Good day, ladies and gentlemen and welcome to the Newtek Business Services Corp Q1 2018 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Mr. Barry Sloane, President and CEO. Sir, the podium is yours.

Thank you very much, and good morning everyone and welcome. We're proud to host our first quarter 2018 financial results conference call. I have presenting with me today, Jenny Eddelson, our EVP and Chief Accounting Officer. I'd like to welcome everybody to follow the presentation along on a PowerPoint that is on our website newtekone.com in the Investor Relations section, and the presentation and audio portion of this call will also be archived. We have lots to cover today. Let's jump into it and move forward to Slide 2, going over our historic stock performance. Investors in Newtek over the last year, including dividends have earned 27.5%; over three years, a 102.2%; five-year return, 220%. First quarter of this year, total rate of return through March 31, 2018, negative 11 basis points, obviously a tough quarter I think for all BDCs. However, when you take a look at the 3.31% price differential versus where we are today, we think we're going to get a nice bump up here, and we look forward to better stock performance, obviously in the third quarter and second half of the year, which is somewhat typical and historical for our stock. We are typically a second half performing company in many instances where the market is used to having level-pay dividends and earnings throughout the year. We have typically indicated that 55% to 60% of our earnings and dividend comes in the second half of the year and that does benefit the stock price. Moving to Slide 3, we wanted to make a general comment, and hopefully guide investors and the analysts. So we had adjusted NII increasing 10% first quarter of 2018 versus first quarter of 2017. And we wanted to sort of give, what I think were the key metrics to that. We…

Thanks, Barry. Good morning everyone, and thank you for joining today's call. I'd like to start with some financial highlights from our first quarter 2018 consolidated statement of operations. Please turn to Slide 33. In total, we had investment income for the quarter ended March 31, 2018 of $11.1 million, a 23.1% increase over $9 million in the first quarter of 2017. The majority of this change was from an increase in interest income. The increase in interest income was attributable to the average outstanding performing portfolio of SBA loans increasing to $267 million from $207.4 million for the three months ended March 31, 2018 and 2017 respectively, as well as Prime rate increases throughout the period. Servicing income increased by 25.5% quarter-over-quarter from $1.6 million in Q1 2017 to $2.1 million in the same quarter of 2018, which was the result of the SBA loan portfolio for which we earned servicing income, increasing from $727.3 million to $909.1 million quarter-over-quarter. Other income, which relates primarily to legal, packaging and other loan-related fee revenue, increased by approximately $390,000 in the first quarter of 2018 as compared to Q1 of 2017, primarily as a result of an increase in loan origination volumes year-over-year. Dividend income in the first quarter of 2018 increased by $325,000 to $2.6 million from $2.3 million in 2017. For the quarter ended March 31, 2018, our dividend income included approximately $1.75 million from Newtek Merchant Solutions, $400,000 from Premier Payments, $250,000 from Sidco and $225,000 from United Capital Source. Total expenses increased by $2.8 million quarter-over-quarter or 24.8%. Included in total expense this quarter is a $1.1 million, a loss on extinguishment of debt, which was related to the redemption of the company's notes due 2021 and represents the remaining unamortized deferred financing costs related to those…

Thank you. Operator, we'll open for questions.

[Operator Instructions]. Our first question comes from the line of Leslie Vandegrift from Raymond James.

Sorry, Jennifer I just missed at the very end there, what was the loan sale number for the quarter, thought I would just write something down?

The loan sale?

Yes.

The loan sales were $73.2 million.

Okay, and then I know you had the bit held over in the brokers receivable at the end of the quarter, which increased leverage, but post first quarter, how much has been sold or I guess what's your leverage as of today?

Like as of this day?

Or as of after that sale? Or as after that sale. I want to get that brokers receivable?

Approximately 83%, 84%. I think you'd see that demonstrated on Slide 7.

Okay, perfect. And then I appreciate all the color around the new leverage rules, and I know you received board permission asking shareholders in July. And if you get the shareholder permission to use immediately or if you just have the board permission to use any here, what are the plans for that extra leverage to use it for 7(a) program, 504, so what is the mix going to be there?

I think that we would use the additional leverage judiciously to fund growth in originations. I would say - and these are just rough approximations. Let's say in the second half of the year, we were going to sell [indiscernible] $25 million, $35 million of equity and that's probably a little high, instead of it, we might use debt. Now these are all supposition, these are all hypothetical things. But when you think of, say, $25 million or $35 million debt, you're only moving your leverage ratio by 10%. It's not a big deal one way or another. So I don't think you're going to see us zooming up with leverage. However, we'll use it methodically and judiciously to fund loan growth. But we found an interesting acquisition we could use it for that. However, I would tell you the pipeline is - it's basically a 0, we have a couple of really tiny ones that we might announce that are a couple million dollars here and there. But I don't see us - I think what you'll see from us, Leslie, I appreciate the question, is a methodic judicious utilization of the additional leverage. I also want to point out to you and callers, typical non-bank lenders who would go to a bank and get leverage with a restrictive covenant 4x, 2:1 is very, very vanilla. Banks are 8x leverage, 10x leverage, which makes sense that NSBF insured deposits. But for us from a risk perspective, to go to 1:1 and 2:1, not hard to manage.

