Good day, ladies and gentlemen, and welcome to the Newtek Business Services Second Quarter 2019 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 call is being recorded.I would now like to introduce your host for today’s conference Mr. Barry Sloane, President, CEO and Founder. You may begin.

Thank you, operator and welcome everybody to our second quarter 2019 financial results conference call. I'd like to thank all the participants – call today for your investment in Newtek as well as your continued interest.Joining me today on the call is our Chief Accounting Officer, Chris Towers. I'd also like to call everyone's attention to our website, where you can follow the presentation along from the PowerPoint that's typically hung at the time we released earnings last night. Go to newtekone.com. Go to the Investor Relations section and you will be able to take a look at our presentation.I'd now like to forward everyone's attention to page 2 on the presentation and we do like to start-off with our historic equity returns of NEWT. So you could see over the course of five years and these prices are all as of June 30th; five-year return 209%, three-year return 139%, one-year return 26.3% that also includes the dividends during the period of time when we were a BDC, which almost fully encompasses that five-year return. So we're extremely proud of our history and being able to deliver results to our shareholders.Moving forward to slide number three and looking at our second quarter 2019 financial highlights, we were able to grow total investment income for the month – for the quarter ended June 30, 2019 an increase of 24% over the three months ended in the prior quarter in the prior year.Our net investment income NII with GAAP reported income for BDCs, we had a narrowing loss, which was originally $2.1 million for the three months ended in June 30, 2018 to $1.1 million. We are clearly proud of that narrowing and we will go into what that actually stands for and what it means and why it's clearly beneficial to…

Thank you, Barry, and good morning everyone. You can find a summary of our second quarter 2019 results on slide 49 as well as the reconciliation of our adjusted net investment income or adjusted NII on slide 49. For the second quarter of 2019, we had a net investment loss of $1.1 million or $0.06 per share as compared to a net investment loss of $2.1 million or $0.11 per share in the second quarter of 2018 a 45.5% improvement on a per-share basis.Adjusted NII, which is defined on slide 48 was $11 million or $0.57 per share in the second quarter of 2019 as compared to $8.2 million or $0.44 per share for the second quarter of 2018, a 29.5% improvement on a per-share basis. Focusing on second quarter 2019 highlights, we recognized $14.1 million in total investment income, a 24.1% increase over the second quarter of 2018.Interest servicing and other income was the primary drivers for the increase with interest income increasing by 27.2% resulting from a higher interest rate on our SBA loan investments year-over-year and larger performing loan portfolio. Servicing income increased by 24.7% to $2.5 million in the second quarter of 2019 versus $2 million in the same quarter last year, which was attributable to the average servicing portfolio growing from $950 million at June 30th, 2018 to $1.2 billion at June 30th, 2019.Other income which relates primarily to legal packaging and other loan related fee revenue increased by approximately $458,000 in the second quarter of 2019 as compared to Q2 of 2018, primarily as a result of an increase in loan origination volume year-over-year.Dividend income in the second quarter of 2019 included $2.5 million from NMS, $250,000 from Sidco, and $75,000 for Mobile Money.Total Expenses increased by $1.7 million quarter-over-quarter or 12.5%. Salaries and…

Operator?

[Operator Instructions] Our first question comes from Chris York with JMP Securities. Your line is now open.

Good morning guys and thanks for taking my questions. So, Barry the first question is a strategic question. 7(a) loan fundings were once again very strong and I think I calculated maybe a five-year CAGR around 30%. So, at that point, it places you -- as you noted that in your deck as the fourth largest SBA lender and then it puts you in a shared territory with some large financial utility banks.So, the question is how much more share growth do you want to achieve or should investors expect in this loan product longer term as further growth could drive increased regulatory tension?

