Q3 2022 Enova International Inc Earnings Call
Good afternoon, and welcome to the Nova International third quarter 2022 earnings Conference call.
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Please note. This event is being recorded on August 10th Accomplishable Lindsay Savarese Investor Relations for another international. Please go ahead.
Thank you operator, and good afternoon, everyone and never released results for the third quarter of 2022 and at September 32022. This afternoon. After the market close if you did not receive a copy of our earnings press release.
May obtain it from the Investor Relations section of our website at IR Dot Dot com.
With me on today's call are David Fisher, Chief Executive Officer, and Steve Cunningham, Chief Financial Officer. This call is being webcast and will be archived on the Investor Relations section of our website.
Before I turn the call over to David I'd like to note that today's discussion will contain forward looking statements and as such is subject to risks and uncertainties.
Actual results may differ materially as a result from various important risk factors, including those discussed in our earnings press release and in our annual report on Form 10-K quarterly reports on forms 10-Q, and current reports on form 8-K.
Please note that any forward looking statements that are made on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events.
In addition to U S GAAP reporting and Novo reports certain financial measures that do not conform to generally accepted accounting principles.
We believe these non-GAAP measures enhance the understanding of our performance reconciliations between these GAAP and non-GAAP measures are included in the tables found in today's press release.
As noted in our earnings release, we have posted supplemental financial information on.
On the IR portion of our website.
With that I'd like to turn the call over to David.
Thanks, and good afternoon, everyone.
Appreciate you joining our call today I'll start with an overview of our third quarter results and then I will discuss our strategy and outlook for the fourth quarter of 2022.
After that I will turn the call over to Steve Cunningham, our CFO , who will discuss our financial results and outlook in more detail.
The third quarter was another strong one for <unk> revenue in the third quarter increased 42% year over year, and 12% sequentially to $456 million.
Adjusted EBITDA was $115 million and adjusted EPS was $1 74.
Both increases from Q3 of last year.
As these results demonstrate the Nova team executed extremely well to deliver solid top and bottom line results. Despite the economic uncertainty.
Last quarter I know some question, whether we're being overly optimistic in our forward looking commentary, believing that we would not be able to effectively manage credit given high levels of inflation and the corresponding rising interest rates.
But our deep experience sophisticated improving machine learning driven analytics diversified product offerings strong balance sheet and a world class team enabled us to adapt to the changing landscape.
As a result credit quality across our portfolio remained solid.
Net charge offs were eight 4% in the third quarter. This.
This is slightly higher than Q2, as we continued to add a large number of new customers, which were 43% of total originations.
Despite the increase over Q2 net charge offs remain well below pre COVID-19 levels of 13, 4% in Q3 of 2019 and.
And 13, 8% in Q3 of 2018.
In addition at the end of the quarter, we saw improvement in early payment performance across recent vintages, which is an encouraging sign as we head into what is typically our busiest season.
For years, we have spoken about the strength of our technology, our analytics, our team and our consistent financial performance.
Underwriting non prime customers is not easy and Thats, where the strengths give us a big advantage.
And a less certain environment like the one we are currently in really highlights our differentiation from our competitors in these areas.
In addition, the high payment frequency and relatively short duration of our portfolio provides fast feedback that we can incorporate into ongoing decision, making enabling us to react quickly if needed.
Additionally, our diversified portfolio enables us to lean into the products that are doing well in a particular environment, while being more conservative with those that are maybe a bit more challenging.
Recently, we've been moderately more aggressive with our shorter maturity products, while being a bit more conservative with our longer term products.
This provides us with more visibility and allows us to adapt more quickly in an uncertain macroeconomic environment.
On this last quarter, we emphasized our shorter term subprime line of credit products as well as our SMB products, which all have average effective terms of under a year, while pulling back a bit on our near prime installment loans that have the longest average duration of any of our products.
In the third quarter small business products represented 60% of our portfolio, while consumer accounted for 40%.
Within consumer line of credit products increased to 33% of our portfolio, while installment products decreased to 67%.
Given our continued focused on short maturity products, we expect the percentage of consumer installment loans in our portfolio to decrease over the next several quarters.
In addition, it is likely that SMB originations will continue to grow as a percentage of the total as we are seeing strong demand and strong unit economics.
