Newtek Business Services, Inc's CEO Discusses Q1 2013 Results - Earnings Call Transcript

| About: Newtek Business (NEWT)

Newtek Business Services, Inc. (NASDAQ:NEWT)

Q1 2013 Earnings Conference Call

May 8, 2013, 16:15 ET

Executives

Barry Sloane, President, Chairman and Chief Executive Officer

Jenny Eddelson, Chief Accounting Officer

Analysts

Marc Silk - Silk Investment

George Sutton - Craig-Hallum

Charles Kaplan - Singular Research

Operator

Good day, ladies and gentlemen, and welcome to the Newtek Business Services Inc Q1 2013 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 conference call is being recorded.

I would now like to turn the conference over to your host Mr. Barry Sloane President and CEO of Newtek Business Services. Please go ahead, sir.

Barry Sloane

Thank you very much and welcome everyone to our first quarter 2013 financial results conference call. We appreciate the opportunity to chat with you today and welcome you all for following along to our presentation, which is archived on the Investor Relations section of our website.

Speaking today along with myself, Barry Sloane, President and CEO of Newtek Business Services, a small business authority is Jenny Eddelson, our Chief Accounting Officer.

Jenny would you like to read the safe harbor statement?

Jenny Eddelson

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

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

Barry Sloane

Thanks Jenny. Moving to slide three of the PowerPoint and looking at our agenda, we are going to talk about our results for the first quarter on a consolidated basis. We are going to break down the segments for the quarter. We are going to talk about the reaffirmation of our 2013 guidance. We are going to spend a lot of time talking about our growth strategy going forward. We are going to spend some time on our marketing initiatives, which will create that growth strategy and make it successful as well as future initiatives of the overall company and some investment merits.

Moving to slide number four when you take a look at our consolidated earnings performance for the first quarter we are real proud of the results in modified EBITDA, which was up 41.9% compared to Q1 2012, our net income was up 42.5% compared to Q1 2012 and on a consolidated basis, our pretax net income was up 34.8% compared to Q1 2012.

We reported earnings per diluted share up $0.04 this year versus $0.03 last year. Looking at our year-over-year guidance going forward, we are reaffirming our midpoint guidance of $0.18 with $0.17 to $0.19 as the range. For 2013, on a fully diluted basis, with pretax income coming in at around $11.5 million at the midpoint for 2013.

When you take a look at our balance sheet at the end of March 31, 2013, we had some nice performance results in terms of our total shareholders' equity increasing to $70.5 million that was an increase of $1.6 million in total equity. We had an increase in cash and cash equivalents of a little under $5 million, about $4.4 million and we really grew the total assets of the business and liabilities modestly.

Switching over to slide number nine and looking at the segments, the small business lending segment continues to have a stellar performance both on top and bottom line with revenue increasing 53.9% over Q1 2012 and pretax net income 48.4% over Q1 2012.

The Electronic Payment Processing segment had revenue increasing by 5.1% and pretax income by 15%. We do think that the Electronic Payment Processing segment over the course of the year will grow to an increase of 10% to 12%. Some of this new increase in the first quarter is based upon the effect of [Durban]. We do see the revenue side of this business growing significantly over the remainder of the year.

In the Managed Technology Solutions business, which is the business we've talked about historically and are real positive about the repositioning, revenue declined by 6.4% in the quarter versus Q1 2012 and pretax income declined by 18.7%. I think many of you that have followed the company from conference calls to conference calls, have heard me say that lending is the single best opportunity that Newtek has going forward.

We still view lending as a great opportunity. As a matter of fact we don’t think that the lending environment and our position in the lending environment change for at least two to three years and we will explain why and you will take a look at some of the metrics and what the pipeline looks like.

However, we are extremely positive in what we are doing in the Managed Technology Solution space and we wanted to emphasize that on the call. The Managed Technology Solution space which is basically offering cloud computing solutions for the SMB market, over the long-term we believe could be the single best opportunity from a segment perspective for growth of topline revenue and bottom line revenue,

Most small businesses in the United States are becoming introduced to cloud. We think that most small businesses are going to need to take all of their hardware and software and rather than keep it on premise, in a tower, in a closet, over the local IT provider is going to need to be moved to a data center is going to be need to be managed in a data center. It's more secure and it's more cost effective.

