Edgar Filing: NEWTEK BUSINESS SERVICES INC

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Non-Accelerated Filer

Smaller reporting company

Form 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-16123

NEWTEK BUSINESS SERVICES, INC.

(Exact name of registrant as specified in its charter)

New York

11-3504638

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)


1440 Broadway, 17^th floor, New York, NY		10018
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (212) 356-9500

Indicate by checkmark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of November 10, 2009, there were 36,012,673 of the Company’s Common Shares outstanding.

CONTENTS


		PAGE
PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited):

	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2009 and 2008	3

	Condensed Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008	4

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008	5

	Notes to Unaudited Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	39

Item 4.	Controls and Procedures	40

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	42

Item 6.	Exhibits	42

Signatures		43

Exhibits		44

Item 1.

Financial Statements

NEWTEK BUSINESS SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

(In Thousands, except for Per Share Data)


	Three Months ended September 30,						Nine Months Ended September 30,
	2009			2008			2009			2008
Operating revenues	$	26,812		$	24,243		$	78,010		$	72,393


Operating expenses:
Electronic payment processing costs		15,370			13,075			42,424			38,224
Salaries and benefits		4,410			5,052			13,717			17,616
Interest		2,668			2,333			8,790			6,816
Depreciation and amortization		1,313			1,772			4,532			5,348
Provision for loan losses		387			711			1,320			1,622
Other general and administrative costs		3,797			4,026			12,223			12,218

Total operating expenses		27,945			26,969			83,006			81,844


Operating loss before fair market value adjustment and benefit (provision) for income taxes		(1,133	)		(2,726	)		(4,996	)		(9,451	)

Net change in fair market value of credits in lieu of cash and notes payable in credits in lieu of cash		34			(74	)		1,044			(13	)


Loss before benefit (provision) for income taxes		(1,099	)		(2,800	)		(3,952	)		(9,464	)
Benefit (provision) for income taxes		1,244			(56	)		2,389			1,706


Net income (loss)		145			(2,856	)		(1,563	)		(7,758	)
Net loss attributable to noncontrolling interests		637			109			732			335

Net income (loss) attributable to Newtek Business Services, Inc.	$	782		$	(2,747	)	$	(831	)	$	(7,423	)


Weighted average common shares outstanding - basic		35,631			35,628			35,625			35,771

Weighted average common shares outstanding - diluted		35,756			35,628			35,625			35,771


Earnings (loss) per share - basic and diluted	$	0.02		$	(0.08	)	$	(0.02	)	$	(0.21	)

See accompanying notes to these unaudited condensed consolidated financial statements.

NEWTEK BUSINESS SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2009 AND DECEMBER 31, 2008

(In Thousands, except for Per Share Data)


	September 30, 2009			December 31, 2008
	Unaudited			(Note 1)

ASSETS
Cash and cash equivalents	$	15,572		$	16,852
Restricted cash		8,548			8,366
Credits in lieu of cash		53,230			70,559
SBA loans held for investment (net of reserve for loan losses of $4,014 and $3,420, respectively)		23,408			26,912
Accounts receivable (net of allowance of $563 and $192, respectively)		5,524			5,175
SBA loans held for sale		—			6,133
Prepaid expenses and other assets (net of accumulated amortization of deferred financing costs of $2,423 and $2,122, respectively)		9,966			9,998
Servicing asset (net of accumulated amortization and allowances of $4,351 and $3,756, respectively)		2,422			2,282
Fixed assets (net of accumulated depreciation and amortization of $11,591 and $9,477, respectively)		3,861			5,062
Intangible assets (net of accumulated amortization of $13,840 and $12,113, respectively)		4,649			6,096
Goodwill		12,092			12,092

Total assets	$	139,272		$	169,527


LIABILITIES AND EQUITY
Liabilities:
Accounts payable and accrued expenses	$	8,841		$	9,344
Notes payable		16,801			25,998
Deferred revenue		1,964			2,203
Notes payable in credits in lieu of cash		53,230			70,559
Deferred tax liability		3,833			5,344

Total liabilities		84,669			113,448


Commitments and contingencies
Equity:
Newtek Business Services, Inc. stockholders’ equity:
Preferred stock (par value $0.02 per share; authorized 1,000 shares, no shares issued and outstanding)		—			—
Common stock (par value $0.02 per share; authorized 54,000 shares, 36,657 and 36,667 issued, respectively; 35,631 and 35,649 outstanding, respectively, not including 97 and 394 shares held in escrow, respectively)		733			733
Additional paid-in capital		58,324			58,232
Accumulated deficit		(5,377	)		(4,545	)

Treasury stock, at cost (1,026 shares)		(649	)		(649	)

Total Newtek Business Services, Inc. stockholders’ equity		53,031			53,771

Noncontrolling interests		1,572			2,308

Total equity		54,603			56,079

Total liabilities and equity	$	139,272		$	169,527

See accompanying notes to these unaudited condensed consolidated financial statements.

NEWTEK BUSINESS SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

(In Thousands)


	2009			2008
Cash flows from operating activities:
Net loss	$	(1,563	)	$	(7,758	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Income from tax credits		(6,483	)		(4,634	)
Accretion of interest expense		7,528			5,300
Fair market value adjustment		(1,044	)		(13	)
Deferred income taxes		(1,511	)		(2,562	)
Depreciation and amortization		4,532			5,348
Provision for loan losses		1,320			1,528
Gain on sale/recovery of investments in qualified business		(1,078	)		(93	)
Other, net		553			300
Changes in operating assets and liabilities:
Originations of SBA loans held for sale		(3,976	)		(16,067	)
Proceeds from sale of SBA loans held for sale		10,109			10,311
Broker receivable		(1,096	)		—
Prepaid expenses and other assets, accounts receivable and accrued interest receivable		(393	)		(412	)
Accounts payable, accrued expenses and deferred revenue		(729	)		(1,365	)

Other, net		(532	)		228


Net cash provided by (used in) operating activities		5,637			(9,889	)


Cash flows from investing activities:
Investments in qualified businesses		—			(885	)
Return of investments in qualified businesses		1,981			859
Purchase of fixed assets and customer merchant accounts		(1,298	)		(2,733	)
SBA loans originated for investment, net		(1,004	)		(5,169	)
Proceeds from sales of loans held for investment		400			—
Payments received on SBA loans		2,846			4,102
Change in restricted cash		(387	)		2,889

Net cash provided by (used in) investing activities		2,538			(937	)

See accompanying notes to these unaudited condensed consolidated financial statements.

NEWTEK BUSINESS SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008 (CONTINUED)


	2009			2008

Cash flows from financing activities:
Net repayment on notes payable	$	—		$	(338	)
Purchase of treasury shares		—			(458	)
Net (repayments) proceeds on bank notes payable		(9,197	)		4,226
Other		(258	)		(151	)

Net cash (used in) provided by financing activities		(9,455	)		3,279


Net decrease in cash and cash equivalents		(1,280	)		(7,547	)
Cash and cash equivalents - beginning of period		16,852			25,372


Cash and cash equivalents - end of period	$	15,572		$	17,825


Supplemental disclosure of cash flow activities:

Reduction of credits in lieu of cash and notes payable in credits in lieu of cash balances due to delivery of tax credits to Certified Investors	$	25,126		$	14,314


Issuance of treasury shares for 401k match	$	—		$	112


Reduction of structured insurance product and notes payable - Certified Investors	$	—		$	3,810


Shares held in escrow released to former shareholders of wholly owned subsidiary	$	—		$	72

See accompanying notes to these unaudited condensed consolidated financial statements.

NEWTEK BUSINESS SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION:

Newtek Business Services, Inc. (“Newtek”) is a holding company for several wholly- and majority-owned subsidiaries, including fourteen certified capital companies which are referred to as Capcos, and several portfolio companies in which the Capcos own non-controlling or minority interests. The Company provides a “one-stop-shop” for business services to the small- and medium-sized business market and uses state of the art web-based proprietary technology to be a low cost acquirer and provider of products and services. The Company partners with companies, credit unions, and associations to offer its services.

The Company’s principal business segments are:

Electronic Payment Processing: Marketing, credit card processing and check approval services to the small- and medium-sized business market.

Web Hosting: CrystalTech Web Hosting, Inc., d/b/a/ Newtek Technology Services, (“NTS”) which offers shared and dedicated web hosting and related services to the small- and medium-sized business market.

Small Business Finance: Primarily consists of Newtek Small Business Finance, Inc. (“NSBF”), a nationally licensed, U.S. Small Business Administration (“SBA”) lender that originates, sells and services loans to qualifying small businesses, which are partially guaranteed by the SBA; and CDS Business Services, Inc. d/b/a Newtek Business Credit (“NBC”) which provides receivable financing.

All Other: Includes results from businesses formed from Investments in Qualified Businesses made through Capco programs which cannot be aggregated with other operating segments.

Corporate Activities: Corporate implements business strategy, directs marketing, provides technology oversight and guidance, coordinates and integrates activities of the segments, contracts with alliance partners, acquires customer opportunities, and owns our proprietary NewTracker™ referral system. Revenue and expenses not allocated to other segments, including interest income, Capco management fee income and corporate operations expenses.

Capcos: Fourteen certified capital companies which invest in small- and medium-sized businesses. They generate non-cash income from tax credits and non-cash interest and insurance expenses.

The condensed consolidated financial statements of Newtek Business Services, Inc., its Subsidiaries and consolidated entities (the “Company” or “Newtek”) included herein have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America and include all wholly- and majority-owned subsidiaries, and several portfolio companies in which the Capcos own non-controlling minority interest in, or those variable interest entities which Newtek is considered to be the primary beneficiary of. All inter-company balances and transactions have been eliminated in consolidation. Noncontrolling interests (previously shown as minority interest) are reported below net income (loss) under the heading “Net loss attributable to noncontrolling interests” in the unaudited condensed consolidated statements of operations and shown as a component of equity in the condensed consolidated balance sheets. See New Accounting Standards for further discussion.

The accompanying notes to unaudited condensed consolidated financial statements should be read in conjunction with Newtek’s 2008 Annual Report on Form 10-K. These financial statements have been prepared in accordance with instructions to Form 10-Q and Article 10 of Regulations S-X and, therefore, omit or condense certain footnotes and other information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States. The results of operations for an interim period may not give a true indication of the results for the entire year. The December 31, 2008 consolidated balance sheet has been derived from the audited financial statements of that date, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

All financial information included in the tables in the following footnotes are stated in thousands, except per share data.

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES:

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported

NEWTEK BUSINESS SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

amounts of revenue and expense during the reporting period. The level of uncertainty in estimates and assumptions increases with the length of time until the underlying transactions are complete. The most significant estimates are with respect to valuation of investments in qualified businesses, asset impairment valuation, allowance for loan losses, valuation of servicing assets, chargeback reserves, tax valuation allowances and the fair value measurements used to value certain financial assets and financial liabilities. Actual results could differ from those estimates.

Revenue Recognition

The Company operates in several different segments. Revenues are recognized as services are rendered and are summarized as follows:

Electronic payment processing revenue: Electronic payment processing income is derived from the electronic processing of credit and debit card transactions that are authorized and captured through third-party networks. Typically, merchants are charged for these processing services on a percentage of the dollar amount of each transaction plus a flat fee per transaction. Certain merchant customers are charged miscellaneous fees, including fees for handling charge-backs or returns, monthly minimum fees, statement fees and fees for other miscellaneous services. Revenues derived from the electronic processing of MasterCard^® and Visa^® sourced credit and debit card transactions are reported gross of amounts paid to sponsor banks.

The Company also derives revenues from acting as independent sales offices (“ISO”) for third-party processors (“residual revenue”) and from the sale of credit and debit card devices. Residual revenue is recognized monthly, based on contractual agreements with such processors to share in the residual income derived from the underlying merchant agreements. Revenues derived from sales of equipment are recognized at the time of shipment to the merchant.

Web hosting revenue: Web hosting revenues are primarily derived from monthly recurring service fees for the use of its web hosting and software support services. Customer set-up fees are billed upon service initiation and are recognized as revenue over the estimated customer relationship period of 2.5 years. Payment for web hosting and related services is generally received one month to three years in advance. Deferred revenues represent customer prepayments for upcoming web hosting and related services.

Income from tax credits: Following an application process, a state will notify a company that it has been certified as a Capco. The state then allocates an aggregate dollar amount of tax credits to the Capco. However, such amount is neither recognized as income nor otherwise recorded in the financial statements since it has yet to be earned by the Capco. The Capco is legally entitled to earn tax credits upon satisfying defined investment percentage thresholds within specified time requirements and corresponding non-recapture percentages. At September 30, 2009, the Company had Capcos in seven states and the District of Columbia. Each statute requires that the Capco invest a threshold percentage of Certified Capital in Qualified Businesses within the time frames specified. As the Capco meets these requirements, it avoids grounds under the statute for its disqualification for continued participation in the Capco program. Such a disqualification, or “decertification” as a Capco results in a recapture of all or a portion of the allocated tax credits; the proportion of the recapture is reduced over time as the Capco remains in general compliance with the program rules and meets the progressively increasing investment benchmarks.

As the Capco continues to make its investments in Qualified Businesses and, accordingly, places an increasing proportion of the tax credits beyond recapture, it earns an amount equal to the non-recapturable tax credits and records such amount as “income from tax credits”, with a corresponding asset called “credits in lieu of cash”, in the accompanying condensed consolidated balance sheets. The amount earned and recorded as income is determined by multiplying the total amount of tax credits allocated to the Capco by the percentage of tax credits immune from recapture (the earned income percentage) under the state statute. To the extent that the investment requirements are met ahead of schedule, and the percentage of non-recapturable tax credits is accelerated, the present value of the tax credit earned is recognized currently and the asset, credits in lieu of cash, is accreted up to the amount of tax credits available to the Certified Investors. If the tax credits are earned before the state is required to make delivery (i.e., investment requirements are met ahead of schedule, but credits can only be used by the certified investor in a future year), then the present value of the tax credits earned are recorded upon completion of the requirements. The receivable is calculated at fair value; see note 3 for a full discussion. Delivery of the tax credits to the Certified Investors results in a decrease of the receivable and the notes payable in credits in lieu of cash.

The allocation and utilization of Capco tax credits is controlled by the state law. In general, the Capco applies for tax credits from the state and is allocated a specific dollar amount of credits which are available to be earned. The Capco provides the state with a list of the Certified Investors, who have contractually agreed to accept the tax credits in lieu of cash interest payments on their notes. The tax credits are claimed by the Certified Investors on their state premium tax return as provided under each state Capco and tax law. State regulations specify the amount of tax credits a Certified Investor can claim and the period in which they can claim them. Each state periodically reviews the Capco’s operations to verify the amount of tax credits earned. In addition, the state maintains a list of Certified Investors and therefore has the ability to determine whether the Certified Investor is allowed to claim this deduction.

