NewtekOne Inc (NEWT) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Newtek Business Services Inc. Q1 2014 earnings conference call. (Operator Instructions). As a reminder, this call is being recorded.

I would now like to turn the call over to your host for today's conference, Mr. Barry Sloane, president, founder and CEO. Sir, the floor is yours.

Thank you. Good afternoon, everyone, and welcome to the first-quarter 2014 shareholder conference call. I am Barry Sloane, President and CEO of Newtek Business Services, stock symbol NEWT. Here today to help with the presentation and present the financial aspects is Jenny Eddelson, our chief accounting officer. Jenny, would you read the Safe Harbor statement?

Sure. The statements in the 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 risk 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.

Thanks, Jenny. For those of you that would like to follow the presentation you can find it on our website, thesba.com, go to the investor relations section and you will be able to see the first-quarter 2014 PowerPoint presentation and follow along.

We will begin on slide number 3. Business development company, the company expects to percent to its shareholders a proposal to convert to a business development company once we are cleared to do so by the Security and Exchange Commission. A particular document can be found under the name Newtek Business Services Corp., which is a Maryland corporation, and can be found on the SEC's website.

In addition the company has filed pulmonary materials to conduct a public offering with connection of the conversion to a BDC of up to $50 million of shares in the BDC and on the registration statement you will see the book managers of Stifel, JMP, William Blair. We will not be able to offer any further information or take any questions regarding this proposed conversion or offering.

Q1 2014 financial highlights. We first want to announce that we are reaffirming our 2014 consolidated guidance for the year. We expect a double-digit topline and bottom line percentage growth in 2014. We will talk about that through the presentation. The Company has excelled in meeting or exceeding our pretax net income and EBITDA guidance in years 2011, 2012, 2013. We look forward to be able to perform in that manner as well this year, and we are reaffirming our guidance.

In the first quarter, adjusted EBITDA was $4.8 million, a year-over-year increase of 10.6%. Operating revenues were $36.1 million, a year-over-year increase of 5.7%. Pretax net income was $2.2 million, essentially flat from the year prior. Our diluted EPS of $0.04 with equal to Q1 2013.

In the Small Business Finance segment, revenue was $10 million, a year-over-year increase of 34.8%, and pretax of $2.7 million, a year-over-year increase of 23.7%.

Looking at some operational highlights. We originated close to $46 million in 7(a) loans, a 31% increase on our way to originate between $240 million and $260 million worth of loans in 2014. I will add that the lending business, similar to the merchant processing business, is very seasonal. The first quarter is typically the weakest. The lender is on run rate to receive over $6 billion in referrals in 2014 versus a little over $4 billion in referrals received in 2013.

Our loan servicing portfolio grew by 95% to $1.1 billion in Q1 2014. Throughout Q1 2014, the Company reached a milestone, which we put a press release out on. We have received over 500,000 individual referrals from independent business owners through the NewTracker system. This is an asset that we are in the process of positioning ourselves to data mine. We haven't got to that yet at this point in time.

In the first quarter, we have expanded our alliance partnerships with nationally recognized firms such as The Hartford, Teachers Federal Credit Union, and Paragon Financial Group. We also expanding the depth and breadth of management team with the hiring of senior executives. We will actually name two of those executives today and we hope to name two additional ones within the next one to two weeks.

One of the things the Company is going to focus on and talk about today is reducing its cost of capital. We obviously talked about the potential BDC equity raise under Newtek Business Services Corp. We are currently working on potentially closing a $20 million facility with Capital One Bank which will refinance $10 million of Summit Capital Partners debt. That debt was taken out over two years ago. It has a 15% interest rate on it and we stand to save somewhere in the neighborhood of 9% to 10% in our cost of funds.

When we took this debt down, we obviously had a lot of conversations as to why we were borrowing money that was so expensive. Obviously if you can look at the Company's performance over the course of two years, this mezzanine capital clearly paid off. The Company was able to generate returns in excess of the cost of capital and now we are prepared to pay it off without any penalty.

We are also working on closing our $75 million Goldman Sachs small business lending warehouse line. That is in the process and you can see it as we are moving forward. The company has capital providers both in the lending and equity side and it is looking to capitalize on and reduce its overall cost of capital.

On slide number 7, we would like to announce the building out of our senior executive team. Rich Rebetti has recently been named president and chief operating officer of Newtek Technology Services. Rich has over 20 years worth of experience in business development and operations of high tech and communication companies. He was former CFO of Data Storage Corp and Telco Inc. and former Chief Technology Officer of STi Prepaid.