Credit performance of the SMB portfolio remains solid and despite setting higher ROE targets during the quarter originations remained strong.
We continue to analyze real time cash flows as well as external data to monitor industries that are more prone to recessions and inflationary pressures and.
And we are pleased with the portfolio, we have curated over the last several quarters.
Our small business brand presence as well as the diversity of our three SMB products positions us well to continue to capture share in this market.
Finally, as Steve will discuss in more detail due to our consistent and predictable results, we've been able to build a strong balance sheet ending the quarter with almost $800 million of total liquidity.
As we look forward to Q4 and early 2023, we are maintaining the balanced approach to growth and risk I mentioned, a few minutes ago.
They have increased the ROE targets across all of our products.
While this approach will likely result in us originating a little less volume than we would have if we had a more growth focused approach.
We were still able to generate strong growth in Q3 and are optimistic that we will have strong originations in Q4 as well.
This optimism is in part due to us observing some of the strongest demand and lowest levels of competition in my nine years at Inova.
Total company originations for the quarter reached.
We reached $1 2 billion up 10% sequentially and up 40% compared to the third quarter of 2021.
While our portfolio grew 59% year over year to just over $2 6 billion.
On the demand side, while many consumers still have elevated savings from pandemic stimulus. These savings levels are declining and <unk>.
Part due to the high levels of inflation, we are currently experiencing.
This is resulting in an uptick in demand for credit we.
We believe that customers will be able to effectively manage these higher credit levels due to the historically high employment levels and strong wage growth.
It is important to understand that our customers are familiar with living paycheck to paycheck and our sophisticated at managing variability in their cash flows.
Demand has also remained strong for our SMB products.
Small business government stimulus has been exhausted and we believe that we are seeing additional tailwind as banks have tightened credit, resulting in high credit quality borrowers, who may have otherwise gone to a bank coming to us.
On the competitive side, we are seeing both consumer and SMB competitors pull back meaningfully on originations.
As they struggled to manage both credit and our loan portfolios and access to capital.
Problems that we are not experiencing.
Before I wrap up I want to spend a minute on the recent ruling in the fifth circuit CFPB case.
It now appears likely that the payment provision of the CFPB small dollar rule will not become effective.
The work to comply with this provision would have been significant and those efforts will now be focused on a balanced approach to growth and better serving our customers.
Also if the original rule would have been implemented as proposed would have likely required us to reduce lending to our lowest credit quality customers, who are the ones most in need of credit.
Notwithstanding the court's ruling in this case, we continue to support sensible regulation that balances appropriate consumer protections with access to credit for all.
In sum our continued success is a testament to our strong team diversified product offerings and the strength that for proprietary technology and analytics.
Looking ahead, we remain dedicated to our mission of helping hard working people get access to fast trustworthy credit.
We will continue to manage the business to produce sustainable and profitable growth.
Now I'd like to turn the call over to Steve who will discuss our financial results and outlook in more detail and following steves remarks, we'll be happy to answer any questions that you may have.
Keith.
Thank you David and good afternoon, everyone.
We're pleased to report another quarter of solid top and bottom line financial performance that was in line with our expectations and characterized by focus growth stable credit operating cost discipline and balance sheet flexibility.
Turning to our third quarter results total company revenue rose, 12% sequentially and increased 42% from the third quarter of 2000 $21 million to $456 million.
The increase in revenue was driven by the growth of total company combined loan and finance receivables balances, which on an amortized basis were $2 6 billion at the end of the third quarter up 11% sequentially and nearly 60% higher than the third quarter of 2021.
As David noted total company originations for the third quarter totaled $1 2 billion up 10% sequentially and 40% higher than originations during the third quarter of 2021.
Originations from new customers remained strong totaling 43% of total originations as our marketing activities continue to attract new customers across our products.
Small business revenue increased 15% sequentially and 72% from the third quarter of the prior year to $173 million.
Paul business receivables on an amortized basis totaled $1 6 billion.
At September 30th a 16% sequential increase in 80% higher than the ended the third quarter of 2021.
Small business originations increased 75% from the prior year quarter to $807 million.
Revenue from our consumer businesses increased 10% sequentially and 29% from the third quarter of 2000 $21 million to $277 million.
Consumer receivables on an amortized basis ended the quarter at $1 1 billion.
