ELEVATE CREDIT, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)
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 2.7 million customers with $10.0
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."
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 March 31, 2022 .
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"), 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. As the primary beneficiary, 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 by
FinWise Bank and sold to EF SPV.
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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 than FinWise Bank . Similar to the relationship with
FinWise 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. As the primary beneficiary, 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 to
Elastic SPV, Ltd. ("Elastic SPV") and Elastic SPV receives its funding from VPC
in a separate financing facility (the "ESPV Facility"), which was finalized on
July 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 at
March 31, 2022 .
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. These credit card
receivable purchases are funded through a separate financing facility (the "TSPV
Facility"), and through cash flows from operations generated by the Today Card
portfolio. The TSPV Facility has a maximum commitment amount of $50 million ,
which may be increased up to $100 million . As the lowest APR product in our
portfolio, Today Card allows us to serve a broader spectrum of non-prime
Americans. 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 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.
In January 2022 , we collaborated with Central Pacific Bank ("CPB") to invest in
the launch of a new fintech company, Swell Financial, Inc. ("Swell"). The Swell
App includes several groundbreaking features to help customers automatically
control their spending, tackle debt, and invest in exclusive private market
opportunities with as little as $1 thousand . We will help CPB and Swell offer
the Swell Credit line of credit product with APRs between 8% and 24%. Our
current total investment carrying value in Swell, using equity method
accounting, is $5.5 million and we have a non-controlling interest in Swell.
Our management evaluates our financial performance and our future strategic objectives using key indicators 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 legacy US
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 maintained our strong credit quality. With the adoption of
fair value for the loans receivable portfolio effective January 1, 2022 , the
credit quality metrics we monitor include net charge-offs as a percentage of
revenues, change in fair value of loans receivable as a percentage of revenues,
the percentage of past due combined loans receivable - principal and net
principal charge-offs as a percentage of average combined loans
receivable-principal. Prior to our adoption of fair value for the loans
receivable portfolio effective January 1, 2022 , our credit quality metrics also
included the combined loan loss reserve as a percentage of outstanding combined
loans and total provision for loan losses as a percentage of revenues. Under
fair value accounting, a specific loan loss reserve is no longer required to be
recognized as a credit loss estimate is a key assumption used in measuring fair
value. See "-Non-GAAP Financial Measures" for further information.
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•Margin expansion. We aim to manage our business to achieve a long-term
operating margin of 20%. In periods of significant loan portfolio growth, our
margins may become compressed due to the upfront costs associated with
marketing. Prior to our adoption of fair value for the loans receivable
portfolio, we incurred upfront credit provisioning expense associated with loan
portfolio growth. When applying fair value accounting, estimated credit loss is
a key assumption within the fair value assumptions used each quarter and
specific loan loss allowance is no longer required to be recognized. 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 be approximately 10% of revenues and our operating
expenses will decline to 20% of revenues. While our operating margins may exceed
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.
Choice of fair value option
Prior toJanuary 1, 2022 , we carried our combined loans receivable portfolio at amortized cost, net of an allowance for estimated loan losses inherent in the combined loan portfolio. EffectiveJanuary 1, 2022 , we elected the fair value option to account for all our combined loan portfolio in conjunction with our early adoption of Measurement of Credit Losses on Financial Instruments ("ASU 2016-13") and the related amendments. We believe the election of the fair value option better reflects the value of our portfolio and its future economic performance as well as more closely aligns with our decision-making processes that relies on unit economics that align with discounted cash flow methodologies that are utilized in fair value accounting. Refer to Note 1 for discussion of the election and its impact on our accounting policies. In accordance with the transition guidance, onJanuary 1, 2022 , we released the allowance for loan losses and measured the combined loans receivable at fair value at adoption. The cumulative-effect adjustment, net of tax, was recognized collectively as a net increase of$98.6 million to opening Retained earnings. In comparing our current period results under the fair value option to prior periods, it may be helpful to consider that loans receivable are carried at fair value with changes in fair value of loans receivable recorded in the Condensed Consolidated Statements of Operations. The fair value takes into consideration expected lifetime losses of the loans receivable, whereas the prior method incorporated only incurred losses recognized as an allowance for loan losses. As such, changes in credit quality, amongst other significant assumptions, typically have a more significant impact on the carrying value of the combined loans receivable portfolio under the fair value option. See "-Non-GAAP Financial Measures" for further information.
