Good morning, ladies and gentlemen, and welcome to the Newtek Business Services Corp. Q3 2020 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to your host today, Mr. Barry Sloane, CEO and President of Newtek Business Services Corp.

Thank you very much, operator, and good morning. I'm Barry Sloane, President and CEO of Newtek Business Service Corp., stock symbol NEWT on the NASDAQ. With me today is Chris Towers, Executive Vice President and Chief Accounting Officer. For those of you that would like to follow along on our presentation, I'd like to suggest that you go to our website, newtekone.com, N-E-W-T-E-K-O-N-E.com. Go to the Investor Relations section, where we have a PowerPoint presentation for all of you to follow along. And once again, welcome to our third quarter 2020 financial results conference call. I would like to point all of you to the note on our forward-looking statements on Slide #1 and move everybody over to Slide #2, where we could talk about our third quarter 2020 financial highlights. Net investment income for the quarter of $1.7 million or $0.08 a share. That was an overperformance versus a $0.03 a share loss for the 3 months ended September 30, 2019. Adjusted net investment income came in at $0.04 a share for the 3 months ended September 30, 2020. That was compared to $12.2 million or $0.63 for the same period last year. This was an underperformance based upon us ceasing lending activities in the end of the first quarter, which we've now started up, but it was a beat on the street relative to consensus of negative $0.015. So the $0.04 that came in beat the consensus analyst of negative $0.015. Net asset value came in at $324 million or $15.13 a share versus NAV of $15.70. A lot of that was due to the redistribution of cash that was earned in the second quarter performance, that distribution of the cash versus the earnings drove NAV down. We do expect NAV to normalize. And historically, we've been able…

Thank you, Barry. Good morning, everyone. You can find a summary of our third quarter 2020 results on Slide 34 as well as a reconciliation of our adjusted net investment income or adjusted NII on Slides 36 and 37. For the third quarter 2020, we had net investment income of $1.7 million or $0.08 per share as compared to a net investment loss of $500,000 or $0.03 per share in the third quarter of 2019. Note that income related to the PPP is included in investment income. Adjusted NII, which is defined on Slide 35, was $950,000 or $0.04 per share in the third quarter of 2020 as compared to $12.2 million or $0.63 per share for the third quarter of 2019. Focusing on third quarter 2020 highlights. We recognized $14.9 million of total investment income, a 6.9% decrease from the third quarter of 2020. Decrease was driven primarily by a decrease in interest income attributed to the decrease in the Prime rate and a decrease in dividend income from portfolio companies, mainly NMS. These decreases were offset by the recognition of $3.1 million of income related to the origination of $82.5 million of PPP loans during the quarter. Servicing income increased 11.8% or 2 point -- to $2.9 million in the third quarter 2020 versus $2.5 million in the same quarter last year, which is attributable to the average servicing portfolio growing from $1.04 billion at September 30, 2019, to $1.1 billion at September 30, 2020. Distributions from portfolio companies for the quarter included $1.7 million from NMS, $125,000 from IPM, $175,000 from Sidco and $240,000 from Newtek Conventional Lending, our joint venture with BlackRock TCP. Total expenses decreased by $3.3 million quarter-over-quarter or 19.9%, mainly driven by a decrease in interest expense, referral fees and other G&A costs such as advertising. Realized gains recognized from the sale of the guaranteed portions of SBA loans sold during the quarter totaled $1.6 million compared to $11.7 million during the same quarter in 2019. In the third quarter of 2020, we sold 16 loans for $11.8 million at an average premium of 11.79% as compared to 147 loans sold during the third quarter of 2019 for $89 million at an average premium of 11.49%. The decrease was attributed to our continued focus on PPP originations during the third quarter of 2020. As I mentioned earlier, income related to the PPP is included in investment income. Realized losses on SBA non-affiliate investments for the third quarter of 2020 were $2.4 million and $838,000 during the third quarter of 2019. Overall, our operating results for the third quarter resulted in a net decrease in net assets of $500,000 or $0.02 per share, and we ended the quarter with NAV per share of $15.13. I would now like to call -- turn the call over back to Barry.

Thank you, Chris. Operator, I'd like to open up a question-and-answer section -- session.

[Operator Instructions] Your first question comes from Mickey Schleien from Ladenburg.

