NewtekOne, Inc. 8.50% Fixed Rate Senior Notes due 2029 (NEWTG) Q4 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Newtek Business Services Corporation Full Year 2015 Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. I would now like to turn today’s conference call to Mr. Barry Sloane, you may begin.

Good morning operator and thank you all for attending the full year 2015 financial results conference call. We’re excited to present our 2015 results and also give future guidance going forward for 2016. Presenting with me today will be Jenny Eddelson, EVP and Chief Accounting Officer. You can all follow our presentation on our website at thesba.com, go to the Investor Relations section and click on presentations and there will be full Power Point on it. Jenny, could you please read these forward-looking statements.

Sure. This presentation contains certain forward-looking statements, words such as plan, believes, expects, plans, anticipates, forecasts and future or similar expressions are intended to identify forward-looking statements. All forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from the plans, intentions and expectations reflected in or suggested by the forward-looking statements. Such risks and uncertainties include among others intensified competition, operating problems and their impact on revenues and profit margins, anticipated future business strategies and financial performance, anticipated future number of customers, business prospects, legislative developments and similar matters. Risk factors, cautionary statements and other conditions which could cause Newtek's actual results to differ from management's current expectations are contained in Newtek's filings with the Securities and Exchange Commission and available through www.sec.gov.

Thank you Jenny. I’d like to turn everyone’s attention to page 2 of the power point, where we talk about our full year 2015 financial highlights. Our net asset value was 204 million or approximately $14.06 a share at December 31, 2015. That was an increase from the NAV last reported on October 01 of $13.10 when the Board declared the special dividend. The adjusted net investment income was 22.2 million or $2.06 per share, which is approximately $0.65 per share for Q4. The debt-to-equity ratio was about 66.5% at December 31, 2015. We did a lot of capital raising in the third and fourth quarter of last year. We did a $36 million equity raise, we did a $40 million plus securitization of our uninsured 7(a) loans, and we did an $8 million plus daily bond offering. So the company is very well positioned going forward in terms of cash as well as debt-to-equity ratio going forward. We also announced the stock repurchase program underway which company may repurchase up to a 150,000 shares. Our blackout period will lift this Friday and the window will be open until March 31, and the window will close again based upon our knowledge of earnings. We recently closed in the third quarter of 2014, an $8.2 million Baby Bond deal. It was the first deal of this nature that we did 7.5% notes due 2022, stock symbol NEWTZ. We acquired from your payments in July of 2015 as a controlled portfolio company to add to our merchant processing business. We are excited about the acquisition of Premier, a Long Island based payment processor that combined with UPS Wisconsin to give us a real strong foothold in the market. Premier has been experiencing in 2015 double digit revenue and adjusted EBITDA growth year-over-year. In small business lending highlights, we funded $242 million of 7(a) loans in 2015, an increase of 20% over 2014. That was in line with previously issued guidance. We also are today reaffirming loan funding forecast of 320 million which includes SBA 7(a) loans that [BDC] and SBA 504 loans which originated by one of Newtek’s controlled portfolio companies. We chatted about the Standard & Poor’s securitization that we did, which was done in September of 2015. That was a AA rated transaction sold to investors at a net yield of 2.5%. We’ve had good success so far this year in our double guaranteed loan participation sales. Through March 4, we’ve had a net premium, net to the company of 112.4 and a short weighted-average term of 14.8 years. A few things that we’ve experienced that we’ll focus on the increased pricing that we have achieved; number one, we’ve been issuing smaller loans so far this year, and you’ll see that in future slides. Number two, a negative obviously has been what’s going on in the equity markets, but the debt markets have rallied, which has made government guarantee floaters more valuable and clearly there’s been a flight to quality. So the fact that we have been selling smaller loans in to the secondary market which trades better than larger loans, and I’ll try to clarify that. When you’re selling a $3 million government guarantee piece in to the secondary market, the investors that assemble the government guarantee pieces have larger risk exposure to the one loan. So the smaller loans typically get better pricing, because they can create diversified pools. You will see that this is going to be a trend in our business as we’re moving towards doing more with smaller loans and we’ll explain the technology behind that and the strategy behind that later on in the presentation. One of the things that we wanted to highlight is, if you go to the slide 4 of the presentation at net premium trends; so over the course of the last five years you can see, you’ve really got about 2% band on these government guaranteed floaters from 2011 to 2016. We also showed the weighted average term. You can see the longer the term typically the greater the price. The longer data securities been trade at greater prices, however sometimes the offset is the longer loans which collateralize by commercial real estate tend to be larger. For those of you that are trying to take care at your slide rule and figure out what our premiums are, I will tell you, it’s difficult. But the company does a really good job of managing the referrals that comes in, picking up the best credits to enable itself to meet its guidance and fulfill all of its obligations which you’ll get a better feel for as we go through the rest of the presentation. When you look at the average loan balance of loans sold; in 2015, it’s approximately 900,000, that includes the government guaranteed piece and the uninsured piece. So far this year, and this is through March, that number will pop up a little bit, because towards the end of the quarter you tend to do the larger loans. We are currently averaging around 400,000. I would say that’s one of the primary reasons for the better pricing that we have received in addition to the market performing well on the government guarantee bond side. Smaller loans give us greater efficiencies. I think it’s really important to note, we are not cutting credit. When I say why are smaller loans more efficient? The SBAs’ requirements for documentation in the file require less work. You don’t have to spread three years with balance sheet, you don’t have to spread three years’ worth of income statements. You get to the difference between 15 to 20 tabs in an Excel spreadsheet versus three to five. So efficiencies in doing smaller loans are there. We can get the volumes out of the smaller loans, we can get the greater diversification, we can get the better pricing without cutting in to credit. Basically diversified portfolio of smaller loans is better than larger loans, which I think is one of the reasons why Newtek is an attractive investment opportunity versus other BDCs. One more thing that I will add, while our staff is doing the smaller loans, it gives out staff the ability to focus more on the larger loans and make greater opportunities and the amount of referrals that were being calling through. We’re going to spend some time on that to give the market place and investors a good sense that we think we can grow our originations with the number of looks in our [pearls] that we are currently getting. Slide number 6, we wanted to focus on the loan sale premium income trend. It’s kind of an important slide. It is important to note that the gains that we get, the capital gains from selling the government guarantee pieces do not show up in NII. So on a GAAP basis using BDC GAAP accounting, when you look at NII, this doesn’t show up. Sometimes Reuters will pick up this GAAP number and report that we’ve lost money, which is why we position ourselves when we look at NII on an adjusted basis. These gains do show up in adjusted NII. I’ve heard analysts basically look at these gains on sales and investors and say this is non-reoccurring. You just have to look at the facts. These are reoccurring events, we’ve been in this business for 13 years, we’ve always had gain on sales, its part of what