Rich, is taking over the operations and P&L responsibility of managed technology solutions, will be working with CJ Burnett, who historically has functioned as our chief information and chief technology officer. Taking some of the responsibility of managing the operating systems of managed technology solutions, we believe will further enhance our ability to grow, manage technology solutions, and reverse the current trend to enable us to get a lot of our technology products developed faster, with CJ having renewed focus on his CIO and CTO duties.

We are also proud to announce Susan Streich has joined our organization. She will be beginning on Monday as chief risk and chief compliance officer for Newtek Business Services and Newtek Small Business Finance. Susan has over 30 years of experience at the executive level, particularly in small business lending area. She formerly was senior advisor, project lead, and subject matter expert at Booz Allen Hamilton and working for the US Treasury Department. Susan also formerly worked at Capital One Bank for about seven years and while she was there originated and ran the SBA lending business for Capital One Bank and originated $1.5 billion worth of loans. She was also president of Transamerica Small Business Capital, one of the largest non-bank SBA lenders in the United States.

Today we are announcing the reaffirmation of our 2014 guidance. We are looking at revenue growth in 2014 of 12.1% over 2013; pretax income increase of 21.6% over 2013; diluted EPS of $0.23, previously $0.20, an increase of 15%; and adjusted EBITDA approximately $26 million. Looking at our balance sheet, you can take a look at obviously the amount of leverage that we have. When you take a look at the real unsecured debt, which is primarily Summit and a small $400,000 to $500,000 current debt outstanding to Capital One Bank, the Company has very little debt on its books. Most of the other debt is in securitizations, which in the history of finance would be considered off-balance-sheet. In today's accounting vernacular it is on-balance sheet. As well as our Capital One Bank leverage line.

So we look at our business with $78 million of equity on March 31, 2014, with most of the liabilities that you see there, $113 million, about $100 million is secured by loans. So we really do not believe we have a highly levered business at this point in time.

Looking at Small Business Finance, our Q1 revenue was up 34%. We funded approximately $46 million worth of loans, 31% increase. We talked about our servicing portfolio growing to $1.1 billion dollars and getting lots of opportunity referrals, gain of $6 billion. I would tell you as we hope to convert into potential BDC, we will be able to put more of this referrals to work. Our current limitations in the lending space are limited to our Newtek business credit, our receivable line of credit product. We do merchant cash advances in Asia and we do 7(a) lending. Under the BDC umbrella, we clearly plan on expanding our lending menu. We will be able to put more money to work and grow our lending business.

On slide number 11, there is the classic example that I am going to spend a little bit of time on today of your typical $1 million of an SBA 7(a) loan. When you make the $1 million, $750,000 is full faith and credit US government guaranteed in the government guaranteed loan participation; $250,000 is uninsured. But, importantly, losses occur across the participations on a prorated or pari-passu basis, not subordinate. So the $250,000 piece, which typically remains on Newtek's books, is not subordinated to the senior piece.

The accounting for that is when we sell a $1 million loan, we typically sell it on average 112.5% premium in this particular example, which I think is consistent, Jenny, with what we got in the first quarter. Do you remember what we netted out? About 112.5%? 112.5% net to us. We also created a servicing asset which is worth about $18,630. And when you add those two incomes up together of $112,000, that is the value of the serving asset plus the cash gain on sale. We take a piece of that, we loaded into a discount which is currently 6% on the uninsured piece.

If you take a look at our 10-Q, and this information was also in our 10-K, you can see we run a discount-to-cash flow analysis to mark the uninsured pieces to market. We run them through a full model. We run them through a 25% historic default rate. We run them through a 35% severity over the course of time. And we basically use a market-clearing yield at a spread of about 135 basis points behind where our single-A rated securities have traded to come up with a $94 price on our uninsured loan participations with a 6% floating-rate coupon over prime. So if you take a look at the discount, the referral fees we pay to third parties, direct expenses of $22,000, we have a net we use the term risk-adjusted profit of $92,000 on $1 million loan.

The next thing I want to talk about is how much cash is created post-securitization, which is typically in a 6- to 12-month cycle when we do a $1 million loan. So on slide number 12, create a $1 million loan, you sell the government guaranteed piece of $750,000 into 11 pools, assemble those on Wall Street, you get a premium of approximately $93,750. Then typically what we would do is we would put the uninsured piece of $250,000 in our Capital One Bank line at approximately a 55% advance rate. When we put it in into a securitization, you get a 67% advance rate. So on the $250,000 face you get $167,000 of cash.

