NewtekOne, Inc. 8.50% Fixed Rate Senior Notes due 2029 (NEWTG) Q3 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Newtek Business Services, Inc. Third Quarter 2012 Earnings Conference Call [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Barry Sloane, President and CEO. You may begin.

Good afternoon everyone and thank you for attending the third quarter 2012 financial results conference call. We really appreciate you attending today particularly with all the weather issues that we've had back on the East Coast. Today joining me for the call is our Chief Accounting Officer, Jenny Eddelson. And for those of you that are following the call, we like you to take a look at our PowerPoint presentation which is on the Investor Relations section of our website at thesba.com. Jenny, may I ask you to read the safe harbor statement?

Sure. The statements in this Slide presentation, including statements regarding anticipated future financial performance, Newtek's beliefs, expectations, intentions or strategies for the future maybe forward-looking statements under the Private Securities Litigation Reform Act of 1995. All forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from the plans, intentions and expectations reflected in or suggested by the forward-looking statements. Such risks and uncertainties include among others, intensified competition, operating problems and their impacts 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.

Thank you, Jenny. I'd like to bring everybody up to Slide 3 on the PowerPoint and take a look at our conference call agenda for today. We will go over our third quarter 2012 consolidated financial performance, our segment performance and revenue growth, our 2012 revised guidance, our 2013 guidance, our growth strategy at Newtek, our marketing initiative and future initiatives that we're going to have to try the revenue growth. Focusing on Slide 4, our consolidated performance. For the third quarter of 2012, the company had pre-tax income of $2.9 million, an increase of $2.6 million over the year prior quarter and 776% increase. Net income increased by $1.5 million or an increase of $620,000 or 70.5% increase compared by the same quarter, same period in 2011. Modified EBITDA, which we have defined and we can go over in the Q&A period, of $4.9 million with an increase of $2.9 million or 145% over the quarter earlier in the year. For the 3 months ended September 30, the company had earnings per share of $0.04 versus $0.02 in the comparable quarter a year. For 9 months ended September 30, the company had EPS of $0.11 per diluted share. That's for the first 9 months of this year versus $0.03 for the comparable 9 months in 2011. On Slide 5, you can take a look at a graphic description of the growth of the company's pretax income, net income and modified EBITDA quarter-over-quarter 2011 versus 2012. On Slide #6, you can take a look at the earnings per diluted share on, obviously a post-tax basis with a nice growth in $0.04 over $0.02 and $0.11 over $0.03. On Slide #7, which we'll talk about a little bit more, we obviously took a look at our 2012 guidance that we'd previously given and decided to revise our guidance upward based upon improvements, primarily in the small business finance segment. We're now looking at pre-tax income midpoint of $8.75 million. That's up from $7.5 million. And the EPS range has been adjusted up to $0.12 to $0.15 with a midpoint of $0.13 and that's up from a range of $0.10 to $0.14 per diluted share. Taking a look at our balance sheet on Slide #8, you can see we do have a strong balance sheet with the growth in cash and cash equivalents. Over the course of 9 months, a slight upward adjustment in assets and liabilities and our total equity has grown from $59.2 million to $67.6 million. Our consolidated cash position has increased by $7.1 million during that 9-month period of time. Our cash per diluted share increased from $0.31 to $0.52, which includes restricted cash that went from $0.71 to $0.80. Taking a look at our operating segments comparing 2011 versus 2012 in the third quarter, our Payment Processing segment revenue increased by 5% to $21.7 million. If you add back the effect of the Durbin Amendment, revenue was actually up 12.3%. The Durbin Amendment effectively made an adjustment to what we call our cost of goods sold, which is embedded in our revenue number, so we do feel it is appropriate to show that the company is growing in this particular segment by double digits. Pre-tax income increased by approximately $800,000 or 63% from the earlier quarter in 2011. Looking at the Managed Technology Solutions segment, our revenue declined by 5% or $300,000. Our pre-tax income also declined by about $100,000 or 8%, compared with Q3 2011. As we'll talk about in forward Slides, our Managed Technology Solutions business is primarily in a transition to position itself as a cloud solutions provider from more of Microsoft shared hosting business. Our Small Business Lending segment, revenue increased by 46% to $6.7 million over the third quarter 2011. Our pre-tax income increased by $1.1 million or 127% in the third quarter over 2011 as well. Take a look at Slide #11. You can see some real nice growth in the Electronic Payment Processing revenue segment. That's pretty strong. That does not include the Durbin effect between '11 and '12. That Durbin effect should begin to go away in the next quarter as it kind of matched up and Durbin really took place in October of 2011 for the first time. Our cash flow positive business in EPP segment is extremely important to us. It basically requires very little capital expenditure. We have no debt in this particular segment and we believe we had significant operating leverage as we add more and more merchant customers on to a significant fixed cost infrastructure. E-commerce, which we believe we excel in, based upon the components that we have within new tech business services, as a company that owns our own gateway, is a web hosting company, is a merchant processor and can design sites, gives us a significant market position in e-commerce that our competitors typically do not have. Also, e-commerce is a segment in the market that's growing by 10% to 15% of, frankly the bricks-and-mortar of the Electronic Payment Processing segment, is primarily flagged up a couple of percent. This is probably the most single important corporate initiative that we have. It will be a significant growth engine. As we begin to roll out various types of products, like e-commerce and the cloud, like our new Paymobile which is a comparable product to PayPal and to Square. One of the things I'd like to point out is just the market comparisons; there have been companies such as Digital River, which just