NewtekOne Inc (NEWT) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Newtek Business Services First Quarter 2012 Earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder today's call is being recorded.

I would now like to turn the conference over to your host, Barry Sloane. Sir, you may begin.

Thank you very much and welcome to our first quarter 2001 (sic) earnings conference call. I am Barry Sloane, President CEO of Newtek Business Services, The Small Business Authority, stock symbol NEWT on the NASDAQ. And here with me today to help present the conference call information is Jenny Eddelson, our Chief Accounting Officer.

Jenny, would you care to read the Safe Harbor statement?

Sure. The statements in this slide presentation including statements regarding anticipated future financial performance, Newtek's beliefs, expectations, intentions, or strategies for the future 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 impact on revenues and profit margin, 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 seven jurisdictions and these place varying requirements on the structure of our investments. In some cases, particularly in Louisiana or in certain situations in New York, we do not control the equity or management of a qualified business, but that can not always be presented orally or in written presentations.

Jenny, thank you very much. To begin the call, we'd like to call all of our attention to our PowerPoint presentation, which available on our web site at thesba.com, go to the investor Relations section, and you could follow the presentation along. We'll begin on Page 3 with first quarter key performance statistics.

The Company had consolidated pretax income of $2.1 million, which was an increase of $1.3 million over the first quarter of 2011. We're happy to report that our earnings per share for the first quarter were coming in at approximately $0.04 per diluted share as compared to $0.01 per diluted share in the first quarter of 2011. Consolidated EBITDA, modified EBITDA, came in at $3.6 million as compared to $2.6 million from the first quarter in 2011. Our electronic payment segment pretax increased 72% to $2.1 million for the first quarter as compared to $1.2 million. Our Small Business Finance pretax income increased by 15% to $1.5 million from the first quarter as compared to $1.3 million.

Our SBA lender funded $25 million of loans in the first quarter as compared to $19 million. Our forecast for our lending segment includes a $125 million funded origination year for our SBA 7(a) loans.

We had previously announced that we had signed an agreement with Summit Capital partners for $10 million to $15 million in mezzanine debt. $10 million has been pulled down. There's another $5 million that will -- is anticipated to be pulled down within the next several months subject to certain conditions. That mezzanine capital is primarily there to support Newtek's continued growth and provide the necessary working capital to expand its product offerings, particularly its small business lending function.

The Company anticipates full-year earnings per share of approximately $0.12 and we revised our pretax guidance to between $6.5 million to $8.5 million with a midpoint of $7.5 million. That's up from its prior $6 million pretax midpoint guidance. So we increased our pretax midpoint guidance by approximately $1.5 million.

As we look at the agenda for our 2012 call, we'll focus on our overall financial performance, our cash position, our balance sheet. We'll talk about developments and business trends in the market, we'll focus on our revenue growth, and we'll talk further about our recent financing arrangement with Summit Partners and why we believe this is an important financing transaction for the Company and how it will allow us to grow and increase our earnings per share. We will also review our 2012 guidance.

When we look at our first quarter 2012 financial results, our payment processing segment was up 3% in revenues to $20.6 million. I must say that that growth number is a little smaller than we'd like. Part of that is because of the effects of the Durbin legislation, which basically reduces the amount of dollars. This also reduces our cost of goods sold. But if you took the effects of Durbin out of that number, our revenue would've been up approximately 10%.

Our Managed Technology Solutions business, which we'll talk about later on in the call, had a revenue number down 3% from the first quarter of 2011. Our Small Business Finance segment continues to be a significant engine of growth from a revenue perspective and at $4.8 million we would've been up 36% after adjusting for a fair value accounting adjustment relating to the timing of recognition of premium income included in the prior quarter.

When we look at the income changes of Q1 2012 versus Q1 2011, our payment processing business was up 72% from the quarter -- from the same quarter a year prior. Our Managed Technology Solutions, which we talked about and will continue to talk about throughout the presentation, was down 10% from Q1 2011, and our Small Business Finance segment up 15%.

