Q4 2020 Oportun Financial Corp Earnings Call
[music].
Greetings and welcome to the opportunity in financial Corporation.
Our 2020 earnings conference call at this time, all participants are in listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded I would now like to turn the conference over to your host Ms.
Nils Erdmann.
Vice President of Investor Relations. Please go ahead Sir.
Thanks, and good afternoon, everyone. Joining me today to discuss opportunities fourth quarter and full year 'twenty 'twenty results are Raul Vazquez, Chief Executive Officer, and Jonathan Coblentz, Chief Financial Officer, and Chief administrative officer.
I'll remind everyone on the call or webcast at some of the remarks made today will include forward looking statements related to our business future results of operations and financial position land products and services business strategy and plans and objectives of management for our future operations actual results may differ materially from those contemplated or implied by these forward looking.
Statements, particularly given the uncertainties caused by the COVID-19 pandemic and we caution you not to place undue reliance on these forward looking statements a more detailed discussion of the risk factors that could cause these results to differ materially are set forth in our earnings press release and in our filings with the Securities and Exchange Commission under the caption risk factors, including <unk>.
Our most recent quarterly report on form 10-Q, and our annual report on form 10-K for the year ended December 31, 2020 that will be filed with the Securities and Exchange Commission any forward looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events.
Also on today's call, we will present, both GAAP and non-GAAP financial measures, which we believe can be useful measures per period to period comparisons of our core business and which will provide useful information to investors regarding our financial condition and results of operation.
Unless stated otherwise all of the metrics shared in this call will be on a fair value pro forma basis, a full list of definitions and reconciliations can be found in our earnings materials.
Non-GAAP financial measures are presented in addition to and not as a substitute for financial measures calculated in accordance with GAAP.
A reconciliation of non-GAAP to GAAP measures is included in our earnings press release, our fourth quarter 2020 financial supplement and the appendix section of the fourth quarter of 2020 earnings presentation, all of which are available on the Investor Relations website at Investor day at Opportune Dot Com. In addition, this call is being webcast and an archived version will be available after the call on the investor.
Relations portion of our website with that I will now turn the call over to Raul.
Okay.
Good afternoon, everyone and thank you for joining us.
Concluded 'twenty 'twenty, well situated to grow our business and expand our mission and I'd like to start by highlighting five things that became clear about our company as a result of successfully navigating the challenges of the pandemic.
First our business is resilient and showing additional signs of recovery.
In the fourth quarter, we grew aggregate originations, 48% sequentially generated $141 million from total revenue and $17 $5 million of adjusted net income or <unk> 60 cents of adjusted EPS.
We also grew our managed principal balance to $1 $9 billion up sequentially from $1 $8 billion.
In summary, our fourth quarter results were strong and give us confidence that we exited the year on a trajectory for continued growth.
Second we saw the benefits of our AI driven platform reflected in our positive credit outcomes I don't think I'd highlighted there's enough before but the foundation of our Decisioning engine is a powerful set of tools that we developed using artificial intelligence, which we've been employing from over 12 years, specifically with credit <unk>.
Fraud models were developed by applying machine learning to 8.4 billion data points, a proprietary data and we consider our ability to underwrite and control fraud for no or thin file applicants a significant competitive advantage.
For the fourth quarter, our annualized net charge off rate was $9 four per cent 107 basis points lower sequentially, and only 35 basis points higher than last year prior to the pandemic.
Our ability to manage risk with precision contributed to this favorable charge off trend and is a testament to the adaptability of our Decisioning platform.
Third our investment in digital capabilities gives us a path for continued growth in a more capital efficient manner.
We were deliberately driving a shift from in store to mobile prior to 2020.
With the onset of the pandemic and shelter at home orders, we further accelerated the development of our digital capabilities and increase the percentage of online marketing spend.
To illustrate how much progress we've made in transitioning to a digital first strategy, let me share a few statistics.
For the fourth quarter 65 per cent of new applicants chose to apply online up from 46 per cent one year ago <unk>.
Additionally, <unk> 73 per cent of all payments were made outside of our stores, whereas this figure was 60 per cent one year ago.
Based on the success of our digital first strategy. We believe we can consolidate our retail operations, while continuing to provide great levels of service to our customers and creating incremental shareholder value.
As a result, we will be closing 136 locations, primarily in our larger markets, where there is the greatest coverage overlap.
We have modeled how to achieve this with minimal impact to our customers into our expected loan production.
After initial charges relating to these actions, we will generate approximately $19 million of operating expense savings a year, which affords us the ability to reinvest capital in our growth initiatives, new products and technology development.
While we recognize and still believe that our retail channel is a key differentiator and our customer experience. We are optimizing the mix of our omni channel ecosystem and lean even more heavily towards digital tools and capabilities.
