Q4 2020 GreenSky Inc Earnings Call
Yeah.
Good morning, and welcome to Green Sky's fourth quarter in full year, 2020 financial results Conference call.
As a reminder, disadvantage streaming live on the Green Sky Investor Relations website, and a replay will be available on a same site approximately two hours after the completion of a call.
We will begin with opening remarks and introductions.
At this time I would like to turn the call over to Tom Morabito, Vice President of Investor Relations. Mr. Morabito, you may begin.
Thank you and Italia and good morning, everyone. Thank you all for joining US earlier. This morning Green Sky issued a press release announcing results for its fourth quarter and full year 2020 ended December 31, 2020.
And access this press release on the Investor Relations section of the Green Sky website and.
In addition, we have posted our fourth quarter and full year, 2020 earnings presentation, which we will refer to in today's call.
Today, you will hear prepared remarks from David Zach, our chairman and Chief Executive Officer, and Andrew King, Our Executive Vice President and Chief Financial Officer, we were on.
Also joined by Gerry Benjamin Vice Chairman and Chief administrative officer.
Before we begin and let me remind you that our presentation and in discussions will include forward looking statements excuse me and statements that are based on current and assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from those projected.
We disclaim any obligation to update any forward looking statements, except as required by law.
Information about these risks and uncertainties is included in our press release issued this morning as well as in our filings with regulators.
We also will be discussing non-GAAP financial measures on today's call. These non-GAAP measures are not intended to be considered in isolation from a substitute for or superior to our GAAP results and we encourage you to consider all measures when analyzing green sky as a performance.
These non-GAAP measures are described and reconciled to their GAAP counterparts in the presentation materials. The press release dated March 10, and 'twenty 'twenty, one and on the Investor Relations page of our website.
At this time I will turn the call over to David.
Thanks, Tom.
Good morning, everyone and thank you for joining us to review, our fourth quarter and full year 2020 results.
2020 was a year, where we witnessed the durability in the home improvement market demonstrated the strength in which we operate in that market and reinforced underlying resiliency of green Sky's people and proprietary financial technology platform to service that market.
Green Sky ended the year strong and transaction volume trends and despite the unprecedented impacts of the pandemic. We delivered results in line with the prior year.
Fortunately, our fourth quarter results as well as a solid starts a new year lead me to be optimistic about achieving our goals in 2020 one.
Not without challenges in 2020, we were able to grow our servicing portfolio to over $9 $5 billion, while maintaining the strength of green Sky's consumer base, but.
And with full year, 2020, and transaction volume and top line revenues were in line with a prior year. Despite the significant headwinds of the nationwide shutdown in business activities and a tremendous toll it took on everyday life.
2020 was also a pivotal year for us in which we set out on a critical strategy to diversify our funding as a result, we now have increased capacity and multiple sources of liquidity, which allows us to support our growth objectives optimize profitability and help manage liquidity risk into the future.
In 2020, we completed over $1 billion, a new funding initiatives and since year and that momentum has continued with a recent completion of a new $1 billion board flow sale agreement with a leading life insurance company earlier this month.
The agreement brings yet another new funding partner to our ecosystem and supports our ability to grow transaction volumes into 2022.
Included in the agreement was in initial sales of approximately $135 million in assets, which was incrementals a four one year commitment.
Andrew will provide additional details on our overall state a funding, but I am delighted that our funding is a strongest and most diverse it has ever been in the history of our company.
On slide four Green Sky has enabled $28 billion a transactions for over $3 7 million consumers and 2020 transaction volumes from $5 5 billion.
It reflects the resilience of our business during the past year, despite the impacts and the restrictions related to a elective health care businesses.
In 2020, we were pleased to be able to increase the average ticket size of our transactions by over 10% compared to the prior year, which also helped drive the growth in our year and servicing portfolio by over 30% from what it was two years ago.
Turning to slide five of the presentation. We continue to believe our high quality program consumers and theirs on credit performance is a key differentiator for Green Sky.
Our weighted average FICO score a borrowers at a time of application was 781 in Q4.
Third a 30 day plus delinquencies observed at the end of the fourth quarter were just under 1% compared to 138% at the end of fourth quarter of 2019, reflecting a nearly 40 basis point improvement compared to a year ago, and an improvement compared to the third quarter, a 2020 outperforming typical seasonal trends.
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These metrics reflect a positive credit nature of our consumers who represent a homeowners actively pursuing the improvement of their highest valued assets.
And the performance of our service portfolio reflects the investments Green Sky has made in technology process and operations that allow us to differentiate credit quality, a time of origination and as we service the portfolio throughout the life of the loves.
