Q3 2020 Elevate Credit Inc Earnings Call
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Thank you for standing by this is the conference operator.
Welcome to the elevated credit third quarter Twentytwenty earnings call.
As a reminder, all participants are in listen only mode and the conference is being recorded after.
After the presentation, there will be an opportunity to ask questions to join the question queue. You May Press Star then one on your telephone keypad.
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I would now like to turn the conference over to Danielle Gray director of Public Affairs. Please go ahead.
Good afternoon, and thanks for joining us on <unk> third quarter 2020, <unk> earnings Conference call earlier today, we issued a press release with our third quarter results a copy of the release is available on our website at <unk> Dot Com Slash investors today's call is being webcast is accompanied by a slide presentation, which is also available on our web site. Please refer now to slide two.
That presentation.
Our remarks and answers will include forward looking statements within the meaning of the private Securities Litigation Reform Act. These forward looking statements are subject to risks that could cause actual results to be materially different from those expressed or implied by such forward. Looking statements. These risks include among others matters that we have described in our press release issued today.
Including impacts related to COVID-19, and our most recent annual report on form 10-K, and other filings we make with the FCC. Please note all forward looking statements speak only as of the date of this call and we disclaim any obligation to update these forward looking statements during our call today, we'll make reference to non-GAAP financial measures for a complete reckons.
Situation at historical non-GAAP to GAAP financial measures. Please refer to our press release issued today and our slide presentation, both of which have been furnished to the FCC and are available on our website and elevate dotcom slash investors. We do not provide a reconciliation of forward looking non-GAAP financial measures due to our inability to project special charges and so.
Certain expenses joining me on the call today are president and Chief Executive Officer, Jason Harbison, and Chief Financial Officer, Chris lose I will now turn the call over to Jason.
Hello, everyone and thank you for joining our third quarter 2020 earnings conference call, let's start on slide four where I'll begin by reviewing the highlights of our quarter.
Similar to last quarter, the demand environment remains muted given the combination of factors, including the impact of federal stimulus high levels of consumer savings and lastly, a conservative approach to credit underwriting by elevating the banks we support.
As a result of these factors our revenue of 94 million for the third quarter declined 43% on a year over year basis.
Also similar to our last quarter and most importantly, elevate produced record profitability with net income from continuing operations up over five fold from last year to 16.6 million for the third quarter. Likewise, our adjusted EBITDA of 40 million was up 61% from a year ago, which represents a margin of 42.3%.
We were very proud of our record profitability, such a challenging environment and it speaks volumes to the execution and diligence ever team.
The key driver of our profitability was another stellar quarter for credit quality is past due balances now stand at just 6% of our portfolio, which is down from 10% a year ago.
First of all we accomplish this record profitability, while further broadening consumer assistant tools that help customers in the current environment.
These tools allow customers to extend and push payments at no additional cost.
Before I give an update on credit consumers and some new development to elevate let me start with some color on the quarter.
First I'll begin with contacts on loan originations and lower a be ours, which have led to lower revenue is similar to last quarter originations to new customers were modest at just over 8000 across each of the three U.S. brands. This is down approximately 84% from last year and as a result, our combined loans receivable principal balances ended the quarter at 370.
7 million, which is down 36% compared to a year ago.
Hey be ours declined across the portfolio as well driven largely by consumer friendly deferral programs portfolio wide, a PR was 96% for the quarter compared to 113% for the third quarter of 2019. This decline was primarily driven in the rise portfolio for a PR or 101% compared to 126% a year ago.
This is clearly a win for consumers and demonstrates our commitment to lower rates, especially through tough times.
The pace of decline in the P. ours has slowed on a sequential quarter basis. They are down just five percentage points from second quarter. This stabilization is happening commensurate with a lower use of deferrals by customers, which will touch on in a second.
The key takeaway here, though is that while our revenue has declined with lower originations and lower EAP ours is it 80 customers. The power of our model has never been more evident as we maintain our ability to grow as loan demand returns and have driven significant profitability in a challenging environment.
On the back of those comments, let's talk about credit and consumers as they have been a significant driver of that profitability.
First on credit I detailed if you ever highlights, but for some added background I want to dig in on why charge offs and loan performance had been as good as they have.
