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spk00: Greetings and welcome to Elevate Credit, Inc. full year, fourth quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during today's conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr. Daniel Wright, Director of Public Affairs. Please go ahead, Stuart. You may begin.
spk02: Good afternoon, and thanks for joining us on Elevate's fourth quarter and full year 2020 earnings conference call. Earlier today, we issued a press release with our fourth quarter and full year results. A copy of the release is available on our website at elevate.com slash investors. Today's call is being webcast and is accompanied by a slide presentation, which is also available on our website. Please refer now to slide two of that presentation. Our remarks and answers will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed or implied by such forward-looking statements. These risks include, among others, matters that we have described in our press release issued today, including impacts related to COVID-19 and our most recent annual report on Form 10-K and other filings we make with the SEC. Please note that all forward-looking statements speak only as of the date of this call, and we disclaim any obligation to update these forward-looking statements. During our call today, we'll make reference to non-GAAP financial measures. For a complete reconciliation of historical non-GAAP to GAAP financial measures, please refer to our press release issued today and our slide presentation, both of which have been furnished to the SEC and are available on our website at elevate.com slash investors. We do not provide a reconciliation of forward-looking non-GAAP financial measures due to our inability to project special charges in certain expenses. Joining me on the call today are President and Chief Executive Officer Jason Harbson and Chief Financial Officer Chris Lutz. I will now turn the call over to Jason.
spk03: Good afternoon, everyone, and thank you for joining us today. Today, I'd like to spend some time on 2020 and how Elevate both succeeded as a business and helped customers in what was a challenging year for all of us. I'll then provide thoughts on the year ahead, including our growth strategy and some product updates. Lastly, I'll discuss Elevate's strong balance sheet and give an update on how we're putting capital to work for shareholders. Before those topics, let me start on slide four and give some highlights from our fourth quarter. Our financial results are similar to the past few quarters as muted demand continued to dampen revenues, but very strong credit bolstered adjusted earnings and adjusted EBITDA. Specifically, fourth quarter revenue of $90.7 million was down 45% compared to a year ago, but was just down 3.7% sequentially. The most important takeaway in our view, though, was that our loan balance in the fourth quarter were up 6% over last quarter. Turning to profitability, Elevate had another very strong quarter with adjusted EBITDA of $26.5 million and adjusted earnings of $8.9 million. Strong credit and lower marketing costs again drove profitability, and as a result, adjusted EBITDA margins for the quarter increased. remained above historical trend at 29.2%. Payment assistant tools continue to help customers in their time of need, whether that be due to COVID or not. We anticipate these features continue to help keep credit strong across the portfolio. For marketing costs, Chris will give more detail, but the cost to acquire or tax in a quarter was, again, optically high due to low originations. What is masking the result was some great success we've had with the TodayCard offering, which originated at very attractive costs. The company incurred an overall net loss for the fourth quarter, resulting from a $17.4 million charge associated with legal matters related to our spinoff from the predecessor company in 2014. Finally, as you saw in our fourth quarter press release, we repurchased 7.7 million shares of Elevate Common Stock at an average price of $2.58 per share. In addition, at our most recent board meeting, we approved an additional $25 million of repurchases under our existing plan. In addition to a strong capital position, the most important point here is that we see very compelling value in our current valuation based on the anticipated growth and return opportunity ahead of us. In summary, the company ended fourth quarter in a very strong position to resume both growth from an operations and capital perspective. Let's now turn to slide five and briefly look back at 2020. Clearly, it was an unprecedented year for every business and every person, but I'd like to call out two main highlights for context about why Elevate performed the way it did and how we also help 80,000 non-prime consumers manage the ongoing crisis with payment assistance tools. First, let me speak to our operations and how we manage 2020. As you can imagine, credit has been even more of a priority focus for Elevate this year. That said, as we look back, management of credit was the biggest contributor to our returns, and we feel very validated in the process and strategy we put in place before the pandemic took hold. First, as you know, We rolled out new credit models over the back half of 2019, and the benefit to underwriting clearly showed with customers over 2020. The use of bank-level transaction data significantly improved screening across both Rise and Elastic. We also benefited from the strategy put in place 18 months ago to manage elevate to profitability over volume and top-line growth. In 2020, lower demand took that choice out of our hands somewhat, but we do believe the pace growth over 2019 certainly benefited our performance in 2020. And lastly, while difficult to quantify, we can't ignore that the environment and behavior of customers certainly aided performance in 2020 as well. Key factors that we've discussed include the impact of federal stimulus and unemployment benefits over 2020. Additionally, consumers showed better than expected discipline and resilience by saving more, reducing expenses, and exhibiting job