Marlin Business Services' (MRLN) CEO Jeff Hilzinger on Q1 2018 Results - Earnings Call Transcript

Marlin Business Services Corp. (NASDAQ:MRLN) Q1 2018 Earnings Conference Call May 4, 2018 9:00 AM ET

Executives

Lasse Glassen - Addo IR

Jeff Hilzinger - President & CEO

Lou Maslowe - SVP & CRO

Taylor Kamp - SVP & CFO

Analysts

Brian Hogan - William Blair

Bill Dezellem - Tieton Capital Management

Operator

Greetings, and welcome to Marlin Business Services Corp. First Quarter 2018 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Lasse Glassen, with Addo Investor Relations.

Lasse Glassen

Good morning, and thank you for joining us today for Marlin Business Services Corp.'s 2018 first quarter results conference call. On the call today is Jeff Hilzinger, President and Chief Executive Officer; Lou Maslowe, Senior Vice President and Chief Risk Officer; and Taylor Kamp, Senior Vice President and Chief Financial Officer.

Before beginning today's call, let me remind you that some of the statements made today will be forward-looking and are made under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected or implied due to a variety of factors. We refer you to Marlin's recent filings with the SEC for a more detailed discussion on the risks that could impact the company's future operating results and financial condition.

With that, it's now my pleasure to turn the call over to Marlin's President and CEO, Jeff Hilzinger. Jeff?

Jeff Hilzinger

Thank you, Lasse. Good morning, and thank you, everyone, for joining us to discuss our 2018 first quarter results.

I will begin with an overview of the highlights from the first quarter, along with our recent progress on the Marlin 2.0 strategy that is transforming our company from an equipment lessor into a much broader provider of credit products and services to small businesses. Lou Maslowe, our Chief Risk Officer, will comment on portfolio performance; and Taylor Kamp, our Chief Financial Officer, will follow with additional details on our financial results and business outlook.

Marlin is off to a good start in 2018 as strong execution continue to drive solid origination volume, stable portfolio performance and excellent earnings growth. Excluding referral volume, total origination volume was $159.7 million for the quarter compared with $146.5 million last year, resulting in a year-over-year increase of 9%. Growth in the quarter was driven by solid customer demand for both our Equipment Finance product and our working capital loan product, Funding Stream.

During the quarter, yield on our origination volume also improved to 12.44% compared to 11.86% a year ago. We also continue to gain traction in our direct channel that identifies additional financial opportunities with existing customers.

During the quarter, direct origination volume was $30.9 million compared with $16.6 million last year, resulting in a year-over-year increase of 86%.

Also in the quarter, as part of Marlin's developing capital markets activities, we referred or sold $27.2 million of leases and loans. As a result of these origination and capital markets activities, our investment in leases and loans grew to $930.6 million, up 12.3% from a year ago. Also for the first time, our managed assets exceeded $1 billion, growing to $1.02 billion compared with $855.3 million a year ago, resulting in a year-over-year increase of 19.4%.

Importantly, our focus on maintaining disciplined underwriting standards continues to be a top priority, and portfolio performance remains stable and within expectations during the quarter.

At the bottom-line, we reported GAAP earnings of $0.50 per diluted share compared to GAAP earnings of $0.12 per diluted share for the first quarter last year. On a non-GAAP basis, we also reported earnings of $6.2 million or $0.50 per diluted share compared with $4.3 million or $0.34 per diluted share a year ago. A reconciliation of non-GAAP to GAAP net income is available in the press release we published yesterday afternoon.

I'd now like to move on and provide an update on our business transformation initiative that we refer to as Marlin 2.0. As you may recall, through Marlin 2.0, we expect to drive growth and improve returns on equity by: first, strategically expanding our target market; second, better leveraging the company's capital base and fixed cost through origination and portfolio growth; third, improving our operating efficiency by better leveraging fixed cost through scale and through operational improvements to reduce unit processing cost; and fourth, proactively managing the company's risk profile to be consistent with our risk appetite.

I'd like to share with you the progress we've made in each of these areas since our last call. First, with respect to our strategic market expansion, historically, the company operated primarily as a single product, micro-ticket equipment lessor originating through equipment vendors. At the heart of the Marlin 2.0 strategy is the company's transformation into a broader provider of credit products and services to small businesses. So rather than thinking of ourselves as only a single product provider, we are now focused on providing multiple products and developing financing solutions to help small businesses grow. This strategy has also caused us to expand our go-to-market strategy by not only continuing to originate through our vendor partners, but also directly with our end-user customers.