Barry, I just wanted to touch on trends in SBA 7(a) prices, which were quite strong in the third quarter, and ask you who would you say are the main players bidding up those prices. And what do you think the outlook is finishing this year and going into next year?

I think that in looking at the government-guaranteed bid for 7(a) loans, a couple of things have occurred. Prepayment rates have slowed significantly in this calendar year, and we do expect them to continue to be slow as the lending environment for particularly most bank lenders is one of a more cautious note. So you're not getting banks refinancing small and medium-sized business borrowers with low interest rate loans at this point because they're just -- the banks right now still have their risk off-trade on. So prepayment speeds clearly drive the market. Supply and demand drives the market. There has not been a plethora of originations. I don't see that at this point yet in the fourth quarter. It may start to pick up. We don't see that. The demand for government-guaranteed assets with a zero risk-based capital is insatiable. Banks are flushed with deposits. The stimulus has put a lot of money into the banking system so that they need to put that money to work. A LIBOR floater plus 65 basis points at zero risk-based capital is attractive. So my view of this is beware of the change of prepayment speeds. So until we get into a more robust economy, which I don't think that's on the cards until -- now growth is one thing, but what I mean a more robust economy, I mean a lot of lending activity, as a matter of fact, greater GDP than you had in Q1 of 2019 going into the pandemic. I don't think we need to be overly concerned about significant price weakness until maybe the third and fourth quarter of next year at best.

And just a couple more questions, one on the balance sheet. Any guidance you can give us on when you might do your next securitization?

Yes. Look, securitizations are a financing for us, and they wind up taking out the Capital One Bank line. So a general forecast and obviously a little -- we got to be a little careful about SEC issues and front-running, which is weird, but generically speaking, I'm thinking this is going to be -- it's clearly a 2021 calendar event and maybe second or third quarter.

I understand. And that's just due to the cadence of the 7(a) business, right?

Yes, in other words, just building up enough critical mass. We probably have around $60 million that we've mostly funded with equity at this point in time. We're not using our line. And our lines are very low levels across the board and -- which is good. It shows that we've got good liquidity in the system and don't have excessive needs to hit the capital markets. We always want to stay ahead of that game. You never know when the markets won't be kind. So we've been very good in managing that for us. And I think that, that portfolio could begin to build up after 2 quarters. We also have a prior transaction that we might be able to call, but that's -- I think out in the future would probably be third, fourth quarter of next year is probably a good enough guess.

I understand. And you kind of hit the nail on the head. We don't know when the markets will be open or not. But I'd be interested in understanding, just broadly speaking, what's your thesis on the economy for next year that ultimately is supporting your dividend forecast.

I think that our thesis is that the economy has a lot of momentum behind it. And irrespective of whether you've got Trump in the White House or Biden, which is on everyone's mind, I think the concept of additional stimulus is out there. I'm not overly concerned about a tax hike with either executive in. I have to make this one comment. I'm not -- people think the Republicans have the Senate. That's not clear at this point, particularly if you get 2 Georgia runoffs, which is possible. But I think that there's a ton of liquidity in the system. There's a lot of momentum. New business formation, believe it or not, is growing rapidly. So a lot of parts of the economy are growing on all cylinders, lots of liquidity in the system. From an aggregate standpoint, I'm bullish. Now the flip side of that is you've got certain businesses at the extreme that require no social distancing, indoor activity. Those are businesses that are going to have a hard time. We're happy that we have a diversified portfolio, both geographically and Sidco, to be able to combat that. So there's no -- there's nothing in our portfolio that keeps me up at night, that says, oh my god, I'm overbalanced in gymnasiums in New Jersey, for example.

Those are all my questions, Barry. I appreciate your time this morning.

Thanks, Mickey. Thank you very much. Just to put one more final point on it, I'm generally optimistic about economic growth in 2021.

Your next question comes from Scott Sullivan of Raymond James.

First of all, a comment. I really do appreciate sort of the management's flexibility and acuity in terms of being able to live the Warren Gretsky school of thought, skating to where the puck is going rather than where it is, so congrats on that.

Thank you.

And I do appreciate the color on the cross-selling initiatives and certainly the more elegant solution with IPM and NTS. So from a high level, where do you -- where are you modeling the most growth, obviously, in a more normal economic scenario? Where is the best CAGR in all of the different silos other than lending?