we do. There is a little bit of volatility in numbers, you could see that from the price chart that we previously discussed and obviously our volumes keep increasing which we think is going to occur. We have growing volumes, fairly stable pricing, this looks pretty good, but I want to repeat, it’s really important to understand our business model. We are not a simple BDC that just has coupon, debt, static portfolio of loans. There is more to understanding Newtek, and in 2015 investors got rewarded for it. Looking at our dividend payments, the company declared $20.9 million worth of dividends, cash dividend, the cash quarterly dividends, which came out to $1.76 a share during 2015. That represented approximately 94% of our taxable income. Our taxable income did not exactly match the adjusted NII. It will be a little bit closer in 2016 going forward, but importantly we came in right in the middle of the range in 2015 for our cash dividends versus our taxable income. We paid a one-time special dividend that was paid on December 31, 2015 of $2.69, 27% of that was paid in cash, 73% in newly issued shares. Important to note, that of the 2015 quarterly cash dividends, 35.8% were allocated to qualified dividends. That is a very valuable statistic to understand, because obviously the qualified dividends attack that 15% to 20% rate, they got preferential tax rate versus the ordinary rate. We do believe and we’re going to forecast this at the trends of our dividends which are about 35% to 40% come from the business services entities which have a reoccurring revenue stream, and our tax as portfolio companies are going to be pass-through. So a significant portion of our dividends are going to shareholders at tax advantage rates. Looking forward, the company has forecasted a $1.50 a share or approximately $21.8 million in quarterly dividends that represents a 4.3% gross increase over the $20.9 million in cash dividends for 2015. The Board of Directors declared a $0.35 a share dividend or $5.1 million payable on March 31 to shareholders of record on March 22. If you were to buy the stock today, you would receive that particular dividend. To clear up some confusion, there are investors that have looked at the $0.35 for the first quarter, the straight lined it, they come to $1.40. That’s been consistent with our $1.50. Historically over the course of a decade the company has paid more, has earned more in the second half of the year than the first half of the year. That’s been the part of the payment business being seasonal for the third and the fourth quarter, as well as loan business also having more loan closings, fundings, and gains on sale in the third and fourth quarter as well. On slide number 8, we wanted to point out some examples that might have created confusion by the one-time historic event of the special dividend which was a special dividend because of the requirement to change from C-Corp to a BDC, because of our changing from C-Corp to a BDC, we had to distribute approximately $34 million to $35 million worth of retained earnings. With that said, the special dividend that we issued and were received on December 31 of 2015, created additional shares to shareholders of record in November, I believe it was $1.8 million additional shares. There’s been a lot of confusion with investors looking at what we paid in cash dividends are expected to pay in 2016 versus 2015. We took a look at one example which we have on this chart, the regular quarterly cash dividend which was paid on a cash basis which is how all of you performance based investors are accounted for. You got three quarterly cash dividends of $1.36 and then the cash portion of the special dividend was $0.84 to receive cash of $2,200 for 1,000 shares. In 2016, those shares which if you receive a special dividend - extra shares and didn’t sell the extra shares, you’d have approximately 1150 shares approximately a 15% increase. You would have gotten the $1.50 cash dividend that we anticipate paying, that dividend must be declared by the Board. The only dividend that has been declared is the first quarter dividend of $0.35, and you will receive the $0.40 cash dividend that was already paid from the prior year to come up with cash of $2185, pretty close. Another way to look at it is, if you just look at quarterly cash dividends versus quarterly cash dividends on 1150 shares at $1.50 that’s $1725. On a 1,000 shares at a $1.76, that’s $1760. I have to say this is very close. I know we’re not playing Horse Shoes, but when I hear people say that our dividends are cut this year, I’m kind of scratching my head. On slide number 9, we’re going to focus on Newtek’s differentiated business model from other BDCs. We are internally managed BDC, we don’t pay any base 2% or 20% to an external manager, everything is internal. Our controlled portfolio companies are wholly owned, three of the four for over 10 years, the payroll business for approximately four years. 40% of our BDCs adjusted net investment income was earned from dividends generated at our controlled portfolio companies. That gives you preferred rate very valuable. We’ve been lending for almost 13 years, we’re not new to the business, we don’t purchase re-packaged loans, we don’t use BDOs. We have a real 50 state retail business. The average unguaranteed loan that sits on our books, this is the unguaranteed, uninsured loan but not subordinated 176,000, really offers a tremendous amount diversification to investors. We’re primarily a senior secured first lender, I think that’s real important. When we say we’re a senior secured first lender in the small business phase, we are typically lending to no growth or slow businesses. Frankly, no growth or slow growth businesses have got collateral behind loan our great opportunity for payment, frequency in terms of good quality loans, as well as not having severity. Our competitors tend to lend to modest growth for high growth business, which is the only way they can get compensated for that 10%, 11%, 12%, 13%, 14% rate of interest plus the equity ticker which they need to charge because they are taking 2% and 20% or 4% out of a deal. All of our coupon goes directly to our shareholders not if it’s taking out form of a management phase. We have no direct lending exposure to oil and gas industry. We have few gas stations and convenient stores on the books on a low debt-to-equity ratio, which gives us the ability to raise significant amounts of debt without having to go back to the capital markets provided their NAV maintains stable at $14.06. We do not presently anticipate raising equity in the foreseeable future, we did our capital raising in the third and fourth quarters of last year. On slide 10, you could see internally managed BDCs typically trading the premium. I would point to Hercules, Mainstream and Triangle, KCAP is at a discount. We are clearly currently trading at a discount. On slide number 11, you can look at the breakout of cash flow. Not suggesting that EBITDA is the right way to look at a lender, but you could see that a significant amount of our cash probably in 2015 is coming from the portfolio companies and non-lending businesses. We anticipate that being the same in 2016 and you can see that on slide number 12. When you look at our NAV and you proportionally breakout NAV, the lending business contributes approximately a 110 million or so to our NAV, the other businesses are 92 or 100 million or so. Our pre-tax net income from our lending business this year was a little bit over $16 million. If you put a market multiple on that, you may come up with a different valuation for our lending businesses as one. I think it is important to note, when you look at our lending business, there’s 50 state retail lender that currently focuses on SBA 7(a), 504, receivable lines of credit and inventory lines of credit. We’ve looked to expand that in the future as we’ve raised additional capital. On slide 13, you can look at new stock performance, we’ve beaten all the major indices over the course of five years, NASDAQ, S&P, Russell and the S&P Small Cap. On slide number 14, looking at our lending operation, we are unaware non-banking lending licenses there’s only 14 of them. I do not believe that the SBA has issued a new one in over 20 years. We are the 7th largest SBA 7 (a) lender that includes banks. We’ve been in this business for over 13 years, we’ve done six S&P rated securitizations. Our average loan size sits on our books and is funded by a line of credit from Capital One Bank and securitizations. Our balance sheet, gives us a real good diversification too. We are not overly dominated by any one particular, which we think is a major differentiator between other BDCs. Once again, I want to reiterate, Newtek as a lender, as a lending platform that’s driven by financial