ECN Capital Corp

TSX:ECN

Earnings Call Transcript 2020-Q2

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the ECN Capital Second Quarter 2020 Results Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions] I would now like to turn the meeting over to Mr. John Wimsatt. Please go ahead, Mr. Wimsatt.

[John B. Wimsatt]

Thank you, operator. Good afternoon, everyone. Thank you for participating in our conference call to discuss ECN Capital's second quarter 2020 results announced earlier today. Joining us are Steven Hudson, Chief Executive Officer; and Michael Lepore, Chief Financial Officer. The news release summarizing these results was issued this afternoon and the financial statements and MD&A for the 3-month period ended June 30, 2020, have been filed with SEDAR. These documents are available on our website at www.ecncapitalcorp.com. Presentation slides to be referenced during the call are accessible in the webcast as well as in PDF format under the Presentation section of the company's website. Before we begin, I want to remind our listeners that some of the information we are sharing with you today includes forward-looking statements. These statements are based on assumptions that are subject to significant risks and uncertainties. I'll refer you to the cautionary statement section of the MD&A for a description of such risks, uncertainties and assumptions. Although management believes that the expectations reflected in these statements are reasonable, we can obviously give no assurance that the expectation of any forward-looking statements will prove to be correct. You should note that the company's earnings release, financial statements, MD&A and today's call include references to a number of non-IFRS measures, which we believe help to present the company and its operations in ways that are useful to investors. A reconciliation of these non-IFRS measures to IFRS measures can be found in our MD&A. All figures are presented in U.S. dollars, unless explicitly noted. With these introductory remarks complete, I'll now turn the call over to Steven Hudson, Chief Executive Officer.

[Steven K. Hudson, CEO & Director]

