Good day, ladies and gentlemen, and welcome to the Newtek Business Services Corporation Third Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to introduce your host for today’s conference, Barry Sloane, President and CEO of Newtek Business Services Corporation. Please go ahead.

Good morning, everyone. This is Barry Sloane, CEO and President, Newtek Business Services Corp. NEWT is our stock symbol on the NASDAQ. And this morning, Newtek will be presenting our third quarter 2017 financial results conference call. On the call today I also have the pleasure of having Jenny Eddelson, EVP and Chief Accounting Officer. I’d like to call everyone’s attention to our website newtekone.com, going to the Investor Relations section and under Events & Presentation you will be able to follow along the conference call with our PowerPoint presentation. If I can point you to slide number one, we have our note regarding forward-looking statements. I would like to suggest that all of your people following on the call will have the opportunity to read that at their convenience. I would like now to roll forward to slide number two, Small Business Lending -- SBA lending highlights. Newtek Small Business Finance funded a record $103 million of SBA 7(a) loans during the three months ended September 30, 2017, a 20.6% increase. Newtek Business Credit Solutions, a controlled portfolio company funded $4.8 million of SBA loans for the three-month period ending September 30, 2017. We continue to maintain our annual forecast of $415 million in all SBA loans which will represent a 31% increase in total SBA fundings over 2016. Moving to slide number three, Third Quarter 2017 Financial Highlights. Our NAV grew by 0.7% over the $14.30 at December 31, 2016; at the end of the recent quarter, it stands at $14.4; last year, we grew about 2% to 2.5%. The Company does endeavor to grow its NAV on an annualized basis that is a goal of ours, if it is available to us, as well as to grow the dividends. We would like to point out that our…

Thanks, Barry. Good morning, everyone, and thank you for joining today’s call. Please turn to slide 33 to review our third quarter 2017 results. Total investment income increased by $1.8 million or 22.3% in the third quarter of 2017 from $7.9 million in Q3 2016, primarily due to increases in interest and servicing income, offset by a decrease in dividend income quarter-over-quarter. Interest income increased by $1.9 million, as a result of higher average outstanding performing portfolio of SBA loans as well as an increase in the primary. Dividend income from controlled investments in Q3 2017 was $2.6 million, a decrease of $382,000 from the same quarter 2016 and represented $1.75 million from Newtek Merchant Solutions, $37,5000 from Premier Payments, $200,000 from Newtek Business Credit Solutions and $200,000 from IPM. Total operating expenses increased by $817,000 quarter-over-quarter. Salaries and benefits increased by $1.1 million, representing higher compensation levels and an increase in the number of employees, resulting primarily from increases in loan originations, underwriting, closing and servicing activities, required to manage the growing loan portfolio. Interest expense increased by approximately $645,000 quarter-over-quarter, primarily due to higher average debt outstanding during the third quarter of 2017 and a higher average interest rate, as compared to the same period in 2016. Included this quarter in total expenses is change in fair value of contingent consideration liabilities, which resulted in income for the period of $748,000. The Company reduced the contingent consideration liability related to the IPM investment based on the probability of IPM attaining specific EBITDA levels for 2017 and 2018. Overall, our net investment loss for the period decreased from the loss of $2.1 million in Q3 2016 to a net investment loss of $1.2 million in Q3 2017. The Company had net realized and unrealized gains of $9.3 million in…

Thank you very much. Operator, we’d like to open up the call for Q&A.

Thank you. [Operator Instructions] Our first question comes from the line of Nick Grant with KBW Financial Services. Nick, your line is open.

So, you guys have just over $30 million remaining of 504 kind of hit guidance there. So, how strong is the backlog right now and what’s the pipeline? And then, how should we be thinking of that business in 2018, given the investments?

