Q2 2020 ECN Capital Corp Earnings Call
Thank you for standing by this is the conference operator welcome to the you see on capital second quarter 2020, <unk> results Conference call.
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I'd now like to turn the meeting over to Mr. John a website. Please go ahead Mr. website.
Thank you operator, good afternoon, everyone.
Thank you for participating in our conference call to discuss the same capital second quarter 2020 results announced earlier today.
Joining us for Stephen Hudson, Chief Executive Officer, Michael <unk>, Chief Financial Officer.
And usually summarizing these results was issued this afternoon and financial statements and M. DNA for the three month period ended June Thirtyth 2020 up and filed to see dark.
These documents are available on our website at Www Dot you see on capital Corp. Dotcom presentation slides to be reference during the call are accessible in the webcast as well as a PDF format under the presentation section of the company's website.
Before we begin I want to remind our listeners that some of the information we're sharing with you. Today includes forward looking statements. These statements are based on assumptions that are subject to significant risks and uncertainties.
I'll refer you to the cautionary statements section of the M. DNA for a description of such risks uncertainties assumptions.
Although management believes that the expectations reflected in these statements are reasonable we can obviously give no assurance that the expectation of any forward looking statements will prove to be correct.
You should note that the company's earnings release financial statements Mdna in today's call include references to a number of non <unk> for us measures, which we believe helped to present the company. Its operations in ways that are useful to investors reconciliation up he is not I have for us measures to I have for us measures can be found in our Indiana all think.
As a percentage in U.S. dollars unless explicitly noted.
With these introductory remarks complete I'll now turn the call over to Steven Hudson Chief Executive Officer.
Thank you John and welcome to our second quarter coal.
Second quarter saw significant business rebound.
We are pleased to report both earnings per share of seven cents as well as solid operating results and the cobot 19 affect a quarter.
As we will discuss shortly you'll see approvals originations have rebounded strongly at both service finance and Tri Ed.
More importantly, our credit assets continued their exceptional performance on behalf of my Bank partners.
Service I didn't see used on an extraordinary take share opportunity in the second quarter.
<unk> unprecedent growth and dealers, which we'll discuss a few minutes.
Service finance locked in substantial funding for 21, including adding a global investment manager, specifically, Canada pension plan investment board as well as expanding and extending current funding partners early and adding to credit unions.
This additional funding supported the unprecedented take share opportunity and exchange service finance granted short term fee concessions in 2020.
With with full fin funded an increase funding for 21 with no concessions Kevin.
Service Finance now anticipates 21, 2020, 21 originations in excess of 2.5 billion.
And the second quarter triad, built and launched its incremental mortgage product no one as land home.
Freddie Mac's seller service approval, Naples triad to offer competitive land homebody mortgage product, we leveraged the existing infrastructure within triad, and we'll be adding a minimum of 150 to 200 million in volume and 21.
This program will allow triad to track $2 billion originations and 21.
Turning to slide.
Eight.
<unk> kg pipeline substantially improved.
After transitioning in 2019 to a long term recurring slash annuity model and successfully navigating the cobot 19 period.
Kgs, securing significant new mandates that will drive revenue in position it to return and 21.
Similar to the past 2008 financial crisis period, the cold with 19 related economic disruption has driven similar [noise] banking.
Portfolio opportunities and you'll see letter will discuss the three X increase and the kg pipeline.
Finally, we're taking a general provision to 3.2 billion after tax related to solar progress payments and the second quarter.
Notwithstanding the detailed credit one Q1 credit scrub, which isn't this portfolio and another similar scrubbing Q2 solar dealers, particularly in California have endured long and severe cold with 19 shutdowns.
Starting in June time to complete has extended substantially and de <unk> dealers are struggling to get inventory.
Over 19 has also affected deal its ability to complete customer transactions on a timely basis service finances actually it's actually working with these dealers to complete installations.
Our total solar exposure and progress pay as is approximately 13 million down from 19 billion a year ago and actually as of today, It's approximately 11 million.
[noise] I should note that the solar loans that have been completed in place in our bank partner portfolios are outperforming the other non solar loans in the portfolios and I want to stress and this is the general provision for the cost to complete this projects well as we go through and complete them will determine whether we need the into.
Higher provision or not.
Turning to slide nine.
You see in his reinstating its guidance with an adjusted operating earnings of 75 to 79 million or 31 to 33 cents or 2020.
This can pays fair, but favorably to the baseline that I gave you last quarter 27 cents, representing a 15% to 22% increase.
You see N is also reinstating, it's 2021 earnings per share forecast, a 44 to 53 cents inline with the guidance. We gave you the 2020 Investor day.
We've also added in response to Marios question last quarter. The are are we targets for both 1920 and 21 and the lower part on the left lower part of slide number nine.
We'll provide additional guidance next quarter as well as at our Investor day on the 21 forecast, but we feel confident highly confident in our forecast.
Turning to page 11.