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 experienced 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 resulted 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. 41 -------------------------------------------------------------------------------- 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 we originated in the third and fourth quarters of 2021 as we grew the loan portfolio to a level that approximated our pre-pandemic size and the ending of government assistance, we are experiencing a short-term increase in net charge-offs in excess of our targeted range with an expectation of net charge-offs returning to our targeted range of 45-55% of revenue as the portfolio becomes more seasoned with a balance of new and returning customers, in the second half of 2022. 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 a 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 into the next 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.
KEY FINANCIAL AND OPERATIONAL INDICATORS
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
March 31,
Revenue metrics (dollars in thousands, except as noted) 2022 2021
Revenues $ 124,244 $ 89,733
Period-over-period change in revenue 38 % (45) %
Ending combined loans receivable - principal(1) $ 511,319 $ 353,089
Average combined loans receivable - principal(1)(2) $ 535,857 $ 378,877
Total combined loans originated - principal $ 205,487 $ 133,514
Average customer loan balance(3) $ 1,993 $ 1,817
Number of new customer loans 19,303 13,890
Ending number of combined loans outstanding 256,615 194,331
Customer acquisition costs $ 323 $ 316
Effective APR of combined loan portfolio 93 % 96 %
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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, / Loans
receivable at fair value, the most directly comparable financial measures
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 revenue is made up of Rise finance fees, Rise CSO fees (which are fees we receive from customers who obtain a loan through the CSO program for credit services, including loan guarantee, which we provide), revenue earned on the Elastic line of credit, and finance charges and fee revenue from the Today Card credit card product. See �?Components of Our Results of Operations – Revenues�?.
42 -------------------------------------------------------------------------------- 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. 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 130%. In this example, the customer's monthly installment loan payment would be$236.72 . 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$1,657.39 over the eight-month period and has an average outstanding balance of$1,912.37 . The effective APR for this loan is 130% over the eight-month period calculated as follows:
(
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$1,125 . The effective APR for the line of credit in this example is 107% over the payment period and is calculated as follows:
(
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$350 of interest for this customer, the effective APR for this loan would decrease to 103%. From the Elastic example above, if we waived$125 of fees for this customer, the effective APR for this loan would decrease to 95%. 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. 43 --------------------------------------------------------------------------------
The following tables summarize the evolution of customer loans by product for the three months ended
Three Months Ended March 31, 2022
Rise Elastic Today
(Lines of
(Installment Loans) Credit) (Credit Card) Total
Beginning number of combined
loans outstanding 134,414 110,628 35,464 280,506
New customer loans originated 12,147 4,392 2,764 19,303
Former customer loans originated 15,702 136 - 15,838
Attrition (44,187) (12,183) (2,662) (59,032)
Ending number of combined loans
outstanding 118,076 102,973 35,566 256,615
Customer acquisition cost (in
dollars) $ 330 $ 462 $ 70 $ 323
Average customer loan balance (in
dollars) $ 2,341 $ 1,806 $ 1,376 $ 1,993
Three Months Ended March 31, 2021
Rise Elastic Today
(Lines of
(Installment Loans) Credit) (Credit Card) Total
Beginning number of combined
loans outstanding 103,940 100,105 10,803 214,848
New customer loans originated 8,656 2,852 2,382 13,890
Former customer loans originated 12,856 94 - 12,950
Attrition (33,944) (13,030) (383) (47,357)
Ending number of combined loans
outstanding 91,508 90,021 12,802 194,331
Customer acquisition cost (in
dollars) $ 327 $ 475 $ 83 $ 316
Average customer loan balance (in
dollars) $ 2,209 $ 1,514 $ 1,149 $ 1,817
Recent trends. Our revenues for the three months ended March 31, 2022 totaled
$124.2 million , an increase of 38% versus the three months ended March 31, 2021 .
