NewtekOne Inc (NEWT) 2009 Q3 法說會逐字稿

Good day and welcome to the Newtek Business Services third quarter 2009 earnings conference call. (Operator Instructions) At this time, I would like to turn the conference over to Mr. Barry Sloane. Please go ahead, sir.

Thank you very much. Welcome to our third quarter 2009 shareholder conference call that will be hosted by myself, Barry Sloane, CEO and Chairman of the Board and Seth Cohen, our Chief Financial Officer. I would like to draw everyone's attention if they want to follow the presentation along on the Internet they can go to our website, NewtekBusinessServices.com. Go to the Investor Relations section where they can follow the PowerPoint presentation or if they decide to listen to it by the Internet versus the phone they can do that as well.

I would now like to turn the presentation over to Seth Cohen to read the Safe Harbor Statement.

Thanks Barry. Statements in the slide presentation, including statements regarding anticipated future financial performance, Newtek's beliefs, expectations, intentions, or strategies for the future, maybe forward-looking statements under the Private Securities Litigation Reform Act of 1995. All forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from the plans, intentions and expectations reflected in or suggested by the forward-looking statements.

Such risks and uncertainties include, among others, intensified competition, operating problems and their impact on revenues and profit margins, anticipated future business strategies and financial performance, anticipated future number of customers, business prospects, legislative developments and similar matters. Risk factors, cautionary statements and other conditions, which could cause Newtek's actual results to differ from management's current expectations are contained in Newtek's filings with the Securities and Exchange Commission and available through www.SEC.gov.

Also, we need to point out that our (inaudible) operate under a different set of rules in each of the 8 jurisdictions and that these place varying requirements on the structure of our investments. In some cases, particularly in Louisiana or in certain situations in New York, we don't control the equity or management to the qualified business, but that cannot always be presented orally or in written presentations.

Thank you Seth. I would like to turn every's attention to Page 3 of the PowerPoint and we will start with the third quarter 2009 highlights. As we announced a little while ago, we had $782,000 post tax net income for the quarter. We had improved our 2009 annual guidance, which was originally set with boundaries of $7.4 million to $5.2 million loss and we have revised that to $5.1 million to $4.7 million loss. The difference is about $2.4 million. So, given our third quarter and fourth -- our third quarter results and our fourth quarter results, we have made a rosier picture of about $2.4 million.

We also made an announcement of 2010 annual guidance with boundaries of a $2.4 million loss to a $2.3 million pretax gain. We will discuss the variables that will affect our performance in 2009.

We are happy to announce that in the Wisconsin and Louisiana CapCo's, [Aslick], our credit enhancer, made payments on those two notes, retiring those two notes in the month of October. With respect to Wisconsin, in addition to retiring the note was (inaudible) statutory provision, so there was constant CapCo, has gone away in it's entirety. That's not the case in Louisiana, which is still outstanding.

Our primary revenue trends in the Electronic Payment Processing business and Web Hosting business continued as we exceeded 2008 comparisons. With respect to our GE amendment, as GE is our lead lender on our SBA business, we have out until the end of February, I believe it's February 28, 2010, to produce a commitment letter for GE. We have a signed letter of intent with a top 20 US commercial bank to take out GE and that is due diligence is proceeding and we are optimistic that we will get a commitment and take GE out with a new lending facility.

Third quarter 2009 highlights further the SBA lending business dynamics have improved significantly. We believe this is where we are getting the biggest change and turn around in our overall consolidated guidance. The Government-guaranteed portion of SBA loans that are created when we do an SBA loan today, has 110 pricing. Very, very strong. We think the dynamics of that pricing will continue for the foreseeable future.

Our portfolio has behaved very, very well, despite the weaker economic conditions. As we mentioned in previous quarters, we began originations and we anticipate that we will close approximately $10 million or more SBA 7A loans in the fourth quarter.