Adjusted operating income second quarter for service was 14.6 million.
This reflects the extraordinary take share market opportunity driven by the market disrupt disruption.
Indirectly caused by the corporate 19 crisis.
The season this opportunity.
We proactively locked in 21 funding to support the middle take share and returned temporary fee concessions were given in servicing income to reduce our which have reduced our servicing income.
Service finances fully funded through 21 at historical margins I know concessions.
21% year over year growth and the second quarter originations and 41% growth in managed portfolios.
Turning to page 21.
I would like to center you won the 40% games in the June and July period tremendous gains on originations and approvals I would note that has continued into August specifically H. fact originations are up 45% year over year Lennox volumes are up 35% year over year Windows and doors are up 46 for.
And the second quarter, we're seeing a tremendous take share in fact, we're seeing what we call a transition phase we're funding mature dealers with substantial pipelines transferring to surface finance.
It's important to note in these substantial growth numbers that we made a strategic decision to further limit solar originations solar originations are down 40% year to date through July and hours that represent only 6% originations second quarter as opposed to 21% in lighting as I mentioned earlier. So are loans are performing just.
Fine, it's our view that there's significant margin and the non solar business and that's the area, we're focusing our growth off.
Turning to page 13, a little more color on on the take share opportunity.
Home improvement dealers began reevaluating their financial partners in the wake of the fund in this financial crisis caused by the <unk> crisis, we've seen very elevated at elevated levels of new dealer adds began in March.
You May and June dealer adds or two times in excess of two times. The long term average from momentum and its continuing into August as I mentioned, a moment ago in a typical take share a lot of effort a lot of time goes into taking share. This is part of the take share, but it's important to all these are deal matured dealers transitioning within tech.
Pipelines, which are providing immediate benefit to the originations and profitability of surface finance may and June record percentage of submitting dealers.
[noise] and it's also like to note that this takes share was also driven by positive.
Growth within the industry, you've seen Lennox at home depot and others report Americans are staying at home and there are electing to spend their money on improving their homes.
Service Finance now anticipates 21 originations in excess of 2.5 billion.
Turning to page 14.
Service Finance is fully funded for 21 with increased origination forecast dealers have specifically asked about funding we provided our investment grade rating and the increased support of our new and existing partners.
In Q2 surface finance added new funding partners as I mentioned earlier as well as expanding existing partners. We added CAD to pension investment board for approximately <unk> billion dollars of committed flow in 2020, and 21 added two new credit unions, and we expanded several new existing funding sources every new commitments in excess of 1.5.
Billion, we think we are properly position to seize this once in a lifetime take share opportunity.
Turning to page 15.
I mentioned earlier, but more important <unk> is a factor for us as the performance of our credit portfolio on behalf of our bank partners Happy to report the exceptional work by the surface finance team.
The servicing side, you'll see that deferments peaked at 1.8% in May that's 1.7 in June 1.4 in August and in July and as a mid August those deferments or 1% like to college and thank the incredible work the team that's surface finance.
[noise] as well delinquencies are in line with historical ranges and loan losses remained consistent with our expectations.
Turning to page 17.
Assets held.
Increased to 2200 31.5 billion second quarter 2020 up from $99 million in Q1, as we discussed in the Q1 call sales were temporarily held up resulting in short term accumulation of balance sheet assets.
We're happy to report that subsequent to Q2, we sold 214 billion and assets held for resale several parties and the August balances are now at 89, approximately 90 million.
Turning to page 17.
The chart that we've had historically for you just want to demonstrate the strong month over month origination again again centering you on the June and July substantial growth in originations, which are continuing to August.
Turning to Tri Ed on page 18 second quarter operating income of seven 7.2 million second quarter saw slight decreases in year over year originations EBITDA and operating income related to cope with 19 slowdown in early Q2.
Approvals originations have rebounded since mid April.
[noise] Freddiemac seller service approval has enabled triad to build and launch its mortgage system.
And process seven new credit unions were added in the year to date, including four and the second quarter. Four plan remained flat at approximately 120 million with very strong credit quality, almost almost no delinquencies and zero losses, while maintaining our yield.
Turning to page 19.
After the covert 19 pullbacks in March and April we've seen strong rebounds in the approval levels that in at triad as well as the originations as you know there's a lag time between an approval and at origination the approval commences when the home is purchase at the dealer and the funding origination occurs when it.
Installed on your site.
We anticipate originations of 650 million to 700 million, representing us 816% growth year over year inclusive of the impact of Cobot 19.
Originations growth or back to double digits in July with 11.4% and as I mentioned <unk> approvals and origination momentum is continuing into into August.
With respect to the expanded land home product and think of a mortgage if you will our principal product have been shadow loans today I want I wanted you to take away for highlights from this product. That's been launched first it will increase originations I tried to approximately a billion dollars in 2021, we'll give you additional detail.
In the third quarter call at Investor Day, second all that incremental volume is closer to 200 million than the 150.
Third all the work has been done the automated.