In terms of our credit products and services that extend beyond our traditional finance business, we continue to be very pleased with the performance of Funding Stream, our working capital loan product.

During the first quarter, Funding Stream origination volume of $18.1 million was an all-time record for a single quarter, increasing from $13.8 million or 31% from a year ago.

I am also pleased to report that Funding Stream's portfolio performance has exceeded our original expectations. Given our proven credit models and expertise in underwriting credit products to small businesses, we believe that Marlin is uniquely positioned to safely and profitably offer this product to our customers.

We also continue to be pleased with our efforts providing financing solutions directly to our end-user customers. Although our equipment dealers, distributors and manufacturers will always be a critical importance to Marlin, a key aspect of Marlin 2.0 is leveraging our relationships with our end-user customers, including our approximately 78,000 active small business customers and the 2,500-plus new customers coming into the Marlin ecosystem every month. The objective under our direct strategy is to identify additional financing opportunities with these existing customers by offering multiple products and to create ongoing relationships with these customers by meeting a broader set of their financing needs.

Importantly, because we do not pay customer acquisition cost beyond the initial transaction, repeat business significantly lowers our blended customer acquisition cost over time. As I mentioned earlier, this initiative is working well and gaining good traction.

And finally, last month, we announced the new $300 million forward flow agreement with Varadero Capital, which is our most recent initiative to expand our served market and to enhance Marlin's relevance with small business customers. Here, we are partnering with Varadero as a means to originate transactions that were being previously declined because the transactions did not fit within Marlin's traditional credit parameters. These transactions are now credit decision using a proprietary algorithm that supports credit profiles just adjacent to the low end of the profile suitable for Marlin's balance sheet. Transactions that are completed under this algorithm are then sold to Varadero for which Marlin is reimbursed its origination cost and all credit risk is transferred to Varadero. Marlin will also service the portfolio, which will allow us to maintain future direct access to these customers while being reimbursed for our servicing cost.

Varadero will receive a preferred return on their investment with any residual return shared between Marlin and Varadero.

Taylor will provide additional details on the financial impact of this program, but we are very excited by the possibilities and look forward to updating you on our efforts in the coming quarters.

We also made good progress during the quarter on our second key priority, which focuses on leveraging Marlin's capital and fixed cost through growth. Our continued solid origination volume and portfolio growth during the quarter allowed us to further reduce our equity-to-asset ratio to 17.2% from 17.3% in the prior quarter. Moreover, we continue to manage the size and composition of our balance sheet through our capital markets activities.

During the first quarter, we sold $23 million in assets, and there was strong investor demand for Marlin's product. Along with providing Marlin with another source of funding, we view these transactions as a way to optimize our portfolio by better managing its overall size and composition in terms of returns, credit risk and exposure levels to particular industries, geographies and asset classes.

As a follow-up to comments we made on our last earnings call, we remain committed to entering the securitization market during 2018. To this end, we have made significant progress over the past several months, including meeting with rating agencies and working with advisers on the structure of the program. At this point, we expect to complete the initial securitization towards the end of the second quarter. While our cost of funds under securitization will be higher than our bank funding cost, the capital required to support the securitized portfolio will be substantially less, which will ultimately be accretive to our ROE by allowing us to continue to scale within our existing capital base.

Moving on to our third strategic pillar. We are also making progress in better leveraging the company's fixed cost through growth and by improving operational efficiencies through our process renewal initiatives. Our adjusted operating efficiency ratio for the quarter improved to 55.8% from 59.5% last year, and our process renewal teams continue to make good progress on modernizing and automating our business processes.

Our fourth and final key area of focus is proactively managing the company's risk profile to be in line with our risk appetite. To this end, we are continuing to build out our enterprise-wide risk management program, which includes, among other things, a Marlin risk appetite statement that defines the aggregate level and types of risk Marlin is willing to assume to achieve our strategic objectives.

As we highlighted on our call last quarter, initial work here led to significant strategic shifts within our Transportation and Franchise businesses to generate more attractive risk-adjusted returns through the credit cycle. While more work remains, our early efforts have helped to stabilize delinquency and charge-off trends, and our portfolio is performing within an acceptable range.