The securitization market begun to thaw, as even private label securitizations are now beginning to trade with buyers stepping up to the plate. That may in fact, be helpful if we take our existing loans on our portfolio and are successful getting a rating from Standard & Poor's. We are already into the rating agencies to try to get a AAA rating on our existing uninsured loan portfolio.

We have also had some success with new Alliance partners queueing up. That's extremely important as Alliance partners, based upon economic conditions do get stronger and weaker, particularly with the historic legacy of our Alliance partners being concentrated in the financial services sector.

We do think this is the beginning of a reversal in the fortunes of our lender. We anticipate growing -- servicing our Asset Management business with increased servicing. We recently announced in an 8K that we have signed a contract with the FDIC, so some of our guidance in 2010 includes increase in servicing for others. We do anticipate a 110 price for the Government portion of SBA loans to continue, particularly given that these loans are full-faith and credit US Government-guaranteed floaters without a cap.

With respect to the 90% guarantee, when we create an SBA loan, historically there has been a 75% guarantee. Over the course of the last year based upon the Obama and Congress' Stimulus Plan, a 90% guarantee was put in place. That guarantee at 90% is based upon an allocation that is legislated in by Congress and signed by the President. We have not been told that this guarantee appears to be running out imminently. Our loan port -- our loan opportunities for the fourth quarter already have guarantee numbers from the SBA. And our guidance going forward in 2010 assumes a 90% guarantee at the high end of the range and assumes virtually no originations on the low end of the range.

We do believe that there are favorable characteristics in SBA lending, particularly with respect to what's going on in Washington. Obama recently announced an indication to increase the minimum loan, I should say the maximum loan for SBA 7A lending from $2 million to $5 million. So, we do think the Administration and Congress are very in favor and supportive of the SBA. We have had no further information regarding the 90% guarantee versus the 75% guarantee.

We are excited about repositioning the lender with respect to financing. As we indicated earlier, we have signed an LOI which would take out GE. We are also looking at over the course of the next several years, potentially taking the lender and merging it into a bank, but that's quite preliminary at this point in time.

Looking at what we want to focus on with respect to this conference call, we will review our primary corporate initiatives and strategy, financial results snapshot, developments in Electronic Payment Processing and Web Hosting segments, Web Hosting EPP and eCommerce initiatives, small business finance initiatives, further discuss the emphasis on cost reduction and expense reduction, we will talk about our marketing focus, go over a financial review of the Company, as well as a 2009 and 2010 outlook.

With respect to the third quarter, if you take a look at the 2010 projections that we given today and you took the midpoint, which is a flat net income number, looking at the fact that we typically have approximately $5 million of depreciation and amortization, one can see that we are generating positive cash flow from operations. I will -- I want to make everybody aware of the fact that we do use that cash currently for our lending operations, will make cash flow when you look at our cash flow statements and our K's and Q's more a little bit more difficult to follow because the lending operation actually does use cash when it makes a loan.

With that said, if you look at 2009 and you take a look at the midpoint of the guidance that we have just given at about $4.7 million, we had $5.9 million of anticipated depreciation and amortization this year and we have added $1.7 million to our loan loss reserve. Over the course of the year, you can see we have also been successful in generating cash to the balance sheet in 2009.

The lender projections for the fourth quarter, as I mentioned, 110 pricing is important, 90% guarantee is baked. The originations obviously, we need to do about $10 million to hit our numbers. And where we have been losing about $800,000 a year at $10 million, the lender which it includes our Receivables Finance business would project to lose about $200,000 to $250,000.

We are happy to say we recently repaid our CapCo debt, the FDIC contract is an important and material contract for Newtek and is now included as part of our income generation in 2010. We are going to talk about the key variables for success in Payment Processing, Web Hosting, as well as cash flow and expense control.

When we look at our mission statement, we are approaching small or medium-sized business customers in the United States, which there are approximately 27 million of them, according to an SBA definition. Why should clients do business with Newtek? The reason is to reduce their expenses, to grow their revenues and reduce their risk.