As we've shared with you before I'd like to update you on a small portion of our portfolio that continues to receive a COVID-19 disaster assistance as the as of the end of the year approximately a 0.8% of the total loans serviced on our platform remained in payment deferral status related to COVID-19.
Other borrowers that were impacted by this hardship did result in a loss, but with a peak a 4% who received disastrous assistance less in 0.3% charged off in 2020.
Although the overall impact of these losses has yet to be determined in 2021, we continue to see positive trends are.
Our borrowers are continuing to exit payment deferral at a faster rate in those requesting new enrollment and less in 0.5% of loans in our servicing portfolio remain in deferral at the end of February.
We are optimistic that the assistance our consumers received a continuing federal stimulus support and a whole pool expeditious reopening of our economy will prevent meaningful opportunity on our performance for the remainder of the year.
Turning to slide six Green Sky has demonstrated a proven track record of maintaining a very high quality consumer base for many years and we have achieved a greater than 30% CAGR on transaction volumes and revenues prior to 2020 without sacrificing on quality.
At the end of the fourth quarter, 80% a borrowers at time of application had a way.
<unk> average FICO score in excess of 740% had scores in excess of 780.
Not only have we shown strong credit performance historically, but we've also been successful and maintaining a quality of new originations and a challenging 2020 without sacrificing credit.
Walgreens Guy has limited actual exposure to credit risk our originations benefits our business as we earn incentive payments in a bank waterfall when loans performed better than expected. Additionally, the quality of loans originated on Green Sky's platform remain important to our funding partners, which has allowed us to maintain and expand existing relationships and add in.
New banks and institutional investors Green Sky program.
On slide seven the size of the target addressable market for our core domestic home improvement and elective health care verticals exceed $600 billion per year.
This combined with a superior consumer experience and seamless technology platform, we provide to our merchants are key differentiators, making green sky the market leader in our core home improvement business and a strong disruptor elective health care financing.
Focusing on home improvement, we recently renewed our partnership with the home depot and have added a significant number of new merchants to our platform by way of example in Q.
Q4, a merchant additions included a $25 million a year, a regional HVAC contractor to regional roofing contractors, who combined annual revenue in excess of $85 million and a new $30 million a year regional window and door contractor and many others other new relationships added in Q4 approximately 75.
And that those merchants represent a migration from our competitors and in increase in Green Sky's market share.
Overall, our home improvement business was resilient through the fourth quarter, despite ongoing supply chain disruptions, which increased cycle times for many larger home improvement projects.
And I believe that we will begin to see improvements in these delays and disruptions and a return to more normal project timelines as the pace of business normalizes in 2021.
Our green Sky patient solutions business also continues to be well positioned to benefit from a significant recovery in pent up demand in the coming year.
Although the fourth quarter and full year transaction volumes were still adversely impacted by COVID-19 related shutdowns in elective health care procedures, we expect to see solid growth in our patient solution business as the year progresses or.
Our growth strategy is focused on specific high growth.
Vertical such as non invasive cosmetics large ticket dentist rate and laser vision correction.
Non sexually win already this year was successfully establishing and integrated financing solution with laser a way a leader in aesthetic dermatology with 67 clinics nationwide.
As a technology driven operator, if they were delighted with green Sky API capabilities to deliver a seamless financing experience for their patients and we expect partnerships like these will support the growth and recovery of our elective healthcare business in 2021.
Turning to slide eight Green Sky continues to generate outstanding lifetime value to customer acquisition cost metrics due to a focus on larger merchants and maintaining the loads account acquisition costs among a fintech competitors.
The chart on the left shows that we have achieved a 53% CAGR and a number of merchants with over $10 million a annual transaction volume since 2015.
On the right you can see that our transaction volume include merchants that have been with us for many years as trusted partners. We have shared in their successful growth of their business and in Green Sky's transaction volume over the years drew.
During the fourth quarter alone we added over 1000, new merchants to the Green Sky platform, many of whom left our competitors and came degree in sky by a inbound inquiries as they seek to gain access to a patented proprietary platform.
Throughout 2020, we talked with you about our focus on increasing merchant productivity and in Q4, our average merchant ticket size increased by 10% compared to the prior year. While we also observed meaningful growth in the average monthly transaction volume per merchant originated on our platform.
This is another important example of a disciplined execution of our team on key strategic goals to increase the scale and resiliency of our transaction volumes.
Before I turn the call over to Andrew to go through the details of our fourth quarter and full year 2020, a performance as well as update you on our 2000 and 'twenty one guidance, let me briefly recap our 10 by nine by 30 plan that we shared with you at our Investor Day in early July and January.
Our strategic plan calls for a transaction volumes approaching $10 billion.
Revenues of approximately $900 million and a long term sustainable adjusted EBITDA margin targeting in excess of 30% by 2020 five.
