NewtekOne Inc (NEWT) 2017 Q4 法說會逐字稿

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

(Operator Instructions)

As a reminder, this conference is being recorded.

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

You may begin.

Thank you, operator, and welcome, investors and analysts, to our full year 2017 financial results conference call.

We certainly appreciate your interest and investment in the past year of 2017.

And we have posted a PowerPoint presentation for all of you to follow along.

Go to our website, newtekone.com, and then you can go to the Investor Relations section, and you'll be able to follow along on the presentation.

I'd like to draw everyone's attention to the forward-looking-statement message on Slide #1.

For you speed readers out there, we can now go right to Slide #2, where we begin our presentation.

We always like to point out our historical stock performance.

These numbers are taken right off of Bloomberg.

Last year's 1-year return including a dividend, 27.5%; our 3-year return, 102.2%; our 5-year return, 220.9%.

Given our comparative returns versus other BDCs, we're extremely proud of the financial results, and I specifically wanted to thank all the employees, stakeholders, management team of Newtek and the board of directors on being able to deliver these results to the shareholders.

On Slide #3, we report our full year 2017 financial result information.

We're proud to announce an increase of NAV of 5.5% over the $14.30 per share at December 31.

We finished last year at $15.08.

If you look at all of the other metrics, you can see that we've clearly had real good performance in the year.

Net investment loss, which is unique, obviously, for a BDC, of $7.9 million; however, that did narrow from $9.3 million.

The delta here is as a BDC that's unusual that sells its loans regularly -- we've done so for 14 years and booked gains on sale -- those capital gains do count as qualified income, but for the GAAP ANII number, it shows up as a loss.

It's one of the issues that we have to deal with relative to BDC accounting.

We do modify that in the adjusted net investment income number of $30.8 million, or $1.77/share.

That was a 10.6% earnings increase on a per-share basis compared to the adjusted ANII of $23.2 million, or $1.60/share, for the year ended December 31, 2016.

Debt-to-equity ratio of 78%.

We have had investors in the past that remark about this number moving up and down; that is just a function of how our loan sales do bunch up at the end of the quarter at times.

We try to avoid that, but there are times that we will bump that number up.

If you take a look at it and realize what percentage of that higher number is evidenced by government guarantees that are sold into a forward Wall Street bid, you wouldn't quite be as concerned.

Obviously, at this end of the year, December 31, 2017, we didn't have it.

We reported a 78% debt-to-equity ratio.

Total investment income of $38.9 million, growing 25.7%.

Total investment portfolio increased by 32%.

For a growth BDC like ours that's able to grow its balance sheet, raise equity at attractive prices that we believe is nondilutive to shareholders from an earnings per share perspective, these are good numbers.

Our portfolio income continues to grow.

Mind you, a little over half of our portfolio has no debt on it.

It is floating rate, quarterly adjust above prime.

So we're really throwing off a very nice coupon income for our senior secured loans that will wind up going into securitizations.

On Slide #4, you can take a look at Newtek Small Business Finance, which is the government-guaranteed 7(a) lender, one of the rare 14 nonbank lending licenses, funded a record $385 million of 7(a) loans during the 12 months.

That was a 24.8% increase.

We're forecasting for 2018 loan fundings between $465 million and $485 million, a 23% increase.

I want to mention this.

This is against the backdrop of the SBA statistics, which I believe were down about 10% from the year prior.

So all SBA 7(a) loans, I believe, were down about 10%.

We're growing our business against the trend, and that's because of our business model, the way we acquire referrals, which we'll demonstrate later on in the presentation.

Our utilization of financial technology, the NewTracker system, it's really coming together in a very nice way.

Newtek Business Credit Solutions, NBC, a controlled portfolio company, closed $21.8 million of 504 loans and funded $18 million -- I'll go in the difference -- later on in the presentation, I'll go over between the difference between a closed loan and a funded loan and why there is a delta there, which I think is important relative to income recognition down at the portfolio company.

We're estimating that our 504 business is growing significantly and down the road will be a very nice contributor to our company.

These 504 loans primarily do come out of the opportunities that we get through NewTracker.

We're looking at loan closings of $75 million to $100 million, and I do believe we'll probably fund $40 million to $50 million within this period of time.

We're excited about our new management team down in Orlando, headed up by Tony Zara.

I will actually be meeting with him as I'm presenting at the Raymond James conference in the next couple of days.

But that is a growing group.

We're staffed up, I think, 6 or 7 individuals.

Hopefully be up at around 10 by the end of March or the end of April.

Moving to Slide #5, dividends.

We paid $1.64 in 2017.

That represented 95.4% of the estimated taxable income.

If you compare that to the adjusted, net income was about 92% to 93%.

That $1.64 dividend during 2017 represented an increase of 7.2% on a per-share basis over the 2016 dividend of $1.53.

We're forecasting $1.70 in 2018, $1.70 per share.

That includes the expected share raises throughout the course of the year.

That would be a 3.7% increase.

And the board of directors declared a first quarter cash dividend of $0.40, payable on March 30 to our shareholders of record on March 20.

For the past 3 years as a BDC, our annual dividend payout has exceeded our initial annual dividend forecast.

In 2016, we went from $1.50 to $1.53.

In 2017, we went from $1.57 to $1.64.

We left out the numbers in 2015 because they were a little bit confusing relative to the special dividend that we paid at the end of the calendar year in 2015.

I want to point out that as we go through these first few slides, and looking at Newtek as an investment perspective, we, conference call after call for the last 3 and change years, have been fairly adamant expressing that -- the importance of following us on an annualized basis.

