Skyline Financial Holdings Management Presentation Q1-2015
Skyline Financial HoldingsManagement Presentation
Q1-2015
2
Company OverviewSkyline Financial
Business Descriptionand History
Growth Strategy
Company Information
Production Summary
Skyline Financial Corporation (“Skyline” or the “Company”) is an independent mortgage lender headquartered in Calabasas, California
The Company was founded in 1985 and has historically been a traditional retail lender with a branch model largely focused on Los Angeles County
In 2009, Bill Dallas purchased a 50% ownership stake in the Company and was appointed CEO Skyline has grown its retail lending operations with seven strategic acquisitions since 2009, making
it one of the top non-bank mortgage lenders in the 12th district*
FHA and VA lender, approved seller and servicer with all three agencies: Freddie Mac, Fannie Mae, Ginnie Mae
Today the Company originates loans through three channels: Skyline Home Loans, its retail platform with offices located throughout the 12th Federal District; NewLeaf Wholesale, nationwide wholesale and correspondent and NewLeaf Lending, the company’s consumer-direct and centralized fulfillment platform.
Currently, loans are sold through best efforts, mandatory or securitization commitments with the servicing rights released to the buyer or retained and subserviced by Provident. Ellington Financial is backing the company to originate non-agency and nonQM mortgage loans.
Financial highlights include 2014 revenue of $45 million, book value of $23 million and warehouse capacity of $200 million. The company expects to fund $3.5 Billion in 2015 with Ebitda between 6-15M
$2 billion in production volume in 2014, comprised almost exclusively of first lien, fixed-rate mortgages; average balance of ~$362,000; top three states were CA (91.6%), OR (6.4%) and WA (1.0%)
2014 production breakdown: Skyline $1.3B; NewLeaf Wholesale $600M; NewLeaf Lending $140M Targets high-quality loans to borrowers with excellent credit – average LTV of 68.0% and FICO of
760; 90% of all loans to borrowers with a 700+ FICO score, 40% of the loans were for home purchase Growth initiatives include opportunistic acquisitions of distributed retail platforms, growing NewLeaf Lending and NewLeaf TPO businesses
Use proprietary products via Ellington and our proprietary iMP to lower costs, scale business and attract new capital partners
Deploy the company’s proprietary Intelligent Mortgage Platform (iMP) across all channels to improve productivity and provide the firm a disruptive, sustainable competitive advantage
* 12th Federal Reserve District (includes California, Oregon, Washington, Idaho, Nevada, Utah, Arizona, Hawaii and Alaska)
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Seasoned Team Skyline Financial
Bill DallasChief Executive Officer
Has been involved in mortgages since co-founding First Franklin in 1981 Founded two California Independent Banks (Heritage Bank of Commerce and California Oaks
State Bank) Also founded several financial service/technology companies (OwnIt Mortgage Solutions,
MindBox, InterThinx, and Factual Data)
Mark AttawayChief Information Officer
30 years in real estate technology development Led escrow software company, ACS Systems, former CIO at Fidelity and LSI/LPS Founded Online Consumer Lending, Inc. Founded iMP and mobile divisions, and NewLeaf Lending
Bruce DickinsonPresident of NewLeaf
Wholesale
30+ years of mortgage experience Built two TPO businesses with Bill from the ground up, founder of NewLeaf Wholesale Spent time at First Franklin ($10 million to $12 billion annual volume in 12 years), OwnIt (start-
up to $8 billion annual volume in three years) and Annaly Capital Management REIT
Prateek KhokharChief Financial Officer
20 years of mortgage operations, financial, warehouse and capital markets experience Treasurer and SVP Finance and Warehouse Prospect Mortgage SVP Finance, Warehouse at PMAC Lending Started with Bill and Bruce at Ownit Mortgage Solutions
Marti TromleyChief Risk Officer
30+ years in lending operations experience Chief Operations Officer at Home Savings and SVP Wholesale Operations at Washington Mutual
Bank Founder of NewLeaf Wholesale,