flexibility by leveraging the gig economy to supplement lost incomes. In summary, we were very pleased with the performance on credit and have conviction that this model will produce strong returns as growth resumes. Before I speak to growth, though, let me also review 2020 from the lens of how we served consumers in the pandemic. To put it bluntly, we couldn't be prouder to have helped as many people as we have through such a challenging time. Elevate continues to lead the market for customer service in a number of ways, and we've proven it yet again this year. From an availability standpoint, we found more than ever that the online model compared to brick and mortar was important for non-prime consumers during quarantine. While Elevate isn't the only online consumer finance company, we do believe that COVID-19 likely accelerated the shift to online. More specific to Elevate, we expanded already industry-leading consumer-friendly credit assistant features to aid customers when they needed it most. All three products currently in market rolled out payment flexibility tools that can be self-serve for consumers. This was a big win for many during the pandemic but we believe these features will also serve consumers and elevate wealth in non-recessionary times. We know non-prime consumers will often experience hiccups throughout the course of a loan. Adding this layer of deferral at no cost helps ease the bumps while also lowering default rates over the long term. In total, there are several proof points on the resilience and durability of the credit model, but most important is what it meant for our profitability in a challenging year. Specifically, we generated nearly $55 million in adjusted earnings, more than double last year, which implies an ROE of over 22%. Clearly an impressive number, especially when compared against regional bank or credit card performance in 2020. Now let's turn to slide six, where I'd like to give a brief update on product development. First, as you've noticed in our reporting ever since our IPO, Elevate's consolidated APR continues to decline, primarily driven by our new product introductions and an increase in repeat or seasoned performing customer base. As you know, our brands include customer-friendly features that allow rates to decline with consistent payment performance. As I just noted about our 2020 results, we see a lot of profit potential across a wide range of credit and amongst near prime lenders. We certainly believe our company is best positioned to shift to near prime rates. In fact, 17% of the current portfolio is at near prime rates, which is up 65% from a year ago. The Today card, which we launched two years ago, is the latest success story as we saw a 237% increase in the portfolio over the past year. Looking ahead, we expect today to become a bigger driver of growth given how well the card tested in the market during the pandemic. Let's turn to slide seven. As we look forward to the year ahead, there's still a lot of uncertainty regarding the pandemic. That said, we can provide our initial thoughts based on what we saw in the fourth quarter and our view of demand. First, let me speak to the fourth quarter, which was encouraging as consumer spending increased, jobs began to recover modestly, and demand picked up as stimulus impacts from earlier in the year began to fade. Put simply, we believe there's growing demand for credit, but looking ahead, it seems likely that additional stimulus will impact the shape of that demand in 2021. Based on what we know today about the proposed stimulus plan, we anticipate that the first quarter of 2021 will be down from a year-over-year origination standpoint and and stimulus payments will more than replace the impact of tax refunds that consumers typically rely on throughout the spring. That said, as we look to second quarter and beyond, we expect originations to grow over last year based on growing demand. Recall that customers commonly use our brands for emergency credit to fund unexpected life events. Through much of the quarantine, these drivers have been delayed or eliminated because people have experienced fewer events, such as auto breakdowns, due to lower activity, such as driving less. In the fourth quarter, we saw an increase in loan origination demand as the economy began to reopen, which is a positive sign for 2021. Against this backdrop of anticipated rising demand, we have a three-tiered strategy for growth. First, in 2020, we saw increased attrition amongst the customer base, given lower demand and paydowns. Many of these consumers will again experience a need for credit in 2021, and we plan to market to them in a reacquisition strategy. The advantage of this group is we have a history from an underwriting perspective, and we expect that average customer acquisition costs should be lower as well, both of which benefit returns. Additionally, consumers are likely to receive a reduced rate due to consumer-friendly features that allow for rates to decline with consistent payment performance. The second leg of our growth strategy will be to restart traditional direct mail campaigns. Last year, we focused on digital marketing with small marketing dollars. In 2021, we plan to go back to direct mail in a large way. Based on our experience, we expect this to be an effective marketing spin as demand increases. And lastly, we will build on the success in the credit partner channel with a focus to increase new partnerships on the platform. While we do not have specific guidelines yet, we believe the overall demand will continue to improve in 2021 and we'll have a near-term line of sight in the customer and channels where anticipated returns should be better than average. Overall, we believe Elevate has never been better positioned from a product set perspective than And as you will hear from Chris in more detail, we also believe our credit and capital positions have never been stronger. Like everyone else, we look forward to a better 2021 and plan to share additional detail on our views as the demand environment becomes less uncertain. With that, let me turn the call over to Chris.
