Good day, ladies and gentlemen. Welcome to - the Newtek Business Services Corporation Quarter Two 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct 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 introduce your host for today's conference Barry Sloane, President and CEO. Please go ahead, sir.

Good morning, everyone, and I'd like to welcome you to our Q2 2018 conference call. And on this morning's call with me is Jennifer Eddelson, our Chief Accounting Officer. For those of you that would like to follow along with our PowerPoint presentation, we welcome you to go to our website, newtekone, n-e-w-t-e-k-o-n-e.com, and go to the Investor Relations section and our PowerPoint presentation is there. It will also be our archived in an audio format. I would like to draw everyone's attention to Slide 1 regarding our forward-looking statement and would appreciate if everybody could acknowledge that and read that. Moving to Slide 2, we always like to start off our call with our stock's performance, and the number that we have here were derived from Bloomberg. Our 5-year total rate of return including dividends, 220%; our 3-year return is 102.2%; our 1-year return, 27.5%; and NEWT's total return from January 1 to July 27, including reinvested dividends so far this year, 17.6%. On Slide 3, clearly we typically compare ourselves to other investment opportunities in the BDC segment. According to a report recently issued by Ladenburg, Newtek tied with 2 other BDCs for top-performing BDCs for the year. Total rate of return of 36% over the last 12 months, comparing that with the S&P 500 at 17%; S&P 600 Financials at 20%; Russell 2000 at 22%. The report included 45 BDCs, most of them externally managed, some internal. The mean return for BDCs over the last 12 months is 3%. Recently, the company announced it is increasing its dividend for 2018 forecast to $1.80 per share. That would represent a 9.8% increase over the company's paid 2017 annual dividend of $1.64. Once again, that is a forecast. We believe that our returns that we're able to deliver to…

Thanks, Barry. Good morning, everyone, and thank you for joining today's call. I'd like to start with some financial highlights from our second quarter 2018 consolidated statement of operations. Please turn to Slide 35. In total, we had investment income for the quarter ended June 30th, 2018 of $11.4 million, a 15.1% increase over $9.9 million in the second quarter of 2017. The majority of this change was from an increase of 20% in interest income due to several factors. Interest income increased due to the size of the average outstanding performing portfolio of SBA loans increasing from $220.7 million at June 30th, 2017 to $276.9 million at June 30th, 2018 coupled with increases in the Prime rate during the 1-year period. For the quarter ended June 30th, 2018, we had an increase of $399,000 over the same quarter last year from interest income earned on holding guaranteed portions of loans held for sale. Offsetting these increases was $852,000 of interest income recognized in the second quarter of 2017 related to a non-accrual loan that paid off during the 2017 quarter. Servicing income increased by 16.5% quarter-over-quarter from $1.7 million in Q2 2017 to $2.0 million in the same quarter of 2018, which was the result of the SBA loan portfolio, for which we earn servicing income, increasing from $755.7 million to $949.6 million quarter-over-quarter. Other income, which relates primarily to legal, packaging and other loan-related fee revenue, increased by approximately $158,000 in the second quarter of 2018 as compared to Q2 of 2017 primarily as a result of an increase in loan originations volume year-over-year. Dividend income in the second quarter of 2018 increased by $110,000 to $2.6 million from $2.5 million in 2017. For the quarter ended June 30th, 2018, our dividend included approximately $1.75 million from Newtek…

Thank you, Jenny. Operator, we're opened for Q&A right now.

Thank you. [Operator Instructions] Our first question comes from Robert Dodd from Raymond James. Your line is now open.

Hello, everybody. Good morning and congrats. Just going to your comments on the premium if I can, Barry. I mean obviously we'd seen the data for July and there seemed to be some compressing and you're saying that's likely to last for all of Q3. But then again you then said you felt comfortable that it's probably stable and prepayment rates probably can't go up. So I mean can you just give us a little bit more color on or be more explicit? Like do you believe that that 111 for Q3 is likely to be a floor rate, provided nothing weird happens in the economy, a floor rate going forward with margin for error? Or can you give us a little bit more color on what your feel is there?