I think that it's a good question because part of it relates to where we are in our product cycle, and then there's near term, medium term and long term. I think I'm optimistic about the turn in Tech Solutions. Now from a marketing perspective, we're probably less built out there than we are in Tech Solutions -- than in, I'm sorry, Payment Processing, which is a bigger business. But I think that the menu of solutions that we have to be able to offer to independent business owners relative to product, professional services, managed solutions is broad. This is a growth area for many, many years, and there's so much work to be done. And frankly, not a lot of competition in the space, in my opinion. In the merchant space, which there's a lot of competition and a lot of people in there, I think that we've got superior solutions. I was on with a financial institution last night. And for example, we talked about our POS on Cloud and branding it for the particular institution. So you can call it -- we can give a financial institution their own payment solution, where their name comes across the brand. For example, I'll use your company's name, Raymond James. We could create Raymond James Payment Solutions. Well, what does that do? We're going to put POS software in the business that's got your name across the top. That's branding to the business owner and branding to the 8 to 10 to 100 employees that are interfacing with that POS system, whether that's doctors, dentists, lawyers, motels, restaurants, and at a finger snap, you can boot up a website for pay at the table or all the retail SKUs right away because it comes right out of the POS, both…

Your next question comes from Brian Stauffer from Compass Point.

Barry, congrats on the quarter. So I got one question answered about the 7(a) loan market and the strength you're seeing there, but you did mention earlier in the call the work-from-home dynamic. Do you see any opportunity there to kind of rationalize Newtek's real estate footprint moving forward, maybe save money on OpEx down the road as leases come up for renewal?

Brian, no question. I think that the pandemic changed my viewpoint on real estate footprint and staffing. And I think that a lot of that relates to given that I typically drive somewhere, wherever I am, whether it's an hour each way, which is fairly typical. I think that on a going-forward basis, that's going to be more pertinent. We will be not renewing our lease in Irvine, California. Our staff is working remotely and doing great. We will not be renewing our lease in Milwaukee. Staff's working remotely and doing great. We have taken a little bit more space in our Lake Success area, but we also have one parcel that we'll probably put up for sublet. Our Orlando business is doing well. So I think that you're going to see more cost savings in that particular area. And we've also put tools in place for staff to be able to monitor their own activity relative to talk time, inbound calls, outbound calls and time sheets. So from a monitoring perspective, it's really important to make sure that we're hitting all of our production metrics. So I think one of the -- there were many negative aspects, obviously, to the pandemic. One of the positive ones is to get people to work more efficiently from home and save on commutation, which saves them money as well as time.

Your next question comes from Matt Tjaden from Raymond James.

Barry, first one, if I can, on 7(a) originations. Any color you can give on what you're seeing a month into the quarter? I know $135 million is the expectation for 4Q. Any expect -- or any color you can give on what you're seeing a month in?

Look, I think we put that number out there, and it's difficult for us to peg that with precision. I'll explain why. We put commitments out there. We then go into an underwriting. And some of that is, wow, all of a sudden, the tax lien pops up at closing. Okay, all of a sudden, our real estate appraisal changes. It's really hard to forecast that pipeline, both positive and negative. We put out a number that we're comfortable with. We've expressed to the market there's volatility. But also I would say this, we've come out with guidance that we expect our dividend will be between $1 -- from $1.80 in the low to $1.90. We're down from $2.30 to $2.20. We've taken PPP out of that. So if a PPP comes in, that's extra. So I think that our investor base, which is sensitive to, obviously, share price as well as the dividend, should feel pretty good that we're going to come close to -- we certainly believe we're going to be within the range, and we'll forecast that dividend. But to forecast specific loan funding, it's tough. You lose a $5 million, $10 million loan, it becomes difficult. The good thing about our business model, though, is we're kind of firing on many cylinders. We've got the 504 business now. We gave a fairly wide range of dividend and income generation of $1 million to $3 million. Our tech business is picking up. No, but I can't give you the type of guidance that we're traditionally used to giving because it would be disingenuous because we're finding situations where we're trying to get loans closed and the world's changed, stuff pops up at the last minute. Conversely, we're getting an overwhelming amount of referrals that are blowing away previous numbers. So we've got plenty of stuff to look at. I think that's important because I realize we're sitting here at November 5, and the way the world is today, everybody wants to know what's going to happen between now and December 31. Well, I will tell you that's important to me, but what's more important is the direction and the movement in the model. So to me, I'd just be frank with you, yes, I don't want to be on a conference call with all my numbers or my guidance, but I'm really interested in the long-term forward momentum of the business, which looks pretty good for 2021, with a fairly wide range for 2020. I know I evaded your question, but I think the long-winded answer is appropriate for this investor group that we're trying to get them to really focus on the long-term aspects of our business, not quarter-to-quarter, which is what we've been pretty good at historically, trying to cultivate investors in Newtek not to be quite hung up on just straight quarterly, even dividend that you see in most BDCs. Thank you. Any other questions, Matt?

