Q3 2023 Enova International Inc Earnings Call
Ladies and gentlemen, thank you for standing by the Inova callable became momentarily. Please stay on the line.
[music].
Hello, and welcome to the <unk> third quarter 2023 conference call.
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Please note. This event is being recorded I would now like to turn the conference over to Lindsey salaries Investor Relations for another please go ahead.
Thank you operator, and good afternoon, everyone and never released results for the third quarter 'twenty. Three ended September 32023. This afternoon after market close.
If you did not receive a copy of our earnings press release, you may have.
On the Investor Relations section.
Site 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 web.
Right.
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 they are subject to risks and uncertainties.
Actual results may differ materially as a result from various important factors, including those discussed in our earnings press release and in our annual report on Form 10-K.
What are the reports on Form 10-Q, and current reports on forms 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 never 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.
Conciliation 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.
We have posted supplemental financial information on the IR portion of our website.
And with that I'd like to turn the call over to David.
Thanks, and good afternoon, everyone. I appreciate you joining our call today.
I'll begin with an overview of our third quarter results and then I'll discuss our strategy going forward.
After that I'll turn the call over to Steve Cunningham, our CFO, who will discuss our financial results and outlook in more detail.
We're pleased to have produced another strong quarter with record originations and revenue driven by solid demand and stable credit.
The skillful execution of our team combined with our World class machine learning analytics and technology.
Allowed us to continue to do well in the current macroeconomic environment.
Well, there's a lot of uncertainty in the economy today, both internal and external data lead us to believe that both our consumer and small business customers are navigating it well.
Inflation continues to moderate while the labor market and wage growth continue to be very strong.
And while prime and Super Prime borrowers are facing higher interest expense due to an increase in the fed funds rate, we have not raised our pricing.
As a result, we generated more than $1 billion in originations for the eighth straight quarter.
Driven by growth in both our consumer and small business products, even as we balanced growth and credit during this uncertain economic environment.
Originations grew 13% sequentially to over $1.2 billion as we were moderately more aggressive with the originations during the third quarter, especially in our consumer business is our Q3 consumer originations were up 19% sequentially.
We also generated strong revenue growth with revenue of $551 million equating to a 21% year over year and 10% sequential growth.
Adjusted EBITDA increased 5% year over year, but was down 5% sequentially.
And adjusted EPS was down 14% year over year, and 13% sequentially lagging our expectations for the quarter.
There were two primary drivers underlying the lower than expected EPS in Q3.
First as I mentioned, we continue to lean into the solid demand and good credit metrics with increased marketing spend.
And our marketing activities continue to be efficient with marketing at 21% of revenue compared to 22% of revenue in Q3 of last year.
On marketing as a percentage of revenue declined year over year, it was slightly elevated compared to our expectation.
Given the stronger than anticipated consumer demand we were seeing during Q3, we made the decision to increase our marketing spend to capture this demand at attractive unit economics.
Marketing spend is one of the levers we use intra quarter and we do so on a daily and weekly basis.
As is evident from our strong origination growth we generated in the quarter. This was largely successful.
However, much of the origination growth came late in the quarter, resulting us incurring the additional marketing expense, but not generating much incremental revenue in the period offset.
However, these additional loans should drive additional revenue and income over the next few quarters.
The second driver of the lower than expected profitability in Q3 with continued credit normalization in our SMB portfolio.
Let me be clear credit performance in that portfolio as a whole remains good.
However, as I mentioned in each of the last two quarters, we did see slightly higher than expected defaults and vintages from the second half of 'twenty to 'twenty two.
As you would expect our underwriting models adjust that based on this data and vintages. Since January of this year are back in line with our expectations.
But since there was a nine to 12 month emergence period for charge offs and our small business products.
Charge offs from those second half 2022 vintages were at their peak in Q3 of this year.
We expected this and included in our forecast, but we're just off a bit and the timing as we saw a bit more would come in early Q4 and not late Q3.
The upside of this is that we now expect lower F&B charge offs in Q4, particularly given that early stage delinquencies and vintages in this portfolio. This year are well below those we saw in the late 2022 vintages.
I also think that it's important to point out that while charge offs from those 2022, F&B vintages were higher than our expectation.
When it's just still generated solid ROE is above our cost of capital.
So to be clear and Novo overall is in great shape, and we're feeling good about Q4 and next year.
Our strong growth and solid credit metrics position us well for future success.
We just missed forecast for these two items this quarter.
We've been very consistent with their forecasting guidance and results over the last several years.
And we believe this quarter will prove to be an aberration.
In addition, we continue to demonstrate the importance of having a diversified portfolio.
As we discussed in the past this diversification enables us to lean into products with the strongest unit economics now.
It's further resiliency to our balanced approach to growth.
In the third quarter, our small business products represented 61% of our total portfolio and consumer was 39% roughly in line with Q3 of last year.
Outside of our core products, we're now producing very strong growth in Brazil. After a few years of adapting to changes in the banking regulations there.
In Q3, we generated record originations were which were almost 300% higher than Q3 of last year.
While still a small business for us we are excited about the potential for this business going forward.
Before I wrap up I'd like to spend a few moments talking about our progress in unlocking shareholder value.
<unk> been very thoughtful about building a strong balance sheet and ended the quarter with nearly $1 billion in excess liquidity.
Which we believe gives us significant flexibility to accomplish that.
As I mentioned on our earnings call last quarter, we're looking at a number of possible alternatives given.
Given the current economic environment and high interest rates are near term focus is to return capital to our shareholders through opportunistic stock buyback.
Yeah.
As Steve will discuss in more detail. We are pleased to successfully complete the consent solicitation on R 2025 senior notes.
Which increases the amount of stock we were permitted to buyback under the terms of those notes.
Following the successful consent solicitation our board of directors has authorized a new $300 million share repurchase program.
Which is the largest in our history and equates to approximately 20% of our outstanding shares at current prices.
Overall, we believe these actions will help us on a path to close the disconnect between our business fundamentals and our current valuation.
Looking ahead, we remain committed to repurchasing shares and bonds, but also continue to explore additional options to further unlock shareholder value.
In sum our flexible online only business model nimble machine learning powered credit risk management capabilities diversified product offerings and solid balance sheet.
And as well to continue to drive profitable profitable growth.
Effectively manage risk and further unlock shareholder value.
With that I would like to turn the call over to Steve will discuss our financial results and outlook in more detail and following steves remarks, we'd be happy to answer any questions you may have.
Thank you David and good afternoon, everyone. We delivered another solid quarter of financial results driven by record levels of quarterly originations and revenue.
Our diversified product offerings.
<unk> learning risk management algorithms and our strong balance sheet continue to allow us to nimbly lean into market opportunities.
Drive growth with strong unit economics, while maintaining solid profit margins.
Turning to our third quarter results total company revenue increased 21% in the third quarter of 2022.
To a record $551 million.
Year over year increase in revenue was driven by the growth of total company combined loan and finance receivables balances.
Which on an amortized basis increased 15% from the end of the third quarter of 2000 $22 billion to $3.1 billion in September 30th.
Company originations this quarter rose to a record $1 3 billion.
Small business revenue increased 13% from the third quarter of 2000 $22 million to $195 million.
Mall business receivables on an amortized basis ended the quarter at $1 $9 billion.
Were 17% higher than the end of the third quarter of last year, a small business originations totaled $783 million.
Revenue from our consumer businesses increased 26% in the third quarter of 2000 $22 million to $348 million consumer receivables on an amortized basis.
