NewtekOne Inc (NEWT) 2007 Q3 法說會逐字稿

Good day, everyone, and welcome to the Newtek Business Services third quarter 2007 earnings conference call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Barry Sloane, Chairman and CEO. Please go ahead, sir.

Thank you.

Welcome, everyone, to our third quarter shareholder conference call. I would like to introduce Seth Cohen our Chief Financial Officer who will be joining me for the call, and I would like to ask Seth to read the Safe Harbor statement.

Statements made during this conference call that are not based on historical facts are forward-looking statements. These statements are made in reliance of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995 and are subject to uncertainties and risks. Newtek's future results may differ materially from those anticipated and discussed in forward-looking statements. Some of the factors that could cause actual results to differ materially from the plans, intentions and expectations reflected in or suggested by the forward-looking statements have been described in press release issued today and in Newtek's filings with the Securities and Exchange Commission. We refer you to these sources for additional information.

Also we need to point out that our CAPCOs operates under a different set of rules, in each of eight jurisdictions and that these place a varying requirements on the structure of our investments. In some cases, particularly in Louisiana and New York, we don't control the equity or management of a qualified business, but that cannot always be presented orally or in written presentation.

I'd also like to point out that remarks made during this conference call are made based on information believed to be accurate as of today's date, November 8, 2008. This call is the property of Newtek, any distribution, transmission, broadcast or rebroadcast in any form without the express written consent of the Company is prohibited.

Thank you.

Newtek is quickly becoming the premiere distributor of business services and financial products for the small and medium sized business market. As of 9/30/07 we have 84,000 business customers, we're adding an excess of 2,500 new clients per quarter and that's net of attrition. Newtek truly is becoming a one-stop shop for the small and medium sized business owner. We want the small and medium sized business market to view Newtek as the Company to go to for all their business service needs. With our product offering, this is becoming a reality.

When you look at Newtek's distribution advantage, what we basically have analyzed is that product and process are linked very closely. So you could have a huge customer base like some of our alliance partners do, and may have access to different products from different providers, but the key to Newtek's success is our process. Many of you are familiar with our NewTracker system that allows us to get into the intranets of the Merrill Lynchs, Morgan Stanleys and Navy Federal Credit Unions of the world to allow their distribution channels to drive their small and medium sized business clients to us. With Newtek you could basically start at any point.

In our third quarter, we had some very nice financial highlights, with the growing revenues, the electronic payment processing segment and web hosting segment. EPP increased by 25% Q3 '07 over Q3 '06. Web hosting segment revenue increased by 20% Q3 '07 over Q3 '06.

Our small business lender is very well positioned to grow, however, SBA lending segment revenue declined by 22%, Q3 '07 over Q3 '06, and to be frank with you, this was by design. Over the course of the last eight quarters or two years, the Company has stressed concerns over credit conditions in the market. I would like to say that the Company has navigated this extraordinarily well. Our portfolio is in great shape, we've got the appropriate reserves and have plenty of leverage and funding capability to grow our business from here. We finish the quarter with over $40 million of cash, that's $1.12 in cash and cash equivalents and restricted cash, and $79 million in book value or $2.19 per share.

The other highlight I'd like to mention today is we closed a $10 million line of credit facility with North Fork Bank. That facility currently is undrawn, but gives us the ability to draw money as we need it for working capital purposes and have the ability to expand it beyond there for acquisitions if we see interesting opportunities which we anticipate seeing in businesses within our footprint. Slide number seven basically shows growing revenues in EPP and web hosting over a 9 month period of time, 27% for EPP, 20% in the web hosting segment, and SBA lending only declined by 3% over that 9 month period of time.

I'm going to fast forward everybody to slide number 11. Addressing the small business lending environment which happens to be an important topic for many entities today, particularly financial institutions and we can see that the stock market clearly is driven by the concern over the credit crisis in the small business lending market. We're very happy to say Newtek is extraordinarily well-positioned at this point in time to take advantage of being a lender to small and medium sized businesses.

In the market there are concerns about liquidity, credit deterioration, loan volume loss rates, leverage and market position. Newtek is extremely well-positioned in the marketplace as of today and going-forward to take advantage of market opportunities. As you can see on slide number 12, Newtek's originated SBA7A loan loss rates on a cumulative basis to present time 2.8% below the SBA average of 6.2%. Newtek has positioned itself to be a small business lender with a very wide menu.

We're not just an SBA7A lender any more. Going forward, we do anticipate buying distressed assets in our space going forward, increasing our new origination volumes significantly, and recently one of our primary competitors in the SBA7A market, probably the second largest competitor, made an announcement that it's de-emphasizing SBA lending entirely. We believe this is a great opportunity for Newtek, and we're well positioned for success.

On slide number 14, you can see that we're rolling out our new lending menu. We have recently launched a Newtek brand of Visa and MasterCard for up to $50,000. This is a white labeled product by a major banking institution for us, this is a product that we do not have the lending risk on our books. Newtek also launched an unsecured line of credit for up to $100,000, also white labeled risk was off of our books.