Underwriting system from Freddie Mac the loan advisor is in place, we've implemented black Knight, which the mortgage standards servicing system and the pricing engine system optimal blue is in place all of this is functioning we began to improve.
Well, we've got into accepted approve applications. This business will build deciles homes are built and you'll see originations commence early in the first quarter you may see a few of the fourth quarter, but you'll see it fully turned on those those homes are delivered in the <unk> and the mortgages are placed.
Finally, the fourth point these transaction yields is about 3.5%, what we called gain on sale and the Freddie system and we receive a full servicing fee a 45 basis points all of that is incremental to try it's business as of today.
Turning to page 21 pleased to report on the credit performance also want to thank the team a tri Ed for their hard work.
We saw from its peak at 1.2% in May down to 1.1 as of June and now down to point for same time, we've seen them very modest elevation and delinquencies no changes to loan losses.
[noise] similar to try add on page slide 22, the growth a year over year, they must sorry month over month highlights the.
The strength of the system and the return to is very strong growth.
Turning to slide a 23.
[noise] Casters operating income of 9.4 million Refracts reflects lower transaction services and marketing services as expected due.
Due to cope with 19 partnership revenue was up 24% year over year represented by increased annuity revenue in credit card investment management fees.
Marketing service revenue was deferred as result of the campaigns due to covert 19, I would tell you that some of those campaigns have begun to be turned on again and we're seeing those build backup transaction service revenue was deferred as result of co vid and I mentioned that the the pipeline is up on a three X basis.
Credit card investment portfolio, our balance sheet is performing as expected in fact, it's performing a little better than we expected EBITDA margins are 62%, which reflects the hard work of Scott Shaw and his team.
I guess, there group kg turning to 24 the strategic.
Shifting we made in 19 with less onetime transaction and more recurring revenue continues with the second quarter, 86% of the revenue coming off recurring businesses.
Turning to page 25.
Is important to note that the portfolio pipeline of transactions a potential transactions is up three X you saw the same phenomena post the great credit crisis in 2008, a number of banks are reevaluating their credit card there their portfolio of co op and affinity credit card books.
And the number of transaction the pipeline is significant.
I don't want to leave you with the impression that 10 billion of a pipeline as all transactions that will happen because it's not.
But it is if a significant increase in our pipeline and its three X or what it was last quarter that bodes well for a strong fourth quarter in Q1.
For for kg.
Michael over to you.
Thank you, Steve turning to slide 27, and the consolidated operating highlights I'm just wondering what it was a very strong operating quarter right in the middle of the Pandemics, We're very pleased with the results.
Total originations were 676.4 million up over 13% compared to the prior year, reflecting the strong growth at service finance right through the pandemic.
Q2, adjusted EBITDA of 31.3 million was down slightly compared to the prior year and Q2 adjusted operating income before tax at 24 million.
And seven cents per share were in line with Q2 2019.
As Steve noted earlier, we recorded a provision of 3.2 million after tax as a consequence of the <unk> coated 19 pandemic related to service finances solar business.
Also recorded a provision of 1.1 million after tax related to the Rightsizing of our corporate staffing levels and office space in response to the pandemic.
[noise] turning to page 28, and the balance sheet a key highlights to note total assets increased by about 170 million as Steve noted this was largely due to the increase in the held for trading a assets at service finance and place to note that a post post the quarter I want to subsequent sales.
That that that number is down to a that increase just out to 30 million quarter over quarter.
That was up by up over 170 million.
From prior quarter again, largely due to the increase in assets and again subsequent to the sales pro forma dad is now down to approximately 540 million.
Post Q2.
Turning to slide 29 in the income statement as noted adjusted EBITDA of 31.3 million was down slightly compared to Q2 2019 net was largely due to the decrease margins that service finance.
As there is also the service weaken concessions that were noted earlier.
Adjusted net income of 24 million was him and seven cents per share was in line with the prior year has a lower adjusted EBITDA was offset by the impact of lower interest expense and the elimination of the non controlling interest kg.
Turning to slide 30.
Operating expenses were higher at service finance, largely driven by the growth in originations and manage assets and that increase was partially offset by lower cost. The K G. As a result of the cost reduction efforts there.
Corporate expenses remained in line with our.
Q1 forecasted guidance of 4 million per per quarter for the remainder of the year.
We expect that are to remain at those levels in Q3 in Q4.
And as noted we were did record a provision are largely due to the staffing and office space reductions implemented in the in the quarter.
Turning to page 31 on the discontinued operations, a key items snowed real assets remain consistent two effects.
Q1 balances.
On the aviation side, we made nice progress in the quarter. That's two asset sales for a total of $4 million, but despite the impact of the covert 19, a pandemic. We continue to expect to material reduction in legacy aviation asset balances before the end of the year.
We also expect a significant reduction and the remaining CMV asset balances before the end of the year.