Up 3% from June 30, and.
And 35% higher than the end of the third quarter of 2021 is consumer originations of $396 million were flat to the prior year quarter.
Looking ahead, we expect total company revenue for the fourth quarter to grow sequentially, but at a slower rate than the sequential growth rate for the third quarter as we maintain a balanced approach between growth and risk that David discussed.
This expectation will depend upon the level timing and mix of originations growth.
Now turning to credit.
Net revenue margin was sequentially stable at 64% and the fair value of the consolidated portfolio as a percentage of principal increased more than a full percentage point during the quarter to 108%.
These results indicate that credit during the quarter, including our future outlook remained stable and that our risk balanced origination strategy is increasing the resiliency of our portfolio.
For the third quarter net charge off and delinquency rates for the total company as well as for both the small business and consumer portfolios reflect the expected seasoning in recently originated vintages.
The total company ratio of net charge offs as a percentage of average combined loan and finance receivables for the third quarter was eight 4%.
Up from seven 2% last quarter and four 2% in the third quarter of 2021, which preceded the acceleration of growth in receivables over recent quarters.
Especially from new customers.
The ratio of net charge offs as a percentage of average combined loan and finance receivables for both the small business and consumer portfolios increased sequentially, but are similar or better than pre pandemic levels is $3 3 billion of originations. So far this year continue to season in line with expectations and our unit economics.
Framework.
As a percentage of total portfolio receivables past due 30 days or more was five 6% at September 30.
And is flat compared to the end of the third quarter a year ago.
As we would typically expect between the second and third quarters due to an acceleration of originations to new customers. The ratio of total receivables past due 30 days or more increased sequentially from five 1% at the end of the second quarter.
Importantly, we saw a sequential decline in early stage delinquencies driven by our consumer portfolio.
Which demonstrates our ability our ability to effectively manage credit risk in the current operating environment.
As I mentioned last quarter, while there may be quarter to quarter variations in credit metrics for our consumer and small business portfolios is vintage vintages season <unk>.
The ability or improvement in the fair value premium as a percentage of principal typically reflects stability or improvement in the cumulative lifetime loss outlook for the portfolio.
Which was the case this quarter.
As a reminder, these lifetime loss forecast and related fair value estimates receive significant review and validation internally from senior management.
And our analytics accounting and model risk teams and externally by our independent auditors from Deloitte.
Who have built their own models to test the accuracy of our fair value calculations each quarter.
Similar to the past two quarters, we increased the discount rate used in the fair value calculations for our products to incorporate observed market information.
The increase this quarter of 40 basis points for each of our products.
Decrease the fair value of our loan portfolio.
And the net revenue margin.
Despite the impact of the discount rate adjustment.
Fair value of the consolidated portfolio as a percentage of principal at September 30th increased from the end of the second quarter to 108%, reflecting a stable outlook for the expected lifetime credit performance of our total company portfolio.
The increase in the total company fair value premium this quarter was driven primarily by the fair value of the consumer portfolio, which increased to 109% from 106% at the end of the last at the end of last quarter.
As the rate of early stage consumer delinquencies declined sequentially.
To summarize the change in fair value line item. This quarter was driven primarily by credit metrics and modeling at the end of the third quarter to continue to reflect a solid outlook for expected future credit performance.
Partially offset by higher discount rates and increases in net charge offs. During the third quarter is recently originated vintages have seasoned in line with our unit economics expectations.
Looking ahead, we expect the total company net revenue margin for the fourth quarter of 2022.
To be in the range of 60% to 65%.
Future net revenue margin expectations will depend upon portfolio payment performance and the level timing and mix of originations growth.
Now turning to expenses, our operating costs. This quarter continue to reflect the operating leverage inherent in our online model.
And thoughtful expense management to support our businesses.
Total operating expenses for the third quarter, including marketing were $184 million or 40% of revenue compared to $151 million or 47% of revenue in the third quarter of 2021.
Marketing expenses totaled $101 million or 22% of revenue compared to $80 million or 25% of revenue in the third quarter of 2021.
As a reminder, under fair value accounting, we recognize marketing expenses in the period. They are incurred instead of deferring a portion of recognizing them over the life of the loans as we did prior to 2020 and as many in the industry is still due.
