CURO Group Holdings Corp.

Good morning and welcome to Hero Group Holdings' fourth quarter and full year 2020 conference call. All participants will be in listen-only mode. If you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, please press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Matt Keating, Investor Relations for Curo. Please go ahead.

Thank you, and good morning, everyone. After the market closed yesterday, Curo released results for the fourth quarter and full year 2020, which are available on the investor section of our website at ir.curo.com. With me on today's call are Curo's Chief Executive Officer, Don Gayhart, President and Chief Operating Officer, Bill Baker, Chief Financial Officer, Roger Dean, and Chief Accounting Officer Dave Strano. This call is being webcast and will be archived on the investor section of our website. Before I turn the call over to Don, I'd like to note that today's discussions will contain forward-looking statements based on the business environment as we currently see it. As such, it does include certain risks and uncertainties. Please refer to our press release issued last night in our forms 10-K and 10-Q 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 did not conform to generally accepted accounting principles. We believe these non-GAAP measures enhance the understanding of our performance. Reconciliation between these GAAP and non-GAAP measures are included in the tables found in yesterday's press release. With that, I would like to turn the call over to Don.

Thanks, Matt. Good morning, and thank you for joining us today. I hope this finds you all healthy and safe. Before we begin our fourth quarter update, I'd like to point out we've again prepared a supplemental investor presentation to highlight key trends through last week. We'll be referencing this presentation in our remarks, and you can find it on the events and presentation section of our IR websites. After a year unlike any in our history, we exited 2020 encouraged by the resiliency we demonstrated and cautiously optimistic about our opportunities for 2021 and beyond. In the fourth quarter of 2020, we delivered quarterly sequential loan growth of 11.3% compared to 1.6% quarterly sequential growth in the fourth quarter of 2019. Overall loan balance has finished the year 19.5% below prior year levels, 11.7% excluding California installment loans, loan balances in Canada increased 9.2% year-over-year and 13% sequentially. U.S. loan balances, while still well below 2019 levels, grew 9.2% sequentially in the fourth quarter, driven by our online lending platform. Despite COVID-19 impacts that lowered loan demand and loan balances after the first quarter of 2020, Historically good credit performance and strict expense management allowed us to post solid quarterly earnings while significantly increasing cash and liquidity levels. In addition to being pleased with our business resiliency during a difficult year, we're excited by the tremendous value realization of our investment in Catapult and by our addition of point of sale, buy now, pay later, and credit card capabilities in Canada with the acquisition of Flexity. Starting with Catapult, As we announced in December, Catapult reached an agreement to merge with FinServ in December. FinServ is a special purpose acquisition company, or SPAC, and the merger was the first step in a process that resulted in Catapult becoming a publicly traded company in the first half of 2021. At closing, subject to SPAC-related redemptions, we expect to receive about $130 million in cash and approximately 21% or 20.4 million shares of the public entity. In addition, based upon the trading price of the public shares, we could receive up to 3 million additional common shares. At FinServ's recent trading price, all of these earned out shares would vest and increase the total value of our investment to approximately $520 million. We're obviously proud of Catapult's accomplishments, and we're extremely happy with the return on our $27.5 million cash investment in this business. We're also pleased to have the opportunity to retain a meaningful ownership stake in Catapult and representation on the company's board of directors. We believe that this investment allows Curo and its stakeholders to participate in the rapidly growing e-commerce point of sale finance space. Back at Curo, and as we've noted previously, the impacts of COVID-19 reduced demand but provided us with ample liquidity for future growth and investments. Along these lines, we were very excited to announce earlier this week that we reached an agreement to acquire Flexity. As we publicly discussed on Monday, Flexity is an emerging growth point of sale, buy now, pay later provider in Canada, integrated with over 2,000 merchant partners and available at nearly 6,000 merchant locations and e-commerce sites. Flexity's originations have grown from $49 million in 2017 to an estimated $292 million this in 2020. Moreover, simply annualizing fourth quarter 2020 origination suggests an annual origination run rate close to $475 million. The Flexi acquisition affords us access to the full spectrum of Canadian consumers across credit tiers. Flexi has been recognized for its product innovation and rapid growth, and we're happy to add the company's creative and talented management team to the Curo family. As we said in the context of our own business in Canada, the Canadian market is a large, growing, addressable market. There's limited competition at scale in Canada, and we now have omnichannel capabilities to reach customers in all of the ways in which they access credit. This acquisition increases Curo's long-term growth profile and provides further product and geographical diversification while reducing regulatory challenges. It also clearly aligns with our expressed interest in growing in Canada and cards, areas where we expect to remain active moving forward. Moving to the final quarter of 2020, our results were impacted by three things. First, the previously mentioned increase in loan demand compared to the prior quarter. Secondly, reduced quarantine and stay-at-home orders. And finally, continued historically low delinquencies and net charge-off rates. Canada remained a bright spot, posting another quarter of sequential loan revenue and bottom-line growth. Canada's $22.2 million of adjusted EBITDA for the quarter is the single highest quarterly earnings we have reported from that business segment. We believe that our strong results in Canada reflect two principal factors. First, our strong market position and market-leading omni-channel product offerings. And second, the more pronounced economic rebound in Canada through the year end. However, like many places, there has been a COVID