Ladies and gentlemen, thank you for standing by, and welcome to the Newtek Business Services Corp. Full-Year 2019 Earnings Conference Call. At this time, all participants' lines are in listen-only mode. After the speakers presentation there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference maybe recorded. [Operator Instructions]. I would now like to hand the conference over to you speaker today, Mr. Barry Sloane, President, and CEO of Newtek. Please go ahead, sir.

Good morning everyone and we certainly appreciate everybody attending our full-year 2019 financial results conference call. I would like to call everyone's attention to the forward-looking statement note on Slide 1 of our presentation. For those of you that would like to follow along to our presentation; you can go to our website at newtekone that's newtekone.com and please go to the Investor Relations section the PowerPoint for this presentation being utilized has been hung there. I would like to roll everybody forward to our Slide number 2 and we're proud to report our full-year 2019 financial highlights. Our total investment income for the year $59.3 million, up 19.8%. Net asset value on December 31, 2019, of $15.70 a share, up 3.4% from the year prior. Net investment loss continues to narrow an improvement of 27.5% for the calendar year over the prior-year. Adjusted net investment income which includes realized gains 20.1% increase from the year prior. Debt-to-equity ratio at the end of the year 1.36%. On a pro forma basis based upon SBA loans and receivables that sort of roll over the end of the quarter, and are typically liquidated subsequent to that 1.27. Total investment portfolio continues to grow by 21% for the year. Pro forma number that we use for that debt-to-equity explanation is on Slide number 3. On Slide number 4, we wanted to give the market a better understanding of how our NAV has changed over the course of time. Our actual annual average over the last four years approximately 2.8% with a 3.4% increase in the last calendar year. On Slide number 5, we're closely focused on our GAAP NII loss differentiator obviously one of the differentiators of the Newtek model is that we make loans and are able to sell them net. So…

Thank you, Barry, and good morning, everyone. You can find a summary of our fourth quarter 2019 results on Slide 40, as well as the reconciliation of our adjusted net investment income or adjusted NII on Slide 42. For the fourth quarter 2019, we had a net investment loss of $3 million or $0.15 per share as compared to a net investment loss of $1.1 million or $0.06 per share in the fourth quarter of 2018. Adjusted NII which is defined on Slide 41 was $13.5 million, or 68% -- $0.68 per share in the fourth quarter of 2019 as compared to $10.8 million or $0.57 per share in the fourth quarter of 2018, that was a 19% improvement on a per share basis. Focusing on fourth quarter 2019 highlights, we recognized $15.4 million in total investment income, a 4.8% increase over the fourth quarter of 2018. Interest, servicing and other income were the primary drivers for this increase, with interest income increasing by 10%, resulting from a year-over-year increase in the accrual loan portfolio. Servicing income increased by 13.1% to $2.6 million in the fourth quarter of 2019 versus $2.3 million in the same quarter last year, which is attributable to the average servicing portfolio growing from $1 billion to $1.2 billion at December 31, 2019. Other income increased 30.2% for the fourth quarter 2019 resulting mainly from a year-over-year increase in originations volume. Distributions from portfolio companies for the quarter included $3.6 million from NMS, $750,000 from IPM, $50,000 from Sidco, $100,000 from Mobil Money, and $394,000 from Newtek Conventional Lending. Total expenses increased by $2.6 million quarter-over-quarter or 16.4%. Salaries and benefits decreased by 34% primarily due to NSBF employees being hired by Small Business Lending LLC or SBL, one of Newtek's wholly-owned controlled portfolio companies on…

Thank you, Operator. Let's open up the call to questions.

[Operator Instructions]. Our first question comes from the line of Mickey Schleien with Ladenburg. Your line is now open.

Good morning, Barry, how are you?

Mickey, doing great. How about yourself?

Okay, thank you. Couple of questions, Barry. I do appreciate that you and your team have managed Newtek for a long time; you've seen ups and downs. So I want to ask about what your expectations are given all the noise around the COVID virus and you do have borrowers in industries like restaurants and laundries and ambulatory healthcare. Those are places where we would expect folks to maybe avoid at least for a few months. And I would imagine payment processing could be impacted too. So in the past when we've been in a down cycle, how have these borrowers performed?