You will recall from last year, the elevate undertook a top to bottom overhaul of our credit models on the hills of our fin was partnership before the overhaul we identified opportunities in our underwriting mainly within the non D.M. channels for loan originated via direct mail our approach was sound, but the volume opportunity via credit partners drove us to conduct a rigorous review and rebuild of our models.
I mentioned this because we believe that much of the improvement in credit. We have achieved this year, we can directly attribute to decisions made in the modeling as opposed to simple risk aversion, we're tightening of the credit standards. This.
This is a critical point in one that gives us a lot of confidence about the models. We have built clearly this isn't the way any of US would have liked to see the year ago, but to have our credit model validated and battle tested and such an extensive way is highly encouraging as they think about returning to a market where demand is rising.
With that let's turn to slide five and let me give you an update on consumers and what we're seeing on the ground.
In summary consumers for the most part continue to exhibit resilience and responsibility saving rates remain higher than usual, which is good for existing borrowers, but also serves a headwind for new originations that said, what's most encouraging is that nonprime consumers have become increasingly confident in their pull in their employment.
Obviously this is an important factor in the ability to extend credit and while we aren't out of the woods uncoated, we know that businesses across the country have found ways to retain employees and improve topline trends as well.
This is an encouraging sign for us as we think about how the man may trend at 2021 additional fiscal stimulus is the key variable in the short term, we expect demand to remain muted for 2020 as we mentioned on our previous call that said, even with additional stimulus. Our current expectation is the demand likely bottoms for the near Prime borrowers in the first quarter of 2021.
The key takeaway here is that with our optimized credit models, the relative health of our customer set and our liquidity position. We believe that elevate has never been better positioned for growth.
Before I move on while we can't control. The man we are serving consumers broadly first we are expanding channels and geographies on the underwriting side. The new models have allowed us to expand our target market, both up and down the credit spectrum.
On the applications, our conversion rates and flow processes have improved immensely with a new technology stack that we have implemented.
Ultimately, we feel we are prepared to be in front of as many customers as possible when demand returns.
Before I turn the call to Chris to detail, our financials and speak to the balance sheet I'll turn to slide six the hit on a few developments over the quarter.
First we are pleased to report that we continue to expand the rice bran and additional bank has licensed our technology and new markets and further diversifies our brands.
The second development is that we have combined our product and bank relationship teams under one platform ultimately the two functions go hand in hand with the recent promotion of Scott to revert to be our chief product officer, We believe there's opportunities to drive strategic improvement and efficiency in the future. Congrats Scott and we're excited to have him leading the team.
Lastly, as I noted at the start of our call our team at elevate has gone above and beyond this year, we owe our success to a lot of hard working people.
It is for that reason that we are most proud of elevates recognition for the fifth consecutive year is a great place to work.
On behalf of the management team at elevate I'd like to personally thank our employees for making our company even greater in a year that has been anything but with that let me turn the call to Chris to speak on our financials Chris.
Good afternoon, everybody, Jason and I have been in this industry for over 14 years, and we have never experienced such strong credit quality and low loan losses as we did this past quarter.
While customer loan demand continues to be weak, resulting in decreasing loan balances and revenue loan losses have dropped at historic lows, resulting in record quarterly gross profit and net income for the company.
Turning to slide seven combined loans receivable principal totaled $377 million at September Thirtyth, 2020 down 36% from a year ago.
These amounts exclude the UK sunny loan balances, which are now part of discontinued operations.
While the year over year decreases rather dramatic we believe we are at the bottom of the drop in loan balances looking.
Looking at the sequential quarter over quarter decrease combined loans receivable principle were down 9% at September Thirtyth 2020 versus June Thirtyth of this year, while they were down 25% and 9% at the end of their respective second and first quarters of this year.
From our perspective, the additional liquidity provided to consumers through the various stimulus programs enacted to date has slowed and average customer checking account balances have returned to normal levels.
At the product level rise loan balances totaled $216 million at the end of the third quarter of 2020 down a $112 million or 34% from $327 million a year ago.
Rice, California loan portfolio accounted for almost a third of that decrease as the portfolio in that state dropped to $20 million at the end of the third quarter of this year, a decrease from $54 million a year ago as we stop lending in that state at the beginning of this year.
We expect the majority of that loan portfolio to continue to pay down over the next six months.
Elastic loan balances at September Thirtyth, 2020 totaled $153 million down $101 million or 40% from a year ago.