I think that CS [ph] which we think is business credit, particularly with the addition of Tony Zara and new staff for Orlando and staff that’s anticipated, that’s a nice growing pipeline, particularly with Tony’s expertise in the area of construction. And this construction is not ground -- this is not very risky construction, it’s construction that he’s very, very familiar with. We have not gone out into 2018 and given a forecast yet; that’s probably something we’re going to be doing over the next 30 to 45 days internally. But, we feel very good that the 504 business which we’ve had people say, gee, when is it coming, when is it coming? Sometimes these things take time and sometimes they take having the right people in the right place doing this. I would tell you, I’ve got two-graph term sheets on my desk for leverage lines for 504 that are significant that will enable us to grow the business. We have recently sold some 504 loans into the secondary at very nice premiums. This business is working out real well. So, I know I haven’t given you that much color with a number but we hope to do that in more recent times and to give people a feel from what we think we might be able to do from a contribution to 504. With that said, we do make it a practice, Nick, of not drilling down into these portfolio companies, to give guidance on that. So, we try to give everybody a feel and flavor for how we’re doing. We ask the Street and the market to really pay close attention to our annual dividend forecast, so nobody gives annual; we go out and give annual. And we feel pretty good about it. So, hopefully that answers your question.

And then, kind of onto the M&A pipeline, how active are conversations right now? And kind of more specifically in the payments business, what targets are you most interested in, in terms of like annual volumes?

So, I would say this, the pipeline is a little bit low. I think we feel pretty good about that because it’s going to give myself and the management team an opportunity to digest, and we’ve got a lot going on and a lot of great things going on when you look at these leverage lines. And there’s a lot of opportunities for us to capital markets. But, when you look at the two targeted entities, both area technology oriented. So, when you look at the recent sales that were done with BluePay and CardConnect, they were payment processing entities that had growing business but they also had an interesting technology twist. So, for the ability of Newtek to offer for example a POS system, to people that are coming in for payments account and to work out the concept of, hey, we can give you POS software-as-a-service, we can give you a payments which I think could wind up being payments-as-a-service over time as the market moves, as well as we think this zero-cost processing. And let me see if I can elaborate on that. When you check in to a hotel today, you are going to pay -- in many hotels, you’re going to pay a resort fee. When you pay your taxes online, you wind up paying a fee to the IRS by the use of the card. We think that there will be a trend in the payment space, it’s currently selective, but we think it’s going to be more pervasive, particularly in area ecommerce to be able to switch the cost of the payment from the merchant to the consumer. And that leaves a tremendous opportunity for market share if you’ve got the right technology and the right pitch and the right presentation. So, these would not be big numbers for us relative to portfolio but they would give us tech solutions when adding to the existing portfolio as well as size of customers coming into the system that could be quite-additive, down the road. And we are always looking for opportunities where we can get inexpensive cash flows with good technology that fits into our customer base.

And I guess following up on that. Do you see investments on the tech side of that business as kind of the key to driving valuation higher in payments, or is that more of a scale and volumes question?

It’s an interesting question. Look, I know there are -- I would say -- those are two separate questions. I think in the tech space, we are very focused on the movement of businesses to take their hardware and software moving into the cloud for the purposes of increased security against third-party attacks, better efficiencies relative to cost having external people manage hardware and software 24x7, and really importantly better security, not having the server in the clouds that are under ones debts. The payments business very much driven towards point-of-sale, a technology as well as e-commerce, I do think that they are somewhat separate growth initiatives.

Our next question comes from the line of Harold Elish with UBS. Harold, your line is open.

So, you’ve come too loud and clear that you view Newtek as a growth BDC and you’ve certainly come too loud and clear that the payment processing and tax divisions are really great vehicles for client acquisition. Is there a some sense as to what we could expect over the next five years in terms of the financial results those divisions could have in terms of what they will contribute to growth, in and of themselves?