Finally, the increased loss from discontinued operations compared to Q2 last year is largely due to the impact of the continuing wind down of legacy assets of the sale of revenue generating aviation assets.
With that I'll turn it back to Steve for some closing remarks [noise]. Thanks, Michael on Slide 33.
Again, I'm pleased with our earnings per share of a seven cents or adjustments for seven cents, especially at a period that's been in back to buy like Cobot 19.
Happy to provide guidance to get us to this afternoon at 31 to 33 cents as well to provide guidance with respect to 21 of 40 or 53 cents. If I could comment on that range for a second it's obviously a wide range.
We'll provide more Colorado and the next quarter and specifically at Investor day, but like I did a in the last quarter or I gave you a 27 cents a baseline.
Would suggest to you I feel very comfortable sitting here today that we're at a 46 47 cents range and with more to come we're still working on a number of opportunities.
And this significant in my career 62 years of age. This this takes share opportunity that both service and try it is unprecedented and we will I'm sure that that that Mark and Mike will run with us and.
We'll see great things to come.
Are we will increase to 14.5 to seven tend to happen 21 at the current Dps guidance.
Dealer count is running twice that twice the long term average.
I want to note that these are mature dealers coming across with significant pipelines of transactions that required immediate funding.
So our confidence in 20.
And 21 guidance.
A service finance is fully prepared for the take share and we have locked in the funding to seize this very significant opportunity.
Drives results you know triad triad and you see on World was kind of little engine that could we think it's brought up today.
Because it's been phenomenal its execution that we think with the with the Freddie endorsement of the systems launched that we now have a billion dollar origination business where.
We're quite excited about Tri Ed as we are with Kasler that with the three X and increase in potential transactions, you think that will bode well letter latter part of this year and for 21.
We are pleased with I. I wish we I'm sure because all say both personally and Corporately. We wish we all hadn't gone through this cobot 19 experience what the one positive for us as a very resilient recurring business model with exceptional asset quality.
On the capital management side quarterly dividend remains unchanged at two <unk>, two and a half assess.
With that operator, we're going to open the call for questions.
[noise] certainly.
We will now take questions from the telephone line.
I've a question. Please press Star then one on your telephone keypad, you will Jared Cohen acknowledging your request if you're using a speaker phone lift your handset before pricing.
To withdraw your question. Please press Star then Q.
There will be a brief pause bought the participants register for questions. Thank you for your patience.
[noise] [noise] [noise] [noise]. The first question comes from Jeffrey Kwan with RBC capital markets. Please go ahead [noise].
Hi.
Sure.
Are you.
How much.
Production.
That's fine.
And then.
<unk>.
Yeah.
<unk>.
Sunday partners.
New funding partners, we're willing to commence.
Finding beyond the current agreement and or increase funding commitments or where you offering see reductions.
She finding partners that would not have shipped into any of those categories.
Yeah, sorry, Jeffrey I Didnt there was some back right now so I got the latter part of question I didn't hear the first part sorry.
I was just wondering what the if you're able to quantify what see productions were in Q2, and then just Steve reductions where they pretty much most funding partners are where they only to certain ones.
Right well, we don't we don't disclose the deals each individual funding partners you can appreciate.
But we did an exchange or long term commitments provide select concessions I think the important point to notice that builds are now dawn and we're fully funded that full marginal rates through 21.
You know I'm there was a huge opportunity here, Jeff to take share and I wanted to be more than funded coming into this opportunity because I don't think the opportunity I think the opportunities just beginning for us and dealers were looking for us to be fully funded plus more because they had gone through some experience with what's competitors or we're not going to name.
Where they would I be unable to provide the funding.
So in in the midst of a Kobe crisis and people worried about asset quality, we provided a little more support to our partners, which was appropriate turns out our credit quality was better than anyone expected, but I wanted the increased funding commitments to take the share.
And Jeff, It's Michael and terms of the overall impact on service finances profitability and Investor Day, we are forecasting EBITDA margins of just under 70%. We still expect her overall EBITDA margins to be in the range of 65%. So it's not a hugely material impact for 2020 and as we noted to at a 2020 longer.
Back to normal margins.
Okay. Okay.
You know I guess, what you're trying to accomplish share in terms of you have to give something in talks in order to get it.
You guys talked consistently better service finance not taking on credit risk and I'm, just kind of curious when I read the mdna characterize that see reductions is providing funding partners.
Section in and uncertainty or an uncertain credit performance environments. Just was wondering about the wording that you had there yeah. So Jeff I I think it's important to note that our partners model a series of credit outcomes.
We have a very.
Definite view on our credit outcomes. They can model number or a number of arc partners required to do stress test by U.S. regulators. So we work and those stress test scenarios, our credit performance has not moved.
Okay and just the last question I can ask it I just was wondering what the thought process wise on including the loan loss provisions being below the adjusted operating income line as opposed to with UBS.
Yeah I it gets a good question, Jeff we we've obviously disclose that in the documents not hitting anywhere I don't know, whether we need the entire provision or not right I could come back to next quarter the say.