NEWTEK BUSINESS SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Sales and Servicing of SBA Loans: NSBF originates loans to customers under the SBA program that generally provides for SBA guarantees of 50% to 90% of each loan, subject to a maximum guarantee amount. NSBF sells the guaranteed portion of each loan to a third party and retains the unguaranteed principal portion in its own portfolio. A gain is recognized on the guaranteed portions of these loans through collection on sale of a premium over the adjusted carrying value or a par sale with excess servicing. Commencing on January 1, 2008, the Company began to recognize the gain on sale of the guaranteed portion of the loans on the trade date rather than the date of settlement.

In each loan sale, the Company retains servicing responsibilities and receives servicing fees of a minimum of 1% of the guaranteed loan portion sold. The Company is required to estimate its adequate servicing compensation in the calculation of its servicing asset. The purchasers of the loans sold have no recourse to the Company for failure of customers to pay amounts contractually due.

Upon sale of the loans to third parties, NSBF separately recognizes at fair value any servicing assets or servicing liabilities first, and then allocates the previous carrying amount between the assets sold and the interests that continue to be held by the transferor (the unguaranteed portion of the loan) based on their relative fair values at the date of transfer. The difference between the proceeds received and the allocated carrying value of the financial assets sold is recognized as a gain on sale of loans.

Each class of servicing assets and liabilities are subsequently measured using either the amortization method or the fair value measurement method. The amortization method, which NSBF has chosen to continue applying to its servicing asset, amortizes the asset in proportion to, and over the period of, the estimated future net servicing income on the underlying sold portion of the loans (guaranteed) and assesses the servicing asset for impairment based on fair value at each reporting date. In the event future prepayments are significant or impairments are incurred and future expected cash flows are inadequate to cover the unamortized servicing assets, additional amortization or impairment charges would be recognized. The Company uses an independent valuation specialist to estimate the fair value of the servicing asset.

In evaluating and measuring impairment of servicing assets, NSBF stratifies its servicing assets based on year of loan and loan term which are key risk characteristics of the underlying loan pools. The fair value of servicing assets is determined by calculating the present value of estimated future net servicing cash flows, using assumptions of prepayments, defaults, servicing costs and discount rates that NSBF believes market participants would use for similar assets.

If NSBF determines that the impairment for a stratum is temporary, a valuation allowance is recognized through a charge to current earnings for the amount the amortized balance exceeds the current fair value. If the fair value of the stratum were to later increase, the valuation allowance may be reduced as a recovery. However, if NSBF determines that an impairment for a stratum is other than temporary, the value of the servicing asset and any related valuation allowance is written-down.

Interest and Small Business Administration (“SBA”) Loan Fees—SBA Loans: Interest income on loans is recognized as earned. Loans are placed on non-accrual status if they are 90 days past due with respect to principal or interest and, in the opinion of management, interest or principal on individual loans is not collectible, or at such earlier time as management determines that the collectability of such principal or interest is unlikely. Such loans are designated as impaired non-accrual loans. All other loans are defined as performing loans. When a loan is designated as non-accrual, the accrual of interest is discontinued, and any accrued but uncollected interest income is reversed and charged against current operations. While a loan is classified as non-accrual and the future collectability of the recorded loan balance is doubtful, collections of interest and principal are generally applied as a reduction to principal outstanding.

The Company passes certain expenditures it incurs to the borrower, such as forced placed insurance, insufficient funds fees, or fees it assesses, such as late fees, with respect to managing the loan. These expenditures are recorded when incurred. Due to the uncertainty with respect to collection of these passed through expenditures or assessed fees, any funds received to reimburse the Company are recorded on a cash basis as other income.

Insurance commissions: Revenues are comprised of commissions earned on premiums paid for insurance policies and are recognized at the time the commission is earned. At that date, the earnings process has been completed and the Company can estimate the impact of policy cancellations for refunds and establish reserves. The reserve for policy cancellations is based on historical cancellation experience adjusted by known circumstances.

Other income: Other income represents revenues generated by NBC, as well as revenues derived from operating units that cannot be aggregated with other business segments, and one-time recoveries or gains on qualified investments. Revenue is recorded when there is pervasive evidence of an agreement, the related fees are fixed, the service, and or product has been delivered, and the collection of the related receivable is assured. Other income for the nine months ended September 30, 2009 includes a $1,000,000 recovery of a qualified investment previously written off. Other income particular to NBC include the following components:

•

Receivable fees: Receivable fees are derived from the funding (purchase) of receivables from finance clients. The percentage of fees is set when entered into an agreement with the client. The Company recognizes the revenue on the date the receivable is purchased. The Company does not take ownership of the receivables until funds are released which then constitutes a purchase of a client’s asset. The Company also has arrangements with certain of its clients whereby it purchases the client’s receivables and charges interest at a specified rate based on the amount of funds advanced against such receivables. The interest income is recognized as earned.

NEWTEK BUSINESS SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

•

Late fees: Late fees are derived from receivables the Company has already purchased that have gone over a certain period (usually over 30 days) without payment. The client or the client’s customer is charged a late fee according to the agreement with the client.

•

Billing fees: Billing fees are derived from billing-only (non-finance) clients. These fees are recorded when earned, which occurs when the service is rendered.

•

Other fees: These fees include annual fees, due diligence fees, termination fees, under minimum fees and other fees including, finance charges, supplies sold to clients, NSF fees, wire fees and administration fees. These fees are charged upon funding, takeovers or liquidation of finance clients. Finally, the Company also receives commission revenue from various sources.

The detail of total operating revenues included in the condensed consolidated statements of operations is as follows for the three and nine months ended:


	Three months ended September 30:					Nine months ended September 30:
(In thousands):	2009		2008			2009		2008
Electronic payment processing	$	18,109	$	15,969		$	50,750	$	47,073
Web hosting		4,743		4,586			14,117		13,361
Interest income		368		744			1,296		2,547
Income from tax credits		2,234		1,680			6,483		4,634
Premium on loan sales		142		(5	)		725		472
Servicing fee		421		438			1,246		1,360
Insurance commissions		201		225			619		818
Other income		594		606			2,774		2,128

Totals	$	26,812	$	24,243		$	78,010	$	72,393

Electronic Payment Processing Costs

Electronic payment processing costs consist principally of costs directly related to the processing of merchant sales volume, including interchange fees, VISA and MasterCard dues and assessments, bank processing fees and costs paid to third-party processing networks. Such costs are recognized at the time the merchant transactions are processed or when the services are performed. Two of the most significant components of electronic processing expenses include interchange and assessment costs, which are set by the credit card associations. Interchange costs are passed on to the entity issuing the credit card used in the transaction and assessment costs are retained by the credit card associations. Interchange and assessment fees are billed primarily as a percent of dollar volume processed and, to a lesser extent, as a per transaction fee. In addition to costs directly related to the processing of merchant sales volume, electronic payment processing costs also include residual expenses. Residual expenses represent fees paid to third-party sales referral sources. Residual expenses are paid under various formulae as contracted with such third-party referral sources, but are generally linked to revenues derived from merchants successfully referred to the Company and that begin using the Company for merchant processing services. Such residual expenses are typically ongoing as long as the referred merchant remains a customer of the Company and are recognized as expenses as related revenues are recognized in the Company’s condensed consolidated statements of operations.

Restricted Cash

Restricted cash includes cash collateral relating to a letter of credit; monies due on loan-related remittances and insurance premiums received by the Company and due to third parties; cash held by the Capcos restricted for use in managing and operating the Capco, making qualified investments and for the payment of income taxes; and a cash account maintained as a reserve against chargeback losses.

NEWTEK BUSINESS SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Purchased Receivables

Purchased receivables are recorded at the point in time when cash is released to the seller. A majority of the receivables purchased have recourse and are charged back to the seller if aged over 60, 90 or 120 days, depending on contractual agreements. Purchased receivables are included in accounts receivable on the condensed consolidated balance sheet.

Investments in Qualified Businesses

The various interests that the Company acquires in its qualified investments are accounted for under three methods: consolidation, equity method and cost method. The applicable accounting method is generally determined based on the Company’s voting interest or the economics of the transaction if the investee is determined to be a variable interest entity.

Consolidation Method. Investments in which the Company directly or indirectly owns more than 50% of the outstanding voting securities, those the Company has effective control over, or those deemed to be a variable interest entity in which the Company is the primary beneficiary are generally accounted for under the consolidation method of accounting. Under this method, an investment’s financial position and results of operations are reflected within the Company’s condensed consolidated financial statements. All significant inter-company accounts and transactions are eliminated, including returns of principal, dividends, interest received and investment redemptions. The results of operations and cash flows of a consolidated operating entity are included through the latest interim period in which the Company owned a greater than 50% direct or indirect voting interest, exercised control over the entity for the entire interim period or was otherwise designated as the primary beneficiary. Upon dilution of control below 50%, or upon occurrence of a triggering event requiring reconsideration as to the primary beneficiary of a variable interest entity, the accounting method is adjusted to the equity or cost method of accounting, as appropriate, for subsequent periods.

Equity Method. Investees that are not consolidated, but over which the Company exercises significant influence, are accounted for under the equity method of accounting. Whether or not the Company exercises significant influence with respect to an investee depends on an evaluation of several factors including, among others, representation on the investee’s Board of Directors and ownership level, which is generally a 20% to 50% interest in the voting securities of the investee, including voting rights associated with the Company’s holdings in common, preferred and other convertible instruments in the investee. Under the equity method of accounting, an investee’s accounts are not reflected within the Company’s condensed consolidated financial statements; however, the Company’s share of the earnings or losses of the investee is reflected in the Company’s condensed consolidated financial statements.

Cost Method. Investees not accounted for under the consolidation or the equity method of accounting are accounted for under the cost method of accounting. Under this method, the Company’s share of the net earnings or losses of such companies is not included in the Company’s condensed consolidated financial statements. However, cost method impairment charges are recognized, as necessary, in the Company’s condensed consolidated financial statements. If circumstances suggest that the value of the investee has subsequently recovered, such recovery is not recorded until ultimately liquidated or realized.

The Company’s debt and equity investments have substantially been made with funds available to Newtek through the Capco programs. These programs generally require that each Capco meet a minimum investment benchmark within five years of initial funding. In addition, any funds received by a Capco as a result of a debt repayment or equity return may, under the terms of the Capco programs, be reinvested and counted towards the Capcos’ minimum investment benchmarks.

Stock - Based Compensation

All share-based payments to employees are recognized in the financial statements based on their fair values using an option-pricing model at the date of grant.

As of September 30, 2009 and 2008 the Company had two share-based compensation plans. For the three and nine months ended September 30, 2009 and 2008, compensation cost charged to operations for those plans was $30,000 and $95,000 in 2009, respectively, and $49,000 and $206,000 in 2008, respectively, and is included in salaries and benefits in the accompanying condensed consolidated statements of operations.

There were no options or restricted stock awards granted during the nine months ended September 30, 2009.

In March 2008, Newtek granted its six independent directors an aggregate of 197,434 options valued at $87,000. Option awards are granted with an exercise price equal to the market price of the Company’s stock at the date of grant. The options vest immediately and expire 10 years from the date of grant. The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model that uses the following assumptions: 5 year expected life, risk-free interest rate of 2.51% and expected volatility of the Company’s stock of 53.48%. Expected volatilities are based on the historical volatility of the

NEWTEK BUSINESS SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Company’s stock and other factors. The risk-free rate for periods during the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected term was determined as the midpoint between the original contractual term and the vesting term.

As of September 30, 2009 and December 31, 2008, there was $92,000 and $238,000 of total unrecognized compensation costs related to non-vested share-based compensation arrangements granted under the Plans, respectively. That cost is expected to be recognized ratably through the month ending July 31, 2010.

Fair Value

The Company adopted the methods of fair value to value its financial assets and liabilities. The Company carries its credits in lieu of cash, prepaid insurance and notes payable in credits in lieu of cash at fair value. The Company also carries impaired loans and other real estate owned at fair value. Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, the Company utilized a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:


Level 1		Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as certain U.S. Treasury, other U.S. Government and agency mortgage-backed debt securities that are highly liquid and are actively traded in over-the-counter markets.

Level 2		Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes certain U.S. Government and agency mortgage-backed debt securities, corporate debt securities, derivative contracts and residential mortgage loans held-for-sale.

Level 3		Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category generally includes certain private equity investments, retained residual interests in securitizations, residential mortgage servicing rights, and highly structured or long-term derivative contracts.

Income Taxes

Deferred tax assets and liabilities are computed based upon the differences between the financial statement and income tax basis of assets and liabilities using the enacted tax rates in effect for the year in which those temporary differences are expected to be realized or settled. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized.

Accounting for Uncertainty in Income Taxes

The ultimate deductibility of positions taken or expected to be taken on tax returns is often uncertain. In order to recognize the benefits associated with a tax position taken (i.e., generally a deduction on a corporation’s tax return), the entity must conclude that the ultimate allowability of the deduction is more likely than not. If the ultimate allowability of the tax position exceeds 50% (i.e., it is more likely than not), the benefit associated with the position is recognized at the largest dollar amount that has more than a 50% likelihood of being realized upon ultimate settlement. Differences between tax positions taken in a tax return and recognized will generally result in (1) an increase in income taxes currently payable or a reduction in an income tax refund receivable or (2) an increase in a deferred tax liability or a decrease in a deferred tax asset, or both (1) and (2). When accounting for uncertainty in income taxes, the Income Tax Topic of the FASB Accounting Standards Codification also provides guidance on:

•

Derecognizing the benefits associated with a recognized tax position where subsequent events indicate that it is not more likely than not that the entity will benefit from the tax position taken

NEWTEK BUSINESS SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

•

Classification of financial statement elements that result from recognizing benefits associated with uncertain tax positions

•

Treatment of interest and penalties related to uncertain tax positions

•

Accounting for uncertain tax positions in interim periods

•

Disclosure and transition

Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents and accounts receivable. The Company maintains its cash and cash equivalents with major financial institutions and at times, cash balances with any one financial institution may exceed Federal Deposit Insurance Corporation (FDIC) insured limits.

For the nine months ended September 30, 2009 and 2008, no single customer accounted for 10% or more of the Company’s revenue or of total accounts receivable.

Fair Value of Financial Instruments

As required by the Financial Instruments Topic of the FASB Accounting Standards Codification, the estimated fair values of financial instruments must be disclosed. Excluding fixed assets, intangible assets, goodwill, and prepaid expenses and other assets (excluding as noted below), substantially all of the Company’s assets and liabilities are considered financial instruments as defined under this standard. Fair value estimates are subjective in nature and are dependent on a number of significant assumptions associated with each instrument or group of similar instruments, including estimates of discount rates, risks associated with specific financial instruments, estimates of future cash flows and relevant available market information.

The carrying values of the following balance sheet items approximate their fair values primarily due to their liquidity and short-term or adjustable-yield nature:

•

Cash and cash equivalents

•

Restricted cash

•

Bank notes payable

•

Accrued interest receivable (included in prepaid expended and other assets)

•

Accrued interest payable (included in accounts payable and accrued expenses)

The carrying values of accounts payable and accrued expenses approximate fair value because of the short-term maturity of these instruments. The carrying value of investments in qualified businesses (included in prepaid expenses and other assets) and loans receivable approximate fair value based on management’s estimates.