Mickey, great question, and we appreciate it. Look, I think part of that question revolves around class within an industry code. I think number one thing to point out we're very diversified. I don't believe we've had an industry -- a specific industry class code that's greater than 8%. So we try to stay diversified. So far in the payments area and I do ask fairly regularly, I've been checking payments this year, last year, and I do it on a daily basis or how we're doing for the month. The consumer has been pretty flattish at this point in time. Now I will tell you, last week, I was on planes a lot. Air traffic busy, was at a conference, place was sold out. I did fly in on JetBlue yesterday and for the first time in a long time that plane was 75% occupied. I think from our standpoint, we are thankful and appreciative that Congress for the House yesterday, a portion, a plan, which the SBA will be providing assistance to smaller businesses that are affected by the coronavirus. So our business owners will be able to go and get very, very low cost attractive financing which the SBA has done from time-to-time. We've seen this with hurricanes. We've seen this with storms and disasters. So that's something we're going to pay close attention to. The only way lender like ourselves do well in these particular areas is number one, we're collateralized lender. We have personal guarantees, and we win people to that. And we do have a lot of tools in the toolbox depending upon the SOP, standard operating procedure of the SBA to work with borrowers. But we speak to them, we communicate them, we're actively servicing these accounts. And I'll say at the moment we haven't seen and I do believe that could change pretty sharply. You've got a situation where I think there's a school closing in Riverdale, New York. You've got more reports of companies telling people to work out of their homes. It's going to have an effect. We're on top of it. We're working with borrowers, and I believe this too shall pass and hopefully pretty quickly.

Thank you, Barry. That's helpful and I understand. Just one more question, SBA 7(a) premiums were very solid in January and February up pretty meaningfully from the end of 2019. I haven't seen data, let's say for the early part of March. And I know you don't want to be offering price discovery, but at least directionally how are premiums behaving very recently given more news about the virus.

Well, Mickey, thank you for that because that's helpful, you've helped with the forecast. But look premium pricing and I'm kind of giving you stuff that's -- what you've observed was accurate as of yesterday, that's about all I could say. What you have observed was accurate as of yesterday.

Okay, I understand. Those are all my questions, Barry. Appreciate your time. Thank you.

Thank you, Mickey.

Our next question comes from Marc Silk with Silk Investment Advisors. Your line is now open.

Hi, Barry. Can you hear me?

Hey Marc, yes good morning, Marc. How are you doing?

Good, I'm on a cell phone. So hopefully the reception is high. So first of all, actually, I see you on CNBC. I see you on CNBC all the time. Can you quantify if that strategy is working right now?

Sure. Well it is because you saw me, so. Look, I think that the campaign where we have a fairly modest spend and we've been doing it for five or six years has been beneficial. And recently, I would say over the last nine months and working with Natasha Gordon, our Chief Revenue Officer, have done some additional work on our website to do a better job of capturing that inquiry through more aggressive activity in terms of live chat with respect to software, making sure that referrals that are coming to the website are hitting business service specialists immediately. And I would say number one the reason why you've noticed it is we've shifted some of our spend, which was almost exclusively Cable News, MSNBC, CNN, and Fox to do some on CNBC, which tends to be more expensive than Bloomberg, which actually is less expensive. So it's giving us different people, different notoriety, it's creating activity, people looking at us. And the thing I'll tell you about advertising, it's an investment. It's a capital investment, and we expense it from an accounting standpoint immediately, but it does build, it does build over time, and we can pretty much quantify that for the most part, it's breaking even, although I'm totally confident that that spend is generating a lot of activity that is hidden and we haven't quite been able to quantify. So we're comfortable with that spend for the foreseeable future. But I do believe we're going to start to with our big database, which we really haven't utilized, start to pay more attention to using digital techniques. So we think there's upside obviously what we're doing. We've got over 800,000 referrals that have gone into new tracker, we're still getting I would say 275 to 300 a day. So we feel pretty good about where we are.

Okay. So with this coronavirus, are you seeing more inquiries? So basically, business owners know that eventually things going to stop for a while or slow down for a while. Are they trying to jump the gun here and saying, I don't need money now, but I might need the money if it gets worse. So is there a possibility that maybe more incoming inquiries are going to happen or have been happening?

Yes. So we've got two things going on, obviously, we've turned the spigot on for the non-conforming sector. And we've also got a lot of more businesses that are looking for loans. And some of these -- some of these avenues are shutoff. So this is going to be more difficult, I think for non-collateralized lenders. We are very much a collateralized lender. And there's no question we're going to be seeing people looking for that funding. And that's why we're paying more attention to things like personal credit scores and SLA scores with your business credit. So all of a sudden we see strains on businesses, where they can't pay their bills, or they're slowing things down, you got to pay attention on a real-time basis. So the answer is we got to be exceptionally careful today and pay attention to geographies with the viruses are affected and we got to be a little bit more careful. There's no -- this is -- there's -- I've made comments, there's no question that this thing is not. It's not one or two, it's not a one or two week event, this can be with us for a while, and it will slow things down. We feel like we're on top of it and paying attention.

