Good day, ladies and gentlemen and welcome to Newtek Business Services Q1 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we’ll have a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Mr. Barry Sloane, President, Chief Executive Officer. Sir, you may begin.

Thank you very much and everyone welcome to our first quarter 2017 financial results conference call. Presenting here today with me is Jennifer Eddelson, EVP and Chief Accounting Officer. I’d like to welcome all of you to please follow along on our newly launched website newtekone.com, and if you go to the Investor Relations section under Events & Presentation, you’ll be able to see our PowerPoint presentation. From that presentation, I’d like you to turn to slide number one on the note regarding forward-looking statements. I’d like everybody to have an opportunity to read through that, we’re not going to recite that, we’ve done it for about 14 years and hopefully could read through that for themselves. I’d like to ask everybody to go to slide number two in the presentation and talk about our stocks performance. Newtek’s total return on its equity for the first quarter of 2017 including reinvested dividends was 9.1%. Our one year return for the last year was 27.7%. You could see the returns over time five years, three years and in 2015 quite stellar. Going to slide number three, the financial highlights looking at the first quarter of 2017, our NAV increased approximately 21% and that percentage increase is primarily on the gross dollars. We had a 17.8% increase in NAV of $209 million and that’s versus December 31, 2016 number. Our net investment loss of $2.1 million or $0.13 per share for the three months ended March 31, 2017, a lot of that net investment loss is based upon the fact that for GAAP reporting, there are no capital gains. For most BDCs, that is relevant. We’ve had capital gains for over 14 years – the reoccurring nature of selling government guaranteed SBA 7(a) loans into the marketplace. Therefore, we do report an…

Thanks, Barry. Good afternoon everyone and thank you for joining today’s call. Please turn to slide 29 to review our first quarter results. In total, investment income was $9 million, a 32.4% increase over $6.8 million from Q1 2016. The majority of this increase was from the growth of interest and servicing year-over-year. Interest income increased by $1.8 million period over period and was attributable to few factors, including an increase in the primary and the average outstanding performance portfolio of SBA loans increasing to $207.4 million as of March 31, 2017 from $158.1 million for the quarter ended March 31, 2016. In addition, interest was favorably impacted in Q1 2017 by $641,000 of interest income related to accrued non-performing interest owed by one borrower that paid their balance in full. Our total servicing asset value at quarter end was approximately $17.1 million as compared to $16.2 million at December 31, 2016. Servicing income increased by $275,000 quarter-over-quarter as the total portfolio that we earned servicing income fund increased from $591 million to $727 million year-over-year. SBA guaranteed loans sales totaled $59.8 million in the first quarter of 2017 as compared to $42.5 million during the first quarter of 2016. The net realized gain on sale was $8.7 million compared to $6.3 million for the three months ended March 31, 2017 and 2016 respective, a 38.4% increase. The weighted average premiums declined slightly to 12.03% versus 12.41% quarter-over-quarter. Looking at the credit quality on our SBA loan portfolio, realized losses or charge-offs as a percentage of the average outstanding loan portfolio was 0.44%, a four basis points reduction from December 31. Total non-performing SBA loans totaled $8.1 million representing 3.7% of the total unguaranteed SBA loan portfolio by quarter end as compared to $8.6 million or 4.1% of the total…

Thank you, Jenny. Operator, we’d like to open up the call for questions.

Thank you. [Operator Instructions]. Our first question comes from the line of Leslie Vandegrift of Raymond James. Your line is open.

Thank you. Good afternoon.

Hi, good afternoon.

Thank you. Quick question, on the SBA volume originated in the quarter, obviously this is the same quarter in the row where you’ve had high volume for that in the 7(a) program, obviously that’s a good thing, but looking for an outlook there for the year, are we adding new higher steady state or just a bit of hyperactivity in the first quarter?

Leslie, we’re forecasting still, 25% 30% growth, obviously we’re a little higher in Q1. We just feel more comfortable at lower levels, although, to be honest with you, we have the funding, we have the capital and we’re getting pretty good opportunities. Just came from a NAGGL conference, National Association of Government Guaranteed Lenders, and one of the interesting things that’s come out of the conference is without naming names, but the big banks of the United States and there’s four of them, two of them are actually significant SBA lenders. Their SBA volume is down year-over-year and a lot of that has to do with some of the problems they’ve had in not wanting to do loans for their branches because of the problems that have shown up at the Wall Street Journal. So we may be seeing more and more of that, the industry average right now for SBA business is up 9% or 10%. So we feel pretty good about where we are. We just like staying at these conservative numbers and that’s probably what we’ll stick to for the time being.