Newtek positioning itself as a brand to become the authority for small business. We have 7 core offerings with the primary offerings being Lending, Electronic Payment Processing, Insurance and Hosting Applications. Secondarily, Web Design Development, Data Storage and Payroll are on the list as well.

We aim to cross-sell and cross-market the database. That is extremely important because as we go into existing database, we don't have to have a variety of revenue shares or commission payouts and structures. That's our highest margin business. We want small and medium-sized businesses to come to us and recognize us as the authority because we know small business.

Consumers go to Wal-Mart because they know they can buy virtually anything and everything and Wal-Mart is basically selling other people's merchandise. People go to Amazon.com on the Internet also to buy other people's merchandise.

We are interested in small and medium-sized businesses coming to Newtek, as the business authority and we are in the process of further positioning and branding Newtek..

When we look at the small business market, we talk about an SBA definition of businesses under $25 million in sales and under 500 employees. We are primarily going after independent business owners. That marketplace is very wide. It could represent a single practitioner working out of their home as a consultant, it could be a 75-site set of parking garages with different locations, it could be a Doctor group that has 25 or 30 Doctors in the group with over 100 or 200 employees, or it could be a restaurant or a restaurant chain.

What does Newtek do well? We do very well at acquiring small and medium-sized business clients cost affectively without having to use significant amounts of bricks and mortar or a significant sales force or paying third party commissions to brokers, BDO's or insurance agents.

We do a great job servicing our clients. We have an excellent reputation in handling the complex issues that are related to the Electronic Payment Processing Space and the Hosting Space. We have begun to cross sell and cross-market our database exceptionally well and over the course of 2010, we will deliver to the marketplace metrics that actually demonstrate that. Once again our goal is to be the small business authority.

In the future we may look to expand our web presence, take advantage of the fact that small and medium-sized businesses tend to use the Internet more and more and drive customers to our website by in addition to offering products and services, offering timely market pieces relating to what small businesses may need to do in things outside of our service offering, whether it's IT issues, tax issues, might be healthcare issues and potentially offer other people's products and services. Things like Kinkos, Dell Computers or things of that nature. Once again, the goal of Newtek is to become the small business authority.

Looking at our third quarter financial results, we are happy to say that we have reported a profit for the third quarter. I did want to point out that some of this is due to the release of an income tax valuation allowance and some accounting changes that Seth will go into more deeply when he does MDA. This was significant improvement over a $2.8 million net loss for Q3 2008.

In Q3 2009, we had a pretax loss of $1.1 million, we had depreciation and amortization in that particular quarter of $1.3 million. When we look at our third quarter financial results, we are happy to say that our Electronic Payment Processing Division had a 13% increase over 2008 Q3 of $18.1 million of revenues. Web Hosting, a smaller increase of up 3% over Q3 2008 and Small Business Finance still down over Q3 by 10%.

Our cash positions were still pretty strong. $24.1 million versus $24.2 million of the year prior. Approximately $2 million at the end of the quarter, I believe, was invested in SBA loans that were on our books that were sold, but yet unfunded. This equates to about $0.67 in cash per share.

If you look at our cash flow statements in our upcoming queue, you can see that we had significant improvements on our cash flows. $5.6 million of net cash provided from operations versus $9.9 million in the year prior and $1.2 million in net cash and cash equivalence for the first nine months of 2009 versus $7.5 million net cash declining cash and equivalence for the same period in 2008.

In look at the EPP segment, revenues as we said, were up 13%, margins were down from 10.5% in the year prior to 8.3%. We are pretty adamant that margin compression will reverse itself in 2010. We have had very modest merchant attrition. This is a cash flow positive business with significant operating leverage.

We are forecasting EBITDA in this business segment as no debt of $6 million to $6.1 million for the year 2009 and we are still focused that eCommerce is a single most corporate initiative that we have within our purview.

Looking at the Web Hosting initiatives, revenue is up 3%, pretax net income up 14%. The Hosting Space, as well as the EPP Space, with the economic headwinds quite challenging. We do have excess capacity in Hosting. We still are only utilizing about 60% of the real estate in our datacenter.