Thank you, Chris. I think those are all relevant points. I think that from our perspective we're very happy with our I'll call it market share position. In other words, we do not aspire -- I don't aspire to be number one. I don't aspire to be number 10. We'll sort of take it wherever it goes.As long as we're able to pass through credits and do good credits, we'll continue to grow at this rate and it's not inconceivable that the rate could accelerate. The industry for the last 18 months has been down about 10% year-on-year for 7(a) lending. The benefit of our now four programs is -- and we've never gone out as an SBA, we've always gone out as a lender. So that we position ourselves as hey from $2,000 to $15 million, 10 to 25-year amz schedule, no covenants, single-digit interest rate we can fund your business. That's dramatically different than Fintech lenders. We use technology we think to a greater degree than they do. They just do a very limited amount of underwriting and they lend on six to 24-month schedules.We're in good position with our regulators. They've recently increased -- allowed us to increase our facility. Your point about increased scrutiny I don't necessarily -- if you're number one, you're number one; it is what it is. I don't love being number one because everybody likes to take shots at number one, but we're not going to gauge our business by that.I think that we are so pleased with what we're doing across the board. We've added a lot of staffing to the line of credit business that comes under CDS. We have optimism about that business growing with Frank Bertelle at the helm; he's one of the people in the deck that you can look up.And the pipeline as a non-conforming business that's going to roll nicely and what that's going to do Chris is that's going to show up as an equity investment on our scheduled investments. The returns that come off of that are going to be effectively given an income.If you look at the public documents, there is a 10% preferred coupon on the JV investment. So, we'd like to think that we'll outperform that from an equity standpoint, and that'll also give us different income than gain on sale. So, I would tell you that going forward, we would definitely like to be less reliant on gain on sale, and we think that's clearly in the cards. We don't see the 7(a) growth slowing per se. I would say as far as my eye can see maintaining it is the right number.

Got it. Very comprehensive answer and I think investors certainly appreciate what you're doing on the nonconforming side. Switching to that, so you lowered your 504 loan guidance to $75 million from $100 million and then you have it looks like year-to-date loan fundings of $10.2 million. So what gives you such confidence in the second half of the year that should be a strong period of production for that product?

Well, like any good manager, it's my management team gives me those numbers. And then I just have to believe them or not believe them or haircut them. I have a lot of confidence in Tony Zara and his team. I will point out that 504 financing market is actually more complicated than the 7(a). I'll try to quickly explain it.When you do a 504 loan, you have to go to a CDC, the Community Development Corp, they have to underwrite it. Meaning that they're going to basically underwrite it and they're going to wind up effectively financing the second position. Then it's got to go to the SBA. And with the government shutdown, it's been a tough year for 504 lending.But the pipeline is there. We think we've got the best team in the business. Also I have to state that internally we've got tensions and pressures between is it a 7(a) loan, is it a 504 loan, is it a conventional loan, is it a line of credit.And we're working the bugs out of that. Tony and his team have only been here 12 to 18 months. Our business service specialist have to get more comfortable doing 504 loans. It's an important part of our umbrella.It is easier for a business service specialist, because we're a preferred lender to prospectively suggest to a customer to do a 7(a) loan and 504 loan, and we've got to change that psyche and that mindset and sometimes that's easier said than done.We've also got to get our business service specialist to embrace the nonconforming area. And frankly, that's been an easier road to hoe, because there's less parties to deal with than the conventional side.So, it was a really good question, because the reality of it is -- Chris when we hang up this phone and I'm done with the call I've got to deal with managers and a lot of human beings. And human nature is trying to gravitate to what's necessarily easiest. 504 loans are harder to do, and I think we are -- we got a little bit of a hill to climb, but I'm confident that we'll pick it up.

That's good to hear. And I think people certainly appreciate the difficulty associated with all the management responsibilities you have relative to other BDCs. Last question from me is just on the financial that you recognized the largest quarter of unrealized losses on non-guaranteed loans converting to a BDC. So is there any trend in the charge off or delinquency data maybe from a behavior or fundamental side that throw some of that loss?