In December of last year we acquired a receivables finance company, this company is doing very nicely. We will also be rolling out Newtek merchant cash advance giving us the ability to basically provide credit card advances to entities that are looking to borrow against forward electronic payment processing receipts. We believe that this will increase our business coming in on the merchant's side, but it is also a funding opportunity that will be laid off to other parties, meaning no credit risk associated with that.

We have recently embarked on a conventional commercial real estate loan program up to $10 million, also sold to third parties. We are announcing today that we are focusing further on SBA504 loans, with a 90% loan to value where the U.S. government lends 40% on the subordinate piece to 50% first conventional loan as well as seeking to get USDA approval to do government guaranteed USDA loans, mind you these loans aren't necessarily farm loans or Ag loans they're also known as business and industrial loans.

The important issue here is for small and medium sized businesses, loans aren't bought off the rack, they're made. Our business service specialists in speaking to our small business clients can now fit a loan to a small business clients' needs by expanding our menu from primarily a 7A only business to a business with 7--6 or 7 different product lines, we believe we're a., going to improve our SBA7A business as well as produce significant volumes in these other categories.

If you take a look at slide number 15, 16 and 17, you can clearly see that our volumes in SBA lending are picking up. We believe this is based upon our efficiencies in the marketplace, and further gaining of a reputation as being the place to go for a small business for their lending needs as well as the credit crunch--more borrowers are gravitating towards government-type programs. In the third quarter, on pre-qualified loans, we went from $62.5 million up from $50 million in the second quarter. We actually anticipate $77 million of pre-qualifications in the fourth quarter of 2007. You could also see that from Q3 we have $46 million of loans submitted to underwriting, and $59 million as a projection for loans going into underwriting. On loan referrals, $606 million came in, in Q3 of 2007 and our projections for Q4 is $630 million.

The small business lending division is clearly positioned to be a contributor both from a revenue perspective and bottom line perspective. We think that we'll significantly increase our--both our revenues and bottom line contribution. We have yet to give guidance for 2008, but our guidance for pre-tax income for 2007 in the lending division had a range of about $300,000 to $700,000. Given the momentum that we see in the business, the additional business lines that are available, our under leverred position in the market, the fact that many of our competitors are getting out of the business or significantly tightening their credit box, we are very, very bullish about the ability with a clean balance sheet, clean bill of health to be able to go out and put money into the small business market at great risk for reward spreads. We have a state of the art origination software platform.

We discussed adding additional products to our lending menu which makes us the place to go, if you're a small business looking to borrow money. Plenty of leveragability in our operational platform. We also have the ability for our lending and funding sources to buy distressed assets, which we believe will be available in great quantities at attractive prices. Capital has also been offered to us at a divisional level, non-dilutive to Newtek shareholders both in the form of additional debt and mezzanine capital, and we plan on being extremely opportunistic in the small to medium sized business lending market.

In the electronic payment processing area. Seth Cohen obviously will go over our financial results shortly, but we were very, very happy that our growth has continued in that particular area, our channels and strategy are working very nicely. The Merrill Lynch's of the world, the credit union relationships that we have are driving all referrals into our NewTracker system, and are being processed remotely in our facilities in Milwaukee, Wisconsin, Brownsville, Texas and Florida.

Our training programs are working, we have business service specialists that historically were closing five, six, and seven deals a month, some of those professionals are up to closing 40 transactions a month. Basically we're in the market selling solutions, strategy and security and not price. Most of our competitors in the electronic payment processing business continue to push price. We feel that based upon our position in the market, our connection with our web hosting business, the ability to offer various types of wrap insurance products to protect against identity theft and things of that nature, we can offer our customers significantly more in their ability to do E commerce business, Check 21, on the internet and through their bricks and mortar than our competitors that are constantly pushing price and margin.

Our alliance partners are driving great front end business, so we're not--our business model, unlike most of our competitors is not driven by independent selling agents, and our back office capability once again with the business being processed in remote locations is keeping expenses extraordinarily low. We're very happy with the progress that we're making with our strategic alliance partners.

On a formal basis today, we are announcing that we have recently signed an agreement with Fiserv. For those of you that are not familiar with Fiserv, they're a multi-billion dollar public company that provides most of the platforms for most financial institutions in the market today. I believe there's in excess of 11,000 financial institutions that actually operate on a Fiserv platform. Fiserv provides platforms for entities like credit unions and community banks.

Newtek has signed a contract with Fiserv, Fiserv is rolling out what they trademark as their virtual bank branch powered by Newtek and that basically is our full business suite of business services, for those of you that might be unfamiliar with it, you can take a look at it on AIGsmallbusiness.com's website or our insurance portal. For those of you that aren't familiar with it, you can look at our insurance portal on Newtek Alliance Bank, an $8 billion Connecticut-based bank with I believe 80 branches. Fiserv is rolling out our business services to their financial institutions. They've searched for many years for a provider like ours, that would be able to deliver a full suite of business services, with a high level of quality to their client base.

