Q2 2020 GreenSky Inc Earnings Call
[music], ladies and gentlemen, thank you and welcome to the Green Sky second quarter 22.
<unk> earnings Conference call.
His time all participants are in listen only mode. It brief question and answer session will follow the prepared remarks as a reminder, this event is streaming live on the Greens Guy Investor Relations website, and a replay will be available on the same site approximately two hours. After the completion of the call. It is my pleasure to introduce your host Amelia Friedman Vice President.
An equity agreed Sky. Please go ahead.
[music] someone may be on mute.
After the close of market trading hours yesterday Green I issued a press release announcing results for the second quarter ended June 30 2020.
You can access this press release on the Investor Relations section of the Green Sky website.
In addition, we have also said our second quarter Investor presentation, which we will refer to during today's call.
On the call today, we have David Sally Chairman and Chief Executive Officer, Jerry Benjamin Vice Chairman and Chief administrative Officer, and Robert Partlow, Executive Vice President and Chief Financial Officer. We're also joined by Jim Callaghan, Our President and Chief Risk Officer.
Before we get started let me remind you that her presentation in 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 to differ materially from those projected we disclaim any obligation to update any forward looking statements, except as required by law.
Information about these risks and uncertainties is included in our press release issued yesterday as well as in our filings with regulators.
We will also be discussing a non-GAAP financial measure adjusted EBITDA on today's call. This non-GAAP measures not intended to be considered an isolation from a substitute for or superior to our GAAP results and we encourage you to consider all measures when analyzing greenstein performing.
Non-GAAP measures described the reconciled to GAAP counterparts in the presentation materials. The press release dated August 10th 2020, and on the Investor Relations page of our website.
That I would now like to turn the call over to David.
Thanks, Amelia good morning, everyone and thank you for joining us it's good to be with you today to review our second quarter 2020 results.
As we continued to navigate Kobin 19, we're committed to helping our consumers merchants bank partners and our teammates navigate this challenging environment and continue to focus on the safety of all of our Green Sky Associates and their family members.
To that end substantially all of our workforce continues to work remotely from home.
Providing world class servicing and customer service levels to our bank partners Murchinson Greens Guy program consumer borrowers.
We continue to benefit from our investments in our Green Sky technology infrastructure and I continue to be gratified by the innovation of our talented workforce.
Now turning to our quarterly results, our second quarter operating results in key business metrics to pick strong resiliency of demand in our core home improvement business record levels of new merchant volumes outstanding credit performance.
Fective expense discipline across our business.
Our transaction volume for the quarter was 1.4 billion compared to 1.6 billion in second quarter of 2019.
After hitting a low point in April 2020, our volumes rebounded throughout the second quarter with April 2020 levels at 74% of April 2019 volume maybe volumes were 84% of May 2019 volumes in June volumes were 100% of 2019 levels.
With the persistence of covered 19, we expect to see the rate of rebound slow that's it's difficult to reliably predict volumes for the remainder of 2020.
Notwithstanding the impact of carbon 19 on this quarter's volumes the company reported a very strong second quarter adjusted EBITDA of $40 million depicting adjusted EBITDA margin of 30.3% compared to an adjusted EBITDA 37 million with an adjusted EBITDA margin of 26.7%.
The second quarter of 2019.
In a few minutes, Jerry will walk us through our key operating metrics and trends.
Impacting our business and then Robert provided detailed review of this quarters operating results.
However, I want to update you on 40 basis points are hardship assistance program diversification of our funding model. The final approval of our patent application and the conclusion of our board strategic alternative review process and related implications.
First our hardship assistance program.
As we discussed with you on our May call, 100% of Greens Guy Bank funding partners came together in mid March to offer voluntary payment deferrals for any green sky borrower requesting hardship.
Maximally, 4% of the balances in the company's 9.4 billion dollar servicing portfolio, our Greensky program borrowers that ever see payment deferrals in response to hardship requests.
The number of request for hardships peaked in the month of April and has declined significantly over the course of the quarter.
The rate of payment deferral requests screens Guy program borrowers continues to be quite low relative to what is being reported for other consumer loan programs, but nonetheless, a headwind Jerry will touch on further in today's presentation.
Second funding diversification.
As we shared with you in our May call. We closed on an asset backed revolving credit facility to finance purchase participations in loans by a green Sky sponsored SPV.
We completed the first purchases of loan participations by the SPV in June.
We expect that the SPV will then periodically conduct sales of the loan participations or issuances of asset backed securities to third parties, which would allow additional purchases to be financed.
Through the revolving facility.
As those sales are issuances occur the revolving facility could facilitate substantial volumes through the green Sky platform.
In addition to the new revolving facility, we continue to work with multiple institutional investors to complement our bank funding.
By both whole loan sale programs and Ford flow financing arrangements, we expect to close one or more of these financings in the second half of 2020, thus we will be supported by a mixed funding model on a go forward basis.
Third I'd like to share some key news on the intellectual property front. If you weeks ago. We received our final approval of our United States patent related to our mobile application process and credit Decisioning model. We originally filed this patent in 2014 and this approval is an important long awaited recognition of a key component of our green.
