ELEVATE CREDIT, INC.
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") is intended to help the reader understand our
business, our results of operations and our financial condition. The MD&A is
provided as a supplement to, and should be read in conjunction with our
unaudited condensed consolidated financial statements and the related notes and
other financial information included elsewhere in this Quarterly Report on Form
10-Q.
Some of the information contained in this discussion and analysis, including
information with respect to our plans and strategy for our business, includes
forward-looking statements that involve risks and uncertainties. You should
review the "Note About Forward-Looking Statements" section of this Quarterly
Report on Form 10-Q for a discussion of important factors that could cause
actual results to differ materially from the results described in or implied by
the forward-looking statements contained in the following discussion and
analysis. We generally refer to loans, customers and other information and data
associated with each of our brands (Rise, Elastic and Today Card) as Elevate's
loans, customers, information and data, irrespective of whether Elevate directly
originates the credit to the customer or whether such credit is originated by a
third party.
OVERVIEW
We provide online credit solutions to consumers in the US who are not
well-served by traditional bank products and who are looking for better options
than payday loans, title loans, pawn and storefront installment loans. Non-prime
consumers now represent a larger market than prime consumers but are riskier to
underwrite and serve with traditional approaches. We're succeeding at it - and
doing it responsibly - with best-in-class advanced technology and proprietary
risk analytics honed by serving more than 2.6 million customers with $9.5
billion in credit. Our current online credit products, Rise, Elastic and Today
Card, reflect our mission to provide customers with access to competitively
priced credit and services while helping them build a brighter financial future
with credit building and financial wellness features. We call this mission "Good
Today, Better Tomorrow."
Prior to June 29, 2020 , we provided services in the United Kingdom ("UK")
through our wholly-owned subsidiary, Elevate Credit International Limited
("ECIL") under the brand name 'Sunny.' During the year ended December 31, 2018 ,
ECIL began to receive an increased number of customer complaints initiated by
claims management companies ("CMCs") related to the affordability assessment of
certain loans. The CMCs' campaign against the high cost lending industry
increased significantly during the third and fourth quarters of 2018 and
continued through 2019 and into the first half of 2020, resulting in a
significant increase in affordability claims against all companies in the
industry over this period. The Financial Conduct Authority ("FCA"), a regulator
in the UK financial services industry, began regulating the CMCs in April 2019
in order to ensure that the methods used by the CMCs are in the best interests
of the consumer and the industry. Separately, the FCA asked all industry
participants to review their lending practices to ensure that such companies are
using an appropriate affordability and creditworthiness analysis. However, there
continued to be a lack of clarity within the regulatory environment in the UK .
This lack of clarity, coupled with the ongoing impact of the Coronavirus Disease
2019 ("COVID-19") on the UK market for Sunny, led the ECIL board of directors to
place ECIL into administration under the UK Insolvency Act 1986 and appoint
insolvency practitioners from KPMG LLP to take control and management of the UK
business. As a result, we have deconsolidated ECIL and are presenting its
results as discontinued operations.
We earn revenues on the Rise installment loans, on the Rise and Elastic lines of
credit and on the Today Card credit card product. Our revenue primarily consists
of finance charges and line of credit fees. Finance charges are driven by our
average loan balances outstanding and by the average annual percentage rate
("APR") associated with those outstanding loan balances. We calculate our
average loan balances by taking a simple daily average of the ending loan
balances outstanding for each period. Line of credit fees are recognized when
they are assessed and recorded to revenue over the life of the loan. We present
certain key metrics and other information on a "combined" basis to reflect
information related to loans originated by us and by our bank partners that
license our brands, Republic Bank, FinWise Bank and Capital Community Bank
("CCB"), as well as loans originated by third-party lenders pursuant to CSO
programs, which loans originated through CSO programs are not recorded on our
balance sheet in accordance with US GAAP. See "-Key Financial and Operating
Metrics" and "-Non-GAAP Financial Measures."
We use our working capital and our credit facility with Victory Park Management,
LLC ("VPC" and the "VPC Facility") to fund the loans we directly make to our
Rise customers. The VPC Facility has a maximum total borrowing amount available
of $200 million at September 30, 2021 . See "-Liquidity and Capital
Resources-Debt facilities."
44-------------------------------------------------------------------------------- We also license our Rise installment loan brand to two banks.FinWise Bank originates Rise installment loans in 17 states. This bank initially provides all of the funding, retains 4% of the balances of all of the loans originated and sells the remaining 96% loan participation in those Rise installment loans to a third-party SPV,EF SPV, Ltd. ("EF SPV"). These loan participation purchases are funded through a separate financing facility (the "EF SPV Facility"), effectiveFebruary 1, 2019 , and through cash flows from operations generated by EF SPV. The EF SPV Facility has a maximum total borrowing amount available of$250 million . We do not own EF SPV, but we have a credit default protection agreement with EF SPV whereby we provide credit protection to the investors in EF SPV against Rise loan losses in return for a credit premium. Elevate is required to consolidate EF SPV as a variable interest entity ("VIE") under US GAAP and the condensed consolidated financial statements include revenue, losses and loans receivable related to the 96% of the Rise installment loans originated byFinWise Bank and sold to EF SPV. Beginning in the third quarter of 2020, we also license our Rise installment loan brand to an additional bank, CCB, which originates Rise installment loans in three different states thanFinWise Bank . Similar to the relationship withFinWise Bank , CCB initially provides all of the funding, retains 5% of the balances of all of the loans originated and sells the remaining 95% loan participation in those Rise installment loans to a third-party SPV,EC SPV, Ltd. ("EC SPV"). These loan participation purchases are funded through a separate financing facility (the "EC SPV Facility"), and through cash flows from operations generated by EC SPV. The EC SPV Facility has a maximum total borrowing amount available of$100 million . We do not own EC SPV, but we have a credit default protection agreement with EC SPV whereby we provide credit protection to the investors in EC SPV against Rise loan losses in return for a credit premium. Elevate is required to consolidate EC SPV as a VIE under US GAAP and the condensed consolidated financial statements include revenue, losses and loans receivable related to the 95% of the Rise installment loans originated by CCB and sold to EC SPV. The Elastic line of credit product is originated by a third-party lender, Republic Bank, which initially provides all of the funding for that product. Republic Bank retains 10% of the balances of all loans originated and sells a 90% loan participation in the Elastic lines of credit. An SPV structure was implemented such that the loan participations are sold by Republic Bank toElastic SPV, Ltd. ("Elastic SPV") and Elastic SPV receives its funding from VPC in a separate financing facility (the "ESPV Facility"), which was finalized onJuly 13, 2015 . We do not own Elastic SPV, but we have a credit default protection agreement with Elastic SPV whereby we provide credit protection to the investors in Elastic SPV against Elastic loan losses in return for a credit premium. Per the terms of this agreement, under US GAAP, we are the primary beneficiary of Elastic SPV and are required to consolidate the financial results of Elastic SPV as a VIE in our condensed consolidated financial statements. The ESPV Facility has a maximum total borrowing amount available of$350 million atSeptember 30, 2021 . See "-Liquidity and Capital Resources-Debt facilities." Today Card is a credit card product designed to meet the spending needs of non-prime consumers by offering a prime customer experience. Today Card is originated by CCB under the licensed MasterCard brand, and a 95% participation interest in the credit card receivable is sold to us. As the lowest APR product in our portfolio, Today Card allows us to serve a broader spectrum of non-prime Americans. During 2020, the Today Card experienced significant growth in its portfolio size despite the pandemic due to the success of our direct mail campaigns, the primary marketing channel for acquiring new Today Card customers. We are following a specific growth plan that began in 2020 to grow the product while monitoring customer responses and credit quality. Customer response to the Today Card is very strong, as we continue to see extremely high response rates, high customer engagement, and positive customer satisfaction scores. Our management assesses our financial performance and future strategic goals through key metrics based primarily on the following three themes: •Revenue growth. Key metrics related to revenue growth that we monitor by product include the ending and average combined loan balances outstanding, the effective APR of our product loan portfolios, the total dollar value of loans originated, the number of new customer loans made, the ending number of customer loans outstanding and the related customer acquisition costs ("CAC") associated with each new customer loan made. We include CAC as a key metric when analyzing revenue growth (rather than as a key metric within margin expansion). •Stable credit quality. Since the time they were managing our US legacy products, our management team has maintained stable credit quality across the loan portfolio they were managing. Additionally, in the periods covered in this Management's Discussion and Analysis of Financial Condition and Results of Operations, we have improved our credit quality and lowered our credit losses. The credit quality metrics we monitor include net charge-offs as a percentage of revenues, the combined loan loss reserve as a percentage of outstanding combined loans, total provision for loan losses as a percentage of revenues and the percentage of past due combined loans receivable - principal. 