Good day, and thank you for standing by. Welcome to the Newtek Business Services Corp. Third Quarter 2021, earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, . I would now like to hand the conference over to the speaker today, Mr. Barry Sloane, President and CEO of Newtek Business Services Corp. Sir, please go ahead.

Thank you, operator. Good morning, everybody, and welcome to our third quarter '21, financial results conference call. I would also like everyone to welcome Nick Leger, our Chief Accounting Officer that will assist me in the presentation today. I would like to point everybody to our PowerPoint presentations that are all on our website. Newtek One, newtekone.com, goes to the Investor Relations section, events and presentations. There are PowerPoint presentations for today, which is the third quarter 2021, financial results conference call. We also have a presentation, introducing the Newtek One dashboard, which we'll talk about. I'd also like to point out, we may have some new investor group on the conference call that has an interest in banks. We obviously announced over 90 days ago the acquisition subject to a proxy vote and regulatory approval of National Bank of New York City. We might have some new investors on the call. If those investors are interested in seeing information previously distributed to the investment community on what the bank might look like, there are presentations on the website for mortgage second, fifth, and tenth. We're proud to announce our results today. We think we had a terrific quarter. A lot of the results that you're going to be seeing, really a representative of the Company's ability to apply technology to financial and business services solutions. We've got some terrific key performance indicators and metrics that are dedicated to demonstrate that our business is growing, is well-positioned for the fourth quarter and beyond into 2022. I'd now like to bring everyone's attention to the PowerPoint presentation that is on our Investor Relations section regarding today's particular call. On Slide number 1, please note the forward-looking statement disclaimer that is there. We appreciate everyone taking the opportunity to read and review…

Thank you, Barry. And good morning, everyone. You can find a summary of our third quarter 2021 results on Slide 42, as well as a reconciliation of our adjusted net investment income or adjusted NII on Slide 44, and 45. For the third quarter of 2021, we had a net investment loss of $6.7 million or $0.30 per share, as compared to a net investment income of $1.7 million or $0.08 per share in the third quarter of 2020. Please note that income rates, the PPP is included in investment income. Adjusted NII, which is the -- you find on Slide 43 was $12.6 million or $0.56 per share in the third quarter of 2021, as compared to $900,000 or $0.04 per share in third quarter 2020. Focusing on third quarter 2021 highlights, we recognized $12.4 million in total investment income, which is a 16.7% decrease over the third quarter of 2020's total investment income of $14.9 million. Interest income related to the fees from the PPP was the primary driver for the decrease. We recognized $269,000 of income related to the origination of PPP loans of $6.4 million of PPP loan originations during third quarter 2021, as compared to $3.1 million of income recognized in the third quarter of 2020 on $82.5 million of PPP Loan originations. The portfolio companies in the third quarter of 2021 as compared to 2.2 million in the third quarter of 2020. Moving on to expenses, total expenses increased by $5.8 million quarter-over-quarter, or a 43.7% increase, mainly driven by an increase in SBA 7(a) loan referral fees, through the higher loan origination volume, also interest-related costs and other loan administrative expenses. Realized gains recognized on the sale of the guaranteed portions of SBA loans sold during the third quarter, totaled $22.4 million as compared to $1.6 million from the same quarter in 2020. On the third quarter of 2021, NSBS sold 205 loans for $148 million at an average premium of 13.04% as compared to 16 loans sold on third quarter 2020 for $11.8 million at an average premium of 11.79% the increase in realized gains is attributable to higher SBA loan origination volumes. In the third quarter 2021 combined with higher average premium prices when compared to the third quarter of 2020. As I mentioned earlier, income related to the PPP is included in investment income, not in realized gains. Moving on to realize losses, on the SBA non-affiliate investments for the third quarter of 2021 was $3.2 million as compared to $2.4 million in the third quarter of 2020. Overall, our operating results for the third quarter of 2021 resulting in a net increase and net assets of $16.6 million or $0.74 per share. And we ended the quarter with NAV per share of $16.23. I would now like to turn the call back over to Barry.