Ended the third quarter at $1 2 billion or 14% higher than the end of the third quarter of 2022.
As David mentioned last quarter with the consumer demand in credit performance were seeing especially in our line of credit products. We continue to be moderately more aggressive with consumer originations this quarter, which grew 19% sequentially and 21% from the third quarter of 2000 $22 million to $479 million.
It's Super line of credit products comprised 74% total quarter consumer originations.
And grew 21% sequentially and 82% from the third quarter of 2022.
Looking ahead to the fourth quarter, we expect total company revenue to grow between five and 7% sequentially, resulting in revenue growth for the full year of 2023 compared to 22 in excess of 20%.
This expectation will depend upon the level timing and mix of originations growth during the quarter.
Now turning to credit, which is the most significant driver of net revenue and portfolio fair value.
Credit remains solid in the quarter, resulting in a consolidated net revenue margin of 58% from the third quarter.
It was generally in line with our expectations of around 60%.
In addition expectations for lifetime credit losses, which will be reflected by changes in fair value premiums for our portfolios.
Stable for the consumer portfolio and improved slightly for the small business portfolio, resulting in a two percentage point increase in our consolidated company share value ratio.
114%.
As we've discussed in previous quarters quarter to quarter net charge off rate delinquency rates and net revenue margins for our portfolio are heavily influenced by the seasoning of origination vintages, along their expected loss curves.
As a result, these metrics may temporarily fall above or below typical ranges as we've seen from both our consumer and small business portfolios over the past year.
It will be influenced by sequential changes in the growth and mix of originations arising from our typical origination seasonality.
As well as our balanced approach to growth in this macro environment.
Total company ratio of net charge offs as a percentage of average combined loan and finance receivables for the third quarter was nine 4%.
Compared to seven 6% last quarter and eight 4% in the third quarter of 2022.
The net charge off ratio for the consumer portfolio increased sequentially settling at more typical levels from the low in unsustainable levels last quarter.
It was below the rates of the third quarter of 2022.
Sequential and year over year changes in the net charge off ratio for the small business portfolio.
Driven by the continued seasoning of that portfolio over the past year as David discussed in his remarks.
Importantly, the consolidated portfolio delinquency rate at September 30 was relatively stable, reflecting a continued solid outlook for the future credit performance.
The percentage of total portfolio receivables past due 30 days or more.
Seven 9% at September 30, compared to seven 7% at June 30.
Driven by an increase in consumer delinquencies to more typical levels offset by a decline in small business delinquency.
Looking ahead as recent vintages season, the longer expected loss curves and small business net charge offs moved lower.
We expect the total company net revenue margin for the fourth quarter of 2023 to be between 55 and 58%.
Future net revenue margin expectation will depend upon our portfolio of payment performance and the level timing and mix of originations growth.
Now turning to expenses third quarter operating costs were driven by efficient marketing activity supporting our strong sequential growth.
The continued leverage inherent in our online only model.
<unk> expense management.
Total operating expenses for the third quarter, including marketing for $206 million or 37% of revenue.
Compared to $184 million or 40% of revenue in the third quarter of 2022.
As David noted third quarter marketing spend remain decision is at the higher end of our expected range and drove an acceleration in originations, especially later in the quarter.
Marketing costs increased to $117 million or 21% of revenue compared to $101 million or 22% of revenue in the third quarter 2022.
We expect marketing expenses as a percentage of revenue to range in the low 20 percents for the fourth quarter.
It will depend upon the growth and mix of originations.
Operations and technology expenses for the third quarter increased to $52 million or 9% of revenue compared to $46 million or 10% of revenue in the third quarter of 2022.
Operator: Ladies and gentlemen, thank you for standing by. The Enova call will begin momentarily. Please stay on the line.
By growth in receivables in originations over the past year.
Given the significant variable component of this expense category sequential increases in knowing P costs should be expected in an environment, where originations and receivables are growing.
Should be around 9% of total revenue.
Our fixed costs continue to reflect our focus on operating efficiency and thoughtful expense management.
General and administrative expenses for the third quarter increased only slightly to $38 million or 7% of revenue.
$37 million or 8% of revenue in the third quarter of 2022.
Well they may there may be slight variations from quarter to quarter we.
We expect G&A expenses as a percentage of revenue of around 7% for the fourth quarter.
Our solid balance sheet and ample liquidity gives us the financial flexibility to successfully navigate a range of operating environments.
It has allowed us to deliver on our commitment to driving long term shareholder value.
Continued investments in our business.
Share repurchases in open market purchases and retirement of our senior notes.
We ended the third quarter, just under $1 billion of liquidity, including $204 million of cash and marketable securities.
$748 million of available capacity on the facility.
Stable credit performance of our portfolio continues to allow us to attract new cost effective funding.
Last week, we increased the capacity of our secured corporate revolver by $75 million $515 million with no change in terms.
During the third quarter, we acquired 693000 shares at a cost of approximately $36 million.
The recent bondholder approval of our request for additional share repurchase capacity under our 2025 senior note indenture.
And our confidence in the continued strength of our business relative to our current valuation.
Our board authorized a new $300 million share repurchase program that will expire at the end of 2024.
The new authorization replaces our existing authorization and following following the retirement of our 2024 senior notes.
It will allow us to create even more meaningful opportunity to drive value for our shareholders.
During the quarter. We also opportunistically purchased an additional $10 million of our 'twenty 'twenty four senior unsecured notes in the open market.
We had $170 million remaining of the 'twenty 'twenty four senior notes at September 30.
Well likely retire all remaining 2024 senior notes by early 2024.
Lindsay Savarese: Hello and welcome to the Enova third quarter 2023 conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.
Our cost of funds for the third quarter was stable sequentially at eight 3% or approximately 180 basis points higher than the third quarter of 2022.
Primarily due to increases in silver over the same time period.
Operator: After today's presentation, there will be an opportunity to ask questions to ask a question. You may press star then one on your telephone keypad to a draw from the question to you. Please press star then two. Coordid.
We expect our cost of funds to remain at a similar level in the near term, but will depend primarily on changes in social.
And finally, we continued to deliver solid profitability this quarter with an adjusted EBITDA margin of 22%.
Lindsay Savarese: I would now like to turn the conference over to Lindsay Savarese, Investor Relations for Enova. Please go ahead. Thank you operator and good afternoon everyone. Enova released results for the third quarter 2023 and it's September 30th 2023 this afternoon after market closed.
Adjusted earnings a non-GAAP measure was $48 million or $1.50 per diluted share compared to $57 million or $1.74 per diluted share in the third quarter of last year.
As David mentioned earlier, our adjusted EPS was lower than expected for the quarter.
Lindsay Savarese: If you did not receive a copy of our earnings press release you may 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 four looking statements and as such is subject to risk and uncertainties.
Largely due to our decision to lean into solid demand and good credit metrics with increased marketing during the quarter.
The continued credit normalization and our small business portfolio.
To wrap up let me summarize our fourth quarter expectations.
We expect revenue to grow between five and 7%.
As we continue to focus on an origination strategy that balances growth and risk against the current macro environment.
Lindsay Savarese: 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 10K. Quarterly reports on forms 10Q and current reports on forms 8K. Please note that any four are 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.
This should lead to continued stable credit, resulting in a total company net revenue margin between 55 and 68%.
In addition, we expect marketing expenses as a percentage of revenue to be in the low 20%.
