Q3 2019 Earnings Call
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I'd like to hand, the conference over to Rebecca Gardy Senior Vice President of Investor Relations. Please go ahead ma'am.
Hi, Michelle and good morning, everyone earlier. This morning, Greensky issued a press release announcing results for its third quarter ended September Thirtyth 2019.
Can access this press release on the Investor Relations section of the Green Sky website. In addition, we have also posted our third quarter investor presentation, which we will refer to during today's call.
Joining me on the calls this morning, our David Salix, Chairman and Chief Executive Officer, Jerry Benjamin Vice Chairman and Chief administrative officer, and Rob Partlow, Chief Financial Officer.
Before we get started let me remind you that her presentation and discussions will include forward looking statements. These are statements that are based on current assumptions that are subject to risks and uncertainties that could cause actual results could differ materially from those projected we disclaim any obligation to update any forward looking statements, except as required by law and.
Termination about these risks and uncertainties is included in our press release issued this morning as well as in our filings with regulators.
We'll be discussing certain non-GAAP financial measures on today's call. These non-GAAP measures are not intended to be considered in isolation from a substitute for or superior to our GAAP results and we encourage you to consider all measures when analyzing greens guys performance.
These non-GAAP measures are described in reconciled to their gap counterparts in their presentation in the presentation materials. The press release dated November 15, 2019, and on the Investor Relations page of our web site.
Following our prepared remarks, we will take your questions as a courtesy to other participants. Please ask no more than two questions. Any that you have additional questions that are not covered by others. Please feel free to re queue and we'll do our best to come back to you. Thank you for your cooperation on this and finally, a replay of this call will be available later today on our web site at Green Sky Dasan.
And with that I'll turn it over to David.
Thanks, Rebecca good morning, everyone and thank you for joining us.
I'll drop this morning by providing a brief overview of our third quarter performance.
For those of you are familiar with greenstein no that our unique business model consistently delivers double digit growth in transaction volume and revenue attractive profitability and strong free cash flow.
Revenue in the third quarter gross 35% driven by transaction volume growth and increased servicing fee revenue.
We reported transaction volume this quarter of $1.6 billion as a result of our expanding ecosystem of nearly 17000 merchants elective health care providers, excluding solar transactions or third quarter volume increased 19% over the prior year and we are on pace to deliver 20%.
Plus growth for the full year.
Adjusted EBITDA for the third quarter was $57.5 million and cash flow generated from operations for the nine months ended Septemberthirty 2019 was $125.4 million.
As highlighted in this mornings press release, the credit quality of the company's loan servicing portfolio remained style or what 85% of the company's September 30 loan servicing portfolio composed of borrowers with a weighted average FICO scores in excess of 737% over 70 80.
Liquidity remained strong with unrestricted cash of $206 million and full availability of our 100 million dollar line of credit facility at September 30, even after repurchasing $146 million of our class a common shares over the past 12 months.
Greens guys fundamentals served as a solid backdrop for continuous innovation in support of our commitment to deliver value to our merchant network.
For example in the third quarter, we launched the Green Sky Universal credit application.
This innovative application platform allows greens guy merchants to seamlessly offer second look financing to consumers.
Loans are funded by participating second look providers and Green Sky takes on no credit or volatility risk.
This platform further eliminates the friction and administrative burden that our merchants experience when having to submit multiple credit applications in the event that a prospective customer is initially declined.
This proprietary platform is another great stop.
Forward in Green skies, unwavering commitment delivered to delivering a far superior user experience to our merchants and their consumers.
But before I turn it over to Jerry I'd like to touch on our bank partner consortium.
The ended the third quarter, we had aggregate bank funding commitments of $11.9 billion of which 3.5 billion was on yours.
Through the normal course of business, we extended three of our bank agreements since our last call.
In addition, as we discussed last quarter, we continued to progress on establishing a whole loan purchase program with non bank investors to augment diversified and optimize our funding.
We expect to share more on this initiative over the next few months, we're confident that our current bank funding commitments in conjunction with future commitments from new potential bank partners customary periodic commitment increases and our anticipated forward flow program will provide ample funding to support our growth well into 2022.
I'll now turn it over to Jerry.
Thank you David good morning.
The company's transaction fee rate of 6.9% for the third quarter was steady compared to both last quarter the third quarter 2018.
As of September Thirtyth, we had 16887 active merchants on our platform, including over 4300 elective health care providers.
Our 19% growth rate and total active merchants over the third quarter of 2018 reflects the substantial addition of high quality merchants, none of our intentionally roll off of prior merchants that did not either meet our performance outdoor profitability targets.
Since the company's inception through the ended the third quarter Greenstein, though enabled nearly 21 billion of transactions with over 2.8 million consumers as David referenced the weighted average FICO score of consumers at origination remains exceptionally strong at 770 and 85% of consumer.
And our servicing portfolio at September Thirtyth had a weighted average FICO scores of over 700.
