Sunlight Financial Holdings Inc. Q1 2023 Earnings Call
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Speaker 2: Greetings. Welcome to Sunlight Financial's first quarter of the 2023 earnings call. At this time, all participants are in a 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.
Speaker 2: Please note this conference is being recorded. I will now turn the conference over to Lucia Dempsey, Head of Investor Relations. Thank you. You may begin. Good afternoon and welcome to Sunlight Financial's first quarter 2023 earnings call. To the close of the market today, we filed our first quarter 2023 Form 10Q.
Speaker 2: announced first quarter 2023 financial results and poses an earnings presentation to our investor relations website at ir.com
Speaker 2: Before we begin, I'd like to remind everyone that this webcast may contain certain statements that constitute four looking statements within the meaning of the Private Security Litigation Reform Act of 1995.
Speaker 2: These include remarks about future expectations, beliefs, estimates, plans, and prospects.
Speaker 2: Such statements are subject to a variety of risks, uncertainties, and other factors that could cause actual results to differ materially from those indicated or implied by such statements. Forward-looking statements include, but are not limited to, some of financial expectations or predictions of financial and business performance and conditions in competitive and industry outlooks. We look at number of Motion in different applications.
Speaker 2: Forward-looking statements speak as of the date they are made, are subject to risks, uncertainties, and assumptions, and are not guaranteed of performance.
Speaker 2: FOMAC Financial is under no obligation and expressly disclaims any obligation to update, alter, or otherwise revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.
Speaker 2: The company also refers participants on this call to the press release issued by the company and filed today with the SEC, the supplemental presentation posted to Sunlight Financial's website, and Sunlight Financial's SEC filings for a discussion of the risks that can affect our business.
Speaker 2: Additionally, during today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP.
Speaker 2: A reconciliation of these non-GUT measures to the most directly comparable GUT measures can be found in both our press release and the supplemental presentation.
Speaker 2: Joining me today are Matt Peteri, the White Financials Chief Executive Officer, and Rodney B. Deutert, the White Financials Officer.
Speaker 2: Matt will start with an operational performance review of the first quarter of 2023. Rodney will then share additional detail on our financial results before Matt closes with an update on our key priorities for our ongoing success.
Speaker 2: We'll then open up the call for questions.
Speaker 2: It is now my pleasure to turn the call over to Matt Pateri.
Speaker 3: Thank you Lucia, and thank you all for joining us.
Speaker 3: In the first quarter of 2023, Sunlight funded $627 million of solar and home improvement loans.
Speaker 3: reflecting a 6% increase relative to the first quarter of 2022.
Speaker 3: or 12% increase.
Speaker 3: when normalizing to the impact of the solar installer that filed bankruptcy in late 2022.
Speaker 3: Home improvement volume was particularly strong, with $92 million funded in the first quarter of 2023.
Speaker 3: That's a 20% increase relative to the same period last year.
Speaker 3: We also funded loans for nearly 16,000 borrowers in the first quarter, demonstrating the sustained demands for solar and home improvement financing overall.
Speaker 3: We also saw average loan balances continue to grow relative to the first quarter of 2022, with average solar loans up 6% to $47,000.
Speaker 3: and average home improvement balance is up 13% to 19,000. Additionally, we continue to maintain strong relationships with our network of contractors and add new partners to our Orange Origination platform.
Speaker 3: including 41 new solar installers and 32 new home improvement contractors.
Speaker 3: that became active in the first quarter of this year, increasing our total contractor relationships to 2,070, a 30% increase relative to the first quarter of 2022.
Speaker 3: with Cross River Bank, as well as other actions we've taken, positions sunlight to address many of the key issues faced in 2022 by enhancing our indirect channel execution, bolstering our liquidity, and reducing our risk of
Speaker 3: addressing the maturity of our SBB revolving credit facility.
Speaker 3: ensuring profitable pricing.
Speaker 3: right-sizing our expense base, and reducing our contractor advance program.
Speaker 3: I also wanted to take this opportunity to provide an update on our credit performance.
Speaker 3: which demonstrates that we continue to be an industry leader in credit quality. While we don't hold loans on our own balance sheet, we track the performance of loans originating with our orange platform so that we can ensure high quality credit performance for our capital providers and indirect channel partners.
Speaker 3: For example, solar loans that sunlight originated in 2022 had an average credit loss rate of only 77 basis points after 24 months.
Speaker 3: relative to 162 basis points for similar loans originated by our peers in 2022. This superior credit performance reinforces our dedication to high quality assets.
Speaker 3: supports our value proposition for current and future capital providers.
Speaker 3: providing them the opportunity to earn an attractive risk-adjusted return, which in turn benefits some night's margins.
