NewtekOne Inc (NEWT) 2011 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to Newtek Business Services Second-Quarter 2011 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session with instructions following at that time.

(Operator Instructions)

As a reminder, this conference is being recorded. Now I would like to turn the conference over to your CEO and Chairman, Mr. Barry Sloane. Please begin.

Hi, thank you very much. This is Barry Sloane speaking. Welcome to our Second-Quarter 2011 Financial Results Conference Call. Today joining me will be Jenny Eddelson, our Chief Accounting Officer, who will go over financial results. To start off our call, I'd like to ask Jenny to read the Safe Harbor statement.

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

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

Our Capcos operate under a different set of rules in each of the 7 jurisdictions, and these place varying requirements on the structure of our investment. In some cases, particularly in Louisiana and in certain situations in New York, we do not control the equity or management of a qualified business, but that cannot always be presented orally or in written presentations.

Thank you, Jenny. For everyone attending today, you can follow along on the PowerPoint presentation, which is on our website, thesba.com. You click on Company and go to the Investor Relations section and you can follow on the call with the PowerPoint that is hung there.

I'd like to move forward to page 3 of the PowerPoint, and also announce that I'm extremely pleased to present our second-quarter results of 2011, and also for those of you who follow the Company, we issued guidance for 2012.

It's a bit early for us, frankly, to issue 2012 guidance at this point in time, particularly given all the uncertainties in the market. We thought a lot about it. We took a look at some of the results that we've had over the first 6 months of the year. We've recently come off of an internal planning conference, and the senior managers, presidents, and overall staff feel so good about what's going on in the marketplace with respect to our business model, that we wanted to give the market some comfort that we're a good place to do business with.

We are dealing with a lot of small- and medium-size businesses. There's a lot of uncertainty, there are a lot of people who had concerns about counter-party risk, and we felt it was important to go out -- frankly, as we all know, at the risk of being wrong, and giving comfort to the marketplace that we're a good place to do business with, and we're actually growing a nice bottom line.

With that said, focusing on the second-quarter results, we announced consolidated pre-tax income of $136,000 for the quarter just ended. That is versus consolidated pre-tax income of $514,000 for the year prior. The decline was primarily based upon some one-time charges of $466,000. We also announced for the first 6 months of the year, $970,000 pre-tax, for the 6 months ended June 30, 2011, and that's versus a pre-tax loss of $360,000 for the 6 months prior in June 30, 2010.

Focusing on after-tax net income, we had a net loss for the quarter. We had a net income gain for the first 6 months of $223,000. A lot of that net loss is attributed to taxable income based upon our historic certified capital company tax liability.

Focusing on further second-quarter 2011 highlights on page 5, we revised our annual guidance for 2011. We're looking at a pretty tight range of $122 million to $124.8 million for a consolidated revenue range. We tightened up our pre-tax net income range to a $1.5 million to $4 million, the mid-point has remained the same. As we announced earlier today, we have given some very early 2012 guidance of $121.9 million to $125 million, and on pre-tax basis, $2.8 million to $6.1 million, leaving us with a mid-point of $4.5 million, which is approximately a 65% increase over 2011 pre-tax.

For those of you that are looking at the sales number year-to-year, part of the lack of growth in that number is based upon the Durban legislation for our electronic payment processing business, which we believe will affect sales revenue, but will actually help our margins.

Looking at further second-quarter 2011 highlights, we had some pretty good revenue growth in the second quarter of 15%. We came in at $32.3 million Q2 2011 consolidated revenues. Although we do and are somewhat concerned about slowing trends at EPP and Managed Technology Solutions, which we'll talk about later on in our presentation, we still are growing, albeit at a 1% growth, and we came in on a combined basis of $25.5 million for EPP and Managed Technology Solutions.

The small business finance segment had a very good quarter, posting $6.3 million of revenue for Q2 2011, versus $1.9 million in Q2 2010. Small business finance segment posted pre-tax net income of $1 million for Q2 2011, versus $550,000 for Q2 2010.

