Hello ladies and gentlemen, welcome to the Newtek Business Services Corp. Q1 2020 Earnings Conference Call. At this time, all participants are in 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 turn the conference over to your host, Mr. Barry Sloane, President of Newtek Business Corp. Go ahead, sir.

Thank you very much operator and good morning. My name is Barry Sloane, CEO, President, and Founder of Newtek Business Corp., stock symbol NEWT on the NASDAQ. This morning accompanying me on this call is Chris Towers, our Chief Accounting Officer and Executive Vice President. First of all, I want to thank all of the Newtek staff that has been working remotely. 100% of our staff has been working remotely during this period of time. 24/7, particularly focused on the PPP program, as well as payroll and other important vital services to over the 20 -- estimated 27 million businesses in the United States. We don't have all of them. We are servicing many of them, helping business owners have the funds necessary to provide payroll for their employees. We've estimated that the PPP funds that we have gotten [indiscernible] numbers or guarantees from the SBA will total approximately 130,000 individual payroll checks and quite proud of that and want to thank our staff for working 24/7. For those of you that are familiar with Newtek, you can follow along this presentation. It is archived on our website, newtekone.com in the Investor Relations section. I would also like to point everyone to forward looking statement that exists in that presentation on slide number one. Moving forward to slide number two on first quarter 2020 highlights. The company yesterday reported a net -- NII, net investment income or loss of a $0.01 a share. That is an improvement of 80% over $0.05 a share from the quarter and year prior. Our NII does not include gain on sale and a significant part of our business is originating loans and selling them for gain on sale. This improvement is valuable because it pretty much indicates that without any origination and gain on…

Thank you, Barry, and good morning, everyone. You can find a summary of our first quarter 2020 results on slide 40 of the presentation, as well as the reconciliation of our adjusted net investment income or adjusted NII on slide 35. For the first quarter of 2020, we had a net investment loss of $282,000, or $0.01 per share, as compared to a net investment loss of $1 million or $0.05 per share in the first quarter of 2019, that's an 80% improvement on a per share basis. Adjusted NII which is defined in the slide was $4.3 million, or $0.21 per share for the first quarter of 2020, as compared to $8.3 million, or $0.44 per share for the first quarter of 2019. That's a 52% decrease on a per share basis. Focusing on first quarter 2020 highlights, we recognized $15.8 million in total investment income, so 14.8% increase over the first quarter of 2019. Service -- servicing, interest and dividend income were the primary drivers for the increase, with interest income increasing by 7.5% resulting from a year-over-year increase in the performing loan portfolio. Servicing income increased by 11.8% to $2.7 million in the first quarter of 2020 versus $2.4 million in the same quarter last year, which is attributable to the average servicing portfolio growing from $1.1 billion to $1.3 billion. Distributions from portfolio companies for the quarter included $3.75 million from NMS, $75,000 from IPM, $250,000 from Sidco, and $307,000 from Newtek Conventional Lending. Total expenses increased by $1.3 million year-over-year, or 9%. Total interest expense increased by $0.4 million in the first quarter of 2020, primarily due to higher average outstanding debt balances, origination and loan processing costs from SBL increased by $450,000 primarily due to increased headcount and overall compensation levels. Small Business Lending LLC or SBL is one of Newtek's wholly-owned controlled portfolio companies and is a lender service provider that starting January 1, 2019 provides NSBF with loan origination and loan processing services. Realized gains recognized from the sale of guaranteed portions of SBA loans sold during the first quarter totaled $5 million, as compared to $9.7 million during the same quarter in 2019. In the first quarter of 2020, we sold 67 loans for $38.1 million at an average premium of 10.9%, as compared to 117 loans sold during the first quarter of 2019 for $74.1 million at an average premium of 11.09%. Realized losses on SBA investments for the first quarter of 2019 and 2020 were $400,000. Overall operating results for the first quarter resulted in a net decrease in net assets of $7.3 million or $0.35 per share, and we ended the quarter with NAV of $15 per share. Now I’d turn the call back to Barry.