acquired an entity called LMLP. LMLP was bought for $100 million market cap. I think our numbers fair very comparably with theirs. I think our product set, although slightly different, is also quite comparable. There was this stack called UBPS which did a significant acquisition of a merchant processing business as well as a Payroll business. I think our valuations in this segment alone compare quite favorably to those other public comparisons. On Slide #12, we got some financial results for the Managed Technology Solutions business. As we discussed earlier, this has been a business that's been flat or slightly down in recent quarters. We do expect this segment to begin to flatten out. As a matter of fact, when you look at our 2013 guidance, you will see that we think it will flatten out, to increase slightly over the course of 2013. We feel very good about this segment as we're transforming ourselves and taking advantage of the shift to cloud-based businesses. Particularly when you look at what happened, obviously, with Hurricane Sandy, businesses are going to need to have all their important hardware, software and business applications hosted in the cloud, not on premise, not on site and be able to drive that data to a smartphone or an iPad. As we go through our presentation, you'll see that Newtek particularly, the Newtek advantaged operating system is very well positioned to take advantage of that opportunity with SMBs. On Slide #13, I call your attention to the attractive growth that we've had in the revenue segment of Small Business Finance. Our Small Business Finance revenue increased 46% from $4.6 million to $6.7 million for the 3 months ended September 30, 2012. Historically, we have completed 2 securitization transactions of the unguaranteed portions of SBA 7a loans. We'll actually go through with SBA 7a loan transactions so investors can follow with the economics and dynamics of how we make money in the 7a business. We've been rated by Standard & Poor's as a commercial servicer. We are also the only entity that the FDIC has issued a contract to for government guaranteed debt obligation, so we've had that contract now for 2 3/4 years and we are acting in a capacity to asset manage services, special service performing and non-performing small business loans for the U.S. government as they take over banks. The mortgage side of the SBA 7a business is strong. When we created SBA loans, 75% of the loan is full paid in credit, U.S. government guaranteed. We typically sell that government guaranteed piece off of the secondary market. For pricing for the government guaranteed piece has been closer to the 117% mark. We don't get 100% of that. We typically split that 50-50. So on a 117% premium on 75% of the loan, we receive about 3.5% -- 13.5% total cash premium on 75% of the loan. We've historically said over the last 2 years in this particular segment for growth and revenue and growth and bottom line offers the best opportunity from new shareholders within our full business model. We continue to believe that will be the case going forward over the next 12 to 24 months, primarily because the competition in small business lending from major money center banks and community banks, we think, will continue to be weak, as banks are hard-pressed to shore up their balance sheets. We capitalize themselves and not particularly focused on this segment for the banking business. On Slide #14, we have had discussions with investors in past calls and felt it was important to just further talk about the recent capital that the company has taken down from Summit Capital Partners in Boston. That was a $15 million commitment, of which, we've currently drawn $10 million. We expect to draw the remaining $5 million in the fourth quarter of 2012. Essentially, this capital is primarily used to grow the lending business. As you can see by our projections on the originations and loan closings, we're looking towards a range in 2013 of $150 million to $200 million in SBA 7a forecasted financing. For every additional $100 million in SBA 7a financing given current market assumptions, it equals about $4 million in additional pre-tax income and that includes the cost of the mezzanine capital. In 2012, we have revised our forecast down slightly to $110 million to $115 million in originations. That's down from an original forecast of $125 million. Obviously we're not despondent about this other market dynamics, particularly increase in their servicing portfolio and market prices have been able us to keep our guidance -- actually we've increased our guidance in this particular segment to the market, but we're still incredibly constructive on the business going forward. We will discuss our pipeline and we're very, very positive about the Summit Partners transaction in terms of taking down that capital and being able to deploy it. On Slide #15, I'll give you an idea of the value of 7a financing to Newtek shareholders. On a typical $1 million loan on which we would make to a small business, which is typically done at prime plus 2 3/4 with a 7 to 25-year amortization schedule, 75% of the loan is full paid from credit U.S. government guaranteed. We typically sell that loan off into the market into approximately 11 different pool assemblers on Wall Street. We keep $250,000 unguaranteed balance on our books. If we assume that we're going to get a 12% premium, which means there will be some government guaranteed bond off at 114 a split, everything 50-50 above 110 with the government, we're basically getting a 12-point premium on $750,000 of the loan balance. So in that particular example, that equates to a $90,000 premium. The servicing asset over the life is worth about $18,630. So when you look at the total premium income, it's about $108,630, so we're making a little bit over 10% on the entire loan. You add a packaging fee of $2,500, the fair market value of discount is effectively what we posted the loan loss reserve, which is approximately 9.5% against the uninsured loan balance. The government guaranteed piece, the government would incur the losses if we didn't lose money on the default and the liquidation. So we have pretty close to 10 point loan loss reserve on our risk piece in the transaction. We typically pay approximately 1 point in referral fees here recording live partners, so direct expense is at $31,250. The net revenue that's recognized off of a $1 million SBA loan is approximately $79,000. We talk about the cash invested, its $2,500. So how do we get to that number? Effectively, if you take the premium that you get on the government guaranteed piece pre-tax, if you take $250,000 on a guaranteed piece, you post it against a leverage volume of Capital One Bank, which is currently 50%, so it's about $125,000 that we're able to borrow, you basically only have about $2,500 of equity to deal, that effectively throws off $79,000 of revenue recognized. So you can see this particular business has a real high return on capital. We like that and we're positive about how this business looks and works for us going forward. On Slide #16, you can see year-over-year comparison. Obviously we would have like to done a little bit better in the third quarter, but we're optimistic that we should close about $40 million worth of loans in the fourth quarter to get us within our range and that will get us to a total of $110 million to $115 million of closings for 2012. On Slide #17, you can get a feel for our pipeline. As of October 26, the Small Business Lending pipeline has increased by about 60% year-over-year or approximately $38 million. You can see we've got some real nice increases of 27% approved pending closing. Loans currently in underwriting increased by 63% and our prequalified volume, up over 125%. This will be the first time in our history we have a nice pipeline of $102.3 million as of October 26, 2012. On Slide #18, you can get a glimpse of what our servicing business looks like. At the end of the third quarter, we're taking a look at our total loan service, about $587 million, up from $360 million from the year prior. And we anticipate our servicing portfolio will be somewhere in the neighborhood of $625 million to $650 million by 12/31/2012. We just put a new transaction on Aurora, which we took in the servicing on our rate of securitization. This is a business where you are going to lose some accounts as well as put new accounts on. So servicing is reoccurring income. We typically service for around 100 basis points or more, a typical transaction. But there are times for loans that we're servicing for others get sold to third parties. That will reduce out servicing portfolio, but we're also safely picking up steam in this particular segment. So our forecast for the end of the year is about $625 million to $650 million in total servicing portfolio. Looking at our 2012 and 2013 guidance, we've recently revised our 2013 upward and came out with 2013 guidance both in revenue, pre-tax, and EPS that clearly was higher than 2012. For 2012, we increased our midpoint on a pre-tax basis to $8.75 million, up from $7.5 million. The EPS range midpoint is not $0.13 per diluted share, up from $0.12. We've recently also gave out in this press release our 2013 full year guidance for EPS with a pretty wide range of $0.13 to $0.20 with a midpoint of $0.17 per diluted share. We are extremely comfortable with our midpoint, but we did want to give a wide range. Obviously as a company, we're sitting in front of things like an election, the fiscal cliff and the effects of Hurricane Sandy. So we did want to be a little cautious and not disappoint, but we are comfortable giving that midpoint out and feel pretty good about it. On Slide 20, there's a graphical presentation of what our guidance is and you can see year-over-year, that keeps increasing up. I will point out that in 2011, we had $0.10 in the earnings per share after tax. The significant piece of that was based upon a positive tax hike [ph] that we had. Looking at our EBITDA calculation #21 with respect to guidance, you can see that, that is ramped up nicely from a $9.8 million number in 2011 to a recently revised upward number with a midpoint of $16 million for 2012, and 2013 midpoint EBITDA guidance of $21.4 million. On Slide #22, you can take a look at a pie chart on the sizes of our business. Obviously the largest size, by revenue, the Payment Processing business is almost 66 2/3, but the lending business is growing quite quickly and we think we'll take a bigger piece of this pie chart going forward. We are optimistic, however, about Managed Technology Solutions growth, although I will say that our forecast for next year is conservative, but it's flat to slightly up a little bit. And on 2013 and 2014, there's granular presentations of our original 2012 guidance, our upwardly adjusted 2012 guidance and our 2013 guidance. Looking at our growth strategy going forward, the primarily force and engine of the company has been our alliance partner channels. We're going to continue to emphasize working with entities like Credit Union National Association, Morgan Stanley, AIG and other major alliance partners in the marketplace. Are many of you familiar with the fact that we have begun to advertise nationally and for those of you that are avid cable TV watchers, you could see our ads which we'll talk about on Fox, Fox Business News and CNN, and that strategy seems to be working real well. We've got some preliminary results from the first 7 weeks to share with you. Cross selling and cross marketing is embedded in our culture and we're excited about our efforts there, particularly with training and our internal staff on a regular basis on how to become expert refurbers. We're very excited about our product launch at the NASDAQ market site on November 14 where we're going to rollout our Newtek Advantage, our small medium sized business operating platform. We're real excited about that business product for SMB, primarily focusing on a cloud-based application that will give businesses real-time data right at their fingertips on their smartphone or iPad. On Slide #27, this is really sort of a repeat of where our thrust is going to be. We're real excited about the exposure that we're getting both on national TV. Our public relations program's working real well. I will be on the Gerri Willis Show tonight on Fox Business News at 6 p.m. Our rollout of the Newtek Advantage platform, which will be debuting on November 14 at the NASDAQ market site. For those of who wanting to attend that, please go to our website or see our press release and you'll be able to get an invitation to that product launch. On Slide #28, that's a little bit of a more granular description of our national television marketing campaign. For the first 7, 8 weeks, our campaign is primarily focused on lending. Our actual TV commercial is on our small business financed section of our website. We are putting out practically 200 monthly 30-second commercials. These commercials have been seen on CNN, Fox News, Fox Business News, MSNBC, et cetera. And our commercial schedule is primarily Monday to Thursday 7 a.m. to 11 p.m. in prime time. We've had some very good results early on. The average time in our site has increased by 32% since the beginning of our campaign on September 10. We've had a 20% improvement in our balance rates since the campaign has started. On Slide #21, there's a snapshot. We really suggest you all go to thesba.com. We call it 2.0. It's the second derivation of