We believe this plan has upside as it does not include additional platform innovations and strategic projects and a pipeline.
We will periodically be updating our plan for additional stair steps and growth as we launched new initiatives coming out a successful pilots and sharing specific details supporting such incremental growth expectations. Thank you for your interest in Green Sky and I will now turn the call over to Andrew.
Thank you David and good morning, before I discuss our 2020, a results and update our guidance for 2021, let me provide some additional details around green sky in funding and liquidity.
David shared earlier since year end, we executed a $1 billion.
A word flow sale agreement with a leading life insurance company, new to Green Sky ecosystem and.
Conjunction with establishing this forward flow, we also executed and initial sale of approximately a $135 million to a new partner.
This execution reflects a significant milestone in establishing new structural liquidity and reflects our continued focus on having a a both robust and diverse set of funding options to support our immediate and long term growth plans.
It also demonstrates the successful first step of establishing a forward flow strategy that we set out to do before encountering headwinds in 2020.
Our bank waterfall funding capacity also remains strong and approximately 2 billion a commitments unused entering 2021, and we expect another $2 $6 billion in revolving capacity to become available in the next 12 months as outstanding loans pay down.
Since the end of June four of our ex <unk> existing bank partners have renewed a $5 8 billion in commitments and in existing bank partner expanded their commitment by an incremental $100 million.
The current and forecasted capacity under our bank funding combined with a new $1 billion forward flow arrangement.
How's us to be opportunistic and nimble with respect to our funding strategy in 2021.
I mentioned this previously on our Investor day, but in the fourth quarter, we completed $685 million and loan sales a significantly.
Significantly improved pricing, which more closely reflects our bank funding costs. We also amended our warehouse credit facility to increase the committed capacity to $555 million and increased the advance rate and establishing a more efficient funding structure as we temporarily warehouse those loan participations price.
And that's a sale.
With our existing bank partner capacity and successful rollout of our loan sales program Green Sky funding is the strongest it has ever been in the history of the company.
Importantly, current market dynamics today continue to show a strong demand for our assets from both banks and institutional investors and we continue to have active dialogue with new and existing partners interested in adding to a bank amendments as well as participating in our loan sales.
And with attractive economics. These additional sources of funding will allow us to grow our business, while maintaining and improving our margins.
Turning to slide 11.
Our net income was $23 million in the fourth quarter compared to a $5 million in the same quarter in 2019 on.
Let me walk through the key drivers of these results.
Starting with revenues Green Sky and reported fourth quarter, a total revenue of $129 million.
Compared to $136 million in the fourth quarter, a 2019 Q.
Q4 transaction fee revenue reflected the benefit of a 40 basis point increase in a transaction fee rate compared to the same quarter in the prior year across $1 3 billion, a new transaction volume in a quarter.
For the year Green Sky's total revenues were $526 million, reflecting a 30 basis point increase in transaction fee rate over the prior year, which largely offset the decrease in volumes in 2020.
I will go into more detail on a cost of revenue and financial guarantee expense in a moment, but I also want to highlight the efficiency of our operating expenses for the year.
Excluding noncash and nonrecurring items, our operating expenses were flat year over year with incremental expenses related to investments in new products and innovations funded through those efficiencies.
Spence control continues to be a strict focus for us in 2021, as we ensure the most efficient path towards growth and realize a true scalability of our operations.
It is worth noting that our 2020 results are consistent or better than what we provided during our investor day. Our net income is higher than originally estimated largely due to better than expected revenue a $6 million as well as an additional $4 million favorable variance driven by December a bank waterfall activity that result.
And it in $2 $4 million lower cost of revenue and a one $5 million a favorable impact to a financial guarantee expense.
Turning to slide 12.
Our full year average transaction fee rate for the year was seven 1% and seven 2% in Q4 or 40 basis points higher than the same period last year.
Higher transaction fee year over year reflects the continued demand for promotional financing products with higher transaction fees in our home improvement business.
We were also highly successful in working with our merchants on new and innovative products that supported higher close rates towards the end of the year and into 2021.
On the right the trend in APR on new originations also continued to increase quarter over quarter with strong demand for deferred interest products, which have higher corresponding yields.
And there was a 20 basis point decrease in total portfolio APR in the fourth quarter compared to the prior year, the elevated transaction fees more than offset the decline and resulted in an improvement to overall revenue generation when taking into account both a transaction fee rate in collateral APR collectively.
On slide 13 transaction fee rates and a multi year history of recurring merchant utilization on a platform that David described earlier together drove a transaction fee revenue of $393 million per the year <unk>.
