NewtekOne Inc (NEWT) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Newtek Business Services Inc. first quarter 2010 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. (Operator instructions). As reminder, this program is being recorded. I would now like to introduce your host for today's program, Mr. Barry Sloane, President and CEO of Newtek Business Services, Inc. Please go ahead, sir.

Good afternoon and welcome to our first quarter 2010 financial results conference call. Joining me on the call today will be Seth Cohen, our Chief Financial Officer, who I will ask to read the Safe Harbor statement.

The statements in this slide presentation, including statements regarding anticipated future financial performance, Newtek's beliefs, expectations, intentions or strategies for the future may be 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, offering problems and their impact on revenues and profit margins, anticipated future business strategies and financial performance, anticipated future number of customers, business product specs, legislative developments and similar matters. Risk factors, cautionary statements and other conditions which could cause Newteks' 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 Capcos operate under a different set of rules in each of the eight 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 of a qualified business, but that cannot always be presented orally or in written presentation.

I'd like to suggest to everybody that if you're just been following along to the presentation you can go to our website, go to the investor relations section of NewtekBusinessServices.com and in the IR section you can see a Power Point presentation that will also be archived along with the recorded audio presentation.

I'd like to now turn your attention to page 3 of the presentation, first quarter 2010 highlights. I'd first like to say that, given the good performance that we had in the first quarter, we'll be maintaining our previously given guidance on the more recent call, which is a breakeven profit picture for the entire year. In announcing Q1 2010 revenue of $25.9 million, that was a 7.5% increase in growth versus Q1 2009 revenues. We also announced Q1 2010 pre-tax net loss of $874,000. That was a $1.2 million improvement over the year over Q1 2009 pre-tax net loss. Also announcing a Q1 2010 post-tax net loss of $467,000. That was a $509,000 improvement versus Q1 2009.

Our primary Q1 2010 revenue trends in the EPP and Hosting segment exceeded Q1 2009 comparisons with an increase of 15% growth. For EPP and Hosting combined, Q1 2010 over Q1 2009. In addition, in the first quarter we recently announced that we consummated our transaction with $14.6 million five-year term loan financed with Capital One Bank, which replaced our GE loan, which was due to mature on May 30, 2010.

Our SBA lending business continues to be very strong. The pricing prospects for the government guaranteed piece remain between 108 and 110 type pricing. Our legacy portfolio has performed very well, very stable. Our loan loss reserves are more than adequate and have held up exceptionally well. As we previously announced in the fourth quarter of last year and the third quarter of last year, we have begun originations. We originated $11.6 million in loans in Q4 of 2009 and $12.3 million in Q1 2010. Our pipeline looks terrific for the second quarter of 2010, and we hope to be able to increase our originations over the prior quarter sequentially.

The securitization market seems to be functioning, [A], away from what we do here at Newtek. The CMBS market seems to be coming back where rated private-label securitizations are starting to hit the market. We believe and have been working on for a while securitizing the uninsured participations that we have, and we are optimistic that that market will begin to open up for us as well. We will also be announcing, probably in the third and fourth quarter, some new major alliance partners queuing up for both lending and other Newtek-based products.

We have previously asked, is this the beginning of a reversal on lending? We feel pretty confident that from our perspective, given the performance that we've seen in the fourth quarter of last year, first quarter of this year is clearly a reversal in lending trends, and we have forecasted a $1 million to $3 million profit for the year.

Looking at a recent announcement of our asset management business and the hiring of Dave Leone, as we have spoken in previous calls, the opportunity to acquire portfolios, we think, is a significant opportunity. We've hired Dave Leone with tremendous background and experience in acquiring commercial small business loan portfolios from an asset management perspective and we believe this will significantly add to the servicing income that we are able to put on our books at the lender.

The 90% guarantee, which is an important function to our P&L and business objectives for the SBA, looks pretty good for the foreseeable future. We currently have until the end of May on the 90% guarantee. As we've discussed previously, the 90% guarantee legislation exists in a Senate bill and in the House bill that's part of the Jobs Bill. And as we are all aware, Washington is having its own issues with respect to gridlock. But it is clear that the administration and Congress are very positive on small business, very positive on the SBA government-guaranteed 7(a) program. So we are pretty optimistic that that 90% guarantee will continue to last, and we have that 90% guarantee included in our guidance all the way through the end of this year.

