Ladies and gentlemen, thank you for standing by. And welcome to the Newtek Business Services Q3 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers presentation there will be question and answer session. [Operator Instructions].I would now like to hand the conference over to you speaker, Barry Sloane, President, CEO and Founder. Please go ahead sir.

Thank you very much, operator and good morning everybody. I'm Barry Sloane. Welcome to our third quarter 2019 financial results conference call. I would like to call your attention to PowerPoint presentation that we have on our website. Go to newtekone.com. That's a relation section. You could see a copy of the PowerPoint presentation. That will also be archive with the audio part of our presentation today.Here with today is Chris Towers, our Chief Accounting Officer and he will help me through the presentation. I want to thank everyone for their interest and investment in Newtek Business Service Corp. stock symbol NEWT.Let's go forward to slide number two. We would like to show our historical equity performance. We've consistently outperformed the S&P 500, Russell 2000 and OBC Indices. As of September 30, 2019, our five-year return 210%, our three-year return 108%, our one-year return year to-date 18.3%, which does not include the Q4 dividend which is coming out to shareholders of record.Slide number three, representation of where we sit versus other BDCs on a sector evaluation comparison. We are currently trading below market capital sort of I refer is the magic $500 million which sort of brings you into small-cap land out of microcap or nanocap.BDCs with the market low $500 million created a median price income of 0.85. Most of the BPCs obviously are externally manage and trade at around par or discount and provide median current yield of 10.6%.Internally managed BDC's were in that bucket, trade at a median price of NAV 1.22 and a core yield of 7.8%, our current market cap of $4.36 million that does not include shares that was done in the current quarter.I would say, we're somewhere between as of today $235 million to $440 million in market cap including those shares. We're…

Thank you, Barry. Good morning everyone. You can find a summary of our third quarter 2019 results on Slide 43 of the presentation, as well as a reconciliation of our adjusted net investment income or adjusted NII on Slide 45.For the third quarter 2019, we had a net investment loss of $0.5 million or $0.03 per share as compared to a net investment loss of $1.4 million or $0.08 per share in the third quarter of 2018 to the 62.5% improvement on a per share basis.Adjusted NII which is the finance slide 44 was $12.2 million or $0.63 per share in the third quarter of 2019 as compared to $9.3 million or $0.50 per share in the third quarter of 2018, a 26% improvement on a per share basis.Focusing on some third quarter 2019 highlights, we recognize $60 million of total investment income, a 29.4% increase over the third quarter of 2018. Interest dividends and servicing income were the primary drivers for the increase, with interest income increasing by 25.5% resulting from a higher interest rate on our SBA loan investments year-over-year and a larger performing loan portfolio.Distributions from portfolio companies for the quarter included $5.2 million from NMS, $150,000 from IPM, $250,000 from Cisco, $100,000 from Mobile Money and $428,000 from Newtek Conventional Lending, our joint venture with BlackRock TCP.Servicing income increased by 16.8% to $2.5 million for the third quarter of 2019 versus $2.2 million in the same quarter last year, which is attributable to the average servicing portfolio growing from $997 million at September 30, 2018 to $1.2 billion at September 30, 2019.Total expenses increased by $2.7 million quarter-over-quarter or 19.7%. Salaries and benefits decreased by 34.4% primarily due to NSPF employees being hired by Small Business Lending, LLC or SBL, one of Newtek's wholly owned controlled…

Thank you operator. We're open for questions now.

Thank you. [Operator Instructions] Our first question comes from the line of Mickey Schleien with Ladenburg. Your line is open.

Yes. Good morning Barry. I wanted to follow-up on some of your prepared comments. So if I recall correctly going into this year one of your main goals was to increase the close rate using existing staffing. So clearly there has been some disappointment on that metric despite having a good solid year. How do you -- what are you anticipating in terms of operating leverage going into 2020 to meet your goals?

