Q3 2019 Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the Ondecks third quarter earnings call.
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I would now like to handle conference over to your speaker today.
He's calling the head of Investor Relations. Please go ahead Sir.
Thank you Carol good morning, everyone and welcome to Ondecks third quarter earnings call I'm here. This morning, with Noah Breslow, our Chief Executive Officer, and Ken Brown, our Chief Financial Officer.
Our earnings release was issued earlier this morning and is available with our earnings presentation and financial supplement in the Investor Relations section of our website.
Certain statements, including those related to our 2019 financial guidance and our outlook for 2020 are forward looking statements. They are not facts and are subject to material risks and uncertainties described interests you see borrowings.
These statements are based on currently available information and we undertake no duty to update them as required by law.
Today's discussion is also subject to the forward looking statement limitations in the earnings release, and our actual results could differ materially and adversely from those anticipated.
During this call we will use terms to find in the earnings release and refer to non-GAAP financial measures for certain definitions and reconciliations to GAAP. Please refer to non-GAAP tables in the earnings release and the appendix of the earnings presentation posted on our website.
With that I'll turn the call over to know.
Thank you Stephen Thank you all for joining us.
We had a solid third quarter as origination volume increased credit quality improved and we commenced our share repurchase program.
Clearly that's in the right direction as we advance our strategic initiatives.
This morning, I will touch on some of the course highlights and provide a general business update then.
On the call over to Kevin who will walk you through the financials in detail and update you on our full year guidance and the initial outlook for 2020 .
And finally I'll come back to provide some closing thoughts before opening the call for questions.
Starting with the quarter's results.
Total revenue net income and adjusted net income were all at or above the upper ends of our guidance ranges driven by solid results in the core U.S. lending business.
Origination volume increased as expected from the seasonally softer second quarter.
Our loan and finance receivable portfolio grew 2% sequentially and 10% for me you would go to over $1.2 billion.
Total revenue increase with portfolio growth in our portfolio yield was essentially unchanged sequentially.
Our net interest margin remains very strong an increase from the prior quarter to 29.2% as our cost of funds rate continue to improve.
Our credit quality metrics normalized from last quarter's elevated levels with improvements in both the provision and net charge off rates.
Delinquency was largely unchanged from the prior quarter at the impacts from changes in our collection strategies or not largely in the run rate.
These factors led to a $2.5 million sequential increase in pre tax income.
And when we layer on the quarters tax benefit and improved international performance, both of which Ken will discuss later net income doubled from the prior quarter to $8.7 million.
And our EPS growth rates slightly exceeded our income growth as we are starting to see benefit from our share repurchase program.
Turning to the core U.S. lending franchise, which continues to be the main driver of our results.
Originations increased 6% sequentially as term loan volume accelerated but were down 3% from the prior year as we tightened underwriting and competition intensified from a year ago.
We remain focused on the higher end of our target demographic by offering slightly larger loans and longer maturities to our most qualified term loan applicants accordingly, our weighted average term loan size increased to $56000. This quarter and the average maturity increased to 13.5 months well, our small business owners average FICO score remain.
Above 700.
Our line of credit offering continues to experience good growth and accounted for 21% of the quarter's origination volume.
We now have over 250 million outstanding line of credit balances and credit performance has been strong.
We continue to see solid volume across all origination channels and the breadth and diversity of our distribution network is clearly a strategic and competitive differentiator.
We continue to source the largest share of our volume about 40% to the direct channel, which comes through direct mail and Internet search although competition in this channel remains elevated with a number of targeted small business mailings, increasing and the bidding up of keyword search beyond where we see value.
However, the strategic partner channel is an area, where we're where we are seeing value and winning more business. In fact, this panel has our lowest customer acquisition cost and the affinity we continue to build based on the quality and consistency of the Ondeck approach has resulted in steady application flows.
We're working with some great brand names today, including intermittent Lendingtree, and we expect to and others and 2020 to drive continued growth in this channel.
We continue to make progress rolling out our equipment finance offering.
We are broadening the universe of partners from whom we are accepting applications and we are expanding our capabilities to underwrite and service a wider variety of equipment classes.
Our equipment financing volume has been growing each quarter, but the business is still in its early stages and we are being prudent with respect to growing the book.
Moving onto the international business.
Our integration with ever lofty in Canada is proceeding well.
We relaunched the Ondeck, Canada brand in August and now originated transactions in all provinces and document and service loans in English and French.
We believe we're now the second largest online small business lender in Canada, and see a path forward to becoming number one.