Thank you, John, and welcome to our second quarter call. Second quarter saw a significant business rebound. We are pleased to report both earnings per share of $0.07 as well as solid operating results in the COVID-19-affected quarter. As we'll discuss shortly, you'll see approvals and originations have rebounded strongly at both Service Finance and Triad. More importantly, our credit assets continued their exceptional performance on behalf of our bank partners. Service Finance seized on an extraordinary take-share opportunity in the second quarter. We've had unprecedented growth in dealers, which we'll discuss in a few minutes. Service Finance locked in substantial funding for '21, including adding a global investment manager, specifically Canada Pension Plan Investment Board, as well as expanding and extending current funding partners early and adding 2 credit unions. This additional funding supported the unprecedented take-share opportunity and exchange Service Finance granted short-term fee concessions in 2020 with full funded and increased funding for '21 with no concessions given. Service Finance now anticipates '21 -- 2021 originations in excess of $2.5 billion. In the second quarter, Triad built and launched its incremental mortgage product, known as land home. Freddie Mac's seller service approval enables Triad to offer competitive land home, i.e. mortgage product. We leveraged the existing infrastructure within Triad, and we'll be adding a minimum of $150 million to $200 million in volume in '21. This program will allow Triad to track to $1 billion of originations in '21. Turning to Slide 8. KG pipeline substantially improved. After transitioning in 2019 to a long-term recurring/annuity model and successfully navigating the COVID-19 period, KG is securing significant new mandates that will drive revenue and position it to return in '21. Similar to the past 2008 financial crisis period, the COVID-19-related economic disruption has driven similar bank portfolio opportunities, and you'll see, later, we'll discuss a 3x increase in the KG pipeline. Finally, we are taking a general provision of $3.2 million after-tax related to solar progress payments in the second quarter. Notwithstanding the detailed credit 1 -- Q1 credit scrub we did in this portfolio and another similar scrub in Q2, solar dealers, particularly in California, have endured long and severe COVID-19 shutdowns. Starting in June, time to complete has extended substantially, and dealers are struggling to get inventory. COVID-19 has also affected dealers' ability to complete customer transactions on a timely basis. Service Finance is actively working with these dealers to complete installations. Our total solar exposure on progress pay is approximately $13 million, down from $19 million a year ago. And actually, as of today, it's approximately $11 million. I should note that the solar loans that have been completed in place in our bank partner portfolios are outperforming the other nonsolar loans in the portfolios. And I want to stress that this is a general provision for the cost to complete these projects will -- as we go through and complete them, we'll determine whether we need the entire provision or not. Turning to Slide 9. ECN is reinstating its guidance with an adjusted operating earnings of $75 million to $79 million or $0.31 to $0.33 for 2020. This compares favorably to the baseline that I gave you last quarter of $0.27, representing a 15% to 22% increase. ECN is also reinstating its 2021 earnings per share forecast of $0.44 to $0.53, in line with the guidance we gave you on the 2020 Investor Day. We've also added in response to Mario's question, last quarter, the ROE targets for both '19, '20 and '21 in the lower part -- on the left lower part of Slide #9. We'll provide additional guidance next quarter as well as at our Investor Day on the '21 forecast, but we feel confident, highly confident in our forecast. Turning to Page 11. Adjusted operating income in second quarter for Service was $14.6 million. This reflects the extraordinary take share market opportunity driven by the market disruption indirectly caused by the COVID-19 crisis. To season this opportunity, we proactively locked in '21 funding to support the incremental take share. And return temporary fee concessions were given in servicing income, to reduce our -- which have reduced our servicing income. Service Finance is fully funded through '21 at historical margins, i.e. no concessions. 21% year-over-year growth in the second quarter originations and 41% growth in managed portfolios. Turning to Page 21. I would like to center you on the 40% gains in the June and July period. Tremendous gains on originations and approvals, I would note that as continued into August. Specifically, HVAC originations are up 45% year-over-year. Lennox volumes were up 35% year-over-year. Windows and doors are up 46% in the second quarter. We're seeing a tremendous take-share, in fact, we're seeing what we call a transition phase where we're funding mature dealers with substantial pipelines transferring to Service Finance. It's important to note in these substantial growth numbers that we made a strategic decision to further limit solar originations. Solar originations are down 40% year-to-date through July. They now represent only 6% of the originations second quarter as opposed to 21% in '19. As I mentioned earlier, solar loans are performing just fine. It's our view that there's significant margin in the nonsolar business, and that's the area we're focusing our growth on. Turning to Page 13. A little more color on the take-share opportunity. Home improvement dealers began reevaluating their financial partners in the wake in this financial crisis caused by the COVID crisis. We've seen very elevated levels and new dealer ads began in March. May and June dealer adds are 2x -- in the excess of 2x the long-term average for momentum and it's continuing into August. As I mentioned a moment ago, in a typical take share, a lot of effort, a lot of time goes into taking share. This is part that takes share, but it's important. All these are mature dealers transitioning with intact pipelines, which are providing immediate benefit to the originations and profitability of Service Finance. May and June, record percentage of submitting dealers. And I'd also like to note that this take share is also driven by positive growth within the industry. You've seen Lennox and Home Depot and others report, Americans are staying at home and they're electing to spend their money on improving their homes. Service Finance now anticipates '21 originations in excess of $2.5 billion. Turning to Page 14. Service Finance is fully funded for '21 with increased origination forecast. Dealers have specifically asked about funding. We provided our investment-grade rating and the increased support of our new and existing partners. In Q2, Service Finance added new funding partners, as I mentioned earlier, as well as expanding existing partners. We added Canada Pension Investment Board for approximately $1 billion of committed flow in 2020 and '21, added 2 new credit unions, and we expanded several new existing funding sources and renewed commitments in excess of $1.5 billion. We think we are properly positioned to seize this once in a lifetime take-share opportunity. Turning to Page 15. As I mentioned earlier, a more important factor for us is the performance of our credit portfolio on behalf of our bank partners, happy to report the exceptional work by the Service Finance team. On the servicing side, you'll see that deferments peaked at 1.8% in May, it's 1.7% in June, 1.4% in August -- in July, and as of mid-August, those deferments are 1%. I'd like to acknowledge and thank the incredible work of the team at Service Finance. As well, delinquencies are in line with historical ranges and loan losses remain consistent with our expectations. Turning to Page 17. Assets held increased to $231.5 million in the second quarter of 2020, up from $99 million in Q1. As we discussed in the Q1 call, sales were temporarily held up, resulting in short-term accumulation of balance sheet assets. We're happy to report that subsequent to Q2, we sold $214 million in assets held for resale with several parties, and the August balances are now at $89 million -- approximately $90 million. Turning to Page 17. A chart that we've had historically for you just want to demonstrate the strong month-over-month origination, again, centering you on the June and July, substantial growth in originations, which are continuing into August. Turning to the Triad on Page 18. Second quarter operating income of $7.2 million. Second quarter saw slight decreases in year-over-year originations, EBITDA and operating income related to the COVID-19 slowdown in early Q2. Approvals and originations have rebounded since mid-April. Freddie Mac seller service approval has enabled Triad to build and launch its mortgage system and process. 7 new credit unions were added in year-to-date, including 4 in the second quarter. Floorplan remained flat at approximately $120 million with very strong credit quality, almost no delinquencies and 0 losses while maintaining our yield. Turning to Page 19. I after the COVID-19 pullbacks in March and April, we've seen strong rebounds in the approval levels at -- in Triad as well as the originations. As you know, there is a lag time between an approval and an origination. The approval commences when the home is purchased at the dealer and the funding or origination occurs when it's installed on your site. We anticipate originations of $650 million to $700 million, representing a 8% -- 16% growth year-over-year, inclusive of the impact of COVID-19. Originations growth are back to double digits in July with 11.4%. And as I mentioned, the approvals and origination momentum is continuing into August. With respect to the expanded land home product and think of a mortgage, if you will, our principal product have been shadow loans to date. I wanted you to take away 4 highlights from this product that's been launched. First, it will increase originations at Triad to approximately $1 billion, in 2021, we'll give you additional detail on the third quarter call and Investor Day. Second, all that incremental volume is closer to $200 million than $150 million. Third, all the work has been done. The automated underwriting system from Freddie Mac, the loan adviser is in place. We've implemented Blacknight, which is the mortgage standard servicing system and the pricing engine system, Optimal Blue, is in place. All of this is functioning. We began to approve -- we began to accept and approve applications. This business will build as those homes are built, and you'll see originations commence early in the first quarter. You may see a few in the fourth quarter, but you'll see it fully turned on as those homes are delivered and the mortgages are placed. Finally, the fourth point these transaction yields, it's about 3.5%, what we call gain on sale in the Freddie system, and we received a full servicing fee of 45 basis points. All of that is incremental to Triad's business as of today. Turning to Page 21. I'm pleased to report on the credit performance. I also want to thank the team at Triad for their hard work. We saw deferments peak at 1.2% in May, down to 1.1% as of June and now down to 0.4%. Same time, we've seen a very modest elevation in delinquencies, no changes to loan losses. Similar to Triad on Page -- Slide 22, the growth year-over-year -- sorry, month-over-month highlights the strength of the system and the return to very strong growth. Turning to Slide 23. Kessler's operating income of $9.4 million refracts -- reflects lower transaction services and marketing services, as expected, due to COVID 19. Partnership revenue was up 24% year-over-year, represented by increased annuity revenue and credit card investment management fees. Marketing service revenue was deferred as a result of the campaigns due to COVID-19. I would tell you that some of those campaigns have begun to be turned on again, and we're seeing those build back up. Transaction service revenue was deferred as a result of COVID and I mentioned that the pipeline is up on a 3x basis. Our credit card investment portfolio in our balance sheet is performing as expected. In fact, it's performing a little better than we expected. EBITDA margins are at 62%, which reflects the hard work of Scott Shaw and his team at Kessler Group, KG. Turning to 24. The strategic shift that we made in '19 with less onetime transaction and more recurring revenue continues with the second quarter, 86% of the revenue coming off recurring businesses. Turning to Page 25. It's important to note that the portfolio pipeline of transactions of potential transactions is up 3x. You saw the same phenomena post the great credit crisis in 2008 and a number of banks have reevaluated their credit card, their portfolio of co-op and affinity credit card books and the number of transactions, the pipeline is significant. I don't want to leave you with the impression that $10 billion of the pipeline is all transactions that will happen because it's not. But it is a significant increase in our pipeline and this 3x of what it was last quarter. That bodes well for a strong fourth quarter in Q1 for KG. Michael, over to you.