Oh and T cost of around 9% of revenue and G&A costs of around 7% of revenue.
These expectations should lead to sequential adjusted EPS growth of 10% to 20% from the fourth quarter.
Our fourth quarter expectations are it will depend upon customer payment rates and the level timing and mix of originations growth.
Lindsay Savarese: In addition to US gap reporting and over reports certain financial measures that do not conform to generally accept your accounting principles. We believe these non-gap measures enhance the understanding of our performance. Reconciliation between these gap and non-gap measures are included in the tables found in today's press release.
Our third quarter results continued to demonstrate the ability of our team to deliver record levels of growth in revenue, while maintaining solid credit profit margins, our strong financial position diverse product offerings.
<unk> balance sheet competitive position and new opportunity to return meaningful capital to our shareholders as it is well positioned to deliver on our commitment to driving long term shareholder value.
David Fisher: As noted in our earnings release we have posted supplemental financial information on the IRR portion of our website and with that I'd like to turn the call over to David. Thanks and good afternoon everyone. I appreciate you joining our call today.
With that we'd be happy to take your questions operator.
David Fisher: I'll begin with an overview of our third quarter result and then I'll discuss our strategy going forward.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad. If you are using a speakerphone. Please pick up your handset before pressing the keys to.
David Fisher: After that I'll turn the call over to Steve Cunningham, our CEO who will discuss our financial results and outlook in more detail. We are pleased to produce another strong quarter with record originations and revenue driven by solid demand and stable credit. The scuffle execution of our team combined with our world class machine learning analytics and technology has allowed us to continue to do well in the current macroeconomic environment. While there's a lot of uncertainty in the economy today both internal and external data lead us to believe that both our consumer and small business customers are navigating it well.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Today's first question comes from David Scharf with JMP Securities. Please go ahead.
Hi, good afternoon, thanks for taking my questions.
A couple of things I wanted to.
Let's drill down and you know first.
David Fisher: Inflation continues to moderate while the labor market and wage growth continue to be very strong and while prime and super prime borrowers are facing higher interest expense due to the increase in the Fed fund rate we have not raised our pricing. As a result we generated more than $1 billion in originations for the eight straight quarter driven by growth and both our consumer and small business products even as we balanced growth and credit during this uncertain economic environment.
Not sure if I've ever asked this before but.
Credit trends in the small business.
Asset class ever.
Historically served as sort of a leading indicator for consumer I'm just thinking about.
You know if it's the local dry cleaning chain is running into problems that they have to lay off people six or 12 months later or is there any correlation between the two segments in that regard.
David Fisher: Originations grew 13% sequentially to over $1.2 billion as we were moderately more aggressive with the originations during the third quarter especially in our consumer businesses where Q3 consumer originations were 19% sequentially. We also generated strong revenue growth with revenue of $551 million, equating to 21% year-over-year and 10% sequential growth. Adjustment EBITDA increased 5% year-over-year, but was down 5% sequentially, and adjusted EPS was down 14% year-over-year and 13% sequentially, lagging our expectations for the quarter.
Right.
I mean, it's not as correlated it's not super correlated but to the extent there is correlation its the other way around.
So if the consumer falls on their face small businesses are in big trouble.
Okay, because when we saw that and we saw that we saw that during COVID-19, but if the consumer is still spending and doing well, there's small businesses tend to be a big beneficiary of that incremental spend you talked about this before the.
Consumer has like somewhat fixed spending a half a day that I got to pay their mortgage or rent they got to pay for their car they got to pay for their their.
Their phone and their electricity either their power to gas like those all go to big companies.
David Fisher: There were two primary drivers underlying the lower than expected EPS and Q3. First, as I mentioned, we continued to lean into the solid demand and good credit metrics with increased marketing spend. And our marketing activities continued to be efficient with marketing at 21% of revenue compared to 22% of revenue and Q3 of last year. While marketing is a percentage of revenue declined year-over-year, it was slightly elevated compared to our expectation. Given the stronger than anticipated consumer demand, we were staying during Q3.
But big businesses the incremental spend.
Do I take the Dol to get you know, there's nails clipped her to get grown do I go out to dinner one extra time those tend to be more small businesses. So yeah like I said if anything it's the.
It's the other way around if you see consumer really really starting to struggle small businesses are likely to come next.
Okay got it got it and then just drilling down a little bit.
And to the Guy the.
And I recognize it's there, but a lot of variables. It's it's it's it's hard to nail it perfectly.
David Fisher: We made the decision to increase our marketing spend to capture this demand at attractive unit economics. Marketing spend is one of the levers we use in the quarter, and we do so on a daily and weekly basis. As is evident from the strong origination growth we generated in the quarter, this was largely successful. However, much of the origination growth came late in the quarter, resulting as incurring the additional marketing expense, but not generating much incremental revenue in the period to offset.
The net revenue outlook, it seems to be trending a little more towards kind of the lower end.
Of that 55 to 65, you know normalized.
Kind of range, it's obviously.
Below 60 for fourth quarter.
David Fisher: However, these additional loans to drive additional revenue and income over the next few quarters.
Given that it it sounded like some of your expected losses and SMB, we're actually more front end loaded in the third quarter.
Is this just a reflection of a bigger mix of new borrowers.
Can you just.
Give me give a little help on kind of what's behind maybe which seems like a little bit of a reduction in the fourth quarter.
David Fisher: The second driver of the lower than expected profitability in Q3 was continued credit normalization in our SMB portfolio. Let me be clear, credit performance in that portfolio as a whole remains good. However, as I mentioned in each of the last two quarters, we did see slightly higher than expected defaults and advantages from the second half of 2022. As you would expect, our underwriting models adjusted based on this data, and vinegar since January this year are back in line with our expectations.
Yeah, I mean, it's a good cause.
A good question.
I talked a little bit about it just to set up in the commentary we're.
In our portfolios and at the consolidated level as we are navigating the seasonality that we have in some of our portfolios or just some of the balance that we've been talking about.
Which can exacerbate some of that seasonality from period to period.
Can see us move around in the range that doesn't mean that credit quality is worsening.
David Fisher: But since there is a 9-12-month emergency period for chargeoffs in our small business products, chargeoffs from those second half 2022 Vineages were at their peak in Q3 of this year. We expected this and included in our forecast, but we're just off a bit in the timing as we thought a bit more would come in early Q4 and not late Q3. The upside of this is that we now expect lower SMB chargeoffs in Q4, particularly given that early stage delinquencies and fitages in this portfolio this year, from well below those we saw in the late 2022 Vineages. I also think that it's important to point out that while chargeoffs from those 2022 SMB Vineages were higher than our expectations, those Vineages still generated solid RLEs above our cost of capital.
And so I'll just tell you like we can land in our typical.
Ranges for consumer and for small business.
So small business, we talked about should improve quarter over quarter I would expect it to be in our our typical sort of more normal 4% to 5% range.
And with consumer relatively stable.
The seasonality that we've seen over the past couple of quarters and that we expect going into Q4 is going to be the difference. So.
If you take a look at our the fair value of the portfolio, that's a little bit better indicator of what.
What we're seeing in terms of the lifetime expectations. After you consider the charge offs in the remaining delinquency stocks.
And what we think the overall.
So the portfolio will be as it's tracking along it.
Its expected loss curve.
David Fisher: So to be clear, ANOVA overall is in great shape, and we're feeling good about Q4 and next year. Our strong growth and solid credit metrics position us well for future success. We just miss forecasted these two items this quarter.