Yeah, the behavioral aspect is that we are going into the belly of the default curve on the portfolio, because the overall portfolio is growing. I just give a ballpark number. Chris Towers might be able to help me on this. You're looking at around $400 million, so -- and that's uninsureds.So, even if we do our numbers this year, it only represents call it $125 million-ish of uninsured that you're adding to the whole portfolio. So the portfolio is seasoning. As it seasons, you're going to get more loans that are going to underperform.And as I mentioned on the call, for those that are forecasting losses, without putting an exact finger on it, charge was down the road that will be between 1%, 1.5%. It doesn't bother us, because you've got to look at the chart -- on a static pool basis, you have to look at the charge offs over the life of the loan.So, if you look at what we do when we do the valuation of the loans, we look at it fairly conservative 20% gross cumulative default with a 40% severity. So when you put those two things together, that's over the life of the loan, an 8% charge off.Well, the reality of it is you really don't have charge offs in the first 24 months of a loan. They occur in the belly of the default curve. So, therefore, if you took the 8 number and you said, Jeez. 60% of them are going to happen within this period of time. You can have fairly high charge off numbers.So, once again a very good question. I think it's something for you and other investors to track. But as I mentioned, we're comfortable with higher charge off numbers, which is the better way to follow us going forward as well as looking at the unrealized number, because the unrealized number will be indicative of what will get charged off down the road. The unrealized number however, does come off with a balance sheet and affects our NAV right away.

Yep. It makes a lot of sense. That's it for me. Thanks Barry for your time and insights,

Thank you.

Our next question comes from Mickey Schleien with Ladenburg. Your line is now open.

Yes. Good morning, Barry. I have a couple of questions that sort of follow up on Chris's questions. Going into this year, one of your goals – I think a major goal was to increase your loan close rate and also take advantage of operating leverage meaning you invest in a lot of staff last year. So you're definitely reporting very nice top line numbers. What I'm curious about is how you feel about Newtek's progress versus your expectations on these trends you were looking for?

Mickey, thank you. I think that when you look at from an overall basis, maybe it hasn't been that glaring in the second quarter. But when you look at loan closings now we've got to look at 504 or fundings we've going to look at 504, we've got to look at non-conforming, we've got to look at 7(a), as well as the growth in CDS. And that's something I'll think about with my legal and accounting team relative to portraying it. Obviously from a portfolio company perspective we have certain limitations. We don't want to lay too much out there for fear of forced consolidation which isn't necessary. But I think that we're extremely pleased how we're rolling out.Our new programs are being well received by our alliance partners. The staff is starting to pick it up. You could see that by the jump in the non-conforming pipeline from the month of June to the month of July. And we're putting processes in place – people like Brent Ciurlino and Karen McHugh are putting those processes in place that are helping loan assemblers and underwriters get these things through the pipeline quicker and faster. And that pipeline now has four different choices, which if you think about it, at the end of the day what really matters is how well we help the client and the client experience.So if you're a client and you come to us and all of a sudden there's four different choices of different programs, which give you a lot of flexibility with respect to revolvers, term loans, size of the loan it's an exciting time. We are very pleased with the progress we made in the second quarter and we believe that we will be able to ramp the business in the third and fourth and in 2020.

So in terms of that last comment Barry, yeah that actually is a good segue into my last question. Looking at your target borrowers, or the typical borrower at Newtek deals with and I know there's a lot of different industries that you work with and some that you avoid, what are your expectations for demand for your loan products, if the economy were to meaningfully slow? I mean I don't know where the economy is going to go. What's happened in the last few weeks could be a handshake but let's just assume things are going to slow down meaningfully. How would you expect demand for your products to progress?

Okay. So what we do consciously is we don't invest in the fringes of the industry. Let me try to explain that. We didn't invest heavily in oil and gas despite the fact those are easy loans to make as oil prices were soaring. We don't invest in volatile businesses. We invest in businesses that are boring, stable and tend to be more recession-proof than other businesses. Now when I say recession-proof that doesn't mean that they don't weaken or go down during an economic slowdown, or recession, but they go down less. The key is as a lender to stay away from volatility so you don't invest in volatile businesses.Fast growing businesses are great if you can underwrite them at a slow growth and a low loan to value. So we're less concerned about these types of things. It's built into our model. We have anticipations. We've been through really what I hope is the worst of the worst which was what occurred in 2008, 2009. And we were able to once again survive. None of our creditors got haircuted. So I think that the key salvation is we're not investing on the fringe.Now let me comment what the fringe is. The fringe is a business that basically says, jeez give me the money in 48 hours I don't care if I'm paying 25% or 50% and I'll pay you back in 6 to 24 months. Someone that takes our loan they're invested. They filled out 50 slots in our file vault. They've given us projections. They've given us tax returns. They've given us liens on all their personal and their commercial assets. They've made a major bet that they're going to pay us back otherwise unfortunately they're going to lose it all.So that's different than an LBO where okay if it doesn't work okay, I lost the equity too bad. Commercial real estate loans, goes upside down, I lost the equity too bad. So although we do experience higher levels of default frequency in an good economy or a bad economy, we think we have less volatility in our business than other types of lending that require that robust economy to be able to repay the principle or the interest.