Likewise, we continue to see good growth opportunities in Australia. The portfolio has grown approximately 30% from a year ago and portfolio quality, which did soften a little earlier this year has improved.
As we think about or international operations more Holistically, we have built leading franchises in each region with the leadership talent and capabilities in house the scale efficiently.
Turning now to OTI X.
Earlier this week investors Bank announced it will be using OTI x's loan origination platform to digitize, it's small business lending operations.
Investors as a full service bank with over 27 billion in assets headquartered in New Jersey.
Similar to other OTI ex programs. Our revenue stream will include fixed and variable components with the greater opportunity coming on the latter as we scale the relationship over time.
The PNC program is progressing well and we are working together to enhance functionality and broaden reach in order to increase application flow through the platform.
Our new bank pipeline continues to build and we expect to sign more customers by yearend.
Finally, a quick update on two strategic initiatives, we announced last quarter.
Starting with our $50 million share repurchase program.
We've been active since early August into quarter end, we repurchased 3.2 million shares for just over $11 million.
We are pleased with the execution to date and a current price levels, we'll look to repurchase as many shares as possible.
And finally regarding our pursuit of the bank charter.
In short work is very much underway and we remain open to either a de novo or a transaction path. We've retained professional service firms to help with the process and we are moving the ball forward, including engaging in dialogue with central regulators and others.
While still early in the process. Our work to date is validating our thesis behind the strategic benefits are becoming a bank.
With that I'll turn it over to Ken to walk through the financials.
Well, Thank you know and good morning, everyone. Our solid third quarter results reflected several factors, including a general reversion to the mean on some of the metrics that stood out last quarter, particularly with respect to credit and we continue to grow book value per share.
Net income for the quarter was $9 million or 11 cents per diluted share.
This quarter includes a 2.8 million dollar discrete tax benefit related to research and development costs than prior years.
Excluding that benefit and the roughly 2 million of stock based compensation expense. Our adjusted net income this quarter was $8 million or 10 cents per diluted share.
Getting into the details.
We continue to grow the portfolio.
Portfolio assets grew 10% from last year in 2% sequentially to 1.2 billion.
Well, we saw growth in both term loans and lines of credit the growth was primarily driven by locks.
This growth reflects strong demand for this offering as well as the benefit from the lengthening of amortization periods that occurred over the past year.
Likewise, our strategy to slightly lengthened term loan maturities should bolster the growth rate in that portfolio next year.
We also grew revenue.
Gross revenue of 113 million came in slightly above our guidance range, reflecting increased interest income, which grew at a rate commensurate with the sequential and year over year portfolio growth.
Portfolio yield increased slightly from last quarter, the 35.1% largely reflecting mix shift as pricing was down slightly across channels in line with market dynamics and our decision to improve offers for better quality customers.
Interest expense at just over $11 million has been relatively stable over the last year as higher debt balances have been offset by improvements in cost of funds.
Our cost of funds rate is now, 5.3% and improvements of 20 basis points sequentially, an 80 basis points from a year ago.
Most of the sequential improvement was driven by lower base rate and the annual improvement also reflected lower spreads on debt we refinanced.
Net interest margin remained strong at 29.2% up 20 basis points sequentially, reflecting both a higher yields and lower funding costs and was unchanged from a year ago.
Turning to credit.
Overall portfolio quality was stable with our provision and net charge off rates normalizing from last quarter's elevated levels and delinquency holding steady.
Getting to the specific metrics, our net charge off rate was 13.7% down from 15.1% last quarter and back within our 12% to 14% target range.
Our provision rate of 6.8% was in line with the outlook, we provided last quarter.
And the total 15, plus delinquency rate was essentially flat sequentially at 8.5% with a slight improvements in 15 to 89 day rate and a slight increase in the 90 plus rate.
The impact from our changes to collection practices, namely the retention of 90 day plus delinquencies in house for collection is now largely reflected into our delinquency run rate.
Those factors all contributed to a provision expense that was unchanged from the prior quarter as the favorable impact from improved loan quality and international was offset by reserves for increased originations.
Our allowance for credit losses increased slightly to 148 million well our reserve ratio was unchanged at 12.3% in.
In fact, our reserve ratio has remained in a relatively tight range of 12% to 12.5% since March of 2018.
Moving on total operating expense remained steady at 52 million and our adjusted efficiency ratio was unchanged 44%.
