Ladies and gentlemen, thank you for standing by, and welcome to Newtek Business Services Corp. First Quarter 2021 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. Please be advised that today's conference may be recorded. I would now like to hand the conference over to your speaker host today Mr. Barry Sloane, President and CEO of Newtek Business Services Corp. Please go ahead, sir.

Thank you very much, operator, and good morning everybody and welcome everyone to our first quarter 2021 financial results conference call. It seems like yesterday we were just doing our annual call, obviously the first quarter catches up pretty quick after we produce the annual results, and that obviously, I wanted to put a special thanks out to our accounting team led by Nick Leger, who will join be joining me on the call today, Executive Vice President and Chief Accounting Officer, did a tremendous job obviously in a transition with Nick picking up the responsibilities from Chris Towers and Elise Chamberlain and their entire team working very hard to get us out get results out and get us into the market with all of our filings.

Thank you, Barry, and good morning everyone. You can find a summary of our first quarter 2021 results on slide 39, as well as a reconciliation of our adjusted net investment income or adjusted NII on Slide 41. So the first quarter 2021, we had a net investment income of $16.2 million or $0.68 per share as compared to a net investment loss of $280,000 or negative $0.01 per share in the first quarter 2020. This represents a 126% increase on a per share basis. Please note that the income related to the PPP is included in investment income in 2021. Adjusted net investment income, which is defined on Slide 41 was $23.5 million or $1.05 per share in the first quarter 2021 as compared to $4.3 million or $0.21 per share for the first quarter of 2020. Focusing on our first quarter 2021 highlights, we recognized $34.7 million in total investment income, a 119% increase over the first quarter of 2020 total investment income of $15.8 million. Interest income related fees from the PPP was primarily the driver for the increase. We recognized $24.2 million of income related to the origination of approximately $425 million of PPP loans during the first quarter of 2021. There were no distributions from portfolio companies for the first quarter of 2021 as compared to $4.4 million in the first quarter of 2020. Moving on to expenses. Total expenses increased by $3.4 million as compared to the same quarter in 2020 or 21%, which was mainly driven by an increase in the SBA 7A loan referral fees, compensation-related costs and a one-time loss on extinguishment of debt. Moving on to realized gains, realized gains were recognized from the sale of the guaranteed portions of SBA loans sold during the first quarter totaled $8.9 million as compared to $5 million during the same quarter in 2020. In the first quarter of 2021, we sold 107 loans for $57.8 million at an average premium of 30.3% as compared to 67 loans sold during the first quarter 2020 for $38.1 million at an average premium of 10.9%. The increase in realized gains was attributed to higher SBA 7A loan origination volume in the first quarter combined with higher average premium prices when comparing to the first quarter 2020. As I mentioned earlier, income related to the PPP is included in investment income, not in realized gains. Realized losses on SBA non affiliate investments for the first quarter of 2021 was $1.5 million as compared to $447,000 in the first quarter 2020. Overall, our operating results for the first quarter 2021 resulted in net increase and net assets of $30.1 million or $1.35 per share and we ended the quarter with NAV per share of $16.28. I'd now like to turn the call back over to Barry.

Thank you, Nick. Appreciate that. Operator, love to open it up for Q&A.

Thank you, ladies and gentlemen. Now, first question coming from the line of Paul Johnson. Your line is open.

Good morning, guys, thanks for taking my questions. The first question. Today, I'd just like to get maybe a little bit of commentary on just the lack of income from the control companies this quarter and I guess just what drove bad and whether that was due to like retaining earnings or that's something we could expect going forward, but any color there would be helpful?

Sure appreciate that Paul there. As we stated in the presentation there was no lack of income. There was just no distribution. The portfolio companies independently make decisions whether to distribute income and dividends or to retain the capital for other uses. So, we did forecast earnings from entities like NBC, we forecasted earnings on NMS, we forecasted earnings on Managed Tech Solutions, which would be three of the larger entities that typically do dividend out. So, no, there was, there was income, but those entities decided not to distribute.