Customer multi draw activity or line utilization for elastic customers continues to be low.
Idle customers those with no active balance have increased from 24% pre coded to approximately 40% at September Thirtyth 2020.
Staying on this slide revenue for the third quarter of 2020 was down 43% from the third quarter a year ago.
For the rise product revenue decreased $45 million or 44% in the third quarter of this year versus prior year.
Roughly two thirds of the revenue decline for rise resulted from a drop in average loan balances while the remainder related to a decline in the effect of our of the rise product, which declined from 126% in the third quarter, a year ago to 101% in the third quarter of this year.
The PR was impacted by both a lack of new customer loans, which typically have a higher a PR than more seasoned customers as well as the impact of adjusting the effective EMR for customers that have deferred payments on their loan balances.
For elastic most of the decline in revenue resulted from the decrease in loan balances I just discussed.
Looking at the bottom of this slide both adjusted EBITDA and adjusted earnings are up significantly on a year over year basis, while topline revenue was down year over year, our gross profit and operating income for the third quarter of this year increased $18 million and $16 million, respectively from a year ago.
Despite initial concerns related to Covance credit quality has never been better resulting in much lower net charge offs and total loan loss provision versus the prior year quarter.
Additionally, we recently implemented an operating cost reduction plan, which resulted in several onetime expenses in the third quarter of this year.
While operating expenses totaled $37 million in this third quarter. Excluding these one time items a normalized operating expense amount would have been $33 million and we expect to Q4 run rate for operating expenses to be around that normalized amount.
Combined this resulted in adjusted EBITDA totaling $40 million for the third quarter of this year up 60% from the prior year quarter.
Adjusted earnings for the third quarter of 2020 totaled $17 million or 42 cents per fully diluted share compared to $3 million or six cents per fully diluted share a year ago.
Net income for Q3 of this year totaled $21 million or 52 cents per fully diluted share and included a $4 million gain from the UK discontinued operations due to an increase in the expected tax benefit from the write off of that entity.
This compares to net income of $5 million or 11 cents per fully diluted share in the third quarter a year ago.
Adjusted earnings for the first nine months of this year totaled $46 million more than doubling adjusted earnings of $22 million for the first nine months a year ago.
Turning to slide eight the cumulative loss rate as a percentage of loan originations for the 2019 vintage continues to be the lowest ever with the new generation of risk scores and strategies that were rolled out in 2019, performing much better than the 2018 vintage which remained relatively flat with the 2017 vintage.
The year to date 2020 vintages, even better after layering in the tightened underwriting and customer liquidity from the stimulus payments.
On this slide we also show the customer acquisition cost there were minimal new customer loans and marketing expense in the third quarter of this year.
When customer loan demand picks up again in future quarters, we expect our CAC to continue to trend between 250 and $300.
Slide nine shows the adjusted EBITDA margin, which was 42% for the third quarter of this year up from 15% in Q3 a year ago.
Almost all the increase in the adjusted EBITDA margin resulted from lower loan loss provision.
As we disclosed last quarter, our UK operations was placed into administration on June 29, 2020, which is the UK form of bankruptcy.
All current year and prior year UK numbers in our press release are now disclosed as discontinued operations.
At September Thirtyth 2020, the remaining UK debt was completely repaid to victory Park capital and there is no remaining liability associated with our UK operations.
We were able to record a us deferred tax benefit totaling approximately $27 million related to the loss on our investment in the UK.
We will utilize this net operating loss in future years, as we continue to generate taxable income in the us.
While we don't have a slide let me spend a minute discussing the loan loss reserve methodology and how the reserve is determined for customers that are using payment flexibility tools that we have previously discussed such as deferring loan payments we.
We did not have to adopt Cecil at the beginning of the year. So the loan loss reserve methodology has remained unchanged in 2020.
These factors are calculated by product and by delinquency status and considers historical data such as the number of successful payments of customers made.
For customers that have deferred payments the loans do not continue to age is past due while their payment is in deferral status, but this bucket of loan balances is monitored separately to determine if additional loan loss reserves are needed. In addition to reserves generated under the normal methodology.
Additionally, the effective PR for rise installment loans is lowered to account for the longer duration of the loans as interest continues to accrue during the deferral period at that lower effective APC are.