So the amount of equity that basically goes into that $250,000 loan is $250,000 less $167,000 which is approximately $82,000. And you get $93,000 of cash gain, so therefore on every $1 million loan you create $11,250 once you (technical difficulty) and do a securitization. Mind you, there is no accounting gain when we do a securitization. That is a finance transaction. The loans are on the books. So we have historically in the course of lending 11 years used extremely conservative accounting. We have been through many lending cycles. We are not a new lender. We are not new in the business. We have been around the block and we have managed our risks very well and we are very excited about how we are growing the book.

On slide 13, you can take a look at the improvement of the credit quality over time. When you look at what our portfolio look like on December 31 of 2010 to March 31, 2014, you could see our FICO scores have improved. Our percentage of first liens on real estate, whether it is commercial or the residence of the owner, is up to 95%. Over half of our loans are secured by the commercial real estate on the business. We have clearly reduced concentrations in industries. You can see our largest concentration is about 7%. And in state concentrations, our largest state is New York with 13%.

Our servicing portfolio has continued to grow. It is about a 50/50 split between servicing our own loans versus servicing third-party loans. Our own loans tend to have a longer average life and duration. Our own loans I would say have about a five-year average life and a four-year duration. The servicing portfolio for others can be quite volatile but it is typically sits somewhere around a year for the larger portfolios. We actually do have smaller portfolios that have stayed with us for many years which we are servicing for third-party financial institutions.

But in many cases we would get a big portfolio of loans, we are brought in to clean it up. We get asset management fees for doing that and then they wind up getting sold to other third parties. Our third-party servicing portfolio wound up increasing by 95.6% to $1.1 billion. We do have quite a few opportunities in the pipeline to service for others. We are hopeful, optimistic, and would love to announce future large increases in that particular business line.

Looking at the electronic payment processing space, which for those of you that follow the Company historically has no debt on -- currently has no debt on and historically had no debt on it. Revenue growth was very slight. It was close to flat, declining 0.7%. Growth in the payment processing business going forward we believe is going to be depended upon two important trends. One is POS in the cloud strategy. For those of you that have gone to restaurants recently where you have seen people taking your order on a smart phone or a tablet-based POS system, those forms of taking a POS, putting it on a tablet, significant cost reductions over MICROS systems, NCR systems, Aloha systems.

So we are embracing several different POS providers. We plan on rolling out product offerings in a big way. In this quarter we have actually put some POS product out in the market already. We will have our white-label version. We'll be offering other people's POSs. The big benefit to business owners, significant cost reduction on POS software and also more attractive data reporting and information to the business owner from these POSs.

The other important change in the payments industry is EMV, Euro Master Visa. It is basically the chip card which is very popular in Europe. We will be rolling out a program to take advantage of other competitors' clients they currently do not have the appropriate chip card terminal to make sure that our own clients have a terminal that can take a chip for security reasons. The big issue here and incentive for merchants to change over the terminal is that in October of 2015 Visa and MasterCard have indicated that merchants taking fraudulent cards will be responsible for the fraud, no longer the issuing bank. So the risk is going to shift from the issuing bank to the merchant and having a compliant terminal is important. We are aggressively out there talking to our customers as we speak.

Managed technology solutions, the first quarter 2014 MTS revenue declined by 7.7%. We have discussed historically that we are transitioning the business to take advantage of the shift in cloud-based businesses, upgrading to Linux-based platforms. It is an important part of our overall strategy. Some of our results in this particular segment are attributed -- have been attributed to a decline in the number of lower-priced shared hosting plans, a decrease in the number of higher-priced dedicated hosting plans. And we had to obviously do significant investment in software development costs.

The key to our turnaround in this area is execute on the hyper growth plans for cloud offerings, growth in higher-priced dedicated server plans, and to make sure that our products are integrated into our existing cloud offerings, things like payroll, POS in the cloud, products of that nature. We are very optimistic with the new edition of Rich Rebetti to president and chief operating officer with P&L responsibility, with an intense focus on the business, and the operating team out in Phoenix that we will achieve levels of success in the near future.

Looking at Newtek going forward as we continue to position ourselves as the brand presence, you know we talk about our operating model. I think what is important, we have always been true to our clients and true to our brand. We are the payroll company. We are the 50-state-licensed independent insurance agent. We are the company that manages the data center, that actually handles clients' hardware and software needs. We are the company that makes the loans. And we are the company that does the payment processing.