We are forecasting $6.7 million to $6.8 million of EBITDA from 2009 and we are very focused on IT partners and web developers using our Tech Exec Program, which will enable Tech Execs and professionals in this space to drive customers to us and gain revenue shares off of Electronic Payment Processing and other business services that they provide to their customer.

In the Hosting and EPP segment, we are very focused on being a one-stop shop by offering clients a Newtek Gateway, a Newtek Hosting Plan, Newtek Merchant Processing and a Newtek Shopping Cart. Everything you need can be obtained by booking and binding with us with one professional and from a customer service standpoint, going to one professional after the fact.

We are about to roll out two interesting products called NewtPay and NewtPay Pro. These are going to be very aggressive alternatives to PayPal. I will repeat, NewtPay and NewtPay Pro will be very aggressive alternatives to PayPal. This is a product that we may actually advertise on TV and radio and really throw a lot of weight behind this. We are very excited about offering a competitive solution to small businesses that do business on the Internet and sign up for PayPal because of the ease, but are unhappy with the high cost of PayPal, as well as how easy it is to sign up for PayPal.

We think we will have a very competitive advantage to that and we look forward to quite a bit of success. We think this will be particularly attractive to web developers and designers that have historically complained about PayPal, but have not had a strategic alternative.

Looking at the SBA Lending Space, the important positive trends, 90% guarantee, reduced competition, most of our competitors -- the two biggest lenders, nonbank lenders in the SBA Space -- CIT, obviously we are aware they are in bankruptcy, Business Loan Express owned by Allied, they were in bankruptcy, they have just come out of bankruptcy and have been bought by a company called Aries.

Conventional loan market, as we are totally aware by our Treasury Secretary, Tim Geithner, who is constantly criticizing the banks for not making small business loans -- banks are just not out there doing anything with respect to small business lending in any significant manner. The type of quality that we are seeing from the marketplace, very, very high at better prices. Slide 17 shows the dynamics and the profitability of making a loan at 110. We have shown this previously at 106 and 107.

On Page 18, we are positioned to buy sub and non (inaudible) portfolios. We believe this activity this activity is going to pick up significantly in 2010 as the FDIC gets it's needed funding from Congress. That is speculation on my part. At this point in time, there are not of assets that are coming out of the FDIC. We believe that will start to occur in 2010, but that is anticipated from our perspective and not guaranteed.

We are looking to grow our Servicing and Sub-Servicing portfolios and we have put some of that in our guidance. We have a very attractive lending infrastructure. We have been in the Origination, Underwriting, Servicing and Collection business. In January, it will be 7 years. We have great technology, as we said before, the Lending business is the most decimated sector and may offer the best opportunity for Newtek shareholders. A swing this year from minus two to up two, is primarily one of the areas that is significantly driving our guidance.

Moving on to Slide 20, we continue to focus on cost reduction and expenses. There are some significant bullet points in this particular arena. Cost reductions, equating to a minimum of $4 million of cash savings in 2009. We think we will continue to have cost reductions in 2010 at the overhead, but at a much lower rate. We have reduced our facilities cost by getting rid of our lease in Great River Long Island and in Florida. We have targeted DC and our New York City location as next targets. Our guidance does not reflect those lease reductions.

In the past we have talked about payroll, we have been very aggressive in getting ahead of the curve in reducing headcount and payroll expense. These payroll reductions on a year-over-year basis will start to decline as the full reductions have begun to take affect in Q1 2008 and Q1-- and Q2 2008. So, as you start to look at these comparisons, they will begin to shrink as a percentage because some of these reductions have already taken place last year.

In focusing on Brownsville, we opened up our new Brownsville facility March 15, 2009. We are excited about it, we are getting some very good traction on our outbound effort in Brownsville. Our Insurance Agency has also beefed up it's activity down there. We are starting to get good traction in our outbound calling initiatives to our existing and our strategic Alliance partner client base.