Servicing fees from our $9 $5 billion portfolio contributed approximately 22% of total revenues for the year with the average servicing fee rate increasing to 123% from one one and 4% compared to the prior year.
As a result actual cash servicing fees received in 2020 were up 23% compared to 2019.
Shifting now to the cost of revenue.
Cost of revenue was $79 million per quarter compared to $70 million in 2019, We Inc.
And for $29 $7 million in loan sale costs in the fourth quarter, which were offset by a $12 $6 million a reduction in bank waterfall costs for.
For the year cost of revenue increased to $307 $9 million, primarily due to $72 million in non cell costs and $10 $7 million in noncash sales. So took a facilitation expense. This was also offset by a $23 million decrease in our bank waterfall in costs compared to 2000 and.
19.
As you can see for the quarter and for the year our loan sale activities have results results that benefit our bank waterfall costs that I will go into more detail in a moment.
Origination expenses as a percentage a transaction volume were lower for the quarter, while servicing related expenses increased $2 million year over year, but as a percentage of the average servicing portfolio. These costs remained flat. This is particularly remarkable when taking into account the volatility in consumer behavior and uncertainty.
A credit during 2020 and it continues to highlight Greens, guys cost discipline, and the agile and nature of our operations and investments in technology to service the loans on a platform.
Over the last few quarters, we've highlighted the positive trends within our bank a waterfall costs and specifically the improvement is attributed to stronger incentive payments.
Overall bank waterfall costs.
26% in the fourth quarter compared to a year ago or $13 million lower in 2020 compared to 2019.
On the right we show the components that make up our bank waterfall costs.
And our expense for the quarter was $85 million or 7% lower compared to the same quarter in the prior year and total ending SCR liability was $185 million at the end of the year or $21 million lower than a year ago.
Lastly, incentive payments were $6 million higher in Q4 versus the prior year, reducing the cost of revenue and reflecting in the combined benefit of lower charge off rates and lower bank margins.
As we discussed in Q3 loans sales costs makeup and important component of a cost of revenue to remind everyone Green sky as a business model has always been focused on the lifetime profitability of each vintage of originations and as we described in our Investor day will fully loaded funding costs, a recognized upfront with loan sales.
Over the life of our vintage originations a current sale economics. These costs are equivalent to a historical bank funding costs.
Loan sales expense was $29 $7 million in a quarter, which reflects a realized expense on assets sold as well as the mark to market expenses on loan receivables held for sale on our balance sheet at the end of the quarter.
Beginning in Q3, we also began recognizing a noncash mark to market and expense on future sales facilitation commitments for assets not on Green Sky and balance sheet. This noncash item for the quarter was $7 $6 million a.
Due to improved pricing execution in the fourth quarter compared to the $18 million expense recognized in Q3 for.
For the full year, the noncash mark to market expense was less than $11 million.
While we incurred upfront expense on a loan sales keep in mind and they also reduced SCR expense otherwise incurred on our bank waterfall in future periods, and mitigate risk and incentive payment and variability due to charge offs. It is also important to note that a loan sale costs vary based on a loan product mix that is sold and taken in concert with trans.
Action fees earned at the loan product level, our loan sales maintain a lifetime contribution margin of greater than 5% consistent with our historical cost of funds.
Turning to slide 15, a financial guarantee expense for the fourth quarter represented a benefit of $23 5 million.
You will recall that under a under our adoption of seasonal.
Escrow, we put aside on behalf of our bank partners represent the main component of the financial guarantee expense.
Historically, our ongoing bank partners have used a little to no escrow. The seesaw methodology requires us to estimate the expenses there were a loan portfolios were in runoff.
The loan sales in Q4 had the impact of reducing our modeled escrow usage and as a result, there were a latest financial guarantee liability.
This resulted in the recognition of a significant financial guaranteed benefit during the fourth quarter a 2020.
Prior to the fourth quarter, we adjusted EBITDA for seasonal expense as a non cash items. However, we now estimate certain modeled scenarios show a small amounts of cash escrow usage might reasonably occur as a result, we have discontinued our adjustment a this is a noncash item and EBITDA recognized a cumulative reduction to EBITDA from prior quarter.
Adjustments and further simplified our financial reporting said another way there is a zero dollar EBITDA adjustment for seasonal for full year 2020, as well as in our 2021.
Turning now to guidance on slide 16, we are on track to achieve transaction volumes of six two to $6 $5 billion, a approximately 15% growth year over year and our estimated revenue remains at approximately $584 million.
We are revising our net income estimate to breakeven for the year based on two primary reasons.
First while there is still uncertainty in the post COVID-19 recovery of the consumer and improvement in the macroeconomic environment. The trends we are seeing through the end of last year and into the first couple months, a 2021 lead us to believe incentive payment performance as a result of lower charge offs will be better than our prior estimate.