New Accounting Standards

In September 2006, the FASB issued an accounting standard related to fair value measurements, which was effective for the Company on January 1, 2008. This standard defined fair value, established a framework for measuring fair value, and expanded disclosure requirements about fair value measurements. On January 1, 2008, the Company adopted this accounting standard related to fair value measurements for the Company’s financial assets and financial liabilities. The Company deferred adoption of this accounting standard related to fair value measurements for the Company’s nonfinancial assets and nonfinancial liabilities, except for those items recognized or disclosed at fair value on an annual or more frequently recurring basis, until January 1, 2009. Effective January 1, 2009, the Company fully adopted the provisions of this standard relating to its nonfinancial assets and liabilities. The adoption of this accounting standard related to fair value measurements for the Company’s nonfinancial assets and nonfinancial liabilities did not have a material impact on its financial position or results of operations. This accounting standard was subsequently codified into ASC Topic 820, “Fair Value Measurements and Disclosures.”

NEWTEK BUSINESS SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In September 2008, the FASB issued an accounting standard related to liabilities measured at fair value with a third party enhancement and provides guidance for measuring liabilities issued with an attached third-party credit enhancement, such as a guarantee. It clarifies that the issuer of a liability with a third-party credit enhancement should not include the effect of the credit enhancement in the fair value measurement of the liability. This standard is effective for the first reporting period beginning after December 15, 2008. The Company concluded that it does not impact its condensed consolidated financial statements. This accounting standard was subsequently codified into ASC Topic 820, “Fair Value Measurements and Disclosures.”

In December 2007, the FASB issued an accounting standard requiring an acquirer to measure the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. This accounting standard is effective for financial statements issued for fiscal years beginning after December 15, 2008. The adoption of this accounting standard had no material impact to the condensed consolidated financial statements. This accounting standard was subsequently codified into ASC Topic 805, “Business Combinations.”

Effective for financial statements issued for fiscal years beginning after December 15, 2008, an acquirer is required to measure the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. Noncontrolling interest in a subsidiary should be reported as equity in the unaudited condensed consolidated balance sheets. The amount of consolidated net income or loss attributable to the parent and to the noncontrolling interest should also be reported in the unaudited condensed consolidated statement of operations. Changes in a parent’s ownership percentage and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated should be disclosed in the unaudited condensed consolidated financial statements. The Company adopted this accounting standard in the first quarter of 2009. As a result of the adoption, the Company has reported noncontrolling interests as a component of equity in the unaudited condensed consolidated balance sheets and the net loss attributable to noncontrolling interests has been separately identified in the unaudited condensed consolidated statements of operations. The prior periods presented have also been retrospectively restated to conform to the current classification requirements. Other than the change in the presentation of noncontrolling interests, the adoption of this standard had no impact on the condensed consolidated financial statements.

In April 2009, the FASB issued an accounting standard to require that disclosures concerning the fair value of financial instruments be presented in interim as well as in annual financial statements. This accounting standard was subsequently codified into ASC Topic 825, “Financial Instruments.” In addition, the FASB issued an accounting standard to provide additional guidance for determining the fair value of a financial asset or financial liability when the volume and level of activity for such asset or liability have decreased significantly and to also provide guidance for determining whether a transaction is an orderly one. This accounting standard was subsequently codified into ASC Topic 820, “Fair Value Measurements and Disclosures.” The FASB also issued an accounting standard which revised and expanded the guidance concerning the recognition and measurement of other-than-temporary impairments of debt securities classified as available for sale or held to maturity. In addition, it required enhanced disclosures concerning such impairment for both debt and equity securities. This accounting standard was subsequently codified into ASC Topic 320, “Investments – Debt and Equity Securities.” The requirements of these three accounting standards are effective for interim reporting periods ending after June 15, 2009. Early adoption is permitted for interim periods ending after March 15, 2009, but only if the election is made to adopt all these accounting standards. Disclosures for earlier periods presented for comparative purposes at initial adoption are not required. In periods after initial adoption, comparative disclosures are required only for periods ending after initial adoption. The Company has adopted these accounting standards during the second quarter of 2009.

In May 2009, the FASB issued an accounting standard which provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires entities to disclose the date through which subsequent events were evaluated as well as the rationale for why that date was selected. This accounting standard is effective for interim and annual periods ending after June 15, 2009 and, accordingly, was adopted by the Company during the second quarter of 2009. It requires public entities evaluate subsequent events through the date that the financial statements are issued. This accounting standard was subsequently codified into ASC Topic 855, “Subsequent Events.” The Company has evaluated subsequent events through the time of filing these condensed consolidated financial statements with the Securities and Exchange Commission (“SEC”) on November 12, 2009.

In June 2009, the FASB issued an accounting standard which removes the concept of a qualifying special-purpose entity and limits the circumstances in which a financial asset, or portion of a financial asset, should be derecognized when the transferor

NEWTEK BUSINESS SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

has not transferred the entire financial asset to an entity that is not consolidated with the transferor in the financial statements being presented and/or when the transferor has continuing involvement with the transferred financial asset. The new standard will become effective for the Company on January 1, 2010. The Company is currently evaluating the impact of adopting the new standard on the condensed consolidated financial statements. This accounting standard was subsequently codified into ASC Topic 860, “Transfers and Servicing.”

In June 2009, the FASB issued an accounting standard which modifies how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. It clarifies that the determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. It requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity and additional disclosures about a company’s involvement in variable interest entities and any significant changes in risk exposure due to that involvement. This accounting standard is effective for fiscal years beginning after November 15, 2009. The Company is currently evaluating the impact of adopting this accounting standard on its condensed consolidated financial statements. This accounting standard was subsequently codified into ASC Topic 805, “Business Combinations.”

In June 2009, the FASB issued an accounting standard which established the Codification to become the single source of authoritative accounting principles generally accepted in the United States of America (“GAAP”) recognized by the FASB to be applied by nongovernmental entities, with the exception of guidance issued by the U.S. Securities and Exchange Commission (the “SEC”) and its staff. All guidance contained in the Codification carries an equal level of authority. The Codification is not intended to change GAAP, but rather is expected to simplify accounting research by reorganizing current GAAP into approximately 90 accounting topics and providing all the authoritative literature related to a particular topic in one place. The Company adopted this accounting standard in preparing the condensed consolidated financial statements for the quarter ended September 30, 2009 and all subsequent public filings will reference the Codification as the sole source of authoritative literature. The adoption of this accounting standard, which was subsequently codified into ASC Topic 105, “Generally Accepted Accounting Principles,” had no impact on retained earnings and will have no impact on the Company’s statements of income and condition.

In August, 2009, the FASB issued Accounting Standards Update 2009-05, “Fair Value Measurements and Disclosures (Topic 820) –Measuring Liabilities at Fair Value,” which updates ASC 820-10. The update provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the following techniques:

A valuation technique that uses

the quoted price of an identical liability when traded as an asset, or

quoted prices for similar liabilities or similar liabilities when traded as assets.

Another valuation technique that is consistent with the principles of Topic 820, examples include an income approach, such as a present value technique, or a market approach, such as a technique that is based on the amount at the measurement date that the reporting entity would pay to transfer the identical liability or would receive to enter into the identical liability.

This standard is effective for financial statements issued for interim and annual periods ending after August 2009. The Company adopted Update 2009-05 effective for the quarter ending September 30, 2009. The adoption did not have a material impact on the Company’s disclosures.

NOTE 3 – FAIR VALUE MEASUREMENTS:

FAIR VALUE OPTION ELECTIONS

Effective January 1, 2008, the Company adopted fair value accounting concurrent with the election of the fair value option. The accounting standard relating to the fair value measurements clarifies the definition of fair value and describes methods available to appropriately measure fair value in accordance with GAAP. The accounting standard applies whenever other accounting standards require or permit fair value measurements. The accounting standard relating to the fair value option for financial assets and financial liabilities allows entities to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and financial liabilities that are not otherwise required to be measured at fair value, with changes in fair value recognized in earnings as they occur. It also establishes presentation and disclosure requirements designed to improve comparability between entities that elect different measurement attributes for similar assets and liabilities. On January 1, 2008, the Company elected the fair value option for valuing its Capcos’ credits in lieu of cash, notes payable in credits in lieu of cash and prepaid insurance.

NEWTEK BUSINESS SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company elected the fair value option in order to reflect in its financial statements the assumptions that market participants use in evaluating these financial instruments. Under the cost basis of accounting, the discount rates used to calculate the present value of the credits in lieu of cash and notes payable in credits in lieu of cash did not reflect the credit enhancements that the Company’s Capcos obtained from AIG, namely its AA+ rating at such time, for their debt issued to certified investors. Instead the cost paid for the credit enhancements was recorded as prepaid insurance and amortized on a straight-line basis over the term of the credit enhancements.

With the adoption of the fair value measurement of financial assets and financial liabilities and the election of the fair value option, credits in lieu of cash and notes payable in credits in lieu of cash are valued based on the yields at which financial instruments would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts. The accounting standards requires the fair value of the assets or liabilities to be determined based on the assumptions that market participants use in pricing the financial instrument. In developing those assumptions, the Company identified characteristics that distinguish market participants generally, and considered factors specific to (a) the asset type, (b) the principal (or most advantageous) market for the asset group, and (c) market participants with whom the reporting entity would transact in that market.

Based on the aforementioned characteristics and in view of the AIG credit enhancements, the Company believes that market participants purchasing or selling its Capcos’ debt, and therefore its credits in lieu of cash, and notes payable in credits in lieu of cash view nonperformance risk to be equal to the risk of an AIG nonperformance risk and as such both the fair value of credits in lieu of cash and notes payable in credits in lieu of cash should be priced to yield a rate equal to an applicable AIG U.S. Dollar denominated debt instrument. Because the value of notes payable in credits in lieu of cash directly reflects the credit enhancement obtained from AIG, the unamortized cost relating to the credit enhancement will cease to be separately carried as an asset on Company’s condensed consolidated balance sheet and is incorporated in notes payable in credits in lieu of cash.

Assets and Liabilities Measured at Fair Value on a Recurring Basis are as follows (in thousands):


	Fair Value Measurements Using:
	Total		Level 1		Level 2		Level 3
Assets:

Credits in lieu of cash	$	53,230	$	—	$	53,230	$	—

Prepaid insurance		—		—		—		—


Total assets	$	53,230	$	—	$	53,230	$	—


Liabilities:
Notes payable in credits in lieu of cash	$	53,230	$	—	$	53,230	$	—

Credits in lieu of cash and Notes payable in credits in lieu of cash

The Company elected to account for both credits in lieu of cash and notes payable in credits in lieu of cash at fair value in accordance with SFAS 159 in order to reflect in its condensed consolidated financial statements the assumptions that market participants use in evaluating these financial instruments.

Prepaid insurance

The Company has determined that the effect of the credit enhancement obtained from AIG is inseparable from the notes payable in credits in lieu of cash. In adopting SFAS 159 the prepaid insurance unamortized cost relating to the credit enhancement ceased to be separately carried as an asset on the Company’s condensed consolidated balance sheet and is incorporated in notes payable in credits in lieu of cash.

The Company’s Capcos’ debt, enhanced by AIG insurance, effectively bears the nonperformance risk of AIG. Therefore the Company calculates the fair value of both the Credits in lieu of cash and Notes payable in credits in lieu of cash using the

NEWTEK BUSINESS SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

yields of various AIG notes with similar maturities to each of the Company’s respective Capcos’ debt. The Company elected to discontinue utilizing AIG’s 7.70% Series A-5 Junior Subordinated Debentures (the “AIG Debentures”) because those long maturity debentures began to trade with characteristics of a preferred stock after AIG received financing from the United States Government. The Company considers the AIG Note Basket a Level 2 input under fair value accounting, since it is a quoted yield for a similar liability that is traded in an active exchange market. The Company selected these AIG Note Baskets as the most representative of the nonperformance risk associated with the CAPCO notes because they are AIG issued notes, are actively traded and because maturities match Credits in lieu of cash and Notes payable in credits in lieu of cash.

After calculating the fair value of both the Credits in lieu of cash and Notes payable in credits in lieu of cash, the Company compares their values. This calculation is done on a quarterly basis. Calculation differences primarily due to tax credit receipt versus delivery timing may cause the value of the Credits in lieu of cash to differ from that of the Notes payable in credits in lieu of cash. Because the Credits in lieu of cash asset has the single purpose of paying the Notes payable in credits in lieu of cash and has no other value to the Company, Newtek determined that the Credits in lieu of cash should equal the Notes payable in credits in lieu of cash.

As of June 30, 2009, the present value of the credits in lieu of cash was $49,388,000 and notes payable in credits in lieu of cash was $49,644,000. On that date, the yield on the AIG Note Basket was 18.27%. As of September 30, 2009, the date the Company revalued the asset and liability, the yields on the AIG notes averaged 9.08% reflecting changes in interest rates in the marketplace. This decrease in yield increased both the fair value of the credits in lieu of cash by $7,244,000 to $52,819,000 from an expected value of $45,574,000 assuming the yield had remained unchanged from June 30, 2009, and the fair value of the notes payable in credits in lieu of cash by $7,365,000 to $53,230,000 from an expected value of $45,865,000 assuming the yield had remained unchanged from June 30, 2009. The Company increased the value of the credits in lieu of cash to equal the value of the notes payable in credits in lieu of cash because the credits in lieu of cash can only be used to satisfy the liability and must equal the value of the notes payable in credits in lieu of cash at all times. The net change in fair value reported in the Company’s condensed consolidated statement of operations for the three and nine month periods ended September 30, 2009 was a gain of $34,000 and $1,044,000, respectively.

Changes in the future yield of the AIG issued debt selected for valuation purposes will result in changes to the fair values of the credits in lieu of cash and notes payable in credits in lieu of cash when calculated for future periods; these changes will be reported through the Company’s condensed consolidated statements of operations.

OTHER FAIR VALUE MEASUREMENTS

Assets and Liabilities Measured at Fair Value on a Non-recurring Basis are as follows (in thousands):


	Fair Value Measurements at Reporting Date Using:						Level 3
	Total		Level 1		Level 2		Level 3

Assets

Impaired loans	$	8,934	$	—	$	—	$	8,934

Other real-estate owned		386		—		386		—


Total assets	$	9,320	$	—	$	386	$	8,934

Impaired loans

Impairment of a loan is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral if the loan is collateral dependent. Impaired loans for which the carrying amount is based on fair value of the underlying collateral are included in assets and reported at estimated fair value on a non-recurring basis, both at initial recognition of impairment and on an on-going basis until recovery or charge-off of the loan amount. The determination of impairment involves management’s judgment in the use of market data and third party estimates regarding collateral values. Valuations in the level of impaired loans and corresponding impairment affect the level of the reserve for loan losses.

NEWTEK BUSINESS SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Other real-estate owned (included in Prepaid expenses and other assets)

The estimated fair value of other real-estate owned is calculated using observable market information, including bids from prospective purchasers and pricing from similar market transactions where available. The value is generally discounted between 20-25% based on market valuations as well as expenses associated with securing our interests. Where bid information is not available for a specific property, the valuation is principally based upon recent transaction prices for similar properties that have been sold. These comparable properties share comparable demographic characteristics. Other real estate owned is generally classified within Level 2 of the valuation hierarchy.