Sky proprietary technology platform.
Fourth let me now turn to our strategic alternatives review process, our board of directors working together with our senior management team and outside legal and financial advisors commenced a process to explore review and evaluate a range of potential strategic alternatives focused on maximizing stockholder value.
The board has brought this process to.
After extensive evaluation and deliberation has determined that our company can best drive future value creation by executing on a growth plan their leverages a renewed focus on our core home improvement vertical the cross marketing of complimentary products to our consumer program borrowers and merchants enhance merchant productivity.
Scalability of operations the termination of the Programatic sale of charged off receivables and funding diversification to support our continued profitable growth.
Over 19 undoubtedly length in this process and I appreciate the service of our board of directors as well as the patients of our team members and investors throughout this process.
With that process now behind us we fully embrace our standalone growth plan as contained in last Night's press release and as I commented earlier, particularly in light of our mixed funding model. We firmly believe that adjusted EBITDA is the most reliable metric by which to track the company's progress on a quarterly basis.
Later this year, we will host an inaugural virtual investor day at which members of the Green Sky Senior management team will present, the details of our five year plan.
Logistical details will follow closer to the event.
I'll now turn it over to Jerry.
Thank you David good morning.
The 1.4 billion this quarter transaction volume.
Hi, guys enable nearly 25 billion transactions.
3.4 million consumers decide for loan servicing portfolio now approximated 9.4 billion.
Consumer spending considerably more time in their home or horrible Ruben verticals continue to be strongly resilient.
It's actually volumes increasing considerably from April demand.
And then again for me.
The global 19 impacted our Q2 elected healthcare vertical was much more severe however, as virtually all stages prohibited Mormons elective procedures, Robbie monthly transaction volumes negligible.
Fortunately the this represents only a very small piece of our overall company origination.
As we progress through 2020, we plan to intensify our focus on enhancing our oldest proven product offerings.
Particular, any larger merchants that meet both our quality of productivity target.
While continuing to invest advancing the effectiveness of our risk management processes and procedures.
At our upcoming Investor day later in the year will be harlan manner by which our ability to communicate digitally the 85000 merchant sales associates.
Downloaded the greenspan mobile app can be leveraged to enhance sales productivity.
We continue to believe that the strong homeware credit buys resins and our loan servicing portfolio represents an important differentiator when can drafting the greenstein program with most other consumer loan portfolio.
We're extremely pleased Greens guys Q2 credit performance.
Turning to consistently improving trends that we witnessed now over the past.
[noise] as depicted on slide 20 of our second quarter 2020 investor presentation.
Dollar weighted average FICO score consumers that originations.
Sufficiently strong it's 73 second quarter compared to 769 same quarter last year.
As highlighted in last nights earnings press release, the credit quality, the company's loan servicing portfolio.
Since inception.
As of the company's June loan servicing portfolio portfolio.
Presenting the birds in originated weighted average cycle in excess of 700.
38% or as an excess of 70.
30 day delinquencies as or.
Order were <unk>, 0.74%.
Compared to 1.31.
The second quarter 2019.
57 basis point improvement compared to a year ago.
As David noted roughly 4% of our loan servicing portfolio with the payment deferral under merger requests.
This being said our small hardship rural portfolio had a very healthy dollar weighted average FICO score at applications of over 730.
The ultimate performance. These archon deferral account well currently difficult to predict.
We'll have.
What will kobin related unfavorable impact on future quarters.
In addition to the company's outstanding second quarter operating results due to was extremely productive from a new merchant addition bridge bank.
No we added new merchants that restarting network in the second quarter, producing more than $4.6 billion annual sales revenue.
New company quarterly record.
30, we had nearly 80000 active merger respect technology platform.
More importantly, the 6% growth and the number of active merchants on our technology platform over the last year the quality of the merger.
We focus not only on the substantial additional high quality merchandise, but also upon generated in Q productivity for merchants have been part of the Greenstein merchant network for many many years.
We partner with use of these merchants to successfully grow their business.
And you we've taken steps to Colo.
Don't meet our consumer satisfaction.
Published qualities.
We opened 19 versus to the partnership we have joined with our merchants has never been more important.
In order for a merchant better adapt to their customers financing needs of the current economic environment.
Worried or emerge.
As we the new promotional loan products, primarily additional reduced rate.
Loan products.
The merchant.
These product innovations have been very lowers.
We did do today, we remain extremely well positioned to enjoy significant increase in marketshare once economic condition restore normal.
Very good about the quality of or 9.4 billion servicing portfolio.
Quality the low respect for bank mergers in the second quarter was exceptional.
Before I turn it over to review the Companys financial performance for the second quarter I'm pleased to announce that would be though will be joining greens Guy later this month.
Companies.
President of Investor Relations.
Seasoned IR professional formal cell site equity analysts.
Greetings from John and are pleased to welcome.
Hi, guys.
We look forward to having Tom joined Us at our Investor day literally year, none our earnings call next quarter introduce them to many of you over the next few months.