Moving forward to slide number 8 and focusing on the electronic payment processing business, the Managed Technology Solutions business, and the small business finance business, you could see revenue growth up a slight 2% in EPP, down 1% in Managed Technology Solutions, and up 224% in small business finance.

Looking at the bottom line, the pre-tax number, EPP is down 2%, Managed Technology Solutions down 16%, small business finance, up 86%.

Our cash positions, which tend to vary quite a bit from quarter to quarter, we came in at $29.1 million in cash and cash equivalents, down from be $33.2 million. A lot of those changes, frankly, are based upon how we run our lending business on a quarter-to-quarter basis.

On slide 10, we're looking at developments in the electronic payment processing space. Our revenue came in up 2% quarter-over-quarter, pre-tax was down 2%, EBITDA was down 2%. In the 6 months ending June 30, our revenue was up 4%, our pre-tax income was up 4%, and our EBITDA was up 1%.

We continue to like the payment processing business. It's got significant operating leverage in it. We're very focused on the e-commerce segment of the business. Our new pay model, which is an extremely competitive product to PayPal, continues to gain market share, and has done a pretty good job. We finished the second quarter with our Meet or Beat campaign, and we'll be aggressively rolling into a Durbin fee campaign in the third and fourth quarters of this year, which we think should actually do very well for our Company.

Focusing on the Managed Technology Solutions initiative. Looking at the quarter, revenue was down 1%, pre-tax net income down 16%, EBITDA down 18%. Looking at it on a 6-month basis, revenue was flat. Pre-tax income up 5%. EBITDA down 4%.

Looking at both of these businesses, I think we had a challenging second quarter. To be frank with all of you, we're still extremely optimistic about where we stand for the third and fourth quarters, and for the rest of the year. That's reflected in the guidance that we've given.

We've made some significant changes in those particular businesses -- A, with new sales initiatives; B, taking a look at pricing structure on various types of programs, where we'll be instituting some price increases, and actually have started to do so, and had pretty good results in the month of July. So we feel very constructive on both these segments of the market.

Clearly, we're going through significant contractions in the economy today, and some of these businesses are obviously feeling those effects. We continue to be optimistic on the payment processing business and the technology solutions business based upon new initiatives, based upon things we are doing with the existing customer base in terms of re-pricing and re-strategizing, and that's reflected in our guidance for the remaining part of 2011, as well as the guidance that we've given in 2012.

Focusing on slide number 12, we're extremely optimistic about what we're doing in the cloud computing space. Cloud computing is an important trend in the marketplace today. Cloud computing has got significant margins, and we're gaining traction. We have an extremely competitive product, and we think we have a very good distribution model.

Cloud computing for independent business owners is extremely relevant, because it offers them lower-cost alternatives. We believe it offers them better service and management of their resources, more security, and more functionality.

Our cloud computing product, we think, is in an extremely competitive position, in that we are able to offer service to the small- and medium-sized business market, where the other big players in this base frankly have ignored it, and really based their cloud computing models on more larger businesses and enterprise solutions.

If you look forward to slide number 15, you could see that on a cumulative basis, since the beginning of the year when we've rolled out our cloud computing product, while we continue to grow the number of instances that we've sold; and if you look at what we're doing on a month-to-month basis, despite the fact that we're going into a slower season during the summer, we've had pretty good growth in sales in this particular market, and, in addition to selling our own internal customers that are picking up more and more cloud, we are now starting to reach on outbound basis and having new customers that are totally new to Newtek and the small businesses have already picked up the cloud product.

On slide 17, we begin the focus on our small business finance segment. We have historically talked about the value that this segment -- A, provides to our customer base in terms of being able to provide financing. Clearly in today's market, where capital and financing is at a premium, particularly to most business customers, we're very happy with the performance that the small business finance group has put in for us.

The market continues to be well-positioned, particularly with respect to our 7A business. Pricing on the government-guaranteed bonds is still very strong. We have recently been named an S&P-rated commercial servicer. We have closed on an S&P-rated transaction, which was closed in December of 2010. We have repositioned our financing with Capital One bank and had our credit lines increased. That occurred about 45 days ago.

