Enova International - Earnings Call - Q3 2018

Transcript

Speaker 0

Good afternoon, and welcome to the Enova International Third Quarter twenty eighteen Earnings Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Monica Gold, Investor Relations for Enova. Please go ahead.

Speaker 1

Thank you, Phil, and good afternoon, everyone. Enova released results for the 2018 ended September 3038, this afternoon after the market closed. If you did not receive a copy of our earnings press release, you may obtain it from the Investor Relations section of our website at ir.enova.com. With me on today's call are David Fisher, Chief Executive Officer and Steve Cunningham, Chief Financial Officer. This call is being webcast and will be archived on the Investor Relations section of our website.

Before I turn the call over to David, I'd like to note that today's discussion will contain forward looking statements based on the business environment as we currently see it and as such does include certain risks and uncertainties. Please refer to our press release and our SEC filings for more information on the specific risk factors that could cause our actual results to differ materially from the projections described in today's discussion. Any forward looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. In addition to U. S.

GAAP reporting, we report certain financial measures that do not conform to Generally Accepted Accounting Principles. We believe these non GAAP measures enhance the understanding of our performance. Reconciliations between these GAAP and non GAAP measures are included in the tables found in today's press release. As noted in our earnings release, we have posted supplemental financial information on the IR portion of our website. And with that, I'd like to turn the call over to David.

Speaker 2

Thanks, Monica. Good afternoon, everyone, and thanks for joining our call today. I'm going to start by giving a brief overview of the quarter, then I'll update you on our 2018 strategy. And finally, I will share our perspectives looking forward. After my remarks, I'll turn the call over to Steve Cunningham, our CFO, to discuss our financial results and guidance in more detail.

The third quarter was another impressive quarter for Inova. We once again produced strong new customer growth that drove record revenue. And stable credit and efficient marketing allowed us to deliver solid profitability even with the high mix of new customers. Revenue increased 35% year over year to $294,000,000 This is well above the high end of our guidance range and marks the tenth consecutive quarter of double digit year over year revenue growth and the third consecutive quarter of growth in excess of 30%. Adjusted EBITDA for the quarter rose 30% year over year to 44,000,000 and adjusted EPS increased 84% to $0.46 Both of these metrics were in line with the midpoint of our guidance.

Due to the strong demand, loans to new customers represented 31% of total originations in the quarter. This is the highest level we have seen since 02/2004, our first year in business. As we've mentioned in the past, these new customers ultimately expand our returning customer base and our revenue potential going forward. As we have commented on many times, strong revenue growth, particularly from new customers, typically leads to more muted earnings as we incur marketing dollars to track those new customers and reserve a larger provision for losses upfront. However, we have shown our ability to overcome this challenge by keeping marketing expenses low and credit performance high, all while leveraging our efficient online model, which has enabled us to significantly grow the business without adding large amounts of infrastructure and expense.

This is how we produce 30 plus percent adjusted EBITDA growth even with the sizable revenue growth. The strong new customer growth we have been generating, combined with a solid base of loyal returning customers and stable credit across the portfolio, creates significant tailwinds for us. Our total AR has increased 32% year over year, which is built in earnings, especially when you layer on expected additional growth from all of the new customers we've been acquiring. Based on these strong tailwinds, we are raising both our Q4 and full year guidance, as Steve will discuss in more detail. We are also very optimistic about 2019 and our ability to generate continued growth and increasing profitability.

While we are seeing strength across all of our businesses, our installment and line of credit products are resonating the strongest with our customers, proving out the merits of our diversification strategy. Total company wide originations in Q3 increased 16% sequentially and 23% year over year. Installment loans and lines of credit now comprise 80% of our total revenue and 90% of our total portfolio. Our success and positive results across our short term line of credit and installment and receivable purchase agreement segments is attributable to our focus on our six growth businesses, namely our U. S.

Subprime business, our U. S. Near prime offering, our U. K. Consumer brands, U.

S. Small business financing, our installment loan business in Brazil and Innova Decisions, our Analytics as a Service business. We remain focused on actively building out each of these businesses and adding additional products within them to drive further growth. We are seeing growth accelerate in our large U. S.

