NewtekOne, Inc. 8.00% Fixed Rate Senior Notes due 2028 (NEWTI) Q4 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Newtek Business Services Fourth Quarter 2016 Earnings Conference Call. At this time all participants are in a listen-only mode. Later, there will be a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder this conference call is being recorded. I would now like to turn the conference over to Barry Sloane, President and CEO. Sir, you may begin.

Good morning everyone and welcome to our full year 2016 financial results conference call. Presenting today Barry Sloane, President, CEO of Newtek Business Services Corp, and Jenny Eddelson, Chief Accounting Officer. For those of you who want to follow the Power Point presentation please go to our Web site newtekone.com, go to the investor relation relations section and presentation and you'll be able to follow along with the Power Point presentation. Jenny, could you please read the note regarding forward-looking statements.

Sure. The matters discussed in this presentation as well as in future, oral and written statements by management of Newtek Business Services Corp that are forward-looking statements are based on current management expectations that involve substantial risk and uncertainties which could cause actual results to differ materially from the results expressed in or implied by these forward-looking statements. Forward-looking statements relate to future events or our future financial performance. We generally identified forward-looking statements by terminology such as may, will, should, expect, plans, anticipate, could, intend, target, project, contemplate, believe, estimates, predicts, potential or continue or the negative of these terms or other similar expressions. Important assumptions include our ability to originate new investments, achieve certain margins and levels of profitability, the availability of additional capital and the ability to maintain certain debt to asset ratios. In light of these and other uncertainties the inclusion of a projections or forward-looking statement in this presentation should not be regarded as a representation by us that our plans or objectives will be achieved. The forward-looking statements contained in this presentation includes statement as to our future operating results, our business prospects and the prospects of our perspective portfolio companies, the impact of investments that we expect to make our informal relationships the third-party, the dependence of our future success on the general economy and is impact on the industries and which we invest, our ability to excess debt markets and equity markets, the ability of our portfolio companies to achieve their objectives, our expected financings and investments, our regulatory structure and tax status, our ability to operate as a BDC and a Rec, adequacy of our cash resources and working capital, the timing of cash flows, if any from the operations of our portfolio company, the timing, form and amount of any dividend distribution, the impacts of fluctuations and interest rate for our business, the valuation of any investments in portfolio companies, particularly those having no record trading market and our ability to recover unrealized losses. The following discussion should be ready in conjunction with our consolidated financial statements and related notes and other financial information carrying in our quarterly and annual reports filed with the U.S. SEC.

