Q4 2020 Elevate Credit Inc Earnings Call
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Greetings and welcome to elevate credit Inc. Full year fourth quarter 'twenty 'twenty earnings Conference call.
At the Sun all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during todays conference. Please press star zero on your telephone keypad as the.
A reminder of this conference is being recorded I would now like to turn this conference over to your host Mr. Daniel rate Director of Public Affairs. Please go ahead, Sir you may begin.
Good afternoon, and thanks for joining us on the elevated fourth quarter and full year 2020 earnings conference call earlier today, we issued a press release with our fourth quarter and full year results a copy of the release is available on our website at elevate dot com slash investors today's call is being webcast is accompanied by a slide presentation.
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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.
Today, including impacts related to COVID-19, and our most recent annual report on form 10-K, and other filings we make with the SEC.
Please note that 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 reconciliation of 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 SEC and are available on our website at elevate dot com slash investors, we did not provide a reconciliation of forward looks.
Non-GAAP financial measures due to our inability to project the special charges and certain expenses.
Joining me on the call today are president and Chief Executive Officer, Jason Harvison.
And Chief Financial Officer, Chris loops, I will now turn the call over to Jason.
Good afternoon, everyone and thank you for joining us today.
I'd like to spend some time on 2020 elevate both exceeded at the business and help customers on what was the challenging year for all of US will then provide thoughts on the year ahead, including our growth strategy with some product updates.
Lastly, I'll discuss elevate strong balance sheet and give an update on how we're putting capital to work for shareholders.
The photos topics, let me start on slide four and give some highlights from our fourth quarter.
Our financial results are similar to the past few quarters is muted demand continued to dampen revenues, but very strong credit bolstered the adjusted earnings and adjusted EBITDA.
Specifically fourth quarter revenue of $90 7 million was down 45 per cent compared to a year ago, but was just down three 7% sequentially.
The most important take away all of you, though was the our loan balance of the fourth quarter were up 6% over the last quarter.
Turning to profitability the elevate had another very strong quarter with adjusted EBITDA of $26 5 million and <unk>.
Most of the earnings of $8 9 million strong credit and lower marketing costs again go profitability and as a result, adjusted EBITA margin for the quarter remained above historical trend at 29, 2%.
Mainly the assistant tools continued to help customers in their time of need whether that would be due to COVID-19 or not we anticipate these features continue to help keep credit strong across the portfolio.
For marketing costs, Chris will give more detail, but the cost to acquire for cat in the quarter was again optically high due to low originations what is the masking of the resort with some great success with adequate with the today card offering.
Which were originated at very attractive cost.
The company incurred an overall net loss for the fourth quarter, resulting from a $17 $4 million charge associated with legal matters related to our spin off from the predecessor company in 2014.
Finally, as you saw on our fourth quarter press release, we repurchased seven 7 million shares of elevate common stock at an average price of $2 of 58 per share. In addition at our most recent board meeting we approved an additional $25 million of repurchases under our existing plan.
In addition to our strong capital position. The most important point here is if we see very compelling value on our current valuation based on the anticipated growth and return opportunity ahead of us in summary, the company ended the fourth quarter and a very strong position to resume both growth from an operations and capital perspective.
Let's now turn to slide five and briefly look back of 2020 clear.
Clearly it was an unprecedented year for every business and every person, but I want to call out two main highlights for context about why elevate performed the way it did and how we also held 80000 non prime consumers manage the ongoing process with payment the system tools.
First let me speak to our operations and how we managed 2020.
As you can imagine credit has been even more of a priority focus for elevate this year that said as we look back management of credit was the biggest contributor to our returns and we feel very validated in the process and strategy, we put in place before the pandemic the cold first.
As you know we rolled out new credit models over the back half of 2019, and the benefit to underwriting clearly show the customers over 2020.
The use of bank level transaction data significantly improve screening across both rise and elastic.
We also benefited from the strategy put in place 18 months ago to manage elevate the profitability over volume and topline growth in 2020, lower demand took the choice out of our hands somewhat but we do believe the pace of growth over 2019, certainly benefited our performance in 2020.
And lastly, while difficult to quantify we can't ignore that the environment and behavior of customers certainly aided performance of 2020 as well.