Got it.
Hey.
Question, I guess its bigger picture.
In terms of.
Obviously the.
Elevated demand kind of leaning in to meet more of that with with marketing.
David Fisher: We've been very consistent with our forecasting, guidance and results over the last several years, and we believe this quarter will prove to be an aberration. In addition, we continue to demonstrate the importance of having a diversified portfolio. As we've discussed in the past, this diversification enables us to lean into products with the strongest unit economics. That's further resiliency toward balanced approach to growth. In the third quarter, our small business products represented 61% of our total portfolio, and consumer was 39%, roughly in line with Q3 of last year.
How do you how do you think about.
In this environment just given.
Some of the uncertainties and to the extent that.
At least for a lot of your consumers you know unemployment can't get any better.
You know.
Do you get as you know.
Or are you worried that.
There's market share that you're going to lose if you don't have to leave that it's you know once you lose that borrower you don't get a second crack at them.
Just trying to get a sense of the broader kind of macro thought process because you know what.
David Fisher: Outside of our core products, we're now producing very strong growth in Brazil after a few years of adapting to changes in the banking regulations there. In Q3, we generated record originations, which were almost 300% higher than Q3 of last year. While still a small business for us, we are excited about the potential for this business going forward.
But is does stand out among a lot of the companies we follow with just in terms of the.
[noise] positivity towards customer acquisition, whereas a lot are stepping back.
Yeah.
Look I mean, it's it's a balance where we wanted to get every customer we can but we don't want to be too aggressive in either spend too much to acquire those customers or build a portfolio of bad loans and so that's the balance that we've managed super well and over the last 10 years.
David Fisher: Before I wrap up, I'd like to spend a few moments talking about our progress and unlocking shareholder value. We've been very thoughtful about building a strong balance sheet and ended the quarter with nearly $1 billion in excess liquidity, which we believe gives us a significant flexibility to accomplish this. As I mentioned on our earnings call last quarter, while we were looking at a number of possible alternatives given the current economic environment and high interest rates, our near-term focus is to return capital to our shareholders through opportunistic stock buybacks.
10 years or so.
We are comfortable pulling back when we need to because the flip side is way worse. It's.
It's better to lose some customers then to.
You can find yourself with a portfolio that's not not looking so good.
And given that the relatively short nature of especially.
Even small business loans, both of them, the relatively short nature, and especially on the consumer side, where people don't.
David Fisher: As people discuss more detail, we're pleased to successfully complete the consent solicitation on our 2025 senior notes, which increase the amount of stock we were permitted to buy back under the terms of those notes. Following the successful consent solicitation, our Board of Directors has authorized a new $300 million share repurchase program, which is the largest in our history and equates approximately 20% of our outstanding shares at current prices. Overall, we believe these actions will help us on our path to close the disconnect between our business fundamentals and our current valuation. Looking ahead, we remain committed to repurchasing shares and bonds, but also continue to explore additional options to further unlock shareholder value.
They're not always borrowing they're coming in and out of the market based on credit needs. One time expenses dislocations between their income.
And expenses that we have the opportunity to get those customers back.
And over time, if we miss them. The first time. So you know it's something we've got very good at over time, and you know I have learned that it's better to be a little bit more conservative than more aggressive than in most market environments.
Got it.
Thanks, so much guys.
Yeah. Thanks, David.
Thank you. The next question comes from John Hecht with Jefferies. Please go ahead.
Afternoon, Thanks, guys.
I, just I guess sticking a little bit with the credit team maybe can you talk about.
Payment rates and payment behaviors and even borrowing behaviors.
David Fisher: In sum, our flexible online only business model, nimble machine learning powered credit risk management capabilities, diversified product offerings, and solid balance sheet, position as well to continue to drive profitable growth effectively manage risk and further unlock shareholder value.
And then beyond that kind of what it is.
Is there something like in terms of mix within the SMB category that.
<unk> may have influenced the kind of temporary pick up in losses in your comfort and a decline into the fourth quarter.
Yeah, Yeah, Let me, let me talk at a high level the civil probably jump in with a couple of numbers, but let me be very clear I tried to be in my script I'll do it again.
David Fisher: With that, I would like to turn the call over to Steve. We'll discuss our financial results and not look in more detail, and following Steve's remarks will be happy to answer any questions you may have.
We look at payment rates every single day every week every month and these loans is that true.
Steven Cunningham: Steve? Thank you, David.
Charge off at a higher rate than we've seen over the last few years are all from the back half of 2022 like almost all of them and we can see payment rates by vintage for all of the loans. Since then so all this year and if you look at those payment curves every vintage. This year is below every vintage of last year I mean, it's the curve looks like a J.
Steven Cunningham: Good afternoon, everyone. We delivered another solid quarter of financial results driven by record levels of quarterly origination and revenue. Our diverse side product offerings, machine learning risk management algorithms, and our strong balance sheet continue to allow us to mentally lean into market opportunities to drive growth with strong unit economics while maintaining solid profit margins. Turning to our third quarter results, total company revenue increased 21% in the third quarter of 2022 to a record $500,000,000.
It's spread out plan, which is what you when you're trying to improve is exactly what you'd want to see basically each month. This year is better than the month before when youre looking at on.
Vintage curves.
So it was a mix.
It wasn't a change in product wasn't a change in competition, just forgotten a little bit too aggressive with our originations in the back half you know really three or four months of 2022.
Steven Cunningham: The year-over-year increase in revenue is driven by the growth of total company combined loan and finance receivable balances, which on an advertised basis increased 15% from the end of the third quarter of 2022 to $3.1 billion in September 30th. Total company origination this quarter rose to a record $1.3 billion. Small business revenue increased 13% from the third quarter of 2022 to $195 million, as small business receivables on an advertised basis into the quarter at $1.9 billion, were 17% hired in the end of the third quarter of last year as small business originations totaled $783 million.
I'll kind of late late Q3 into Q4.
And the loss emergence period and the small on the small business products as kind of nine ish, you know nine ish months and we knew that and we tried to forecast it and again, we were just off a little bit in terms of the timing kind of thought the hit we took in Q3 it would be more spread between two three in Q4 kind of September to October.
We weren't a public company it wasn't calendar.
Calendar quarter wouldn't think twice about it that they came like a couple of weeks earlier versus a couple of weeks a couple of weeks later they'd come in Q3, instead of Q4, and you know and that's and that's you know that's where we ended up but when we look at the credit performance of the loans that we've originated over the last nine months.
Steven Cunningham: Revenue from our consumer businesses increased 26% in the third quarter of 2022 to $348 million consumer receivables on an advertised basis ended the third quarter at $1.2 billion or 14% higher than the end of the third quarter of 2022. As David mentioned last quarter, with the consumer demand and credit performance were seen, especially in our line of credit products, we continue to be moderately more aggressive with consumer originations this quarter, which for 19% sequentially and 21% from the third quarter of 2022 to $479 million.
Very very good and that makes us confident about Q4 and going forward and the only other thing I'll add that I did say in my script also even though the loans that you.
<unk> had higher charge off rates than we forecast at the time, when we originated them still positive or at least I mean, we still made money on these loans just not as much as we would've thought we would've we would've made but given the loss given the default and no loans. We've originated since so this year right back.