I mean, you've done a great job mitigating risk in the past. So I just felt like you're putting a few more elements like exactly right, like where people's credit scores change quickly. And like you said, you're going after; you're watching the areas that are affected. So on the government SBA potential boost that's helping out, is that like -- is that like a tide lifting all boats, meaning that if that happens, you could potentially get more interest or that just goes to a specific few SBA lenders?

Yes, I'm glad you asked the question because I probably wasn't clear. Those are not loans that we make. We don't touch that. Those borrowers go directly to the small business administration and the loans which are tend to be small in nature and focus on working capital liquidity are made directly to the business. I know this is like hot off the press, but traditionally those disaster relief type loan tend to be 20 to -- 20-year type repayments with -- like way below market rates of interest.

Okay. And then the last question, you obviously talked about your other businesses and I've asked you this a few years ago besides obviously the SBA loan, which you've obviously done a great job on, what part of the business are you hoping for or expecting for that'll be your number two business, let's say two or three years down the line?

Yes, I'm going to pick one, I’m going to get three people mad at me, Marc, so. Yes, look I think that it's easier for me just at least to discuss the ones that are a little bit bigger, a little bit more robust on a quicker path. I think that the business that we have uniqueness in, it as a major differentiator and we've had issues with that obviously by some the numbers is the tech business; people are readily spending money on technology. We're in the early innings; we're very well set up. I brought in a new manager; I think he's seven, eight months and maybe nine. He's really changed the culture; it's been night and day. And the good news is managers that come into the organization has got to fit into sort of what our strategy is. So when you think about technology, somebody that wants to do business with, the street salespeople valuated REIs. The bottom line is that's a market, that's going to grow, the tech spend is going to grow and our customers have got to make changes. And when I say that, we're not competing with Azure, and Google. I want to be clear here or AWS, smaller businesses they have a hard time dealing with those entities. And those entities really aren't set up to do business with them. I want to point out; we will manage workloads in AWS and manage workloads in Azure. We don't have to use our data center or in the client could have a hybrid setup, they could be on-prem and they could be in one of those entities or in our facility, lot of boxes. That's the one that's probably got the most upside, putting that aside the payments business looks great. And I think we've made some changes in payroll and insurance that will also bear fruit this year. So if I had to pick one, I'm going to get three people mad at me. I'll pick tech.

Okay. And then the last thing more of a PSA, I was -- I saw in the planning the wall, someone came out with a negative, maybe a short sellers trying to come after you which is -- that's fine. That's what makes markets but I've been a shareholder since 2006. And I've invested at average down during the financial crisis. And if this is a fraud, I could get the biggest misnomer out there considering since 2015, my shareholders have received $11.69 of dividends and you've done a very good job controlling costs and growing this business. So I think the proof is in the footing. And again, I've been a very happy shareholder since 2006. My clients are extremely happy and that's all I can say. And that's the truth. So good luck going forward and I know it's going to be rocky road this year, but I feel very confident that you'll be able to persevere.

Thanks, Marc. Appreciate it.

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

Hi, guys. Good morning, Barry. A couple of questions, portfolio companies first and then the 7(a) business. On NMS, you highlighted capital cost savings, I mean the legal expense go away, closing the Wisconsin office, et cetera. But if I'm right is it the $10.9 million pre-tax in the back of the presentation for 2020, the forecast is -- would be down year-over-year. So can you tell us what the driver of that is given the cost savings that are going to flow through this year?

Yes, so are you, Robert, are you asking me about the EBITDA forecast of $16 million for payments and Mobil Money, is that what you're asking?

Effectively, yes. I mean, what I'm looking at is pre-tax which is in the back of the presentation.

Robert, Robert, Robert, here is where I am. I stand by the forecast.

Okay. Understood.

On the forecast -- that's a forecast of revenue and expense, I stand by the forecast.

Understood.

It's a portfolio company, we don't consolidate it. I've tried to give, see the problem with giving you a little peek under the hood; at least you want to put your whole body under there. And I love you, Robert fine. That's what I got and we’re very comfortable with the forecast.

I understand that is indeed my instinct to climb under the hood. So moving on to the next one the tech business.