Second we expect additional improvements in 2021 loans sale costs anchored by the new $1 billion for flow agreement that we announced today together. These two trends combined for a $40 million benefit to net income at the midpoint of our revised guidance.
We are also revising adjusted EBITDA higher which reflects the benefits and a cost of revenue that I. Just described but also takes into account that we are no longer adjusting EBITDA for the financial guarantee expense.
As a result, we are revising our adjusted EBITDA to a $45 million to $55 million and adjusted EBITDA margin to between 8% and 10% per year.
Once we have finished recognizing the remaining impacts from the pandemic and it reached a steady state and our diversified funding model, which we believe will be by 2022 reported GAAP net income and adjusted EBITDA estimates to reflect sustainable adjusted margins exceeding 30%.
Excuse me before moving to Q&A I wanted to offer some additional assumptions and transparency on how to model key inputs underlying our 2021 guidance on revenue and cost a roadmap here.
Here, we provide a range for a transaction fees servicing fees and interest and other income as well as cost of funds and servicing and origination costs.
Thank you for the opportunity to discuss our fourth quarter and full year 2020 financial results and for your ongoing interest in Green Sky.
Operator, this completes our prepared remarks, and we are now ready to take questions.
At this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
Again to ask a question. Please press Star then the number one.
We will pause for just a moment to compile the Q&A roster.
Your first question is from the line of John Davis with Raymond James.
Hey, good morning, guys and.
And maybe just wanted to quickly start on a margin. So since that's where you kind of wrapped up a 10% and nice to see a little bump there but just.
On a better understand what gives you confidence that you go from let's call. It 10 to 30 from 'twenty, one to 'twenty two and a.
Switzerland, those kind of Panther.
Pandemic costs that you think more or less what will come out I just wanted to understand the moving pieces because obviously, that's a that's a pretty big year over year ramp in the margin in and pretty important to the forward EBITDA forecast.
Sure.
As I mentioned I think the the two main components and the revision upward are around and improving.
A charge off estimate for the year as well as a mark to market costs. So let.
Let me start by kind of touching.
Touching on the on the first part so when we provided our guidance on Investor day.
And we noted that there was still a lot of uncertainty we are still in the back half.
Towards the end of 2020, as we were putting our estimate together we've seen ongoing improvement you can see.
Part of our performance related to delinquencies are.
40 basis points better year over a year, we're seeing positive trends in.
And declining.
COVID-19 deferral status.
We are seeing a moat.
Mentum and possibly some optimism around stimulus and vaccine related reopening so from a 2020 credit perspective, we knew that we were uncertain and conservative and so we are bringing that forward.
Based on the additional data we've seen in the past two or so months to improve our credit loss forecast for the year the other.
Other main component is around our mark to market or a loan sale costs and as we noted previously even at the end of last year, we saw a strong momentum improving.
And mark to market costs relative to our initial sale in Q3.
And that was even further solidified by the establishment of this $1 billion forward flow agreement.
Which really anchors a kind of the pricing for 2021. So those are those are the two largest components that are attributing to the shift in.
And in Europe.
In 2021 expectation.
Let me add to that good morning, John.
This is very much about.
The enhancement of our model of having a more diversified.
Distribution a funding.
And what what we're doing in literally midstream is going from a bank waterfall model to a mixed model and what that creates for the for about a two year period is all of this mark to market.
Which which technically pulls forward all of that cost into current period.
And as we start getting the benefit of everything that we sold off.
Which was sold off in a discount far less in a transaction fee that we earned but it's still sold off in a discount in 'twenty and 19 and.
Also in sorry in 2000 in 'twenty, one we'll start seeing the benefit of that so we are literally.
Changing the funding model and diversifying it which which is which is what's creating this optic in this this EBITDA margin. So we have confidence because it's math and we see how it normalizes by the time you get to year two year three of this transition.
Okay, Great. That's Super helpful. And then I just wanted to touch a little bit on on stimulus impact I think Andrew you mentioned that you have better.
Great expectations for better credit this year.
But if I think about the potential impact on originations and do you see last year was stimulus hit that you had.
Kind of a slowdown in originations as people had more cash and didn't need to to finance you kind a one understand the play a how you guys thinking.
Obviously, it's and if it on the on a credit side.
And so thus stimulus.
And really helps.
Marginal borrower may.
<unk> payments the stimulus doesn't seem to correlate to a more people wanting to do home improvement youre dealing with homeowners Super Prime.
And that are spending $10000 on a home improvement project.
From what we can see.
And the data is is that it.
Economies opening up communities opening up is what stimulates home improvement projects. If you have marginal borrowers it get stimulus checks.