technology, it gives the ability to acquire small business credits cost effectively, process them in a remote location not in the bank environment cost effectively. It’s been doing this for over 13 years. And when we look at some of our referral numbers in the pipeline, I think you’ll also appreciate the optimism that I have for the business going forward. On slide number 15, you could see what our current 2016 SBA 7 (a) loan pipeline looks like. Total pipeline through March 4 of 2016, 526 million versus a year earlier of 309 million. Our referral parties are starting to kick in, the additional RVPs that we have put in to the system, as well as significant alliance relationships are giving us a lot more looks. When you look at the pipeline, we’re almost to the $100 million of loan prequalified. So this will bode well for the second quarter. Loans and underwriting; now loans and underwriting were higher last year, but my point here with respect to underwriting is given that we’re looking at a lot of small balance which are going through the system quicker. You’re not going to have loans sitting in the loans and underwriting bucket as long as you used to. They’ll go in and out much quicker which is extremely important to us. We are very bullish on the pipeline. I want to move ahead if I can to slide number 19 and then I’m going to come back. Slide number 19 looks at the amount of lending referrals that we’ve gotten over an 80% year-to-date increase, and right now we are on track to receive $2 billion of gross referrals in the first quarter of 2016. That’s 8 billion run rates, last year we look to 5 billion. So we’re getting more referrals, our process is getting more efficient, and we’re able to do more with the smaller balance loans. We’re going to announce the rollout of a small balance loan app here within the next 7 to 10 days, which should make us more efficient. We believe we’re going to be able to higher conversion ratio on a number of looks. We hope and anticipate to get better diversification which reduces our risk, as well as get better pricing. We are all under the cover of our financial technology lending model. I’d like to go back to slide number 16, if I can, this is the classic slide that we have in all of our presentations. Net cash created in the typical 7 (a) loans with the current pricing of a 112.40 net to us, creates 20,000 of cash after the gain on sales of the government guaranteed piece, and the financing of the uninsured loans that sit in our books through approximate 70% advance rate of the debt and securitization. Slide number 17 shows the accounting gain that’s up to approximately $94,000 that is a risk adjusted. Slide number 18 an important, we’ve had very strong loan portfolio performance. We have gotten better looks in the market place. We are able to be more selective as more opportunities come to us. We’re extremely happy with the loan performance. I just need to make everybody aware that this is charge-off so the losses that you see are actually once the loan goes all the way through liquidation, and get written off our book. When goes in the non-performing category, we mark all the collaterals in the market, we take a write-down, but that’s an unrealized loss that affects our NAV, doesn’t affect our income. I think this is - should give people comfort when they are concerned about BDC market, they are concerned about credits going bad, they are concerned about mezzanine and subordinated debt not being worth as much as it used to be, which clearly has been the case for the first month of this year. I think it is important to note, obviously we’re showing really good credit numbers here, and we’re looking at a 98% to 99% currency ratio on the existing portfolio of loans. So rest of the loans were mark-to-market and it’s very easy to mark our loans to the market. When I say it’s easy to do, you’re looking at securitization exits, you’re looking at government guaranteed exits. We run our own true pieces for a disguised cash flow model. We stress them out. We feel very good about the valuation of our loans. I think it’s also important to note, when you look at a senior secured loan that we do, there’s personal loans of the other [Board], 80% to 85% are backed by real estate. The senior secured loans of other BDCs are typically backed by the leverage loans. So yes they are senior secured, but is there collateral buying that loan? Am I making a loan at four, five or six times EBITDA? Does that business need growth? So it’s a bit of a misnomer in many cases to compare as to other BDCs. It is extremely important if you want to be rewarded, be a little more than last year to do the work, take a look at what we’re doing, and have a good understanding of what’s in that BDC wrapper. Comparative loan portfolio and statistics you could see on slide 20. We opened up 504 loans, we’ve funded our first loan in November, we anticipate reporting a sale this year. We’ll have further information on that on the next quarterly call, but there’s a nice sample 504 loan that shows you the types of profit that can be earned on a 504 loan or you make a loan backed by commercial real estate, you sell off a 50% LTV first, the government buys the 40% second debenture, you are left with no exposure on the balance sheet, a gain on sales and the servicing asset. In comparing our lending to other businesses which isn’t easy, we look at Live Oak Bank trading at a little over two times book. BankUnited recently acquired Certus’ Small Business Finance Unit that was a non-bank lender. They paid a 10% premium over the loan portfolio and Certus hadn’t made a loan I believe in over a year or two and actually was out of capital compliance. So lot of good comparisons to what our small business lender is worth. A look at our portfolio of companies on slide 25, our payment processing business doing really well. We came in revenue up approximately 9.1%. Over the prior year, adjusted EBITDA of 10.9 million, that was a significant increase over the prior year. Looking forward, particularly with the acquisition of Premier payments, we are prospectively looking at an EBITDA number in 2016 of our payments business, 13.1 million, you’re looking at approximately $5.5 billion worth of processing volume, of course 16,500 accounts. As this business starts to get bigger, the valuation should move towards the public comps of a Heartland or Vantiv or a First Data, which we’re all trading in multiples in the double digits. We look at payment processing opportunities, adding additional alliance partners, American Express OptBlue program table and mobile base, opportunities in the market place and EMV compliance solutions. Our managed tech solutions business, we believe is about to reverse its downward trend. We don’t hide the fact this has been a struggling business for us, but we are optimistic with new management changes and restructurings, the valuation of 1.6 times last 12 months trailing revenue and 1.5 times expected going forward. We are very comfortable with the business, we’ve been in it for over 10 years and we look at the independent business shown its migration to the Cloud as being a valuable positioning opportunity in our portfolio, businesses looking 24/7 outsource managed services in our datacenter, hot backup as well as doctors, dentists and other medical practitioners needing HIPAA compliant solutions. So, we’re excited about the future for managed tech and hope to report some good numbers in the first quarter of 2016. We’re also moving to a new location in Lake Success in New York, it’s on the Queens-Long Island border, 34,000 square foot facility. We anticipate putting four of our businesses with presence in that location. So that’s going to help us datamine, cross-sell and develop an aggressive outbound call and [home] marketing strategy in to our existing and alliance partners client base. We’re very excited about the opportunity to finally put all of our businesses on one flat floor and give us presence. In summary, we are a real interesting opportunity in the BDC space, being internally managed, looking at approximately $11 to $12 stock price, $1.50 forecasted cash dividend, not a lot of leverage. We finished the year at 0.66; we have the ability to borrow, to grow in the near term. Management’s interest is very much aligned with shareholders, the founder, myself, management, Board, we believe control in excess of 15% of the outstanding shares. Our interests are very aligned, we do not have trenched residual credits to get these yields. We are not lending at 10% to 14% with equity kickers with leverage on businesses that must need to grow. We have now no direct lending exposure to oil and gas industry, and we are very pleased to report our first year as a BDC. I’d like to Jenny to do a financial review of our numbers for 2015.