Our PSE relationship is growing in stature and prominence, over 600 credit unions own PSCU which is a credit union cooperative, known as a CUSO. PSCU is a fairly significant player in the market, I believe they've been in existence for over 20 to 25 years, I believe they have issued over 12 million credit cards into the market so clearly they've got tremendous penetration into the credit unions that they do business with, and they have exclusively endorsed Newtek and its products and services to their members. Merrill Lynch internally has also recently announced that it will be paying its brokers commissions for electronic payment processing, and even though we've had a four year relationship with Merrill, that's just recently been renewed contractually for another three, the incentive going to brokers as well as broker's assistants is something new, we're real happy with Merrill's decision to do this, and pretty excited about the momentum that we're seeing from our strategic alliance partners.

In the web hosting business, great revenue growth continues, 20% revenues. We've recently done some significant investing, I'll let Seth Cohen talk about that. So for those of you that are trying to take a closer look at our margins, we have experienced some expense in the web hosting business, but that gives us the ability to significantly grow our capacity beyond where we are today. We currently have got a new NOC center facility that basically allows us to grow in excess of 50%, and I'll let Seth go through the mathematics of that.

We are currently working on new product development, once again stressing security and service, and not price. Price and stressing price, we believe is a losing proposition for a provider like Newtek. Obviously, our ability to bundle and offer web hosting data storage and electronic payment processing services to businesses that need E commerce solutions is very valuable.

Our ownership of these various different entities and subsidiaries such as our insurance agency, our storage company, our web hosting company, really puts us in a terrific position. You can't open up the Wall Street Journal in a given month and not find significant articles on breach of storage, identity theft, liability that occurs due to credit cards. We're in a very unique position to take out a piece of the market for customers that are concerned about security and identity theft and willing to pay a fair market price for a service.

We've also been very happy that market leaders like Microsoft have recognized Newtek's ability in the web hosting space. We recently put out a press release in conjunction with Microsoft, basically launching a Window's 2008 server. Seth might chat about that a little bit later, but we're very happy that Microsoft recognized Newtek and our capability in this space to be one of the first participants to be able to offer this exciting product in the marketplace.

Newtek's success and growth will be predicated upon our ability to hire the best available talent in the market. We're thrilled that we've recently made some major hires from First Data Corp., we've recently hired Donna Neary and Darcie Claus. Both are 10 to 15 year veterans in the electronic payment processing space, have got significant experience in Check 21 as well as merchant cash advance. We'll be using both of these professionals on the product development and distribution side. We also feel that in the marketplace today, Check 21 goes hand in hand with the electronic payment processing product, and you really need to be able to bundle these products together and market them in a cohesive fashion and format. We've got that capability to do it.

In our insurance division, Bill Bear who joined us from Gladfelter, also a 25 year plus veteran in the insurance agency business is doing a terrific job in helping us build our penetration and back office capability and ability to process more business there. We have also made a recent hire in the last few days of Jane Cavuto. Jane joins us from Delta Financial.

Jane will be handling investor relations for our company from an internal perspective, dealing with outside investor relations firms as well as institutions that would be interested in acquiring Newtek's shares. This is a bit of a revised, rejuvenated effort, the Company feels that as it sheds its CAPCO business it's got a leaner and cleaner story and we look forward to more aggressively pursuing investor relations, and that was one of the reasons why we took the opportunity to bring Jane in, who has a very good investor relations background particularly with respect to organization that have got a financial bend to them. And Justin Shrom, head of human resources, has got a keen focus on feeding our thirst for new employment hires.

Slides 23 through 24 really focus on some of the information I discussed earlier. We're happy to report our continued growth in revenues, we're happy to maintain our 2007 annual guidance for the year, with EBITDA on a combined basis from our business service segment still being maintained at an expected guidance $15.9 million to $16.8 million for 2007.

The Company clearly in a growth mode has a key focus on its human resource aspect. Justin Shrom's primary initiatives relating to the hiring, training and recruiting, we're focusing on scalability across the entire enterprise in all different business divisions. We have recently announced that our Brownsville, Texas operation was able to benefit from a $1.25 million federal grant to build out a 20,000 square foot facility. We have also been named as the beneficiary of a $500,000 grant for hiring, training and education of our employees down in Brownsville as well. Also, many of you are aware we recently added a new outside director Cody Schrader as an independent director with tremendous background in the human resource area.

We're constantly looking at and evaluating and updating our IT, both from the standpoint of serving our customers as well as refining our product. This clearly is one of the keys to our business--businesses. We will be rolling out our project CVIA, our master central database. That is a 2008 project which will give us the ability to cross sell and cross market our products to our existing customer base, I'm perennially asked, well how do you cross sell, and why haven't you done it on a more institutionalized basis, and my answer has always been, until our professionals are properly trained and until we have the right software, so that we can present ourselves to our customers in a professional manner, we'll continue to hold back on cannibalizing our customer base. I'm proud to say that's been a good decision to date, but I do think we'll start to see some synergies and a nice lift from a growth in these various different categories as our technology finally gets finished in calendar year 2008.