This brings me to my fourth highlight of 2020.
Our partnership with <unk> is an exciting capital efficient growth opportunity that leverages, our digital platform.
Underwrite a partner's customer base, making it our first application of lending as a service.
As a reminder.
We had committed to starting a pilot in the fourth quarter, which we did successfully with a subset of total extra locations in Florida.
And the next few weeks, we will begin to rollout to all location from Florida and also plan to launch shortly in Texas, which has a much larger footprint.
This is an exciting extension of our business and I will share our 2021 goals for this service in a moment.
My fifth and final highlight relates to our new product initiatives.
On the fourth quarter results, we believe we have product market fit for both credit cards and secured personal loans, which gives us confidence to begin scaling these new products.
For credit card, we continued our geographic expansion across the U S and are now in 40 states.
In the fourth quarter, we saw 77% sequential growth in credit card receivables. We ended the year with 13000 active customer accounts and over $5 $7 million in credit card receivables, which we're proud of considering we launched the product about a year ago just prior to the start of the pandemic.
For auto.
During the fourth quarter, we originated $1 $7 million of secured personal loans, representing 717% quarter over quarter growth and we ended the year with $2 million in secured personal loan receivables.
Unlocked at high growth with the introduction of a side by side offers.
Third person alone and an unsecured personal loan and we let the customer choose the product that was right for that.
We also expanded the secured personal loan offering to all eligible customers in California, and we are preparing to make secured personal loans available across additional states in 2021.
In summary, our 'twenty 'twenty achievements are a direct result of our abilities to manage superior credit outcomes.
Swiftly and prudently returned to growth.
Scale, our business in a capital efficient manner, and innovate through new products and strategic partnerships.
As we look ahead to 2021, our roadmap includes key initiatives to drive more digitally enabled capital efficient growth.
I would summarize these initiatives as follows.
Lunch or medibank partnership to expand our addressable market.
Expand our points of presence with the rollout of additional <unk> locations.
Further accelerate the enhancement of our digital platform and AI capabilities.
Scale of credit card unsecured personal loan products and make strides in obtaining a national bank charter.
I will now spend a moment on each of these initiatives.
With Meadowbank, we remain on track to expand our distribution in over 30 additional states by mid 2021, we.
We estimate that by expanding across the nation through the Medibank partnership we can nearly double the size of an addressable market.
With respect to total X. We are pleased with our initial lending as a service offering and are excited to announce that we expect to launch in over 150 total extra locations by the end of the year.
We believe this initial offering can be a foundation for signing up new partners in 2021.
To further enhance our AI driven digital platform, we will utilize a portion of the cost savings from our retail network optimization.
Today, we leverage AI and alternative data and our direct marketing models that were developed using over 100 billion data points.
Another area I don't think I'd highlight it enough.
Models are driving our digital growth as evidenced by the 65 per cent of new applicants who chose to apply on line in Q4.
We plan to invest more in our digital marketing capabilities in 'twenty and 'twenty, one to drive the efficient scaling of our medibank partnership as well as growth in all states and from customers continue to respond favorably to our digital capability.
Regarding our new products. Our goal is to grow our credit card portfolio, which was $50 million and our secured personal loan portfolio to $40 million by the end of 2021.
And finally with a bank charter application I remain enthusiastic about the opportunity to more broadly serve our customers and to fulfill our mission on a national scale.
Becoming a national bank will allow us to offer uniform products across the country, while greatly reducing operational complexity and allowing us to pass savings along to our customers.
It will also enable us to offer depository services that can support our customers' efforts to build savings over time.
I am encouraged by the progress we're making on this effort and I will provide more detail on it and all of our initiatives in the near future.
I'll now turn the call over to Jonathan who will walk you through a more in depth discussion of our fourth quarter financial results and then we'll open up the line for your questions.
Jonathan.
Thanks, Raul and Hello, everyone in the fourth quarter, our business exhibited growth in originations and revenue normalization of our credit performance and improve profitability.
Agree get originations were $448.6 million up 48% sequentially total revenue was $148 million up 3% sequentially due to higher interest income and higher non interest income, but down 15% euro per year.
Interest income was $129 $9 million up 1% sequentially, but down 12% euro per year.
Noninterest income, which includes cash gain on sale from our whole loan sale program was $10 $9 million, 36% lower than the prior year period, but up 36% sequentially due to higher originations, reflecting the volume of loans sold offset by a higher gain on sale premium of $12 eight per cent.
Versus 10, 2% in the prior year period.
Net revenue was $114.6 million up 24% sequentially, but down 13% year over year.