[Michael Lepore, Chief Financial Officer]

Thank you, Steve. Turning to Slide 27 and the consolidated operating highlights. I just wanted to note, it was a very strong operating quarter, right in the middle of the pandemic. So we're very pleased with the results. Total originations were $676.4 million, up over 13% compared to the prior year, reflecting the strong growth at Service Finance right through the pandemic. Q2 adjusted EBITDA of $31.3 million was down slightly compared to the prior year, and Q2 adjusted operating income before tax of $24 million and $0.07 per share were in line with Q2 2019. As Steve noted earlier, we recorded a provision of $3.2 million after tax as a consequence of the COVID-19 pandemic related to Service Finance's solar business. We also recorded a provision of $1.1 million after-tax related to the rightsizing of our corporate staffing levels and office space in response to the pandemic. Turning to Page 28 and the balance sheet. Key highlights to note. Total assets increased by about $170 million. As Steve noted, this was largely due to the increase in the held for trading assets at Service Finance. I'm pleased to note that post the quarter with the subsequent sales, that number is down to -- that increase is down to $30 million quarter-over-quarter. Debt was up by over $170 million from prior quarter, again, largely due to the increase in assets. And again, subsequent to the sales, pro forma debt is now down to approximately $540 million post-Q2. Turning to Slide 29 and the income statement. As noted, adjusted EBITDA of $31.3 million was down slightly compared to Q2 2019, and that was largely due to the decreased margins at Service Finance as a result of the service fee concessions that were noted earlier. Adjusted net income of $24 million was in -- and $0.07 per share was in line with the prior year as the lower adjusted EBITDA was offset by the impact of lower interest expense and the elimination of the noncontrolling interest at KG. Turning to Slide 30. Operating expenses were higher at Service Finance, largely driven by the growth in originations and managed assets. And that increase was partially offset by lower costs at KG as a result of the cost reduction efforts there. Corporate expenses remain in line with our Q1 forecasted guidance of $4 million per quarter for the remainder of the year. And we expect it to remain at those levels in Q3 and Q4. And as noted, we did record a provision largely due to the staffing and office space reductions implemented in the quarter. Turning to Page 31 on the discontinued operations. Key items to note, real assets remain consistent with Q1 balances. On the aviation side, we made modest progress in the quarter with 2 asset sales for a total of $4 million, but despite the impact of the COVID-19 pandemic, we continued to expect a material reduction in legacy aviation asset balances before the end of the year. We also expect a significant reduction in the remaining C&V asset balances before the end of the year. Finally, the increased loss from discontinued operations compared to Q2 last year is largely due to the impact of the continuing wind-down of legacy assets and the sale of revenue-generating aviation assets. And with that, I'll turn it back to Steve for some closing remarks.