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 first quarter of 2022. Rise, Elastic, and the Today products experienced
year-over-year increases in revenues of 38%, 29%, and 254%, respectively, which
were attributable to increases in year-over-year average loan balances as we
focused on growing the portfolios beginning in the second half of 2021. The
Today Card balances increased significantly over the past year due to an
increase in marketing and origination activity during the second half of 2021,
and due to the nature of the product which provides an 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).
We experienced an increase in new and former customers as demand for the loan
products provided by us and the bank originators increased beginning in the
second quarter of 2021 and continuing through the first quarter of 2022. 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. All three of our
products experienced an increase in principal loan balances in the first quarter
of 2022 compared to a year ago. Rise and Elastic principal loan balances at
March 31, 2022 totaled $276.4 million and $186.0 million , respectively, up
roughly $74.3 million and $49.7 million , respectively, from a year ago. Today
Card principal loan balances at March 31, 2022 totaled $48.9 million , up $34.2
million from a year ago.
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-------------------------------------------------------------------------------- Our CAC was slightly higher in the first quarter of 2022 at$323 as compared to the first quarter of 2021 at$316 , with the first quarter CAC generally higher than our targeted range of$250-$300 due to the seasonal decrease in loan demand due to income tax refunds in the first quarter of each year. The new customer 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, and on an annual basis, 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-$100 CAC.
Credit quality
As
from and for the three months ended
2022 2021 (Pro-forma)(6) Net charge-offs(1)$ 76,819 $ 30,890 Net change in fair value(1)(6) 7,340 4,667 Total change in fair value of loans receivable (6)$ 84,159 $ 35,557 Net charge-offs as a percentage of revenues (1) 62 % 34 % Total change in fair value of loans receivable as a percentage of revenues(6) 68 % 40 % Percentage past due 11 % 6 % Fair value premium(6) 10 % 13 % As of and for the three months ended March 31,
Credit quality measures (in thousands of dollars), before the adoption of fair value
2021
Net charge-offs(2) $ 30,890
Additional provision for loan losses(2) (9,920)
Provision for loan losses $ 20,970
Total provision for loan losses as a percentage of revenues 23 %
Net charge-offs as a percentage of revenues(2) 34 %
Percentage past due 6 %
Combined loan loss reserve(4) $ 39,159
Combined loan loss reserve as a percentage of combined loans
receivable(3)(4)(5) 10 %
_________
(1)Net charge-offs and net change in fair value of loans receivable 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. Net change in fair value reflects
the adjustment recognized related to the change in the fair value mark during
the reported period. See "-Non-GAAP Financial Measures" for more information and
for a reconciliation to Change in fair value of loans receivable, the most
directly comparable financial measure calculated in accordance with US GAAP.
(2)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.
(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.
(4)Combined loan loss reserve is defined as the loan loss reserve for loans
originated and owned by us and consolidated VIEs 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.
(5)Combined loan loss reserve as a percentage of combined loans receivable is
determined using period-end balances.
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(6)We have provided pro-forma information reflecting the adoption of fair value
in the 2021 financial period to provide comparability to the 2022 financial
period. See "-Non-GAAP Financial Measures" for more information and for a
reconciliation to previously reported amounts for 2021 calculated in accordance
with US GAAP. The pro-forma fair value adjustments reflect fair value
methodology acceptable with US GAAP.
Net principal charge-offs as a percentage of
average combined loans receivable - principal First Second Third Fourth
(1)(2)(3) Quarter Quarter Quarter Quarter
2022 11% N/A N/A N/A
2021 6% 5% 6% 10%
2020 11% 10% 4% 5%
_________
(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 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 first quarter of 2022 is higher than the first
quarter of 2021 and consistent with this credit metric during 2019 and the first
quarter of 2020. The above chart depicts the historically low charge-off metrics
from the third quarter of 2020 through the third quarter of 2021, due to
COVID-19 pandemic impacts such as a lack of new customer demand, our
implementation of payment assistance tools, and government stimulus payments
received by our customers. Beginning in the fourth quarter of 2021, net
principal charge-offs as a percentage of average combined loans
receivable-principal have returned to the levels consistent with 2019 due to the
increased volume of new customers being originated as we rebuilt the loan
portfolio from the impacts of the COVID-19 pandemic in the second half of 2021
and return to a more normalized credit profile.