Net revenue improved from the prior quarter due to lower charge offs and improvement in net fair value of our loans due to improved charge off outlook and lower discount rate.
Interest expense of $13 $5 million was down 13% year over year, driven by a decrease in our average daily debt balance a 10% euro per year and also driven by the decrease in our cost of debt to three 9%.
For our net change in fair value as you'll see in our earnings deck, we had a $12 $7 million net decrease in fair value, which consisted of a $25 1 million dollar mark to market net increase on our loans and our debt.
And current period charge offs of $37 $8 million from <unk>.
Mark to market adjustments consisted of a 1.6 million dollar mark to market decrease related to our asset backed notes.
The $26 7 million dollar mark to market increase on our loans receivable.
The 1.6 million dollar Mark to market decrease in our asset backed notes resulted from a two basis point increase in the weighted average price of our asset backed notes during the quarter to one O 1.1 per cent.
The $26 7 million dollar increase in fair value of our loans receivable was driven by a 155 basis point increase in the fair value price for our loans to 103 five per cent as of December 31st.
The increase in fair value was mainly driven by a decrease in discount rate reduction and remaining life of loan charge offs and a slight increase in average life.
Turning to expenses, our total operating expense was $100 million.
Excluding sales and marketing new products and nonrecurring adjustments operating expenses decreased $1.4 million sequentially, demonstrating our continued strong expense management sales and marketing increased $3 $3 million sequentially. As we took advantage of continued recovery in demand and seasonality.
To drive originations.
Finally, operating expenses associated with new products grew sequentially by $1.6 million to $5 $8 million. This excludes a $3 7 million dollar impairment charge relating to capitalized software development due to our discontinuing direct auto loans to purchase a vehicle as we have redirected.
All of our auto lending efforts to our secured personal lines, our Q4 performance and achievement of product market share. It validates that we made the right decision and shifting our focus from direct auto loans, just secured personal loans in 2020.
Our adjusted operating efficiency was 64, 3% 650 basis points higher than the comparable quarter last year, and 100 basis points higher sequentially.
Our customer acquisition cost was $155 down from $207 in the third quarter.
All our CAC was still elevated relative to $131 from the prior year period. It is trending back down to pre pandemic levels as origination volumes normalize we are optimizing our marketing investments for the current environment, but we expect to continue to ramp up marketing in 'twenty and 'twenty, one as we reignite our growth initiatives.
Our income from operations on a GAAP basis was $8 $5 million up 241% quarter over quarter versus $23 $2 million in the prior year quarter.
This equated to GAAP net earnings per diluted share up 29 cents up 232% sequentially versus net earnings per diluted share of 81 chance in the prior year quarter.
On a non-GAAP basis in the fourth quarter, we delivered the best quarterly results of 2020 for adjusted net income adjusted EPS and adjusted return on equity.
EPS was 60 cents based on adjusted net income of $17 $5 million up quarter over quarter 300 per cent and 320% respectively versus adjusted EPS of <unk> 94 cents and adjusted net income of $26 9 million in the prior year quarter.
For the fourth quarter adjusted return on equity was 15, 2% up 311% sequentially and versus 22 eight per cent in the prior year quarter for.
For the fourth quarter, we achieved adjusted EBITDA, there was essentially breakeven and improvement over the third quarter, where adjusted EBITDA was negative $1 $2 million.
In the prior year quarter, adjusted EBITDA was $17 million.
As Rolla mentioned, we intend to close 136 retail locations in connection with these actions, we expect to take a $5 million to $6 million charge in the fourth quarter relating to severance and lease another contract terminations and an additional $5 million to $6 million subsequent to the first quarter.
Because this is a nonrecurring event, we plan to back out discharge from our non-GAAP metrics.
After these onetime charges, we expect this action to generate approximately $19 million of expense savings per year in.
In 'twenty and 'twenty, one we plan to reinvest all of these savings to fund the expansion of our new products. Our entry into 30 additional states via Medibank infrastructure and personnel needed to obtain a bank charter and further investments in artificial intelligence applications within our technology platform.
Turning now to credit our fourth quarter results showed continued normalization of our credit metrics.
At December 31, our 30, plus day delinquency rate was three 7% 34 basis points lower than the prior year due to improved credit performance on both pre and post pandemic labs.
Our annualized net charge off rate was 9.4 per cent for the fourth quarter at 107 basis point improvement sequentially.
This charge off rate included $6 $3 million of additional charge offs in the fourth quarter with respect to certain loans, we deemed uncollectible prior to reaching 120 days past due.
Future accelerated charge offs are expected to be lower.
At the end of December only one 4% of our portfolio remained an emergency hardship deferral status. This was up slightly from a low of four 9% in the middle of the fourth quarter due to the return of shutdown orders in California, and other states in December that has begun to decline since the start of the year.