Rob.
Thank you Gerry.
For me your line maybe on.
[noise] okay.
Thank you Jerry as I review the results of this for the second quarter in fiscal 2020 during my remarks, I'll refer to the corresponding page numbers of the presentation.
Please also note that all comparisons will be relative to the second quarter of 2019, unless otherwise stated.
Over the last several quarters, we have highlighted the improving year over year trend and performance fees that served to reduce the fair value change in fcr component of our cost of revenue in fact last quarter, we highlighted the material increase in bank incentive fees.
Received when compared to Q1 2019.
Representing a 76% increase in dollar terms at 56 basis point increase as a percentage of service loans and we reiterated our confidence that the Greens Guy was poised to continue delivering these positive trends over the coming quarters.
Increasing incentive fees are a byproduct of improving credit performance and a moderating cost of funds as outlined on slide 31 of this second quarter Investor presentation released last night. It is noteworthy that second quarter 2020 incentive fees grew 83% from 30.5 billion.
And in 2000 $19 million to $55.8 million, representing 85 basis points improvement as a percentage of service assets laying the foundation for the second quarter strong operating results. Despite the curve at 19 headwinds.
We also talked with you the last couple of quarters about how the new current expected credit loss or Cecil accounting standards change the accounting requirements for estimating credit losses.
I'll briefly remind you said our seasonal.
Impact is different than for bank that has credit what risk on on the loan instead, our primary financial instruments and scope or the financial guarantee arrangements with our bank partners, which are secured by our bank credit escrow, which is a significant component of our restricted cash on our balance sheet.
Under the new accounting for guarantees undersea so future loan originations buyer bank partners are not factored into the forecast of bank partner portfolio performance for the purposes of the new guarantee reserve calculation.
The key feature of Green skies innovative waterfall structures that creates very durable portfolios over our bank partners is the programmatic nature of bank partners continual loan originations to both replace Rob.
As wells to grow their portfolios.
Under the guidance of the seasonal standard we must now Sam.
A loan losses, whereby any consumer loan portfolio goes into run off with no new originations in the portfolio.
For the second quarter, we recognized a noncash charge of $10.2 million associated with our financial guarantees. However, it is important to note that during the course this quarter and so far in 2020, none of our bank partners have actually had to use any the escrow under these arrangements with us.
As such we continue to adjust our EBITDA for the non cash expense and will reduce our EBITDA.
When a bank partner uses cash under the financial guarantees programming.
Turning to our financial results, which correspond to page 20 at our presentation.
Transaction volume in the second quarter fiscal 2020, it was approximately $1.4 billion, 14% decrease from 1.6 billion originate our platform. The second quarter of 2019 as covered 19 depressed transaction transaction activity across our platform.
The company's transaction fee rate in the second quarter was 7.49% an increase of 62 basis points over 29 team 6.87%.
As cobot 19 depressed economic to economic activity during the second quarter.
Merchants pivoted their product offerings to more promotional products lower rates lower interest rates and longer promotional periods translated into higher transaction fee rate.
You can see the trend and transaction fee rate on slide 21 of the presentation and the trend of the interest rates of our bank partner transaction activity on slide 22.
Total revenue in the second quarter decreased by 4%.
Hundred 33 million from 139 million in the same period last year.
The transaction fees.
Totaling $102 million down 6% from last year.
Servicing revenue declined modestly to $28.5 million in the second quarter of 2000 $21.8 million lower than that $30.3 million realized in the second quarter of 29 team.
The decline was entirely attributable to the second quarter of 29 teens $9 million Mark to market gain on the servicing assets, whereas this quarters $1 million Mark to market was was realized as the overall level of the bank partner portfolio balances declined due to low covert impacted originations as well as the aggregation of loans held for sale.
Sales.
Absent the noncash mark to market on loans held for sale service fees, which are senior cash flows in the bank partner waterfalls increased to $29.5 million from $21.3 million driven by the year over year growth in the bank partner portfolios and an increase in the servicing fee rate from 1.08%.
To 1.27% this quarter.
As you are right as you may recall, starting with the second quarter of last year. Several of our bank partners servicing arrangements were amended to among other things increased or fixed servicing fees when servicing fees are higher than their market rate for servicing the excess servicing fees and create the servicing asset.
Interest income is a new revenue streams in Q2 and has increased to $2.7 million in the second quarter.
This is attributable to the loans held for sale in our balance sheet 411 million arising from the our new funding model special purpose vehicle.
Turning to slide 21, 29 cost of revenue totaled $64.9 million or 2.8% other servicing portfolio in the second quarter compared to Q2 29 teams cost of revenue of $56.2 million with the rate of 2.85%.
Cost of revenue has historically been divided into three distinct components servicing cost origination cost and the fair value change in the Fcr liability.
Now with our new mixed funding model, we had a fourth component to our cost of revenue a mark to market and other costs related to loan participations. This is where we will recognize the mark to market on loans, we anticipate selling in forward flow transactions, we will recognize the mark to market. When it does it make these loans for sale all loans on by the SPV will be designated.