resurgence in Canada, and more specifically Ontario since year end, which has led to restrictions on business and personal activity, with the impact on the first half of 2021 yet to be determined. Getting into the details a bit more, on a consolidated basis, we experienced steady weekly increases in loan applications and new loan volume overall as we moved through the fourth quarter. While these trends were still well below the same periods a year ago, they have, for now, turned positive. Our total managed loan balances increased 11.3% from the third quarter of 2020, with growth of 9.2% in the U.S. and 13% in Canada. While managed loan balances were still down 19.5% year-over-year due to the impacts of COVID, the 11.3% sequential increase in this year's fourth quarter was better than the 1.6% sequential growth in last year's fourth quarter. Further, the year-over-year decline was 11.7% without the impact of the runoff of our California installment portfolios due to regulatory changes there. An unprecedented improvement in credit quality partially offset the impact of lower loan volume and loan demand on revenue. Total delinquencies were down more than 25% year-over-year for most of the fourth quarter, and through the weekend of January 29th, total delinquencies were still down 27% compared to the same period a year ago. Putting together the pieces from a P&L perspective for the fourth quarter, we posted a revenue decline of 33.2% year-over-year, primarily due to COVID-19's impact on loan demand, as well as the impact of California regulatory change that went into effect at the start of 2020. Adjusted EBITDA declined $33.2 million, or 49.2%, while net revenue declined $39.8 million year over year. The net revenue decline was partially reduced by lower advertising costs as demand has returned slowly. While we did keep some of the cost reduction efforts in place in the fourth quarter, as previously described, we incurred some additional variable compensation and strategic consulting expenses with an eye toward 2021 and forward. As a result, adjusted EPS declined 20 cents per share for the fourth quarter. We've said before that non-prime consumers consistently show a greater ability to manage credit, as measured by the relative change in their delinquency and charge-off data during an economic downturn than prime and near-prime customers. Our experience in this crisis certainly provides additional support for this view. Our delinquencies and net charges in the U.S. and Canada stayed low despite much of the government stimulus burning off. The behavior of our customers through this period also demonstrates the value of our omnichannel platform and the investments we have made to allow for a seamless transition from our store to digital channels. In the U.S., 68% of transactions occurred online during the fourth quarter of 2020, compared to 57% in the first quarter of 2020. In Canada, where online adoption has lagged the U.S., we saw a similar mixed shift towards online with 35% of transactions conducted online during the fourth quarter of 2020 compared to 23% in the first quarter of the year. As we look ahead to the rest of 2021, while COVID vaccine distribution progress seems very promising, the timing of the reopening of the U.S. and Canadian economies remains uncertain. In some respects, it feels like the end of the pandemic has been a couple of months away from the past six months. In addition, in the U.S., there is significant uncertainty surrounding the timing and magnitude of additional stimulus and the impact of this year's delayed tax season. Therefore, for now, we plan to continue our recent practice in providing business updates as we move through the quarter. We remain prepared for a wide range of outcomes and are continuing to focus on supporting our customers and communities through this unprecedented time. While we exited 2020 with an upward trajectory for earning asset growth, To the extent that the U.S. Congress passes additional stimulus measures as is widely anticipated, our U.S. loan balances could again contract in the first half of 2021, putting continued pressure on revenue and earnings levels for our U.S. business. However, this will also support our continued strong credit performance as well as our cash balances and liquidity. To close, While there are certainly some ongoing headwinds from COVID and potential changes on the regulatory front that may impact portions of our business, I'm optimistic about the work that we've done to continue to move the company forward. We continue to invest in our internal technology and risk and analytics platforms. The strength of these platforms has helped us to quickly migrate customers to our online channel and to continually refine our credit decisioning, creating new product opportunities in all of our geographies. We've grown our Canadian operations, which accounted for approximately 65% of our consolidated quarterly adjusted EBITDA and 55.2% of our gross combined loan balances at the end of the fourth quarter. And pro forma for the Flexity acquisition, this percentage increases to approximately 66% of our loan balances. We've also grown and enhanced our card offerings. We've also started to realize significant value from our investment in Catapult, and its market-leading e-commerce lease-to-own solution. And finally, we continue to evaluate the number of opportunities for both new organic initiatives and strategic acquisitions that could offer further growth and diversification of our business lines. I'd like to close by thanking our 3,900 team members who, despite the challenges created by the pandemic, continue to meet our customers' everyday needs for financial services and execute on our strategic priorities. all while helping customers navigate financial hardship and other challenges. We believe that the strength of our company lies in our people and our culture. I'm confident that together we will continue to manage these unprecedented times and emerge even stronger and more nimble than before. And finally, this week we announced a number of promotions, and one that I'm particularly happy about is that my partner, Bill Baker, has been promoted to President and Chief Operating Officer. Many of you on this call have gotten to know Bill, and I think this promotion is incredibly well-deserved. Bill is enormously talented and tech-savvy, and he's spearheading some of our most important new product and process initiatives while continuing to oversee our branch and contact center operations. He's been at Curo for over 15 years, and really, most importantly, he really embodies the kind of servant leader that we want to attract, retain, and promote as we continue to grow Curo. With that, I will turn it over to Roger.