45 -------------------------------------------------------------------------------- •Margin expansion. We aim to manage our business to achieve a long-term operating margin of 15-20%. In periods of significant loan portfolio growth, our margins may become compressed due to the upfront costs associated with marketing and credit provisioning expense associated with this growth. As we continue to rebuild and scale our portfolio from the impacts of COVID-19, we anticipate that our direct marketing costs primarily associated with new customer acquisitions will decline to approximately 10% of revenues and our operating expenses will decline to approximately 20% of revenues. While our operating margins may exceed 15-20% in certain years, such as in 2020 when we incurred lower levels of direct marketing expense and materially lower credit losses due to a lack of customer demand for loans resulting from the effects of COVID-19, we do not expect our operating margin to increase beyond that level over the long-term, as we intend to pass on any improvements over our targeted margins to our customers in the form of lower APRs. We believe this is a critical component of our responsible lending platform and over time will also help us continue to attract new customers and retain existing customers. Impact of COVID-19 The COVID-19 pandemic and related restrictive measures taken by governments, businesses and individuals caused unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity inthe United States , including the markets that we serve. As the restrictive measures have been eased in certain geographic locations, theU.S. economy has begun to recover, and with the availability and distribution of COVID-19 vaccines, we anticipate continued improvements in commercial and consumer activity and theU.S. economy. While positive signs exist, we recognize that certain of our customers are experiencing varying degrees of financial distress, which may continue, especially if new COVID-19 variant infections increase and new economic restrictions are mandated. In 2020, we experienced a significant decline in the loan portfolio due to a lack of customer demand for loans resulting from the effects of COVID-19 and related government stimulus programs. These impacts resulted in a lower level of direct marketing expense and materially lower credit losses during 2020 and continuing into early 2021. Beginning in the second quarter of 2021, we are experiencing a return of demand for the loan products that we, and the bank originators we support, offer, resulting in significant growth in the loan portfolio from that point. This significant loan portfolio growth is resulting in compressed margins in 2021 due to the upfront costs associated with marketing and credit provisioning expense related to growing and "rebuilding" the loan portfolio from the impacts of COVID-19. We continue to target loan portfolio originations within our target CACs of$250-$300 and credit quality metrics of 45-55% of revenue which, when combined with our expectation of continuing customer loan demand for our portfolio products, we believe will allow us to return to our historical performance levels prior to COVID-19 after initially resulting in earnings compression. Both we and the bank originators are closely monitoring the key credit quality indicators such as payment defaults, continued payment deferrals, and line of credit utilization. While we initially anticipated that the COVID-19 pandemic would have a negative impact on our credit quality, instead the monetary stimulus programs provided by the US government to our customer base have generally allowed customers to continue making payments on their loans. At the beginning of the pandemic, we expected an increase in net charge-offs as compared to prior periods but experienced historically low net charge-offs as a percentage of revenue in the second half of 2020 and early 2021. With the increased volume of new customer loans expected to be originated as we grow our loan portfolio back to our pre-pandemic size and the ending of government assistance, we expect a return of net charge-offs to our targeted range of 45-55% of revenue. Further, we believe that the allowance for loan losses is adequate to absorb the losses inherent in the portfolio as ofSeptember 30, 2021 . We have implemented a hybrid remote environment where employees may choose to work primarily from the office or from home and gather collectively in the office on a limited basis. We have sought to ensure our employees feel secure in their jobs, have flexibility in their work location and have the resources they need to stay safe and healthy. As an 100% online lending solutions provider, our technology and underwriting platform has continued to serve our customers and the bank originators that we support without any material interruption in services. COVID-19 has had a significant adverse impact on our business, and while uncertainty still exists, we believe we are well-positioned to operate effectively through the present economic environment and expect continued loan portfolio growth and strong credit quality through the remainder of the year. We will continue assessing our minimum cash and liquidity requirement, monitoring our debt covenant compliance and implementing measures to ensure that our cash and liquidity position is maintained through the current economic cycle. 46 -------------------------------------------------------------------------------- KEY FINANCIAL AND OPERATING METRICS As discussed above, we regularly monitor a number of metrics in order to measure our current performance and project our future performance. These metrics aid us in developing and refining our growth strategies and in making strategic decisions. Certain of our metrics are non-GAAP financial measures. We believe that such metrics are useful in period-to-period comparisons of our core business. However, non-GAAP financial measures are not an alternative to any measure of financial performance calculated and presented in accordance with US GAAP. See "-Non-GAAP Financial Measures" for a reconciliation of our non-GAAP measures to US GAAP. Revenues As of and for the three months ended As of and for the nine months ended September 30, September 30, Revenue metrics (dollars in thousands, except as noted) 2021 2020 2021 2020 Revenues$ 112,835 $ 94,164 $ 287,108 $ 374,622 Period-over-period change in revenue 20 % (43) % (23) % (21) % Ending combined loans receivable - principal(1)$ 512,870 $ 377,177 512,870 377,177
Average combined loans receivable - principal(1)(2)
$ 389,701 398,566 479,526 Total combined loans originated - principal$ 311,985 $ 132,516 $ 655,959 442,552 Average customer loan balance(3)$ 1,918 $ 1,797 1,918 1,797 Number of new customer loans 69,682 8,489 122,558 47,054 Ending number of combined loans outstanding 267,434 209,887 267,434 209,887 Customer acquisition costs$ 221 $ 305 248 295 Effective APR of combined loan portfolio 96 % 96 % 95 % 104 %
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(1)Combined loans receivable is defined as loans owned by us and consolidated VIEs plus loans originated and owned by third-party lenders pursuant to our CSO programs. See "-Non-GAAP Financial Measures" for more information and for a reconciliation of Combined loans receivable to Loans receivable, net, the most directly comparable financial measure calculated in accordance with US GAAP. (2)Average combined loans receivable - principal is calculated using an average of daily Combined loans receivable - principal balances. (3)Average customer loan balance is an average of all three products and is calculated for each product by dividing the ending Combined loans receivable - principal by the number of loans outstanding at period end. Revenues. Our revenues are composed of Rise finance charges, Rise CSO fees (which are fees we receive from customers who obtain a loan through the CSO program for the credit services, including the loan guaranty, we provide), revenues earned on the Elastic line of credit, and finance charges and fee revenues from the Today Card credit card product. See "-Components of our Results of Operations-Revenues." Ending and average combined loans receivable - principal. We calculate the average combined loans receivable - principal by taking a simple daily average of the ending combined loans receivable - principal for each period. Key metrics that drive the ending and average combined loans receivable - principal include the amount of loans originated in a period and the average customer loan balance. All loan balance metrics include only the 90% participation in the related Elastic line of credit advances (we exclude the 10% held by Republic Bank), the 96% participation inFinWise Bank originated Rise installment loans and the 95% participation in CCB originated Rise installment loans and the 95% participation in the CCB originated Today Card credit card receivables, but include the full loan balances on CSO loans, which are not presented on our Condensed Consolidated Balance Sheets. Total combined loans originated - principal. The amount of loans originated in a period is driven primarily by loans to new customers as well as new loans to prior customers, including refinancing of existing loans to customers in good standing. 47
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Average customer loan balance and effective APR of combined loan portfolio.