Thank you, Mickey. And I will tell you I don't read from a script. You could probably tell that's. So we're typically not prepared. I will tell you that relative that a close rate and this is just focusing on 7(a) only. Our 7(a) close rate is anticipated to still be up 9% or 10% for the year. And if you take all loans into consideration it's between 20% and 30%. So our close rates actually done pretty well. What's the second part of your question Mickey?

Well, I guess I'm not quite following because it sounded like you were disappointed in loan volume and you were attributing that to not being able to close as much as you would like. So even though -- are you saying that even though close rates went up they didn't go up as much as you would have liked?

That's exactly correct. Yes.

Okay.

Look, the math is, the 7(a) business was up 10% and to be transparent as we always are. The delta between what we think we're going to do for the year which is $520 million versus our former forecast was below. As we were came in at the forward forecast or a portion of that delta, okay? We just would have had bigger numbers. We would have distributed more income, didn't happened. I think that is based upon an inflection point in the business relative to process and personnel. We got the appropriate amount of referrals from the ecosystem, the right product came to us, but we didn't execute. I do think these are bugs that may take another quarter to get worked out, but I think we'll be back on our feet in the near term. And I think it's also important to note that we think the economy has changed and there's certain credits within the universe of credits that we see that we probably wouldn't do in a weaker economy.

I understand. And the second part of my question was what are you sort of assuming for close rate improvement if any going into next year?

Good question. I think that we're at the beginning of this year we forecasted around the call it 25% growth in the 7(a) business. I think we're probably more in the range of between 10% to 20% going forward. First -- and it's important to note that's for 7(a) only.

Yes.

Once again there is an ecosystem which we think is very valuable in this ecosystem when you reduce the amount of 7(a) and you go in to 504, you now get fee income, you now get different kind of gain on sale, you get no balance sheet. In nonconforming you've got much bigger loans. You're doing securitizations out of them. And you're getting reoccurring income off of the spread that's based upon the joint venture giving earnings up in a fairly high manner. So at times this is the one thing about our company in life no matter what you do there's always someone else, so what about this or what about that.So the reliance upon the 7(a) gain on sale or what I refer to is P times Q. Hopefully in the future will be a smaller portion of what we do as we grow this business model, grow the ecosystem and diversify into the company that we have said we're going to be on conference call after conference call.

I understand that that's helpful, Barry. One more question, my last question. So looking at SBA 7(a) prices, there was some moderate weakness in the 25-year tenure in the third quarter. But the shorter terms were stable. I'd like to understand your view on how the market is thinking about 7(a) pricing in general longer versus shorter and in particular given some clearer signs that the economy is slowing?

Sure. So, one important to note, our pricing from Q2 to Q3 was essentially flat. And our pricing from Q3 this year to Q3 last year was a significant increase. And again on sale income third quarter this year to third quarter last year was up a little bit, I'll say practically flat for all intents and purposes. We believe the big determinant about pricing relates to number one, volatility and refinancing. And with interest rates softening a little bit particularly on the short and the curve with a 75% decline, and the curve, I believe eventually steepening out, we do anticipate that there'll be some burnout in the ability of the borrowers to be able to go get another fixed rate conventional loan.The market I think has shown that. So when you look at one of our slides which has sort of like a five-year or six-year average over prices, we're like 11.5 [ph] and the average I think over that timeframe is like a 11.7 [ph]. So it's kind of near equilibrium. Now the shorter term paper, Mickey, in my opinion has increased in price and the longer term paper has come down sort of on a hyper technical basis there is a pool assemblers they strip out an IO coupon which is very sensitive to prepayments. That's why the longer term paper has come down because of that hyper technical coupon stripping. I personally don't believe that that's a long term trend. I think from a market standpoint if you model us between one ten and a half to one eleven and a half I think that's a fairly safe, that's once again we give you five or six years worth of history where these things have traded at, they've actually trading at significantly higher levels. We tend to haircut those prices because as you know the business you can't miss.

I understand, Barry. That's really helpful. I appreciate your time today. That's it for me.

Thank you, Mickey.