Steven Cunningham: Consumer line of credit products comprise 74% of total quarter consumer originations, and grew 21% sequentially and 82% from the third quarter of 2022. Looking ahead to the fourth quarter, we expect total company revenue to grow between 5% and 7% sequentially, resulting in revenue growth for the full year of 2023 compared to 2022 in excess of 20%. This expectation will depend upon the level of timing and mix of originations growth during the quarter.
We expect to be right back at our target target earnings.
Yes, John let me add a couple of things to think about as well I mean, if you look at really metrics that I've talked about this before you kind of have to look at those in combination with.
Our fair values, which give a better view of the overall expectation of how we expect the portfolio to perform.
So there can be some variability quarter to quarter, you can see our our loss rate ticked up a touch above the 5% for the quarter.
The reasons, we talked about delinquencies came down.
Steven Cunningham: That's her name to credit, which is the most significant driver of net revenue and portfolio for your value. Credit remains solid in the quarter, resulting in a consolidated net revenue margin of 58% to the third quarter, which was generally in line with our expectations of around 60%. In addition, expectations for lifetime credit losses, which are reflected by changes in their value premiums for our portfolios, remains stable for the consumer portfolio and improves slightly for the small business portfolio, resulting in a two percentage point increase in our consolidated company's fair value ratio to 114%.
And as we look out.
The fair values of the portfolio actually ticked up a bit which is reflecting the fact that a very large amount of the portfolio now.
Consists of those vintages that David mentioned that are from early this year onward, So we expect that.
That we're going to settle in at a more typical range from here as we've been adjusting and obviously, we will continue to adjust where we see uncertainty, but I think that's how you should think about from here.
How the credit quality should play out for the F&B book.
Okay.
That's that's very helpful. I appreciate that and then maybe talk about kind of your you eat a.
Steven Cunningham: As we've discussed in previous quarters, quarter to quarter net charge operates, delinquency rates, and net revenue margins for our portfolios are heavily influenced by this easing of origination benefits, as a result, these metrics may temporarily fall above or below typical ranges, as we've seen for both our consumer and small business portfolios over the past year. It will be influenced by sequential changes in the growth and mixes of originations arising from our typical originations seasonality, as well as our balanced approach to growth in this macro environment.
Big buyback I think that you know obviously that'd be appreciated by the shareholders. Maybe do you have some sort of is this going to be opportunistic as it is going to be do you have any kind of cadence you're thinking about or some combination thereof.
Yeah.
So I think you know our board authorized the program to run through the end of next year.
And I think we'll be looking very seriously at how we have typically done in the past of using that authorization to opportunistically.
Shares out of the market.
As you know John Theres, a number of different ways you can go about doing that.
Steven Cunningham: Total company ratio of net charge-offs is a percentage of average combined loan and financial receivables for the third quarter with 9.4 percent, compared to 7.6 percent last quarter and 8.4 percent, the third quarter is 2022. The net charge-off ratio for the consumer portfolio increased sequentially, settling at more typical levels from the low and unsustainable levels last quarter and was below the rate for the third quarter of 2022. The sequential and year-over-year changes in the net charge-off ratio for the small business portfolio were driven by the continued seasoning of that portfolio over the past year, as David discussed in his remarks.
But I think overall our plan is once we have the 'twenty 'twenty four senior notes.
Tired are will be very active in terms of trying to to repurchase more actively than we have historically in the market.
Yep.
Okay and then.
So obviously, you're leading into marketing.
Leading into growth, particularly in its consumer it seems like at this point is is.
Just sort of to two basic questions on that number. One is is part of that because you see more opportunity because others in the sector. In the segment are pulling back and then the second is <unk>.
Just I'm always curious is are using pretty much the same channels of marketing or is there any any changes to how you're deploying marketing spend.
Steven Cunningham: Importantly, the consolidated portfolio delinquency rate at September 30 was relatively stable, reflecting a continued solid outlook of future credit performance. The percentage of total portfolio receivables past through 30 days or more of 7.9 percent of September 30 compared to 7.7 percent in June 30. Driven by an increase in consumer delinquencies to more typical levels, offset by a decline in small business delinquencies. Looking ahead, as recent veneges season along their expected loss curves and small business net charge-offs move lower, we expect the total company net revenue margins for the fourth quarter of 2023 to be between 55 and 58 percent. The future net revenue margin expectation will depend upon portfolio payment performance and the level timing and next of origination growth.
No no nothing nothing meaningful.
Yeah.
And then what about the competitive environment is that a is that enabling this this more.
I think I got it.
Yeah.
Yeah, sorry, forgot about that first of all I think the competitive environment is still pretty benign like we've been talking about talking about for for a while.
Nothing new on the on the small business side, you know I think we've seen as we've talked about competitors struggle with liquidity also a couple move more towards the prime space in SMB and then and.
Tumor again, no no new entrants.
Lots of pulling back a lots of refocusing, so I would say pretty benign competitive environment on both sides.
Alright, thanks, very much guys.
Steven Cunningham: Now, it's turning to expenses. Third quarter operating costs were driven by assistant marketing activity, supporting our strong sequential growth. The continued leverage inherent in our online only model and thoughtful expense management. Total operating expenses for the third quarter, including marketing, were $206 million with 37 percent of revenue compared to $184 million or 40 percent of revenue in the third quarter of 2022. As David noted, third quarter marketing spend remain decision is in the higher end of our expected range and drove an acceleration in originations especially later in the quarter.
Yep.
Thank you as a reminder to ask a question you May Press Star then one.
The next question comes from Vincent can take with Jeff I'm, sorry with Stephens. Please go ahead.
Hey, good afternoon. Thanks for taking my questions first one on the marketing spend this quarter.
First just wondering in terms of the opportunities Youre seeing is it sort of.
More on the consumer side more to S&P are fairly equal like what opportunities are you seeing for marketing spend and then.
The the direction of that marketing spend is it sort of like direct mail or lead generation already anything specific there. Thank you.
Steven Cunningham: Marketing costs increased to $170 million or 21 percent of revenue compared to $101 million or 22 percent of revenue in the third quarter of 2022. We expect marketing expenses as a percentage of revenue to range in the low 20 percent for the fourth quarter but will depend upon the growth and miss of originations. Operations and technology expenses for the third quarter increased to $52 million or 9 percent of revenue compared to $46 million or 10 percent of revenue in the third quarter of 2022.
Yeah, I mean, I think we saw opportunities and and both and small business were a little bit more conservative.
And you know kind of our AR and our originations during the first half of the year. So.
Probably.
Resulted in seeing that more opportunity as we went into Q3.
And on the consumer side, we've been getting more aggressive all year.
In the face of good demand and very very stable credit and I think.
In Q3, we just saw strong again, a strong consumer with.
Steven Cunningham: 2002, driven by growth in receivables and originations over the past year. Given the significant variable component of this expense category, sequential increases in OIT costs should be expected in an environment where originations and receivables are growing. It should be around 9% of total revenue. Our fixed costs continue to reflect our focus on operating efficiency and thoughtful expense management. General and administrative expenses for the third quarter increased only slightly to $38 million or 7% of revenue, and $37 million or 8% of revenue in the third quarter of 2022. While there may be slight variations through quarter to quarter, we expect G&A expenses as a percentage of revenue of around 7% for the fourth quarter.
Super High employment rates rising wages and a typical you know fairly good seasonal periods to kind of hold back in the summer back to school season tends to be good from the from the consumer side. So you put that together I think it was really very much demand driven and on the consumer side.
And then in terms of.
