Elevate Credit, Inc.
Q1 2022 Earnings Call Transcript

Published: 8 May 2022

[Operator:]

Good afternoon and welcome to Elevate Credit's First Quarter 2022 Earnings Conference Call. . As a reminder, this conference is being recorded. I would now like to turn the conference over to Daniel Rhea, Director of Public Affairs. Please go ahead.

[Daniel Rhea:]

Good afternoon and thanks for joining us on Elevate's First Quarter 2022 Earnings Conference Call. Earlier today, we issued a press release with our first quarter results. A copy of the release is available on our website at investors.elevate.com. Today's call is being webcast and is accompanied by a slide presentation, which is also available on our website. Please refer now to Slide 2 of that presentation. Our remarks and answers will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed or implied by such forward-looking statements. These risks include, among others, matters that we have described in our press release issued today, including impacts related to COVID-19 and our most recent annual report on Form 10-K and other filings we make with the SEC. Please note that all forward-looking statements speak only as of the date of this call, and we disclaim any obligation to update these forward-looking statements. During our call today, we will make reference to non-GAAP financial measures. For a complete reconciliation of historical non-GAAP to GAAP financial measures, please refer to our press release issued today and our slide presentation, both of which have been furnished to the SEC and are available on our website at investors.elevate.com. Joining me on the call today are our President and Chief Executive Officer, Jason Harvison; Interim Chief Financial Officer, Chad Bradford; and Chief Strategy Officer, Chris Lutes. I will now turn the call over to Jason.

[Jason Harvison:]