Our growth strategy going forward is to emphasize cross-selling and cross-marketing into the existing customer base, as well as start to develop and adopt a direct approach to the smaller and medium-sized business market. We look at what Newtek has built in our various divisions of Lending, Payment Processing, Hosting and Insurance -- we have a tremendous opportunity to take advantage of the infrastructure that exists and layer on new business.

We spent a lot of time developing our strategic Alliance channel. We want to continue to do that. We are going to aggressively continue to pursue Credit Unions under our (inaudible) agreement and other relationships. However, we are interested in growing penetration into our customer base of 100,000 -- in excess of 100,000 business accounts, as well as a direct program to reach other small and medium-sized businesses. We believe that the operating leverage that we will get out of our business will significantly improve cash flow.

We are excited about the Company's reduction of our CapCo exposure. With the recent payments that have been made in Louisiana and Wisconsin, AIG has made all the principle payments that they have been contractually required to make, so that reduces our AIG risk exposure with respect to our policies, which we are happy to report and we believe that we will be out of certification with a few other CapCo's in the future. We will report that as that continues to occur.

We will begin to look at, strategically, acquisitions within the footprint and utilize our balance sheet, our lack of leverage and strategic partner financings to help us grow our EPP and Hosting segment in 2010.

We also will be making an announcement shortly. We have contractually hired the Rubinsteins Firm for Public Relations. They have represented us in the past and in Investor Relations. We want to take advantage of the fact that we are one of the few lenders making loans to small business in the marketplace, particularly SBA loans and we want to sharpen our message to the small business community that we are the small business authority on -- we are the small business authority on all small business issues.

As we said before, in 2009, we retired a $37.4 million note to Wilshire Partners in Florida. We anticipate the certification of Wilshire Partners in 2010. With that, we had a return of $250,000 dollars of premium by successfully not causing any losses to AIG on that Wilshire Florida partners credit enhancement. We anticipate similar returns of insurance premiums of approximately $250,000 based upon the retirement of the policy in Wisconsin and Louisiana. We did consummate the sale of our broker dealer, our NASD broker dealer in August of 2000. That will reduce expenses by about $50,000 annually.

In talking about marketing, we did chat a little bit about our focus in expanding to direct and cross-selling and cross-marketing into our database, as well as supplementing and growing our strategic Alliance partners. When we talked about our messaging, the fact that we increased sales, reduced expenses and reduced risk is our mantra to small businesses.

When we engage in speaking to customers on customer service calls, we talk about increasing sales. How do we do that? We do that through providing them more money if they need it, we do that through Search Engine optimization. We plan on white labeling an SEO product in the very near future and we also can do that by providing businesses that do not have an eCommerce solution.

You would be surprised to know how many of our customers do not have an eCommerce solution. By giving that eCommerce solution, which would be a sale relative to putting up the website, hosting the website, providing them a Gateway, selling them a (inaudible) certificate, as well as possible Search Engine optimization.

Regarding reducing a business's expense, we can do that through their payment processing costs, through their payroll cost, or reducing premiums that they pay at all forms of business insurance, general liability, workman's comp, health insurance. We can reduce their hosting cost and their storage costs.

With respect to reducing the risk of the overall business, by fully doing an analysis on what type of insurance coverage they have, as well as to make sure that their data is stored properly off site, as well as making sure they are in PCI compliance in the event that they are taking payments on the net.

Slide 29 shows a graphic description of how we help our businesses. This particular slide is fitted with our customer service reps to show our clients out when they are in discussion with them and solve a problem, how they could actually help grow their business in one or three or more of these areas.

We had success in advertising on WFAM, which is a number one morning drive show from 6:00 am to 10:00 pm, the Boomer and Carton Show. For those of you who haven't listened to the ad, it's terrific. We are excited about it. We have changed the website to www.luvnewt.com. So, we are trying to drive our customers to luvnewt. We love Newt, we think our customers love Newt, we think you should too.