Yes, one follow-up, if I can. And this one might be difficult to answer as well.

Sure.

So the dividend guidance for 2021, $2 to $2.50. Based on your dividend payout ratio, we can kind of back into an earnings number there. Can you give maybe not the specific number, but what's the expectation for 7(a) origination activity during 2021?

I would say that we'll probably be between $580 million and $600 million for 2021 for 7(a).

Great. And then just a last one, quickly on NBL. Just to confirm, NBL did not pay a dividend in 1Q, 2Q or 3Q, so that $1 million to $3 million dividend will all come in the fourth quarter?

I'm going to say yes. Chris, is it accurate? There was no dividend from NBL in Q1, Q2, Q3? I believe that's the case.

Correct, yes.

So that would all be in the fourth quarter?

Yes.

Your next question comes from Adam Morton of RBC.

Congrats on a good quarter, man. Great job.

Thank you.

A couple of questions. Given this pandemic, given I guess it's -- I don't know if I want to say safe to say that it looks like a -- in all probability, a Biden and then a Republican Senate, are there any geographic pockets and/or sectors that you guys think are areas that you may want to attack as far as where you're going to be lending to? I mean, I know I talked to folks down in Texas and in Arizona, and these socially distanced, sort of like the restaurants and things like that, are there any areas that you think that you guys could attack that would make some sense or where you might want to overweight yourselves going forward over the next 3 to 5 years?

I think it's a very good question. And with the backdrop of diversification, which has always been a winner for us, both industry and Sidco, but you can't ignore the demographics of businesses and customers moving to Sunshine states, Rust Belt states -- I should say Sunshine states and Sun Belt states, the Arizonas, the Texases, the South Carolina, North Carolina, Florida. I mean the trends are that's where consumers are moving to. We're certainly going to look at all geographies and all businesses and all borrower types, but it's certainly tough for a lender to go I want to be real big presence in New York City today. It's really hard, really hard.

Okay. Well, that being said, right, and I totally agree with you, there's going to be survivors and thrivers in New York City.

And we will -- and we're currently having conversations -- to be frank with you, we've got -- we're having conversations right now with a couple of restaurateurs that are going into revive like amazing brands, right, that are now looking to an SBA loan where the owners and operators, they're not billionaires, but they've got the capital and the guarantor capability to withstand bumps and grinds. And they've got a plan to go back in and revive the brand. But New York is not going to die. It's always going to be around and it's always going to be present. But you've really got to be more selective in picking the winners and losers.

Your next question comes from [ John Sefiati ] from Santander Bank.

My question really, one of the earlier slides, I believe it was Slide 8, and you're focusing in on the 504 loan program. And I think it was mentioned that there wasn't a lot of growth that was happening in the first half of the year obviously because of COVID and the company is focused more on making the PPP loans and being more neutral. But in looking at the slide, there's about $51 million of loans that were funded during the quarter or maybe getting up through 1031. How are those loans primarily funded? Was there a capital injection that took place from Newtek into the SPV so that there was additional dry powder to fund those loans? Could you just give a little bit of context as far as how -- what capital was contributed and maybe what dividend may be coming back in the fourth quarter?

Sure. I think that with our portfolio companies, I mean for the most part, the ones I mentioned earlier, Merchant Services and Tech, they don't require capital. Where we're lending out of NBL does require capital in addition to our lending partners like Capital One Bank that provide us leverage. So in order to make those loans, we position capital into Newtek Business Lending, which, in conjunction with our leverage partners, enables us to make that loan and then hold it on the balance sheet and lending facility of NBL.

Do you know approximately how much capital was contributed during the quarter?

I do not, not offhand.