We believe our company is very well positioned for the future and we believe that the Managed Technology Solution space from an investment perspective, could offer the single best opportunity for Newtek investors going forward.

On Slide 10, we drill down into the small business finance space and you can see some real nice numbers in revenue growth. The company is on track to fund $175 million SBA 7(a) loans throughout the year 2013. In the first quarter of 2013, we completed our third securitization. We were able to tab funds at about 4% yield to maturity for the investors and we improved our advance rate on the bond issue by 8% to 9% over previous securitization.

Our long term cost of interest based upon this financing was reduced by 150 basis points over the two prior securitizations. For many of you that follow the company, the servicing portfolio where we service loans for our -- where we service loans for our own account as well as for third parties is important revenue source that continues to grow. The total size of the servicing portfolio in 2013 is expected to grow by 32.4%.

On slide number 11, we walk through an example of how we finance as well as the accounting for a single unit of a small business 7(a) loan. I think the important part of this business for our organization is a non-bank lender, it's extremely important for us to get a high return on capital and velocity of that capital returning it back to us.

When we make a loan to a small business because of it is government guarantee, or we sell it into the market in a bond and we finance the uninsured piece in our warehouse line with Capital One Bank and then take is out with a securitization, the difficult timeframe from beginning to end is about a year. Some of our loans are in the warehouse for less than that obviously you know, using six month on average, but we aim to do securitizations at least once a year. I think as our business grows depending upon the size of the securitizations we do, we make these smaller frequencies.

Obviously bigger issues have lower cost and probably get better execution. Smaller issues give us greater frequency and better velocity of money. Putting that aside, we create approximately 11.2% of pretax cash every time we do a securitization. So we've been after tax for creating cash.

That's quite unusual for a lender because we think that most banks to make a loan that certain amount of equity invested in it net liabilities against it and then equity effectively sits in that loan from beginning to end till the loan matures and in our case, we actually get our capital back, which is extremely important given that we book a gain on sale, which is a fraction of the cash gain that we get from selling the government piece off and we have a nice long income stream from the servicing as well as an asset liability match from the growth component of the notes to the last securitization yield of 4%. The typical growth component of 7(a) loan is 6% floating, so we do have a floating to floating match, a very nice business for us that we look forward to growing significantly in the future.

On slide number 12, you can see that small business lending pipeline is really growing at a nice rate. It's up a 150% year-over-year. We've got 171% increase in open referrals. 348% increase in pre-qualifications. Recently we took a look at our pre-qualified volume, we are closing about 60% to 65% currently of all loans and that were pre-qualified.

Loans currently in underwriting up 134% and approved - pending closing, up 17%, by the way the approved - pending closing being smaller is an issue for us because they are being approved, they are closed and then turned into funded loans. So we look at this particular pipeline and we are very optimistic about it and I will tell you that when the investors look at growth in the lending business, they get concerned as what is this company doing? Are they cutting into their underwriting criteria? Are they making their credits? They are buying loans from brokers, the answer, no, no, no and no. We are not doing any of those things.

As a matter of fact, if you take a look at our comparative loan data on slide number 13, you can see the characteristics of our business are improving. The existing businesses which is probably the most important category of loans that we make are 81% -- 81.88% up from 53.9% in 12/31 of 10. We are doing less business acquisitions. We are doing less start-ups and more loans to existing businesses.

Existing businesses tend to be more stable, have less volatility, have tried and tested management teams particularly through up and down economic cycles. You can see that the primary collaterals improved in commercial real estate up about five points to 50.53 and first liens on commercial real estate, 93% up from 84%. You can see that we've got very few industry concentrations under 10%, which is constructive. Take a look at the hotel, motel concentration of 9.36 in 12/31 of 10, that's 2.93%.

When we first got into the SBA lending business, we acquired effectively the [front] lender with a fully performing portfolio with a $55 million portfolio I believe 65% of those loans were motels. We've done a tremendous job in working that portfolio down, cleaning it up and we are real proud of the work that we've done on our portfolio.

State concentrations, biggest concentration is Florida, that's down almost 10% from over three years ago, while New York coming in second and our mean FICO score of the guarantors is currently registering at 700. We typically have more than one guarantee from the business owner on every small business loan.