Okay, thanks for that. And then, maybe just get a little bit more. I mean, I know you touched on it a little bit more commentary on your just your decision to hang on to some of the guaranteed loans that were originated this quarter, do you think you would expect to continue kind of doing that here in the quarters ahead or is this more of a just sort of a one-time thing that you chose to do just given the strength of the premiums?

Yes, I would say, and that's a good question. But we are classically originate and sell. We're in a market that is in classic these days. A couple of things, one we have excess capital and our belief regarding pricing, which is that these particular securities are very attractive, not highly likely to prepay quickly and the current price movements, so. Hey just hang onto the coupon, but I think it's although it. I forecast this with specificity. I think it's likely we will take advantage of the strong pricing that the 7A market will have all the way through September 30 where the 55 basis points, which will be taken out of the coupon, okay? Will ultimately reduce prices on October 1 versus September 30. So, Matt about, it's about as best I can do. I think the important aspect of the question is we have not changed our methodology. We had a lot of excess capital and a 6% coupon is better than keeping it at zero.

Sure. Yes, it's understandable. And then lastly, maybe just kind of like to get your sense of the borrowers in your portfolio, and possibly also just companies or loans that you've looked at here recently. Have you noticed, especially for small businesses, businesses with that are more labor intensive, have you noticed any sort of inflation or wage pressures on these businesses cropping up? Again within your portfolio or sort of across the landscape of borrowers that you looked at?

I think that we definitely hear and see part of it, you hear and see it on TV. Right?. And the reality of it is it's true. Labor is tight right now which is got a lot because it is a reasonably high unemployment rate. I do believe this is a short-term phenomenon. When I say short-term phenomenon we've got another couple of months to go through it. I think people are figuring it out. I think that to be frank with you some of these owners of, we're not going to see it on TV, will wind up paying their sample off the books rather than on the books to make things work, but the one thing about our customer base, they are resilient and they don't go down very easy. But there is no question there is a bit of a labor shortage, but I think 90 days, down the road that goes away, as these unemployment benefits unwind.

Thanks for that. It's helpful, answered all my questions.

Thank you. I appreciate that. Thank you.

Our next question coming from the line of Robert Dodd with Raymond James. Your line is open.

Good morning, guys, and congratulations on the quarter with or without PPP frankly. Just going back, trying to Paul's question on the dividends from the portfolio companies, I understand the point that they did they elected not to distribute in Q1, you've given us some earnings outlooks for those which will flow through into NAB or dividend. Right? So it's just different places where it shows up. But is it you expecting--do you have any color you can give us on whether you expect that dividend, the dividend non-distribution pattern to continue for a long period may be all year, I mean it sounds like we've got a lot of investment opportunities. So is that just your expectations, maybe they don't distribute this year, and they do it the next year or give us any color them a little longer term?

Robert, it's a great question and we probably won't know that for sure is until we keep moving through the quarter. However, from your perspective, I would think history is a reasonable guide to look at and from that perspective, I think you could think about number one, we've laid guidance out there, that's important for us to be able to deliver in our current format on between $3 and $3.30 of dividend out of income. I think historically, those companies have distributed their income, but right now, some of them are looking at reinvesting in new loans, like an NBL through some very interesting technologies that are available in some of these entities, the M&A side of thing is clearly loosen things up there are winners and losers. So, I think looking at history is a guide would be good for you going forward. I can't determine that it's a great question, and I understand, would you need to do on your side of it, as you look at the company and re-forecast, but I would I would use history as a guide, I think that will be, you'll be okay with that.

Okay, I appreciate that. Thank you. On the conventional engine JVs. I'm sorry, I don't have the presentation et cetera in front of me. I mean, as these expected to be 50:50 JVs, are going to give me any give us any high level view on what you expect the structures to be, I just don't have that kind of information in front of me, if it's, if it's in the presentation that even though it's that, but it's obviously it's going to grow, but what's the rough economic for you?

