Q4 2019 Earnings Call
At this time, all participants are in listen only mode a.
A brief question answer session will follow the prepared remarks.
I know this event is streaming live on the Greensky Investor Relations website, a replay will be available in the same site approximately two hours after the completion of the call.
It's my pleasure to introduce your host Ms., Rebecca Gardy Senior Vice President Investor Relations at Green <unk>. Please go ahead.
Thank you Shannon and thank you, so all or listen that's for joining us today greed Sky issued a press release announcing results for its fourth quarter ended December 31, 2019. After the close of market trading hours yesterday March 2nd 2021 thing you can access this press release on the Investor Relations section of the Green side.
Website. In addition, we've also posted our fourth quarter fiscal 19, investor presentation, which we will refer to during today's call on today's call. We have David Salix, Chairman and Chief Executive Officer, Jerry Benjamin Vice Chairman and Chief administrative officer, and Robert Partlow, Chief Financial Officer.
Before you get started let me remind you that our presentation and discussions will include forward looking statements. These are statements that are based on current assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from those projected we disclaim any obligation to update any forward looking statements, except as required by law you.
One about these risks and uncertainties as included in our press release issued yesterday as well as in our filings with regulators.
I'll also 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 the GAAP result, and we encourage you to consider all measures when analyzing green size performance. These non-GAAP measures are described in reconciled to their GAAP counterfeit.
Parts in the presentation materials. The press release dated March 2nd Twentytwenty and on the Investor Relations page of our website and with that I would now like to turn it over to David David.
Thanks, Rebecca good morning, everyone and thank you for joining us it's good to be with you today to review our fourth quarter in fiscal 2019 result.
Our fiscal 2019 revenue grew 28% driven by transaction volume growth of 18% an increase servicing fee revenue.
Through our expanding ecosystem over 17000 merchants and elective health care providers, we reported a record $1.5 billion of loans originated on our technology platform in the fourth quarter, bringing total fiscal 2000 transaction volume to nearly $6 billion.
Over the last five years transaction volume has grown in their average annual compound rate of nearly 33%.
A testament to the power of our expanding base of quality merchants and the range of competitive financing products, we enable on our platform.
As a leading point of sale technology platform, enabling merchants, an elective health care providers to offer instantaneous financing Greens guy operates into vast markets, providing our merchants in providers with compelling innovative products and solutions for their customers continues to be paramount for our sustained growth to that end or robust.
Innovation pipeline, including enhanced feature functionality such as the Greensky Universal credit application is allowing us to become more deeply entrenched with our merchant network and widening the technology gap between Greens Guy and our competitors.
In combination with rapid market shares gains we've made an elective health care space and only four years Greens guys well positioned to again achieved double digit growth in volume in 2020.
This year, we placed an increasing importance on the quality productivity and profitability of the merchants in providers. The comprise our network merchants with over $2 million an annual sales revenue represented two thirds of the volume in our home improvement vertical our focus on merchant productivity is evidenced by the strong transaction volume originated by.
Each cohort as seen on slide 13 of the presentation, we posted on the Investor Relations section of our Websafe last evening.
We've worked side by side with many merchants to help them grow their business and also parted ways with merchants that don't fit.
We expect to see additional momentum and the current year from these efforts.
In a moment, Rob will walk you through the financial statements, but first I want to touch on two key business initiatives evolving and expanding our funding model and our board strategic alternative review process first funding.
As of the ended the fourth quarter, we had aggregate bank funding commitments of $9 billion of which 2.2 billion was on used as a reminder, bank partner commitments, our revolving in nature and as much as they replenishes outstanding loans pay downs.
Given our expectations for originations and portfolio run off we anticipate having approximately $2.7 billion in additional capacity become available during 2020.
Importantly, this is without any new bank partners, joining the Greens got consortium for expansion from existing partners. In addition, as we announced in December we reached an agreement in principle for 6 billion dollar forward flow arrangement with a leading institutional asset manager to complement our bank partner funding group the 6 billion dollar commitment.
Provides capacity of up to $2 billion per year over a three year term.
We expect funding persuade to this agreement to likely commenced during the quarter second quarter of 2020.
The Ford flow arrangement has three important characteristics.
Number one no escrow no fcr no Cecil number two no tail liability or volatility no performance bonus.
Number three approximately equivalent historic to our historic bank cost of funds same profit none of the volatility or complex accounting all recognize the time of origination.
And secondly, as announced in August 2019.
In August 2019, the company's board of directors working together with our senior management team and outside legal and financial Advisors has commenced a process to explore review and evaluate a range of potential strategic alternatives focused on maximizing stockholder value.
The Board review is ongoing and the company doesn't and does not intend to make further public comment regarding these matters unless and until the board has approved a specific transaction or alternative or otherwise concludes its review we expect to make an announcement in this regard no later than the second quarter fiscal 2020, I'll now turn it over to Jerry.
Thank you David and good morning.
From the company's inception through the end of fiscal 2019 Greens Creek has enabled over $22 billion, a transactions with over 3 million consumers.
As David referenced in his comments the market you would screens guy competes or a man.
By the Harvard University Joint Center for housing studies American spend more than $400 billion, a year on residential renovations and repairs well ivas worldwide in the applicable professional accreditations and societies and association estimates that Americans spent more than 300 billion annually on those sub sector.
As we elected health care that greenstein actively pursue.
Namely Dentistry vision correction veterinary medicine.
Intelligent noninvasive cosmetics and reproductive medicine.