Thank you. Our next question comes from Harold Elish with UBS. Your line is open.

Good morning Barry. Going back to the 7(a) sector you had some growth in a sector where it appears that the economy is slowing down a little bit and that originations overall are down. Do you have a sense from whom you're taking market share at this point? I mean where is that coming from as it gravitates towards Newtek?

Yes, Harry, I appreciate that. I think that the important aspect to note is when you look at our business we disintermediation the broker or the BDO. The broker or the BDO is typically in the SBA 7(a) business the one that brings business to banks and non-bank lenders. So what we do is we create borrowers. If you sample the portfolio of 20,000 small businesses and you said, Gee, how to get an SBA loan and what it is? I bet you a very small percentage of them would know what it is or know where to go. And we typically originate. I say, typically I don't think we've cut a rate in seven or eight years.So we're not in competition, but what we do is we sell payment and we sell payment whether we're in the conventional space or whether we are in the -- or whether in the SBA space. What I mean by that is, we're at ten to 25-year amortizing lender, fully amortizing lender, no balloon [ph]. So when the borrower comes to us that's we talk about. We talk about 10 to 25-year amortizing loans. We talk about single digit interest rates. And borrowers care about payment. So that's where we're getting market share.We're educating business owners how to apply for a business loan using our file vault, using technology. So they're not sending e-mails with PDFs, they're not meeting with brokers that are misguiding them. That's where we're getting market share. We're using technology in a process of splitting up the function that a broker typically does who works for the highest commission and goes to the lender that will given the most generous credit profile. That's the differential. That's a differentiator. And there's such a universe of business owners that don't know where to go to get these kinds of loans. That's what we're benefiting from them.

I appreciate, Barry. Thanks very much.

Thank you.

Thank you. And our next question comes from the line of Fred Cannon with KBW. Your line is open.

Thanks. Thanks Barry and good morning. So I have just two questions. One on the referral volumes on slide 19. You have a year over year growth in the nine months, what we calculated that this quarter the third quarter was down quarter-on-quarter and down year-on-year and I was wondering if we're at least seen a sign of a slowdown in loan referrals?

Fred, I don't see that. I'll check with our back office this morning and the fourth quarters coming in pretty good. So sometimes a trend doesn't necessarily happen in a quarter. Maybe we lost one or two players. We're constantly – portfolio is constantly – we're finding people coming in and coming out. So answer that would be no. Similar that we don't think that there should be a take away and a trend that our recovery rates have gone from 60 to 80, but it did happen, so we report it and just track it on a regular basis. And so I don't see that as a trend.

Okay. Thanks. And then one other question on the -- and this just my kind of confusion. On the BlackRock deal that the nonconforming loan piece of the business. On Slide 11, you have -- you say that you're the servicer and you get 100 basis points of servicing on that portfolio. At the same time I believe your receiving interest income on that too. I'm just wondering how you get servicing and interest income at the same time. I'm just not quite clear on the accounting?

Appreciate the question. So let's say we've got an A credit, a B credit and a C credit and let's say the B credit is treasuries plus five-year treasuries plus A 800. So, arguably, got like an 8.65 coupon, SBL services for 100 basis points. It gets a 100 basis points period end of story and the J.V. gets 7.65. So the equity in the JV is getting a 7.65 coupon, it gets warehoused and the Deutsche Bank facility would be close to 3.6%, 3.7%, then it goes into a securitization to get that spread income there.But the servicing income is a 100% ours. So theoretically let's say we get to a portfolio of use around number, $1 billion worth of loans. We would get $10 million worth of income, which gets laid onto our infrastructure in SBL, that's able to service those loans and had a lot of expense against it. And that is reoccurring income over time.

So that $400,000 that you show earning from the NCL this quarter, that servicing income and then any kind of net interest income?

No servicing income in there. The servicing income is earned by SBL. That income is origination fees and that income is spread income on the 7.65 and the example I got versus my Deutsche Bank cost of funding and that's the income.