Thank you, Jenny. And for those following along we’re on Slide 2 of the presentation. We’re going to move into what we think are three reasons why Newtek Business Services Corp., stock symbol NEWT represents an attractive investment. On Slide 2, you could look at the Company’s historical stock performance, five-year total return including reinvested dividends, 307%, three-year return 49.1%, last year’s return, these are all based on calendar years including reinvest dividend 27.7% and clearly you could see by the chart that we had outperformed the S&P 500, Russell 2000 and NASDAQ composite. On Slide 3, we take a look at where Newtek as a business development corporation of [indiscernible] company, which is internally managed compares itself to other internally managed BDCs. We closed as of March 3rd at 1.16% in NAV, the average of our primary competitors of internally managed BDCs, 1.59%. We believe that the delta between us and the other participants is reflective of the size of our organization and longevity of the dividend history. We do believe that potentially there clearly is room for growth in NAV expansion. Slide 4, we take a look at our dividend distributions and the quality of our dividends. In 2016 approximately 47% of total quarterly cash and annual dividends paid qualify for preferential tax treatment, that’s because, this is income that basically has been up streamed from a portfolio of companies where we are taxed, therefore approximately 47% of the dividend would have a max tax rate of approximately 20% versus ordinary income, which is 39 and fraction up. So the actuality if you look at the dividend it's almost apples-to-apples almost 1% better because half of our dividend is taxed at a lower rate. So when you take a look at our organization from an investment opportunity, we hope to be able to provide investors with growth in dividends overtime, we hope to be able to provide them with growth in NAV. We're forecasting paying an annual cash dividend of $1.57 in 2017, that will be a 2.6% increase over the 2016 dividend of $1.53. Net asset value came in at 209 million or $14.30 a share at December 31, 2016, which is up also 2.6% over the NAV of 203 million at December 31, 22015. We really had a very good year across many different metrics where it was investment income, total portfolio size, we finish the year debt-to-equity at 2%, it is difficult for many people to follow that debt-to-equity number because a significant part of our asset base does fluctuate as we create SBA 7a loans with government guarantee pieces, typically liquidated within 10 days upon creation of them. So that the debt equity ratio can fluctuate, but it's very manageable from us from an investment prospective. Moving on to Slide 6, in 2016 we completed our seventh and largest securitization of uninsured loans participations, add of new Newtek business finance and those once again rated by S&P and that transaction was lead by Dutch bank with assistance from Capital One bank. We made an acquisition in 2016 and banc-serv Partners, that transaction its working our well, banc-serv Partners is a portfolio company of Newtek business services corp. We also issued a little excess of $40 million of corporate notes, these notes have a stock symbol AWTL and they trade on that NASDAQ global, all of our notes, including any WTC trader premium. On Slide 7, it gives you good snapshot of our small business lending platform the SBA 7a lender, we funded 309 million loans that was 27.5% increase. We also had some success in funding 504 loans which we think is an important growth position for the company, the 504 loan activity flows through Newtek business Credit NBC, that is a portfolio company and we look for larger loan originations and benefits from our 504 business in 2017. In January of 2017 for the month, the company received 932 million in loan referrals, a 79% increase over the January 2016 number. So our pipeline of opportunities continues to grow and enables us to be selective and pick really good credits and grow our business without having to sacrifice in credit quality. We anticipate funding 4 million in SBA 7a loans and 504 loans in 2017. That will represent approximately 26% increase over 2016. On Slide 8, many of you that have followed our company are familiar with this slide, its why we believe if you're comparing Newtek Business Service Corp to other BDC's why we're better. As an internally managed BDC we do not pay -- well I consider it 4% extra our management fee, the 2% base fee plus 2% of the profits above hurdle rate or above zero in many cases. Therefore in order for us to get our dividends we don't start off down negative 4%, our competitors don't really get that market clearing dividend we believe have to investment in riskier, levered, asset classes and to put more leverage on the books. When you look at our loan portfolio the average loan size 179,000; these are floating rate notes without a cap, by the prime and quarterly adjust. From an alignment of interest standpoint President and CEO own 7% of the outstanding shares, management's interest are very much aligned with shareholders. We don't make investments in CEOs, there's currently no SBIC leverage which is hidden leverage, from BDC perspective, yes it’s real debt, but doesn’t count to the leverage test, we don't currently have that leverage, there's no derivative securities in our BDCs and there's no direct lending exposure to oil and gas. On Slide 9, in 2016 we closed an underwritten offering of 2.5 million shares of common stock, $15.25 was the raise -- I apologize that wasn't 2016 that was 