Well, we believe the greenstein holds the number one market position in the home improvement vertical and the number three market position and elective health care. After just four years from launch our share of both of these markets remains model.
Blowing lots of room for continued material growth for years to go.
Well there market participants are attempting to emulate us we continue to successfully launched new products services and capabilities that further separate us from the competition.
In addition to our existing technology service and support we're extremely excited to see the response from home improvement merchants to our newly released products like Universal credit application and our preapproval marketing capabilities. They continue to make us unique in the market.
And elected health care, we're continuing to innovate to expand the ranger promotional payment options that have traditionally been made available by providers. The health care team is continuing to innovate on these products and services that are needed by providers. Walt the same time answering that the credit profile of approved program borrowers continues to meet our funding partners underwriting standards.
The feedback has been overwhelmingly positive and the pace, which elective health care providers are joining the greensky ecosystem shows, we're making exciting progress.
Accordingly, we enter fiscal 2020 with an intense focus on enhancing our home improvement and elective health care product offerings, adding larger merchants collective health care providers that meet both our quality and productivity targets, while continuing to invest in advancing the effectiveness of our risk management processes and procedures.
As depicted on slide 19 of the fiscal 19 Investor presentation posted we have never relax the Greens Guy program underwriting standards to stimulate transaction volume growth.
In fact, the dollar credit weighted average FICO score of consumers at origination was exceptionally strong have 771 for the fourth quarter and 770 for the full year.
As highlighted in Yesterdays earnings press release, the credit quality, the company's loan servicing portfolio remains truly exceptional with 85% at 37% or the company's December 31st loan servicing portfolio composed of hours with weighted average FICO scores that origination in excess of 707 80 risk.
Actively.
30 day delinquencies reached a three year fourth quarter and low point of 1.38%, which is impressive given the continued growth of health care originations, which depicts slightly lower average FICO scores of predictably display a higher delinquency rates relative to home improvement both our home improvement in the healthcare originations each a better FICO distributions.
Over the prior year and better performance within FICO range as.
We continue to make investments to enhance our proprietary credit merchant management tools and systems, which we believe will deliver additional improvements throughout 2020.
Early indicators show the 2019 home improvement vintage of originations has the highest weighted average FICO distribution and lowest early delinquencies of any loan bijan. We facilitated the same is true for the 19 Benadryl elective health care originations.
As of December 31st we had over 17000 active merchants and providers on our platform.
Our 15% growth rate in total active merchants over December 30, Onest 2018 reflects the substantial addition of high quality merchandise, none of our intentional and ongoing roll off of prior merchants and providers that didnt meet our performance or productivity targets.
The fourth quarter origination productivity index, or OPI was 20.8% down modestly from 21.1% in the third quarter and 22.2% in the fourth quarter of 2018, mostly due to the lagging nature of the 11th District monthly weighted average cost of fund index or coffee.
Given that effective January Onest 2020, the federal home loan Bank has discontinued publishing the Kofi Index management is reviewing alternative represented indices. The benchmark the directional movement a bank cost of funds for driven the computing opioid on a go forward basis.
And with that I'll turn it over to Rob to review the Companys financial performance for both the fourth quarter and the fiscal year Rob.
Thank you Jerry as I review the results for the fourth quarter fiscal 2019. During my remarks note that all comparisons will be relative to the fourth quarter 2018, and the fiscal year 2018, respectively, unless otherwise stated.
Transaction volume in the fourth quarter fiscal 2019 was approximately 1.5 billion compared to $1.3 billion last year or year over year increase of 16%.
Transaction volume for the fiscal year grew by nearly $1 billion or 18% to a record 5.95 billion.
The company's transaction fee rate in the fourth quarter was 6.76% down 10 basis points sequentially from the third quarter.
The fiscal year, the average transaction fee was growth at relatively stable at 6.82% down 12 basis points compared to 28 team.
The predominant driver of the year over year decline was product mix shifts as we had lower solar originations coupled with the marginal shift of originations from zero interest rate promotional loans to deferred rate loans.
As discussed on prior calls the variability of the promotional products, which are merchants and providers offer to their consumer causes our transaction fee as a percentage of transaction volume to fluctuate throughout the year based on the promotional products our merchants choose to use to drive sales activity.
Total revenue in the fourth quarter grew 22% to $133.8 million with transaction fees up 11%.
Servicing and other revenues increased 77% compared to last year, driven by continued portfolio growth and the recognition of $5.1 million servicing asset associated with the increase of the contractual fixed service in the for certain bank partner agreement.
For fiscal year 29 to total revenue grew 28% to $529.6 million the transaction fees up 16% of $405.9 million inline with our transaction volume growth.
Servicing and other fees increased 88% driven by the 30% growth than our average loan servicing portfolio as well as the recognition of a $30.5 million servicing asset in connection with the modification of certain agreement servicing agreements with certain bank partners, whereby the servicing fees, which were seen or cash flows in the waterfall where increase.
Above the market servicing right.
Cost of revenue totaled $69.4 million or 3.1% of assets under management in the fourth quarter and $248.6 million or 3% of assets under management.
Fiscal 2019.
We breakout on slide 29, the components of cost or revenue and to three distinct components servicing costs origination costs and the fair value change in the Fcr liability.
For the fourth quarter origination related expenses totaled $8.3 million or 0.55% of origination.
Down from 2.59% in third quarter and 0.66% in the fourth quarter 2018.
For the fiscal year origination related expenses totaled $33.6 million for 0.56% originations consistent with 2000, 18.56% of originations.