As always, we continue to try to improve our positions in the market. We'll constantly continue to explore lending financing alternatives and better our position in those conversations. We'll always continue, even with our current lender, that being Capital One.

The SBA has a 504 program. I think this is important to know, that the 504 program historically had been a conventional commercial real estate loan program, although you can't do it on machinery and equipment. The focus of this company will primarily be for commercial real estate back loan opportunities where it's a 50% LTV on a commercial first. The new SBA 504 program actually allows you to securitize the senior portion of that loan with an 85% government guaranteed. So we should be able to get the same benefits that we've had from a business model perspective in the 7(a) area, doing a 504 loan and creating a securitized first piece which gets sold into a government guaranteed bid with the types of premiums that we've seen on the 7(a) market. The difference between this market and the 7(a) market is the 7(a) market leaves you with an uninsured piece that is nonsubordinated, as losses occur pro rata. This particular new SBA program leaves you with a subordinate class. But mind you, it's a subordinated 15% interest on a 50% commercial real estate loan valuation. We are optimistic about this program and we believe we will be able to participate in it in the near future.

As we look through the agenda for this particular call, we'll talk about our initiatives and strategy, we'll talk a little bit more about the financial results, developments in the EPP and Hosting segments, developments in the small business finance segments, continue to focus on our markets and where we are going to approach the markets. And Seth will give a full MD&A and financial review as well as a 2010 outlook.

The projections for 2010 that we've discussed before are cash flow positive. When you take a look at what we are projecting, which is a breakeven GAAP net income for the year and depreciation and amortization approximating about $5 million, you can clearly see that we believe we should be should generate cash flow from operations. As we break down the segments, projections for EBITDA, across EPP, $5.6 million to $6.5 million; Hosting, $6.2 million to $7.2 million; small business finance, $2.8 million to $4.8 million.

As we have mentioned previously, we are under contract with the FDIC. And as the FDI continues to work in its markets and close down financial institutions, our relationship with them on one of our contracts is to perform servicing and asset management functions, particularly for all government guaranteed loans. That particular contract is moving in the right traction and performing well for us.

As we look at the EPP, electronic payment processing space, clearly we are in a changing business market. A lot of things are occurring in the electronic payment processing space. There's clearly a move towards taking payments for mobile units and more of a move towards payments in the eCommerce segment versus the old bricks and mortar business. There's also been some very large transactions that have occurred in the market. CyberSource was acquired by Visa. A company called FIS right now is being bid for by Blackstone. It's a very big bid, $10 billion to $11 billion bid. And Silver Lake Partners made a significant investment in a company called Mercury. The valuations on these businesses are pretty steep, and that's based on the outlook for the payment processing business continuing to be very strong.

The Web Hosting business has proven to be quite challenging with the changing business environment and entities like Facebook out there providing hosting services for small businesses and other social marketing type services, really focusing on that lower end of the market. We've always had lower end of the market competitors being willing to offer free hosting type services, and the fact of the matter is, in the hosting business, you do get what you pay for. But the low end of the market has become extremely competitive. Where we are well-positioned is our hosting company has always been very, very good in the area of customer service. We have a reputation for that, and we plan on focusing on driving our clients upscale and maintaining our focus on hosting, particularly within e-commerce spend.

In order to be successful and drive a good bottom line, cash flow and expense control is key. Our managers are constantly focusing on our investments; that's our investment per employee and what their output should be, our investment in our real estate and leasing positions, which we're constantly looking to downsize and get more efficient, as well as our investment in our marketing and advertising outbound budget, which is a new program for us this year.

As we look at our strategy and mission, our primary product offering and value proposition for our customers is to grow their revenues, reduce their expenses and reduce their risk. And our personnel and our processing professionals, both from a book them and bind them standpoint and in the customer service area, are working very hard at making this proposition to our customers, convincing our clients that we are the authority for the small business market and, in addition to that, showing our seven core product offerings. The cross-selling and cross marketing initiative is working very well, as we are seeing growth across all segments. And positioning Newtek as the small business authority, we think, is a winning strategy. And we are going to discuss our small business authority positioning a little bit more at our next quarter call. I think you'll see some new changes with respect to the Company as we really push that small business authority brand into the marketplace and drive small business customers to our Internet portal.

Looking a little bit further at the first quarter 2010 financial results which we discussed, we really had a very good quarter in comparison of 2010 Q1 versus 2009 Q1. And once again, the depreciation and amortization non-cash expense of $1.3 million matches up very well between our pre-tax and post-tax losses.