Basically, Newtek is a distribution channel, as an attractive organization, because we have developed the ability to acquire clients inexpensively. We have a wide net that catches alliance partners from many different product offerings. NewTracker is used by the Merrill Lynches, the Morgan Stanleys, the Navy Federal Credit Unions of the world and AIG's. We use these brand named corporations, we use them for their advertising, their bricks and mortar, and their human interaction with customers. Those professionals and great selling and marketing organizations drive small and medium sized business customers to us, for business services and financial products that they really have elected not to provide for their customers directly due to cost and focus.

Technology makes referrals easy, it's the life blood of our organization, and through this Newtek is building its own brand. So all of our clients, when they come to us through an alliance partner, they know they're being serviced by Newtek, it is a Newtek product. We continue to process our business cost effectively and inexpensively, and that's based upon our remote production plants in Milwaukee, Phoenix and Brownsville versus staffing up in our more expensive New York City Times Square based location.

Our business we have proven small and medium sized business owners will do business remotely and electronically through telephonic interview on the strength of alliance partner's recommendation and on the professionalism of our business service specialists. We look forward to being able to share our data for multiple product services and applications, and also, we've been very successful in being able to minimize commission selling expense due to our referral technology.

Clearly the Company's financial focus is growing cash flow from business services, we're doing that well. 3 1/2 years ago, business services basically generated $0 in EBITDA, and today we're looking at the $15.8 million, $15.9 million to $16.8 million EBITDA number, which we're quite proud of. Deploying operational leverage, we believe that our lending business, for example, is a terrific example of us being able to significantly grow a small business lending platform, while the rest of the world and market is worried about the 2004, '05, '06 and '07 originations that were done with inflated collateral levels on difficult business cashflow projections, were able to come into the market with a great underwriting, servicing and collection staff, put money out at great spreads with really significantly better credits than frankly the market was being able to put on the books in more recent years.

That operational leverage also exists in our web hosting business, which now has plenty of capacity due to our new NOC center, as well as our electronic payment processing space. When you look at the front end of our business and our front end application, you could see that we could take that business service suite or insurance portal and hopefully distribute it through many FiServ financial institutions, PSU financial institutions and give it further penetration rate into Merrill and Morgan Stanley brokers to enable us to really get tremendous front end operational leverage off of our business opportunities.

We look forward in 2008 to help simplify our financial structure as our CAPCO seasons and become mater, we believe we might be able to take advantage of different types of accounting treatments, and also, as we get to the 100% mark in various different CAPCO's, the term of art is voluntary decertification, and that will give us the ability to take different types of accounting treatment that might be able to simplify our structure. We also believe that within the recent couple of months, the world is familiar with our credit crunch and credit crisis, we're approaching times where it may make some sense to start to look at and do acquisitions.

That is the function of the fact that prices in these particular business segments, we anticipate coming down we're very well positioned, we have the ability to borrow against Crystal Tech which currently has zero leverage on it, our electronic payment processing business which has zero leverage on it, our small lending business is only 55% lend against its collateral. We believe that we can get additional dollars both on senior lending and mezzanine lending, that has been offered to us by various market participants, we're very, very constructive on why our company is well-positioned for the future.

As I mentioned, we've got very little financial leverage, we're cashflow positive from our business service segments, we have a clean operation with lots of operating capacity, great sales leverage, we think there's tremendous opportunity in the lending business. We are extremely well-positioned, we have to answer a lot of questions over the last two years, what we're doing in the lending business, well, this is why we're in the lending business. We're really very well-positioned to take advantage of a good opportunity. We also don't know of any other competitor which has our technology or our full menu of product service offerings, with a long term game plan and an implementation strategy to go along with it.

I'll turn the remainder of the call over to Seth Cohen, our Chief Financial Officer.

Thanks, Barry.

First I would like to talk about the consolidated statements of operations, which we included in our press release, which compares to third quarter of 2007 with the third quarter of 2006. Revenue for the third quarter increased $1.6 million or 7% to $23.1 million. This is primarily due to $2.9 million increase in electronic payment processing revenue, and a $700,000 increase in web hosting revenue, offset by $400,000 decrease in premium income and $1.7 million of recoveries of investments and qualified businesses which were included in other income for the 2006 period and therefore not in 2007.

You will note that income from tax credits which is associated with our CAPCO program was $1.3 million or just 6% of revenue, this was unchanged from last year. We achieved our last investment hurdle in the fourth quarter of 2006, and therefore will be recording small amounts of income on a decreasing annual basis from tax credit revenue going forward. Expenses increased $4.6 million or 20% to $28 million. We recorded a loss before benefit for income taxes and discontinued operations of $4.7 million in 2007 as compared with a loss before benefit for income taxes and discontinued operations of $1.7 million in 2006.

We were treating our investments in Phoenix Development Corp. as a discontinued operation. We recorded a loss of $286,000 in 2007 as compared with income of $59,000 in 2006. Phoenix is in the process of being liquidated with little future profit or loss anticipated. Our net loss was $3.9 million or $0.11 per share in 2007 as compared to $1 million loss or $0.03 per share for the third quarter in 2006.