Servicing related expenses were $11.9 billion or 0.53% of the average loan servicing portfolio for the fourth quarter consistent with the fourth quarter 2000, 18.53%.
For the full year servicing related expenses totaled $44.6 million 0.5 forward for side.
And represents a marginal improvement over 2018 to expense rate of 0.56%.
On slide 30, we have provided a detailed components of the fair value changes in the Fcr liability I will focus on the Q4 over Q4 comparison as this will help isolate the noise created by the seasonal nature of consumer credit behavior.
The fair value chains in the Fcr liability for the fourth quarter was $49.2 million or 2.19% of the average loan servicing portfolio up from Q4 2018 $37.3 million are 2.09% of the average loan servicing portfolio.
The increase of $11.9 million largely reflects the growth of the balance deferred interest loans within our portfolio.
In addition impact of the 20 basis point increase in the servicing fee paid to Greens got that bank partners, which reduces incentive payments paid degree and sky and thereby increases is fair value change in SCR liability expense line item.
As higher servicing fee paid results in a higher net servicing revenue to green Scott.
Absent the ship to servicing fees from receipts to servicing revenue the fair value change in the SCR liability rate would have decreased from Q4 2018 to Q4 2019, reflecting the improving metrics in our portfolio of stable to improving credit along with declining bank margins.
On Slide 31, we also break out the fair value change in yes, sorry, fcr liability by the drivers of this expense line.
Beginning with the expense for future finance charge reversals, which is the expense related to building up the liability on our balance sheet for future finance charge reversals.
This expense in the fourth quarter was $94.4 million and 4.21% loan servicing portfolio up from 2018 $66.1 billion for 3.71%.
The increase in this expense is indicative of a larger balance the deferred interest than our portfolio.
As previously noted the Fcr rate has increased due to the impact of higher if yours on newer transaction volume and a higher mix of deferred interest loans and Oh elective healthcare vertical.
Received from our servicing portfolio reduce the expense for future finance charge reversals and totaled $45.2 million for 2.01% or the average loan servicing portfolio in the fourth quarter and were up materially from Q4, 2018 $28.8 million or 1.62% of the average loan service.
And portfolio.
Incentive payments are the principal components of receipts fourth quarter receipts totaled $37.2 million or 1.66% of the average loan servicing portfolio compared to Q4, 2018 $20.6 million or 1.16% of the average loan servicing portfolio.
50 basis point improvement in the rate. Despite the aforementioned 20 basis point impact to the higher servicing fees was driven primarily by the 73 basis point increase in finance charges in the fees from both deferred interest loans as well as reduced interest loans, coupled with a lower mix of zero interest loans being originated.
The other components of incentive payments from bank partners were relatively unchanged agreed upon bank partner yields increased two basis points at the impact of last year's higher rate environment has been offset by the lower cost of this year's originations.
The net charge off rate was effectively flat in Q4 2019 versus Q4 2018 as a benefit from the improvements we have made in restaurant operations have offset the impact of higher proportion of elective healthcare loans in the portfolio.
Proceeds from the recoveries of previously charged off loans and proceeds from charge off receivable transfers totaled 36 basis points. During Q4 29 team down from Q4, 2018 46 basis points as we reduced the transfer of charged off receivables during the quarter.
Operating expenses increased year over year, as we continue to build and invest in our team as well as in Korean certain expenses, we do not expect to be recurrent over the long term.
Compensation expenses increased $21.7 million or 35% for the year to 84.8 $84 million, reflecting a $7.8 million increase in share based compensation and continuing investment in our ITD credit from sales infrastructure.
Property office, and technology expenditures increased $3.9 million or 30% for the fiscal year $17.1 million due to higher technology contractor and consulting expense as well as higher software and operating lease costs.
General administrative expenses increased $10.7 million, a 77% for the year, largely driven by legal advisory and professional fees.
As we've previously discussed one of our bank partners did not renew their origination agreement at the end of November as a result, we realized approximately $60 million financial guarantee expense related to our expected usage of large proportion of the existing $19 million escrow note that historically have had a small financial guarantee expense related to.
While our legacy portfolios in the expenses previously included Gionee expenses, but are now broken out separately on the face of our income statement.
Other expense.
Net of other income increased $12.8 million to $32.1 million for the year due primarily to the 9.8 million dollar expense related to the remeasuring of our tax receivable agreement liability.
During 2019, we remeasured, our deferred tax assets resulted in $11.6 million tax benefit due to state tax law changes and obligation to filed in certain states for the first time.
Since most of our deferred tax assets are turbo to Amortizable tax goodwill and subject to the tax receivable agreement a corresponding increase in the tiara Trc liability was recorded with an increase in other expense.
Income tax benefit recorded during 2019 reflected.
Expected income tax expense of $8.2 million on the net earnings for the entire year related to Green Sky Inc.'s economic interest in June Korean Scott Holdings.
The expected income tax expense for 2019 was offset by 15.3 million dollar of tax benefits, which primarily includes the remeasurement of our deferred tax assets of $11.6 million and warrant and stock based compensation deduction for $2.3 million.
GAAP net income for the fourth quarter, and full year was $5.3 million and $96 million, respectively. Because of our up seek corporate structure GAAP net income reflects only the tax expense or tax benefit on the proportion of green Sky owned by the C Corporation.
We believe adjusted pro forma net income is a more useful measure of our entire enterprises operating results as this.
As it reflects seacorp income tax on all Green Sky earnings inclusive of the amount owned by the non controlling interest as well as adjustments for certain other items as noted in our press release.