Sure. The 50:50, structure, which was our original structure and this is--I'll just say publicly available information, we can talk about it on the deal that got inked it's identical. It's identical. So the JV that is live in action, it's a 50:50 JV and what now let me make this one comment. All the JVs that are done, are 50-50 with respect to a true partnership. So that means all decisioning are split with the JV partner, which is why it's important that we take really good partners that we have the same viewpoint and same vision on because we were stuck to each other, but the economics, everything is 50-50 on that JV. Yes.

Got it, got it. Thank you. There one more if I can on the 504 I mean, your guidance is 125 for the year. You've done 52 already through April. Is this a counter seasonal business. I mean over 7A is tend to be more back loaded is the 504 front-end loaded or more even distribution or is the 125 just a very conservative number?

Yes, I think it's a fair question. And so, here's my sitting in the seat. If you look at what we did in April versus what I did more loans in April fundings and closings than I did in the first quarter. Right? So I really think if you stick to the 125 you'd be good.

Okay. So you know. No. Yes, I mean that's what did April was the genesis of the question after all.

Yes, it's very, it's very hard to gauge the 504 business, because in the 7A business, we have full delegated underwriting. In the 504 business, the CDC has got to approve it, the SBA has got to approve it and then you're good to go, and depending upon supply and demand that stuff to get tied up slowed down and this is up all your numbers. So, it's why having these differentiated business lines and models has enabled us to do okay, things are moving around. I think if you stick to the 125. It's a good, yes.

Okay, got it. I appreciate it. Thank you. And again, congrats on the quarter.

Thank you, Robert. Thank you very much.

And our next question coming from the line of Richard Greenspan with UBS. Your line is open.

Thank you. Good work. Barry, how are you doing?

Thanks, Rich. Thank you.

I wanted to just ask how important the portfolio companies as a contributor to total earnings, say versus the SBA 7A lending?

Yes, look, I think that for the long term investors and holders of Newtek, hopefully it's readily apparent that we believe in all 5 silos and historically as a percentage of the dividend income, the portfolio companies contributed with the exception of last year, which I'll go into for a second, somewhere between 35% and 30% of the income that round up being distributed. Now that's beneficial because that income is taxed. So, in the distribution that income comes through as qualified. So for those holding the stock in a taxable account is beneficial, for those that income comes through as qualified. So for those holding the stock in a taxable account is beneficial, for those in a retirement account, it's irrelevant. Those business is a real important. We're going to continue to dedicate ourselves to growing them, making them pertinent, that's what prospectively increases the net asset value of the company, amongst other things in addition to growing the dividend, and I think for investors that are trying to figure out on a going forward basis, I would suggest we go back to the 2019 numbers, take a look at where we were, where there was no PPP we're two years down the road, we're two years better, our technology is better, our human capital is better, our alliance partners are better and it's a good base to begin to forecast where we might be without PPP, but we have exciting futures ahead for payments, tax and ultimately payroll and insurance. I appreciate the question, Rich. Thank you.

Thanks, Barry.

Our next question coming from the line of Scott Sullivan with Raymond James, your line is open. Scott Sullivan, your line is open, please check your mute button.

Sorry, I had mute on there, apologies.

That's just that the 2021 version of the conference call questions.

Exactly, user error. My question also centers around where you see Newtek after the windfall, PPP business and can you give us some color on the improved resources in some of the other areas for 2022 and beyond?