NOTE 4 – SBA LOANS:

SBA loans are primarily concentrated in the hotel and motel industry (11% of the portfolio) and the restaurant industry (13% of the portfolio), as well as geographically in Florida (29% of the portfolio) and New York (11% of the portfolio). Below is a summary of the activity in the SBA loans held for investment, net of SBA loan loss reserves for the nine months ended September 30, 2009 (In thousands):


Balance at December 31, 2008	$	26,912
SBA loans funded for investment		1,080
Payments received		(2,846	)
SBA loans held for investment, sold		(400	)
Provision for SBA loan losses		(1,320	)
Loans foreclosed into real estate owned		(67	)
Discount on loan originations, net		49

Balance at September 30, 2009	$	23,408

Below is a summary of the activity in the reserve for loan losses for the nine months ended September 30, 2009 (In thousands):


Balance at December 31, 2008	$	3,420
SBA loan loss provision		1,320
Recoveries		131
Loan charge-offs		(857	)

Balance at September 30, 2009	$	4,014

Below is a summary of the activity in the SBA loans held for sale for the nine months ended September 30, 2009 (In thousands):


Balance at December 31, 2008	$	6,133
Loan originations for sale		3,976
Loans sold		(10,109	)

Balance at September 30, 2009	$	—

All loans are priced at the Prime interest rate plus approximately 2.75% to 3.75%. The only loans with a fixed interest rate are defaulted loans of which the guaranteed portion sold is repurchased from the secondary market by the SBA, while the unguaranteed portion of the loans still remains with the Company. As of September 30, 2009 and December 31, 2008, net SBA loans receivable held for investment with adjustable interest rates amounted to $22,283,000 and $25,948,000, respectively.

For the nine months ended September 30, 2009 and 2008, the Company funded approximately $5,056,000 and $21,172,000 in loans and sold approximately $8,609,000 and $10,311,000 of the guaranteed portion of the loans, respectively.

The outstanding balances of loans past due ninety days or more and still accruing interest as of September 30, 2009 and December 31, 2008 amounted to $468,000 and $626,000, respectively.

NEWTEK BUSINESS SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

At September 30, 2009 and December 31, 2008, total impaired non-accrual loans amounted to $8,934,000 and $5,682,000, respectively. For the nine months ended September 30, 2009 and for the year ended December 31, 2008, the average balance of impaired non-accrual loans was $7,544,000 and $5,837,000, respectively. Approximately $3,044,000 and $2,294,000 of the allowance for loan losses were allocated against such impaired non-accrual loans, respectively. The following is a summary of SBA loans held for investment as of:


(In thousands):	September 30, 2009			December 31, 2008
Due in one year or less	$	—		$	61
Due between one and five years		1,597			1,417
Due after five years		27,386			30,465

Total		28,983			31,943
Less: Allowance for loan losses		(4,014	)		(3,420	)
Less: Deferred origination fees, net		(1,561	)		(1,611	)


Balance (net)	$	23,408		$	26,912

NOTE 5 – SERVICING ASSET:

Servicing rights are recognized as assets when SBA loans are sold and the rights to service those loans are retained. The Company measures all separately recognized servicing assets initially at fair value, if practicable. The Company reviews capitalized servicing rights for impairment which is performed based on risk strata, which are determined on a disaggregated basis given the predominant risk characteristics of the underlying loans. The predominant risk characteristics are loan term and year of loan origination.

The changes in the value of the Company’s servicing rights for the nine months ended September 30, 2009 were as follows:


(In thousands):
Balance at December 31, 2008	$	2,282
Servicing assets capitalized		735
Servicing assets amortized		(595	)

Balance at September 30, 2009	$	2,422

The estimated fair value of capitalized servicing rights was $2,422,000 and $2,282,000 at September 30, 2009 and December 31, 2008, respectively. The estimated fair value of servicing assets at both balance sheet dates was determined using a discount rate of 16.8%, weighted average prepayment speeds ranging from 1% to 18%, depending upon certain characteristics of the loan portfolio, a weighted average life of 3.2 years, and an average default rate of 5.0%.

The unpaid principal balances of loans serviced for others are not included in the accompanying condensed consolidated balance sheets. The unpaid principal balances of loans serviced for others were $137,703,000 and $141,587,000 as of September 30, 2009 and December 31, 2008, respectively.

NOTE 6 – INCOME TAXES:

The Company’s effective tax rate was impacted during the quarter by the release of a valuation allowance. The Company had previously taken a valuation allowance on certain 2008 losses because at the time the Company did not have sufficient evidence to believe it would utilize these losses.

NEWTEK BUSINESS SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 7 – EARNINGS (LOSS) PER SHARE:

Basic earnings (loss) per share is computed based on the weighted average number of common shares outstanding during the period. The dilutive effect of common share equivalents is included in the calculation of diluted loss per share only when the effect of their inclusion would be dilutive.

The calculations of earnings (loss) per share were:


	Three months Ended September 30:					Nine months Ended September 30:
(In thousands except per share data):	2009		2008			2009			2008
Numerator:
Numerator for basic and diluted EPS – earnings (loss) available to common shareholders	$	782	$	(2,747	)	$	(831	)	$	(7,423	)


Denominator for basic EPS – weighted average shares		35,631		35,628			35,625			35,771

Effect of dilutive securities		125		—			—			—
Denominator for diluted EPS – weighted average shares		35,756		35,628			35,625			35,771


Earnings (loss) per share: Basic and diluted	$	0.02	$	(0.08	)	$	(0.02	)	$	(0.21	)


The amount of anti-dilutive shares/units excluded from above is as follows:

Stock options		1,484		1,856			1,484			1,658
Warrants		216		216			216			216
Contingently issuable shares		97		403			97			403

NOTE 8 – SUBSEQUENT EVENTS:

On October 29, 2009, the Board of Directors voted to authorize payment of a one-time dividend of two cents per common shares outstanding. The one time dividend will be payable to shareholders of record on November 25, 2009 and paid on or about December 8, 2009.

NOTE 9 – SEGMENT REPORTING:

Operating segments are organized internally primarily by the type of services provided. The Company has aggregated similar operating segments into six reportable segments: Electronic payment processing, Web hosting, Small business finance, All other, Corporate and Capcos.

The Electronic payment processing segment is a processor of credit card transactions, as well as a marketer of credit card and check approval services to the small- and medium-sized business market. Expenses include direct costs (included in a separate line captioned electronic payment processing costs), professional fees, salaries and benefits, and other general and administrative costs, all of which are included in the respective caption on the condensed consolidated statements of operations.

The Web hosting segment consists of NTS, acquired in July 2004. NTS’s revenues are derived primarily from web hosting services and consist of web hosting and set up fees. NTS generates expenses such as professional fees, payroll and benefits, and depreciation and amortization, which are included in the respective caption on the accompanying condensed consolidated statements of operations, as well as licenses and fees, rent, and general office expenses, all of which are included in other general and administrative costs in the respective caption on the condensed consolidated statements of operations.

NEWTEK BUSINESS SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Small business finance segment consists of Small Business Lending, Inc., a lender that primarily originates, sells and services government guaranteed SBA 7(a) loans to qualifying small businesses through its licensed SBA lender; the Texas Whitestone Group which manages the Company’s Texas Capco and closes loans; and NBC which provides accounts receivable financing, billing and accounts receivable maintenance services to businesses. NSBF generates revenues from sales of loans, servicing income for those loans retained to service by NSBF and interest income earned on the loans themselves. The lender generates expenses for interest, professional fees, salaries and benefits, depreciation and amortization, and provision for loan losses, all of which are included in the respective caption on the condensed consolidated statements of operations. NSBF also has expenses such as loan recovery expenses, loan processing costs, and other expenses that are all included in the other general and administrative costs caption on the condensed consolidated statements of operations.

The All Other segment includes revenues and expenses primarily from qualified businesses that received investments made through the Company’s Capcos which cannot be aggregated with other operating segments. The two largest entities in the segment are Newtek Insurance Agency, LLC, an insurance sales operation, and Business Connect, LLC, a provider of sales and processing services.

Corporate activities represent revenue and expenses not allocated to our segments. Revenue includes interest income and management fees earned from Capcos (and included in expenses in the Capco segment). Expenses primarily include corporate operations related to broad-based sales and marketing, legal, finance, information technology, corporate development and additional costs associated with administering the Capcos.

The Capco segment, which consists of the 15 Capcos, generates non-cash income from tax credits, interest income and gains from investments in qualified businesses which are included in other income. Expenses primarily include non-cash interest and insurance expense, management fees paid to Newtek (and included in the Corporate activities revenues), legal, and auditing fees and losses from investments in qualified businesses.

Management has considered the following characteristics when making its determination of its operating and reportable segments:

•

the nature of the product and services;

•

the type or class of customer for their products and services;

•

the methods used to distribute their products or provide their services; and

•

the nature of the regulatory environment (for example, banking, insurance, or public utilities).

The accounting policies of the segments are the same as those described in the summary of significant accounting policies.

NEWTEK BUSINESS SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table presents the Company’s segment information for the periods ended September 30, 2009 and 2008 and total assets as of September 30, 2009 and December 31, 2008 (In Thousands):


	For the three months ended September 30, 2009			For the three months ended September 30, 2008			For the nine months ended September 30, 2009			For the nine months ended September 30, 2008
Third Party Revenue
Electronic payment processing	$	18,115		$	15,984		$	50,778		$	47,134
Web hosting		4,746			4,590			14,128			13,373
Small business finance		1,478			1,647			4,885			5,592
Capcos		2,298			1,755			6,609			4,993
All other		311			402			2,017			1,708
Corporate activities		712			1,169			2,497			4,729

Total reportable segments		27,660			25,547			80,914			77,529
Eliminations		(848	)		(1,304	)		(2,904	)		(5,136	)

Consolidated Total	$	26,812		$	24,243		$	78,010		$	72,393


Inter-Segment Revenue
Electronic payment processing	$	64		$	19		$	160		$	55
Web hosting		96			56			296			134
Small business finance		18			80			54			849
Capcos		467			458			1,360			1,423
All other		167			235			442			594
Corporate activities		445			519			1,366			1,600

Total reportable segments		1,257			1,367			3,678			4,655
Eliminations		(1,257	)		(1,367	)		(3,678	)		(4,655	)

Consolidated Total	$	—		$	—		$	—		$	—


Income (loss) before benefit (provision) for income taxes
Electronic payment processing	$	1,088		$	1,114		$	3,111		$	3,361
Web hosting		1,027			898			2,860			2,249
Small business finance		(756	)		(1,494	)		(2,097	)		(3,787	)
Capcos		(873	)		(1,520	)		(3,040	)		(5,864	)
All other		(271	)		(575	)		(120	)		(1,527	)
Corporate activities		(1,314	)		(1,223	)		(4,666	)		(3,896	)

Totals	$	(1,099	)	$	(2,800	)	$	(3,952	)	$	(9,464	)


Depreciation and amortization
Electronic payment processing	$	421		$	558		$	1,306		$	1,679
Web hosting		516			808			2,070			2,441
Small business finance		233			277			705			863
Capcos		4			10			16			71
All other		34			23			96			260
Corporate activities		105			96			339			34

Totals	$	1,313		$	1,772		$	4,532		$	5,348

NEWTEK BUSINESS SERVICES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


	As of September 30, 2009		As of December 31, 2008
Identifiable assets
Electronic payment processing	$	14,202	$	15,432
Web hosting		12,606		14,080
Small business finance		39,491		48,361
Capcos		62,488		81,074
All other		6,491		7,515
Corporate activities		3,994		3,065

Consolidated total	$	139,272	$	169,527

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations is intended to assist in the understanding and assessment of significant changes and trends related to the results of operations and financial position of the Company together with its subsidiaries. This discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the accompanying notes.

This Quarterly Report on Form 10-Q contains forward-looking statements. Additional written or oral forward-looking statements may be made by Newtek from time to time in filings with the Securities and Exchange Commission or otherwise. The words “believe,” “expect,” “seek,” “anticipate” and “intend” and similar expressions identify forward-looking statements, which speak only as of the date the statement is made. Such forward-looking statements are within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements may include, but are not limited to, projections of income or loss, expenditures, acquisitions, plans for future operations, financing needs or plans relating to our services, as well as assumptions relating to the foregoing. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Future events and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements. Newtek does not undertake, and specifically disclaims, any obligation to publicly release the results of revisions which may be made to forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after such statements.

We also need to point out that our Capcos operate under a different set of rules in each of the 8 jurisdictions and that these place varying requirements on the structure of our investments. In some cases, particularly in Louisiana, we don’t control the equity or management of a qualified business but that cannot always be presented orally or in written presentations.

We directly distribute business services to small- and medium-sized businesses, a very significant marketplace in the United States. According to statistics published by the U.S. Small Business Administration, approximately 51% of the GDP and private sector employment in the United States comes from small businesses, and 99% of businesses in the United States which have one or more employees fit into this market segment. As of September 30, 2009, we had over 87,000 customer accounts. We use state-of-the-art, web-based proprietary technology to be a low cost acquirer and provider of products and services to our small- and medium-sized business clients. We partner with Chartis (the property/casualty insurance companies of AIG), the Latino Coalition, Morgan Stanley, the Credit Union National Association with its 7,800 credit unions and 91 million members, Navy Federal Credit Union with 3.4 million members, Pershing, PSCU Financial Services, Inc., the nation’s largest credit union service organization, Fiserv Solutions, Inc. d/b/a IntegraSys, and others, all of whom have elected to offer certain of our business services and financial products rather than provide some or all of them directly for their customers. We have deemphasized our Capco business in favor of growing our operating businesses and do not anticipate creating any new Capcos in the foreseeable future.

For the quarter ended September 30, 2009, the Company substantially reduced its loss before benefit (provision) for income taxes to $(1,099,000) from $(2,800,000) in the same quarter of 2008. On October 20, 2009 the Company entered into contracts with the Federal Deposit Insurance Corporation to provide consulting services in connection with failures of banks holding SBA guaranteed loans and to provide servicing of those loans. This reduction in loss demonstrates continued improvements in operations with increases in revenue being matched to reductions in operating expenses, other than electronic

payment processing costs, including reductions in salaries and benefits. We had net income of $782,000, an improvement of $3,529,000 over 2008 primarily from the release of a valuation allowance on a deferred tax asset which increased the benefit for income taxes and also the attribution of net loss to non-controlling interests under the new accounting rules. Total revenues increased by $2,569,000 to $26,812,000, or 10.0%, from $24,243,000 for the quarter ended September 30, 2008 principally due to increased revenues in the Electronic payment processing, Web hosting, Small business finance, and Capco segments, offset by a decrease in revenues from our All other segment. The reduction in the net loss of $3,529,000 from the third quarter of 2008 reflects improvements in income from operations for the Web hosting segment from increased sales, a decrease in the losses for the Small business finance, Capco, and All other segments and a reduction in expense in the Corporate segment offset by slightly decreased income from operations for the Electronic payment processing segment. The gross margin in Electronic payment processing continued to decrease and is anticipated to continue to negatively impact profitability for the segment throughout 2009.