Adjusted Pro forma net income was $20.5 billion in the fourth quarter down 5% from the fourth quarter 2018, and a $101.6 million for the full year down from $109.1 million in 2018.
The effective tax rate was 14.8%, 19.7% for 2019 in 2018 first respectively.
As we have indicated on prior earnings calls, we believe that adjusted EBITDA is one of our key financial indicators of our business performance over the long term and provides useful information regarding whether cash provided by operating activities is sufficient domain paint and grow our business.
Adjusted EBITDA for the fourth quarter was $35.3 million compared to $32.6 million in the fourth quarter 2018 for the full year adjusted EBITDA decreased 3% to $164.1 million from $170 million in 2018.
And our 10-K, we will also report comprehensive income, which accounts for the fair value chains in the $350 million interest rate swap as designate as a hedge of our interest rate risk on our term loan debt the fluctuations in the market expectations about the path of future Federal reserve rate cuts resulted in a mark to market gain in the swap.
$1.9 million during the fourth quarter and a loss of $2.5 million for 2019.
Actual cash settlements are reclassified into interest expense as they occur during the hedges for year term.
Turning to our balance sheet.
We finished the year with $195.8 million unrestricted cash free cash flow for 2019 was $43 million as detailed on slide 36 of our fiscal 2019 investor presentation.
We ended 2019 with approximately $51.9 million of loan receivables held for sale.
As we continue to periodically acquire and sell bank partner originations subsequent to December 31st were 19, the company executed a parcel of $24.1 million of on receivables held for sale within the company's bank partner network.
Looking ahead to our first quarter the company's adoption of the new current expected.
Credit loss or Cecil accounting standards will change the requirements for estimating credit loss to our bank partners escrow accounts.
Which are component of restricted cash.
We account for the risk of loss to the escrow funds as an off balance sheet credit exposure under financial guarantee arrangement and as we noted in our prior 10-Q. This type of guarantee is within the scope of Cecil Importantly, Cecil does not allow the inclusion of future loan originations by our bank partners. Thus the modeling of loan losses for any concern.
It is assumed to go into runoff with no new originations in the portfolio.
The adoption impact is expected to represent a significant portion of our $150.4 million escrow on our 9.2 billion dollar loan servicing portfolio as of December 30, Onest 2019.
Historically, our actual cash payments required on in the financial guarantee arrangements have been immaterial for our ongoing bank partners and we anticipate this continued to be the case.
As for many companies the adoption of Cecil will meaningfully.
Impact noncash.
Have a meaningful impact on our non cash earnings for GAAP and balance sheet and we're working through the refinements of the appropriate non-GAAP measure to be better aligned with our financial measures.
I will better align our financial measures with our actual economic performance.
Finally, before I hand, the call I want to let you know Rebecca Gardy will be leaving Green Sky next week as she is accepted in his new role reload relocating to the north East we want to thank Rebecca for her many contributions since joining green Skype for our IPO. We also want to wish her well on our exciting new opportunity. Thank you Rebecca.
And with that I'd like to turn the call over to Rebecca to set up QNX.
Thanks, Rob.
Operator, we'll take our first question.
Ladies and gentlemen to ask a question you need to press star one of your telephone to withdraw your question press the pound key.
Please standby only compiled acuity roster.
Our first question comes from John Davis with Raymond James Your line is open.
Hey, good morning, guys.
Maybe just wanted to touch on first of all why the decision not to guide for 2020, and I think an early to talk to double digit origination growth would maybe also to help us with directionally. The pieces, okay, great margin and how we should think about the outlook for the full year.
Hey, John just it's David can you hear me okay.
Okay.
Okay terrific.
So I'll take it in reverse order.
From our perspective take rate was a very stable.
And that's always been a function of mix.
So we think Thats a good thing.
I think your other question was around.
The.
Well I think was around guidance and as I mentioned, we are.
Completing the strategic alternative review.
And when that's completed then we'll be ready.
Okay, but just directionally should know how should we think about take rate now this year or margins and I think double digits organization growth, but just trying to think about.
What the profitability this business model looks like going forward. So just any sort of directional color would be super helpful.
Now let me tell you want to if you want to add some color to that yes, let me jump in here I think.
You'll note that our EBITDA margin for the full year.
If we take away the impact of our Fcr growth.
You would have about flat EBITDA margin I think the EBITDA margin adjusted EBITDA margin for the full year decline from roughly 41% of 31%. If we would have normalized the fcr. It would have been within 120 basis points of last year I believe the math is.
In structurally because of our moderating cost the bank funds and improved credit quality you will see in Q4 in the slides. The EBITDA margin converge is very very closely this year Q4 versus last year Q4, we think that's telling.
And a pretty good precursor of what we expected 2020.
Some people say do you have wind in your sale you never want to speak too soon but clearly from interest rate environment things are looking a.
Pretty benign that we'd all agree and from a credit point of view that we've been very very clear did indicate we're seeing improvements that are carrying over into 2020.
So those two factors have a very very material impact on our fcr.
Which as you know, there's a byproduct of our growing service portfolio. So as David said stable take rate, improving EBITDA margin, which only disaggregated for the prior year for 2019 based on the growth of the Fcr.
Okay. That's helpful. And then maybe we can run through just high level economics of the new flow Ford flow agreement, David I think you made some comments on the call that youre not going to get you're going to get a similar cost of funds.
With this agreement, but you're taking a lot less risk. So just trying to understand and foot. The economics don't appear to be changing but you're obviously, taking on risk less risk and volatility. So maybe just kind of walk through how that works.