spk04: Good afternoon, everybody. From a financial performance standpoint, Q4 2020 played out pretty much as we expected, excluding the large legal accrual Jason discussed. We continue to see strong credit quality, and for the first time all year, we saw quarterly loan growth. Turning to slide eight, combined loans receivable principle totaled just under $400 million at December 31st, 2020, down 34% from a year ago. But on a sequential quarter basis, loan balances were up almost $23 million. At the product level, rise loan balances totaled $228 million at the end of 2020, down $122 million, or 35%, from $350 million a year ago. Our Rise California loan portfolio accounted for almost a third of that decrease as the portfolio in that state dropped to $14 million at the end of the fourth quarter of 2020, a decrease from $58 million a year ago as we stopped lending in that state at the beginning of 2020. Total Rise loan balances at the end of 2020 were up $13 million from the third quarter of 2020. Elastic loan balances at December 31, 2020 totaled $157 million, down 95 million or 38% from a year ago, but were up roughly $5 million from September 30, 2020. We have also disclosed today card balances for the first time in this press release. Loan balances for this credit card product totaled $14 million at the end of 2020, more than tripling from a year ago. This product has a stated APR less than 36%. The Today card had over 8,000 new customers in 2020 at a very impressive customer acquisition cost of only $52 per customer. The product was slightly gross profit positive in the second half of 2020 with revenues exceeding loss provision, marketing, and other cost of sales. We expect to continue to ramp up loan balances in this product in 2021 as we continue to roll out improved credit models focused solely on this near prime customer. Staying on this slide, revenue for the fourth quarter of 2020 was down 45% from the fourth quarter a year ago. For the Rise product, revenue decreased $48 million or 47% in the fourth quarter of 2020 versus prior year. Roughly two-thirds of the revenue decline for RISE resulted from a drop in average loan balances, while the remainder related to a decline in the effective APR of the RISE product, which declined from 124% in the fourth quarter a year ago to 100% in the fourth quarter of 2020. The APR was impacted by both a lack of new customer loans, which typically have a higher APR than more seasoned customers, as well as the impact of adjusting the effective APR for customers that have deferred payments on their loan balances. For Elastic, most of the $26 million decline in revenue resulted from the decrease in average loan balances. Looking at the bottom of this slide, both adjusted EBITDA and adjusted earnings for fiscal year 2020 are up significantly versus fiscal year 2019. Adjusted EBITDA totaled $146 million for fiscal year 2020, up 15% compared to a year ago. Adjusted earnings, defined as net income from continuing operations, excluding non-operating losses of $24 million associated with legal matters, more than doubled to just under $55 million, up from $26 million a year ago. For the fourth quarter of 2020, adjusted earnings totaled just under $9 million or 23 cents fully diluted EPS compared to $4 million or 9 cents fully diluted EPS a year earlier. The company incurred an overall net loss for the fourth quarter resulting from a $17 million charge associated with legal matters primarily related to the spinoff from our predecessor company in 2014. Turning to slide nine, The cumulative loss rate as a percentage of loan originations for the 2019 vintage continues to be the lowest ever, with the new generation of risk scores and strategies that were rolled out in 2019 performing much better than the 2018 vintage, which remained relatively flat with the 2017 vintage. The year-to-date 2020 vintage is even better after layering in the tightened underwriting and customer liquidity from stimulus payments. On this slide, we also show customer acquisition cost. New customer loan volume continued to trend at about 50% of prior year volumes, so the product CAC for Rise and Elastic is not indicative of future expectations. When customer loan demand picks up again in future quarters, we expect the CAC to continue to trend between $250 and $300 for the Rise and Elastic products. and the CAC should be sub $100 for the today card. Slide 10 shows the adjusted EBITDA margin, which was 32% for fiscal year 2020, up from 20% a year ago. Almost all the increase in the adjusted EBITDA margin resulted from lower loan loss provision. Long term, we expect the adjusted EBITDA margin to return to 20% in a more normalized growth model. As disclosed in the press release, Loan balances with payment assistant tools of December 30th, December 31st, 2020 total $35 million or 9% of combined loans receivable principle down from $39 million