In our factoring segment, where we provide lines of credit for receivable financing, we have closed in our $10 million facility with Sterling Bank. So where many participants in the market are having difficult time getting financing, we are proud to recognize the fact that the banking community has recognized us to be a viable player and a credit-worthy player, extended us credit lines, which we can in turn extend to our business clients.

One important aspect of our small business finance business is our servicing portfolio. You could see that we continue to make advances in our total servicing portfolio. At the end of June, that portfolio was up to $329 million, we are extremely constructive based upon the fact that we think we'll add approximately $50 million, not including run-off in that particular portfolio in the second and third quarter, as we have $100 million origination target for the year.

We're pretty optimistic that we've got a fairly healthy pipeline of opportunities, both under our FDIC contract and private label participants. So we think that we're going to get some real nice growth in the servicing portfolio, for our own account and for others.

Historically, I think many of you that have followed the Company are aware that our legacy business, the certified capital company business, acronym, Capco, clearly has created interesting balance sheet and income statement effects. We've talked about some of those effects.

You can see it on slide number 20, how it effectively makes us look bigger when you take a look at credits in lieu of cash on the asset side, where they direct off that note's payable and credits in lieu of cash. One of the things you can't see is that these items are shrinking as time goes on. As we talked about, the payment of tax is obviously in the second quarter from some of these effects are starting to occur. So this is beginning to shrink.

As a matter of fact, when you look at our form 10-Q, one of the items I always keep a close eye on and suggest you do the same, we have a deferred tax liability that I'm searching for. Let's see, which at the end of the June 30, 2011, quarter was -- do I have that right, Jenny -- about $2.5 million. That's down from $3 million at the end of December 30, 2010.

So that liability is out there. That's a net number, and that can change from time to time based upon timing differences.

If we move forward to slide number 21, you could see that tax credit receivable and the offsetting liability is on a decline. You could see the total amount of tax credits obviously in 2011. As we start to approach 2012, that number goes down to about $8 million, and then underneath $4 million in 2013.

As we move to slide number 22, what I wanted to try to highlight in this slide is the reduction of the Capco effect -- not the elimination, but the reduction of the Capco effect -- from an operational perspective, where, frankly, we spend a lot of time and energy and effort in the term of ours is de-certifying these Capcos, getting them to the point where we're no longer under regulatory authority.

We have several Capcos that are, I think, fairly close to getting to that 100% threshold in DC and in Texas, and 2 in Louisiana, and 1 in Alabama. There are extensive notes on that. If we look at the following footnote, there are some Capcos that we still will have significant work to do going out in to future.

When we look at our growth strategy going forward, clearly our small business authority brand is doing quite well. It's got a lot of traction in the market. We are clearly becoming more of a thought leader and destination for independent business owners and operators of small businesses all across the United States. As a matter of fact, today we were in the New York Times and also in Inc magazine, so 2 publications that recognize our authoritative position, where they primarily were focused on what we're doing in the lending market and asking us about lending conditions and credit.

This authoritative position is more and more valuable as businesses are coming to us for products, service, and advice to help them reduce their risk, reduce their expenses and become more efficient. Clearly, becoming more efficient will be key. As we get into a tougher and tougher economy, we've seen that in the stock market, and in economic numbers, particularly in the last 90 days. Businesses, we believe, will be coming to us, as we position ourself more and more as a player that can actually help small business.

Looking at slide number 25, this is a new slide for us in our presentation. We are clearly focused on the amount of unique visitors that are coming to our website. More and more are coming to our site. You could see the growth, particularly since the changes that have occurred from the end of last year, when we launched our new site in January of 2011.

Slide 26 shows the average weekly unique visitors. I think an important statistic is, if you average it out, including Saturdays and Sundays, we are getting about 600 new unique visitors a day. The bounce rate is 54%, and that means about 54% of the people that come to the site bounce off it right away. For those of you that are not familiar, that's a pretty good bounce rate statistic. So 46% are staying a while, and the average time that people are staying a while is about 3 minutes and 2 seconds.