2017, time flies, Jenny's looking at me, and that deal was priced at $15.25. I'd say it was traded very well, our underwriters did a really nice job on it. We never closed below the price break and we obviously have traded up very nicely since that -- since those shares have cleared. KBW, Raymond James and for the first-time UBS's investment bank joined in acting as book weighing managers, we look forward to hopefully UBS being more involved with us in the future as well as all of the other underwriters that have done a really good job in working with us. That deal was well oversubscribed, we gained nearly six of our shareholders. I think it's important to note you can look at our organization prospectively using ATM strategies and structures going forward to raise future equity offerings where we hope to be able to raise money at a more consistent basis without listing discounts that might be necessary if you have a big transaction that we need to fund, but on a going forward basis I think you can look forward to us using ATM structure which typically has approximately a 2% being and being able to liquidate shares at the market. On Slide 10, we talk about our credit facilities, we have signed a letter of intent to increase our existing facility through Capital One bank, 75 million, we have a syndicate loan partner in that which we'll announce once the SBA approves it and the deal hopefully will close. Our Goldman Sachs facility of 30 million is still under drawn. We only have 22 million against it, there's still 14.1 million that is available and we are currently in discussions with Goldman to increase the size of that facility as well as to reduce our interest rates. Think it's important to note that you can see our cost of capital whether equity or debt, continues to improve. Moving to Slide 11, when you look at our organization, we are clearly not a typical BDC and for those of you that are familiar with our model what you're basically investing in is a company that has done a very good job historically in growing its loan origination business. We've had tremendous loan growth in the BDC, that's worked well, we've had organic growth in our portfolio companies and we've done strategic acquisitions within the business services footprint. So our ability to generate real attractive returns on equity and our lending business we hope and anticipate that we'll continue in the future, as well as continue to make strategic acquisitions within the business services footprint. Since converting to a BDC, we acquired Premier Payments that was a payment processor that allowed us to move significant resources to our late success New York facility. That was completed and done almost a year and half ago, time flies and that was done at about six times EBITDA, we made an investment in banc-serve Partners, that was done at a little bit over four times EBITDA that's worked that well. We anticipate by reporting some really good results from banc-serve Partners this year and we also did a small acquisition of some technology assets and accounts from an entity ITAS and Deer Valley Data. I believe we will have come close to getting 100% return of our investment within the calendar year or there above. So hopefully, we can continue to do, these types of attractive acquisitions. With that said lets to Slide 12 and look at our pipeline. There is not one of the single transactions that makes or breaks us, I think that's important to note, that’s all of my target candidates probably listening to my conference call today. But we hope and anticipate that we will close some of these, we actually have a technology professional services organization and 2.7 million of EBITDA that we think will significantly help our presence in the tax base. We have an ISO that has about $2 billion in annualized payment processing volume and they were very close to. We’ve recently had meetings with the factory and company what would bolster our own business in Newtek Business Credit. We’ve opened up discussions with a professional employment organization, with 3 million of EBITDA, we think that would certainly help our favorable benefits and HR solutions, opportunities offering these types of services to many of our alliance partners. We are in preliminary discussions with an SBIC funded management company that would give us the ability to do a dropdown SBIC. And six and seven I won't go into, but you could see we’re constantly looking at transactions picking up the best ones that makes the most sense for our shareholders and that really bring us attractive cash flows and a good synergy to get towards public comps in some of the business services basis. On Slide 13, for those of you that aren’t that familiar with the company. We acquire business opportunities cost effectively for the use of our proprietary financial technology platform called NewTracker. We’ve received the patterns on NewTracker, not only just for the software, but the operational methodology. We’ve got in excess of 570,000 business referrals from NewTracker in our history and this is kind of the secret sauce of why we believe, we’re very good in all these different business lines. We acquire clients more cost effectively than our competitors that are typically using feet on the street reps. We believe NewTracker is a disruptive technology that's similar to the salesforce.com for a business referral process and gives us complete transparency with referring partners, entities such as AIG, Amalgamated Bank, Credit Union National Association, The Hartford, Morgan Stanley, UBS, New Community Bank, et cetera. We’ve recently