Subprime consumer business even with its large size. Originations in this business increased 28% year over year. The portfolio remains well diversified, consisting of 48% line of credit products, 34% installment products and only 18% single pay products. According to the OCC, millions of consumers in The United States borrow nearly $90,000,000,000 every year in short term small dollar loans. We're committed to helping these hardworking people get access to fast, trustworthy credit.

Given our single digit market share in this large and fragmented market, our vast experience and continued strong demand, we believe we have significant runway ahead of us to further grow our U. S. Subprime offering. In The U. K, we are also seeing very strong growth.

We remain the leading subprime lender by market share and we believe we are well positioned to capture additional share. As many of you are aware, one of our largest competitors in The U. K. Went into administration during the third quarter, primarily driven by company specific factors and lack of profitability combined with elevated customer complaints. While the entire subprime industry in The U.

K. Is facing higher complaints to the financial opposition, we believe our compliance lending and best practices position us well to succeed long term in The U. K. We'd like to provide some additional color on our performance in The U. K.

This quarter. Third quarter U. K. Revenue increased nearly 20% compared to the same period last year, primarily driven by strong growth in our installment loan product. Loan originations rose 17% from Q3 of last year, led by robust new customer growth.

And while complaint related expenses have increased, you can see that it has had little impact on Inova overall given our significant scale. Operations and technology expenses, which includes costs related to U. K. Complaints, only increased 4% year over year even with the 35% overall revenue growth for Inova. As we've mentioned before, our U.

K. Business continues to be profitable, and our results reflect sustainable, steady growth even with the rise in complaints. Net credit loan balances increased 37% year over year to $453,000,000 and originations increased 21% year over year. Our U. S.

Near prime product represented 50% of our total portfolio at the end of Q3. We've been very successful at growing this business by taking share from incumbent brick and mortar installment lenders due to the ease of use and flexibility of our online model. As Steve will discuss in more detail, to support net credit's rapid growth, we've added additional liquidity this year, which has also lowered our cost of capital. Our small business financing portfolio represented 8% of our total book at the end of Q3. Originations were flat year over year and our loan portfolio contracted 5%, reflecting our cautious approach to small business lending rationalizes.

Our hard work over the last couple of years to build a stable and robust lending and operating platform in Brazil is starting to yield results. Our Brazilian loan portfolio increased 17% year over year to $20,000,000 at the end of Q3. On a constant currency basis, Q3 originations rose 59% year over year and 30% sequentially. We continue to see significant opportunity in Brazil with a huge population, growing middle class and stable regulatory environment. And we believe we are uniquely positioned to grow our market share with our great team flexible online model.

Lastly, Enova Decisions, our real time analytics as a service business, continues to gain momentum. While this business is still in the very early stages, we are active in building out our pipeline and are excited about the opportunity to increase our rates of customer acquisition. Before wrapping up my remarks, I want to provide a brief regulatory update. A few weeks ago, the California Department of Business Oversight sent a request for information to lenders asking about their interaction with lead providers in the state. Our CashNetUSA business received this request and will provide a response.

The DBO has said that this request is intended to obtain data to support legislation requiring the licensing of lead providers. Our team is engaged with our industry partners and with legislatures to address this and other areas that can provide good regulation based on data and protect consumers' access to credit. As you know, our dependence on lead providers has decreased dramatically over the last few years. In fact, lead providers are a competitor of ours across all of our marketing channels. And we believe we could be a significant beneficiary if they are more strictly regulated.

On the federal level, two weeks ago, the CFPB announced that it intends to engage in rulemaking to reconsider the small dollar rule, which currently has a scheduled implementation date of August 2019. The CFPB said they expect to issue a notice of proposed rulemaking in early twenty nineteen that will address reconsideration of the rule on its merits as well as address changes to the compliance date. It isn't clear what the outcome will be of the new rulemaking, but we have identified areas where the current rule would benefit from improvement and we are committed to work with the bureau as it seeks to improve the rule. Our ongoing diversification efforts have reduced our regulatory risk, and the flexibility of our online model provides us with a significant advantage to adapt to new regulation. As a result, we are confident in our ability to continue to have a robust U.