Upon adoption of fair value for the combined loans receivable portfolio on
January 1, 2022 , in reviewing the credit quality of our loan portfolio, we break
out our total change in fair value in loans receivable that is presented on our
Condensed Combined Statement of Operations under US GAAP into two separate
items-net charge-offs and net change in fair value. Net charge-offs are
indicative of the credit quality of our underlying portfolio, while net change
in fair value is subject to more fluctuation based on loan portfolio growth and
changes in assumptions used in the fair value methodology. The net change in
fair value is the change in the reporting period between the current period fair
value mark as compared to the beginning of period fair value mark. With all
other assumptions held flat and a fair value premium associated with the
combined loan portfolio, we would expect the net change in fair value to be
positive in periods of growth in the loan portfolio and expect the net change in
fair value to be negative in periods of attrition in the loan portfolio.
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.
46
-------------------------------------------------------------------------------- Net change in fair value. BeginningJanuary 1, 2022 , we utilize the fair value option on the combined loans receivable portfolio. As such, loans receivables are carried at fair value in the Condensed Consolidated Balance Sheets with changes in fair value recorded in the Condensed Consolidated Statements of Operations. To derive the fair value, we generally utilize discounted cash flow analyses that factor in estimated losses and prepayments over the estimated duration of the underlying assets. Loss and prepayment assumptions are determined using historical loss data and include appropriate consideration of recent trends and anticipated future performance. 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 is a consideration in the credit loss assumption used in the fair value assumptions as a significant increase in the percentage of past due loans may indicate a future increase in credit loss in the portfolio. As such, changes in credit quality, amongst other significant assumptions, typically have a more significant impact on the carrying value of the combined loans receivable portfolio under the fair value option. Future cash flows are discounted using a rate of return that we believe a market participant would require. Accrued and unpaid interest and fees are included in Loans receivable at fair value in the Condensed Consolidated Balance Sheets. Additional provision for loan losses. For financial data prior toJanuary 1, 2022 , in reviewing the credit quality of our loan portfolio, we broke out our total provision for loan losses that was presented on our statement of operations under US GAAP into two separate items-net charge-offs (as discussed above) and additional provision for loan losses. 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. 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 decreased 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 started to increase during the second half of the year, additional provision for loan losses was typically needed to increase the reserve for losses associated with the loan growth. Because of this, our provision for loan losses varied significantly throughout the year without a significant change in the credit quality of our portfolio. Loan loss reserve methodology prior toJanuary 1, 2022 . Our loan loss reserve methodology was calculated separately for each product and, in the case of Rise loans originated under the state lending model (including CSO program loans), was 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 were 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 were based on average historical loss rates by product (or state) associated with each of these three delinquency categories. Recent trends. Total change in fair value of loans receivable for the three months endedMarch 31, 2022 and pro-forma three months endedMarch 31, 2021 , was 68% and 40% of revenues, respectively, (See "-Non-GAAP Financial Measures" for more information and for a reconciliation to previously reported amounts for 2021 calculated in accordance with US GAAP.). Net charge-offs as a percentage of revenues for the three months endedMarch 31, 2022 and 2021 were 62% and 34%, respectively. The increase in net charge-offs as a percentage of revenues is due to the increase in originations beginning in the second half of 2021 with a heavier mix of new customers into the loan portfolio which have a higher credit loss profile than returning customers. We expect the second quarter net charge-offs as a percentage of revenue to be at the high end of our target range of 45-55% of revenue and will return within our target range during the second half of 2022 as the mix of new and returning customers in the portfolio normalizes. We continue to monitor the portfolio during the economic recovery resulting from COVID-19 and recent macro-economic factors and will adjust our underwriting and credit policies to mitigate any potential negative impacts as needed. Past due loan balances atMarch 31, 2022 were 11% 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. 47