So it is clear to us that approximately 300 unique visitors a day are coming to the site and spending over 3 minutes, looking at our different products, looking at our business index, looking at our market sentiment survey, and looking at the different products and services that we have. We think this is extremely important and valuable.

Many of you are aware that we recently have launched our own blog on Forbes. We've been invited by Forbes to do so. The Small Business Authority blog, in which we put up comments on a regular basis, can be viewed at blogs.forbes.com/thesba. We've put 7 blogs out. I welcome all of you to take a look at that. We're getting more and more attention in that particular area. And as we've also previously announced, the Small Business Authority Index is now published by Bloomberg Newswire monthly as it comes out and is released by the Company on a timely basis.

Our radio show, The Small Business Authority Hour, has now done 7 shows. Those shows are archived on our website. Our recent show that we did this past Saturday was on tax issues affecting small business. Our September show will have 1, possibly 2, great business owner-operators. Stu Leonard actually will be on our September show, we are happy to announce that at this point in time. We're actually in discussions with another significant well-known business operator, where these business operators will be able to discuss how they grew their business, their trials and tribulations, what's working in the market, what 's not working in the market.

A great opportunity for small independent business owners to listen in from The Small Business Authority studio on top of Madison Square Garden at WABC. That's the Small Business Authority Hour, the first Saturday of every month.

We've also disclosed to the marketplace that we have over 400 mentions per month -- I actually think the number is close to 460 to 470 -- reporting live from the Small Business Authority studio. For those WABC listeners, you can hear that on the Imus show, the Limbaugh show, the Hannaty show, the Levin show, the Bachelor show, the McEntyre show, and the [Kremmy] show. We also have over 250 60-second radio commercials per month. Some of those commercials are archived on our website. Those commercials are done by Imus, Hannaty, Levin, Cudlow, Bachelor and McEntyre.

For those of you that are WABC listeners, the Imus show in the morning is also broadcast on Fox Business News. For those of you that want to watch it on TV, when Warner does his sports broadcast or Bernie does his briefing, they announce reporting live from the Small Business Authority Hour Show, and we do get some pretty good play from that as well.

We talked a little bit about our SB Authority Index as a financial barometer for the small business economy. We have a lot of people that have picked up this particular index. This index is available. For those of you that are interested in receiving this index and the market sentiment survey on a monthly basis, please sign up for our free newsletter on our website at thesba.com. We're currently distributing 55,000 newsletters a month to small and independent business owners.

The market sentiment survey is a real survey that we put out to the market. We poll typically in excess of 1,000 and 1,200 business owners. The poll is basically from our own customers that are calling in for customer service. We typically do this in a 3-month window throughout the month. Our call center takes in and goes out-bound approximately 6,000 call as day.

So our CSRs and BSSs, as they're speaking to business owners, we'll ask them market sentiment survey questions. We think this is a great way to survey business owners rather than out-bound and try to find business owners that are willing to take a call and answer a question, we're able to get some pretty good data and pretty good information that has been well received by a lot of different distribution sources in the marketplace for content. We released the SB authority market sentiment survey approximately once a week.

When we look at our marketing focus, we obviously have got a few important distribution channels. Strategic Alliance Partner Channel clearly has been the horse and the engine of our Company, driven by our new tracker software system and operational methodology. Referral volume that comes in from credit unions under our CUNA, Credit Union National Association Arrangement, which we've had since 2003, and we were endorsed by a national credit union association. We have contracts with over 450 individual credit unions for most of our products across the spectrum.

In addition to that, Morgan Stanley, New York Community Bank, Chartis, et cetera, this is our primary way of acquiring customers. It's worked very well. Referral volume continues to grow on a consolidated basis, and we'll continue to feed that.

We launched our Small Business Authority Channel, which obviously drives business in from our website, as well as our radio and TV. On the small business authority brand name does speak for itself as we are clearly an authority in the small- and medium- sized business market. We're an authority on lending, health insurance, merchant processing, technology through cloud computing and many other technological services that we provide to small independent business owners, electronic payment processing, data storage, web hosting, web design, et cetera.

We feel very good that we have grown our distribution through the Small Business Authority Channel. Our website's getting more and more traffic, and there are many market participants that are recognizing us as an authority on small business and coming to us for content.