I appreciate the question, I guess -- and I’ve got my Chief Legal Officer sitting on my right shoulder, my ex-General Counsel on my left shoulder to talk about a five-year projection. But, what I will tell you is, Newtek is there out as a public company since September of 2000. I’m one of the original founders since 1998. And I’ve built the business in conjunction with the management and the Board for what I call strategic objectives. And when I look out in the market and look in the economy, does anybody think that the technology sector or segment is not to going to be the biggest growth segment in the U.S. economy, does anybody not think that the way business is being conducted today is going to dramatically shift and change? And the answer is, almost nobody. Our goal is going to be able to -- is going to be to be able to use the best software vendors, the best hardware vendors and to be able to provide the state-of-the-art technology solutions that businesses can operate on. Tell me what supermarket acts like Amazon? Tell me what bookstore acts like Amazon? Tell me what drugstore acts like Amazon? My point is, the world is going to change. We need to be positioned for our customers to be in the middle of that but to do it on a more efficient basis. So, rather than have hundreds and hundreds and hundreds of sales people calling on SMBs and branch offices everywhere, we’ve had conversations with customers to bring them the best technological solutions the way GEICO brings the best auto solutions remotely without having that whole infrastructure and physical presence. That’s how we are positioned today. So, we’re excited about the tech space. And our goal as managers…

Thank you. Our next question comes from the line of Leslie Vandegrift with Raymond James. Leslie, your line is open.

Just starting with one for Jennifer. I’m sorry if I missed this. My phone was breaking up in the middle of your view. But on the dividend income breakdown for the quarter, if you said it, sorry for making you repeat it.

Well, the dividend breakdown income, we have forecasted $1.64. To-date, Jenny, we paid how much, through nine months?

I think Leslie is talking about the dividend income from portfolio companies. Is that right?

Yes. I’m sorry, didn’t mean to be -- need to be clear, I guess.

Sure. So, for Q3, there was 1.75 million from Newtek Merchant Solutions; 375,000 from Premier Payments; 200,000 from CDS; and 200,000 from IPM.

And then, on the 504 loans, obviously, a big jump in growth there or expected for that newer program. But on the return comparison for the 7(a) loans, if you have cash to go to the 7(a) versus the 504 for the shareholders, what’s the argument there for going into the 504, which is just dividend rather than the 7(a) with the gain?

Sure. So, it’s a great question. First thing I’m going to start off with is the customer. So, there are some customers that want a 405 loan versus 7(a) loans; there are some customers that want 7(a) loan versus the 504 loan. So, let me kind of -- a customer that would want a 7(a) loan, would want a fixed rate for five years that’s attractive to them, and they probably are -- 504 loan is for the acquisition, maybe little rehabilitation or construction of commercial real estate. That’s the only purpose for a 504 loan, no working capital. On the SBA side, you can get working capital component, maybe a little less LCB on the real estate and schedules are similar. And that’s kind of the differential. From our perspective, we have equity invested in the balance sheet consideration on 7(a) loans; and 504 loan, the whole component is ultimately sold. So, the returns on equity are comparable but we have some clients that would qualify for 504 loan and some for 7(a) loan. An interesting characteristic, businesses are capped 5 million for 504 loans. I do not believe their -- for 7(a) loans, I do not believe there is a cap on 504 loans. So, those are differences. And by the way, we don’t think that they are importantly -- we don’t think one cannibalizes the other.

And then on the 7(a) loans, obviously sales percentage wise versus the fundings was down a bit this quarter but the premium still looked attractive. Just some color there around why that was down?

We’re carrying over a significant amount of government guaranteed pieces from Q3 into Q4. I think it’s in excess of $20 million. This is an approximation, on a liquidation basis that could be carryover of say $2 million to $3 million. And I think that our goal is to manage the business to its appropriate level, make sure we are within constraints for debt to equity. And we don’t pay that much attention to quarter-to-quarter variabilities. We’re very, very focused on delivering what we say we are going to deliver for the year.

And just lastly, you mentioned a little bit of equity dilution in the quarter. And so, was that entirely due to the restricted cash or restricted stock payment to ECS?

I think that this is -- not entirely. I think some of it was from small than anticipated contributions from the portfolio companies, but also we have switched our method of equity raising from large capital markets transactions where we’d raise between $22, million and $35 million of equity which typically would occur at a significant discounts of the last trade, and 4 to 5 to 6 points of fee to being able to ATM. And that’s been a good strategy for us. So, we believe as we sit here today, we are well-positioned. And although it is possible, I would say, it’s unlikely that we will do any kind of a major announced large-scale equity raise which we did do last year and the year before that in Q4 and in Q1.