our site. We think we've done a real good job in cleaning up our site, making it simple, easy to navigate and most importantly, acquire our products. On Slide #30, you can take a look at our referrals that have been increasing significantly. We had a 20% increase in daily referrals across all of our products. Obviously if you look at the baseline from January 1 to September 9 where we have no TV on and from September 10 to October 23, we've increased about 20%. Now the commercials have been 100% focused so far on lending. If you look at that particular segment alone, referrals were up 144% from our baseline and probably in mid-November, we're going to start to shift towards our fixed hour a month website product as well as eComm in the cloud application of Newtek Advantage program. And we will also be offering our insurance agency in the cloud, offering health insurance products to business owners which we think will be germane whether we have ObamaCare or not. And we'll also be pushing Payroll in the cloud shortly. So that's kind of what we have in the can going forward as we diversify our offering across our TV campaign. Our lending referrals overall experienced an 84% increase when you go quarter-over-quarter. Now obviously for the first 6 months of the year, we were on our regional radio campaign with WABC. We are now off the air there. But I think you can start to see a nice building of referrals from our baseline, particularly looking at Q3 2012 versus Q3 2011. When you take a look at visitor's trend into our website, we've had also significant increases there. Total visitors to www.thesba.com, we refer to that as thesba.com, increased by 109% in the third quarter versus the quarter in the year prior and unique visitors, up 110%. So we're real happy with new businesses acquainting ourselves with our website. Many of you are family with our SB Authority blog on Forbes. We will, in the next day or 2, release our SB Authority market business index and we'll also increase our SB Authority Market Sentiment Survey probably tomorrow. So those are a few things that we play out into the market on a regular basis, which drives significant traffic to our site. I'd like to bring your attention now to Slide #37, which is a discussion over the Newtek Advantage. The Newtek Advantage, which is a press release we put in the last 7 days, is a mobile real-time SMB management platform. We believe this is an extremely important business opportunity for our current existing businesses as well as introducing ourselves to new SMBs and independent business owners all across the United States. The Newtek Advantage basically puts critical transactions and business applications at the fingertips of a small, medium-sized business and basically gives the business owner the intelligence that businesses are going to require going forward and it's going to give them the advantage to succeed. We've come up with an acronym that the Newtek Advantage is SMART. It's going to help businesses increase their sales, it's going to m, give them more control over their business and fewer surprises. It's going to give them a, accelerated profits. It's going to give them r, real-time information right to their tablet or their smartphone. And t, it's a technology enhancement that's going to enable them to reduce their cost of an IT department as well as doing business. On Slide #38, we talked further about our Newtek Advantage and the product launch at the NASDAQ, where we're going to release our first business application which is e-commerce in the cloud. Through e-commerce in the cloud, we're going to be able to drive real-time web traffic statistics which updates every minute and real-time payment processing data: Visa, MasterCard, Discover, or American Express. We're able to do this because we are the host, we are the processor and we have our own gateway. And because we have all these critical business functions to an e-commerce platform, we can give a business owner what they currently don't have and that's real-time data; both in traffic and traffic statistics, bounce rate, time on sight, unique, total visitors, when are they coming to this site, changes during the day, getting real interesting reports that are available right to their tablet, to their smartphone. Similarly on the payment processing side, we're going to get real-time Visa, MasterCard payment processing data so they could check it during the day, in the morning, in the afternoon. If they've got specific promotions when they're driving traffic to an e-commerce site or a virtual terminal, they'll be able to get that information right to their smartphone and their tablet. The Newtek Advantage, we think, is extremely important. Over the course of time, we'll be rolling out Payroll in the cloud and insurance agency in the cloud, giving businesses the ability to manage online Payroll, while making changes or approvals right from a tablet or home device and insurance agency in the cloud, giving business owners the ability to access all their insurance policies, their debt pages, their renewal notification notices as well as [indiscernible] information. I think that particularly with Hurricane Sandy, a lot of business owners have been searching from their policies over the last 24 to 48 hours. With the Newtek Advantage, they'll be able to get it right from their tablet or their smartphone. Concluding my part of the presentation today, looking at Newtek as an investment opportunity, we're excited and we got the company positioned for sustainable growth. We're estimating approximately 12% midpoint of revenue growth for next year. We're really excited about our cloud-based initiatives. Most of guidance that we have for 2013 does not have these particular initiatives loaded into them. The company is unique in that it's got diversified business solutions and the visions that enable it to get a blend of different business cash flows and revenue summary occurring; some one-time, I will say most of our business revenues, however, are recurring. With the growing equity base, you can see that in book value. We have very modest financial leverage where we have leverage; it's to get loans that are typically borrowed at $0.50 to $0.55 on a $1. We have a very experienced management team across all the different divisions with a large market opportunity positioning ourselves for the 27 million small medium-sized business owners that the Small Business Administration defines as small. And we think we've done a very good job of positioning ourselves and being recognized as the authority for small medium-sized businesses. I'd now like to pass the rest of the presentation over to Jenny Eddelson, our Chief Accounting Officer to review important financial information.

