Welcome to the Newtek Business Services Corp. Full Year 2021 Earnings Conference Call. My name is Hilda and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Now, I would like to turn the call over to Mr. Barry Sloane, President, Founder, CEO. You may begin.

Good morning everyone and first and foremost Newtek would like to send its prayers, thoughts, and feelings out to the country of Ukraine and its citizens. We certainly appreciate the dilemma that they're seeing and witnessing this morning. Welcome everyone to our full year 2021 financial results conference call. My name is Barry Sloane. Joining me today will be Nick Leger, our Chief Accounting Officer. I would also like to thank our accounting staff, legal staff, business leaders, and to all Newtek associates that made 2021 and the results that we're about to talk about today, a great year. For those following along on the PowerPoint presentation it, can be found on our website newtekone.com in the Investor Relations section. Please go to Events & Presentations and we are ready to begin. I first like to call everyone's attention to slide number one and please remind everyone to read the note regarding forward-looking statements and comments. Slide number two, we always like to go over our report card, particularly as a public company and on slide number two, you could see that Newtek Business Service Corp. has been a very successful organization over the course of 10 years. The data that you see is the end of year data acquired from Bloomberg and obviously, the returns include capital price improvement as well as dividends. Moving to slide number three, as many of you are aware, approximately August 2nd or 3rd, the company announced our intent to acquire National Bank of New York City and potentially convert, subject to a proxy vote and regulatory approval, from a business development corporation to a bank holding company and designated financial holding company status. There's been a lot of activity in the share count. This particular document demonstrates that shareholders that owned stock at…

Thank you Barry. Good morning, everyone. You can find a summary of our fourth quarter 2021 results on slide number 43 as well as the reconciliation of our adjusted net investment income or adjusted NII on slide number 45. On slide number 43 for the fourth quarter 2021, we had a net investment income of $1.6 million or $0.07 per share, as compared to a net investment income of $850,000 or $0.04 per share in the fourth quarter 2020. That's a 75% increase on a per share basis. Adjusted NII, which is defined on slide number 44 was $16 million or $0.68 per share in the fourth quarter of 2021 as compared to $9.6 million or $0.44 per share in the fourth quarter of 2020. Focusing on fourth quarter 2021 highlights, we recognize $24.8 million in total investment income, up 67.7% increase over the fourth quarter of 2020. Total investment income of $14.8 million. Dividends from portfolio companies, interest income and other income are the primary drivers for this increase, with interest income increasing by $1.4 million, resulting from a year-over-year increase in the accrual loan portfolio. Other income increased by $3.3 million for the fourth quarter 2021, resulting mainly from a year-over-year increase in SBA 7(a) loan origination volume. Servicing income increased by 7.2% to $3 million in the fourth quarter of 2021 plus $2.8 million in the same quarter. Distributions from portfolio companies for the fourth quarter 2021 totaled $9.75 million, which included $6 million from NMS, $3.5 million from NBL, our 504 business and $250,000 from NPS as compared to $4.175 million in the fourth quarter of 2020. Moving on to expenses. Total expenses for the fourth quarter increased by $9.2 million quarter-over-quarter, mainly driven by an increase in the SBA 7(a) loan referral fees due to higher loan origination volume, escalated cost, professional fees and loan origination and processing costs. Realized gains recognized on the sale of the guaranteed portions of SBA loans sold during the fourth quarter, totaled $18.1 million as compared to $11.4 million during the same quarter in 2020. In the fourth quarter 2021 NSBS sold 223 loans for $126.6 million at an average premium of 12.28% as compared to 123 loans sold during the fourth quarter of 2020 for $85.1 million at an average premium of 11.42%. The increase in realized gains is attributed to higher SBA loan origination volume in the fourth quarter of 2021 combined with higher average premium prices when compared to the fourth quarter of 2020. Realized losses on SBA non-affiliate investments for the fourth quarter of 2021 was $3.5 million dollars as compared to $2.7 million for the fourth quarter of 2020. Overall, our operating results for the fourth quarter of 2021 resulted in a net increase in net assets of $20 million or $0.84 cents per share, and we ended the quarter with NAV per share of $16.72. I'd like to turn the call back over to Barry.

Thank you, Nick. Operator, we’d go to Q&A.

Thank you. We will now begin the question-and-answer session. And we have a question from Paul Johnson from KBW.