Thank you, Nick. Operator, we'd like to open up the call to Q&A.

Thank you, sir. At this time, I would like to take any questions you might have for us today. . We have our first question from the line of Richard Molinsky from Max ventures. Your line is now open.

Congratulations. Congratulations on continuing to execute. I just have a couple of quick questions. Is there any plan for any distribution of dividends from the portfolio companies? This is the first question. The second one, what is the earliest time that possibly this acquisition, with National Bank of New York City could go through, what's the earliest? When's the latest date? I think that would be a major benefit based on your track record, getting that deal done.

Richard, on the second question, we originally back in August, give an indication of 6 to 12 months. At this point, I believe that given the timetable, I think we're probably going to be closer to the 12 months and therefore -- and this is just a guess at this point. And I -- it's a total guess based upon integration of a proxy or both, discussions with regulators. And obviously, we know that there are a lot of changes going on at the Federal Reserve, and the OCC right now. I think that you're looking at a third quarter would be the best guess for a

All right.

Regarding the dividends, what the portfolio companies do at the end of each quarter is make a decision in their best interests, whether or not to distribute dividend income up and best use of that. So the portfolio companies have been able to work with the BDC to provide funding of their generating quite a bit of cash on the projection for NMS this calendar year is $14 million, projection for NTS $6.5 million. The projection for Newtek Business Lending. Note, those 2 numbers are EBITDA numbers. Newtek Business Lending is the lender out of say between $4 million or $5 million. The reasonable amount of income generated from those businesses and cash that it can basically provide to the BDC to land or perspectively use that cash to buyback debt. That's expensive, which is I guess a part of an overall plan that we disclosed today. I think -- state that for the first 3 quarters, that's where we wound up and we'll see what happens next quarter. And those -- that cash net earnings can also be distributed at any point in time. They don't go away. In the BDC world, the portfolio companies have the opportunity to retain, for periods of time and then distribute. We don't have that luxury at the BDC. I call it a luxury because it will benefit shareholders so they get a more full amount of the dividend. But given that we have $3.15 quite healthy dividend this year, on projected adjusted NII of $3.40, we think we've had a pretty good year so far.

Yes, you have. Barry as always, thanks you so much. I appreciate the answer.

Thank you, Rich.

Take care.

Thank you. Our next question is from the line of Mickey Schleien with Ladenburg. Please go ahead.

Good morning, Barry. Hope everyone there is doing well. Barry, this year, lenders including Newtek have had a lot of positive trends providing tailwinds including things like the stronger economic growth in a very low default environment. I'm thinking next year will be more challenging with forecast for lower growth and the already announcing that they're going to end quantitative easing and potentially those start to tighten. I'd like to understand how you're thinking about those risks, in terms of managing new tax balance sheet next year.

It's an important question I think that what we're seeing and we just know it's a strange Company, country's split down the middle. We got tremendous loan growth needs, and you could see it from our pipeline, both in October. So there's plenty of businesses right now that have optimism, they're flush with cash. We don't see loan demand being weaker. Relative to interest rates and interest rate changes, we've been somewhat surprised. We made a decision to hedge the 504 portion of our portfolio, which is a fixed component, and the non-conforming portion of our portfolio, a fixed component. And I think that's worked out well for us. But even the last couple of days have been somewhat surprising with high PPI numbers, and rates still seem more because the government keeps buying bonds back and keeping rates low and providing liquidity. So I think that we are in good shape for next year. $3.40 would be a lofty number, if we remain as a BDC for the full calendar year. But given the $0.65 rejection in Q1, I think we'll have a very good year for next year, particularly given where market clearing dividend yields are for most BDCs. Looking at this as a BDC, if we do convert to a bank, obviously, the financial technology enable banks Weibo banks, the LendingClubs and SoFi, etc. Those are trading at different multiples and there's exciting opportunities there as well for us. Whichever way we go, we're excited about our future. And the small and medium-sized business market is very strong right now.