30 day delinquencies reached a three year third quarter of low point of 1.25%.
But as we have a super prime nature of the loan servicing portfolio as well as the outstanding work of both our credit and operations teams.
We're particularly pleased with this quarter's metric given the continued growth of health care originations, which as you know have slightly lower average FICO scores than predictably higher delinquency rates relative to our home improvement business, we continue to make investments to enhance credit and merchant management tools and systems, which we believe will deliver additional.
Improvements throughout 2020.
Early indicators show that the 19 home improvement village of originations has been the highest weighted average FICO distribution and lowest early delinquencies have any loan bid we facilitated the 2019 village of elective health care originations is already significantly outperforming our 2018 venues.
The third quarter origination productivity index or opioid was 21.1% down modestly from 22.2 professor in the third quarter of 2018, mostly due to the lagging nature of the 11th district monthly weighted average cost of funding the or coffee.
Given that the coffee will be discontinued after the publication of the December 2019 coffee on January 30 for 2020, we are reviewing options for an alternative computational surrogate for the contracted margin with our bank group.
In mid August American Express began marketing of the American Express home improvement loan powered by Greens Guy to a pre approved Universal American Express Cardmembers located in five Metropolitan markets, Atlanta, Chicago, Dallas, Los Angeles, and Tampa together with access to top rated Greens Guy kind.
Contractors in addition to sharing and transaction economic rents guys servicing the resulting lorne portfolio.
As indicated in this mornings press release in December we anticipate launching a digital mortgage cross marketing campaign.
Targeting select Greens got home improvement program borrowers in conjunction with a national mortgage banker and the bank partner, we believe the opportunity to develop and facilitate a family of digitally delivered loan and savings products. The Greens Guy program borrowers to be substantial.
Finally, as we announced last quarter Greens guys Board is evaluating strategic alternatives that process is ongoing and accordingly, we will not be providing guidance pending the completion of the board's review, which is anticipated to be finalized early next year.
With that I'll turn it over to Rob to review the Companys financial performance for the quarter.
Thank you Jerry as I review the results of the third quarter. During remark my remarks note that all comparisons will be relative to the third quarter 2018, unless stated otherwise.
Transaction volume increased 17% to a record $1.6 billion in the third quarter 2019.
Excluding solar originations, which were approximately $13 million lower than last year, we grew transaction volume by 19% during the quarter.
The average transaction fee for the third quarter was 6.86% in line with the second quarter, 6.87% and marginally lower than the 6.91% we realized in the third quarter 2018.
Excluding solar the average transaction fee in the third quarter is 6.74% in line with the second quarter, 6.73% and 10 basis points higher than a year ago.
As always seasonal fluctuations in the mix of different promotional products offered by our merchants and providers will cause transaction fee percentage to ebb and flow throughout the year.
Total revenue grew 35% to $153.4 million during the third quarter transaction fees were up 17% to $112.8 million commensurate with our transaction volume growth.
Servicing in Russia, and other revenue totaled $40.6 million during the quarter.
Compared to $17.1 million last year, reflecting both the 27% growth of our loan servicing portfolio as well as the recognition of a $16.4 million servicing asset in connection with a modification of service and agreements with certain bank partners, where by the servicing fees, which are sooner cash flows in the waterfall were increased above that.
Mark and servicing rate.
Cost of revenue totaled $65 million during the quarter.
We breakout on slide 29, the components of cost of revenue into three distinct components servicing cost origination cost and the fair value change in the Fcr liability.
Origination related expenses totaled $9.7 million, a 0.59% of originations up $7.5 million up from $7.5 million and 0.53% of originations last year.
The increase in the expense was driven by both higher origination activity and by increases in customer protection expenses during the quarter.
Servicing related expenses totaled $11.6 million or an annualized 0.55% of the average loan servicing portfolio unchanged from last year.
On slide 30, we provided a detailed of components of the fair value change in the Fcr liability, which for the third quarter was $43.6 million or an annualized 2.06% of the average loan servicing portfolio the increase of $24.8 million as a function of both the combination the growth of the balance of our deferred.
Interest loans within the portfolio.
And an increase in the bank Port part bank partner portfolio yield attributable to 2018 surgeon interest rates, which negatively impacted receipts on slide 31, we also breakout the fair value change in Fcr liability by the drivers of this expense line.
I'll begin with the expense for finance charge reversals, which is the expense related to the buildup of the liability on our balance sheet for future finance charge reversals. This expense was $86.8 million for the and Fcr rate of 4.09%.
Up from 28 teens $57.4 million or an fcr rate of 3.49%.
The increase in expenses due to both the gross in the deferred interest loans in the portfolio as well as a higher a PR deferred interest loans originated since mid 2018.
As previously noted the Fcr rate has increased due to the impact of higher IP ours on transactions and a higher mix of deferred interest loans in our elective healthcare verticals.