The
average loan amount and its related APR are based on the product and the underlying credit quality of the customer. Generally, better credit quality customers are offered higher loan amounts at lower APRs. Additionally, new customers have more potential risk of loss than prior or existing customers due to lack of payment history and the potential for fraud. As a result, newer customers typically will have lower loan amounts and higher APRs to compensate for that additional risk of loss. The effective APR is calculated based on the actual amount of finance charges generated from a customer loan divided by the average outstanding balance for the loan and can be lower than the stated APR on the loan due to waived finance charges and other reasons. For example, a Rise customer may receive a$2,000 installment loan with a term of 24 months and a stated rate of 180%. In this example, the customer's monthly installment loan payment would be$310.86 . As the customer can prepay the loan balance at any time with no additional fees or early payment penalty, the customer pays the loan in full in month eight. The customer's loan earns interest of$2,337.81 over the eight-month period and has an average outstanding balance of$1,948.17 . The effective APR for this loan is 180% over the eight-month period calculated as follows: ($2,337.81 interest earned /$1,948.17 average balance outstanding) x 12 months per year = 180% 8 months In addition, as an example for Elastic, if a customer makes a$2,500 draw on the customer's line of credit and this draw required bi-weekly minimum payments of 5% (equivalent to 20 bi-weekly payments), and if all minimum payments are made, the draw would earn finance charges of$1,148 . The effective APR for the line of credit in this example is 109% over the payment period and is calculated as follows: ($1,148.00 fees earned /$1,369.05 average balance outstanding) x 26 bi-weekly periods per year = 109% 20 payments The actual total revenue we realize on a loan portfolio is also impacted by the amount of prepayments and charged-off customer loans in the portfolio. For a single loan, on average, we typically expect to realize approximately 60% of the revenues that we would otherwise realize if the loan were to fully amortize at the stated APR. From the Rise example above, if we waived$400 of interest for this customer, the effective APR for this loan would decrease to 149%. Number of new customer loans. We define a new customer loan as the first loan or advance made to a customer for each of our products (so a customer receiving a Rise installment loan and then at a later date taking their first cash advance on an Elastic line of credit would be counted twice). The number of new customer loans is subject to seasonal fluctuations. New customer acquisition is typically slowest during the first six months of each calendar year, primarily in the first quarter, compared to the latter half of the year, as our existing and prospective customers usually receive tax refunds during this period and, thus, have less of a need for loans from us. Further, many customers will use their tax refunds to prepay all or a portion of their loan balance during this period, so our overall loan portfolio typically decreases during the first quarter of the calendar year. Overall loan portfolio growth and the number of new customer loans tends to accelerate during the summer months (typically June and July), at the beginning of the school year (typically late August to early September) and during the winter holidays (typically late November to early December). Customer acquisition costs. A key expense metric we monitor related to loan growth is our CAC. This metric is the amount of direct marketing costs incurred during a period divided by the number of new customer loans originated during that same period. New loans to former customers are not included in our calculation of CAC (except to the extent they receive a loan through a different product) as we believe we incur no material direct marketing costs to make additional loans to a prior customer through the same product. The following tables summarize the changes in customer loans by product for the three and nine months endedSeptember 30, 2021 and 2020. Three Months Ended September 30, 2021 Rise Elastic Today (Installment (Lines of Loans) Credit) (Credit Card) Total Beginning number of combined loans outstanding 108,784 92,278 17,481 218,543 New customer loans originated 41,010 18,937 9,735 69,682 Former customer loans originated 18,295 154 - 18,449 Attrition (35,391) (3,870) 21 (39,240) Ending number of combined loans outstanding 132,698 107,499 27,237 267,434 Customer acquisition cost $ 268$ 206 $ 52$ 221 Average customer loan balance$ 2,194 $ 1,744 $ 1,254 $ 1,918 48
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Three Months Ended September 30, 2020
Rise Elastic Today
(Installment (Lines of
Loans) Credit) (Credit Card) Total
Beginning number of combined
loans outstanding 107,125 108,553 6,566 222,244
New customer loans originated 6,794 831 864 8,489
Former customer loans originated 14,466 72 - 14,538
Attrition (28,426) (6,602) (356) (35,384)
Ending number of combined loans
outstanding 99,959 102,854 7,074 209,887
Customer acquisition cost $ 317 $ 369 $ 141 $ 305
Average customer loan balance $ 2,157 $ 1,485 $ 1,256 $ 1,797
Nine
Months Ended
Rise Elastic Today
(Installment
Loans) (Lines of Credit) (Credit Card) Total
Beginning number of combined
loans outstanding 103,940 100,105 10,803 214,848
New customer loans originated 77,370 28,128 17,060 122,558
Former customer loans originated 46,060 380 - 46,440
Attrition (94,672) (21,114) (626) (116,412)
Ending number of combined loans
outstanding 132,698 107,499 27,237 267,434
Customer acquisition cost $ 284 $ 261 $ 60 $ 248
Nine
Months Ended
Rise Elastic Today
(Installment
Loans) (Lines of Credit) (Credit Card) Total
Beginning number of combined
loans outstanding 152,435 146,317 3,207 301,959
New customer loans originated 31,834 10,888 4,332 47,054
Former customer loans originated 38,615 212 - 38,827
Attrition (122,925) (54,563) (465) (177,953)
Ending number of combined loans
outstanding 99,959 102,854 7,074 209,887
Customer acquisition cost $ 311 $ 337 $ 78 $ 295
Recent trends. Our revenues for the three months ended September 30, 2021
totaled $112.8 million , an increase of 20% versus the three months ended
September 30, 2020 . The increase in quarterly revenue is primarily attributable
to higher average combined loans receivable-principal as we saw growth in all of
our products in the third quarter of 2021. Conversely, our revenues for the nine
months ended September 30, 2021 totaled $287.1 million , down 23% versus the
prior year. Both the Rise and Elastic products experienced a year-over-year
decline in revenues of 26% and 22%, respectively, which were attributable to
reductions in year-to-date average loan balances and a lower Rise effective APR
due to the economic crisis created by the COVID-19 pandemic beginning in March
2020 , which resulted in substantial government assistance to our potential
customers that lowered demand for our products. This decline in revenue was
partially offset by a year-over-year increase in revenues for the Today Card
product, which has more than doubled its average principal balance outstanding
year-over year. We believe Today Card balances increased over the past year
despite the impact of COVID-19 due to the nature of the product (credit card
versus installment loan or lines of credit), the lower APR of the product
(effective APR of 30% in the third quarter of 2021 compared to Rise at 104% and
Elastic at 94%) as customers receiving stimulus payments would be more apt to
pay down more expensive forms of credit, and the added convenience of having a
credit card for online purchases of day-to-day items such as groceries or
clothing (whereas the primary usage of a Rise installment loan or Elastic line
of credit is for emergency financial needs such as a medical deductible or
automobile repair).