Looking forward, we expect marketing expenses as a percentage of revenue to be in the low 20% range in the near term, but will depend upon the mix and growth of originations, especially from new customers.
Operations and technology expenses for the third quarter totaled $46 million or 10% of revenue compared to $38 million or 12% of revenue in the third quarter of 2021.
Given the significant variable component of this expense category.
Sequential increases in <unk> costs should be expected in an environment, where originations and receivables are growing.
Should range between 10 and 11% of revenue.
General and administrative expenses for the third quarter totaled $37 million or 8% of revenue.
Compared to $34 million or 10% of revenue in the third quarter of 2021.
While there may be slight variations from quarter to quarter.
We expect G&A expenses as a percentage of revenue to remain below 9% in the near term.
We recognized adjusted earnings a non-GAAP measure of $57 million or $1 74 per diluted share compared to $1 64 per diluted share last quarter and $1 50 per diluted share in the third quarter of the prior year.
We ended the third quarter was $769 million of liquidity, including $189 million of cash and marketable securities.
$580 million of available capacity on committed facilities.
With the addition of a new $125 million facility. This week to support our near Prime consumer installment business. We continue to demonstrate our ability to successfully access new liquidity at favorable terms.
Our cost of funds for the third quarter was six 5% down from six 7% for the third quarter of 2021.
At the end of the third quarter, our marginal cost of funds range from approximately two 1% to six 7% depending on the facility utilized.
Demonstrating our confidence in the continued strength of our business relative to our current valuation.
During the third quarter, we acquired 588000 shares at a cost of approximately $20 million.
At September 30, we had $27 million remaining under our $100 million share repurchase program.
Our solid balance sheet and ample liquidity give us the financial flexibility to successfully navigate a range of operating environments and to continue to deliver on our commitments to long term shareholder value through both continued investments in our business as.
As well as share repurchases.
To summarize our fourth quarter outlook as we continue to execute an origination strategy that balances growth and risk against the current macro environment, we expect.
Revenue to increase sequentially, but at a lower sequential rate than in the third quarter.
We also expect to see stable credit and a total company net revenue margin in the range of 60% to 65%.
In addition, we expect marketing expenses to be in the low 20% of revenue and we expect our fixed costs to continue to scale with growth.
These expectations should lead to an adjusted EBIT margin in the mid 20% range and we expect quarterly year over year increases in adjusted EPS to continue in the fourth quarter of 2022.
Our fourth quarter expectations will depend upon the level timing and mix of originations growth.
We remain confident that the demonstrated ability of our talented team has us well positioned to adapt to the evolving macro environment.
Our resilient direct online only business model diversified product offerings nimble machine learning powered credit risk management capabilities and solid balance sheet support our ability to continue to drive profitable growth, while also effectively managing risk.
And with that we'd be happy to take your questions operator.
We will now begin the question and answer session.
To ask a question you May press Star then one silicon keep that.
Using a speaker phone please pickup your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Okay.
Yes.
Yes.
Our first question will come from David Scharf JMP you May now go ahead.
Thank you.
Good afternoon, Thanks for taking my questions.
Hey, Dave Hey, so.
Would it be 2022, if I didn't start off just asking about credit.
And what I'm wondering is Dave.
Obviously fed actions and inflation are impacting.
Consumer household liquidity, but we haven't really seen a meaningful.
<unk> and the employment backdrop.
And if there is unemployment and maybe more of a white collar kind of phenomenon, but I am wondering.
Since the fair value Mark.
It was more pronounced for your consumer.
Loans as opposed to small business.
Is there an implied unemployment rate in 2023 since these are less than a year duration, that's embedded in sort of your loss forecasting.
No.
It's more analytical than macroeconomics, not putting macro big macroeconomic adjustments in fair value.
Calculations, but.
Well I mean, we've run this business for almost the entirety of it with unemployment rates much higher than where they are today. So.
Unemployment rates do move up and 23 or 24, even somewhat meaningful I think a double.
Still kind of getting back to more normal levels and more normal unemployment unemployment rate. So that's not a big concern of ours.
Okay.
In addition wages have been very very strong with wage growth has been very strong.
And that kind of supports people being able to.
To payback to pay back their loans also so yes. There is some choppiness in bumping this in the credit markets and individuals.