added Raymond James and their 7,000 broker dealer network, Mineke mufflers, Trade Association and True Value Hardware stores to give us additional alliance partner relationships. On Slide 14, we’re always expense conscious as a company that’s been bootstrapped since the day we opened up our doors in 1998. We took a new headquarters in Lake Success, New York and we vacated our space previously West Hemsted, which was a drag on earnings and as Jenny will report actually took a GAAP charge to that, however we've recently subletted the Hemsted space, we're happy to say. We should receive approximately $750,000 of rental income over the next two to three years. We've announced plans to close our Brownsville, Texas office which at one point had 60 or 70 people, that office will be closed and many of the staff will be relocated to other locations, that should happen in June that should reduce expense there as well. And our West Alice unit we cut approximately 12,000 to 13,000 square feet, that’s going to be reduced down to 3,000 that should also save us somewhere in the area of $100,000 a year. So we're always very focused on cost reduction. On Slide 15, we're also focused on upgrading and recruiting and hiring some great talent, here is a list of some of those people that have recently joined our organization in 2016. And we will continue to look at enhancing, recruiting and upgrading the best available talent for our strategy and business plan. On Slide 16, there are some highlights for those of you that are not quite familiar with our pedigree in SBA 7a lending, we're the largest non-bank SBA lender in the market place today, with the7th largest SBA lending including banks with a 14-year history of the full frequency and severity statistics intaking loans to small businesses in all 50 states. We've issued 7 S&P rated securitizations with our outstanding track record in that particular area. Our average loan size 179,000. So you can compare our average loans sizes of some of the average loans sizes of other BDCs that are 5 million, 10 million, 15, million, 20 million, you can't compare with respect to the diversification issues. Moving to Slide 17, you could see our growth in this particular market, referrals that we've received have increased by approximately 67% in the last calendar year. So we went from 5.1 billion to 8.5 billion, very, very pleased about that growth. We talked about the increase in January of $932 million of referrals in that month alone. Units are also increasing its really important, the units increased by 56% a year, enclosed units 38%. So I think it's important to note just from a processing prospective, we're getting more efficient. I give tremendous kudos to Peter Downs, our Chief Lending Officer, his technology team of Nilesh Joshi and Dan Hendel, as well as his management team, really focusing on efficiencies which will continue to make us better, particularly as we look at new lending program, in addition to our flagship SBA 7a loan program, our line of credit for inventory non-SBA, our line of credits for accounts receivables non-SBA and the 504 loan program. We look at Slide 18, further demonstrating our increasing pipeline, pipeline both in bar charts and end charts. Slide number 19 for those who that are familiar with the model, know that when we create a 7a loan, we sell the government guarantee piece of the secondary market, here is the history of net premiums trends on transactions with a five-year average, you can see it has been fairly stable. I will add that even with the recent conversation about increases of rates with respect to the Federal Reserve Chairman with a tenure backing up to 2.5%. Prices in this quarter have been strong, they're actually improved over the fourth quarter and for those of you that really try to track what's going on in this market, for us increases of rates do not necessarily reflect a declining premium on a government guarantee floating rate instrument. I think it's important to note that the primary driver will be changed in prepayments. Another important statistic is supply and demand. In institutions that create the government guarantee bonds tend to sell them at the end of quarters and tend to sell them particularly in the fourth quarter at the end of the year, when they need gain on sale. So first quarter prices from a supply and demand standpoint holding everything else constant is typically less supply in Q1 than demand right now there is a very significant appetite for government guaranteed floaters. On Slide 20 this is an important side for us, we also look at the credit quality of our portfolio fairly steady, fairly stable sitting at about 4% of the total portfolio size and charge offs for the calendar year December 31, 2016 as a percentage of the outstanding loan balance 4.8%, I got to say we're very proud of that, I think we've done a very good job. Slide 22 and 23 are our basic slides showing the cash flows and accounting treatment for 7a loan, I won't repeat that. Slide 24, a discussion of the 504 loan program which currently is a growing business for us, an important business for us, particularly at Newtek Business Credit. We believe that we will start to provide some more information on the progress of Newtek Business Credit in 2017 beginning in Q1, this is a program where we're allowed to make a loan to a business owner that can collateralize the loan by commercial real estate which we for acquisition or refinance, it's a 90% LTV, the government provides a 40% second debenture and gets taken out, we're left with a 50% first, which you can see on Slide 25, which we