S. Business under any likely final rule and believe we will have a significant advantage over storefront lenders. Overall, we are excited about the strong growth and sustained momentum at Enova. Revenue is up 30% year to date versus last year, driven by strong demand and stable credit across each of our six growth businesses as we have shown our ability to obtain larger and larger numbers of new customers. And we remain determined on managing the business to maintain consistent profitability even with strong growth as evidenced by adjusted EPS being up 86% year to date.

Finally, we believe our focused growth strategy, ongoing diversification, scalable online model and world class team position us well for long term profitable growth. Now I will turn the call over to Steve, our CFO, who will provide more details on our financials and guidance. And following his remarks, we'll be happy to answer any questions that you may have. Steve?

Speaker 3

Thank you, David, and good afternoon, everyone. I'll start by reviewing our financial and operating performance for the third quarter and then provide our outlook for the fourth quarter and the full year 2018. We are pleased to report another quarter of strong financial results with receivables growth again above 30%, revenues substantially above our expectations and adjusted EBITDA and adjusted earnings per share at the midpoint of our guidance. Total third quarter twenty eighteen revenue increased 35% to $294,000,000 exceeding our guidance range of $260,000,000 to $275,000,000 and rose 16% sequentially. On a constant currency basis, revenue increased 36% year over year.

And we are growing faster. Revenue growth accelerated from a year ago in the second quarter driven by an increase in total company combined loan and finance receivables balances, which rose 32% year over year to $1,020,000,000 from $772,000,000 at the end of the 2017. Installment loan and line of credit products continue to drive the growth in total loans and finance receivables balances. Total company originations during the quarter increased 23% year over year to $698,000,000 while originations in our installment and RPA and line of credit products increased 2744% respectively. As we've discussed in the past, the ongoing diversification of our receivables portfolio has been generating faster receivables growth in our line of credit installment loan products.

These products have longer durations and higher average loan amounts. As a result, we're able to drive higher total company receivables and revenue growth with fewer originations, which generally should result in less effort and lower cost to grow over time. This is a leading factor of the recent trend of lower operating expense as a percentage of revenue. Domestically, revenue increased 38% on a year over year basis and rose 18% sequentially to $251,000,000 in the 2018. Domestic revenue accounted for 85% of our total revenue in the third quarter.

Revenue growth in our domestic operations was driven by a 41% year over year increase in installment loan and finance receivable revenue and a 43% increase in line of credit revenue. Continued strong demand for these products drove our domestic combined loan and finance receivables balances up 34% year over year. Driven by the strong growth of net credit, domestic near prime installment loans grew 37% year over year and comprised 44% of total company combined loan and finance receivables balances at the end of the third quarter. International revenue increased 18% from the year ago quarter to $43,000,000 and accounted for 15% of total revenue in the third quarter. On a constant currency basis, international revenue rose 23% on a year over year basis.

Year over year international revenue growth was driven by a 29% increase in international installment loan revenue and a 7% increase in short term loan revenue. International loan balances were up 20% year over year as international installment loans grew 23%. International installment originations rose 43% compared to the year ago quarter. On a constant currency basis, international loan balances were up 28% year over year. Turning to gross profit margins, our third quarter gross profit margin for the total company was 44% which compares to 51% in the year ago quarter and a gross profit margin of 52% in the 2018.

We typically see a decline in gross profit margin during the second half of the year as we move into our seasonal growth periods. This can be especially pronounced during periods of accelerating growth like we've experienced in recent quarters and if a higher proportion of growth is coming from new customers. As we've highlighted in the past, higher mix of new customers and originations requires higher loss provisions upfront as new customers default at a higher rate than returning customers with a successful history of payment performance. Originations from new customers across all of our businesses were 31% of the total, which as David mentioned is the highest quarterly proportion we've seen since 02/2004. New customer originations accounted for 37% of the quarterly year over year change in total company originations.

