Good day and thank you for standing by, and welcome to the Newtek Business Services Corp. Q3 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. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, President and CEO and Founder, Barry Sloane.

Good morning, everyone, and appreciate you all attending our third quarter 2022 financial results conference call. First, I'd like to welcome John McCaffery to the call. Today. John, is our SVP of Accounting and Finance and John was hired with our intent that subject to regulatory approval, John will become the Chief Financial Officer of Newtek Bank. In addition to John being on the call today is Nicholas Leger. Nick is Chief accounting Officer of our publicly traded company Newtek Business Service Corp. and he'll be doing the financial part of the presentation towards the end of the call. And the voice you hear today is Barry Sloane, President CEO and Founder of Newtek business services Corp. We have many new people that are attending today's call. Just a little bit of background. Newtek was founded in 1998 [indiscernible] in a New York City apartment, 120 West 18th Street apartment 4B. We reverse merger into a publicly traded company in September of 2000. I say that because as I do a little bit of counting on my fingers and toes, we've probably done about 88 to 89 of these quarterly earnings reports and conference calls. As they say, not our first rodeo. We've been through up markets, down markets, up credit cycles, down credit cycles, up rates, down rates. We've seen it all and you've got a very experienced management team and Board that has been able to manage through all these turbulent times and turbulent waters. We also like to welcome the analyst community that has followed us, KBW, Raymond James, Ladenburg Thalmann and Compass Point. We appreciate the work that you do in our company, and the reports that you put out. For those of you looking to follow along on the conference call, the presentation is located…

Thank you, Barry. Good morning, everyone. You can find a summary of our third quarter 2022 results on Slide #41, as well as the reconciliation of our adjusted net investment income, or adjusted NII on Slide #43 and 44. For the third quarter 2022, we had a net investment income of $205,000, or $0.01 per share, as compared to a net investment loss of $6.7 million, or $0.30 per share in the third quarter of 2021. That's 103% increase on a per share basis. Please note that income related to the PPP of $269,000 is included in the third quarter 2021 investment income. Adjusted NII, which is defined on Slide #42 was $15 million, or $0.62 per share in the third quarter of 2022 as compared to $12.6 million or $0.56 per share for the third quarter of 2021. Focusing on third quarter 2022 highlights, we recognized $23.6 million in total investment income, which is a 90.3% increase over the third quarter of 2021, total investment income of $12.4 million. The primary driver of the increase in total investment income was primarily due to the $7.2 million of dividends from the portfolio companies in the third quarter of 2022. In addition, interest income increased by $1.7 million, resulting from a year-over-year increase in the accrual loan portfolio. Other income increased by $1.8 million in the third quarter of 2022 compared to Q3 2021, resulting mainly from a year-over-year increase in SBA 7(a) loan origination volume. Servicing income increased by 28 -- 20.4% to $3.6 million in the third quarter of 2022 versus $2.8 million in the same quarter of 2021. Distributions from portfolio companies for the third quarter of 2022 totaled $7.2 million, which included $4.35 million from NMS, $1.65 million from NBL our 504 business, $360,000 from NCL, our…

Thank you, Nick. Operator, we'll open it up for Q&A now.

[Operator Instructions] And our first question comes from Scott [indiscernible] from Raymond James. Your line is now open.

Thanks very much. Congrats on a great quarter.

Thank you, Scott.

I am wondering if you could give us some color on loan demand. The growth has been clearly outstanding, especially in light of current situations we're dealing with here. Massive hike -- rate hikes, and the questions of the possible recessions next year. And, obviously, we talked about preparing for non-performing loans, which help -- was certainly helpful. But I'm very curious in terms of your conversations with current customers or future customers, both in SBA and non-SBA, more conventional bank lending. What kind of appetite are you seeing on the horizon for your loan book? Thanks.