We are not a broker. We are in there dealing with the customer every single day. Unlike Amazon, who is positioned to sell everybody else's products, we are little bit more like Walmart. Well, how do we succeed in this business strategy? The key is the Company has positioned over the course of 11 years as a FinTech company, acquiring business clients cost-effectively, not using expensive feet-on-the-street reps in the marketplace, but to basically use the NewTracker system where leads are coming in from strategic alliance partners, to offer our services in the cloud through the Newtek Advantage, and basically to make sure all of our business services are integrated with one another. Where we view business services going forward will be more of as a software as a service function but also being there 24/7, picking up the phone, being able to talk to customers and service their needs.

When we look at the markets today and we are looking at the different trends, I guess people copying what you are doing is clearly a high level of flattery. We have noticed that Heartland for example made a $20 million investment in Leap to take their POS, make sure that it dumps into their software, makes sure it dumps into accounting information for the clients. Heartland is also integrated into the payroll business. So Heartland we can see is moving more towards a more complete offering for business owners. For the business owner gets a solution, they get accounting software, they get payroll and POS and processing all dumping into one spot. We own and operate all of these businesses today. We think we have a very valuable business proposition and currently isn't receiving the value that we hope and anticipate that it will get in the future.

Looking at our marketing strategy, we are going to continue to present ourselves as The Small Business Authority. We have expanded our national TV advertising program. For those of you that have seen us on CNN, Fox, Fox Business News, MSNBC, Bloomberg, the History Channel and the Discovery Channel, we are pretty much on 7 AM to 7 PM. We run somewhere between 200 to 350 commercials a month depending upon the month and the quarter. And we do believe the strategy is paying off.

We have recently announced the expansion of several alliance relationships. We just signed a deal with the Hartford. The Hartford has over 1 million small business customers. The Hartford also has 40,000 property and casualty agents and health and benefits agents that write to them. Hartford will be introducing us to their clientele and distribution partners over the course of time.

We also announced an alliance with Teachers Federal Credit Union, with over 234 members, and the CTAA, Community Transportation Association of America, basically providing all forms of financial services to many transporters in their alliance relationship. When we look at people that are in the public domain for comparables, we have given you a full array of entities on page number 24, some big, some small. But we do think that what is unique about Newtek is we do many more things than these companies. We are a FinTech company. We actually see some of these companies gravitating more towards our model.

On slide number 25, there has been a lot of attention to non-bank lending. Obviously that is something that we are highlighting ourselves financially. As a BDC, it will be the primary focus of many investors. Despite the fact that the other business services prospectively will be under the BDC, non-bank lending has clearly become a very, very hot item. Entities like the Lending Club, which is in discussion to go public, have recently attracted capitalization in a $3.8 billion market cap. On debt capital, raising over $180 million in venture capital. A lot of the companies that we compared to have our real high valuations.

We feel very good about where we are, what we're doing in the market. We have always run our business on a long-term basis. We have never paid much attention to month-to-month, deviations quarter-to-quarter. Our last three years we have met or exceeded our bottom-line guidance for pretax EPS, EBITDA. We feel very good about the quarter and very good about the year ahead.

I will now turn the rest the presentation over to Jenny.

Thank you, Barry. To summarize our consolidated first-quarter results, we had operating revenue of $36.1 million, a 6% increase over the first quarter of 2013; consolidated pretax income of $2.2 million, a 1% increase over the year ago quarter. Net income decreased by 4% to $1.4 million and we reported diluted EPS of $0.04 per share, unchanged from the year-ago period.

Please turn to slide 30 for a summary of our first-quarter 2014 revenue, pretax income or loss, and adjusted EBITDA by segment compared with the year-ago period. Electronic payment processing segment revenue decreased to $21.5 million or 1% from $21.7 million. Processing revenue less processing costs or margin also decreased from 15.7% in Q1 2013 to 14.8% in the current quarter, due in part to competitive pricing as well as in the mix of merchant sales volume generated in the current quarter. While there was a reduction in total expenses between periods, overall pretax income decreased by $117,000 to $1.7 million for the first quarter of 2014 compared with $1.8 million a year ago.

The small business finance segment had a 35% improvement in total revenue, increasing by $2.6 million to $10 million for the first quarter of 2014. The majority of this increase was in servicing fee income, which increased to $2.6 million for our combined portfolios. Our aggregate servicing portfolio grew by 96% quarter-over-quarter, exceeding $1 million at March 31, 2014.