Through the first nine months of twenty eighteen, new customer originations have totaled 29% of total company originations compared to 26% for the same period a year ago and have accounted for 43% of the year over year increase in total company originations for that period. Net charge offs as a percentage of average combined loan and finance receivables increased in the third quarter to 13.8% from 11.9% in the prior year quarter. This increase was expected given the rising proportion of new customers in our portfolio. Overall, the credit performance of the portfolio was stable during the quarter and in line with our expectations given the significant increase in new customer volumes so far this year. Similarly, the allowance and liability for losses for the consolidated company as a percentage of combined gross loan and finance receivables at the end of the third quarter was 15.1% compared to the year ago quarter at 13.9%.

As you can see in our supplemental earnings release tables, the increase in the consolidated net charge off ratio is driven by the year over year increases in the line of credit and installment loan and RPA segments which are experiencing the fastest growth and the highest proportion of new customer volume and originations. Let me use the line of credit segment as a simplified example of how significant increases in new customer volume can increase the provisional expense in line with our credit expectations. For the first nine months of 2018, about one third of our originations for the line of credit segment were from new customers. This compares to 24% for the same period in 2017. In addition, in recent vintages, new customers in the segment charge off on average at a rate roughly three times higher than for returning customers.

So if about 9% more of the line of credit segment portfolio is comprised of new customers that on average will charge off at roughly three times higher, then all things being equal, you would expect to see the ratio of portfolio charge offs to rise about 36%. Net charge offs as a percentage of average combined loan and finance receivables in this segment increased in the third quarter to 18.1% from 13.4% a year ago or about 35%. The same new versus returning customer dynamics apply to all of our segments as it relates to net charge off and allowance coverage levels and trends. And our marginal investment decisions for acquiring vintages of new customers considers not just the expected performance on the first loan but also the expected lifetime value of customers as they become recurring customers. We are very pleased with our ability to continue to attract new customers as this sets us up very well for continued profitable growth in the future.

We expect the fourth quarter and full year consolidated gross profit margin to be within our expected range of 47% to 57%. You may recall that the fourth quarter gross profit margin typically falls in the low end of our range due to seasonality. And in fact, our gross profit margin for the 2017 was 48%. Ultimately, the fourth quarter and full year consolidated gross profit margins will be influenced by the pace of growth in originations, the mix of new versus returning customers in originations and the mix of loans and financings in the portfolio. Our domestic gross profit margin was 43% in the third quarter compared to 51% in the 2017.

Gross margin declined from 52% in the second quarter driven by the reasons I previously discussed. Our international gross profit margin was 51% in the third quarter compared to 48% in the prior year quarter. The increase in international gross profit margin from the year ago quarter was driven primarily by higher UK installment yields and a lower cost of revenue for UK short term products. We expect our international gross profit margin for the full year to be at the low end of our range of 50% to 60% driven by the pace of growth we see especially in The UK as well as the mix of new and returning customers. Turning to expenses, strong operating leverage from our scalable online model has allowed us to continue to meet strong customer demand while maintaining attractive levels of EBITDA.

Total non marketing operating expenses of $53,000,000 for the third quarter were flat to the year ago quarter and our total operating expense including marketing were $89,000,000 or 30% of revenue in the third quarter compared to $79,000,000 or 36% of revenue in the 2017. Marketing expenses in the third quarter grew 33% compared to the year ago quarter to $36,000,000 or 12% of revenue compared to twenty seven million dollars or 12% of revenue in the 2017. The increase in marketing spend drove strong customer volumes this quarter while maintaining attractive CPFs. We expect marketing spend will likely range in the mid teens percentage of revenue for the remainder of the year. Operations and technology expenses totaled $28,000,000 or 10% of revenue in the third quarter compared to $27,000,000 or 12% of revenue in the 2017 and were higher primarily on volume related variable expenses including the ongoing expenses associated with complaints in The UK.

General and administrative expenses were $24,000,000 or 8% of revenue in the third quarter compared to $25,000,000 or 12% of revenue in the third quarter of the prior year and reflect lower legal compliance and personnel expenses. Adjusted EBITDA, a non GAAP measure of $44,000,000 increased 30% year over year in the third quarter. Our adjusted EBITDA margin was 15.1% compared to 15.7% in the third quarter of the prior year. Our stock based compensation expense was 2,900,000 in the third quarter which compares to $3,000,000 in the 2017. Our tax provision for the third quarter benefited primarily from utilizing available tax methods and elections to accelerate tax deductions on the 2017 tax return filing.