In terms of some of the underlying dynamics stock based compensation was down due to lower incentive accruals, but offsetting that were increased legal costs as well as professional service fees related to our bank charter efforts.
Turning to income taxes, we recorded a net benefit of $1.6 million this quarter.
As mentioned earlier, we booked a $2.8 million R&D tax credit related to prior years.
Excluding that benefit the tax provision would have been 1.2 million with an effective tax rate for the quarter of around 18% as we bring the year to date provision inline with the full year effective tax rate estimate of between 25 and 30%.
And finally, a few thoughts around Noncontrolling interest.
As a reminder, b and C. I represents third party owners pro rata share of the results in our international operations, which is a bit over 40% in both geographies.
Losses from our international operations declined from the prior quarter as we saw improvements in both Canada and Australia. However, most of the improvement stem from Canada, where we refined our loss forecasting model.
Turning to the balance sheet.
Our liquidity and capital positions remain strong and we continue to refinance debt at improved terms.
Cash and equivalents were unchanged from June thirtyth at $59 million.
Cash and equivalents were unchanged from June thirtyth at $59 million.
Our third quarter financing activities included the doubling of our borrowing facility in Australia.
And a 20 million additional commitment to our syndicated corporate debt facility, bringing the total to 105 million.
Our committed debt facilities now total 1.3 billion.
Approximately 420 million or over 30%.
What's available at quarter end.
What's available at quarter end.
Ondecks stockholders' equity increased slightly to 350 million at September Thirtyth as the $11 million of share repurchases was more than offset by retained earnings and new issuance for stock based compensation and benefit programs.
As we mentioned, we repurchased 3.2 million shares for just over $11 million through quarter end, which represents an average cost of roughly $3.45 per share.
Most of the repurchases were executed in the open market, including through Tenbfive plan and we also purchased a block of 700000 shares in a private transaction within institutional investor who contacted us.
And our capital levels remain robust with equity representing 26% of total assets and a debt to total equity ratio of just 2.6 times at quarter end.
And our capital levels remain robust with equity representing 26% of total assets and a debt to total equity ratio of just 2.6 times at quarter end.
Our book value per diluted share increased from $3. A 98 cents at June thirtyth to $4.15 that book value per share grew 17% from $3.56 a year ago.
With another quarter behind us, we are narrowing the ranges and raising the midpoint of our guidance metrics.
For the full year, we now expect.
Most revenue between 442 and 446 million.
Net income attributable to on debt between 21 and 25 million.
And adjusted net income between 28 and 32 million.
And adjusted net income between 28 and 32 million.
That's a roughly a 4 million increase to the midpoint of our adjusted net income range, which was driven by slightly better than expected credit performance in the third quarter.
That's a roughly a 4 million increase to the midpoint of our adjusted net income range, which was driven by slightly better than expected credit performance in the third quarter.
Slightly lower funding costs and improve results from our international operations.
In terms of our full year 2019 key performance indicator trends, we continue to expect the portfolio to grow at a high single digit rate.
In terms of our full year 2019 key performance indicator trends, we continue to expect the portfolio to grow at a high single digit rate.
Net interest margin to remain stable.
Net interest margin to remain stable.
Our adjusted efficiency ratio to increase.
We want to provide you with some initial high level expectations on how some of the key performance drivers will evolve next year.
Makeup of that platform and how that enables you to sell down through smaller banking institutions, where do we stand.
Maybe.
We're able to sort of start startup process go through the diligence and evaluation part and get to assign deal in a in a dramatically shorter time that it took at a larger institution. So we're encouraged by that and hopefully that translates to a faster rollout as well.
Okay and then the repurchases were the backend loaded Tom you said, you repurchased 3.2 million shares for the diluted share count came down by a little over 1 million. Some trying to understand how that flows through into the share count for the fourth fourth quarter.
Okay and then the repurchases were the backend loaded Tom you said, you repurchased 3.2 million shares for the diluted share count came down by a little over 1 million. Some trying to understand how that flows through into the share count for the fourth fourth quarter.
Yes, so it's Ken.
Yes, so it's Ken.
Yes, so it's Ken.
That's right because we didnt start the program till August so that's why the average would would reflect that as opposed to the total.
From point to point.
Okay, and then what's the ongoing tax rate, obviously, I don't think 18% adjusted for the quarters are correct one going forward. So just.
We use for Fourq UN for 20.
Yes.
Maybe a set of my remarks that the we've currently estimating that full year effective tax rate of 25% to 30%.
But that includes a true up in Threeq.