For elastic lines of credit no fees accrued during the payment deferral period.
At September Thirtyth, 2020 loan balances with deferred payments totaled $39 million or 10% of combined loans receivable principal down from $51 million or 13% of combined loans receivable principal at June Thirtyth 2020.
Now, let me discuss the remainder of fiscal year 2020, while we are not providing revenue adjusted EBITDA or net income guidance for the remainder of this year due to uncertainty caused by co bid and the potential next round of stimulus. We can provide some high level thoughts the.
The biggest uncertainty from our perspective is one consumer loan demand picks up again, which impacts forecasted revenue loan loss provisioning and marketing expense for this year.
We expect marketing expense will be down materially in the fourth quarter of this year compared to a year ago.
Loan originations will probably be at 50% of prior year levels at best in the fourth quarter of this year.
As a result, we expect revenue in the fourth quarter of 2020 will be down versus a year ago by roughly the same percentage as in Q3 of this year.
However, we do expect loan balances to remain flat to slightly up at the end of this year compared to the end of Q3 of 2020.
We expect loss rates in the fourth quarter of this year to trend up slightly versus the third quarter of 2020 due to increased loan origination volume in the fourth quarter.
Operating expense levels for Q4, 2020 will be flat with the normalized Q3, 2020 operating expense level of $33 million to $34 million I discussed earlier.
Turning to liquidity and capital one of the positives of our business model is the short term nature of the loans on September Thirtyth 2020, there was over 225 million of cash on our balance sheet.
Most of that is cash supports the VPC debt the totaled $440 million at the end of the 2023rd quarter.
In early 2021, we expect that we will use over $100 million of this cash to repay victory Park capital debt as part of our Q1 revolver and the sub debt that is maturing.
This will result in lower interest expense in fiscal year, 2021, and Rudy reduce outstanding debt down to approximately $330 million.
Given the lower loan originations to customers. There is no need for additional debt for the next few quarters all debt facilities were in compliance with their covenants at September Thirtyth 2020.
Lastly, I would like to briefly discuss the common stock repurchase plan authorized by our board in February of 2020.
We believe this use of capital at the current stock valuation is compelling from a return on capital perspective.
During the first nine months of 2020, we repurchased $15 million of common shares under this repurchase program in accordance with our existing plan.
This represents a 14% reduction in common shares outstanding since the beginning of 2020, we have an additional $10 million and remaining availability under this plan for the fourth quarter of 2020, and we will probably continue to repurchase shares in fiscal year 2021 under this plan upon an expected increase in off.
The resumption by the board before the end of this year with that let me turn the call back over to the operator to open it up for Q and a.
Thank you.
We will now begin the question and answer session to join the question queue. You May Press Star then one on your telephone keypad, you will hear a tone acknowledging your request. If you are using a speakerphone. Please pick up your handset before pressing any key.
To withdraw your question. Please press Star then too.
We'll pause for a moment as callers join the queue.
The first question comes from David Scharf JMP Securities. Please go ahead.
Thanks, Good afternoon, everybody. Thanks for taking my questions.
Okay.
Thanks I wanted.
Follow up on.
The first.
You had made a comment in the prepared remarks that.
You felt that balances probably bottomed out.
You know Chris your year end guidance suggested that balances will be closing out the year hopefully above above September thirtyth.
Can you just give us a sense for sort of what's driving.
The conclusion that you probably arrived at the trough I mean is it just sheer volume of credit applications is that the quality of the applications you're seeing is it a new bank partner.
It kind of gets you to.
Sort of the comfort level that.
The trough is in the rearview mirror.
Yeah, David It's Jason Good question, yes.
I have a handful of things that we're seeing that give us some confidence out there will be one.
We have opened up some additional channels either for our portfolios were four.
Thanks, we support maybe.
Mainly on the partner side, where they drive traffic inside and that's allowing us to open up the funnel a little bit more of the top so while demand might not be a strong. There was this time last year, we didn't catch that net a little bit more broad.
Plus we're seeing multi draw activity in full and refinance activity consumer start to pick back up some.
It's still not at levels, we saw a year ago, but at levels that we feel like between the expansion of channels some expansion on geographies.
And with the underwriting models out there that we should be hitting that trough here in Q4 now the one thing that I'd point out is remember how this this.