We're a BDC that has been able to grow its NAV.

It's been able to grow its dividend, in a market, frankly, where other BDCs are lucky to be able to maintain their dividend and maintain their NAV.

So we're very proud of these statistics.

We think it's based upon our business model.

We work very hard in managing these operating businesses on a day-to-day basis.

They don't always go up in a straight line; sometimes there's puts and takes.

But as you aggregate everything together, Newtek has really been a really good performer for the last 3 years, and I'm extremely proud of the board and the management team for being able to deliver these results to shareholders.

On Slide #6, we talk about our eighth and largest securitization of uninsured loan participations that come out of our 7(a) business.

We did a $75.4-million unguaranteed 7(a) loan.

I want to point out those are unguaranteed, but not subordinated, notes.

They are pari-passu with the government-guaranteed pieces that we sell into the market for gain on sale.

This offering consisted of 2 classes, both rated by Standard & Poor's, as all of our transactions to date have been done: $58.1 million single-A-rated and a $17.3 million triple-B-rated.

We had a record advance rate of 79.5%, a 3.25% improvement.

It was the highest advance rate of all securitizations.

The notes were priced at an average initial yield of 3.59%.

The A class came out at 200 over LIBOR; the B class came out at 300 over LIBOR.

It was really a tremendous transaction, 100-basis-point rate reduction over the prior transaction.

Deutsche Bank and Capital One bank, hats off to you; we appreciate your efforts as co-manager for the offering.

All of our outstanding issues in the market, and we've collapsed a couple of them, so I think there's 5 outstanding, have all maintained their ratings or have been upgraded or are on credit watch for upgrades.

On Slide #7, we recently did a baby-bond deal.

We closed an unwritten public -- underwritten, excuse me -- public offering of $57.7 million.

That includes the greenshoe.

The stock symbol is NEWTI.

They are trading on the NASDAQ.

They traded up immediately at a premium; we're happy about that.

Coupon on the note 6.25%'s due 2023.

These are 5-year fixed-rate notes, noncallable for 2 years.

These notes have been rated A-minus from Egan-Jones as our senior debt rating is also A-minus.

We're pleased to announce and appreciate the effort that was done by KBW, D.A. Davidson, Compass Point, BB&T Capital Markets and Ladenburg Thalmann.

We plan on redeeming $40.2 million of the 7% notes, NEWTL, on March 23, so most of that deal is going to go to refinance the other notes from that offering.

We have a live ATM program in the market.

We believe this has been a very good way for us to raise equity.

Weighted average price, $17.58 in 2017.

Total proceeds of $19.6 million.

We also have existing availability under that shelf.

Slide #9 is a slide that we repeat in most of our presentations.

Most of you are very familiar with it.

We're proud of the fact that we have staked out a position over the course of -- I think we're going on our 15th year participating in the 7(a) SBA loan program with PLP status.

We have a 15-year track record of default history, frequency and severity.

We do real 5 Cs of credit underwriting.

We have a very unique model using the NewTracker system, as does many of our portfolio companies that we provide a license to use it and to use the Newtek brand to get referrals in, that enable us to acquire referral opportunities without using brokers or purchasing loans in an auction basis on Wall Street.

The average loan size of our portfolio is $183,000, so you get tremendous diversification with $183,000 average balances that are quarterly adjust, prime plus 2.75% with no caps.

The loans are a very good form of financing for businesses as they get a 7- to 25-year amortization schedule.

Weighted average of maturities of our loans tend to gravitate towards 17 to 18 years.

Secondary markets, which has been established for 7(a) loans, has been around for over 61 years.

Going to Slide #10.

You can take a look at what our pipeline looks like.

Our pipeline is up $193 million versus $175 million of the year prior.

For the 12 months ended, loan fundings increased by 24.8%.

One thing I think that's important to note: With the recent technologies that we've put in place relative to being able to upload data from our customers in a shared-file format, we are really getting to borrowers, putting loans through our system significantly faster.

And some of the upcoming slides will demonstrate that.

So our pipeline growth tends to be a little bit muted in that we're cleaning these loans out a lot quicker and getting the borrowers, getting to prequals and underwriting, without sacrificing quality, based upon our technology, being able to pass data from assembler to underwriter to credit memo to credit committee to preclose to postclose.

We take a look at Slide #11, and this is one of the key slides relative to optimism for growth in the future -- excuse me -- not only for the 7(a) program, but for the 504 program, for the line-of-credit program, which is conventional debt by inventory, for the line of credit program backed by accounts receivables, as well as our 504 program going forward and a conventional loan program that we look to put out in the future.

My point being, of the $10.8 billion worth of loans that we looked at in 2017, a 28% increase, a significant percentage of those are creditworthy but won't fit in the 7(a) box.

We intend to utilize those opportunities in portfolio companies that do the business entirely different than the 7(a) business and really make good advantage of the infrastructure that we have.

In -- let's see.

Year-to-date through February 28, 2018, loan referrals were $3.2 billion.

I mean, we've having a pretty big first quarter for loan referrals, almost a 78% increase.

Now I want to point out that the world doesn't work linearly, so when things change pretty quickly, we've got to change with them.

So don't think that the 78% referral increase is going to relate to a 78% increase in what we're doing.

We've got to bring people in, scale up, whether that's assemblers, underwriters, all aspects of the business.

So please understand.

The good news is we're getting more opportunities, but growth does have its limitations, and we feel very good about where we are, what our projections are.