Okay. And then, on to that point, if there’s a bit of bank hesitation from I guess, like said stories in the Journal, etcetera for regulation reasons. Do you see an issue with premium them not from repayment activities just that from banks, just wanted to get off with that a bit?

Well, I think overall loan volume for 7(a) is higher, it’s up 10%. And there definitely appears to be an interest in the program, we’re not seeing it from a competitive perspective, we’ll try and push two and three quarters, we don’t have to cut our rate, we’re not losing deals at the approval level. I think it’s a strange market. I mean you’ve got talking Washington about breaking up big banks, Glass-Steagall. I think that from our standpoint, I’d like the marketplace to look at what we do as different unique. I think the acquisition of banc-serv, very valuable, so we’re now able to go into smaller community banks and say hey, we can assemble, underwrite and service and we can -- a lot of these community banks they have loans that are outside of their footprint, that are outside of their size limitations, they may not like a particular category. They’re referring those loans to us. Then our [indiscernible] bank service getting the fees from those businesses. So, we’re doing things in the marketplace that are totally different than any of our competitors in the particular space. We signed up some new alliance partners, Raymond James was one of those. So we’re getting more leaves in. We like the model that we’re involved with. We’re seeing really good credits, lot of opportunities and as a target, we say 25%-30%, now the reality is, if we see really good credits that are coming in and we see, it looks like we’re on a $10 billion or $11 billion referral pace for the year, that’s up from $8.5 billion last year, we may wind up beating these numbers. But it’s not because we’re cutting credit, it’s not because we’re paying bigger brokerage fees to third parties, it’s because the business model is very leverageable and we’re accelerating into it.

Okay. So you’re not seeing a pull back on the sale side though because of that, so you’re not having issue with banks who wants to purchase these off you?

No.

Okay.

No, that’s why the referral volume continues to go in the right direction. We’re not seeing banks saying I don’t want to refer you, I want to do it myself. We’re not seeing that.

Okay. All right. And then, last question on one of your slides you obviously have the slide about why our model is better. The top bullet on that slide is about you’ve been an internally managed BDC. Obviously another BDC in the space last night suggested going over to an external structure, I’m curious if that would ever fit your structure?

No.

Okay. Short and sweet.

Very happy, my team is happy. We’re all good. No.

Okay. Well thank you for answering my questions.

Okay.

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

Thank you. The referrals into the new tracker system continue to come in at a very high level. Is that from new alliance partners that you’re adding? Is it coming from penetration of the existing partners? Some thoughts around that.

I would say the bigger growth was probably from new participants. We’ll be a little bit careful there because sometimes new participants aren’t necessarily the best, but I think, we’re getting more from the core book, from new and it’s a good mix and it’s a good blend. Part of it is to work with the existing alliance partners to get more out of them. We do that on a regular basis, in addition to signing up new.

Do you have a lot of repeat from the same referring sources after they have the successful – I mean do you track the repeat business from your existing referrals?

We do and we work those relationships. We have 11 regional Vice Presidents in all the major markets, Texas, California, Florida, New York, that go out and meet with alliance relationships whether it’s branches, whether it’s bankers, whether it’s working with call centers, whether it’s tomb stoning various participants that can give us deals. We do that on a regular basis.

Thanks. And in terms of the payments processing business, I think I saw a fairly large expectation and increase of volume. What’s driving, I mean it was $5.8 billion to $8 billion, what’s driving that expectation?

Well the potential acquisition. Without the acquisition, that’s not happening.

Okay. And then just lastly there, operating costs have kind of come up a bit with your high growth. Can you frame the amount of growth in operating expenses you’re expecting for the next year?

I would say, and I would let Jenny elaborate on this, I think it’s modest. I say that right now, this stuff comes and goes. Couple of things, right now we’ve got, I’ll say duplicative rent, I’ve got 34,000 square feet here – success, that square footage is being used up. I think I’ll be full in June. Our Brownsville facility will go away at the end of June. Our facility in Wisconsin will go from 14,000 to 4,000 square feet. I’m losing some rent I think in November in Great Neck which went along with the Premier deal. So I look at rent obviously as one area. I would say that’s the biggest area of increase in expense, Jenny, I don’t know if there’s anything else.

Yeah, I mean the other increases would be in relation to loan volume, so we’ve got our referral fees, origination costs those types of expenses.

So I think it’s important to note Arren, on part of that and maybe we need to try to break that out, a lot of that SG&A, if we do more loans, we’re paying more referrals fees, so it’s variable, so it’s not a bad thing. But to be honest with you, we really are cost conscious. We keep an eye on those costs and I don’t really think our fixed costs have gone up that much. The only thing that has gone up this year is somewhat of the duplicative rent which I think will begin to go away towards the second half of this year.