Thanks Barry. Good morning and thank you for joining today’s call. I’d like to start with some financial highlights from our 2015 consolidated statement of operations. Please keep in mind, since this is first full year reporting at [BDC] stage, there are no consolidated BDC financial statements to compare for the prior year. Please turn to slide 32, we had investment income of $26.1 million which included approximately 9.2 million of interest income. Substantially all interest income is derived from SBA loan portfolio which generated $8.9 million and $6.7 million of interest income for the years ended December 31, 2015 and ’14 respectively. This 31% increase in interest income year-over-year can be attributed to the growth in the average outstanding performing portfolio of SBA loans year-over-year. Servicing income which is a type C revenue that we earned from servicing the guaranteed portions of loans originated and sold by NSBF increased approximately $948,000 for the year, as compared to 2014. The increase was attributable to the growth of the size of the total SBA loan portfolio for which we earned servicing income of approximately $100 million year-over-year. Dividend income was approximately $10.2 million for the year and represents dividends from our controlled portfolio companies which included 6.6 million from Newtek Merchant Solutions, 600,000 from Premier payments, approximately $350,000 from small business lending, [303,000] from Newtek Technology Solutions, and approximately 2.3 million in non-recurring dividends from other controlled portfolio companies during the year. Full year 2015 expenses totaled approximately 32.3 million, and include salaries, interest expense and other G&A such as rent, loan processing expenses, professional fees and marketing. Overall, we had a net investment loss of $6.2 million before taking in to account any adjustment for recurring gains to be recognized under the sale of our guaranteed SBA loan. Our net realized and unrealized gains for the period totaled a positive $41.9 million and primarily represents gain on sale of the guaranteed portion of SBA loans we sell during the period. In 2015, we originated 292 loans totaling $242.5 million and sold 304 loans for $211.1 million, generating $29.6 million in realized gains. The average sales height net to NSBF for the year as a percentage of the principal balance was 111.72%. In 2014, the company originated a 193 loans totaling $202.3 million and sold a 163 loans for $130.4 million, generating $19.5 million in premium income or realized gains. The average sale price in 2014 net to NSBF was 112.49%. As a reminder, we originate SBA 7(a) loans and able to sell the guaranteed portions which are typically 75% of the loan balance for a premium. This premium income is recognized as a realized gain for loan sold during the period and an unrealized gain for loans held at quarter end. In addition, we recognize 5.5 million in realized gains from two of our portfolio companies that paid distributions in excess to current earnings and data. We also recorded net unrealized depreciation on our controlled investment of approximately 12.3 million primarily from appreciate in our investments in the Small Business Lending and Electronic Payment Processing controlled portfolio companies. Overall, our operating results for 2015 resulted in an increase in net assets of 35.7 million or $3.32 per share, and we ended the year with NAV of 203.9 million or 14.06% per share. On the liquidity front, we ended the year strong including 4.3 million of cash and $27 million available under credit facilities. I would now like to turn the call back to Barry.