or 10% of combined loans receivable principle at September 30th, 2020. Turning to liquidity and capital on slide 11, one of the positives of our business model is the short-term nature of the loans. On December 31, 2020, cash on the balance sheet totaled over $200 million. In January 2021, we paid down approximately $97 million of debt, $18 million of which was maturing and the remainder under the Q1 revolver. Debt at the end of January 2021 totaled just over $340 million on roughly $165 million in equity. During 2020, we also repurchased $20 million of common shares under our existing common stock repurchase program. This represents an 18% reduction in common shares outstanding since the beginning of 2020. We also repurchased an additional $5 million of common shares under the existing plan in January 2021. And our board recently approved expanding this plan by an additional $25 million beginning in February of 2021. Now let me discuss expectations for fiscal year 2021. While we are not providing revenue, adjusted EBITDA or net income guidance for this year due to uncertainty caused by COVID and the potential next round of stimulus, we can provide some high level thoughts. The biggest uncertainty from our perspective is consumer loan demand, which impacts forecasted revenue, loan loss provisioning, and marketing expense for this year. We expect marketing expense will be down materially in the first quarter of this year compared to a year ago due to low consumer loan demand resulting from federal stimulus and normal tax seasonality. Loan originations will probably be at 50% of prior year levels at best in the first quarter of this year. Lower loan originations combined with the usual Q1 seasonality of loan paydowns will likely result in loan balances dropping 15 to 20% during the first quarter of 2021 from year end 2020. As a result, we expect revenue in the first quarter of 2021 will be down versus a year ago by roughly the same percentages in Q4 of 2020. However, we do expect loan balances to then grow the rest of the year, and we are targeting year-over-year loan growth in the 10% to 15% range by the end of 2021. The overall effective APR of the loan portfolio will continue to slightly decline as more loans are originated at near-prime rates, such as the state card. We expect second-half 2021 year-over-year revenue growth north of 10%. Loss rates should continue to be better than prior years, but increased marketing spend and loan loss reserve build associated with expected loan growth in the latter part of the year will compress adjusted net income in 2021 versus 2020. Operating expense levels for 2021 will be slightly lower than 2020, and interest expense should be down materially in 2021 from 2020 onwards. as we will self-fund most of the loan growth rather than borrowing. The effective tax rate will be in the normalized 25% to 30% range, but our cash taxes paid are expected to be minimal as we use the net operating loss from the 2020 write-off of our UK investment. With that, let me turn the call back over to the operator to open it up for Q&A.
spk00: At this time, we will be conducting a question-and-answer session If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star keys. One moment while we poll for questions. Our first question comes from the line of Moshe Arembach with Credit Suisse. You may proceed with your question.
spk05: Great. So congratulations on getting through. It was a difficult year and being able to use capital to both return from the standpoint of both debt and equity. Maybe if you could kind of just start a little bit. In the past, I guess, it was difficult to know how the consumer would behave, and now you seem to have a perspective of on, you know, the performance post the first quarter? Maybe is there like something that you're seeing or what your customers are telling you that gives you the confidence that post that they will, you know, they will come back in the bar and you'll be able to get to that 10 to 15% loan growth?
spk03: Yeah, I'm going to go to Jason. I'll take that and Chris can maybe add some color. But I think some of the things that we're seeing, you know, we talk about the ability to look at bank transaction data from consumers And what we're seeing is, you know, the most recent stimulus that came through, it seemed to flow through pretty quickly for the consumer. And, you know, also when we look back in Q4, you know, we saw people start to get back in the marketplace. You know, jobs were up some, and people were outspending again. So we saw that demand pick back up. And so, you know, while we do expect to have some dampening on demand in the first quarter with another round of stimulus coming ahead of us, We think the need for consumers is still going to be there when things open back up as they get back out in the marketplace. And so we think we're well positioned to be ready for that.