Thanks, Don, and good morning. Consolidated revenue for the fourth quarter of 2020 was $202.1 million, down 33.2% compared to last year's fourth quarter. U.S. loan balances and revenue decreased 39.2% and 39%, respectively, year over year, primarily due to the impact of COVID-19 and some additional pressure from the runoff of the California installment portfolios. California installment balances finished 2020 at $37.3 million, and we expect the remaining balances to run off in the first half of 2021. Excluding California installment loan balances, U.S. loan balances finished down $102 million, or 30.7% year-over-year, but grew 29.4 million from the end of third quarter. Canada loan balances increased 9.2% year-over-year, including a $51.2 million increase in open-end balances, offset by a $17.7 million decline in single-pay balances, primarily from COVID-19 impacts. Sequential growth in Canada continued to be strong at 13%. Consolidated adjusted EBITDA came in at 34.3 million, down 33.2 million, or 49.2%, as revenue declines from lower loan balances were offset by lower provision for loan loss and cost reductions. As a result, Q4 adjusted earnings per share was 20 cents. Taking this by country, I'll start with Canada, where, again, the year-over-year performance continue to stand out despite COVID headwinds. In Canada, revenue declined 10.5% compared to the prior year quarter, entirely due to lower demand for the single-pay product from COVID-19 impacts. Our open-end loan book in Canada increased 20.3% year-over-year, with revenue up 14.1% for the same period. Net revenue increased 3.4%, largely due to a 326 basis point improvement and in that charge off rate year over year. Despite COVID-19 impacts, Canada posted annual adjusted EBITDA of $62.8 million, up 6.7% versus 2019, and exited 2020 with Q4 year over year loan growth of 9.2%. In the U.S., The impact of COVID-19 in the fourth quarter remained more pronounced than in Canada, with revenue down 39% from the prior year and adjusted EBITDA down $35.1 million, or 74.2%. In addition to COVID impacts, U.S. comps were affected by the aforementioned runoff of our California installment loan portfolios. Loss rates in the U.S. improved 420 basis points year over year. So even with the sequential loan growth, the loan loss provision was down 47% like for like. The resulting $41.2 million decline in risk-adjusted revenue translated to a $35.1 million decline in U.S. adjusted EBITDA with risk-adjusted revenue declines mitigated partially by lower advertising costs and expense management. I'll expand a bit on trends and key drivers for the quarter. First, demand and loan volume. Page five of our supplemental earnings presentation recaps the weekly trends through last week indexed to the weekend of March 7th of last year. Weekly application volume has returned steadily and loan balances have grown modestly week to week, more so in Canada. We finished January 2021 with loan balances in Canada flat to the end of the year and the US down modestly from the end of the year. But this was consistent with the same monthly sequential trend for January a year ago. As we moved through the fourth quarter, the percentage of loans originated to new customers increased to an average of 13.6%, up from the 12.5% in the fourth quarter of 2019, and up from 11.5% in the third quarter of 2020. Second, delinquency and credit trends. Page six of our earnings supplement highlights weekly delinquency trends by bucket. As we move through January 2021, delinquency levels have been stable to December, generally, And through the week ended January 29th, total delinquency levels still remain over 27% better than the comparable period a year ago. Our fourth quarter consolidated company owned net charge off rate declined 730 basis points year over year with a 326 basis point improvement in Canada and a 420 basis point improvement in the U.S. Third, turning to the provision for loan losses, our allowance coverage rates declined modestly from third quarter of 2020, but we built allowance overall as the provision for loan losses exceeded net charge-offs by 4.8 million for the fourth quarter. Consolidated allowance coverage was 15.6% at the end of fourth quarter 2020, compared to 16.2% at the end of the third quarter of 2020. The impact of changes in delinquencies and lower net charge off rates was offset qualitatively in our allowance evaluation by continued high levels of uncertainty for employment trends and expiring unemployment supplements, stimulus, and the impact of modified loans. Loans modified under our customer care program made up 3.6% of our loan balances at the end of fourth quarter, which is down from 4.1% at the end of the third quarter of 2020. Fourth, the operating expense reductions. As discussed on our last two quarterly conference calls, we took actions in mid-March to reduce operating expenses across several major categories, including advertising, variable compensation, a freeze on hiring, suspension of merit increases, and savings from work from home initiatives. Most of those actions remained in effect for all of fourth quarter. During the fourth quarter, we incurred some discretionary variable compensation costs and some non-recurring spend for long-term strategic planning, while otherwise maintaining the COVID-19 cost-saving initiatives. On slide 18 of our investor presentation, we provided outlook for 2021 run rate operating expenses on a quarterly basis as we return to normalized levels for items like performance-based compensation. We ended the fourth quarter with $213.3 million in cash and $310.5 million of liquidity, including undrawn capacity on revolving credit facilities. We'll use $85 million of cash when Flexity closes later this quarter. Then, when the Catapult transaction closes in early second quarter, we estimate we'll receive about $90 million or so of cash, net of cash taxes, so about a wash in terms of the resulting cash balances. As we move through the first half of 2021, we will continue to evaluate the use of the resulting excess cash for corporate purposes ranging from funding regrowth of our loan book to investing in new and existing organic growth initiatives to strategic M&A. As Don mentioned, due to continued uncertainties related to COVID-19, including the timeline for full reopening of the markets we serve and impacts from governmental stimulus, we are not in a position to offer 2021 guidance at this point. However, we expect our operating trends in 2021 to continue to be influenced by the timing and magnitude of governmental stimulus and the duration of the pandemic. U.S. loan demand moderated in early January but bounced back slightly over the last couple of weeks, which we attribute to additional U.S. federal stimulus payments in late December and early January. In other words, about $600 for most eligible people. Canada demand last month was affected by a return to lockdown measures in several major markets, including Ontario. Because of these factors and expected additional U.S. stimulus measures, loan demand will likely remain constrained in the first half of 2021. Other variables which could affect the pace of recovery include the timing and magnitude of U.S. income tax refunds. Based on fourth quarter net income and strong cash flows, our board of directors declared quarterly dividend of 5.5 cents per share to be paid on March 2nd to shareholders of record as of February 16th. This concludes our prepared remarks and we'll now ask the operator to begin Q&A.

