Enova International, Inc.

Good day and welcome to the Innova International First Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. Should 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, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note that this event is being recorded. I would now like to turn the conference over to Monica Gould, Investor, Investor Relations of Innova. Please go ahead, ma'am.

Thank you, Operator, and good afternoon, everyone. Innova released results for the first quarter of 2020 and did March 31, 2020, this afternoon after the market closed. If you did not receive a copy of our earnings press release, you may obtain it from the Investor Relations section of our website at ir.inova.com. With me on today's call are David Fisher, Chief Executive Officer, and Steve Cunningham, Chief Financial Officer. This call is being webcast and will be archived on the Investor Relations section of our website. Before I turn the call over to David, I'd like to note that today's discussion will contain forward-looking statements based on the business environment as we currently see it, and as such, does include certain risks and uncertainties. Please refer to our press release and our SEC filings for more information on the specific risk factors that could cause our actual results to differ materially from the projections described in today's discussion. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. In addition to U.S. GAAP reporting, we report certain financial measures that do not conform to generally accepted accounting principles. We believe these non-GAAP measures enhance the understanding of our performance. Reconciliations between these GAAP and non-GAAP measures are included in the tables found in today's press release. As noted in our earnings release, we have posted supplemental financial information on the IR portion of our website. And with that, I'd like to turn the call over to David.