The loans, we have originated since the start of the pandemic have continued to exhibit lower first payment defaults and pre pandemic loves this demonstrates the effectiveness of our AI driven underwriting platform given our strong performance our risk team continues to analyze opportunities to open up additional well performing notes as evidenced by the quarter over quarter growth.
We delivered and four kids.
Turning now to capital and liquidity as of December 31, total cash was $168 $6 million. We also continue to maintain a strong capital base and run our business at a low level of leverage or debt to equity ratio was three times a reduction from three two times for the prior year.
As of December 31, 2020, we had $153 million of Undrawn capacity on our 400 million dollar warehouse line that is committed through October 2021.
We had extended our current whole loan sale agreement through February 26, So that we can conclude the documentation of a longer term renewal and we recently closed a $25 million credit card receivables funding facility with Westpac.
These funding sources combined with our demonstrated ability to successfully place both senior and subordinate bonds in the fourth quarter give us confidence that we will be able to fund our growth this year.
Turning now to our outlook for 2021, our originations and credit trends are showing sequential improvement, we expect that our normal seasonal trends combined with the economic recovery will shape, our 2021 performance.
Additionally, given current regulatory trends at the state and federal level. We believe we will benefit from our mission driven lending approach and adoption last year about 36% APR cap.
Because of the ongoing uncertainties related to the pandemic and the likelihood of continued government stimulus we are not providing financial guidance at this time.
While additional stimulus may temporarily lessened demand, we would expect to see a positive credit impact short term and a return to normalized demand afterwards.
We will look to reinstate guidance once we have a clearer sense of demand most likely after the expected stimulus with that I will now turn the call back over to Raul.
In closing.
Want to thank all of opportunities employees for their ongoing commitment.
The raptor, which made it possible from opportunity to navigate through the pandemic successfully.
What's more we've accomplished this while ensuring that we stayed committed to our mission of helping hardworking people in the U S build a better life for themselves and their families.
Entering 2021, we are well positioned for growth and I'm very excited about all the things we set out to accomplish this year.
Thank you all for your time and now we welcome your questions and comments operator.
Thank you at this time, we'll be conducting a question and answer session if you'd like to ask a question.
Star one on your telephone keypad.
Information total indicate that your line is in the question queue. You May press star two if he'd like to remove your question from the Q4 participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment. Please while we poll poll for questions.
The first question is from Sanjay talk Ronnie K B W. Please go ahead Sir.
Thanks, guys. So first question sort of a three part question on the branch closures.
Just wanted to clarify like the branches that you closed it was more that they were in the general vicinity of each other and that's why you could get efficiencies I guess the second part of that are there more branches like that that you could consider taking out over the future.
Second question related is are there any discernible behaviors of consumers that you originate online versus offline or you feel pretty comfortable that youre not getting any adverse selection related to that and then final one on the savings the $19 million does that come back in 2022, then Mike.
Re investing this year, but we'll get it in 2022.
Sure.
Sanjay This is Rob so on the branch closures, you're absolutely right Brett the branches were close to each other on average the next closest branch to one that we're closing is about three miles away.
And in our dense markets like L. A.
Average distance is one two miles from where.
We executed on our strategy and some customers go ahead and shifted the digital capabilities. We did have an opportunity to optimize the network given the fact that we have branches nearby so you're absolutely right.
The second part to your first question was whether there were more branches like this.
We're always monitoring our footprint and we're always taking a look at whether or not there are opportunities to optimize our omni channel approach. So.
So that'll be something that we continue to do and continue to monitor.
So that's that's the first part let me pause there and see if you have any follow up questions on that.
That's good.
Okay. Your second one was whether or not you see any differences by channel and do we believe there is any sort of adverse selection. We do not we're really pleased with the progress that we've made with this strategy.
What we've seen is just the performance continued to improve across really just about every metric in mobile.
So we are making this decision with a lot of confidence given the numbers that we've seen and given the performance in our mobile channel and then your third question is the $19 million.
So yes, we believe that there is kind of a recurring savings if you will relative to what our run rate was.
How much would drop to the bottom line versus how much we invest we'll make that decision as we go into the next year.
You heard me describe in the beginning of this call. There are a lot of growth opportunities that we're very excited about going into 2021. So this year, we decided to reinvest that capital, but that'll be the sort of thing that will take a look at as we go into 'twenty two.
Okay, Great just one last one on the deferrals.
On Slide 11, you guys talked about how that picked up a little bit on the shutdowns, but since the start of 2021 they have decreased.
As far as that pick up is concerned is that because your customers from sort of index to <unk>.
Professions that are leveraged to the shutdowns are or what I'm, just trying to make sure I understand that part.
