Q1 2022 Elevate Credit Inc Earnings Call
Slide at similar rates in fact, we noted a few dips which could be related to the lack of availability of good work with certain gas prices.
<unk> has brought our return to stability in both expenses and income, but it is a situation. We're continually monitoring through bank account transaction data and our non prime customer tracker.
An update on credit non Prime Americans have a healthy balance sheet. Despite a strong recovery in consumer spending from the onset of Covid and 2020 at this point. We know this balance sheet may be inflated with a recent tax refund season, but the higher savings rates continue to persist.
And bank data that checking account balances are above pre COVID-19 levels.
Employment levels for the customer base are materially better than they were even three years ago and wage growth in the fiscal responsibility have broadened the target market more than narrowed it in 2022, so far.
We continue to be diligent in credit management, utilizing real time bank transaction data and monitoring tools. We also have modeling tools and adjustments in place for near immediate changes to underwriting should they be needed.
We've consistently said the market we serve is fast and the need to chase growth for growth sake is not a prudent use of our resources, we will be disciplined in our growth and focus on the fundamentals of our business model, while delivering on our mission of helping non prime consumers Chris.
Credit will always be the most important determinant of growth, but we believe the current elevate borrower base remains very attractive from a unit economics perspective.
I would also add that we remain in sync with the banks that utilize our platform and align our goals for the remainder of this year.
In reviewing the dynamics between the products on slide six I'll start with rise, which account for approximately 55% of the total portfolio.
It drives the loss rates associated with the new customer mix are most pronounced.
On this slide we breakout Q3 cumulative loss rate on a six months from originations timeline for new customers with this backdrop Q3 of 2021 is no different from past Q3s was strong with strong growth and achieving our targeted customer unit economics to understand the metrics, we need to look back remember how the COVID-19 pandemic impacted decisions.
Our portfolio growth include.
Including the rapid decline in loan receivable in 2020, and the rapid increase in late 'twenty, one, including a great number of new borrowers to the platform.
From a rough math standpoint, returning or former customers charge off at about half the rate of new customers. So while the unit economics are profitable at the onset for each you can note the substantial difference in a rapidly growing portfolio with new customers.
Credit when broken down into new versus former buckets for comparison purposes false almost exactly in line with our expectations and modeling.
All products had stable Apr's and as we mentioned last quarter, we in the <unk> support continued to see an opportunity to optimize growth.
As you have heard US detail, we are proud of the repeat borrower base repeat customers drive better returns because we can serve them with lower marketing costs and exhibit better credit performance, both of which enhanced returns. Additionally, the consumers benefit from lower price loans.
Based on our focus on disciplined growth, we continue to be encouraged that unit economics for all borrowers as well within our band of expectations.
To touch on the other two products briefly elastic demand was slightly weaker than expected in the quarter Youll.
Youll see this pronounced in the high seasonal CAC. The use case for elastic is slightly different than that of rise and we know limited voltage our activity in the quarter due to tax seasonality.
On the positive side losses, as a percent of revenue or below our targeted range.
On the today card, which accounts for about 10% of the portfolio at quarter end, we experienced some test segments that performed outside our expected performance ranges.
This has led to higher losses, and anticipated and due to the longer timeline of credit card products has led to a longer tail on the losses.
Starting in January vintages are back in line with expectations and we continue to test and look to grow the product.
I will conclude by highlighting my enthusiasm for the remainder of the year, we anticipate a return to profitability by the end of 2022, along with a return to our stock buyback program. The tailwind of a proven credit and a growing portfolio will position us for strong returns into the future with that I'll turn the call over to Chad.
Thanks, Jason and good afternoon everybody.
Turning to slide seven I'll start by discussing the loan portfolio combined loans receivable principal totaled $511 million as of March 31 2022.
45% from $353 million, a year ago and sequentially down 9% from where we ended 2021.
This was in line with our previous outlook for Q1 2022 here.
We expected a decrease in the loan portfolio, which occurred through normal seasonal loan paydowns and reduced demand for new loan originations and multi draw upon the elastic line of credit product.