Thank you, Barry. For the quarter ended December 30, 2012, the company's consolidated revenue grew by 9.1% and we had consolidated pre-tax income of $2.9 million, both significant improvements from the third quarter of 2011 and driven primarily by our EPP and SBF segments. Our earnings per share doubled from income of $0.02 per diluted share September 30, 2011 to $0.04 per diluted share September 30, 2012. Please turn to Slide 45 for a summary of revenue and pre-tax income or loss by segment for the third quarter of 2012. Electronic Payment Processing segment revenue increased by $980,000 or 5% period-over-period to $21.7 million. The increase was due predominately to a combination of growth and processing volumes, selected fee increases and in addition to services provided to our merchants. Pre-tax income increased by $777,000 or 63% to just over $2 million to the third quarter of 2012 compared to $1.2 million recorded in the same period last year. The increase is due primarily to a $662,000 improvement in dollar margin of operating revenues, less Electronic Payment Processing costs resulting from the introduction of new higher margin products and services during 2011 as well as the impact on revenue and EPP costs resulting from debit card pricing and interchange cost adjustments. In addition, depreciation and amortization decreased by $208,000 period-over-period due to intangible assets becoming fully amortized. Managed Technology Solutions segment revenue totaled $4.5 million for the third quarter of 2012, a decrease of $261,000 compared with the year-ago period. This decrease was due to a reduction in the total number of web hosting plans sold as well as a decrease in web design revenue for the period, which was offset in part by improved revenue per plan. The increase in the average revenue per plan reflects the growth in average cloud instances, which increased 60% quarter-over-quarter and customers purchasing higher cost plans, including additional options and services. Pre-tax income was $1.2 million, an 8% decline from the third quarter of 2011. The decrease in revenue was partially offset by $154,000 reduction in total operating expenses for the period. Cost savings and leasing utilities expenses were achieved primarily as a result of the MTS, management office relocation in 2012. The small business finance segment had 46% improvement in total revenue, increasing from $4.6 million in the third quarter of 2011 to $6.7 million in total revenue for the third quarter of 2012. Premium income increased by 27% or $675,000 for the third quarter of 2012 due to an increase in the number of loans sold during the quarter as well as an increase in the average sale price from 110 in the third quarter of 2011 to 115 for the third quarter of 2012. Loans funded in the third quarter of 2012 totaled $26.6 million versus $25 million in the same period of 2011. Servicing income increased by 154% or $1.3 million period-over-period as a result of significant additions to both third party servicing as well as to our own portfolio. Total expenses for the lending segment increased to $1.3 million period-over-period and was partially attributable to $660,000 increase in interest expense, the majority of which, was related to the Summit financing transaction. In addition, salaries and benefits as well as other G&A costs increased by a combined $689,000, both of which is directly attributable to increases in the amounts of loan service and year-to-date loan originations. The lending segment had pre-tax income of $2 million for the third quarter of 2012, a 127% improvement over the same quarter last year. The All Other segment, pre-tax loss decreased by $125,000 or 41% quarter-over-quarter. This improvement was due primarily to an increase in insurance commissions as well as growth in revenues from our Payroll services subsidiary. Both the Corporate and Capcos segment showed improvements quarter-over-quarter with a combined 25% decrease in loss due to decreases in salaries and benefits, professional fees, rent and related expenses and other operating expenses. Slide 46 reflects our revised full year guidance for 2012 based primarily on an improvement in the small business finance segment. We are increasing our consolidated midpoint pre-tax income to $8.75 million from $7.5 million as well as midpoint modified EBITDA to $16 million, up from the previous midpoint of $15.3 million. EPS midpoint increased to $0.13 per diluted share, up from $0.12 from our previous guidance. Slide 48 reflects our 2013 full year guidance. We are forecasting midpoints of EPS at $0.17 per diluted share, an approximate 31% increase over the expected midpoint forecast for 2012. Revenue at $147 million, a 12% increase over the 2012 forecast midpoint, pre-tax income at $11.5 million, an approximate 31% increase over the 2012 forecast midpoint and modified EBITDA at $21.4 million, an approximate 34% increase over the 2012 midpoint forecast. And with that, I would now like to turn the call back to Barry.