Thank you, Chris. We'd like to open up the call to Q&A.

[Operator Instructions] Your first response is from Mickey Schleien of Ladenburg. Please go ahead.

Good morning, everyone. And thanks for taking the time to explain such a fluid situation. Barry, just quickly on the SBA 7(a) prices and I did look at the slide as you were talking. They were soft in March as you’ve shown, and I have data that shows that they were also soft in April, which is a little confusing, because these are government guaranteed and there's low loan origination volumes. So you would expect the supply and demand imbalance to actually improve their pricing. So can you just describe the market dynamics and what's the outlook?

Sure. Mickey, I appreciate the question. And I do want to add that the SBA has done an amazing job during this crisis, just phenomenal. And although, it's easy to sit in the bleachers and your question doesn't address that at all. But a lot of people think they're critical of everything. This is not the time to be critical. This is the time to be proud of what we've been able to do here. I do want to compliment the SBA on their efforts and working with us. Now, here's a little technical issue, however, well, historically, they've contracted with an entity called Colson, which I believe that will be changing out in the very near future. Well, Colson is located in Downtown Brooklyn. So unfortunately, most of the pool assemblers, I'm saying like almost all of them had difficulty in clearing bonds, because of Colson issues and issues of having to deliver physical certificates and signatures, and that was a primary cause for there being a market dislocation in the month of March and in the month of April. I do see that shoring up. We did a little bit of selling in April, and we're able to clear. We had some product left over from the prior quarter that we held on to. But I think from a pure valuation standpoint, these are premium bonds, they’re government guaranteed and prepayment speeds aren't at 22 or 24, but they're at lower numbers, putting supply and demand side that should affect the bounce back in price.

Right. I agree. Moving on to PPP and this is sort of a subsequent event discussion, and I recognize there's limitations as to what you can say. But my understanding is that you're collecting loan administration fees, which will be at the BDC level and they range from 1% to 5% of the loan depending on its size, right? Could you describe how you expect the accounting for those fees to be? Are you going to book those fees as they're earned or will you capitalize them and then amortize them over the loans to your life?

Important question. First item, we've sold 100% of the loan in the form of participation certificate to third parties. And the fees are earned for the purpose of putting the loan together and putting it on our license. So and obviously, it's early, so I'll put the qualifier on it that auditors haven't signed off on this, but in our conversations internally, these fees will be earned upon the funding date. They'll be paid in cash by the SBA, that's still to be determined, but the law indicated fairly expeditious manner in which those cash fees will be paid. And they'll be -- those fees should be earned in the current quarter. But I think it's important to note, I think some people wonder where we're selling these at. They're all sold at par. And -- they're all sold at par. So basically, we’re trying to come up with some kind of an income model, you can figure it's one, three or five.

Right, right. And so there are parties out there interested in holding this 1% paper. I mean, it's a little surprising.

It’s done.

Okay. Barry, since PPP doesn't require -- based on what you just said, it doesn't require use of your capital. And meanwhile, your legacy loan programs are sort of on hiatus at least for now, what's the outlook for Newtek's balance sheet leverage for the balance of the year?

So, yes, Mickey you're asking the questions that really are valuable to investors and have created sort of a lack of visibility that we really haven't been able to address up until this point. We're not giving a lot of visibility, but we're giving what we can. When we originate the PPP loan, we fund it, and then we sell it expeditiously. So that there's, I'll say, virtually no balance sheet. We've got currently four different funding partners. The funding partners have availability beyond what we've got PPP numbers for. So you can imagine that they're fairly deep. I've got one funding partner that's fairly small, that will keep us with maybe a $5 million or $10 million balance sheet at the end of it, but practically all of our funding partners are buying 100%.

Okay. And these are folks that are, I guess, they're just looking at this given the guarantees, these are almost like money market investments for them, right?