It wasn't 3.3, it was a million so I just I visit that's a variable number and it was given out of up a cautionary basis, you know you, Jeff you're free to take it.
We disclose that put a bubble lighting society. So instead of having 33 cents, we have 32 cents for the year.
Okay, Yeah, they've got their gather isn't for doing that.
It really as it related to covet, it's not a normal operating provision we still have normal provisions. They are going through earnings that was just the specific impact of the California solar.
Adjusted for.
Yeah, there's been a.
There's been a whole number of articles and other things talking about the difficulties in the solar market in California, if a if you'd like to see some of those let me now I can I can afford them too.
Alright, Thank you very much.
The next question comes from Tom Mackinnon with BMO. Please go ahead.
Yeah, Thanks, very much good afternoon.
Take another stab at the.
Concession.
Service Finance are you sort of all done with offering.
Uh huh.
That's come up for renewal and 2020 are you considering the reductions for those as well.
Yeah, Tom where were renewed for 21 of that historical contracted margins there is nowhere concessions.
Okay.
And then.
I think dealers to come over and service.
What does it sorry about.
Yeah.
Tom.
Is that something else that makes them one at least another place.
Boy, that's that's a good question and I think you. It's it's I think it's a combination Tom have.
You've seen the impact of Kogut bad it's in manifests itself in the financial markets at a number of our near competitors and direct competitors have experienced financial difficulty.
And if you're a dealer and you've got your installing a air conditioners in Phoenix. This afternoon, you want funding stability.
And it's the history of marks performance and as relation the dealers. So I'm concerned about my funding source I know Mark system has worked.
And I'm going to come over to well that's that's the why the funding a long term funding you know we wouldn't have locked up all 2021 by now, but we did it made her concessions we walked up 21 at historical margins I think the second thing Tom has been people are sitting at home in both U.S. in Canada, and they're now you know building offices in their homes through improve.
In their homes, you've seen the and significant increases the both Lenox and home depot and elsewhere. So we've seen <unk> industry dynamics the wins that are back.
So that's helped but I think if you're a dealer you're looking for a permanent well funded finance source service finances is your hall.
I don't want to talk about competitors do you have seen them announced the results here. Shortly you can go back and looked at that.
Okay, and I can just squeeze one more in.
Unique about solar that you had to take provision for you got 18 million in advance.
Finance it.
You know what happens at the dealers aren't able to complete some of those jobs.
Is there any unique about a non solar business then that said, okay. I got a gap is yet another yeah. Another good question Tom.
We already have our of our progress pay as is done on solar so that term between a vast and completion this typically not longer than a week or two.
You know installed the air Conditioner, you can contracts two days later.
Windows are you know a week or two it's not a long period solar has an extended period and we're now face to face the situation in California, having gone through to lock Downs, which started in March where consumer may have a permitting done or they may have happened array sitting on their house and they haven't seen anyone for four or five months. So we have the above.
Realty and that's unheard of Tom So it's a learning from those Pogo and we've taken the appropriate action to dramatically reduce our solar we're happy with what we have.
And again, the solar loans within our bank portfolios are performing at or above the bank performance, but we have reduced our to our progress pay on solar we just don't we don't know when we're going to get a chance to get back to those rooftops in California, we have the legal right to step in and complete those contracts.
But we'll see how long it takes right the consumer we're going to chance to reevaluate. It. So it's a bit of uncharted territory, Tom and it may be all fine on the projects get completed but we've taken this precautionary a reserve in case, we have to complete those programs.
Okay. Thanks.
[noise] [noise]. The next question comes from Paul Holden.
Please go ahead.
Yeah.
A number of.
I think better than expected.
The results you did the same.
But one thing you did differently is reinstated guidance, where others has kind of shied away from.
Reinstating guidance, whether it's for this year next year.
What is it that gives you the confidence to bring that guidance.
Yeah.
And even uncertainties around covert cases.
Yeah no. Good question all the that we've watched our manufacturers and dealer develop waves to sell home improvement notwithstanding cold.
We watched our manufacturer manufactured home dealers to sell but the the manufactured homes notwithstanding cobot. So they have developed the systems to sell and the other part is the is the strength of of both of those business. Both on the approvals and originations. The approvals are really what gives me comfort here Paul because you're.
Approvals be got the applications, we get approvals approvals beget fundings, that's a strong pipeline so based upon that and discussions with.
With the senior team market service and Mike Tri Ed. We we concluded to reinstate our guidance were highly confident of our numbers notwithstanding the fact that co. It is not we've not certainly living in South Florida.
We're not <unk> pass the call good crisis, yet, but we're comfortable reinstating our guidance.
And that was gonna have come to eat. The next question the same topic, because as the geographic <unk> a concentration southern states, including Florida.
Pretty close the situation though.
And it's not impacted sales or approval rates and those specific state.
I live it every day also it's.
It's up you certainly pick where you go but.