Marketing spend and we've already gotten very very good over the last seven eight years, it's about having a balanced approach to marketing.
In the subprime consumer side lead traditionally providers are a portion of the business, but not a majority like they they were many years ago for us.
And we do a lot of direct mail, we do a lot of T V. Given our scale. We're in one of the only players in the industry is large enough to do TV at scale on the on the consumer side.
Steven Cunningham: Our solid balance sheet and ample liquidity gives us the financial flexibility to successfully navigate a range of operating environments. It has allowed us to deliver on our commitment to driving long-term shareholder value to continued investments in our business, as well as share purchases and open market purchases and retirement of our senior notes. We ended the third quarter with just under $1 billion of liquidity, including $204 million of cash and marketable securities, and $748 million of available capacity on facilities.
And so really kind of all channels.
On the small business side still a lot coming through the wholesale channel through I suppose, but we continue to grow our direct channel, it's a very fast growing channel for us.
Correct as the same stuff as you as we do on the consumer side. So it's all stuff, we know how to do with T V.
T V. Some direct mail.
Plenty of digital and clearly definitely our experience on the consumer side has helped us grow that direct channel very quickly on the small business side.
Steven Cunningham: The stable credit performance of our portfolio continues to allow us to attract new cost-effective funding. Last week, we increased the capacity of our secured corporate revolver by $75 million, $515 million, with no change in terms. During the third quarter, we acquired 693,000 shares at a cost of approximately $36 million. The recent bondholder approval of our request for additional share repurchase capacity under our 2025 senior note indenture and our confidence in the continued strength of our business relative to our current valuation, our board authorized the new $300 million share repurchase program that will expire at the end of 2024.
Okay, great Yeah, it's certainly been see more advertisements on CNBC lately.
Good that's great that's great if it's effective.
In terms of so so leaning into marketing a lot of opportunities. There you also have that big share repurchase authorization if you could.
Remind us in terms of the opportunity set and how you decide between putting more capital towards loan.
Loan growth opportunities versus.
Your cheap stock.
Yes.
Yeah sure. So first of all we're not capital constrained. So we can do do it all and you know when you think about when we become in different based on what we think the value of our firm should be given our performance and our outlook versus making another loan.
Steven Cunningham: The new authorization replaces our existing authorization and following the retirement of our 2024 senior notes will allow us to create even more meaningful opportunities to drive value for our shareholders. During the quarter, we also opportunistically purchased an additional $10 million of our 2024 senior and secured notes in the open market. We had $170 million remaining of the 2024 senior notes, it's September 30. We'll likely retire all remaining 2020 floor senior notes by early 2024.
And then you move from there we can become as aggressively as you can be legally every day. So we do have a.
A method that we followed for many years I would expect that we'll continue to.
At a minimum continue to follow that with a larger repurchase program and theres. Other there could be other opportunities as well to tackle a larger buyback program, but I think the key thing is we can continue to grow our business with meaningful rates and return capital to shareholders.
Steven Cunningham: Our cost of funds for the third quarter was stable sequentially at 8.3%, or approximately 180 basis points higher than the third quarter of 2022. Primarily due to increases in sulfur over the same time period. We expect our cost of funds to remain at a similar level in the near term, but will depend primarily upon changes in sulfur. And finally, we continue to deliver solid profitability this quarter within adjusted EBIT margin of 22%.
While generating good irr's aren't all of it.
Okay great.
Last one from me Steve on the fair values continue to increase which I presume that means that the risk adjusted margins on the loans, you're putting in to continue to improve and just wondering if you can say I guess the investor questions just what's built into that.
The level of conservatism.
The opportunities in terms of the Rfps that you're now able to generate energy originations.
Steven Cunningham: Adjusted earnings and non-GAT measure was $48 million or $1.50 per diluted share compared to $57 million or $1.74 per diluted share in the third quarter of life, last year. As David mentioned earlier, our adjusted EPS was lower than expected for the quarter, largely due to our decision to lean into solid demand and good credit metrics with increased marketing during the quarter and the continued credit normalization in our small business portfolio.
Yes, so we don't I mean as you can imagine we're not building in levels of conservatism in our fair value marks were trying to give the best view.
The value of the portfolio is based on the credit quality.
And a few other things that matter less and credit quality, but at the end of the day. It's about what we think the lifetime credit performance of those portfolios is going to look like and discounted back.
Steven Cunningham: To wrap up, let me summarize our fourth quarter expectations. We expect revenue to grow between 5 and 7 percent as we continue to focus on an origination strategy that balances growth and risk against the current macro environment. This should lead to continued stable credit, resulting in a total company net revenue margin between 55 and 58 percent. In addition, we expect marketing expenses, its percentage of revenue, to be in the low 20 percent.
Obviously with the short duration discounting doesn't matter as much.
So I think the ROE.
The hurdle rates that we've built in that's kind of where they start to show up a little bit because of the cash flows.
Hum.
The portfolio is either Richard or they become on a net basis, so more cash flow for a given level of loss.
Well, we'll get you a higher fair value all things being equal so.
Again, you can have some variations as I've talked about now for many quarters.
Steven Cunningham: ONT costs of around 9 percent of revenue and GNA costs of around 7 percent of revenue. These expectations should lead to sequential adjusted EPS growth at 10 to 20 percent in the fourth quarter. Our fourth quarter expectations will depend upon customer payment rates and the level timing and mix of origination growth. Our third quarter results continue to demonstrate the ability of our team to deliver record levels of growth and revenue while maintaining solid credit and profit margins. Our strong financial position, diverse product offerings, flexible balance sheet, competitive position, and new opportunity to return meaningful capital to our shareholders as it's well positioned to deliver on our commitment to driving a long-term shareholder value.
In your quarterly metrics from quarter to quarter, but our fair values have been fairly stable to kick ticking up overtime, reflecting that.
There are are we hurdle and the stability in credit that.
We've been pointing to now for for some time.
Okay great.
Great very helpful. Thank you.
Thank you. The next question comes from John Rowan with Janney. Please go ahead.
Good afternoon guys.
Hey, John.
One quick question for me.
You know just thinking around 10000 foot view is this the environment that you know huge look out when you chose to do fair value accounting right. You've got others that are pulling back and yes, you missed earnings because you spent a lot more on marketing, but you didn't get the double whammy of having your bill.
Operator: With that, we'd be happy to take your questions. Operator? Thank you.
As for our <unk>.
Operator: We will now begin the question and answer session. To ask a question, you press star and one on your telephone t-pad. If you are using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star and two.
The metric type growth rate is this kind of where the benefit comes in fair value that you can go after all these incremental customers that are not being you know that are they're not getting offers from other lenders, who maybe pulling back or whatever credit reasons or you know or.
Operator: At this time, we will pause momentarily to assemble our roster.
Because they would have to build allowances I'm, just trying to think through a little bit.
Yeah, Matt I think you've really seen over the last two years as the books built back up following COVID-19 as a business is doing well as we are growing and putting on good loans the financial statement from a quarter because of fair value.
David Fisher: Today's first question comes from David Sharf with JMP securities. Please go ahead. Hi, good afternoon. Thanks for taking my questions. A couple of things I wanted to drill down in. First, I'm not sure if I've ever asked this before, but do credit trends in this small business asset class ever historically serve as sort of a leading indicator for consumer? I'm just thinking about, you know, if a local dry cleaning chain is running into problems, that might mean they have to lay off people six or 12 months later.