Moving to slide number 14, you can see that in the first quarter, we funded approximately $35 million of loans. We feel very good about the second quarter. We think we will do about $45 million of fundings. That gets us to $160 million through the first six months of this year. We are forecasting $175 million as the midpoint. We feel very good about that, particularly given that the fourth quarter is the strongest and the first quarter is typically the weakest.

Our servicing portfolio at the end of the March 31, 2013 quarter came in at $546 million, that's up from $431 million. We are really excited about the increase in both the third party servicing portfolio as well as servicing for our own account. We do close a $65 million transaction where a multibillion dollar bank transfer they are servicing to us, I will tell you about the servicing portfolio it does have in flow.

We wound up running off about $100 million of our portfolio that one of our outside providers had in the fourth quarter of last year. They wound up selling those loans away from us. Not away from us, we were servicing the loans but they sold them to an investor. We also had some of those investors coming back to us, they asking us that we do service them those loans.

We have a nice pipeline in this category, but I will tell you there will be some volatility here, but we feel pretty good that the uptrend is -- that the trend on the total size of the servicing portfolio is up. We are forecasting to be between $650 million and $750 million, up from the $546 million in total servicing by the end of the year.

Looking at the Electronic Payment Processing segment, we talked about our revenue growth and pretax income growth for the year. We've also announced that Eric Turille assumed the role of President of the division in Q1 2013. There was a press release out on Eric that's archived on our website. Eric formerly sat on the Visa or MasterCard Advisory Board, has over 25 years worth of experience in the Electronic Payment Processing space. Eric is a great executive and is really doing some great things that we are excited about, bringing real exciting results in the payment processing space in the second, third and fourth quarters.

On the distribution side, we've also added Randy Sagar, who comes in as an Executive Vice President of business development in the merchant processing division and his team in Louisville, both Mike Valerio and William Berry that work underneath him, Mike handling ISO, William handling agent bank relationships. We are very excited on them signing up independent selling organizations throughout the second half of the year.

On slide number 17, we talk a little bit about the growth of the ISO space. Conservatively we are forecasting the addition of about 30 ISO contracts, 50 ISO contracts by the end of the year. We currently have 30 contracts out for signature. Also extremely conservative we are looking for from a forecasting perspective five to ten merchants per one of these relationships, but I think these things could increase exponentially.

There are ISO out there that prospectively can get you 50 deals a month a 100 deals a month. We are in conversations with some of them that could give us more than that on a monthly basis, but we do like to be conservative in our forecast, but we are very excited about Randy and his team. When Randy was at NPC, which then got bought by Banc of America, which got bought by (inaudible) he was closing approximately 7,000 units for new merchant account a month from this particular channel. So we are extremely excited about it.

You know, it was in the first quarter, our average customer adds were somewhere between 303 in a quarter just from adds, so this could add significant bottom line impact to the company going forward.

Looking at the Managed Technology Solutions division, revenue declined by 6.4%. However, we do have some real good metrics to report and this really relates to what we are doing in cloud, cloud instances as well as Linux products. In Q1 2013, the average cloud revenue per user was up 22.5% and the average number of cloud instances was up 16.9%.

We are very excited about this particular business and space. You know, over the course of the last year, we've done a lot of upgrading on our product offering as well as what we can do in the back office because it's a great percentage. You got new products out there, but the important point is you have to have the right team, staff and training to service those particular attractive market opportunities.

So we work real hard, we've created associated control panels, service support and billing that allows us to be able to garner a better share of this growing market and I am saying a growing share of this market, I am referring to the non-Microsoft market. The non-Microsoft market is growing significantly and to be frank with you, we were not well positioned historically to take advantage of this. The numbers that we are showing here in the first quarter are demonstrating that we are better positioned for that.

As we move to slide number 20, during Q1 2013, total shared Linux accounts increased by 126% to 430 accounts and total cloud service accounts increased by 33.9% to 21,000 accounts. We are doing a lot of conversion with customers over the Linux and over to the Cloud from other traditional products and services.

If we take a slide number 21, the world of cloud computing and cloud computing services is fairly significant. I think the slide gives the investor community and our customer base a pretty good idea of what we are doing and what we can do going forward to provide cloud computing services to clients. Obviously they are traditional services that we've done, shared web hosting as a [self certificate] for main registration etcetera.