Lou will provide additional details on the portfolio performance, along with several enterprise-level risk management initiatives that are currently underway.

In summary, we enjoyed a productive first quarter and a solid start to 2018. Strong execution continues to yield growing origination volume, earnings expansion and improving adjusted ROE. Our momentum continues to build, and I am very excited and confident in our ability to continue driving shareholder value in the future.

With that, I'd like to now turn the call over to Lou Maslowe, our Chief Risk Officer, to discuss the performance of our portfolio in more detail. Lou?

Lou Maslowe

Thank you, Jeff, and good morning, everyone.

My comments today will focus on Marlin's first quarter portfolio performance, including an update on our portfolio in the regions impacted by Hurricanes Harvey and Irma as well as our Transportation 1.0 portfolio. I will also discuss some important risk management initiatives.

Overall, we are pleased with our first quarter portfolio performance as it was in line with our expectations. During the quarter, we saw an improvement in charge-offs for the first time since Q3 of 2016, while delinquencies remained within an acceptable range. Equipment Finance receivables over 30 days delinquent were 107 basis points, up 3 basis points from the fourth quarter and up 17 basis points year-over-year.

For benchmark purposes, we utilize the Thomson Reuters PayNet 30-plus delinquency index, which shows similar movement to Marlin with a 7 basis point increase quarter-over-quarter and 13 basis points year-over-year. Marlin's Equipment Finance receivables over 60 days delinquent were 66 basis points, up 10 basis points from the fourth quarter and up 14 basis points from the first quarter of last year. The results for March 31 is high compared to the 60-plus day delinquency average since Q1 of 2013, which was 51 basis points with a standard deviation of 7 basis points. We believe that the higher delinquency is temporary, and it is expected to fall back into the historical range in the coming months.

Aggregate net charge-offs improved to 168 basis points of average finance receivables on an annualized basis as compared to 187 basis points in the prior quarter. The solid sequential quarter improvement was primarily due to lower charge-offs in the Equipment Finance portfolio, which decreased by 18 basis points compared to the fourth quarter. Significantly improved performance in the Transportation 1.0 portfolio contributed to the lower charge-offs in the quarter, as charge-offs in this portfolio declined from 515,000 in Q4 to 157,000 in Q1. The charge-offs in Q1 are in line with the range since Q1 2013, the quarterly average of which has been 150 basis points with a standard deviation of 19 basis points. Year-over-year aggregate net charge-offs are up modestly from 157 basis points in the first quarter of last year.

Credit quality for our Funding Stream working capital loan product remains excellent and continues to perform better than our expectations. Delinquency improved in Q1 and charge-offs of 310 basis points on average Funding Stream receivables on an annualized basis improved compared to 331 basis points in Q4 and 551 basis points in Q1 of 2017. We attribute this performance to our focus on both our existing customer base and an intensive underwriting process that is constantly being adjusted to ensure that our decisions optimize return on equity.

The allowance for credit losses increased by $800,000 to $15.6 million. Approximately 40% of the increase was due to growth in the portfolio with the balance attributable to various credit-related factors. The allowance for credit loss reserves was 1.68% of total finance receivables, which is up 5 basis points from last quarter and still within an acceptable range.

I'd now like to provide an update on the portfolio in the regions impacted by Hurricanes Harvey and Irma last year and our view as to the adequacy of the $500,000 loss reserve that was established in Q3 of last year. The restructured portfolio has the remaining net investment of approximately $3 million. As expected, the restructured portfolio delinquency remains elevated, but we continue to believe that the reserve will be sufficient to cover future losses. As Jeff mentioned in his remarks, we continue to make progress with our strategic focus on proactively managing the company's risk profile, consistent with our risk appetite.

To this end, I'd like to provide an update on several important risk management initiatives. During Q1, we performed an enterprise-wide risk assessment in order to identify Marlin's top risks and ensure that there was sufficient mitigating strategies in place. The process entailed determining the probability and potential impact of a wide range of risks. While some new risk mitigation initiatives were created as a result of this evaluation, we were pleased to find that the most significant risk related to credit, operational and compliance risks are being effectively managed.