Breaking down into the segments, our electronic payment processing business grew revenues at 19% year-over-year, a very strong quarter. For the EPP segment I believe part of that is based upon our rollout of NewtPay and some other initiatives. Our Web Hosting segment was only up 2% in the revenue column. On the net income column our EPP segment was up about 13% and our Hosting segment up about 2%.

Our cash position if you include the valuable broker receivable, broker receivable is basically what we call the sale of our government guaranteed piece to the third-party broker dealer, which typically gets liquid in about 10 days. If you include that broker receivable, we have maintained some significant cash balances of about $0.74 a share, which, if you compare it to our approximate $1.50 stock price, you can see that we do have an interesting valuation when you look at the rest of the Company versus another $0.75 a share.

Switching to page 11, developments in EPP, we talked about the good numbers that came in both for revenue and pre-tax net income. We love the EPP business. We love the marketplace. We talked about the great leverage that's available to us. We talked about the fact that our EPP segment doesn't have any debt and some recent transactions in this space, the CyberSource deal acquired by Visa, the FIS deal by Blackstone and the Mercury deal, which had a significant infusion from Silver Lake were at really significant valuations for entities that are able to demonstrate a technological advantage, which we think we have in the market. Obviously, we don't have the size that these entities do in the marketplace, but we do think that, based upon our business model, we have a technological advantage. We also think we have an advantage, given the way we are the host as well as the processor for e-commerce solutions. We think that we are building tremendous value in the Newtek franchise in this particular arena.

Looking at the Hosting space, we've talked about our challenges here. It's been a difficult business in the quarter. We have not experienced the type of growth that we've experienced historically. I think that we've had a challenge trying to maintain some of those lower-cost websites as the competition heats up. We are moving upstream and upscale with our customers. We've got the capability to do it. We've got a tremendous back office and service capability, and we think that some of our initiatives such as our Open New Business Account strategy, will pay off dividends where we are working with financial institutions to open up new business accounts, offering them a free website and providing hosting and payment processing solutions.

Moving over to slide number 14, we talked about the SBA lender. The dynamics looked pretty good, very good positive trends for SBA lending. And we are anticipating a $1 million to $3 million pre-tax gain from that particular segment. We do anticipate further bidding on sub-performing and non-performing loan portfolios. We have a terrific lending infrastructure, both on the origination, underwriting, funding, servicing and collections side. This infrastructure appears to be quite valuable. Matter of fact, we saw a deal in the market recently where Capital Source, which owns a very large thrift on the West Coast, acquired Main Street Lenders. Obviously, with the trend towards government being more involved in financing, with Washington being a significant backer of the SBA business, the SBA lending franchise, in addition to throwing off attractive cash flows with respect to our future expectations, now looks to be quite a valuable asset. We have also recently concluded a situation with Standard & Poor's, and we now actually do have a Standard & Poor's rating as a commercial servicer for SBA loans, which should help us on securitizations. We're looking to currently broaden that status with Standard & Poor's, which should help us with other endeavors as well.

Our growth strategy going forward is to continue to emphasize cross-selling and cross-marketing into our customer base, which brings in 100% gross margin to us. We have been successful with our outbound campaign strategy, focusing on the small business market, particularly with our radio ads on WFAN. We believe the strategy will improve our cash flow, and we look forward to further success on our cross-marketing and cross-selling strategy, particularly direct into the small and medium-sized business market.

One of the marketing messages that we believe makes us unique is the message that we deliver to our customer base of increasing sales, reducing expenses and reducing risk under the moniker of The Small Business Authority. As those conversations continue to move down the road with our customers, we are able to demonstrate that through a variety of our different services and products we can actually help them achieve these goals and objectives. And in the current market environment where businesses are really fighting for bottom-line P&L and risk reduction, we think this message is working. This clearly gives us a competitive advantage as we have seven to eight arrows in our quiver, where our typical competitors really are just positioned more as sales on to self-processing into a customer or to sell a hosting product or to sell data storage or payroll.

As we have announced previously, Newtek University will be launched within the four walls of Newtek. We did anticipate a launch in the second quarter of this year. That will be pushed back one quarter. That launch probably will begin on June 1 and will carry through six months of the year. We are very excited about Newtek University. We think educating our personal on all of our products and cross-marketing and cross-selling techniques will clearly improve our ability to increase numbers of referrals as well as increase our close rate.