typically sell into the secondary markets, and on Slide 26 you can see the cash that's created on 504 loans and you could also see the accounting treatment. Important aspect and difference of the 504 business is when a loan is made the entire loan balance comes off our books. We do keep a servicing asset and we get gain on sell treatment. There is nothing that sits on our books with respect to 504 loans. The junior debt is taken out by the CEC through government debentures and the conventional first is sold into a secondary market that is not like the government guaranteed 7a market, but is primarily driven by banks that are looking for attractive three and five-year type paper with call protection on them. Moving to Slide 27, we get into the portfolio companies, our electronic payment processing business today is primarily driven by Newtek Merchant Solutions in premier payments. We're close to $6 billion of processing, with the new acquisition hopefully we'll get close to 8 billion of processing. You know as you start to get to those bigger numbers, you start to move towards entities like Vantiv Global, First Data and CardConnect is probably a better comparison that we should add to this in future presentations, our volume will be closers to there. But you could see the public coms traded fairly high multiples in terms of aiding public versus private to get the size back to their as well. In the meantime, we get to grow our business, add to acquisitions the premier deals that are six times, we like multiples in that area, in that range six times EBITDA, put a little bit of debt on it, you're now looking at a 20% pre-tax cash-on-cash return. Those are things that are valuable to us, it enables us to upstream money and attractive dividend, grow the size of the business and move towards public multiples. You can see that the value of our business this year, we grew revenues high-single digits, we grew adjusted EBITDA 17.6%. If you took Premier Payments, which we only owned for about half a year and you reduce that factor, we'd still be in the low-double digits, frankly those are increases that I am proud of and I think important for our shareholders. We look at Slide 28, there is a lot of opportunities in the payment processing space, it's a technological solution. Today, it’s not really pricing comparison whether you're trying to differentiate yourself through at EMV compliance or through programs like AMEX OptBlue, Mobile Payments, better solutions for e-commerce, this is a great space for us to be in, we need to be nimble, we need to bring the best technological solutions to our customers every day. At our technology sector, this is the business that is in transformation. We are aggressively adopting hyper convergent solutions to our customers that give us the ability to take multiple business applications run them in our cloud, give them disaster recovery, reduce their licensing fees, reduce the cost of boxes, reduce the power consumption, reduce the bandwidth consumption, reduce the space in the datacenter, reduce the amount of labor that they have. Hyper convergent technologies and the changes that are going to occur in the IT world are huge and they're huge amongst Fortune 1000 and they're huge amongst SMBs. We want to be very well positioned, so as we move forward and you’ve got products like desktop business service, security as a service, infrastructure as a service. We think this is a major opportunity. We look at this opportunity similar to the opportunity that we saw in ’08, ’09 in lending. It’s a major shift going on in the dollars that are going to spend in IT and the way those dollars are going to be spent and we plan to taking advantage of it, some of our acquisitions will be very helpful to this particular sector that we have in the BDC. Moving on to Slide 31, I just want to state this is a bit of an awkward chart for us in the sense that adjusted EBITDA over the whole company isn’t necessarily the best way to look at our cash flows and particularly given the lender. However, we just really want to try to demonstrate what piece of our business is lending versus business services. So obviously we’re still looking at about 65% of EBITDA, but when you look at it from a dividending perspective, they’re more like 55-45, and I think that's probably a decent balance for us. We want to make sure that our portfolio companies do count for that, obviously interest expense is an important part of a lender. On Slide 32, to wrap things up from a summary stand point before I pass the call over to Jenny, we have a differentiated business model, we believe we offer a great dividend with less risk then our BDC counter parties. We believe we offer an alignment of interest with our shareholders, with management and the board owning significant stock positions. We don’t purchase re-packet loans like other BDCs, we originate them on a true retail basis which we think gives a very nice feel to our lending business. Our lending business as part of NAV is valued at a discount to face on the notes. Respectively our lending business has a lot of other interesting things that prospectively can bring value down the road to probably shareholders. We're forecasting an annual dividend of about 57 in 2017, that’s up 2.6%. We're not a newbie, we've been around since 2000 as a public trade company and we're very, very appreciative of our shareholder base and the investment in good faith that you've made in our company historically and look forward to producing really good earnings reports and future successes. Jenny, would you like to do the financial review.