Market that can be impacted but that's where our experience and our analytics has worked really really well.
Yes, we have to put in a lot of hard work to keep it keep it on the right path, but it's something we absolutely know how to do and we know how to put in that hard work.
How stable not only as a courtesy credit been good that's been just really stable over the last.
Several quarters, despite how much the macroeconomic environment has changed.
Clearly in.
Maybe a follow up on that as you think about your origination strategies.
Yeah.
It sounded like just.
Given some of the macro uncertainties.
It felt like or it sounded like you are leaning.
More towards.
Limiting duration risk.
As opposed to.
Leading originations towards.
Higher quality near Prime credits.
Can you just walk through some of the reasoning there it sounds a little.
Yes, hi, good morning, maybe a little counterintuitive.
<unk>.
Yes.
For some reason the world believes that higher loans to higher credit quality customers are less risky.
And on an individual loan sure but in your portfolio, where you can do where you have.
Have a great experience estimating loss rate that's not true at all we can be off by 100 basis points and our defaults estimates our charge off estimates until we file you're a super Prime credit card lender and you're off by 50 or 50 basis points in your charge off estimates and things start getting bad pretty quickly.
So.
Credit quality is what we do super well and we have no concerns about our ability to underwrite across the near Prime and subprime spectrum.
Duration risk is what can get more challenging in an uncertain macroeconomic environment we have.
Loans that are out there three or four three or four or five years.
And the economy takes a major turn you have a big portfolio that you now need to need.
Need to deal with.
So we did has pivoted to our portfolio.
We're a large majority of the loans we originated in the last couple of quarters have average durations of less than a year and you can react very quickly as the economy, if the economy turns.
And so that that's really been our focus over the last quarter. So as I mentioned in my prepared remarks, that's going to continue to be our focus over the next several quarters. So.
If you think about our near Prime installment book.
That's probably going to.
Ken can reduce the most.
But across the rest of our portfolio whether it's.
<unk> has some of our lowest apr's, our subprime consumer that as some of our highest APR.
We're going to continue to be.
Moderately across a balancing growth with risk because we're comfortable with the duration of those loans.
Got it Hey, you know what if I can just squeeze in just a mechanical question.
Follow up to that.
Yields came in.
Higher than we were forecasting.
Does this quarter, particularly for consumer.
Should they continue to sequentially trend up in consumer because of the mix shift away from near prime or the third quarter average levels.
Good.
Benchmark.
The model over the next few quarters.
Yes, David I think this is Steve I think some of what Youre seeing is some of the mixed shift that David talked about in the consumer side.
But even if you just take a look at quarter to quarter of this year, we've averaged between one of them.
Okay.
Tumor side, which is not sort of out of <unk>.
Out of range and I think SMB is been very very flat. So the top of the house is a little bit more of a mix shift but underneath.
It will be driven by the mix of products, which would be probably a little bit more.
Sure David.
Got it okay. Thanks, so much.
Thanks, David.
Yeah.
Our next question will come from John Rollin with Jamie You May now go ahead.
Afternoon, guys.
Hey, Jeff. So I know you gave guidance for the fourth quarter margin of 60% to 65%.
Past the fourth quarter is 55% to 65% still the right number.
It is at the top of the House John .
Bill or what we think are sort of a long term range will be there'll be quarter to quarter.
Variations in that obviously, because we are not sort of in a in a typical environment, but 55 to 65 is the right way to think about consolidated.
And then in the fourth quarter, obviously, well in the third quarter, we did see a 16% charge off rate in the consumer book.
Maybe can you just touch on that historically speaking and whether or not that's a peak given some of the early payment default information that you provided.
In your commentary.
Well like I mentioned in my commentary, we are seeing early stage delinquencies in the consumer portfolio down sequentially, which usually is a very positive indicator of what's to come.
And if you take a look at this year, our consumer charge off rate on a quarterly basis have been between 14 and 16.
In 2018 in 2019, they tended to range between 13% and 17, so sort of well within historical norms.
And really positioned coming out of the quarter with a pretty resilient book based on what we're seeing with credit quality.
And I would just add.
As you think about that number in Q4 and 10 in Q1, we're still generating strong numbers of new customers in Q4 can be a big new customer quarter as well so.
You'll see a little bit of that flow through but it shouldnt be anything dramatic.