Receipts from our servicing portfolio reduce the expense for future fine its charter vessels and totaled $43.2 million up 12% over Q3, 2018 $38.5 million and up 11% from the second quarters $38.9 million.
Regarding the proceeds from charged off receivable transfers component of receipts. Please note that the sale of charged off receivables and a third quarter of 2018 included proceeds from prior period charge offs. Therefore last year's third quarter sales represented 0.55% of the average AUM during the quarter.
18 basis points higher than the more normalized rate of 0.37% in the third quarter of 2019.
Incentive payments also component of receipts totaled 1.61% of the average loan servicing portfolio during the quarter.
Six basis points from the second quarter and down 16 basis points from 1.77% during the third quarter 2018.
Incentive payments did that did not rise proportionately from build.
Deferred interest finance charges, primarily because the increase of bank partner portfolio credit losses, coupled with the increases in the agreed upon bank partner portfolio yield associated with loans originated during 2018 in the first quarter 2019 as market rates have receded in 2019 agreed upon bank partner portfolio yields on loans originate.
In the second third quarters of this year have declined.
Components of incentive payments from bank partners changed as follows.
Finance charges in fees were up approximately 82 basis points, reflecting the higher if you hours on the deferred interest loans and reduced rate loans originated in 2018 and 28 2019.
Agreed upon bank Port Port agreed upon bank partner yields increased 32 basis points.
Attributable to last year's higher rate environment, which I outlined earlier.
Net charge offs were up approximately 64 basis points due to a combination of the maturation of the home improvement portfolio and the growth of elective healthcare loans in the portfolio elective healthcare loans realize higher and bosses and are priced accordingly. In addition, as one would expect early vintages have higher losses as we tested in refined our initial credit Paul.
Please.
As a result of the portfolio dynamics outlined above coupled with the increases in our fixed servicing fee, which is recognized and servicing and other revenue incentive payments declined 16 basis points versus the third quarter of 2018.
Compensation expense totaled 20 $821.8 million in the third quarter, an increase of $7.5 million or 52%, reflecting a $2.3 million increasing share based compensation as well as continued investment in or I T credit and sales infrastructure.
Property office and technology expenditures totaled $4 million with a modest 200000 increase of is higher software and operating lease costs were partially offset by lower technology contractor and consulting spend.
General and administrative expenses totaled $6.7 million during the quarter up $3.5 million, driven primarily by legal and professional fees higher insurance costs and guarantee reserves related to escrows usage by a smaller legacy bank partner.
Other expenses net of other income increased $1.6 million to $6.8 million during the quarter due primarily to the establish establishment of a loan loss reserve related to the increase in our balance of loans held for sale.
Operating profit was $52.4 million for the third quarter compared to $54.3 million last year.
From a GAAP perspective, we had a third quarter tax expense of $1.5 million, reflecting reflective of tax expense on the net earnings for the period related to Greens Inc.'s economic interest in Gs Holdings.
Net income was $44.1 million during the quarter because of our up see corporate structure GAAP net income reflects on the tax expense on a portion of the Greens guide.
By the C Corporation, we believe pro forma net income as a useful measure of our enterprises financial results. As this measure reflects corporate income tax on all Green Scott earnings inclusive of the amount owned by the non controlling interest.
Pro forma net income was 39.1 $9 up from $38.8 million in the third quarter 2018.
The effective tax rate was 15.34% and 21.8% for the third quarter of 2018 and 20.
2018, respectively.
As we have indicated on prior earnings calls we believe the adjusted EBITDA is at one of the key financial indicators or business performance over the long term and provides a useful information regarding whether cash provided by operating activities is sufficient to maintain and grow our business for the third quarter adjusted EBITDA was $57.5 million compared to 58.3.
Million dollars last year.
And our 10-Q, we also report comprehensive income, which accounts for the fair value change in $350 million interest rate swap that has designated as a hedge of interest rate risk on our term loan debt.
The series of actual and expected Federal reserve rate cuts have resulted in a mark to market loss on the swap at $2.5 million during the third quarter and $4.4 million year to date.
Actual cash settlements have reclassified into interest expenses they occurred during the edges term.
During our turning to our balance sheet, we finished the quarter with a $206 million of unrestricted cash free cash flow. The first nine months of 2019 was $52.3 million as detailed on slide 36 of our Q3 investor presentation.
We ended the quarter with approximately $30.4 million of loans receivable held for sale as we continue to periodically acquire and sell bank partner originations.
Subsequent to September 30, the company executed the net purchase of $45.7 million with loans receivables held for sale.
Consistent with our customer practices, we will look to sell these loans at par on a periodic basis and with that I'll turn it over to Rebecca to set up acuity.
Thanks, Rob that concludes our prepared remarks. Please remember we're happy to say detailed modeling questions offline operator, let's have our first question. Please.
As a reminder to ask a question you would need to press star one on your telephone to withdraw your question press the pound Keith Please standby why the composite Q and a roster.
