got, I'll say, duplicative rent.

I've got 34,000 square feet here in Lake Success.

That square footage is being used up.

I think I'll be full in June.

Our Brownsville facility will go away at the end of June.

Our facility in Wisconsin will go from 14,000 square feet to 4,000 square feet.

I'm losing some rent, I think, in November in Great Neck, which went along with the Premier deal.

So I look at rent obviously as one area.

I would say that's the biggest area of increase in expense.

Jenny, I don't know if there's anything else.

Yes, I mean the other increases would be in relation to loan volumes.

So we've got referral fees, origination costs, those types of expenses.

Right.

So I think it's important to note, Arren, that on part of that, and maybe we need to try to break that out, a lot of that SG&A, if we do more loans, we're paying more referral fees.

So it's variable, so it's not a bad thing.

But to be honest with you, we really are very cost conscious.

We keep an eye on those costs.

And I don't really think our fixed cost have gone up that much.

The only thing that has gone up this year is somewhat of a duplicative rent, which I think will begin to go away toward the second half of this year.

Okay, so the salary and benefit line we talked about a little bit part being I think some stock comp but also headcount increase.

Is that also partially variable cost in the salaries and benefits as well?

I think that we have added certain amount of senior staff to be able to lever the business to higher highs, particularly in the lending area.

I think you'll see greater contribution from a portfolio company, Newtek Business Credit.

I think we've added some technology resources as well, but I don't see a real explosion in compensation at all.

Our next question comes from the line of Lisa Springer of Singular Research.

My question concerns the 504 pipeline.

I'm not clear.

Is the referral sources for 504, do they overlap with the 7(a)?

Or do you have to build a completely separate referral source area for that, for the 504?

It's a great question, so I'm going to give a weird answer.

I would say it's the same, but it's different.

So this is what's important.

The traditional 504 lender in the market goes out to, I'll call it the usual suspects, which are CDCs, community development corps or banks or brokers that really know that market well.

The SBA rents have changed to where you can now do a 504 loan to refinance an existing loan, and it's a 90% LTV.

So there's a tremendous opportunity for us.

So we don't have a broker-driven model, but we have to do a better job getting out to our RVPs to get to our alliance partners that, hey, we now have a 504 product.

As a matter of fact, we have a buyer of like 25-year fully amortizing fixed rate 504 loans.

That's great for us.

So I can go out and quote 4.5%, 5% rates depending upon the credit for a 90% LTV loan to a business backed by commercial real estate.

That's powerful, but I've got to get salespeople focused, salespeople have to get alliance partners focused, alliance partners have to get their customers focused.

Now when the lead flow comes in, part of us is -- part of our job is to work with the borrowers.

Now there are many times a loan can qualify for 7(a) loan and a 504 loan at the same time, so we have to make that value judgment what's best for the client in that case.

But I would say, it is generally a work in process, and it will lean toward a new message and the same distribution channel but a different message.

(Operator Instructions) Our next question comes from the line of Scott Sullivan of Merrill Lynch.

Wondering if you could expand a little bit in terms of what percentage of sales EBITDA that Technology Solutions and consulting might be in the future.

I would say it probably represents 5% today.

And we look at studies from Gartner, Forrester, every REIT -- research that the growth of IT spending in the U.S, it's going to double or triple in the next 5 years.

It's just off the charts.

In addition to that, the churn, people are going from different software, different hardware and move into the cloud.

So I certainly would like to get our technology business.

It's not going to happen overnight, but I would like to get it up to 15% or 20% of the total earnings or dividend at some point in time.

We have a lot of wood to chop there.

We've got to develop the channels, we have to develop the intersection, get the portfolio companies to work well with each other.

But I'm pretty bullish about it and optimistic.

It can be a very significant opportunity for us.

Terrific.

And could you speak to the potential leverage you have using your existing lending customer list and sort of cross-selling to these technology solution area?

I think that this is an area where, if my lending executives and management team are listening, we need to do a lot better job.

In addition to that, the new Director of IT, Jesse Davis, will -- is being brought in to help me build the tools to make that easier and a little effortless.

I think we've done an okay job with it, but not anywhere near where it can be.

And I look at intellectual property for businesses and we should have that, we should have liens on it.

Now obviously you've got to be careful that you don't want to get into the area of tying, which is fairly sensitive to lending professionals, nor would we ever force somebody or tie things together, but I think the ability to really work with business owners, particularly our lending clientele and offer them state-of-the-art IT solutions is extremely important, it's money that's being left on the table, and we've got to push my -- I got to push all my divisions to do a better job in this area.

But there is a good upside, obviously?

Big upside, big upside.

That's why we're here.

That's why we do all these things.

And ladies and gentlemen, I'm showing no further questions in the queue at this time.

I'd like to turn the call back to you, sir, for closing remarks.

Great.

I appreciate everybody participating in the call today, and we look forward to reporting our second quarter.

We -- the board declared a $0.40 dividend.

It was a little early or a little earlier than usual, but we feel really confident about where we are and wanted to get that out to the marketplace as soon as possible.

So we look forward to reporting our second quarter results in the near future, and thank you all for attending today and your questions.

Thank you.

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

This does conclude the program.

You may now disconnect.

Everyone, have a wonderful day.