Thank you. We will now begin the question and answer session. To ask a question, please press star then 1 on your telephone keypad. If you're using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Today's first question comes from Moshe Orenbuch with Credit Suite. Please go ahead.

Great. Thanks very much, and congrats, guys, on strong results, and especially to you, Bill, on the well-deserved promotion. I guess, Don and Roger, you guys talked about, you know, the cash position sounds like it's likely to increase during the first half at least of 2021. And, you know, Roger, you specifically mentioned a couple of potential uses, but kind of didn't mention kind of debt and equity. I mean, maybe can you guys talk about, you know, what you're seeing that, you know, makes you, you know, think about the uses, you know, in, the standpoint of opportunities? Are there other things out there? I mean, you've done a tremendous amount so far, so maybe just talk about that a little bit more, please.

No, I'll start, and then Roger can fill in some details. So, you know, we're, I think we've said, you know, we're, for a while, in terms of strategy, you know, cards, Canada, catapult, obviously catapult's going to turn into a a realization opportunity as opposed to an investment opportunity. But both organically and in terms of M&A, cards and Canada continue to be interesting to us and we'll evaluate opportunities, M&A opportunities as they come about. um, you know, there's nothing, I think, don't think there's anything that's sort of sort of imminent from us. I think it's just, we're just going to keep looking at, uh, at the market. And then obviously we've got, uh, uh, uh, catapult won't close until probably, you know, into the early, the second quarter. Um, and flex to the, uh, you know, we've got, got a good bit of work to do, uh, with them in terms of integration and might not be a ton of integration, but just help and support them to grow that business. So, um, You know, just not a lot of specifics to offer right now other than we'll continue to evaluate stuff as it comes up and hope that we can find some things that fit into our both organic growth opportunities and M&A opportunities that fit in with our longer-term strategy.

Okay. And is there anything from the standpoint of looking at your debt that makes sense to do with some of that cash, or is that not something you're doing in your term?

I think it's probably something we'll, once Catapult closes, I think we'll continue to evaluate that, but probably not something that we'll do much on until into the second quarter, even just sort of evaluating it in a serious way.