Factors that we've discussed include the impact of federal stimulus and unemployment benefits over 2020. Additionally, consumer showed better than expected discipline and resilience by saving more reducing expenses and exhibiting job flexibility by leveraging of the gig economy. The supplement lost income.
In summary, we were very pleased with the performance on credit and have conviction that this model of produced strong returns as growth resumes.
Before I speak the growth, though let me also review 2020 from the lens of how we serve consumers of the pandemic to put it bluntly, we couldn't be prouder to of help as many people who have through the such a challenging time.
All of it continues to lead the market for customer service and the number of ways and we've proven that yet again this year from an availability standpoint, we found more than ever that the online model compared to the brick and mortar was important for non prime consumers. During the quarantine will elevate isn't the only online consumer finance company. We do believe the COVID-19 likely accelerated the shift to online.
More specific to elevate we expanded already industry, leading consumer friendly credit assistant features the eight customers when they needed. It most all free products currently the market rolled out payment flexibility tools that can be self serve consumers.
This was a big win for many during the pandemic, but we believe these features will also serve consumers and elevate will and non recessionary times.
We know non prime consumers will often experience hiccups throughout the course of alone adding this layer of deferral at no cost helped ease the bumps while also lowering default rate over the long term.
In total there were several proof points on the resilience and durability of the credit model. The most important is what it meant for our profitability in a challenging year, specifically, we generated nearly $55 million and adjusted earnings more than double last year, which implies an ROE of over 22% clearly an impressive number, especially when compared against regional bank or credit card performance in <unk>.
20.
Now, let's turn to slide six of them I can give a brief update on product development first if you've noticed in our reporting ever since our IPO elevate consolidated APR continues to decline primarily driven by our new product introductions and an increase in repeat or seasoned performing customer base is.
As you know our brands include customer friendly features that allow rates declined with consistent payment performance.
As I just noted about our 2020 results, we see a lot of profit potential across a wide range of credit and amongst near Prime lenders. We certainly believe our company is best positioned to shift to near Prime rates. In fact 17 per cent of the current portfolio is that near prime rate, which is up 65 per cent from a year ago.
The today card, which we launched two years ago is the latest access or as we saw a 237% increase in the portfolio over the past year. Looking ahead, we expect the day to become a bigger driver of growth given how well the card tested it in the market in the during the pandemic.
Let's turn to slide seven as we look forward of the year ahead. There is still of lot of uncertainty regarding the pandemic that said, we can provide our initial thoughts based on what we saw on the fourth quarter and our view of demand.
First let me speak to the fourth quarter, which was encouraging as consumer spending increased jobs began to recover modestly and demand picked up as stimulus impact from earlier in the year began to fade put simply we believe there is growing demand for credit, but looking ahead. It seems likely the additional stimulus will impact the shape of that demand in 2021.
Based on what we know today about the proposed stimulus plan, we anticipate that the first quarter of 2021 will be down from a year over year origination standpoint, the stimulus payments will more than replace the impact of tax refunds. The consumers typically rely on throughout the spring.
That said as we look the second quarter and beyond we expect originations to grow over last year based on the growing demand.
Recall the customers, commonly use our brands for emergency credit the fun unexpected life events through much of the quarantine. These drivers have been delayed or eliminated because of people have experienced fewer events such as auto break downs due to lower activity such as driving less in the fourth quarter. We saw an increase in loan origination demand as the economy began to reopen.
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Against this backdrop of anticipated rise in demand, we have a three tiered strategy for growth.
First in 2020, we saw increased attrition amongst the customer base, given lower demand and pay downs. Many of these consumers will again experience the need for credit in 2021, and we plan to market to them and kind of re acquisition strategy.
The advantage of this group because we have a history of from an underwriting perspective, and we expect the average customer acquisition cost should be lower as well both of which the benefit returns.
Additionally, consumers are likely to receive a reduced rate due to consumer friendly features that allow for rate of decline with consistent payment performance.
The second leg of our growth strategy will be the restart traditional direct mail campaigns.
Last year, we focused on digital marketing with small marketing dollars in 'twenty and 'twenty. One we plan to go back of direct mail in a large way based on our experience we expect it to be an effective marketing spend the demand increases.