The other point to in this kind of dovetails into what David just mentioned, even if charge offs are higher in the fourth quarter would you focusing in on more of a short term products right. There is some yield that comes along with those as well as an offsetting factor right.
Is that something that will continue into the fourth quarter, possibly we do see a higher charge off rate.
We have a corresponding yield adjustment and the consumer book.
Yes, I mean, the net revenue margin considers that range that we gave you in the guidance there and like we mentioned in the commentary a lot of the changes sequentially and what's happening with the credit metric is driven by the expected seasoning of these vintages as we bring them on so with new customer mix and mix set of product underneath there can be some variations from.
Quarter to quarter, but that net revenue guide.
Guide us sort of your best indicator of how that will sort itself out, but yes. I mean, if you think about the mix shift, it's mostly from moderately lower APR loans to higher APR loans.
And then just last question for me.
We've heard a couple of conference calls here now with lenders, saying that competition has gotten a lot weaker than they can exploit kind of these partners pockets of weakness what do you attribute that to is that just credit fear or is it liquidity crunch. We're hearing frankly of some dislocation in the ABS markets over the last few weeks I'm just trying.
Pinpoint.
What it is that's causing competition for you guys specifically to <unk>.
So up weaker than has been the case the hazard in the past. Thank you.
I think it's both.
I think you've seen it in some of the public companies and there's we've seen at some of the private companies as well.
Companies that have struggled with credit both on the SMB side and on the.
On the consumer side.
Okay.
Yes.
Hi, its public companies I think you've heard talk about issues in the kind of near Prime book.
Shifting to higher credit quality customers.
Which is great for us because we know how to right. We know how to underwrite near prime customers or super comfortable doing it.
Im struggling struggling there.
And I think theres, a little bit of a flight to quality and the ABS market and the securitization market term loan market there.
Kind of seasoned issuers that have proven performance like us have been able to continue to issue. We spent new warehouse facility in place a few days ago.
$770 million I think Steve said, our liquidity at the end of the quarter. So we're super strong position there, but yes, there are lenders both on the consumer side and the small business side. There's upon the news in the last couple of days that have pulled back significantly off because they don't have.
Our strong access to liquidity right now.
Are you seeing these dislocations tend to be shorter term in nature.
Thats tend not to be shut down for.
Here's an end, but we have plenty plenty of liquidity now are still able to access the markets I think thats going to put us in a stronger place.
Going forward.
Thank you.
If you have a question. Please press Star then one our next question will come from John Hecht with Jefferies. You May now go ahead.
Hey, guys, thanks very much.
Most of my questions been asked I'm wondering I know you guys to some degree track the use cases of the credit you provide.
Given given kind of the emerging inflationary environment is there any change in the use case or the behavior of the borrowers or is it pretty consistent with what <unk> seen over the last several years.
Very very minor I think the but yes, I think over especially during Covid, where there was a lot of stimulus money.
The use cases tend to be a lot more towards big big onetime emergencies.
Yes.
And then I guess that would be expected.
With all the stimulus that's why demand was down a fair amount during 2020 and into 2021.
Now lets pivoted, a teeny bit to kind of smaller smaller cash needs than kind of big.
Changing types of things, but it's really around the edges.
That kind of if you look at kind of what people are using money for now it's not different than historic numbers, it's just kind of getting a little bit more back back to normal.
That kind of post COVID-19.
And then I guess.
Pivoting.
Kind of following on some of the questions about competition.
Yes.
Are you able to assess that.
Cause of the favorable competitive environment.
Customer acquisition costs are going down are you able to kind of optimize that a little bit more.
I think what we've been able to do is be a bit more conservative on credit.
And still originate.
At pretty high levels and sugar, so she'll good origination growth.
Sure.
So.
Competition was stronger us being a bit more conservative on the credit side.
You might have resulted in lower lower levels of origination so.
Turns out to affect Cps quite as much.
Because you can try to try to originate to your ROE targets.
We did raise our ROE targets a bit and so that helped but now it really is just keeping origination levels high despite tiger credit.
Okay, and then final.
Just because it's always interesting to track some of your new growth endeavors, but any update with Brazil or pangea.
