JANUARY 2021 Specialty Finance Sector Review and Outlook Defining Strategy and Executing in a Post-Pandemic World Financial Services Investment Banking This Report Has Been Prepared By: Bryce Endline JJ Schmidt Christine Foster Managing Director Vice President Vice President Tel: (704) 602-3907 Tel: (704) 602- 3986 Tel: (704) 602- 4872 Email: [email protected] Email: [email protected] Email: [email protected] Table of Contents 2020 Year in Review ............................................................................................................................... 10 Introduction ......................................................................................................................................... 11 Specialty Finance Review ................................................................................................................... 12 Strategic Trends Impacting Financial Services Broadly ..................................................................... 19 Consumer Finance Review ..................................................................................................................... 30 Introduction ......................................................................................................................................... 31 Subsector: Credit Cards ..................................................................................................................... 34 Subsector: Student Lending ............................................................................................................... 39 Subsector: Auto Finance ..................................................................................................................... 43 Subsector: Installment Lending .......................................................................................................... 53 Subsector: Pawn Lending ................................................................................................................... 58 Subsector: Debt Collection ................................................................................................................. 62 Mortgage Finance Review ...................................................................................................................... 66 Introduction ......................................................................................................................................... 67 Subsector: Nonbank Mortgage Companies ....................................................................................... 68 Subsector: Residential Mortgage REITs ............................................................................................. 75 Subsector: Investor Loan Providers .................................................................................................... 80 Commercial Finance Review .................................................................................................................. 84 Introduction ......................................................................................................................................... 85 Equipment Leasing and Finance ......................................................................................................... 86 Asset-Based Lending .......................................................................................................................... 88 Year-End Review ................................................................................................................................. 89 PIPER SANDLER | 2 List of Figures Figure 1: 2020 Stock Market Performance ............................................................................................. 11 Figure 2: Considering Relative Risk and Opportunity Across Specialty Finance ................................... 13 Figure 3: Capital Requirements and Declining Rates Pressure Bank ROEs Post-Crisis ........................ 21 Figure 4: Notable Partnerships Between Asset Management and Insurance Companies ..................... 25 Figure 5: Athene Portfolio Composition and Characteristics ................................................................. 26 Figure 6: 2020 Total Return Performance Across Financial Services Sectors ....................................... 29 Figure 7: U.S. Credit Card Landscape ................................................................................................... 34 Figure 8: Credit Card Risk-Reward Profile ............................................................................................. 35 Figure 9: Historical Credit Card Charge-Off Trends and Near-Term Projections ................................... 37 Figure 10: U.S. Student Lending / Servicing Landscape........................................................................ 39 Figure 11: Total U.S. Student Loan Debt ($B) ........................................................................................ 40 Figure 12: Federal Direct Loan Servicing ($B) ........................................................................................ 40 Figure 13: Total U.S. Auto Loans Outstanding ($B) ................................................................................ 43 Figure 14: U.S. Auto Finance Landscape ............................................................................................... 44 Figure 15: Net Percentage of U.S. Banks Tightening Standards for Auto Loans ................................... 45 Figure 16: Overall U.S. Auto Finance Market Share by Lender Type (New and Used) .......................... 45 Figure 17: U.S. Light Vehicle SAAR (Monthly) ........................................................................................ 46 Figure 18: U.S. Light Vehicle SAAR (Annual) .......................................................................................... 46 Figure 19: Light Vehicle Production (#000) ............................................................................................. 47 Figure 20: Automobile Inventory Levels (#000) ....................................................................................... 47 Figure 21: Manheim Used Vehicle Index ................................................................................................ 47 Figure 22: Car Gurus Used Car Price Index ........................................................................................... 47 Figure 23: Second Quarter 2020 Y/Y Change in Auto Loan Volume by Borrower Credit Score ............ 48 Figure 24: Third Quarter 2020 Y/Y Change in Auto Loan Volume by Borrower Credit Score ................ 48 Figure 25: Risk Distribution of Total (Loan and Lease) Auto Originations .............................................. 48 Figure 26: Average Credit Scores on Total Used Vehicle Originations .................................................. 49 Figure 27: Average Credit Scores on Total (Loan and Lease) New Vehicle Originations ....................... 49 Figure 28: Average Credit Scores on Total (Loan and Lease) Used Vehicle Originations ...................... 49 Figure 29: Y/Y Change in Rates on Used Vehicle Loans Across Credit Scores .................................... 50 Figure 30: Delinquencies (30+ DPD) on Prime Auto Loan Securitizations ............................................. 51 Figure 31: Annualized Net Losses on Prime Auto Loan Securitizations ................................................. 51 Figure 32: Delinquencies (30+ DPD) on Nonprime Auto Loan Securitizations ....................................... 51 PIPER SANDLER | 3 Figure 33: Annualized Net Losses on Nonprime Auto Loan Securitizations .......................................... 51 Figure 34: Extensions on Prime Loans ................................................................................................... 52 Figure 35: Extensions on Subprime Loans ............................................................................................. 52 Figure 36: U.S. Installment Lending Landscape ..................................................................................... 53 Figure 37: Marketplace vs. Balance Sheet ............................................................................................. 56 Figure 38: U.S. Pawn Landscape ........................................................................................................... 59 Figure 39: Y/Y Decline in Pawn Loan Balances ..................................................................................... 60 Figure 40: Y/Y Decline in Pawn Inventories ............................................................................................ 60 Figure 41: Debt Collection Landscape ................................................................................................... 62 Figure 42: ERC Compositions by Geography......................................................................................... 63 Figure 43: LTM Purchase Volumes ......................................................................................................... 63 Figure 43: U.S. Unemployment Level and Nonbusiness Bankruptcy Filings ......................................... 63 Figure 44: 2020 Global Corporate Debt Issuances Across Debt Collection Industry ............................ 64 Figure 45: U.S. Residential Mortgage Landscape .................................................................................. 67 Figure 46: Top 20 U.S. Mortgage Originators .......................................................................................