49-------------------------------------------------------------------------------- We are currently experiencing an increase in new and former customers as demand for the loan products provided by us and the bank originators began to return during the second quarter of 2021. This is in contrast to 2020 and early 2021 when the portfolio of loan products experienced significantly decreased loan demand for both new and former customers due to COVID-19, including the effects of monetary stimulus provided by the US government reducing demand for loan products. We anticipate the return of demand for the loan products to continue for the remainder of the year, as we recover from the impacts from COVID-19. All three of our products experienced an increase in principal loan balances in the third quarter of 2021 compared to a year ago. Rise and Elastic principal loan balances atSeptember 30, 2021 totaled$291.2 million and$187.5 million , respectively, up roughly$85.0 million and$34.8 million , respectively, from a year ago. Today Card principal loan balances atSeptember 30, 2021 totaled$34.2 million , up$25.3 million from a year ago. Our CAC was lower in the third quarter of 2021 at$221 as compared to the third quarter of 2020 at$305 , with the third quarter of 2020 not reflective of our historical CAC due to the significant reduction in new loan originations due to the COVID-19 pandemic. The third quarter 2021 loan volume is being sourced from all our marketing channels including direct mail, strategic partners and digital. We've seen a marked improvement in loan volume from our strategic partners channel where we have improved our technology and risk capabilities to interface with the strategic partners via our application programming interface (APIs) that we developed within our new technology platform ("Blueprint"). Blueprint will allow us to more efficiently acquire new customers within our targeted CAC range. We believe our CAC in future quarters will continue to remain within or below our target range of$250 to$300 as we continue to optimize the efficiency of our marketing channels and continue to grow the Today Card which successfully generated new customers at a sub-$100 CAC. Credit quality As of and for the three months ended As of and for the nine months ended September 30, September 30, Credit quality metrics (dollars in thousands) 2021 2020 2021 2020 Net charge-offs(1)$ 39,015 $ 22,428 $ 95,968 $ 163,878 Additional provision for loan losses(1) 15,888 (9,264) 7,130 (30,662) Provision for loan losses$ 54,903 $ 13,164 $ 103,098 $ 133,216 Past due combined loans receivable - principal as a percentage of combined loans receivable - principal(2) 9 % 6 % 9 % 6 % Net charge-offs as a percentage of revenues(1) 35 % 24 % 33 % 44 % Total provision for loan losses as a percentage of revenues 49 % 14 % 36 % 36 % Combined loan loss reserve(3)$ 56,209 $ 51,330 $ 56,209 $ 51,330 Combined loan loss reserve as a percentage of combined loans receivable(3)(4) 11 % 13 % 11 % 13 %
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(1)Net charge-offs and additional provision for loan losses are not financial
measures prepared in accordance with US GAAP. Net charge-offs include the amount
of principal and accrued interest on loans that are more than 60 days past due
(Rise and Elastic) or 120 days past due (Today Card), or sooner if we receive
notice that the loan will not be collected, such as a bankruptcy notice or
identified fraud, offset by any recoveries. Additional provision for loan losses
is the amount of provision for loan losses needed for a particular period to
adjust the combined loan loss reserve to the appropriate level in accordance
with our underlying loan loss reserve methodology. See "-Non-GAAP Financial
Measures" for more information and for a reconciliation to Provision for loan
losses, the most directly comparable financial measure calculated in accordance
with US GAAP.
(2)Combined loans receivable is defined as loans owned by us and consolidated
VIEs plus loans originated and owned by third-party lenders pursuant to our CSO
programs. See "-Non-GAAP Financial Measures" for more information and for a
reconciliation of Combined loans receivable to Loans receivable, net, the most
directly comparable financial measure calculated in accordance with US GAAP.
(3)Combined loan loss reserve is defined as the loan loss reserve for loans
originated and owned by us plus the loan loss reserve for loans owned by
third-party lenders and guaranteed by us. See "-Non-GAAP Financial Measures" for
more information and for a reconciliation of Combined loan loss reserve to
Allowance for loan losses, the most directly comparable financial measure
calculated in accordance with US GAAP.
(4)Combined loan loss reserve as a percentage of combined loans receivable is
determined using period-end balances.
50
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Net principal charge-offs as a percentage of
average combined loans receivable - principal First Second Third Fourth
(1)(2)(3) Quarter Quarter Quarter Quarter
2021 6% 5% 6% N/A
2020 11% 10% 4% 5%
2019 13% 10% 10% 12%
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(1)Net principal charge-offs is comprised of gross principal charge-offs less
recoveries.
(2)Average combined loans receivable - principal is calculated using an average
of daily Combined loans receivable - principal balances during each quarter.
(3)Combined loans receivable is defined as loans owned by us and consolidated
VIEs plus loans originated and owned by third-party lenders pursuant to our CSO
programs. See "-Non-GAAP Financial Measures" for more information and for a
reconciliation of Combined loans receivable to Loans receivable, net, the most
directly comparable financial measure calculated in accordance with US GAAP.
Net principal charge-offs as a percentage of average combined loans
receivable-principal for the third quarter of 2021 is higher than the third
quarter of 2020 due to the lack of new customer loan demand, the implementation
of payment assistance tools and government stimulus payments received by
customers that contributed to historically low charge-off metrics during the
third quarter of 2020. As we continue to increase loan originations to new and
former customers, we expect this quarterly loss ratio to initially increase due
to the volume of new customers being originated as we re-build the portfolio
from the impacts of the COVID-19 pandemic and then return to a more normalized
credit profile.