Opportunity to back mortgage veterans – Bill Dallas, Bruce Dickinson & Team The NewLeaf management team is led by Bill Dallas, a 31-year mortgage market veteran who has founded
and exited two independent mortgage banking firms backed by PE firms
The dedicated management team: Bruce Dickinson, Marti Tromley, Steve Kolker and Mark Attaway
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Profitable InvestmentsSkyline Financial
Bill Dallas has a strong history of profitable investments
* EBITDA multiples
Mortgage Banker – primarily wholesale after focusing on retail its first 10 years Founder, Chairman & CEO Sold to DLJMB, BofA, NCC for $330M (6.6x)*
Mortgage Banker – primarily wholesale; technology focus Founder, Chairman & CEO Sold minority to Merrill Lynch for $500M (4x)*
Risk Management Founder & Chairman Sold to ISO/Verisk Analytic for $27M (3.9x)*
Lending Process Automation Founder & Chairman Sold to MDA for $20M (6.9x)*
$2 Billion Public Bank Founder & Board Member
Almost exclusively purchase originations
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Liquidity for InvestorsSkyline Financial
In the mortgage space alone, Bill Dallas has built two mortgage companies from the ground up
Saleto
National City
* Acquisition price, not company valuation
0.01
5015
232
330
38
500
1981 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Founder and CEO of First Franklin
Co-founded
small retail
brokerage
Recapwith DLJ
RecapwithCIVC,
DLJ sells
Saleto
BoA
AcquisitionwithCIVC
Company valuation ($ in millions)
Recap Merrill Lynch
Founder - OwnItCEO/Investor -
Skyline
*
Wind down
business Upfront
Dallas Ellington
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Diligent Planning Leads to Growth Opportunity
Skyline Financial
Contrarian market view leads Bill Dallas towards decision to re-enter the mortgage market
Competition waning
Big banks exiting
New regulations
High barriers to entry
Margin opportunity
Skyline platform purchased
Strategic decision made to build platform around retail
More stable
Less regulatory scrutiny
Small platform scaled through strategic bolt-on acquisitions
Deploy Intelligent Mortgage Platform
Phase I – The Opportunity(2009 – 2010)
Company raised growth capital with GRP Partners to scale the business and develop technology
Origination platform designed around technology development
Skyline unsatisfied with off-the-shelf technology being used by the industry
Aligns closely with work processes
Ability to control technology provides flexibility with compliance and regulatory changes
Disruptive economics through scale and efficiencies (e.g., lower incentive comp)
Phase II – Building Blocks(2010 – 2012)
Capital partner & grow
Build out channels
Improve economics
Sell more to GSEs
Ginnie Mae (FHA/VA)
Retained & built out master/sub
Strategic capital markets MCM
NewLeaflending.com
NewLeaf wholesale
iMP
Proprietary technology driving efficiencies throughout the channels
iMP, Skyline Web and Mobile launched to loan officers
Phase III – Growth(2013+)
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30-Year History in Mortgage LendingSkyline Financial
1985
March 2010: Mr. Dallas (and others) supplemented the capital with a $3.6 million Series A equity infusion
March 2011: Skyline acquires certain assets of Rancho Financial, Inc.
June 2009: Mr. Dallas purchased 25% ownership share of Skyline
December 2009: Skyline acquires certain assets of Diversified Capital Funding, Inc.
1985: Skyline Financial Corp. is founded
November 2009: Skyline acquires certain assets of Security Pacific Home Loans, Inc.
November 2011: July 2011 bridge notes are converted to equity to support the company’s continued growth
2009 2010 2011 2012
2014
September 2009: Mr. Dallas (and others including Ellie Mae) invested additional funds in the business to support the initial restructuring of the business
September 2012: Skyline acquires certain assets of Online Consumer Lending, Inc. & Launches NewLeaf Lending
August 2012: Skyline acquires certain assets of BenefitIQ, LLC
March 2010: Skyline acquires certain assets of Pacific Coast Lending, Inc.
April 2010: Skyline acquires certain assets of Evergreen Mortgage Corp.