And in terms of that outlook -- and this is my final question -- given that the majority of the loans that you make are floating rate loans do you feel you are relatively protected against changes in CPR, if the Fed continues to cut rates and interest rates and mortgages decline?

So Mickey in the scenario where -- which I think right now is more likely than not rates decline, economy slows. The coupon on our portfolio will go down and because we have a reasonable amount of that portfolio funded with equity that prospectively will be a negative relative to interest income. However, we're adding more to the portfolio. So I think we'll be okay there.The flip side of that is -- and you've seen this in the prices of the governments -- the slowing economy slow CPR. People want to buy a government guaranteed floater because loan demand is down they need to -- the banks hedge funds need to put money to work. So the prices of the securities get bit up. So regarding the 7(a) business, it's almost a nonevent as we see it.

That’s where I headed with that. I – that’s very helpful and I appreciate your time, Barry.

Thank you, Mickey. Appreciate your questions.

Our next question comes from Robert Dodd with Raymond James. Your line is now open.

Hi, guys. A couple questions on loan fundings you've guided the 7(a) towards the low-to-mid end of the range. I mean so two questions tied to that. I mean is there anything in your referral channel that is has changed? I mean the pipeline is down a tiny bit year-over-year, but you said you're being much more selective.So have you removed anybody or is anybody withdrawn from contributing to that pipeline because they're not meeting the criteria you set out or anything like that? And is that what's behind the modest slowing of guidance on the 7(a)? Because after all you said I mean overall loan demand is pretty strong but you trimming it back there a little bit.

Yes so look Robert, I appreciate your question because it's the questions that I asked either every other day or a minimum once a week -- as I get the data. One of the reasons why I put the July information in there because if you look at the July information you'll go, oh, my god look what's going on over here. They really outperformed last July.There could be an underlying tone that the economy is slowing a bit and loan demand is slowing a bit. Now let me do the counter to that. Our ability to go out now with a big trumpet up to 15 million, 10 to 25-year around schedule up to 85% advanced on the real estate collateral as a first we always stick to second and tertiary to get that LTV down no covenant single-digit interest rate.No matter what way the economy goes over the long term we're going to get a lot of people coming to us wanting to borrow money because that financing doesn't exist. And that's been our lending thesis for 15 or 16 years. So I'm not concerned about the fact that in my opinion we didn't have a great first and second quarter.It was a good one. It wasn't a, oh, my god wow. I'll tell you something else too. I read some of the notes last night and it's like okay so adjusted NII grew by 29% we kind of expected that. I'm going, oh my god. That gives me a little heartburn. When the market is sort of expecting this type of growth from a company in our space and they're saying, gee I don't -- I mean people got to get a better understanding of it.To answer your question no long term, I'm not concerned at all. I think that we've got a bigger diversified portfolio. We're going to have diversified revenue streams, people come in people come out. No, I do think that we spent a good amount of time in the first half laying tracks for these other things which could have possibly detracted from the traditional more focused 7(a) footprint. I think that's what it is. However, we should ask this question another quarter and maybe I'll have a different answer for you. But I don't think so.

Okay, I appreciate that because obviously, I mean you did have a really great July. The numbers are up 200% year-over-year. But first half your loan fundings are up 11% and to hit the low end of your guidance you got to be up 33% in the second half. So I mean is your confidence level high that you can hit even that low end just to adapt -- just to get -- yes okay.

It is. Otherwise we wouldn't have given it.