In typical years, these deductions would have only resulted in changes to the timing of recognition of taxes between financial reporting and tax returns. However, because of the recent federal tax law change, one time permanent savings from these deductions were required to be recognized in the tax provision line. We continue to believe that our normalized effective tax rate will be in the mid 20%. Net income was $15,300,000 in the third quarter or $0.43 per diluted share, which compares to a net loss of $3,400,000 or a loss of $0.10 per diluted share in the 2017. Net income has benefited from rising EBITDA, a drop in the company's cost of financing and a drop in the effective tax rate.

Net income includes a loss on the early extinguishment of debt during the quarter of $12,500,000 as a result of retiring $179,000,000 of our nine point seven five percent twenty twenty one notes during the quarter with a portion of the proceeds from our 8.5% unsecured senior note issuance during September. The remaining nine point seven five percent twenty twenty one notes recalled during October using unrestricted cash and cash equivalents. Adjusted earnings, a non GAAP measure, increased 89% to $16,300,000 or $0.46 per diluted share from $8,600,000 or $0.25 per diluted share in the third quarter of the prior year. During the third quarter, flows from operations totaled $172,000,000 and we ended the quarter with unrestricted cash and cash equivalents of $164,000,000 and total debt of $951,000,000 Our debt balance at the end of the quarter included $226,000,000 outstanding under our $445,000,000 of combined installment loan securitization facilities. We continue to successfully access financing markets to provide new sources of efficient capital to support growth or re ladder and refinance existing debt.

During the quarter, we accessed the unsecured senior note market to raise $375,000,000 of seven year notes at 8.5% which were used to retire existing 9.75 notes and support liquidity as we move into our seasonal peaks for growth. Also in October, we amended our bank led secured revolving line of credit to increase borrowing capacity from $75,000,000 to $125,000,000 with no change in the borrowing cost of prime plus 1%. Today, announced two additional transactions. First, we added a new two year $150,000,000 secured facility at a cost of one month LIBOR plus three seventy five basis points to support the growth of our net credit near prime installment product. The new facility brings our total near prime secured facility capacity to $595,000,000 And finally, today we also announced the pricing of our inaugural multi class net credit term securitization.

$125,000,000 security has a blended fixed cost of six percent. The transaction reflects our ability to access a new market, expands our investor base and further lowers our cost of financing. In total so far this year, we have raised $885,000,000 of funding from diverse sources at competitive costs resulting in our lowest public company quarterly cost of funds ever despite increases in market interest rates. Our cost of funds for the third quarter was 9.6%, a 70 basis point decrease from the same quarter a year ago. We expect our cost of funds to continue to improve into 2019 as we recognize the cost benefits of recent transactions.

Now I'd like to turn to our outlook for the fourth quarter and full year 2018. Our outlook reflects continued strong growth in each of our businesses, stable credit, a sustained higher mix of new customers and originations and no significant impacts to our businesses from regulatory changes. Any significant volatility in the British pound from current levels could impact our results. We expect to experience our typical quarterly seasonality during the 2018 as we continue to add new customers across our businesses. During our peak growth period, gross margin, EBITDA and earnings per share could be impacted by higher marketing spend and provisions for losses.

As noted in our earnings release, we are raising our 2018 guidance. We expect total revenue to be between $290,000,000 and $310,000,000 diluted earnings per share to be between $0.17 and $0.38 per share adjusted EBITDA to be between $43,000,000 and $53,000,000 and adjusted earnings per share to be between $0.40 and $0.61 per share. For the full year '18, we are again raising our guidance and now expect total revenue to be between $1,091,000,000 and $1,111,000,000 diluted earnings per share to be between $1.92 and $2.13 per share, adjusted EBITDA to be between $2.00 $5,000,000 and $215,000,000 and adjusted earnings per share to be between $2.46 and $2.67 per share. We will provide detailed guidance for 2019 on our Q4 call early next year. But as David mentioned, we are very optimistic about 2019 and our ability to generate growth and increasing profitability.

And with that, we would be happy to take your questions. Operator?