Industry works you know in the first quarter, we see the seasonality of all the tax season. So we'll still see that come up in the first quarter. So we feel like we're seeing that demand start to come back here in Q4, we'll go through the tax season, Q1, and then hopefully back to business as usual in Q2.
Got it got it no. That's helpful. And then maybe just as a follow up.
Can you give a little more color on.
Maybe some of the kind of broad outlines of the new Bank partnership I mean is this.
Specific to entering a particular geography is it.
Taking away.
Some volume from existing partner or is it purely additive.
Or is it different.
It yet David and generally in general is additive.
Expanding with one of the things we currently work with them to three new geographies.
That we feel like we'll give a more flexible product for consumers expand up.
From there we think it will help them on the balance side, particularly on the rise portfolio, including the states there.
The three states or Texas, Tennessee, and Kansas So.
So we're excited about working with the bank and pushing that for the film to serve loans on consumers.
Got it great. Thank you.
The next question comes from John Hecht with Jefferies. Please go ahead.
Thanks, very much guys.
I know, it's real early on and that maybe things are totally settled here, but year to the first companies reported post election and I'm. Just wondering if you guys have kind of any high level thoughts on just what to expect in that regard with respect to potential regulatory framework changes in any any kind of activity you might expect.
That level.
Yeah, John I mean, I think that the question most everybody has out there I think the way we're approaching it right now.
Is that if things continue to play out as they look like they are you are going to end up with a divided government, which.
A bipartisan government hopefully doesn't mean, there's anything that's who we won four factory for one way or the other which we think is good obviously in the last few months, we've seen some good progression on things out.
Out of the FDIC and the FCC, we're hoping that that can continue I mean, I think anything anytime we can get clarity on how bank for consumers I think that's that's a good thing.
It's going to be a little bit of a wait and see but we're hopeful that im confident that what we have been able to view over the last 10 to 15 years with our online platform, we will be able to adapt to whatever changes come come through we were one of the only companies to support with the CFPB did back in to go Bama on the small dollar.
Sales and profit with some some really good momentum there on affordability and things like that so you know were yes.
We're waiting to see exactly how it all shakes out but we've been in this space for quite some time and feel confident in our abilities and our kind of block will be able to adapt.
Okay.
And then you guys did talk about.
The loan.
Loan applications and Youve application trends in loan demand and your thoughts there what about do the yields I mean, given the deferrals loan demand that type of mix your underwriting for this when do you think yields pitted backup from where they are now.
Yes, Hi, John its Chris.
On the elastic side did the small drop in the effective PR is just literally due to the payment flexibility tools and as we booked some new customers and those will stabilize it will return to normal it's more on the right side, where we saw a more dramatic drop over the past couple of quarters and I would say about two thirds of that drop is due to the lack.
New customer loan origination so when I look at my my longer term preliminary model for next year, its probably towards the third quarter. We will continue to see gradual increase in that PR in Q1, as we start to book New customer loan definitely in Q2, Q3, and probably will be late Q3 early Q4 of next year.
Or will we see that rises kind of average effective PR return into the 120 plus percent range. So it wont take much longer than a year from now.
Okay, that's helpful Chris and.
Do you are you able to tell us I mean, we obviously, we can see or allowance level as a percentage of the.
Portfolio can you either tell us or maybe give us a frame to thinking about what's the specific reserve you might have for the remaining deferrals, how do we think about that.
I think we're pretty conservative it's 50%.
Okay.
So, yes, Larry reserve off with 50 cents on the dollar for the deferred deferred loan customers.
Okay.
Thats helpful. And then last question for me is you mentioned new geographies, what can you tell us about that.
Any kind of details around where you're where you're going with the different products.
Yes, John you are with the three jobs, we added it's an installment loan product offered through one of the banks, we work with and and I think theres the banks offering a much higher wind product with a lower CPR. So I think it will help usually some good balances.
We are excited to help them partner to get that back to market.
It's still pretty early as we look out in the 2021 and beyond of what other products, we'll look to take to market we have some things.
On the drawing board that we were looking at this year.
As it is with the focus of the year to bring something new to market. So I'd say it's.
TBD on on other products were going to bring out but there is definitely an exciting things we're looking at.
On both and what we can do from a product structure standpoint, and from a channel standpoint on how we think we can open a few things up with some with strategic partners in the future.