-------------------------------------------------------------------------------- Net change in fair value as a percentage of revenue was 6% for bothMarch 31, 2022 and pro-formaMarch 31, 2021 , as the fair value premium was relatively flat with the fair value premiums calculated during the prior reporting periods (See "-Non-GAAP Financial Measures" for more information and for a reconciliation to previously reported amounts for 2021 calculated in accordance with US GAAP.). The fair value premium of the combined loans receivable-principal portfolio was 10% atMarch 31, 2022 compared to 13% atMarch 31, 2021 due to the composition of the loan portfolio with an increased mix of newly originated loans atMarch 31, 2022 as compared to a more mature loan portfolio atMarch 31, 2021 due to limited origination activity and significant paydowns experienced in the portfolio due to the effects of COVID-19. The key assumptions used in the fair value estimate atMarch 31, 2022 and 2021 are as follows:March 31, 2022 Credit loss rate 17 % Prepayment rate 27 % Discount rate 21 % Total loan loss provision for the three months endedMarch 31, 2021 , and prior to the adoption of fair value, which was below our targeted range of approximately 45% to 55%, was 23% of revenues. Net charge-offs as a percentage of revenues for the three months endedMarch 31, 2021 was 34% due to reduced demand and limited loan origination activity in 2020 and early 2021 coupled with customers' receipt of monetary stimulus provided by the US government which allowed customers to continue making payments on their loans. The combined loan loss reserve as a percentage of combined loans receivable totaled 10% as ofMarch 31, 2021 . The lower historical combined loan loss reserve rate reflects the strong credit performance of the portfolio atMarch 31, 2021 due to the mature nature of the portfolio resulting from limited new loan origination activity in 2020 and early 2021. 48 -------------------------------------------------------------------------------- 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 throughMarch 31, 2022 for each annual vintage since the 2013 vintage are generally under 30% and continue to generally trend at or slightly below our 20% to 25% long-term targeted range. Our payment deferral programs and monetary stimulus programs provided by the US government in response to the COVID-19 pandemic 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. While still early, we would expect the 2021 vintage to be at or near 2018 levels or slightly lower given the increased volume of new customer loans originated during the second half of 2021. 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 or the current inflationary environment.[[Image Removed: elvt-20220331_g2.jpg]]
_________
1) The 2020 and 2021 vintages are not yet fully ripe from the point of view of losses. 2)
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 throughMarch 31, 2022 for the 2020 annual vintage is under 8%. While our 2021 account vintage is currently performing better than 2020, we expect the 2021 account vintage to have losses higher than the 2020 account vintage based on the volume of new customers originated in the second half of 2021 and the performance of certain segments upon the release of the credit model during 2021. The Today Card requires accounts to be charged off that are more than 120 days past due which results in a longer maturity period for the cumulative loss curve related to this portfolio. 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. 49 --------------------------------------------------------------------------------
[[Image Removed: elvt-20220331_g3.jpg]]
Margins
Three Months Ended March 31, Margin metrics (dollars in thousands) 2022 2021 Revenues$ 124,244 $ 89,733 Net charge-offs(1) (76,819) (30,890) Change in fair value(1) (7,340) - Additional provision for loan losses(1) - 9,920 Direct marketing costs (6,226) (4,383) Other cost of sales (2,882) (2,047) Gross profit 30,977 62,333 Operating expenses (38,281) (37,594) Operating income (loss)$ (7,304) $ 24,739 As a percentage of revenues: Net charge-offs 62 % 34 % Change in fair value 6
–
Additional provision for loan losses - (11) Direct marketing costs 5 5 Other cost of sales 2 2 Gross margin 25 69 Operating expenses 31 42 Operating margin (6) % 28 % _________
(1) Non-GAAP measure. See “-Non-GAAP Financial Measures – Net Write-offs and Net Change in Fair Value�? and “-Non-GAAP Financial Measures – Net Write-offs and Additional Allowance for Loan Losses�?.