Thank you Jenny. Operator, we’d like to open it up to Q&A.

[Operator Instructions] our first question comes from Jefferson Harrelson with KBW.

Want to start out by asking you on the referrals the $8 billion run rate versus the $5 billion run rate. Can you break that down between new referral partners or increases in your existing loans like what referral partners are driving this significant increase.

Jefferson I appreciate the question. My competitors would probably like to know that too. But I would tell you that they are pretty much coming in from a diverse selection of different parties. And importantly, we’re seeing a good amount of small balance, and historically we hadn’t really focused a lot on the small balance. We’ve really tuned up our operation with a lot of restructuring last year and it’s starting to pay dividends both in the Regional Vice President area, where we are out with a variety of different alliance partners, getting different referrals. These contracts do tend to take a little more than I’d like connecting our technologies to other participants’ technology. So I would tell you that last year we only had one alliance partner that was a little under 10% of our total funding. We do not anticipate a change in that this year, so our goal would be, number one, seeder greater than 10%. So a diversification is really important to us both in terms of loan size, credit, geography and industry. I’d like to tell like in the forecast oil prices or the price of poultry or things of that, I just can’t. So we always looked at a 50 state, what I call, retail model. Our alliance partners do not package loans, they don’t submit projections, they just give us a raw lead. And we believe are doing a much better job between technology, training, adding new staff in the right places to [cut-off] higher closure rate and opportunity, but it only needs to be marginally higher and to pick the best credits and the best selection of credits that will perform and provide capitals for business and earn the types of fees that we need to meet and exceed our earnings forecast.

Okay. And on the loans and funding, they are up about 18% quarter-to-quarter if I’m backing in to that correctly. But the realized gains on loans sold was relatively flat. So did I read in to it that you sold less loans or there is a less gain on sales percentage quarter-to-quarter?

Are you looking at Q4?

Yeah, I’m trying to look at Q3 versus Q4.

Sure. Q4 clearly we had an issue with pricing and larger loans, particularly at the end of the year. Although we always try to avoid doing business a couple of weeks of the year, magically it just always happens. And the last couple of weeks we are in a fixed income markets, we are fairly volatile and I think that our counterparties were resistant to adding balance sheet. So we’re going to try to avoid that next year. Even with it, we are still able to importantly make our numbers, make our projections and deliver the dividend yield and the earnings to investors that we said we’re going to do.

Our next question comes from Leslie Ann B. Curry with Raymond James.

Just a quick question on the dividend income and then the realized gain? Last quarter we had some of the dividend income from the portfolio of company as well. Just trying to get some color around where it came from this quarter, and how can you expect that going forward since those companies sitting at zero care about you and where you can see that coming through.

I think one of the things that is unique about our organization and I appreciate the analyst coverage and we try to be as transparent as we can and work with you guys. These are operating businesses, and unlike most BDCs which is coupon, debt and its certainly predictable and its straight line and just helped a ruler a little bit one way or another, these are operating businesses that we have the ability to earn money and hold that money or dividend to backup. Our goal is to make sure that we meet or beat expectations in the market. I think we’ve done a pretty good job with that so far. I think what you can look at in a forecast when we forecasted $1.50 for next year, 35% to 40% of our earnings should come from dividends from the portfolio companies and we hope to be able to meet or exceed the expectations from the lending business. The portfolio companies obviously it’s from organic growth - in terms of acquisitions right, this is an important thing to talk about. We’re going to be opportunistic in looking at acquisitions. Currently we only have a real smaller pipeline. We had a bigger one which fell out of bed. So I think what you can anticipate from us is majority of the income that’s earned at the portfolio of companies being dividend it up, nothing less, nothing more, that’s fairly stable. If we take a look at the range of price that we put in to the market place for 7(a), is a look at our loan volumes and you could forecast that pretty much where earnings are going come from.

And then on the realized gain side, kind of the same question, where that came from and how we can expect that going forward?

When you go back and you look at five years, in the last five years the range of net premiums has been, I’d say fairly stable within a two point range from our gain on sale perspective. You could see that we have ability because of our technology to grow volumes, because we are becoming more prominent. Frankly I wouldn’t be surprised if we lose certain online players in this phase based upon their difficulty in the market place. We are not seeing that difficulty. If you look at our charge-offs, if you look at our currency rate, the ability to look at $8 billion worth of loans prospectively and pick the better credits is a big win for us, and not that we pay upfront for those referrals. If we are not buying keywords, it’s coming to us from 10 years’ worth of work with the entities that are listed in our 10-Ks and Qs, the Harpers, the AIGs, the UBSs, the Morgan Stanleys and the New York Community Bank, the Iberia Bank, joined by Credit Union National Association, the lending trees, all of these entities are really appreciative of how well we handle these clients. The New Tracker system gives full transparency in to our back office, so people who give us leads are never left out, and if we give a quick no, they are happy with it and we do that quite frequently.