spk05: Maybe just to follow up on that, and when we think about the amount of the I guess your thoughts about how big the credit card product is going to be a year ago, I mean a year from now, excuse me, or what percentage of that 10% to 15% loan growth will be driven by the credit card? How do you think about how large that's going to be?
spk04: Hey, Moshe, it's Chris. What we've got in kind of the preliminary forecast with the high-level thoughts that I gave is the credit card product doubling year over year. So you're looking at balances probably around 25 to 30 million-ish at the end of this year. I think Jason and I know we could probably grow that faster. So at least from a preliminary standpoint, we feel pretty good that we can double the portfolio on a year over year basis. And if we like the credit performance, we like the CAC and the profitability, we could certainly look to potentially grow it even faster.
spk05: And when you think about that, I mean, that CAC is lower than your overall CAC. I would assume that that's a product that has, I mean, assuming that credit stays within your bands is, you know, it's got a better lifetime profitability because that customer probably sticks around longer.
spk04: Yeah, yeah. Probably much better long-term profitability. Certainly a much longer initial payback period. just given the lower APR and the average loan balance that we're seeing so far is around, I think, about $1,200 per customer. So that's a little bit lower than what we typically see with a rise or elastic customer. So we're certainly generating lower revenue initially, but over the life, you're right. I mean, if you go out three or four years, I think the lifetime customer profitability off of this customer looks very promising, especially at the CACs that we're seeing right now. Got it. Thank you.
spk00: Our next question comes from the line of David Schwartz with J&P Securities. You may proceed with your question.
spk07: Thank you. Good afternoon, guys, and thanks for taking my questions. Hey, Jason, I guess maybe a little more of a strategic question. You know, I'm looking at slide six where, you know, you discuss the interest rate environment and specifically sort of the APR. and, you know, I clearly understand the math, I mean, as far as the effect that the Today card and some of the other developments have on the average APR near term. I'm just trying to get a sense, I mean, as we think about where you want to take the business mix over the next several years, I mean, is there a concerted effort to to become more of a near-prime, lower APR lender, or is this just kind of the byproduct of sort of a one-off opportunity you saw in the card space? I'm just trying to get my arms around, A, how you're defining near-prime APR in this slide, and B, whether this is going to be an ongoing evolution, notwithstanding the upward trend in yield that you'll get once you start to add new customers once again?
spk03: Sure, sure. It's a great question, David. And I think it's a little bit of both. You know, when we look at what we've done with, you know, the core products, you know, I'm going to say that maybe you're talking about Rise and Elastic. You know, we're real proud of what their progress has been over the last four, five, six years, to see the effect of APRs come down to be below 100% in the double digits. And I think that's a byproduct of the payment assistant tools we've built in for consumers to have better payment performance. It's a function of the better underwriting that's been put in place with more consumer data that we can leverage. And I think that's always been part of the plan is to continue to drive down costs for consumers and continue to expand access to credit. And so I think you'll continue to see that with those existing flagship products that are out in market today. But I think there's also an opportunity to move closer towards near prime with the Today card and taking some of those learnings that we've had over the last 10, 15 years on how to serve non-prime consumers and expand access to credit and give them – the nice thing about the Today card, it's a card that gives them the benefit of having a primish type of transaction vehicle that the non-prime consumer is not used to having. I think that's why we're seeing the CACs be very strong, and we're optimistic about what that could mean for us in the future. So we think it's just a natural progression and an extension of the current products and market, continue to invest and rise and elastic, but also think today provides a nice opportunity for Elevate.
spk07: Got it. That's helpful, and I may have missed this in the discussion on the Today card or maybe even when you were rolling it out, but do you have any color on who these borrowers are? I'm curious whether, A, they're entirely new to Elevate. I would imagine if they're sub-36% borrowers, they are. And B, as you kind of look at their credit files, even if they're thin files, if you have a sense whether or not they've ever had a general purpose card elsewhere, whether they're kind of augmenting existing card balances, just a little more flavor on who this borrower is relative to who you've typically served.