Our first question comes from John Davis of Raymond James Your line is open.
Hey, Good morning, guys first just wanted to touch on the servicing gain obviously 16.4 million are there any offsets I. It seems like you've got a better rate for shrunk for servicing these loans going forward, but was that just read rejiggering more servicing revenue versus bank margin or maybe just talk about what drove that.
Outsized gain this quarter.
Hey, John it's Jerry good morning.
We had the ability to renegotiate a couple of our bank servicing agreements and as you know how our waterfall works servicing grows as a percentage.
And sort of goes up the hierarchy of the waterfall.
So a servicing fee is sort of a first claim on waterfall dollars.
You could make the argument that this perhaps moved from incentive fee, which would have to the bottom the waterfall.
Up to servicing fee.
Based on the resilience of a waterfall.
Thats servicing fee, becoming a first claim.
At a rate in excess of fair value gives rise to the establishment of an asset.
We continue to grow the portfolio.
We'll evaluate that after that are non going basis.
But we think.
The gap is good and we don't expect a corresponding give back if you will.
Okay. So as we kind of think about going forward should we should we think about a higher rate on the servicing revenue I think historically has been just north of 1% is that going to like 1.1 or is this just can be more of a revaluation every quarter that we could potentially see an up or down impact to that revenue line.
Your comments a fair one historically you know our servicing drawn about 108 basis points, you'll see on a dollar weighted basis that drift up to reflect these renegotiations. So you'll see it moved from a 108 basis points to perhaps something north of 120 530 basis points.
And then as opposed to a revaluation it'll be evaluated periodically for Rob would impairment be the right word.
And also growth in the portfolio correct as the portfolio continues to grow obviously that asset will continue to be established if we.
Execute that the elevated rate.
So you'll see some additional asset formed as well.
So all else equal, we're moving a little bit of revenue out of incentives up into.
Uh huh.
Higher priority, if you will right. So so but as an impact on the margin we could expect kind of a lower reported EBITDA margin going forward as that.
I guess.
Right when it call is fee to you lose from.
Contract cost of revenue to two revenue.
No it won't it won't have a downward pressure on reported EBITDA margin.
As as portfolio grows and it's growing dynamically.
You will sort of recognize the asset as we have we don't expect to see that asset impaired and with the growth in the portfolio will continue to enjoy incentive fees not dissimilar to what we have in the past.
Okay, and then so maybe Rob just maybe just a little bit more color on.
The cost of revenue this quarter I think that came in.
Quite a bit higher that lease than I'd expected and just wondering if I exclude this this game, which is not I guess fair to exclude the because rates going up but the margin came in at 30%. Excluding the so just maybe talk about the moving pieces the cost of revenue and what would you expect to that line kind of going forward.
Okay. Great question, the whether its identity I kind of outlined during my prepared remarks kind of a different components of the receipts that are moving I think one of things, which you can see we did.
There's really two drivers one is the overall fcr rate and how that.
Pieces moves for finance charge reversals.
The thing about the Fcr component Theres, the fcr expense rate.
Yes, I think that will continue to move up model modestly in the coming quarters, we continue originate more.
I'd like to healthcare loans I think on the receipts line item side, I think you'd have seen improvement in that quarter over quarter.
Both as.
The yield on our loans in the portfolio has increased as well as we start benefiting from the.
Benefiting from.
Thank margins no longer kind of increase in at the speed at which they were doing last year.
So I think if if you want to go on to Slide 29, you can certainly the other components of course or the origination related I would certainly expect the origination related expense pieces to remain.
Kind of where they are in the current level kind of in the range bound to 50 to 60 basis points of originations.
Service and expenses kind of similar in that kind of 50 to 60 basis points.
I would expect we will have some.
Economies of scale start being realized on the servicing side and appears to come Okay and wants to sneak one quick one more and David I think you reiterated your 20% growth for volume this year, which implies you'd see kind of a 500 basis points are so acceleration in the fourth quarter.
You do have an easier comp, but what gives you confidence in that re acceleration as we head into the end of this year.
The benefit of knowing October .
And the benefit of seeing how the merchant cohorts perform and the demand. We also are comping against what was a little bit I'm characters loop vertically saw December in 2018.
Okay, but have a break from prior years. So we think we are comping against a.
Sort of an anomaly in 2018.
Alright, thanks, guys.
Thank you Jim.
Our next question comes from James Fossett.
Rgus Stanley Your line is open.
Great. Thank you I wanted to follow up on that last question.
Just wondering in terms of that visibility clearly you sound like you started off well in October , but there's been some headlines about around.
Some survey work that others have done are about intention.
Around remodeling on and and upgrading of of homes et cetera, just wondering how you're feeling about the overall macro economy and what your feedback looks like right now.
So.
We will.
Always have the posture of being cautiously skeptic.
That being said, what we're seeing from demand both from the merchants and consumers.