So Robert, definitely appreciate the question. And we've been doing this for 20 years, 18 as a public company, and we've been very good and, I think, accurate in being transparent to the investment community. As a matter of fact, when rates started their move a couple years ago, I kept getting asked by many, by analysts, by investors, "Hey, what's going to happen? Rates are going. Are your prices going to go down?" And I said, "No, they're not." I said, "It's driven by prepays." And we've been very right. As a matter of fact, all the way through the end of last year, we held that sort of 112 pricing mechanism. And there's also sort of a supply-and-demand component here. I feel very good about the overall guidance that we've given. I think that's really what's important because, in many instances, we have the investment community looking at volume and price and then everything else is just sort of noise. And now we've got; okay, you've got volume, you've got price, you've got other business lines that are growing, you've got - which is why we do what we do. I mean many times people say, "Hey, can you just do 7(a)'s and go home?" And after doing this for 20 years, I've learned that things cycle in and cycle out, just like '08-'09. So I feel very good about the guess. Now here's what I want to be really clear about; I have absolutely no clue as to whether we're going to be a 111, 111.25 or 110.75. Here's what I did give you. I gave you my real good transparency and best guess and a forecast, and importantly what I've tried to do is give comfort to yourself and people in the investment community that we have enough opportunity in the looks that we had last quarter of, I think, $4.6 billion, $4.8 billion in Q1, to be able to I'll use the term meet and hopefully beat our numbers. We can't always beat our numbers. Sometimes you just meet them. But we really try very hard not to disappoint and that's been our 4-year track record. So I don't know if that cleared things up because I can't - I have no idea where we're going to be for the quarter. But that's our best guess.

Yes. I appreciate both the clarity and that comment. So one more follow-up. On the non-conforming loan, the JV you're going to do, on the conformings for the 7(a) obviously you do not need SBA pre-approval. You have one of those, the special licenses - I can't remember its name - where you're a trusted partner. On the JV, on the non-conforming side, are you going to have that same level of - freedom isn't quite the right word for it - or are you going to have to run every loan past your JV partner for approval, which could slow things down? Or are you going to have the same kind of freedom and trust from your partner that the SBA gives you in growing that business?

That's a great question, Robert. Look, to be 100% clear, in this partnership there will be equal say on approving a loan or not approving the loan with the partner. So with that said, I could be very clear; if the partnership doesn't work, we'll have the ability to end the partnership and do the loans ourself. So we're not going to tie ourselves up. We're not going to give the keys to the kingdom away. And by the way, one good question might be, "Well, gee, why are you doing a partnership then?" Well we're doing a partnership for the purposes of being prudent because we believe it's really important to have many different outlets for capital, which is why we have a lot of different banks, a lot of different equity participants. So this is a really great way for us to be able to bring in outside capital in a side-by-side and not have to - if we force stock out into the market, particularly if this business takes off the way we think it can, it might use a lot of capital. So we're really excited about it. We're still negotiating finalities. We think they're really a good partner. Hopefully, they're listening. And we're excited about the opportunity.

Okay. I appreciate it. Thanks a lot, Barry.

Thanks Robert.

And our next question comes from Frederick Cannon with KBW. Your line is now open.

Oh, hi, Barry this is Fred Cannon. Hey, this quarter you had what I consider very good operating leverage, certainly against my estimate in terms of both revenue beat me and then your expenses came in very contained. And then but I'd like a little - perhaps you could talk a little bit about expenses going forward. I was - especially given the new hires that you have and what Jennifer mentioned about the stock compensation coming down for the quarter. Maybe kind of just how should we be thinking about expenses going forward?

I would say this, Fred, and I appreciate the question, when I'm in the New York office, Jenny is 2 offices down from mine. And when I had these talented people, I walk into Jenny's office and say, "You got that one? You got that one? And is it in your budget?" We feel good about these adds. All these adds are baked into our budget. I would say, generally speaking, we're looking at our expense lines as being stable. I think we're also going to get some benefits from some reduction of interest expense going forward versus in the past. We did a nice bond refinancing recently this year. We knocked off, I think, 1.25% on $40 million. We have some other things that we could look at. Our NEWTZ bonds, I believe is NEWTZ, are callable in September. There's an opportunity. So we feel pretty good about our operating expenses. We feel good about our cost of capital, debt expenses. So no, I think we're very good on the expense line as well as CapEx. We've really made significant investments in the business so as things go on and things change we'll be able to continue to do what we've done historically and deliver it to shareholders.

Okay. Thanks, Barry. So kind of the concept of operating leverage should be maintained, it sounds like. Is that fair?