Sure, thanks Berry. Good morning, everyone and thank you for joining today's call. I would like to start with some financial highlights from our 2016 consolidated statement of operation. Please turn to Slide 34. In total, we had investment income of $31 million and 18.8% increase over $26.1 million in 2016. The majority of this increase was from the growth and income from interest, servicing and other income on our non-affiliated investments year-over-year. The increase in interest income was attributable to the average outstanding performing portfolio of SDA loans increased in 176.2 million from a 137 million for the year ended December 31, 2016 and 2015 respectively as well as the increase in primary from 3.25% to 3.5% in December 2015. We recognized servicing income of 6.2 million in 2016 as compared to 4.6 million in 2015. The increase was the result of the increased size of the SBA loan portfolio for which we earn servicing income increasing from 520.8 million to 633.1 million year-over-year. Other income which relates primarily to legal, packaging and other loan related fees increased by approximately 40.7% from 1.9 million in 2015 to 2.7 million in 2016 as a result of an increase in loan origination volume year-over-year. Dividend income in 2016 was $10.6 million versus $10.2 million in 2015. The 2016 period our dividend income consisted of approximately 6.8 million from Newtek Merchant Solutions, $1.7 million from Premier Payments, $700,000 from small business lending, $990,000 from Newtek Technology Solution and a $300,000 from bank-serv Partners, a new controlled investment that we added to our portfolio this past June. It's important to note also that in 2015 we had approximately 2.3 million in non-recurring dividend from other controlled portfolio companies that did not re-occur in 2016. Total expenses increased by $8 million year-over-year, salaries and benefits increased by 2.5 million, which included 577,000 of stock based compensation expense incurred during the year ended December 31, 2016 related to the issuance of restricted stock awards to employees beginning in the latter half of 2016. The remaining increase in salaries and benefits is approximately 1.9 million year-over-year related to increases in salaries primarily at NSCF and it's commensurate with the increases in loan originations underwriting closing and servicing activities required to manage a growing portfolio. Interest expense increased by approximately $2 million year over year. The increase was due primarily to a 2.7 million increase in interest on the notes due 2022 and notes due 2021 that were issued in September 2015 and April 2016. This increase is offset by a $361,000 decrease in interest expense on related party notes payable as well as a decrease of $564,000 in interest expense on the term loan that was paid off in June 2015. Other general and administrative expenses increased approximately $3.6 million year over year and included an $899,000 increase in rent expense of which $604,000 was to recognize the remaining West Hampstead, New York lease liability. Other G&A also increased by an increase in referral fees and loan processing costs of approximately 1.7 million which was commensurate with the increase in loan originations year-over-year. IP expenses also increased year over year by approximately $370,000 as a result in part of increased IP projects related to various enhancements to our system and new IP initiatives. Overall, we had a net investment loss of $9.3 million as compared to a net investment loss of $6.2 million year-over-year. Adjusted net investment income for the year was 23.2 million or a $1.60 per share. Our adjusted net investment income for the fourth quarter of 2016 was 6.7 million or $0.46 per share. Net realized and unrealized gains totaled a positive $36.6 million and primarily represents gain on the sale of the guarantee portion of SBA loans sold during the year. In 2016 we originated 402 loans totaling $309.1 million and sold 379 loans for $226.4 million generating $32.4 million in realized gains. These gains were offset by realized losses of 925,000 for the year. The average sale price as a percentage of the principle balance was 111.91%. During 2015 we originated 292 loans totaling $242.5 million and sold 304 loans for $211.1 million generating $29.6 million in realized gains at an average sales price of 111.72%. The 2015 realized gains were offset by realized losses of 1.2 million for the year. Overall our operating results for the year resulted in the increase in net assets of 27.3 million or a $1.88 per share. I would now like to turn the call back to Barry.