Well, look, a financial institution can pledge this at the Federal Reserve for 35 basis points. So, and they can also put it on their books at zero risk based capital with unlimited leverage. So, when you think about this, Mickey, and this is once again, looking at the company and all of a sudden, this program gets thrust on us where it may have a 4% rate on Friday, a 50 basis point rate on Tuesday, and back to a 1% rate on Thursday, where I mean, the way that the United States reacted in this crisis, I think financially, although it's been heavily criticized, has been just terrific. And once again, I want to compliment the Senate, the house, the administration, the SBA and the Treasury. So, [indiscernible] and what you see on TV is everything is bad. It's not accurate. Not everything is bad. There's a lot of good things going on out there, and we'll come out of this.

For what it's worth, I've stopped watching the TV Barry, but maybe you can, could you at least give us a blended average between the one - a weighted average between the one and the five, I mean, there's a big difference between 1% fee and a 5% fee – borrowers, in my sense, it's probably closer to the five than to the one.

Well, look, let me comment on this because I want to be careful relative to forecasting and what's going to fund and what's not going to fund. So, as of this date, we funded or closed, which I think also is a great number, about $650 million to $670 million, worth of 1.1 billion, so we've been working at lightspeed. The SBA statistics indicate that round two, the average loan was at the lower end of the rung and that would be in the 5% bucket. I think you could indicate that round one was closer to the bigger loans from an average. I mean, look at this point and I really prefer to wait until June. You could come up with different averages and forecasts and ranges. But we would just prefer to wait until that amount has been funded, that we've been reimbursed from the SBA with cash in the bank, and we could then move on from there. The one thing that has come to fruition is we got I think 17. -- 17 plus million dollar payment from the Treasury for our portfolio, which makes us very happy and our portfolio is 98.6% current, so that's one act that's passed through in round [two] [ph]. This will happen too. This will happen as well.

All right, I understand and I appreciate your time, Barry. Thank you.

Thank you, Mickey.

Thank you. Your next response is from Luke Wooten of KBW. Go ahead, please.

Hey, good morning, Barry.

Luke, how are you doing?

Doing all right. So just kind of following up on, on what you were saying. I mean, just because of the obviously ins and outs of the PDP program, just want to reiterate what you said, The 100% of the loan that you guys are originating are being sold the, like you said, 5 million to 10 million of the smaller partners that you're partnering with, right?

Yeah, so the balance sheet won't grow in this activity by more than $5 million or $10 million. Plus, we've also sold governments that we have in the line so our leverage might actually go down.

Okay, got you.

Holding everything else constant.

And then actually just on the kind of just the housekeeping question, but on the referral volume for exclusively 7(a) loans in 1Q, do you have that number on hand? Or is it kind of mixed in with a PDP? So it's hard to delineate between the two.

Could you repeat that again? I'm sorry -- no phone volume?

Yeah.

It's -- Luke I would say, I would say that what we've historically done over the course of four or five years relative to referral volume growing. I mean the data wouldn't be useful. In other words, because if people came in and said they were looking for a $10 million, normal 7(a) loan, we just, we stored it, so we did -- it just -- it's just not useful right now. I can't tell you that from a modeling standpoint, the SBA business is now a very common name and work. There are a lot of business owners that didn't know about. Newtek is also become more prominent in the space with a variety of different new referral partners. I would say, in order to be frank with you, we've dropped a couple of balls, but not many. And we've made a lot of new friends. So, I think that we're going to probably suspend the whole referral volume number for another quarter and then we'll pick it back up. But I'm confident that our numbers are great. And it's going to grow. It’s not real relevant. I would say those 70,000 are primarily driven to PPP.

PPP. Got you. Okay. That's what I thought. I just wanted to make sure. And then just you had a second point on that, is you're expecting the 7(a) to pick up more towards the back half of the year, correct. So kind of two half 2020 event rather than anything in the next quarter, or even maybe a little bit in 3Q, right because of the PPP?