[Steven K. Hudson, CEO & Director]

Thanks, Michael. On Slide 33, again, pleased with our earnings per share of $0.07 -- our adjusted earnings per share of $0.07, especially in a period that's been impacted by COVID-19. Happy to provide guidance to you this afternoon at $0.31 to $0.33 as well to provide guidance with respect to '21 of $0.44 to $0.53. If I could comment on that range for a second. It's obviously a wide range. We'll provide more color on it in the next quarter and specifically at Investor Day. But like I did in the last quarter, where I gave you $0.27 of baseline, I would suggest to you that I feel very comfortable sitting here today that we're in the $0.46, $0.47 range. And with more to come, we're still working on a number of opportunities. And this significant -- in my career, 62 years of age, this takes share opportunity at both Service and Triad is unprecedented. And we will -- I'm sure that Mark and Mike will run with us, and we'll see great things to come. ROE will increase to 14.5% to 17.5% at '21 at the current EPS guidance. Our dealer count is running twice the long-term average. And I want to note that these are mature dealers coming across with significant pipelines of transactions that require immediate funding, hence, hence our confidence in '20 and '21 guidance. Service Finance is fully prepared for the take share, and we have locked in the funding to seize this very significant opportunity.Triad's results. Triad in the ECN world was kind of little engine that could, we think it's growing up today because it's been phenomenal in its execution. And we think with the Freddie endorsement and the systems launched, that we now have a $1 billion origination business. We're quite excited about Triad. As we are with Kessler, that with the 3x increase in potential transactions, we think that will bode well latter part of this year and for '21. We are pleased with -- I wish we -- I'm sure we can all say both personally and corporately. We wish we all haven't gone through this COVID-19 experienced, but the one positive for us is a very resilient and recurring business model with exceptional asset quality. On the capital management side, the quarterly dividend remains unchanged at $0.025. With that, operator, we're going to open the call for questions.

[Operator]

[Operator Instructions] The first question comes from Geoffrey Kwan with RBC Capital Markets.

[Geoffrey Kwan, Analyst]

My first question was, are you able to quantify how much the fee reductions at Service Finance was in the quarter? And then were the temporary fee reductions only being provided to funding partners that either became new funding partners, were willing to commit to funding beyond the current agreement and our increased funding commitments? Or were you offering fee reductions to funding partners that would not have fit into any of those categories?

[Steven K. Hudson, CEO & Director]

Yes. Sorry, Geoffrey, I didn't -- there was some background noise. I got the latter part of your question, I didn't hear the first part. Sorry.

[Geoffrey Kwan, Analyst]

Yes. I was just wondering what -- if you're able to quantify what the fee reductions were in Q2? And then just the fee reductions, were they took pretty much most funding partners? Or were they only to certain ones?

[Steven K. Hudson, CEO & Director]

Right. Well, we don't disclose the deals of each individual funding partners, you can appreciate. But we did in exchange for long-term commitments, provide select concessions. I think the important point to note is that those are now done, and we're fully funded at full marginal rates through '21. There was a huge opportunity here, Geoff, to take share, and I wanted to be more than funded coming into this opportunity because I don't think the opportunity -- I think the opportunity is just beginning for us. And dealers were looking for us to be fully funded plus more because they had gone through some experience with competitors that we're not going to name, where they were unable to provide the funding. So in the midst of a COVID crisis and people worried about asset quality, we provided a little more support to our partners, which is appropriate. It turns out our credit quality was better than anyone expected, but I wanted the increased funding commitments to take the share.

[Michael Lepore, Chief Financial Officer]

And Geoffrey, it's Michael. In terms of the overall impact on Service Finance's profitability, at Investor Day, we were forecasting EBITDA margins of just under 70%. We still expect our overall EBITDA margins to be in the range of 65%. So it's not a hugely material impact for 2020. And as we noted, at 2021, we're back to normal margins.

[Geoffrey Kwan, Analyst]

Okay, okay. It's just -- I get what you're trying to accomplish here in terms of you have to give something in order to get it. You guys have talked consistently about Service Finance, not taking on credit risk. And I'm just kind of curious, when I read the MD&A, it characterize the fee reductions as providing your funding partners protection and uncertainty or an uncertain credit performance environment. Just was wondering about the wording that you had there.

[Steven K. Hudson, CEO & Director]

Yes. So, Geoff, I think it's important to note that our partners model a series of credit outcomes. We have a very definite view on our credit outcomes. They can model a number of our partners required to do stress test by U.S. regulators. So we work in those stress test scenarios, our credit performance has not moved.

[Geoffrey Kwan, Analyst]

Okay. And just the last question, if I can ask it. I just was wondering what the thought process was on including the loan loss provisions being below the adjusted operating income line as opposed to above.

[Steven K. Hudson, CEO & Director]

Yes. It's a good question, Geoff. We've obviously disclosed it in the documents, not hidden anywhere. I don't know whether we need the entire provision or not, right? I could come back to you next quarter and say, it wasn't $3.3 million, it was $1 million. So I just -- it's a variable number. And it was given out of a precautionary basis. Geoff, you're free to take it. We disclosed it, put above a line as a cent. So instead of having $0.33, we have $0.32 for the year.

[Michael Lepore, Chief Financial Officer]

But the other reason for doing that, it really is related to COVID-19. It's not a normal operating provision. We still have normal provisions there going through earnings. It was just a specific impact of the California solar that we've adjusted for.

[John B. Wimsatt]

Yes. Geoff, there's been a there's been a whole number of articles and other things, talking about the difficulties in the solar market in California. If you'd like to see some of those, let me know, I can floor them to you.

[Operator]

The next question comes from Tom MacKinnon with BMO.

[Tom MacKinnon, MD & Analyst]

Just going to take another stab at the concession, at the fee concessions and Service Finance. Are you sort of all done with offering these concessions? As other commitments come up for renewal in 2020, are you considering fee reductions for those as well?