As held for sale marked the mark to market will depend on both market factors such as interest rates, yes spreads as well as the types of loans held for sale for instance, zero interest rate loans and deferred interest rate interest rate loans will generally be sold at a discount whereas reduced rate loans will have premiums are discounts depending on the market.
Loans being sold during the quarter, we recognize the $10.8 billion loss on the sale.
Of loans held for sale.
Servicing related expenses for the second quarter was $12.1 billion are 0.52% of the average loan servicing portfolio consistent with Q2 2000, 19.2%.
For the second quarter origination related expenses totaled $6 million, 4.44% originations down marginally from 0.5%.
In the second quarter 2019.
On slide 30, we have provided the detail of how the fair value change in the Fcr liabilities determined based on the change the fcr liability.
Over the last several quarters I've highlighted the improving trends within the fair value change them yesterday, our liability and specifically the improving trends in incentive payments.
This quarter the improvement trend continues as the expense for the second quarter is $36.1 million or 1.5 fiber side, the average loan servicing portfolio.
Down from Q2, 2019 $38.8 million per rate of 1.97%.
The year over year decline of $2.7 million more importantly, 42 basis points and servicing portfolio was driven by the continued improvement in the bank partner performance fees due to a combination of lower charge off rates lower bank margins.
And higher finance charges.
Note that the improvement comes even though we did not pursue a charged off recovery sale during the second quarter.
Portion first quarter.
Whereas in 2019, we realized a 7.4 million dollar.
Game.
Quarter sales.
As we will make.
Moreover, time.
Retaining these receivables versus selling the receivables to investors, we do not plan to continue these sales going forward.
This can tune to this program is part of our funding diversification.
As we have does continue these sales our adjusted EBITDA for 2019 was recast to adjust for the sales to allow for comparability with 2020 performance.
In addition improvement and the fair value change in the Fcr liability has occurred despite the impact of the aforementioned 19 basis point increase and the servicing fee paid to Greens got that bank partners, which has the effect of reducing receipts paid screens guy.
On Slide 31, we also breakout the fair value change and yes your liability by the drivers of this expense line.
I'll begin with the expense for future finance charge reversals, which is the expense related to the building up the liability on our balance sheet for future finance charge reversals.
This expense in the second quarter was $95.7 million or 4.12% loan servicing portfolio.
In 2019 $77.7 million.
Or 3.94%.
The increase in this expense is indicative of a larger balance of deferred interest that's in our portfolio.
As previously previously noted the Fcr rate has increased year over year due to the impact of higher nprs on our transactions impact of these higher build interest on deferred interest loans has largely played itself out as you can see the rate has been relatively stable over the last four quarters.
Receipts from our servicing portfolio reduce the expense for future finance charge reversals, even though we did not off.
Offer a charged off receivables for sale this quarter.
We have in prior quarters receipts, Nonetheless increased materially this quarter to $59.6 million or 2.57% to the average loan servicing portfolio from Q2, 29 teams $38.9 million or 1.98% at the average loan servicing portfolio.
The driver the strong year over year improvement was within incentive pay the incentive payments line.
Second quarter incentive payments totaled $55.8 million for 2.4% of the average loan servicing portfolio compared to Q2 20 nineteens rate of 1.55%.
The approximate 85 basis point improvement in the rate. Despite the aforementioned 19 basis point impact at a higher servicing fees was driven by a combination of higher finance charges and fees for both the furnace plans as well as reduced it relate loans approximately 23 basis points.
Lower agreed upon bank partner yields as a portfolio benefits from the decline in rates of approximately 90 basis points.
Lower net charge offs as the portfolio benefits from the improvement we have made and risk in operations approximately 62 basis points.
As we noted previously we recognized a noncash Cecil financial guarantee expensive $10.2 million this quarter driven entirely by the growth of our escrow balances and the reserve methodology prescribed underseas.
Operating expenses, which exclude cost of revenue and financial guarantee expense increased quarter over quarter from $34.6 million to $38.1 million.
The $3.5 billion increase included a $1.7 million increase in that provision for loan losses on loans held for sale.
The remaining $1.8 million increase of expenses reflects modest increases, which are largely attributable to higher comp and benefits and RT and risk organizations.
As we never got navigate this difficult cobot environment, we are seeking a balanced expense discipline with investing in our team and our infrastructure.
Turning back to slide 28, net income for the second quarter was up there.
The profit of $13.4 million compared to 20 $39.2 million net income in Q2 2019.
DKI decrease was primarily due to a combination of both the recognition of the C., So financial guarantee expense of $10.2 million, coupled with the absence of a charge off recovery sale during the quarter versus the $7.4 million in proceeds during Q2 2019.
As we've indicated in our prior earnings calls we believe that adjusted EBITDA is one of the key financial indicators of our business performance over the long term provides useful information regarding whether cash provided by operating activities is sufficient to maintain and grow our business.
We reflect.
The noncash Cecil charge on as an adjustment to.