I think it's also important to note that the second quarter in the first half is usually weaker than the second half. So, I think that, if you can put any kind of a typical number in the second half that you're trying to forecast, we've decided not to do this. So I mean, you guys can do and again, investors want to get a feel for it, but just to go out into the third or fourth quarter, but I mean, if you put any kind of 7(a) volume in there with any kind of pricing, and actually salvage is a year that in most cases, particularly in BDC world or in financials is just in the toilet.

Yeah, got you. Okay. And then, kind of switching over to the payment or the principal and interest payments from the SBA, on the current accrual portfolio, I think, on that slide, I think it's 15, you kind of list that there's 15 loans that are either a little bit past due or further and so we should expect that less or subtracting out -- I think it's the 80,000 that will be transferred to liquidation. The rest should be funded with P&I payments from the SBA. So that would be another just under $5 million

Number goes higher…

Yeah. Got you -- $5 million balance within P&I is obviously lower. Okay. And then lastly, on that portfolio, I mean, coming out of this, we're kind of -- I mean, I think the question has to remain what the demand for businesses and borrowers has been since those borrowers have gone back to work, I mean, obviously, just trying to get through a normalized loss rate on some of these following the six months payments from the SBA. So, I know you gave the slide that saying that 30% cumulative, butchering this the cumulative gross default at 30% with a 40% loss severity, which should imply roughly 12% cumulative loss rates on the portfolio. Can you speak more to that coming out of this event? And what kind of business demand has been for borrowers?

Well, first thing in addressing valuation, I think that is I'll use the word fair. And I think particularly when you pose it against the literature that we put out, that shows these curves really flattening based upon seasoning. And I think that for those of you that really aren't immersed in dealing with small businesses and entrepreneurs, they are an extremely resilient class. They are going to come in every day. They are going to make their payroll and unlike a lot of consumers that are in many cases, living paycheck to paycheck, the small medium sized business operator in my opinion can survive a month or two or three of zero. Now, when I say that, I'm not talking about 100% of the pie, but a pretty big percentage of them. And I think that's, that's what we're seeing. Now, relative to loan demand coming out of this, a lot of them have built up net worth. They've got 401(k), they got retirement plans, and they believe in themselves, they believe in their business, they're going to tap into those additional resources to give them whatever equity is required to bridge this and to be able to borrow, if need be from the next SBA program that comes out and we do have a lot of people today. We've seen that and we've we're holding these situations, but there is clearly a pent up demand for capital. And this is a classic downturn from the standpoint that you will lose weaker entities, there's no question that you will lose weaker entities and the entities that are around they're going to do better because they have got less competition. So there's going to be loan demand. I believe there'll be loan demand.

Okay, got you. Yeah, I was kind of just looking for adding a few and the anecdotal references from the businesses themselves in terms of kind of consumer demand for their products or anything like that just in terms of their ongoing kind of cash flows?

It's a little early, well with respect to cash flows. The interesting thing, Luke and we showed this, we pulled in a lot of cash in March from businesses that wanted to get closer to current. So, they could benefit from being in regular servicing and that was very beneficial. We did very few deferments in the month of March. A lot of people did them immediately. We tell people make your payment, so you can still have a deferment down the road if you need, because you can't get unlimited deferments in the SBA program, I think you're allowed one.

Got you.

So, I did like 10 or 15 that I could recall and they were all short-term just to get people -- get the people current. But for the most part, these business owners, they've got savings, they've got -- they're not going paycheck-to-paycheck. Now when I say that, I'm not talking about 100%, I'm talking about 80%, 85% maybe 90%, but they've got valuable businesses and infrastructure and some of them have got marginal restaurants or marginal coffee shops or marginal and they're going to go out. There's going to be -- there's going to be businesses that shut, I don't think it's one, I don't think it's three in 10 or four in 10.