Going forward, infrastructure as a service, platform as a service, software as a service, these are all types of products and services that we are going to providing our customer base to grow the top and bottom line of managed technology solutions.

Looking at the referral trends, I think in previous conference calls, we've talked about C.J. Brunet, our Chief Information Officer, relocating to Phoenix, Arizona, he took hold in the beginning of January of 2012 and you can start to see the metrics moving in the right direction.

Looking at the total amount of managed technology solutions referrals, Q1 2012 to Q1 2013 we were from 3,196 to 3,983 and on closed transactions we went from 2,217 to 2,928, so we are really excited about the trends in managed technology solutions.

If you take a look at the average revenue per customer, per user, also up significantly, our shared rev per customer up $18.10 to $19.3 in Cloud, $205 from $167.3 and dedicated $352 to $331 and virtual VPS, $170 from $158. One of the things we wanted to -- today was to reaffirm our 2013 guidance. We are looking at midpoint revenue of $140 million, that's about a 12% increase year-over-year, pretax income increased to 22.3% is our expectation with the midpoint of $11.5 million of pretax income. We are looking at $0.18 in the midpoint of diluted EPS, that's an increase of 20% over the prior year coming in at 15% and modified EBITDA midpoint range of about $21 million and that's up from about $16.5 million increase of 26.7%,

Slide number 26 has got a pretty comprehensive picture of the guidance across all the different segments. In our growth strategy, many of you are familiar with our legacy way of acquiring customers, using our patent and new tracker system working with alliance partners. We are obviously excited as we continue to grow our alliance channels and bring on a lot of new opportunities.

Many of you are also familiar with our national television campaign, which I will talk about in a second as well as how we are growing our brand organically with more heads coming to our website. International TV campaign, we are averaging about 190 commercials, primarily on cable news, CNN, Fox News, Fox Business News, MSNBC 7 AM to 7 PM is sort of the sweet spot Monday through Thursday.

We've got a significant increase in our web traffic statistics which you could see on slide number 29, total quarterly unique visitors year-over-year Q1 2013 versus Q1 2012 of 62% and total visitors increased by 87%, so we've got a lot of new traffic coming to our site which we are excited about.

Many of you are familiar with the Newtek Advantage product. The Newtek Advantage product is the simplest way for us to articulate declines that are using our merchant services product, using our payroll product our other products that by using Newtek you have an advantage. You got real time data, real time information right to your fingertips on a smartphone or a tablet and the Newtek Advantage we think is an important selling point as SMBs are looking for real time mobile SMB management platform.

So the Newtek Advantage is a strong point of our company. There is a nice little video on our site to familiarize yourself with that particular product. In looking at our company and comparable market comps, we are seeing some very positive trends in the market. Recently it seems that although the lending space from all the way was kind of hibernating probably the whole way to 2011, non-bank specialty lending finance companies are starting to get a significant bid.

On their capital recently raised some money in the marketplace depending upon your source it was anywhere from $250 million evaluation to a $500 million market evaluation; Lending Club, another enterprise in the market, $1.5 billion current market evaluation. I look at these entities its black box underwriting, not a whole lot of infrastructure to originate on the front end and like we are doing and I am going okay, I feel pretty good about where we are in our space.

Other market comps looking at the segments Digital River and this is a deal I think it's about five or six months old, but I will come on and take a look at the EBITDA multiples at Digital River purchase of LMLP. UBPS, they recently put out a press release at [EPA] conference, they got our business model. They paid $180 million for three entities with $20 million of EBITDA, sounds familiar.

These are three separate entities in all different platforms that have no synergies and this was purchased by a stack and I wish them a lot of luck in trying to integrate these businesses and figure out how to cross-sell and cross market because we've been at this for many, many years and we are happy with where we are and wish them luck in their business going forward.

Looking at our organization, we publicly traded since 2000. Management's interest is very much aligned with the shareholders, myself and the other original founder; on a reported basis, close to 26%, 27% of the outstanding shares that were in our name. We are trading at a little bit more than three times 2013 modified EBITDA. We are trading at slight multiple, slightly higher multiple to current book of $70 million.

Revenue growth this year is estimated to be around 12%, 13%. We love the small business space. It's a strong economic segment without a real major brand player. If you take a look at the segments, we compare very favourable in the marketplace.

And with that, I would like to turn the financial review section over to Jenny.