Is not seeing any any diminishment of degradation.
We have really good visibility for the next two months just because.
Most people that we'll be spending in November and December have already been approved and so its hub, it's a pretty predictable volume curves.
For the next.
Really quarter or too.
And as it relates to what we're seeing in the market as we survey arm our merchants.
There their expectation is still growth.
And they're hiring and they're expanding and there's lots of M&A activity. So we're not seeing it and then on top of that.
We were seeing Tailwinds from a credit performance that are actually very encouraging as it relates to consumers ability to spend to digest credit.
And that's reflected in.
Candidly better than expected credit performance.
I certainly want to give a lot of credit to our credit and risk and operations team.
But they're certainly not not doing it against a difficult environment compared to what we could have reasonably expected. So the short answer is.
We see we see the.
The studies.
Occasionally there is some inappropriate confusion I know, it's not what you're referring to connecting to housing starts we think people staying in their homes is better for our business longer there was a really great article that that suggested instead of living in their houses for seven years people are living in their houses for 10 or 12, we think that sub Q.
It's even more demand so we're not seeing at we feel very good about the demand.
In home improvement, but we're also so tiny and.
And we sign of hundreds of merchants a month and then of course elective medicine is.
Very exciting for us and we're just getting started.
And on that point it.
Oh, sorry, yes, the only oded, we've gotten a fair number questions regarding the updated the Harvard study that you may have seen.
For the talking about potentially home improvement growth slowing out in 2022 in 2003 growing but a decreasing rate keep in mind, our average home improvement loan as but $10000.
So when you look at the study and you look about what home improvement consists of we're not talking about major rebuilds as David mentioned very little correlation between new home starts in our business our average loan as $10000.
Got it that's really helpful and then David you mentioned.
Elective health care I know, we're not talking about specific targets and guidance. If you will but how should we be thinking about the mix of home improvement versus elective health care versus other new initiatives. As you think about your kind of the growth drivers for 2020.
So.
I think I think.
The the.
Information that I can provide is that long term, we believe healthcare will be even bigger than home improvement.
And certainly.
Next year, we see it getting into the.
Mid teens.
Got it got it is hard to grow the percentage of the pie when we continue to grow our core home improvement business North of eight 900 million a year.
Of the denominator effect, we'd like to petals.
These are high quality problems, we're dealing with.
Yes, absolutely and then last last thing for me was just on.
You know the funding relationships you talked about that Youve renewed a few.
Of your bank partners.
How should we.
Are we likely to see.
Ongoing like.
Not only big partners, leaving but other bank partners coming in as well as non bank I'm, just wondering how you're thinking about like that partnership group pipeline and what the funding mix is going to look like as we go into 2020.
So.
Great question, we love our bank partner network.
And.
We do see occasionally a bank changes strategy.
But thats why we have diverse network of banks.
We do not anticipate.
Any particular institution changing their strategy.
But we know that happens from time to time.
And our case it seems like it happens every two or three years.
So.
So one we don't we end the ordinary course.
Long term.
As any ecosystem, we would expect.
This is why diversification matters that we will we will add.
More than we lose.
And.
We feel very good about the demand and unceremoniously.
Three three of our banks.
Extended.
That may be surprise to sum it was absolutely not surprise to us.
And that's great and then we think those partnerships are strong and getting stronger.
And we think it's supported by additional.
Value added strategic things that we can do together with our banks.
And we're seeing that that.
Notwithstanding some some fear and loading there's great demand from our existing bank network from additional banks that would like an allocation.
And.
In addition, as.
As I mentioned, we do expect that.
Into next year, we'll be announcing.
Ppas sizable pocket of non bank funding commitments.
Buckets, probably.
Not ambitious enough of a word.
Okay.
Great great. Thank you very much further questions.
Thank you.
Our next question comes from Chris Donat of Sandler O'neill. Your line is open.
Hi, Thanks for taking my questions David I'd.
Whenever I'm going to risk this one and ask if you can dimensionalize pocket Premier last answer.
And I know you probably won't but so then related question just as you look at the non bank opportunity.
Can you give a sense on timeframe.
Mike I would imagine there are.
It's a more complex thing and getting to commitment is one thing, but then getting to actual loans would require a few quarters.
Ideally I'd like to know what the specific steps are but if you can give give us some rough sense on timeframe from commitment to lending.
Got it so.
So I think Chris good morning.
Good morning detail.
So just just to just to read back to you two questions. One is dimensionalize the size of the pocket.
And the second is what's the sort of the timeframe.
Yes.
So.
Let me start with.
The expressions of interest for that pocket was actually far larger than we expected and exceeded the aggregate commitment that we have from our banks.
Now, let me be clear, we love our banks.
We think our banks love us too.
We don't think our banks are going anywhere we don't want them to go anywhere we are only interested in that because we think it provides important healthy diversification and we like the added liquidity.
And so while the appetite for the non bank funding far exceeded.