Our cash positions came in $22.6 million in cash and cash equivalents. That's down from $25.4 million. A lot of that changing in the cash positions is based upon the success that we're having in our loan originations.

Turning to Slide Number 8, balance sheet items, obviously there's a few changes. We view the most significant change is our growth in total equity position to $63.5 million of total equity versus $59.2 million, which was the balance a quarter earlier at the end of December 31, 2012 (sic).

In this call as we always discuss our legacy certified capital company business. As you could begin to see, the balance sheet of credits in lieu of cash, the asset versus notes payable and credits in lieu of cash, which balance off each other, continues to decline. We -- as we continue to move through our cycles of certified capital company investments, we continue to reduce the amount management time that we spent on this segment. We continue to reduce our accounting cost and other miscellaneous costs in terms of staying in compliance with our certified capital companies.

On Slide Number 10 if you take look at the balance of tax credits, you could see in 2010 $35 million, 2011 a little over $15 million. Our expectation is at the end of 2012 we should be down to about $7 million to $8 million and that precipitously declines from there. So that reduction of leverage where both of this asset and liability match off each other will be a welcome attribute to our financial statements.

We talked a little bit earlier about developments in payment processing. We're happy with our payment processing business. It's got great reoccurring cash flow. The factory and service provider is built, requires little to no CapitalEx to grow this business, particularly as we do it organically. We had a significant increase in our pretax net income. We're forecasting pretax numbers somewhere in the neighborhood of $8 million overall. We'll focus on that number a little bit later on. I think the midpoint of pretax net income in the EPP space is between $8.2 million and $8.6 million with a midpoint of EBITDA about $9.2 million. These businesses trade at pretty high multiples in the market. It's a cash flow-positive business. There's great operating leverage associated with it. This particular segment doesn't have any debt on it and we continue to see eCommerce and Internet-based business be a significant part of the economy and it is one of our most important corporate initiatives and has been identified as such.

We talked about our Managed Technology Solutions business, which is one of our three key businesses, which, frankly, is in the process of being repositioned. We talked about our revenues being down 3% compared to a quarter -- the same quarter a year earlier and our pretax income declining by 10% from a year earlier as well.

Some of the changes that we've made to our management technology solutions business, we have named CJ Brunet as the President of Newtek Technology Solutions. Bob Cichon has moved over to be our Chief Technology Officer. CJ continues to remain in his position as our Chief Information Officer. We have recently put a press release out naming Mark Denzin as Senior Vice President in charge of Customer Service and Dan [Lukinda] has been named the professional in charge of our Sales Department. What you're going to be seeing from us in the future is all of our products, the payroll product, our eCommerce product, our insurance product, will be available to our clients all hosted in a cloud solution environment. Our business owners will be able to look at their payroll, their Electronic Payment Processing statistics, their web traffic statistics, all available on iPads, iPhones, and Droids. I think this is an important aspect of what we're doing with respect to offering the highest level of efficiencies and state-of-the-art products and solutions to our clients, all hosted in our cloud environment in Phoenix, Arizona. We also intend on improving our position in products in addition to Microsoft products. Historically the Company has had a tremendous position in terms of offering all of the state-of-the-art products and customer service in Microsoft. After evaluating our financial numbers that have been coming out of our Managed Technology Solutions division, we realized that we need to improve our products in other software areas, which tend to be a larger growth area of the marketplace versus Microsoft today. I think this is an important analysis that we've made. And we plan on offering more robust solutions, both in terms of product service offerings as well as customer service on the backend in these particular areas.