Okay. And then on those originations, do you mean just 7(a) or mix of 7(a) and 504?

Well, so when looking at 504 for example, and it's a healthy question. In 504, we're forecasting say, $75 million the $100 million of closings, maybe that represents $15 million in fundings. The haircut on those lines are between 80% to 90% of pace and that's because you get the CDC take out upfront. So we're not talking about a ton of equity that will go from the BDC down into the portfolio company to be able to fund that.

Okay. And then on, I know you said you are not going to zoom up, but you talked about traditional non-bank lenders using up to 4 to 1. What do you feel is kind of an appropriate cap to get to in the long run, again not necessarily in 2 quarters, et cetera, but how much of that 2:1 do you think it's an appropriate to target?

Well, if I have like a lot of government guaranteed floaters on my books that were earning 3.5% that I get liquidate in an afternoon and get my money back in 5 days, I think that's a smart thing to utilize. I'm probably going to avoid answering your question, because we're so unique, we're not like any other BDC. But buying a portfolio of sub-debt and mez capital and somebody that told me that, hey I got to liquidate this in 30 days or 60 days, I'll be sweating. I'll be sweating a lot, that is not us. I mean, we are just different. So - but one of the issues we all being different is, typical BDCs that bump up against these leverage amounts, everyone gets nerves because if you've got a movement in now one way or another, you can't liquidate the portfolio. Our assets are very liquid, like every one of our loans has gone into a securitization. So we feel pretty good about the utilization of leverage and we use it judiciously and we will respect the other factors, despite the fact, I told you I just made a statement. I know a lot of people don't believe it. So we still pay attention to these ratios and try to stay within the balance. But I mean, you won't see us zooming up to 2:1, but there is no problem, no problem. With an entity like ours and our business model, with the liquidity in the assets that we have using more on leverage. Remember the - you know like merchant account business, which has got $100 million NAV, those merchant account is still liquid, very liquid. If you held an auction, there would be 5 buyers or 10 buyers that could line up to take those assets in 60 days or 90 days. They're on bank platforms, they're on [indiscernible] platforms, very liquid. So I think it's important - this important question relative to the leverage. If you've got liquid assets, and once again 2:1 is not a leverage, if you have liquid assets, you shouldn't be that worried about the leverage.

And then you said in the past before, obviously you are a BDC that you were able to use that higher leverage, kind of what level did you set at then?

When we were C-Corp, we were limited to 401. We managed it beautifully and we managed it beautifully during the credit crisis. So when the world sort of disrupted, Hank Paulson didn't offer us a government payout of TARP money. We made it through that crisis. So we're being a little arrogant here today, but we are good managers, I am, knocking on wood right now. We've been able to manage through good markets and bad markets clearly with higher leverage and not as well-heeled as we are today. Back then the market cap was $60 million, we got a much bigger market cap, much more resources. So we - so management team, it's been together for over a decade. We feel very good about our ability to manage this leverage.

Okay. And then you mentioned it in your remarks that the new reliability structure, so either the new credit facility or any other debt out there have covenants. Is that don't allow you to go 2:1 at this or are they all open?

Well, for example and I don't know this, because I'm not insider prospect, but prospect said they were going to use the leverage and next day they came out and said no, not really. So I'm assuming that they've got senior debt lines with a lot of banks, they're a big player. I mean it's not just one bank, it's many. And the banks kind of through - wait a minute, you got to talk to us first. And some of the bigger BDCs with their covenants and their bond issues, so we do not - so we have that flexibility, we appreciated the relationship that we had with our lenders and our borrowers, they know us we're prudent, we're not new to this. We've been in these businesses for over a decade and most importantly, we don't buy other people's assets, we create them.

Of course, and just so - a last little wrap-up question. You mentioned again the reason the premium was down a bit this quarter was because the mix of the 10-year versus the 25-year loans you were doing. Is there time when that might shift more to 10-year or 25-year cyclically or are you having more of mix of 10 years now, just as your targets?