Thank you, Daniel, and thanks to everyone for joining us today. Elevate delivered strong year-over-year growth among all our products for the quarter. Even though we incurred a net loss, our Q1 2022 results were in line with our expectations and heavily influenced by the loan growth opportunities that we took advantage of in the second half of last year. At a high level, the loan portfolio continues to season due to strong growth in new customers from Q3 of last year. I'll go into this further in a minute, but ultimately, as the mix of new to former customers skewed heavily towards new customers in the second half of last year, we anticipate a stress on credit into the first half of 2022. Traditionally, new versus former customers mix typically hover around 50-50 in any given quarter. In the third quarter of 2021, due to strong new customer loan growth, this jumped to a 70-30 mix. While that percent split has an impact on the consolidated earnings of the company, the unit economics of that vintage met or exceeded our expectations and are comparable to prior vintages with similar new versus former customer mixes. So we remain excited on the growth experienced in 2021. We expect charge-offs to normalize beginning in the second half of this year with adjusted EBITDA margins returning to our long-term target of 20% by the end of this year. This should result in strong free cash flow and earnings per share for the second half of 2022. We continue to enhance underwriting models and real-time decision-making tools that should lead to overall improved unit economics even above the seasoning of the portfolio previously mentioned. To summarize the quarterly results, revenues increased 38% to $124 million from the first quarter of 2021. At quarter end, the loan portfolio totaled $511 million, which is a 45% increase over a year ago and down slightly since year-end due to seasonal tax paydowns. First quarter expectations of normal seasonal paydown patterns came to fruition. The loan portfolio decreased modestly compared to year-end 2021 primarily driven by an early tax refund season and also impacted by a return to a more measured growth philosophy, especially borrowers that are new to Elevate. As you will note in our full year guidance, we anticipate a traditional shaped growth and revenue curve as the year progresses. While loan balances will continue to increase during Q2, revenue will bottom out in Q2 due to the decrease in average loan balances resulting from a decrease in loans during the first quarter of 2022. We expect loan balances to grow between 25% and 31% over the last 3 quarters of this year. Lastly, on profitability, you will begin to note the impacts of our change of fair value accounting. We recognize a 10% book value premium associated with this change. Chad will discuss the change in fair value accounting in detail, but we continue to believe that this change will be a better representation of the economics of our business. Before moving to the next slide, I would like to also highlight and welcome our new CFO, Steve Trussell. Steve joins us from Discover Financial Services and brings a strong depth of experience and new industry perspectives to our finance team. Steve will be particularly focused on capital management and forecasting while also evaluating our existing debt facilities. I would like to thank Chad Bradford for his tenure as interim CFO. Chad will remain as the Chief Accounting Officer and a crucial member of the finance team. Chris Lutes will remain as our Chief Strategy Officer. With that, let's flip to Slide 5 and expand our view on the market backdrop so far in 2022. As we are all aware, 2022 has presented new challenges on many fronts even as the pandemic threat has continued to diminish. First, demand for credit remains broad. In this current environment, we see demand across all product types as healthy through the remainder of the year. Post tax season, we look to see tailwinds across our sector as a whole. On to the far bigger questions, inflation and credit quality. First, with inflation, we noted in bank account data that revenues and expenses have stabilized over the last month after seeing quite a bit of volatility early in the year. Expected strain on family finances began to peak in January and February as we saw grocery and gas prices, in particular, go up. Incomes unfortunately did not rise at similar rates. In fact, we noted a few dips, which could be related to the lack of availability of gig work with surging gas prices. April has brought a return to stability in both expenses and income, but is a situation we're continually monitoring through bank account transaction data and our nonprime customer tracker. And to update on credit, nonprime Americans have a healthy balance sheet despite a strong recovery in consumer spending from the onset of COVID in 2020. At this point, we know this balance sheet may be inflated with the recent tax refund season, but the higher saving rates continue to persist. We note in bank data that checking account balances are above pre-COVID levels. Employment levels for the customer base are materially better than they were even 3 years ago, and wage growth and the fiscal responsibility have broadened the target market more than narrowed it in 2022 so far. We continue to be diligent in credit management, utilizing real-time bank transaction data and monitoring tools. We also have modeling tools and adjustments in place for near immediate changes to underwriting should they be needed. As we have consistently said, the market we serve is vast and the need to chase growth for growth's sake is not a prudent use of our resources. We will be disciplined in our growth and focus on the fundamentals of our business model while delivering on our mission of helping nonprime consumers. Credit will always be the most important determinant of growth, but we believe the current Elevate borrower base remains very attractive from a unit economics perspective. I would also add that we remain in sync with the banks that utilize our platform and align on goals for the remainder of this year. In reviewing the dynamics between the products on Slide 6, I will start with RISE, which accounts for approximately 55% of the total portfolio. With RISE, the loss rates associated with the new customer mix are most pronounced. On this slide, we break out Q3 cumulative loss rates on a 6 months from originations time line for new customers. With this backdrop, Q3 of 2021 is no different from past Q3s with strong growth and in achieving our targeted customer unit economics. To understand the metric, we need to look back and remember how the COVID pandemic impacted decisions about portfolio growth, including the rapid decline in loans receivable in 2020 and a rapid increase in late '21, including a great number of new borrowers to the platform. From a ReFmat standpoint, returning or former customers charge-offs are about half the rate of new customers. So while the unit economics are profitable at the onset for each, you can note the substantial difference in a rapidly growing portfolio with new customers. Credit, when broken down into new versus former buckets for comparison purposes, falls almost exactly in line with our expectations and modeling. All products had stable APRs. And as we mentioned last quarter, we and the bank you support continue to see an opportunity to optimize growth. As you have heard in detail, we are proud of the repeat borrower base. Repeat customers drive better returns because we can serve them with lower marketing costs and exhibit better credit performance, both of which enhance returns. Additionally, the consumers benefit from lower-priced loans. Based on our focus on disciplined growth, we continue to be encouraged that unit economics for all borrowers is well within our band of expectations. To touch on the other 2 products briefly, Elastic demand was slightly weaker than expected in the quarter. You'll see this pronounced in the high seasonal CAC. The use case for Elastic is slightly different than that of RISE, and we note limited multi-draw activity in the quarter due to tax seasonality. On the positive side, losses as a percent of revenue are below our targeted range. On the Today Card, which accounts for about 10% of the portfolio at quarter end, we experienced some test segments that performed outside our expected performance ranges. This has led to higher losses than anticipated and due to the longer time line of credit card products has led to a longer tail on the losses. However, starting in January, vintages are back in line with expectations and we continue to test and look to grow the product. I will conclude by highlighting my enthusiasm for the remainder of the year. We anticipate a return to profitability by end of 2022 along with a return to our stock buyback program. The tailwind of improving credit and a growing portfolio will position us for strong returns into the future. With that, I'll turn the call over to Chad.