Helpful.
Sure I think we yeah I think of it.
Go ahead David.
Now please Jerry.
We touched on this briefly on our last call as you would expect as we're selling basically loans.
That our banks originate into a forward flow arrangement.
There is a true up at the point of time of that movement. So you'll either have a gain or loss recognized on the movement because those loans will be sold either up or.
Premium or discount.
The David's point, there is no Cecil implication because there is no no no ongoing economic in that loan it's held by the counterparty. There is no escrow for the same reason and accordingly, you have what I call. It closed transaction. So your points well taken there is less risk becomes with the cost some of those loans will sell at a discount.
But as David pointed out over the life of the loan arrangement, we would expect the economics to be approximately equivalent to what we've historically experienced.
Okay, and then last one for me the opium right I think it was down 140 basis points on apologies if I missed it may be just what what kind of drove that and.
How do we think about where were how you guys think about the OPI kind of going into next year I know we bring habit.
Index change, but just high level commentary on the profitability of originations with all the new mix of the forward flow into the different forming agreements.
Sure sure I think the computation of the idea to measure.
The productivity of originations in a given quarter taking into account something that approximates our bank cost of funds or our treasury cost of funds based on where funding is coming from still has merit. The coffee index is being discontinued by the federal home Lord but it does have a lagging nature. So right now as we report coffee in Q4, it didn't show the bench.
With that of the moderating interest rates on sort of a real time with a lagging indicator. If it would have it would have been much closer perhaps higher the Q4, a year ago. So I wouldn't make too much out of that we're we're searching and my guess is as opposed to the coffee, we'll be using something that may be swap base as a surrogate for cost of funds is.
Maybe a closure estimate.
Of what our bank cost of funds were treasury cost of funds will be after theres a mixed funding model.
That makes sense.
Yeah, Okay. Thanks, guys sure.
Thank you. Our next question comes from Stephen Wallet with Morgan Stanley. Your line is open.
Hey, good morning, and congratulations Rebecca.
Thank you and maybe if we had just if we could just start with the.
The strategic alternative I know you guys can't really comment too specifically, but if we kind of rewind the tape back almost year almost half a year.
Seemed like it was sort of a sense that the market was missing something and you guys wanted to make sure you could maximize shareholder value could you just talk us through anything you've seen since then that may have changed or.
Maybe you could definitely since you've gone into the review process, what you sort of seen in terms of.
You know whether you know I think will obviously thought maybe you were talking about something like a dealer.
Has anything changed there since you've announced that that we should be thinking of in terms of how you're thinking about this.
Well I would tell you know I don't think anything is.
I don't think anything has changed.
What we've seen is that.
The enhancements from.
The incremental $6 billion of funding in the implication that that has.
On our accounting, we think is a real positive.
You can imagine what our personnel in our balance sheet looks like.
If the vast majority of our funding has no escrow no fcr now know Cecil with similar lifetime economics to Green Sky.
No no tail liability or volatility we've also seen that there are alternatives.
[music].
That is part of part of the valuation Jerry I think you had something to add.
Though to your point I think the board's been purposefully comprehensive in their review.
He is always take longer than you think they would but to your point.
The accounting implications of what May become a mixed model where were supported by our historic Bank program that we like in value.
Complemented with a forward flow arrangement, there implications to us if someone's looking at a transaction. There also implications to a counterparty and this accounting provision is somewhat new and it's been a fluid the interpretation have now to apply it because our bank model with our waterfall is not typical in the marketplace. So there's been learnings bye.
The outside audit firms ourselves as well as I sense Counterparties looking at the company. So it's taken sometime but I'm confident the board's being comprehensive and thoughtful and their review.
Got it.
David I think you sort of you alluded to this in the last point there.
Yeah, the shift with the new partner and the $6 billion full and slow as you kind of gone into the finalization of that and as Youre looking at that's quite a sizable commitment how does that change your view overall on where you guys should be pushing for the next leg of things should this be more should we expect this to be more than non.
Thanks focused.
Flow strategy in terms of new partners or will you continue to be pushing on the bank funds as well.
We love diversification, we love our Bank partners, we love Nonbanks.
I think what you should be looking for from us is a.
Better accounting simpler accounting, a simpler way to understand the PNM will the business and Thats one of the advantages of the structure.
Not not not to mention at least $6 billion of incremental liquidity.
And so our focus always has been.
Diversification of funding.
And certainly as part of this strategic review is.
How do we provide better information that allows.
And investor to understand the actual performance of the business because the gap the way we have to do today is not particularly helpful.
Got it and if I could just maybe squeezing a quick one at the end here.
On the rate side of things, obviously resembling around quite a bit but I think we all the call how things kind of went moving toward more of the economics out.
So the higher interest products over time as things maybe come down the other way.
Pending on where rates that allowed how are you guys thinking about that in terms of how that could impact take rate versus.
More sort of servicing or interest rate driven revenues.
Yes, so on on the way down what we have not seen as a material change in in take rate.
As you can see 10 basis points or less.
So we haven't seen a material change.
And it's rates rates have been back down for a while now so.
Okay, great hasn't changed the interest rates have not materially changed.
Got it okay. Thank you.
Thank you.
Thank you. Our next question comes from Andrew Jeffrey with Suntrust. Your line is open.
Hi, good morning, Thanks for taking the question and congratulations Rebecca thanks.
Appear ready for colder winters.
So it sounds like it David in Gerry it sounds like you've undertaken a fairly.
Comprehensive review.