No, it's kind of random. And let me just take a look at that slide, because is if you look at the slide, I mean, look at - in 2014, we had 12.49% and in 2015 we had 11.72% then it trended back up. So I mean there is no - there is somewhat of a random nature, and by the way this is within a given quarter. So let me give you an example. Let's say, we had 2, $5 million 10-year loans that were large. The larger loans tend to depress price than 10-year loans. So if all of sudden I push that out in the market and their settling at $1.10 that could change the whole quarterly mix. So at the moment prices are stable. I am making a statement which I haven't made for 3 years on these calls and talking about rates rising and is this problematic, and I would always talk to analysts and investors and say look, if things got quite hot and values were escalating, business values were escalating, you will have greater refinance activity. Well I'm saying that although we don't currently see that, that's a possibility. So I want to freak everybody out, we've got - in our model we've got haircut at price valuations. But I'm just making a statement, things don't always last forever. One last thing Leslie. Price changes can easily be made up with loan volume, not forced loan volume, but loan volume, which is why it's extremely important that we continue to grow our infrastructure, core technology. We're taking more real estate space in our Boca. We're going from 3,000 square feet to 8,000 square feet. We just opened up an Orlando office. I think it can seat 20, I've our got room in Irvine for 10 more people. So we have room to be able to expand and opportunities to be able to expand to offset changes in the market.

And our next question comes from line of Peter Heckmann from D.A. Davidson.

It's Alexis on for Pete. So we are seeing calculations for publicly traded merchant suppliers moving higher and given the move up in valuation, does that make you feel at all like you are being too conservative in your current valuation of your investment portfolio?

We'd say possibly. We're obviously putting private valuations on these businesses. I will tell you is, we tend to look at the businesses very prudently, appropriately and aggressive quarter-to-quarter. So I would say that we are going to continue to look at this business, look at the metrics, see how it's performing, see out it's tracking to see if we should take further price increases, but it's a fair comment. We look at these things every quarter.

And then as a follow-up on that merchant acquiring piece, so even though you noted that the company is a lot smaller than some of the top players, according to our research at least Newtek Merchant Solutions is still a Top 50 merchant acquirer in the U.S. So given some of the strong growth from players such as Square, do you believe you can maintain the Top 50 and also continue to take share from some of the smaller providers? And then also, can you comment at all on some of the trends in the business and whether the company is growing at the same rate or faster than the overall market?

It's a good question. I think we are, to be fair, on average. We're a little bit above average. And to be honest with you, we're not happy with that. We're not in the business to be average in anything. We have some new initiatives that we're going to be pushing out 0-course payment processing, we think is a big trend and really pushing more into the space of making sure that we've got technological solutions that are fitting customers, which is much more important than, just hey, I can save you money on your payment processing because - that ship has sailed. Square is somewhat unique in that they've done a good job in putting out their technology, but we have like technologies, but I think Square has done for growth however, is that they put out a tremendous amount of financing in conjunction with payments and personally, I am not a fan of their financing, because I think their financing weak credits. And think I'm a stock analyst because I probably would have been crushed on the price of Square, which has done nothing but gone up. But what I've seen in a lot of lending models particularly ones where there is only 1 year, 2 years or three years' worth of lending history with growth that sometimes ends in not so great story. So I think that our goal is to compete in eCommerce, POS and we think there is a big trend in - what would I refer to 0-request processing, which is pushing the cost of processing on to the consumer away from the merchant, because the merchant needed 3% savings, we're currently looking at a small acquisition with some talent that will get us there. So we think we can continue to be competitive in the space by the way, that the markets think is very valuable. I mean the value of customers in the payment space it's been very strong, it continues to be strong, and it continues to be consolidation there. So that's a good thing for us.

Our next question comes from the line of Frederick Cannon from KBW.

Barry, it was a little confusing press release as you know the story about the organization to 504 business, NBL versus NBC, could you kind of just update us how - how you see the 504 business organized at Newtek?

So currently CDS, which is a portfolio company, houses all conventional loan opportunities of which I do consider 504 lending, despite the fact there is a government aspect to it. It technically is a conventional loan that we made in the first. And on a going forward basis with our growth and the acquisition of Tony Zara's team in Orlando office, we will be separating our 504 lending into what Anthony called NBL, Newtek Business lending, so that we got to move over some of the lines of credit, both businesses will be portfolio companies. The will have separate staffs, separate management, separate loan committees and things of that nature. But on a going forward basis, I can't put a data and confirm - negotiating with lenders that takes time, you will see the 504 business primarily separated and segregated in the NBL. Right now on a good note, and I realize, we don't make it easy for you analysts, I'm sorry for that. The numbers are not that significant that it's going to make a change in one way, shape or form the next quarter or so. Fourth quarter there could be some decent numbers in there, but right now, I think CDS is the entity that you would look at for lines of credit business and 504 business.

That's helpful because I was just a little confused on NBL. That's helpful. Secondly, in anticipation of the board meeting, can we assume that there won't be any further share issuance on a go-forward basis until you kind of figure out how you're going to address the leverage issue?