Operator, we're ready for questions.

[Operator Instructions] We have a question from Marc Silk of Silk Investment Advisors.

In a sub-2% GDP environment, how are you able to achieve these type of revenue growth going forward?

Well, I think, Marc, whether it's plus 2%, flat or minus 2%, small medium-sized businesses represent about 50% of GDP. So it's a big number. And our goal, relative to being able to do business in the market is not based upon a growing economy. We'd certainly love to have it. I'd love to have strong new business formation, I'd certainly like to have an environment where businesses are wildly optimistic and wanting to spend money. We're able to grow in this particular business because I think we're positioned in the market with the right products at the right time. From a countercyclical perspective, we're in the lending business where nobody else is in it. We got capital available and a good program to lend. We've come through the credit crunch and the lending crisis with good accounting, good reserves and a good discipline and we think we can grow that business because we're well positioned for it. When other people were blowing up because they took accounting gains, we stayed the course. So that's one aspect of it. The second aspect of it is the one thing you can count on is the world and business is constantly changing. So we're real happy and proud of our position in the market, particularly given what you've seen with Hurricane Sandy, to be able to offer to small and medium-sized businesses, cloud computing solutions that are significantly going to save on their infrastructure, and in a market today where people, they're stranded, they can't get into work, their data is destroyed and they would love to have their data or business applications on a tablet. We're happy to rollout the Newtek Advantage and be able to drive that into businesses. In the Electronic Payment Processing space, I guess we could have gone to an independent rep model like everybody else has done over the last 5 to 10 years and have independent reps in the market going out, trying to get business done. We have a virtual sales and marketing effort using the new tracker system which we recently got approved as patent from the U.S. Patent Office. We're lined up with some of the largest institutions in the world, Navy Federal Credit Union, Morgan Stanley, Near Community Bank [ph] and others to drive their small businesses to us using technology. We give them full transparency into our back office. There's a new tracker system, it's like the salesforce.com for business services and referrals. So the way that we can grow and are succeeding is because we're well positioned. We're in a segment of the economy that is not going away. Small businesses is going to continue to thrive and we think we've got superior products and that's why we're able to continue to grow revenues and drive a good bottom line.

Okay. You mentioned Newtek Advantage, so how big could this be and why is it meaningful to your business?

Let me say this. I'm extremely proud of the Newtek Advantage as a product and to be able to drive business applications to a tablet or smartphone. And we've also filed a patent on the Newtek Advantage as well. The secret to the sauce is our ability to execute on it. So I don't want to -- if you'll pardon, I know you're from New England, Marc, I don't want to be Rex Ryan and say we're going to get to the Super Bowl because it invariably works against you. But that business application is really good. So we've got to do some heavy lifting, get it out in the market, promote it and really demonstrate to people we've got a great product and get people to use it. That's why we're doing the launch at the NASDAQ. Personally, I think it's a big deal, particularly in e-commerce space. It is not going to be easy for other people to try to enter the market with that application off of that operating management platform, because you have to be a host, be a processor and have your own gateway and have them all linked together and have them all be able to drive data together into one reporting mechanism. And we know how long we've worked on this now and how hard it is to get in this, plus you got a patent on it. So we think that this is important. You are going to start to see ads on it. I don't think it's going to be a significant contributor in 2013, it could be. But I think it's an important -- Newtek Advantage is an important business process that we're going to drive to small to medium-sized businesses down through the next several years to drive revenue growth for this company. Business, owners are going to be operating their business from mobile app devices, from tablets and smartphones. And we're very well positioned to do that and we could layer multiple products onto that platform.

So there was an article in Boston Globe and it said Eastern Bank, for the fourth year in a row is the biggest SBA lender in Massachusetts and the number was a whopping $23 million. I think they've got about $8 billion in assets. So what is it with these banks, is it not profitable as other venues or because -- little guys like you are crushing them, that performer in Boston?

I think that if you look at the SBA 7a business, which is a unique type of a loan program, the policy and procedure manual from the Small Business Administration is 1,600 pages. You have to have a dedicated group of underwriters, servicing people, collectors, to follow that policy and procedure guidelines. So for major money center banks, it's not big enough to move the needle. And for community banks, they can't put out enough of this business in their own market to make it profitable. So we're a bit unique that we have a national platform. We're unique in that our new tracker system in relationship with alliance partners allows us to aggregate a lot of opportunities, look at a lot of deals and take in the kind of deals that we want to do. Most banks are running after this type of business with 6-figured salary bankers that are typically more familiar with other types of conventional loan programs that they did throughout the last decade. So there are barriers to entry and frankly most community banks and major money center banks are not well suited to the product and that's we're well positioned for it.

But somewhere down the line, it might make sense for a bank to just say, okay instead of putting all this infrastructure, let's just agree [ph] with Newtek at a very big premium. Anyways, you don't have to comment on that. So the people you're advertising with, I know you didn't mention CNBC. Are their rates just so out of whack to the others that you mentioned?

I think that our primary strategy in advertising is to make sure that we go after the SMB -- business owner and that's not to say that we won't look at CNBC in the future, but those are the current channels that we're on, that we're getting the best deals for at this time.

Okay, because my argument, as always most money managers big and small are going to watch that channel and I know it's -- and then last, you're putting a lot of money into awareness of your stock on the investment side. How has the interest been in your company, the last 6 months or so?

The interest you're talking about in the stock in general?

Yes, by investors, money managers, et cetera?