And how many shares were coming out of the ATM this quarter?

Jenny, how many?

Through the nine months, it’s 455,000 shares.

455.

Thank you. Our next question comes from the line of Lisa Springer with Singular Research. Lisa, your line is open.

When you secure a new referral partner, how do you go about educating them about your products and services, and how long does it take those relationships to ramp up typically?

That’s not instant. Tim Ihlefeld, who is Executive Director of Strategic Alliances, manages about 10 regional vice presidents around the country that do manage these alliance relationships. And they do take quite a period of time to incubate. And in many cases well that alliance partner that may have one to two products and they come back and pick a third or fourth or -- recently, we have anticipation that we’re going to pick up one for insurance that has been a lending partner of ours for many, many years. And they just decided they don’t want to offer insurance through the distribution channel, which we think is significant. But then, you’ve got the work of educating the alliance partner, the producers in the middle which could be wealth managers, they could be commercial bankers, they could be branch officers, or people in call center to be able to drill the offering down to the ultimate customer to generate referrals, which then close at a close rate. So, I would say from a dead start, it’s going to take you three to six months, if somebody is really geared up, to start flowing these referrals in. But we have a significant pipeline of referring partners coming in and out. We think we have more resources at this business than we’ve ever had before. At the NAGGL Conference, we had about six or seven people total that were speaking to a lot of banking institutions that are very favorable to our methodology of working with them. So, we feel pretty good about where we are in the process, and it’s showing up in higher referrals, particularly in lending.

Thank you. Our next question comes from the line of Peter Heckmann with D.A. Davidson. Peter, your line is open.

Good morning, guys. This is Franco Granda in for Pete. Thanks for taking my question. And first of all, great job on hitting that 7(a) milestone; and then quick one for me. I’m hoping you could provide some insight into an impact you saw from the hurricanes in both Texas and Florida, and whether things are getting back to normal?

So, as we are all watching weather, and I have to say, Peter, I really appreciate the question, because it’s interesting. 45 days ago, everybody was freaked out about Houston, Puerto Rico and Florida, and have kind of almost forgot, to be honest with you. Now, we’re worrying about other news events, which kind of come in and out of people’s minds very quickly. We were fortunate that number one, although we do have a reasonable amount of Florida business, most of it does tend to be in Southern Florida and on the East Coast, and the storm did most of its damage on the West Coast, although clearly, there was significant important given the size of the storm on East Coast as well. We’re very well protected. It’ll show up in our NAV calculations, if in fact, any of our loans were -- I don’t have specific data to tell you, except that -- I don’t think that there was any material -- I shouldn’t say I don’t think. There were no material changes in our portfolio or the performance of these loans due to the effect of the storm. I would also say to you that if the storm did effect one of our clients, it is highly likely that they would immediately go to the SBA for disaster loan, hit capital on a 20 to 25-year term with a 1%, 2%, or 3% interest rate where the lien would be subordinated to all of our other liens. So, it’s almost like instant equity. So, in a perverse way, as you are aware, sometimes these storms are actually good for businesses and good for GDP. But, we really have not seen any impact for the storms that hit in Houston and in Florida.

[Operator Instructions] Our next question comes from the line of Casey Alexander with Compass Point Research. Casey, your line is open.

Can I ask a question? Is there something that drives SBA 7(a) originations to the end of the quarter that requires that explanation of the debt-to-equity ratio? Does it bulge at the end of the quarter and therefore each quarter you have a larger than normal carryover than you might have, if measured at the middle of the quarter?

I would basically gravitate towards my psychologist in answering why do businesses in all aspects of life tend to do things when the deadline is up, whether that’s a college student studying for exam or business owners that need their funding in specific times, whether it’s end of the year, end of the quarter. I don’t know of any company that does not have, I’ll use the word, multicar pileups at the end of the quarter. I mean, I have got a good friend of mine and he’s in the software company, and he says the last three days of the quarter are like a freak show. Got to get these things done, we got to get the contracts closed. So, I will say this, over the course of our 14, 15-year history, it has gotten much better, relative to the quarter. And I’ll tell you this, although -- I guess as a percentage, it’s fairly significant, I would think we -- Jenny, what’s the number, 20, 25, $30 million?