We currently talk to thousands of small and medium-size business clients every day that are calling in for customer service issues. In most cases we satisfy those customers and do a great job in servicing our clients, which is why we have such low retention rates. And our ability to satisfy the customer and then discuss our other product offerings is very, very high.

Moving forward, the role of Newtek marketing strategy, I think, will primarily be focused on Newtek as The Small Business Authority. When we look at our mission statement, to be known as the business services provider to independent business owners across the globe, we really want to position ourselves as an authority to small business. We will continue to work the markets, deliver value-added information and content. Some of that information and content may be in the area of health, which is really important to small business today -- health insurance, I should say, as well as tax planning and tax preparation. We want businesses to come to us not only because they're necessarily looking to buy a product and service but for information. We need to have a full, rounded out portal where businesses can come to us and get knowledge and information about all the important issues that small businesses face today.

As we said earlier, our 2010 segment guidance -- we are maintaining it. We anticipate generating between $110 million to $115 million of revenues. We anticipate the midpoint of our pre-tax net income coming in at about breakeven, and we do anticipate generating positive cash flow from those financial results. If you take a look at slide 44, the annual pre-tax loss trend is pretty steep. Obviously, going from 2007 to 2010, we are very excited about the improvement that we've had and are working very hard to be able to generate positive earnings in the very near future.

With that, I'd like to turn the financial presentation over to Seth Cohen.

I will now review our first quarter 2010 results. For the quarter ended March 31, 2010, we recorded pre-tax loss of $874,000 as compared to the pre-tax loss of $2.1 million one year ago. We had a net loss of $467,000 or $0.01 per share in 2010, compared to a net loss of $976,000 or $0.03 per share in 2009. The revenue increased by $1.8 million or 7% to $25.9 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 48. We began the year with $12.6 million of unrestricted cash and cash equivalents and ended March 31, 2010 with $9.1 million, an increase of $3.5 million. Decreasing cash primarily reflects the volume of SBA guaranteed portions originated and traded near quarter and (inaudible) their settlements coming after quarter end which resulted in a $2.8 million increase in our broker receivable to $9.3 million. Broker receivable converted to cash in early April.

I would like to briefly talk about the effects a new accounting pronouncement had on our first quarter results and will continue to have on our results going forward. Please turn to slides 49 and 50. FAS 166, re-codified as ASC Topic 860, which became effective for us on January 1, requires certain sales of financial assets to be treated as financings. For our lender, the limited primarily 90 day warranty contained in the SBA sales documents requires us to return loan sale premium under certain conditions. Presence of this warranty and its recourse results in our secondary market sales of guaranteed portions being accounted for as financings until the warranty period ends.

Slide 49 sets out the assumptions we will utilize in the examples shown on slide 50. Please note we have simplified the accounting to show the basic changes. The table at the top of slide 50 shows our accounting previous to the new pronouncements. We sold the guaranteed portions originated, reported in our financials as SBA loans held for sale, received cash and booked premium income for the difference between the asset we sold and the cash we received.

The table at the bottom of slide 50 shows the accounting after ASC Topic 860 became effective. The sale of the SBA loans held for sale is accounted for as a financing. Cash received is now matched with a new liability termed liability for SBA loans transferred subject to recourse, secured by a new asset, SBA loans transferred subject to recourse. That is, the SBA loans held for sale, now shown as retained on our financial statements. At this point no premium income is recognized because there is no sale for accounting purposes.

As a second step, we fair value the liability based on our 3% historical likelihood of repaying the premium. As a result of the reduction in the value of the liability, we show a gain. Once the warranty period ends, the asset is considered sold, the liability is extinguished, the gain on the liability becomes a loss through a reversal and the premium income is recorded. This example shows the effects of a single sale. While the end result is the same, the intermediate treatment of the components is different, and there is timing difference in that premium income that previously would have been recognized in the first quarter will now most likely be recognized in the second or third quarters.

However, during this quarter the income statement benefited from the fair valuing of the new liability. As we continue to originate new guaranteed portions and sell them, the balances for the new asset and liability will continue to appear in our financial statements, increasing and decreasing with loan origination activity.

ASC 860 also impacts the appearance of our cash flow by temporarily showing proceeds from the secondary market sales as financing activity as opposed to an operating activity. Had the current quarter been reported on a pre-ASC 860 basis, the $2.7 million shown as proceeds from the establishment of the new liability in our statement of financing activity would have reduced our cash used in operating activities to $1.7 million from the $4.4 million we reported on a post-ASC 860 basis.