In conclusion, before I turn the presentation over to Jenny Eddelson, I think slide number 36 is an important slide for us, and hopefully depicts to the marketplace that clearly we are on a positive trend. You could see our pre-tax net income forecasts are on a very good slope. When you start to look at these pre-tax net incomes that frankly are somewhat new to the marketplace, the investment community, I think investors are going to need to start to put some market multiples on these types of pre-tax income trends, and look at different ways to evaluate the Company than it has done so historically.

As we mentioned earlier, we have maintained our 2011 segment guidance on a consolidated basis. There are some pieces within that have moved around slightly, most importantly we have tightened our bands up, as we believe we have more certainty, and that the final outcome will come out near the mid-point of about $2.7 million to $2.8 million pre-tax 2011.

As we mentioned earlier, we have given pre-tax net income consolidated guidance and we have the break-out below in all the different segments of about $4.5 million dollars for 2012. Obviously from our standpoint, we did inhale a little bit, particularly given the backdrop of some fairly lousy economic statistics over the first 6 months of this year, a fairly lousy stock market performance, and a lot of negative information, we feel pretty good about our business going forward, and we feel so good that we've been willing to go out about 18 months at this point in time, and give an increase of 65% increase in our pre-tax net income.

With that, I'd like to turn the financial review and the MD&A part of our discussion over to Jenny Eddelson, our Chief Accounting Officer.

Thank you, Barry. I would now like to review our second-quarter 2011 results. For the quarter ended June 30, 2011, the Company had pre-tax income of $136,000, compared to pre-tax income of $514,000 a year ago. The decrease of $378,000 was primarily due to a non-recurring severance payment accrual and a contract dispute settlement aggregating $466,000.

We had a net loss of $287,000, or $0.01 per share for the second quarter of 2011, compared to net income of $931,000, or $0.03 a share, in 2010. The decrease from net income to a net loss, year-over-year, was due to the non-recurring expenses just discussed, as well a tax revision in 2011, as compared to a tax benefit in the prior year.

Revenue increased by $4.3 million, or 15%, to $32.3 million, compared to prior year, primarily from growth in our small business finance and electronic payment processing segment.

Press turn to slide 45. We began the year with $10.4 million of unrestricted cash, and ended the second quarter with $11.7 million, which is an increase of $1.3 million. The increase primarily reflects the receipt of cash from our broker receivable and the utilization of the securitization pre-funding account, which had been accounted for as restricted cash at year-end, used to finance SBA loans.

Cash, restricted cash, broker receivable, and SBA loans held for sale affectively our short-term liquidity, totaled $31.5 million at quarter-end, down $2.7 million from the beginning of the year. The decrease in our short-term liquidity primarily reflects the Company's utilization of its own available cash to fund the un-guaranteed portions of SBA loans.

Now I'd like to review the second quarter 2011 performance by segment, found on slide 46. Electronic payment processing segment revenue increased by $310,000, or 2%, in 2011, to $20.7 million, predominantly due to organic revenue growth from a combination of growth in processing volumes and additional fee-based services to our merchants. Pre-tax income decreased $24,000, or 2%, to $1.3 million for 2011 compared to the prior year, primarily due to margin, or the amount of revenue less electronic payment processing costs, declining slightly year-over-year, and was partially offset by a decrease in other expenses between periods.

Managed technology solutions segment revenue decreased by $47,000, or 1%, in 2011, to $4.8 million. The decrease was due to a reduction in the total number of planned counts year-over-year, offset by a combination of improved revenue per plan, as a result of the growth of cloud instances, and an increase in sales of customer website development.

Pre-tax income decreased $197,000 to $997,000 for 2011, primarily due to the resolution of a contract dispute which resulted in $190,000 of additional expense for the quarter. Salaries and benefits, and depreciation and amortization expenses continued to trend below the prior period, while marketing expense increased over the prior year as a result of the Company's marketing campaign launched in January, 2011.

The small business finance segment originated $23.2 million of SBA loans in the second quarter of 2011, versus $14.3 million in 2010, and purchased $18,1 million of receivables, versus $12.9 million in the same period last year.