My Chief Legal Officer is listening, Fred and he is going to spank me if I can't answer that. Let me, say this. So we put up the press release last night and the board did vote to expand. Now without a shareholder vote, we'd have to wait a year. So I would speculate that we will continue to use the ATM when appropriate for equity until that board comes in.

But I mean in theory though, you could let your leverage move up from that 83% level towards that 100% level in anticipation of that board meeting just in theory?

I could, but Leslie wouldn't like that. Yes, I mean I've got people like Oh, my god. Yes, I could put it this way, I could get a little closer to the precipice but we are thrilled secretly, but we're not that thrilling.

One other, Jennifer had mentioned the referral cost going up and I note that your referrals are really moving up rapidly and your fundings are moving up significantly, but not as rapidly as the referrals. Could you talk a little bit about the economics of that, I mean is it, because it would appear that your pull-through on your referrals is declining as you're getting more referrals. Does economics work well in terms of those referral cost going up relative to the number of loan growth?

It does. A couple of things. Number one, we're bringing on new people and the market price for our referral fees is much higher than what we pay, and we tell people to come to us and ask us for these higher fee like two business with somebody else, but they still wind up doing business for lower fees because we're quick, we get quick yes or no's and good loans trade very quickly, it's just a fact of life. So we're competing against banks, the fact that we're fast enables us to get loans at lower cost. Now as our portfolio grows and we're able to do more business with the existing portfolio, you get some of those deals are come in, there is no fee, and you get no fee from other companies in the portfolio that come to us for financing. I do think that our current fee paid has been steady like 70 basis points to 75 basis points, gross fees are going to continue to go higher, because we are doing more loans. But I think the average is fairly steady at this point.

And our next question comes from line of Robert Maltbie from Singular Research.

A couple of questions. So regarding your net income line moving ahead in the next year too, how important this your non-lending and lending servicing business relative to the big picture as a contribution to net income? And as a percentage where do you kind of see that going in a year to from now?

Robert, that business kept us in business in '08, '09. And we're not nostalgic or romantic but we also recognized that recurring revenue business that's not tied to credit is valuable to the overall organization. Approximately 33% of our dividends, I think in 2017, came from that side of the business. I would like it to be a bigger percentage, but right now, there is a pretty big tailwind on the lending side of the business. So that may shrink, but long term, I would like to see that side of the business to be frank with you, closer to 40% or 45%. I like the diversification of non-fee-oriented businesses, they also trade at greater multiples which is super for the NAV. So we'd like that to be more, but it's not in the cards at the moment.

And do you expect interest rate increases to impact premiums earned on the sales of your guaranteed portion of your SBA loan sales?

So, one of things I did is, I looked at Prime over the last couple of years. Prime has gone from 3.25% to 4.75%. So up 150 basis points. And the government guaranteed bonds, which are floating rate bonds without a cap, haven't moved in price and they haven't moved in price because it's not the level of rate that changes the price. It's the expectation of the loans underneath those bonds prepay, which are caused by the borrower flipping the business, which is going to happen if the prices are higher. These are not - this isn't base book. These are your basic stable bread and butter or American businesses. It's your diner, it's your dry cleaner, it's your bowling alley, it's your doctor's office, et cetera. So what drives prepayment are significant increases in owner-occupied real estate, when the real estate is behind or the business owner just says, hey I got a higher price in business, done really great, I am going to sell it. So without inflation relative to the real estate - so think of your business owner. You bought a diner, you bought a piece of real estate five years ago, the real estate is worth $1.25 million more than when you bought it. It's okay. I'm going to get down. I'm done. I'd rather just sell the real estate and work in the diner. We haven't seen that yet. I mean, owner-occupied real estate does not go up like office building, multi-family, other income producing our CRE base or investor real estate. And you're not seeing this business sector being over financed, which doesn't goose valuations of the business. When and if that happens, you will have more refinancing. I'll give you one more quick example. Let's say I did a loan five years ago. Five years ago, a person brought a group of doctors, they bought an office building for $1 million. That building is now worth $2 million and they're paying a higher rate. They can go to community bank, get a lower fixed-rate at a lower LTV. They can't get the long AMC schedule and I am going to get 20, 2five years, but they make - that they might have extra principal to pay the loan down and they'll take the lower rate. That's when you get a refinance. But my point here is, and I don't want to over-exaggerate this, it is currently not in the cards. Could it be in the cards couple of quarters from now, maybe. First quarter GDP was not indicative of white hot on fire economy of real estate market at this moment.

And I'm kind of seeing no further questions. And I would like to turn the call back to Mr. Barry Sloane for any closing remarks.

All right. I appreciate everyone's attendance. I know we had a lot of material today, but I thought it was important to get out a lot of new things to talk about. And certainly appreciate your attendance and investment. So we look forward to reporting in the second quarter, very soon. I know Jenny's excited about it. Thanks everybody.

Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes this program and you may all disconnect. Everyone have a great day.