Our data analytics team is developing two behavioral scorecards, which we expect to be implemented by Q3. One of the behavioral scorecards will be utilized to enhance the efficiency and effectiveness of our collection processes by identifying the customers with the highest probability to become seriously delinquent. This will enable our collectors to focus their efforts on the high-risk customers rather than spending time on the customers that just pay habitually late but that don't represent a high risk of loss. This tool is especially important considering the growth expectations of our managed portfolio.

The second behavioral scorecard will benefit our direct strategy as it will be utilized for new credit applications with our existing customers. With this enhanced predictive capability, this scorecard will enable Marlin to auto-decision a higher percentage of applications, thereby leading to improved turnaround time and customer service. We will also utilize this behavioral model to establish higher preapproved offers for our existing customers, improving our customer penetration rate.

In closing, we continue to be pleased with the stable performance of the portfolio, and we are excited by the impact that we expect the new behavioral models to have on our direct business and collections efficiency and effectiveness.

With that, I'll turn the call over to our CFO, Taylor Kamp, for a more detailed discussion of our first quarter performance. Taylor?

Taylor Kamp

Thank you, Lou and Jeff, and good morning, everybody.

Marlin continued to deliver strong results in the first quarter, marked by solid asset production and record portfolio levels, excellent earnings growth and ROE expansion, while maintaining stable portfolio performance. First quarter net income was $6.2 million or $0.50 per diluted share compared to $1.5 million or $0.12 per diluted share for the first quarter last year. First quarter net income on an adjusted basis a year ago was $4.3 million or $0.34 per diluted share.

Marlin's supplemental quarterly data now reflects our new strategic emphasis on our direct and indirect market channels. Marlin will continue to expand reporting on these 2 channels in the future. For the quarter, total yield on new originations funded of 12.44% was up 85 basis points from the prior quarter and up 58 basis points from the first quarter of 2017.

First quarter yield on direct originations was 19.47%, up 25 basis points from the prior quarter, due primarily to asset mix, and to a lesser degree, the company's ability to pass through market rate increases.

The yield on indirect originations for the quarter was 10.75% compared to 9.93% for the fourth quarter. As with the direct channel, the increase was primarily due to asset mix, and to a lesser extent, our ability to pass through rising market interest rates.

On April 1, we published new pricing matrices, partially reflecting the recent increase in base interest rates. In the future, we will continue to pass through base rate increases as aggressively as the market will allow.

Referral volume of $4.2 million was down $2.3 million from the prior quarter and down $18.1 million from the first quarter of 2017. This year-over-year decline was due to a substantial decrease in the amount of Horizon Keystone referrals and to a particularly large referral transaction that took place in the first quarter of last year. Note that a large majority of HKF production is now retained on balance sheet.

During the quarter, we syndicated a total of $23 million in loans and leases. These transactions generated an immediate net pre-tax gain on sale of approximately $1.7 million that was recorded in other income. This resulted in a net gain of approximately 7.5%. The first quarter syndication volume was on plan and reflects the successful execution of our capital market strategy, made possible by continued strong investor demand and attractive pricing from Marlin's assets in the market. We continue to service the assets sold and will recognize servicing fees over their life.

In fact, we are currently servicing over $90 million in assets for our funding partners, which allows us to maintain an ongoing relationship with these customers in support of our direct strategy.

Our investment in leases and loans grew approximately 2% from last quarter and 12% year-over-year to $928 million, an all-time record. Total managed asset increased 19% from a year ago. This balance, which captures both on and off balance sheet assets, serviced by Marlin, will continue to grow disproportionately as our syndication and forward flow programs grow.

For the quarter, net interest margin, or NIM, was 10.43%, down 14 basis points from the prior quarter and 48 basis points lower than a year ago. The decrease in margin percentage was primarily the result of a decline in late fees and end of lease revenues resulting from certain updated servicing practices and an increase in cost of funds.

Cost of funds increased to 149 basis points compared to 145 basis points for the devious quarter and 117 basis points for the first quarter of 2017. Pressure on cost of funds will continue to increase as market rates rise.

As previously noted, we are continuously refining the information we present in our supplemental reporting. While the net interest and fee margin decreased from the prior quarter, risk-adjusted NIM, which includes the impact of charge-offs, increased 4 basis points from the prior quarter. This was due to improvement in charge-offs.

As Lou emphasized, the portfolio continued to perform within acceptable ranges in the first quarter. The allowance for credit loss reserves was 1.68% of total finance receivables, up 5 basis points from the last quarter.