Jenny Eddelson

Thank you, Barry. To summarize our consolidated results for the quarter, total revenue was $34.1 million, an 11% increase from $30.7 million during the same quarter in 2012 driven primarily by the performance in the EPP and SBF segment. The net change in fair value was a loss of $357,000 as compared to a loss of 58,000 in the year ago period, which is reflective of the growth in loans funded quarter-over-quarter and the associated fair value discount recognized upfront.

Total consolidated expenses grew by approximately 9% quarter-over-quarter due in part to an increase in electronic payment processing cost and interest expense recognized in the small business finance segment, as well as increases in marketing expenses and salaries and benefits.

The company's effective tax rate was 41% and net income attributable to Newtek Business Services was $1.5 million with $0.04 per diluted earnings per share, a 43% and 33% increase respectively over 2012’s third quarter net income and diluted EPS of $1 million and $0.03 per share.

Please turn to slide 36 for a summary of the first quarter 2013 segment results. In the Electronic Payment Processing segment, revenue was $21.7 million, a 5% increase over the first quarter 2012 revenue of $20.6 million. The overall increase in revenue was due to growth in processing volume and the average number of merchant service, partially offset by lower average pricing between years due to both competitive pricing considerations and the mix of merchant sales volumes realized during periods.

Pretax income increased by 15% to $1.8 million through the quarter -- current quarter, compared to $1.6 million during the same period last year. Our EPP margin increased by $128,000 period-over-period and depreciation and amortization decreased by 53% as a result of intangible assets becoming fully amortized during 2012.

In the Small Business Finance segment, revenue grew by 54% to $7.4 million in the first quarter of 2013 as compared to $4.8 million in the same quarter of 2012. Servicing income increased by 35% period-over-period and is reflective of the growth in the aggregate servicing portfolio from $432 million in loans serviced at March 31st, 2012 to $546 million at March 31st, 2013.

The Small Business lender funded $34.8 million in SBA loans during the quarter, a 42.2% increase over $24.5 million in loans funded during the first quarter of 2012. Premium income for the current quarter was $4.3 million, a 78% increase over the prior quarter premium income of $2.4 million, due to an increase in the total amount of loans originated in total during the quarter as well as an increase in the premiums on guaranteed loans sales, which added just over [118] with 1% servicing for the 2013 first quarter compared with 112 during the first quarter of last year.

Segment expenses including the change in fair value of SBA loans increased by $1.3 million quarter-over-quarter, interest expense increased 111% or $640,000 primarily due to the summit financing which closed in April 2012, salaries and benefits increased 28% from additions to staff in the originating, servicing and liquidation department.

In summary, pretax income for the lending segment increased by 48% period-over-period from $1.5 million in the third quarter of 2012 to $2.2 million in the first quarter of 2013. In the managed tax segment, revenue between periods decreased $299,000 or 6% to $4.4 million in 2013. Web hosting decreased by $361,000, which was partially offset by an increase in web design revenues of $62,000 between periods. The average monthly total plans decreased by 11% between periods and occurred primarily in the shared and dedicated segment.

The average number of cloud instances however, increased by 16.9% period-over-period and average cloud revenue per user was up 22.5% over the first quarter of 2012. As Barry talked about earlier, this increase is a result of our strategy to reposition this segment to take advantage of the market shift to cloud-based trends.

Pretax income for this segment was $896,000 down $206,000 from the same period in 2012. The $299,000 decrease in revenue was partially offset by a $93,000 reduction in total operating expenses period-over-period, which included decreases in salaries and benefits as well as a reduction in occupancy cost as a result of the management office relocation during March 2012.

The All Other segment, which primarily represents results from our insurance and payroll subsidiaries had revenues of $646,000 for the quarter, an 18% increase over the prior year quarter and primarily driven by an increase in insurance premiums resulting from the purchase of a health and benefit book of business, which occurred in December of 2012.

The segment had a pretax loss of $462,000 in the first quarter of 2013, $228,000 increase in loss over the same period in 2012. Contributing to the 2013 pretax loss was $129,000 loss generated by a [product] company, which offers web-based security solutions to the marketplace, which began consolidating as a variable interest entity in December of 2012.