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

Thank you, [Operator Instructions] our first question comes from Arren Cyganovich with D.A. Davidson, you may begin.

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

I think you’ve -- there is no one dominant factor that you’ve outlined that can answer that quarter. There are all an important part of it. So a couple of things to take from this. One of the things we emphasize is an investment in Newtek, is an investment in an organization that has done a very good job of figuring out, using technology, how to acquire cost effectively opportunities in credit that work and make sense. So some of the things we are looking to do is develop other programs outside of the four that we currently are in to make utilization of those opportunities. Number two, we do want to be selective. We want to pick the best credits that we have. Number three, a lot of financial services concerns, especially finance companies, bond bank lenders, they all get excited and say, I could grow 50%, I could grow 100% and it’s real easy to do if you’ve got the money and you’ve got the debt lines, but this still a very much of a human business where you’ve got human interaction and controlled growth is important, that’s why we’ve been a lender for 130 years and now God willing you don't step on any land mines I hope I don't Jinx myself today, but I think that we want to continue to let shareholders know they were prudent, we’re not just trying to put numbers on the books, because in the lending market, the problems always show up two, three, four years down the road. So I think that the way for you and investors to look at us is the company is doing what makes sense, they’re creating a large funnel, they’re picking through the funnel, they’re looking to add other loan programs on to make utilization of some of those other lead flows, they are diversified, they're average balance is going down, and they are kind of not getting carried away with themselves at this point. We wake up every morning thinking about who’s going to beat us at our game, who’s going to knock us off.

Thanks. That’s good. I appreciate that. And then the 400 million of fundings for the guidance this year. How much of that broken down between 7a and 504 loans?

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

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

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

Thank you. Our next question is from Lisa Springer with Singular Research. You may begin.

My question considers the expanded revolver credit facility for Capital One, you mentioned that’s going to be at a reduced borrowing rate. I'm wondering if you could give us little more color around that and also when do you expect to be able to close this?

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

Great, thank you.

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

First of all, when you answered the question about the mix of SBA 7a versus 504, I'm curious with 35 million in 504 loans in the pipeline at the end of the year, and you expected to do may be 40 million for the year. How does that translate, are you -- are those 35 million SBA 504 loans in the pipeline still in the screening stage and you’re going to screen that out?

It’s a good question Casey. I think that from our prospective, until we get to approved pending closing, its -- you're still dealing with ratios. I would expect that we should be able to close on half of those loans may be 60% of those loans that I see here today and then we'll keep building up the price line. And we try to be conservative in our forecasting, the other thing I think that's important to note from your financial models for income purposes at least in 2017, you need to make a loan fully fund it, season it for a quarter or two and then you're selling the conventional piece out for the gain on the sale. The fee that you're booking for point the interest income, that all flows through, but the primary income characteristic would be the sale of the conventional piece. So we try be as conservative and as we realize that we have a lot of people out there looking at things and forecasting, but I think that from your prospective, some assumptions around the 30 million to 40 million for the gain on sales is probably okay. But that’s going to come in a portfolio company and would wind up may be or may be not getting dividend at all.

Right, I mean that’s was going to be my next question, as this sits in the portfolio company, so were actually not going to see necessarily this income unless it gets dividends up from the portfolio company on the traditional sort of BDC income statement, is that correct?

That is correct, yes.