Lastly, we will build on the success in the credit partner channel with the focus to increase new partnerships on the platform.
While we do not have specific guide range, yet we believe the overall demand will continue to improve in 'twenty and 'twenty. One we will have near term line of sight in the customer and channels, where anticipated return should be better than average overall, we believe elevate has never been better positioned from a product set perspective, and as you will hear from Chris in more detail. We also believe our credit and capital positions have never been stronger walk everyone.
We look forward to of butter, 'twenty 'twenty, one and plan to share additional detail on our views of the demand environment becomes less uncertain with that let me turn the call over to Chris.
Good afternoon, everybody from a financial performance standpoint, Q4, 2020, you played out pretty much as we expected excluding the large legal accrual Jason discussed we continue to see strong credit quality and for the first time all year, we saw quarterly loan growth.
Turning to slide eight combined loans receivable principal totaled just under $400 million at December 31, 2020 down 34% from a year ago, but on a sequential quarter basis, the loan balances were up almost $23 million.
At the product level rise loan balances totaled $228 million at the end of 2020 down $122 million or 35% from $350 million a year ago.
On a rise, California loan portfolio accounted for almost a third of that decrease as the portfolio in that state dropped to $14 million at the end of the fourth quarter of 2020 of decrease from $58 million a year ago as we stopped lending in that state at the beginning of 2020.
Total rise loan balances at the end of 2020 were up $13 million from the third quarter of 2020.
Elastic loan balances at December 31, 2020 totaled $157 million down 95 million of 38% from a year ago, but were up roughly $5 million free from September 30 of 2020.
We have also disclosed today card balances for the first time in this press release.
Loan balances for this credit card product totaled $14 million at the end of 2020 more than tripling from a year ago.
This product has the has a stated APR of less than 36%.
The today card had over 8000, new customers in 2020 at a very impressive customer acquisition cost of only $52 per customer.
The product was slightly gross profit positive in the second half of 2020 with revenues exceeding loss provision marketing and other cost of sales we expect.
To continue to ramp up of loan balances in this product in 2021 as we continue to rollout improved credit models focused solely on the near prime customer.
Staying on this slide revenue for the fourth quarter of 2020 was down 45% from the fourth quarter of year ago.
For the rise product revenue decreased $48 million of 47% in the fourth quarter of 2020 versus prior year rough.
Roughly two thirds of the revenue decline for rise of resulted from a drop in average loan balances while the remainder of related to a decline in the effective APR of the rise product, which declined from 124% in the fourth quarter of year ago to 100% in the fourth quarter of 2020.
Of the APR was impacted by both the lack of new customer loans, which typically have a higher APR then more seasoned customers as well as the impact of adjusting the effect of APR for customers that have deferred payments on their loan balances.
For elastic most of the $26 million decline in revenue resulted from the decrease in average loan balances.
Looking at the bottom of the slide both adjusted EBITDA and adjusted earnings for fiscal year 2020 are up significantly versus fiscal year 2019 adjusted.
Adjusted EBITDA totaled $146 million for fiscal year 2020 up 15.
Percent compared to a year ago.
Adjusted earnings defined as net income from continuing operations, excluding non operating losses of $24 million associated with legal matters more than doubled to just under $55 million up from $26 million a year ago.
For the fourth quarter of 2020 adjusted earnings totaled just under $9 million or 23 fully diluted EPS compared to $4 million or <unk> <unk> fully diluted EPS a year earlier.
The company incurred an overall net loss for the fourth quarter, resulting from a $17 million charge associated with legal matters, primarily related to the spin off from our predecessor company in 2014.
Turning to slide nine 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 2000 <unk>.
<unk> vintage the year to date 2020 vintage is even better after layering in the tightened underwriting and customer liquidity from stimulus payments.
On this slide we also show of customer acquisition cost new.
The new customer loan volume continued to trend at about 50% of prior year of volumes. So the product CAC for rise and elastic is not indicative of future expectations.
When the customer loan demand picks up again in future quarters, we expect the Tac to continue the trend between 250 and $300 per the rise and elastic products and the cash should be sub $100 for the today card.