Looking at our revised 2009 segment guidance, we talked about the major changes, particularly with respect to our overall reduction and the loss that we expect for the year. With a range on a consolidated basis of a $5.1 million loss versus a $4.7 million loss. If you take a look at the trend analysis on Slide 32, in 2007 we had a $17.1 million loss, our midpoint this year for 2009 would be $4.9 million, next year for the midpoint of the range down to 0.

We are happy about the progress that we have made. We are moving in the right direction. I will point out that given the significant amount of depreciation and amortization that we have, we believe that in 2010, we should generate, putting aside using the cash for loans, approximately $5 million to $6 million in operating cash flow.

I would now like to turn the remaining part of the presentation over to Seth Cohen, who will focus on our financial results for the quarter.

Thank you, Barry. I will now review our third quarter results. For the quarter ended September 30, 2009, we recorded a loss before benefit for income taxes of $1.1 million, as compared with a loss before benefit for income taxes of $2.8 million one year ago. We had net income of $782,000 or $0.02 per share in 2009 compared to a net loss of $2.7 million or $0.08 per share in 2008.

The reduction in net loss benefited from improvements in operations, as well as the attribution of losses to noncontrolling interests under new accounting rules, which became effective in 2009. In addition, based on current and future estimates, the Company reported an additional tax benefit from an early release of a portion of it's tax evaluation allowance. The effect of all these pieces was to take our $1.1 million pretax loss and turn it into a $782,000 of net income for the quarter.

Revenue increased by $2.6 million or 10.6% to $26.8 million, compared to prior year. This is primarily attributable to the growth in our Electronic Payment Processing and Web Hosting segments.

Please turn to Slide 36. We began the year with $16.9 million of unrestricted cash and cash equivalence and ended September 30, 2009 with $15.6 million, a decrease of $1.3 million. In the 9 months ended September 30, 2009, we used the $5.6 million of net cash provided by operating activities and $2.5 million of net cash provided by investing activities to reduce notes payable $9.2 million. Principally consisting of our lenders line of credit from GE. That is from $26 million to $16.8 million.

I would now like to review the performance by segment. If you could turn your attention to Slide 37 in the PowerPoint presentation, you will see the comparison of our third quarter 2009 results versus the third quarter of 2008. The Electronic Payment Processing segment revenue increased by $2.1 million or 13% in the third quarter of 2009 to $18.1 million, predominantly due to organic revenue growth from a combination of growth in our merchant accounts and increase in process volume per merchant.

Income before taxes remained virtually flat at $1.1 million for the third quarter of 2009 to that of 2008. This is principally due to the lower margin of revenues less Electronic Payment Processing costs. The additional revenue was offset by greater processing costs, including increased third party residual payments. This was partially offset in turn by an overall reduction in cost other than Electronic Payment Processing costs, primarily depreciation and amortization between years.

The Web Hosting segment revenue increased by $156,000 or 3% in the third quarter of 2009 to $4.7 million from $4.6 million in 2008. The increase is due to a combination of improved revenue received per website and organic growth of virtual dedicated websites. Hosted, dedicated and shared websites decreased period-over-period.

Income before benefit for taxes increased 14% or $129,000 to $1 million from third quarter of 2009 and $900,000 in 2008. The improvement in profitability primarily resulted from the decrease in depreciation and amortization. Increase in other expenses offset the gain in revenue quarter-over-quarter.

Small Business Finance segment revenue for the third quarter of 2009 decreased by $169,000 or 10% to $1.5 million due primarily to a decrease of $293,000 in interest income, reflecting a decline in the prime rate upon which our loans interest rates are based, as well as the size for performing loan portfolio between periods, offset by premium earned from sale of a guaranteed portion of one new loan originated in the quarter.

Loss before benefit for taxes decreased 49% or $738,000 to a loss of $756,000 for the third quarter of 2009. $907,000 in quarter-over-quarter expense reductions, including a $236,000 decrease in salaries and benefits and $319,000 decrease in Other, General and Administrative costs primarily contributed to the improvement.