In reviewing the credit quality of our loan portfolio, we break out our total
provision for loan losses that is presented on our statement of operations under
US GAAP into two separate items-net charge-offs and additional provision for
loan losses. Net charge-offs are indicative of the credit quality of our
underlying portfolio, while additional provision for loan losses is subject to
more fluctuation based on loan portfolio growth, recent credit quality trends
and the effect of normal seasonality on our business. The additional provision
for loan losses is the amount needed to adjust the combined loan loss reserve to
the appropriate amount at the end of each month based on our loan loss reserve
methodology.
Net charge-offs. Net charge-offs comprise gross charge-offs offset by
recoveries on prior charge-offs. Gross charge-offs include the amount of
principal and accrued interest on loans that are more than 60 days past due
(Rise and Elastic) or 120 days (Today Card), or sooner if we receive notice that
the loan will not be collected, such as a bankruptcy notice or identified fraud.
Any payments received on loans that have been charged off are recorded as
recoveries and reduce the total amount of gross charge-offs. Recoveries are
typically less than 10% of the amount charged off, and thus, we do not view
recoveries as a key credit quality metric.
Net charge-offs as a percentage of revenues can vary based on several factors,
such as whether or not we experience significant growth or lower the APR of our
products. Additionally, although a more seasoned portfolio will typically result
in lower net charge-offs as a percentage of revenues, we do not intend to drive
down this ratio significantly below our historical ratios and would instead seek
to offer our existing products to a broader new customer base to drive
additional revenues.
Net charge-offs as a percentage of average combined loans receivable-principal
allow us to determine credit quality and evaluate loss experience trends across
our loan portfolio.
Additional provision for loan losses. Additional provision for loan losses is
the amount of provision for loan losses needed for a particular period to adjust
the combined loan loss reserve to the appropriate level in accordance with our
underlying loan loss reserve methodology.
Additional provision for loan losses relates to an increase in inherent losses
in the loan portfolio as determined by our loan loss reserve methodology. This
increase could be due to a combination of factors such as an increase in the
size of the loan portfolio or a worsening of credit quality or increase in past
due loans. It is also possible for the additional provision for loan losses for
a period to be a negative amount, which would reduce the amount of the combined
loan loss reserve needed (due to a decrease in the loan portfolio or improvement
in credit quality). The amount of additional provision for loan losses is
seasonal in nature, mirroring the seasonality of our new customer acquisition
and overall loan portfolio growth, as discussed above. The combined loan loss
reserve typically decreases during the first quarter or first half of the
calendar year due to a decrease in the loan portfolio from year end. Then, as
the rate of growth for the loan portfolio starts to increase during the second
half of the year, additional provision for loan losses is typically needed to
increase the reserve for losses associated with the loan growth. Because of
this, our provision for loan losses can vary significantly throughout the year
without a significant change in the credit quality of our portfolio.
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The following provides an example of the application of our loan loss reserve
methodology and the break-out of the provision for loan losses between the
portion associated with replenishing the reserve due to net charge-offs and the
amount related to the additional provision for loan losses. If the beginning
combined loan loss reserve were $25 million , and we incurred $10 million of net
charge-offs during the period and the ending combined loan loss reserve needed
to be $30 million according to our loan loss reserve methodology, our total
provision for loan losses would be $15 million , comprising $10 million in net
charge-offs (provision needed to replenish the combined loan loss reserve) plus
$5 million of additional provision related to an increase in inherent losses in
the loan portfolio identified by our loan loss reserve methodology.
Example (dollars in thousands)
Beginning combined loan loss reserve $ 25,000
Less: Net charge-offs (10,000)
Provision for loan losses:
Provision for net charge-offs 10,000
Additional provision for loan losses 5,000
Total provision for loan losses 15,000
Ending combined loan loss reserve balance $ 30,000
Loan loss reserve methodology. Our loan loss reserve methodology is calculated
separately for each product and, in the case of Rise loans originated under the
state lending model (including CSO program loans), is calculated separately
based on the state in which each customer resides to account for varying state
license requirements that affect the amount of the loan offered, repayment terms
and other factors. For each product, loss factors are calculated based on the
delinquency status of customer loan balances: current, 1 to 30 days past due, 31
to 60 days past due or 61-120 past due (for Today Card only). These loss factors
for loans in each delinquency status are based on average historical loss rates
by product (or state) associated with each of these three delinquency
categories. Hence, another key credit quality metric we monitor is the
percentage of past due combined loans receivable - principal, as an increase in
past due loans will cause an increase in our combined loan loss reserve and
related additional provision for loan losses to increase the reserve. For
customers that are not past due, we further stratify these loans into loss rates
by payment number, as a new customer that is about to make a first loan payment
has a significantly higher risk of loss than a customer who has successfully
made ten payments on an existing loan with us. Based on this methodology, during
the past two years we have seen our combined loan loss reserve as a percentage
of combined loans receivable fluctuate between approximately 10% and 14%
depending on the overall mix of new, former and past due customer loans.
Recent trends. Total loan loss provision for the three and nine months ended
September 30, 2021 , which was within or below our targeted range of
approximately 45% to 55%, was 49% and 36% of revenues, respectively, compared to
14% and 36% in the respective prior year periods. Net charge-offs as a
percentage of revenues for the three and nine months ended September 30, 2021
were 35% and 33%, respectively, compared to 24% and 44% in the respective prior
year periods. The increase in these credit performance metrics is due to the
increase in new loan originations beginning in the second quarter of 2021 and
charge-offs and loan loss provisioning associated with a growing portfolio.
While we initially anticipated that the COVID-19 pandemic would have a negative
impact on our credit quality, instead the large quantity of monetary stimulus
provided by the US government to our customer base has generally allowed
customers to continue making payments on their loans. We continue to monitor the
portfolio during the economic recovery resulting from COVID-19 and will adjust
our underwriting and credit policies to mitigate any potential negative impacts
as needed. As loan demand returns to pre-pandemic levels and the loan portfolio
grows, we expect our total loan loss provision as a percentage of revenues to be
within our targeted range of approximately 45% to 55% of revenue.
The combined loan loss reserve as a percentage of combined loans receivable
totaled 11% and 13% as of September 30, 2021 and September 30, 2020 ,
respectively. This year-over-year decrease reflects the continued strong credit
performance of the portfolio, and we would expect the loan loss reserve to
increase as we originate more new customers and return the portfolio to a
normalized credit profile. Past due loan balances at September 30, 2021 were 9%
of total combined loans receivable-principal, up from 6% from a year ago, due to
the number of new customers originated beginning in the second quarter of 2021
which is consistent with our historical past due percentages prior to the
pandemic. We, and the bank originators we support, are no longer offering
specific COVID-19 payment deferral programs, but continue to offer other payment
flexibility programs if certain qualifications are met. We are continuing to see
that most customers are meeting their scheduled payments once they exit the
payment deferral program. We anticipate the combined loan loss reserve as a
percentage of combined loans receivable, as well as our past due loan balances
as a percentage of total combined loans receivable-principal, will move toward
historic norms as we continue to grow our loan portfolio.