Good afternoon, everyone. Thank you for joining our call today. Instead of our usual practice of providing an in-depth review of the quarter, I'm going to spend most of this call discussing Inova's response to COVID-19 and the economic crisis we are all facing. After that, I'll turn the call over to Steve Cunningham, our CFO, who will discuss our financial results and outlook in more detail. First, I hope that you, your families, and loved ones are safe and healthy. I would like to extend my heartfelt gratitude to our country's first responders and healthcare professionals. I would also like to thank all of our employees for their continued hard work and teamwork through this difficult time to support not only our customers, but also each other. Our priority is the safety and well-being of our employees and customers. And fortunately, given the advantageous nature of our online-only business model, we believe we are well positioned to help them manage through this crisis. Innova's nearly 1,300 team members across all corporate and contact center functions have been working remotely since mid-March. Our nimble technology and online model have enabled us to continue to operate at high levels of productivity with full access to all of our data and tools. This includes maintaining high customer service levels with our dedicated in-house contact center team across all contact points, phone, email, and chat. Approximately 50% of emails and 30% of calls with our customers pertain to COVID, but service levels remain high, as do customer satisfaction scores, with over 90% of customers indicating they were satisfied with the solutions we've worked on with them. Turning to the quarter, Our performance through mid-March exceeded our expectations, and we were on track to again meet our revenue and earnings guidance based on strong origination and solid credit metrics. However, as the seriousness of the COVID crisis increased in early March, we aggressively began to reduce originations and shift our focus to our existing customers and managing our portfolio of loans. One thing that became apparent almost immediately is that this recession was not going to follow the typical course. In most recessions, the economy slowly deteriorates over a period of months, giving our credit models time and adequate data to adapt. But this appears to be the first time a recession is caused by unemployment. Historically, it has always been the exact opposite. Events in the world or the market cause growth to slow and eventually jobs are lost. In every other recession, unemployment peaked near the end. But here we have the peak at the beginning with over 25 million jobless claims filed in just the first month or so. With the speed in which the employment and spending picture in the U.S. is changing, our underwriting models are not currently able to be predictive enough to make sound decisions. As a result, we meaningfully cut back originations across all of our products during the last half of March. This resulted in us curtailing almost all paid marketing and focusing our resources on supporting our existing customer base and adjusting to the emerging risks in this economic environment. The effect of these actions led originations for the month of March declined 16% from a year ago. And in total, we have now cut back originations 60 to 80% depending on product. At Enova, one of our core values is customer first. And since we know many of them will be impacted by COVID-19, we are ensuring our policies will help them. We have increased repayment flexibility, temporarily stopped assessing late fees, and will continue to work with customers on due date adjustments, payment deferrals, and adjusted payment plans. In addition, we've made changes to our credit reporting process so that if an impacted customer does have a late payment, any impact to their credit report is lessened by noting the late payment was due to a disaster. To date, in part because of our fast actions, default rates have ticked up only slightly. Our customers are also benefiting from the significant stimulus at the state level and from the $2 trillion CARES Act. The hope is that this bill will help America avoid a deep and long economic recession. In addition, we know that subprime customers are very accustomed to managing variations in their personal cash flows. As has been said before, in some ways, our customers are always in a recession. So while we are certainly anticipating further deterioration in credit quality, in many ways, recessions have less of an impact on our customers than on prime borrowers. In terms of the impact of Inova, both Steve and I will cover it in more detail, but we have a strong balance sheet and ample liquidity to weather this economic slowdown. And our proven ability to adapt to changes will also enable us to reaccelerate quickly when conditions dictate. We are already rapidly readjusting our sophisticated analytics models to take into account uniqueness of the economic deterioration in our reacceleration plans. Despite scaling back lending efforts during the end of Q1, we delivered revenue growth of 37% compared to the first quarter of last year. And our flexible business model allowed us to quickly reduce our operating costs to align with lower business activity. Adjusted EBITDA of $36 million and adjusted EPS of 26 cents compares to $80 million and $1.27 per share in the first quarter of last year. Our first quarter results include an approximately $60 million reduction that we took to the fair value of our loans to reflect the increased risk due to the COVID crisis. Without this adjustment, adjusted EBITDA, and adjusted EPS would have both been in line with our guidance. Our domestic lending businesses, which include our large U.S. subprime business, Net Credit, and our small business financing products, continued to drive our growth and profitability during the first quarter. Revenue for these three businesses was up 38% year-over-year in Q1, driven by a 78% increase in line of credit revenue and a 23% increase in installment loan and finance receivables revenue. The composition of our total portfolio in the first quarter was 66% installment products, 32% line of credit products, and only 2% single-pay products. And our UOS near-prime product represented 51% of our portfolio at the end of Q1, while small business now represents 16%. Turning to our smaller businesses, in Brazil, first quarter originations increased 10% sequentially and 7% year-over-year on accounts and currency business. And lastly, Inova Decisions, our real-time analytics as a service business, is continuing to gain traction as we actively build out the pipeline. Before I wrap up, I'd like to discuss how we are operating at Inova to weather this crisis. The flexibility of our online platform, our proprietary analytics, balance sheet resiliency, and deep experience on our management team provides us with a substantial competitive advantage. We also have a well-diversified product offering without significant exposure to some of the more impacted states like New York and New Jersey, and without significant concentration to the restaurant and hospitality industry in our SMB portfolio. Thanks to our intensive recession readiness preparation over the last two years, combined with our flexible online platform, we were well positioned to act quickly at the onset of the crisis, as I described earlier. And our talented team is well prepared to navigate the ongoing uncertainties. From an operations perspective, we have always had formal daily risk monitoring and response planning across all of our businesses. For example, we look at initial defaults, delinquency rates, ACH returns, line utilization, the credit profile of our applicants, and much, much more. Combined with the high payment frequency across most of our portfolio, this allows us to have a near real-time view of credit performance. In part because of this, we performed very well through the Great Recession of 2008, and our analytics and operational capabilities are much more sophisticated today than they were then. Sitting here, we have over 16 years and over 37 terabytes of data. This includes data from over 300 million unique customer interactions. We are confident that the quality of our analytics to digest this data distributed over our online-only business model has and will continue to enable us to rapidly and efficiently take real-time actions based on the data we are seeing. As I mentioned previously, we are already quickly readjusting our sophisticated analytics models to take into account the uniqueness of the economic deterioration. This includes not only actions to manage our existing portfolio, but also decisions around how and when to re-accelerate lending. While that will be based on a number of factors, it's important to understand that we do not need to see a full economic recovery, but simply for unemployment levels to stabilize at whatever that level may be. From a financial perspective, which Steve will discuss in further detail, we have a strong balance sheet and ample liquidity to manage us through an economic downturn. Our cash position is growing, and our online-only business model has significant operating leverage so we can adjust our expenses quickly to adapt to changes in our business activity as a result of market conditions. Additionally, we benefit from higher margins and lower credit quality as a nine prime consumer lender versus a prime or super prime lender. And we have sufficient liquidity and operational capacity to expand lending once unemployment and economic conditions begin to stabilize. Lastly, our highly experienced management team is another key differentiator that sets us apart from our competitors. We have successfully operated multiple industries and through multiple economic downturns. We know how to manage through these cycles, and we have consistently demonstrated prudence and profitability. While COVID-19 has created uncertainty in the short term, we believe the long-term fundamentals of our business remain strong and that we are well-positioned to navigate through the downturn. We also remain committed to producing long-term, sustainable, and profitable growth and will swiftly resume lending efforts once the economy begins to stabilize. With that, I'll turn the call over to Steve, who will provide more details on our financial performance and outlook. And following Steve's remarks, We'll be happy to answer any questions that you may have.