Risk and it's a both I think mostly I would think sounds to me on the contractor side the merchant side.
Can you talk about sort of how far through that process you are whether theres been any trade off.
Between.
Contractor quality overall and growth and if maybe if we're nearing the end of that process.
Do you feel like we could see some acceleration just sort of maybe same store sales of I think about it that way.
Yes, yes so.
I would expand what you've said we're not we we we we've taken a comprehensive review of risk, but not just on the merchant side.
We certainly worked very hard on expanding and diversifying the funding.
Quite substantially.
In addition that funding structure dramatically changes the lacked with lack of volatility on the on the tail.
And yes on the on the merchant side Weve focused heavily on.
Profit and profitability and and risk and customer satisfaction and so we we are now where we want to be we're beginning to see the benefit benefits of that.
We do think that now that we have that behind us.
The the.
The the back book is where we wanted to be in so we do think that there's.
Those aspects of of tailwind.
Okay and.
Just a with regard Rob it sounds like you alluded to in your comments.
Perhaps an elevated level of investment in span.
You know to support Green skies growth.
Do you anticipate operating leverage and I'm thinking about the sort of.
Mostly fixed cap cost categories.
In opex, whether that be comp and benefits are DNA.
Again leveraging 20.
Yes.
Okay awesome. Thank you.
Thank you. Our next question comes from Chris Donat with Piper Sandler Your line is open.
Hey, good morning, Thanks for taking my questions and congratulations Rebecca.
Thank you just just one clarification on the timing of the strategic review do you mean that it will it will.
Are you expect it to conclude by June.
Thirtyth or March 31st.
June I'm, sorry, Q2, no later than the end of second our second fiscal quarter.
Okay.
Okay and then.
Looking at the I think I'll throw this one to Rob just on the.
The financial guarantee liability and the seasonal impact as we think about it going forward and you know I see that disclosure on slide 18, and then the 10-K.
Can you give us out on a high level sort of the puts and takes on what will.
Cause that to move what will we will that be a function of the.
Of the size of escrow is that what's going to be driving it or are there other factors that move it.
Yeah, Let me just kind of highlight that was.
See so those kind of have this this framework, where it's what's it's an unnatural.
Presumption that all no no new originations go into the bank partner.
Portfolios, so escrow ends up being utilized as a wind down under kind of draconian fashion.
So for first and foremost all things being equal a feed it had no growth in your servicing portfolio our growth in the bank partner portfolio and no growth in escrow.
It actually expect to see no real change and that seasonal expense quarter over quarter, because there'll be no real cash usage out of that.
So.
Doing larger terms when you look forward, whether it's David highlighted with the new.
Forward flow structure, there is no escrow associated with that.
So with that you will see a portion of our originations and a portion of our growth in our servicing portfolio not go into bank partner structures with escrow, but into these other structures.
So while you would expect off as the escrow grows you would expect their wses of charge associated with that escrow growth. You should also expected diminished growth in that escrow portfolio or escrow balances because we'll have more originations in these non.
Escrowed bank partner structures.
Does that make sense.
I I think so so but but if you were to have.
Say another situation, we have a bank partner and or decrease.
That that causes the head like you had in the fourth quarter right. It was mostly the and to regions or or was it also the shrinkage of another relationship there.
No that was driven by regions and.
Got it if you will the kind of.
One color code name, but the quick nature in which they kind of.
But their portfolio.
Going to run off versus kind of more of a typical orderly rundown of the portfolio, which is what we've seen in the past the bank partners.
Okay.
Okay.
Got it on that one or at least I think and then I'm just thinking about the the flow agreement and the the gain on sale or potentially some some discount.
Can you also talk.
About where.
Like the different impact from either loan types or or other factors that will drive whether or not it's a gain or loss on sale. Just so we can.
Yes, the start to get our heads around this one.
Yeah, So, it's saying or Matt it it's a net.
And it's a net so for example, we originate $100, we might get a transaction fee of 7%.
Depending on the.
Investors expected future cash flow that hundred dollar origination might be worth.
A 1% premium of 1% discount and so we would not if we got 7% transaction fee and end up parcell, we'd not seven.
The net equivalent of those two pieces.
Are the same as the net equivalent of what what our bank cost of funds is today, except Theres no fcr. There is no escrow, there's no Cecil there's no tail liability or volatility.
Right and and Dave just to be clear in terms of financial reporting as longer you will have the bank partner relationships you will have some component of I mean, unless there's some change.
Out there, but do you still have the fcr liability and seasonal impact for the bank partner side right.
No no question my comments on no Esprit no escrowed Fcr are only in the context of this forward flow alright, and would only apply to similar forward flow.
Certainly there are scenarios, where greens guy could.
Could provide non-GAAP reporting to translate it more simply for everybody. There is also the possibility of of some of our banks.
Moving to a different structure, but but but our objective number one is diversification of funding and number two providing a simpler PML.
Which.
Gets us on the path on the path to.
Got it into the non-GAAP and the banks move into different structures or whatever they're there and the realm of the possible.
Sure.
Okay.
All right thanks very much.
Thanks, Chris.
Thank you. Our next question comes from Ashwin Shirvaikar with Citi. Your line is open.
Ashwin. Your line is open please check your mute button.
Sorry about that.
Hey.
So I had a follow up question on the forward flow.
Piece of fate.
Does that have.
Specific.
Use cases applications that are different than what you've been doing.
I'd like to understand that he said a little bit better because as you as you might imagine anytime someone says.
You know same returns less today.