Just as kind of from a big-picture standpoint, there's a lot of uncertainty between the risk of near-term shutdowns and the payments of additional stimulus. I keep thinking that when you looked at the stimulus payments that were received almost a year ago last, clearly the outlook for consumers was incredibly uncertain. And while at the moment it's not certain, is this something, I mean, how do you think about your customers' kind of mindset in terms of their willingness to think about borrowing money when that outlook starts to stabilize? I mean, is that something that we could expect in 2021? And how do you think about that?

Yeah, so the thing about the, I guess the stimulus from, I guess you call it the April-May stimulus, was it came at a time when I think customers generally were, our customers were in good shape, like for like. They had income tax refunds, so that's just sort of you look kind of through the year on kind of the seasonality Um, it, it, it hit at a time when consumers were, our consumers were typically, would typically have a bit more, a bit more liquidity. Um, so it kind of added to that. And at a time when everybody sort of, you know, just kind of stopped and there was no, um, you know, the discretionary spending, um, you know, um, uh, kind of fell off, uh, dramatically, you know, eating out and travel and that kind of stuff. So, um, I think if you roll that forward to the year-end stimulus, which was much smaller, that obviously came at a time when there was more uncertainty and obviously that our customers were, and consumers in general, were just in a different spot in terms of liquidity and sort of their outlook. So we felt like that stimulus, the second stimulus kind of burned off, I guess, a bit more quickly. Um, and you know, it wasn't, it wasn't sort of saved and then spent, I think it was more kind of readily spent to catch up on, uh, maybe some, some, uh, some, some past due balances. So, um, I think looking into 21, um, I think depending on the timing of it and it's, you know, what the payment is, what, what the eligibility levels are in terms of income. Um, I think you're going to, you know, and where the economy is in terms of reopening. I think it's going to probably tend to look more like the latter stimulus in terms of the kind of personal balance sheets, the shape of personal balance sheets when people were to get a, when our customers were to get a, I guess I'd call it, you know, this one a third stimulus payment. So I think, you know, I don't think anything is, you know, fundamentally from there we see the jobs recovery, you know, I just had a chance to glance at the jobs report and I You know, I think the economy is making, you know, kind of taking baby steps forward. But if vaccines hold and you start to get the jobs back in retail and restaurants and all the hospitality jobs, I think that, you know, points to a pretty good second half. And I think that the consumers will be back spending and borrowing again. It's just the timing of that. I think I said in my remarks, you know, it feels like we've been, you know, kind of getting to the end of the pandemic, you know, in a couple months for the last, you know, six months. It just feels like it gets kind of pushed out a little bit more. But now it does feel like the vaccines can really get distributed right, that we should see a pretty strong second half. And I think the borrowing, and that will include consumer spending and consumer borrowing across the credit spectrum. Thank you.

And our next question today comes from Kyle Joseph at Jefferies. Please go ahead.

Hey, good morning. Congratulations on navigating a turbulent year, and let me echo my congratulations to Bill on the promotion. Let's start off in the U.S. I think both Don and Roger talked about tax refunds, but can you give us a sense for the outlook? I know you mentioned they'd be but so give us a sense for timing and potentially the magnitude and if there's going to be any impacts on tax refunds as a result of all the stimulus from 2020. Good morning, Kyle.

It's Bill. Thank you for the kind words there. I think that's one of the, as Don mentioned, that's one of the uncertainties we're trying to plot. I mean, there's obviously a delay in when people can file for their tax refunds, but I think the bigger question is how it impacts when the earned income credit refunds are released. As has been the case in previous years, although you could file at the end of January, typically those refunds were not released until late February due to the IRS reviewing them. There historically has been a higher amount of fraud with those. So, a number of years ago, the IRS began holding those and essentially releasing them all at once. So, the question is, if you can file now mid-February instead of the end of January, how long would they hold those? And We continue to ask the questions and stay close to tax preparation companies and look for guidance from the IRS, but I don't think we've seen anything to date. But if you just sort of run the calendar out, it seems like having earned income credit refunds released in mid-March could be a likely outcome. As far as the impact, I don't know how much the stimulus really impacts that. It's really more of a question of employment. And if people weren't working, you know, how does that factor into their refund? But I don't think that there's an impact to the earned income credit. And I think just the point that sort of complicates it is, if that is the timing of tax refunds for our customer mid-March, does that coincide with another stimulus payment? And then what that does to demand over a number of months, because if a customer gets a $4,000 or $5,000 tax refund and then gets a $2,200 direct payment, obviously that's going to depress loan demand for some time, even if the economy is recovering and people are getting back to work. So just one of the things that we're staying really close to.

Appreciate that. A lot of moving parts there. And then shifting to Canada, excuse my ignorance here, but is there any talk of incremental stimulus in Canada? I know you mentioned that they're economies recovered faster than ours, but anything potentially on the horizon there?