Anything we could possibly remotely ever think about allocating.
We can certainly see.
In the future an important slice, whether its 20 or 30%.
Being allocated.
Which is all incremental front to non banks.
Is that is that.
Being responsive to your question on the dimension of the pocket, yes. It is.
Thats more detail than I expected. Thank you for that.
I'm here to add on and then on.
Go ahead, yet then on God timeframe and.
I would imagine you might have some regulatory hurdles and things like that to jump through.
Chris Good tell me about the which regulatory question are you talking about as it relates just for for non banks.
I'm like for example, if its insurance I would think therapy certain.
Things you need to do or with asset managers certain structures you need to have something like that I'm just wondering.
It's me on the outside more gassing than anything else. So so the structure would actually be that one of our existing banks would originate the loans.
And be the lender of record and.
In a legal structure and a compliance structure.
So the receivables to a non bank periodically.
Okay, that's pretty straight forward.
Yep.
And the process from our perspective is letter of intent definitive agreement.
Forward flow.
And that said 90 to 120 day process.
Got it okay, you're right you're right, Chris that we'd likely will do a bit of a dance with the rating agencies, but we don't view this to be.
Terribly difficult.
And that incremental to what we've done historically.
Okay got it and then just on a separate topic with the the change we've had whenever and last 12 months in the rate environment and rate expectations.
Can you talk about how that's affected.
The yield on originated loans.
Are you.
Youre seeing a different mix within what gets originated right.
Nothing like health care versus home improvement, but within the home improvement Max.
Yup.
The mix and home improvement has has not changed.
We still run roughly 60% rub reduced rate loans, 40% deferred interest loans, we've not seen a material change in mix, Chris Yes, it's interesting the I mean, the the loans, we originate the promotional products over.
Originated really haven't shifted over the last several quarters four quarters as rates kind of went from their highs in the fourth quarter.
To this quarter.
I see a few basis points here and there movement, but we're not really seen any.
For a shift from higher if you are loans to lower a pure loans in this and rate environment.
Okay got it thanks very much.
Very well.
Thanks, Chris.
Our next question comes from Jason Kupferberg of Bank of America. Your line is open.
Hi, This me here for Jason Thanks for taking questions. Let me just stop I guess, let me start with just one of your bank partners recently commented that portfolio growth has been impacted by higher prepayments.
Just wondering if you could comment on that as it relates to your expectations on prepayments and then just more generally what are the financial implications to you all prepayments exceeding expectations.
Let me just simplify we have not seen any change in prepayment speeds.
Okay, and then just if you wanted to see one what would be the financial implications.
Modest okay, great and then.
Most of economics come from the transaction fees at the merchant pages.
Great and then just I was just wondering if you could give us an update on the just the new verticals and just how that ramp is going in the process I think there's been a little bit of.
Maybe slow slowdown slower than some of.
Historical on so just wondering if there's any update on that and Thats. All thank you great. Thank you for the question.
We continued to be very excited about our elected.
We have we feel really good about.
The products as well as what the team has accomplished this year, we feel like we're going into next year with a lot of momentum.
And likewise, we feel very good it's much earlier about.
Our capabilities and.
The progress that we've made in e-commerce .
Great. Thank you.
Thank you my here.
Our next question comes from Reggie Smith of Jpmorgan. Your line is open.
Good morning, gentlemen.
Congrats on the quarter most of my questions again nickel walls calls, hoping you could.
Originally you are paid at your fading in and Alan will then I heard most of your questions are.
And have done that have been addressed but you know.
Yes, yes, yes.
Yes.
I was curious could you give some color. So delinquencies was it was a nice surprise.
Could you did you provide some color on I guess, how that split between maybe your your full loan book versus your deferred loan book.
And any appreciable.
Turning to the trends there.
And delinquency rates.
Got it so.
The deferred loan book.
We'll generally have obviously just incredibly modest amount of delinquency just by nature of its incredibly short duration.
Hi.
So.
We're seeing it across the board by leveraging.
A bunch of really smart people.
In our credit and analytics team.
And we're seeing in across the board by leveraging really smart people in tools that are technology organization as collaborated delivered and the execution of our operations team. So Reggie it is a.
The combination of really smart people doing really hard things and executing really well.
And it's it is it is a pleasant surprise.
But we actually think at the beginning of some pretty interesting trends and opportunities for us.
Good morning thread to purchase loans, we're not seeing a material change in the percentage of borrowers retiring those loans in the promotional period, it's still is hovering right at 90%.
Got it and then I guess in the past gases.
That's kind of emphasizing call about the fact that the back half of the year typically I guess seasonally weaker for.
Delinquencies.
David I mean listening to your comments.
What would it be beyond the realm of a possibility to kind of think that.
As we get into early 2020, if if.
What you talked about is it sustainable that you should see even.
Further declines in delinquencies am I getting ahead of myself there simply for taxes.
Just so you know Reggie I like how you're thinking.