For 2009, a pretax loss in the CapCo segment decreased to $873,000 or 43% compared to $1.5 million in 2008. The reduction loss primarily reflects reduced management fees improved period-over-period.

For 2009, the All Other segment improved $304,000 to a pretax loss of $271,000, as compared to a pretax loss of $575,000 in 2008. The reduction in loss primarily reflects reduction in salaries and benefits expense of $200,000 period-over-period, as well as a reduction in professional fees. In 2009, Corporate Activities, which generates revenue primarily from management fees from the CapCo segment, recorded revenue of $712,000 or a 39% decrease from $1.2 million one year ago. This decrease is primarily due to the reduced management fees.

Management fees are expected to continue to decline in the future as CapCo's mature and utilize their cash. Our efforts to reduce cost resulted in a $366,000 decrease in total expenses, as compared to 2008. Corporate salaries and benefits decreased $318,000, however as a result of the decrease in management fees, the Corporate segment increased it's pretax loss to $1.3 million compared to a loss of $1.2 million in 2008.

I would now like to discuss our revised guidance for 2009, which you will find on Slide 39. We now expect consolidated revenues of $103.5 million to $104.1 million versus the original guidance of $95.3 million to $101.2 million. We now expect a pretax loss of $5.1 million to $4.7 million versus $7.4 million to $5.2 million.

We provided a new guidance (inaudible) for each segment with each segment, except Web Hosting showing improvement over what had been originally forecast. In particular, the Small Business Finance segment will benefit from originating SBA loans in the fourth quarter, which our original guidance had not assumed.

Finally, Slide 40 reflects our newly issued guidance for 2010. Based on current operating performance and business initiatives, anticipated cost cutting and expected marketing and sales plans to be launched in 2010, we are forecasting consolidated revenues of $110.2 million to $115.8 million and a range of consolidated pretax net income from potential loss of $2.4 million to potential income of $2.3 million.

Forecast performance in the core Electronic Payment Processing, Web Hosting and Small Business Finance segments substantially drive the consolidated pretax net income improvement over forecasted 2009. Large range in forecasted pretax and income reflects in part, impact of the Small Business Finance segment, which is forecasted to provide pretax income of between $1 million to $3 million. That range in turn, portrays uncertainty regarding timing and potential benefit of future Servicing revenues.

I would now like to turn it back to Barry.

Thank you, Seth. Operator we would like to open up the call to Q & A.

Thank you, sir. (Operator Instructions) We will go first to Stephen Silk with C. Silk and Sons.

Good afternoon, Barry and Seth, congratulations.

Thank you.

All over the map with a bunch of questions. Thank you very much for the dividend. I guess that's going to give you a little more flexibility than using cash to buy back shares. Would there be a tie in to free cash flow or earnings that would be able to sustain the dividend on a quarterly basis?

Steve, I think the issue with respect to dividend was the Board took a look at cash position, clearly understood the patience of investors, looked at the cash on the balance sheet and felt it was appropriate to reward our investors. As we go forward, and we are looking at our cash needs, plus our ability to generate cash, the Board will on a quarterly basis evaluate that as an alternative. As well as stock buy back, as well as utilizing the cash to perspectively invest in it's own business to determine what makes the most sense.

The best think we could derive from this is that the issuance of a dividend, which is the first time the Company has done this in it's history, demonstrates the Board's comfort with our balance sheet and the fact that we look -- we are looking very optimistic about the Company's ability to have cash on it's balance sheet, as well as generate cash.

I can't believe I'm saying this, but at this point I don't think a buy back of shares would be proper for a few reasons. Number one, you don't really have a huge institutional ownership and that's been the case I think because of the difficulty of understanding the balance sheet and just the difficulty of the times, but I think things are turning enough and I was also wondering when do you go to the street to tell your story again?

Just to add to that, the reduction in the CapCo, I didn't know if it had to go really to 0 for you to go and have the ease of explaining your balance sheet, but I think the trend of that reducing, is there a level where you could say it's not so much on your balance sheet that we have to spend so much time explaining it?