But I don't want everybody taking out their slide rules and saying, okay, we're just going to increase our fundings by that amount.

And it does happen.

In 2009 -- this is extremely important -- units referred, 103% increase.

A lot of this is based upon a, being able to staff up, bringing in additional resources, particularly in management, but most importantly, our technological improvements internally have made this a happening.

Year-to-date through February 28, the units are up 280%, so we've got a lot of work in-house and we're getting to it.

On prices, Slide #12.

For the last 3 years we've talked about rates going higher; well, they're finally happening.

And we've had a lot of conversation about rates going higher and the premiums are going to go down.

And I've said, no, no, no, not the case.

Not the case.

I do want to point out that on a going-forward basis, the big determinant in the changes of these prices is based upon prepayment expectations, and not movements in rates, because these are floaters.

So at the moment, prepayment expectations are still muted.

If this economy does gravitate -- I've said this forever -- to a white-hot economy, this could represent a bit of a decline there in the prices that we're getting.

I don't expect it.

I don't forecast it.

But we tend to forecast conservatively, and we haircut things vis-a-vis the market.

Slide #13.

You can take a look at the performance of the loan portfolio.

We are proud of these statistics.

When you look at our nonperformance as a percentage of the 7(a) portfolio, typically it's trending between 4% and 5%.

That's pretty steady.

We're happy with that level of performance and charge-offs.

They are gravitating toward the low end of what I think they openly gravitate toward with respect to an equilibrium in what we're underwriting to over the long-term averages.

With that said, when we forecast, we typically stick to what we view the long-term averages are.

So when we're coming in under these numbers, we do tend to get a bit of a surprise.

Also, for the analysts out there, I want to point out that it's important also to take a look at our balance sheet.

When we have nonperforming loans, we do write down the NAV immediately, but the losses occur as they are liquidated.

So for those of you that are trying to forecast things in the future, you certainly can take a look at that particular balance-sheet item.

Slide #14 and #15 are traditional slides that we've had from our time as a BEC, even before that.

They show the net cash creation of a 7(a) loan.

They also show the income aspects of it.

They -- it's not important to go over this today, but for those of you that are new to the story, this is an important granular aspect of what we do in 7(a) lending.

Moving to the portfolio company review.

Important to note, a little over 30% -- I think we have 32%, 33% of the dividend income paid in 2017 -- came from the portfolio companies.

That is valuable because that dividend does get taxed at the portfolio company level and then gets distributed up in the form of a qualified dividend to shareholders.

So that portion of the dividend that is qualified, investors get the benefit of getting a lower tax rate on that dividend.

Our 504 business sits at the portfolio company level of Newtek Business Credit.

This is a basic description of what 504 loans look like.

These are basically loans to businesses -- that's important.

These are not CRE or commercial real estate loans [fully] backed by commercial real estate.

These are loans to businesses that are performing and doing well, backed by the commercial real estate.

You can get up to a 90% LTV against the real estate.

The funding can't be used for working capital or purchasing inventory.

When we make these loans, we put a first lien on 50% LTV.

The government puts a 40% second lien on it.

When we make the loan, the 40% lien is -- the 40% takeout is in existence from a CDC, community development corp, that gets taken out by government debentures.

So our income -- well, let me go to -- I think that's on Slide #20, so let me go to 18.

This is what our pipeline looks like.

Obviously, you see this is a growing part of our business.

We're very excited about the 504 loan business headed up by Tony Zara and his team up in the Orlando office.

On Slide #19, we closed $21.8 million in loans and we're forecasting $75 million to $100 million in loan closings in 2018.

Slide #20 shows what a typical 504 loan would look like.

Slide #21 basically shows the analysis, where the cash is and where the income comes from.

Important to note: We -- our income on fees for the senior loan, for the 40% second, we get typically carried interest on the coupon of the loan versus our warehouse loan, our warehouse bank.

And then when we're able to sell, the government guarantee -- the 50% conventional first, which we've done successfully, we're able to get premiums ranging from 3% to 5%.

Our largest portfolio segment is the Electronic Payment Processing business.

We've owned and operated it for over 10 years.

We own 100% of our payment processing businesses.

We processed a little over $6.1 billion in payments in 2017.

This is a business that did attribute to some of the increase in NAV last year, and I refer to last year as 2017.

We're forecasting an adjusted EBITDA of around $14 million; that's about a 7.4% valuation.

This business is sitting on our schedule of investments at $103 million net of debt as of 12/31/17.

When you look at the comparables, we feel that this is appropriately marked.

Our tech solutions business, which is probably third in line as a contributor, consists of 3 portfolio companies, combined fair market value of $23.5 million net of debt.

We basically are able to provide to our client base managed technology and cloud computing solutions.

That's done through Newtek Technology Solutions.

IPM provides professional technology solutions in the way of selling hardware and software and professional consulting services, and Cloud Nine provides the white-labeled professional services for some of the largest software companies in the world.

Before I hand the presentation over to Jenny, I always want to do a quick summary.

Many of our investors are typical traditional BDC investors.

Some of them are fintech investors and some of them are financial services investors.

But the bulk do compare us to other BDCs.

When I look at other BDCs, I don't see dividend growth year to year.

I don't see the earnings growth year to year.

I don't see the NAV growth year to year.

It's because their business models are different.

They're investing in riskier assets, we believe, than the assets that are in our BDC.

They're typically mezzanine debt and subordinated debt with equity kickers.

The majority of the BDCs are externally managed, and they've got to pay two and twenty percent out to the managers, so 4% comes right off the top.