And by the way, you're always welcome. You're always welcome.

Thank you. Thank you. On the tech business, you just gave us some color on that, that you're optimistic there. Obviously, if you hit your forecast on that, that would be a big improvement year-over-year. Would it be the plan to distribute that EBITDA after-tax, pre-tax however we want to format or to retain it for reinvestment given your -- you seem quite excited about that business and it might have some growth capital needs?

So Robert I would say the historic trend of the company over time has been to pay out -- pay out earnings as they come in. I don't believe we're going to have significant capital needs in that business because we just spent a significant amount. But again, you never know. So the big account comes in, they want us to buy hardware and software for them. It's a long-term opportunity. So that could change. Those decisions on dividends are made at the board level of each portfolio company, which has a separate and different board than the board of the BDC.

Got it, got it. I appreciate it. And then just on the 7(a) business and we go back to the last quarter call. You've had a couple of tough months and you sounded quite optimistic clearly the fourth quarter was there was a lot of growth and you did a lot of 7(a) loans. So can you tell -- I mean on the last call, you said there were some internal issues, and then you were avoiding some loans because of you didn't like the credit quality metrics. So can you tell us into the fourth quarter, either what you did internally with systems or what changed it to really accelerate that? I think arguably, maybe a bit faster even than you thought it could get past 40, you said it could take three to six months to sort out?

Yes, so Robert, I appreciate that. Look the comment about management changes and repositioning, we have got four different buckets that are now four different receptacles for different loan programs. And when your business is growing in each of these different buckets, at one point you had, the one person that was managing 26 people, well, that person wants up needing help. So then you divide that up into three well you got to get in situated, you got different reporting responsibilities, you got to be used to the different systems. So, financially, God, I wish -- I wish it was that easy just to shift things around, but you've got human beings, you've got interaction, you've got systems, you've got reporting, et cetera. So look, we're still in the process of working through efficiencies with respect to management changes because we obviously needed different than additional underwriters. We've needed different assemblers in the loan area, and we're still working through those issues. We are not totally where we need to be at this point in time. When you say troubled categories. One category that's been difficult for us is transportation. And this is the world that we live in, right. So pre-Amazon dominating transportation or you got a lot of transportation companies and you figure geez, it's a great business because the economy is robust, et cetera. But all of a sudden, you got problems with insurance, you can't hire truckers, you got a couple of litigation issues that cause businesses problems with people getting sued, and so has been one of our tougher categories. On a good note and our exposure is modest there, as a category at one of the categories that we've had, tough, tough times in. So we try to keep on top of this on a real time basis, we try to be nimble. But I don't think we're out of the woods yet relative to we're nowhere near 100% of where we need to be relative to gee, my 504 process is down, my NCL process is completely down, my 7(a) process is completely down, plus you now have this whole new issue that everybody in the world is adjusting to, which is the coronavirus. But as I said, we're kind of on top of things, we're appreciative of housing, passing that Bill that's going to help our borrowers out and give them whatever liquidity they need to come through this. And frankly, I feel pretty good about our borrowers and entrepreneurs being extremely nimble in dealing with the issues that they have to. Because in our case, Robert, they're all in, they got their personal guarantees, they got their house on the line, they're personally guaranteed, doing several. So they've got everything on the line to make sure that these loans work out and that's hopefully I’ve answered your question.

Hello, can you hear me?

I hear you now, Robert. I hear you now, yes. Yes, Robert are you there? Operator, maybe we will go to the next question.

[Operator Instructions]. Our next question comes from the line of Luke Wooten with KBW. Your line is now open.

Hey good morning, Barry.

Hey Luke, good morning. How are you doing?

Doing well. First question is actually just on the SBA 7(a) loan pipeline. I know historically, you guys have included that slide that kind of details, the open referrals, pre-qualified loans and such for the total pipeline. Do you mind just running off those numbers?

Yes, so given some of the changes that I just discussed with Robert, it's been more difficult for us to disseminate pipeline issues. For example as loans are coming in from a prequalified perspective now that one of the issues that we're addressing is which program is this borrower and this loan best situated for. So more an applause position on that. What I can tell you our referrals are up significantly. We’ve just given the market, a forecast of growth across the ecosystem, which is fairly robust. And I think that's all we could do at this point in time. The problem is, as I report pipelines, loan could go in a committee and winds up is better situated for another area. So I didn't want to put anything out there relative to a 7(a) pipeline that ultimately goes into the different bucket.