The Corporate and CAPCO segment reflected a combined improvement in pretax loss period-over-period of $53,000. In the corporate segment, the net loss increased by $156,000 and is primarily due to increases in professional fees related to the company's recent re-statement and salaries and benefit to cost resulting from new hires and the executive sales and HR department. The pretax loss in the CAPCO segment decreased by $209,000 period-over-period to mainly due to decrease in related management fees and finally slide 37 is a summary of our reaffirmed guidance by segment, which was addressed earlier on the call.

I would now like to turn it back to Barry.

Barry Sloane

Thank you, Jenny. Operator, we would love to take questions at this time.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from Marc Silk of Silk Investment. Please go ahead.

Marc Silk - Silk Investment

Barry, congratulations on another good quarter. My question has to do with -- obviously I see your revenues rising on the banking sector, so you are adding new clients, so can you may be comment more on how you are going to be able to do cross-selling?

Barry Sloane

How am I going to be able to cross-selling to the overall customer base?

Marc Silk - Silk Investment

Yes, you are getting new customers and obviously your existing customer base absolutely.

Barry Sloane

I think that cross-selling Marc, is sort of the Holy Grail of business today. Everyone is trying to put more products into the customer and we are extremely realistic about the ability to cross-sell. The other new business that comes to us, which we do get quite a bit of them is not hard to put multiple products into the customers into the customer. As a matter of fact, one of the things is we are currently working on as a new business starter kit.

When you come to us and we can pre-approve for a merchant account, pre-populate in a [court] application obviously, we will not thrilled of our [people] and not thrilled about what takes money to start businesses. We can do it, but it is not a real strategy for us.

Relative to the ongoing customer base, we currently are putting out 67,000 newsletters a month to the existing customer base that have opted into the newsletter for the 18% open rate. Customers that are coming into us for merchant or for hosting are basically getting the Newtek Advantage product for free and when they go the Newtek Advantage product and they are getting all their data and their information, every time they go there, they are seeing the menu of products and services on a regular basis. So we think that over the course of time, business owners they get constantly reminded that we do these other things is the best way to cross-selling across markets.

In addition to the training of staff, regular, consistent forward messaging to the customer base on a repetitive basis is going to lead us to the path of being able to cross-sell and cross-market into the customer base.

Marc Silk - Silk Investment

Okay. Good luck. Thanks Barry.

Barry Sloane

Thank you.

Operator

Our next question comes from George Sutton of Craig-Hallum. Please go ahead.

George Sutton - Craig-Hallum

Hi Barry, how are you?

Barry Sloane

Good George. How are you today?

George Sutton - Craig-Hallum

Good. So curious you had talked about cloud computing within the managed technology area being your biggest opportunity long term and I am curious as you look at the market being ranging from folks like Rackspace and Cbeyond on a cross, do you view yourself as having a service capability advantage or are you viewing this from a relationship advantage perspective?

Barry Sloane

We -- thank you George. I think we think that basically we are not a competitor to Rackspace and we are a not a competitor to Amazon. We think those enterprises particularly are focusing on the upscale customer, the bigger customer and Rackspace is really dealing with medium size to upsize customer and they are getting the box, they are stacking in the data center, it's almost close to a co-location.

We think our specialty, which we've done for many, many years in the space is being able to provide and outsource solution for hardware, software, really in all computing technology and most importantly, 24X7 pick up the phone and answer the question, that's what we are good at and we think that business owners are going to want to have their bookkeeping in the cloud, the tax information in the cloud, they are going to want to have their merchant processing in the cloud, they are going to want to have their payroll in the cloud, their insurance agency in the cloud, they are having benefits in the cloud.

So that's where we -- that's where we see our organization really specializing and it's really most small business owners, they will latch on to technology, but they still want to talk to somebody and they are not technologists. So they want to know that -- you know the big pool in the cloud is how many people are ultimately going to give up hugging their server, or their tower, or their software, their hardware? Well we think it's going to happen just like nobody would put money in an ATM machine, they could even deal with a seller or do banking online. We think this is just going to happen.

The reason why we say it's the biggest opportunity, you can see huge trend and there is not so many people that are positioned in this space. So that's where we see Newtek having the niche and a lot of our services are going to be cloud based and we are going to give the data on an iPad or smartphone to our client. So we definitely think we are different than the entities that you mentioned. We are a lot smaller obviously today and our target customer base will be smaller in size as well.