October 2010: Upfront Ventures (GRP) makes a Series B Preferred capital investment of $6.5 million in Skyline, with Chaparal Investments participating. In addition, Dallas Capital Management, Inc. converts $1.65 million of sub-debt to Series B Preferred
July 2011: Company further strengthens its capital and liquidity position through a $4+ million mandatory convertible bridge financing transaction from GRP, Dallas Capital and other participants
Built stable, 12th district retail business through acquisitions
Invested in best-in-class proprietary technology
September 2013: NewLeaf Wholesale Launched
December 2014: $20M Series C Ellington Financial & Wedgewood
Platform ready to growSkyline Financial
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As of February 15, Skyline Financial has 485 employees, which includes 42 in NewLeaf wholesale and 50 in NewLeaf Lending
NewLeaf is headquartered in Calabasas, CA and has offices in San Diego and Portland
NewLeaf Wholesale brand is led by team with strong history of success in prior ventures together
30+ Years of Experience
First Franklin: $10M to $12B in 12 years
Ownit: start-up to $8B in 3 years
Differentiated model: use proprietary iMP and non-agency products to channel partners, banks, credit unions and other mortgage lenders
Ellington offers non-agency; non QM and deep capital markets/RMBS expertise
NewLeaf offers Ellington way to build high quality assets quickly and efficiently without entering the highly regulated origination space
Hawaii
Grow Nationwide brand & lever Ellington
Current States
Future States
Unprecedented Growth OpportunitiesSkyline Financial
9
Opportunity Implementation
Increasing purchase market (+20% YoY)
Capture purchase share through next generation wholesale mortgage platform (iMP)
Implemented through existing Wholesale channel, affinities, banks and CUs
Competitors exiting TPO business
Build national wholesale franchise and correspondent business Hub strategy - Focused regional operating centers (ROCs) “Utility” AEs responsible for servicing brokers and affinity/employer
networks
Servicing market turmoil
Grab market share from distracted banks Start retaining as much servicing as possible (selling direct to agencies) Government intervention / barriers to entry Tight underwriting / low defaults lead to higher MSR value and lower cost
to service
Historically low interest rates
Build servicing asset (focus on non QM and non-agency) Natural hedge to rising rates / falling volumes
Value of MSR asset rises along with rates (lower refinance risk)
Non QM Product Build non-agency; non QM products Opportunistic pool and whole loan purchases
Correspondent Fulfillment Platform
Lever iMP to build correspondent-link to channel partners Seamless integration with iMP
Channel partners market and source leads; NewCo fulfills
Margin expansion
Use non-agency and non QM products to drive agency loans to platform Lever Ellington’s Secondary Marketing expertise with NewCo’s credit
discipline ~$xx million additional 2015 pretax income (pro forma for ~25 bps GOS)
Smart, controlled growth – Achieved through highly scalable platform with proprietary technology; More efficient correspondent operations with significantly less compensation, shared fixed expenses, that leverages Ellington’s vast capital markets and RMBS expertise
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Established market with approximately $10 trillion in mortgage debt outstanding
– Significant room for growth
– Focused on the purchase market
Strong origination volumes and margins
– Low interest rates driving strong refi volumes
– Gain on sale margins near record highs
Improvement in competitive landscape
– Increased regulatory, compliance, disclosure and capital requirements have dramatically increased barriers to entry in U.S. mortgage industry
– Dramatic retrenchment by traditional competitors in light of legacy production and servicing issues has created market void
Reductions and/or exits of wholesale and correspondent activities: Wells Fargo, Chase, Bank of America, Citi, ING Direct, Ally, PHH, MetLife, etc.