Steve? Thank you, David, and good afternoon, everyone. As David mentioned in his remarks, our direct online-only business model, world-class analytics and technology, and deep organizational preparedness have allowed us to adapt quickly to current market conditions and will serve us well as we continue to adjust to the rapidly evolving and uncertain economic environment facing our country. Our consistent and disciplined focus on unit economics has delivered predictable and steadily increasing returns in recent years, resulting in strong earnings. This earnings capacity provides a strong first line of defense to absorb an increase in credit losses caused by the current crisis. In fact, as David mentioned, ahead of the rapid deterioration in the economic environment during late March, We were on track to deliver another solid quarter as reflected by strong year-over-year growth in receivables and revenue. Excluding some initial COVID-related pressure already experienced at March 31, resulting in an adjustment of approximately $60 million to the fair value of our portfolio to address the uncertain credit environment as the quarter closed, we would have once again delivered financial results consistent with our guidance ranges. As I will explain in more detail, the additional adjustment addressed risks to the fair value of the portfolio from some observed worsening of credit risk, as well as our view of higher expected required returns at March 31st. In addition, our solid cash, liquidity, and balance sheet position provide us significant flexibility and will be a strength as we navigate economic uncertainties in the coming months. Our balance sheet resiliency is supported by a strong tangible capital position, significant committed financing capacity with strong counterparties, and low refinancing risk from thoughtful laddering of debt maturities. We ended the first quarter with $214 million of cash in marketable securities, including $171 million unrestricted, and had an additional $157 million of available capacity on committed facilities, where eligible collateral is available. Additionally, all of our unsecured debt and secured facilities have a maturity date or final amortization maturity at February 2022 or beyond. Our net cash flows from operations for the first quarter total $253 million. In a reduced origination environment, we expect a rapid build in our cash position in the next several months, even if we experience increased defaults. given the relatively short duration of our receivables, revenue yields, and the frequency of contractual payments. As of April 24th, our cash and marketable securities balance had grown to $292 million, including $232 million unrestricted, and available capacity on committed facilities was $161 million. By the end of the second quarter, we projected cash balance of at least $350 to $400 million. We estimate our cash balances, available facility capacity, and portfolio repayment characteristics would provide us with sufficient cash to operate indefinitely without additional external financing. Even once we return to the meaningful growth rates experienced in recent years, we project a long runway of available liquidity before needing to raise new funding. Given the ongoing economic uncertainty resulting from the speed of the economic slowdown and joblessness that began in March, and the timing of reopening the economy as social distancing restrictions are lifted, we are not providing guidance for the second quarter of 2020, and we are withdrawing the full year 2020 guidance that we previously issued. Before I turn to first quarter results, I want to remind everyone that beginning on January 1st of this year, We adopted fair value accounting for our receivables portfolio to comply with new GAAP requirements for life of loan loss accounting. The adoption required restatement of the existing book value of the receivables portfolio to fair value on January 1, which resulted in a $99 million one-time non-cash increase to retained earnings to recognize a fair value premium on the portfolio of 7%. This represents the percentage that the fair value of the portfolio exceeds the outstanding principal. The other notable change to reported results from the adoption of fair value accounting is related to our historical practice of deferring certain marketing and selling expenses and recognizing them over the life of the related loans. These costs will no longer be deferred under fair value accounting, so we expect marketing expenses as a percentage of revenue to be slightly higher going forward. Now turning to first quarter results, total company first quarter 2020 revenue from continuing operations increased 37% to $362 million and was above our guidance range of $328 million to $348 million. Revenue growth was driven by a 29% year-over-year increase in total company combined loan and finance receivables balances. which ended the quarter at $1.2 billion on an amortized cost basis. Line of credit accounts and installment loans continued to drive the growth in the overall book. These products grew 69% and 20% year-over-year, respectively. Together, installment loans, receivables purchase agreements, and line of credit products now comprise 98% of our total portfolio and 93% of our total revenue. Given the very small size of the short-term portfolio, we are now including those loans in the installment loans and RPAs product grouping for ongoing reporting. Combined loan and finance receivables balances on an amortized basis decline 9% from year-end, primarily as a result of normal seasonality and the significant reduction in originations in the second half of March that David discussed. As David mentioned, in the current economic environment, until signs of credit stability are apparent, we will continue to restrict marketing to new customers and expect originations to be significantly below prior year levels and largely from existing customers. The net revenue margin for the first quarter was 35%, below our guidance range of 45% to 55%. The lower-than-expected margin was driven by a larger than expected change in the fair value for the receivables portfolio at March 31st. As you'll recall, the change in the fair value line item that we will include in the income statement beginning this quarter is driven mostly by changes to key valuation assumptions, including credit loss expectations, prepayment assumptions, and the discount rate. Changes to fair value assumptions for the portfolio at March 31st were driven primarily by two key considerations. First, credit risk apparent in portfolio metrics, including delinquencies and modifications at the end of the quarter. And second, a change in the discount rate to capture the greater uncertainty of portfolio performance in the current operating environment. Let me start with credit. For the first quarter, the ratio of net charge-offs as a percentage of average combined loan and finance receivables was 16.8%, compared to 15.4% in the prior year quarter. Similar to recent quarters, we expected some year-over-year increase in this ratio, given our recent success with attracting new customers. In addition, this ratio was slightly elevated for both of our product groupings as we saw some small impacts from the rapid deterioration in economic conditions during the last half of March. Similar to net charge-offs, other customer credit metrics on March 31st were showing signs of deterioration, but only