50 -------------------------------------------------------------------------------- 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 20% operating margin. Recent operating margin trends. For the three months endedMarch 31, 2022 , our operating margin was (6)%, which was a decrease from 28% in the prior year period, as originally reported, and a decrease of 11% on a pro-forma basis considering the pro-forma adoption of fair value at the beginning of 2021 (See "-Non-GAAP Financial Measures" for more information and for a reconciliation to previously reported amounts for 2021 calculated in accordance with US GAAP.). The margin decreases we are experiencing in 2022 are primarily driven by the increased net charge-offs in the first quarter of 2022 due to a higher volume of new customers originated in the loan portfolio during the second half of 2021 as we rebuilt the portfolio from the impacts of COVID-19. As the portfolio matures and we manage the mix of new and returning customers to the portfolio, we would expect our net charge-offs to return to our target range of 45-55% and our gross margin to normalize in future periods with our past historical performance. The margins achieved in the first quarter of 2021 are not reflective of our historical performance due to the limited origination activity in the loan portfolio during 2020 and early 2021 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 the first quarter of 2021 leading to an outsized gross margin for the period. Our operating expense metrics have been negatively impacted by the COVID-19 pandemic and its impact on loan balances and revenue. We began to see improvements in our operating expense metric in the third and fourth quarter of 2021 due to the growth in the portfolio and associated increase in revenue during those periods as we continued to manage and maintain a relatively consistent operating expense during the latter half of the year and into the first quarter of 2022. In the short term, with the continued growth in the loan portfolio expected in 2022, we expect our expense metrics to continue to improve and move toward our target range as we focus on growth to increase our new and former customer loan volume and continue to scale the 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.
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 EBITDA and Adjusted EBITDA margin
Adjusted EBITDA represents our net income (loss) adjusted to exclude:
• Net interest expense primarily associated with notes payable under credit facilities used to fund loan portfolios;
•Remuneration in shares;
• Depreciation of fixed assets and intangible assets;
• Gains or losses from an investment using the equity method;
•Settlement related to litigation included in non-operating income; 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.
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Adjusted EBITDA and Adjusted EBITDA margin should not be considered as
alternatives to net income (loss) 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:
•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 or cash requirements for our working capital requirements; 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 provides a reconciliation of net earnings (loss) to Adjusted EBITDA and Adjusted EBITDA margin for each of the periods indicated:
Three Months Ended March 31, (Dollars in thousands) 2022 2021 Net income (loss)$ (13,923) $ 12,716 Adjustments: Net interest expense 12,170 8,786 Share-based compensation 1,658 1,602 Depreciation and amortization 3,761 5,243 Equity method investment loss 344 - Non-operating income (1,666) (207) Income tax expense (benefit) (4,229) 3,444 Adjusted EBITDA$ (1,885) $ 31,584 Adjusted EBITDA margin (1.5) % 35.2 %
Unaudited pro forma condensed consolidated financial information
The following unaudited pro-forma condensed consolidated statement of operations information reflects the adoption of ASU 2016-13 as ofJanuary 1, 2021 . Management has made significant estimates and assumptions in its determination of the pro-forma accounting adjustments based on certain currently available information and certain assumptions and methodologies that we believe are reasonable and consistent with US GAAP. Management believes the pro-forma financial information is a useful supplemental measure 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. 52 --------------------------------------------------------------------------------
Three months completed
Fair value Pro-forma financial (Dollars in thousands) As reported adjustments information Revenues$ 89,733 $ -$ 89,733 Cost of sales: Provision for loan losses 20,970 (20,970) - Change in fair value of loans receivable - 35,557 35,557 Direct marketing and other costs of sales 6,430 - 6,430 Total costs of sales 27,400 14,587 41,987 Gross profit 62,333 (14,587) 47,746 Total operating expenses 37,594 - 37,594 Operating income 24,739 (14,587) 10,152 Total other expense (8,579) - (8,579) Income before taxes 16,160 (14,587) 1,573 Income tax expense 3,444 (2,940) 504 Net income$ 12,716 $ (11,647) $ 1,069 Basic earnings per share$ 0.35 $ (0.32) $ 0.03 Diluted earnings per share$ 0.34 $ (0.31) $ 0.03 Adjusted EBITDA$ 31,584 $ (14,587) $ 16,997 Adjusted EBITDA margin 35.2 % 18.9 % Free cash flow
Free cash flow (“FCF�?) represents our net cash provided by operating activities, adjusted to include:
• Net write-offs – capital loans combined; and
• Capital expenditures.