During the current quarter, the lender originated $45.7 million in loans, a 31% increase in dollar volumes as well as a 40% increase in the total number of loans funded. Interest income also increased by 55% to $1.6 million as the average outstanding performing loan portfolio increased along with the total volume of loan originations during the year.

Total expenses for the lending segment increased by $1.2 million. Interest expense and other G&A costs primarily related to various loan-related expenses increased by a combined $800,000, and salaries and benefits increased by $460,000 due to additional staff added to our lending division. Overall, the lending segment pretax income of $2.7 million, a 24% improvement over the first quarter of 2013.

Managed technology solutions segment revenue totaled $4.1 million for the first three months of 2014, a decrease of 8% compared with the first quarter of 2013. The segment had a decrease in the average number of total plans and both web hosting and web design revenues decreased by a combined $390,000 in the current quarter. Total expenses also decrease primarily in G&A costs, resulting in a $193,000 reduction in total expenses compared to the year-ago quarter. Pretax income was $751,000 down 16% from the first quarter of 2013.

The all other segment, which primarily represents results from our insurance and payroll subsidiaries, had a pretax loss of $400,000 in 2014, a $60,000 improvement over the year ago quarter. While current-year revenue decreased by $70,000, mostly related to our insurance division, total expenses decreased by $130,000 and included reductions in insurance broker commissions, other G&A costs, as well as reduction in salaries and benefits during the quarter.

The pretax loss for our corporate segment increased by 12% to $2.2 million in the current quarter, due primarily to an increase in marketing expenses included in other G&A costs. The pretax loss in our captive segment remained essentially unchanged in the quarter, decreasing to a pretax loss of $270,000.

Finally, slide 31 reflects our reaffirmed consolidated guidance for 2014 as well as the guidance by segment for revenues, pretax income, and adjusted EBITDA. I would now like to turn called back to Barry.

Thank you, Jenny. Operator, we are open to taking questions.

(Operator Instructions) Brian Walsh, Oppenheimer & Co.

Great, thank you. Barry, you had somewhat of a modest quarter relatively speaking, but your reaffirmed your guidance on several occasions during the discussion. Do you expect to make any changes going forward to assure that you are going to meet you guidance for 2014?

I appreciate that. I think from our perspective, we are constantly making changes to the operating business. We are constantly improving our technology. We are constantly improving our process. We are constantly adding more relationships. We talked about improvement in our cost of capital.

So I think that -- before doing this I worked on Wall Street. I know we are all out there with our abacuses and slide rules and looking for the exact linear movement. We give our guidance on an annual basis. We have met or beaten our guidance three years in a row. We feel very good about it. Jenny and I sat down, we went through every segment, had every president on the phone with us. We scrubbed them all raw, so we are good to go.

Great, thank you.

Thank you, Brian.

[Peter Chetavorn,] [Burra & Co.]

Barry, thank you for the in-depth review. One question I have, how does the conversion to a BDC help the shareholder over the long term? It doesn't seem to be helping us right now. But can you explain a little bit why converting to a BDC will be beneficial for the shareholders?

Sure. And what I am going to do, Peter, be a little bit careful. I am not allowed to talk about our transaction but, I can certainly talk about a BDC in general.

That's fair.

I guess the first thing, obviously we did our filing in the fourth quarter of last year. So it is always one of these hurry-up-and-wait things. Obviously dealing with bureaucracies and putting filings out there, they always take longer than you think. I think you could tell from our perspective and the fact that we haven't said anything other than we are moving ahead and we are pointing you towards public filings. It is not atypical, though, when someone goes out and tries to raise money, the knee-jerk reaction well, let me just push this thing down for the moment.

Right.

BDCs are attractive investment vehicles. Because the average BDC is paying dividends of 7%, 8%, 9%. With respect to our expectation, I point you to the registration statement. I'm not even going to tell you what is in there at this point in time because I have been advised by counsel that they are going to put me in the woodshed. So I would direct you to that document.

The other thing that is attractive to a BDC is there is no corporate tax. And that is a tremendous advantage. One of the Company's historic weaknesses, which is having different businesses together, prospectively is a strength in this case. Because management believes it will be able to pay a dividend, still develop these businesses, which ultimately will benefit shareholders upon some kind of an exit or some kind of an execution.