Yes. Good morning, guys. Thanks for taking my questions. Just have a few for you today. I'm curious as far as what you're seeing with your portfolio in terms credit trends, just subsequent to the expiration of the CARES Act last year in September, if that's changed at all, if that's improved or any sort of significant developments there.

Yes. I think that if you look at the results, the majority of the portfolio stopped receiving the CARES payments in probably March-April timeframe. And I think that people look at that as gee, that's personal -- none of these things are permanent. And these businesses took these funds and because in many cases they were very limited by government action to open up or wearing masks or a variety of different things they had to do see things better. So, when you look at our portfolio performance, which we covered in one of the slides we’re very, very pleased and we think that businesses and Newtek is kind of an example of it really took the opportunity to pay attention, get rid of unnecessary expenses, and position themselves for how business has to be done in the future. So we think the trends are pretty good. Now today's all of a sudden the new day, lots change. Consumer spending has been incredibly strong up until, I would even say, yesterday. I mean, I'm seeing that in the payments numbers. So, if this is not overly punitive, meaning that if we have oil at 125 bucks a barrel for six months, that'll be a problem, I would presume to a degree, but I think so far we're in good shape. I mean, the future is a little bit more uncertain with what's happened yesterday, But right now, we feel pretty good about the quality of the portfolio where our clients are. I mean, we knocked out everything 60 days and over and non-accruals went down. So we feel pretty good about where we are as well. And I will tell you, the value of the collateral is very strong right now.

Thanks for that. Yeah. It's great to hear. Secondly, you guys have grown your staff pretty significantly last year. Just wondering, do you expect that kind of rate of hiring to continue into this year or do you think you've kind of reached a point where you're pretty satisfied with the staff that you have today.

Yes. It's a great question. Myself, in the lending team led obviously by Tony Zara and Peter Downs, look at headcount regularly. But we've got the right staff size and the capacity to lean into the business now. As we grow the NCL business, we'll probably need to add a few selected people, but not a lot. Because you got to remember, the NCL business, you got bigger loads and fewer units. So the other thing, I would tell you, on the servicing side, hopefully, loan forgiveness and PPP will diminish. So we'll be able to shift resources around. I think, we're in pretty good shape. I think the most important story to tell is, we significantly increased, what I think was, our SG&A last year and we're able to cover it. And I think that based upon what we're looking at for Q1 and Q2, we're able to handle it and we think we get a tremendous amount of leverage through the NCL opportunity, as well as we get leverage in the event we're successful in the acquisition of National Bank of New York City.

Thanks for that, Barry. Appreciate that. I just had a few more and I'll hop back in the queue, let few others ask questions. I'm curious on the JVs that you talked about with new partners and potentially forming those and growing those over time. How do you plan funding the JVs? Is that going to be essentially cash on your balance sheet, or potentially assets from the portfolio, or how -- what's the plan in terms of just getting those JVs started?

Sure. And it's a great question. Paul, I appreciate you asking, because I think that a lot of people don't fully understand the value and capability of the JVs. And the way we currently do it today, which is what we continue to do as a BDC. And frankly, be not much different than if we were, had that assets at a bank holding company would be by a combination of debt and equity. And they're typically 50/50 equity pieces, and we have leverage financing from different partners. And we're -- we've got term sheets and offers on that now. So, the loan growth would basically be funded on balance sheet by the equity investment of Newtek Business Services Corp. into the joint venture.

Got it, got it. And then, lastly, I was hoping maybe you could just to kind of maybe talk about the effect of inflation and how you've seen that kind of flow through your portfolio companies, or maybe even, how you expect that kind of flow through this year. Any, sort of, effect that had on your portfolio or maybe even your underwriting process, just any kind of color there would be helpful.

Yeah, I think that inflation is a good thing for the payments business. I hate to say that because it's just dastardly, but it increases the volume and you've got a lot of fixed expense there. So for the payments business, it's good. For the insurance agency, it's good. For the payroll business, it's good. So -- for the business services business, it's great. Now in the lending business, it can be problematic if in fact, it drives rates up a material amount. And I say that driving up rates to material amount does put pressure on businesses that don't have the price elasticity. So you know where we begin to see certain strains from borrowers typically, is when you have a very material rate shock. But it's nothing that we -- I mean, we've been doing this for, you know, in the SBA space since 2003. So it's nothing that we haven't seen before. It's stuff that we model in all of our models. You know, it not overly concerned about inflation as being problematic for overall this business, which is why it's great to have all these diversified streams.