Yeah. This is Jonathan Sanjay that's a that's a good question.
I don't you know, we don't have specific data around that and obviously it was a very small increase it correlates very closely with the timing of shutdowns and now reopening and California. So as you noted correctly, we saw a peak in December and since it's been coming down but that that peak was.
Up very slightly from 0.9 at a low during the quarter to only point for and its trending down again.
Great. Thank you.
Yeah.
We have a question from Mark Devries from Barclays. Please go ahead Sir.
Yes. Thanks.
So it looks like you had some pretty encouraging developments around the digital engagement that gave you confidence to make the decision to shut some of the branches.
Just curious to hear how you're thinking about the risks that youre doing that you know what when maybe customers are engaging more out of necessity and at a time as you know as we emerge from this pandemic, where they they may actually look to to want to move back to more of that kind of in store interaction.
That's a great question Mark so.
I can say there are three parts to it to how we think about that.
Number one.
It is the fastest growing and top channel from our customers now.
That was true whether or not there were restrictions in place or if we ended up in a period or a stage from which the restrictions were not as severe so what we really saw is what I think we've heard.
Across every industry is that the pandemic accelerated all of those efforts that were already taking place. So when we think about potential risks. The first thing that we look at is we think that the risks are not high given how many people are already transacting outside of the stores.
Second thing that we think makes the with a very manageable one is the proximity to other locations and I've talked already a little bit about that in terms of.
Kind of the response to Sanjay and there was a lot of analysis that was done we took a look at the different customers that interact in the stores that we're going to close and we have a well proven playbook already that we use to migrate customers to other stores either because of a winter event I'm, sorry, a weather event or because of start up.
The position that we've done in the past because I did mention in my response to Sanjay.
This is something that we always do we always monitor our footprint and optimize from channel. So that's the second reason would be that proximity to other locations. The analysis, we've done in the well established playbook that we have and then finally.
What are the adjustments that we've made as we think about our channel ecosystem. It's all sort of think about the partner locations as part of that channel ecosystem. So when we think about our physical footprint and the ability to interact with someone in person, we think of it as a combination of water locations and the locations of our partners and I mentioned during the call.
Our goal for 2021 is to expand our partnership with Dell relax to 150 locations. So if you think of adding 150 physical locations with Doe likes and then declined to 136 of her alone.
Still up 14 locations right over the span of the year. So we think that that also helps to mitigate the risk.
Okay got it that's helpful. And then I. Appreciate you you know given the uncertain you don't want to provide any kind of guidance I'm you know, but just given kind of where you were this quarter.
With you know with both new originations and loan growth where are you in terms of.
The impact from from both tightening and demand and what do you think the implications are for for growth as we look forward into 'twenty and 'twenty one.
Yeah as we look forward into 2021, we're absolutely optimistic so when we think about I'll.
I'll take both of the pieces that you just asked about Mike when you think about the tightening we have a lot of faith in our models.
We have now spent over 12 years investing in machine learning and AI to develop these models that we think were tested last year and performed incredibly well we have been increasing approval rates. Since June we started with the repeat customer because that someone who's already proven their ability to be successful with their products.
Structure, but we've also started to increase approval rates for new customers as we worked our way through the back half of 2020 and as Jonathan mentioned first payment defaults continue to look really good our credit performance is also really good. If you were to look at charge offs on a dollar basis were below last year. So we have a lot of confidence right.
Now in our models and that makes us optimistic that we can continue to grow as we go into 'twenty one.
The second part is the demand piece and that's where the.
The government right now is doing something that we think is really good for our communities, they're putting capital into the hands of families and individuals who may be suffering and just this morning right. We saw with the retail results look like and customers are using that capital.
That means that at least short term interest while they go ahead and use that capital there may be a slight dampening in demand. We certainly saw that one day 600 dollar checks went out at the end of last year and this customer spent them at the beginning of this year. So the only reason, we're not giving guidance right now mark despite our optimism.
Is the government is obviously you're talking about another large stimulus effort. We wanted to get a sense of what is that going to be who's going to get it what are the timelines that will then give us a sense of that short term impact on demand and once we get through that Mike we're.
We're very optimistic for the rest of the year.
Okay. That's very helpful. Thank you.
Thank you.
We have a question from David Scharf JMP Securities. Please go ahead Sir.
Hey, good afternoon, guys and thanks for taking my questions as well.
Listen you know would rollout.
Please stay on topic.
In terms of focusing on.
The the store rationalization in the channel strategy I guess can you actually can you just remind me put it into context after the one.
36, what will be the branch count.
Of.
Left.
So we have 361 locations now David.
And we as I've mentioned during the call we're going to close 136 of them. So that leaves 225 locations.