Given its noncash accounting construct in addition, we have recast prior periods for comparability purposes by adjusting for the charge off recovery sales. In addition, as we focus on maximizing our cash returns, we now make adjustments for noncash mark to market income and expense on servicing assets.
Adjusted EBITDA for the second quarter was 40 million.
An 8% improvement over 2019 37 million in the second quarter, reflecting how the core operations of our business model have improved year over year, just despite the extreme noise created by this these cobot impact at times.
From a balance sheet standpoint, I do want to highlight the $411 million of loans held for sale, which are financed with the $299 million nonrecourse SPV financing and operating cash.
You should expect to see our investment in loans held for sale ebb and flow each quarter as we aggregate loans for sales to our club partners.
In addition, during the quarter, we opportunistically raised $75 million of additional term loan debt.
To demonstrate access to capital as well as provides flexibility as we navigate volatile economic period.
Unrestricted cash of $140 million reflects the proceeds from the debt offering as well as investments in our loans held for sale.
With that like and turn it over to maybe just a kick off for Q in AG.
Yes.
Thank you Rob that concludes our prepared remarks and with that operator. Please remember first question.
Certainly ladies and gentlemen, if you have a question at this time Star then one.
First question comes from John Davis at Raymond James Your line is open.
Hey, Good morning, guys. David one just you could provide a little bit more color on the strategic review and specifically kind of focused on home improvement does that mean, you're going to kind of exit elective medical or.
Not expand in the future vertical or other verticals in the future just maybe a little more color on how you arrived that remaining public company, but also your comments, we're really focusing on home improvement.
Thanks for the question good morning.
Yeah. So I think it's pretty straightforward our home improvement business even in this environment has proved.
On an unbelievably resilient in terms of demand.
And so.
That's that's where we're focusing.
Certainly for for this year.
Other other business lines, which are much smaller for green Sky had been much more impacted but where we're already at 100% plus of prior year in home improvement. So that's where the bulk of our businesses. The vast vast majority, 90%, that's where all of our consumers and merchants are in terms of majority.
So it's sort of obvious for us that's where the focus is certainly as the environment returns to normal they'll continue to be opportunities.
And we'll continue to grow them, but we're focusing where the revenue is.
Right now.
And then in terms of the strategic review I think the board and management and advisors did it really thoughtful job.
And for Us.
Understanding the opportunities in front of us the opportunities on related to funding.
And the current environment.
Took longer than we wanted to but I think we.
Made some good decisions.
Have some good opportunities in front of us.
Okay, and then obviously films is pretty impressive the about the flat volumes in June.
Assuming that those of increase on a year over year basis in July and maybe early August seen any commentary there and then also along those lines credit remains very solid how much did you end or the banks tightened credit and if you did have you started Lucy and those credit standards at all.
Yes, so we.
We've been very cautious about volume, we certainly feel feel good about it.
But we're not going up we're not going to predict what this fall will bring a we're cautiously optimistic.
But we certainly feel good about.
It's certainly better than we expected relative to volume.
Especially considering our health care business was much more impacted that our home improvement business.
And.
The the performance of credit is a function of.
The industries that were in the positive selection that we got primarily doing business with homeowners and the credit performance is a function of years of work.
From our risk organization.
Preparing for.
The eventual recession, so we feel really good about that.
Thank you.
Alright, and then last one for me just high level, how should we think about the margin profile. This business going forward radio public. This was the mid fortys.
The margin business, obviously, there's a little bit different business model today with the difference on the next so as we think about the go forward I think you did 30% margins in the quarter. How should we think about what you guys think the right level EBITDA margin is the kind of think about the back half of this year.
Points on line.
Right, So I can't speak to the to the back half of this year specifically.
I think we've been consistent and.
Suggesting that overtime in long term. This is a 30% plus margin business. Jerry do you want to add some commentary to that.
Yeah, you nailed it did.
Absent any onetime cobot related impact.
The seasonal distortion, which is non cash.
Perhaps periodic mark to market adjustments that will go both ways over time.
I think this is Alan 30%, plus EBITDA margin business and as Gale.
We could move.
Midway point, there mid Thirtys and moving on.
David.
Okay, Alright, thanks, guys.
Thank you.
Thank you and our next question comes from Stephen World with Morgan Stanley. Your line is open.
Great. Good morning, and thanks for taking my questions just kind of what a follow up on some of those points. It maybe just to start out on the margins as we ended there.
Just going to the reconciliation how you guys have reshaped that relative to some of the things that have happened over the last year I think second quarter is typically mark the high point of the year for you guys seasonally on the margin and so I'm just trying to make sure I understand the puts and takes of what gets you to 30% margin as you shift the funding model and ready to see revenue each.
The revenue yield move higher or should we just see less pressure on the cost of revenue side from the Fcr and just trying to understand what drives the expectation for a 30% plus margin in what looks like it's been revised lower in terms of the margins from from the prior year.
Jerry do you want us we want to speak to that.
Can join me, we've got three things going on that I think you'll see.
Well, we're starting to see some nice scaled the business.
Good you see our customer acquisition cost and the investor deck is down 3% this quarter.