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

Sure, so for a Mynecki muffler I think there is close to 750 Mynecki muffler dealers in the association and these are dealers that are in disparate markets all over the United States, and a typically Mynecki muffler dealer takes payments, has payroll, may have a local website, needs health insurance for its employees, needs workman's comp and in many cases needs a business loan. Maybe to refinance bank debt, maybe to do acquisitions of other dealer associations. So we recently started an outbound calling unit, that's headed up by a gentleman by the name of Andy Cholis, who now works at our Lake Success unit and he is adding to his staff to be able to take on these types of opportunities, make outbound calls to members of these associations, introduce Newtek to them as a preferred partner and let all these entities know that we're here for them today and in the future as to what we can do for them. This is you know, we needed to get into this type of facility, this type of staffing and bring in these types of relationships. True Value was interesting, obviously, there's payments, there is loans, a lot of contractors going to True Value Hardware stores, they have house accounts, there's factoring of receivables there for lines of credit backed by accounts receivable. Lot of opportunities in these associations for SMVs and these are entities that typically don't know what their options are. And they don't run around looking for SPA loans they just want financing.

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

Sure, the current facility that we have for Newtek Business Credit which is with Sterling Bank and Bank United is a $35 million facility. I believe on the 504 piece the advances up to 90% of the loan amount. So we have decent room there and I think don't anticipate, if we needed more that that would be problematic for us to get more. There is positive carry while the loans are held in the warehouse and there is significant fee income that we receive on 504 lending. A lot of that is written out in one of the slides in the Power Point, but we feel very good about the 504 business you know particularly given that it's really obviously not a bankable product and business owners, all they know is they have a piece of commercial real estate and frankly as you may be aware, a small business owner walking into a local community bank, these banks will do income producing loans, but they typically do them on investor properties not owner occupied properties. So this is an interesting program that we have an ability and expertise in. And I think it could be a very nice complement to our overall lending platform going forward.

Okay. Great. Thanks for taking my questions.

Thank you. [Operator Instructions]. Our next question comes from Leslie Vandegrift with Raymond James. You may begin.

Quick question, I know Jennifer you went through the dividend income for the year. Just missed the bank serve number, if I could grab that?

Sure. That was 300,000.

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

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

Yes.

So, Leslie, part of that number. We get some deals that we don’t pay any referrals fees on. So there is a bit of blend there, hopefully that's helpful. I’ve got internal sales people, external sales people. But I think you could use the 75% mark, which has been pretty consistent over the last couple of years. We’re using that in our business model and we would suggest you use that too.

Okay. So there were late funding in the quarter that you held to the first quarter, because you saw [Multiple Speakers].

I’m sorry, carryover.

Yes, exactly. Carryover.

We had some carryover.

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

Sure. This is pretty premature. This is an opportunity we haven’t issued a term sheet on. But obviously, the benefits of an SBIC fund here, sort of near and dear to many BDCs, it enables you to get some additional leverage beyond one-to-one, because the SBIC debt doesn’t count. We are looking at -- to put this way, I do not think you will see us have a dropdown SBIC in 2017. But we may look to make an investment with an SBIC, where it would just be an investment in the fund that perceptively might give us some rights down the road, any unique area of lending. But frankly some of our additional opportunities that Casey pointed out, would be useful. However, the one situation, we’re looking at, is sort of a unique area of lending that we think has some risks characteristic. So it's an early discussion and I would guess most of my targets are listening, you know my phone calls, so I try not to get too over exuberant about these things.

Thank you, I am showing no further questions at this time. I would like to turn the call back over to you Barry Sloane, for closing remarks.

Great, thank you very much just, one more before we sign off, I have one question that was emailed at last night from Nick Rand from KBW. How did interest income increased so much in fourth quarter? We had a delta in the fourth quarter, we had one loan recovery that came back couple of 100,000 of additional interest -- 400,000 of additional interest that we were able to recapture. I mean we do have these circumstances, this is not an anomaly, it's not reoccurring income, but this does happen to us in many cases were we will wind up repositioning a loan and a work out where we recapture interest because of the excess collateral, so that’s happen in Q4. And we appreciate next question from KBW. So with that said as a wrap up, I want to thank everybody for joining the call and participating and we look forward to our first quarter call, we announced our quarterly dividend yesterday and we look forward to increasing and improving second, third and fourth quarter results. Thank you very much and have a great day.

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