So we think that for a company that can convert to a BDC, the tax advantage, investors get paid a nice healthy dividend, and if the activity within the BDC can actually grow over a period of time, an investor in a BDC could be rewarded nicely. I am speaking just generically at the moment.

Right, right. And in our case specifically -- well, not specifically, but does our cost of funds for the lender come down dramatically or substantially?

One thing I would point to, the Summit Capital Partners debt was 15%.

Right.

And there were also other fees. If you think about the dividend of a typical BDC from an equity standpoint or a microcap company if you think about it, that is not that high given -- and one of the benefits is if you say, well, if it is not that high, you know, I'm an investor; I'm getting screwed. But the reason why you are not getting screwed is the money would be paid in taxes. So, Jenny, ballpark what did we pay in taxes lecture?

$6 million.

We paid $6 million in taxes last year. I'm starting to sweat. Was that a good explanation?

Okay, I appreciate it.

Thank you.

Jim Fowler, Harvest Capital.

Barry, congratulations on attracting a group of executives. It sounds like they have a lot of good experience to add to the platform. I wanted to ask you on the Newtek Tracker, I know the 7(a) loan program robust. I'm wondering what you think the market opportunity is to get into some other lending products away from the 7(a).

Sure. Well, NewTracker, which gives us the ability to not use brokers and to use financial institutions, trade associations, insurance companies, people with large pools of small business clients that will just drive the opportunity to us. So there is no packagers, there is no assemblers, there is no one skewing the underwriting guidelines. We have currently with our limited capital base just a few programs to offer.

We believe that the borrower base that is looking to borrow $50,000 to $15 million, which is typically not the market that BDCs are competitive on, is very firm. You know, most BDCs are doing $15 million and up. It is a mezz loan with an equity kicker. It is a high coupon. It is kind of the deal that we did with Summit. That is not what we are going to be fighting for.

So we will be in their servicing small business clients in a market that is just not competitive. The banks and the financial institutions, they are just not active in this market. When you look at the top four major money center banks, I am just guessing but I think they represent about 65% of the market today. We just had a major money center bank tell us they hired 6000 compliance officers. So those money center banks are more concerned about knowing their customer, total compliance, and not expanding the universe into the small business market.

So we see our opportunity to do conventional small business loans with 8% to 12% type coupons on them, not SBA, with long amortization schedules, converting that fixed rate I just talked to you into a floating, and providing good value to seasoned businesses with hard collateral and equity lending opportunities, use the experience that we have gotten over 11 years worth of lending to small businesses in an SBA structured format and do it in a conventional format. We think we will be very successful at doing that.

Got it. And then maybe just a follow up there. Your strategies for -- I mean, a lot of loans come from referrals. Is the strategy in place to continue to increase and broaden the referral network that you can leverage?

Absolutely. We will have some real nice large announcements going forward, both on new alliance partners that love the NewTracker system because it works just like Salesforce.com for a business referral process. We have a patent on it. There are a lot of players -- there was just a significant conference out in your neck of the woods, it was the LendIt conference, right?

Yes.

And people on LendIt -- the imbalance at the LendIt conference was there is too much money but they can't get their arms around the customer base. Well, we have that customer base. We have that front-end referral origination network and we make it -- and we have developed this over 10 years. So we have the ability to work with credit unions, community banks, a major money center bank, an insurance company, accountants, lawyers, and have them pass a referral to us, give them complete transparency into our back office, create an audit and compliance trial, and without using expensive six-figure salary bankers, assemble, package, get separated for underwriting, and process the business in a very automated basis. That is the value proposition to what we have in our lending world and universe.

Great, I appreciate it, Barry. Catch up with you mid-quarter.

Thank you, Jim.

Eric Weinstein, Chancellor Capital.

Thanks. I guess the BDC registration statement has been out for some time. I kind of want to get a sense of how much time to have been spending on this, whether or not it is a distraction. In part, I guess when I look at the context and the first questioner sort of brought this up, growth in the first quarter on revenue and pretax is sort of well below that of the full-year midpoint guidance. But I guess to the extent that you seemed happy with performance over the quarter, was it what you were estimating internally and the rest was always to be made up during the rest of the year? Or are there other things going on?

Yes, we are just working hard. As I said, Eric, and I do appreciate the call and the question and it is not an out-of-the-ordinary call it question or comment, we don't look at things on a quarter-to-quarter basis. We spend a lot of time developing a business and an enterprise and we don't really wig out about a quarter. We are very focused. We know we know we are a publicly traded company and we have to deliver results. We really focus on what we are doing for the year.