Sure. So, I think that we mentioned this in the presentation, in 2020 and 2021 24,000 units processed close to a $1 billion aid in PPP funded loans. That's a lot of wood burning, that's a lot of management time, that's a lot of software development, that's a lot of closing, a lot of conversations with clients in addition to the fact that we've got 24,000 new units with clients that we process and due to 24,000, I'm going to say, we must have spoken to 60 or 70, maybe took a lot more data and a lot of other. So, those resources are going to get shifted, they're going to get shifted to 7A, they're going to get shifted to 504, they're going to get shifted to non-conforming because all that stuff comes in the front end of the funnel. In addition, the management resources of myself, the Accounting Department, the Legal Department, the Sales and Marketing department, will now shift to all the five silos, so that we will be able to, God willing, prospectively grow payments, grow tech, grow insurance, grow payroll, sharpen up a NewTracker system, develop new alliance and channel partners. So, I think that we're very excited about where we are. We don't have any new PPP loans coming through, we've probably got a good amount to still process left, there's still a window to get these things funded forgiveness we've done -- I think, a really good job in automation to automate the forgiveness process with clients that have stepped up to the plate. We're working on that from a servicing standpoint and I feel pretty good about our ability to sustain attractive levels of income without PPP. Once again I go back to that 2019 adjusted EBITDA number of $2.31, which obviously is going be markedly different than this year. And I go okay now we're looking at next year. So the 2021 under our belt with a run rate, particularly within NCL coming on I think we're going to be just fine. I'm excited about it and I think when you look at us versus other BDCs it's night and day.

Totally agree, that's very helpful. So given the impressive growth metrics and what I'd like to call the FinTech side of your company, how scalable is this model in other words, would it be an attractive thing potentially to M&A and what is separately, what is the greatest post PPP opportunity?

So, I think that from our standpoint we got to do what's best for all of our stakeholders. And I think that we've built a model business that works great in the BDC construct, but it could also work well in other constructs, and that's why when everybody else is doing five-year fully locked out notes we're willing to give up some coupon to have that flexibility. I just think that we owe that to people to do what's best for everybody that's involved. Relative to when you look at what we're involved with and it's funny you mentioned the word FinTech. So I don't think we're a FinTech. I think we're a Newtek, so I like to use that word is up I don't know what the FinTechs are doing to be honest with you, I say that euphemistically, but I know what Newtek is doing. In Newtek we do is we take real smart technologies and apply them to try into and let me be clear, you could do payroll by going to quick in our QuickBooks, not talking to anybody, putting in a little bit of data and getting some kind of result, but God forbid, if you've got a question or problem or concern you got nothing to do. Same thing I guess you can go by an insurance policy from Lemonade and go online nobody to talk to, or for that matter you can try to go on line and loan from Lending Club and you might get a personal loan, I don't know whether doing business or not, but there is nobody to talk to. Our business model is there to provide technology, any human being associated with the solution because our business clients, particularly the larger ones and I see the larger ones. We service two employee companies we service 20, we service 200, we service 2,000 were there for all of them, and in many instances, the two or five person company ultimately grow significantly larger and we're able to keep them and retain them. So, we're very excited about our business model, how we're positioned, where we sit today, we've got the right capital structure, our equity is in good shape, our liquidity is in good shape, but what a difference a year makes. Right?

Absolutely. Well, it's great. Thank you, again, and congratulations.

Thank you. I appreciate, Scott. Thank you very much.

Our next question is coming from line of Merrill Ross with Compass Point. Your line is open.

Hi, good morning. Congratulations, it's a good quarter. I am new to the story, so I may ask a question. It's very naive but do you provide those business services to customers that are not applying for credit?

Yes. Thank you, Merrill. I appreciate you picking up coverage on us. At 100% absolutely, yes. I think it's important to note that there is no zero requirement to take two products, very important we don't tie. Many of our clients that are dealing with us in payroll or tech don't borrow any money at all. That's actually almost more of the rule, there is rule, I mean we like in the do multiple things, and in many cases, they do, but no, there is no tie between the two rule.

Okay. So, if you were to look at the opportunity to continue to deepen your client list, it's not tied to the referrals to your credit programs?

Not at all. The one skill we need to get better at which we've recognized is the ability to outbound into the existing customer base and introduce--so many times we will speak to our clients, could you, I didn't know you did that. So this is the one skill set that were currently not very good at, but it is a target focus and I greatly appreciate the question.

Okay. This question is truly the question of analysis. You're looking at rapid ramp in the second half of the year and you mentioned that the net premiums will go down in at the September and two kind of work against each other, so aside from the dividends from the portfolio companies what gives you the confidence that the year will end with a higher dividend run rate?