Despite the overall drop in the loan portfolio, we saw new customer and unit growth of approximately 40% and returning customer and unit growth of slightly over 20% during the first quarter R 22, as compared to 2021.
Staying on this slide revenue for Q1, 'twenty two is that 38% from the first quarter a year ago due to an increase in the average outstanding loan balance resulting from growth experienced in 2021.
While individual product apr's were relatively consistent between the two period.
The overall portfolio APR was down approximately three points due to a shift in the mix of the portfolio to the today card, which now comprises approximately 10% at the combined loan portfolio has a March 31 2022.
We expect the revenue during the second quarter should be lower than the first quarter due to a lower average loan balance and an increase in the second half of the year as we grow the portfolio.
Looking at the bottom of this slide adjusted EBITDA and adjusted earnings for the first quarter of 'twenty to decrease compared to prior year as Q1 'twenty two was impacted by increased net charge offs, along with the adoption of fair value accounting.
Of which I'll discuss further on later slides.
Adjusted EBITDA was negative $2 million for the first quarter end of 2022 as compared to $32 million for the first quarter end of 2021.
On a pro forma basis, considering the adoption of fair value loan accounting at the beginning of 2021.
Adjusted EBITDA for the first quarter of 2021 would have been reduced approximately $15 million with pro forma adjusted EBITDA of $17 million.
Earnings was a net loss of $14 million for the first quarter of 'twenty two with net income of $13 million reported for the first quarter of 'twenty one.
On a pro forma basis, considering the adoption of fair value loan accounting at the beginning of 'twenty. One net income of approximately 1 million would've been reported a decrease of approximately $12 million from the reported results.
As we discussed during our last earnings call in recent annual report, we elected to adopt fair value accounting for the loan portfolio beginning January one 2022.
We early adopted the new life of loan reserve requirement and apply the upturn to fair value accounting model provided under these standards.
The impact of adoption resulted in a net increase to retained earnings of approximately $98 million net of tax which represents the reversal of a previously recognized loan loss provision and the fair value adjustment at the loan portfolio as of January one.
At adoption on January one 2022, the fair value premium was approximately 10, 2% across the combined loan portfolio.
The fair value premium declined 50 bps to nine 7% at the end of Q1, 'twenty two primarily due to a shift in the mix of the portfolio and slight increase in the discount rate for the quarter.
On a pro forma basis. The overall premium as of March 31, 2021 was approximately 12, 6% as the loan portfolio is comprised of more mature loans and lower new loan originations during the COVID-19 pandemic period in 2020 in the first quarter of 2021.
For financial reporting the most significant change to earnings beginning this quarter is recognizing the change in fair value of the combined months receivable portfolio, rather than a provision for loan losses.
The change in fair value will be comprised of gross charge offs net of recoveries and valuation impacts associated with changes in both the portfolio and valuation assumptions.
In prior years under the previous methodology or loss position with decreased due to the release of loan loss reserves as a loan portfolio pay down.
Under the new fair value accounting, there is a negative fair value adjustment realized when the loan portfolio decreases.
As a result of these differences we have presented a pro forma analysis of Q1, 'twenty, one assuming adoption of fair value accounting in the first quarter of 2021 within our non-GAAP disclosures.
On slide eight the cumulative loss rate as a percentage of loan originations for the 2020 vintage is the lowest loss rate ever due to the tightening of underwriting slowdown in new loan originations increased government stimulus and improved payment flexibility tools we.
We are pleased to see the 2021 vintage is still performing slightly better than 2018 levels as we stated on our last call.
However, the strong growth in the loan portfolio during the second half of 2021 resulted in an increase in net charge offs during the first quarter of 2022.
As Jason just discussed with the heavier mix of new customer loans during the second half of 'twenty, one our net charge offs as a percent of revenue during the first quarter of 'twenty. Two we're above our long term target range of $45 to 55% of revenue, but were in line with our expectations as we closely monitor the performance of these vintages.