But rather than the gain on sales, I was more referring to the smaller realized gain on the portfolio can be rather the one that was specific -- associated with the gain on sale of the other realized gain. Sorry about them.

Sure. You are referring to the NAV increase?

Yes, that would be 5 million in realized gains, that one.

I mean that is not going to our adjusted net investment income. That realized gain came from two portfolio companies. One portfolio company that paid distribution in access of its current year earnings [basis], so that was treated as capital gains and that was about 4.9 million and then we had another $600,000 in realized gains from a portfolio company that sold some assets and distributed that money up to the BDC and a piece of that was reported as capital gains because it was in excess of the portfolio companies current year earnings and profits.

My final question on that is, I know that they are non-recurring, but we seem to be seeing them in the same way as they perform each quarter, should help me kind of - its where they are marked at, how does that tell us about?

I think what you need to do is, take for face value that we’re basically saying that your earnings in 2016 are going to come from the lending business and the cash flow that we’ve forecasted on payments, managed tech and the other businesses are fairly smaller. Maybe on the next call we can - and they are really not that material or significant at this point in time. So I think that’s how you can forecast it in and what you’re looking at, as Jenny has said, its non-reoccurring. So it shouldn’t affect it.

Our next question comes from Mickey Schleien with Ladenburg.

Wanted to ask you what organic growth rate you’re anticipating in the payments processing business and how the integration of Premier is progressing?

To be frank with you, I wish I would have been in there Long Island space a little bit sooner, but the fire marshal has the south at the time being the contract they’ve got to clear for violation. I think the integration of Premier and UPS Wisc is moving along. We’ve named Jordan Stein as President and Chief Operating Officer of both units. We’re seeing better unit growth in these underlying businesses. We are getting better leverage out of their ability to utilize technology in to the UPS Wisconsin Distribution channel. So we think that we’re probably look at the modest double-digit bottom line growth. I will point out that Premier’s revenue is really recorded sort of on a net basis, its net of interchange. UPS is gross revenue. So, I think you’re going to be looking at somewhere in the neighborhood of 8% to 10% type of growth rates from an organic perspective top and bottom line. That’s a very early guess that‘s with a month and a half worth of data and at this point.

We’ve seen nice firming in the 7(a) loan pricing so far this year. I was trying to scribble as you were talking, but can you go back and comment again on why you think those prices have firmed up so far in the first quarter?

Sure Mick. Well let me just say this there’s three primary factor for pricing; one factor which is the biggest is loan size. So a $3.5 million government guaranteed loan with similar characteristics to say or 300,000 or 500,000 government guaranteed loan could trade at a point to point and a half discount, because when the pool assemblers buy it, it unwinds the diversification in that pool. So that’s one item. So, smaller loans bode for higher prices. The other factor which actually worked against us so far is the way the weighted average maturity. The longer loans typically traded 2 to 2.5 points higher on net pricing to us. So we actually expect to see our ramp go out longer. So, if everything else is constant and we were just doing longer data itself, which if you look at our averages, I don’t think we’ve been 14 years - I’d have to go back and dig through that presentation in a while. So that is a factor. And then you’ve got where the government bond market is. So which by now appears to be in a pretty good shape unless we’ve done a big rally in the equity markets which there is really not anybody anticipating or the concern over the fed raising rates which I don’t think is out there. So I think we’re in pretty good shape on pricing. You don’t have to go back to - I am looking at the chart now 2011, where we had a 15.9 year ramp. Our best pricing years were in ’13 and ’14 with respect to the ramp. In our first quarter the [ramp] was around ’14. So I think we are in a pretty good shape on pricing.

Just one question about leverage and one question housekeeping question. The press release indicates that you at least by now you don’t anticipate issuing equity, but if I’m doing the math right if you were to originate loans at the high end of your guidance, you would be approaching the regulatory limit for BDC. So trying to understand what is sort of the maximum leverage you’re willing to run the balance sheet at your current level of net assets.

There is no way that calculation is correct. First of all we just raised equity cash capital, so we are in a pretty good cash position as we sit here today. And then we could say, if we needed to we could raise another 60 million of debt. I mean we don’t use to do this amount of loan origination. It does not require anywhere near $60 million worth of debt raising. So if we didn’t do any acquisitions and stuff to our needing and just click coupons, I think we are in pretty good shape.

And my last question, I don’t understand the tables at the bottom of the press release. May be you can walk us through that. At the very bottom there is one table that talks about processing 2015, 2014 and that appears to include Premier, and then there is a table with Premier by itself for 2016 and then there is another table that says December 2016, it must be a typo right?

No, Mickey these tables are put here to support any adjusted EBITDA numbers that we discussed in the press release. So if you look at the first table for Electronic Payment Processing, the 2015 table does include Premier payment which was acquired in July 2015, so that’s for Newtek Merchant Solutions and for Premier payments combined in 2015. Then the 2014 table which is the Newtek Merchant Solution since we didn’t own Premier in 2014, but the Premier payments, the reason that we have this table in here for Premier payments is Barry has mentioned or one of our Boards does talk about Premier payments by itself, it’s adjusted EBITDA. So we’ve got a table reconciling those numbers. And then the left table is our forecast for the Electronic Payment Processing portfolio companies and that includes Newtek Merchant Solutions and Premier payment.