All of our expenses are loaded right into the internally managed structure.

Management's interests are very much in line with shareholders.

The management and the board combine to own 6.2% of the outstanding shares as of December 31, 2017.

When you look at the risk of our balance sheet, when you look at the average loan size of $183,000, diversified industry, diversified zip codes.

And we're not new to this business; we've been doing over 15 years through different lending cycles, up rates, down rates.

We have a proven track record.

We are very excited about our business opportunity.

Look forward to the Q&A, but I'd first like to have Jenny do her financial review to sum up the fourth quarter, which is spelled out in this PowerPoint.

We have had some investors that have commented on, why don't we put our quarterly results.

They're in this document.

They'll be in the K. This was posted last night.

We do this for the purposes of transparency, but I'll continue to repeat myself, as I've done over 12 quarters: We believe the market should be paying attention to this company on an annualized basis, and looking at it as a long-term investment, and not quarter to quarter.

Jenny?

Thank you.

Thanks, Barry.

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

I'd like to start with some financial highlights from our 2017 consolidated statement of operations.

Slide 27 depicts a summary of our year-to-date and our quarter-to-date 2017 results.

In total, we had investment income for the year ended December 31, 2017, of $38.9 million, a 25.7% increase over $31 million in 2016.

The majority of this increase was from the growth in interest income, servicing income and other income on our nonaffilate investments year-over-year.

The increase in interest income is attributable to the average outstanding performing portfolio of SBA loans increasing to $227.8 million from $176.2 million for the years ended December 31, 2017, and '16 respectively, as well as prime rate increases throughout the year.

We recognized servicing income of $7.2 million in 2017 as compared to $6.2 million in 2016, a 17% improvement, which was the result of the SBA loan portfolio, for which we earned servicing income, increasing from $633.1 million to $783.6 million year-over-year.

Other income, which relates primarily to legal, packaging and other loan-related fee revenue, increased by approximately 21.2% from $2.7 million in 2016 to $3.3 million in 2017 as a result of an increase in loan origination volume year-over-year.

Dividend income in 2017 declined by $826,000 to $9.7 million from $10.6 million in 2016.

For the year ended December 31, 2017, our dividend income included approximately $7.1 million from Newtek Merchant Solutions, $1.6 million from Premier Payments, $550,000 from IPM, $225,000 from Sidco and $200,000 from CDS.

Total expenses increased by $6.6 million year-over-year, or 16.3%.

Salaries and benefits increased by $4.1 million, representing higher compensation levels and an increase in the number of employees, resulting primarily from increases in loan origination, underwriting, closing and servicing activities required to manage a growing loan portfolio.

The increase in salaries and benefits also relates to a $386,000 increase in stock-based compensation year-over-year.

Other general and administrative expenses increased by 5%.

I'd like to point out, if you're looking at the quarter-over-quarter increase in other G&A, that in Q4 2016 we had a reduction in our lease liability, resulting from the sublet of our West Hempstead space.

This resulted in a $731,000 credit or positive impact to other G&A in the fourth quarter of 2016.

In addition, we reported $675,000 of reserves on related party receivables primarily related to banc-serv in the fourth quarter of 2017.

Interest expense increased by approximately $3 million year-over-year due to higher average debt outstanding during 2017 coupled with a higher weighted average interest rate as compared to 2016.

Overall, we had a net investment loss of $7.9 million, as compared to a net investment loss of $9.3 million year-over-year.

Adjusted NII for the year ended December 31, 2017, was $30.8 million, or $1.77 per share, as compared to $23.2 million, or $1.60 per share, for the year ended 2016.

Our adjusted NII for the fourth quarter of 2017 was $9.2 million, or $0.51 per share, as compared to the Q4 2016 adjusted NII of $6.7 million, or $0.46 per share, an increase of 10.9% on a per-share basis year-over-year.

A reconciliation of adjusted NII for the quarter and full year ended December 31, 2017, can be found on slides 29 and 30 respectively.

Net realized and unrealized gains totaled a positive $46.9 million in 2017, an increase of $10.3 million, and primarily represents realized gains on the sale of the guaranteed portions of SBA loans sold during the year.

In 2017, NSBF originated 480 loans totaling $385.9 million and sold 458 loans for $283.6 million, generating $40.5 million in realized gains at an average price of 111.99%.

The 2017 realized gains were offset by realized losses of $894,000 for the year.

During 2016, NSBF 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 sales price in 2016 as a percentage of the principal balance was 111.91%.

Overall, the company had a net increase in net assets resulting from operations of $39 million, or $2.25 per share, for the year ended December 31, 2017, as compared to $27.3 million, or $1.88 per share, for the year ended December 31, 2016, an increase of 19.7% on a per-share basis year-over-year.

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

Thank you.

Operator, we welcome calls from the listening group.

Questions, excuse me.

(Operator Instructions)

Our first question is from Leslie Vandegrift from Raymond James.

I know you touched on this a bit in the prepared remarks, but the other operating expenses in G&A, can you give me a breakdown of that just for the fourth quarter?

A breakdown in terms of what the change was?

Yes.

Sure.

So we had an increase in other G&A of about 1 -- let me -- just hold on one second.

That's in the slides, actually.

Jenny, is this relative to the lease issue?

Yes.

So we're . . .

Well, while Jenny's looking for the number, there's 2 items that we believe are nonrepeatable and nonreoccurring.

One, we had a gain in 2016 that related to the extinguishment of a lease operation.

So from a comparison, it then looked like 2017 had extra costs.