Slide 10 shows the adjusted EBITDA margin, which was 32% for fiscal year 2020 up from 20% of year ago on.
Almost all of the increase in the adjusted EBITDA margin resulted from lower loan loss provision.
Long term, we expect the adjusted EBITDA margin to return to 20% and a more normalized growth model.
As disclosed in the press release loan balances with payment assistant tools. The December 30th December 31, 2020, total of $35 million or 9% of combined loans receivable principal down from $39 million or 10% of Gabon in the combined loans receivable principal at.
September 30 of 2020.
Turning to liquidity and capital on Slide 11, one of the positives of our business model is the short term nature of the loans on December 31, 2020 cash on the balance sheet totaled over $200 million in January 2021, we paid down approximately $97 million.
Of that $18 million of which was maturing in the remainder of under the Q1 revolver draw.
Net at the end of January 2021, total just over $340 million on roughly a $165 million on equity.
During 2020, we also repurchased $20 million of common shares under our existing common stock repurchase program.
This represents an 18% reduction in common shares outstanding since the beginning of 2020.
We also repurchased an additional $5 million of common shares under the existing plan in January 2021, and our board recently approved expanding this plan by an additional $25 million beginning in February of 2021.
Now, let me discuss expectations for fiscal year 2021, while we are not providing revenue adjusted EBITDA or net income guidance for this year due to uncertainty caused by Covid and the potential next round of stimulus.
We can provide some high level thoughts.
The biggest uncertainty from our perspective as consumer loan demand, which impacts forecasted revenue loan loss provisioning and marketing expense for this year.
We expect marketing expense will be down materially in the first quarter of this year compared to a year ago due to low consumer loan demand, resulting from federal stimulus the normal tax seasonality.
One originations will probably be at 50% of prior year levels at best and the first quarter of this year.
Lower loan originations combined with the usual Q1 seasonality of loan Paydowns will likely result in loan balances dropping 15% to 20% during the first quarter of 2021 from year end 2020.
As a result, we expect revenue in the first quarter of 2021 will be down versus a year ago by roughly the same percentages in Q4 of 2020.
However, we do expect loan balances to then grow the rest of the year and we are targeting year over year loan growth in the 10% to 15% range by the end of 2021.
The overall effective APR of the loan portfolio will continue to slightly of the decline as more loans are originated at near prime rates such as the day card.
We expect second half 2021 year over year revenue growth north of 10%.
Loss rate should continue to be better than prior years, but increased marketing spend and loan loss reserve build associated with expected loan growth in the latter part of the year will compress adjusted net income in 2021 versus 2020.
Operating expense levels for 2021 will be slightly lower than 2020, and the interest expense should be down materially in 2021 from 2020, as we will self fund most of the loan growth rather than borrowing the.
The effective tax rate will be in the normalized 25% to 30% range, but our cash taxes paid are expected to be minimal as we use the net of net operating loss from the 2020 right off of our U K investment.
With that let me turn the call back over to the operator to open it up for Q&A.
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Question from the queue, the participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key one moment, while we poll for questions.
The first question comes from the line of Moshe Orenbuch with Credit Suisse. You May proceed with your question.
[noise] great. So.
Congratulations on that.
Getting through was a difficult year in being able to use the capital too.
Both return from the standpoint of both debt and equity.
Maybe if you could kind of just start a little bit in the.
In the past I guess, there was a lot of.
It was difficult to know how the consumer would behave and now you you you seem to have a perspective on.
On the.
The performance post the first quarter, maybe is there like something that youre seeing or what your customers are telling you that gives you the confidence the posts that they.
They will they will come back on the bar and you'll be able to get to that 10 to 15 per cent loan growth.
Yes, most of it.
Jason I'll take that and Chris can maybe add some color, but I think some of the things of that we're seeing we talk about the ability to look at bank transaction data from consumers.
And what we're seeing as you know the most recent stimulus the came through it just seem to flow through pretty quickly for the consumer and we also when we look back in Q4, we saw people start to get back in the marketplace jobs are up some and.
People were outspending again, so we saw that demand pick back up and so while we do expect to have some dampening on demand in the first quarter with another round of stimulus coming on or ahead of US. We think the need for consumers are still going to be there when things open back up as they get back out in the marketplace and so we think we're well positioned to be ready for that.