Speaker 0

Thank you. We will now begin the question and answer session. The first question comes from David Scharf with JMP Securities. Please go ahead.

Speaker 4

Hi, good afternoon. Thanks for taking my questions. It's probably similar to what I asked the last couple of quarters, but maybe just starting on the demand side. I know you've acknowledged, David, that you still have, you know, very limited market share in this overall TAM. But I'm just curious, I mean, any sense for where some of the where a lot of these new customers are coming from, and whether there are other products there they may be refinancing with with yours as well?

Speaker 2

Yeah. I mean, I think, David, you're overthinking this a little bit. These are shorter term ish loans, even our net credit product, you know, with an average Right. Average term of four or five years, the average duration of kind of only two plus. People aren't refinancing to go into these short term products.

They're taking loans when they need them. So they're continually back in the market. And when they're in the market, they're going to what they view as the most attractive source. And because of the new products we've rolled out, our efficient marketing, our pricing, our website, we are continually winning when they're in the market. It's a nice thing about the product, right?

It's not like a thirty year mortgage, where if you lose the customer, it's a long time until you have another bite at the apple. We continually have bites at the apple. And with single digit market share, we have lots of opportunity to continue to grow by winning those winning those continuous opportunities. So it's it's really a combination of those factors. It's great product, continuous improvement on the product side, continual shift to installment and line of credit.

And those aren't one off things. And we have numerous installment products and numerous line of credit products. When you combine those with really good marketing, we are winning when those customers are in the when they're in the marketplace for credit. Got it. It's advantage over our business over like a long any kind of other long product, loan product or any other product, you have when you're doing well, you have lots of opportunity to take share.

Speaker 4

Yeah. Well, maybe what I was getting at, obviously, are short term in nature and so are a lot of the store based installment lenders that you're taking share from. And I didn't know if any of your customers may maybe in situations where they pay down, you know, 50 to 75% of store based loan, didn't get re upped maybe by that lender and then are coming online, but but it's

Speaker 2

not that mhmm. Yeah. No. It's not that. I mean, storefront lenders, you know, historically will continue to fund their customers for forever, the storefront guys.

I think what we're seeing is customers would much rather, go online and, you know, the efficiency of just logging on their phone anytime, any place, anywhere, not having to schlep down to the storefront lender with kids in tow and bringing their paperwork along with them. Instead, just apply it in over, be improved in as little as five minutes. And increasingly, we're able to do same day funding with our customers. So some of the historic benefits of the storefront lenders in terms of speed are quickly going away with the rapid rise of same day funding.

Speaker 4

Got it. You know, turning And to the credit side, you know, it's been a recurring theme, obviously, with the percentage of new customers within the origination pool that it requires more provisioning upfront. You know, I probably asked in the past whether you wanted to go much beyond 30%, you know, of volumes, you know, being attributable to new customers. It looks like you, you know, broached that this, this quarter. Just trying to get a sense.

I mean, should we be thinking about an inflection point, in in of, you know, the the the percentage of the overall portfolio that that's consists of repeat borrowers and when loss rates might peak? It's such a it's such a fluid moving target in terms of modeling, you know, expected losses, trying to get a little more of a road map into sort of this 14% -ish range for blended quarterly losses, we should be thinking of that as a peak, or should it go beyond that?

Speaker 2

I think as I mentioned in my prepared remarks, we're still seeing very strong demand. We don't see that abating anytime We could be proven wrong, but from what we see right now, our products are continuing to resonate extremely well in the market. The demand remains strong. And I think as we try to emphasize on the call, there's really two things that are encouraging us to continue to take all the new customer volume good new customer volume that we can. The first is even with those high that high level of new customer growth, we're still able to generate strong overall profitability, because of the stable credit and, you know, kind of efficient operating structure.

And that we are able to we are seeing across our portfolio and across our our vintages. So the combination of those factors makes us absolutely willing to take, all the good and new customer volume we we can, we can get because we're building a strong business ahead without having to invest at levels that are challenging our profitability today. So we think we're in a really nice spot that allows us to lean into that strong demand.