The other expense, and Jenny -- while she's ticking out the number, related to funds that the BDC pushed down into banc-serv, its portfolio company, to cover legal expenses to clear the current issue up.

So those are -- what's the total of those 2, Jenny?

That's -- yes.

Just combine them.

The total of those 2 amounts are about $1.3 million.

Right.

So that's really your increase quarter-over-quarter.

We had other G&A of $841,000 in Q4 of '16 versus $2 million in Q4 of '17, and that's the primary driver of the increase.

Got it.

So it's a -- those 2 items account for, like, $1.3 million?

$1.3 million.

And what's the full delta?

The full delta is $1.2 million.

Yes, there you go.

It's those 2 items.

Perfect, thank you.

And on the net asset value increase in the quarter, can you give me an idea of how much of that was due to changes in value due to tax reform or other factors at the end of the year?

I think it's a little bit of both.

I think the entire stock market has been affected by changes in tax reform as it improved most businesses' cash flows by 20% to 30%.

I think the other thing that you look at is, in particular, the public market comparisons of these businesses.

They're off the charts.

So I mean, we can't ignore that.

So if the public stock markets keep rising, that's part of our evaluation basis.

It's cash flow, just kind of the cash flow which obviously tax reform would affect.

It's the public market comparisons.

And it's based upon where, most importantly, we feel we can sell these assets and negotiate an arm's length transaction.

So I think the increases that we took were more than appropriate and clearly not excessive or aggressive at all.

Okay, thank you.

And then on the 504 loans and the 7(a) loans expectations for the year, you said about $75 million to $100 million on the 504, but the pipeline right now is almost $100 million.

What's the hit rate on that side of ones in the pipeline that you end up doing?

And then on 7(a), what are the expectations for 2018?

Sure.

I think it's also important to note, and this may take some more work -- it's a little bit tricky.

The revenue recognition, which is down to portfolio company gets taxed and then gets distributed and dividended up.

So I believe, Jenny, we're able to recognize revenue on the fees.

Yes.

Origination fees.

Origination fees as they come in, because the loans typically in this environment are there for sale, particularly the origination fees on the second debentures, and then on the firsts, and then we get gain on sale when we sell it out.

I think that -- and these pipeline numbers are going to change as we continue to dive into this market and our mix gets better, but I think that on that existing pipeline, I think you could easily forecast 30% of that pipeline as it exists today should close, with a pretty high level of confidence.

Then, the loans could close.

You've got, in the 504 business, you've got some ground-up construction.

You've got some partial, refurbishing and rehabilitation of properties, in there.

So the team that we have in Orlando, very well versed in this business, 20-plus years' worth of experience.

We think this is a major growth business for us.

We're very excited about it.

Our next question is from Nick Grant from KBW.

So maybe I'll start with kind of the originations here.

Obviously the pipeline's really strong, your guidance is strong.

We've heard from some other competitors in the SBA space, the move to require 10% down payments is impacting growth.

Do you guys see any impact from this at all, or would you comment on that statement?

Move to -- could you clarify that, Nick?

Yes.

I think the SBA is now requiring a 10% down payment on a lot of their different loan segments.

Well, the typical equity infusion, if you're looking at commercial real estate property, is between 80% to 90%.

So I mean, that doesn't really affect us.

I mean, the one thing I will say is, my recollection of the SBA statistics at the end of their fiscal year, which was September of 2017, they were -- their business was off 11%.

Our business is up.

Our business is up because of our differentiated business model, because we don't use brokers coaching borrowers.

So we're looking for businesses that are looking for long-term capital.

I'm not looking for businesses that are typically coached by BDOs in the middle to get the maximum leverage out of us as a lender.

So the only thing I would say is, because of our business model, and we don't push ourselves out as a 7(a) lender, we're just a small-business lender.

We take the opportunity in and we figure out what is the best program for the customer?

Is it 7(a)?

Is it 504?

Is it line of credit?

As I mentioned, we've had this in our public document since 2014 when we converted.

We do plan on coming out with a conventional program.

That does not bother us.

It is creating fits for the people that their entire distribution channel is based upon a brokered network.

Okay, great.

And then, you kind of touched on this already, but how should we think about dividends from controlled companies growing here?

Obviously, payments, company's making a lot more, it sounds like there's a pretty significant ramp in 504.

So how should we think about what would be paid up in dividends from controlled?

I've got to -- I have to say this, Nick.

#1, I really appreciate the work that you and the other analysts do on our company, because it's not that easy and simple to follow.

It's confusing.

What we ask the analysts in the street to do, we have a 3-year track record of forecasting, being conservative in our forecasting, and you can follow the trends.

Jenny's kind of given you numbers that we've dividended up.

So take a look at our dividend forecast of $1.70.

We always aim to try to get right in the middle.

It's never going to happen where it's 95%.

It's always going to 93%, sometimes it might be 97%, but we've been pretty good over the course of time.

And the important thing is there's an upward trend.

So we looked at the dispersion, for example, of the street estimates in 2017.

Boy, there was some pretty wide dispersion out there, and we don't really know how that stuff gets that dispersed.

So I think a good way to look at it would be, figure 30% to 40% of the income will come from the portfolio companies.

That could change.

That's kind of been our history, although we started off a little bit higher, but the lending business is outperforming.

So if you take that into account and you back into what we've put out there from a long-term forecast, that's a good thing.

And sometimes people get upset because we didn't highlight our press release with fourth quarter numbers.

Well, we've done that for 20 years.

We've always reported the fourth quarter on an annualized basis.

