Good day. Thank you for standing by. Welcome to the Newtek Business Services Corporation Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that this conference is being recorded. I would now like to turn the call over to your speaker today, Barry Sloane, President and CEO. Please go ahead.

Good morning, everybody, and greatly appreciate everyone attending our Q2 second quarter financial results conference call. I'd also like to welcome Nick Leger this morning to the call, who will be joining me. Nick is our Executive Vice President and Chief Accounting Officer. In addition, we have invited several Newtek executives to the call today in a listen-only mode. I'd like to introduce Nick Young, who was hired over a year-ago as Chief Risk Officer of Newtek Business Services Corp; John McCaffery, Executive Vice President of Finance, Newtek Business Services Corp; Kelvin Lui, Senior Vice President of Operations, Newtek Business Services Corp; and John Vivona, who just joined us this week as SVP of Risk Management, Newtek Business Services Corp. I point these four individuals out primarily because these will all be executives that will be joining the Newtek Bank subject to regulatory approval. Once, we subject to approval, complete the acquisition of National Bank of New York City. Nick Young will become the President and Chief Operating Officer. John McCaffery who's been with us for about six months will be the Chief Financial Officer of Newtek Bank. Kelvin Lui will be the Chief Digital Officer of Newtek Bank. Kelvin has been with us a little over seven or eight months. And John Vivona, new recent hire will be joining us as Chief Compliance Officer. In addition, many of you are familiar with Peter Downs, who's been with Newtek for over 19 years will be maintaining his position as Chief Lending Officer. Peter is also President of Newtek Small Business Finance, and he'll be joining the bank. Jared Mills, who's the President of Newtek Technology Solutions, will be moving over as Chief Technology Officer of the bank as well. The purpose of introducing all these people is to just give…

Thank you, Barry, and good morning, everyone. You can find a summary of our second quarter 2022 results on Slide number 43, as well as a reconciliation of our adjusted net investment income or adjusted NII on Slide number 45. For the second quarter 2022, we had a net investment loss of $2.25 million or a loss of $0.09 per share as compared to a net investment income of $15.5 million or $0.69 per share in the second quarter of 2021. Please note that the income related to the PPP of $25.5 million is included in the second quarter 2021 investment income. Adjusted NII, which is defined on Slide number 44 was $18.1 million or $0.75 per share in the second quarter of 2022, as compared to $27 million or $1.20 per share for the second quarter of 2021. Focusing on second quarter 2022 highlights, we recognized $19.2 million in total investment income of 47.6% decrease over the second quarter of 2021 total investment income of $36.6 million. The primary driver for the decrease of total investment income was primarily due to the $25.5 million in fees from the PPP in 2021. Dividends from portfolio companies of $5 million in Q2 2022 helped to offset the decrease of the PPP fees. In addition, interest income increased by $1.8 million, resulting from a year-over-year increase in the accrual loan portfolio. Other income increased by $1.1 million in the second quarter of 2022 compared to Q2 of 2021 resulting mainly from a year-over-year increase in SBA 7(a) loan origination volume. Servicing income increased by 14.4% to $3.2 million in the second quarter of 2022 versus $2.8 million in the same quarter of 2021. Dividends from portfolio companies for the second quarter of 2022 totaled $5 million, which included $3.1 million from NMS,…

Thank you, Nick. Operator, let’s open up to Q&A.

Thank you so much. Your first question comes from the line of Paul Johnson from KBW. Please go ahead and ask the question.

Thank you for taking my questions. Good morning, everyone on the call. You mentioned a lot of names there earlier. Anyway, I was hoping, I don't know if there's any way to quantify potentially the impact just kind of quarter-over-quarter either what earnings would've been this quarter or potentially what kind of the benefit would be next quarter just from the increase in the prime rate during the second quarter?

Yes. So Paul, it's a tough one because that would require us to sort of forecast what the bond price is going to be and the capital markets are going to do with respect to pricing. So I do think with respect to the roll forward, you're probably going to get a lag on that coupon. So you kind of have a partial adjustment between the two recent rate hikes, but the full adjustment for example, the three quarters of a point that we just had in prime, this is a second three quarters, that's a fourth quarter event with respect to a “gross coupon of the portfolio,” but you could see that we're getting short-term movements in the expense, but not the full benefit of the portfolio. With respect to gain on sale, with our portfolio mix, I don't believe we've ever had a gain on sale that's been lower than the number we had in the second quarter. Going back over seven years, you could actually see that in the chart. Is it fair for me to say, gee, I think that'll be the floor? I can't say that, although I'm optimistic that we should do better from that number. Hopefully that's somewhat helpful.

Yes. That's very helpful. And I understand it's a difficult question to answer, so I appreciate that. My next question is just kind of around, I guess, how you look at sort of a risk as you're underwriting the portfolio any given quarter. Is there any point during the cycle where you would begin to shift your origination strategy to focus on potentially like a higher quality subset of the 7(a) market, such as, point in time like today where risks are obviously increasing, recession or no recession seems to be a fairly telegraphed flow down just primarily due to the quantitative tightening that's ongoing. So I'm just curious how you evaluate credit quality and business risk in an environment like this?