slightly. During the last two weeks of March, more than three-quarters of our portfolio had at least one payment contractually due, giving us quick visibility to any early issues. The percentage of total portfolio receivables past these 30 days or more increased to 7.5% at the end of the quarter, from 6% a year ago. And we also saw a small uptick in early stage delinquencies as well. Additionally, as we work to support our customers, the proportion of receivables balances at the end of the quarter tied to customers that we have granted requests for payment deferrals or modifications were meaningfully higher across our businesses. As we've done in the past for more regionally focused natural disasters, we believe this is the right approach given the unprecedented speed of change in the economic environment and the timing of government responses to stabilize consumers and businesses. While not considered delinquent, we expect customers that have received deferrals or modifications to present higher default risk than typical non-delinquent customers that continue to pay on time. Therefore, we adjusted the fair value of these loans downward to reflect the increased risk. We also increased the discount rate used in the fair value calculation by 500 basis points to capture the increased uncertainty in portfolio performance arising from the combination of the speed of the economic slowdown and joblessness that began in March. In summary, the combination of a slight increase to delinquencies in the back half of March increased risk attributed to deferrals and modifications at the end of the quarter, and the increase in the discount rate to address greater uncertainty reduced the fair value of the portfolio to 103% of principal at March 31st from the aforementioned opening fair value position on January 1st of 107%. This is the primary reason our profitability metrics were below our guidance ranges for the first quarter. As of late last week, virtually all of our receivables have had at least one contractual payment due since mid-March, and more than half have had three or more contractual payments due since then. The frequent contractual payments across our portfolio not only speed conversion to cash, as I previously mentioned, but also allows more opportunities to interact with and support customers facing hardships. It provides more data to quickly refine analytical approaches for operating in the current environment. Through late last week, we have seen some deterioration in our credit metrics since the first quarter ended, and an increase in the rate of customers seeking relief as they work through the impacts of the COVID-19 crisis. Although it's still too early to identify any discernible trend, we have started to see some signs that those metrics are beginning to stabilize. Given the aforementioned duration and payment frequency characteristics of our portfolio, the significant reduction in new originations, and our 60-day charge-off policy, we expect relatively rapid financial recognition of credit risk in the coming months. On the other hand, we recognize this timing ultimately depends on the duration of the ongoing COVID-19 pandemic. It may also vary as we work to support impacted customers. Turning to operating expenses, during the first quarter of 2020, total operating expenses, including marketing, were $94 million, or 26% of revenue, compared to $69 million, or 26% of revenue in the first quarter of 2019. As I previously mentioned, under fair value accounting, we no longer defer certain marketing and selling expenses, which increased operating expenses for the first quarter of 2020 compared to a year ago. Marketing expenses in the first quarter were $35 million or 10% of revenue compared to $19 million or 7% of revenue in the first quarter of 2019. Approximately $7 million of the year-over-year increase in marketing expenses during the first quarter was attributable to the adoption of fair value accounting. Our marketing programs continued to demonstrate efficiency prior to the deliberate reduction in originations during late March when we ceased all paid marketing. Operations and technology expenses totaled $31 million, or 9% of revenue, in the first quarter, compared to $21 million, or 8% of revenue, in the first quarter of 2019. And we're higher primarily due to volume-related variable expenses and increases in certain small business origination expenses that were previously deferred prior to adoption of fair value accounting. General and administrative expenses were $28 million or 8% of revenue in the first quarter, compared to $29 million or 11% of revenue in the first quarter of the prior year, and were lowered primarily due to lower personnel-related and legal costs. Reflecting the operating leverage in our business model, in the near term, periods of reduced originations where we are focused on supporting our existing customers we expect total operating expenses to decline and range in the mid to upper teens as a percentage of revenue before they renormalize in the mid-20s as a percentage of revenue. Adjusted EBITDA, a non-GAAP measure, declined 55% year-over-year to $36 million in the first quarter for the reasons I've previously discussed. Our adjusted EBITDA margin decreased to 10% from 30% in the first quarter of the prior year. Our stock-based compensation expense was $3.5 million in the first quarter, which compares to $3.1 million in the first quarter of 2019. Our effective tax rate was 34% in the first quarter, which increased from 24% for the first quarter of 2019. The increase was driven primarily by typical first quarter non-deductible expenses being a higher proportion of lower first quarter operating income. We expect our normalized effective tax rate to be in the mid to upper 20% range, but also expect some near-term volatility, depending on the trajectory of our future results. We recognize net income from continuing operations of $6 million, or 18 cents, per diluted share in the quarter, compared to $39 million, or $1.13 per diluted share in the first quarter of 2019. Adjusted earnings, a non-GAAP measure, decreased to $9 million or 26 cents per diluted share from $44 million or $1.27 per diluted share in the first quarter of the prior year. The trailing 12-month return on average shareholder equity using adjusted earnings decreased to 25% during the first quarter from 28% a year ago. Our debt balance at the end of the quarter includes $212 million outstanding under our $350 million of combined installment loan securitization facilities and $105 million outstanding under our $125 million corporate revolver. Our cost of funds for the quarter declined to 8.15%, an 88 basis point decrease from the same quarter a year ago as we continue to recognize the cost benefits of transactions completed over the past two years. During the first quarter, we acquired 2.3 million shares at a cost of $41 million under our $75 million share repurchase program. In summary, our online direct-only model, market-leading technology and analytics, resilient balance sheet, and disciplined financial approach have positioned us well, and importantly, As we've evaluated paths of varying severity on how the current economic environment plays out, it's difficult to envision a scenario where we face a liquidity shortfall or where the value of our portfolio does not meaningfully cover our liability. And with that, we'd be happy to take your questions. Operator?