I would now like to review the performance by segment. If you would turn your attention to slide 51 in the Power Point presentation, you will see the comparison of our first quarter 2010 results versus the first quarter of 2009. Electronic Payment Processing segment revenue increased by $3 million or 19% in the first three months of 2010 to $18.8 million, predominantly due to organic revenue growth from the combination of growth in our merchant accounts and an increase in process volume per merchant. Pre-tax income increased 13% to $1.1 million for the first quarter of 2010 compared to $963,000 for the first quarter of 2009. Although the amount of revenues with Electronic Payment Processing costs or margin as a percent of sales declined quarter over quarter, our margin increased in dollar terms. This, coupled with an overall reduction in cost other than electronic and the payment processing cost between years improved pre-tax income.

Web hosting segment revenue increased by $115,000 or 2% in the first quarter of 2010 to $4.8 million from $4.7 million in 2009. The increase is due to a combination of improved revenue received per plant and organic growth of virtual instances, [mostly] dedicated servers and shared website decreased period over period.

Pre-tax income increased 2% or $16,000 to $932,000 for the first quarter 2010 from $916,000 in 2009. The improvement in profitability primarily resulted from the decrease in depreciation and amortization. Increases in other expenses offset the gain in revenues. Small Business Finance segment revenue for the first quarter of 2010 decreased by $521,000 from 2009, from 28% to $1.3 million, due primarily to a $446,000 decrease in premium earned from the sale of guaranteed portions, because the Company did not recognize premium income due to the requirements of ASC 860, as we have previously discussed.

Pre-tax loss decreased 81% to $483,000 to a loss of $110,000 for the first quarter of 2010. The segment benefited from the recognition of a $979,000 gain with a fair valuation of the new liability, liability for SBA loans transferred subject to recourse.

For 2010 the pre-tax loss in the Capco segment decreased to $901,000 or 18% compared to $1.1 million in 2009. The reduction in loss primarily reflects reduced management fee expense year-over-year. For 2010 the all other segment improved $56,000 to a pre-tax loss of $348,000 as compared to a pre-tax loss of $404,000 in 2009. The reduction in loss primarily reflects a reduction in salaries and benefits expense of $89,000 year-over-year as well as a $30,000 reduction in professional fees and other general and administrative costs.

In the first quarter of 2010 corporate activities, which generates revenue primarily from management fees from the Capco segment, reported revenue of $708,000, an 18% decrease from $860,000 one year ago. The decrease is primarily due to reduced management fees. Management fees are expected to continue to decline in the future as Capcos mature and utilize their cash.

Our efforts to reduce cost resulted in a $478,000 decrease in total expenses compared to 2009. As a result, the Corporate segment decreased its pre-tax loss to $1.5 million compared to a loss of $1.9 million in 2009.

Finally, slide 51 reflects that we -- 52, I apologize -- reflects that we are reaffirming our previously issued guidance for 2010.

I would now like to turn it back to Barry.

Operator, I'd like to open up the call for questions.

(Operator instructions). Marc Silk, Silk & Sons.

Hi, guys, another solid quarter and lots of information there. So let me see here. It seems to me that what's affecting your stock is the Capco. So can you break down how many basically you have left and how many are going to transpire over the next three years?

Marc, I guess that the issue of mitigating the effects of Capco on our income and balance sheet -- I think that over the next two or three years the big asset that you see, if you take a look at, moving a moment to our balance sheet, on the balance sheet you are looking at (inaudible) tax credit, $46.8 million credit in lieu of cash, $46.8 million notes payable on credits in lieu of cash -- they match. Basically, that asset is going to wind down over the next one, two and three years with probably the biggest chunk in the next two years. So I think, at this point in time, from a financial reporting perspective, those are the key assets there. In terms of actually expending some time, effort and some cash from a regulatory perspective, we expect that wind-down also to be over the next two or three years.

I can't really quantify it, but that number was almost double two years ago. So it is coming down quite nicely. It does not have any significant effect, and I'll leave it from that word, on the income statement at this point because it's pretty close to matching based on our use of fair market value accounting.

But obviously, when you look at that number, it's a pretty big number and it does bloat the balance sheet a little bit and gives us an appearance of being more levered than we actually are.