And I can't speak to the exact numbers and in Texas, and California, but in Florida, We've seen cobot track to much younger demographics, and it's not our customer customers someone to them mid too early to mid Fiftys, a high FICO who's sitting at home and there are electing to improve their their halden are electing to upgrade the age.
Back and you know we've had I don't like talking about whether I don't like whether it'd be a benefit or whether to <unk>.
It would be a negative but we you know we've had very it's been 20% above the historical norms for for how autism U.S., we don't I wouldn't take credit for that it's just a period, where you have you have to fix your air conditioner. So.
We we've learned to <unk> <unk> <unk>.
I think we maybe in a period, where we have covered for an extended period of time, Unfortunately, but we've learned to work around it.
Just going to add that we have been tracking some of the states as they have outbreaks and it but service and ask and triad, we have not seen any real effect in California, and Texas in Arizona, and Florida as it relates to originations to this point.
We've seen strong originations out of each of those markets and they're they're important markets.
Okay.
Next question, if I look at the.
The financial statements and the.
Finance receivables.
Each.
I see an up tick in a significant tech and the stage three either nonperforming assets is that.
Earlier related to the solar exposure, we've already talked about or are there.
Uh huh.
Classes that are all so now that that's that's the California solar exposure there were talking about yeah.
So that was 8.1 million Andy.
For me given your 3.2 million provision then you're assuming some kind of recovery rate is that correct way to look at it.
Correct.
Okay.
That's helpful.
Yeah.
And I guess.
Last question from me.
Yeah.
Just getting a better understanding of that.
That 8.1 million versus your total exposure I think he said 13 million or sorry, 11 million remaining exposure on solar.
Can I compare that 8.1 to the via live and residual it because that seems like an awful high default rate. So just want make sure I understand.
Yep, well I want to go back to the word default. These these are valid progress pays with with risks that are inside there not part, they're not perfected our executed or or enforceable to the projects completed so we still have the option of completing it so they're not in default. If you will there's no legal default there certainly high risk and that.
Why Michael appropriately moved him into the third bucket.
But it is centered on on California solar.
We haven't seen it anywhere else because the other U.S. states haven't been locked down to the extent that California has so we've been able to complete the projects, but I did.
Earlier covenant that Mark appropriately has reduced dramatically reduced the size of solar originations and we dramatically reduced the size of the progress pay.
First solar.
Okay.
Thank you.
The next question comes from Vincent Caintic with Stephens. Please go ahead.
Hey, Thanks, good afternoon guys.
Three quick ones first on the dynamic of taking share here.
For the dealers that you are.
Taking in.
Can you give us an idea of just.
How quickly can you inboard them at any particular time, our their dealers that are still in the or onboarding process that have been captured and then when you are so your your guidance is really a really nice growth for for 2021 is that simply the dealers existing production levels that you're seeing now and that there mature dealers are moving over to you.
Yeah.
Yeah. Many of US many dealers will have to finance sources turned on all have a loss Boston what other name that you know.
They would have had in those cases, where the other the other competitor was the dominant provider we received a little bit of their flow those have dramatically changed to last 90 days, where we are now the dominant provider if not the only provider to all of those dealers that uses as a second.
A second I'm not a second look because I've second look on credit, but they they flow this little bit we would've God.
510% of their volume.
We're now getting 100% their volume so their online they're tied into mark system, there's a little bit of trading, but it's not material and the flows immediate the pipelines coming across the dealers are searching for a well financed.
It's a financial partner with liquidity going into 21 22 as the absolute requirement.
No that's been a big selling point.
And allowing marks been very effect on those take share and it's all I'd almost I don't want to create a second category, we have to take share and make sure.
But this this take share is really a transition notes mature dealers, who know surface finance quite well.
That's really helpful second on your funding strength and it's it's a great that you're able to secure funding this time for Julie versus the competitors and seeing what's happening with them.
Yes, if you can take him talk about how much funding runways available to you from your existing commitments, even if the funding markets shut down just wanted to clarify you don't need.
Any more funding commitments deliver on your 2021 originations and then if you could talk about kind of the discussions you're having generally with your existing funding partners such as the banks yeah. So the answer that second question first we are fully funded and 21.
[noise] lot of committed basis with no concessions on margins.
You know I think the addition of.
CPP IB is one of the largest sovereign wealth funds in the World is an important addition to our funding group.
We have significant relations the banks as you know it's been a strategic focus Vincent for us state of the two years ago.
To bring in life insurers, which mark did and no pension plan Slas sovereign wealth funds I think this marks a significant step forward you know CVP I'd be was 15 months and due diligence and.
And we're happy to have them a partner, we're happy to have our partners renewing so I.
I'm, feeling very a very comfortable but our funding relationships or will be call our debt investors.
Going forward.
Okay, great very helpful. Thanks much.
The next question comes from Steven Bohlen with Raymond James. Please go ahead.