Got it okay.
And I.
I guess following up on the kind.
The drivers of this shift in focus I'm wondering.
Are the proximity.
[noise] issue I mean, obviously that.
That's existed for a while.
And I'm wondering is is the overwhelming rationalization less maybe the proximity and redundancy of some.
Branch locations.
As opposed to you know.
Just how the pandemic has been playing out.
With respect to close to.
You know about two thirds of your applications moving online.
Just trying to get a better sense for.
Ultimately whats an operational decision versus what's a strategic decision in which is really the one we should be focusing on margin.
I would say.
And to give you insight into how we thought about this this is a strategic decision.
What the pandemic did was it now.
The weighted the outcomes of our strategy.
Ever since 2014, we started on mobile journey and every year, we've invested a bit more in every year the customer.
Shows us that they like to keep it but what are you doing like the convenience, which then creates a cycle right where the most positive feedback we get the more that we invest there.
And what happened this year during the pandemic day, because I really like your question is all of those trends just got accelerated I mentioned that last year about 46% of new customers. We're applying on line. So it was certainly high but it really crossed.
Over the 50 per cent and got to be that two thirds level that we talked about we saw the same dynamic in terms of activity outside of our stores when it came to payments.
And it was very consistent and different states. He was very consistent in different periods of the year. So we think that in many ways. What has happened is for consumers. The genie is out of the bottle and now they've interacted via mobile with their favorite retailers with their restaurants, where financial services right with each other.
I'm, even struck by the number of QR codes that we can see because Chinese had them for some time and they never really took off here in the U S and how do you see them in a lot of restaurants. So we think the pandemic simply accelerated from strategic outcome that we were driving.
The benefits to us as a company.
Our debt there was an element of our expense base that you could think of as being fixed and now by moving more to a mobile element. So we think it's a lot more variable, it's a lot more capital efficient and it's consistent with the.
Direction in which we want to go which is to absolutely be digital first and we'd had that through before but it got accelerated during the pandemic.
Right right in it as I guess, as we think about where that 65% figure it can go.
The percentage of applications that are.
Online or mobile.
Just trying to get a sense for.
You know if if if I mean, if that number goes to 80 85.
There are certain triggers you have in mind at which point.
You know, we we see even further rationalization of branches, even if there's not redundancy of.
Stores within a few miles.
Well, David we absolutely believe that a physical.
Physical location can be a differentiator for us or are we have a portion of customers that likely this physical interaction channel, we're always going to be.
Led by <unk>.
Serving the customer and the way that the customer wants to be served.
We've said for years now that we think the physical locations allow us to add to our addressable market because there may be some people that don't want to deal with us digitally.
I would agree with your point, David I do think that this number is 65 per cent is only going to continue to go up so as that continues to happen. We will do exactly what I mentioned earlier, we'll monitor our footprint and we'll continue to optimize our omni channel approach in particular with Eni.
To putting our capital against the efforts that are going to drive the most growth and the most value and then per your question was asked earlier also trying to figure out how much of that capital then after we feed our growth investments can we go ahead and drop to the bottom line. So that we can get back to the <unk> trajectory that we've committed to investors.
Got it got it and just one last follow up along those same lines in the channel strategy.
Can you.
Mind us sort of what percentage of the marketing has traditionally been.
Direct mail.
And you know just is this more balanced shift to.
Digital origination also mean youre going to redirect more of your marketing spend too.
You know to online lead Gen partners. That's a that's a great question. So although we have not disclosed historically, where we spend our marketing dollars. It's your intuition is correct what income.
And over the last few years and again it was accelerated last year during the pandemic.
We've invested a lot in a data infrastructure and set of capabilities from marketing that were very similar to what we have done for 20 plus years in risk.
We've increased our hiring they've got a great team day, where they did a fantastic job last year. So the mix of our marketing debt went to didn't you don't get absolutely come up last year, David and we expect that to continue to go up because one of the nice things between digital marketing and the digital capabilities that we've developed is there's a very nice handoff there right.
Can put someone straight into the application.
And you can present information in a more compelling way so.
We've got a lot of faith in her team they've done a great job.
We expect that mix to go up on the DM side, one of the other things that has happened over the years as the customers are responding positively to our digital capabilities.
<unk> started to emphasize our mobile capabilities a lot more so if you were to look at them.
Or direct mail from a few years ago like it would've been more prominence per location and then what has happened over time is digital and the story started the debt equal weight and now there are some creative that we test in which he called action really feels like much more of a mobile line. So that shift has already taken place.
We have monitored how customers are using our omni channel network.
Got it thank you very much.
Thank you David.
We have a question from Rick Shane of J P. Morgan. Please go ahead Sir.