Historically would have been running 5%.
Use of might scale, there, we don't know represents sustainable forever.
We are seeing the benefits of our scale.
Our transaction fee mix appears to stabilize.
Could change we got back in the solar business in a meaningful way.
Well were advised there.
I mentioned earlier well, we have these mark to market adjustments periodically to your point.
Say that 50% of originations were but he is going forward flow investor related rate.
That would take all the beta of our business model there would be the last year.
So it becomes a simpler.
Vision for that piece of the business.
That is either or low.
We have arrangements universe.
Yes.
Close.
Revised meaningful drag and our cost of sales that LCR it would be realized.
Yeah.
Those investments held for sale or divest.
So combination of scale shutting the fcr.
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Right.
Okay. That's helpful.
We could switch back to credit in the delinquencies 74 basis points.
Yeah, I know that did that is the asterisk there around it could just excluding the deferrals looks great on its own just kind of wanted to get a sense of what you're seeing in terms of.
Customer behavior, there and what's your sense of if you were to normalize that within the deferrals of who you think would probably normally be on a delinquent basis kind of where you'd be he will be more within the range you been historically or.
I would just get a sense of where that might be once you normalize for that.
With only 4% of the servicing portfolio.
Well these are too.
The average Waco of the universe.
Is that are in the deferral population.
Is really shockingly strong.
Gifts say was tremendous confidence.
Rules will perform we're cautiously optimistic that will come out of this was double level.
Well George on the go to loss, but this is difficult to say.
Even if we normalize those versus rural.
Come up with a very very satisfactory.
The rate maybe than the 100 basis.
Something in that.
Okay. That's a problem then if I could just squeeze one last one following up on the strategic review, maybe if we just step back towards you know I reviewed your comment last night from when you. When you guys started in the sense was it the market was sort of missing something in the intrinsic value of the business and I guess I'm kind of wondering as we move a year ahead to kind of the stocks, where it is and obviously.
Thats happened cobiz happening or whatnot.
I guess I'm curious in terms of pushing ahead in the areas that have been core to you. The entire time with the you know major change being the move to add non bank funding.
In the coming year sort of what what it is that drove you towards you know deciding that the current course wouldnt would push the you know it would really enhance the market I guess I'm curious I guess, how your thoughts have evolved on that.
We we like to be continued owners of the business. We think it will be good for shareholders. We think that in the long term.
The opportunities are are good for for being shareholder.
Let me.
David.
The one thing is co. This period of time is reinforced to us.
We're just terribly.
Of the credit advice.
Due to the vast majority murmur being homeowners.
When we look at our credit performance when we look at our hurdle rate compared to the other consumer program. We're aware of what we'll look at the core performance versus maybe the strength of these borrowers.
When we look at our Jason online in E Commerce.
Touching homeowner.
We want to stay very very close.
We think that whoever buys.
Program out there of our mass of our debt.
Of our breath than anybody.
And that reflects itself the demand were seeing for our loans in the marketplace.
I think we're seeing for alone the marketplace.
The liquidity.
Program loans.
We're bank for.
I think they're very very pleased with the quality.
Versus the lack of concentration with turnover.
Tremendous attributes that we binders, though I think uniquely advantaged work as well so continued to invest in leverage that buys.
Gives us a unique asset to.
Value.
Understood I appreciate all the color.
Yes.
Thank you.
And our next question comes from Andrew Jeffrey with truly Securities. Your line is open.
Hi, good morning.
Taking the question.
Good morning, Andrew.
If everybody is doing well.
I'm I'm looking at the transaction fee rate and I think.
My understanding is to take rate improved this quarter.
More promotional offers I wonder if you could just elaborate a little bit is that.
Is that merchant, saying, hey, look, particularly great time to putting new windows or.
Remodel your kitchen, and and they're selling products that are that are more and more promotions in them and I guess I wonder how sustainable that is and what sort of sink.
But longer term impact is on your business is obviously, a very strong transactions in quarter I'm, just trying to think about how we.
Model that going forward, Yes, let me, let me provide some context, you'll you'll remember when transaction fee rate went down.
We reminded everybody that our economics are.
A combination of a transaction fee.
Plus be servicing revenue plus see.
The performance bonus.
Cash flow of the portfolio that we generate.
And when transaction fee rate goes down.
The performance fee tends to go up as.
Indicated by higher average build yield on the portfolio.
So shifts in transaction fee rate.
I do not impact the long term cash flow of the business.
It's easy to.
To focus on it for the short term.
But it doesn't actually changed.
Present value of the cash flows based on the origination.
So.
The answer to your question is were not from a long term perspective terribly focused on it what we're focused on is quality demand quality origination and quality performance.
Rob would you I would use ready to give guidance in terms of work.
We're building a model.
Yes, it could get.
Maybe we certainly have seen.
During the peak of the Kirby times, the transaction fee rate come up its actually down slightly up I think it's still remaining it's kind of level what would be a transaction activity we see today.
So I'd expect it to.
Our than it was the rate of this year than last year.