Improving conditions for the secondary market for guaranteed loan sales and changes to the SBA 7(a) loan program in the second quarter have permitted us to begin lending again. As of September 30, 2009, we had approximately $12,539,000 outstanding under the $15,000,000 GE line of credit of which the Company guarantees up to $15,000,000 of the advances. On July 22, 2009 we entered into a Fifth Amendment and Consent (the “Fifth Amendment”) to the Credit Agreement dated as of August 31, 2005 between NSBF and General Electric Capital Corporation (GECC) which made certain changes in the terms of the warehouse lending facility provided to NSBF. The Fifth Amendment reduced the aggregate total of the credit facility to $15 million, adjusted the interest rate and other terms and extended the maturity date from August 31, 2009 to May 31, 2010 based upon progress shown by NSBF in obtaining a commitment for a replacement lender. Upon the Fifth Amendment becoming effective the Company partially paid down the line by $1,200,000, in addition to normal collections on the line. There can be no assurance that we will be able to renew our credit line with GE, or that we will be able to negotiate an alternate arrangement. Failure to obtain replacement financing will have a material adverse effect on our business.

Improvement in operations provided the Company with positive operating cash flow for the quarter and the first nine months of 2009. Cash and cash equivalents decreased to $15,572,000 on September 30, 2009 from $16,852,000 on December 31, 2008 reflecting the use of operating cash to pay down the GE warehouse lending facility. Overall, we believe that throughout 2009 the Company has and will continue to enjoy both the full year benefit from the expense reductions made in 2008 in the Small business finance, All other and Corporate segments as well as the continuing cost cutting efforts in 2009.

Our operating businesses are dependent on the health of the small- and medium-sized segments of the U.S. economy. The reduction in the availability of credit and the weak economy has had a negative impact on consumer and commercial spending which in turn most likely has and could continue to adversely impact Newtek’s small business customers. In addition, the weak economy has negatively impacted the value of commercial and residential real estate, which could adversely impact the collateral securing the loan portfolio of our SBA Lending segment.

On August 13, 2008, the Company received a staff deficiency letter from The Nasdaq Stock Market (“Nasdaq”) indicating that, for the prior 30 consecutive days, the bid price for Newtek’s common stock had closed below the minimum $1.00 per share requirement for continued inclusion on the Nasdaq Global Market under Marketplace Rule 4450(a)(5) (the “Rule”). In accordance with Marketplace Rule 4450(e)(2), the Company was given 180 calendar days, or until February 9, 2009, to regain compliance with the Rule. The letter also indicated that if the Company did not regain compliance by February 9, 2009, Nasdaq would provide written notification that Newtek’s common stock will be delisted. On October 16, 2008, Nasdaq announced that it was suspending the rules requiring a minimum $1.00 closing bid price and a minimum market value of publicly held shares until December 19, 2008, and on December 19, 2008 the suspension was extended until April 20, 2009, at which time the Rule will begin to run again. On July 13, 2009 the Company received another letter from the NASDAQ stating that the Company will have until November 27, 2009 to regain compliance. The Company can regain compliance, either during the suspension or during the compliance period resuming after the suspension, by achieving a $1 closing bid price for a minimum of 10 consecutive trading days. At the current market price, the Company would not regain compliance, and there can be no assurance that the Company would be able to do so by November 27, 2009. However, the Company and its Board of Directors are considering steps that could be taken either to achieve compliance or obtain additional time within which to achieve compliance by that date. If the Company is unable to regain compliance, it faces delisting. In the event that the common stock is delisted, there can be no assurance that an active public market for our stock can be sustained or that current trading levels can be sustained or not diminished.

The Company’s reportable business segments are:

Electronic Payment Processing: Credit card and debit card processing, check conversion and ACH solutions for the small- and medium-sized business market.

Web Hosting: CrystalTech Web Hosting, Inc., d/b/a/ Newtek Technology Services, which offers shared and dedicated web hosting and related services to the small- and medium-sized business market.

Small Business Finance: Newtek Small Business Finance, Inc., a nationally licensed, U.S. Small Business Administration lender that originates, sells and services loans to qualifying small businesses, which are partially guaranteed by the SBA. Texas Whitestone Group performs the closing function for all SBA 7(a) loans underwritten by NSBF. CDS Business Services, Inc. (d/b/a Newtek Business Credit) provides financing services to businesses by purchasing their receivables at a discounted rate. In addition, the Company provides billing and accounts receivable maintenance services to businesses.

All Other: Includes results from businesses formed from Investments in Qualified Businesses made through Capco programs which cannot be aggregated with other operating segments.

Corporate Activities: Corporate implements business strategy, directs marketing, provides technology oversight and guidance, coordinates and integrates activities of the segments, contracts with alliance partners, acquires customer opportunities and owns our proprietary NewTracker™ referral system. Revenue and expenses not allocated to our other segments, including interest income, Capco management fee income and corporate operations expenses.

Capcos: Fourteen certified capital companies, which invest in small- and medium-sized businesses. They generate non-cash income from tax credits and non-cash interest.

Segment Results:

The results of the Company’s reportable segments for the three and nine months ended September 30, 2009 and 2008 are discussed below.

Electronic Payment Processing


	Three months ended September 30:				$ Change			% Change
(In thousands):	2009		2008		$ Change			% Change
Revenue:
Electronic payment processing	$	18,108	$	15,968	$	2,140		13	%
Interest income		7		16		(9	)	(56	)%

Total revenue		18,115		15,984		2,131		13	%

Expenses:
Electronic payment processing costs		15,366		13,072		2,294		18	%
Salaries and benefits		962		979		(17	)	(2	)%
Professional fees		62		49		13		27	%
Depreciation and amortization		421		558		(137	)	(25	)%
Other general and administrative costs		216		212		4		2	%

Total expenses		17,027		14,870		2,157		15	%

Income before benefit (provision) for income taxes	$	1,088	$	1,114	$	(26	)	(2	)%

Three months ending September 30, 2009 and 2008:

Electronic payment processing revenue increased $2,140,000 or 13% between periods principally due to the overall impact of growth in organic revenue of approximately 15% while revenues from acquired portfolios decreased overall revenue growth by slightly less than 2% between periods due to merchant attrition. The growth in organic revenue was partially due to the impact of an increase in the average number of merchants under contract between years of 7%. In addition, the average monthly processing volume per merchant increased 8% between years. The increase in the average monthly processing volume per merchant in 2009 reflects the effect of several larger than average sales volume new merchants added in 2009 as well as a continued trend of an increase in transaction count related fees. Total transactions processed increased 19% between years, including an increase in check card transactions of 21% between periods.

Electronic payment processing costs increased $2,294,000 or 18% between years. Electronic payment processing costs resulting from acquired portfolios had the overall effect of decreasing such cost by approximately 1% between periods due to merchant attrition. Organic electronic payment processing costs had the effect of increasing total electronic payment processing costs by 19% between years. Processing revenues less electronic payment processing cost (“margin”) declined approximately 3.0% from 18.1% in 2008 to 15.1% in 2009. The 3.0% reduction in the margin includes 1.8% due to increased residual payments made to certain third-party sales referral sources and the growth of such third-party sales on a sales mix basis. A lower contribution to margin from acquired portfolios contributed an additional .7% to the decline in margin. The remaining reduction in such margin between periods is principally due to the effects of competitive pricing pressures for new and existing merchants between years.

Excluding electronic payment processing costs, other costs decreased $137,000 or 8% between years. Depreciation and amortization decreased $137,000 between periods. The decrease in depreciation and amortization is principally due to a previously acquired portfolio intangible asset becoming fully amortized during 2009 and the effect between years of a portfolio impairment charge recorded in the fourth quarter of 2008. The total of all other costs were unchanged between years.

Income before benefit (provision) for income taxes decreased $26,000 to $1,088,000 in 2009 from $1,114,000 in 2008. The decrease in income before benefit (provision) for income taxes in 2009 is principally due to the lower processing margin partially offset by an overall reduction in other costs between years.


	Nine months ended September 30:				$ Change			% Change
(In thousands):	2009		2008		$ Change			% Change
Revenue:
Electronic payment processing	$	50,748	$	47,070	$	3,678		8	%
Interest income		30		64		(34	)	(53	)%

Total revenue		50,778		47,134		3,644		8	%

Expenses:
Electronic payment processing costs		42,414		38,221		4,193		11	%
Salaries and benefits		3,086		3,021		65		2	%
Professional fees		176		201		(25	)	(12	)%
Depreciation and amortization		1,306		1,679		(373	)	(22	)%
Other general and administrative costs		685		651		34		5	%

Total expenses		47,667		43,773		3,894		9	%

Income before benefit (provision) for income taxes	$	3,111	$	3,361	$	(250	)	(7	)%

Nine months ending September 30, 2009 and 2008:

Electronic payment processing revenue increased $3,678,000 or 8% between periods principally due to the overall impact of growth in organic revenue of approximately 9% while revenues from acquired portfolios decreased overall revenue growth by 1% between periods due to merchant attrition. The growth in organic revenue was partially due to the impact of an increase in the average number of merchants under contract between years of 9%. The average monthly processing volume per merchant increased less than 1% between years.

Electronic payment processing costs increased $4,193,000 or 11% between years. Electronic payment processing costs resulting from acquired portfolios had the overall effect of decreasing such costs by approximately 2% between periods due to merchant attrition. Organic electronic payment processing costs had the effect of increasing total electronic payment processing cost by 13% between years. Processing revenues less electronic payment processing cost (“margin”) declined approximately 2.4% from 18.8% in 2008 to 16.4% in 2009. The 2.6% reduction in the margin includes 1.7% due to increased residual payments made to certain third-party sales referral sources and the growth of such third-party sales on a sales mix basis. A lower contribution to margin from acquired portfolios contributed an additional .1% to the decline in margin. The remaining reduction in such margin between periods is principally due to the effects of competitive pricing pressures for new and existing merchants between years.

Excluding electronic payment processing costs, other costs decreased $299,000 or 5% between years. Depreciation and amortization cost decreased $373,000 between years. The decrease in depreciation and amortization cost is principally due to a

previously acquired portfolio intangible asset becoming fully amortized during 2009 and the effect between years of a portfolio impairment charge recorded in the fourth quarter of 2008. Remaining costs increased $74,000 between years as the result of an increase in the use and cost of services related to information technology and sales and marketing related services.

Income before benefit (provision) for income taxes decreased $250,000 to $3,111,000 in 2009 from $3,361,000 in 2008. The decrease in income before benefit (provision) for income taxes in 2009 is principally due to the lower processing margin partially offset by an overall reduction in other costs between years.

Web Hosting


	Three months Ended September 30:
(In thousands):	2009		2008		$ Change			% Change
Revenue:
Web hosting	$	4,743	$	4,586	$	157		3	%
Interest income		3		4		(1	)	(25	)%

Total revenue		4,746		4,590		156		3	%

Expenses:
Salaries and benefits		1,319		1,183		136		11	%
Interest		34		15		19		127	%
Professional fees		94		27		67		248	%
Depreciation and amortization		516		808		(292	)	(36	)%
Other general and administrative costs		1,756		1,659		97		6	%

Total expenses		3,719		3,692		27		1	%

Income before benefit (provision) for income taxes	$	1,027	$	898	$	129		14	%

Three months ended September 30, 2009 and 2008:

The segment derives revenue primarily from monthly recurring fees from hosting websites. Web hosting revenue between periods increased $157,000, or 3%, to $4,743,000 for the three months ended September 30, 2009 over the same period in 2008 due to a combination of improved revenue per website offsetting a decrease in the average number of hosted websites. Average monthly revenue per site increased 10% to $24.51 from $22.19. NTS utilized plan enhancements as well as new higher priced service offerings to help drive growth in revenue.

The total average number of sites for the nine months ended September 30, 2009 as compared to the same period in 2008 decreased 4,397 sites, or 6%, to 64,499 from 68,896. A 4,383 or 7% decrease in average number of shared sites to 62,187 in 2009 from 66,570 in 2008 accounts for most of the lost sites; this recent trend of decreasing shared websites since the fourth quarter of 2008 reflects the effects of a deliberate price increase to improve profitability of the lowest priced plans as well as economic conditions and increased competition. The additional 155 average number of virtual dedicated websites in 2009, a new service offering which was not offered in the beginning of 2008, offset the decrease in the average number of total dedicated websites by 168 in 2009 as compared to 2008, or 7%, to 2,144 from 2,312. Although improvement in revenue per site reflects the greater growth in virtual dedicated sites in 2009 over 2008, which generate higher monthly fees versus higher end shared and lower end dedicated web hosting plans, revenues from shared and dedicated sites improved as well reflecting better pricing and utilization of higher priced plans by customers and increases in additional options revenue.

Total expenses increased 1% or $27,000 to $3,719,000 from $3,692,000 for the three months ended September 30, 2009 as compared to the same period 2008. The increase in total expenses was due to a $136,000 increase in salaries and benefits due to the hiring of additional sales and technology staff to support future revenue growth initiatives, a $67,000 increase in professional fees mainly for legal fees associated with a prior lease, a $97,000 increase in other general and administrative costs mainly due to bad debt expense, and a $19,000 increase in interest expense relating to the outstanding $2.5 million note, offset in part by a $292,000 decrease in depreciation and amortization mainly result of the intangibles being fully amortized as of June 30, 2009.

Income before benefit (provision) for income taxes increased 14% or $129,000 to $1,027,000 for the three months ended September 30, 2009 from $898,000 for the same period 2008. The improvement in profitability primarily resulted from the decrease in depreciation and amortization; increases in other expenses offset the gain in revenue quarter over quarter.


	Nine months ended September 30:
(In thousands):	2009		2008		$ Change			% Change
Revenue:
Web hosting	$	14,117	$	13,361	$	756		6	%
Interest income		11		12		(1	)	(8	)%

Total revenue		14,128		13,373		755		6	%

Expenses:
Salaries and benefits		3,749		3,596		153		4	%
Interest		100		45		55		122	%
Professional fees		203		81		122		151	%
Depreciation and amortization		2,070		2,441		(371	)	(15	)%
Other general and administrative costs		5,146		4,961		185		4	%

Total expenses		11,268		11,124		144		1	%

Income before benefit (provision) for income taxes	$	2,860	$	2,249	$	611		27	%

Nine months ended September 30, 2009 and 2008:

The segment derives revenue primarily from monthly recurring fees from hosting websites. Web hosting revenue between periods increased $756,000, or 6%, to $14,117,000 for the nine months ended September 30, 2009 over the same period 2008 due to improved revenue per website and organic growth of hosted virtual websites, which was a new service offering successfully launched in the third quarter of 2008. NTS sales promotions and service and plan enhancements failed to drive growth in sites but did help to improve revenue.