The following table presents a reconciliation of the net cash provided by operating activities to the FCF for each of the periods indicated:
Three Months Ended March 31, (Dollars in thousands) 2022 2021
Net cash from operating activities(1) $49,935
$ 31,880 Adjustments: Net charge-offs - combined principal loans (59,793) (22,632) Capital expenditures (6,277) (3,383) FCF$ (16,135) $ 5,865 _________
(1) Net cash from operating activities includes net charges – combined finance costs.
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Net charges and net change in fair value
We break out our total change in fair value into two separate items-first, the
amount related to net charge-offs, and second, net change in fair value needed
to adjust the current period fair value mark from the fair value mark from the
beginning of the reporting period. We believe this presentation provides more
detail related to the components of our total change in fair value 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.
Net change in fair value. The net change in fair value is the change in the
reporting period between the current period fair value mark as compared to the
beginning of period fair value mark. With all other assumptions held flat and
fair value premium associated with the combined loan portfolio, we would expect
the net change in fair value to be positive in periods of growth in the loan
portfolio and expect the net change in fair value to be negative in periods of
attrition in the loan portfolio.
Three Months Ended March 31,
(Dollars in thousands) 2022 2021 (pro-forma)(1)
Net charge-offs $ 76,819 $ 30,890
Net change in fair value 7,340 4,667
Total change in fair value of loans receivable $ 84,159 $ 35,557
_________
(1)We have provided pro-forma information reflecting the adoption of fair value in the 2021 financial period to provide comparability to the 2022 financial period. See "-Non-GAAP Financial Measures" for more information and for a reconciliation to previously reported amounts for 2021 calculated in accordance with US GAAP. The pro-forma fair value adjustments reflect fair value methodology acceptable with US GAAP.
Net write-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.
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 March 31,
(Dollars in thousands) 2021
Net charge-offs $ 30,890
Additional provision for loan losses (9,920)
Provision for loan losses $ 20,970
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 consolidate Elastic 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.
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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 by FinWise 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 began expanding 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 than FinWise Bank . Similar to the relationship with
FinWise 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."
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 held by a third party lender; and
• The Rise CSO loans were funded by a third party lender and were not part of the VPC Facility.
At each of the period ends indicated, the following table presents a reconciliation of:
•Loans receivable, net and at fair value, held by the Company (which correspond 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);
•Loans receivable combined (which we use as a non-GAAP measure); and
•Combined loan loss reserve (which we use as a non-GAAP measure).