What we're seeing is.
Is something I think more sophisticated then for us than seasonality.
What we're seeing.
Thanks to credit and technology and operations.
Executing well together, what we're seeing is the benefit of smarter vintages.
And so to your point.
There is certainly opportunity for that too.
To impact into the future.
Yes, the okay.
Look at the most of my stuff has been covered thank you for for taking my question. Thank.
Thank you Rachel.
Our next question comes from Jeff Cantwell of Guggenheim Securities. Your line is open.
Hi, good morning.
Good morning, good morning.
Hi, Thanks for squeezing me and you've been touching on especially if I could ask about a broader question to you David which has given all the changes in the macro environment with last 12 months.
What do you think back over the last year, So where would you say you've made the biggest changes in your own strategic thinking sort of see we get your updated thoughts to I'm trying to get a sense for opt for where you're seeing greater opportunities now versus six months 12 months ago, or maybe where you find yourself, taking more offensively or even a briefing thinking more about finding operational efficiency.
And on the cost side.
Great to hear your thoughts there. Thanks.
Well, that's a great question I don't I don't often get.
As such big broad.
Strategic questions I'm going to keep talking for second as I.
Ponder a thoughtful answer.
I think that be.
Strategy remains unchanged.
I think that as we enter rate on the execution.
And continued to add talent to the team.
We're able to make accelerating progress, but the strategy. We have this amazing home improvement franchise.
Keep investing in it keep getting more sophisticated not only from a sales and go to market perspective, but also adding more products and tools.
Is really powerful.
Good job products in the differentiated we brought to market has has really helped us add hundreds and hundreds and hundreds and hundreds of merchants a month.
And so that remains unchanged I think that.
What is important and and.
Exciting is.
When you've had this much growth it takes time to catch up to it sometimes and actually to take advantage of some of the on.
Funded opportunities.
Like.
Building out more and more capabilities for our merchants that give them more tools that they desire that creates even more.
Value add.
And remote.
And so we're seeing that with.
New tools like Universal credit App, Preapproval marketing services and products.
And that's that's proven to be incredibly powerful and there are other products and.
Even even SAS oriented services that we intend to provide our merchants.
As it relates to.
Banks and consumers where.
Finally at the scale and allocating the resources to build products that we expect our bank partners will want to offer their consumers you've seen that already launched with American Express we think that that is strategically very important.
And we're finding that we have.
Products and an ecosystem our merchants are actually very helpful to consumers of.
Other financial institutions, but also partnering with our banks.
We collectively have nearly 3 million consumers and we find that they're very interested in other products and services and so you've seen us this morning.
Mentioned that we're launching a digital mortgage product with partnerships that we think is one of many steps in the journey of expanding the relationship with our consumer customers.
So I think the biggest changes more.
We're clearly spending a lot of money building out teams to be able to do a lot a very important things around a very focused strategy.
And thats exciting.
Okay. Thanks very much appreciate it.
Our next question comes from Guiliano Baloney of T.I.E. Your line is open CCSG.
Good morning, gentlemen.
I'll just jump into a couple of high level questions first but looking at the product evolution over time, obviously, you made the announcement about the mortgage product in the partnership there.
And you have a lot of access to data and clients in the sense of being able to look to see if theres an opportunity for their accounts or refinance or second mortgage are there any products that you're specifically targeting there and can you expand further beyond that into new products with partnerships.
I can't really go beyond what we've already talked about.
But certainly we like providing other services to consumers.
Bob Zappos things could include.
Mortgage products it could include.
Something that we're very excited about which could include a.
Consumer credit card products.
It could be a home improvement consumer credit card product that comes with valuable data for consumers and this is one of the interesting things the way we look at data and data security data privacy is the consumer should control it and our approach to two data and information.
And machine learning is actually how do we use it to provide value and service for the consumer where it's not about the consumers data it's about the merchants data.
And.
Who are the merchants that are most relevant to the consumer if the consumer is interested in a certain product or category and that will be up to the consumer to self select.
That makes sense and thinking about that type of product or at least on the mortgage side without being more of a referral base business, where you get a referral fee. If you could have a long close on the other side.
In the short term yes.
And I guess kind of going along that same line.
So that seems to imply that you might be able to underwrite at some point, but then the question is with a credit card type of product would you be underwriting or would you be.
Summing that off.
To have that managed by one of your partner banks.
The latter.
Sounds good.
The only other question is on that servicing asset that you recognize is there any amortization as that asset overtime.
And does that flow through overtime to amortize it on a quarterly basis, and then reassess it every quarter, yes, yes, and the way to think about as all relative to the growth for this at underline portfolio. So in.
In a kind of environment, where the portfolio static you'd see kind of additions to that portfolio and amortization more or less also offset each other but to the extent that portfolio is growing you would actually see that additional gains are the games now greater than any.
Physicians.