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We also look at Rise and Elastic principal loan charge-offs (including both
credit and fraud losses) by loan vintage as a percentage of combined loans
originated-principal. As the below table shows, our cumulative principal loan
charge-offs for Rise and Elastic through September 30, 2021 for each annual
vintage since the 2013 vintage are generally under 30% and continue to generally
trend at or slightly below our 25% to 30% long-term targeted range. During 2019,
we implemented new fraud tools that have helped lower fraud losses for the 2019
vintage and rolled out our next generation of credit models during the second
quarter of 2019 and continued refining the models during the third and fourth
quarters of 2019. Our payment deferral programs have also assisted in reducing
losses in our 2019 and 2020 vintages coupled with a lower volume of new loan
originations in our 2020 vintage. The 2019 and 2020 vintages are both performing
better than the 2017 and 2018 vintages. While still very early, we would expect
the 2021 vintage to be near 2019 levels or slightly higher given the increased
volume of new customer loans expected to be originated this year and a return of
net charge-offs to our targeted range of 45-55% of revenue. It is also possible
that the cumulative loss rates on all vintages will increase and may exceed our
recent historical cumulative loss experience due to the economic impact of a
prolonged crisis resulting from the COVID-19 pandemic.
[[Image Removed: elvt-20210930_g2.jpg]]
_________
1) The 2020 and 2021 vintages are not yet fully mature from a loss perspective.
2) UK included in the 2013 to 2017 vintages only.
We also look at Today Card principal loan charge-offs (including both credit and
fraud losses) by account vintage as a percentage of account principal
originations. As the below table shows, our cumulative principal credit card
charge-offs through September 30, 2021 for the 2020 annual vintage is under 7%.
While our 2021 annual vintage is currently performing better than 2020, it is
not yet mature enough for analysis. Our 2018 and 2019 vintages are considered to
be test vintages and were comprised of limited originations volume and not
reflective of our current underwriting standards.
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Margins
Three Months Ended September 30, Nine Months Ended September 30,
Margin metrics (dollars in thousands) 2021 2020 2021 2020
Revenues $ 112,835 $ 94,164 $ 287,108 $ 374,622
Net charge-offs(1) (39,015) (22,428) (95,968) (163,878)
Additional provision for loan losses(1) (15,888) 9,264 (7,130) 30,662
Direct marketing costs (15,406) (2,585) (30,353) (13,898)
Other cost of sales (4,766) (1,672) (9,718) (5,949)
Gross profit 37,760 76,743 143,939 221,559
Operating expenses (40,866) (42,662) (117,066) (121,517)
Operating income (loss) $ (3,106) $ 34,081 $ 26,873 $ 100,042
As a percentage of revenues:
Net charge-offs 35 % 24 % 33 % 44 %
Additional provision for loan losses 14 (10) 2 (8)
Direct marketing costs 14 3 11 4
Other cost of sales 4 2 3 2
Gross margin 33 81 50 59
Operating expenses 36 45 41 32
Operating margin (3) % 36 % 9 % 27 %
_________(1)Non-GAAP measure. See "-Non-GAAP Financial Measures-Net charge-offs and additional provision for loan losses."
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Gross margin is calculated as revenues minus cost of sales, or gross profit,
expressed as a percentage of revenues, and operating margin is calculated as
operating income expressed as a percentage of revenues. Due to the negative
impact of COVID-19 on our loan balances and revenue, we are monitoring our
profit margins closely. Long-term, we intend to continue to manage the business
to a targeted 15-20% operating margin.
Recent operating margin trends. For the three months ended September 30, 2021 ,
our operating margin was (3)%, which was a decrease from 36% in the prior year
period. For the nine months ended September 30, 2021 , our operating margin was
9%, which was also a decrease from 27% in the prior year period. The margin
decreases we are experiencing in 2021 are primarily driven by the upfront costs
associated with credit provisioning and direct marketing expense associated with
the increased new and former customer loan origination volume as we grow and
rebuild our loan portfolio from the impacts of COVID-19. The margins achieved in
2020 are not reflective of our historical performance as we experienced a
significant decline in the loan portfolio due to a lack of customer demand
resulting from the effects of COVID-19 and related government stimulus programs.
These impacts resulted in a lower level of direct marketing expense and
materially lower credit losses during 2020 leading to an increased gross margin.
Our operating expense metrics have been negatively impacted by the COVID-19
pandemic and its impact on loan balances and revenue. We expect our expense
metrics to continue to be negatively impacted in the short term as we focus on
growth to increase our new customer loan volume and grow our overall loan
portfolio. In the long term, as we grow the loan portfolio while actively
managing our operating expenses, we expect to see our operating expense metrics
return to approximately 20% of revenue. However, management will continue to
look for opportunities to reduce our expenses to help offset the increased loan
origination and direct marketing expenses.
NON-GAAP FINANCIAL MEASURES
We believe that the inclusion of the following non-GAAP financial measures in
this Quarterly Report on Form 10-Q can provide a useful measure for
period-to-period comparisons of our core business, provide transparency and
useful information to investors and others in understanding and evaluating our
operating results, and enable investors to better compare our operating
performance with the operating performance of our competitors. Management uses
these non-GAAP financial measures frequently in its decision-making because they
provide supplemental information that facilitates internal comparisons to the
historical operating performance of prior periods and give an additional
indication of our core operating performance. However, non-GAAP financial
measures are not a measure calculated in accordance with US generally accepted
accounting principles, or US GAAP, and should not be considered an alternative
to any measures of financial performance calculated and presented in accordance
with US GAAP. Other companies may calculate these non-GAAP financial measures
differently than we do.
Adjusted Earnings
Adjusted earnings (loss) for the three and nine months ended September 30, 2021
and 2020 represent our net income (loss) from continuing operations adjusted to
exclude the impact of:
•Uncertain tax position
•Contingent loss related to a legal matter
•Cumulative tax effect of adjustments
Adjusted diluted earnings (loss) per share is Adjusted earnings (loss) divided
by Diluted weighted average shares outstanding.
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The following table presents a reconciliation of net income (loss) from
continuing operations and diluted earnings (loss) per share to Adjusted earnings
and Adjusted diluted earnings (loss) per share, which excludes the impact of the
contingent loss and uncertain tax position for each of the periods indicated:
Three Months Ended September 30, Nine Months Ended September 30,
(Dollars in thousands except per share
amounts) 2021 2020 2021 2020
Net income (loss) from continuing
operations $ (11,005) $
16,616 $ (1,334)
1,582 - 1,582 -
Impact of contingent loss related to a
legal matter - 1,007 - 6,692
Cumulative tax effect of adjustments - (239) - (1,590)
Adjusted earnings (loss) $ (9,423) $ 17,384 $ 248 $ 45,733
Diluted earnings (loss) per share -
continuing operations $ (0.33) $
0.41 $ (0.04)
0.05 - 0.05 -
Impact of contingent loss related to a
legal matter - 0.02 - 0.16
Cumulative tax effect of adjustments - (0.01) - (0.04)
Adjusted diluted earnings (loss) per
share $ (0.28) $ 0.42 $ 0.01 $ 1.07
Diluted weighted average shares
outstanding 33,786,968 40,762,330 34,841,624 42,624,808
Effect of potentially dilutive shares
outstanding* - - 632,631 -
Adjusted diluted weighted average
shares outstanding 33,786,968 40,762,330 35,474,255 42,624,808
_________
*Represents potentially dilutive shares that had not been included in the
Company's nine months ended September 30, 2021 diluted weighted average shares
outstanding as the Company is in a net loss position under U.S. GAAP. Including
those shares would have been anti-dilutive when in a net loss position.