[Chad Bradford:]

Thanks, Jason. Good afternoon, everybody. Turning to Slide 7, I'll start by discussing the loan portfolio. Combined loans receivable principal totaled $511 million as of March 31, 2022, up 45% from $353 million a year ago and sequentially down 9% from where we ended 2021. This was in line with our previous outlook for Q1 2022. We expected a decrease in the loan portfolio, which occurred through normal seasonal loan paydowns and reduced demand for new loan originations and multi-draw on the Elastic line of credit product. Despite the overall drop in the loan portfolio, we saw new customer unit growth of approximately 40% and returning customer unit growth of slightly over 20% during the first quarter of '22 as compared to 2021. Staying on this slide. Revenue for Q1 '22 was up 38% from the first quarter a year ago due to an increase in the average outstanding loan balance resulting from growth experienced in 2021 while individual product APRs were relatively consistent between the 2 periods. The overall portfolio APR was down approximately 3 points due to a shift in the mix of the portfolio to the Today Card, which now comprises approximately 10% of the combined loan portfolio as of March 31, 2022. We expect the revenue during the second quarter to be lower than the first quarter due to a lower average loan balance and then increase in the second half of the year as we grow the portfolio. Looking at the bottom of this slide, adjusted EBITDA and adjusted earnings for the first quarter of '22 decreased compared to prior year as Q1 '22 was impacted by increased net charge-offs along with the adoption of fair value loan accounting, both of which I'll discuss further on later slides. Adjusted EBITDA was negative $2 million for the first quarter ended 2022 as compared to $32 million for the first quarter ended 2021. On a pro forma basis, considering the adoption of fair value loan accounting at the beginning of 2021, adjusted EBITDA for the first quarter of 2021 would have been reduced approximately $15 million with pro forma adjusted EBITDA of $17 million. Earnings was a net loss of $14 million for the first quarter of '22 with net income of $13 million reported for the first quarter of '21. On a pro forma basis, considering the adoption of fair value loan accounting at the beginning of '21, net income of approximately $1 million would have been reported, a decrease of approximately $12 million from the reported results. As we discussed during our last earnings call and recent annual report, we elected to adopt fair value accounting for the loan portfolio beginning January 1, 2022, as we early adopted the new life of loan reserve requirements and apply the alternative fair value accounting model provided under these standards. The impact of adoption resulted in a net increase to retain earnings of approximately $98 million, net of tax, which represents the reversal of the previously recognized loan loss provision and the fair value adjustment of the loan portfolio as of January 1. At adoption on January 1, 2022, the fair value premium was approximately 10.2% across the combined loan portfolio. The fair value premium declined 50 bps to 9.7% at the end of Q1 '22 primarily due to a shift in the mix of the portfolio and slight increase in the discount rate for the quarter. On a pro forma basis, the overall premium as of March 31, 2021, was approximately 12.6% as the loan portfolio was comprised of more mature loans and lower new loan originations during the COVID-19 pandemic period in 2020 and the first quarter of 2021. For financial reporting, the most significant change to earnings beginning this quarter is recognizing the change in fair value of the combined loans receivable portfolio rather than a provision for loan losses. The change in fair value will be comprised of gross charge-offs, net of recoveries and valuation impacts associated with changes in both the portfolio and valuation assumptions. In prior years under the previous methodology, our loss provision would decrease due to the release of loan loss reserves as the loan portfolio paid down. Under the new fair value accounting, there is a negative fair value adjustment realized when the loan portfolio decreases. As a result of these differences, we have presented a pro forma analysis of Q1 '21, assuming adoption of fair value accounting in the first quarter of 2021 within our non-GAAP disclosures. On Slide 8, the cumulative loss rate as a percentage of loan originations for the 2020 vintage is the lowest loss rate ever due to the tightening of underwriting, slowdown in new loan originations, increased government stimulus and improved payment flexibility tools. We are pleased to see the 2021 vintage is still