Speaker 4

Okay. Hey, one last quick one, and I'll get back in queue. Hey, on the small business product, it's been quite a number of quarters where you've provided similar commentary about being cautious and restrained. And I you know, the big public comp out there in online small business lending has actually sort of voiced a maybe contrasting viewpoint that, you know, relative to maybe a couple years ago, it's not as frothy. I'm wondering, David, are there a few things that you're looking for in particular that sort of drive a decision about whether you want to reaccelerate that business or perhaps wind it down?

Speaker 2

You know, look. The business is profitable today, and it doesn't require, you know, a huge amount of focus. It's got a good team that, you know, is kind of separate. And so it's we're we're able to tread water a little bit here. You know, I hear comments about OnDeck, but, Matt, keep in mind, their focus over the last two years has been retrenching on the origination side and cutting expenses.

So, you know, it's it's it's still unclear, you know, with know, even at a, you know, kind of that size of originations, they're able to make a, you know, a significant amount of money. So, that keeps us actually remaining cautious With the business not being a drain on the rest of our resources, we're willing to be patient. We won't be patient forever. But for now, we believe in the market long term, unlike other businesses where we've exited where we didn't believe in the market long term. So we're still patient, and we'll see how the market evolves over the next year or two.

Speaker 5

Perfect.

Speaker 0

Thank you. The next question comes from Jon Rowan with Janney. So

Speaker 5

I just want make sure I understand. In the press release, says stable credit. Obviously, charge offs are higher year over year. When you talk about stable credit, what we're talking about is just that the charge off rates between new customers and existing customers are stable, but the mix shift toward new customers is causing the overall charge off rate to go higher. Is that an accurate statement and how to interpret your comments?

Speaker 2

That that's exactly right. And Steve gave that really detailed example of how with the exactly how it works on the line of credit portfolio, how you can see that that effect. So, yeah, that's correct. If you kind of isolated credit performance across vintages with new customers and separated them for, existing customers, you would see very stable charge off rates.

Speaker 3

And, John, I think if you go back I was gonna add, John. If you go back and look at our allowance coverage through time, which is really covering the next ninety days of losses, I think you can see we're pretty close, from quarter to quarter with how we're doing that, which is another good example of that with expectations and stability.

Speaker 5

Okay. What was the data that you gave about new customers? I didn't get get it down. I was trying to if you could repeat it.

Speaker 3

Sure. So for the quarter, it was 31 percent. The other piece I gave for the consolidated company was the year to date new customer proportion in originations, which for 2018 year to date is 29% versus 2017, it was 26%.

Speaker 5

We're talking about new customer origination as a percent of total originations. Correct?

Speaker 3

That's that's correct.

Speaker 5

Okay. And then, just one question on regulations. You guys kinda opened the door to the question. So you guys have always talked about, you know, addressing new customers as if, you know, and assigning a lifetime value to them. Right?

Obviously, we're gonna we're kind of in limbo as far as what the regulations are gonna look like. And how do you handicap that? And is there, you know, any risk of a change in the way you address a new customer, going into 02/2019, based on how you will assess their lifetime value when, you know, we don't necessarily know what the end product's gonna be from the CFPB?

Speaker 2

Yeah. I mean, we've been taking into account the CFPB's proposed rule for quite some time now. It's been out, you know, the the the final rule, which is now the not final rule for quite some time now. It's been a proposed rule for over two and a half years now maybe. And so that's you know, we've had that calculus for a long time.

We don't know what the new final rule the new proposed rule, which will become the new final rule, will look like, but we certainly expect it to give us more area to operate as opposed to less than the current final rule. That sounds like it won't become effective. So that will only likely increase the expected lifetime value of our customers compared to the current final rule.

Speaker 5

So just to be clear, you are already assessing customers on a lifetime basis based on what the, you know, the prior final rule was. Right?

Speaker 2

are we are certainly taking that to account in our calculation. Yeah.

Speaker 5

Okay. So if we get a better new new final rule, those lifetime values will look better. And, frankly, I mean, I'm just kind of, you know, interpolating your your comments here. You know, we could even see more aggressive new customer growth, if you're assigning better lifetime values under, you know, the new new rules, whatever whatever

Speaker 3

they may

Speaker 5

be, if they are less restrictive.