First quarter operating expenses were $16.6 million compared to $15.4 million in the prior quarter and $19.6 million in the first quarter last year. The increase from the prior quarter was primarily due to seasonal expenses related to equity and other variable compensation, partially offset by lower headcount and a reduction in insurance-related expense. The decrease from a year ago was primarily due to a $4.4 million charge recorded in the first quarter of 2017 in connection with a regulatory matter. This was partially offset by increased expenses related to the Horizon Keystone acquisition, higher servicing asset expenses and investments in the direct channel. We expect quarterly operating expense for the rest of the year to settle in at approximately $16 million net of deferred cost.

The company's efficiency ratio for the first quarter was 57.1%. After adjusting for acquisition-related sales commissions, the efficiency ratio was 55.8%, which better reflects the company's continuing level of core operating expenses. We expect this core efficiency ratio to continue to improve going forward.

Our capital position remains strong in the quarter with an equity-to-assets ratio of 17.2%, 5 basis points below last year. As communicated in our previous earnings call, Marlin's capital account greatly benefited from the impact of the recent tax reform.

As Jeff mentioned, we have made measurable progress in finalizing the structure in terms of our new securitization program and expect to complete our initial securitization in the second quarter. The ability to fund assets through our holding company will allow us to significantly improve our consolidated leverage and drive expansion in ROE. It will also give us more flexibility to fund both organic and inorganic incremental growth in either the bank or the holding company.

We are quite pleased with the $300 million forward flow arrangement announced in March with Varadero Capital. This deal expands Marlin's ability to provide equipment financing to small businesses that are not currently served by the company's existing finance programs, diversifies our funding sources and provides substantial new lending capacity. Importantly, this innovative program has a number of financial and operational benefits.

While the earnings impact in 2018 will be minimal, over the next several years, it could be significantly accretive to earnings without adding any incremental credit risk. Since these transactions will be treated as a sale for booked purposes, this program will not consume capital and will improve ROE. We look forward to keeping you updated on the progress of this program on future calls.

And finally, our Board of Directors declared a regular quarterly dividend of $0.14 per share, payable on May 24, 2018, to shareholders of record as of May 14, 2018.

Now turning to our business outlook for 2018. Total origination volume, including referral volume, is expected to finish the year approximately 20% above 2017 level. Portfolio performance is expected to remain within our targeted range.

Net interest margin, as a percentage of AFR, is expected to be between 10% and 10.25%. ROE is expected to continue to improve in 2018 as the company continues to improve operating scale.

And lastly, EPS is expected to be between $1.95 a share and $2.10 per share.

And with that, I will turn the call back to Jeff. Jeff?

Jeff Hilzinger

Thanks, Taylor.

In summary, 2018 is off to a strong start and we are excited about Marlin's future. Momentum continues to build and puts us on track to achieve our strategic and operational objectives for the year. I look forward to continued strong execution of our strategy, enhancing our financial performance, significantly expanding ROE and driving shareholder value as we move forward.

With that, let's open up the call to questions. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions].

Our first question is from Brian Hogan with William Blair.

Brian Hogan

Hi good morning.

Jeff Hilzinger

Good morning. How are you doing Brian?

Brian Hogan

Well, thanks. A question on your credit trends, particularly the delinquencies up in the quarter. I guess, in your prepared remarks, you expressed confidence and expect it to fall to the year. I guess, why? What's driving that confidence and expectations of lower delinquencies later this year?

Lou Maslowe

It's Lou. Well, I think the confidence was more in the near future and it's really about we don't see any change in the portfolio quality. So it's hard to predict what December will be. We just, at this point, believe that our delinquency level's going to remain in a historical range that we've seen over the last few years. And in fact, we saw some improvement in the month of April. So the charge-offs were better. We had a blip in the 61-plus, and we had expected some elevated charge-offs in April, which we saw. But Q2 is on target for what we expect. So basically, no change in the overall quality of the portfolio.

Brian Hogan

And can you point to like what drove the blip in 1Q and what caused that?

Lou Maslowe

Brian, we look -- there was no concentrations in terms of customers, dealers, any really particular trends or industries. It's just -- so there's nothing in particular that drove the higher delinquency. I mean, it happens from time to time. And overall, we didn't see a big increase in 30-plus in the quarter, 3 basis points. So yes, there's no single issue that we can point to.