Okay. So the salary and benefit line, you talked about it a little bit, part being some stock comp and also headcount increase. Is that also partially variable cost in the salaries and benefits as well?

I think that we have added certain amount of senior staff to be able to lever the business to higher highs, particularly in the lending area. I think you’ll see greater contribution from a portfolio company Newtek Business Credit. I think we’ve added some technology resources as well, but I don’t see a real explosion in compensation at all.

Okay. Thank you.

Thank you. Our next question comes from the line of Lisa Springer of Singular Research. Your line is open.

Thank you. Hi, Barry. My question concerns the 504 pipeline. I’m not clear, is the referral sources for 504, do they overlay up with the 7(a) or do you have to build a completely separate referral source area for that, for the 504?

It’s a great question, so I’m going to give you a weird answer. I’ll say it’s the same but it’s different. So this is what’s important. The traditional 504 lender in the market goes out to I’ll call it the usual spend suspects which are CDCs, community development corps or banks or brokers that really know that market well. The SBA rates have changed to where you can now do a 504 loan to refinance an existing loan and it’s a 90% LTV. So there’s a tremendous opportunity for us. We don’t have a broker driven model, but we have to do a better job getting out to our RVPs, to get to our alliance partners that hey, we now have a 504 product. As a matter of fact, we have a buyer like 25 year fully amortizing fixed rate 504 loans, that’s great for us. So I can go out and quote, 4.5% 5% rates depending upon the credit for 90% LTV loan to a business backed by commercial real-estate. That’s powerful. But I’ve got to get sales people focused, sales people have to get alliance partners focused, alliance partners have to get their customers focused. Now when the leaf blow comes in, part of our job is to work with borrowers. Now there are many times a loan can qualify for 7(a) loan and a 504 loan at the same time. So we have to make that value judgment what’s best for the client in that case. I would say it is generally a work in process and it would lean toward a new message and the same distribution channel, but a different message.

Okay. Well thank you for all the color. Appreciate it.

Thank you.

[Operator Instructions]. Our next question comes from the line of Scott Sullivan of Merrill Lynch. Your line is open.

Good afternoon and thanks for taking my call.

Good evening, Scott.

Congratulations on a great quarter, obviously humming along here. Wondering if you could expand a little bit in terms of what percentage of sales, EBITDA that technology solutions and consulting might be in the future?

I would say it probably represents 5% today. And we look at studies from Gartner, Forrester, every research, the growth of IT spending in the U.S. it’s going to double or triple in the next five years, it’s just off the charts. In addition to that, the churn, people are going from different software, different hardware, and moving to the cloud. And so, I would certainly would like to get our technology business, it’s not going to happen overnight, but I would like to get it up to 15% or 20% of the total earnings or dividends at some point of time. We have a lot of wood to chop there, we got to develop the channels, we have to develop the intersections, get the portfolio companies to work well with each other. But I’m pretty bullish about it and optimistic. It can be a very significant opportunity for us.

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

I think that this is an area where if my lending executives and management team were listening, we need to do a lot better job. In addition to that, the new director of IT, Jesse Davis is being brought been to help me build the tools to make that easier and a little effortless. I think we have done an okay job at it, but not anywhere near where it can be and I look at intellectual property for businesses and ewe should have that, we should have leans on it. Now obviously you got to be careful, you don’t want to get into the area of tying which is fairly sensitive which is fairly sensitive to lending professionals nor would we ever force somebody or tie things together. But I think the ability to really work with business owners particularly with our lending clientele and offer them state-of-the-art IT solutions is extremely important. It’s money that’s being left on the table and we got to push – I got to push all my divisions do a better job in this area.

But there’s good upside obviously.

Big upside. That’s why we’re here. That’s why we do all these things.

Terrific. Terrific. Thank you very much.

Thank you, Scott.

And ladies and gentlemen, I’m showing no further questions in the queue at this time. I’d like to turn the call back to you sir for closing remarks.

Great. I appreciate everybody participating in the call today and we look forward to reporting our second quarter. We, the Board declared a $0.40 dividend, it was a little early, we’re little early than usual but we feel really confident about where we are and wanted to get that out to the marketplace as soon as possible. So, we look forward to reporting our second quarter results in the near future and thank you all for attending today and your questions. Thank you.

Ladies and gentlemen, thank you for your participating in today’s conference. This does conclude the program. You may now disconnect. Everyone have a wonderful day.