Hey, Kyle, it's Don. So I think there's, I've been by the deck, but they did kind of a follow-up round as well in 4Q. In general, Canada has a more, just to kind of call it the standing social safety net is a bit more, there's a bit more there. For consumers, there's a lot of supplements kind of by province for child care, et cetera. So I think that that was kind of in place, and that's part of what helped. I think additionally, just kind of doing a better job managing the COVID cases, that kind of the standing social safety net help supplemented by this, I think it's called the CERB, So there is, I think, a little bit of talk about further stimulus there. I think part of it is if you look on a relative basis, and again, I'm not going to go down the rabbit hole here, but I think Canada has done a much better job sort of from a per capita cases standpoint, hospitalization, et cetera. But if you look at vaccinations, they're, you know, I think about kind of 2% versus 8% or 9% in the U.S., so they're a good bit behind us. In terms of vaccination, there's a lot of sort of it started the political sort of finger pointing is starting and that may give rise to some additional stimulus. But the additional stimulus there as an increase over kind of what the standing net social safety net provided is much less than what we've seen before. on a relative basis in the U.S., relative to what the standing safety net gives consumers.

Got it. Very helpful. And one last one for me, just on the Flexity business, I guess I'd ask, you know, what is the most comparable business that we look at in the U.S.? Is it kind of a synchrony, an afterpay, and a firm, or is Flexity really a combination of all three of those? And then a follow-up there would be, would it be possible – to integrate kind of a catapult product on that platform, or is there one already there?

So I guess the short answer would be it probably is a bit of a combination. I think as the business is currently structured, and if you look at the product mix now, it's probably closest to a synchrony. But the growth, which is kind of six months, no payments, interest-free for six months, and then it kicks into a it's not paid off an interest rating obligation as a percentage of the total pie there. But if you look at where the mix shift is happening, it's two more of a pay over time, a buy now, pay later, than a paying for equal installments product. So in terms of a catapult type opportunity, the RTO product, there are versions of it. um, in Canada, um, that, that some, that some of the retail level, um, we think that as simple, um, that, that the line of credit product, um, a line of credit product structured to, um, uh, from, from a credit standpoint to, uh, to be offered to non-prime consumers, um, is probably the, the, the, the, the better option there, uh, because it seems built on the existing platform that flexing has a, a line of credit platform now. We obviously offer line of credit in Canada. So it probably will look more like a line of credit product offered to non-prime consumers as opposed to an LTO product.

Got it. Very helpful. Thanks for answering my questions. Okay. Thanks.

And our next question today comes from John Rowan with Jannie. Please go ahead.

Morning, guys.

Morning, John.

Bill, congratulations on the promotion. And I wanted to follow up with you because Kyle stole my question on the tax season. But one other aspect I just wanted to get your input on. Obviously, you talked about possibly delaying earned income tax credits and, you know, how that would foot up with, you know, someone potentially getting their refund. But what about if refunds are different? You know, Are you tracking anything related to people not withholding enough money for the federal unemployment benefits that they received and whether or not your customer can see a shift in their average refund? Putting aside for a second the potential for stimulus payments.

Yeah, John, it's not really something that we track. Certainly not quantitatively. Qualitatively, we can review W-2s or pay stubs, but At the end of the day, because the majority of their refund comes through earned income credit, we're not tax advisors or tax specialists, so we don't delve too far into that. I don't expect a major shift in that arena. I think the bigger question is timing. The one thing I should have mentioned with the previous question is what can happen between now and tax refund season, because typically you would see balances pay off and pay down because of refunds. But if it's truly mid-March, it does potentially create an opportunity to grow loan balances between now and then. It seems unlikely we would actually see a direct payment to customers in February. So what happens in the next few weeks? I mean, as Don mentioned, we saw the last stimulus, we believe, burn off pretty quickly. And there's been a number of articles about a pretty high percentage of renters in the U.S. being behind on rent. we've worked with TransUnion a bit on some macro data and everything that we look at, it looks like that that stimulus went away pretty quickly. And so, you know, there could be an opportunity to grow the book between now and when tax refund season happens and or another round of stimulus.

You know, and just to follow up on the timing too, hasn't there always been kind of a, I want to say a longstanding understanding, but some notion that the later the refunds come in, the less seasonal pay down consumer lenders see from the refunds? I'm trying to refresh my memory, but that had always, if I'm not mistaken, that was kind of the working assumption that a lot of people would use.

You know, I think it's difficult to tell because the biggest change that we noticed is when they started to hold all of the earned income credit refunds. So you're really tax season, which for us used to be, you know, four to six weeks. you know, now it's typically, you know, eight days or something like that. I mean, it's very, very much compressed because you have all of those refunds going out at one time. Whereas, you know, a number of years ago, the refunds would start flowing in late January and go through early to mid March. And that has just been compressed. So I don't know that we've seen as big of an impact on what you mentioned other than what we said, it's just, it's just a real compression. And it, and it happens very quickly. And then it also, you know, the, the paydowns happen quickly as well, but it does start to normalize.