Speaker 3: I'd like to now turn the call over to Rod De Joder, sunlight CFO , to discuss the quarter's financial results. Thanks, Matt. The Assembly generated total revenue of $20.6 million in the first quarter of 2023 relative to $30.1 million in the prior year period.
Speaker 4: While total funded volume was up 6%, total platform fee loans, or solar loans, were down 59% and the proportion of direct to indirect channel loans also decreased.
Speaker 4: These factors led to a $5.7 million decrease in direct channel platform fees.
Speaker 4: and a $4.9 million decrease in indirect channel platform fees.
Speaker 4: as we only sold a small portion of home improvement in direct channel loans in the first quarter of this year.
Speaker 4: In the first quarter of 23, our Direct Channel Platform B margin was 7.1%, up 180 basis points from 5.3% in the first quarter of 22, reflecting the impact of pricing actions we've implemented in the last year.
Speaker 4: given the April indirect channel loan sale as well as upcoming back book loan sales.
Speaker 4: We expect negative indirect channel platform B margins in the near term.
Speaker 4: we've been implementing since mid-22, we expect recently approved direct and indirect account loans to be profitable and improve our platform fee margins later this year. Adjusted EVA for the first quarter was a loss of $12.4 million relative to a $7.8 million profit in the first quarter of 22. An adjusted net income for the first quarter was a loss of $17.2 million or a loss of $0.11 per diluted share relative to $4.9 million profit or three cents.
Speaker 4: in the first quarter of 2022.
Speaker 4: In addition to decreased platform fees, adjusted EBITDA, and adjusted net income for the first quarter of 23 were impacted by higher unsold loan balances at CRB.
Speaker 4: increased interest income.
Speaker 4: While we did not sell any solar indirect channel loans in the first quarter of 23, we completed a $296 million sale of solar indirect channel loans on April 28.
Speaker 4: and the associated deferred payments were added to the new term loan as specified in the Cross River Bank Agreement.
Speaker 4: While we are originating new indirect channel loans at CRB's balance sheet, we expect to maintain our unsold loan balances within compliance of the recently executed CRB Finance Agreements through additional loan sales in the coming months.
Speaker 4: I'll now turn the call back to Matt to highlight the significant progress we've made to address our key challenges from 2022.
Speaker 3: Thanks Rodney. As just discussed, we're continuing to reduce the balance of unsold loans at Cross River Bank including the 296 million dollars of solar indirect channel loans that we sold last month.
Speaker 3: Losses on the sale of the backbook loans are supported by the Cross River Bank financing agreements. We're encouraged by the strong demand we're seeing for our high quality assets in the indirect channel.
Speaker 3: With increased funding capacity, lower fees, and an extended facility maturity, we are well positioned to originate profitable indirect channel loans.
Speaker 3: We've also been taking action since the middle of last year to ensure profitable pricing, including the elimination of a number of unprofitable products, and materially raising the interest rate of new loans that are being originated to ensure that they are profitable in both the direct and indirect channels. As a result, we believe the loans we are approving today are profitable.
Speaker 5: for Q&A. Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing your star keys.
Speaker 5: Our first question is from Philip Shen with RUS-MKM. Please proceed.
Speaker 6: Hey guys, thanks for taking my questions. First one is on the...............
Speaker 6: Remaining amount of
Speaker 6: platform fee loans that you have on balance sheet my
Speaker 6: Uh, guesses, you guys have about 450 million left after the April ...
Speaker 6: sale of about 300 million Can you talk through? How much more could be sold in q2 and then also in q3 and and do you expect that to? Taper to close to zero by the end of the year or do you expect?
Speaker 6: to keep some kind of residual amount there. Thanks.
Speaker 4: Thanks, Bill. I appreciate the question. So, to your point, we did disclose as of March, the unsold loans at CRB were $764 million. In April , we did complete that $296 million sale, which is in the balance of CRB. Alright guys, let's do this.
Speaker 4: you know, at the end of the second quarter, we'll reflect that sale and other potential sales that will be completed for success by further funding in that channel.
Speaker 4: you'll see on page 10, you know, we've kind of given more detail and a walk of that balance over time and and while we haven't
Speaker 4: disclose the specific size of the back book. To your point, we have sold over 500 million in the last five months. We believe the back book is...
Speaker 4: pretty well contained. We believe the arrangement of CRB provides us with the ability to execute on future sales. We do have, you know, very strong demand for these assets. We're very pleased with the pricing actions we've taken and the subsequent profitability of the front book going forward.
Speaker 6: Okay, thank you. And you talked about the margin for the platform fee improving. Can you quantify in any way how you see that improving? Over which quarters do you think by the end of the year, this year, we could see a normalized level? Or do you think it takes a little longer than that?
Speaker 3: Yeah, Phil, thanks for the question. We started taking pricing actions in the middle of last year, and we started to eliminate low-coupon, unprofitable products in the middle of last year as well. We've continued to take actions to improve the profitability. As Roddy mentioned, we think we have the back book well contained.