The increase in revenue reflects an increase in average monthly revenue per site of 9% to $23.88 from $21.82 offset by a decrease in the average number of total websites by 2,347 for the nine months ended September 30, 2009 as compared to the same period in 2008, or 3%, to 65,678 from 68,025. Improvement in monthly revenue per site primarily reflects the greater growth in virtual dedicated sites, the customers gravitating towards higher end services combined with additional options, and is also a result of a price change to our lowest priced plan in the third quarter of 2008. The average number of dedicated websites, which generate a higher monthly fee versus shared websites, decreased by 62 between periods, or 3%, to an average of 2,185 per month from an average of 2,247 per month for the same period in 2008. The average number of shared websites decreased 2,417, or 4%, to an average of 63,356 per month for the nine months ended September 30, 2009, from an average of 65,356 per month for the same period 2008. The decreasing trend in total shared and dedicated site counts began in the fourth quarter of 2008. This change in trend reflects the continuing economic conditions, which started impacting the web hosting segment in the fourth quarter of 2008, along with increased competition, a deliberate price increase by the hosting division to improve profitability of the lowest priced plans, and the move of high-end shared users and low-end dedicated users to the new Hyper-V plan.

Total segment expenses increased at 1%, or $144,000, as compared to the 6%, or $755,000, growth in revenues for the nine months ended September 30, 2009. The majority of the 1% or $144,000 increase in expenses between periods reflects an increase in other general and administrative costs of $185,000, an increase in salaries and benefits of $153,000, an increase in interest expense of $55,000, and an increase in professional fees of $122,000 offset by a decrease in depreciation and amortization expense of $371,000. As a percent of sales, other general and administrative costs, depreciation and amortization, and salaries and benefits have decreased between periods as a result of management’s efforts to maintain and improve cost efficiency. The increase in other general and administrative costs was primarily due to a $64,000 increase in SSL certificates and domain costs, a $42,000 increase in utilities, a $47,000 increase in marketing, a $32,000 increase in processing and other costs and a $112,000 increase in bad debt expense, mainly attributable to the poor economic environment. The increases were offset in part by a $66,000 decrease in internet and communications, a result of renegotiations of internet and telephone contracts, and an approximate decrease of $49,000 in licenses and permits. Salaries and benefits increased $153,000, at a lower rate than revenue growth. The $371,000 decrease in depreciation and amortization was primarily due to the intangibles being fully amortized at June 30, 2009 and the slowing of capital expenditures as a result of consolidation efforts in the shared segment to allow for more efficient use of the already existing equipment within the datacenter and the decrease in the number of dedicated sites. The increase of $122,000 in professional fees was due to higher audit and legal fees in the nine months ended September 30, 2009.

Income before benefit (provision) for income taxes increased 27% or $611,000 to $2,860,000 for the nine months ended September 30, 2009 from $2,249,000 for the nine months ended September 30, 2008. The improvement in profitability primarily

resulted from increased web site plan sales; effectively, imbedded rent, utility and software licensing fees contributed more revenue. Maintenance of current staffing levels and other general and administrative cost in the first nine months of 2009 contributed to the improvement in income as well. Due to management’s focus on cost efficiency, continued growth in revenue should result in improved future profits and margins.

Small Business Finance


	Three months ended September 30:
(In thousands):	2009			2008			$ Change			% Change
Revenue:
Premium income	$	142		$	(5	)	$	147		2,940	%
Servicing fee		421			438			(17	)	(4	)%
Interest income		318			611			(293	)	(48	)%
Management fees		146			146			—		—	%
Other income		451			457			(6	)	(1	)%

Total revenue		1,478			1,647			(169	)	(10	)%

Expenses:
Salaries and benefits		682			918			(236	)	(26	)%
Interest		366			483			(117	)	(24	)%
Management fees		115			115			—		—	%
Professional fees		101			8			93		1,163	%
Depreciation and amortization		233			277			(44	)	(16	)%
Provision for loan losses		388			672			(284	)	(42	)%
Other general and administrative costs		349			668			(319	)	(48	)%

Total expenses		2,234			3,141			(907	)	(29	)%

Loss before benefit (provision) for income taxes	$	(756	)	$	(1,494	)	$	(738	)	(49	)%

Three months ended September 30, 2009 and 2008:

Revenue is derived primarily from premium on loan sales generated by the sale of the guaranteed and unguaranteed portions of SBA loans, interest income on SBA loans held for investment, servicing fee income on the guaranteed portions of SBA loans previously sold, servicing income for loans originated by other lenders for which NSBF is the servicer, and receivables factoring and billing services, classified as other income above, provided by Newtek Business Credit (“NBC”). Most SBA loans originated by NSBF charge an interest rate equal to the Prime rate plus an additional percentage amount; the interest rate resets to the current Prime rate on a monthly or quarterly basis which will result in changes to the amount of interest accrued for that month and going forward and a re-amortization of a loan’s payment amount until maturity.

As a result of the dislocation in the secondary market for guaranteed loan sales, NSBF stopped originating new loans in the fourth quarter of 2008. Improving secondary market conditions and changes to the SBA 7(a) loan program in the second quarter of 2009 have permitted NSBF to begin lending again, although the temporary nature of its lending line, described below, has caused management to limit the amount of loans NSBF will make. One new loan was originated in September 2009, resulting in the sale of one $1,327,500 guaranteed portion in the three months ended September 30, 2009, compared to 5 guaranteed portions sold aggregating $493,000 in the same period for the prior year. In the three months ended September 30, 2008 NSBF refunded, as required under SBA guidelines, $19,000 of premium for a loan that prepaid within 90 days of settlement date which exceeded the amount of premium received on the five sold loans discussed above and resulted in recording negative premium income. The Company expects to generate additional premium income as NSBF begins to originate new loans in increased volumes.

Servicing fee income related to SBA loans decreased by $17,000 due to a decrease in the NSBF loan servicing portfolio and an increase in non-performing loans, as well as a reduction in the fee income associated with the servicing of an SBA portfolio for a savings bank in New York which totaled $35,000 for the three months ended September 30, 2009 compared to

$40,000 in the three months ended September 30, 2008. The average NSBF servicing portfolio for the quarter ended September 30, 2009 was $124,043,000 compared with $125,948,000 for the quarter ended September 30, 2008. NSBF only earns servicing income on the performing loans within its own portfolio.

Interest income decreased by $293,000 due primarily to a decrease in the average interest rate being charged to borrowers from 7.63% to 5.93% due to a reduction in the prime rate, a decrease in the average outstanding portfolio from $34,706,000 in the three months ended September 30, 2008 to $28,947,000 in the three months ended September 30, 2009, and an increase in the nonperforming NSBF portfolio from an average of 16.8% to 30.0% for the three months ended September 30, 2008 and 2009, respectively. If NSBF does not originate and fund new loans in substantial volumes, then its performing portfolio will continue to shrink as loans normally pay down principal and default, further reducing its opportunity to earn interest and servicing income.

Other income decreased by $6,000 due to a decrease in revenue earned by NSBF of $97,000 primarily attributable to a decrease in the number of loans prepaying as well as a decrease in revenue earned on late payments. This decrease in revenue was partially offset by an increase in revenue earned by Newtek Business Credit. For the three months ended September 30, 2009, NBC had revenue of $361,000 and purchased $5,732,000 of receivables from an average customer base of 116 compared to revenue of $336,000 on $4,547,000 of receivables purchased with an average customer base of 120 for the three months ended September 30, 2008.

Consideration in arriving at the provision for loan loss includes past and current loss experience, current portfolio composition, future estimated cash flows, and the evaluation of real estate and other collateral as well as current economic conditions. The quarterly provision for loan loss decreased quarter over quarter by $284,000. The reserve for loan losses as compared to gross portfolio balance increased from $2,779,000 at September 30, 2008 to $4,014,000 at September 30, 2009. At September 30, 2009 and September 30, 2008, total impaired non-accrual loans amounted to $8,934,000 and $5,359,000, respectively, with $3,043,000 or 34.0% and $1,757,000 or 32.8% of the allowance for loan losses being allocated against such impaired non-accrual loans, respectively. The year over year increase in the reserve balance on an absolute and as a percentage of impaired non-accrual loans reflects the effects the recession has had on NSBF’s borrowers’ business performance and the reduction in the value of the borrowers’ assets underlying the impaired, nonaccrual loans as well as lengthening the time to liquidate such loans.

Salaries and benefits decreased by $236,000 as a result of staffing cutbacks in sales and origination staff in connection with the lending operation totaling $449,000 that began in the fourth quarter of 2008 and were completed during the quarter ended March 31, 2009. NSBF believes it currently has adequate staff to service its portfolio and originate loans with the capability to quickly hire staff or obtain the services of independent contractors as needed. This was offset by an increase in headcount and salaries at NBC of $46,000 for the same period. Combined headcount decreased over 37% from 49 at September 30, 2008, to 31 at September 30, 2009.

Professional fees for the three months ended September 30, 2009 increased by $93,000 primarily due to the settlement of a contingent liability in the prior year 3rd quarter which resulted in a $98,000 reduction of legal expense.

After deducting the amortization of deferred financing costs associated with the lines of credit held by NSBF and NBC of $81,000 for the three months ended September 30, 2008 and $131,000 for the three months ended September 30, 2009, interest expense decreased from $352,000 to $285,000 for the same periods, respectively. This decrease was primarily attributable to a decrease in the prime lending rate on which the financing costs associated with NSBF are based from an average of 5.00% to a rate of 3.25% quarter over quarter. This decrease in the Prime rate was offset by an increase in the spread over prime being charged by General Electric (“GE”). In 2008, the spread over Prime was 0.25% whereas in the three months ending September 30, 2009, the spread was 3.09%. This increase in the spread was offset by a decrease in the average amount outstanding under the GE credit facility. The average amount outstanding for the three months ended September 30, 2008 was $22,662,000 as compared with $13,801,000 during the same period in 2009.

Other general and administrative costs decreased by $319,000 due primarily to a reduction in forced placed insurance costs of $71,000, a reduction in loan processing costs due to the reduction of new originations of $58,000, a reduction in loan recovery expenses of $74,000 due to the number of loans going into default leveling off as compared to the prior year as well as a reduction in losses taken on the value of real estate owned, and general office, rent and utilities expenses, which are allocated based on headcount of $68,000, and a reduction in, all in connection with the lending operation. Additionally, a reduction of $47,000 in bad debt expense recorded in the three months ended September 30, 2009 as compared to the three months ended September 30, 2008 at NBC.

Overall, the reduction in segment revenue of $169,000, offset by a reduction of expenses totaling $907,000, resulted in an improvement in loss before benefit of income taxes of $738,000 for the three months ended September 30, 2009 versus that of September 30, 2008.


	Nine months ended September 30:
(In thousands):	2009			2008			$ Change			% Change
Revenue:
Premium income	$	725		$	472			253		54	%
Servicing fee		1,246			1,360			(114	)	(8	)%
Interest income		1,114			1,955			(841	)	(43	)%
Management fees		439			439			—		—	%
Other income		1,361			1,366			(5	)	—	%

Total revenue		4,885			5,592			(707	)	(13	)%

Expenses:
Salaries and benefits		2,129			3,379			(1,250	)	(37	)%
Interest		1,159			1,439			(280	)	(19	)%
Management fees		345			345			—		—	%
Professional fees		259			228			31		14	%
Depreciation and amortization		705			863			(158	)	(18	)%
Provision for loan losses		1,320			1,528			(208	)	(14	)%
Other general and administrative costs		1,065			1,597			(532	)	(33	)%

Total expenses		6,982			9,379			(2,397	)	(26	)%

Loss before benefit (provision) for income taxes	$	(2,097	)	$	(3,787	)	$	(1,690	)	(45	)%

For the nine months ended September 30, 2009 and 2008:

Revenue is derived primarily from premium on loan sales generated by the sale of the guaranteed and unguaranteed portions of SBA loans, interest income on SBA loans held for investment, servicing fee income on the guaranteed portions of SBA loans previously sold, servicing income for loans originated by other lenders for which NSBF is the servicer, and receivable factoring and billing services, classified as other income above, provided by Newtek Business Credit (“NBC”). Most SBA loans originated by NSBF charge an interest rate equal to the Prime rate plus an additional percentage amount; the interest rate resets to the current Prime rate on a monthly or quarterly basis which will result in changes to the amount of interest accrued for that month and going forward and a re-amortization of a loan’s payment amount until maturity.

NSBF stopped originating new loans in the fourth quarter of 2008 although loan fundings continued through the first quarter of 2009. As a result of improving market conditions, the Company originated two new loans, one in the second quarter of 2009 and one additional loan in the third quarter of 2009. The first nine months 2009 premium income, and the increase over the same period in 2008, benefited primarily from a change in the method of valuing servicing assets created at the time of sale. The Company sold 15 guaranteed loans in the nine months ended September 30, 2009, aggregating $10,109,000 compared to 40 loans sold aggregating $10,311,000 in the same period for the prior year. With the exception of the two new loans originated in 2009, the period’s sales primarily consisted of loans funded over previous quarters that had been held for sale due to capital market conditions. Management made the business decision to sell its guaranteed loans available for sale through March 31, 2009 at par with an average of 3.4% servicing due to low premium bids at the time. To more appropriately value the servicing asset created under the secondary market conditions earlier in the year, management utilized a discounted cash flow model, which uses valuation techniques to convert future amounts to a single present amount and is based on the value indicated by current market expectations about those future amounts. The premium earned on those loans sold at par through March 31, 2009, reflects the valuation of the newly created servicing assets, not cash earned at the time of the sales. As a result of the secondary market returning to somewhat normalized levels beginning late in the second quarter 2009, the Company began to originate loans and sold one guaranteed loan aggregating $1,500,000 at a premium of 107.55% in the second quarter, and sold another in the third

quarter 2009 in the amount of $1,327,000 with associated premium of 110.00%. Premiums on guaranteed loan sales during the nine months ended September 30, 2008 averaged 107.9%. The Company expects to generate additional premium income as NSBF begins to originate new loans in increased volumes.

Servicing fee income related to SBA loans decreased by $114,000 due to a decrease in the NSBF loan servicing portfolio and an increase in non-performing loans, as well as a reduction in the fee income associated with the servicing of an SBA portfolio for a savings bank in New York which totaled $109,000 for the nine months ended September 30, 2009 compared to $127,000 in the nine months ended September 30, 2008. The average NSBF servicing portfolio for the nine months ended September 30, 2009 was $126,227,000 compared with $128,691,000 for the nine months ended September 30, 2008 while the nonperforming servicing portfolio increased from $17,923,000 at September 30, 2008 to $33,729,000 at September 30, 2009. NSBF only earns servicing income on the performing loans within its own portfolio.

Interest income decreased by $841,000 due primarily to a decrease in the average interest rate being charged to borrowers from 8.44% to 5.92% due to a reduction in the prime rate, a decrease in the average outstanding portfolio from $33,243,000 in the nine months ended September 30, 2008 to $30,453,000 in the nine months ended September 30, 2009, and an increase in the nonperforming portfolio from an average of 17.9% of the NSBF portfolio to 24.9% for the nine months ended September 30, 2008 and 2009, respectively. If NSBF does not originate and fund new loans in substantial volumes, then its performing portfolio will continue to shrink as loans normally pay down principal and default, further reducing its opportunity to earn interest and servicing income.