Okay, and with respect to the new geographies I mean can you just give us can you characterize where the high densely populated or the smaller geography, yet and he just characteristics ill share there.
It was it was the three state for Texas, Kansas in Tennessee.
Okay.
Great I appreciate that thanks, guys.
Once again, if you have a question. Please press Star then one.
The next question comes from Moshe Orenbuch with Credit Suisse. Please go ahead.
Great. Thanks.
We see you did refer to the press release to kind of changes in the model and some in your discussions and that's driving some of the improvement.
From a credit quality perspective to talk a little bit about what those changes were like what sort of things happened did that also have an impact on originations and.
How do we think about that.
Obviously as you kind of roll through the next into 2021.
Yes, mostly when we started working on revising our models Bakken late 18 early 19, and probably when the biggest things we were looking at is consumer bank transaction data.
And the idea was to be able to see cash inflows and outflows and make a better credit and affordability determination on the consumer and the original plan was the use that for consumers, we didnt get enough beautiful information on and help expand who we can underwrite or work with banks to underwrite and.
So we had those model developed and ready to go for 28, 20, and what worked out fairly well as win.
Total would hit and the Bureau information that you currently get might not be as predicted in the past the cash flow information that we were able to obtain on consumers help navigate look ahead accessing that.
Credit performance and and affordability and so on the portfolio as we originate and the banks have also adopted using some form of bank transaction data and their underwriting to help better assess consuming so I think thats going a long way forward and we'll see that be part of the models on a go forward basis, but I think the other thing that is happening yet.
We've always focused on flexibility within the products to help with consumer outcomes and I think when co would hit and the beginning of the year. We already had some pretty good performance will go up in more products, but we were also able to fast track some additional flexibility tools in our products and on the platform for banks and I think what we were able to do.
Match up great solutions for consumers that might have had a financial hiccup and we don't see that as being something that will go away in the near future. We think thats a long term structure is going to be in our platform on a go forward basis, and I think it just helps consumers.
Navigate if they have any other capital of challenges as they are using one of the products.
Got it thanks and.
Kind of a separate question yes.
One of the things that's going to be really unusual about this.
Downturn recession, whatever you want to call. It is obviously the hit at the front end of it credit losses are actually substantially better and then at some point they will kind of season.
Maybe could you just talk a bit about two separate things number one like how do you think that seasoning impact your losses, and then separately how will that impact the PNM in other words, how much of that would already have been reserved given the way that you.
You kind of set up your reserves.
Yeah. This is hey, Moshe its Chris.
What we generally try and look out almost a full year in terms of setting up our loan loss reserves.
And is what John's question to regard to how much we're reserving again seen a deferred payments customers that are using the payment flexibility tools I mean, I mentioned, 50%, which I feel is conservative because we're typically seeing around the roughly 60% to 70% success rate and customers, making those payments and those that don't.
And up deferring again or if they go into like a past due collection status. We still typically are seeing roughly 50% cure rate. So I think that.
From a reserve standpoint, we've we've done a really good job of trying to be conservative within the underlying GAAP methodology.
To cover losses looking out over time, and I think the payment flexibility tools have also allowed our customers to kind of weather short term storms and again I think one of the benefits as I mentioned in my script is these are short term loans and so you don't have to go out.
235 years and these are ones, where you generally know pretty quick what are good customers and water bad and and Jason than I've been in this industry long enough, we know that a lot of the.
A lot of losses are generally related to new customer loan originations and I think the fact that loan demand has been so weak over the past several quarters. As a result of this tells us that there probably isn't I'd like to think not going to be nearly as much pent up loss in the existing portfolio is what you might see in credit card or other law.
Longer term forms of debt.
Gotcha. Thanks.
This concludes the question and answer session I would like to turn the conference back over to Jason Anderson for any closing remarks.
Well I just like to thank everyone for joining us. This evening I do want to reiterate that we feel confident that here, though that we are well positioned that demand for return it with the new channels geographies and stronger underwriting and the new application flow process. We put in place I think before the step on the gas when the market conditions are right. So with that I'd like to thank you again for joining.
Sales and as always I'd like to thank elevate team for all that you do to help sort of nonprime consumers. Thanks, So much and we'll talk to you next quarter.
This concludes today's conference call you may disconnect. Your line. Thank you for participating and have a pleasant day.
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