Speaker 6: Okay, all right. Thanks Matt. I might ask one, it might you guys this next one might be a little bit
Speaker 6: What's the right way of putting it? I'm just going to ask it. I don't mean this to be offensive in any way. So you said in your script, we believe the indirect channel loans that you're originating.
Speaker 6: You guys you guys think they're profitable now I'm guessing the one the loans that were that are not profitable now in the back book When you originated them you also probably thought they were profitable then
Speaker 6: they're profitable now. I'm guessing the loans that are not profitable now in the back book, when you originated them you also probably thought they were profitable then.
Speaker 6: Or perhaps that's not true. So if it were the case that you thought they were profitable then But then they turned out to be not profitable, you know, the fact that you're saying that they're profitable today What gives the street what can give the street confidence around in terms of?
Speaker 6: What might how it might be different this time does that make sense? Thanks?
Speaker 3: Yeah, understood. And yeah, certainly understand your question. Now, for the last year, interest rates have increased at nearly unprecedented levels. And so we've seen a very rapid rise in rates, and that's what made that back book unprofitable.
Speaker 3: That said, we made significant pricing actions. We've eliminated unprofitable products, and we're having regular conversations with loan buyers that give us confidence that the loans that were originating today, we believe are profitable.
Speaker 6: Got it. And then on a go-forward basis, you know, once you kind of clean up the back book
Speaker 6: What do you expect the duration to be for the loans to be originated and kind of sitting there on your balance sheet as opposed to sold off to third parties? Would you expect a quarter longer? Would you expect it within the quarter? Thanks. Yeah, thanks for the question Phil.
Speaker 4: As we fell down the back book, we are seeing similar and some potential improvements in loans pulling through and getting to PTOs. So I would not expect any material change in time frame, but we do expect to be on a regular cadence going forward.
Speaker 6: take some action. So just curious if you could share some detail on that topic. Thanks.
Speaker 3: While I cannot comment on any specific rumor or potential transaction, what I can say is first we were very pleased to close the agreement with Cross River Bank. We think it positions the company very well to address the challenges from last year.
Speaker 3: And that agreement aligned to the objectives of the strategic alternatives process. All of that said, the Board continues to consider additional actions that are in the best interest of the company and the best interest of the shareholders as we go forward.
Speaker 5: Okay, thank you both. I'll pass it on. Our next question is from Aaron Sajgenovich with CIDI. Please proceed....
Speaker 7: Thanks. I was looking through your 10K that you put out recently in one of the items listed. You only had one direct channel capital provider, at least at that time, but you did fund 240 million loans.
Speaker 7: in the first quarter, was that all with one single provider? And what's your capacity to originate and fund direct channel loans on a go-forward basis?
Speaker 4: Thanks for the question, Aaron.
Speaker 4: I really appreciate the question. As we talked about in the past, our depository partners continue to tell us that they appreciate the strong credit quality of the loan.
Speaker 4: or the macroeconomic impact. So our call is made higher loan and deposit ratios. And so as previously mentioned, we expect to have a higher alliance on the indirect channel. Matt talked about the progress we've made eliminating locally plowed products and a great loan to generate attractive yields.
Speaker 4: regardless of that channel.
Speaker 4: regardless of that channel.
Speaker 4: the direct channel provides benefits and over time, if balance sheets free up, they'll come back. But at the same time, you know, we're, you know.
Speaker 7: I'll say, for the industry, getting credit performance. And we like what we're seeing from a profitability perspective on a go-forward basis on the front book. I guess from a forward perspective, though, is $240 million, is that possible in the second and third quarters? I expect that that's going to come down to a...
Speaker 4: and it does provide us the flexibility to settle down our back book and originate profitable growth on the front book. That's where I would look. Certainly we'll have a much higher reliance on the indirect channel, certainly in the near term. Let's look at some things you're all familiar on an script through the scratch. What we're going to do is this right now, to give you thesim Film gameplay and then, we'll go to situations where we see good timing. Online over that we need to show going to draw? the book is important. Today, we're going to be QnA hisperion. This week we will beiewing about the Google inbuilt virtual reality series, music and features, and even everyday activities that are out E partners as well in there. Both of these happens about every week because Curriculum equals Notebook. In these web pages all of them focus on Flutter and ID fails Na
Speaker 7: Okay, and then I guess with respect to the Cross Rivers arrangement.
Speaker 7: The, I guess on page 17 of your slide deck, you have the loan caps with various dates. Is that going to be a, you know, kind of where the maximum is in terms of originations on a quarterly basis as you try to sell down the back book? Yes.
Speaker 7: If your cap's at, say, $400 million at the end of this year, is that essentially kind of a limitation for how much you can produce on a quarterly basis?