Revenue for the second quarter of 2011 was $6.3 million, as compared to $1.9 million in the second quarter of 2010, primarily due to an increase of $4.1 million in premium income from guaranteed loan sales, as well as improvements in servicing and interest income. Included in premium income is $1.7 million related to loans transferred in previous quarters that achieved sales status, which resulted in a corresponding reduction in fair value.

During the quarter of 2010, the Company recorded $193,000 in premium income, and had a fair-value gain of $1 million related to the transfer of guaranteed loans subject to premium warranty. Changes in total revenue and fair-value adjustments between periods increased segment income by $623,000.

The increase in loan originations, additions to owned and serviced loan portfolios, improvements in portfolio performance, and increases in receivables factoring, sufficient to offset a $286,000 increase in the combined loan loss provision and change in fair value, and a $144,000 increase in operating expenses, primarily from additional salaries and loan origination costs. As a result, the segment had pre-tax income of $1 million for the second quarter of 2011, versus pre-tax income of $557,000 for the same quarter of 2010.

For the second quarter of 2011, the All Other segment had a pre-tax loss of $342,000 a $127,000 increase from 2010 second-quarter loss, primarily due to the start-up of our payroll services subsidiary.

For the second quarter of 2011, the corporate activities segment recorded revenue of $304,000, a $228,000 decrease from a year ago. This decrease was primarily due to the expected reduction in Capco management fee revenue. Total expenses increased by $462,000 period-over-period, primarily due to an increase in salaries and benefits, including a $276,000 severance payment accrual recorded during the quarter. As a result, the corporate segment increased its pre-tax loss to $2.4 million, compared to a loss of $1.7 million in 2010.

For 2011, the pre-tax loss in the Capco segment decreased by 27%, to $485,000, from a pre-tax loss of $666,000 in 2010. The decrease in loss primarily reflects reduced management fee expense period-over-period.

Now please turn to slide 47, and you will see that we are narrowing the range of our previously issued guidance for 2011. Based on operations to date and our forecast for the remainder of the year, we have narrowed our range for consolidated revenues and pre-tax income to revenues of between $122 million and $124.8 million, and consolidated pre-tax income of between $1.5 million, and $4 million. Previous guidance reflected a range for pre-tax income of between $1.2 million and $4.3 million. Our mid-point pre-tax income remains unchanged at $2.7 million.

Finally, please turn to slide 49, which reflects our newly issued guidance for 2012. The Company is projecting consolidated revenues of between $121.9 million and $125 million, and consolidated pre-tax income of between $2.8 million and $6.1 million. Expected performance in the core electronic payment processing, managed technology solutions, and small business finance segment will substantially drive the forecasted improvement in consolidated pre-tax income over forecasted 2011, and accounts for the large range in forecasted pre-tax income in 2012.

I would now like to turn it back to Barry.

Thank you, Jenny. Operator, we would like to take questions.

(Operator Instructions)

First question is from Marc Silk of Silk Investment Advisors. Your line is open.

Hi, Barry, lately I've been hearing CEOs talk about lack of visibility. So what --?

Okay, Marc's question, I guess, related to, in the marketplace, a lot of companies are saying there is a lack of visibility out there. Clearly I can understand a lot of companies looking at what's going on and saying, gee, I really can't see that far out. We recently came back from a planning conference where we had all of our division heads together. We took a look at our business, and we have forecasted going forward what we think are numbers that we believe we can head.

There are a lot of changes in the marketplace, both from a lending perspective, in the payment processing space, Durbin is a major factor; in the technology solutions space, cloud computing is a factor. Although the economy looks real bad, and is going to be a major and significant drag, our Company, we believe, is very well positioned to deal with small- and medium-size business owners that need a solution.

Business owners need better solutions for payment processing in e-commerce. Business owners need better solution for their technology, where they can basically come to us and get the cost reduced. And business owners need financing, which banks aren't providing, and we're seeing tremendous opportunities there. So we took a look at this and basically said why should we hide behind an economy that isn't very good, and let our customers know, as well as investors, that we think we're going to do well, despite the fact that the economic trends aren't in our favor.