Adjusted EBITDA and Adjusted EBITDA Margin
Adjusted EBITDA represents our net income (loss) from continuing operations,
adjusted to exclude:
•Net interest expense primarily associated with notes payable under the VPC
Facility, ESPV Facility, EF SPV Facility and EC SPV Facility used to fund the
loan portfolios;
•Share-based compensation;
•Depreciation and amortization expense on fixed assets and intangible assets;
•Gains and losses from dispositions or a contingent loss related to a legal
matter included in non-operating (income) loss; and
•Income taxes.
Adjusted EBITDA margin is Adjusted EBITDA divided by revenue.
Management believes that Adjusted EBITDA and Adjusted EBITDA margin are useful
supplemental measures to assist management and investors in analyzing the
operating performance of the business and provide greater transparency into the
results of operations of our core business.
Adjusted EBITDA and Adjusted EBITDA margin should not be considered as
alternatives to net income (loss) from continuing operations or any other
performance measure derived in accordance with US GAAP. Our use of Adjusted
EBITDA and Adjusted EBITDA margin has limitations as an analytical tool, and you
should not consider it in isolation or as a substitute for analysis of our
results as reported under US GAAP. Some of these limitations are:
56
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•Although depreciation and amortization are non-cash charges, the assets being
depreciated and amortized may have to be replaced in the future, and Adjusted
EBITDA does not reflect expected cash capital expenditure requirements for such
replacements or for new capital assets;
•Adjusted EBITDA does not reflect changes in, or cash requirements for, our
working capital needs; and
•Adjusted EBITDA does not reflect interest associated with notes payable used
for funding the loan portfolios, for other corporate purposes or tax payments
that may represent a reduction in cash available to us.
The following table presents a reconciliation of net income (loss) from
continuing operations to Adjusted EBITDA and Adjusted EBITDA margin for each of
the periods indicated:
Three Months Ended September 30, Nine Months Ended September 30,
(Dollars in thousands) 2021 2020 2021 2020
Net income (loss) from continuing
operations $ (11,005) $ 16,616 $ (1,334) $ 40,631
Adjustments:
Net interest expense 9,544 11,575 26,897 37,408
Share-based compensation 1,559 1,166 4,948 6,513
Depreciation and amortization 4,544 4,588 14,339 13,413
Non-operating (income) loss 198 1,007 (519) 6,692
Income tax expense (benefit) (1,843) 4,883 1,829 15,311
Adjusted EBITDA $ 2,997 $ 39,835 $ 46,160 $ 119,968
Adjusted EBITDA margin 2.7 % 42.3 % 16.1 % 32.0 %
Free cash flow
Free cash flow ("FCF") represents our net cash provided by continuing operating
activities, adjusted to include:
•Net charge-offs - combined principal loans; and
•Capital expenditures.
The following table presents a reconciliation of net cash provided by continuing
operating activities to FCF for each of the periods indicated:
Nine Months Ended September 30,
(Dollars in thousands) 2021 2020
Net cash provided by continuing operating activities(1) $ 111,566 $ 177,705
Adjustments:
Net charge-offs - combined principal loans (70,636) (125,232)
Capital expenditures (11,903) (12,867)
FCF $ 29,027 $ 39,606
_________
(1)Net cash provided by continuing operating activities includes net charge-offs
- combined finance charges.
Net charge-offs and additional provision for loan losses
We break out our total provision for loan losses into two separate items-first,
the amount related to net charge-offs, and second, the additional provision for
loan losses needed to adjust the combined loan loss reserve to the appropriate
amount at the end of each month based on our loan loss provision methodology. We
believe this presentation provides more detail related to the components of our
total provision for loan losses when analyzing the gross margin of our business.
Net charge-offs. Net charge-offs comprise gross charge-offs offset by
recoveries on prior charge-offs. Gross charge-offs include the amount of
principal and accrued interest on loans that are more than 60 days past due
(Rise and Elastic) or 120 days (Today Card), or sooner if we receive notice that
the loan will not be collected, such as a bankruptcy notice or identified fraud.
Any payments received on loans that have been charged off are recorded as
recoveries and reduce total gross charge-offs.
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Additional provision for loan losses. Additional provision for loan losses is
the amount of provision for loan losses needed for a particular period to adjust
the combined loan loss reserve to the appropriate level in accordance with our
underlying loan loss reserve methodology.
Three Months Ended September 30, Nine Months Ended September 30,
(Dollars in thousands) 2021 2020 2021 2020
Net charge-offs $ 39,015 $
22,428 $ 95,968
15,888 (9,264) 7,130 (30,662)
Provision for loan losses $ 54,903 $
13,164
Combined loan information The Elastic line of credit product is originated by a third-party lender, Republic Bank, which initially provides all of the funding for that product. Republic Bank retains 10% of the balances of all of the loans originated and sells a 90% loan participation in the Elastic lines of credit to a third-party SPV,Elastic SPV, Ltd. Elevate is required to consolidateElastic SPV, Ltd. as a VIE under US GAAP and the condensed consolidated financial statements include revenue, losses and loans receivable related to the 90% of Elastic lines of credit originated by Republic Bank and sold to Elastic SPV. Beginning in the fourth quarter of 2018, we started licensing our Rise installment loan brand to a third-party lender,FinWise Bank , which originates Rise installment loans in 17 states.FinWise Bank retains 4% of the balances of all the loans originated and sells a 96% participation to a third-party SPV,EF SPV, Ltd. We do not own EF SPV, but we are required to consolidate EF SPV as a VIE under US GAAP and the condensed consolidated financial statements include revenue, losses and loans receivable related to the 96% of Rise installment loans originated byFinWise Bank and sold to EF SPV. Beginning in 2018, we started licensing the Today Card brand and our underwriting services and platform to launch a credit card product originated by CCB, which initially provides all of the funding for that product. CCB retains 5% of the credit card receivable balance of all the receivables originated and sells a 95% participation in the Today Card credit card receivables to us. The Today Card program was expanded beginning in 2020. Beginning in the third quarter of 2020, we also license our Rise installment loan brand to an additional bank, CCB, which originates Rise installment loans in three different states thanFinWise Bank . Similar to the relationship withFinWise Bank , CCB retains 5% of the balances of all of the loans originated and sells the remaining 95% loan participation in those Rise installment loans to EC SPV. We do not own EC SPV, but we are required to consolidate EC SPV as a VIE under US GAAP and the condensed consolidated financial statements include revenue, losses and loans receivable related to the 95% of the Rise installment loans originated by CCB and sold to EC SPV. The information presented in the tables below on a combined basis are non-GAAP measures based on a combined portfolio of loans, which includes the total amount of outstanding loans receivable that we own and that are on our balance sheets plus outstanding loans receivable originated and owned by third parties that we guarantee pursuant to CSO programs in which we participate. There were no new loan originations in 2021 under our CSO programs, but we continued to have obligations as the CSO until the wind-down of this portfolio was completed in the third quarter of 2021. See "-Basis of Presentation and Critical Accounting Policies-Allowance and liability for estimated losses on consumer loans" and "-Basis of Presentation and Critical Accounting Policies-Liability for estimated losses on credit service organization loans." We believe these non-GAAP measures provide investors with important information needed to evaluate the magnitude of potential loan losses and the opportunity for revenue performance of the combined loan portfolio on an aggregate basis. We also believe that the comparison of the combined amounts from period to period is more meaningful than comparing only the amounts reflected on our balance sheet since both revenues and cost of sales as reflected in our financial statements are impacted by the aggregate amount of loans we own and those CSO loans we guaranteed. Our use of total combined loans and fees receivable has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under US GAAP. Some of these limitations are: •Rise CSO loans were originated and owned by a third-party lender and •Rise CSO loans were funded by a third-party lender and were not part of the VPC Facility. 58
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As of each of the period ends indicated, the following table presents a
reconciliation of:
•Loans receivable, net, Company owned (which reconciles to our Condensed
Consolidated Balance Sheets included elsewhere in this Quarterly Report on Form
10-Q);
•Loans receivable, net, guaranteed by the Company (as disclosed in Note 3 of our
condensed consolidated financial statements included elsewhere in this Quarterly
Report on Form 10-Q);
•Combined loans receivable (which we use as a non-GAAP measure); and
•Combined loan loss reserve (which we use as a non-GAAP measure).