I will tell you that getting a BDC in the market, getting Goldman Sachs line of credit, working with Capital One Bank, the remediation that we had in the merchant processing business last year caused by one of our executives, we clearly had a lot going on. Through that, we are hiring and bringing on better, more qualified people. We are further developing our software products. So bottom line is you have got to keep the machine going and we are on a very good trajectory.

If you go back and I guess if you took the slide ruler out and you looked at the last 12 quarters, you would be pretty happy. The numbers weren't necessarily 10% to 15%, at times there were 30% and 50% and some wild numbers, but it is what it is. We look to grow this business. We look to grow the enterprise value. We are in the right space. We are not detracted by what some kind person referred to as a modest first quarter. From my perspective, the underpinnings of growth and of building a first-class organization are more intact than they have ever been.

Got it. And then I guess to the extent that you have had professional fees or other things associated with the conversion proposal, is that impacting profitability much at all? And then and also as you have been beefing up the human resources infrastructure with a number of hires, is that being done on a sort of business-as-usual bases or already in anticipation of a morphing of the business?

I think a few things. I think in the lending business, we have clearly added some expenses in the first quarter in terms of beefing up personnel. That is not -- that is one of these things that is not a straight line. Because when you grow your servicing portfolio as fast we did, you have to make sure that you have the right talent. When you're growing your loan originations as fast as we are, you have to make sure that you have got really good, solid underwriters and business service specials. So that is one area where for the most part it was a little bit more expense pumped into the business in Q1.

There was one other anomaly sort of in Q1. The price of the government bonds in Q1 of last year were at the all-time highs because that was low in rates. So that kind of skewed things in little bit. Relative to the expense of the offering, no, that is part of the offering. That is all capitalized when the offering gets done. I will tell you we probably spent I would say a couple million dollars last year just dealing with that remediation issue. Am I -- is that a fair comment, Jenny?

Yes.

Yes. Both from accounting, bringing in people to make sure that our policies and procedures are tight in the merchant business. So more of a drain last year than where we are now. I feel pretty good about where we are.

Okay, thanks.

Thank you.

Joe Pretlow, Active Owners Fund.

Well, as they used to say, say it ain't so, Joe.

Due to no response, we will be moving on to the next person in queue. Mark Silk, Silk Investment Advisors.

Thanks for taking my call. So a few questions. With such a low GDP number in Q1 and discussions of catch-up later in the year, how do you feel about the visibility, the economy, and more importantly how does that affect Newtek?

Thank you for the question I think if you notice, the one thing we didn't do is blame a weak first-quarter GDP. I guess depending upon who you talk to is the economy strong or weak? Because you have this kind of big non-form payroll normal that just hit. The first quarter GDP was up 0.1% and if the government didn't jury rig the PCI deflator, it would have been negative. GDP is very obviously sales-driven. So some of the businesses are clearly harder to push.

I think that from our perspective, our job whether it is in credit and lending or in the payments business or in the cloud computing business is you have got 27 million businesses that are defined as small. To be able to go get the customers that are clearly bigger than the average, been in business 2 to 3 years, have collateral, have good history, and have good business models. So we seem to think that the economy generally speaking will be a headwind, however we look at the markets that we are in. Lending we see not a lot a competition. We are in a nice market. I was going to say it is a niche, but for us it could be significant. There is no reason why over the course of time this company can't do double the current originations that is doing in 2012.

When we look at the area of cloud computing, the Gartner surveys have got cloud computing expenditures doubling over the course of three years, where every independent business owner is going to get rid of the tower under their desks and get rid of the server in their closet. We look at the payments business. People have got to change their terminals to make them EMV-compliant. And where businesses can really reduce their expenses through better POS, better reporting, getting information on a tablet, we are very well-positioned for that.

So the economy is a drag, clearly. We have just got to be able to execute on our strategy. And we will be fine.

Okay. In regards to the working with banks to help with let's just say dealing with the loans, how does that come about? Can you see these institutions find you, you are aggressively pursuing it is through sales effort, or both? Then can you expect more of these in the future? Lastly, what are the average margins on that for Newtek?

You mean on a 7(a) loan?

No, I mean you are helping processing loans for banks and just being their right-hand man for the SBA.