Sure. Thank you. I think it's when people talk about loan demand, they always think about it in the aggregate. And when you think about, like Bank of America, big bank, I mean, they actually -- they are almost the market because they're that big. We have the opportunity, given how we're set up using technology to pick and choose what we think are the best credits. So even though the market is softer, number one, you're able to get much better terms from the borrower. Number two, people that might not have thought about borrowing, now come into the borrowing realm. And those are clients that are typically stronger borrowers. They have more assets. They have more commercial real estate, they have more unencumbered things that they can pledge and have better businesses. So the goal is to continue to be selective, pay attention to the things that we talked about. But we are fortunate that we're not struggling to get opportunities. So we're able to pour through those opportunities and get the best opportunities. In addition, these are times where you've got the bank lenders that were tripping over themselves to do loans, a 2.5% to 3% rates, or 3.5%, all of a sudden, they're like, risk off, they don't want -- they don't really want to put money out there. And I think that in economies that are declining or declining, or not increasing at a faster rate or declining at a slow rate, there's still really good credits out there. And that's what we excel in, making sure we pick those best credit. So plenty of loan demand, plenty of opportunity to make money. So charge-offs may not be 50 basis points. Maybe they're 75, maybe they go up to 1, maybe they're a little higher on an annual basis. But when you look at the coupons that we can charge, which is what we've experienced over 20 years, and really paying attention and realizing that, in our best guess at this point in time, we are not, '08, '09. This is nothing close to '08, 09. I mean, unfortunately, the risk has been shifted to the government, or for commercial enterprises and consumers. So commercial enterprises and consumers and their balance sheets unlike '08, 09 are actually in pretty good shape. It's the government that's got all the debt at the Fed level, in potentially budget deficits at the state level. So our customers are actually in pretty good shape from balance sheet prospective. Question is, will consumers continue to spend? There's still a lot of liquidity out there. So, we feel good about there being enough great credits to make good loans with better terms.

Great. That's very helpful. And if you could sort of have your wish list in terms of the loan mix, would you prefer to have the same level of SBA versus non-SBA? And how would you [multiple speakers] going forward?

I think that -- yes, I think that we're going to have a real good year. And we're trying to finish nailing down a few funding commitments, which we think we'll do here in the next couple of weeks for the non-conforming book, which diversifies us now. When we say non-conforming, those are typically borrowers that want bigger loans, have stronger personal guarantees, have more liquidity than the SBA book. So we would like to clearly continue to grow as we've grown in 7(a), but use the operating leverage that we've got existing in the company to put on more 504, more non-conforming, and if we are blessed with the regulatory approval, put on conforming C&I and CRE in the bank. So really have a very diverse portfolio and now you've covered almost all angles of the lending spectrum. So you've got businesses at different maturation points, that you continue to lend to them, as they get better and better and grow and get bigger.

That's terrific. Thanks so much.

Thank you. And one moment for our next question. And our next question comes from Jim Collins from Excelsior Capital Partners. Your line is now open.

Thank you. Good morning, Barry.

Good morning, Jim.

Question on the -- question on a little bit of a geeky question, sorry, but on the dividends, so this is Slide 16. So if this transaction -- if everything is approved, as planned, essentially, as I understand that you basically have to sort of push all the retained earnings back out. And so my question is …

That’s correct.

… so then that would be as of September 30, correct? Because then those that distribution would have been made by 12/31. So then for your full year '22 earnings, it wouldn't be included or am I misunderstanding that process?

Let me lay this out and then tell me if I've answered the question. The $0.70 forecast that we have made. It's a forecast, it's not a declaration yet for a distribution for Q4. It's an estimate of Q4 earnings plus any spillover to get to the 100% mark through December 31, 2022.

Okay.

So in the event that the Board declares that dividend, and then declares that it's going to withdraw its election as a BDC, the goal would be to distribute every dollar of income, including anything that's been retained historically, which does require work and an estimate that the company has been at work and doing, but hasn't fully wrapped up yet.

Okay. So that's …

So when and if the derricking [ph] occurs, all that income is paid to the shareholders. So look, you think about it, 2021 was a banner year, and our shareholders participated in that by getting the benefit of the earnings because there's a BDC, paid all out. But some of it modest amounts were retained from that year and years prior, et cetera, et cetera, by like, that's kind of the way the market likes it. Don't give it all out, but give most of it out. And you'll get between 90% and 100%. However, to conclude, you want to pay 100% to 101% to 102% out just to make sure that you don't miss.

Exactly. And then that that figure is the one that you would be including in the 10-K, which obviously will take you a few months to follow. I'm just wondering if …

Yes.

… it's all done by 12/31, then there's no like catch up, if you want to call it that in 1Q '23. You really will have it all out.

That's the -- that would most likely be the intention, yes.

Okay, that helps. That clarifies a lot. Thank you very much, Barry.

Thank you, Jim. We appreciate [indiscernible].

[Operator Instructions] And our next question comes from Paul Johnson from KBW. Your line is now open.

Yes, good morning, guys. I hope you can hear me okay. Thanks for taking my question. Just one quick clarification. I just wanted to let you know my estimate, the $0.63 versus the $0.54 that you mentioned, so I'm not quite sure what if there's some stale information that you're looking at, but just wanted to clarify?

Do you have an August 8 report, Paul?

Yes, I -- well, I don't know, sometime in September, I believe I may have updated the estimates.

Okay. Well, we did it off the August 8 report and that's where we are. But that's [indiscernible]. But that's I went over this morning.