Exactly, and it's getting clearer as the years have gone on. In the last conference call your quote was, we believe the economy in the future -- not in the near future but in the future we'll have a tendency to rebound. And you also said in the same conference call, 2010 is going to be our year. And then you obviously followed up with your guidance being pretty optimistic.

So why can you say that when, obviously, I know we are going to have issues going -- we're going to probably have some headwinds going forward in the economy, once the stimulus is pulled?

Well, we like the comment on the position of 2010 being our year because we are optimistic of our business model and our plan. And that's really on a comparative basis from a performance standpoint, picking up market share and being in the right places. At the end of the day you could have -- and it's not the case, but you can have GDP in a decline but Newtek continues to grow and do well and is growing revenues and growing income, in the case where we've got extremely competitive products, new product offerings in the right space.

So we're very optimistic with respect to 2010 and beyond. And I guess I should clarify, we're not overly optimistic on the economy. We don't believe -- now, by the way, if I'm wrong and the economy goes gangbusters, we'll do much, much better. But we're optimistic and believe to 2010 is our year based upon our strategy, positioning ourselves as the small business authority with a major focus on eCommerce and having the right business in place, like Hosting and Payment Processing, by being a player in the SBA lending space. Well, clearly that's a great market to be in and in vogue.

So that's really where we are optimistic about things. We are not very rosy about the economic outlook, although clearly, if there is a left in the market off of, I guess, the first quarter of 2009 was one of the worst GDP quarters, I think, in 50 years. So we are clearly off that bottom, but we're not too optimistic on the economy at this point.

Well, you never said optimistic regarding the economy, so you didn't throw it out there. Let's talk about NewtPay. Can you go over some of maybe your marketing strategies? Because I think that something that could be a wildcard for you guys.

It's been a very good product for us. We were recently at the TA Conference out in Las Vegas and had a lot of conversation on NewtPay with intermediaries that are dealing with businesses, particularly in the e-commerce space, as well as our customers that we are offering NewtPay to -- to us. Obviously, it's a fairly new product in its new rollout, and I think we will probably publish some NewtPay statistics. But it's going very, very well. It's a very, very attractive, competitive product to PayPal. And my goal and objective is to get more marketing dollars and a bigger marketing push on NewtPay so that it's real meaningful. That is clearly a goal. So I guess one of these benefits of these calls -- I get to deliver messages to my staff. That's clearly one of them. NewtPay is a winner. It works. Our customers like it; when it's offered, they take it.

And then I've got a comment. It sounds like the loan origination was left for dead, and then it's had two impressive quarters. So that's fantastic. Can you kind of go over some of the loans that you are making just because people are getting worried going forward? But is there more collateral that needs to be put up for the people who are loaning? And I know you are probably flipping these, anyway, so as soon as possible, for the benefit, so you get the risk out of your way.

Well, I think I'll start off with the ending position, which is that, given a 90% guarantee, and let's take a midpoint of a 9-point premium on the 9% piece, you're left on a $1 million loan owning a $100,000 loan just on a cash basis, not on an accounting basis at $0.10 on the dollar plus a servicing strip of 100 basis points.

So, because of the math, you are able to really remove a lot of the risk that the uninsured piece is not subordinated. Putting that aside, the environment is very good for lending. Now let me coach that, if I can. Really, where you want to lend into the market is, you're interested in lending to small businesses that have got five or 10 years worth of operating history, real good operators with a management team and the ownership of the small business has got good character in the way of high credit scores, where there's good cash flow in the business and you've got good collateral. Those are your five C's of credit.

And those loans in other environments typically go to small community banks or commercial banks, and they are done at very aggressive rates. They are done for the deposits. So today we are able to put those loans when they fit into our SBA box and we are able to do increasing volumes with really tremendous credit attractiveness to it. And that's why we like the lending space right now with our loan products and we feel pretty good about it. We are lending to credit, so we wouldn't normally see in a market where the banks had balance sheet -- and I don't think the banks are going to have balance sheet for several years.

David Adler, Paragon Capital.

Hey, guys, good quarter. I'm new to this story. One question I had -- it seemed like on page 51, when you talk about corporate activities showing a pre-tax loss of $1.5 million -- does that include anything associated with the Capcos, or is that true non-Capco, non-EPP, etc., corporate activities?

That's pretty much -- the only part from the Capco is the management fees, which then wind up getting knocked out in the intercompany eliminations. So the (inaudible) is set. The corporate activities revenue line includes the management fees, then subtract the expenses and you get to the pre-tax net income number. The actual non-cash Capco operations and other Capco cash runs through the Capco segment.