Maybe just to follow up on that and.
Hmm.
When you when we think about the <unk>.
Out of the.
I guess your thoughts about how big the credit card products is going to be a year ago. I mean, a year from now excuse me and or what percentage of that 10 to 15 per cent loan growth will be driven by the credit card like how do you think about how large that is gonna be.
Hey, Moshe it's Chris.
Well, we've got in and kind of the preliminary forecast the with the high level thoughts that I gave is the credit card product doubling year over year. So youre looking at balance is probably around $25 million to $30 million ish at the end of this year.
I think Jason and I know, we could probably grow that faster. So at least from of preliminary standpoint, we feel pretty good that we can double the portfolio on a year over year basis, and you know if we liked the credit performance, we like the cap on the profitability, we could certainly look to potentially grow it even faster.
And when you think about that I mean that CAC is lower than your overall cash I would assume that that's the product that has I mean, assuming the credit stays within your band as you know it was kind of debt or the lifetime profitability because of that customer probably sticks around longer.
Yeah Yeah.
Much probably much better long term profitability certainly a much longer payback. The initial payback period, just given the the lower APR and.
The average loan balance that we're seeing so far is around I think about $200 per customer. So that's a little bit lower than what we typically see with the rise of elastic customer. So we're certainly generating lower revenue initially but over the life you're right. I mean, if you go out three or four years I think the the lifetime customer profitability off of the.
The customer looks very promising, especially at the caps that were seeing right now.
Got it thank you.
Our next question comes from the line of David Schwartz of JMP Securities. You May proceed with your question.
Thank you.
Good afternoon, guys and thanks for taking my questions.
Hey, Jason I guess, maybe.
Maybe a little more of a.
The strict strategic question of you know on them.
Looking at slide six where.
You discussed the.
Interest rate environment, and specifically sort of the APR.
Developments and.
I clearly understand the math I mean as far as the the.
Effect that the two day card.
And some of the other developments have on the average APR near term I'm just.
Trying to get a sense I mean, as we think about where you want to take the business mix over the next several years I mean is there a concerted effort to.
Become.
More of the near Prime lower APR.
Lender or is this just kind of the byproduct of.
Sort of a one off opportunity you saw on the card space and I'm, just trying to get my arms around how youre defining near Prime APR in the.
This slide and B, whether this is going to be an ongoing.
Lucian notwithstanding the upward trend in yield that Youll get once you start to add new customers once again.
Sure sure. It's of Great question, David I think it's of a.
Little bit of both of you know.
When we look of what we've done with.
The core products.
Say that maybe you were talking about ryzen elastic real proud of what their progress has been on over the last four of five six years to see the effect of Apr's come to come down to be below <unk>.
The percent of the double digits and I think that's the.
Byproduct of.
The the payment assistant tools, we built in for consumers that have better payment performance. It's a function of of the better underwriting has been put in place with more of consumer data that we can leverage and I think that's always been part of the plan is the continued to drive down cost for consumers and continue to expand access to credit.
So I think you'll continue to see that with those existing flagship products that are out of market today, but I think there's also an opportunity to move closer towards near Prime.
With the today card of taking some of those learnings that we've had over the last.
10, 15 years on on how to serve non prime consumers and expand access to credit and give them that they're not thinking about the today carts.
It's a part of it gives them the benefit of having a promised type of transaction vehicles.
The non prime consumers not used to having and I think that's why we're seeing the cash be very strong and we're optimistic about what that could mean force in the future. So we think it's just the natural progression and the extension of the current products and market will continue to invest in ryzen and elastic but also think today provides a nice opportunity for elevate.
Got it.
That's helpful and I may have missed this in the discussion on the on the today card or maybe even when you were rolling it out but can you do you have any color on home of these borrowers are I'm curious whether a.
They're they're entirely new to elevate I would imagine if the sub 36 per cent borrowers they are.
The as you kind of look at their credit files, even if their thin files, if you have a sense, whether or not they've ever had.
A general purpose card elsewhere.
Or are there kind of augmenting existing card balances just a little more flavor on it.
With this borrower is relative to your typically served.