Other income decreased by $5,000 due primarily to a reduction in revenue earned by NSBF in the amount of $160,000 attributable to a decrease in the number of loans prepaying as well as a decrease in revenue earned on late payments and revenue earned on loan originations. This decrease was offset by an increase in revenue earned by Newtek Business Credit. For the nine months ended September 30, 2009, NBC had revenue of $1,090,000 and purchased $15,509,000 of receivables from an average customer base of 120 compared to revenue of $975,000 on $11,737,000 of receivables purchases with an average customer base of 121 for the nine months ended September 30, 2008. Additionally, in the nine months ended September 30, 2008, Small Business Lending, the holding company for NSBF recognized $60,000 in referral fee income compared to $9,000 of corresponding revenue earned in 2009.

Consideration in arriving at the provision for loan loss includes past and current loss experience, current portfolio composition, future estimated cash flows, and the evaluation of real estate and other collateral as well as current economic conditions. The provision for loan loss decreased period over period by $208,000. The reserve for loan losses as compared to gross portfolio balance increased from $2,779,000 or 9.02% at September 30, 2008 to $4,014,000 or 14.03% at September 30, 2009. At September 30, 2009 and September 30, 2008, total impaired non-accrual loans amounted to $8,934,000 and $5,359,000, respectively, with $3,043,000 or 34.0% and $1,757,000 or 32.8% of the allowance for loan losses being allocated against such impaired non-accrual loans, respectively. The year over year increase in the reserve balance on an absolute and as a percentage of impaired non-accrual loans reflects the effects the recession has had on NSBF’s borrowers’ business performance and the reduction in the value of the borrowers’ assets underlying the impaired, nonaccrual loans as well as lengthening the time to liquidate such loans.

Salaries and benefits decreased by $1,201,000 as a result of staffing cutbacks in sales and origination staff in connection with the lending operation totaling $1,402,000 that began in the fourth quarter of 2008 and were completed during the quarter ended March 31, 2009. NSBF believes it currently has adequate staff to service its portfolio and originate loans with the capability to quickly hire staff or obtain the services of independent contractors as needed. This was offset by an increase in headcount and salaries at NBC of $79,000 for the same period. Combined headcount decreased over 37% from 49 at September 30, 2008, to 31 at September 30, 2009.

Professional fees for the nine months ended September 30, 2009 increased by $31,000 primarily due to a reduction in contingent expenses in the prior period as a result of favorable settlements.

After deducting the amortization of deferred financing costs associated with the lines of credit held by NSBF and NBC of $393,000 for the nine months ended September 30, 2008 and $276,000 for the nine months ended September 30, 2009, interest expense decreased from $1,046,000 to $882,000 for the same periods, respectively. This decrease was attributable to a decrease in the prime lending rate on which the financing costs are based from a weighted average of 5.43% to a rate of 3.25% period over period. This decrease in the Prime rate was offset by an increase in the spread over prime being charged by GE. In 2008, the average spread over Prime was 0.18% whereas in the nine months ending September 30, 2009, the average spread was 2.61%. This increase in the spread was offset by a decrease in the average amount outstanding under the GE credit facility. The average amount outstanding for the nine months ended September 30, 2008 was $20,226,000 as compared with $15,671,000 during the same period in 2009.

Other general and administrative costs decreased by $532,000 due primarily to an overall reduction in office and overhead related expenses due to a reduction in headcount at NSBF and cost cutting measures at NBC. The Company also experienced a reduction in loan processing fees due to the suspension of loan originations. These cost reductions were partially offset by a $114,000 increase in loan recovery expenses as a result of the increase in non-performing loans and the loss experienced on several REO properties due to the impact of falling real estate prices.

Although segment revenues fell $707,000 or 13% period over period, the Company’s cost cutting efforts successfully reduced segment expenses by $2,397,000 or 26%, reducing the loss before benefit of income taxes by $1,690,000 or 45% to $(2,097,000) for the nine months ended September 30, 2009 from a loss of $(3,787,000) for the nine months ended September 30, 2008. The segment should continue to benefit from cost reductions for the remainder of 2009.

Capcos


	Three months Ended September 30:
(In thousands):	2009			2008			$ Change			% Change
Revenue:
Income from tax credits	$	2,234		$	1,680		$	554		33	%
Interest income		21			73			(52	)	(71	)%
Other income		43			2			41		2,050	%

Total revenue		2,298			1,755			543		31	%

Expenses:
Interest		2,268			1,825			443		24	%
Management fees		731			1,190			(459	)	(39	)%
Professional fees		140			105			35		33	%
Other general and administrative costs		66			81			(15	)	(19	)%

Total expenses		3,205			3,201			4		—	%

Loss before fair market value adjustment and benefit (provision) for income taxes		(907	)		(1,446	)		(539	)	(37	)%
Net change in fair market value of Credits in lieu of cash and Notes payable in credits in lieu of cash		34			(74	)		108		146	%

Loss before benefit (provision) for income taxes	$	(873	)	$	(1,520	)	$	(647	)	(43	)%

Three months ending September 30, 2009 and 2008:

As described in Note 3 to the condensed consolidated financial statements, effective January 1, 2008, the Company adopted fair value accounting for its financial assets and financial liabilities concurrent with its election of the fair value option for substantially all credits in lieu of cash, notes payable in credits in lieu of cash and prepaid insurance. These are the financial assets and liability associated with the Company’s Capco notes that are reported within the Company’s Capco segment. The table above reflects the effects of the adoption of fair value measurement on the income and expense items (income from tax credits, interest expense and insurance expense) related to the revalued financial assets and liability for the three months ended September 30, 2009 and 2008. In addition, the net change to the revalued financial assets and liability for the three months ended September 30, 2009 and 2008 is reported in the line “Net change in fair market value of Credits in lieu of cash and Notes payable in credits in lieu of cash”.

Revenue is derived primarily from non-cash income from tax credits. The increase in income from tax credits for the third quarter 2009 revenue versus the third quarter 2008, reflects the effect of the higher interest rate used under fair value accounting. The amount of future revenue will fluctuate with future interest rates. However, over future periods, the amount of tax credits, and therefore the income the Company will recognize, will decrease to zero.

Expenses consist primarily of management fees and non-cash interest expense. Management fees decreased 39%, or $459,000, to $731,000 for the three months ended September 30, 2009 from $1,190,000 for the same period ended 2008. The primary reason for the decline was due to several Capcos insufficient cash resources. Management fees, which are eliminated on consolidation, are expected to decline in the future as the Capcos mature and utilize their cash. If a Capco does not have current or projected cash sufficient to pay management fees then such fees are not accrued. Interest expense increased 24%, or $443,000, to $2,268,000 for the three months ended September 30, 2009 from $1,825,000 for the same period last year, reflecting the higher interest rate used under fair value accounting.

Because the Company does not anticipate creating any new Capcos in the foreseeable future, the Capco segment will continue to incur losses going forward. The Capcos will continue to earn cash investment income on their cash balances and incur cash management fees and operating expenses. The amount of cash available for investment and to pay management fees will be primarily dependent upon future returns generated from investments in qualified businesses. Income from tax credits will consist solely of accretion of the discounted value of the declining dollar amount of tax credits the Capcos will receive in the future; the Capcos will continue to incur non-cash interest expense.


	Nine months ended September 30:
(In thousands):	2009			2008			$ Change			% Change
Revenue:
Income from tax credits	$	6,483		$	4,634		$	1,849		40	%
Interest income		82			353			(271	)	(77	)%
Other income		44			6			38		633	%

Total revenue		6,609			4,993			1,616		32	%

Expenses:
Interest		7,528			5,287			2,241		42	%
Management fees		2,558			4,792			(2,234	)	(47	)%
Professional fees		436			485			(49	)	(10	)%
Other than temporary decline in value of investments		158			—			158		—	%
Other general and administrative costs		13			280			(267	)	(95	)%

Total expenses		10,693			10,844			(151	)	(1	)%

Loss before fair market value adjustment and benefit (provision) for income taxes		(4,084	)		(5,851	)		(1,767	)	(30	)%

Net change in fair market value of Credits in lieu of cash and Notes payable in credits in lieu of cash		1,044			(13	)		1,057		8,130	%

Loss before benefit (provision) for income taxes	$	(3,040	)	$	(5,864	)	$	(2,824	)	(48	)%

Nine months ending September 30, 2009 and 2008:

As described in Note 3 to the condensed consolidated financial statements, effective January 1, 2008, the Company adopted fair value accounting for its financial assets and financial liabilities concurrent with its election of the fair value option for substantially all credits in lieu of cash, notes payable in credits in lieu of cash and prepaid insurance. These are the financial assets and liability associated with the Company’s Capco notes that are reported within the Company’s Capco segment. The table above reflects the effects of the adoption of fair value measurement on the income and expense items (income from tax credits, interest expense and insurance expense) related to the revalued financial assets and liability for the nine months ended September 30, 2009 and 2008. In addition, the net change to the revalued financial assets and liability for the nine months ended September 30, 2009 and 2008 is reported in the line “Net change in fair market value of Credits in lieu of cash and Notes payable in credits in lieu of cash”.

Revenue is derived primarily from non-cash income from tax credits. The increase in income from tax credits revenue for the nine months ended September 30, 2009 versus the same period in 2008 reflects the effect of the higher interest rate used under fair value accounting than that previously used under cost basis accounting. The amount of future income from tax credits revenue will fluctuate with future interest rates. However, over future periods, the amount of tax credits, and therefore the income the Company will recognize, will decrease to zero.

Other general and administrative costs decreased by $267,000 or 95% primarily due to the returned premium on a Capco insurance policy which expired in April 2009, in the amount of $250,000.

Expenses consist primarily of management fees and non-cash interest expense. Management fees decreased 47%, or $2,234,000, to $2,558,000 for the nine month period ended September 30, 2009 from $4,792,000 during the same period of 2008, which did not reoccur in 2009. The decrease was primarily due to the recovery of management fees from one Capco totaling approximately $1,638,000 during the nine months ended September 30, 2008. Management fees, which are eliminated on consolidation, are expected to continue to decline in the future as the Capcos mature and utilize their cash. If a Capco does not have current or projected cash sufficient to pay management fees then such fees are not accrued. Interest expense increased 42%, or $2,241,000, to $7,528,000 for the nine months ended September 30, 2009 from $5,287,000 for the same period last year reflecting the higher interest rate used under fair value accounting.

Because the Company does not anticipate creating any new Capcos in the foreseeable future, we anticipate that our Capco segment will incur losses going forward through 2010. The Capcos will continue to earn cash investment income on their cash balances and incur cash management fees and operating expenses. The amount of cash available for investment and to pay management fees will be primarily dependent upon future returns generated from investments in qualified businesses. Income from tax credits will consist solely of accretion of the discounted value of the declining dollar amount of tax credits the Capcos will receive in the future; the Capcos will continue to incur non-cash interest expense.

All Other


	Three months Ended September 30:
(In thousands):	2009			2008			$ Change			% Change
Revenue:
Interest income	$	10		$	29		$	(19	)	(66	)%
Insurance commissions		201			225			(24	)	(11	)%
Other income		100			148			(48	)	(32	)%

Total revenue		311			402			(91	)	(23	)%

Expenses:
Salaries and benefits		376			576			(200	)	(35	)%
Professional fees		18			148			(130	)	(88	)%
Depreciation and amortization		34			23			11		48	%
Other general and administrative costs		154			230			(76	)	(33	)%

Total expenses		582			977			(395	)	(40	)%

Loss before benefit (provision) for income taxes	$	(271	)	$	(575	)	$	(304	)	(53	)%

Three months ending September 30, 2009 and 2008:

The All Other segment includes revenues and expense primarily from qualified businesses that received investments made through the Company’s Capcos which cannot be aggregated with other operating segments.

The revenue decrease of $91,000 is primarily due to the decrease in insurance commissions of $24,000 and other income of $48,000 in the third quarter 2009 as compared to the third quarter of 2008. Insurance commissions decreased by $24,000 for the three month period ended September 30, 2009 as compared to the three month period ended September 30, 2008, due primarily to staff reduction and reorganization negatively impacting new insurance sales as well as current economic conditions reducing the demand for new policies. Interest income decreased as a result of a decrease in cash and cash equivalents during the third quarter of 2009 as compared with the third quarter of 2008. The decrease in other income was primarily due to a $39,000 recovery in the third quarter of 2008 related to a qualified investment previously written off that did not reoccur in the third quarter of 2009.

Salaries and benefits decreased by $200,000, or 35% to $376,000 for the three months ended September 30, 2009, as compared to $576,000 for same period 2008, as a result of staff reductions in the insurance agency and other entities. The decrease in professional fees of $130,000, or 88% to $18,000 for the third quarter ended 2009 as compared to $148,000 for 2008 was mainly due to a non-reoccurrence of consulting expenses incurred in 2008 relating to a customer data information and communication system. Other general administrative costs decreased by $76,000, or 33% to $154,000 for the third quarter ended 2009, as compared to $230,000 for 2008.

Loss before benefit (provision) for income taxes decreased by $304,000 during the third quarter of 2009 as compared with the third quarter of 2008, primarily due to the decrease in total expenses of $395,000 partially offset by the decrease in total revenue of $91,000.


	Nine months Ended September 30:
(In thousands):	2009			2008			$ Change			% Change
Revenue:
Interest income	$	39		$	137		$	(98	)	(72	)%
Insurance commissions		619			818			(199	)	(24	)%
Other income		1,359			753			606		80	%

Total revenue		2,017			1,708			309		18	%

Expenses:
Salaries and benefits		1,270			2,246			(976	)	(43	)%
Professional fees		143			218			(75	)	(34	)%
Depreciation and amortization		96			71			25		35	%
Other general and administrative costs		628			700			(72	)	(10	)%

Total expenses		2,137			3,235			(1,098	)	(34	)%

Loss before benefit (provision) for income taxes	$	(120	)	$	(1,527	)	$	(1,407	)	(92	)%

Nine months ending September 30, 2009 and 2008:

Revenue increased $309,000, or 18%, for the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008. The revenue increase consists of a $606,000 increase in other income primarily due to a $1,000,000 recovery in the second quarter of 2009 related to a qualified investment previously written off, offset by a $199,000 decrease in insurance commissions and an $98,000 decrease in interest income. The decrease in insurance commissions for the nine month period ended September 30, 2009 as compared to the nine month period ended September 30, 2008 was due primarily to staff reduction and reorganization negatively impacting new insurance sales as well as current economic conditions reducing both the demand for new policies as well as coverage levels for existing customers. Interest income decreased as a result of a decrease in cash and cash equivalents during the first nine months of 2009 as compared with the first nine months of 2008.