Okay. So SBL earns these…

The other income, right, so the other income is earned by SBL separately, that's 100 basis points is a 100% earned by a portfolio company and Newtek owns 100% of.

Got it.

So there's no servicing income in the joint venture, none.

Got it. Okay. I need to get my head around it, Barry. But that's helpful. I just need to walk through it my own mind. I think Chris maybe you can help me on this. The JV document is in public filings?

The JV results and balance sheet will be in the 10-Qs and 10-K.

Okay, great. I'll be able to work through that then. Thanks Barry.

Thank you, Fred.

Thank you. And our next question comes from the line of Scott Sullivan with Raymond James. Your line is open.

Thanks for taking my call and congratulations on a great quarter.

Thank you, Scott.

I got a couple of questions. One partially answered. I'm always amazed at sort of the secret sauce you guys have in lending. I think the lot of banks would kill for the sort of loan growth that you have. You did go over that pretty well. So, I'll pivot over to could you speak to the diversification of your income sort of away from the SBA side?

Sure. So, I think that – I'd like to say it is what it is, but there's been a lot of focus on and I'll keep using the term P times Q. And that's the gain on sale that we've profited from over 16 or 17 years which relates to us making a loan, selling a government guaranteed piece and getting a gain on sale, which gives us very high velocity and very high return on equity. As a matter of fact our return on equity I believe is better than Main's over the last five years and better than Hercules. I got to go back and check that. I think that's the case.Aside from that we get 100 basis points to service an SBA 7(a) loan, that's another stream of income. We get dividend income from the Merchant Solutions business. We get dividend income from SBL for servicing third party loans. The other portfolio companies I think in particular Newtek Technology Solutions, although we haven't talked about it for a while. One of my investors likes to affectionately refer to me as Jeff Bezos as a joke because this has been a tough business for us for a long period of time.However we believed in the trade, trend in cloud we have failed to bring in the right management team in several iterations. We've brought in a guy who's made a tremendous turnaround and improvement in the business along with some more to help over the last six months. So that's going to be a contributor as well. Now your segway into Newtek Conventional Lending with BlackRock and we take the operational leverage of the new tech ecosystem. What is that? That's $20 million worth of referrals. That's a servicing operation. That's a loan assembly operation with the requisite…

What would you say is the blue sky scenario for the JV?

My Chief Legal Officer tells me it's cloudy every day. So I will answer on that, but here's what I can tell you and I appreciate the question. The ability to provide 10 to 25-year amortizing loans at a single digit interest rate to businesses and markets wide open. That is not a bank market. Banks won't -- banks will not do those long-end loans. Banks will not do loans with frankly little or no covenants and banks won't do the over advance. All I'm describing is the credit criteria in 7(a). And we've just moved over to two bigger loans in this nonconforming segment.So we feel pretty good about it. We're going to take this quarter by quarter. And we feel good about our dividend forecast for next year to 2020. We feel good about approaching half a billion dollar market cap. Thank you 2019. What I say, okay, Chris. 2019, so yes, I think we're well set up for 2020.

Thanks. That's very helpful. One last question, could you speak to the net and to the NAV?

Look, I think that BDCs have a difficult time increasing NAV, because it's a static portfolio loans. I mean, you kind of can't get around that. So I mean, if you have a fixed income portfolio what's going to move the NAV on that portfolio. Okay. What's going to move the NAV? It could be equity kickers which it's clearly based on active, private equity market, IPO market et cetera, could be based on a reduction in rates. I don't know about that because we're pretty low. Could be based upon spreads tightening and we're at all time spreads. So when you look at the portfolio or NAV improvements, okay, given our other BDCs operate it's almost impossible to move NAV which is why most of them traded a discount to NAV for a variety of reasons. And a lot of our invest in leveraged loans because they've got to pay themselves 1.5% to 2% in order to be able to get to an equivalent dividend that we get to in the market.So what is our NAV increase? Well, we've got a very large portfolio company has done very well and is attractive versus public comps. We also now have the JV with BlackRock which we're creating assets that have valuation for the thing that it's created. So that's going to be a needle mover to now. We also have some of the portfolio companies that we'll talk about further like Managed Tech Solutions and also I think we'll be moving in the right direction. So look, I mean at the end of the day people typically buy BDCs for the coupon and next year for us it might be a coupon market. I don't know. It depends. I don't know if our Presidents Elizabeth Warren or its Donald Trump…

Thanks so much and congrats again.