Barry, do you think your demand profile for loans is a leading indicator and perhaps the market's just underestimating how strong the economy could be next year?

The market is underestimating the strength of the economy particularly with the amount of dollars that are still out there. Other government stimulus, these are unprecedented numbers, and the Fed insistence on keeping interest rates low. So I think that the government interaction in the market, and assistance to consumers and individuals, will further propel the economy.

All right. Thanks, Barry. Just a couple more questions. You mentioned the retained earnings at the controlled portfolio companies, to help them fund their growth. In your first quarter 2022 guidance for the dividend as a BDC, what have you assumed for capital retention in those controlled portfolio companies?

I appreciate the question. I can't give you that breakout at the moment.

Okay. And my last question, if you could just remind us the restricted cash on the balance sheet, I think it has to do with PPP. Where is that cash going to go and when is it going to be used?

The cash on the balance sheet that falls into the restricted category is primarily from PPP loans that are basically for given money comes from the government. And then we distribute to the participation certificate holders, which say off balance sheet for us. So that money moves off our balance sheet.

Over one -- what period of time?

Frequently.

Okay. That's it for me this morning, Barry. Thank you very much.

Thank you, Mickey.

Thank you. Our next question is from the line of Matt Jaden with Raymond James. Please go ahead.

Hey, Barry, good morning. And I appreciate you taking my questions. First one, kind of following up on the bank holding Company conversion timing. Based on your earlier commentary, is it fair to expect that be the 2Q and 3Q dividends next year will be paid on a BDC structure?

I would think that if that holds, Q1 and Q2 are highly likely. That gets you to July 1. If the conversion occurred in July, August, or September, I don't want to forecast this, but there may or may not be additional dividends paid before the final conversion.

Got it. That's helpful. Another one for me maybe following up on the portfolio Company dividends. Would you expect any portfolio Company dividends ahead of the conversion or continue to retain capital?

I think that obviously that depends upon -- I would think that those will wind up being utilized in some way, shape, or form. To continue to fund loan growth, which is growing. To pay down on expensive baby bond debt. I think those targets are out there for the utilization of that capital.

Got it. Last one for me, maybe on the 78 funding’s levels. I know it's a little early. Any high-level color you can give on where you're expecting 2022 funding’s to settle out in relation to maybe 2019 or 2021 levels?

I think that we'll probably look at a lower end of the boundary of $700 million. We haven't given that out yet but I'm okay using $700 million at the low end of the boundary.

Got it. That's it for me. I appreciate the time this morning.

Thank you.

Thank you. The next one we have the line of Paul Johnson with KBW. Your line is now open.

Good morning, gentlemen. Thanks for taking my questions. My first question, you addressed the timing of the merger, which I appreciate but I was wondering if you have any other updates in terms of how conversations and meetings gone with regulators and how progress has been tracking along with the merger process, if you're able to provide any of that.

Yeah, that's a no, no. I speak like our president and I don't divulge conversations with I couldn't do that. But I think that one could assume that we are on target and nothing has changed from recent conversations that we have -- that we've had with the public markets.

Got it. Okay. And then for the dashboard, the NewtekOne Dashboard, how far along are you with the launch of the product? Is that something that you're expecting to have ready to go and be launched kind of around the time of the closing of the merger or do you expect there to be a little bit more time and investment required to get that up and running?

There's no question that we will have the dashboard, and I'll use this word in some form, at the time of the closing of the transaction. We'd like to have the dashboard ahead of time. In some functional use prior to that, because we plan on using the dashboard, whether we're BDC or whether we're a bank. So obviously you wouldn't have the depository component but, the value of the dashboard is to give the business owner a tool. We think that the bank issue makes it special. Because if you think about businesses, they're constantly moving money, wiring money,

Dealing with the banks sort of as core, so the bank makes the dashboard more relevant. But even without the bank, the dashboard would be a great tool for businesses. We hope to have it available in some form or not, maybe as early as the second quarter.