Okay. And then, thanks for your answer. And then, Roger, just wanted to, a couple of questions on the slide in your investor presentation on the Catapult deal. You know, obviously, right now with the FinServ stock at $17 a share, I assume that that is more than enough for you to earn those additional $3 million earn-out shares? Is that correct?

Correct.

And then, you know, given how strong, you know, Finster stock has performed, you know, you have basically two SPAC holder redemption assumptions. I'm going to go ahead and assume that, you know, if the stock stays where it is, you know, the working assumption would be that the redemptions would be on the low end of that. Is that correct? You obviously can't tell me what redemptions are going to be. No one will know. But I assume that the impetus here is for those shareholders to not redeem.

I mean, based on our understanding of everything that is a predictor of redemptions, everything that's gone on so far would predict very low redemption, would predict low redemption. Okay.

All right. Thank you.

And, ladies and gentlemen, as a reminder, if you'd like to ask a question, please press stars and 1. Our next question comes from Bob Napoli with William Blair. Please go ahead.

Thank you, and good morning. Congratulations, President Baker. Really great to see the promotion.

Thank you.

Just, I guess, obviously, there's a lot of difficulty predicting the next several years. quarters. I mean, I guess if you look at the first quarter, you're probably going to have revenue down a little bit. But credit, I mean, credit probably is going to remain really strong, I guess, if you have, I don't want to get too much into and have some longer term questions, but just trying to be like in the ballpark on the first quarter and think the, but you would expect with the redemption and the additional cash, you're not seeing anything on the credit side that would cause something unusual, you know, in the move in the credit losses?

Yeah. I mean, yeah. Hey, it's Roger. If you look at page six, our investor presentation, you know, we we've updated delinquency trends through, through the end of January through last week. And we actually, they've actually improved. They actually improved. So, you know, again, for Q1, you know, we've, I don't want to sound – I always kind of smile when I say it, but we have a 90-day charge-off policy generally. So for Q1, we're a third of the way through Q1 at this point. But I think that points that direction for all the first half.

So revenues will be down some – right. So revenues will be down some in the first quarter. I mean, I think the world – and assuming the world goes the way it looks A lot of people are thinking, you know, vaccines are getting out, cases are coming down. The world starts to get, you know, kind of back to normal by the third quarter, close to normal and probably not fully normal until 22. I mean, what really matters here is, you know, the earnings power of the company, long-term, 2022 earnings power, the FlexCity deal, the cash that you have. You have a strong balance sheet, so there's no questions. But the only... Issues, I guess, are the growth rate and the margins of the company as we think about 2022, 2023. Are any regulatory with the change in administration, are you seeing anything concerning? I mean, obviously, the CFPB went through a lot under the Obama administration, but I'm sure they'll look for things and there's always issues. But what are you concerned about most on the regulatory side that could change the long-term view of your business?

Hey, Bob, it's Don. There were a couple questions in there. Maybe more than a couple. No, it's okay. But I guess sort of the last maybe part of the question first on CPD. To your point, we did manage the business quite successfully through at Obama and CFPB. We've invested a ton in terms of our compliance and risk management areas in the business. There's a lot of much more sophisticated kind of reg tech technologies that we can use to help better identify and manage risk. So I think I feel good about our ability to manage the business and have, you know, decent working relationships with federal regulators, the kind that we have at a lot of state level as well. So how that all plays out, you know, and the timing of it all remains to be seen, but it's certainly not something that – and obviously we didn't – you know, we don't run the business, you know, hoping that, you know, certain politicians win certain elections. I mean, we've got to look – you know, we've got a longer-term kind of view and mandate than that. Great. In terms of the rest of it, I think it seems like we've been in this rolling, oh, it'll be better by, it was going to be the end of the year in 2020, and it was maybe the end of the first quarter, and at the end of the second quarter, we'll have a normal summer, and it just seems like it keeps getting stretched out. But I think from a competitive standpoint, we feel great about where we are. From a resources standpoint, people, processes, technologies and capital. We feel great about where we are. We know that the longer this thing drags on, the more strain it puts on companies that just don't have the liquidity and the balance sheet strength that we have. We're not alone in that. There are other companies in the sector that are well capitalized and kind of poised to grow their business. We also know that this is, for me, this is kind of I've been running a business in this consumer finance, you know, this will be downturn number four. And we know that, you know, we don't see anything changing, you know, the way consumers spend and borrow coming out of this downturn. You know, obviously the timing and the scale and the scope, et cetera, this is a different one in some respects. But it does have some, as it's been dragging on a little bit, we sort of thought maybe on it would be shorter and sharper and But as it's kind of dragged on, it's starting to look more like the last downturn, you know, 07, 08, 09. And I think our business and a lot of businesses in our sector did quite well in 10, 11, and 12 as consumers returned to spending and regular spending and borrowing patterns and credit remained very good. And competition was much more muted because a lot of companies simply didn't survive the the financial crisis, either at all or certainly in the same shape that they were in going into it.