performing slightly better than 2018 levels as we stated on our last call. However, the strong growth in the loan portfolio during the second half of 2021 resulted in an increase in net charge-offs during the first quarter of 2022. As Jason just discussed, with the heavier mix of new customer loans during the second half of '21, our net charge-offs as a percent of revenue during the first quarter of '22 were above our long-term target range of 45% to 55% of revenue but were in line with our expectations as we closely monitor the performance of these vintages. We expect this trend will continue for an additional quarter before it drops back down within our target range in the third and fourth quarter of this year as the loan portfolio seasoned. Loan vintages from '21 have performed within our targeted unit economics, and the unit loss rates from new customer loan vintages in '21 are consistent with pre-pandemic vintages. Our quarterly net principal charge-off as a percentage of our average combined loans receivable principal was 11% for the first quarter of '22 and remains within our historical experience in 2018 to 2019. Past due balances totaled 10.6% of the loan portfolio as of March 31, 2022, up slightly from 10.2% as of March 31, 2021, and continue to remain within our historical range for 2018 to 2019 of 9% to 11%. On this slide, we also show the customer acquisition cost. We note that the Q1 '22 CAC is above our target range, which we have historically experienced during the first quarter as demand and response rates are impacted by seasonally low loan demand. We continue to maintain our CAC targets that allow us to achieve our unit economics. These targets are between $250 to $300 for the RISE and Elastic product and sub-$100 for the Today Card. We continue to diversify our marketing mix between direct mail, strategic partner and digital channels. We expect to be within our target range for CAC as the portfolio returns to growth mode for the remainder of the year and on a full year basis. On Slide 9, we disclose our outlook for 2022. As addressed during our prior call, we forecasted continued growth in the loan portfolio with expected end of year combined loans receivable principal of $640 million to $670 million, representing a 15% to 20% annual increase or 25% to 31% from the end of Q1 '22. We would forecast revenue to be $500 million to $525 million, which results in 20% to 25% year-over-year growth. Our adjusted EBITDA will be $70 million to $80 million, and our bottom line net income will be around breakeven for the full year as we return to profitability in the second half of the year. Turning to liquidity and capital on Slide 10. We ended the quarter with a total cash balance of $106 million that includes both corporate cash and cash maintained to support loan growth and the underlying borrowing base for the loan portfolios, which represented approximately $45 million to $50 million of the total cash balance. We'll make payments in the second and third quarters of 2022 totaling $37 million related to the settlement of legacy litigation matters that were disclosed earlier in 2022. To supplement our working capital, we entered into a credit agreement for a $20 million term note, which matures on March 1, 2024. We utilized the revolving feature on the VPC facility to pay down approximately $25 million in debt at the end of 2022 first quarter based on excess cash available from seasonal paydowns in the loan portfolio. The company had minimum borrowings during the first quarter due to the seasonal reduction in loan demand. The company had an overall weighted average cost of funds of 9.03% as of March 31, 2022, down from 9.67% at March 31, 2021. The majority of our debt has a fixed rate until maturity in January 2024. On the VPC facility, new borrowings are priced at 3-month LIBOR, plus 7%, subject to a 1% LIBOR floor. Lastly, during the first quarter of '22, we repurchased approximately $3.3 million or approximately 973,000 common shares under our existing common share repurchase program and in connection with the litigation settlement terms. This represented approximately 3% of our common shares outstanding at the time of purchase. We'll continue to evaluate future purchases under the share repurchase plan in the near term as we continue to review our liquidity position to ensure that we have adequate cash balances to fund the expected loan portfolio growth while maintaining our borrowing base and covenant compliance. Since beginning our share repurchases in August 2019, we have repurchased approximately 35% of all shares that were outstanding and issued or reissued since that point in time. With that, let me turn the call back over to the operator to open it up for Q&A.