Jeff Hilzinger

Yes. I think, Brian, the key for us is trying to get a sense as to whether we think delinquencies and charge-offs are going to stay within an acceptable range. And we've got an established range for all three of those metrics and it's going to move around within that range. And -- but as long as it stays in the range, it doesn't really raise any concerns.

I think for the second quarter, we're -- we -- the 60-plus delinquency actually declined from I think it was 66 to something in the high 50s. We had -- part of that was because charge-offs in April were a little elevated over what we had planned. But May and June both look very good, both in terms of delinquency and charge-offs. So we expect the quarter to -- we expect that this quarter that we're in to be stable as well.

Lou Maslowe

And just to be specific, our 60-plus dropped to 57 basis points in April. So that's the kind of volatility or fluctuations we see from 1 month to the next.

Brian Hogan

Right. And then remind me of your acceptable ranges. Is it what you referred to previously as like the average since 1Q 2013 plus or minus the standardization? Is that what you view as acceptable?

Lou Maslowe

Yes, exactly. I mean, in the current economic environment, we expect that there shouldn't be any material changes. So since the beginning of 2013, our 31-plus average has been 88 bps for the standard deviation of 13. And it's ranged from 71 to 114. And 61-plus has been an average of 51 bps with standard deviation of 7. I think I mentioned that in my remarks. And it ranged from 40 to 66. So it's not unusual to see that -- those trends.

And I think, as I also mentioned, what we see, it's really a return to normal and the industry benchmarks that we look at show the same increasing trends. So we're not at an uncomfortable place.

Brian Hogan

All right. Shifting to originations, up 9% in 1Q and you're targeting 20% for 2018. I guess, how are you going to accelerate that? What do you see as an opportunity? Can you just elaborate what you're seeing there? Is it demand going to pick up, tax reform driven, just --

Jeff Hilzinger

Yes, I think the macros, Brian, are still really good. I mean, what we -- the demand that we see for our products in the market is -- it continues to be just as strong as it's ever been. I think being at 9% instead of our target of 20% in the first quarter really had more to do with a series of initiatives that we implemented within our sales force in the quarter that we felt was required in order to position us to be able to continue to scale the sales force. And it created some disruption and it created some distraction. But we're -- we seem to be through that at this point. April was -- again, April was a good month. We increased origination -- we'll start with apps.

Apps were up 22%, April versus April last year. Origination volume was up almost 20% this April versus last year. So I think it's -- I think it has less to do with sort of macro stuff. It has more to do with, I think, growing pains as we continue to position the company to be able to have a sustainable long-term growth rate of 15% to 20%.

Brian Hogan

All right. And then kind of elaborate on your gain on sale plans. Your origination is, obviously, to Varadero Capital and, obviously, other bank partners. One, have you decided which goes where? And then how fast do you ramp the Varadero? I think you mentioned over the course of next several years, but clarify that. And then I guess, lastly, tied to that would be the yield. You said 7.5% gain on sale yield in the quarter, which I think it's the highest you've recorded. Is that sustainable? Or what do you think going forward for yield?

Jeff Hilzinger

In terms of the yield expressed as a percentage on the gain on sale or yield in the origination environment?

Brian Hogan

You said 7.5% yield on the gain of sale, right?

Jeff Hilzinger

Yes, yes, yes. That was the gain on sale yield, yes. Well, let's talk about Varadero first. So I mean, we sort of view Varadero as being complementary to the quarterly syndication activities that we initiated, I think, about one-and-a-half years ago. The whole objective here is to try to increase the size of the credit box that our sales force can sell to our small business customer base. And the quarterly syndication approach was really about expanding the high side of the credit box. So it was larger transactions with larger companies, better credit quality at yields that didn't make sense for Marlin to hold on its balance sheet, at least given the amount of capital it had at that time and still today.

So the objective here is to provide as much, be as much of our customer needs as possible regardless of whether it makes sense for us to hold the asset on our balance sheet through duration and intermediated to balance sheets where it may make more sense. So some of our bank partners have half the capital in their bank that we do. So it may not make, well, may not make sense for us to hold it. It can make a lot of sense for them to hold it.