Hey, guys. Thanks for taking my question and I hope everybody's well.
I'm sitting here and listening to my my peers asked the questions and I know they've all followed your company for a long time as well.
When we think about.
What you're going to be in two years.
Pretty wrap its a pretty radical departure from where you were two years ago I'm likely to be.
Increasingly concentrated on line versus branch based and B, a and have a national bank charter and potentially be a depository as opposed to being a non bank.
So it's obviously a huge shift.
All of those changes most curious about the shift to having your own bank charter I think at this point with your partnerships you have many of the benefits from an asset gathering perspective.
But I'm curious, whether the regulatory constraints of being a depository.
Really create enough benefit.
We think they absolutely do we're very excited about that.
The chapter that is going to start.
If we get to become a bank.
From a benefit perspective.
Cost of funds rate improved significantly for us and that gives us an opportunity to continue to sharpen our pricing that gives us an opportunity to invest more in the business and it helps us on a trajectory to the auto so that's going to be a big benefit. The second thing is there is a lot of them.
So for us as a company and having a uniform set of products that we can offer across all 50 states.
If you think about we've talked a lot about the channel ecosystem. So far we're also building a product ecosystem. So we have a personal loan product, which is obviously, what we do best but we really made a lot of traction last year and in particular in the fourth quarter with both of our secured personal loan than a credit card offering.
And as a bank, we would be able to offer those products as well as the personal loans in a uniform fashion across all 50 states in a way that we think not only would create operational efficiencies, but again helped the bottom line and help us sharpen her price them to customers.
And then strategically the things that we are really really clear on is we do tune things better than anyone else in the industry. We think in our segment number one is underwriting people with no file them from the fire.
And then number two is providing great service to them, even as they create a credit score.
And as we took a step back and really thought about what strategic opportunities does that open up for us what youre seeing for example, with Doe likes is the beginning of taking our platform and those core capabilities and figuring out how can you go ahead and drive more growth and a more capital efficient way by extending.
Those capabilities right.
So in the total X model, it's not our location, it's not only staffing, but it's still our product structure with all of the protections all the pricing all the things that we do really really well.
But it's done in a more capital efficient way, which means it's accretive to the P&L and we're really pleased so far not just with the progress with total X, but the fact that we've got other potential clients in the pipeline I talked to one this morning that want to work with us in that way and that's now opened us up to thinking about other ways to do digital distribution.
I bring that up in the context of a bank because we think not only is lending as a service the potential opportunity for us over time, but as we stand up our bank as we get experience.
Hopefully if all these things happen the regulators get comfortable with us we'd like to explore even banking as a service capabilities.
That case, we're exporting a lot of our Knowhow and working with partners again digitally distributed capital efficient way.
We absolutely think that being a bank is going to be a net positive for us our customers and our shareholders.
Got it and look I think that I think it's a great answer and and I agree with you in terms of.
Your assessment of your core strength and I I.
Inventory by your comment as product as a service I just do you consider that.
Some of the constraints that the bank regulated companies that we follow and everybody else on this line followers have experienced over the last 12 months and the flexibility that the non banks have enjoyed and there are opportunities to frankly gaining share because.
All of it.
We still have so much share opportunity in front of us and I think even even as we work through potentially some of those challenges.
Positives greatly greatly outweigh any potential negatives I, absolutely hear what youre, saying.
We think we're barely scratching the surface in our addressable market one of the things I mentioned that we're really excited about is it's medibank right, where we're going to almost double our addressable market. This year that shows how much potential there still lives in our business and how excited we are about unlocking it.
Whether it's from partners.
Medibank or doe likes or our own bank charter.
Got it.
Great answers I appreciate the time and look obviously, we've seen a lot of companies are.
Moved towards banking deposits were increasingly towards depository models over the years its.
It'll be interesting to see how it evolves. Thank you guys.
Thank you Rick.
As a reminder, if you wish to ask a question press star one on your telephone keypad Thats Star one.
We have a question from John Hecht Jefferies. Please go ahead Sir.
Hey, guys. Thanks for taking my questions. Most have actually been asked but I I've got a couple more.
Thinking about the meta and the Dol works Road, you mentioned some service components of those.
Those relationships can you tell us are you gonna be.
Housing all the credit or would those partnerships will do X and met a b housing some of the credit.
And is there anything as those partnerships develop that we think in terms of mix.
Fee income versus net interest income and so forth on your income statement.
Yeah, It's a great question and as you know historically, we have sold 10 to 15 per cent of a loan so we've had a.
A portion of our P&L that is already to income.
Specific partnerships that you asked about meta.
Largely with US there is an element that is theirs.
We don't like cities as well.
So for now it is ours.
Okay.