Attractive Industry DynamicsSkyline Financial
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
E
$0
$400
$800
$1,200
$1,600
1990 – 2014E
CAGR: 2.6%
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
$0
$2
$4
$6
$8
$10
$12
1990 – 2012CAGR: 6.2%
Source: FHFA, Fannie Mae, Freddie Mac and MBA Mortgage Finance Forecast as of January 2015
Purchase Originations
Mortgage Debt Outstanding
($ billions)
($ trillions)
Favors the most highly sophisticated, nimble players
Non-agency products key driver towards continued growth
Provides immensely larger opportunity for quickly scaling
wholesale channel
Disruptive Technology Skyline Financial
11
Unsatisfied with off-the-shelf technology being used by the industry, Skyline hired the industry’s leading IT experts to create a best-in-class, proprietary Intelligent Mortgage Platform (iMP) Control – Third parties do not understand needs
Nimble – Quickly react to changing regulations
Disruptive economics
iMP simplifies and automates workflow from the point of sale through loan fulfillment by digitizing all aspects of the loan process, reducing costs per loan, limiting required human capital and creating a new culture based on technology and efficiency in the lending space
Invested $5 million towards technology since inception; fully deploy by EOY 2015
Provide originators with platform and non-agency products changes fulfillment modelStatus Quo Intelligent Mortgage Platform (iMP)
Employs distributed branches to create volume
Centralized centers
Relies on Account Executives to drive business
Creates fulfillment platform for lenders
Analog (PDFs and images) Digitized data-driven engine drives down
costs and insures compliance
5-10 Days 1-3 Days
Result: become dependable fulfillment engine for mortgage brokers, banks, and credit unions
Better analytics, big data, digital compliance, scalable platform
Appendix
Summary of Warehouse FacilitiesAppendix
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Wilshire UBS Customers Texas Capital Bank
Maximum Amount (Capacity)
$25,000,000 $75,000,000 $30,000,000 $75,000,000
Committed Amount $20,000,000 $37,500,000 $30,000,000 $30,000,000
Maturity 6/20/2015 9/20/2015 10/18/2015 9/24/2015
Base Rate 1 Month LIBOR 1 Month LIBOR 1 Month LIBOR Coupon less 100 bps
Floor 2.00% 1.00% 0.78% 2.50%
Margin (Agency) 2.00% 2.75% 3.50% - 3.75% N / A
Advance Rate 90% - 100% 97% 95% 99%
Tangible Net Worth Covenant
$9,614,456 $7,500,000$6,000,000 +
50% of NI for prior 3 months
$5,000,000
Leverage Covenant (D/E)
15:1 15:1 12.5:1 15:1
Liquidity Covenant $3,000,000 $3,000,000 $3,000,000 $3,000,000
Note: As of March 1, 2015
Maximum borrowing amount of $195 million as of August 31, 2013 Three additional term sheets being negotiated ($140 million of capacity)
5 year modelSkyline Financial
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2014 2015 2016 2017 2018 20190
500,000,000 1,000,000,000 1,500,000,000 2,000,000,000 2,500,000,000 3,000,000,000 3,500,000,000 4,000,000,000 4,500,000,000 5,000,000,000
577,502,185 922,402,861
1,821,810,830
2,838,079,976
3,763,098,081
4,569,576,001
Wholesale Production
• Projecting almost $1B in 2015 production assuming a conservative flat forecast
• Mix is comprised of 43% Conventional Low Balance and 34% FHA/VA
• Mix comprised of long term, performing, positive cash flow assets
• On a conservative basis, production to reach almost $4B in three years
2014 2015 2016 2017 2018 2019(2,000,000)0
2,000,000 4,000,000 6,000,000 8,000,000
10,000,000 12,000,000 14,000,000 16,000,000
(686,206)713,628
3,753,145
7,646,109
10,784,828
13,487,840
EBT
• EBT expected to be $714k in 2015 with a conservative and current stable mix on product. EBT reaches almost $11M in thee years.