We expect this trend will continue for an additional quarter before it drops back down within our target range in the third and fourth quarter of this year as the loan portfolio season.
Loan vintages from 'twenty, one half performance than our targeted unit economics, and the unit loss rates from new customer amongst an interest in 'twenty, one are consistent with pre pandemic vintages.
Our quarterly net principal charge offs as a percentage of our average combined loans receivable principal was 11% for the first quarter of 'twenty, two and remains within our historical experience in 2018 to 2019.
Past due balances totaled 10, 6% of the loan portfolio as of March 31, 2022 at slightly from 10, 2% as of March 31, 2021, and continue to remain within our historical range for 2018 to 2019 at 9% to 11%.
On this slide we also show the customer acquisition cost. We note that the Q1 'twenty two CAC is above our target range, which we have historically experienced during the first quarter as demand in response rates are impacted by seasonally low loan demand.
We continue to maintain our CAC targets that allow us to achieve our unit economics.
<unk> of between $2 50 to 300 for the rise and elastic products and sub $100 for the today card.
We continue to diversify our marketing mix between direct mail strategic partner and digital channels, we expect to be within our target range for CAC at the portfolio returned to growth mode for the remainder of the year and on a full year basis.
On slide nine we disclosed our outlook for 2022.
As addressed during our prior call. We forecasted continued growth in the loan portfolio with expected end of year combined loans receivable principal of $640 to $670 million.
Representing a 15% to 20% annual increase or 25% to 31% from the end of Q1 'twenty two.
We look forecast revenue to be $500 million to $525 million, which resulted in 20% to 25% year over year growth.
Our adjusted EBITDA will be $70 million to $80 million and our bottom line net income will be around breakeven for the full year as we returned to profitability in the second half of the year.
Turning to liquidity and capital on Slide 10, we ended the quarter with a total cash balance of $106 million that includes both corporate cash and cash maintained to support loan growth and the underlying borrowing base for the loan portfolios, which represented approximately $45 million to $50 million at the total cash balance.
We'll make payments in the second and third quarters of 2022 totaling $37 million related to the settlement of legacy litigation matters that were disclosed earlier in 2022.
To supplement our working capital we entered into a credit agreement for a $20 million term note, which matures on March one 2024.
We utilize the revolving feature on the BPC facility to pay down approximately $25 million in debt at the end of 2022 first quarter based on excess cash available from seasonal paydowns in our loan portfolio.
The company had minimal borrowings during the first quarter due to the seasonal reduction in loan demand.
The company had an overall weighted average cost of funds of nine 3% as of March 31, 2022 down from $9, 67% at March 31 2021.
The majority of our debt has a fixed rate until maturity in January 2024 on the BPC facility, new borrowings of process three months, LIBOR, plus 7% subject to a 1% LIBOR floor.
Lastly, during the first quarter of 'twenty, two we repurchased approximately $3 3 million or approximately 973000 common shares under our existing common share repurchase program and in connection with the litigation settlement terms.
This represented approximately 3% of our common shares outstanding at the time of purchase.
We will continue to evaluate future purchases under the share repurchase plan in the near term as we continue to review our liquidity position to ensure that we have adequate cash balances to fund the expected loan portfolio growth, while maintaining our borrowing base and covenant compliance.
Since beginning our share repurchases in August 2019, we have repurchased approximately 35% of all shares that were outstanding and issued four we issued since that point in time.
With that let me turn the call back over to the operator to open it up for Q&A.
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Our first question comes from the line of Glenn.
Credit Suisse. Please proceed with your question.
Hi, guys.
Good quarter.
Brian .
In line with what you guys guided last time, but I mean, if you can give some color I guess you mentioned that demand is strong across the board.
I mean in terms of application volume I guess from you in <unk>.
Some customers in approval rates I mean, what are you seeing there.
Just some kind of it would be helpful.
Yes, thanks for the question.
I think what we're seeing right now obviously, we saw the tax season slowdown that is typical in the first quarter of the year, but as we exited the first quarter I'll cover the first part of the second quarter, we were definitely seeing in the consumer's bank balances.