I ask that you please turn to our balance sheet included in our press release, which compares September 30, 2007 with December 31, 2006, where I would like to point out a few items. Our total cash and investment totaled $40 million at September 30th as compared to $43 million at December 31. In the first quarter of 2007, we consolidated our investments in CDS, which is a billing and receivable financing company. This has added $2.3 million in accounts receivable, $2.5 million in good will, $1.7 million in accounts payable, and $1.4 million in bank notes payable to our September 30, 2007 balance sheet. You will also note that our balance sheet continues to shrink as tax credits are delivered which reduces our credits in lieu of cash asset and our notes payable and credits in lieu of cash liability and that at the same time, our prepaid end structured insurance asset amortizes down, or it's reduced. This is both are non-cash reductions to the assets and liabilities.

I would now like to review the performance by segment. If you turn back to your PowerPoint, slide 32, we compare our third quarter 2007 guidance with our actual results. You will note that overall we recorded revenue of $23.1 million, which was slightly below our guidance range of $23.4 million to $24 million. This was primarily due to a decrease in premium income for the SBA lending segments of $400,000. Our pre-tax loss was $4.6 million at the lower end of our guidance of a pretax loss of between $5.1 million and $4.6 million. We met or exceeded the range in each segment except for corporate activities. We achieved EBITDA in our three major segments of $3.5 million as compared to our guidance range of $3.4 million to $3.8 million.

Slide 33 in the PowerPoint compares our third quarter 2007 results with our third quarter 2006 results. Electronic payment processing segment revenue increased $2.8 million or 25% to $14 million for the third quarter. This increase came from a combination of organic sales growth and portfolio acquisition. Income before taxes decreased 7% to $868,000 for the third quarter, from $935,000 in 2006. Web hosting segment revenue increased $692,000 for the third quarter or 20% to $4.2 million.

Quarter-over-quarter, we provided services to 18% more customers including 25% more dedicated hosting customers who generate higher revenue per customer. For the third quarter, expenses increased $1.2 million or 50% over third quarter 2006. The major expenses that increased included $143,000 in payroll costs, $218,000 in depreciation due to the purchase of services--servers for customers, a $738,000 increase in rent and utilities reflecting a move to our new data center of which approximately $325,000 should not be recurring and a $222,000 increase in additional software licensing fees. There was a net reduction of $90,000 in interest expenses compared with 2006.

As for Barry and the earlier part of the call, the--we did increase our rent at our NOC center--at our server center, where we're currently occupying or the servers we have are currently occupying about 50% of the space. We did this because we needed the extra room in order to expand our business over the next two to three years. For the third quarter income before taxes was $440,000, down from the $996,000 recorded for the third quarter last year. Again, this primarily reflects the move to the new NOC center, the expenses that came through on that.

SBA lending segment revenue in the third quarter of 2007 decreased $626,000 to $2.2 million from the third quarter 2006 due to a decrease in premium and interest income. Expenses for the quarter decreased $99,000 due to lower interest expense of $91,000, salaries and benefits declined $69,000, and professional fees decreased $90,000, offset by $184,000 increase in the provision for loan losses.

For the quarter, the lending segment had a pre-tax loss of $17,000 versus income before taxes of $510,000 in 2006. For the third quarter 2007, revenue in the CAPCO segment decreased $173,000 while the pre-tax loss decreased from $3.6 million to $2.9 million. The non-cash loss represented by income from tax credits less accretion of interest expense and amortization of pre-paid insurance totaled $2.3 million in 2007, and $2.6 million in 2006. Revenue in the all other segment decreased $1.2 million for the third quarter 2007, this reflects an increase that we received due to the $420,000 from CDS, which came on to our--consolidated onto our books for the first time this year, against the one time gain of $1.7 million from the sale of a qualified business which we had in the third quarter of 2006 and therefore, not in this quarter.

The segment had a third quarter 2007 loss of $685,000 versus income before taxes of $1.2 million , primarily in 2006--primarily due to an increase--due to an overall decrease in losses for entities included in the segment, offset by losses from CDS and the previous periods gained from the sale of the qualified business. For the third quarter of 2007, corporate activities, which generates revenue primarily from management fees from the CAPCO segment lost $2.3 million as compared to $1.7 million last year, this was primarily due to $233,000 less in management fee revenue, coupled with a $415,000 increase in expenses. Consulting, payroll and benefits increased by $892,000 quarter-over-quarter, this was offset in part by a $232,000 decrease in professional fees.

Slide 34 compares our nine months ended September 30, 2007 results with our nine months ended September 30, 2006 results. You'll find on slide 35, details by segment for cash flow from operating activities for the nine months. Slide 36 of the PowerPoint provides our annual segment guidance which are unchanged at this time.

I would now like to turn it back to the operator for questions.

Thank you. (OPERATOR INSTRUCTIONS) We will take our first question from Patrick Schaffer from Chartwell. Please go ahead.

Good afternoon, how are you?

Good, thank you.

The 26% EPP growth you gave, was that all organic or were there acquisitions embedded in that growth?

Both. It was primarily--

Most of it was primarily organic. Very, very minimal amount of acquisitions, we added a small portfolio in the third quarter.

Okay. So I can say that the growth rate is certainly north of 20% at least?

Very easily, yes.