Yes, let me see if I can answer that because -- it was a bit of a jumbled question. I think that -- one thing I will say is that as we sit here today versus a year ago, management feels that they will get more of a return on it's investment by having those conversations because I think we are able to more clearly depict what we are doing in these different business segments. I think we are in exciting business segments. The fact that we are recognized by entities like the FDIC in terms of servicing agreements. I think it will be easier for us -- for investors to begin to pay attention. We are still looking at $53 million of credits in lieu of cash and a receivable of $53 million in notes payable in credits in lieu of cash that offset each other. Not necessarily on a 100% match, but it's still there. So, I think that with respect to looking at CapCo, I think we minimized it as best as we can and as prudently as we can, but it's still there.

Let me ask you abut the new PayPal or what were you going to call it? Sorry about that.

NewtPay, NewtPay Pro.

Have you done research as far as your existing customer base, not necessarily in the cross-selling, but presenting it to all of your customers and what kind of feed back and can you talk about how it works as far as -- is the customer who uses it and how it would be on your balance sheet as far as what it takes up?

It's proprietary at this point in time. We haven't done the release. What I can tell you, from a price standpoint, very competitive. From a utilization standpoint, very competitive. From the standpoint of distributing the cash back to customers, very competitive. So, we think we actually have a product that is extremely important and competitive.

Now the product is most competitive at the merchant level, at the customer level. It's not a product that you go out to the consumer with that might have a PayPal account to switch to a NewtPay account, but merchants, particularly merchants that are smaller, that are taking payments on the Internet and are using PayPal, find it extremely effortless to switch over the us. Find that they're immediately saving money and that it was going to resonate with them.

But, wouldn't the customer have to open a new -- Newtek Pay account.

It could be done in a very short period of time.

Okay.

Very effortless. The key to PayPal, is it is effortless and very cost affective. The key to NewtPay is it is equally as effortless and far more cost effective.

The FDA servicing of the leans, it would seem to me that you have all of the facilities in place and it would be a very high margin product for you because you really don't have to expend that much energy and no cost of acquisition.

No comment on the FDIC contract. That is confidential and we are not going to give transparency on that. But, what I will tell you is that the Servicing business and the Servicing Loan business, which we have really excelled in over the course of 7 years, which is why we believe we got the FDIC contract, also under the approval and auspices of the SBA, was beneficial because we are very good at it and the leverage that you get in the Servicing business is significant.

So, this is another case of us able to leverage our infrastructure and not have to put out huge dollars to be able to grow this business. So, as loans are coming out of banks, the FDIC, as investors need servicing partners with a quality capability to service and collect, we believe this is a very attractive opportunity for us. We will speak about the sector more or less in aggregate as Servicing Small Business Loans.

One quick question. In the press release you had said one of a group of companies that the FDIC has used. Is there a lot of competition within that or it is -- I'm wrong and there is more of a open field for you to run with?

I can't comment on the Government's contracts, but what I will tell you is with respect to SBA loan servicing with a national footprint -- if you look at nonbank lenders that had the national footprint, CIT, Business Loan Express and many others, they are not involved.

I will leave it open to somebody else and Barry and Seth, I wish you the best of luck going forward.

Thank you Steve.

(Operator Instructions) We will go next to Mark Silk with C. Silk and Sons.

Hi Barry and Seth. A quick question on the FDIC. Did you guys approach them or they found you guys?

We answered an RFP.

Okay and then my last question, it's a quick one. Do you have a limit of what interest you can charge in these small business loans?

Under SBA 7A Program, it's Prime plus 2 3/4.

Okay. Well, great quarter and continued progress going forward, guys.

Thank you, Mark.

And there appear to be no further questions at this time. I would like to turn the call back over to Mr. Barry Sloane for additional or closing remarks.

Okay. Well, thank you all for participating in the call.

We had a lot of participation today and look forward to further executing on the plan and having a good fourth quarter and finishing up 2009 very strong. Thank you, all, very much.

Thank you.

That does conclude today's conference. We thank you for your participation.