And let's say, we had the great recession again in the book was bad the financial statements. It would look bad and that's what we would want everyone to see as opposed to under the old incurred method when the business look crappy and originations were slowing all of a sudden you were making a lot of money by releasing provision, which never made a ton of sense to us. So.
Yeah, we've been happy that we've been able to really accelerate our originations over the last couple of years coming out of Covid and had financed financial statements that reflected the positive trends in the business.
Alright, thank you.
David Fisher: Is there any correlation between the two segments in that regard? I mean, it's not as correlated. It's not super correlated, but to the extent there is correlation, it's the other way around. So if the consumer falls on their face, small businesses are in big trouble. We saw that during COVID, but if the consumer is still spending and doing well, the small businesses tend to be a big beneficiary of that incremental spend.
Yeah, Yeah, it's faster.
Yeah.
Thank you.
A question and answer session I would now like to hand, the call back to David Fisher for closing remarks.
Thanks, everyone for joining our call today, we appreciate that take your take you taking your time and we 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.
David Fisher: We talked about this before. The consumer has like somewhat big spending to have to do. They've got to pay their mortgage or rent. They've got to pay for their car. They've got to pay for their phone, their electricity, their power, their gas. Those all go to big companies. The big businesses, the incremental spend. Do I take the dog to get, you know, this nails clip there to get groomed? Do I go out to dinner one extra time? Those tend to be more small businesses. So, yeah, like I said, if anything, it's the other way around. If you see consumer really, really start to struggle, small businesses are likely to come next.
Okay.
[music].
David Fisher: Okay, got it. And, hey, just drilling down a little bit into the guide. And I recognize there are a lot of variables. It's hard to nail it perfectly. The net revenue outlook, it seems to be trending a little more towards kind of a lower end of that 55 to 65, you know, on the lies kind of range. It's, you know, obviously below 60 for fourth quarter, you know, given that it sounded like some of your expected losses in SMB were actually more front and loaded in the third quarter, is this just a reflection of a bigger mix of new borrowers?
David Fisher: Can you just give a little help on kind of what's behind maybe what seems like a little bit of a reduction in the fourth group? Yeah, I mean, it's a good question. And I talked a little bit about it just to set up in the commentary where in our portfolios and at the consolidated level, as we are navigating the seasonality that we have in some of our portfolios, or just some of the balance that we've been talking about, which can, you know, exacerbate some of that seasonality from period to period.
David Fisher: You can see us move around in the range. That doesn't mean that credit quality is worsening. And so I will just tell you, like we can land in our typical ranges for consumer and for small business, for small business we talked about should improve quarter over quarter. I would expect it to be in our typical sort of more normal four to five percent range and with consumer relatively stable. The seasonality that we've seen over the past couple of quarters and that we expect going into Q4 is going to be the difference.
David Fisher: So if you take a look at the fair value of the portfolio, that's a little bit better indicator of what we're seeing in terms of the lifetime expectations, after you consider the charge-offs and the remaining delinquency stocks, and what we think the overall performance of the portfolio will be as it's tracking along its expected loss curve. Got it. Hey, last question, I guess it's bigger picture, you know, in terms of obviously the elevated demand kind of leaning in to meet more of that with marketing.
David Fisher: How do you think about in this environment just given some of the uncertainties and to the extent that at least for a lot of your consumers, you know, unemployment can't get any better. You know, Do you get us – are you worried that there's market share that you're going to lose if you don't think it is heavily, that once you lose that borrower, you don't get a second crack at them. Just trying to get a sense of the broader kind of macro thought process, because Enova does stand out among a lot of the companies we follow, which is in terms of the positivity towards customer acquisition, whereas a lot are stepping back.
David Fisher: Yeah, look, it's a balance. We want to get every customer we can, but we don't want to be too aggressive and either spend too much to acquire those customers, or build a portfolio of bad loans. That's the balance that we've managed super well over the last 10 years or so. We are comfortable pulling back when we need to because the flip side is way worse. It's better to lose some customers than to find yourself with a portfolio that's not looking so good.
David Fisher: Given that the relatively short nature of especially – well, even small business loans, both of them – the relatively short nature and especially on the consumer side where people don't – they're not always borrowing. They're coming in and out of the market based on credit needs, one-time expenses, dislocations between their income and expenses, that we have the opportunity to get those customers back in overtime if we miss them the first time. It's something we've got very good at over time, and have learned that it's better to be a little bit more conservative than more aggressive and most market environments.
David Fisher: Great. Thanks so much, guys. Yep. Thanks, David. Thank you.
John Hecht: The next question comes from John Hecht with Jeffrey. Please go ahead. Afternoon. Thanks, guys. I mean, I just – I guess stick it a little bit with the credit theme. Maybe can you talk about, you know, like payment rates and payment behaviors and even borrowing behaviors?
David Fisher: And then beyond that kind of what – is there something I can terms of mix within this SMB category that may have influenced the kind of temporary pickup and losses and your comfort that they're going to decline into the fourth quarter? Yeah, let me – let me talk at a high level. I'm going to see if we'll probably jump in with a couple numbers. But let me be very clear. I tried to be in my script.
David Fisher: I'll do it again. We look at payment rates every single day, every week, every month, and these loans that charge off at a higher rate than we've seen over the last few years are all from the back half of 2022, like almost all of them. And we can see payment rates by vintage for all the loans since then, so all this year. And if you look at those payment curves, every vintage this year is below every vintage last year.
David Fisher: I mean, it's – the curve looks like a giant spread out fan, which is what you – when you're trying to improve is exactly what you want to see. Basically, each month this year is better than the month before when you're looking in on – on – on vintage curves. So, it wasn't a mix. It wasn't a change in product. It wasn't a change in competition. Just we got a little bit too aggressive with our originations in the back half, you know, really three or four months of 2022.
David Fisher: I'll kind of late – late 2, 3, and 2, 4. And the loss emergence period in the small – on the small business products is kind of 9-ish – you know, 9-ish months. And we knew that, and we tried to forecast it. And again, we were just off by a little bit in terms of the timing. Kind of thought the hit we took in Q3 would be more spread between Q3 and Q4, kind of September to October.
David Fisher: You know, if we weren't a public company, it wasn't calendar. You know, if it wasn't a calendar quarter, it wouldn't think twice about it. That they came like a couple weeks earlier versus a couple weeks later. But they'd come in Q3 and set a Q4, you know, and that's – you know, that's where we ended up. But when we look at the credit performance of the loans that we've originated over the last nine months, they look very, very good.
David Fisher: And that makes us confident about Q4 and going forward. And the only other thing I'll add that I did say in my script also is, even though loans that had higher charge operates than we would forecast at the time we originated, still positive our elites. I mean, we still made money on these loans, just not as much as we would have thought we would have made. But given the loss – given the defaults and the loans we've originated since, so this year, right back – you know, we expect to be right back at our target – target our own.
Steven Cunningham: John, let me add a couple of things to think about as well. I mean, if you look at the early metrics and I've talked about this before, you can't have to look at those in combination with our fair values, which give a better view of the overall expectation of how we expect the portfolio to perform. So there can be some variability quarter to quarter. You can see our loss rate ticked up, but touch above the 5% for the quarter for the reasons we talked about, the linkancies came down.
Steven Cunningham: And as we look out, the fair values of the portfolio actually ticked up a bit, which is reflecting the fact that a very large amount of the portfolio now consists of those advantages that David mentioned that are from early this year onward. So we expect that we're going to settle on at a more typical range from here as we've been adjusting. And obviously, we'll continue to adjust where we see uncertainty, but I think that's how you should think about from here how the credit quality should play out for the SMB boat.