Will default less often.
So on the demand side it hits.
Tell me, where the market is open and I can tell you where were unimproved meant is growing.
And on the debt side.
We have a narrow slice of marginal credit.
And they are being helped by the stimulus.
And I think the data.
And like the data shows that people are getting stimulus or.
Actually paying off debt and saving money.
Right now and that makes us I just didn't know if there was a.
Potential headwinds from some stimulus just from.
People might be in a borrower makes sense, Okay, and then I guess last one from me.
It's just topical with what kind of a move up in interest rates recently, so with this new diversified funding mix, maybe just at a high level talk about how interest rates will play through.
The P&L.
Whether it's the take rate upfront and look forward to funding costs.
And just at a high level I know, it's complicated when you get in the weeds, but just.
Good bad neutral if rates were and continue to rise just just any commentary there. Thanks guys.
Sure Let me, let me comment first on the funding cost piece.
So I think obviously, we're footwear focused on watching.
The expected change in interest rates down the road I would say that.
Predominantly our bank waterfall costs are anchored off of the short end of the curve and based on where they've been historically and where they are today a R.
Our bank margin structure does have some capacity.
And for movement upward before it actually begins to impact.
On a cost of funds from a bank waterfall I think from.
Loan sales perspective, we're seeing strong demand.
Across that segment today and in fact.
One thing we didn't highlight was the execution of a securitization that was done with our loans.
Earlier this quarter.
And that also was received very successfully and I. So I don't think there is any immediate impact in the in the at least in 2021 as we see it on.
On the funding side that would impact our profitability due to a raising rate environment.
In terms of.
The take rate I might let David comment, but my initial thought is that obviously.
And the different type of products that we offer a show a broad range of.
Elasticity to the consumer and I think that when we see a rates move and we're trying to adjust for that on the front and I think we have a lot of optionality to ensure that we protect margin on that side as well, but David I don't know if yes, yes.
Said for years now when rates went up or rates went down, especially over the last couple of years.
At the end of the day.
A consumer bears that cost it doesn't impact.
Negatively origination growth.
Simply by our interest rate. So if the interest rate is driven by hyperinflation or.
Hey.
A deep recession and Thats one thing but.
<unk> is in long term interest rate expectations.
<unk> does not impact on margin as price as interest rates go up and consumers are expecting to pay a higher rate.
We're getting a less and lesser benefit.
And as interest rates go down and it's the same thing.
Okay, Alright, thanks, guys.
Your next question is from the line of ear in <unk> with Citi.
Hi.
Thanks for the question if maybe you could just talk a little bit about that.
On the consumer demand.
It looks like you have.
A pretty solid expected growth for 2021, and how are you.
You're seeing a trending over and over the past a few months.
We're seeing a very strong consumer demand.
We are getting reports from our merchants that they're off to a great start we're certainly seeing in.
Encouraging early results in our in our own data.
And I think the biggest challenge is labor.
And supply chain and.
Certainly supply chain is making progress catching up.
But the consumer demand is.
Certainly there.
And then the FTR expense was lower.
Year over year, which was that primarily related to loan sales in the quarter and just trying to.
I'm trying to understand the moving.
That's fair.
Yes.
And that was primarily due to the diversified funding model so again.
As we incur a.
Cost on loan sales, we have said that it does have an offsetting benefit to our bank waterfall cost and some of that is due to.
On deferred rate loans again.
Theyre not put into the bank waterfall and then you don't have that SCR expense.
But overall.
We are seeing that benefit come through 2000, 22020, and we expect that to be fairly consistent in the <unk>.
And here as well.
Okay. Thank you.
Your next question is from the line a bill Ryan with Compass point.
Good morning, and thanks for taking my questions.
Just a couple of things on the.
Third quarter call you kind of talked about a two 7% discount is what you would be selling.
A.
The loans to third parties at a relative to par.
And you kind of gave some positive directional indicators from the conference call and even in a press release could you talk about what youre seeing in that number what are the key drivers are required rates of return going down with low interest rate environment and then.
And we talked about this in the past, but you gave us the delinquency number.
As far as credit goes, but we really don't have a credit loss rate number which is one of the key drivers of.
The incentive income line item.
Is that something that you are thinking about providing to us. So that we can kind of draw a correlation if you will between the delinquencies and the credit losses to a better calculate incentive income. Thanks.
So.
Thank you I'll start with the.
A component just a breakdown of the discount I think what we shared with you before the $2 seven probably was around our Investor day, when we were comparing.
Kind of a lifetime profitability of bank, a waterfall versus our loan sales.
I believe we said a bank waterfall, it's about $2 six and.
And in cost and get them getting us about a five 3% to five for contribution margin.