[Operator:]

. Our first question comes from the line of Hoang Nguyen with Credit Suisse.

[Hoang Nguyen:]

Good quarter. I mean you guys were in line with what you guys guided last time. But I mean, if you can give more some color, I guess you mentioned that demand is strong across the board. I mean in terms of application volume, I guess, from new and existing customers and approval rate, I mean what are you seeing there? Just some color would be helpful.

[Jason Harvison:]

Yes. Thanks for the question. I think what we're seeing right now -- obviously, we saw the tax season slow down, that's kind of typical in the first quarter of the year. But as we exited the first quarter coming to the first part of the second quarter, I mean we're definitely seeing in the consumers' bank balances -- some of the pressures of inflation with our expenses are definitely picking up, but we also saw some wage growth is there. I think the good news is we're seeing some strong employment out there, so we feel pretty good about the credit quality. But we are seeing consumers kind of revert back to what we saw back in late '19, early '19 where they're back somewhat paycheck to paycheck and when an unexpected expense demand is there. And so we saw demand pick back up at the end of the first quarter going into the second quarter. And given that where we're at with some of the payments we've made here recently, we've been pretty measured on the growth side. And so there was actually more demand out there than we actually captured closing out the quarter and starting this quarter. So we're pretty optimistic about what the demand outlook is for the rest of this year.

[Hoang Nguyen:]

Got you. And then if I can dig into the losses for the first quarter. So it looks like x percentage of revenue for the RISE business, I mean it's -- it looks high compared to historical standards, yet I mean you disclosed in your slide that unit economics while for new customers is actually still a little bit below pre-pandemic. So can you square that for me?

[Chad Bradford:]

Sure. Yes. Hoang, this is Chad. So as we've previously discussed during last quarter, the losses coming through relate to the new customers that originated during the third quarter and were charging off during the first quarter. But on that slide, we're pointing back to what our performance was back in 2018, 2019 for those new customers, and we're still seeing better performance than what we saw during that period. And that can be attributed to the models that we have, the payment flexibility tools and various initiatives that we've had. So we're pleased with that performance, working toward managing the mix of the portfolio to ensure that we're getting a more even mix of new and returning customers in the portfolio going forward.

[Jason Harvison:]

Yes. And kind of leaning just a little bit more what Chad wrapped up with, I mean I think in the prepared remarks, we talked about in RISE particular at the end of last year, we saw that mix kind of skewed about 70-30, which is a little bit higher than what we're typically seeing. But it was a unique opportunity for us to grab some demand and better unit economics. It's the right thing for the organization long term. We're seeing that piece of the portfolio -- of that cohort mature right now. But as we sit here today, we're back to that normalized mix of kind of 50-50, seeing the loss curves on both new and formers sit where we expect them to sit. And that's what gives us the optimism of those losses coming down quarter-over-quarter as we finish out the year.

[Hoang Nguyen:]

Got you. And my last question is on funding costs. So given the rising rate, I mean I think a couple of people in the space have also talked about this. So I mean most of your debt is fixed, 90%. But I mean when it comes to, I guess, refinancing opportunities or when you have to refinance, so I mean what are some of the measures that you can take to kind of control that going forward?

[Chad Bradford:]

Yes. Hoang, this is Chad again. So yes, you're right on point, majority of our funding facilities are all fixed rate. And that's primarily a VPC facility. So we're definitely focused on looking at opportunities, additional funding mechanisms that allow us to continue to lower the cost of funds. In addition, as we're borrowing on the facility, getting the portfolio back into growth mode, you will continue to see the current rate come down as our incremental borrowing costs will be at 8%. But also, going back to the fourth quarter, we closed on the Today Card facility, which was a lower cost of funds. And from closing that facilities, we were able to broaden our relationships with various providers. So we'll definitely be reaching out to that network and be working with them as we look at alternative funding mechanisms to lower our cost of funds in the future.

[Operator:]

We show no further questions in the queue, and I would like to turn the call back over to Jason Harvison for closing remarks. Please go ahead.

[Jason Harvison:]

Yes. As always, I'd like to thank the team here at Elevate for all their hard work in the first quarter and the accomplishments we made during the quarter and look forward to what the team is working on as we go forward to the rest of the year. I'd also like to thank Chad Bradford. I mean Chad has done an amazing job stepping in as the interim CFO over the last few quarters. I've been really happy with his work and contributions to the team, but also just as excited to welcome Steve to the organization and what he'll do for us in that CFO role as we go forward. So exciting to have a new member of the team that continues to strengthen the team we have here at Elevate and pushes forward in the future. So with that, I'd like to thank everyone for joining this afternoon, pleasure to speak with every one of you and look forward to catching up here in the future. Take care.

[Operator:]

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.