Got it. Got it. Moving on just on the -- on a lot of color on charge-offs versus non-performance and defaults. When you talk about that the 1%, 1.5% long run charge-off like, can you give us a bit more color? I mean, is that what you're expecting because that's just what should happen as things that age to et cetera, et cetera or are you seeing trends in the portfolio? Obviously, your non-performers are up a little bit, et cetera, but are you seeing trends in the portfolio that indicate that that will happen or is it just more based on that's what should happen based on aging of the portfolio?

That's what should happen.

Got it. Thank you. That's it. Appreciate it

Thanks Robert.

Our next question comes from Luke Wooten with KBW. Your line is now open.

Good morning Barry and Chris. How are you doing?

Good. Luke, how are you doing?

Doing well. Chris, could you just go over that number? I think you went over it towards the end, but I might have missed it just the loans. So the SBA 7(a) loans sold during the quarter?

Sure. From a unit perspective, it was 170 loans 1-7-0 for $96 billion compared to 130 loans 1-3-0 for $78.1 million.

Perfect. Thank you. And then just kind of switching to like little housekeeping just on the other income line from the non-affiliate investments it seems to be kind of higher than what it's been in previous quarters. Do you mind just like enlightening us on what's in that line so we can kind of manage that going forward? Is it the $1.56 million on the quarter?

Sure. So look what runs through that line is both the -- our origination fees related to packaging fees, any legal fees that we charge, any prepayment fees, any late fees. That's what usually runs through that line. So generally as our loan volume increases, the other income increases in line with that.

Okay. And do you mind -- what was the prepayment speed during the quarter? In the last quarter it was 26%. Was it stable with that or a little bit higher?

For this quarter, we had that at 23%.

Okay. And then kind of just moving over to the non-conventional loan platform, I mean, solid growth so far and since May it seems like it's really boomed. Kind of going forward, should we see that kind of growing in? I know you said that we should start seeing income from that in the next year and that should be shown in the dividend income line, correct?

Yeah, you would see that in the dividend income line as that's an equity investment. And we have 50% of the equity BlackRock TCP has 50% of the equity. So you'll get the spread income off the coupon on the portfolio, less the any interest expense that might be incurred on the Deutsche Bank facility.

Okay. That's helpful. And then Barry I know I've talked to you about this a little bit, but just on that platform you just gathering -- like it's basically using your existing loan referral platform to kind of underwrite the loans and increase the close rate on loans for those that don't qualify for the SBA and just those can go up to $15 million, is that correct?

Yeah. They can go up to $15 million. And so let me give you some of the reasons if there was a choice between 7(a) in that. The SBA program maxes at $5 million. So if somebody already borrowed $5 million, they can't borrow any more from that government guaranteed program.Secondly, maybe they want a fixed rate and we can offer a fixed rate and the conventional where the 7(a) program is prime plus two and three quarters, which today it would be I think around eight in the quarter. Maybe they only occupy 40% of the real estate, the SBA requires 50% of the real estate. Maybe there are five potential guarantors that would have to guarantee an SBA loan, only three of them want to do it. We move it over into conventional.There's a few reasons, which are hyper technical that we move it into conventional versus the 7(a) and it's -- but the credit box is similar. The credit -- so we're fairly confident that given that we've done this for 16 years and up markets and down markets, we have a good feel for how these borrowers react and these businesses react in different interest rate cycles and different credit cycles that we you've got a really good handle on how this portfolio should perform.

Okay. That's helpful colors. Thanks. And then just briefly switching back over to the NSBF. I mean, seems like the gain on sales have come back strong since the end of last year. And just kind of how you see those going forward, I know it's -- there's a lot of moving pieces, but is there any impacts from the lower, I mean, with the Fed Gov last week and kind of just how do you see that those gain on sale premiums going forward?

That's a tough one. It's sort of asking me to forecast a market price on something, but what I can tell you is if you believe that the trend on rates is lower than it has been the last couple of months, which based upon the futures market and the swap market more likely than not. And if you believe, that the economy is slowing.And you could look at that versus, what's happening in the stock market. And other market indicators, maybe more likely they are not that bodes well for prices, on the securities.