<unk> on the source of liquidity.
I'd say just to try and answer your question the $2 seven is a what we've continued to improve upon.
And what Youre seeing the benefit of and our 2021 view is that because we've now established a.
A large forward flow agreement with equivalent pricing, we're able to then take advantage of the expected cost we would incur over the coming year.
So really the $2 seven.
It is also a component of the different type of loans that we sell but we think thats still the appropriate.
Kind of a.
Target to represent in terms of loans sale costs with probably some upside given that there continues to be some strong demand from our partners and doing more of those types of agreements and also a new and new and existing partners that we're having active dialogue with.
In terms of the question on credit loss, we understand that that's an important piece.
The assumption we are building as you can see some some additional granularity on how to model our per.
Projections, a credit losses one.
And that we haven't.
Specifically provided historically, we did show in.
In our Investor day kind of a historical view.
And on credit losses, I think thats, probably the best place to start and we will continue providing directional guidance relative to where we think that will play out and I think the best.
And kind of early indicator of that is the delinquency metric that we've provided historically so I think we will work with you to try and triangulate that but at this point, we have not provided a specific.
Loss forecast embedded into.
The bank waterfall economics, but.
And we'll try and and work with you on that and see if we can dissect it with what the information is out there okay and just one follow up to that on the delinquency number that you gave us at what's in 99 basis points and you talked about.
Eight.
8% loans on deferral.
And you kind of try and adjusted to an apples to apples comparison, a year ago with deferrals and its impact on delinquencies.
Is there a way on a number that you can kind of directionally give us on that as well. Thanks.
I think it's hard to compare apples to apples when youre right were really talking about apples and oranges.
But but from from our perspective credit.
Continues to outperform our expectations.
The thing I'd add too is just from a timing perspective, we saw much of the decline in the deferral status occur in Q3 and in Q4.
So when you when you kind a fast forward to the end of the year. Many of those accounts that have come out a deferral have now had 30 days or more to go into delinquency. If that were the direction that were going so I think David is correct. It's hard for us to actually pinpoint an exact number but I do think directionally, even loans coming out of a deferral or remaining health.
The other than we initially expected.
Thank you.
Your next question is from the line of Rob on <unk> with Autonomous research.
Good morning, guys I wanted to ask about your commentary that the escrow could be used going forward in this.
Slide you talk this up to funding diversification, but that's not really a new development this quarter. So.
And why would you be tapping into escrow in the credit environment has gotten so much better over the past couple of quarters and then two what.
Specifically has changed now and really since the Investor day in and that led you to change and no longer.
And then make this adjustment to a two year EBITDA.
Sure.
Try and take that one so.
And as I mentioned.
And our.
Escrow utilization forecast is based on a non I would say non a kind.
Kind of.
Practical runoff scenario. So you have you have to start with the fact that when we take into account. The modeling we assume that there are no additional originations in any of our bank waterfalls and therefore, we project.
And some some amount of paydown and escrow utilization in aggregate.
When we model that going forward. There are a couple of components that I think in impact whether or not cash is used and by the way.
Just to be just to repeat we don't see like large scale or a material impacts a cash utilization theyre very much on the margin.
But they can be impacted by.
A.
Portfolios that are paying down faster or slower.
And it can be impacted by.
Changes in credit and they can also be impacted in now the activity of loan sales. So as we sell loans loans may or may not come in and out of our bank waterfall in battle.
<unk> balances as well so I think.
To answer to try and answer your question.
And in a concise manner.
Our model show that in certain cases, we may show, a small utilization for certain bank partners not again not in a material amount.
But the guidance that we are applying is that it is either a cash or noncash expense based on a again runoff forecast and if we see.
Any amount of cash utilization, whether it's small.
We are going to apply the guidance of not adjusting it back and so our EBITDA. So it's kind of a binary yes, let me let me add to that so this is really all about accounting treatment.
And it's not a change in cash and so for example, Rob if we have a bank solid portfolio and in order to facilitate the sale.
The escrow as years, what that means is all of the escrow can't be for any any bank can't be added back.
In EBITDA.
So <unk>.
Cecil and GAAP strikes again.
Okay. Thanks.
Is it fair to say then Andrew just to kind of characterize where you said that.
The loan sale activity in the fact that you are selling more whole loans means that.
Obviously less fewer loans go into the waterfall and.
That could trigger some payments to bank partners, maybe because they're not getting the volume that they might have under the old model.
No. It's not it's not it's not a considerably that if we've got a small bank.
That just can't originate anymore, or we've had small bank cell and they need to exit the program. It's that kind of small stuff that's going on that's going to have a very modest.
Escrow expense.
Okay. Thank you.