Speaker 4: Thanks again for the question. A couple of things. We definitely will stay in compliance with these balance limits. Keep in mind that is the balance after both originations and sales.
Speaker 4: and as I mentioned earlier we're going on a cadence where as we originate we'll be selling loans you know through that channel. I'd also note that the 400 you know can be increased with a with a small you know collateral amount of five percent so you know I would I would expect this to be somewhere between that 400 500 capacity perspective again and that would be the balance.
Speaker 4: that would reflect both new originations as well as sales within the quarter.
Speaker 7: Got it. And do you have a hedging program in place yet for new indirect channel origination?
Speaker 4: So, you know, as we've talked about last year, you know, we've moved, you know, at an unprecedented speed and magnitude.
Speaker 4: you know, we've made significant improvement in our pricing, which does provide, you know, some protection against interest rates. You know, we'll continue to assess the hedging benefits and associated costs and then we'll evaluate opportunities to mitigate that risk, you know, going forward. Okay.
Speaker 7: And then just lastly, you had mentioned some cost savings that you've implemented. What do you view as your kind of run rate operating costs now on a go-forward basis after your cost savings? Yeah, great question. So we have taken...
Speaker 4: backed about $5 billion of annual savings there. So with that, we've addressed.
Speaker 4: advanced program there breaking actions and what the Co be arranged that you know maybe like quiddity because of trouble
Speaker 5: Okay, thank you. As a reminder, to star one on your telephone keypad if you would like to ask a question. Our next question is from Jeff Osborne with TD Cowan. Please proceed.
Speaker 4: Great. Good evening. Just a couple of questions on my side, maybe just picking up on the expense items. I think a couple of quarters ago you had talked about the public company costs of the company being roughly $4 million a quarter. Is that still a good number to use?
Speaker 4: Yeah, we have continued to look for ways of reducing reliance on third parties. And so, you know, the accounting compliance numbers are driving quite a bit of that public company expense.
Speaker 4: But I think for now that's probably an okay number to use. Got it. And then is there a way to think about what the indirect platform fee would be on a pro forma basis? Is that with a four handle, five handle? I'm just trying to think of... I'm trying to think of...
Speaker 8: As that becomes the majority of the mix, I always should think about the profitability of the loans that you're underwriting today.
Speaker 4: Yeah, that's going to be a function of the timing of sales, and the mix of the back and front book.
Speaker 4: and not disclosing and providing guidance. You can look at the December sale that we had of $228 million. We took a loss of 22.3 million. You know, that said, we sold loans in April and we'll report the impact that had on our.
Speaker 4: on our income statement when we release two key earnings. But as Matt mentioned, we've made significant pricing actions and as that front pulls through, we do expect to see strong profitability in that channel.
Speaker 8: I was just trying to get at the front book, excluding any sales of the back book that you're underwater on. Is there a way to think about what the benchmark target is that management is pursuing?
Speaker 4: for new underwritten months? Yes, I think you know again while we're not providing any guidance in particular you know we have targeted pricing action at address.
Speaker 4: you know, the fact that we will be largely relying on eDirect Channel to deliver, you know, the profitable loans that you would normally see from Sunlight.
Speaker 8: I was just curious, maybe, for Matt, what the uptake of the no-dealer fee loans are. I think you've got a 9.5% loan out there with zero-dealer fee. Is that something that you're seeing demand for? No.
Speaker 3: So, we do have a number of products in both solar and home improvement that do have a no-deal appeal associated with them. We do certainly see some interest from our contractors. I would say generally we still see originations skewed toward some lower APR products or lower than a loss of capital.
Speaker 3: the no dealer fee product, but we've taken pretty significant actions as Rondi mentioned earlier to eliminate the lowest APR products.
Speaker 8: The last one I had is just on the 18 million of advances. It's great to see that come down. I think in the queue you disclosed that 6 million of it is delinquent by 90 days or more. Is that all with one customer? You also, in a separate table, break out the concentration. It looks like there's three or four.
Speaker 8: chunkier in size relative to the rest, but is the 6 million in particular that's 90 days delinquent? Is that a handful of folks or is that one or two installers?
Speaker 4: Yeah, that's going to be a combination of installers. We can certainly provide more detail if required.
Speaker 4: Yeah, that's going to be a combination of installers. We can certainly provide more detail if required. Okay. Thank you.
Speaker 5: We have reached the end of our question and answer session. I would like to turn the conference back over to Matt for closing comments.
Speaker 3: Thank you for all of your questions and thanks everyone for joining us today. We're really pleased with the progress that we've made to address the key challenges from 2022 and we're looking forward to generating long-term value for our partners in what we think is a very attractive industry. Thank you all and have a good evening.
Speaker 5: This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.
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