We have added Hayden Investor Relations. Their phone number is -- and contact information is on a PowerPoint externally. We've also added an internal resource, Jayne Cavuoto, who has worked for us previously in investor relations and we feel pretty good about the renewed effort in investor relations at this point. And I think you could see how the stocks trading. It's somewhat evident of that.

The next question is from Greg Cole of Sidoti & Company.

Just the first question was kind of a clarification. When you're talking about referrals, I guess just describe exactly what that is?

Okay. Because of the way we do our business, using the Internet and the new tracker system, which basically is the frontend aggregation tool, any client, business client, that comes to us and says, hey, I'm interested in the business loan, I'm interesting in web design, I'm interested in a business owner's protection policy, I'm interested in health insurance, whatever it might be, we have a product, that's considered a referral. And that comes from predominately the Alliance partners, it also comes from our TV commercials, it comes for an Internet search. So the way business owners reach us, it's an untraditional way not through feet on the street salespeople typically or branches or bricks-and-mortar, it's through referrals. And in each one of these divisions, we track these referrals nightly, we look at the close rates, we look at where the referrals are coming from, we track them by product, et cetera. So it really gives us a very good database of information. Plus you might have a business that comes in for a referral, you can't do the business but now you've got the client's information in the database to cross-market and put him on the monthly newsletter which now goes out in excess of 60,000 businesses across the U.S.

Okay. So it is very similar to an application?

It's actually less than an application because you might have somebody that might come in and apply for a loan and they don't own a business. However, in the merchant space and in the hosting space and some of the other spaces, it's a little bit closer to an application, but it a step before an application.

Okay. I guess have you -- has it been long enough to see if there is a different close rate between the -- I guess these new referrals and what you were doing prior to the commercials?

It's a little early on the TV news because we're probably -- let's see, September, October, we're 6 weeks into the program which is too short of a cycle for a loan close, but we are tracking that pipeline pretty closely and the quality of the referrals that are coming in is pretty good. So we're satisfied with the results that are coming in from that business. Now obviously the margin on the loan is a lot greater and bigger than the margin on a $72 website or maybe what you might get in revenues for health insurance of -- or the products, but you should get a lot more units in the other areas. So it is will be an interesting discussion going forward as we look at the data and analyze it. But right now, we're very happy with the value that we've gotten from the national TV campaign so far.

Okay. And then -- I guess the Aurora purchase, those are just servicing, right? So it's essentially 1% is the annual profit or, I guess, revenue from off of that $30 million. Is that the right way to think about that?

Yes, you could use that a good rule of thumb. And in the Aurora transaction, we assumed that servicing performance containing for it. And that's approximately the revenue in servicing that S&P-rated securitization. So that's the -- although we've done 2 transactions ourselves, but we combined into one, this is the second rated Standard & Poor securitization that we're servicing.

Okay. And are there good referral opportunities from there?

Yes.

Okay. I mean do you -- I guess is there any way to quantify that?

Well, one way to quantify it is that every borrower in that book of business has qualified for a small business loan and I think most of those loans were done in 2005 and 2006 and there's been some pay down. Those are good customers, they're well healed. They could take other products. There's also a clean-up call in that deal that will enable us to effectively, at a price, buy the loans out and put them into another transaction and possibly refinance loans out of that transaction.

Okay. And then the last caller was talking about community banks and their SBA lending and I guess you gave a pretty good response as to what your competitive advantage is, but I guess have you seen a lot of community banks trying to have this as -- to try and increase fee income? Can you talk about that a little bit?

Yes, I think with -- as markets go back and forth, there's no question that this particular market is being looked at but you really can't snap your fingers and walk into this business. It takes years. So I think people look at it and -- but the one thing you can take a look at to gauge the reality of that question is look at the changing participants of the top 20 or 30 SBA lenders and then they really don't change very much.

The next question is from Harold Elish [ph] of UBS.

To follow-up on the previous question, your sense of -- did you have any data that suggests, with new tracker, the log in cost that the average person that comes in from a referral, the average opportunity is increasingly being led to other aspects of the business that Newtek can offer them?

I think the cross selling opportunity from lending is a bit misunderstood in that our lending book is 900 to 1,000 business accounts, of an excess of 100,000. On the other hand, the account to [ph] lend money to typically tend to be in the top quartile size and they do make good referring participants for the other products. I will tell you that we have a product to ensure business owners against PCI compliance risk for security breaches for Visa, MasterCard cards for merchant acquirers. And I would say about 8,000 to 9,000 of our clients that process with us also have purchased that insurance product. So we have had real good success in cross selling and cross marketing. We're going to continue to do that by educating and training our processing staff, both customer service reps and business service specialists. And as our applications like Payroll in the cloud here get rolled out, we drive real-time Payroll information to a business owner's tablet, the ability to also provide the health insurance and the workman's comp and drive that to the tablet is going to enable our ability to bundle. When you look at our e-commerce in the cloud product, you've got merchant processing, web hosting, gateway fees all rolled up into one product offering. So we think as we rollout the Newtek Advantage and business owners become more familiar with Newtek as the national brand, the ability to cross sell and cross market into the customer base become more apparent. As our newsletter distribution gets larger, we're excited about on a monthly basis, demonstrating to business owners that we do have other products and services. We have about 12% to 13% open rate on our newsletters, so we're pretty happy about that. So we're pretty happy with our cross selling and cross marketing opportunities. It's not easy as many institutions have tried this and been road kill [ph] before us, but with our technology, we think it really makes a lot easier as well as the fact that we got real good products.