Some of the pressures of inflation, where their expenses are definitely picking back picking up but we also saw some wage growth is there I think the good news is we're seeing some strong employment out there. So we feel pretty good about the credit quality, but we are seeing consumers kind of revert back to what we saw back in the late.
Late 19 early 19, whether back somewhat the paycheck to paycheck and when an unexpected expenses demand there and so we saw demand pick back up at the end of the first quarter going into the second quarter.
And given that we're at with some of the payments. We've made here recently, we've been pretty measured on the growth side and so there was actually more demand out there than we actually captured closing out the quarter and starting this quarter. So we're pretty optimistic about what the demand outlook.
For the rest of this year.
Gotcha, and then you begin.
Looking to the losses.
For the first quarter, so it looks like X percentage of revenue.
For the <unk> business I mean.
It looks high compared to historical standards, yet you disclosed in your slide that unit economics for new customers is actually still a little bit below pre pandemic. So can you square that.
For me.
Sure, Yes, Hungary, Chad so.
As we previously discussed during the last quarter.
<unk> is coming through relate to.
The new customers have originated during the third quarter and were charging off during the first quarter on that side.
We're pointing back to what our performance was back in 2018 2019 for those new customers and we're still seeing better performance than that.
What we saw during that period and that can be attributed to two.
The models that we have.
Payment flexibility tools and various initiatives that we pass through where we're pleased that that performance now and working toward.
Managing the mix of the portfolio to ensure that we're getting a more even mix of new and returning customers in the portfolio going forward kind of lean on that just a little bit more what Chad wrapped up with I think in the prepared remarks, we talked about in particular.
At the end of last year, we saw that mix can astute about 70, 30, which is a little bit higher than what we're typically seeing but it was a unique opportunity for us to grab some demand and better unit economics.
Right thing for the organization long term.
Seeing that piece of the portfolio that cohort mature right now, but as we sit here today, we're back to that normalized mix of kind of a 50 50 seeing the loss curve on both new formers.
Where we expect them to and that's what gives us gives us the optimism of those losses coming down quarter over quarter as we finish out the year.
Gotcha.
And my last question is on funding costs, given the rising rate.
A couple of people in the space have also talked about this so I mean, most of your debt is fixed 90%, but I mean, when it comes to I guess refinancing opportunities.
When you have to refinance so I mean, what are some of the measures that you can take to kind of.
Control of that going forward.
Yes, Thanks Congress chat again, so yes, youre right on point majority of our funding facilities are all fixed rate.
I mean thats permitted at GPC facility. So we're definitely focused on looking at opportunities additional funding mechanisms.
That or allow us to continue to lower the cost of funds. In addition, as we're borrowing on the facility getting that portfolio back into growth mode. Youll continue to see the current rate come down as our incremental borrowing costs will be at 8%, but also going back to the fourth quarter. We closed on the today card facility.
Which was the lower cost of funds.
And from closing that facilities, we were able to broaden our relationships with various providers. So we will definitely be reaching out to network that network can be working with them as we look at alternative funding mechanisms to lower our cost of funds in the future.
Gotcha Okay.
Thank you.
We show no further questions in the queue and I would like to turn the call back over to Jason Jason Harvison for closing remarks. Please go ahead.
Okay.
As always I'd like to thank the team here at elevate for all their hard work in the first quarter and the accomplishments we made during the quarter and look forward to what the team is working on as we go forward for the rest of the year I would also like to thank Chad Bradford rich ads than an amazing job stepping in as the interim CFO over the last few quarters have been really happy with his work and contributions to the team but also.
Just as excited to welcome Steve to the organization and what they'll do for us in that CFO role as we go forward so exciting to have.
A new member of the team to continue to strengthen the team we have here at elevate and pushes forward in the future so with that I'd like to thank everyone for joining this afternoon pleasure to speak with every one of you and look forward to catching up here in the future take care.
That does conclude the conference call for today, we thank you for your participation and ask you. Please disconnect your lines.
Okay.