Oh good evening, just one question, Steve I mean, it seems like the optimism around the three businesses is almost I would say stronger than it was when you gave the initial guidance.
In the Investor day, maybe for 2021, but your I think your your guidance for operating you'd gas is still in that same range, but.
Now it seems like originations are higher for service the pipeline as higher for councilor. So is there I am I reading that right is there an offset to why the guidance wouldn't be even higher at this point.
For it for 21 state.
Yeah were 21.
I I think we're feeling very bullish what 21.
I want to set a baseline with you about 46 cents I sort of baseline last quarter and outperformed by 15% to 20%.
So I'm feeling bullish and I want some time with with the operating partners to work through those numbers you know if I. If I told you that service finance was going to originate 3 billion you'd think on bacha crazy.
But you know we're going to leave it where we're at and we'll watch the quarter's progress but.
You know I I think it's a good markets significant growth you say, we committed 32 or 33 this year than 45 to 46, the very nice number and I said I think that we'll obviously do better than.
45, 46, and we'll update you on the Q3 call at Investor Day.
Okay. That's my only question thank Steve.
The next question comes from Jamie line with National Bank Financial. Please go ahead.
Yeah. Thanks, good evening.
First that first question on the on the dealers, where you're taking share.
Can you give us a little bit of color as to their manufacturer or retailer relationships is that from one specific manufacturer or retailers.
Not a how many manufacturers are retailer relationships would you be taking share from competitors.
Yeah, Thanks, Jamie it's.
If I take it back to the Windows and doors that are up 46%.
You'll see one of our competitors announced early in the weak and they were.
Down a windows and doors, so you can kind of triangulate.
Where that came from there are three or four large major dealers in windows and doors in the U.S. you can assume that they're all now surface finance partners.
You know if your question is is this is Paul our RV, a it's driven by large multistate dealers who significant size.
So we'll get that's both in Windows and doors and age fact, we have a you know very deep relationship with let X, which is doing exceedingly well.
Where where we've launched the Mark has launched a beacon program, which has continued to gain traction.
So I don't have a manufacturer deal to announce your Jamie, but I would tell you about we have some very significant multistate.
You know organizations that would be mid size by Canadian standards that have now signed up as partners. We don't publish their names, but for now onboard if you go look at competitors.
You can you can go from one box to the next.
That's helpful. If I'm thinking about the funding ads are sonic sure I have this correctly so existing funding partners.
And the CPP a program that is adding 1.5 billion a funding to 2021.
And if I'm correct, and if I recall correctly the funding commitment for 2021 would have been around.
Oh it to an app millions so does this suggest that.
<unk> commitments in 2021 for the service finance program or three and a half to 4 billion.
But I have that correctly.
Yeah, I think maybe just a we can we can go through a scheduled post the call, but right now we have renewed all of our 21 financing commitments. It earlier than we had to go through in the renewal Jamie.
So right now if you look at 21, if you take redeploying and everything else.
And who is in the pipeline, you're probably up to six to seven a funding commitments were announcing really 2.5.
You know, we're getting to the point, where it's it's going to be hard to take on on take anymore.
Funding trends or 21, but we have a series of pipeline investors, who are going to renew from 20 to 20 to 21.
We have to accommodate them first.
So what will will reconcile numbers, we oppose to call but were.
We're in great shape.
Yeah, Thank because I think quite fall out.
The steps there on that 2.62 0.7, so called after it be Greg.
One yeah, a couple more questions. The first one on the the a 30 day delinquencies I just want to confirm that that 30 day delinquencies and he was 7.6 million if I'm looking at the financial statements is that also tied to <unk>.
He solar program.
That's correct answers.
And last one for me just around the that concessions that were given in the service finance.
Business unit.
Just like from where those concessions given because though the extension and expansion of the funding commitment or where they given because of the certain credit environment I just.
Failing to just.
Right those two drivers of that of why they're concessions given.
No there I mean, so they think the credit book has performed at or above it right. We've now gone early to expand and we'd gotten larger.
So and those requests were made in in a cobot period, but the credit performance has been.
Right, where it should be.
Right. So as you went to the partners tied to secure more and longer term funding and they came back and said while we have this credit issue, where we have a wider range of possibilities and because of that we would like a reduction in our service fees for the rest of 2020.
Yeah, I think of it Jamie as a senior line of credit like we have on our balance sheet, where you know we have a for your line of credit in our balance sheet. We've made the strategic decision to extend these funding relationships for longer than we have so you're paying quarter quota commitment fee for the extension manifested itself in the former reduced service.
But only for 20 2020 ones now done a full margin.
Okay.
Got it thank you [noise].
[noise] [noise] once again, if you have a question. Please press Star then one.
The next question comes from Mario Mendonca with TD Securities. Please go ahead.
Good evening, everyone. Steve can I, just ask you to think little bit like beyond this quarter and.
And help me think through this this concept.
Hey conditions, but you can imagine.
Under which you see in our service finance would make further concessions say in 2020 or in 2021 can you envision any circumstances, where that could play out again.