• Only 4.9% of product projected to be Non QM / Non Agency product which would yield more Margin in 2015
• Minimal productivity increases assumed year over year as IMP rolls out and efficiencies are achieved
• Opportunity to further lower incentive comp and loan level expenses as scale is achieved
5 year modelSkyline Financial Holding
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Actuals Forecast
Account Description 2014 2015 2016 2017 2018 2019 2014 to 2019NLL - Wholesale 577,502,185 922,402,861 1,821,810,830 2,838,079,976 3,763,098,081 4,569,576,001 14,492,469,934
Revenues Fair Value Gains (Losses) 3,751,275 6,106,821 11,858,708 18,797,492 24,924,176 30,265,732 95,704,203 Provision for Loan Losses (290,216) (512,272) (981,956) (1,589,325) (2,107,335) (2,558,963) (8,040,066) Loan Origination Income 1,112,377 1,776,720 3,509,147 5,466,670 7,248,427 8,801,854 27,915,194 Brokered Fee Income - - - - - - - Net Interest Income 90,056 176,189 363,926 566,937 751,719 912,822 2,861,649
Total Revenue 4,663,492 7,547,457 14,749,824 23,241,774 30,816,987 37,421,444 118,440,980
Variable Expenses
Incentive Compensation (1,429,379) (2,003,275) (3,956,610) (6,163,744) (8,172,699) (9,924,208) (31,649,914) Loan Related (294,277) (693,276) (1,369,269) (2,133,094) (2,828,336) (3,434,482) (10,752,734) Other Variable (148,448) - - - - - (148,448)
Total Variable Expenses (1,872,104) (2,696,551) (5,325,879) (8,296,838) (11,001,034) (13,358,690) (42,551,096)
Gross Profit 2,791,388 4,850,906 9,423,946 14,944,936 19,815,953 24,062,754 75,889,883
Fixed Expenses Salary & Benefits (2,747,740) (3,450,443) (4,722,959) (6,027,741) (7,436,795) (8,657,339) (33,043,016) Marketing (6,186) (10,333) (12,797) (16,383) (19,968) (23,553) (89,220) Office Expense (44,022) (57,471) (73,064) (92,476) (111,887) (131,299) (510,220) Professional Services (57,683) (32,868) (40,709) (52,114) (63,518) (74,923) (321,815) Facilities (311,139) (310,977) (440,926) (602,707) (764,488) (926,269) (3,356,507) Technology & Communication (144,893) (178,000) (256,791) (351,026) (445,262) (539,497) (1,915,469) Travel & Entertainment (62,248) (22,884) (29,092) (36,822) (44,551) (52,280) (247,877) Insurance, Other Income & Exp (66,868) (32,332) (41,103) (52,024) (62,944) (73,865) (329,137)
Total Fixed Expenses (3,440,779) (4,095,307) (5,617,442) (7,231,292) (8,949,414) (10,479,026) (39,813,261)
EBITDA (649,391) 755,599 3,806,504 7,713,644 10,866,539 13,583,728 36,076,623
Depreciation (36,815) (41,971) (53,358) (67,535) (81,711) (95,888) (377,279)
EBT (686,206) 713,628 3,753,145 7,646,109 10,784,828 13,487,840 35,699,344
BPS ANALYSIS
Revenues Fair Value Gains (Losses) 64.96 66.21 65.09 66.23 66.23 66.23 66.04
Provision for Loan Losses (5.03) (5.55) (5.39) (5.60) (5.60) (5.60) (5.55)
Loan Origination Income 19.26 19.26 19.26 19.26 19.26 19.26 19.26
Brokered Fee Income - - - - - - - Net Interest Income 1.56 1.91 2.00 2.00 2.00 2.00 1.97
Total Revenue 80.75 81.82 80.96 81.89 81.89 81.89 81.73
Variable Expenses Incentive Compensation (24.75) (21.72) (21.72) (21.72) (21.72) (21.72) (21.84)
Loan Related (5.10) (7.52) (7.52) (7.52) (7.52) (7.52) (7.42)
Other Variable (2.57) - - - - - (0.10)
Total Variable Expenses (32.42) (29.23) (29.23) (29.23) (29.23) (29.23) (29.36)
Gross Profit 48.34 52.59 51.73 52.66 52.66 52.66 52.37
EBT, BPS (11.88) 7.74 20.60 26.94 28.66 29.52 24.63