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2021 2022
(Dollars in thousands) March 31 June 30 September 30 December 31 March 31
Company Owned Loans:
Loans receivable - principal, current, company
owned $ 331,251 $
372,068
Loans receivable – principal, overdue, company property
21,678 27,231 46,730 57,207 54,060 Loans receivable - principal, total, company owned 352,929 399,299 512,870 558,759 511,319 Loans receivable - finance charges, company owned 21,393 19,157 22,960 23,602 22,991 Loans receivable - company owned 374,322 418,456 535,830 582,361 534,310 Allowance for loan losses on loans receivable, company owned(5) (39,037) (40,314) (56,209) (71,204) - Fair value adjustment, loans receivable- principal - - - - 49,844 Loans receivable, net, company owned / Loans receivable at fair value$ 335,285 $ 378,142 $ 479,621 $ 511,157 $ 584,154 Third Party Loans Guaranteed by the Company: Loans receivable - principal, current, guaranteed by company$ 145 $
$17 – $ – $ – Loans receivable – principal, past due, company guaranteed
15 4 - - - Loans receivable - principal, total, guaranteed by company(1) 160 21 - - - Loans receivable - finance charges, guaranteed by company(2) 22 4 - - - Loans receivable - guaranteed by company 182 25 - - - Liability for losses on loans receivable, guaranteed by company (122) (7) - - - Loans receivable, net, guaranteed by company(3)$ 60 $ 18 $ - $ - $ - Combined Loans Receivable(3): Combined loans receivable - principal, current$ 331,396 $ 372,085 $ 466,140 $ 501,552 $ 457,259 Combined loans receivable - principal, past due 21,693 27,235 46,730 57,207 54,060 Combined loans receivable - principal 353,089 399,320 512,870 558,759 511,319 Combined loans receivable - finance charges 21,415 19,161 22,960 23,602 22,991 Combined loans receivable$ 374,504 $ 418,481 $ 535,830 $ 582,361 $ 534,310 Combined Loan Loss Reserve(3): Allowance for loan losses on loans receivable, company owned(5)$ (39,037) $
(40,314)
(122) (7) - - - Combined loan loss reserve(5)$ (39,159) $
(40,321)
$ 21,693 $
27,235
Combined loans receivable – principal(3)
353,089 399,320 512,870 558,759 511,319 Percentage past due(1) 6 % 7 % 9 % 10 % 11 % Combined loan loss reserve as a percentage of combined loans receivable(3)(4)(5) 10 % 10 % 11 % 12 % - % Allowance for loan losses as a percentage of loans receivable - company owned(5) 10 % 10 % 11 % 12 % - % Fair value adjustment, combined loans receivable- principal(6)$ 44,458 $
51,078
Combined loans receivable at fair value(6) 418,962 469,559 585,866 639,545 584,154 Fair value as a percentage of combined loans receivable- principal(3)(6) 113 % 113 % 110 % 110 % 110 % _________ (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. (5)EffectiveJanuary 1, 2022 , upon the election to carry the loan portfolio at fair value, a combined loan loss reserve and allowance for loan losses is no longer required as a loan loss assumption has been included in the fair value assumptions for the loan portfolio. (6)The periods ofMarch 31, 2021 toDecember 31, 2021 include pro-forma adjustments reflecting the combined loans receivable at fair value consistent with a fair value methodology acceptable withU.S. GAAP. 56
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COMPONENTS OF OUR OPERATING RESULTS
Revenue
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 (inclusive of finance charges attributable to the participations in the credit card receivables originated by CCB), 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
Change in Fair value. BeginningJanuary 1, 2022 , we elected the fair value option for our loans receivable portfolio. As such, loans receivable are carried at fair value in the Condensed Consolidated Balance Sheets with changes in fair value recorded in the Condensed Consolidated Statements of Operations. To derive the fair value, we generally utilize discounted cash flow analyses that factor in estimated losses and prepayments over the estimated duration of the underlying assets. Loss and prepayment assumptions are determined using historical loss data and include appropriate consideration of recent trends and anticipated future performance. Future cash flows are discounted using a rate of return that we believe a market participant would require. Provision for loan losses. Prior toJanuary 1, 2022 , 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 costs of sales include data verification costs associated with signing up prospective customers and Automated Clearing House (“ACH�?) transaction costs associated with funding and making loan payments to customers.
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.
Benefits and compensation. Salaries and personnel costs, including benefits, bonuses and stock-based compensation expenses, constitute the majority of our operating expenses and these costs are determined 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 includes rental charges for our leased facilities, as well as telephony and web hosting charges.
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. 57
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Other expenses
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, the EF SPV and EC SPV Facilities that fund Rise installment loans originated byFinWise Bank and CCB, respectively, the TSPV facility used to fund credit card receivable purchases, and the Pine Hill subordinated debt facility used to fund working capital. Interest expense also includes any amortization of deferred debt issuance cost and prepayment penalties incurred associated with the debt facilities.
Gain or loss on investment using the equity method. Investment loss under the equity method includes our share of profit or loss associated with an investment in an unconsolidated subsidiary beginning in the first quarter of 2022.
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