Our next question comes from Rob Brock, West Family Investments.

Two questions for you, one general and one more specific; could you talk a little bit about 504 program and like what are key variables in growth. This is obviously is a very profitable business and you have a forecast on the 20 million to 40 million bucks is that a function you being able underwrite more or see more leads and how has that business originated. And the second question I had has to do with your excellent - I think at 80 basis points in net charge-offs versus 1.83%. I think historically you’ve been taking a 5% mark on all these under guarantee loans. Did you move the mark to 2.5% after the quick performance, and if so is that going to be ongoing and how did you pick that number if you talk about that. Thanks.

Working backwards we run our loans through discounted cash flow model, which gets obviously review by management, reviewed by the Chief Lending Officer, and reviewed by our Board of Directors at last. Given the loss rates the recovery rates that held some collateral starts [evading] our portfolio. We do this every single quarter. The motto and our understanding of where these loans in an aggregate sale could be sold on an on-phase transaction came out to about 97.5 versus the 95. So that was an unrealized gain as you go through the income statement. But it does increase our NAV, and the primary justification for that was a change in gross Q1 of [default] and a few other variables that went in to the model. Rob what was your other question, I am sorry.

It was on the 504 as one of the key variables that are driving the growth, and obviously doesn’t [trust]. You don’t use a lot of capital so you don’t want to go out of these. What kind of underwriting standards do you have and how do you see the pipeline going forward just 2016 to 2017?

We do have leverage for these loans, with Sterling Bank and Bank United and gives us good leverage while we hold them in the warehouse once we - the SBA issues debentures every 90 days, so you typically have to wait for their debentures that is issued for them to buy the second round. And then we sell the first loan, which are the conventional first to a cluster of third party buyers. That is really a question because some of the traditional alliance partners are not the entities accretive for 504 opportunities. They tend to be other [mediaries] that to have traffic in this space, although we do see opportunities. These are business loans where the owner wants to buy a piece of real estate or has a piece of real estate and you can offer them 90% LTV. So I think we are modest in building a pipeline. You could do a $5 million or $10 million 504 loan, so we’d come out with modest projections. Obviously the goal here is to perform and to - there aren’t too many people that understand what 504 loan is. I mean people don’t come in asking for 504 loan and frankly a lot of people don’t come in asking for 7(a) loans. That is typically a party that we’re looking for. We’re looking for business owners that want to finance their business. So I think that channel will build overtime. It takes a while to get in to that market for peoples that are in the business to know that we provide that type of funding and can do the grids to the SBA as well as the senior first. I think it will take a little time, but it’s very profitable, you could charge one to two points in origination fee. Typically can sell the government fee, the conventional first [frame way] between 3 and 5 points in the market and you have no capital investment except for the servicing. So it’s a good business for us to be in, higher return on equity.

Our next question comes from Lisa Springer with Singular Research.

I wanted to ask about the 504 business as well. What would you consider the size of the overall opportunity and could that at some point potentially ride the SBA 7(a) business?

I don’t think we’ll do more 504s than 7(a), given that we’ve been in the 7(a) business a long time. We do tend to be methodical, however I think we’ll get in to the 504 business quicker and faster than the 7(a) business. I could see our 7(a) business - there have been non-bank 7(a) lenders that own billion dollars’ worth of 7(a) loans and that was during times where the largest loan was 2 million. So that can give you an idea what a non-bank lender can go to. If I had to take a guess, I would think that we’ll always somewhere in the neighborhood of one-third to a quarter with 7(a) business as the 504 business. So it’s not conceivable that we could do 50 million of 504 loans this year or may be more or may be a 100, but we’ll see if that happens. It really is function of us on the marketing side getting the word out, we have the capital, we’ve got the technology, the markets there. We just have to really push ourselves a little bit. I would like to have the ratio to be at least a third of 7(a).

Our next question comes from the line of Mark (inaudible) with [Growth Investment Advisors].

I just wanted a bit more color and this is really your opinion, but why are BDCs trading at such a discount and where is the opportunity to invest.

I think you got BDC some of them that are down greater 40%,50% of NAV. You got the three primary internally managed ones that are trading at a premium than that, and we’d like to get back there. We were out of premium for NAV, but then we did our capital rates. I think that when you look at the opportunity, investors got to look at primarily two things, one is, what are these assets worth? Can you really figure out what’s in that cookie jar, and with thus we got loans that have gone in to six securitizations perhaps one gets cleaned up every single time. The small balances, the loans are fairly homogenous and they can’t on a pool basis, they are fairly easy to figure out. And from a dividend prospective, I won’t say that we don’t have - we have zero volatility in our earnings stream because there some volatility on the [unit] sale, but it is not huge volatility. It is not like I’ve got a $50 million or $100 million loan to an energy company or I’ve got a leverage loan to a business that I did at least four or five terms of EBITDA and all of a sudden the businesses turns down. So I think that the discounts that we are seeing with other BDCs isn’t based upon the fact that the mez capital and the sub-debt market has gotten crushed properly so because people are questioning what the global growth is going to be which a lot of these loans are based upon. If you don’t have growth, really high growth these borrowers then mez capital and sub-debt, they can’t make the payments. Now I think that’s why you’re seeing a discount in the NAV and these people are saying hey, can they actually sustain that [pivot]. We really do have an entirely different model, and when we (inaudible) the other insured pieces of loan as we get our cash back on a non-recourse basis. We clearly would watch the market which it has market and look at us differently. They’ll take a little time, listen to the calls. We really appreciate the analyst participation today. I am not sure that the discount in BDC market is not something that doesn’t make sense. I am a little perplexed but also understand that it takes more to understand and accompany the other guys and I think we just felt (inaudible) to a tough window here being a smaller BDC, and that’s why they followed, but I think they can reverse itself.