[Steven K. Hudson, CEO & Director]

Yes. Tom, we're renewed for '21 at historical contracted margins. There's no more concessions.

[Tom MacKinnon, MD & Analyst]

Okay. And then what's driving dealers to come over in Service Finance? What is it about Service Finance that makes them want to come? Or is it something else that makes them want to leave another place?

[Steven K. Hudson, CEO & Director]

Well, that's a good question, and I thank you. It's -- I think it's a combination, Tom, of -- you've seen the impact of COVID and it manifests itself in the financial markets and a number of our near competitors and direct competitors have experienced financial difficulty. And if you're a dealer and you've got -- you're installing air-conditioners in Phoenix this afternoon, you want funding stability. And it's the history of Mark's performance and his relation with dealers. So I'm concerned about my funding source. I know Mark's system has worked, and I'm going to come over to you. That's why the funding -- the long-term funding, we wouldn't have locked up all 2021 by now, but we did it. Made our concessions. We locked up '21 at historical margins. I think the second thing, Tom, has been people are sitting at home in both U.S. and Canada. And they're now building offices in their homes, they're improving their homes. You've seen it in significant increases of both Lennox and Home Depot and elsewhere. So we've seen the industry dynamics, the winds at our back. So that's helped. But I think if you're a dealer, you're looking for a permanent well-funded finance source, Service Finance is your home. I don't want to talk about competitors. You've seen them announce their results here shortly, you can go back and look at them.

[Tom MacKinnon, MD & Analyst]

Okay. And if I could just squeeze one more in. What is unique about solar that you had to take a provision for advances? You've got $62 million in advances at Service Finance. What happens if the dealers aren't able to complete some of those jobs? Is there anything unique about nonsolar business that says, okay, I don't know if you take provisions for this?

[Steven K. Hudson, CEO & Director]

Yes. Another good question, Tom. The majority of our progress pay is to nonsolar, so the term between in advance and completion is typically not longer than a week or 2. As to install the air-conditioner, you can contract is 2 days later. Windows are a week or 2. It's not a long period. Solar has an extended period. And we're now face the situation in California having gone through 2 lockdowns, which started in March, where a consumer may have a permitting done or they may have half an array sitting on their house, and they haven't seen anyone for 4 or 5 months. So we have the ability -- and that's unheard of, Tom. So it's a learning from this COVID. And we've taken the appropriate action to dramatically reduce our solar. We're happy with what we have. And again, the solar loans within our bank portfolios are performing at or above the bank performance, but we have reduced our progress pay on solar. We just don't -- we don't know when we're going to get a chance to get back to those rooftops in California. We have the legal right to step in and complete those contracts, but we'll see how long it takes, right? The consumer will get a chance to reevaluate it. So it's a bit of uncharted territory, Tom, and it may be all fine, and the projects get completed, but we've taken this precautionary reserve in case we have to complete those projects.

[Operator]

The next question comes from Paul Holden with CIBC.

[Paul David Holden]

So we've seen a number of financials or at least I've seen a number of financial companies put up, I think, better-than-expected Q2 results. You did the same. But one thing you did differently as you reinstated guidance where others have kind of shied away from reinstating guidance, whether it's for this year or next year. So what is it that gives you the confidence to bring that guidance back given continued uncertainties around COVID cases?

[Steven K. Hudson, CEO & Director]

Yes. No, good question, Paul. We've watched our manufacturers and dealer develop ways to sell home improvement, notwithstanding COVID. We've watched our manufacturer -- manufactured home dealers to sell the manufactured homes not withstanding COVID. So they have developed the systems to sell. And the other part is the strength of both of those businesses, both on the approvals and the originations. The approvals are really what give me comfort here, Paul, because the approvals be get -- the applications we get approvals, approvals we get the fundings as a strong pipeline. So based upon that in discussions with the senior team, Mark at Service and Mike at Triad, we've concluded to reinstate our guidance. We're highly confident of our numbers, not withstand the fact that COVID has not -- we're not certainly living in South Florida, we're not past the COVID crisis yet, but we're comfortable reinstating our guidance.

[Paul David Holden]

Okay. And I was going to have kind of the next question on the same topic. Because of the geographic concentration southern states, including Florida, you're pretty close to the situation, though, and it's not impacting sales or approval rates in those specific states.

[Steven K. Hudson, CEO & Director]

Yes. I live it every day, Paul. So it's -- you certainly pick where you go. But -- and I can't speak to the exact numbers in Texas and California, but in Florida, we've seen COVID track to much younger demographics. And it's not our customer. Our customers is someone in the mid to -- early to mid-50s, a high FICO, who's sitting at home and they're electing to improve their home. They're electing to upgrade the HVAC. And we've had -- I don't like talking about whether I don't like whether it to be a benefit or whether to be a negative, but we've had very -- it's been 20% above the historical norms for how hard is in the U.S., we don't -- I wouldn't take credit for that. It's just a period where you have to fix your air-conditioner. So we've learned -- and we may be in a period where we have COVID for an extended period of time, unfortunately, but we've learned to work around it.