We are not necessarily riding the wind at our back. We've got the wind in our face. We feel pretty good about where we are, and that's why we went out and decided that we were going to give this guidance to the marketplace, at the risk of being wrong. Which frankly, most executives today are more than happy to hide behind a bad economy, and just blame it on the economy and come up with excuses. Well, that doesn't do much for shareholders, and it doesn't do much for employees that want bonuses, and our other stakeholders, our creditors. So we feel pretty good about our numbers, and that's why we went out and gave the guidance.

Thank you, sir. Next question is from Mark Allen of Pine Management. Your line is open.

Hi, Mr. Sloan. My question is, from your perspective, Newtek, which segments of the business do you see having the most amount of risk?

When we look at risk, and I want to quantify it in a bunch -- in different areas. When you say risk -- number one, I will address it in terms of what I'll call the volatility of earnings. I think that the payment processing space probably has the most risk in it, in the sense that customers really have it very easy to switch. There's very little barriers to entry. It's a commodity-based market, and unless you can figure out different ways to ingratiate yourself to the customer, that has the most risk in terms of market dynamics and changes and a lot of things that are going on.

Clearly, I would have normally answered that question that the lending segment carries the most risk, because it's really the 1 segment where you have balance sheet risk on your books. But when I look at what we're doing in the marketplace today, based upon our accounting, we put uninsured loan participations on our books at $0.86 on the dollar. We have a general reserve of $1 million, I believe -- is that right, Jenny -- against the portfolio and losses that haven't occurred today. And our non-performers are marked to the market.

So because of what's gone on in the lending business, where basically banks don't have balance sheets, and they're letting good credits expire because they don't have the capital to re-roll good credits. So those good credits are coming over to us, and because they're coming over to us, we're able to put on more and more business. Thank God, I'm knocking wood, we have secure financing.

Normally where I would say the small business finance sector is where we have the most risk in our books, it's where I'm frankly the most optimistic, because we're in a space with very little competition, we're able to put great credits on our books, and the market dynamics and the profit opportunities are the greatest.

The managed technology solutions area, I don't see that having tremendous amounts of risk. Although, to be frank with you, we're always concerned about the concept of hacking. There's rumor going around that Facebook is going to get hacked, so we always look at that. We always try to be straight up with our shareholders and our Ks and Qs and discuss the risks in the business in the market.

We have very little leverage on our books. Obviously we have loan leverage, but away from that, we've only got about a $1.6 million, $1.7 million worth of debt, so we can expand and contract with the market. We're just really well-positioned. Our cash flows are coming in nice. We kind of like the way things are rolling out. That's how we see the market with respect to risk at this point.

Okay, 1 other question. With that being said, where do you believe the most potential upside of the business category would be in?

I think we've got -- the biggest upside, I have to say, is in the lending segment. That's just based upon the way finance businesses are. You just keep doing more loans, and the cash flows and profits drop to the bottom line without having to put much infrastructure on. The other thing is, we're very well-positioned in the servicing area, so I would expect -- and we've talked about this for a while -- but I would expect our servicing portfolio to grow, and that also gives you tremendous economies of scale.

I think from an earnings standpoint, the surprise will be there. I think in the payment processing space and in the managed technology solutions space, you've got to convince the marketplace that we are an authority, that we have a better mouse trap, in order to get back to the exponential growth that we had from a couple years ago.

Thank you.

(Operator Instructions)

We have a question from Tracy Schmidt of NCMIC. Your line is open.

Hi, Barry, how are you doing?

How are you today?

Fantastic. Congratulations on the great results, and you really look like you're headed in the right direction here.

We appreciate that, thank you.

Wondered if you might comment for a second on some of the regulatory activity that's going on, and it seems to have creeped into the electronic payment processing sector. What are your thoughts on that?

I think the biggest thing that is sitting out there going forward, and I'll talk about going backward secondly. Going forward is the issue of the Durbin legislation where basically fees are capped, on the interchange side for debit. Durbin Amendment is part of the Dodd-Frank bill, and I think we need to sit here today, and this is based upon Dodd-Frank existing and Durbin existing.