And one thing we haven't discussed on these calls, to my knowledge is do businesses get a pricing advantage for each incremental service that they're willing to contract with you? I mean if somebody is on the web with you and decides to do Payroll or decides to do their insurance, do they get a price break or how does that impact your margins or where do you go with that?

We have real good prices on an individual basis. So when you look at prices comparably, we are very competitive. We don't want to sell on price. We think that's a bad strategy. We really want to sell on ease of use, customer service, state-of-the-art products with competitive pricing. So we don't want to go out and say basically, buy this get this free as that's not a real good long-lasting strategy. Our preference is to get our clients to use our operating platform such as the Newtek Advantage, lay your products on top of it, becomes so comfortable and familiar with the application, they just don't want to switch out. But always be competitive. We want our clients to know that when they use our business products, they have great value. So we've had situations like in the last couple of days, where we got customers come to us on Payroll for example, they can't get into the office, they can't make Payroll. It really becomes very problematic. So we want customers to use our products and services in a bundled format because a, the pricing is good, they're easy to use. And we really don't want to be discounting for taking additional products at this point. There's really no need to.

[Operator Instructions] The next question is from Eric Duncan of Moloney Securities.

I had a couple of questions surrounding new customers and new customer growth. Is it fair to say that your alliance partners are your primary method of new customer acquisition?

Yes, our alliance partners have historically been the big driver of growth and at one point that's probably 95% of our new clients that were coming in from the alliance relationships. Now it's probably down to 80%.

Given that you have these other referral sources?

Given that our national campaign is generating referrals and our website is generating a lot of opportunities with increased traffic and the blogging and other activities, yes.

Okay, good. Do you have any kind of a metric where we can see the sheer number of customers you have now had in the past trend along those lines, do you -- is that a public -- is that something you publicly state?

We have it in our MD&A. And when we publish our Q this quarter, you'll be able to dig that out and I think we'll take a look at that for the fourth quarter when we do the annual to give that type of information as well as maybe try to come up with some metrics for average revenue per customer, which will be interesting, given that we've got all these different products.

Okay. And kind of speaking to that, you have a nice recurring revenue element to this business model. What would you say your annual customer retention rate is or maybe possibly on the net basis, relative to new customer adds?

Sure. The -- in the small medium-sized business market, where you look at the payment processing business and the hosting business. The attritional rates are industry standard typically between 20% and 25%, which might sound alarmingly high. I mean, the fact of the matter is, there's a lot of small to medium-sized businesses with a preponderance of them being new start-ups grow our business quite frequently. So it's not like we're losing away. Particularly in a tough economy, you have a high level of business failures. Putting that aside, in our payment processing space, we're typically towards the low end of that range and our hosting space historically, we've been underneath that. I will say, however, right now, share hosting plans which we have quite a few of at the low end of the range are something an endangered product. Although it will be interesting to see what happens, going forward with Facebook; does Facebook become the major player with SMBs or do they flame out? Does the small and medium-sized business think they're getting a free website and hosting plan with Facebook, whether they've been giving Facebook all their sensitive information or if they did it with us for $72 a year. So I think that the concept of attrition is clearly important to us and our goal is to continue to attract new businesses and start-ups, through your farm [ph] team. Those are always going to attrite at a high level, but to make sure that we keep our larger customers that are generating the bigger revenue dollars. So there's sort of attrition on a revenue basis, there's attrition on the unit basis and we'll look at producing more of that information in the future.

And this attrition, is that net of new customers or simply static?

That's gross. I mean we're growing our -- I know we're growing our customer count in the EPP business. I think in the last couple of years, our customer count in the technology business has declined. I see that trend reversing itself and in all the other businesses it's growing.

Okay, good. Let me think here. The other question is, you certainly are starting to focus more on the loan servicing element and as such, you seem to have a view, very unique parts to this business. Do you have a goal in mind, relative to margins going forward for say 2013 or beyond? Where do you see a stable margin either on an EBIT basis or any other one you had one you hadn't thought of?

Well, I think the biggest margins in our business are in small business lending. The smallest margins are in probably the payment processing space. Now, the double-edged sword in the payment processing space is trading at the biggest multiples. So the biggest margin business is trading at the lowest multiples. So to be frank with you, I don't have -- in a company, at this point in time does not have a real philosophy with respect to what we want to target. What I will tell you is if you look at our projected 2013 EBITDA midpoint which is a range between $21 million and $22 million and what we closed, at a $70 million market cap and the fact that our revenues are growing at around double digits, slightly over like 12% next year, as an investor, I'd be pretty happy with that.

There are no further questions in the queue at this time.

All right. Thank you very much and I appreciate everyone's attendance. I'm heading over to the Gerri Willis show. I'll see you all at 6 o'clock on Fox Business News. Take care. Thank you.

Ladies and gentlemen, this concludes today's program. You may now disconnect. Good day.