Moving over to Slide Number 13, the Small Business Finance area, which we have repeatedly for the last three years indicated that this segment offers one of the best financial opportunities for Newtek's shareholders, continues to do so. We have a very strong lending infrastructure, both origination, underwrite, funding, servicing, and collection. Our pricing on the loans that we're creating, particularly with respect to the government guaranteed obligations of the 7(a) business, continues to remain strong. We continue to have our FDIC contract in place as we are the only provider to the FDIC for government guaranteed servicing and special servicing of debt obligations. We indicated we closed on a significant transaction of $10 million to $15 million in mezzanine capital with Summit Partners that will help support our lending business. And we believe that additional capital in conjunction with our senior facilities will increase our capability to grow our lending business and we'll use the term in $100 million increments. So in 2011 we funded approximately $100 million worth of loans. With this extra mezzanine capital in conjunction with our senior lines and our securitizations that we executed in December of 2010 and December of 2011, we believe we'll be able to go from $100 million to say $200 million or from $200 million to $300 million. Now the current forecasts that we have, which we will give as we've updated for 2012, have the SBA 7(a) lender at $125 million of originations. So what you're going to see with respect to the lending segment is a forecast that's based on $125 million worth of originations. With the additional capital we plan on ramping up our marketing efforts so that we believe that in 2013 in the full calendar year as we build our pipeline we'll be able to do $200 million of SBA 7(a) loan originations. For every increment of $100 million of loan originations, including the cost of the debt all in to Summit as well as our senior warehouse lines, it increases our pretax income in that segment by about $4 million. So we feel that although the additional debt capital obviously has an expense associated with it both in terms of the interest and the warrants that we paid to our debt provider Summit Partners that the growth and our ability to grow our pretax income in this segment will clearly make up for the extra expense that we have in putting this particular mezzanine capital on. And as we go forward and offer guidance for 2013, I think you will see that in our forecast.

As we go to Slide Number 14, our servicing portfolio is an outgrowth of building up our prominence in the lending space, bringing in more capital. We closed our servicing portfolio out in Q1 2012. Total servicing portfolio closed out at $430 million. That was an increase of 40% year over year. We also added $125 million of servicing for other parties in the month of April 2012. So you can add that $125 million to the $531 million and we currently stand at at least $556 million. And we anticipate our portfolio increasing to $650 million (sic -- see Slide 15) conservatively by December 31, 2012. Obviously servicing income is reoccurring income and we welcome that contribution to be made to our overall consolidated statements, as well as the lending segment.

Newtek Payroll is an important product for us. We think payroll is a core product for a small to medium-sized independent business. We're currently servicing customers over 33 states. We did mention earlier that our payroll solution will be available during the course of 2012 in the cloud. We also plan on launching insured payroll so our clients will have in addition to our high-quality service will also get an insurance certificate that in the event that the taxes aren't done correctly there will actually be an insurance certificate that will show that in the event a mistake is made they have a level of insurance to protect themselves against that. We own our own software in the payroll space and we're currently in the process of integrating health and benefits offerings so that customers that use our payroll service in the future will also have an integrated workmen's comp solution and health and benefit solution all available at their fingertips on their Droid, iPhone, iPad, or other tablet device.

As we look at our growth strategy, we're continuing to grow Newtek Business Services through our Small Business Authority brand. Our web site is thesba.com. Feel free to go there and sign up for our free monthly newsletter. We have emphasized cross-selling and cross-marketing into the existing customer base and have some metrics to demonstrate that success. We want to continue to our alliance channels and basically add new alliance partners, as well as develop a better penetration into the existing ones. And we'll talk about our direct focus and our outbound campaign. The strategy and mission of Newtek, The Small Business Authority, is as a thought leader and destination for independent business owners that operate small businesses to come to us and acquire business services and financial products, as well as important data and information so they can improve the efficiencies and success of their business.

On Slide Number 18, you could see that we've had real good experience in growing our referral base. We increased our referrals approximately 20% year over year, Q1 2011 to Q1 2012. And in taking a look at unique visitors that have come to thesba.com, when we look at the period of total visitors from January 2011 to March 2012 versus uniques, approximately 63% of all visitors to your site are now unique compared to repeat visitors. You could also see some different trends with respect to our site on Slide 20. Clearly as we discussed, the number of unique visitors is growing nicely both on a month-to-month basis as well as quarter over quarter. And there was a 54% total increase in unique visitors quarter over quarter.