Sure sure it's still somewhat early on in the life of that product. So I don't know the data is not quite as rich as what we'd have on other products, but I think from a demographic standpoint, we're seeing on be somewhat similar to.
The rise and elastic products, maybe just a touch more of the critical scale, but still on the non prime category.
They do have.
The historical credit that they've had access to the whether its been maxed out or had some delinquencies there so they're getting a second chance, but it's kind of the ability for.
So for US it takes some of the learnings and understand that we've had with non prime consumers and.
Take a product out there that we think fits a need that's not being met right now.
Got it got it.
One last follow up I mean, I guess, it's more housekeeping, but it.
The the legal accrual.
It sounds like it goes back quite a number of years, so probably isn't.
The germane to your business at all today, but is that something that's expected to ultimately be of cash.
Expenses for the company.
Provide just a little color on what.
With that Ah I guess leave the legal reserve of four.
Sure. Thank.
Thank you you did hit on it there you know it's not related to our core business. It's it's tied to the the spin off of our predecessor company.
And so we'll continue to fight that the litigation that's out there we thought it appropriate to go ahead and take of legal reserve at this time.
We need to reach a settlement of where there is a final decision on that.
There could be of cash outlay, but we thought that was the right number of it the accrued at this point.
Got it great. Thank you.
As a reminder, if you would like to ask the question. Please press star one on your telephone keypad.
The next question comes from the line of John <unk> with Jefferies. You May proceed with your question.
Yeah, a little bit more of follow ups from the Moshe and David on the card book.
Yeah, because it sounds like it's kind of out of growth of momentum.
What kind of you know.
I know your overall business I think you shoot for something around the 50% gross margin over the long term.
Is this product going to be similar to that or how do we think about the kind of unit level economics.
Yeah, Hi, John It's Chris.
Okay got it.
Robley.
Initially over the first 12 months to 24 months. The the operating margins are going to be similar to slightly lower.
And then a rise of elastic customer, but over time, given the the revolving nature of the product that's where it starts to generate probably longer term better margins I think of key aspect of this as well as given the the nature of the APR and that it's more prime ish customer will certainly as it starts to grow we've been self fund.
It's so far.
We'll go out and get a much lower cost of funds to fund this product going forward. So generally speaking I think this product so far from what we've seen with the initial loss results. The CAC and the performance, we think that longer term. It could have you know unit.
<unk> margins better than our existing rise and elastic.
The customer, but it's probably going to take a longer period of time to get there.
Okay and then.
You guys talk about.
I think you gave some specific kind of expectations for growth in the card book, you mentioned ryzen elastic and you've talked about on the aggregate loan growth expectations for the year, how do you think about rise.
Which one of those has more momentum now and how do you think of it that trending over the year.
It's Chris again, I think right has a little bit more amount of them right now and so I think when you look at the 10% to 15% overall growth target for the year rise will probably be at the higher end of that range of elastic will probably be at the lower end of that range, but both products, we're expecting double digit growth on a year over year basis.
Okay.
Can you.
You talked you gave us some of the the.
The information that the deferrals can you give us a sense with the allowance level with the deferral.
Yeah, and then also give it give the one update you that we didn't put in the press release, but the.
The overall way, where we've been handling the loan loss reserve for customers with deferrals is treating them as though there 1% to 30 days past due which for us because we we havent adopted seasonal since we're a small reporting unit.
Typically of loan loss reserve of between 40, and 50% of the customer loan balance and what we've seen on on performance of those customers. So far is the typically the loss rate is probably in the 20% range. So I think so far we've been conservative with the loan loss reserve factors as we get a little bit more.
Experienced will continue to true up those those loss factors and probably bring that down in future periods. If they continue to perform well the other data point that I'll put out there that's really recent that we.
Just didn't have a chance to put it in the in the press release was.
In January with the with the amount of the.
I guess the initial $600 stimulus checks, we did see the deferred loan balance principal balances come down $10 million from year end.
So that was obviously very positive from our perspective.
And should continue to show the strength and credit quality that we're seeing so the customers did the right thing with the stimulus checks that they were receiving the $600. They took it and for those that had deferred principal payments. They made their payments on her back in the current bucket.
Okay.
Very helpful information.