Okay. Got you. That's super helpful. And then this one last one really quick, just kind of on with the actual individual loan that you highlighted the non-accrual loans to paid off on slide 16 to 18. In the interest that's recovered from those recognize in the interest income or is it like should we expect that to be kind of an interest recovery because I mean, just given the size, it looks like it would be roughly like 8% to 10% of the interest income that you guys receive on a quarterly basis. So just want to kind of see if we should look at that as kind of one-time, if we look at loan yields or overall interest yields coming in on to 2Q?

I think the one good question is, these loans are now cash current, we should have a much higher interest income that comes off of that existing portfolio. Portfolio will shrink a little bit, I still think we'll probably have 8% type prepayment speeds, but a lot of the portfolio got that cash infusion, which will be the full interest coupon as well as servicing.

Okay. Got you and that's all. Thank you.

Thank you.

Thank you. Your next response is from Robert Dodd of Raymond James. Please go ahead.

Hi, guys. As lot going on obviously, first one, if we can go to the dividend momentarily and then I've got some other questions. I mean, is it the current intent obviously, in the presentation you talked about, there are annual distribution requirements. But is the current intent to pay a cash dividend during the second quarter, just delaying when you declare it because of lack of visibility? Or is it more the intent right now to pay out kind of more in the second half as everything works out and maybe you skip the normal dividends that you would have already declared for the second quarter?

Robert, number one, the Board's going to determine that. I am a Board member and we kind of get more visibility as every day that goes on. I think that, we clearly have got investors that look forward to receiving some cash payment on a quarterly basis. Given that we think that the second quarter could be a very big quarter and normally, we pretty much -- we kind of keep that dividend very close to what NII is, right that's the store. But this, whatever it was historic almost goes out the window now. I think that from our perspective, if you would ask me that question a couple of weeks ago, maybe my leverage was going up, I might have had a different answer than I have today. I think that we're going to; I don't have a specific answer for you today because the Board determines that. I think that we're going to try to get investors some regular cash flow they can count on, but I am I am hopeful and I say this I am hopeful that investors come away with owning Newtek this year and saying, well, given the coronavirus, they paid me a pretty good dividend, their portfolio held up and this turned out given that this is a tough space to be in financials, small, medium sized business, this worked out pretty well. So we're going to be judicious, I'll probably have more clarity on that beginning of June, like to understand from the SBA for example, when we're going to receive that payment. So I feel really uncomfortable. So yeah, we're going to make a cash payment and I don't, I didn't get the cashback from the government yet. So, as you can see, I'm being very careful about that. But we feel very strongly about the model, the earnings and what we're doing. I think investors will wind up being pretty happy with our cash dividend performance as well as how well our portfolio held up. And that's important to note, we're partners with the government.

Got it. I really appreciate that color. I mean you used to mention it again, like a bit if I'd asked you two weeks ago, you're given a different answer in your prepared comments you talked about, you do expect the SBA market to come back now in the second half of the year. But if you actually that two, three weeks ago, you might not have said that. So obviously things are moving really fast.

Very.

But what have you see over those two weeks? What is it that's changed your confidence level so much more in the interest, this question about the fact that the traditional program can come back in a second half?

I love that question. Two weeks ago, everybody believed the money would run out in 10 minutes. There's no money. The whole 310 billion in the second would be gone, which means you need legislation to appropriate new 7(a) money, right? Well, no one behold, the money still out there, there is 120 billion left, that could be used for 7(a) through the end of this year and then it will most likely get relegislated. I've also seen the Rubio, Cardin letter. You hear things from Pelosi and other politicians, this program is a bipartisan program. The administration is talking about growth and going forward and another round of stimulus, which I believe and hope the SBA would be part of it. Important to note, the Rubio bill was part of the original CARES act that portion of it that would have gone to 90% with $10 million limits and the availability to not have credit elsewhere. That got pulled because I think what the administration wanted to do, is they want to do bridging first, to bridge everybody, get paychecks out there, get money to consumers, do PPP and then go with stimulus after the fact. So, number one, the availability under the 7(a) program. Two, what I'm hearing from Washington. Three, loan demand from businesses that indicates to me that we'll get back into a normalized environment. I want to tell you something else, we really covered a lot in my payments sector looking at the first six or seven business days of May versus April and you could see it's, as people -- as things are opening up, people are going out and they're getting out of their house and they're starting to spend. So those are the things that give me the confidence that there will be a 7(a) business with some point in time in the rest of the year.