I'm not sure I understood that completely. But if I look on the far-right column or the penultimate column, the $1.44 million negative EBITDA for corporate activities, does any of that relate to supporting the Capcos, or not?

Yes, it relates to supporting the Capcos. Part of the expense is related to the management of the Capcos.

There's accounting expense, there's legal expense.

There's the investments, there's actually (multiple speakers) management time. There's a good amount of activity.

And would you guess that it represents half of it, most of it, a small chunk, just size wise?

Probably about 20% or so.

Size-wise, that's helpful. The other question I had was, in terms of electronic payment processing, give me a sense of why revenues jumped 19%. And I would've thought that in that business there was benefits of scale, and yet you had more revenue -- EBITDA dollars, but the margin went, based on my math, from 9% to 8%. I'm just trying understand -- is that just because there's a lot of churn in the underlying base there? Why would you be taking -- if the bulk of your customers have longer-term relationships, why would the margin be going down unless you're bringing on less profitable business or breakeven business?

It's a very hard number to follow quarter by quarter sequentially. I am hopeful that you will see I guess I would call margin expansion next quarter. Some of that gets affected by constantly seasonal issues between debit card and credit card. Some of those issues can be affected by Visa pass-through rates. We are actually going through a repricing, I think, beginning April 1 that should bring some margin back to us.

I will tell you the overriding issue right now relates to competitive pressures in the payment processing space. It's an extremely competitive market. We've got a lot of repricing going on with our customers. New business that's getting put on the books which might come in at big volumes is getting put on at smaller margins. So there's a lot of different factors that are going on right now with respect to the payment processing business and the payment processing industry. Mind you, it's real mature. We talked about a lot of dollars going into this business. So the ultimate valuations of these businesses, even in kind of a lousy market for valuations, are continuing to press higher. But I will tell you that if there was one factor that I would say is causing that, it's probably margin compression related, although I think you'll see some of that come back in the next quarter.

And your gross revenue line, you include the gross. You don't net out to get net of the interchange fee; correct?

That's correct.

That's correct.

And, have you ever considered reporting the net revenues as opposed to showing the gross revenues?

No.

Last question for me-- on the Web Hosting side, I was also surprised, I saw revenues pop a little bit, 2.5%, and yet the margins dropped from 37% to 30%. Can you give some background as to what's happening there? Are these new clients coming on that are less profitable or, again, is there repricing in that space as well?

I think the biggest issue in the Hosting space for the first quarter really relates to the attrition, particularly at the lower end of the market. We've also gone through some expense adjustments which will show up in the second quarter. So I think that I feel pretty good right now about the market moving forward with respect to EPP. In the hosting space I think we've got some challenges from a market standpoint, and I think some of our initiatives are spot on. But it may take us several quarters to get through that before we start to reverse that trend.

(Operator instructions) [Charles Shark], Private Investor.

I think there were a couple of bills that you mentioned moving through Congress that might help expedite the loan application process. Do you know if and when, any feel for when those bills might become law?

Those bills are tied to the Jobs Bill, the Obama Jobs Creation Bill, which has been sitting in Congress now for three, four, five months. And as you are aware, their priorities change pretty quickly, from health to immigration to financial regulation. So that one's impossible to tell at this point, although what they have been doing -- and have done it, I think, three or four times -- is, rather than pass the Jobs Bill, they'll just pass a two-month extension. And those two-month extensions keep happening like clockwork, and there really is not a lot of opposition to the SBA lending, which historically has been a program that has been profitable for the US Treasury and has returned money to the US Treasury, unlike the FHA or unlike Fannie or Freddie or HUD.

Paul Solit, Potomac Capital Management.

Your recent release on the hiring of David Leone to build the finance asset management business -- you talked about going from, I guess, towards $750 million to $1 billion. Could you talk a little bit about what gets you there? Is that lending plus portfolio purchases plus FDIC?

Currently, P.J., our servicing portfolio is slightly in excess of $250 million in servicing. When we hired Dave -- and I'm not saying Dave will be -- the growth of that portfolio will be the direct result of Dave's efforts. But, by bringing Dave on and focusing on asset management, Dave is going to be speaking to -- we have a fairly significant pipeline of investors that have indicated an interest in investing in the asset class of SBA loans as well as small business commercial. Dave is going to be maintaining those relationships, given his capital markets background and knowledge of where assets like this trade and can be securitized.