Okay, that that's helpful. And then I wanted to switch over kind of just on I mean kind of touched on it earlier, but just trends in the credit community and just kind of ongoing trends. It seems like the portfolio seasoning kind of moves a step back from last quarter it was 28.9 months, now it's 28.5 months and just kind of it sounded like the realized losses were a little bit higher this quarter and obviously a lot of these loans are priced for a lot of the estimated losses, but just kind of wanted to hear what your thoughts were on trends -- for trending credit overall?

Well, I think that and we said this when way back, when we're looking at 35 basis points of annual charge-off that's not where we're going to be. I think that will have charge-off numbers that more accurately reflect close to 1.5% of the portfolio. You can use that as a guide. You may want to use it as a guide. I don't know if that's helpful or not. But we've got the charge-offs all factored into our forecast. We feel very comfortable with the business model relative to what you're going to get from 7(a) and the other business segments. I think relative to credit, I got to tell you a little, it's too hard to tell right now. And I think I like a lot of other people that are on this call we're watching the news every night, we're trying to get our arms around things. It's constructive; China is the lead player here. And if you believe their information, and I'd like to -- I'd like to think that if they were lying, I think the globe -- although they haven't -- it doesn't necessarily mean that they'll hear to it. I think China hopefully is forthright this time; situation in China appears to be plateauing. I think that's what we're looking for here because people are trying to gauge how bad is this going to be? Clearly, I think there's nobody that doesn't feel the hysteria is greater than the reality. But nobody wants to be the historical person that contracts it. So we certainly understand when people are overly cautious, when they wear masks, when they don't want to go out, they basically cancel vacations it's going to have an effect. I do think it's going to be short lived. And that means one, two, three quarters, it's not going to be one, two, or three years. That's my guess. And our borrowers, which are typically collateralized borrowers, would be able to get through these times, particularly with government assistance.

Okay, that's definitely helpful. And then this is kind of just a side note in your -- onto loan distribution by category. Do you guys have outside exposure to any of the hospitality industry or I don't know if it's broken out and anywhere I can find?

What do we've got, Chris, it’s typically like 2%, I mean it's usually pretty low, but I could be wrong.

Say that percent again, I'm sorry. I missed it.

What do you got for motels, Chris?

No, motels. Restaurants?

Motels, motels?

Motels, I don't know.

I think motel portfolio -- hotel [ph] motel portfolio is about 2%.

2%, okay, that's helpful. And then the last thing I wanted --

That's a tough category. And we have historically avoided that category in robust of markets. So it's a tough category. A lot of business acquisitions are done there. So we've kept the low profile there. I will -- we will circle back later. I don't think I'm too off on that number.

Okay, that's, that's helpful. And then the last thing I wanted to touch on was just the equity issuances from the ATM, the past couple of quarters. I mean, you talked about it a little bit earlier, it sounded like the 3Q and 4Q have definitely been higher than normal. And with the pricing that you're currently seeing in the market, maybe taking a step back on that, but just kind of want to get your thoughts on the uses of that that ATM. I mean, I think you still said you had about; I think it was just over a million in shares outstanding under the current issuance. But just wanted to hear what your thoughts were for the rest of 2020?

Yes, look, I think from an issuance standpoint and a management standpoint right now, look at the debt market. And we've done Baby Bonds with KBW. I don't know, but I would love to be able to look at our current 6.25. We don't have, in my opinion, much leverage at all. So we have plenty of room here. I think the important note is we don't need to push stock out. And I will tell you. I've had retail and some institutional investors that talk about Main Street strategy it's constantly issuing and it doesn't make any, I mean, it helps. But it doesn't make any sense to me. We don't issue shares; we don’t issue shares for the sake of issuing shares.

Yes, no. It makes sense. And then, actually just final one, do you mind, Chris, just identifying what the dollar amount of the charge-offs were, I think you gave it a little bit earlier but I just wanted to make sure I got that number right? In the SBA?

Yes, Q4 of 2019 was $1.7 million and Q4 of 2018 was $1 million.

Okay, all right, perfect. And that's all the questions for me. Thank you guys.

Great. And Luke, I think, once again, I want to repeat those numbers will be significantly higher this year, and that we can sustain that with where we currently forecasted.

I'm showing no further questions in queue at this time. I'd like to turn the call back to Mr. Sloane for closing remarks.

All right. Well, we certainly appreciate everyone attending the call, particularly with what's going on in the markets. Good luck to everybody and we look forward to reporting at the end of Q1. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.