2020 2021
(Dollars in thousands) September 30 December 31 March 31 June 30 September 30
Company Owned Loans:
Loans receivable - principal, current,
company owned $ 346,380 $
372,320
21,354 25,563 21,678 27,231 46,730
Loans receivable - principal, total,
company owned 367,734 397,883 352,929 399,299 512,870
Loans receivable - finance charges, company
owned 24,117 25,348 21,393 19,157 22,960
Loans receivable - company owned 391,851 423,231 374,322 418,456 535,830
Allowance for loan losses on loans
receivable, company owned (49,909) (48,399) (39,037) (40,314) (56,209)
Loans receivable, net, company owned $ 341,942 $ 374,832 $ 335,285 $ 378,142 $ 479,621
Third Party Loans Guaranteed by the
Company:
Loans receivable - principal, current,
guaranteed by company $ 9,129 $
1,795
314 144 15 4 -
Loans receivable - principal, total,
guaranteed by company(1) 9,443 1,939 160 21 -
Loans receivable - finance charges,
guaranteed by company(2) 679 299 22 4 -
Loans receivable - guaranteed by company 10,122 2,238 182 25 -
Liability for losses on loans receivable,
guaranteed by company (1,421) (680) (122) (7) -
Loans receivable, net, guaranteed by
company(2) $ 8,701 $ 1,558 $ 60 $ 18 $ -
Combined Loans Receivable(3):
Combined loans receivable - principal,
current $ 355,509 $
374,115
21,668 25,707 21,693 27,235 46,730
Combined loans receivable - principal 377,177 399,822 353,089 399,320 512,870
Combined loans receivable - finance charges 24,796 25,647 21,415 19,161 22,960
Combined loans receivable $ 401,973 $ 425,469 $ 374,504 $ 418,481 $ 535,830
Combined Loan Loss Reserve(3):
Allowance for loan losses on loans
receivable, company owned $ (49,909) $
(48,399)
(1,421) (680) (122) (7) -
Combined loan loss reserve $ (51,330) $
(49,079)
$ 21,668 $
25,707
6 % 6 % 6 % 7 % 9 %
Combined loan loss reserve as a percentage
of combined loans receivable(3)(4) 13 % 12 % 10 % 10 % 11 %
Allowance for loan losses as a percentage
of loans receivable - company owned 13 % 11 % 10 % 10 % 11 %
_________
(1)Represents loans originated by third-party lenders through the CSO programs,
which are not included in our condensed consolidated financial statements. The
wind-down of the CSO program was completed in the third quarter of 2021.
(2)Represents finance charges earned by third-party lenders through the CSO
programs, which are not included in our condensed consolidated financial
statements. The wind-down of the CSO program was completed in the third quarter
of 2021.
(3)Non-GAAP measure
(4)Combined loan loss reserve as a percentage of combined loans receivable is
determined using period-end balances.
59-------------------------------------------------------------------------------- COMPONENTS OF OUR RESULTS OF OPERATIONS Revenues Our revenues are composed of Rise finance charges and CSO fees (inclusive of finance charges attributable to the participation in Rise installment loans originated byFinWise Bank and CCB), cash advance fees attributable to the participation in Elastic lines of credit that we consolidate, finance charges and fee revenues related to the Today Card credit card product, and marketing and licensing fees received from third-party lenders related to the Rise, Rise CSO, Elastic, and Today Card products. See "-Overview" above for further information on the structure of Elastic. Cost of sales Provision for loan losses. Provision for loan losses consists of amounts charged against income during the period related to net charge-offs and the additional provision for loan losses needed to adjust the loan loss reserve to the appropriate amount at the end of each month based on our loan loss methodology. Direct marketing costs. Direct marketing costs consist of online marketing costs such as sponsored search and advertising on social networking sites, and other marketing costs such as purchased television and radio advertising and direct mail print advertising. In addition, direct marketing cost includes affiliate costs paid to marketers in exchange for referrals of potential customers. All direct marketing costs are expensed as incurred. Other cost of sales. Other cost of sales includes data verification costs associated with the underwriting of potential customers and automated clearing house ("ACH") transaction costs associated with customer loan funding and payments. Operating expenses Operating expenses consist of compensation and benefits, professional services, selling and marketing, occupancy and equipment, depreciation and amortization as well as other miscellaneous expenses. Compensation and benefits. Salaries and personnel-related costs, including benefits, bonuses and share-based compensation expense, comprise a majority of our operating expenses and these costs are driven by our number of employees. Professional services. These operating expenses include costs associated with legal, accounting and auditing, recruiting and outsourced customer support and collections. Selling and marketing. Selling and marketing costs include costs associated with the use of agencies that perform creative services and monitor and measure the performance of the various marketing channels. Selling and marketing costs also include the production costs associated with media advertisements that are expensed as incurred over the licensing or production period. These expenses do not include direct marketing costs incurred to acquire customers, which comprises CAC. Occupancy and equipment. Occupancy and equipment include rent expense on our leased facilities, as well as telephony and web hosting expenses. Depreciation and amortization. We capitalize all acquisitions of property and equipment of$500 or greater as well as certain software development costs. Costs incurred in the preliminary stages of software development are expensed. Costs incurred thereafter, including external direct costs of materials and services as well as payroll and payroll-related costs, are capitalized. Post-development costs are expensed. Depreciation is computed using the straight-line method over the estimated useful lives of the depreciable assets. Other expense Net interest expense. Net interest expense primarily includes the interest expense associated with the VPC Facility that funds the Rise installment loans, the ESPV Facility related to the Elastic lines of credit and related Elastic SPV entity, and the EF SPV and EC SPV Facilities that fund Rise installment loans originated byFinWise Bank and CCB, respectively. Interest expense also includes any amortization of deferred debt issuance cost and prepayment penalties incurred associated with the debt facilities. 60
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