The fourth quarter numbers are in the PowerPoint.

They're in the Ks and Qs.

You can get to them.

But really, try to look at us from a long-term trending perspective and a long-term investment opportunity.

And I'm really pleased; the street -- the analysts have been very supportive in that area, and I think that's why we're trading at a premium in the NAS.

Okay.

Appreciate the color on that, and maybe I'll kind of ask it in a slightly different way.

So as we think about earnings increasing quite a bit from tax reform at the controlled company levels, how much of the increased cash flow or earnings in those different units kind of falls to the bottom line through being dividended up?

Yes.

So it's a great question, because clearly the tax rate change is beneficial to the portfolio companies.

However, if you look at what we put out in this presentation, we have bigger growth rates in the lending business now than they do from the portfolio companies.

I mean, I -- the management team, the board and I are working very hard to change that, but I would sort of stick to the overall ratios that I gave you and don't get -- I'd get -- if you're going to get overexuberant, I would do it on the lending side.

You might get some favorable tax benefit from CDS, which does lending as a portfolio company, but right now the growth is in the lending part of the business.

I hope I've answered that.

I tried.

Yes.

No, that works.

Well, I was kind of -- well, I guess the biggest thing to me is, so you have this really significant growth pipeline in 504 that's kind of new, right?

And that's coming through the controls company.

So I'm just curious, what -- I guess, the earnings in that company, or in that unit, what falls through dividend income from controlled, and what gets, I don't know, reinvested in the business or -- I'm just trying to think about how much dividend income from controlled grows with that unit seeing so much growth.

I would say, given where we are in the phase, there's difficult visibility there.

Also, we try to put a materiality gauge on these before we give out this, because otherwise -- we've got a lot of these different businesses, Nick, so I appreciate you being interested in the granularity.

I think that if you work through the model and you figure out some of the assumptions I've given in funding, you tick average prices, I think you can back into a number that would come out of a CDS or out of the 504 business over time.

We do think it's a growth opportunity for us.

At the moment, and I say that, 2017, not material, I would say not material first quarter.

It could actually be a couple of points, 5%, with total earnings.

But I don't -- I guess I should keep my mouth shut and say, as I'm struggling and trying to help you, I don't have good visibility on that.

Our next question is from Mickey Schleien from Ladenburg.

I guess I also want to ask some questions about 504, and that's simply because it's a large part of the growth this coming year.

So those are fixed-rate loans; I'm just curious whether you're seeing your customers, your borrowers, accelerate their plans to borrow ahead of expected rising rates, and sort of what cadence can we expect for your forecast loan closings of $75 million to $100 million?

Sure.

I think that because of the tax changes, it's reduced the burden of rising rates on fixed rate obligations.

And not all these businesses will qualify.

And we're not yet in a lending environment where community banks are aggressively looking to do these kinds of loans.

Now, if all of a sudden the commercial real estate component of these assets picks up in valuation, so somebody can go out of an originally originated 80% or 90% LTV commercial real-estate-backed C&I loan, or they can get a 70% into a bank and it -- they get it fixed, you're going to see that.

The 504 is an alternative to being able to get somebody into a fixed rate option.

Our 504 loans are fixed for 5 years and then they adjust over a 5-year index.

We're not seeing a tremendous amount of that, but I do think that's possible another quarter or two down the road as you get another 25 or 50 basis points in rate hikes.

Okay.

To follow up on the 504, last year you funded $18 million of the 504 loans and you sold $6 million.

So I realize that there's economics to consider in terms of what you keep on the balance sheet, or actually, technically, I guess it's on CDS's balance sheet, and when you sell, but can you give us a sense of how quickly you expect that portfolio to turn over?

Sure.

So the $18 million, just to round numbers, assume $9 million was taken out in debentures, right?

So now you've only $5 million left.

And those most likely are loans that still haven't fully funded or partially funded.

The appetite -- we've got investors that are coming in and wanting to put circles on loans before they're even closed, when they're in underwriting.

So there's a real good appetite for loans with these spreads.

They're high-quality loans.

They're 50%.

They're C&I loans, loans made to a business, with 1.1, 1.2 debt-service coverage ratio with 50% LTVs on the real estate collateral.

So they're really good loans.

There's a real good loan appetite for particularly smaller banks that want these products.

So I think this is a good market.

I think is also a good market for us because we're going to be able to take some of that $11 billion that we look at in 2011 and some of that that we're growing -- right now you're at a $13-billion, $14-billion-type run rate for this year, and put them into 504 loans.

With the borrowers not saying, do you have a 504 loan?

Most borrowers don't know what a 504 loan is.

They don't know what a 7(a) loan is.

They come to us for a small-business loan.

I understand.

And I'm going to ask the -- a similar question that was previously asked but maybe in a different way, again focusing on CDS.

Can you give us a sense at least what sort of net margin that business might have this year, even if it's a range?

And what kind of payout ratio they can manage, taking into consideration their working capital needs.

As we sit here today, CDS also has the line of credit in the inventory business in it, which generates a decent amount of cash flow.

So I would guide you toward the fact that we can [pretty] fully pay out the earnings and will continue to push capital down into the business as an as-needed basis to fund the haircuts.

Our next question is from Casey Alexander from Compass Point.

This is just really just a maintenance question.

Probably Jennifer can answer this in terms of modeling.

For Q1, I think you're going to have around $1 million of accelerated debt offering cost related to the call of the 7% baby bond.

Are you going to leave that in the adjusted NII number or will you back that out of the adjusted NII number when you report Q1?