Speaker 2

It's certainly possible, but obviously highly dependent on what that that new final rule says.

Speaker 5

Okay. Thank you.

Speaker 2

Yep.

Speaker 0

K. The next question comes from John Hetched with Jefferies. Please go ahead.

Speaker 6

Hey, guys. Thanks very much for the call. The quick first question I have is just in terms of modeling. I mean, you've obviously, you've refied with the lower cost of funds, but it sounds like you've added a lot of liquidity or capacity as well. Can you give us a sense for kind of run rate Q4 interest expense?

How we should think about that?

Speaker 3

Yeah, John. I would I gave you the the third quarter cost of funds. I think you can probably take a couple of the notes that we released today on the new transactions and start to factor those in as well. I mentioned that we're not carrying as much cash now as we were at the end of the quarter because we use that to call the remaining, nontender 2021. So I think we're increasingly focused on carrying reasonable amounts of cash on the balance sheet and keeping our standby ready to go at the levels that we've talked about.

So you should expect to see that cost of funds, all things being equal, without a big spike in the underlying indexes to continue to sort of creep down from where we

Speaker 2

are at.

Speaker 6

Funds certainly is gonna go over. I'm wondering, do you it just you've added some threshold debt too for kind of growth capacity or liquidity? And so I'm wondering, do you have a sense for what the dollar amount of interest rate should trend for next quarter?

Speaker 3

It's all going to depend on the growth, John.

Speaker 2

Most of the debt we most of the debt we added is capacity that will get filled with originations as opposed to, you know, debt you're taking up front cash you're taking up front and paying interest on up front.

Speaker 3

Yeah. The senior note balance the senior note balance is up a little bit. We kinda prefunded, which is the way we always do it when we issue a new note, but the overall coupon is down now to 8 and a half versus where we were blended. And as David mentioned, our standby so most of our financings now are stand in standby mode and pull them as you need them versus carrying the cash.

Speaker 6

So much more efficient. Got it. I appreciate that. Sorry. Were you going to say something else?

Speaker 2

Nope. Nope. Nope.

Speaker 6

Okay. And then I don't understand there's a huge component of the fluctuation there's seasonal components and fluctuations in charge offs and then also the mix of new customers and so forth. In the line of credit product, it's undergone really rapid growth. And I'm just wondering if the kind of rate the range of charge offs we're in now, is that more reflective of a maturing mix of new versus used customers? Or should we still expect kind of migration there?

Speaker 2

Yeah. I mean, the rate of growth in the line of credit product is still very strong. Now it is becoming just because of the way just because that that product tends to be newer, it is becoming more existing as a proportion faster than some of the other products. Just because three years ago, was almost a 100 new customers. We hadn't been been in that product for very long.

But, the rate of growth, new customer growth, is very, very strong in that product. So it's still gonna it it's still gonna have higher charge offs for some time to come, which is a great which is, from our standpoint, you know, a great, great thing. I mean, it's a really strong product. Customers love it. Retention levels are very, very high.

We have good profitability in that product. We are extremely excited to be growing that product as fast as we are.

Speaker 6

Okay, great. And then final question is, Steven, have you ever given any have you been able to give any thought to what you're able to tell us Or is it still something you're kinda working through?

Speaker 3

Yeah. It's it's a little early. We still have a a little bit to go, but it's definitely something that we're looking at. And as we go, you know, as we're into 2019, obviously, we will talk more about that as it relates to, impacts on our performance or adjustments to the outlook. So stay tuned.

It'll be It's really just gonna be with an implementation at one time, if you recall, sort of a one time balance sheet adjustment. And then from there forward, you know, hopefully, it'll it'll actually maybe stabilize things a bit compared to our quarterly approach that we have today.

Speaker 6

Wonderful. Congratulations on a good quarter and thanks very much.

Speaker 3

Thanks, John.

Speaker 2

Thanks, John.

Speaker 0

This concludes our question and answer session. I would like to turn the conference back over to David Fisher for any closing remarks.

Speaker 2

Great. Thanks, everybody, for joining us on our call today. We look forward to catching up in early twenty nineteen to give you the wrap up on the year. Thanks a lot. Have a good rest of your day.

Speaker 0

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.