Looking at Alexa traffic statistics, our ranking from Alexa is 74,000. All of our internal metrics looking at our web site is growing. It's in a positive direction. As we do with our web site and in our other business services, we're constantly looking at it, revamping it. We will take a look at our web site and look to upgrade it and give it a facelift and improve upon some of the things that we think will help improve our site for visibility, messaging, and level of customer service. We have a bounce rate of approximately 63% with average time on the site 2 minutes and 23 seconds. And we're currently experiencing about 1,100 unique visitors every day.

As many of you are aware, our Small Business Authority Index is now published by Bloomberg and CNBC. CNBC is also releasing The Small Business Authority Market Sentiment Survey and our blog on Forbes is available at blogs.forbes.com. Please feel free to go take a look at it and see what we publish on a regular basis.

35, both on the radio, as well as on FOX Business News Network broadcast on cable. And I will be on as Imus's guest talking about small business.

Moving to Slide Number 26, going forward our advertising and media plan, we clearly have budgeted in a ramp-up phase. We're increasing our budget by about 50%. On an annualized basis beginning July 1 we plan on growing our business national versus what we've done regionally, which was just limited to regional Northeastern radio. And we also plan on looking at television digital, and other media to be able to add to our further overall messaging and positioning Newtek as The Small Business Authority.

We recently announced a new hire, Hyonwoo Shin, Senior Vice President of National Sales. Mr. Shin's experience, which is primarily from Wall Street investment banking, private finance, a lot of experience working with financial institutions. Mr. Shin is also a graduate of the US Military Academy at West Point, served in the US Army as a first lieutenant. We think he's going to bring a tremendous amount marketing skills, sales skills, discipline to our regional vice presidents, which will enable them to better help our alliance partners service their small- to medium-sized business clients. We look at our existing alliance relationships, which are vast and deep, and we look forward to better penetration with those particular alliance relationships. As we look at the success that we are beginning to experience in our direct channel, you could see that our total referrals from our direct channel, which is primarily the regional radio and WABC and the WABC banner ad, increased by 13.9% Q1 2012 over Q1 2011. Our cross-sell referrals internally also increased by 10%, so we're starting to pick up more business from marketing internally to our own customers and database, as well as the direct channel, reducing our reliance upon our alliance partners. The goal obviously is to both -- growth both distribution channels at the same time.

Going to Slide Number 34, I just refer to this as my favorite slide; the annual pretax income trend clearly is up. We have forecasted a midpoint of $7.5 million. That's up from $6 million in our prior call.

In looking at our 2012 revised segment, the things I'd like to call your attention to are the new midpoint of our modified EBITDA number, which is approximately $15.3 million. That's a fairly good number when trying to look at our organization and put a valuation on it. Multiples times that particular number might result in some interesting consequences. We also believe that our revenue growth when you reposition the Durbin effects, as well as the accounting change in lending, demonstrates that we're continuing to grow revenue at a very strong growth rate from 2012 versus 2011, and clearly we're proud of the fact that we're going from a $2.2 million pretax net income to a new midpoint guidance of $7.5 million for 2012.

With that, that concludes my part of the presentation. I'd like to turn the financial review over to Jenny Eddelson.

Thank you, Barry. For the quarter ended March 31, 2012, the Company had consolidated pretax income of $2.1 million, an improvement of $1.3 million over the $834,000 recorded in the first quarter last year. We had consolidated net income of $1.3 million or $0.04 per diluted share for the quarter compared to net income of $509,000 or $0.01 per diluted share in the first quarter of 2011. With the exception of Managed Technology Solutions, each of the segments reported improvements in current quarter earnings compared with the year-ago prior.

Revenue increased by $206,000 to $30.7 million, primarily from growth in our Electronic Payment Processing segment. In addition, the total fair value loss decreased by $1 million period over period, which I'll review in further detail in the Small Business Finance segment discussion.

Please turn to Slide 38 for a discussion of the first quarter 2012 segment performance. Electronic Payment Processing segment revenue increased by $529,000 or 3% period over period to $20.6 million, predominately due to a combination of increased processing volumes, selective fee increases, and additions to services provided to our merchants.

Pretax income increased by $862,000 or 72% to $2.1 million for the first quarter of 2012 compared to $1.2 million recorded in the same period last year. The improvement was due primarily to the $742,000 increase in the dollar margin of operating revenues less Electronic Payment Processing costs resulting from the introduction of new higher-margin products and services during 2011, as well as the impact on revenues and EPP costs resulting from debit card pricing and interchange cost adjustments. In addition, depreciation and amortization decreased by $140,000 period over period due to intangible assets becoming fully amortized.

Managed Technology Solutions segment revenue totaled $4.7 million for the quarter of 2012, a decrease of $136,000 compared with the year-ago period. The decrease was due to a reduction in the total number of plans sold, which was offset in part by improved revenue per plan. Total expenses period over period remained essentially flat as increases in salaries and related expenses offset reductions in depreciation and amortization. Pretax income for the current quarter was $1.1 million, a $129,000 or 10% decrease over the first quarter of 2011.

The Small Business Finance segment originated $25 million of SBA loans in the first quarter of 2012, a 26% increase over the first quarter last year, and purchased $22 million of receivables compared to $17 million during the first quarter of 2011. Total revenues for the Small Business Finance segment decreased period over period due to the recognition of $1.5 million of premium income from previously-originated loans that achieved sale status as a result of the warranty period expiring in the year-ago quarter. Also in the fourth quarter of 2011 a corresponding loss of $1.5 million was recorded as a fair value adjustment to SBA loans transferred to -- subject to premium recourse. When taking this adjustment into consideration, premium income increased by 57% or $860,000 period over period. Sourcing income increased by $442,000 over the first quarter of 2011 as a result of additions to our originated loan portfolio, as well as increases in third party servicing. The fair value discount on SBA loans held for investment decreased from a loss of $324,000 in the first quarter of 2011 to a loss of $142,000 for the first quarter of 2012.

The Company considers its securitization pricing model the best indicator to estimate the discount on its unguaranteed loans held for investment and accounted for under fair value. During the first quarter, management reduced the discount taken by a point and a half, which resulted in a positive cumulative adjustment of $445,000.

The increase in loan originations, additions to owned and third party loan servicing portfolios, improvements in portfolio performance, as well as the adjustment to the fair value discount on loans held for investment was sufficient to fully absorb a $669,000 increase in total expenses primarily related to salaries and loan origination costs for the quarter of 2012.

The lending segment reported $1.5 million in pretax income in the current quarter, a 15% increase over the year-ago period.

The all-other segment pretax loss decreased from $296,000 in the first quarter of last year to a $234,000 loss in the first quarter of 2012. The improvement was due primarily to a $100,000 gain on the sale of an investment with a zero carrying basis, as well as improvements in insurance commissions earned on force-placed insurance policies offset by broker commissions. In addition, salaries and benefits increased by $111,000, primarily as a result of the development of our Payroll Services sub.

In the corporate segment, the pretax loss decreased to $1.8 million, $165,000 improvement compared to the year-ago period. The decrease includes a $30,000 reduction in salaries and benefits, as well as reductions in professional fees and rent and related expenses.

The pretax loss in the Capcos segment also decreased in the current quarter. The segment had $116,000 improvement over the year-ago period and primarily reflects reductions in related party management fee expense and in professional fees and other general operating expenses period over period.

Now please turn to Slide 39, which reflects our revised guidance for 2012.

We are increasing our 2012 full-year pretax income guidance range to between $6.5 million and $8.5 million, which previously had a range of $5 million to $7 million. Our modified EBITDA forecast has been increased to between $14 million and $16 million, up from $11 million to $13 million. These improvements over previously-issued guidance are primarily due to forecasted growth in both EPP and Small Business Finance segments.

I would now like to turn the call back to Barry.

Thank you, Jenny. Operator, we'd like to begin to take questions.

(Operator Instructions). We'll take our first question from Keith Zdrowak with National Securities. You may begin.

Hey, Barry. Just wanted to -- just had a couple of questions. One is for the cloud computing, how significant can that be to your business as far as revenues and earnings going forward? And then the second question I had would be I know you guys paid a dividend a couple of years ago. Any talks or chance that we may have another small dividend coming anytime soon?

Okay. Keith, I appreciate that. Cloud computing I think is one of the biggest trends that businesses are going to embrace. And when you think of cloud computing, I think a lot of people today think of the larger businesses that are using maybe Google of Amazon structure. And there clearly are savings and benefits from large entities using Google and Amazon's facilities. Google and Amazon, this is just a matter of opinion, they're pretty large organizations and they're not really set up to handle smaller businesses and do the handholding that is required to take the smaller businesses. As a percentage of cost savings, however, when you think of a -- an independent business owner that can be a law firm or a medical professional, they may have an internal IT person and then an outside local provider. The cost savings that they have, particularly with respect to labor in a pay-for-what-you-use format versus internal professional makes $6,000 or $7,000 a month, my outhouse person makes $4,000 or $5,000, and then the cost savings of buying the box and the software versus renting it, which is really what cloud offers, is significant. So we think that as a general trend cloud computing is going to be huge and it's here to stay.

The other important trend with respect to the cloud is the use of tablets and iPhones, smartphones that business owners tend to be gravitating towards. And we have done surveys on this in our Market Sentiments Survey, which is the use of our own market intelligence.

So we plan on embracing the cloud, offering cloud services to intermediaries, designers, developers, and resellers. That business is a important, growing business for us. And in addition to that, we plan on having all of our business services hosted in the cloud environment so that if you're doing payment processing with us on the Internet and you're doing eCommerce with us, we are unique in that we are the host, we have the payment gateway, and we're the processor, so we could actually deliver and aim to deliver real-time data right to your iPhone or your iPad. And we think that those will be significant products and applications. Payroll being delivered on a real-time basis to your iPhone and iPad, your insurance products, your workman's comp, maybe if you're a business owner your home and your auto, being able to deliver notifications policy renewals or cancelation notices, as well as being able access your desk pages and your policies directly to your iPhone and iPad in addition to our loan products.

So we're pretty geared up and think cloud is important and plan on that being an important product category and we plan on having that positioned out of our Managed Technology Solutions arm.

In regard to the dividend, I think that the additional mezz capital to be brought in enables us from a liquidity standpoint to be more helpful. However, we do have all of the traditional lender limitations in this area. And this is something I think we'll continue to look at as time goes on. We obviously are sensitive to shareholder needs, want to return capital in terms of stock appreciation or dividends. And we'll continue to look at it as we go forward in the future.

Okay.

Thank you. Our next question comes from Marc Silk with Silk Investments. You may begin.

Hi Barry, nice quarter.

Thank you, Marc.

So on the capital raise, you've lined up kind of what you're going to do with the money, which is fine. You can always add anything if you'd like. But I guess my question is why was it worth the expense of taking the capital on? Because I know you're a shareholder as well and there is some dilution there, but I just figured what your opinion on this is.

Well, the guidance that you see for 2012 includes the cost of that capital. So clearly without much of the capital being deployed in my opinion to gives us the benefit of it, we're still on a good numerical basis in terms of 2012. And I think when we give our guidance out for 2013, I think that it'll become more readily apparent that this capital was enabling the Company to lever our selves and to grow. I think most importantly for us to get on the radar screens of more, larger meaningful investors, growth is important, growth in revenues, growth in the bottom line, as well as maybe growth in customer accounts (inaudible) so when we talk today about being able to add loan growth in increments of $100 million, we believe that in 2013 our lending business potentially could add $100 million of incremental growth.

So let me just take a peek here. Our guidance for -- well, let me back up. Our guidance for 2012 in the lending segment pretax is $5.5 million, $6.7 million, midpoint call it about $6.1 million midpoint for Small Business Finance. Let's just say we go up to $200 million, so it's three quarters, put $3 million onto that. So we could be up to $9.1 million. And when you actually filter it down from an EPS perspective, it's accretive. At the end of the day, despite the fact that all capital is expensive today, we believe this capital will be worthwhile and will be -- it'll be able to generate increasing revenues, increasing gross profits, enable us to grow our prominence in the lending business and our stature in the lending business, which should lift the boats of all of the different business segments.

So on a fully-diluted basis -- and we analyzed this fairly heavily -- we believed and do believe that this capital will wind up being accretive to earnings.

So the irony here is that it seems that for you to go let's say off the board to borrow more money, instead of a bank, that might show me that it's still hard to borrow money from a bank. Having said that, on your lending side, you can obviously expose that because of your small business loans and that's why -- is that why you just feel that the demand is just increasing?

Well, I think this capital -- what this capital does is it gives us the ability to borrow more from the bank and to lever our capital because this capital is subordinated to the senior bank line. So I think what this capital enables us to do is do larger securitizations, ramp up our level of originations, increase and improve our liquidity, which generates larger income plus more servicing income and more servicing revenues with larger, more meaningful customers.

So I think that it's important not to mistake the mezz capital for increase in just senior lines because it's not. What it does is it really supports senior lending, which obviously is at much lower rates, enables us to put more money out, hold larger amounts of uninsured pieces, and do larger potential securitizations of the uninsured pieces.

What's the amount of the uninsured piece that you can, you know, to resell? I know it's -- I know it used to be 90% and then 75% I think.

Yes, so on $100 million of loans you're creating $25 million of face value of uninsureds.

Okay. And then do you have a particular collateral verse an SBA loan? I know I've gone through the process with you and you definitely like to take a lot of collateral, but I don't know if there's different scenarios, whether it's property or account receivables, et cetera.

Well, I think that approximately 80% to 85% of our loans are secured by real estate and particularly at today's valuations we like that. There's no real magic formula in our underwriting box. And every loan that we do under the 7(a) program is personally guaranteed by every 20% business owner or greater. We take all personal assets. We take all business assets. And historically we've done pretty well with our underwriting guidelines and have survived the '08, '09 credit crunch to be positioned today to grow the lending business. So we are real happy with where we are. We don't see a lot of competition currently coming in from banks. And given the capital constraints in the market, I'm not sure that's going to change any time in the near future.

I know. You've definitely done a good job getting through '08 and '09. So actually on that venue, I'm concerned about major headwinds ahead of the economy, for business in general, obviously what's going on in Europe. I think it's going to carry on to China and affect us. So having said that, if this is the case, do you take additional measures of caution above and beyond what you have been presently been doing in regards to the SBA program as far as lending?

I think it's a good question. And there's no question that we look at lending in all of our businesses not in a vacuum, but in conjunction with what I would call the business environment.

We think that barring a real sharp downturn, which we currently don't see, we are somewhat optimistic that irrespective of a political persuasion, we think that the headwinds and the markets dictate to us that we will not as American citizens go the way of Europe where Europe recently both in France and Greece voted for no austerity. We think that it is likely that there will be breaks on spending. That goes against conventional wisdom and cynicism, but if you actually look at what has transpired between both Democrats and Republicans with Republicans leaning more towards being austere than Democrats, but I think that whichever party gets in, I think you will have a serious effort to reduce government growth and government spending. I think that's good for business in the near term. As lenders, we do not need a robust economy. We need an economy that is flat to slightly upswinging so that our businesses can maintain the current cash flows that we've underwritten to.

So what said, although we prefer an upswing because it's much better, as long as things remain slightly stable to the upside, which is the current trend, that's a good lending environment for us to be in. I'd certainly prefer 5% growth or 10% growth. That makes it totally brainless activity. But even flattish activity is okay from where we stand. And we don't see that changing much no matter who gets in or it's not really in our economic forecast at this point in time.

Then lastly, I think I've been in the stock since I was six, but as I got my proxy in the mail today, I just wanted to make a comment that you can't control the stock price. You can control what you do in the Company. And I do think that -- I continue to support you and that's how my proxy will go as well, so keep up the good work.

Thank you, Marc. I appreciate that.

Thank you. Our next question comes from Harold Elish with UBS. You may begin.

Hi Barry. It's actually Michael. Harry had to run to a meeting. He asked me to congratulate you on this quarter and your long-term trend. He did have a question about the issues in Newtek's Managed Technology Solutions group. Do you see these as a function of decreased demand in a competitive field or as a problem with execution at Newtek?

That's a good question and a tough one and I think it's a function of the fact that the market's changed and I think it's a function of the fact that we missed it and we weren't on top of things as much as we needed to be. And we're now in the process of making those changes. We've announced several changes in terms of our product offerings, what we're focusing on and concentrating on. But I also think that relative to being able to be positioned in this market, we talked about the types of cloud computing offerings that we would be rolling out this year and some of the management changes. We anticipate that the current flattish movements that we had last year and the downward movements that we've had in the first quarter we will able to make up. So we take full accountability and responsibility for what I consider lackluster to poor results in the first quarter for that division and anticipate a turnaround. I can't tell you how quickly that's going to be. I do feel quite confidently because we've obviously given guidance that our other businesses and divisions will make up in multiples for the downward swing in this particular segment and that we have our hands around the issues, we have quantified the issues, and we have solutions to the issues that I believe will reverse that performance in that segment.

All right, thanks Barry and congratulations.

Thank you.

Thank you. (Operator Instructions). And your next question comes from [Ron Vemint] with [Hyde] Investors Capital. You may begin.

Hi Barry. Great quarter.

Thank you, Ron.

Wanted to find out the size of the lending market, who the competition is, if General Electric Finance has come in and started to do the same type of work as you're doing. It seems like from what I gathered that you are the lead on this. And I want to know the size of this market.

Okay. Ron, on the SBA 7(a) market in 2011 was about a $16 billion market. And that's the market that was done under the program. The market can be significantly larger. And historically prior to the Obama Recovery Act the guidelines that were set out in the program by Congress, which got altered in the Obama Recovery Act, were pretty restrictive. There was a $2 million max loan cap and there certain underwriting guidelines that really restricted the types of business that could go under the 7(a) program.

With some of the changes in the Recovery Act of 2009, namely increasing the loan size from $2 million to $5 million on a max basis and being able to accommodate bigger borrowers, we think that there is growth for this business. And historically the business has been one in which the premiums that come off of the program have returned money to the US Treasury. So unlike Fannie and Freddie, which have been a drain on the Treasury and a HUD, which has been problematic, the 7(a) program's loan fees have been a positive one.

We're seeing loans that typically would go to banks in a conventional format being -- coming to us because banks aren't lending. We're also seeing banks that need balance sheet that are basically telling good borrowers to go find another home without much notice. We're getting those opportunities as well.

So when we took down the mezzanine capital, we did so with the thought process that we will go from $100 million to a $200 million run rate and then from a $200 million run rate to a $300 million run rate at some point in time in the future.

I will point out that the only forecast that we've given so far is $125 million for 2012. Obviously you can't turn a lending business on with a -- flipping a switch, but we've also indicated in the release today that we think that in calendar year 2012 we can do $100 million to $200 million worth of 7(a) loans and originations.

So I think that our goal is to have a bigger presence, put money out as long as we have good feelings about the economy, our loan loss discount that's in fair value accounting, and our market position. So we feel very good about this particular segment and think it's still the single best opportunity that we have right now in terms of return on capital and cash flow and shareholder value.

Thank you.

Thank you, Ron.

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

Great. Thank you, Operator, and we want to thank everybody for attending the call and participating in the call and the Q&A and we look forward to reporting our second quarter results hopefully with the same positive outcome and optimism that we have here today. So thank you once again. See you soon.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation have a wonderful day.