Yeah, [laughter] very broad question, but how did you guys.
Think about credit this year I mean, you're you're clearly coming into this year with good momentum in delinquencies and loss rates.
And then you and you've tightened had done a very good job developing your underwriting engine, but we've also got more stimulus come in that may affect demand for credit and and then and then we've got yes. Some expectations at least if you look at like provisioning from some of.
The credit card issuers for some if you look at the they have relatively large allowances, suggesting they expect at least from sort of charge offs cycle to occur through the year.
How do you guys perceive it given you did kind of momentum you're coming in with with those factors along with kind of the macro factors I know, you're not giving any guidance, but how do you just sort of see per year shaping up.
It's a great question so.
You and the others on this call at minutes for quite some time, John we've always wanted to be a company that pursue as growth in a prudent fashion right in the lending business. Since I think you have to take that approach if not you can be surprised and given all of the uncertainty in 2020.
We were prudent right we pulled back at the beginning of the pandemic, we waited to see what was going to happen.
All around the World, who were trying to one of your standard over the shutdowns during the recession. So there was a lot of uncertainty when we look into 2021.
Theres still more work to do.
We've read but an estimated one in 10 people across the country now has gone into vaccine the number of doses given I looked at it. This morning, I think it's twice now the number of people that ever tested positive for the disease in the U S and the bite into administration is certainly committed to a central role for the complement and really pushing out.
More of those vaccines and trying to get them to as many people I just wanted to take them. So we think that that trend is going to be really really positive and it's going to help the economy just get back on the cheap right and get people employed and just it's going to help us from a demand perspective to your point, there's stimulates as I mentioned earlier, there's something that can dampen demand.
Yeah.
But our customers Unfortunately, right live paycheck to paycheck, so even when stimulus comes in whether it's $600 $1200. It helps for a period of time, but it's not necessarily going to be there when the car doesn't start or theres. Some other need for capital. So we look in many ways past whatever that short term impact.
Is gonna do you have the next stimulus will apps.
Absolutely make sure we take any more account when we get back to providing guidance, but when you think it will be a short term impact and that the year will be one that will be characterized by growth in our personal loan business in the auto business, our secured personal loans and credit cards.
If I could just add.
One thing John.
You asked about provision, which we have remaining cumulative charge off as part of our fair value calculation.
And I'm looking at page 15 of the deck that we shared on line.
At the end of this past year at December 31, 2020.
That remaining cumulative charge off number pinned down.
By about 60 basis points, it's 10% now 10 point out per cent.
In comparison at the end of 2019.
The forward looking estimate was nine 5% so consistent with all of the other credit trends that are normalizing that forward looking outlook is normalizing as well so.
Just wanted to share that number.
Okay, and then I guess, while we're on this just thinking I mean, you'd have the I guess the flexibility that you're you're opening so many channels. This year that even if there's a.
Dampening of maybe credit demand at a secular level your youre able to grow through that because youre expanding somebody do X branches in markets with meta.
So given that do you.
Is there any mix shift with respect to the shred it the kind of.
Average credit performance you expect in those channels or are they pretty consistent with how you think your historical delinquencies and losses have come through.
So we expect that there'll be I'm, sorry go ahead Robin.
I'll just start Jonathan.
So the you're absolutely right. Let me first confirm your intuition one of the things that makes that usage and exciting one for US is we think we're really opening up the top of the funnel, we're adding 30 additional states we're leaning into the marketing of these new products. We've got the 150 additional don't likes locations.
Right, we're seeing great response to digital which is obviously something that we can continue to scale up.
So your intuition is absolutely right Jon that's part of what makes this such an exciting year for US is that top of the funnel. These really really going to open up.
And that means as you put it right, but even if there was a slight dampening of demand through the stimulus or if it takes a bit longer to get to a herd immunity right. We still think we're going to be able to have quite a bit of growth this year in.
In terms of the mix shift. This is one of the things we know how to do really really well we've opened up new states. We've opened up new channels, we've been very deliberate in the growth of mobile.
So certainly when we go ahead and reintroduce guidance, we'll give a view of what we think.
Losses will look like and as a reminder, one of the things that we've talked about when we went public because we think we're at a stage of our company where losses will seek to optimize certainly the responsible lending approach that we have but also growth in profitability because of the growth part means that we're putting capital into a more of a moderate income communities. So we look at.
Very manageable, John and we'll set expectations when we give guidance.
Okay. Appreciate all that color guys. Thanks.
Thank you John.
Ladies and gentlemen, this is the end of the question and answer session and now I'd like to turn the call back over to Ralph that's close for closing remarks.
Yeah.
Well I want to thank everyone. Once again for joining us on today's call. We look forward to speaking with you again soon.
Thank you.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you.