We will be adding that back to the adjusted NII number in Q1.

Our next question is from Scott Sullivan from Merrill Lynch.

Congratulations on another great quarter and for really cutting yourselves from the herd in the BDC space in what is obviously -- has been a tough interest rate environment.

So this can be a rather complex story with all the layers in the deck.

So Barry, what would you say is the most important takeaway for us and to new investors?

Thanks, and I have a follow-on.

I think that what we tried to do for this earnings call was really demonstrate the longer-term trends.

The longer-term trends in how the stock has moved around from $120-million BDC to a $323-million and $330-million BDC, the fact that we've always been able to -- and hopefully this will continue in the future.

I've got my lawyer sitting at my shoulder -- promise but deliver more, both in dividend -- we've tried to evidence that we've been prudent.

We've been in the lending business for over 14 years.

Our cost of capital continues to go down.

Our Capital One bank line rates reduced.

Our baby bond rates reduced.

We've been more efficient in raising equity.

So what we're trying to get investors to focus on is that we're a long-term opportunity, and we're going to have bumps in the night.

They always happen.

They happen to everybody in every aspect of life, and they certainly happen in business.

So that's the big takeaway.

Look at the long-term trends.

That's why I always put Slide #2 out there.

We try to show what we do year-over-year.

And one other thing that's important: We are doing a lot of things at the same time.

People tell me you can't do that.

Well, we've done it now for 20 years as a company and 18 as a public company.

We work hard at it.

Not all things are going to go straight up at the same time.

There are many times we've got to invest in businesses.

We're obviously dealing with a banc-serv issue and some other issues that we -- that hogtie us.

But we've got a great core strategy in terms of how to acquire clients, how to acquire referrals, and to process the business, and a management team that is very dedicated and focused towards its strategic goal and mission.

So that's hopefully what the primary takeaway is.

Fantastic, Barry.

Thanks.

And finally, from a blue-sky perspective, in terms of things that could go really well and really right for you, what would you say those one or two things are?

Is it cross-selling, is it -- what really gets you very excited about a blue sky going forward?

I would say that the most important thing that -- I'm going to give you 2 answers.

The simple one, and I do have a lot of my staff that listens to these calls, the most important thing is that we get more senior managers in the company that work with a passion, look at what's working, figure out -- because some of these team managers are new, and really fit into the strategy and be additive.

Because if we can get these 3 other pillars cranking, it's going to be really exciting.

That's what gets me excited over the top.

The easy, low-hanging fruit, frankly, is to continue to go on the path, do what we do well, particularly in the lending and the payments business, and exploit the opportunities that we have in the market.

I think there's -- I don't want to jinx us.

I'm knocking wood.

There's wind at our back, we've got the technology.

You can't replicate this in a finger snap.

I don't -- you can't replicate 10 years of conversations with people making referrals to you, building the technology, finding the staff that does the business differently than any other place.

We have that.

That's not easy to replicate.

So I think, for the short-termers out there, continue to look for really good success in our top 2 businesses.

For the long-termers, have patience.

We will figure out these other 3 areas, and then it becomes a very, very, very exciting horse race.

Our next question is from Lisa Springer from Singular Research.

Usually, Barry, you give us a slide showing us about what's in the pipeline for acquisitions for the portfolio companies?

I'm just wondering what's going on in that area.

Are valuations still rich, or are you focusing on digesting what you've already purchased?

Could you comment?

Check, check.

So you've got a crystal ball there and you've got the exact answer.

Valuations are expensive.

We have a couple of small ones we're looking at, but nothing major.

And we have so much on our plate right now that the better opportunities are to focus on the existing assets and resources that we have.

So I -- now, those were insightful questions, and appreciate your thoughts.

Our next question is from Marc Silk from Silk Investment Advisors.

Okay, so my first question is, after the whole tax law changed, obviously not just the tax rate, but more importantly, the investment in equipment, how it gets expensed, have you seen an uptick in interest, a, and b, also, your existing clients that have loans with you, have they come back to you and said, you know what?

Now, we were holding off on some investments, but now maybe we want to redo our loan and borrow more money?

Clearly the latter, Marc, that a lot of our existing companies are experiencing and anticipating increased cash flow.

And we define that existing portfolio pretty regularly to see who has additional -- whose business is working well and qualifies for additional funding.

Marc, what was the first part of your question?

Because I kind of -- I missed that.

Just -- yes, with the change in the tax law where, more importantly, the way they can expense investments, have you just seen a larger wave of incoming inbound calls, let's just say, to inquire about, obviously, borrowing money now, whereas they might have been holding off in the past?

We think that there is a lot of business demand.

I mean, here's what's interesting, and this is an important point.

The world, whether it's a consumer or a business, they're reluctant and resistant to change.

There are a lot of businesses that are not making changes.

They're not making changes in how they deal with consumers, how they manage their staff, how they manage their technology.

Those businesses are going to go away.

They're not progressive.

But businesses that are progressive, and there's a lot of them, they have a -- there's a good need for capital out there.

And we can provide it, and those are the businesses that you want to back.

So yes, I think this is a very healthy business environment that will not be supported by an increase in rates, provided that they're gradual, muted, and don't -- that we're not -- that we're talking about 100 to 200 basis points and not much more than that.

Sounds good.

On your technology business, I know you've always felt like that could be the next growth driver.

So -- and I've seen you've definitely made some investment in human resources.

What other things are you thinking of?