Thank you.

Thank you. And our next question comes from Rich Kendrick with Stifel. Your line is open.

Rich?

Rich, if your line is on mute please unmute. If your phone is on speaker please lift your handset. We see no response. I will remove you from the podium. Our next question comes from Casey Alexander with Compass Point. Your line is open.

Hi. Good morning Barry.

Casey, good morning. How you're doing today?

I'm fine. Thank you. And forgive me if I -- I'm not trying to sound like a loaded gun, but I am going to ask a little about what about this, what about that questions.

No problem. Casey, we are always prepared for you. I always put on my flak jacket. So please go on.

The $55 million loan portfolio at NCL, how many borrowers does that encompass?

Typically we don't get into the granularity of the portfolio companies, Casey for a variety of reasons. But for you I think it's around 10 give or take.

Okay. And those are not -- in no way those are not SBA guaranteed loans. Those are outside the SBA program?

Yes. That's – we were at a whole explanation. We call them nonconforming conventional loans, correct.

Right. So, I'm kind of unfamiliar with the process of a DCF analysis on a loan that creates a mark as soon as the loan is made that doesn't have a government guaranteed relation to it that marks at 105.6 as soon as it goes on the books. Can you give me some more color on how that process works?

Sure. The way the process would work Casey and it's the same way that we mark their 7(a) loans. You see Casey you look at our case and Qs every quarter, right, for the last five years. And when you look at our uninsured portions of our loans, Casey, those are not guaranteed loans, right? Is that yes?

Yes.

Okay. We use the same methodology to mark these loans as those loans. Other words, they have no guarantee on it. They are effectively conventional loans in nature because they're not guaranteed. We take a 100% of the risk on that uninsured portion of the loan portfolio. So what we do is we're unique in that we use the securitization market. We know where single A is trade, BBB minus is trade, BBs and we spread a market clearing yield to the value with the loans based upon what we believe will be a 20% cumulative gross default, a 40% severity which is what we've experienced in the 7(a) world over 17 years.Although, we do believe the quality of these loans will be higher to come up with a price based upon discounted cash flow. That's how you do it. I mean discounted cash flow. It's nothing that we haven't done in the uninsured portion of the 7(a) portfolio. So it's risk. It's the same credit box. It's just the loans are larger. It's the same ecosystem. It's the same referring parties. There's nothing different doing.

Okay. Secondly, based upon your reported fundings in the SBA 7(a) business, I understand what you say about process providing some impediment, tightening your credit box, providing some impediment. So I totally understand those. Then based upon your fundings of SBA 7(a) in the third quarter it would presume hundred and eighty eight eighty five million of fundings in the fourth quarter to hit your $520 million target. Somehow that increase kind of doesn't fit with your comments regarding process and tightening the credit box. Can you give us some color on that please?

Yes. I mean I think that -- I think last year in the fourth quarter we closed about 150 million I think. And I wish I had a 100% crystal ball in terms of what's going to happen over the next 45 days because I could say, Casey, guaranteed it's going to happen. I think what I said on the call was that we're working things out with respect to the process and that we think it'll take a quarter or two.

Okay. That's fair. The dividend of $4.5 million during the quarter and I appreciate the breakdown. I did get a chance right all down so I'm going to have to go back to the transcript to get it. But what percentage of portfolio company net income, the cumulative net income of the portfolio companies of the quarter. What percentage was that 4.5 million? In other words was the portfolio -- the cumulative portfolio company net income 5 million, 6 million. I'm trying to get to what sort of dividend payout ratio of the portfolio companies that represents?