No that would be the normalized tax rate ex the R&D tax credit, which was a discrete item.
Okay, and then just lastly, obviously servicing fees, Rob I think you said the prepared remarks or that was.
A function of the bank charter is that onetime in nature of the or those stay there.
You are referring to the the processing and servicing in the right.
Yes.
Theres a bunch of things that go in there actually I would I'd attribute more of that to some of the the build we're doing around the equipment finance offering.
And I'd say some of the the bank charter caused you probably see more in Gionee.
For the two loans that were little bit elevated this quarter.
Thanks, John .
Thanks, John .
Thanks, John .
Our next question comes from Melissa.
Morgan. Please go ahead.
Good morning, guys. Thanks for taking my questions.
I want to go back to the Laurie.
Additional expected.
Sort of adjustments.
Similar to what we saw this quarter that we should be thinking about.
Hi, unless it's Kevin so.
We're always looking for opportunities to to manage our tax on effectively obviously, we can't talk about anything until it's done just like this R&D tax credit was in the works for several quarters and certainly when you get final resolution that you can acknowledge recognized and talk about it. So at this point in time I would not build anything more into.
The tax rate again, as we gave our our comments there is nothing that we should assume that we materially move the effective tax rate other than the normal variability that we'll see in the consolidated rate based on the proportion of us versus international results.
Okay and given the focus that you guys have had a relaunching Canada business, Okay that you're seeing in Australia can you remind us developed as far as at the books compared to the U.S. business.
Okay and given the focus that you guys have had a relaunching Canada business, Okay that you're seeing in Australia can you remind us developed as far as at the books compared to the U.S. business.
Understanding that you asked is driving most of the results at this point, but can you. Please.
And I can start and then we can chime in if it is it is relatively is very small relative to the total.
So it doesn't really move the needle in terms of the balances it's under 10% of the the total loan portfolio outstanding at period end, yes, although I will say on the growth rate. If you look year over year is higher than the growth rate in the U.S.. So I would expect it to crossover you know the 10% Mark next year and become a more material part of our results.
Okay got it.
Back in the QSR question. Thanks.
Thanks.
Our next question comes from Julien.
Please go ahead.
Good morning, Thank you for taking my questions.
Good morning regimen.
Good.
We want to.
Hold on a couple of different points, one of things I noticed the runoff rate or the duration of portfolio seem to extend this quarter is that driven mostly by the equipment finance product or is that.
It's really more the extension of the core products. So as we've talked about the last couple of quarters, we've really been focused on offer quality. So call. It the top third of approved customers, making sure. They get high quality offers in terms of loan amount they seek and slightly longer terms them. We've offered you know historically again, we're not going outside of a range that ondeck has historically been in before but call. It the proportion of 18.
As it gets bigger.
That sounds good and then kind of shifting a little bit to the international side.
In the past I remember that you guys. It said that you expected international profitable.
Next year.
Should we kind of back out the impact of what international is running through the income statement, but are there opportunities there to refinance in the Canadian facility, specifically, because you have that Mezz piece as an example of 12% and even bring allowed to kind of the average would take 7 million here.
Yes, absolutely right, so you're absolutely right and I guess, maybe we should have highlighted it but it was a post third quarter things. So we did and if you actually read the footnote in the the earnings presentation on that page, we did pay down that mezz piece in early October .
Debt that we've had outstanding and we are working on a refinancing of the other piece in Canada.
And then just thinking about 2020.
How should we think about magnitude of the impacts flowing to the bottom line.
The decline in net interest margin.
As a more conservative view on yield.
Market interest rates will be as you know were largely a floating rate borrower tied primarily to one month LIBOR. So obviously a move in base rates would impact that assumption as well.
Hey, guys. Good morning, this is actually Trevor Williams on for John .
Yes look I think this is Noah and thanks for the questions over the.
2018, obviously was a year, where there were a lot of tailwinds for four or borrowers and for the U.S. economy in general I think 2019 were seeing a little bit slower growth.
Overall, and obviously some of the trade issues do impact some of the categories. We lend too. So as we look ahead to 2020, we're kind of in our core outlook for the year, just assuming a slower growth environment, but that said you know unemployment remains very low.
As a reminder, she'd like to ask a question that star one.
Going focusing on that there's there's more players lending to that space. But then also if you could also provide us with.
Okay, Great and then maybe just one more on.
Yes.
Yes. They are so this is no.
We will certainly be able to talk more about this.
But either way, it's going to take a lot of time.
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