Oh, Hi returns same risk or something like that it does need to a level. The skepticism. So if he could delve into that a little bit more to appreciate it.
[noise] Jerry why don't you why don't you speak to that.
Sure sure.
So in these arrangements, we expect the counterparty to price the specific types of loans.
That would reflect the underlying cash flows so if they're buying a reduced rate loan.
We expect that loan to be sold at a premium.
If were booked selling a deferred interest loan where the cash flows from the ultimate consumer.
Our perhaps abated or deferred obviously, the counterparty values those cash flows less those would sell at a discount.
One David says that the cost of funds will approximate our historic bag.
Funding.
We ran a pretty brief process received multiple indications of interest.
I was pleasantly surprised by third parties view of the quality these assets.
And obviously we.
We'll look to optimize our cost of funding based on what we sell into the forward flow arrangement, but I think generally speaking David's assertion that will approximate bank cost over the life with alone is an accurate statement.
Got it okay. No that's helpful. HM a lot of sort of macro question obviously.
As the is awards sort of happening with the.
And should be whitening impact of to widen said, so and so forth.
No I wouldn't think.
There is a direct impact do you guys, but how you guys thinking of potentially and.
Indeed act impact because of macro weakness or because of.
Sort of a coordinated disciplines part of which Mike and lot of low enough voting interest states.
Things like that.
Any any early thoughts on framework or how you guys. It thinking about this so any past history.
With regards to.
Yes macro up macro bounds.
Yes, so we've been in touch with many of our key relationships manufacturers.
Merchants and our first.
Question was around supply chain disruption.
And generally what's been reported to us is confidence that.
Particularly in Windows majority is manufactured here.
The there there there are no critical supply chain requirements.
From Asia, and there are alternatives or ample inventory so from a supply standpoint.
We havent heard from from many of our key relationships any particular concerns again that speaks to the particular industries that we're in.
And certainly we have not seen anything from a demand standpoint.
Thus far.
We are certainly well positioned to adapt and adjust.
Yes, if anything changes, but we certainly haven't seen in any lending indicators in the last few days are few weeks.
Got it.
Thank you guys and add it back our congratulations on the new opportunity. Thank you.
Our next question comes on to Anson Huang with JP Morgan Your line is open.
Thank you and thanks to a good back one to ask on the fourth flow first like everyone else out how does just trying to understand one last thing just how was going to fit the around Robyn model again trying to understand how you will tap this funding source versus your your legacy funding model.
Great question. This is just another member of the round Robyn.
So our existing bank network continues to want loans and.
And this will be another series of pegs and around Robin.
Right. So I know that you'll obviously learn as you go with discovery, but with the accounting implications probably being a benefit just trying to think about the economics versus the optics and everything else and how that fits but we should just think about it as one more piece of it.
Yeah. So look our first objective as always.
Ample and diverse funding and we're really excited about that second objective is lifetime profit and cash and then third objective is optics, we think that we can use this.
Clearly it it does a wonderful job of all three we think we can use this.
And emulate this approach with other funding partnerships or use the same data to present information that we think will be more helpful to the public audience understood got it. So then my second question follow kind of question like let's say, it's just on the volume I heard the double digit outlook, but I'm just curious.
If you were asked how would how should we benchmark your potential for volume growth going forward, what level would be satisfactory and in your mind, you talked about still relatively mature or low penetration secular growth is still there I know the the funnel is somewhat changing both at the top in the bottom but.
Give me any outlook on I'm had a benchmark it.
Originations Jerry you want to provide some provide some additional clarity at this time.
Yeah sure to David's point, our market share and these very very large amount of markets.
Continues to be pretty modest notwithstanding we've been growing 800 $900 million a year of originations.
I think if you look at the growth in Q4 over.
Over the prior year, where it was.
Flows around high teens.
Mid teens, the high teens that feels like.
A reasonable place to start as we look into the coming year.
We've sort of gotten a little bit back to basics, focusing on the credit quality emerging quality and to David's point put a lot of investment and processes systems.
Talent, that's really paying dividends and will for years to come over the life of the servicing portfolio would that will come little bit less volume no doubt.
And as we pointed out and have consistently we purposely have never relaxed underwriting standards to stimulate growth.
Correspondingly when you employ.
Discipline and focus on merchant quality.
Credit quality and get back to basics, you'll have a little bit muted topline I would suspect. So I think Q4 kind of growth is probably a reasonable proxy for what to expect as we look forward.
That's helpful. It is thanks for the <unk> shirt.
Thank you as a reminder, ladies and gentlemen to ask the question you need to press star one or your telephone.
Our next question comes from Dell, Ryan with Compass point Your line is open.
Thank you and good morning, just a couple of questions first on the regions portfolio.
Obviously, you've disclosed it for a couple of quarters, but within the possible category not probable.
What moved it to probable in the fourth quarter and you know I may have missed the explanation on the call, but you'd normally run you know these adjustments through the TNL not as an adjusting item in this quarter you obviously put isn't adjusting items. If you can get a little clarity on that.
And then just the second question on the funding side, you kind of add up the 2.2 billion bank funding liquidity.
2.7 billion write off 2 billion from the Ford flow agreement you get to about 6.9 billion in terms of funding capacity for growth in 20, our originations in 2020.
Do you feel you know our how about sands and it seems like I guess the consensus numbers about 7.1 billion in volume. So do you have to kinda add some partners during the course of the year and more importantly for the benefit of 2021 in terms of funding capacity. Thank you.
I'll take the funding and then I'll turn.