Yes, appreciate that. Actually, one more question. I just housekeeping thing on for Nick. He mentioned that, I think, I just missed it. But could you just verify the realized losses on the SBA loans in the fourth quarter?

Yes fourth quarter. Yes, its 3.5 million for the fourth quarter.

Okay, appreciate that. Alright, that's all for me. Congratulations on, you know, really active quarter and a really active 2021. Hopefully, we see more this year.

Thank you very much.

Thank you. The next question comes from Mickey Schleien from Ladenburg.

Good morning, everyone. Hi, Barry.

How are you doing?

Okay. Thank you, Barry, most of my questions were already asked, but just a couple more. You mentioned that SBA 7(a) prices weakened in the fourth quarter as the government's fee waiver and following that, how do you view pricing developing this year? And what do you expect for demand as interest rates rise?

Yes, the prices Mickey on the bonds have actually been not as good -- is you know, quote up, you know, 1:13 and change, but not too far from that. So you know, without putting a number on it. The need and appetite for government, full faith and credit government guaranteed floater in the current environment is desirous and prices have held up pretty well. I – to be frankly, you don't have -- don't have a forecast or a number for Q1, but we'll probably be there in about five weeks with the way things are going so. I don't see major changes. You know, if you want to do some modeling, anywhere between 1:11 and maybe 1:12.5, I'm just giving you a very wide range, but I don't have any further information relative to the mix of the portfolio. And I want to emphasize the change in the pricing was based upon the fact that just 50 basis points less than coupon that we're selling. So, the flip side of it is the demand for the Full Faith and Credit government guaranteed floater is pretty high, and that's what's keeping prices stellar.

And how about demand for the loans in terms of originations, Barry? In other words, when you look at your long history, let's say interest rates climb -- they could claim a couple 100 basis points in the relatively near future. How does that impact demand by your borrowers for debt?

It's a great question, Mickey, it's still because of the fact that we are a 10 to 25-year amortized lender, we are a better alternative than a conventional bank loan do -- obviously, we're higher rate than they are, but it's the stretching out of the payments that's in measurably invaluable. So, higher rate environments don't tend to dissuade the universe of opportunity. And you can see that from our pipeline, which has been growing throughout very material significant rate increases over the life. It's not declining, and it's -- and we're closing and the credits are good and the economy is good. So, no, we do not see a problem with loan demand, I would say on a Newtek specific basis.

I understand. Thanks Barry. Just to follow-up on the credit quality questions. Could you give us a sense of how your borrowers' revenues and margins trended in 2021? And do you expect those to be sustainable in 2022?

That's a good one. I think that -- too early to tell. Today, there's been a lot of pricing elasticity and I guess that people going into restaurant with a higher bill and they are paying. So far, we see people from a rent standpoint, being able to afford rent hikes and other expenses. I do believe that we're still dealing with supply chain issues that will wind up having some effect on the business and business credit. I think I'm -- if I were to telling you anything else, I don't think I'd be telling you what's truthful here. So, you've got an environment that is really volatile, it's changing rapidly, and businesses that are smart and nimble, do well, which frankly, we have 44 people in our servicing department. We are all over our clients right now with the employment retention tax credit thing, of which I would say a lot of our businesses don't know that they're eligible for. So, we work very hard, not just giving people money, but giving them these other solutions that make their business better. And that's why we've been able to lend money for 18 or 19 years in a space that typically people they get in, they get their fingers blown off, and they get out. This -- we really put a mark in working with our client base to make them more successful, not just in giving them money, but in helping them grow and develop their business with the best solutions.

I appreciate that. I understand. Thank you. Barry my last question. Thinking about sort of secular trends, are you seeing opportunities developing amongst small and medium sized businesses to service the alternative energy market, I'm just thinking about companies that may go out to houses to service solar panels or wall chargers for electric cars, things of that nature, and can that displace historically loans that used to make to gas stations, for example?

Yeah. That's a good question. Look that is going to happen. Right now, we would be -- we typically do not -- we're not a venture lender. I think it's important to note that. But there is no question we've seen an unbelievable amount of entrepreneurship and we talk about charging stations, solar panels, CBD, cannabis, but we're seeing a lot of economic changes going on, industry changes. And yeah, we think these are burgeoning markets. It's not typically what we have any interest in lending to.

Understand maybe down the road. That's it for me this morning. Thanks for your time.

Thank you, Mickey. Appreciate it.

Thank you. Our next question comes from Matt Jaden from Raymond James.