Well, it's a good question, I guess the first thing is 23 years' worth of experience with the model we're comfortable and from a pricing standpoint. We clearly will seek to get whatever can get sold through September 30th sold. In addition to that, the 7A market, one of our slides sort of has what it's been over the last 5 or 6 years, it not like it's going to--first of all like anything could happen. But we don't expect it to go from like 113 and change down to like 109. So for argument sake, let's say, for example, it goes to 101.5, you know that --I mean all of this is factored into our own internal forecasting. So we've already assumed in our own modeling that we go out give dividend guidance that will probably not have as an attractive price in the fourth quarter, by the way the other thing to think about is the 90% guarantees will convert to a 75% guarantee post-September. So all of that is factored into our forecasting and modeling in addition to the fact that we think most likely this happens every single year, it's happened for 17 years, the biggest loan volume hits in Q4. I wish were different plan, but that's.

The seasonality of small business, right?

Exactly, I can make about our fund in September when they want to fund in December.

All right. Well, thank you. I appreciate that.

Thank you, Merrill.

Our next question coming from the line of Paul Johnson from KBW.

Yes. Hey guys, thanks for taking my questions. Again, I just had sort of one modeling follow-up for you guys. I was just wondering about sort of like G&A expenses, comp expenses just quarter-over-quarter, year-over-year, obviously up you guys are coming off a pretty successful year, so maybe no surprise there. But I'm just curious kind of from this level, $4.5 million this quarter for salaries and comp expense, should we kind of expect this sort of level from here going forward or is there any kind of one-time items in there that would maybe come down to more of a normalized level in the quarters ahead?

Yes, Paul. I'm glad you brought that up because that is something to think about and it also gives you insight into our thought process, and that is we think that this particular calendar year given PPP, given the economy, given the way our staff has worked incredibly hard, we felt it important to reward them. Now the comp expense, it was very broken out that's way, but it was very bonus related and it was also offered what I'll call in a meritocracy. So in addition to our shareholders benefiting and our creditors benefiting and our suppliers benefiting we wanted to make sure that our staff benefited. So I think that it's reasonable to assume not on a straight-line basis, however, that we will have an elevated level of comp in 2021 versus 2020, but you won't see that going out unless it's sort of commensurate with what we're doing. So, I don't know if I would, if that was helpful. I didn't put numbers around it, but I think it's an important note that our comp jumped. It's not because my total salaries jumped by say 50% it was that we wanted to make sure that other stakeholders, which is our staff equally benefited because they were that are producing the results at the end of the day, so that's where it's helpful, but hopefully, somewhat.

Yes, that's helpful for me. Thanks for taking my questions. Again, congrats on the good quarter.

Thank you. Again, I think I've got one more analyst who is not able to make the call because it was doubled up Mickey Schleien. I'm going to read his questions off. Mickey Schleien from Ladenburg. First question, the outlook for 7A pricing wise have been so strong we chatted about that, and that has to do with the 55 basis point government guarantee fee that will get reintroduced in post-September 30, which will reduce the coupon, how can you take advantage, given that the fourth quarter tends to be the strongest? Generally, we can accept that we will try to pull as much loan closing as we can into the third quarter. And then, the last question was from Mickey; should give a sense of the pro forma results without PPP. And my suggestion which I guess that's in --unfortunately Mickey, you got to go last but I think using the 2019 base assuming we've grown significantly from that looking at historic distributions from all different entities with the growth rate should be able to get you there and give you base and be able to pull this out, but also please do so with the fact that it takes a lot to do $1.8 billion worth the loans in 24,000 to 25,000 units. So really appreciate the questions, the thoughtfulness, the investment and we look forward to producing great results through the rest of the year and beyond. So, I'm assuming, operator, no more questions?

I'm showing no further questions on the phone lines.

Thank you very much, everyone. Have a great and healthy day.

Ladies and gentlemen, that conclude our conference for today. Thank you for your participation. You may now disconnect.