So I think that one way to evaluate it is, and I think this is important to note. There are businesses that have adjusted and adapted to the changing environment to where they've actually – they're in a better spot post-pandemic than they were pre-pandemic. They really looked at their business and they analyzed it. So part of it is to – in conversations with a client, ask them in the underwriting process, what have they done to adjust perspectively to rising rates going forward? How liquid are they? What do they plan on doing with respect to costs of labor and running their business? Do they see those pressures? But also, it's very important that if you're anticipating a downturn in revenues, does the business have enough liquidity to be able to weather 12 to 24 months of any kind of a reduction in revenue? How are they able to reduce expenses to be able to maintain their cash flows and service their debt? The good news with respect to our business model is we're seeing tremendous amounts of opportunity to be able to pick through the best credits. There's certain markets and industries were more sensitive to, particularly what I'll call, leisure, retail, hospitality, where the cost of labor is difficult. Hiring is difficult and it's affecting numbers. You also want to be really, really careful in looking at the 2021 history or recent quarters where you kind of had a little bit of a goldilocks environment that might change, particularly if demand changes. So we've been very pleased that our underwriting has I'll call it tightened. We're doing smaller loans. We're getting more diversification, which we're , because that is clearly a risk reducer, diversification across units, geography and industry. You want to be careful in particular industries like transportation or energy costs or energy shortages could be really problematic and disruptive, particularly with supply chain issues because you just need to be a lot more thoughtful when you go through the underwriting process for approval.

Yes. That makes sense. And that's a great answer, great color there. Appreciate that. Last few questions. I'm assuming just as we're probably in the final quarters here as a BDC, we can expect – you're pretty much expecting to be paying out 100% of NII at this point. So just want to make sure I'm looking at the dividend forecast, $1 to $1.50 for the second half of this year. I think that should be a fairly good approximation of what you expect for earnings in the second half.

Yes. I think that Paul we will be pretty close to the top end. I mean, at this point, it does not pay to retain because you've ultimately got to pay, you have to pay it out when you withdraw the election. So I think that the very wide range that you show on dividends will be pretty close to what I'll call the full payout.

Got it. My last question kind of just has to do with the bank, and I'm not sure if you're able to – how much you're able to answer at this point. But I'm just curious around sort of the legacy SBA portfolio. I guess your current SBA portfolio today, which will reside outside the bank. Just going forward, will that portfolio, I mean, as that sort of runs off, how do you sort of intend to use the proceeds from that? Do you kind of expect to use that to just drop down funding I guess, into bank? Or is that kind of something that will sit sort of on the parent company balance sheet that's on JVs and other investments? Just curious about what the expectations are for that? Is that continues to wind down over the years?

Sure. So I think, what's been difficult I think for us to get across to the investment community is we've historically had to fund SBA 7(a) growth and 504 loan growth by selling a $1 of stock, which reduces your EPS because you're increasing your share count unsecured, secured probably five or six. Those businesses can be funded almost a 100% out of the bank with retail deposits. That's even though you're paying tax it's immeasurably beneficial, immeasurably. And that activity should be in the bank. Now the legacy portfolio, as we have said previously, Newtek Small Business Finance, the licensed non-bank lender. That is designed and we're still waiting for obviously final approval on everything, but we believe based upon conversations to sit up at the bank holding company in a runoff mode. So those loans are in securitizations. Those will run down. So the new business will be in the bank. The other business will be up at the bank holding company in a runoff mode. And that we believe also will be attractive because we'll be able to ultimately harvest the equity that's sitting in that particular relationship over time. So we do think that primarily using core deposits versus securitization and other interim funding amounts will be a measurably beneficial. We still will be utilizing securitization at the bank holding company and may actually do securitizations out of the bank from time to time from a diversification standpoint.

Got it. That makes sense. Yes, those are all my questions this morning and appreciate you having me.

Thank you.

Thank you so much. And we have our next question from the line of Adam Morton of RBC. Please go ahead.

Congrats on the quarter. Just kind of looking forward as we're in this new paradigm, I guess, with the fed, what do you think is – if you could just talk about unlocking value as a bank for – owning a bank for shareholders, how does that kind of just summarize some of the points on what that might look like?

Sure. Adam, I mean, I appreciate the question because today Newtek has primarily five lines of business that they do operate primarily independently from each other. And by being able to get our client base to focus on the fact that we do all these things without having to have human activity talk about them or coordinate them to be able to message them. So the Newtek Advantage or the Dashboard, it's going to be illuminating to our customer base. The Dashboard or the Newtek Advantage is going to be right there as we open up their depository account, as we're able to margin pool. Look, my payment processing clients today, they have their deposit elsewhere. My payroll accounts, they have the deposits elsewhere. The ability to margin pool and give breaks on web hosting, terminals, hosting plans, payroll, these things are going to be very beneficial to clients and the analytical tools that they're going to get. So they're going to get a lot of things in one place that they typically go to two, three, four, five times a week, 12 times a month to be able to see it in front of them. In addition, when they compare what we do versus their current depository, it's night and day. The depositories don't give the customers anything, they take their money and maybe you'll make them alone. With us they're going to get analytical tools to run their business. Futuristically, we believe that we'll be able to integrate most of these things into one GL. We currently have GL integrations today that will be able to illuminate. They're going to realize that they've got a full team of professional solution providers where they don't get that today, whether it's the top four banks or the several thousand community…

Yes. That makes a lot of sense. Thank you so much.

Thank you. Appreciate it.

Thank you so much. And we don't have any more questions. I would now like to turn the conference for closing remarks.

Well, we know that was a mouthful and we appreciate getting that in within an hour and we really appreciate your attendance. We have a lot of people on this call today, bigger numbers that have ever seen before and very, very thankful to the audience for the questions, to the analysts to join. We had two analysts put out reports on us this morning, and we appreciate the updates and look forward to our next report and look forward to bringing further good news from Newtek. Have a great day, everyone. Thank you.

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