The regions question and accounting back to Jerry and Rob on the funding side, we feel very good about.
The bank funding that work the existing.
Open to buy as well as the increase from the Paydowns.
And if we wanted that number to be bigger we think that there's plenty of demand.
And with that number is exactly where we wanted to be as it relates to a 2021, we're going into next year already with what at that point would be $4 billion remaining on the Ford flow again.
If based based on the process. We ran there was.
Mhm plenty of demand. This was just one relationship that we're launching with on the forward flow side. So we feel that we're in really good shape.
And I guess I'll jump in as Rob related to the question on the.
Region as we as we noted in that 10-Q's in prior quarters, we certainly.
We cannot disclose the risk.
In the first in the fourth quarter Nov is when they actually did not renew and that's kind of where we flipped the from be impossible to a probable in terms of the yes the risks.
And from a earning from a location standpoint.
As we've talked about in the past.
Most of our back any of our smaller bank partners or bank partners. Whoever left the program has always done it kind of an orderly way of in terms of allowing their portfolio to go into run off our but slowly I'm doing a mild manner continued originated on other portfolio to kind of decline over time or.
Selling their portfolios are doing other transactions, which didn't resulted in a escrow usage and we look at this.
Ah regions kind of path was just kind of different and something we would expect.
You know kind of more unique in the nature and it certainly is a noncash items. So.
We looked at that as kind of not representative of kind of our core business and how we're operating in 2019.
On a more of an anomaly. So when we're thinking about kind of these these measures its more about trying to represent kind of the earnings power of the company. What we're executing in 2019 versus kind of a one off bank decision and that was how we made the decision on I'm showing it as a.
As a non.
As an adjustment to our pro forma net income.
Okay. Thank you.
Thank you. Our next question comes from Rob filed Heck with Autonomous Research. Your line is open.
Good morning, guys following up on the forward flow in round Robyn am I understanding it correctly that when the forward flow partner is up and around Robyn They get the one on whether its home improvement I'd like to healthcare reduced rate deferred interest and then what happens if you don't necessarily see I on the price I mean, what if you think it's worth.
101, and they price it at 97, how does something like that resolve itself.
So the first answers. Your question is yes, and the second answer is we have agreed on price and it is the equivalent of our bank cost of funding.
Got it okay. So.
It's it's not an auction right.
It's it's already been agreed to it has it has an index no different than our or similarly, situated to our bank partners.
Thats something that can be amended annually or is that sat for the entire at three year agreement.
Jerry do you want to speak to that.
Sure sure.
We have reached pricing.
Agreement as David indicated this is the first of what we suspect will be multiple forward flow arrangements parties can always go back to the table and seek to renegotiate or.
Not our intent.
As we have gone in the marketplace, we saw it would suspect.
There will be opportunities, where select counterparties, they price or product differently than other counterparty. So we'll have the opportunity to optimize a bit.
And I don't think that would jettison anyone but generally speaking we are looking to optimize our overall cost of funds and we'll continue to.
As with any counterparty.
Okay. Thank you.
Thank you we'll take our last question from Jason Kupferberg with Bank of America Your line.
Hi, there on for Jason just real quick on the public float.
And it's just hard to make sure I think just that's similar to the last question about.
The debt for all the all different types of loans as auto specific type of knowing <unk> any kind of restriction on the types of loans you can put into that forward flow agreement.
No the agreement flow arrangement.
Sorry, Gary let Jerry.
The agreement contemplates a selling our traditional reduced rate loans as well as our deferred interest loans in our zero interest loans.
There are partitions regarding amounts that reflect sort of our.
Mix of originations so nothing terribly unusual there.
But in response to the prior question just to be clear.
Swap rates and changes in swap rates are the underlying index that impact pricing. So we're playing in a level playing field or a market that people respect and as we look from counterparty to counter party be those underlying swap rates will impact our cost of funds just like bank cost of funds impact does today and margin on swaps.
Grades so nothing changes in that regard.
Got it and then I wanted to go back to I think you mentioned a couple of times as potential to some of your bank partners to do you know similar type arrangement, that's like actually a whole lot sale almost well this is the foreign.
Which would obviously simplify y'all upon thing and so is this something that's.
And I guess that you're in talks within your own discussions with your foreign bottles and because it's just a potential that you see.
That makes sense I I would I would I would say, it's a little bit of both.
Bob.
I'll leave it at that.
Okay, and then just maybe just switching over just real quick but was curious if you could just provides looked at a more followed as well in terms of what you're seeing in the market. Both from a from a much in perspective, you know I appreciate that you guys have.
Tightened underwriting maybe a little bit of before going back to basics of you said.
Sure. So some bookseller meaningful deceleration we've seen this year in the growth rates for this transaction will you and I was just wondering if you could just talk a little bit more about that what you'll see in how we should think about that spending next year. Thanks, that's all my questions.
Yeah. So I think Jerry provided some good direction you saw growth rate in Q4.
And.
From our perspective, as we keep getting bigger percentage is get harder.
But we've seen good consumer demand good merchant demand, where we're having excellent early vintage is from a size standpoint.
Just as our denominator keeps getting bigger.
You know.
We we it's harder to grow 50% when your six $7 billion. So we're seeing very good demand and we feel good about.
The the market in 2020, so far.
Thank you.
Okay. I think that was our last question operator is that correct.
Yes, ma'am. Thank you. Thank you everyone for joining us it's been a pleasure and we hope everyone has a great day.
With that ladies and gentlemen, this does conclude today's conference. Thank you for your participation you may now disconnect.
[music].