Okay, and the branded Visa/MasterCard business that you discussed. That will be made against future EPP revenues, correct?

No.

Okay. I'm sorry, I misheard you then.

Yes, I think what you might have been referring to is the white label program, that's on the card issuance side.

But can you explain that then?

Yes, basically, we have entered into a transaction with a major money center bank to issue a Newtek Visa/MasterCard.

Right, yes, Newtek branded Visa/MasterCard business. Right, and those will be made against future EPP revenues, is that correct?

That's in the lending segment.

Okay, so that will not impact EPP margins then?

No.

No. Okay, and then one other question, I'm not sure if you addressed this or not. You maintained your SBA lending guidance for the fourth quarter, correct?

Yes.

What gives you confidence despite the myths we saw in this quarter that that business is going to rebound?

Well, because what we've done over the last two years is sort of the antithesis of what everybody else did in the lending market, and what I mean by that is, they really chased bad deals and they chased bad credit, and we feel that we're very well-positioned with a clean balance sheet and clean credits and the volumes are starting to come to us, so a., in addition to being able to do more loans, because it's a government market versus a conventional market, because we've got a menu of six or seven different loan products for a customer instead of just one, because a lot of our competitors are pulling out of this business while we're now repositioning in it, we're pretty bulled up about.

And we also are going to look at going after distressed portfolios, we have got the inhouse talent and the capability to do that. I've got two senior managers in my lending business that have 36 years worth of combined experience. I've got two gentlemen that run my liquidations area, that probably have got combined experience of 35 years in the business, so--this is a lender's dream to have a clean balance sheet unlevered with capital available to make new loans in this market at the right price.

Your net income and EBITDA was relatively in line with your guidance, but the revenue was a little light, what caused the revenue to be light, but the rest of it to be in line?

You're looking at--across all the business service segments?

No, I'm sorry, I'm just looking at the SBA lending line. The SBA lending line looks like you missed your--the low end of that revenue guidance by a few hundred thousand dollars.

I think that was predicated on probably two items.

Yes.

Number one, volumes were lighter than we had previously forecast, which as we went through the year, didn't bother us. Two, slight change in price in the capital markets for the government guaranteed piece for gain on sale. Slight change in price for the uninsured loan participations as well. So I think those are the two primary factors, the primary revenue decline was based upon gain on sale.

Okay. Thanks a lot, guys.

Thank you.

Bye-bye.

We'll take our next question from Stephen Silk with C. Silk and Sons. Please go ahead.

Good afternoon. Can you tell me what the cashflow from operations was?

Yes, I can look it up.

We have it handy, Steve, if you have questions?

Okay. I'll move on and wait for that.

I had been to the conference the last couple weeks and on smart cards or tap cards, I think New York City card has them and they're available to tap into the New York subway system. I'm wondering, along these conferences they're talking about going more toward a cashless society especially for smaller type transactions, are you guys working anything in the electronic payment area for ease of use, point of sale type of opportunities to increase the merchant's revenue from credit cards, or cash cards?

I think, Steve, what you've identified is an excellent opportunity for Newtek in that as you have an emerging market or a new technology, number one, it gives you the ability to take on new customers, number two, you have got some existing clients, for example, that want the new technology, the new POS or the new type of mobile unit. Being on top of that, having the newest technology on the front end a., helps us acquire new customers as they are willing to take electronic payments versus cash or checks or other types of currency, b., for existing clients, they currently have their business elsewhere, it has--gives us the ability to cannibalize them.

Now, frankly, we've got the same issue with protecting our own customer base, which we think is why our cross sell strategy is extremely important to us, because going forward, our ability to contact our customers on a quarterly basis to see a., how they're doing with current EPP product and service, and then let them know of other things we have, will enable us to reduce attrition, offer them new technologies, very, very important aspect of the business, so emerging technologies is extremely important to us, and we have the right people in place to be able to diagnose that and stay on top of it.

Okay, great. Moving over to the lending side, kind of what you're explaining to me is, it reminds me of the end of the moving Trading Places, where everybody was panicing out and they were saying, wait wait wait, and then they said, bring it on. When do you think it's time to turn on the spigot of initiating new loans, is now the right time or does there have to be somewhat of a continued shakeout in the overall market before you're saying, okay, bring it on.

Now is the right time in terms of getting out in the market and letting people know that we've got multiple programs, multiple products., I'm not going to tell you that our closed rate percentage is going to go higher, as a matter of fact, initially it may go lower. You're going to wind up getting a lot of customers coming to you that have liquidity needs that, frankly are bad credits.

So, the good news is, because we screen out these opportunities using technology oriented pre-qual's and business service specialists that are far different than the types of costs you have at a commercial bank, we're able to really survive and thrive with a much lower close percentage than our competitors. So the time is now to get out in the market, get a brand name and a reputation, that we have got a full suite--a full menu of products. At the end of the day, this is not the kind of a market that--you don't want to do 50% new start-up businesses today.

What you want to try to do is the businesses that have been around for 5, 10, 15 years, where all of a sudden due to credit tightening, their prior lenders don't want to do the business anymore, or all of a sudden somebody's out of SBA lending, because they got involved in the frenzy and made some bad loans. So we're pretty excited.