The Varadero program is meant to do the same thing but at the bottom end of our credit box. So the way that works is we have a substantial portion of our flow is credit adjudicated on an automated basis so it goes through our models. And after it goes through all of our models, if it's turned down, it then goes through a model that we created in partnership with Varadero. And if it's approved, we then try to close it just like we try to close any transaction that's approved. And if we're successful closing it, it then goes on our balance sheet for a short period of time. We aggregate for a few weeks and then we transfer it to Varadero on a book sale basis. So the objective here is to have it be completely -- all that behind-the-scenes stuff, the customer never feels that, the customer never sees it. It's all on Marlin docs. The sales force doesn't see it. It's just -- in effect, what it does is it just creates a higher approval rate on the same origination volume or the same application flow that we would have been originating anyway.

So in terms of the potential of program, it's hard to say at this point. I mean, we've got -- we've done a lot of analytical work on it. I think we're -- both Varadero and Marlin feel that the opportunity is substantial. If we didn't, we wouldn't have gone through all the work to put the program in place. But it is early days and we're pretty happy what we've been originating out of the program for about a month now. We're pretty happy with what we've seen so far. But there's a lot of iteration and fine-tuning that is going to occur as we start to get real-time market feedback and we really tune in to try to optimize the program. There's opportunities to help train our sales force and help the entire business get more comfortable to products. So it's got a lot of potential, but it's still early days.

Brian Hogan

And the yield?

Jeff Hilzinger

And then the 7.5%, yes, right now, the market in terms of buy rates and things are -- it's really frothy. So I think Marlin's enjoying the benefit of very attractive buy rates from a lot of different purchasers of these assets on a quarterly basis. So I -- in terms of -- I would -- I personally think that the 7.5% is probably at the high side of what we're going to receive over the balance of the year. But it's really a function of the demand for the Marlin product over the balance of a year.

Brian Hogan

Sure. And then your tax rate, what's the go-forward tax rate we should be using?

Taylor Kamp

This is Taylor. I would use the 27% go forward. We had a little bit of a benefit, temporary benefit in the quarter due to the way we account for, on a tax basis, account for some of our long-term incentive plans. But we're going to go back to a normal rate of about 20% for the remainder of the year -- 27% for the remainder of the year.

Brian Hogan

Right. And then last one. Can you remind me of your longer-term ROE target, which you're going to get down to. I think you had at one point said a 2020 run rate ROE target. But can you just remind me of your plans?

Taylor Kamp

Yes. So yes, there's been a lot of movement or noise, I would say, with the tax reform and everything else and with some other things that go to other direction. But we believe that our long-term target is still in the high-teens ROE.

Brian Hogan

All right. Thank you for your time today.

Jeff Hilzinger

Thanks, Brian.

Operator

[Operator Instructions].

Our next question is from Bill Dezellem with Tieton Capital Management. Please proceed.

Bill Dezellem

Thank you. I'd like to dive into the Varadero relationship further, if you're willing to do that and talk them in as much detail as you can, the economics of how that transaction or that relationship will work, given that you said that it could become meaningful. Maybe put some numbers to how that would develop.

Jeff Hilzinger

Yes. I know you'd like more detail, Bill, but unfortunately, we really can't provide it. I mean, it's -- we're subject to confidentiality with Varadero. And I view this, the economics and the structure of this transaction, as being proprietary. It's innovative. It's unique. Not in a general structure, but in a way it's being applied to the Equipment Finance asset class.

So a couple of things. So the fact that we settled on a $300 million number should give you a sense as to what we think the potential of the program is. And other than talking about the fact that we have a waterfall relationship in place that is generated through applications that flow through our proprietary credit model and that Varadero has a preferred return after which we share, that's as much as we're going to disclose about that at this point.

Bill Dezellem

Then I'll thank you for further detail you did provide. Thanks.

Jeff Hilzinger

Thanks.

Operator

We have reached the end of our question-and-answer session. I would like to turn the call back over to Jeff Hilzinger, President and CEO, for closing comments.

Jeff Hilzinger

Thank you for your support and for joining us on today's call. I'd like to mention that next month, on June 5, we will be presenting at the LD Micro Investor Conference in Los Angeles. And on June 19, we will be at the JMP Financial Services Conference in New York City. We hope to see some of you at these events. If not, we look forward to speaking with you again when we report our 2018 second quarter results in early August. Thank you.

Operator

Thank you. This concludes today's conference. You may disconnect your lines at this time and thank you for your participation.