Well, most of our revenues, Mark, we are a principal. So if you look through our Ks and Qs, if a bank gives us a referral, which I am going to say is 95% of our business today, we pay them a referral fee which averages about 75 basis points. That is it. So we are the principal. They are not participating in it.

Okay.

So, when you look at our returns -- well, let's look at it this way. Last year on around a $30 million equity base, we made about $10 million in pretax profits in the lender. So if you sort of look at the lender simplistically in that manner, you have about a 30% return on equity. And we are not really cranking this thing yet or putting a lot of leverage on it.

So with more equity, we think we will be able to generate those types of returns. In my view, we were able to absorb a 15% mezz capital interest expense and grow the business. So that was one the things I really wanted to point out earlier. You have been looking at a lot of stuff, but then you've talked about a few different areas where we would be able to potentially reduce our cost of capital, get more capital, and feed it into the business.

Impressive margins. Thanks, Barry

Thank you. Thanks, Mark.

(Operator Instructions) [Brandon Mackie,] private investor.

Hi, Barry, good afternoon. I was just wondering in the long-term if there is any concern after the regulatory wave passes if you could see these big money center banks kind of looking down at the small business area and trying to take share from you.

I wish I had time to google this but if you look at JPMorgan, Wells Fargo, Citibank, and Bank of America, that is like 65% of the whole banking industry today. So I guess Dodd-Frank did a really good job of making these banks smaller. In turn, they are huge.

The SBA business will always be a gnat compared to a major money center bank. You know, it is a $18 billion, $19 billion origination business a year. So if we did $0.5 billion or $600 million, that would be great for us and great for our shareholders. That won't even -- that won't pay a day's worth of legal fees for JPMorgan today. So we don't have any worry or concern that they actually care about the SBA 7(a) business.

Now, when it comes down to small business lending which we clearly want to position ourselves conventionally as well, their cost structure is so high they can't originate a loan the way we originate a loan using what I call a FinTech acquisition system and do it cost-effectively. So I just don't ever see them competing in this space.

Now the next set of prospective competitors would be community banks. Well, they can't do anything typically beyond their region, and they typically can't do enough volume or scale to cover the expense of doing a business. Because in order to the business you have got to generate enough volume. You can't be in the SBA 7(a) business and do $25 million worth of loans; you just won't make any money. Because the infrastructure that is required to do it and do it right is too expensive. Just like you can't be in the small business lending business if you are going to do small volumes of loans as a local community bank.

So we are not -- we are just really not concerned about it and we are happy with what we built and we think we have a terrific franchise in that area. And that is the business I have the least worry a concern about to this date.

Okay. That helps a lot. Thanks. And then looking at some of these comps that you have shared, do have any idea how much load volume the Lending Club does?

Yes. It is pretty significant and it is ramping up quickly. Mind you, to date most of the Lending Club's -- not most, all of the Lending Club's loans are $35,000 personal loans. Okay. That is the max loan, actually, so the average is less than that. And they are typically unsecured. They have just started a small business product with $150,000 max loan.

I think the Lending Club did about $1 billion last year. I need to check that but it is probably not less than that. As a matter of fact, it might have been $2 billion. I think the run rate toward the end of the year was $200 million to $300 million a month. That is kind of what sticks out in my head.

Okay. And my last question just switching to the managed technology part of the business. How are you differentiating your product against free and low-cost offerings such as spotify or a hosting platform like Bluehost?

Well, you get what you pay for. And business owners that are getting anything for free, they are not getting service and they have got to be paying for it elsewhere. To be honest, that is the answer to that question.

I think that when you give a provider your technology, your hardware and software, you are giving that provider your most valuable asset. So entities that are doing this quote-unquote doing this for free, that is not a long-term business bottle. It just doesn't work. As a matter of fact, Square for example in a different area, they are now up for sale. And they went through an aggregation strategy, Visa changed the regs.

Giving stuff away for free is not a long-term strategy. I think that if you are a business owner and you have got your data, all your sensitive information, you want somebody that is going to be there 24/7. Frankly, we have been in this business for about 10 years and that has been our strength. So that is what we are going to stick to.

Okay. Thanks a lot, Barry, for taking my questions. I look forward to watching the progress.

Thank you.

Thank you. And with that, I am not showing any further questions in the queue. I would like to turn the call back over to Mr. Barry Sloane for any closing remarks.

Well, we greatly appreciate the attendance. This is one of the highest attended conferences we have had in a long time. I appreciate the great questions from the investor community in the audience. We thank you and we look forward to delivering good results in the second quarter. Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect.