NewtekOne Inc (NEWT) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Newtek Business Services, Inc. second-quarter 2014 earnings conference call. (Operator Instructions). As a reminder, today's program is being recorded.

I would now like to introduce your host for today's program, Barry Sloane, Chief Executive Officer. Please go ahead.

Good afternoon, everybody, and welcome to the Newtek Business Services second-quarter 2014 financial results conference call. I have here today with me Jenny Eddelson, who will help present the financial results and financial information. And for those of you that are interested in following along on the presentation, I suggest you go to our website at thesba.com in the Investor Relations section of the website. There will be the PowerPoint that is available for all of you to view as we go through the presentation today.

Jenny, would you like 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 planned 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 SEC and available through http://www.sec.gov.

Thank you. I would like to begin our discussion today with page 3 of the presentation.

The title of this slide is Business Development Company. The Company expects to present to its shareholders a proposal to convert to a Business Development Company also known as the BDC, once we are cleared to do so by the SEC.

We filed a preliminary materials with the Securities and Exchange Commission for a public offering up to $50 million. The conversion will take place at the holding company level from Newtek Business Services, Inc. to Newtek Business Services, Corp. And as we have said in prior calls, we are unable to offer any further information or take any questions regarding this proposed conversion or offering at this time based upon, obviously, SEC restrictions.

I will tell you that, as I do take many calls throughout the quarter, I have been asked questions such as, can you please present what the Company will look like as a BDC. Because there are many investors that want to understand potentially if we do become a BDC what the Company looks like in a BDC format.

They are interested in dividend projections. They are interested in NAB projections.

This has really kind of put a hold on things for the time being. It has slowed things down, particularly with respect to investor participation in the stock. For those that are interested in learning more about the BDC, I would suggest that you go to the public filings that the SEC has provided. There is a lot of information in there. I think that will help you with your investment decisions and I believe it will, particularly as we go forward, reduce this concept of deal fatigue that we are currently dealing with.

As we move forward in the presentation, in this particular quarter, we have made a change to how we are going to present earnings. We have presented earnings for this quarter as an adjusted -- on an adjusted earnings basis. GAAP financial results for the three and six months ended June 30 include a one-time non-cash charge of $1.9 million, relating to the extinguishment of mezzanine capital that we had with Summit Partners Credit Advisors.

Therefore, pretax income, or net income attributable to Newtek Business Services, are important on an adjusted basis to reflect the reversal of a one-time non-cash charge this quarter of $1.9 million. We believe that this charge primarily represents the amount of unamortized debt discount and other financing costs attributed to the mezz debt.

For those of you that in past calls had talked about our interest in putting that debt on, which we did approximately two years ago, the Company's pretax income had gone from about $2 million to $9 million to $11 million to this year we anticipate about $13.5 million. So, obviously, the taking on of that expense debt, we believe, was a worthwhile bet. We have now paid that debt off and that is going to lead us to lower interest expense in the future.

The 2014 consolidated guidance that we are going to be giving for adjusted pretax and adjusted EPS also reflects reversal of that charge.

On slide number five, we report the Q2 adjusted financial highlights. Adjusted EPS of $0.07, that is a 40% increase over the prior year and quarter. And for the six months ended June 30, 2014, adjusted EPS of $0.10, that is an 11.1% increase over the prior six months.

Adjusted pretax income of $4.2 million, an increase of 45%. Adjusted EBITDA, $7.1 million, an increase of 37%.

So going forward, we have given 2014 consolidated adjusted guidance. It is similar to the previous guidance that we had given on a non-adjusted basis. We will go over what those changes are, but we are still looking forward to double-digit top and bottom line growth in 2014 and, also, we'd like to remind and mention to investors on the call today, that over the past three years when you take a look at the bottom-line performance of our Company, approximately 60% of the total full year's earnings happened in the second half of the year.

From an EPS standpoint, we had previous guidance at $0.20 to $0.26. We are now $0.21 to $0.25 adjusted, and last year, we came in at $0.20 non-adjusted.

Looking at the Q2 2014 GAAP results. That is without the adjustment, operating revenues of $38.1 million, an increase of 3%. GAAP diluted EPS of $0.04, that would be a decline of 20%. Pretax income of $2.3 million, a decline of 20.5% . And a small business finance segment, which was not affected by the reduction of the Summit Capital Partners debt. Pretax income of $3.9 million, a year-over-year increase of 90.8%, and revenue of $10.2 million for the quarter, year-over-year increase of 22%.

Looking at what happened in the second quarter from an operational and financial perspective. Obviously, we talked about a $20 million credit facility of Capital One up at the top of the Company. $10 million of that is term debt to refinance Summit. The other is a draw facility of which at the current time minimal amounts of that money has been drawn.

We have also announced recently and received approval from Capital One to increase our loan to Newtek Small Business Finance which is a revolving facility of $27 million up to $50 million. That is a $23 million increase.

Standard & Poor's reaffirmed ratings on two of our recent securitization trusts, even though Standard & Poor's increased a stricter rating methodology of which many, many issues in the market were downgraded, our ratings work reaffirmed. Standard & Poor's also recently reaffirmed our [service center] rating.

We have also throughout the quarter, which we'll talk about when we get into the segments, made significant upgrades to the senior and middle level management. We are excited about the new management team which we believe will lead us to greater revenue and bottom-line growth.

One of the important things about our Company as we sit here today with an anticipated $165 million revenue projection for 2014 is the need to grow. Small businesses like ourselves and particularly in regulated environments need to be significantly larger to be able to outgrow the extensive amount of the structure technology, fixed costs of compliance and overheads. The fact that we have been able to raise debt financing at lower cost, albeit looking at Capital One recent increase where we had $27 million of total financings available, that is now up to $70 million. Of which $10 million is drawn, approximately $15 million or so is drawn on the lending facility. We have plenty of capacity to grow provided by a client-based financing facility.

We are very excited about the relationship that we have historically had with Capital One. And they have made us more capital available to us to be able to grow the business.

We are excited about the opportunity to reduce our cost of equity capital. Obviously if we go the route of a BDC, typically the cost of your equity capital is based upon the cost to provide a dividend to the shareholders due to the tax-advantaged nature of a BDC.

We are excited about that. As long as you can basically return that type of a market dividend to customers, the market will be open to you. And that will enable us to growth the Company significantly.

So if you think of that and our ability to raise lower cost of equity financing, lower cost of debt financing, and to get some additional operating leverage out of the business, we think, will accrue very nicely to shareholders.

Looking at our 2014 adjusted consolidated guidance on slide number nine, our revenue at midpoint, $161 million. Pretax income, $13.5 million. Adjusted EPS, $0.23. We maintain that and tighten the reins up from $0.21 to $0.25 down from a prior $0.20 to $0.26. And adjusted EBITDA at midpoint of $26 million.

One other comment I would like to make about EBITDA, I have had investors talk to me about is EBITDA the appropriate measure. We try to use many different measures to show to investors' value and comparative financial results of us to other companies.

The one that I do want to point out, obviously, in our current C Corp format, we are taxpaying and we do actually pay interest. So those are important issues. For those of you that are analysts, you can probably reconfigure those numbers and look at the business differently.

If we do wind up in a BDC structure, obviously we will be able to raise equity. We may not have quite as much leverage on the books and we won't pay taxes.

So, we have explained what this is. We have made an adjustment this quarter making an adjusted EPS. We certainly didn't want to take recent comments on adjusted EBITDA at this point in time. There's enough moving parts to consider, but for those of you that have been following us, we think you understand where we are and we believe we are fully transparent.

Looking at the balance sheet on slide number 10, we are excited about the increase in total equity in the Company from $77 million to $80 million, with total assets of the Company growing marginally. So, you could see that we don't need leverage to make money in the business or an increase in leverage.

Looking at our small business finance segment, our Q2 2014 pretax income increased by 90% to $3.9 million and SBF revenue increased by 22%. So obviously we are getting a tremendous amount of leverage in the business.

We talked about the expansion of our Capital One line. We'll talk a little bit further about the growth of and depth of senior management with the addition of Harold Gartner and Susan Streich.

In the six months ended June 30, loan originations increased by 13%. To be honest with you, we had anticipated that being a bigger number. We are very happy with our financial performance. Some of that increase that we anticipated will be stronger in the second half of the year, number one, from a seasonal perspective, and also the additional funding that recently came in from Capital One at the holding company level, as well as the increase lines which will kick in in the second half of the year.

We do expect to have significantly stronger loan origination volume in the second half versus the first. We have also entered some new referral partners in the pipeline such as Union Bank of Switzerland, Randolph-Brooks Credit Union, [Devitt] School Federal Credit Union and several others.

Slide number 12 and 13 are slides that we have shown historically. We like to put that in there for new investors, to give them a feel for what a 7(a) origination looks like, particularly the income that comes off of a $1 million loan, as well as the generation of cash due to the ability to finance the government-guaranteed piece as well as the uninsured loan participations is that are created through securitization.

On slide number 14, I think this is a very important slide. It shows the comparative qualities of the loan portfolio from December 31, 2010 to June 30, 2014. I think this is extremely important. When you have higher quality loans, with more collateral behind the loans, doing less loans to start-ups and more loans to existing businesses; where there are more first liens than you had on things with commercial real estate; when your weighted average borrower score is higher; when you have got lower concentrations, when some of the older loans and the portfolio that might have been of lesser quality or burned off. What does that mean? It means your loans are worth more.

In the current environment, our loans are worth more. Not only the ones that are sitting in the portfolio, the uninsured loan participation, but our ability to create new loans in the marketplace. We are the largest non-bank 7(a) lender as of December 31, 2013, and sixth-largest, if you throw banks in.

People are recognizing us the go-to place to do their business. We are getting conventional credits that we are able to wind up, put it into the SBD box.

Now I say that, mind you, these are credits that cannot be financed conventionally. However, they have some of those characteristics, particularly the heavier concentration in commercial real estate. We typically will advance more than a bank will. We particularly give them greater terms based on the amortization schedule than a bank will.

So, due to SBA regs we are actually able to make that loan under the guidelines. But the important aspect of what we're doing here, is our loans over the course of time both sitting in the portfolio as on a weighted average basis, and those loans we are originating going forward, are worth more and more. How we are getting higher prices for it, we are having lower loan losses, lower default rates and having greater recovery.

The service import portfolio is also growing nicely on slide number 15. You can take a look at the total servicing portfolio increased by 65%. Our own Newtek portfolio increased by 32%.

Servicing income is great. It is reoccurring income. We have, we think, totally appropriate valuations of our servicing portfolio on our books. We think they are conservative. We have had these valuations for over 11 years. We are very, very enthusiastic about the growth of our own servicing portfolio and third-party servicing portfolio.

The strength of Newtek as a company is based upon its senior executive team and its management team and its ability to execute on strategy. We recently announced Susan Streich joining our Company as Chief Risk and Compliance Officer, both for the holding company and the lender. Over 30 years of experience as a financial services professional with particular expertise in SBA lending. Susan formally was the Director of Capital One Bank and President of Transamerica Small Business Capital. At Transamerica Bank she was very much focused on their SBA business and did quite a bit of business there. Locationally Susan is in the Maryland, Virginia, area. and that gives us tremendous proximity to work with the SBA, both in their Herndon office as well as DC. She has been a tremendous addition. In addition to watching over our risks, she is also helping us improve our processes and efficiencies in the lending business.

Harold Gartner joined our Company recently as President and Chief Operating Officer of Newtek Business Credit. Another 30 years of experience in receivables finance, asset securitization, Harold has held senior management positions at Morgan Stanley, Chase Manhattan Bank, Nomura, and other very well-known financial services company. We are excited about Harold. Not only does he help us in receivables business, but also gives us tremendous expertise in the consumer credit card business. Not that we are getting into that business at this point in time, however, we are seeing that there is a blending of opportunity and the electronic payments business and the finance business.

Because debit cards right now and credit cards and the issuance -- we believe the issuance side and the acceptance side are converging somewhat and we think that Harold will be very helpful and useful to us as we go forward. But most importantly, we are excited about Harold's efforts in helping us grow Newtek's Business Credit and our factoring and receivables business.

Our electronic payment processing business had a pretty good quarter. EPP revenue declined slightly by about 1%, but we are going to talk about the second half of the year. We've implemented some price changes in EPP which should give us real good revenue growth. We are going to talk about some new products that we have positioned and some management changes.

We have been very slow in enacting price increases. We have begun a price increase which actually hit in July. First increase we have had in about three years. So, we have had some level of contracting margins in our portfolio.

We have also implemented a new PCI compliance program, which also kicked in in July for the second half of the year. Because of these price increases, and I will state to you entities like (inaudible), our competitors, have had two price increases in the last two quarters.

So, these price increases are not inconsistent with what other people are doing in the industry. In hindsight maybe we were a bit little slow to adjust our prices to market forces. But these price increases, we believe, will add an additional $562,000 of pretax income in the second half alone, and that does include a level of attrition.

I think we were very fair and conservative in making sure that we don't -- we may lose some customers with respect to these price increases. We feel very good about this, and we are pretty excited about the second-half financial -- potential financial performance for our EPP business.

In new product development, Eric Turille, who was formerly the President of the electronic payment processing business, has moved over as director of business development. He has relocated to Phoenix, Arizona, where we have our three primary thrusts going forward.

Some of these products will benefit our managed tech business. But I think they will be significantly beneficial to our payments processing business.

For those of you that have recently gone into restaurants or its retail stores, you might have come across waiters, waitresses and salespeople that basically have a point-of-sale terminal, POS as we call it, on a tablet. This is the future. Mobile processing.

We currently are offering certain software solutions on tablets. We will also have our own Newtek white label solutions. Eric is behind this particular effort, not only creating the product, the marketing materials, the customer service issues, and working very directly with Bruce Hopkins, the President of the payments processing business; Tom Harkins, the Chief Operating Officer of the payments processing business; and Rich Rebetti in managed technology solutions.

We think that tablet-based POS will be a very important growth market within the industry as well as for Newtek.

As many of you are aware, we do own our own Gateway. That Gateway is housed in a subsidiary called Secure Cyber Gateway. It is a tokenized Gateway. We have approximately 2,000 customers on that Gateway and our goal is to increase that Gateway's penetration exponentially.

So we have a tremendous focus on it. In today's market, having clients use your Gateway reduces the level of attrition. It also allows you to do a lot more of the higher tech payment-processing business, which is required in today's competitive market.

So if a client comes to you and [it's got a] POS they want your Gateway integrated into the POS. If it's -- if they are doing e-commerce on the website, they want the payment Gateway entered into the shopping cart. So Eric's repositioning in this particular area, working with Rich Rebetti, in our managed tech solutions group, Craig J. Brunet, Chief Information Officer, Bruce Hopkins, Tom Harkins, David -- Bruce Hopkins, Tom Harkins, Gee, that's a tongue twister. Gary -- David Karcher, that is another new addition for the EPP business -- will help grow our penetration of our Gateway into e-commerce solutions, into POS systems, and retail and restaurant establishments.

Lastly, Eric will be rolling out a Cyber Scan product to give business owners a free Cyber Scan and free report. We are going to be able to scan business owners' websites and for free be able to get them a report which shows the security weaknesses and holes in their site. We think this is a big deal.

We also will be able to offer clients a protective shield if they have a WordPress site which, I believe, I think about 35% to 40% of the websites in the market today are WordPress sites, which is a form of software technology.

This shield product is exciting. That will bring new revenue opportunities, plus it will enable us to engage customers in conversations.

Are you happy with the market position of your site? We can help with that. Do you need your site remediated away from the shield? We can help with that. Where is your site hosted? We can help with that. Who is your payments Gateway? Is it tokenized? Who are you processing with? We can help with that. So, we are very excited about the [lead gen] that the free Cyber Scan product will offer us and Eric is leading that charge working with division heads.

In the payments processing segment, we mentioned Bruce Hopkins who has been recently named President of Newtek Merchant Solutions. Bruce is an experienced professional with over 25 years of experience in financial institutions and payments business. Formerly GM of debit and credit solutions at Fiserv. Former SVP of merchant solutions at FIS Corp., which acquired Metavante -- or which is where Bruce was the former Division President of the Acquiring Solutions group.

We have also very recently hired David Karcher. David is an important hire to us. He is managing our business service group which handles all of our alliance partners that come in through the new tracker system. He is also responsible for ISO sales.

We are very excited about our new management additions in Wisconsin. Both Bruce and David are Wisconsin residents.

In the managed tech group, our second-quarter revenue declined by 8.8% and we have obviously got some repositioning strategies and some cost reductions to talk about there for better financial performance in the second half of the year.

First thing I would like to talk about is cost-reduction measures. As we've talked about previously, we've had a tremendous history of a Microsoft-only web hosting company and that has unfortunately caused the Company to suffer, as less and less people are using Microsoft software to develop sites and people that have been existing are switching over to open architecture.

So, we have taken a look at headcount, we have taken a look at being able to condense our licensing fees. We have discontinued certain programs.

So if you take a look at slide number 22, we have estimated a -- well, actually this is not an estimate. This is a monthly cost reoccurring reduction which took effect -- some of these have begun to take effect previously, but for the full effect in July we estimate it to be about an $80,000 reduction or approximately $966,000 of reduction of costs on an annualized basis.

The key here is to get the business stabilized. We believe we have done that. You are going to see some better bottom-line numbers in the second -- in the third and fourth quarter going out. And we have also got some new products that we are pushing out.

We obviously talked about our POS product which, when we private label our own product, we plan on hosting that and creating hosting revenue.

So when I talk about hosting that, these tablet-based POSes are great, but at the end of the day, small businesses are going to need to be able to get customer service, have questions, have training. We plan on doing that and being an important thought leader in giving smaller businesses the ability to use state-of-the-art technologies and to be able to answer their calls 24/7.

We believe the cyber scanning product that we just talked about will be big, particularly for designers and developers to protect their clients as we engage them in conversations as to why they should be using our [Level 4] data center and our security that historically has really performed very, very well.

We have also rolled out what we call the Newtek Partners Program or the PAR Program. We are aggressively soliciting intermediates, designers, developers, and retailers to create new partnerships and to participate in all revenue streams. To participate in hosting revenue streams, payment processing revenue streams, Gateway streams, payroll streams, insurance streams, lending streams. Our PAR program is being rolled out in full force and some of the personnel changes that we have made in the second half of 2014 will help enact that.

First and foremost, Rich Rebetti has been recently named President and Chief Operating Officer of Newtek -- of Managed Technology Solutions.

Mark Denzin has been named Senior Vice President of Business Development. Mark moved over from customer service. Dan Lukenda has moved over and has been named SVP of all Customer Operations. Very client focused. We want to make sure our clients are happy and that their needs are being addressed. Andrew Lacquire, he reports directly to Dan Lukenda and he is VP of Customer Operations.

The management team in MTS, high level of energy, high level of enthusiasm, tremendous leadership and, most importantly, I believe for the first time in many years, the objectives they have consistent with the objectives of Newtek Business Services were in alignment, one company, one mission, help our client, offer customers safety, security, efficiency in their product and technology running every day and cost reduction.

As we look forward, we feel very strong about where we are in the space. We are looking at a lot of our publicly traded competitors. We think there is great value in what we're doing and we see entities like Lending Club, GoDaddy, that are in our space with extremely high valuations. We feel that we have a lot of hidden assets funded under that publicly traded holding company and we are excited about our future.

With that, I would like to move the presentation over to Jenny Eddelson.

Thank you, Barry. Our three- and six-month results included a one-time non-cash charge of $1.9 million related to the early repayment of the Company's mezzanine debt with Summit Partners. As Barry noted, we believe that the adjusted amount provided a more accurate depiction of the Company's operating performance. On a consolidated as adjusted basis we agreed tax earnings of $4.2 million for the quarter, a 46% increase from the prior-year and diluted EPS of $0.07 per share, a 40% increase from one year ago.

For your reference, slide 37 reflects the reconciliation for a adjusted pretax income for the three and six months, as well as adjusted diluted EPS.

On a consolidated GAAP basis, our second-quarter results were as follows: we had operating revenue of $38.1 million, a 3% increase over the second quarter of 2013. Pretax income was $2.3 million, a 21% decrease compared with the year ago quarter. Net income decreased by 24% to $1.4 million, and our diluted EPS was $0.04 per share down $0.01 from $0.05 as reported in the second quarter of 2013.

Slide 31 presents a summary of our second-quarter 2014 revenue and pretax income or loss, an adjusted EBITDA by segment compared with the year ago period. Electronic payment processing segment revenues decreased by 1% to $23.2 million from $23.4 million. Processing revenue, less processing costs or margin also decreased from 16.3% in Q2 2013 to 15.5% in the current quarter, due in part to price compression particularly for larger processing volume merchants.

Several expenses remained flat between periods resulting in a 12% decrease in net income before taxes to $2.2 million from $2.5 million a year ago.

Small business finance segment had a 22% improvement in total revenue, increasing by $1.9 million to $10.2 million for the second quarter of 2014. The majority of this increase was in servicing fee income, which increased to $2.7 million for our combined portfolios.

Our aggregate servicing portfolio grew to approximately $1.1 billion and increased by $490 million or by 65% quarter over quarter. Interest income also increased by 35% to $1.6 million as the average outstanding performing loan portfolio increased from $67.9 million to $100.2 million year over year.

Total expenses to the lending segment increased by $905,000. The majority of the increase and expense was in salary and benefits due to the addition of staff in all departments. Additionally, interest expense increased due to an increase in outstanding balance on our lines of credit as well as interest expense related to our two 2013 securitization transactions.

Overall, the lending segment had pretax income of $3.9 million a 91% improvement over the second quarter of 2013.

Managed technology solutions segment revenues totaled $4.2 million for the second quarter of 2014, a decrease of 9% compared with the year ago quarter. While the segment realized an increase in the average monthly revenue per plan, the total number of Web hosting plans continue to decline during the second quarter of 2014.

Total expenses also decreased primarily in G&A costs, resulting in a $286,000 reduction in total expenses compared to the year ago quarter. Pretax income was $921,000, down 12% from the second quarter of 2013.

The all other segment, which primarily represents results from our insurance and payroll subsidiaries, had a pretax loss of $301,000 in 2014, a $138,000 improvement over the year ago quarter. While current quarter revenue decreased by $27,000 mostly related to our insurance division, total expenses decreased by $165,000 and included reductions in salaries and benefits, insurance broker commission as well as a reduction in other G&A costs in the current quarter.

The pretax loss for our corporate segment increased by $2.2 million in the current quarter, due primarily to the $1.9 million one-time non-cash charge to operations for the deferred financing costs and debt discount, remaining on the Summit note at the time of refinancing to Capital One.

There pretax loss in our Capco segment improved by $104,000 in the current quarter, decreasing to a pretax loss of $189,000.

And finally, slide 32 reflects our adjusted full-year consolidated guidance for 2014 as well as guidance by segment for revenues, adjusted pretax income or loss, and adjusted EBITDA.

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

Thanks, Jenny. Operator, we will take questions now.

(Operator Instructions). Marc Silk, Silk Investment.

Even though it is not reflected in your stock prices share I want to congratulate you on continuously creating value for Newtek.

So, I guess my first question is, with the money coming in from Capital One, let's say you have it right now and let's say the $50 million you had it right now. Could you put that money to work right now? And if not, because that is a lot more money than you have ever dealt with, what are your plans as far as are you going to increase your advertising or get the word out? I am just curious on that regard first.

I think the ability to use the leverage line is there from the standpoint that the advance on a government piece is 90% and we are currently in a run rate where particularly in the second half of the year, we anticipate doing $50 million plus a quarter easily. So, the [original] leverage lines are useful. It will enable us to hold loans, get a little bit of cost to carry before we seldom.

So, having a -- more liquidity from a financial perspective -- and in both cases they are revolvers. So when you look at a $70 million, there's $10 million above term on which we pay down and we are amortizing. The rest of it is a revolver.

And part of a revolver, you put a [government] in it, you sell it, it you get premium and you pay the line down. And the uninsured piece is held till you have enough through a securitization then it goes into a securitization facility at a 65% to 70% advance rate.

So the additional lines will enable us to increase the velocity of lending and I think we are fairly comfortable that we will be able to use those facilities. And the lack of having those facilities in place really forces us to schedule closings, which is not the easiest thing to do with small business borrowers.

Okay. So, now I am hearing that banks are starting to lend money more than in the past -- past few years, that is. So, will the rising tide lift all boats meaning that now that the public says okay, the banks aren't lending, let me also see what small business associations can offer as well?

I think -- I have to say this. We typically are not in the lending book. We are typically not like in a competitive situation where the borrower is giving out multiple packages to several different people sort of in a Lending Tree type jumble. A lot of our leads come through the Alliance relationship through the new tracker system. We are working with the customers we are bringing them through the process, we are helping -- we do the assembly. This is not -- you're not dealing with -- our model is different. You are not dealing with brokers, you are not doing BDOs. You deal with a broker you do the BDO. If it takes a package to get to five different people, you are in a jumble.

We work with the business and we help them structure loan that works from our standpoint, from a credit standpoint, and gives them the ability to borrow on reasonable terms. But importantly, it gives us enough protection. So it is not a brokered --. The brokered loan typically or packet loan for third-party provider may in fact have the worst available terms for the lender.

So we like the position that we are in in the market. We work with customers, we help them realize the greatest proceeds but also give us enough comfort and cushion in the event that the business plans and the projections don't work out.

Okay. So let's say you are engaged in a customer and do a loan through you guys. Now, you obviously have a lot more to offer these people from all these different various -- variety of businesses. So when is the right time for you to approach these people and say, hey guys, we have this other stuff to offer, can we help you?

I mean you don't want to do it beforehand, to turn them off, but when the deal closes that is when you approach them or how do you work that? Because obviously that is quite a stable of potential future customers for other areas.

This is (technical difficulty) an ongoing process. I will tell you that we recently closed a loan and the client moved their payroll over to us, 145 people, and we will be working on their health insurance renewals as well as their P&C insurance.

So we -- and the lending unit is important to us, just like all the other units are important in terms of cross-selling and cross marketing.

I have to say we treat our customers, every customer on a case-by-case basis and our customers are clearly aware of the fact that we have these other products available. And they are aware of the fact that the loans that are going into committee will have greater comfort factor with those borrowers in the event that using some of our services we have had a chance to look at that and the likelihood of getting approval they will end up being higher because we are providing the services and we've underwritten them.

We don't tie, we don't force people to do the business, but I think that on an ongoing basis -- and you can see by the headcount -- we are hiring experienced staff, people like David Karcher, the changes we made in managed technology solutions. The additions that we've made in the lending division to further push the culture of being able to help customers.

Our payroll solutions, the fact of the matter is they are just better than ADP paychecks. They are less expensive. They get a dedicated person. They are saving money. And on the payment space, business owners have got to have (technical difficulty) (inaudible) compliant terminal. They have got to add tokenized Gateway. They have got to be PCI-compliant.

We can bring that to them. They go to a lender, they don't -- those lenders have no idea what these things mean. So when a business comes to us on a consultative basis, we are able to not only discuss that we can give them a great loan, structure the right way that makes us safe and enables them to grow their business, we can also reduce their cost and give them state-of-the-art business solutions that helps make their day-to-day business life better more cost-effectively with better cash flows.

All right. Because now you are the -- you have been the biggest small business loan provider independently, and you have a very attractive [PU] ratio. Has anyone in the last six months approached you guys just because I know -- the banking business especially -- they have got to figure out ways to generate revenues.

Remember the Superman show when Superman was sitting out on the ledge and inspector Henderson was inside, he said, no comment until [the time is up]. (laughter) I can't answer that question.

That's okay, I understand. My last question is -- and I understand you want to be the Walmart in regards to small businesses, offer all things to all people. But if you didn't have the business Services/Web hosting business would that have increased our earnings per share over the year?

Oh, boy. You know, it is funny I always come back to this. 2009 someone asked me the same question about lending. So, we are real happy with all of our businesses and, no, actually those businesses contributed to our earnings. And they contributed very nicely. Not maybe at the higher growth rate, but businesses and market they cycle in and cycle out. And I hope this isn't the case, but five years from now we might be talking about a different time in the lending cycle. We will be thankful that we have got these business services businesses that are growing and blowing.

Particularly, ones that are positioned in cloud computing, Merchant Services that may go away from interchange, Visa and MasterCard which I think we are well-positioned for. Capital based PLS systems.

I mean the key is you have got to stay on the cutting edge. If you are in the payment space and you are walking in knocking on doors, retail customers, asking them for their payments statement and telling them you could beat their price, that is dinosaur business. And we are positioned for different business and payments, different business for managing hardware and software for businesses remotely and a different way to acquire financing. Talk about health insurance, the future of health insurance for small business, in my opinion, will be personal insurance. I think fewer and fewer businesses are going to provide health insurance for their businesses benefits. We will be well-positioned for that going forward. We are working on that.

So, it is all state of the arts. It is all about state-of-the-art solutions for business and both NTS and EPP contributed significantly to our earnings this year.

And finally, more a comment than a question. You are doing a great job and, as a shareholder, I do appreciate that you and some other insiders have been stepping up even though you own a lot of stock, buying more with your own money because it drives me crazy when a CEO talks about how great their company is yet all they do is give themselves options. They don't put their own money into this.

So you more than most have skin in the game than most, excuse me, and appreciate it and good luck going forward, Barry.

Thanks, Marc, appreciate it. Thank you.

Frank DeLorenzo, Singular Research.

I had a question about Amazon's move into mobile payments, your thoughts on how that might impact you going forward and also the overall space. Thanks.

Amazon always makes big splashes and they are probably a company that actually does more things than we do. So I wonder how Jeff Bezos answers the question. How could you be in cloud computing selling books and providing payment processing? And what do those things have to do with one another?

So, you know, Frank, I really appreciate the question. I took a look at their offering and I am going, wow, this is kind of a non-event. It's -- the pricing is a nonevent, their service is a nonevent.

Now, putting that aside, they have tons and tons of customers. And they are trying to cover every side of the world. Consumers, merchants. But I think that business owners, particularly retailers, are not want to be thrilled with having Amazon in the pot, showing Amazon their customers.

So if you were a retailer today, I think you would think Amazon is a competitor and wants to market to your customers every single day, every minute. And I don't think they are going to be thrilled about giving Amazon their sensitive customer data or sensitive customer information.

So that is why I am not overly concerned about -- and the Amazon product is kind of like a little bit of a Square look-alike. And I think those business models are real tough right now.

I think the business models for the future are the ones that can figure out a way to disintermediate interchange, get the cost down and importantly provide security.

So people think of payments, they are going to want to know their security. They don't have PCI compliance risks, they are going to want to know their costs are low. They are going to want to know that they have got really good customer service. They can call somebody up and get a question answered quickly.

And I don't want to be critical of Amazon, I don't know it, I just don't see them being a real major player in the space.

Okay. Also regarding electronic payment processing. I think there may have been some weakness there in the first quarter, due to the weather conditions we had around the country. Do you see any follow-through on that into the second quarter?

We saw a little bit better number in the second quarter. One of the things that I think we have seen and I do have some disagreements with both people internally and externally on this.

Most processors make more money off of debit than credit. And as the economy gets better, people are more willing to use their credit card and expand certain purchases. And I think that, for us and others, wasn't necessarily the greatest trend. But we think the economy clearly was better in the second quarter than the first. And we also from what we have seen in July, July appears to be better as well.

So I think the first quarter was an anomaly from an economic perspective, a systemic perspective, and the second quarter clearly was better.

Okay, thank you.

(Operator Instructions). And this does conclude the question-and-answer session of today's program. I would like to hand the program back for any further remarks.

Great. I thank you, operator, and I thank you all for attending the call today. We had great attendance and I especially appreciate the questions of various people today and we look forward to reporting our third and fourth quarters. Have a great day.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program and you may now disconnect. Good day.