We are seeing I think margins due to this process I think they kind of realize the promotional financing isn't great way to drive sales.
I think theres, a little bit of stickiness in terms of the promotional products once they start using them, it's a little bit of a they realize that really effective sales tool. So I think it'll be right and not being a little bit higher than it was historically.
Thanks.
Okay, but but I guess the key message for US is it doesn't change your cash flows it's really the focus on quality credit.
Thats correct and again, that's what we said when take rate was down a few dozen basis points.
It's exactly the same accurate message when it goes up.
Yes, we've been consistent messaging.
Appreciate.
The high level.
It's a business that you want to own and that you think you can optimize for shareholders.
The opportunity in the Big Tam.
Are you spending enough to drive growth.
We think theres opportunities.
To accelerate growth.
We're just obviously being very cautious sensing that this environment, we're certainly delighted with the resiliency of quality demand.
And end up a little bit surprised by but we're quite quite encouraged by it so.
We think that as there's more visibility.
Into the economic and political environment.
We would expect to see an acceleration of investment and growth.
Okay. Appreciate thank you.
Thank you and our next question comes Chris Donat.
Your line is open.
Hi, Good morning, gentlemen, thanks for taking my questions wanted to ask one about the patent approval congratulations on a on getting through that got long and torturous process.
I'm just wondering if.
If you have anything it or what it means for the business model is there are there opportunities to license the patent.
I would there be potential litigation.
I imagine not just going to put it as a trophy over the mantle right now the.
Approved application there.
Good morning, Chris.
Nice to hear your voice, it's been a long time since any of us where in person.
Yes, I I, if it's pretty remarkable after nearly six years.
We we.
Appreciate the surface of the United States Patent office.
We do think it it presents opportunities and we're still evaluating that.
And so we expect it'll be more than.
Mantle on the fireplace.
Okay, and I guess will whatever will be aware of it when it happened.
Shifting gears wanted to ask.
It's impressive to see or.
The FICO scores that you put up this quarter and delinquency rates being low.
Any insight into.
How homeowners have behavior, perhaps benefited with the cares act in federal stimulus and unemployment insurance are you seeing any impact.
One of those activities on homeowners or is it is hard to tell what their borrowers if there if they're benefiting from ranting going on.
So I think that it's fair to say that a disproportionately low percentage of our consumers.
And program borrowers, either historically or prospective or new originations a disproportionately low percentage are positively impacted by extended benefits.
These tend to be.
Higher average income homeowners. So so I think that it's the the the fair reliable answer is disproportionately low positive impact.
Which also means disproportionately low impact to volatility of future benefits.
I would point out that delinquency pre March 15 was at record lows. So we feel like we were going into.
That environment.
In a great position.
Okay, and then just want us one more on the.
The mix of.
Of home improvement loans on slide 11 looked like relative to prior quarters, you saw a bit of a downtick in windows and doors, but improvement.
In things like.
Awnings in Sun rooms, and remodeling.
Is it fair to say this is like you're seeing people in a work from home environment.
Doing home offices or any general trends.
You want to comment on I know you made some in the prepared remarks, but just curious whats going on what we're seeing is a healthy and broad rebound.
I think that windows and doors was temporarily more impacted as it has it has a more complex supply chain.
We saw manufacturing capacity limited.
But we're seeing demand by category up begin to return to normal levels.
Okay. Thanks, very much David I appreciate it.
Thank you Chris.
Thank you are next question comes from Reggie Smith with JP Morgan Your line is open.
Hey, guys. Good morning, Thanks for taking my questions. A quick question I guess some numbers it receipts rate.
Nice uptick this quarter was curious.
About the sustainability of that and wed there. It is in any way impacted by anything that's kind of a shorter term in duration.
You speak about maybe payment.
The payment rate, whether that slowed and impacted that in any any color you can provide there on the sustainability of that and the Atlanta trends I got it had a follow up as well. Thank you.
Jerry.
Really just yet.
As you know the receipts or a by product the couple of factors.
Versus our underlying cost of funds I think we all believe were an interest rate environment.
And likely to remain there for the foreseeable future. So we feel pretty good about.
The rate outlook in the forward curve would suggest we should feel good about.
The other significant order to credit performance.
Indicated.
Recall that we felt like we were really in great shape.
Good.
Yes.
But it carefully.
Well.
In terms a pronounced improved.
In Q2 last year.
Yes.
So those to raise those two factors are the key drivers.
We continue to believe interest rates will be to moderate.
Every reasonably exiting cobot related impact the credit performance will continue to be.
So as Rob indicated in his opening comments.
We feel really well.
Oh.
Got it and I guess just to drill down a little bit obviously delinquencies it down which is great.
I've seen a.
I guess a slowing in the payment rate that may be benefits you guys like that that's helpful. Any tailwind there or things just kind of businesses as usual.
Any any any granular details you can provide there would be would be helpful. You see a slowing of the payment rate. Obviously, the 30 day delinquency is sort of leading indicator that we look at carefully as sort of future.
Indicator of what could be coming in the which are lower the better.