Any thoughts on the long-term returns of your business and the growth rate as the world gets back to normal, whenever that is?

Yeah, you know, it's just hard to say right now, Kevin. I think, you know, as we... part of it is just sort of projecting what the world's going to look like. And then secondly, obviously, we've added Flexity to the mix. And as we mentioned, we've got a lot of both sort of organic growth opportunities and potentially further use of our cash and liquidity to do more M&A. So looking at exactly what the business mix looks like, you know, coming out of COVID is a hard one to predict right now.

Great. Okay. Thank you. And, I mean, Catapult, congratulations on that investment and, you know, knock on wood. I know you added, I know that Kira was very involved in bringing that organization together and positioning it for the success it seems to be having, and it's an incredible return. Great. Thank you. Thank you, Bob.

And our next question today comes from Vincent Cantick with Stevens. Please go ahead.

Hey, thanks. Good morning, guys. And thanks for taking my question. It has been already asked and answered. But maybe just a few follow-ups. So we talked a little bit about – mentioned M&A a couple of times already. And, you know, you've shown us great success with Catapult and monetizing that. And then this Felicity acquisition, I mean – It's nice to see impressive acquisition that's anywhere under 10 times revenues, considering where the other guys are trading at. But when you think about generating a lot of excess cash, you now have this history of incubating businesses. How's the rest of a potential M&A pipeline and anything else that you might see out there that might be interesting to incubate?

Yeah. Hey, Vincent. It's Don. You know, I think I said earlier, you know, we strategically cards and Canada continue to be interesting. And more broadly, we said, you know, we, if consumers are accessing credit through direct to consumer, both retail and online through point of sale and through cards, we want to have revenue and earnings and growth drivers and investments in, all three of those verticals in both the U.S. and Canada. So if you look at kind of like a six-box matrix there, that's strategically where we're sort of positioning the business over the long haul. So opportunities that fit in those boxes, and those are pretty broad, and you're catching pretty much every way in which consumers use credit. But within that, there's a whole bunch of different, you know, you can look at the, you can also sort of segment that in terms of of near prime and non-prime and call it underbanked. And so, you know, there's a range of opportunities from a credit standpoint as well. So you can blow that box up, that matrix up and have it look pretty big. So, but generally speaking within that, you know, near prime, non-prime, across those three verticals is where we'll look at opportunities. So it's hard to sort of say, exactly, you know, what's going to come about, what things will look like in terms of values and integration opportunities, et cetera. So, you know, we just have to, I think we have to sort of remain opportunistic and willing to kind of move quickly to evaluate opportunities. But there's also a lot of, you know, organic opportunities that we're beginning to invest in more heavily as well, so.

Okay, great. And actually, that's a good segue into my next question, which is I was just wanting to get some more detail about the technology dollars you plan to invest in for 2021. Because you've had, you know, Kira has had good experience developing new products organically. And, you know, Bill has been really helpful with that. So is there organic products or development that you're thinking of growing, any new products that you think might be interesting? And then now that you have Flexity in Canada, is there something where can that experience be brought over to the U.S. as well where you might get into buy now, pay later in the U.S.?

Hi, Vincent. It's Bill. Thank you. I think on Flexity, we're really focused on supporting them today in Canada with their current business and their current merchant partners. We've done a lot of work on the addressable market up there. We think that there's a tremendous opportunity right in front of them. So I think the focus will remain with them, just with the business that they have and that we feel they can go in in the near term. I think as far as other organic products, we're absolutely interested and working currently on some opportunities on our own platform with the notion that even if we would do M&A, it would just make us that much more educated and a better buyer. But to sit on the sidelines and depend on M&A was not something we wanted to do. So we're really working those two opportunities in tandem. And like I said, to the extent that we evaluate other businesses, we feel like we can ask better questions and do more diligence and ultimately make a better decision. All the while, if that doesn't pan out, we've got a really nice jumpstart on some of these new opportunities.

Okay, very helpful. Thanks very much.

And ladies and gentlemen, this concludes the question and answer session. I'd like to turn the conference back over to Don Gayhart for any final remarks.

Hey, great. Thanks, everybody, for joining us again. We've had two calls this week, so appreciate all of your time and attention, and we'll look forward to talking to you after we complete our first quarter. Thanks very much.

And thank you, sir. This concludes today's conference call. Thank you all for attending today's presentation. You may now disconnect your lines and have a