George Sutton - Craig-Hallum

Relative to your EPP segment, you mentioned revenue should ramp as the year evolves, is this specifically related to the ISO wins that you are anticipating or is there something else behind that?

Barry Sloane

Well one of the ISOs behind that is the effective [Durbin] on a comparative basis. I've also taken a look at you know, [quick] April. I feel very good about it and it's my group in Louisville listening, I am putting a lot of pressure on them in the last half of the year. So we've been fairly modest in what we portray to the marketplace, but our expectations and their talents are their capabilities far exceed what we've built into the projections.

George Sutton - Craig-Hallum

Okay. Lastly for me, you mentioned a $65 million servicing portfolio that got transferred in, can you just give us a sense of what those economics look like for you?

Barry Sloane

What I would like to do George is rather than be specific to that portfolio, I would be more than happy just to give you sort of basic economics. You know, for an SBA portfolio, we typically service for a lot of our basis points for a performing loan and greater numbers for sub-performing and non-performing loans. Not that much greater, but greater. So I think you could pretty much back on the envelop and guess these are fairly a significant reoccurring revenues that would fit, stick with us for a period of time.

This particular bank also is going to be utilizing us to service their branches for these types of loans because they don’t want to do them anymore, they just haven’t had their success in really managing the SBA program and their 16 interpage policy and procedure manual. So you know, in addition to taking over their portfolio and servicing it for them we are also anticipating significant amount of loan originations and this is a multi-billion dollar bank and we are pretty happy about the relationship.

We would like to put a press release out on this transaction. We are just waiting for the legal department to clear it and hopefully it will happen before the end of the year.

George Sutton - Craig-Hallum

Okay. Thanks Barry.

Barry Sloane

Thanks George.

Operator

(Operator instructions) Our next question comes from Charles Kaplan of Singular. Please go ahead.

Charles Kaplan - Singular Research

Congratulations on a very nice quarter.

Barry Sloane

Thank you, Charlie.

Charles Kaplan - Singular Research

What I was curious in it is there are two questions, the premium income is almost doubled, has the consistency of I know the velocity of the loans has increased, but how can you explain such a huge increase in the fixed premium income given that I think the last quarter the amount of business loans increased by $10 million, what was the main factor behind this significant 80% increase in premium income?

Barry Sloane

There are two factors, it's volume and price.

Charles Kaplan - Singular Research

Right.

Barry Sloane

And the volumes are higher quarter-over-quarter. We anticipate that and the other aspect of it is price. Jenny, do you have the actual net price, which will be in our Q. I am going to guess it's somewhere around 114%.

Jenny Eddelson

Yes. That's correct.

Barry Sloane

So we cleared about 114% and those are probably up three points year-over-year.

Jenny Eddelson

Four.

Barry Sloane

Four, okay.

Charles Kaplan - Singular Research

So it was just increasing demand basically for the loans that led to the high premiums.

Barry Sloane

Well [that] zero interest rate policy is making pretty much all assets that are viewed as safe and secure attractive. I mean we have been a beneficiary of that in all aspects of how you fund their businesses and the cost of capital is going down. So that's clearly one of the reasons.

Now it is a floating rate obligation, so it's not like there is an interest play on it, but right now it is interesting Charles. There is a scarcity and I don’t see this changing. There is a scarcity of structured product in the marketplace today and let me elaborate on that. When the accounting rates change particularly for securitization where banks were basically told that if you are going to securitize, it's got to be on balance sheet, their interest in making a loan, putting it into a special purpose vehicle and creating a structured security, almost one way.

So there is a tremendous scarcity value in entities like ours to create structured product whether it's a government guarantee floater or whether it's a private label asset securitization that we recently saw, what we recently financed in March and I think that scarcity value is going to stay for a long period of time.

Charles Kaplan - Singular Research

Thank you.

Barry Sloane

Thank you.

Operator

And I am showing no further questions at this time and I would like to turn the conference back over to Mr. Barry Sloane for any closing remarks.

Barry Sloane

We greatly appreciate the participants on the call. We had a lot of participants today and some great questions and thank you for your faith and confidence for those of you that have invested in our equity and we look forward to delivering good results for the rest of the year. So thank you very much and we will speak to you shortly. Thank you.

Operator

Ladies and gentlemen, this does conclude today conference. You may all disconnect and have a wonderful day.

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