John Hecht: Okay, that's very helpful. I appreciate that.
David Fisher: And then maybe talk about kind of your big buyback. I think that obviously that'll be appreciated by the shareholders. Maybe you have some sort of, is this going to be opportunistic? Is this going to be kind of cadence you're thinking about or some combination thereof? So I think, you know, our board authorized the program to run through the end of next year. And, you know, I think we'll be looking very seriously at how we have typically done in the past of using that authorization to opportunistically takes shares out of the market.
David Fisher: As you know, John, there's a number of different ways you can go about doing that. But I think overall our plan is once we have the 2024 senior notes retired, we'll be very active in terms of trying to repurchase more actively than we have historically in the market. Yep.
David Fisher: Okay, and then any, obviously, you're leading into marketing, leading into growth, particularly in its consumer, it seems like at this point, is sort of two basic questions on that. Number one is, is part of that because you're seeing more opportunity because others in the segment are pulling back, and then the second is, just as I'm always curious, are you using pretty much the same channels of marketing, or is there any changes to how you're deploying marketing spent?
David Fisher: No, nothing meaningful. And then what about the competitive environment? Is that enabling this more, you know, I think? Yeah, yeah, sorry, I forgot about that. I think the competitive environment is still pretty benign, like we've been talking about, talking about for a while. Nothing new on the on the small business side, you know, I think we've seen, as we talked about, competitor struggles with liquidity, also a couple move more towards the prime space in SMB, and then in consumer again, no new entrance, lots of pulling back, lots of refocusing, so I would say pretty benign competitive environments on both sides. All right, thanks very much, guys. Yep. Thank you.
Operator: As a reminder, to ask a question, you may press star, then one.
Vincent Caintic: The next question comes from Vincent Cantic with Jeff, I'm sorry, with Steven. Please go ahead. Hey, good afternoon. Thanks for taking my questions. First one on the market and spend this quarter. First, just wondering in terms of the opportunities you're seeing, is it sort of more on the consumer side, more to the S&P, or fairly equal, like when opportunities are you seeing for marketing spend, and then the direction of the marketing spend is it sort of like direct mail or lead generation or anything specific there.
Vincent Caintic: Thank you. Yeah, I mean, I think we saw opportunities in both in small business. We're a little bit more conservative in kind of our, in our originations during the first half of the year. So that probably resulted in seeing that more opportunities. We wanted PQ3. And on the consumer side, we've been getting more aggressive all year in the face of good demand and very, very stable credit. And I think in Q3, we just saw a strong, again, a strong consumer with super high employment rates, rising wages, in a typical, you know, really fairly good seasonal period that kind of hold back end of summer, back to school, season tends to be good from the, from the consumer side.
Vincent Caintic: So you put that together. I think it was really very much demand driven on the consumer side. And then in terms of marketing spend, we've gotten very, very good over the last seven, eight years about having a balanced approach to marketing. The subprime consumer side, you know, lead traditionally providers are a portion of the business, but not a majority like they were many years ago for us. We do a lot of direct mail.
Vincent Caintic: We do a lot of TV given our scale. We're one of the only players in the industry who's large enough to do TV at scale on the, on the consumer side. And so really kind of all channels on the small business side, still a lot coming through the wholesale channel through ISOs, but we continue to grow our direct channel to very fast growing channel for us. And direct is the same stuff as you, as we do on the consumer side.
Vincent Caintic: So it's all stuffing how to do TV, TV some direct mail, you know, plenty of digital. And, you know, definitely our experience on the consumer side is help us grow that direct channel very quickly on the small business side. Okay, great. Yeah, it's certainly been seen more advertising on the CNBC lately. Good. That's great. That's great to me. It's effective, you know, very effective. In terms of, so leading into marketing, a lot of opportunities there, you also have that big survey purchase authorization.
Vincent Caintic: If you could, you know, remind us in terms of the opportunities that and how you decide between putting more capital towards longer with opportunities versus your cheap stock. Yes, sure. So first of all, we're not capital constrained so we can do do it all. And, you know, when you think about when we become indifferent based on what we think, the value of our firm should be given our performance and our outlook versus making another loan, you know, and then you move from there, we can become as aggressively as you can be, you know, legally every day.
Vincent Caintic: So we do have a, you know, a method that we've followed for many years. I would expect that we'll continue to, at a minimum, continue to follow that with a larger repurchase program and there's other, there could be other opportunities as well to tackle a larger buyback program. But I think the key thing is we can continue to grow our business with meaningful rates and return capital to shareholders while generating good IRRs on all of it.
Vincent Caintic: Okay, great. And the last one from me, Steve, on the Claire values, so continue to increase which, I presume, means that the risk of just the margins and the loans you're putting in continue to improve. And just wondering something, I get the investor questions, just what's built into that, the level of conservatism and the opportunities in terms of the ROEs that you're not able to generate any new originations? Yeah, so we don't, I mean, as you can imagine, Vincent, we're not building in levels of conservatism in our fair value marks, we're trying to give the best view of the value of the portfolios based on the credit quality and a few other things that matter less than credit quality.
Vincent Caintic: But at the end of the day, it's about what we think the lifetime credit performance of those portfolios is going to look like in discounted back, obviously with the short duration discounting doesn't matter as much. So I think the ROEs hurdle rates that we've built in, that's kind of where they start to show up a little bit because the cash flows of the portfolios, the richer they become on a net basis, so more cash flow for a given level of loss, we'll get you a higher fair value, all things being equal.
Vincent Caintic: So again, you can have some variations, as I've talked about now, for many quarters, in your quarterly metrics from quarter to quarter, but our fair values have been fairly stable to kicking up over time, reflecting that, how are we hurdle in the stability and credit that we've been pointing to now for some time? Great, very helpful. Thank you.
David Fisher: The next question comes from John Rowan with Janie. Please go ahead. Good afternoon, guys.
John Rowan: One quick question for me is, just thinking about 10,000-foot view, is this the environment that you looked at when you chose to do fair value accounting? You've got others that are pulling back, and yes, you missed earnings because you spent a lot more on marketing, but you didn't get the double whammy of having to build allowances for an asymmetric type of growth rate. Is this kind of where the benefit comes in fair value that you can go after all these incremental customers that are not getting offer from other lenders who may be pulling back, or whatever, credit reasons, or because they would have to build allowances?
John Rowan: I'm just trying to think it through a little bit. Yeah, I think you've really seen her over the last two years as the books built back up following COVID, as the business is doing well, as we're growing and putting on good loans, the financial statements look good because of fair value. And I'll say we had the great recession again, and the book was bad, the financial statements would look bad. And that's what we would want everyone to see.
John Rowan: As opposed to under the old incurred method, when the business looked crappy and originations were slowing, all of a sudden you were making a lot of money by releasing provision, which never made a ton of sense to us. So, yeah, we've been happy that we've been able to really accelerate our originations over the last couple of years coming out of COVID and had financial statements that reflected the positive trends in the business.
David Fisher: Thank you.
David Fisher: I would now like to hand the call back to David Fisher for closing remarks. Thanks everyone for joining our call today. We appreciate you taking your time and we look forward to speaking with you again next quarter. Have a good evening. The conference has now concluded.
Operator: Thank you for attending today's presentation.
Operator: You may now disconnect.