spk03: Sure, sure. And it's still somewhat early on in the life of that product. So I don't know the data is not quite as rich as what we have on other products. But I think from a demographic standpoint, we're seeing them be somewhat similar to the rise in elastic products, maybe just a touch more up the credit scale, but still in the non-prime category. They do have historical credit that they've had access to, whether it's been maxed out or had some delinquencies there, so they're getting a second chance. but it's kind of the ability for us to take some of the learnings and understandings we've had with non-prime consumers and take a product out there that we think fits a need that's not being met right now. Got it, got it.
spk07: And one last follow-up. I mean, I guess it's more housekeeping, but the legal accrual, I mean, it sounds like it goes back quite a number of years, so probably isn't germane to your business at all today, but Is that something that's expected to ultimately be a cash expense for the company? Can you provide just a little color on what that, I guess, legal reserve is for?
spk03: Sure. I mean, I think you did hit on it there. It's not related to our core business. It's tied to the spinoff from our predecessor company. And so we'll continue to fight that litigation that's out there. We thought it was appropriate to go ahead and take a legal reserve at this time. And at the time that we either reach a settlement or there's a final decision in that, there could be a cash outlay. But we thought that was the right number to accrue at this point. Got it.
spk07: Great. Thank you.
spk00: As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question comes from the line of John Hecht with Jefferies. You may proceed with your question.
spk01: Yeah, a little bit more follow-up from Moshe and David on the card book, because it sounds like it's got a lot of growth and momentum. What kind of – I know your overall business, I think you shoot for something around a 50% gross margin over the long term. Is this product going to be similar to that, or how do we think about the kind of unit-level economics?
spk04: Yeah, hi, John. It's Chris. Hey, Chris. Probably, you know, initially over the first 12 to 24 months, the operating margins are going to be similar to slightly lower than a rise or elastic customer. But over time, given the revolving nature of the product, that's where it starts to generate, you know, probably longer term better margins. I think a key aspect of this as well is given the the nature of the APR and that it's a more primish customer. Well, certainly as it starts to grow, we've been self-funding it so far. You know, we'll go out and get a much lower cost of funds to fund this product going forward. So generally speaking, I think this product, so far from what we've seen with the initial loss results, the CAC, and the performance, we think that longer term it could have, you know, unit economic margins better than our existing Ryzen Elastic products. uh, customer, but it's probably going to take a longer period of time to get there.
spk01: Okay. And then, uh, you guys talk about, you know, I think you give some specific kind of expectations for growth in the card book. You mentioned rise in elastic and you talked about low, you know, the aggregate loan growth expectations for the year. How do you think about rise? Which one of those has more momentum now? And how do you think about that trending over the year?
spk04: It's Chris again. I think Rise has a little bit more momentum right now, and so I think, you know, when you look at the 10% to 15% overall growth target for the year, Rise will probably be at the higher end of that range. Elastic will probably be at the lower end of that range. But both products, we're expecting double-digit growth on a year-over-year basis.
spk01: Okay. Can you... You gave us some of the information about the deferrals. Can you give us a sense what the allowance level is for the deferrals?
spk04: Yeah, and I'll also give one update, too, that we didn't put in the press release. But the overall way we've been handling the loan loss reserve for customers with deferrals is treating them as though they're one to 30 days past due, which for us, because we haven't adopted CECL since we're a small reporting unit, That's typically a loan loss reserve of between 40% and 50% of the customer loan balance. And what we've seen on performance of those customers so far is that typically the loss rate's probably in the 20% range. So I think so far we've been conservative with the loan loss reserve factors. As we get a little bit more experience, we'll continue to chew up those loss factors and probably bring that down in future periods if they continue to perform well. The other data point that I'll put out that's really recent that we just didn't have a chance to put it in the press release was in January with the amount of, I guess, the initial $600 stimulus checks, we did see the deferred loan balance, principal balances come down $10 million from year end. So that was obviously very positive from our perspective. and should continue to show the strength in credit quality that we're seeing. So customers did the right thing with the stimulus checks that they were receiving, the $600. They took it, and for those that had deferred principal payments, they made their payments and are back in the current bucket.