So we will have an asset management function to joint venture with hedge funds and other funders that want to take a position in loans that are coming out of banks or prospectively coming out of the FDIC. So I think, between our contract with the FDIC, working with banks that have loans for sale, working with banks that are doing assisted deals that don't have the infrastructure to do 7(a) or 504-type servicing, which goes along with many of these banks that they are acquiring, we think we'll have an excellent opportunity to grow that servicing portfolio. And this is where the infrastructure that we have been involved with over the course of several years is hopefully going to pay dividends because you have to have that license to be able to do SBA loans. And our license is one that gives us a national pedigree, which even the big banks only want to do things in their footprint. And frankly, the big banks -- this is a space that's tremendously significant to us and it's totally insignificant to the big banks.

And the non-bank lenders -- I would say they are virtually nonexistent today. So we are one of the few non-bank lenders that actually have a footprint, that's in the market, and is looking to aggressively expand this piece of our business.

Are you guys still the only licensed SBA servicer (multiple speakers) for FDIC?

Yes, for the servicing and asset management function, that is correct.

Okay, and are you seeing growth there, or it's too early yet?

We are definitely in the market and we are taking on assets as we speak and have been doing so throughout the entire first quarter.

Could you put a time frame on the target of $750 million to $1 billion? Is that within a few years?

I think you're using the $750 million to $1 billion on the upper end of the band?

Yes.

Yes, I think that can be achieved within 24 to 36 months.

And the economics on that is the same, 1%?

Our standard servicing fee for an SBA loan is 100 basis points.

All right, it's a great opportunity, thanks.

[Haron Ellish], UBS.

Barry, I was interested in the discussion about the 504 commercial property loans and I guess the question I have is, it sounds to me like you're structuring the loans so that the investors have to put up quite a significant amount of equity. Did I hear that accurately?

On a 504 loan?

Yes.

Seth, maybe you could help me with -- the 504 program, which is historically a --

We would do, the 504 program, you issue a first mortgage. And then, on top of that, you then also issue basically a second mortgage on top of it, which then the SBA buys or you do on their behalf. It's only temporary, then they buy it, and then they basically securitize it themselves.

So when you're all done with the 504 program, you wind up owning these first mortgages with an LTV of 50%. The new 504 program that's coming into effect is that they are creating a secondary market for those first first mortgages and that they are going to be, then, purchased in a similar fashion to the way our guaranteed pieces are done now, and they will expedite a market to get that going, the idea being that the SBA wants to get more cash flowing into the 504 market, and that's something that we can get involved in.

But the borrower --

-- and how much does that person have to put down for the property?

Put down for the property?

In other words, are they putting 20% down or --

Yes. Basically, it's 90 -- it would be 10%. When they are all done, they get to finance 90% of the property value.

So it's still a 90% -- I guess I didn't say that correctly. It's still a 90% advance, but the 50% commercial loan, conventional commercial loan, is now -- you are able to securitized it.

So I did misunderstand, then. I'm glad I clarified it just because it didn't sound as potentially influential a program, given what I took to be sort of a higher level of equity participation. Thank you.

Yes, the borrower still gets 90. Our risk is a 50% loan, of which it gets securitized. And then you've got a subordinated class of 15% that we wind up holding. But it's 15% on the 50%.

Marc Silk, Silk & Sons.

I guess I just wanted to talk about the FDIC situation. I'm guessing that there will be a conflict of interest, it's that you find attractive loans for your own business when you are doing that process. So can you relay the ways that Newtek can make money? I don't need to know any numbers or anything because I'm sure it's too early, but I just want to see the opportunities there for you guys.

We couldn't -- We were under our contract performing a function for the FDIC, we couldn't be a bidder, but some other party could be a bidder, bid the loans and then name us as a servicer for them. But that's where -- the conflict lies, in the case that you can't be an agent for the FDIC and a bidder at the same time. So as long as those functions are separate, it's not a problem.

Okay, so it's an additional opportunity to make some additional money off of this?

We think so.

This does conclude the question and answer session of today's program. I'd like to turn the program back to management for any further remarks.

We appreciate the attention and the investor participation today very much. We think we had a good, solid first quarter. So far everything we've seen for the second quarter looks very good as well. We are comfortable with our guidance, and we look forward to growing our business with you. So thanks once again for your participation and we'll see you at the end of the second quarter.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.