And year, yes, they are both doing well this market hasn't really hasnt hurt either one of them Brazil's economy, it's actually starting to turnaround a little bit and they are actually their currency has done better against the dollar than pretty much any currency in the world.
The last six months.
That's been a good sign and P&G is nice that it's a teeny bit.
Recession without even a recession resistant kind of benefit a little bit by recessions as wages go up people can spend more dollars too.
Kind of to other countries and so.
Yes, <unk> is doing doing really really well I mean the growth rates are.
Very very high in that business. It's just still tiny so that's why we are not talking more about it.
Yes, okay.
Okay. Thanks, very much guys.
Yep. Thank you.
Our next question will come from Vincent <unk> with Stephens you May now go ahead.
Hey, good afternoon, thanks for taking my questions.
Wanted to focus on the SMB side.
You were discussing that.
You are.
Looking to kind of grow into the SMB side, and maybe scale back on the consumer side.
And it's a broad question if you could talk about the health of the small business.
Borrower, what they're what they are using both the loans for.
To be candid.
Think less of a focus on small business because there's not many other there's not other publicly traded pure play companies out there. So maybe if you could just kind of give us some idea of what the health of that small business and also are there leading indicators to track.
To gauge the health of that small business borrower. Thank you.
Yeah. Good question I think one thing to keep in mind right off the top on that question is.
We do a lot of segmentation within our small business lending by industry and by by state.
And by size, and so which is something we do much less of the consumer side.
So there are definitely industries right now that are heard and we've been smart we've been staying away from them for a while so.
Construction has been a place where it is.
Really start backing away from.
Three or four quarters ago.
Was a great decision in hindsight, our trucking has been a complete mess that whole industry is just messed up between fuel prices.
Supply chain issues, both affecting ability to repair your trucks and also keeping trucks fall that industry.
Our complaint in us and we backfill income chopping very early this year this year as well those are just two examples at a.
A more micro level, we're really fine tuning where.
We're we're comfortable lending and where we're not so it's hard to describe smbs as a whole.
Beyond that the pandemic, what that a lot of small businesses and the ones that are left.
Look stronger than they did pre pandemic.
Less competition.
Business as we were able to weather the storm tend to be about Iran.
You have some confidence going into the recession.
Third.
<unk> been able to pass along price and Thats why theres. So much inflation, yes, there is there supply.
They're paying more for some of the stuff, they're doing but they've been able to pass along price, which is why we're seeing inflation.
The consumer is still spending.
And that's keeping these small businesses.
Doing well so.
Obviously, we keep a close eye on it and Valeant.
Macro level with a very very micro level, we look at it but as of today credit in that business is looking very very good.
Okay, great. Thank you and.
Another question for Steve.
The funding side maybe.
Maybe if you can talk about any additional funding needs.
The impact of.
<unk>.
Rising rates and.
Maybe also what youre seeing on spreads it's nice to see that you recently had a plumbing completed but if you could talk about what you are looking at for the next couple of quarters. Thank you.
Sure so.
And as we talked about we've been very successful raising new facilities and new money with favorable terms say overall spreads are a little wider just in terms of.
The nature of the environment that we're in but we are we are definitely on a on a competitive basis on.
On the good side of that as you can see with our cost of funds continuing to come down year over year.
And I think with with further rate increases.
Only about half of our.
That structure is floating rate.
And if you just take a look at how much. The fed funds has moved just this year and just take a look at our cost of funds in Q4 is flat to where we are today I think that demonstrates that we're not entirely floating and we're also still capturing some of that that spread benefit that we had locked in.
Over time, so I feel really good about our ability to continue to bring on capacity as we need it.
We continue to grow going forward and doing that in a very economical way.
Okay, Great and I guess with.
The plan to shorten duration on the loans I would think that.
So the velocity of your capital is going to increase or perhaps.
I think maybe the funding needs would actually go down all else being equal.
Sure.
Fair comment just your thoughts there.
Yes.
Maybe maybe a touch but will still need to be accessing.
External financing for small business for example, maybe a little less on the consumer side, but definitely still needing the markets for for small business.
Okay, great very helpful. Thanks, so much.
Okay.
This concludes our question and answer session I would like to turn the conference back over to David Fisher CEO for any closing remarks.
Yes. Thanks, everyone. We appreciate you joining our call today and look forward to speaking with you again next quarter have a good evening.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.