spk01: Okay. Very helpful information. And then you've paid some debt down, you're buying back stock, but you're still, I think, debt to equities around three times. I mean, how do you think about what your optimal kind of, either leverage or capital structure target that you're thinking about?
spk04: Yeah, it's down now two to one at the end of January after the $97 million pay down that we had. If anything, I think we're probably under leveraged a little bit. As I just mentioned, you know, the today card, we've been self-funding that clearly to the extent that that starts to grow materially. We'll look to establish, you know, a formal lending facility for that. So that'll get the leverage back up. I think right now that, you know, For my preference, I'd probably, by the end of the year, prefer a little bit more leverage so that we can, you know, given, again, where the stock's trading, and I know we've had a nice recent run-up, but we still believe that, you know, to the extent possible, if we can't use free cash flow to generate good, solid loan growth off of our three products, I'd prefer to borrow a little bit more and continue to actively buy back our stock, even on top of what, you know, the board just recently approved.
spk01: Great. I appreciate all the information. Thanks, guys.
spk00: Our next question comes from the line of Michael Diana with Maxim Group. You may proceed with your question.
spk06: Okay, thank you. Chris, you gave some good guidance there at the end of your prepared remarks faster than I could write. Do you think you could just quickly review that? Sure.
spk04: Yeah, I mean, what we're looking at is I'll start first with Q1. You know, given the... The initial $600 stimulus check wave that kind of came through, and we saw a lot of that already flush out through customer checking accounts. So we don't think that there will be anything lingering there. But that combined with assuming another $1,400 of stimulus coming here sometime in Q1, we expect loan balances will drop about 15% to 20% during the first quarter from year-end balances. However, we do expect that from Q2 through the end of the year, we'll be back in growth mode, and we're targeting by the end of the year to have year-over-year loan growth of about 10% to 15%. As I mentioned, probably the today card, we could look to see those balances at least double year-over-year, and then rise will probably be at the higher end of that 10% to 15% range, and the elastic product probably at the lower end of that 10% to 15% range. But really, we expect all three products to have double-digit growth on a year-over-year basis. Revenue will obviously drop in Q1 versus a year ago, probably by the same roughly 45 percent that we saw in Q4 as the loan balances kind of hopefully hit the trough at the end of Q1. Marketing expense will be down materially in Q1. We expect loan originations probably at about half of what they were in Q1 a year ago. Remember, COVID really didn't impact loan originations until beginning the second quarter of last year. So on a year-over-year basis, loan originations will be down about 50% in Q1, but then we'll start to expect to see it grow significantly, double-digit, second quarter through the end of the year. We think loss rates, you know, will continue to be much stronger than we've seen historically, given the strong credit quality, the payment flexibility tools that we've rolled out. We do expect that in the second half of the year as we start to grow the loan book, the increased marketing spend and the loan loss reserve build will compress adjusted net income versus what we saw last year. Op expense will be down a little bit for the full year versus what we saw in 2020. And I think interest expense will be down pretty materially given that we just paid down almost $100 million of debt here in January. And we expect to self-fund a lot of the loan growth throughout the rest of the year. So all in all, we're looking for good double-digit growth come the latter part of the year and then doing whatever we can to maintain expenses, including interest expense and trying to drive good margins. Okay. Well, also, obviously, we also announced the $25 million stock buyback, so we'll start that beginning in February. That's an expansion on top of the $30 million that we've already bought back over the course of a little over a year.
spk06: Right. Okay. And on tax, are you saying the effective tax rate is going to be close to zero?
spk04: Yeah, that the cash rate will be zero because we'll be able to utilize the NOL. But we already booked the deferred tax asset related to that UK NOL on our books last year. So the gap P&L tax expense will be a normal 25 to 30 percent. But the actual cash taxes paid will be minimal.
spk06: Okay, great. I appreciate it. Thank you very much.
spk00: Ladies and gentlemen, we have reached the end of today's question and answer session. I would like to turn this call back over to Mr. Jason Harbison for closing remarks.
spk03: To close, I'd like to thank the Elevate team for all the hard work in 2020 and making it such a successful year. I look forward to leading the team in 2021 and building on that success. So thank you for all your time, and we look forward to speaking to everyone here in a few months to cover our Q1 performance. Take care.
spk00: Thank you for joining us today. This concludes today's conference. You may disconnect your lines at this time.
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