Okay. And then going forward, as far as the profile of customers, do you see any change in strategy just related to the underlying customers that you'll target, given the pandemic and changes in the market? Would you focus on targeting certain types of customers from a profile perspective?

Yes. No, it's funny because -- and I say that we are very big on diversification. And I think that diversification makes us smarter without having to be smart. So what I mean by that is I could sit here today and say we are not going to make a hotel loan and we're not going to make a restaurant loan. Now here's the funny thing. Today, those are probably the best loans to be -- to make. And I'm not suggesting that you make a loan in a particular area or region that's totally closed down or based upon 19 -- 2018 underwriting criteria. But some of these situations, they have repositioned themselves. They've got good capital. They've got great location. They've got great operators. And they've just survived COVID and the pandemic. Now where you want to be careful is you don't want to basically provide the funding and there's no liquidity and they can't survive another shutdown, which is a real important analysis that we do when we make these loans. So I think it's fair to say that we're going to continue to be diversified. We're clearly going to be more careful in a motel or a restaurant, particularly over the next 6 or 9 months, but we're not definitely a no. And what happens when you have these economic shakedowns is you wind up losing weaker participants in an industry segment or demographic, and the stronger ones wind up being your best credits because their competition goes out of business, they're the lone survivor and they do well. So we always look at lending with a view towards what's going to not be just a good credit for the next 6 or 12 months, but what's going to be good for the long term. And most importantly, can these businesses survive slow growth, no growth or a downturn in the near term? Do they have enough liquidity to survive the bump? How good is their operating team? And we're very proud, for example, of our nonconforming portfolio really being able to do well during this period of time from the standpoint that we've obviously picked good operators and we pick people that have enough other wherewithal to be able to not want that enterprise value in their business to go away.

Great. That's very much appreciated. And just one other follow-up question. I know that financial results were included in the press release and in the lending presentation. Do you know -- do you have an anticipated date that we could expect to see the full Q for September 30, 2020?

Yes. I mean, usually, that gets filed within a week or so of this call, so that's pretty much a good anticipation.

Your next question comes from Harold Elish from UBS.

So one of the pandemic winners, it has seemed to be, is the world of fintech in general, and that there are a number of new players outside the streams that Newtek has generally employed to get referrals. I don't know whether it's too early, but I'm wondering whether you're thinking of pursuing some of these online relationships, particularly those that seem to be appealing to millennials and active traders as conduits for your business going forward.

So Harry, I appreciate your drawing attention to the value-add of technology in the pandemic sort of rising to the surface. I think that OnDeck Capital, which really had a disastrous portfolio but arguably good technology, I think was acquired for like $90 million for the technology. And I think Kabbage was acquired by American Express for like $800 million or $900 million. And I think that their portfolio results are arguable in that the credits that they made, but with the market, particularly financial institutions that don't -- they're not nimble, they have a hard time putting software changing processes, techniques into place is valuing is that the business methodology of acquiring clients remotely, not having bankers, branches, brokers or BDOs and utilize technology to make and manufacture a loan, and in our case, in addition to making and manufacturing loans, we make and manufacture payment solutions, we make and manufacture technology solutions, we make and manufacture health and benefit solutions and insurance solutions is being valued by the marketplace. Now in our case, I'm kind of being asked how many loans am I going to do in the next 30 days, which we plan on doing a lot. But in addition to that, there is this hidden value within our organization, which I try to emphasize, which is look at how we do our business, look at why there's a thesis about what we're doing. I mean there are people that pay millions of dollars to get the types of economic activity and referral that come through our doors for being in the business as long as we are, for servicing clients well and for having this technology in place that makes it really easy to work with Newtek on a loan opportunity or a tech solution or a payment solution or whatever it might be. So we're hopeful, over the course of time, that we certainly appreciate investors valuing our cash flows and our dividends, but we also are hopeful that the investment community will value the operational methodology, the software and the way in which we conduct our business. That will be the way business is conducted in the next 10 years. We think we're ahead of the game.

I'm showing no further questions at this time. I would like to turn the conference back to Mr. Sloane.

Operator, thank you. And I'd like to thank everybody who participated in the call, the analysts' Q&A and investors in our company. Over 20 years a publicly traded company, we have tremendous appreciation and respect for the faith and the investment that you've made in us. And we'll continue to work hard and continue to perform and hopefully meet or beat all of these expectations. So thank you very much. Have a great day. Stay safe.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.