Got you. Okay. All right. Well, one thing I just kind of wanted to ask on, I mean, as far as the approval rating for the loans in your portfolio, I mean, the tightening standards that you started to make, I guess, for the underwriting practices. I mean, are these systematic changes that you've made to the system for everything in terms of the Newtek Tracker System, more, I would say, rigid, sort of discipline changes that you've made to the underwriting system at Newtek, or these more of just kind of discretionary manual sort of tightening standards that you're making across the company.

I think your question is, do you use a computer generated algorithm? Or is there individual discretion by human beings at a loan committee level?

Yes.

The answer would be the latter. So we still believe at this point, that it's important that we use human credit committees .As a matter of fact, our regulators require that whether that's the SBA or in the future as a bank, and we believe historically that looking at things at the moment, from a human perspective, does work. And with that said, our FICO scores have improved. Our average loan size has gone down from a diversification perspective, are trying to close a deal when they come in, has quickened based upon our technology. So our data is showing us that the technological things that we've put in place are working. But important to note, there is still a human committee that ultimately makes loan decisions whether to approve or not.

Got it. I mean, so does that mean, as you're tightening these standards, I've seen a lot of lenders in the market are doing the same thing kind of in this environment. Does that mean you're also giving up on spread and pricing for the loans that you're originating? Or they still coming in around what historically originated at the 275 or 300 basis point spread?

No, we haven't cut our rate. And that's because we don't use brokers or bankers at auction loans often put us in competition. We offer our customers 10 to 25 year [indiscernible] schedules, no covenants. They must personally guarantee the loan, they must pledge all personal and business assets. That's our program. It goes into the hopper. We don't really discuss rate with them. We openly discuss payment and proceeds. And that's what we went on.

Yes, appreciate it. And then, it's a little bit difficult to know if the small business economy has really feeling a slowdown or not at the moment. I'm just curious how much interaction you do have with borrowers, in terms of information that you get from the projections, potentially, how frequently do you get that sort of information? And are we at the point where companies are reducing expenses, reducing headcount, are these trends that you're noticing at all for your borrowers?

So I think that up until September 30, we really didn't see much movement. I do believe that we've seen changes in October and November, I have to say, part of it is, when you turn on your TV and the midterm elections, how could you be positive? When you turn the TV on and we're all inundated through all various forms of media, about how bad things are, it definitely turns you negative, and also the economic data of rising rates and inflation and things of that nature. So we do believe that we'll finally begin to see the slowdown. We've seen a little bit of that in the payment space, but not dramatically. So consumer spending is still pretty strong. It'll be interesting to see what happens with Christmas spending, because a little too early to tell. But we've definitely seen October and November is different than September, obviously, with the seasonal adjustments factored in. So we're starting to see a slowdown as these rate hikes and inflation issues do eat into people's excess liquidity and savings.

Got it. Thanks, guys. That's great color. We'll be all watching closely, of course. And my last question was just on the portfolio yield for next quarter. Actually, in the fourth quarter I saw in the press release where you gave some guidance next year for 10%, 10.5% yields on the debt, the debt portfolio this coming quarter. I was wondering if you could potentially provide any sort of guidance. I don't think it should be quite in that 10% range, but any sort of estimation there would be helpful.

Well, first of all, I think that the SBA changed its regs. So we will be out at and are currently added Prime plus three, on our loans. So we're going to pick up another 25 basis points. And it's really hard to determine what pricing is going to be particularly going into the end of the year, particularly with another December price hike, et cetera, et cetera. So we're kind of trying to figure out what that gain on sale might be. I think somewhere between 109 and 110.5 might -- as a range might be useful, but it's hard to forecast at this point in time.

Got it. I appreciate it. I was actually referring to the yield on your just retained debt portfolio. So [multiple speakers] …

Oh, well that in January, I really just point out where your [indiscernible]. But in January, it's going to be north of 10. But it gets all complicated because whatever's on the books does not get the 75 basis point rate hike until January 1. So, on that basis, it's whatever Prime was at the end of September. So I'm going to think you're probably around 9 in a quarter.

Got it. Yes, that’s helpful. Those are all my questions and thanks for having me today.

Paul, thanks. I appreciate your help. I realize it's we haven't made it that easy with all of this transition and noise. So I appreciate all the work that you've done. Thank you.

And thank you. And I'm showing no further questions. I would now like to turn the call back over to Barry Sloane for closing remarks.

Great. Well, I appreciate everyone attending. We look forward to making some more progress on our transaction. And hopefully that will really give investors a clear view as to what we see as being a really constructive future for Newtek Business Service Corp. and all its stakeholders. So I want to thank everyone for attending, particularly those that joined and ask questions. We appreciate it. Thank you.

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