At the end of the quarter? Yes.

Yes. So, I mean, we are looking at $20 million $25 million $30 million at the end of a quarter on a $100 million quarter. So, it’s not like it’s totally crazy. And sometimes, it could just take a couple of loans to do that. We are aware of it but here is the good news, it doesn’t really matter. As long as you’re within the guidelines and we watch that very closely, it doesn’t matter. Matter of fact, if you look at the ones that are settled, which we have done because we think that was the fair way to present it, it’s 81%. And you look at my other governments that are carrying over, it’s 74%. So, if I was -- and I can’t do this, because it’s non-GAAP; but if was to present this on a non-GAAP basis, you go, 74, that’s low. So, instead, people that are now looking at it, like you are, going, oh, my god, it’s really high. We watch it, we’re paying attention to it, we know what the regs are. And given these governments settle within 10 days, that’s not a big deal.

Secondly, can you give us a little bit of color on that change in the fair value of the contingent consideration liability for IPM?

Yes, Jenny can.

Sure. So, Casey, when we actually invested in IPM, there was an initial cash payment and then there was contingent consideration with that investment of approximately $1.4 million to be paid over two years. And that payment is based on achieving certain EBITDA level, in both 2017 and 2018. So, what we need to do from a GAAP perspective is look at the liability each quarter and measure whether or not we think the company is growth to hit that EBITDA level in each of those years and basically apply a probability percentage to the different scenarios. And what that equates to is, either your liability is going to stay at the initial measuring amount or you’re going to mark that liability down. So, we did the announcements this quarter, we think it’s improbable that IPM will hit its actual EBITDA target that was part of the total purchase price. So, we mark down that liability, which actually created income for the period by $748,000. And I do want to just point out that that adjustment is deducted from adjusted net investment income. So, we’re including that as an adjustment to ANII. Does that answer your question?

Yes, it does. Thank you. Barry, I understand that at the end of the day, none of a 504 loan stays on the balance sheet, but this is inside of a portfolio company, so we don’t really see the balance sheet of that portfolio company and the entire 504 loan does stay on the balance sheet for some period of time. Does that limit how much you can originate at any one point in time because we don’t really know what the balance sheet of that portfolio company looks like?

So, leverage the portfolio companies to not consolidate for the BDC test?

Right.

Maybe I didn’t answer your question.

No, because obviously we don’t know what the leverage in that portfolio company is, so we don’t know how much that portfolio company can afford to carry of a 504 balance at any one point in time, understanding that it all rolls off eventually but at any one point in time we have a certain amount on the balance sheet until that time period is over, how much can you originate there and carry at any one point in time?

Yes. We currently have an 85% advance on 504 loans. And if we close on these two new term sheets, we will announce those. And I think I could indicate without putting a number on it that there’ll be a lot of capacity. I mean, look, we’ll fund $40 million -- between $20 million and $40 million this year. Obviously, we’ve indicated, $20 million is at the very low end of the range. I think, we’ll be very good on that range without question. I would like to double or triple that business next year, but that’s my wish and that’s not a forecast.

And…

I think that will have the capital and the leverage line to do it.

Okay. All right. Great. That’s it for my questions. Thank you.

Now, we’ll repeat for all the SEC guys, I used the word I think and anticipate. Thank you.

Thank you. And that does conclude today’s Q&A portion of the call. I would like to turn the call back over to Barry Sloane for any closing remarks.

Thank you, operator. Look, I really appreciate the quarter that we had. I would like to stab -- I’d like to thank my executive management team and staff. You have done a great job, you are working hard. I would like to thank the investment community that’s had real good faith in what we do here, with respect to how hard we work and level of integrity. And we will be clear to be very transparent and report things to the community as we go forward. So, we thank you for a great quarter and look forward to reporting the fourth and have some nice events going forward. Thank you all.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone, have a great day.