No we're done Merial.
We are contractually we are contractually done.
And they concessions that were given those were purely.
Like that was a decision that was made that there wasn't some contractual obligation to provide that concessions I want to make sure I'm clear on that as well.
Correct. There was a strategic decision to in order to be able to take this share that we want more than we needed and funding.
Okay.
Just a couple of numbers questions you refer to solar I see 13.6 million and I think you also referred to 11 million is the difference just a provision that was put up.
Oh wait I tracking as of the number I gave you was at the end of Q2. The 11 in changes where those were the balances are as that mid August.
Okay I make sense.
And then the about triad, you're referring to a billion dollars of originations in 2021.
Some of which relates to the Freddie Mac relationship.
[laughter] very big number $1 billion for for Tri Ed could you talk about how that plays out should we just think <unk> expect the originations to increase materially as early as next quarter or do you really see this as reaching a scale in 21.
Yeah no. It's it's a good question to be fair Merit. We you know we're tracking closer to 704. This year 690, 700, so you'd 700 for easy math and then late afternoon. If you assume a 10% growth rate, we've been growing traded about 12%, but assume tend to make my math easy.
Then you'd see the traditional chat alone business at 770, maybe seven data for 2021.
What I'm, saying if you if your load all my 200 million dollar.
Target for four for mortgages, you're at 2 billion dollar number.
But you know I haven't produced that yet I'm, you know were where we're underwriting in approving loans now has been the wife or walking intro to a dealer. We're now offering them a second product as opposed to just a chattel.
The mortgage papers coming through its being approved by Freddie and we'll build that book, but you won't see it till the first quarter, we'll have more color for you on how.
How big that book of approvals is come come Q3.
And just one I forgot and about the nature of this new arrangement can you just described how it's different from what you're currently doing because I I guess.
Yeah. So it's it's a good question where are we so we the current product that triad opposite chattel, where you take a direct interest in the home and a second interest and the underlying land a chattel is a great product that's our core that's around peg going on around hole.
We never had a mortgage product that has a little longer term lower payments to traditional mortgage product that was only 3% of triads volumes historically.
The U.S. government through hot decided that they wanted a platform for affordable housing.
X X term or ex duration and white payments you also be offered to a mortgage product the past that mortgage product we lost at all.
It would have gone through to a 21st mortgage or Vanderbilt.
So it's incremental volume to us we were not going to we're not going to.
To to carve into our channel flow it will be incremental product.
And so to the <unk> <unk> to the its exclusive.
We currently are the only party approved by Freddie.
For <unk> affordable manufactured housing.
<unk>.
Thank you.
The next question comes from Vincent.
Stephen Please go ahead.
Just a quick follow up one but wanted to get an update how you're thinking about a capital return so share buybacks and then your existing dividend. Thank you.
Yeah.
We will we will a review renew our answer the board renewed our NC I'd be today Vincent we're obviously in a period still of uncertainty. We you know we bought back some share a second quarter.
Note that we bought.
We have ability to buybacks impressed so we have some excess capital I like to do that because that does a nice things for for our earnings per share.
I wouldn't Vincent just like to go back just go back to Mariano Merial rang off but Freddie has a number of partners in the mortgage world regular mortgage world.
We are the only partner of manufactured housing mortgages and held back back to your question, though.
Vincent.
Okay. That's all ahead. Thank you.
The next question comes from Jeff Sandwich with Cormark Securities. Please go ahead.
Hi, Good afternoon, everyone. I think most my questions have been answered, but I just wanted to ask event with with adding CPP into next year or how is that can impact the flow through through your business or are these going to be similar to the complementary flow where they get pooled and then and then sent out in a sort of hold on basis to them or is it going to be.
Rick <unk> type of structure for them as well and how should we thinking that you <unk> balance sheet liquidity perspective from that said that trend or that partner.
Yeah, that's a great great question. The they are another quote unquote bank they sitting around Robin they buy loans like our other bank partners on on Rick flows.
Jeff why loans are sold two.
Banks, but on a one off basis you will.
But there they are traditional.
Rick partner like any other apart in the process, but there you know a billion dollars of commitment and we think that's.
We're we're we're quite happy to have CPP I'd be as a partner.
Okay, and so in terms of the BHF T that sits on your balance sheet. You think it'll still likely then you got closer to that sort 100 million level that you've done.
Yeah, It will accumulate doesn't sell it off we haven't changed our underwriting standards whatsoever.
You know we haven't.
Dip down into into lower credits were still provide or a prime and super Prime credit both for surface and for Tri Ed.
Great. Thank you.
[noise] [noise]. The next question comes from came on line with National Bank Financial. Please go ahead.
I'm good thank you.
There are no question. Thanks, Yeah. Thanks, operator, we're going to go and then there were at a time I appreciate it there's no more questions in the Q.
This concludes today's conference call.
You may disconnect. Your lines. Thank you for participating and have a great day.
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