Now, this is the time to go out there now and say, we're here, we're in the market, really increase the amount of referrals, although I did do think initially we'll probably have lower percentages on our closed rates. The key issue is there's a major shock value on collateral, whether it's commercial collateral, residence collateral, so we're going to underwrite our collateral on a real basis. We're also going to underwrite the business in sales growth not on inflated '04, '05, '06 type numbers, we're going to take a pretty heavy pen to it and make good loans. So it's a really good opportunity to lend now.

So your loan rate could stay the same as a percentage, but are you seeing more--can you quantify how many more loans that you're seeing now than you had in the past? So if it's exponential or doubled then you would be doing twice as many loans even though the rate would stay the same.

Well obviously, you have to realize one thing, in lending you do have a bit of a lag time, so we're starting to see, frankly, we started to see a very nice pickup in the pre-quals. In the third quarter, we looked at 62 million of pre-quals, in the second quarter it was 50 million, in the third--in the fourth quarter we're projecting 77 million. So the pre-quals are at the earliest stage. We're having months where we're putting more loans into underwriting than we ever have. So I think this is starting to build, we have our fingers crossed, we're optimistic that this will continue. As I mentioned, there's a fairly significant lender in the market that's pulled their horns back in small business lending in SBA government lending entirely, so we're pretty optimistic about our position in the market.

The amount of SBA loans on your balance sheet from the beginning of the year until now is within a million dollars, it hasn't moved. Now, you--are you still selling off the 75% guaranty at the rate you want, or is since your--the default rate is as low as it is, do you have the mentality to take a little bit more risk on and make the spread instead of just passing it along?

I guess we like diversification, so in the SBA world, 75% of the loan is guaranteed, you sell it and then you're left with 25%. If you said to me, would I rather have a million dollars of four loans which are $250,000 each or would I rather have 10 loans of $100,000 each, I'd take the 10 at 100 just from the standpoint of diversification. So we use selling , as a risk reduction tool. We'd rather have more units and more borrowers and more credits on our books, so right now we're just want to continue our sale program and sell down as much as we can in the SBA portfolio as possible.

Okay. Jumping over to the North Fork line, is that an area that is really fragmented in that there are small opportunities where, perhaps with the business environment that other companies aren't well capitalized? Are they--is there an area for you to cherry pick new customers, are existing companies coming to you? Are you making it known that you're looking for acquisitions, how's that working out?

I think that we're starting to see--we saw a deal last week in the web hosting space, we're starting to see smaller portfolios. A., in a tougher environment, smaller players may have a difficult time competing or existing. Capital obviously has all--the cost of capital all of a sudden went significantly higher for most players that's good for us, that reduces the prices that these assets and business issues trade at. So we just want to be well-positioned if certain acquisitions and opportunities come along with EPP portfolios, web hosting portfolios, or if we could add insurance, health and benefits opportunities, we'll look at that.

Okay. Now, I know you detailed pretty much the--your thoughts about the cross selling, so that takes away my quarterly question, but with the new opportunities that you've laid out here, it seems like some of these cross selling--or your offerings are melding closer to each other. I mean, the whole group of what you're offering is not necessarily so diverse, but you're getting into areas that are really becoming complimentary.

We couldn't agree with you more, I mean, yes, there's cross selling, but also for a business owner that's doing business on the internet, and that's a major percentage of the market today, has a website, website's being hosted, payments being taken, there's PCI compliance issues. That customer, in addition to having the best price going, also wants to know who they're doing business with.

Is it a public company, is it in a SAS70 compliant web hosting organization, is the facility military strength proofed, can you provide me with an indemnification or some form of a guaranty or assurance that in the event business is interrupted, or my data gets stolen that I'll get X or Y. People are not asking that question in the market today, they will be asking that question. It's an important question.

You can't have your website and your data sitting in some IT professional's closet somewhere. That doesn't work any more, there's too much liability. So our goal will be to make sure business owners understand the liability, respect the liability and know that we care about that liability for them and offer them real solutions with security associated with them.

Okay, and I'll just wrap it up with this one last question, Barry.

When do you think we would start seeing some results from the new lending initiatives that you rolled out?

I'm hopeful that our fourth quarter obviously will be in line and that we'll--I think you'll start to see it fourth quarter, first quarter, second quarter, I'm optimistic, based upon the pipeline that I see that we'll start to see this building immediately. I know I've just put myself on record, hopefully I won't have to take my foot out of my mouth, but at the end of the day, we should start to see the fruits of our labor and of our patience immediately, there's no reason why it shouldn't start happening.

I just wanted to clarify, I'm talking about on slide 14 where you were talking about the branded MasterCard or Visa, the line of credit, the receivable financing, those are the areas that I was talking about.

Those products will not be major financial contributors to us, because we don't take risk in them. We lay the financing off, with our bank partners, but what it does do, is it attracts small businesses to us, because a small business owner comes to you, 9 out of 10, 19 out of 20, maybe 98 out of 100, they don't know what kind of a loan they need, they have no idea, they just know they need to borrow money. Our business service specialist will sit with them and figure, do they need a $50,000 MasterCard, do they need a $100,000 unsecured line of credit, are they better off factoring or financing receivables that they have, should they look at a term, million dollar SBA loan. Should they look to buy a building, for example, depreciate it for 3 to $4 million and go into a 504 loan?