[John B. Wimsatt]

Steve, I was just going to add that we have been tracking some of the states as they have outbreaks. And at both Service Finance and Triad, we have not seen any real effect in California and Texas and Arizona and Florida as it relates to originations to this point. We've seen strong originations out of each of those markets, and they're important markets.

[Paul David Holden]

Next question. If I look at the notes of the financial statements and the net investments in finance receivables by stage, I see an uptick and a significant uptick in the stage 3, the nonperforming asset. Is that purely related to the solar exposure we've already talked about? Or are there other asset classes that are also micro?

[Michael Lepore, Chief Financial Officer]

No, that's the California solar exposure that we're talking about, yes.

[Paul David Holden]

So then with $8.1 million in the default nonperforming and given your $3.2 million provision, then you're assuming some kind of recovery rate. Is that the correct way to look at it?

[Michael Lepore, Chief Financial Officer]

Correct.

[Paul David Holden]

Okay, okay. That's helpful. And I guess, last question from me then is, just getting a better understanding of that $8.1 million versus your total exposure of, I think you said $13 million -- or sorry, $11 million remaining exposure on solar. Can I compare that $8.1 million to the $11 million residual? Because that seems like an awful high default rate. So I just want to make sure I understand that.

[Steven K. Hudson, CEO & Director]

Yes. Paul, I want to go back to the word default. These are valid progress pays with rigs that are being signed. They're not perfected or executed or enforceable to the projects completed. So we still have the option of completing it. So they're not in default, if you will. There's no legal default. There are certainly high risk, and that's why Michael appropriately move them into the third bucket. But it is centered on California solar. We haven't seen it anywhere else because the other U.S. states haven't been locked down to the extent that California has, and we've been able to complete the projects. But I did earlier covenant that Mark appropriately has reduced -- dramatically reduced the size of solar originations, and we dramatically reduced the size of progress pay for solar.

[Operator]

The next question comes from Vincent Caintic with Stephens.

[Vincent Albert Caintic, MD & Senior Specialty Finance Analyst]

I had just 3 quick ones. First, on the dynamic of taking share here. So for the dealers that you are taking in, can you give us an idea of just how quickly can you onboard them at any particular time? Are there dealers that are still in the onboarding process that have been captured? And then when you -- so your guidance is really nice growth for 2021, is that simply the dealer's existing production levels that you're seeing now that there are mature dealers moving over to ECN?

[Steven K. Hudson, CEO & Director]

Yes. Many dealers will have 2 finance sources turned on. They'll have us and one other name that you know. They would have had, in those cases, where the other competitor was the dominant provider. We see it a little bit of their flow. Those have dramatically changed in the last 90 days where we are now the dominant provider, if not the only provider to all of those dealers that uses as a second -- not a second look, it was not a second look on credit, but they flowed us a little bit. We would have got 5%, 10% of their volume. We're now getting 100% of their volume. So they're online, they're tied into mark system. There's a little bit of training, but it's not material and the flows immediate. The pipeline is coming across. The dealers are searching for a well-financed financial partner with liquidity going into '21 and '22 is the absolute requirement. That's been a big selling point in allowing -- Mark's been very effective in this take share. And it's all -- I'd almost -- I don't want to create a second category. We have to take share and make share, but this take share is really a transition of mature dealers who know Service Finance quite well.

[Vincent Albert Caintic, MD & Senior Specialty Finance Analyst]

Okay. That's really helpful. Second, on your funding strength and it's great that you're able to secure funding this time, particularly versus the competitors and seeing what's happening with them. I guess if you can think -- talk about how much funding runway is available to you from your existing commitments, even if the funding market shutdown. Just wanted to clarify, you don't need any more funding commitments to deliver on your 2021 originations. And then if you could talk about kind of the discussions you're having generally with your existing funding partners such as the banks.

[Steven K. Hudson, CEO & Director]

Yes. So the answer to that second question first, we are fully funded in '21 on a committed basis with no concessions on margins. I think the addition of CPPIB is one of the largest sovereign wealth funds in the world is an important addition to our funding group. We have significant relationships with banks. As you know, it's been a strategic focus, Vincent, for us, stated that 2 years ago to bring in life insurers, which Mark did and now pension plan/sovereign wealth funds. I think this marks a significant step forward. CPPIB was 15 months in due diligence, and we're happy to have them a partner. We're happy to have our partners renewing. So I'm feeling very comfortable about our funding relationships, so our -- what we call our debt investors going forward.

[Operator]

The next question comes from Stephen Boland with Raymond James.

[Stephen Boland, MD & Equity Research Analyst]

Just one question, Steve. I mean, it seems like the optimism around the 3 businesses is almost, I would say, stronger than it was when you gave the initial guidance in the Investor Day, maybe for 2021. But your -- I think your guidance for operating EPS is still in that same range, but it seems like originations are higher for Service. The pipeline is higher for Kessler. So is there -- am I reading that right? And is there an offset to why the guidance wouldn't be even higher at this point?

[Steven K. Hudson, CEO & Director]

For '21, Steve?

[Stephen Boland, MD & Equity Research Analyst]

Yes, for '21.