Sloane, I really appreciate the color. Thank you, bye.

Thank you.

Thank you. Your next response is from Scott Sullivan of Raymond James. Please go ahead.

Thanks for taking my call. One comment and two questions, real quick. We all know this was really kind of a DEFCON situation. So, personally, I had tip [indiscernible] and both sides of Congress to come together on this, what I think was a very elegant bill. And also really huge congratulations to you and your staff, your team for helping such an important and vital component of the U.S. economy and you guys should obviously in my opinion, be very proud. So, first question is, what's your goal for your staff this next quarter?

That's a good question, Scott. Because they're working real hard, the clients appreciate them, we appreciate them. We've got to keep them going, keep them in their seat, keep them hydrated, keep -- just keep them going at a very high pace to get the money out then deal with the concept of loan forgiveness on these loans. In addition to that, the payroll staff, payments, staff, tech staff, insurance staff that's also going to be helping out on the program and working with businesses to get their payroll cost down to get better health insurance policies, to get other insurance policies that they need to improve their technology for working from remotely and from home. So we have goals that are well beyond what is sitting right in the face. And the one thing that was very constructive about this crisis, which is destructive across the Board. I think our staff realized that the business owners out there, they're just like them and these are people that really need them, they needed their help, they needed them to process their paperwork and to get money in their hands for payroll that was a very positive thing that was hard to get across the people that our staff helps businesses every single day. That's what we do, we help people and getting the staff to recognize it was frankly easy during this pandemic. So those are the primary goals for the quarter and then this too will end most likely by June and we'll shift back into what we normally do, which is helping businesses, but I'll be at a different pace.

Great. Appreciate that. Last question with a large number of new customers, obviously been introduced to and are helping now. What kind of cross pollinization, do you think you could see and so targeted brush on this in the last response? What kind of lift could you see for your other small business offerings?

I've told my staff I think this is kind of a once in a lifetime opportunity where businesses now that are in many cases, not fully functional, not fully operational, not really focused on revenue growth. To really focus in on the expense to focus on having the best solution and to get them to make changes. This is a once in a lifetime opportunity for a business owner that can sit there and look that I have the best technology. Can I work remotely? Can they work remotely securely? Are they storing? Do they have hot backup? Are they using the right payment processing solution? Should they go to a zero cost model? Should they improve their website? I mean, we impressed upon restaurants, for example, to take e-commerce. Well, a lot of them hadn't. I don't want to spend $1,000 or $2,000 on a new website, that would have been the best investment they ever made.

Okay.

To be able to order online and have curbside pickup, they would have been able to stay in businesses. The business that done if curbside pickup, they really got hurt.

Absolutely. Great. Thank you so much and congrats.

Thank you, Scott.

Thank you. I'm sure no further questions in the queue. I will turn the conference back over to Barry Sloane.

Thank you very much and look we appreciate the opportunity to present to everybody, I once again want to thank all the Newtek associates, I want to thank the small business administration, all aspects of government, investors that have hung in there with us. And we look forward to giving further guidance. The important aspect is to a really tough time and a tough segment of the market in the economy. I think, we're very well-positioned going forward and we look forward to providing the types of returns that the community has become accustomed to with investing in Newtek. Thank you all.

Thank you for joining us today. This concludes today's conference call. You may now disconnect.