Hey all, morning, and appreciate you taking my questions. First one maybe for you Nick. Apologies if I missed it during the prepared remarks. Can you give the breakdown of dividend income in the quarter? And then as a follow-up maybe for you, Barry, kind of expectations for the dividend income line in 2022?

Yeah. I'll take the latter and I'll let Nick do the former. So I'll do the latter first. The expectation for dividend income is we have declared a $0.65 dividend for Q1. We have forecasted a $0.65 dividend for Q2. If you look at the momentum that we've got in the business with respect to 7A loans rolling over, the projections of the portfolio companies, we think we're in pretty good shape. Now we've been reluctant and we did say this earlier in the call to forecast Q3, Q4. We don't know whether it will be a bank. We don't know whether it will be a BDC. But I do think, the company has historically trended to be higher in earnings in the second half than the first. I also cautioned that we have a lot of volatility, just looking at what's going on in the market today with rates, gas, stuff like that. So we're a little conservative on that. What I will say is, given that we think though the bank transaction is not a second quarter, we don't think the bank transaction second quarter transaction and maybe a third quarter transaction. If it's a third quarter transaction, we probably would pay a dividend consistent with what we normally do as a BDC. Now that's a guess that might change. I might retract that. But knowing our customer base, our investor base, we want to reward our investors. With that going beyond that I couldn't. But I think you're going to have to do your own projections. I appreciate the work that our four analysts have done because you guys do have adjusted NII projections for the calendar year, all four of you. After this call, hopefully, maybe you'll look them a little bit closer. But I keep an eye on that pretty well. Nick, you -- can you answer Matt's questions on the dividends from last year?

Yeah. So from there was 6 million in dividends from NMS, $3.5 million from NBL, and 250,000 from NTS.

Got it. Appreciate that. Barry, maybe as a follow-up to you on the bank, bank holding conversion company timing. Any sense you can give us as to when we might expect to see a proxy statement?

I should have been prepared for that question, Matt. The answer is I can't really give you a time frame. I think from our perspective, the most important thing that we can do here is make sure when that proxy goes out that people are just really well informed, with everything that we know. So that's kind of what we're studying right now. I preferred to be sooner than later. But I think the – the deeper that we get into, the transaction and we're in it. We're in a pretty deep at this point. And I can say that, we have not encompassed any roadmap at all that's going to us to say no, now, I say that with all humility, because until the regulator's sign off on a final plan, you don't have a final plan. And we're in discussions with them, and we've made certain adjustments to-date and things of that nature. But nothing that's changed the company or the Board's position that we like the deal that we did, and are hopeful that shareholders will follow through with our belief that this makes sense. They'll have to do that evaluation based upon what's in the proxy, which is basically a vote on being a BDC or not being a BDC. I know, I didn't answer your question, Matt. But hopefully I gave you a little bit color that's useful.

Yeah. Fair enough. Last one, for me kind of continuing on that theme, there maybe – maybe at a high level now that both of the baby bonds are fully callable. How are you thinking about a refi or a call of those heading into the conversion?

Sure. I think that, it makes most sense for us to get a little bit further along. And, I think that one way to think about it would be that, if you speculate that the third quarter is likely then, in all likelihood that would be less callable and more callable. I don't want to be one up, boxed myself in here and say that we won't call it tomorrow, we will call tomorrow. But I think, as you try to analyze this and make your own guesses, what are you going to refinance into and refinance out of? I will say, if you look at the way that baby bond debt and bank holding company debt is evaluated by the rating agencies are actually not too dissimilar. So I think that, as you try to figure out that, I think the -- the likelihood obviously of call ability, with the bank deal, being definitive at some point in time or not being definitive, will be the real determinant as to when those bonds go. Now, we did pay off $40 million of an issue that was callable, because we had excess cash. We believe the coupon was high. We wanted to reduce our leverage. And I think that's indicative of the fact that, this company is confident of what its forecasted beliefs are going forward, if that's helpful at all.

That's it for me, Barry. I appreciate the time this morning.

Thank you for the questions. Good questions. I should have been prepared for the other one. But anyway, thank you, Matt

Thank you. At this moment, we show no further questions. I would like to turn the call back to Mr. Sloane for any other remarks..

Great. I want to thank everybody for attending the call today. I know this is a tough day, a lot of activity in the market. We had a great 2021 and we are very, very optimistic about 2022. Look forward to working with each and every one of you on whatever your needs are objectives are. And thank you very much for your time and attention today. Thank you, operator.

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