And I'd just add it's not any one one of those things that it can be a combination of the different components that I mentioned, so it's definitely not related to.
And I'm kind of a lower a bank waterfall.
Capacity or anything like that it's just the ins and outs of loan sales is probably the simplest way to describe it.
Your final question in from the line of Chris Donat with Piper Sandler.
Hi, good morning, Thanks for taking my questions.
Wanted to ask one around <unk>.
Transaction fee rate and how you expect that to play out over the year I know in prior years. It had been at times lower in the first quarter and I think <unk> had a.
A promotional event in the first quarter. So I'm wondering if that's something that we should expect in 'twenty one with.
I know the guidance for the full year on the transaction fee is around 7%, but should it be maybe below that in first quarter and then above it in later quarters.
So what we see.
As certainly a stability in the <unk>.
Take rate.
Our expectation is that in terms of our modeling as we assume it will be a little bit lower.
And kind a go go back to its historical norm, but just reminder, if the average take rate is 700 or $6 70, our margins are intact, because when the take rate is higher and theres, a higher interest rate or economic value of the portfolio.
Net.
Take rate is higher then that's offset by lower economic value.
And just as a data point on Q1 every year, we have some volume based.
Marketing funds and rebates that we pay in Q1, and so that is arbitrarily, making Q1 look different.
And so I think I think we can maybe try to show that with and without the.
Marketing funds.
In reality, it's in <unk>.
It's in annualized expense, but we're paying it and it's earned after the year and we are expensing it paying and the cash comes out in Q1 does that help Chris.
Yes, yes got it.
Just didn't want to be surprised if there was anything but your comments.
Put it in context here.
<unk>.
And then.
Go ahead and I was.
Just going to add that.
On the take rate, we have seen we mentioned that.
And a 2020 into 2021, we've seen higher.
Take rate.
And the mix of consumer demand.
And our outside of the rebates that we just discussed we do think over the course of a year that probably normalizes, a little bit more towards around 7% and just kind of what we've guided to.
So I think that's the best way for you to think about it without a hopefully being surprised.
Okay got it and then just wanted to ask one question about mix.
Got that.
Windows are the most important part of the mix but.
By our math looks like.
HVAC was down about 36% year on year, just wondering if and.
And we've talked about this before but.
First in kind of retrospectively any callouts on HVAC for the fourth quarter and then I'm just wondering what the weather in the first quarter if that changed anything on a.
Activity for for HVAC, particularly in some regions like Texas or.
Just curious.
I'd say that.
HVAC seasonally just in general as seen in kind of a.
A trend downward at the end of the year I think that's something that tends to get more focus in a stress around replacement and in issues. During the peak summer months. So I think seasonally HVAC tends to go down and we haven't seen any major shift in our merchant base in fact, David.
<unk> mentioned earlier.
We've added new merchants, both in HVAC and Windows and doors.
So I don't think theres anything underlying kind of what youre seeing in our business other than the fact that.
And there's just some seasonal changes and.
We're looking to ramp up both in both categories.
I would I would add to that.
We are seeing in every category.
Certainly in home improvement and for that matter a elective health care is.
A good leading indicators for growth in every category of our business.
For.
For us we're getting we're gaining market share we're getting bigger we're getting more merchants.
And we are seeing in every segment of our business.
Growth year over year.
Okay and Sir.
On electric.
Yeah, Yeah, that's a can take on elective health care anything you point us to like.
And.
A combination of restrictions being lifted and states, but I guess, there's also a consumer comfort issue with being willing to go in and getting something scheduled as a.
I mean is this a coiled spring or is it something thats going to be gradual.
So it's not going to be a one quarter, we expect to be back.
Theres, certainly certainly a lot of demand.
Youre right when when the state governments.
Forcibly close medical offices, and there is fear and panic nobody is going to get.
And elective medical procedures that where you saw that we saw so many of our amazing.
Health care providers.
They they went from employing a hundreds of people and growing to literally being down 90% in <unk>.
Some cases, a 100% overnight and unfortunately that didn't last very long.
We're certainly seeing and come back we're seeing our business come back we mentioned earlier today a great relationship.
With a large multistate fantastic medical provider.
We've got many more in the pipeline. So we do think long term over the next year or two this becomes a very important material part of our business.
And we certainly like a steady progression in the trends we're seeing so far.
Okay. Thanks, David.
And you.
There are no further questions I will turn the call back over to CEO David Zalman.
In the remarks.
Thank you for your questions and thank you again for joining US today, please stay healthy and safe and we look forward to speaking with you in may when we discuss our first quarter 2021 results. Thank you again.
This concludes the Green Sky fourth quarter 2020 financial results Conference call. Thank you for your participation you may now disconnect.
Okay.
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