Okay. That's helpful. And then lastly, just -- I know, you are hiring out a lot of teams like in the loan origination platform as well as technology side. And with the new tracker coming on, how should we look at expenses towards the back half of the year?I know, I ask this every quarter, but just kind of want to make sure that, I'm framing it right with the new executive players coming on and as well as the loan origination officers?

I think, it's flattening out, I mean I think, Chris and I at some point, in time need to sit down. And take a look at things, which we do every so often. But I wouldn't expect any expense creep in the second half of the year.

Okay. That's helpful. And that's all my questions. Thank you.

Thank you.

And our next question comes from Marc Silk with Silk Investment Advisors. Your linen is now open.

Hi, Barry.

Hey, Marc, how are you?

Good. All good questions, mine is a little different here. So Barry, presently there's a significant amount of foreign government in debt with negative yields. The U.S. 10-year treasuries are yielding below 1.7%.The S&P 500 dividend yield is around 2%. And based on yesterday's close, new text dividend yield is 9.46%. Again, 9.46% based on your increased dividend of $1.95. This is a third year in a row of increased dividend per share by Newtek, so you have a proven track record.And by year end the Newtek dividends meant, my clients have received, will be equal to $11.49 per share since you have become a, BDC, in 2015. We have an environment of extremely low interest rates.And people desperately looking for yield. And not only does Newtek fill that desire, Newtek is clouded by being in the BDC ecosystem, so in my opinion an underpriced asset.In my eyes, when I started buying your stock in 2016. And yes, I was one of the fortunate ones to average down at $0.50, after buying some at $1.80, I was buying a company. And even though you became a BDC, to get the shareholders back significant dividends, you were still a company.I think that's what's lost here. So although, not very appropriately especially in this low interest rate environment, with you having a bona fide track record. My question is this.Since someone wrote a public article, why they sold your shares based on your net asset value, even though your dividend yield is 9.46%. Why do you think it is commercially reasonable that, Newtek is trading at a premium to NAV? And what makes you different than other BDCs?

Yeah. Thanks Marc. That gives me a lot of food for thought. And answering the question as well as thinking about, what we do after this call in this afternoon, and tomorrow, and the next day because.On one hand, I look at our performance. And I go "Jee can you really argue? Its 30% to 40% return a year for the last five years and probably a greater return even over the last 10. So, on that basis we're doing well. But then, should we be doing better?"And I think that, one of the things that everybody can count on is, we're not done. We have more energy today than, we had yesterday. And we're pushing forward. I think that, we're different. And because we're different, people that want to have an opinion, will take us and compare it to a metric that it's not relevant.You asked for BDC, yes BDCs are managed to NAV. But if you want to manage just against a metric just say "Yo! These guys are losing money on NII, just don't invest in them". Well that would have been a mistake.Doing what we do, having a greater reach, particularly into institutions, very valuable, that will do the work. We'll make a difference, I would say exponentially with respect to our future. You know judging by the calls from the analyst community we've come a long way.The calls are -- the answers to questions are great. I don't think there were soft balls I think they're poking and probing and looking at things that could be problematic. But, I think we've got a real good fighting chance going forward, to get -- I'm going to use the word different valuations.In other words, what's a different valuation? A different valuation is to look at a company,…

You're -- it's funny because your stock had doubled from here and you're still a 5% dividend and I know when I watch CNBC, all these people want is companies that continue to grow their dividend and you're doing it. So people will continue to find you and you do a great job with your cost controls and you have a great management team and keep up the good work?

Appreciate that Marc. I think if we can get over that $500 million market cap number that'll be -- I think that has the potential to be a catalyst.

Sounds good. Thanks a lot, Barry.

Thank you.

At this time I'm showing no further questions. I'd like to turn the call back over to Barry for any closing remarks.

Thank you, operator. And I really want to thank participants on the call today. This was frankly one of the best Q&As, I think we've ever had. The analysts did an amazing job and really appreciate the thoughtfulness of questions both the ones that were out of the strike zone in the strike zone and very thoughtful and will cause myself the Board and the management team to reflect and make sure that we're on the right path doing what we're supposed to do for the investment community.So once again, thank you for attending. We look forward to reporting good results for the third quarter as well. Thank you so much.

Ladies and gentlemen thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.