And is there any way to break out the amortization. It looks like you have an average life that you put in from the fair value calculation in the Q. It's about 4.2 years now obviously, we haven't seen a third quarter numbers, but there's a way to think about how fast will be amortized.
Yes, I mean, I think you need to think about it in terms. The average average life of our portfolio. It is it is a pretty short average life portfolio is made up of both the deferred interest reduced rate loans. So.
Anything about in that context to few if you look at our over.
Kind of.
Servicing portfolio itself. When you look at just at a high level like runoff statistics, it's close to 50% of years. The original balance. So it is a pretty short.
Life.
That sounds good way to think about the asset as is more on a fair value basis think about relative to the size of our servicing portfolio in the growth and that servicing portfolio.
That sounds good well, thank you for answering my questions and.
I appreciate the smelter in Q.
As a reminder, if you'd like to ask a question. Please press Star then one.
Our next question comes from ROP, while attack a.
Autonomous your line is open.
Morning, guys wanted to ask about the merchant count in home improvement I think it was only up about 30 merchant sequentially is there anything that contributed to that this quarter.
How should we view that in the context of the growth opportunity in home improvement from here.
Thanks for the numbers that we reflect our net.
And we did go through a comprehensive.
Merchant devaluation as we periodically do.
Looking at merchants that meet our performance and profitability thresholds and we took the opportunity to call our roster.
Probably the most significant call that we've gone through just based on the growth of the company.
And our ongoing desire to sort of to upgrade the people were doing business with.
So some of that reflecting just initiatives taken as part of our merchant management protocol.
Yes, let me, let me add to that.
We approve a little over 50% of the merchants that applied to do business with us.
And there are two primary reasons that will decline a merchant one is there too small.
No they only make a handful of sales a month.
The other is.
They haven't been in business long enough to have a track record where we can got comfortable that there is dedicated to serving the consumers we are.
And what we what we realize is over time, we had thousands of really small merchants.
That we're not not uniquely profitable.
And it would be better to graduate them and so I think what you're seeing is the noise in that.
Actually I know, that's what you're saying Im looking at sort of the monthly roster. We continue to add four to 600 home improvement merchants every month.
Left nothing's changed in that regard.
Got it. Thanks, that's really helpful. And then I'm just looking at operating expenses as a percentage of revenue.
Down sequentially good to see but also up again year over year. So can you just talk about how you're thinking about that balance between efficiency and scale in the opex lines versus the a necessary investment.
Yes, I would say at the high level comment we do have some expense were running through the current year that I do nonrecurring in nature, we had some on a comparative basis elevated professional liability costs being a public company for the full period versus that just kicking in at the end of May last year. Unfortunately did that.
Some litigation costs relative to a deductible in some professional fees like to believe those are nonrecurring in nature in the comp side, we had some non cash charge.
But where we're spending intentionally isn't IC and sales infrastructure and we're being very purposeful in building. These capabilities. So we are seeing scale. When you take out sort of that nonrecurring, we're pretty pleased with where we are and we think absent those non recurring recurring you will see the scale that you would expect that this sort of level of operate.
Basins.
That's great. Thanks, guys.
Welcome.
Our next question comes from Bill Lyon of Compass point Your line is open.
Good morning, and thanks for taking my questions two things all first could you give a little bit of color on the promotional period.
You are giving on your healthcare loans, specifically reduced rate deferred interest.
And the time period and has that changed.
Since you first introduced the product last year, and then second in relation to the EBITDA margin just to point of clarification, I mean, obviously, the servicing asset recognition head a little bit of boost on the EBITDA margin that you kind of downplayed it impact going forward and you seem to imply that the margins are going to be pretty stable. If you could just clarify that.
Point again, thanks, Greg I'll take the product side on the healthcare it has not changed.
The fundamentally to products and deferred interest products typically has a six or 12 month promotion.
And then.
A.
36 to 60 months fixed rate a PR product so.
On the deferred interest the promotion 612 months on the other product arguably the promotion would be a reduced rate airline for the life of alone.
And I'll.
Turn it over to Jerry.
Rob.
You want to repeat your second question was at the sustainability of EBITDA merger, where we saw going just wanted yes. It was just in relation to the servicing asset recognition, which created a bit of a boost in the EBITDA margin in the quarter, but just sort of looking forward do you seem to imply a fair degree of comfort that it's going to be pretty stable. So just when I get a little bit more clarification.
Color on that thanks.
As we as we think across the quarters, we continue to be.
I think convicted that this is a mid thirtys kind of EBITDA margin expressed as a percentage we've got some things going both ways in the current calendar year, including some of those nonrecurring expenses I made reference to when you add them together, they're not insignificant we won't expect those to.
Be present next year.
Accordingly, I think we feel very very good about sort of 35 ish kind of person EBITDA margin throughout the 12 month period.
Okay. Thank you.
Okay.
I believe that was our last call last question, so operator I.
I think where we conclude today's call.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
You're welcome.
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