[Steven K. Hudson, CEO & Director]

Yes. I think we're feeling very bullish about '21. I want to set a baseline with you of that $0.46. I set a baseline last quarter and outperformed it by 15% to 20%. So I'm feeling bullish and I want some time with the operating partners to work through those numbers. If I told you that Service Finance is going to originate $3 billion, you think I'm bad check crazy. But we're going to leave it where we're at, and we'll watch the quarter's progress. But I think it's a good market, significant growth you say we come in at $0.32 or $0.33 this year, then $0.45 to $0.46 is a very nice number. And I think that we'll obviously do better than $0.45, $0.46, and we'll update you on the Q3 call and Investor Day.

[Operator]

The next question comes from Jaeme Gloyn with National Bank Financial.

[Jaeme Gloyn, Analyst]

First question on the dealers where you're taking share. Can you give us a little bit of color as to their manufacturer or retailer relationships? Is it from one specific manufacturer or retailer? And if not, how many manufacturers or retailer relationships would you be taking share from competitors?

[Steven K. Hudson, CEO & Director]

Yes. Thanks, Jaeme. It's -- if I take you back to the windows and doors that are up 46%, you see one of our competitors announced early in the week and they were down a windows and doors, so you can kind of triangulate where that came from. There are 3 or 4 large major dealers in windows and doors in the U.S., you can assume that they're all now Service Finance partners. If your question is, is this Pella or RBA, it's driven by large multistate dealers of significant size. So we'll -- and that's both in windows and doors and HVAC. We have a very deep relationship with Lennox, which is doing exceedingly well, where we've launched the -- Mark has launched the Beacon program, which has continued to gain traction. So I don't have a manufacturer deal to announce to you, Jaeme, but I would tell you that we have some very significant multi-state organizations that would be midsized by Canadian standards that have now signed up as partners. We don't publish their names, but they're now on-board. And if you go look at competitors, you can go from one box to the next.

[Jaeme Gloyn, Analyst]

That's helpful. If I'm thinking about the funding adds, I just want to make sure I have this correctly. So existing funding partners and the CPP program, that is adding $1.5 billion of funding to 2021. And if I'm correct, and if I recall correctly, the funding commitment for 2021 would have been around $2 billion to $2.5 billion. So does this suggest that funding commitments in 2021 for the Service Finance program are $3.5 billion to $4 billion. Do I have that correctly?

[Steven K. Hudson, CEO & Director]

Yes. I think maybe just -- we can go through a schedule post the call. But right now, we have renewed all of our '21 financing commitments earlier than we had to go through in the renewal, Jaeme. So right now, if you look at '21, if you take redeploy and everything else and who's in the pipeline, you're probably at $2.6 billion to $2.7 billion of funding commitments. We're announcing -- we need $2.5 billion. We're getting to the point where it's going to be hard to take on -- take any more funding commitments for '21, but we have a series of pipeline investors who are going to renew from 2020 to '21, and we have to accommodate them first. So we'll reconcile numbers with you post the call, but we're in great shape.

[Jaeme Gloyn, Analyst]

Yes. Because I didn't quite follow the steps there on the $2.6 billion, $2.7 billion. So call after would be great. One -- couple more questions. The first one on the 30-day delinquencies. I just want to confirm that, that 30-day delinquency, I think, it was at $7.6 million, if I'm looking at the financial statements, is that also tied to the solar program?

[Michael Lepore, Chief Financial Officer]

That's correct.

[Jaeme Gloyn, Analyst]

Perfect. And last one for me, just around the concessions that were given in the Service Finance business unit, I just want to confirm, were those concessions given because of the extension and expansion of the funding commitment? Or were they given because of the uncertain credit environment? I just -- I'm failing to just separate those 2 drivers of why their concessions given?

[Steven K. Hudson, CEO & Director]

Yes. No, Jaeme, so the credit book has performed at or above it, right? We've now gone early to expand, and we've gone larger. So -- and those requests were made in a COVID period, but the credit performance has been right where it should be.

[Jaeme Gloyn, Analyst]

Right. So it's -- you went to the partners to secure more and longer-term funding, and they came back and said, well, we have this credit issue where we have wider range of possibilities, and because of that, we would like a reduction in our service fees for the rest of 2020.

[Steven K. Hudson, CEO & Director]

Yes. Think of it, Jaeme, as a senior line of credit, like we have on our balance sheet, where we have a 4-year line of credit in our balance sheet. We've made the strategic decision to extend these funding relationships for longer than we have. So you're paying "a commitment fee" for the extension, manifested itself in the form of reduced services. But only for 2020, '21 is now done at full margin.

[Operator]

[Operator Instructions] The next question comes from Mario Mendonca with TD Securities.

[Mario Mendonca, MD & Research Analyst]

Steve, could I just ask you to think a little bit like beyond this quarter end and help me think through this concept. Are there any conditions that you can imagine, under which ECN or Service Finance would make further concessions, say, in 2020 or in 2021? Can you envision any circumstances where that could play out again?

[Steven K. Hudson, CEO & Director]

No. We're done, Mario. We are contractually done.

[Mario Mendonca, MD & Research Analyst]

And the concessions that were given, those were purely like that was a decision that was made, there wasn't some contractual obligation to provide the concessions? I want to make sure I'm clear on that as well.

[Steven K. Hudson, CEO & Director]

Correct, correct. It was a strategic decision in order to be able to take this share and we want more than we needed them funding.