Well, Casey I think in the past we talked about this that approximately we've had years where 35% of our dividend income is paid at a portfolio company income. By the way what's great about portfolio income, Casey? It's taxable. But when it flows through to the investor they get it at 20% tax rate instead of their ordinary tax rate. So as a receiver of dividends I love portfolio income. As a percentage I haven't done it maybe Chris to do some math, while we go through the rest of your questions.But I think that from what I would refer to as an ordinary income number, I think that the game was only and I say only about a million and a half, but I think it's also important to note when I went to that slide which I'll try to pull out. Our ordinary income for the year is growing and it grew a lot over the third quarter even with the sale. So I'm not really sure where you're going with the question. But the point is if I create an asset and I sell it for a gain, right, so I monetize it. And that takes that reoccurring stream out of it. And I'm still able to get a more reoccurring, a higher reoccurring stream of income even after the gain, I think that's a great thing. And what's even greater is I get to give it to my shareholders at a lower tax rate.

Okay. Thank you for that answer. One last one. The loan delinquency over 91 days that more than doubled quarter-over-quarter and you have 175 loans in liquidation, I understand you're in the belly of the curve of the seasoning of your loan portfolio. I just wonder what type of manpower does it take to manage the increase in loans that you're liquidating collateral on. And has that had any impact on your ability to underwrite?

So what – 20 [ph] -- Got it. So I'm just wondering how much manpower you have for the work out team?

Doubbling Casey has my ears, my ears perked up. Could you show me where there's a double? I don't see a double. By the way, sometimes I don't see things then somebody like you tells me about and I got to look into them. So I'm just looking for the double.

Hang on. I got to scroll back to your slides.

Okay. Well, I'll help you. There's no doubling. But I will tell you that the size of our portfolio has increased significantly over the last year and continues to grow. I will also tell you that the prepayment speeds [ph] that we've had on the performing portfolio have been pretty quickly. I believe Casey we have approximately 65 or 70 people in our servicing area. We are an S&P rated servicer in two different units which is not hard. It's not easy to get. You've got to go through a rigorous process to get that rating. We also service for the FDIC, we're contractor, we service for the credit union regulator, NCUA. We have a servicing portfolio that I believe for others exceeds $500 million.

Yes. The slide I'm referred to in the doubling is slide 22 where loans delinquent over 91 days, if you look at those two columns, add up to $12.8 million versus the previous quarters $5.9 million in those two columns.

Right. So, I think it's important to -- a couple of things important to note. It's I think misleading to look at a bucket as things slid down in the bucket. I mean, the whole portfolio is growing. So when you have a growing portfolio you're going to have a growing number. That's why we do these calls so people get the right information. And what we've been able to demonstrate in slide number 24 and in slide number 25 is we have loans that are a 120 days, 180 days past due and they pay in full.However, the question really was what resources do you have to service those loans? So the resources that we have and we've had over --as our servicing pedigree which I just described to you. So I appreciate the question and welcome me out to Long Island. Come visit our people. Meet Gary Golden and meet his team. We brought in Brent Ciurlino from OCRM the Office of Credit Risk Management over the SBA. He's supervising all policies procedures which include servicing. We'd love to have you come in and spend some time with us.

Well listen I apologize for the lack of sophistication of my questions. I simply just try to ask questions to get to understand things that I don't.

No. I think your questions are precise. I just didn't understand doubling. But there's no doubling of defaults or delinquencies in our portfolio. There's a particular bucket where loans moved from one bucket to the next. So I just don't want to be misleading to listeners. That's all. Just like you don't want…

I understand and I appreciate you taking my questions.

Thank you, Casey.

Thank you. And I'm showing no further questions at this time. I will now turn the call back to our speakers for closing remarks.

Thank you everyone. Appreciate the Q&A. Appreciate the interest in investing in Newtek. And I thank you very much. Have a great day and a great quarter. Thanks for stocks up nicely too. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.