Clearly maintained and hopefully, frankly, continue to benefit. I mean I realize this isn't operating; it's more financial. But for example, with the ability to not be worried about 1:1 anymore, I can hold a government guaranteed piece for another month or 2 and my coupon on that government guaranteed piece is 7.75 and my cost of money is 4.25. So I get a 350 basis point asset liability match on a Full Faith and Credit U.S. government piece of paper.

Speaking of that, Barry, in the slide deck you stated that you're going to kind of move to a 1.2 debt-to-equity in the next 6 months or so. As you know, we kind of have to push things out a little bit. Any kind of guidance for us on how we should think about beyond that 6 months especially as we think about the share count and whether you would kind of continue to let the leverage move up a bit?

Yes. I think to be clear; I think we indicated we won't go beyond that. And I know this is a little bit of a tough one. First of all, look, we're not forecasting 2019 yet. We hope to do that maybe after the next quarter. But I think we've given enough general feel for you to get a guesstimate on what shares may or may not be issued between now and the end of the year. We look at that every day depending upon what makes sense and what's going on in the market. Look also, issuing shares is - I was reminded by one of our astute shareholders when you're at a premium that actually helps pull up your NAV so it does have, I'll call it, a secondary and tertiary benefit. But the utilization of more leverage is very beneficial for us in that - and by the way, this is important to note; more leverage is more risk. That's obvious to most. But we don't think growing - and we're not going to 2:1, but we've managed 4:1 in the past. That's not a big deal, because we were a non-BDC for a period of time, particularly given when you looked at our diversification, our asset size and liquidity through securitizations and things of that nature. So I think what you can expect is a balanced approach. We will have an equity ATM in the market. We'll have a debt ATM. We're going to look at all aspects of the capital markets. And we don't think we're going to need to put pressure on any aspect of our sources, both our shares or bonds. We don't have rating agency issues. I don't have debt covenants that are problematic. It's all - it's a good situation for us. And the 1.2 number was - that's not beyond that. And that's - and by the way, I'm not going to guarantee it. It's just a forecast. And it's possible, if it made sense to go beyond that, we would. Let's say if it was an amazing acquisition to do, it's possible. But now we don't anticipate it. And that was done to give all of you some feel and sense through February-March of next year.

Alright. Thanks Barry, very helpful.

Thank you very much

[Operator Instructions] Our next question comes from Lisa Springer with Singular Research. Your line is now open.

Good morning, Barry.

Hey, good morning, Lisa. How are you doing?

I am good, thank you. I wanted to ask you about cross-selling opportunity between 504 customers and 7(a) customers and if you're already starting to see some cross-selling opportunities now.

Yes. So, Lisa, that is a good point. The 504 loan is - it can be used for machinery and equipment and we typically don't. I'd say, typically, I'd say almost never. It's usually used against real estate purchased, refinance or rehabilitation or construction. You can't use 504 for working capital. There are times where a business owner - because these are business loans. They're not commercial real estate loans. So it's a loan made to a business that has cash flows, that has personal guarantees, and we're able to give them a greater advance on the commercial real estate collateral. There are times that we're able to do both. That puts us at a tremendous advantage from other lenders that are just 7(a) or lenders that are just 504. And the ability to do the conventional financing will be quite advantageous as well as line of credit against inventory and receivables where our goal is to be the enterprise that is dealing with what I'll refer to as the non-bankable segment. Now this is important; non-bankable doesn't mean non-creditworthy. I'll define non-bankable. The borrower wants an amortization of 10 to 25 years. Banks don't do that. The borrower wants an over-advance on the primary collateral. Over-advance could be anything greater than 75%, let's say 80% against the primary first, not counting the secondary or tertiary, which banks don't for regulatory reasons. So this - it was astute for you to bring up the point because by adding these programs, it's going to help the 7(a) business, it will help the line of credit business. Very additive and we'll be able to get, we think, significant operating leverage off of the infrastructure of $4.6 billion to $4.8 billion of referrals, which most likely would maybe increase based upon opening up the bucket. It's very, very symbiotic to be able to cross-sell between different loans. Many businesses do have a need for financing in 2 different loan programs.

Okay, thank you very much, Barry.

Thank you.

Okay. And I'm not showing any further questions at this time. I would now like to turn the call back to Barry Sloane, President and CEO for any further remarks.

Thank you, operator, and all our shareholders for attending and participating in our recent proxy solicitations. We certainly appreciate you voting your shares and we look forward to reporting in the third quarter. Thank you so much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, you may all disconnect and everyone have a great day.