You saw the 30 day delinquency rates or.
That would not be shocking relative to.
Uh huh.
But we're not.
[music].
And I didn't Claire.
And in terms of dollar payment velocity of of customers. It remains strong.
So we feel good about that.
Got it and I think someone asked about July and I don't know if your your response to get lost in the other questions. But did you did you guys provide a could you provide any look into what you see in transaction wise in July as it is it better than June is it kind of stable to June like.
In any any insight there.
Would obviously be helpful.
We feel good about the.
The continued resilience of the business I don't think where we're publishing July numbers, but certainly relative to prior year July we feel good about it.
Okay. That's helpful. Last question for me I guess, the forbearance hardships when do those.
Roll off or when will.
That.
Mature in those come back to the life.
[noise] those those hardship deferrals were generally 90 days.
So we would expect.
Generally over the next 90 days.
Perfect. Okay. Thank you.
Great quarter.
Thank you.
Thank you next question comes from the line of Bill right.
Your line is open.
Good morning, and thanks for taking my questions.
First question.
Kind of a reiteration of a couple of has questions going incorporates incentive fees forbearances and expected net charge offs.
Lot of the banks are kind of talking about the lifting a forbearances.
What you're having a positive impact on charge offs currently that there's probably going to be some potential spike in charge offs going into Q1 in Q2 of next year.
With lifting a forbearances and the unwinding of.
Temporary benefits in charge offs and so.
And the outlook for incentive income going specifically into the first couple of quarters next year are you anticipating kind of the same phenomenon before it normalizes maybe in the back half of 2021.
And that's going throughout the follow up question just in the sense of timing that you might be selling some of the loans out of your SPV just.
Some color on that thanks.
Thank you great question. So this the simple answer is yes to the first question.
And the second answer is.
Second half of this year.
As we as we stated I think in our prepared remarks.
We expect one or more transactions out out of the SPV [noise].
Okay. Thanks.
Thank you.
Thank you and our last question Tim from Rob <unk>.
Research Your line is open.
Morning, guys I was just a follow up on that last one.
Can you give us any additional color on where losses have been historically and where you think they could get to or what kind of assumptions are informing that expectation for for losses to increase later this year in into 2021.
Yeah, So as as we noted pre cove it losses, as we look at delinquency and loss rate.
More of a leading indicator delinquency in February in early March were record low levels.
So we do think that that overtime. It has in coated the potential to.
Normalize to the historical losses, but we think that.
Foundationally, we're in a much better place.
And we'll we will absorb that over the coming quarters.
And that's based on.
An analysis of.
The fact that I think over 90% of the customers in payment deferrals were current.
Or not.
Not materially delinquent going into the payment deferral, which is which is probably higher than we would have expected which is good.
But certainly as we indicated we do think it's a short term headwind.
But it will it will be.
Continued to be highly resilient.
Okay. Thanks, and can you give us an update on where you are with the forward flow agreements.
It's taking some time for those discussions to get over the goal line. So just wondering.
Those conversations you are liking, where you're getting the confidence that that will still be a two to 3 million dollar commitment.
Jerry you want to speak to that.
Joining me here.
We're.
In the market in discussions advanced discussions with multiple investors.
Clearly, we're not interested in pulling the trigger prematurely just doing a deal to do a deal.
As interest rates to the structures of.
Normalized both goals.
The pricing or is it.
So our patients have served us well one of the reason we put that SPV employees was to be abuse little to warehouse. These assets. We periodically would sell those part of that is not forcing the market with timing living market forces take place.
As we mentioned earlier, we think we've got a unique competitive advantage given the homeowner by.
Stronghold revising the loans we facilitate.
As being reflected in bids we received.
Want to be long.
Consumer but.
Owners.
Yes.
Not a better please.
Good good reasons.
We are being pages this process.
Transparency weren't has done the math.
With multiple parties.
And as David.
We are very confident.
Transactions through the back half of the year, but fundamentally the demand for these assets is really quickly.
Feel very very.
Okay, Great. Yeah, I think you said in the past that you have made pricing wasn't as attractive in some of those discussions. So can we infer based on your comments there Jerry that the pricing conversations are a little bit better from your perspective today, given that things have normalized in the ABS market.
Great market.
Absolutely at the sort of political people didn't know what that Mark would look like it just lockup.
But it certainly tightened reasonably.
People were getting the pause button.
Further wanted to do sort of in sort of risk premiums and candidly we weren't interested breathing.
We have great comp while these assets.
<unk>.
For example in our.
As things have normalized market would become more liquid.
Got it available that are right.
Reflected.
Right.
We stick by the commentary we gave previously over the life of the lovely facility.
We believe the prices will see therefore lorraine.
And spot buys will be closely correlated with what or.
Cost of money goes bankrupt.
We feel very very good about.
Yes, Thank you guys.
Yeah.
Thank you and I'm not showing any further questions at this time.
Thank you speakers for any further.
Thank you everybody.
Yes.
Thank you everybody.
Today's call.
Ladies and gentlemen.
Conference. Thank you.
<unk>.
[music].