[Mario Mendonca, MD & Research Analyst]

Okay. Just a couple of numbers questions. You referred to solar, I see $13.6 million, and I think you also referred to $11 million. Is the difference just the provision that was put up?

[Steven K. Hudson, CEO & Director]

No. I'm tracking as of -- the number I gave you was as at the end of Q2. The $11 million and change is where those -- where the balances are as at mid-August.

[Mario Mendonca, MD & Research Analyst]

Okay. That makes sense. And then about Triad, you're referring to $1 billion of originations in 2021, some of which relates to the Freddie Mac relationship. That's a very big number, $1 billion for Triad. Could you talk about how that plays out? Is that -- should we just expect the originations to increase materially as early as next quarter? Or do you really see this as reaching scale in '21?

[Steven K. Hudson, CEO & Director]

Yes. No, it's a good question. To be fair, Mario, we're tracking closer to $700 million for this year, $690 million, $700 million. So you use $700 million for easy math in late afternoon. If you assume a 10% growth rate, we've been growing Triad at about 12%, but assume 10% to make my math easy, then you'd see the traditional chat-alone business at $770 million, maybe $780 million for 2021. And I'm saying if you load on my $200 million target for mortgages, you're at your $1 billion number. But I haven't produced that yet. I'm -- we're underwriting and approving loans now, husband and wife are walking into to a dealer, we're now offering them a second product as opposed to just a chattel. The mortgage paper is coming through. It's being approved by Freddie, and we'll bill that book, but you won't see it until the first quarter. We'll have more color for you on how big that book of approvals is, come Q3.

[Mario Mendonca, MD & Research Analyst]

And just one -- I've forgotten about the nature of this new arrangement. Can you just describe how it's different from what you're currently doing? Because again, I will have this one.

[Steven K. Hudson, CEO & Director]

Yes. So it's a good question, Mario. So we -- the current product that Triad office is a chattel where you take a direct interest in the home and a second interest in the underlying land. A chattel is a great product, that's our core, that's our round peg going in around hole. That we never had a mortgage product, it has a little longer term, lower payments, it's a traditional mortgage product. That was only 3% of Triad's volumes historically. The U.S. government through HUD decided that they wanted a platform for affordable housing. And after a year of pursuing and underwriting, you were granted a license by Freddie to be that affordable housing mortgage provider. So now when you walk into a Triad dealer, husband and wife will be offered a chat alone, ex-term or ex-duration and wide payments. You'll also be offered a mortgage product. In the past that mortgage product, we lost it all. It would have gone through to 21st Mortgage or Vanderbilt. So it's incremental volume to us. We're not going to carve into our chattel flow. It will be incremental product.

[Mario Mendonca, MD & Research Analyst]

And to the exclusive?

[Steven K. Hudson, CEO & Director]

We currently are the only party approved by Freddie for affordable manufactured housing.

[Operator]

The next question comes from Vincent Caintic with Stephens.

[Vincent Albert Caintic, MD & Senior Specialty Finance Analyst]

Just a quick follow-up one, I wanted to get an update on how you're thinking about capital return, so share buybacks and then your existing dividend?

[Steven K. Hudson, CEO & Director]

Yes. We will renew our NCIB Board, renewed our NCIB today, Vincent. We're obviously in a period still of uncertainty. We know we bought back some shares second quarter. You'll note that we bought we have ability to buy back some press. So we have some excess capital. I like to do that because that does nice things for our earnings per share. I would, Vincent, just allow you to go back, just go back to Mario. I know Mario rang off. But Freddie has a number of partners in the mortgage world, regular mortgage world. We are the only partner in manufactured housing mortgages. Anyhow, back to your question, Vincent.

[Operator]

The next question comes from Jeff Fenwick with Cormark Securities.

[Jeffrey Michael Fenwick, MD & Head of Institutional Equity Research]

I think most of my questions have been answered. But I just wanted to ask about with adding CPP in the mix here, how is that going to impact the flow-through your business? Are these going to be so the complementary flow where they get pooled and then sent out in sort of whole loan basis out to them? Or is it going to be a brick-type of structure for them as well? And how should we think about you balance sheet liquidity perspective from that trend or that partner?

[Steven K. Hudson, CEO & Director]

Yes. That's a great, great question. The -- they are another "bank" base sitting around Robin, they buy loans like our other bank partners on RIC flows. The SFI loans are sold to banks, but on a one-off basis, you will. But they are traditional RIC partner, like any other part in the process, but they're $1 billion of commitment. And we think that's -- we're quite happy to have CPPIB as a partner.

[Jeffrey Michael Fenwick, MD & Head of Institutional Equity Research]

Okay. And so in terms of the HFT that sits on your balance sheet, you think it will still likely then trend sort of that sort of $100 million level that you've done in the past?

[Steven K. Hudson, CEO & Director]

Yes. We'll accumulate it and sell it off. We haven't changed our underwriting standards, whatsoever. We haven't dipped down into lower credits. We're still provider of prime and super-prime credit, both for Service and for Triad.

[Operator]

The next question comes from Jaeme Gloyn with National Bank Financial. There are no questions.

[John B. Wimsatt]

Yes. Thanks, operator. We're going to go ahead and end it there. We're out of time. I appreciate it. There's no more questions in the queue.

[Operator]

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a great day.