Salaries and benefits decreased by $976,000, or 43% to $1,270,000 for the nine months ended September 30, 2009, as compared to $2,246,000 for same period 2008, as a result of staff reductions in the insurance agency and other entities. The decrease in professional fees of $75,000, or 34% to $143,000 for the nine months ended September 30, 2009 as compared to $218,000 for the same period in 2008 was mainly due to a non-reoccurrence of consulting expenses incurred in 2008 relating to a customer data information and communication system offset by a one-time reversal of broker commissions in the second quarter of 2008.

Loss before benefit (provision) for income taxes decreased by $1,407,000 during the nine months ended September 30, 2009 as compared with the nine months ended September 30, 2008, primarily due to the increase in revenues of $309,000 and the decrease in total expenses of $1,098,000.

Corporate activities


	Three months ended September 30:
(In thousands):	2009			2008			$ Change			% Change
Revenue:
Management fees	$	700		$	1,159		$	(459	)	(40	)%
Interest income		9			10			(1	)	(10	)%
Other income		3			—			3		—	%

Total revenue		712			1,169			(457	)	(39	)%

Expenses:
Salaries and benefits		1,072			1,390			(318	)	(23	)%
Interest		—			10			(10	)	(100	)%
Professional fees		221			295			(74	)	(25	)%
Depreciation and amortization		105			96			9		9	%
Other general and administrative costs		628			601			27		4	%

Total expenses		2,026			2,392			(366	)	(15	)%

Loss before benefit (provision) for income taxes	$	(1,314	)	$	(1,223	)	$	91		7	%

Three months ended September 30, 2009 and 2008:

Revenue is derived primarily from management fees earned from the Capcos, which amount to 2.5% of certified capital. Management fee revenue declined 40%, or $459,000, to $700,000 for the three months ended September 30, 2009 from $1,159,000 for the third quarter of 2008. Management fees, which are eliminated on consolidation, are expected to decline in the future as the Capcos mature and utilize their cash. If a Capco does not have current or projected cash sufficient to pay management fees, then such fees are not accrued.

Expenses declined $366,000, or 15%, in the third quarter of 2009 from the comparable period in 2008. As a result of the Company’s cost cutting initiatives, salaries and benefits decreased $318,000 or 23% to $1,072,000 for the third quarter of 2009 as compared to $1,390,000 for the same period ended 2008. The Company expects Salaries and benefits to remain static or slightly decline from its current level over the remainder of 2009. The Company does not believe that the reductions will impact the management of the Company’s businesses. Professional fees decreased $74,000, or 25%, in the third quarter of 2009 from the comparable period in 2008 due to decreased audit fees.


	Nine months ended September 30:
(In thousands):	2009			2008			$ Change			% Change
Revenue:
Management fees	$	2,464		$	4,698		$	(2,234	)	(48	)%
Interest income		21			26			(5	)	(19	)%
Other income		12			5			7		140	%

Total revenue		2,497			4,729			(2,232	)	(47	)%

Expenses:
Salaries and benefits		3,465			5,369			(1,904	)	(35	)%
Interest		—			44			(44	)	(100	)%
Professional fees		1,360			939			421		45	%
Depreciation and amortization		339			260			79		30	%
Other general and administrative costs		1,999			2,013			(14	)	(1	)%

Total expenses		7,163			8,625			(1,462	)	(17	)%

Loss before benefit (provision) for income taxes	$	(4,666	)	$	(3,896	)	$	770		20	%

Nine months ended September 30, 2009 and 2008:

Revenue is derived primarily from management fees earned from the Capcos, which amount to 2.5% of certified capital. Management fee revenue decreased 48%, or $2,234,000, to $2,464,000 for the nine month period ended September 30, 2009 from $4,698,000 during the same period of 2008. The decrease was primarily due to the recovery of management fees from one Capco totaling approximately $1,638,000 during the nine months ended September 30, 2008 which did not reoccur in 2009. Management fees, which are eliminated on consolidation, are expected to decline in the future as the Capcos mature and utilize their cash. If a Capco does not have current or projected cash sufficient to pay management fees then such fees are not accrued.

Expenses declined $1,462,000, or 17%, during the nine month period ended September 30, 2009 from the comparable period in 2008. As a result of the Company’s cost cutting initiatives, salaries and benefits decreased $1,904,000 or 35% to $3,465,000 for the nine months ended September 30, 2009 as compared to $5,369,000 for the same period ended 2008. The Company expects Salaries and benefits to remain static or slightly decline from its current level over the remainder of 2009. The Company does not believe that the reductions will impact the management of the Company’s businesses. Professional fees increased $421,000, or 45%, for the nine months ended September 30, 2009 from the comparable period in 2008 due to the Company exploring various financing and restructuring alternatives and as a result incurred significant one-time professional fees in the first six months of 2009 partially offset by decreased audit fees.

Critical Accounting Policies and Estimates:

The Company’s significant accounting policies are described in Note 1 of the Notes to Condensed Consolidated Financial Statements included in its Form 10-K for the fiscal year ended December 31, 2008. A discussion of the Company’s critical accounting policies, and the related estimates, are included in Management’s Discussion and Analysis of Results of Operations and Financial Position in its Form 10-K for the fiscal year ended December 31, 2008.

Liquidity and Capital Resources


	For the nine months ended September 30,
(Dollars in thousands)	2009			2008
Net cash provided by (used in) operating activities	$	5,637		$	(9,889	)
Net cash provided by (used in) investing activities		2,538			(937	)
Net cash (used in) provided by financing activities		(9,455	)		3,279

Net decrease in cash and cash equivalents		(1,280	)		(7,547	)

Cash and cash equivalents, beginning of period		16,852			25,372

Cash and cash equivalents, end of period	$	15,572		$	17,825

Cash requirements and liquidity needs over the next twelve months are anticipated to be funded primarily through operating results and available cash and cash equivalents. In October 2009, the $2.5 million borrowed under the Capital One line of credit converted to a three year term loan with a level principal repayment. The Small business finance segment depends on outside funding sources to finance loan origination and receivable purchases. The SBA lending unit funds its cash requirements and liquidity needs through available cash and cash equivalents but primarily utilizes the $15 million GE line of credit to originate and warehouse the guaranteed and unguaranteed portion of SBA loans. On July 22, 2009 NSBF entered into a Fifth Amendment and Consent (the “Fifth Amendment”) to the Credit Agreement dated as of August 31, 2005 between NSBF and General Electric Capital Corporation (GECC) which has made certain changes in the terms of the warehouse lending facility provided to NSBF. The Fifth Amendment reduced the aggregate total of the credit facility to $15 million, adjusts the interest rate and other terms and extends the maturity date from August 30, 2009 to May 31, 2010 based upon progress shown by NSBF in obtaining a commitment for a replacement lender. GE has indicated to the Company that GE no longer intends to provide credit facilities to finance companies. Therefore there can be no assurance that the Company will be able to renew the credit line with GE or that it will be able to negotiate an alternate arrangement. Failure to obtain financing would have a material adverse effect on our business. The receivables financing unit utilizes the $10 million Wells Fargo line of credit to purchase receivables. There are no cross covenants or collateralization under any of the above lending facilities. The availability of the lending facilities is subject to the compliance with certain covenants and in addition, for the GE and Wells Fargo lines, the amount of collateral and collateral

requirements, as set forth in the agreements. The Company guarantees the lines of credit for the subsidiaries: Capital One for the amount borrowed, GE up to $15 million, and Wells Fargo up to $800,000. As of September 30, 2009, the Company’s unused sources of liquidity consisted of $15,572,000 in unrestricted cash and cash equivalents, and $228,000 and $174,000 available through the GE and Wells Fargo lines of credit, respectively.

Restricted cash totaling $8,548,000, which is primarily held in the Capcos, can be used in managing and operating the Capcos, making qualified investments, to repay debt obligations and for the payment of income taxes.

Net cash flows provided by operating activities increased $15,526,000 to $5,637,000 for the nine months ended September 30, 2009 as compared to a use of $(9,889,000) for the nine months ended September 30, 2008. This net increase was primarily due to a decrease of $3,495,000 in the net loss period over period, a $12,091,000 decrease in the originations of SBA loans held for sale, as well as a $1,096,000 decrease in the broker receivable.

Net cash flows provided by investing activities primarily includes the purchase of fixed assets and customer accounts, activity regarding the unguaranteed portions of SBA loans, changes in restricted cash and activities involving investments in qualified businesses. Net cash flows provided by investing activities increased by $3,475,000 to $2,538,000 for the nine months ended September 30, 2009 compared to a use of $(937,000) for the nine months ended September 30, 2008. The increase was due primarily to greater returns of investments in qualified businesses of $1,122,000 for the nine months ended September 30, 2009 as compared to the same period last year, and a $1,435,000 decrease in the purchase of fixed assets and customer merchant accounts as well as a decrease of $1,256,000 in the amount of SBA loans originated for investment. In addition, $2,889,000 of restricted cash became available, or declined, in 2008 versus an increase in the change in restricted cash of $387,000 in 2009.

Net cash flows used in financing activities primarily includes repayments on notes payable to Capital One, Wells Fargo, and GE. Net cash flows used in financing activities increased by $12,734,000 to a use of $(9,455,000) for the nine months ended September 30, 2009 from $3,279,000 for the nine months ended September 30, 2008. The primary reason was due to net repayments on bank notes payable of $(9,197,000) during the nine month period ended September 30, 2009 as compared to net borrowings of $4,226,000 in 2008; substantially all of the repayment represents the reduction of the GE note payable due to the return of the financing of the SBA loans held for sale originated in 2008 and sold in 2009, principal repayments received on SBA loans, and payments made by the Company upon the effectiveness of amendments to the GE Credit Agreement.

Newtek funds its holding company through cash on-hand, cash flow from operating businesses, and the receipt of annual management fees from the Capcos equal to 2.5% of initial funding. However, the management fees do not represent revenues to Newtek on a consolidated basis as this is a transfer of funds from Newtek’s Capcos to the holding company, and all intercompany transactions and balances are eliminated in consolidation. These fees from Capcos are expected to decrease over the next few years as the Capcos mature in their business cycle. The Company does not intend to add new Capcos and will rely on expanding the operations of its underlying businesses and cutting costs at the holding company to maintain liquidity. If the operating companies do not continue to grow as expected to produce significant cash flow surpluses, if the capital markets should be inaccessible to Newtek, and if other borrowings are unavailable, the Company will experience a decrease in its liquidity and would be forced to diminish materially its operations so as to conform its expenditures to the cash then available.

Newtek expects to finance other ventures principally with existing funds or new additional borrowings under current or future bank facilities.

Item 3.

Quantitative and Qualitative Disclosure about Market Risk.

All of our business activities contain elements of risk. We consider the principal types of risk to be fluctuations in interest rates and loan portfolio valuations. We consider the management of risk essential to conducting our businesses. Accordingly, risk management systems and procedures are designed to identify and analyze our risks, to set appropriate policies and limits and to continually monitor these risks and limits by means of reliable administrative and information systems and other policies and programs.

Because the SBA lender borrows money to make loans and investments, our net operating income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds. The Company has outstanding under its credit line with GE approximately $12,539,000 at September 30, 2009. The interest rate on such notes is variable, based on the current Prime rate plus 3.25% or three month LIBOR plus 4.25%, whichever is higher, to be increased by 0.25% each quarter beginning September 1, 2009. As of September 30, 2009, the interest rate being charged to NSBF is 6.50%. On July 22, 2009 we entered into a Fifth Amendment and Consent (the “Fifth Amendment”) to the Credit Agreement with GECC which made

certain changes in the terms of the warehouse lending facility provided to NSBF. The Fifth Amendment reduced the aggregate total of the credit facility to $15 million from $28 million, adjusted the interest rate and other terms and extended the maturity date from August 31, 2009 to May 31, 2010 based upon progress shown by NSBF in obtaining a commitment for a replacement lender. There can be no assurance that we will be able to renew or extend our credit line with GE, or that we will be able to negotiate an alternate arrangement. Failure to obtain financing would have a material adverse effect on our business.

There can be no assurance that a significant change in market interest rates will not have a material adverse effect on our interest income. In periods of sharply rising interest rates, our cost of funds would increase, which would reduce our net operating income. We have analyzed the potential impact of changes in interest rates on interest income net of interest expense. Assuming that the balance sheet were to remain constant and no actions were taken to alter the existing interest rate sensitivity, a hypothetical immediate 1% change in interest rates would have the effect of a net increase (decrease) in assets by less than 1% for 2009. Although management believes that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in credit quality, size and composition of the assets on the balance sheet, and other business developments that could affect a net increase (decrease) in assets. Accordingly, no assurances can be given that actual results would not differ materially from the potential outcome simulated by this estimate.

Additionally, we do not have significant exposure to changing interest rates on invested cash which was approximately $24,120,000 at September 30, 2009. We do not purchase or hold derivative financial instruments for trading purposes. All of our transactions are conducted in U.S. dollars and we do not have any foreign currency or foreign exchange risk. We do not trade commodities or have any commodity price risk.

We believe that we have placed our demand deposits, cash investments and their equivalents with high credit-quality financial institutions. Invested cash is held almost exclusively at financial institutions with ratings from Standard and Poor’s of A- or better. The Company invests cash not held in interest free checking accounts or bank money market accounts mainly in U.S. Treasury only money market instruments or funds and other investment-grade securities. As of September 30, 2009, cash deposits in excess of FDIC and SIPC insurance totaled approximately $4,897,000 and funds held in U.S. Treasury only money market funds or equivalents in excess of SIPC insurance totaled approximately $9,219,000.

Item 4.

Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report are functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act is accumulated and communicated to the issuer’s management including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. A controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls systems are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

(b) Change in Internal Control over Financial Reporting

No change in our internal control over financial reporting occurred during the quarter ended September 30, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

(c) Limitations

A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurances that the control system’s objectives will be met. Furthermore, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be

faulty, and that breakdowns can occur because of simple errors or mistakes. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with its policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. We periodically evaluate our internal controls and make changes to improve them.

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings

We are not involved in any material pending litigation. We and/or one or more of our investee companies are involved in lawsuits regarding wrongful termination claims by employees or consultants, none of which are individually or in the aggregate material to Newtek.

Item 6.

Exhibits


Exhibit No.		Description

10.7.4		Fifth Amendment and Waiver to Credit Agreement dated July 21, 2009 to the Credit Agreement dated August 31, 2005, between Newtek Business Services, Inc., the other credit parties signatory thereto and General Electric Capital Corporation (Incorporated by reference to Exhibit 99.1 to Newtek’s Report on Form 8-K, filed July 23, 2009).

31.1		Certification by Chief Executive Officer required by Rule 13a-14(a) and 15d-14(a) under the Exchange Act.

31.2		Certification by Chief Financial Officer required by Rule 13a-14(a) and 15d-14(a) under the Exchange Act.

32.1		Certification by Chief Executive and Chief Financial Officers pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	NEWTEK BUSINESS SERVICES, INC.

Date: November 12, 2009	By:	/S/ BARRY SLOANE
		Barry Sloane Chairman of the Board, Chief Executive Officer and Secretary

Date: November 12, 2009	By:	/S/ SETH A. COHEN
		Seth A. Cohen Chief Financial Officer and Treasurer