Then you're you've paid some debt down youre buying back stock you're still I think your debt to equity around three times I mean, how do you think about what your optimal kind of either of average your capital structure target that youre thinking about.
Yeah, It's it's down now to the one in at the end of January after the $97 million pay down the debt that we had if anything I think we're probably under leveraged a little bit and as I as I. Just mentioned you know the today card we've been self funding that clearly to the extent that that starts to grow materially we'll look to establish a formal lending.
City for that so that'll get the leverage back up I think right now that you know from my preference I'd, probably by the end of the year prefer a little bit more leverage so that we can you know.
Given again, where the stocks trading on I know, we've had a nice recent run up but we still believe that too.
To the extent possible, if we can't use of free cash flow to generate good solid loan growth of off of our three products.
Prefer to borrow a little bit more on continue to actively buyback our stock even on top of what we the board just recently approved.
Great I appreciate all the information thanks, guys.
Okay.
Our next question comes on the line of Michael Diana.
With Maxim Group you May proceed with your question. Okay. Thank you Chris you gave some some good guidance there too at the end of your prepared remarks.
The faster than I could rate do you think you could just quickly review that.
Sure Yeah.
I mean, what we're looking at is I'll I'll start first with Q1.
Given the the.
The initial 600 dollar stimulus check wave that the kind of came through and we saw a lot of that already flush out through customer checking accounts. So we don't think that there will be anything lingering there, but that combined with assuming another $4500 of stimulus coming here sometime in Q1, we expect loan balances will drop of about 15%.
20% during the first quarter from year end balances.
However, we do expect that from Q2 through the end of the year, we'll be back in growth mode, and we are targeting by the end of the year to have year over year loan growth of about 10% to 15% as I mentioned, probably the the today card we could look to see those balances at least double year over year, and then rise will probably be at the higher end of that.
10% to 15% range in the elastic product probably at the lower end of that 10 to 15 per cent range, but really we expect all three products to have double digit growth on a year over year basis.
Revenue will obviously drop in Q1 versus a year ago, probably by the same roughly <unk> 45 per cent that we saw in Q4 as the loan balances kind of hopefully hit the trough at the end of Q1.
Marketing expense will be down materially in Q1, we expect loan originations probably at about half of what they were in Q1, a year ago remember Covid really didn't impact loan originations until beginning of the second quarter of last year. So on a year over year basis loan originations will be down about 50% in Q1, but then we will start to.
Expect to see of grow significantly double digit second quarter through the end of the year.
We think loss rates will continue to be much stronger than we've seen historically given the strong credit quality of the payment flexibility tools that we've rolled out.
We do expect that in the second half of the year as we start to grow the loan book the increased marketing spend in the loan loss reserve build will compress adjusted net income versus what we saw last year.
Op expense will be down a little bit for the full year versus what we saw on 2020 and I think interest expense will be down pretty materially given that we just paid down almost $100 million of debt here in January and we expect the self fund a lot of the loan growth throughout the rest of the year.
So all in all we're looking for good double digit growth come in the latter part of the year and then doing whatever we can know the to maintain expenses.
Putting interest expense on trying to drive good margins.
Okay, well, we'll also obviously, we also announced the the $25 million stock buyback. So we'll continue we'll start that beginning in February that's an expansion on top of the the $30 million that we've already bought back over the course of a little over a year.
Right now on on tax.
Are you, saying the effective tax rate is going to be close to zero.
Yeah, the cash rate will be zero, because we will be able to utilize the NOL, but we already booked the.
The deferred tax asset related to that U K NOL on our books last year. So the the GAAP P&L tax expense will be of normal 25% to 30%, but the actual cash taxes paid will be minimal share.
Okay, Great I appreciate it thank you very much.
Yeah.
Ladies and gentlemen, we have reached the end of today's question and answer session I would like to turn the call back over to Mr. Jason Harvison for closing remarks.
At the close I would like to thank the elevate team for all of the hard work in 2020 and make any of such of such a successful year I look forward to leading the team in 2021 of the building on that success. So thank you for all your time and we look forward to speaking of everyone here in a few months to cover our Q1 performance take care.
Thank you for joining US today. This concludes today's conference you may disconnect your lines at this time.
Yeah.
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