I'm not going to be shocked if Dodd-Frank goes away. I'm not saying it's going to go away in the third or fourth quarter, but maybe it goes away next year, because there are a lot of people that can't understand Dodd-Frank or this whole financial regulations entity that's been created -- because now you've got a regulator on top of the Federal Reserve, on top of the FDIC, on top of local bank regulators, as well as the fact that under Dodd-Frank, this entity can regulate anything that they deem to be financial or related to financial risk.

With that said, clearly from our perspective, we think that Durbin is constructive for our business. We're going to be working with our clients, managing their portfolio, managing their expectations in this particular area. We're going to use it as an opportunity to aggressively pursue additional customers, which we think we're going to get. We think that many institutions that are in this business are not suited to solicit their customers and re-price their portfolio. We plan on aggressively going after that as an opportunity, and we've got an aggressive radio and TV campaign, as well as working with alliance partners to make sure that we are offering a good opportunity to customers in the market place.

I would say going backward, we're in an extremely competitive environment. There is margin compression, and the business is getting tougher. Where we are somewhat unique in our positioning in the marketplace is we are, particularly for e-commerce, which is where we think we provide the most value, where we are the host, where we can design the site. We believe we will have our own exclusive gateway which we'll be launching, which is extremely important to working with business customers and offering them the best price, as well as having further control over attrition and be able to control the customer. We're very unique in the marketplace in that particular space.

We think that the payment processing business is going to continue to grow. We think there's going to be a lot of changes with how it's going to be handled with respect to close-loop, mobile, et cetera. We're an enterprise that is extremely uniquely positioned to deal with businesses that are looking for different ways to take payments and reduce their costs in as best way as they possibly can.

Thank you for your comments, Barry.

Thank you, Tracy.

Thank you. Next question is from Harold Elish of UBS. Your line is open.

Question. It strikes me from looking at one of the slides that the opportunity perhaps to service outside loans is quite extensive, and that you certainly would look to have excess capacity. Is there any discussion of thinking of buying portfolios of loans to service and to use that as sort of a cash cow?

I think that the ability to service other people's loans has clearly been enhanced by the fact that recently we have received a S&P acceptable rating as a servicer, and were consequently upgraded to select, and there actually is an S&P report that is available talking about our ability to service. Now that servicing capability is for government-guaranteed, small-balance loans, as well as conventional loans. We are in extensive conversations with a lot of banks, particularly community banks that really don't have the capability, the infrastructure, and the leverage that we do as a national servicer to be able to put that on the books.

So we've got a fairly healthy pipeline of opportunity there, and where frankly, for some this is a money losing proposition. We can take that liability over for them without having to pay for it, and put it on our books. So the nice thing about it is based upon our infrastructure, we think we're going to pick up portfolios without having to write a check, which kind of gives you the nice infinite leverage and cash flow that drops to the bottom line.

Although we haven't forecasted it, we are hopeful that we pick up a lot of business in that particular area, and we have people within our organization that are part of our operating expense, whose sole focus is to bring that business in and put it on our books. We're hopeful that we pick up more and more of that business.

We have announced, but we don't talk about too much, because we are obviously under confidentiality, but based upon our SEC requirements announced that we have a contract with the FDIC. I think we look forward to picking up more of that business. I think historically, a lot of the FDIC deals have been done where there have been major bank acquirers that have come in and picked up those banks. If that changes in the future, that would be to our benefit. We're not saying that it's going to, we're not making that forecast, but if it does, that would add to that number as well.

I appreciate it. Thanks very much.

Thank you.

Thank you. Mr. Sloane, I'm showing no further questions at this time. I would like to turn the call over to you for any closing remarks.

I appreciate everyone tuning in to the call today and their participation and support. We are very thankful for the results that we've had in the first 6 months of the year, and that we anticipate having for the next 18 months going forward. We look forward to our next quarterly call, and we will see you all then. Have a good afternoon. Thank you.

Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect, and have a wonderful day.