Okay, appreciate that. And one question on the expense side for this quarter. Salaries and benefits obviously came in quite a bit lower than the previous quarter. I would just kind of expect this, you guys have made a lot of hires expanding the Company in getting ready for potentially the bank merger in to be making more hires as time goes on here. Is that -- would you expect that to be an anomaly quarter and potentially run maybe higher 4 to 5 million or so similar to the previous quarters or do you see this quarter is kind of a potentially good .

I think we might see those expenses not job.

Okay. Understood. And then on the balance sheet, just curious. Where -- do you -- did you provide any level or maybe of where you're comfortable potentially running your leverage that to equity? I understand pro forma, you guys are around 1.2, but it looks like you're set up for a pretty active quarter of this quarter in 4Q. If that turns out to be true in 200 plus of SBA originations, do you expect there to be any limitation from the leverage aspect?

I would say this. We know we try to pay attention to what the market accept site, I will recall a conversation I think it was three or four years ago with one of our analysts. And I think we're like 0.83 and then the convention was 0.79. And how high would you go? I said 0.99. I said it's not a problem managing it. I would say it's somewhat tongue in cheek. In other words, I would never want to go that high because the market wouldn't appreciate it. Then one of the reasons why we run higher than most is could then broker receivable and overlaps at the end of each quarter.

I think we're very mindful of what the market thinks is risky versus not. Despite the fact that we have a different opinion over managing risks. I mean, we've managed 4 times leverage on our balance sheet before we will BDC and we define, we survived the 08-09 credit crisis. So I think the answer to your question, we may have a little bit more leverage in Q4. But then again, we may also be able to pay down some of the baby bond debt, so we're swapping one debt instruments for the other.

Got it. So it doesn't sound like it should be something that would slow down originations for the quarter, is that right?

No. Not at all.

Okay. And then lastly, just a broader question. I was wondering if there's anything you can speak to that's in the infrastructure bill or the build back, better plan or any -- I guess any piece of legislation that's been floated out there that you've identified as being beneficial for the SBA lending program? And that's all for me.

But one thing that I heard and I only say this because the bill changes every day, what's in it, what's not in it. At one point in time, I understood that at a fairly nominal cost, and I say that also tongue in cheek, I think it was about $1 billion. The build back better had a draft in it that created 90% versus the current 75% subject every year to the budget being approved. Meaning that the program would, for a 5-year window based upon BBB, build back better is a 90% program for the 7(a) program. In addition, it will also waive certain fees. So you get a higher advance rate, you get higher prices on bonds, which would be favorable. Put it this way, whether it occurs or not, it's indicative of the government favoring small, medium-sized businesses, SBA lending, etc. And I think that from our perspective, I think that it's a coin flip is to whether -- I put it this way. If PPP gets done I think it's more likely than not that it gets in there, but that's pure speculation on my part. And I couldn't tell you whether the recent ramp has it in there or not or for that matter with the recent draft is.

Got it. Appreciate the time.

Thank you.

Thank you. . We have our next question from the line of Adam Morgan with RBC.

Hey Barry, how are you? Hope all is well. Not really a numbers question here but, just looking down the line as you guys hopefully transition to a bank. Do you see any other opportunities in a bank structure that, would be like lending areas that typically and historically you have not been in, that you could actually branch into when you become a bank. If you become a bank, so you say.

I need to be somewhat circumspect about talking about the bank because I'm very limited to what I could say. Although, I do believe that having the ability to diversify lending programs with a lower cost of capital would be overall beneficial. In other words, it will enable us to meet our return on equity guidelines and diversify the risk away from some of the programs that we have today.

But you can't really comment --

I can't comment on whether we would do it or not. First of all, it's not up to me fully, it's up to regulatory authorities. But your suggestion sounds like it makes sense.

Understood. Okay. All right. Thank you very much.

Thank you Adam. Appreciate it. Thank you.

Thank you. There are no further questions at this time. Mr. Sloane, please continue.

I appreciate everyone's attendance and investment in Newtek. We look forward to reporting Q4 and continuing our successful record. Thank you very much.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.