But the loans that we're not taking any risk on and putting on our books, the ones I mentioned will not be a major financial contributor. Major financial contributors will be conventional commercial, SBA7A, hopefully receivables financing, merchant cash advance, even though we're laying it off, we think that could be a decent financial contributor as well.

That covers it, right?

So on some of those, it would be more like origination fees that you would be receiving?

Yes, but it really--to be honest with you, those businesses are so competitive.

Yes.

It's just not significant. I will add, that I am hopeful that we begin to acquire stressed portfolios next year. That's going to be a while until you get a financial impact, but having the inhouse capability to buy stuff and turn it around and clean it up--I mean, I've seen, I'm not saying this is an FDI/ICR/TC return to the late '80s, early '90s, but you could see some pretty good opportunities and our lender has been around for five years in January, we've got a seasoned management team, we've got great professionals, a lot of good capability and now we're going to put that to the test, and bring in some primarily debt-based capital in the lender to take advantage of a lot of loans that have to get reworked and repositioned.

Okay. Thanks, I'll get back in the queue.

Thank you. (OPERATOR INSTRUCTIONS)

We will take our next question from Yvonne Rivera with UBS. Please go ahead.

Hi, I just have one question.

It's whether the tumult at financial services firm such as Merrill Lynch, Smith Barney is having an adverse effect on the formation of alliances with Newtek?

Well, it's an interesting question. Obviously, some of the brokerage firms clearly have announced significant write-offs or losses. Fortunately, those losses aren't in the retail divisions, they're in the institutional divisions, where these institutions that really use their balance sheet more like a bank.

We're hopeful that in some of the--I'll use an old expression, the bigger wire houses, the Merrill Lynch's of the world or a Morgan Stanley where they have significant retail distribution, there's a refocused effort on the broker, on the financial advisor, to distribute products to their customers more on an agency type basis, and that does play into our hands, less of an emphasis on principle risk taking.

So we're hopeful that some of the current events will focus more on retail-based distribution, which--our product set fits into it very nicely. That's a broker going out to their client offer a business service or a financial product to a small and medium sized business owner.

Thank you.

Thank you.

(OPERATOR INSTRUCTIONS)

We will take our next question from [Novid Basulli] with LD Micro.

Good afternoon, guys, I have two questions for you today.

First off, with over $40 million in cash at this point. I was curious to see what you guys are planning on doing with all of that cash, I wanted to see if a buy back is a possibility or if you guys had something else in mind?

What I could say on the buyback is somewhat limited to what's in the public--in the public domain at this point. We have authorization to buy back, I believe, up to a 1 million shares, I believe we put in this Q the amount of shares that we bought back against the buyback, which I'm going to refer you to the Q, it's not a big number, we intend on being opportunistic with that. Historically we've made extremely good use of our cash capital plowing it back and investing it into businesses, and I do think as the stock moves around here, we strongly will consider buy back and take advantage of it.

Great, and my second question is, a lot of people are talking about the economy slowing down in the United States, and you mentioned that Newtek adds about 2,500 new clients each quarter. I want to see, are you seeing any slow down in the number of new accounts coming in. and are you concerned about this moving forward?

If you had asked me that question two or three weeks ago, I would have said absolutely not. I will tell you that, frankly we've had a little bit of a slowdown in referrals in the last three weeks, and I can't tell you whether that's a pattern or not, but I think from our perspective, particularly as a growth business, we're very in tuned to what's coming in the front door and our ability to process it.

So if all of a sudden we see that referrals are slowing down a little bit on the front end, it's very easy for us to pick that up by signing up new financial institutions, it's a web page, and we're always--it's kind of like playing singles--it's kind of like playing tennis, and you're running on both sides of the net. So, yes, I--if you had asked me to answer that question based upon three weeks worth of data, I would say a little bit of a slow down.

I will tell you in other areas of our business, I don't want to cross the line here, we're not seeing that, we're actually seeing some pretty good volumes, but in terms of new customers knocking on the door, a little bit of a slow down the last three weeks. I would--I would say that doesn't fully surprise me, but I'll tell you, I'm extremely confident on our ability to grab market share and put on new business. So if that trend continues, we'll just tweak the marketing effort a little bit, and I'm pretty confident we'll be able to get right back up and exceed the level that we're coming in.

Great. Thank you very much.

Thank you.

At this time there are no further questions. Mr. Sloane, I will turn the conference back over to you for closing comments.

Great. Well, I wanted to thank everyone for participating today. I appreciate you staying late, I appreciate the questions, and we look forward to reporting our annual results in the next several months going forward, and wanted to thank Seth Cohen for doing a great job on his first call today and for speaking loudly.

Thank you.

Take care, everybody. Thanks very much.

Ladies and gentlemen, this will conclude today's conference call. We thank you for your participation and you may disconnect at this time.