I guess my theory is that not necessarily the BDC but when you did a capital raise and then you gave that big dividend and then another dividend in January, part of my skepticism is that maybe build that big chunk of change and then locked in a gain percentage wise and just left, but you find more than me. And then with your BDC comment, may be it seems to me you are the baby turning the bath water because my point is this that, you basically said that you really have no exposure to the energy sector, no defaults, but then on the other side of the equation there’s still an issue the banks unwillingness to lend to small businesses, so you figure that’s where your sweet spot is and so maybe you can talk to that as well.

What we’re supposed to do is raise capital and put it out. We raise capital at the right time of the market, both debt and equity, now I got plenty of cash, I got low leverage on my balance sheet. In a market where frankly my competitors are hurting. That’s I think where we are supposed to be. So we like our position in the market place today. We have the ability to buyback in some shares. The trading window will open, and I think we’re in a pretty good position right now with a lot of cash on the balance sheet, a lot of my on-bank lending (inaudible) competitors. They are a different market, but the fact of the matter is, there are people that probably borrow money at some high rates that could qualify. I am not saying most of them would. We don’t want that real weird weak stuff, but this is going to help us from a long term perspective. We have a 13% viable lending business model. We’ve been in the payment space for 10 years. We’ve owned and operated these businesses for 10 years. We’ve managed their risks, we’ve been through down cycles in the market. So, if you look at the definition of a BDC, it lends money to small business and provides business and mentoring services to small businesses. There’s a $50 million participation in a leverage buy-out loan lending money to small business. I’ll let somebody answer that question, but I know we lend money to small businesses. And we’ve a very good business model that is diversified risk, managed risk and earn good returns for shareholders that’s a lot of leverage, so sorry.

I mean you have other proven track record whereas it might not. So you mention the stock buyback, so watching how your stock has acted over the last year, and as you know I am long term player, it seems that after X dividend your stock goes down usually more than the dividend. So I think strategically you should advantage of that on the buyback instead of just coming in just automatically and buying shares there, because the cheaper you buy it the better it is for the shareholders. On that note, also I don’t know the mentality of a normal BDC investor, but let’s say you start again. It was down, from we’re a close at the end of last year to getting down to the low 9s. Obviously you wish you took advantage of being able to retire stock down there. Could a BDC investor be aggravated if, you always talk about returning money to shareholders and then from a buyback in dividends, what if you said, we’re going to take $2 million of that dividend and we’re going to keep that in maybe escrow and that way if the stock ever dipped below lets $10 again and you have a set 10b5-1 plan then you take that money and you basically retire shares that are ridiculously at low levels, because you talked about long term and that maybe in the short term that dividend might not be as much in 2016 yet going forward buying shares at so low price is going to turn out to be a net debt positive. I just wanted to know your thoughts on that as well. And then also set up maybe a price where you can even buy to a blackout period just based on price alone.

To be honest with your Mark, the fight back is it is a tool to take advantage of it. The window in a calendar year is so small, and so it’s there, but I find its best that focusing on the business line, growing the business and if we do the job the stock is going to go up. So, we don’t want to spend a lot of time with these different plans, but I appreciate the idea. I mean we’ll take advantage of the markets that we can, but in the mean time we’ve got a lot of capital to deploy, and I think we’re well positioned for 2016. The first two month for a stock based perspective that have been pretty rough, but the business has been beautiful.

My last question is this, last conference call you talked about selling some of the non-guarantee loans and I know you kind of had so much information I don’t know if you’ve covered that. But how’s that progressing, what’s the market look like. I know it’s a very thinly traded market, but I just wanted to hear you, what you think of earnings.

Thinly traded market for what Mark I’m sorry the --.

The (inaudible) part of your own portfolio.

I think that all these markets take a while to develop, and we were working on that right now. At the moment we’ve got cash to invest or keeping the coupon is something that we are good with and we’ll continue to work on that because it is a form of definitely of equity capital I think we’ll sell off the uninsured loan participation. So still in process, but right now we’re looking to hold on to what we’ve got versus sitting in cash at zero.

Our next question comes from Andy Ellner with JMP Securities.

Just two questions from me this morning, the first is on expenses. Could you help us understand how you’re thinking about operating expenses going forward specifically in salaries and benefits in G&A, because these line items have hopped around a bit throughout 2015, and we know there were some investment in the business during the year. And secondly, do you have an expectation for the (inaudible).

Yeah, a couple of things; when we are looking at and I’m looking at my K right now which - well this is on the press release, got it. I’m going to refer to Jenny on that, but I will tell you Andy, you know depreciation for the fact it has internally managed BDC how expense ratios are different than most of the (inaudible). Always please note that we don’t take out 2 in 20. This company has been around for a long time, we’ve run it very lean. So may be Jenny can shed some light on what you’re looking at with respect to expenses and hopping around. That’s not something I’m familiar with. So Jenny you want to pick that one up?

We expect our expenses in 2016 to stay in terms of salaries, interest and other G&A to stay pretty stable. You will see in 2016 we will have some increases or some non-cash items related to moving from one template space in to late success, and we’re going to have to take a one-time charge that you’ll see mostly likely in the first or the second quarter of 2016. But other than that, of course we’ve got some increases in salaries and benefits year-over-year, but these should stay and remain fairly stable year-over-year.

And I’m not showing any further questions at this time.

Operator, thank you very much. And I want to thank everybody for joining the call and participating in it. We look forward to reporting our results in the very near future. Thank you.

Ladies and gentlemen that concludes today’s presentation. You may now disconnect and have a wonderful day.