Like maybe buy some IT companies that maybe are -- because they're so competitive, that aren't doing well, and throw them a bone before they go out of business, and on the cheap, buy their client base, although that can be a risky endeavor.

I just kind of want more color on where you think you can see some growth in that area, because I know you're very high on it.

Okay.

Well, in addition to going to synagogue this weekend, Marc, I -- we think that the IPM acquisition was a very good acquisition for us, and bulking us up on institutional, intellectual capital to help businesses find the right solutions.

We're still very acquisitive.

We are looking for additional health in that area.

When we see things that make sense to us, we will jump on them.

But there's nothing in the pipeline right now.

Okay, and a BDC question: So I know you're very unique.

Let's say this year's dividend, assuming the price is around $17, give it 10% yield, is one of your biggest challenges telling people we're not your grandparents' BDC?

Because again, you have upside potential, and as you said, your cost is a lot less than these -- the normal BDC.

I think it's what we do regularly.

I appreciate the comment.

We do that regularly.

We do it on the call.

I do that in investor meetings.

We'll do that at Raymond James.

So yes.

But that's basic blocking and tackling that we've done for 3 years as a BDC, and we're comfortable with it.

And my last question is, on your cross-selling, on a percentage of, just say business, because apples and oranges, the lending to, like, your payments.

Where do you get the most success?

From, like, a payment company to your lending, your lending to your technology?

Percentage-wise.

Because again, obviously, number-wise, just because of the size, the banks would obviously be the first -- I mean the lending would be the first.

But just curious.

We're very careful on the lending side and really have not traditionally tried to interrupt the flow there.

And we also are very careful never to cross the line of financing with a service.

We're still trying to figure out that mousetrap to make sure customers are comfortable being solicited at the time that they have a loan or after the fact.

The 2 easiest areas of integration are payroll and insurance.

Payroll, workman's comp and health insurance and HR, that is ham and eggs.

I mean, we'll do a PEO, but frankly, it's a very expensive way to take care of that solution.

So we're working hard at getting those units to work together.

And I would say payments in web design and hosting are also very closely related.

But we're still working on figuring out the best mousetrap to get into this market.

And one comment: My -- as a shareholder, I appreciate your continued and the board's continued buying of your shares outstanding because -- your stock because it just shows you that you guys know more than anybody seeing your business and the fact that you keep throwing money at this even though you don't have to because you have such a sizable position, it's just as a shareholder, it's nice to know that we all are on the same page.

So congratulations on another good year and continued success.

(Operator Instructions)

And our next question is a follow-up from Mickey Schleien from Ladenburg.

Barry, just a couple of quick questions.

Is there anything that you can say about the banc-serv situation in terms of an update?

And when do you expect to file the 10-K?

Sure.

On the last question . . .

Probably in about 5 more days.

Our auditors are still wrapping up their review process, so probably in the -- about 5 more days, we should be filing.

Tuesday?

Yes, Monday or Tuesday.

Monday or Tuesday.

Okay, 5 more calendar days, okay.

And Mickey, on banc-serv, that incident is now about 6 months old.

We continue to cooperate with the authorities.

We've been open for business from the day the incident occurred.

No one's been terminated.

From my perspective, as the company that's invested in banc-serv, we believe we've got a duty to shareholders that if we saw anything that was inappropriate or wrong, we would take an action.

So, so far, we've done a tremendous amount of investigation.

We brought external -- a significant amount of external people into the company to try to get a handle on what it is.

This, frankly, may have something to do with banc-serv, or it's conceivable it may not.

I don't have any other update than that.

I do appreciate the question, because it helps me at least address the investment community that I don't know anything that you don't know at this point in time.

Our next question is from Michael Kitlinski from UBS.

A couple of follow-up questions about interest rates.

At what point when rates rise would you expect maybe to slow down in loan origination?

And also, at what point would you imagine that the loans start getting a little more risky in terms of default?

Sure.

Clearly, rising rates for a business, with everything else being held constant, is problematic because you have to use more of your cash flow to service higher levels of debt.

I think the long am schedule helps because it really reduces the overall payment.

The tax cut, however, is giving businesses significantly more excess cash to be able to combat the issues of dealing with rising rates.

Relative to a certain level of rates slowing down borrowing needs, that -- I mean, we've been -- I started in the investment business in 1982 when the long bond was the 14s of 11 and the Dow was in the 700s.

So, and people actually did business with treasury rates at double digits, and people would buy homes and pay 13%, 14%, 15% on a mortgage.

People actually did that.

I mean, I think some people find that, like, amazing, but yes, it happened.

So from our perspective, what's being discussed, which is a 1% or a 2% -- actually, no one's talking about that.

That's what I'm talking about.

I think the Fed's talking about 100-ish movement in rates.

And most people don't talk about, like, a 5% 10-year, which I think is viable.

That's -- this economy still moves.

You're going to get some inflation in the numbers.

It's -- from everything I can see, there is nothing from these rate rises that will slow the economy down, and we don't see our borrowers feeling that way either.

We don't have a tremendous amount of borrower complaints currently about rates rising.

Thank you.

At this time, I am showing no further questions.

I would like to turn the call back over to Barry Sloane, CEO and President, for closing remarks.

Thank you, operator, and greatly appreciate the amount of questions we had today.

It was terrific.

We certainly welcome the opportunity to chat with investors.

Many of you are aware you can contact Jayne directly or me directly.

Jayne's information is on the front page of the PowerPoint.

We look forward to working with you and we look forward to having a great 2018 as well.

Thank you very much.

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

This concludes the program.

You may now disconnect.