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we'll pause momentarily to assemble our roster. And our first question will come from John Hecht with Jefferies. Please go ahead, sir.

You gave some color on this, Steve. I'm wondering, what can you tell us? Do you have a picture of, you know, end through April in terms of, you know, stimulated or stimulated cash and kind of activity on referrals? I've been seeing a spike.

John, we... I heard you mention me. I think you were referring, we lost you with a bad connection there, John. But I think what you were asking was in the trends that we discussed, at least through the end of last week, have we seen anything discernible as it relates to stimulus and payments? That's the best I could pick up. But I would basically say I think some of the reasons that we've seen some stabilizations, and I'm very careful to highlight, we don't necessarily think this is a trend just yet, but some of the reasons that we've seen some of the stability is likely has to do with some of the transfer payments that are entering the economy.

Okay. And hopefully my connection is a little better now. I'm not sure. I guess it's a little bit related to that. The marketing spend was up even at an apples-to-apples basis in Q4. Can you give us a sense for what the composition of that was, first-time customers before you tightened up? And have you seen any strange patterns there, like in first payment defaults or anything?

Sure. Our new customers were very similar, running in the mid-30% that we had seen over the recent quarters. And I don't think we would say we've seen anything differentiated as it relates to what we typically see from new versus returning customers. And I think as Dave and I both highlighted, we were beginning to see, you know, stress at the end of the quarter in both of those. And we've seen some, you know, continuing of that before that stability that we highlighted sort of set in here as we got to late April.

Yeah, I would just add two things.

I would just add two quick things to that. One is The biggest reason for the large increase in marketing spend in Q1 was that we're no longer deferring any marketing spend under the fair value accounting rules more than an absolute spend on an operational basis. On an operational basis, it was pretty consistent to what we've seen in the past. I would say second, we haven't seen any material difference and performance of customers either by vintage, so the most recent vintages, or new versus existing in terms of the amount of deterioration. As Steve and I both mentioned, we have seen deterioration, not anywhere near the magnitude we would have expected. It's actually very, very manageable at this point and not a material difference in the amount of deterioration between new and existing. Obviously, existing customers perform better in the absolute. but the relative change isn't significant between the two.

Okay. And appreciate the call. I'm glad to hear everybody's doing well there. Last question is just if you could comment on the small business lending environment. I've heard lots of different stories about the variability in that market. I know it's not a very large portfolio for you guys, but I'm curious as to How that's being impacted because you just think that the impact of small business given force closures and so forth must be interesting to observe.

Yeah, so a few things there. Again, it's only in the teens as a percentage of our total portfolio, so very much manageable for us. We were also very early, much earlier than most of our competitors in stopping originations and tightening down on lines for existing companies. I think the other thing we benefit from is we are extremely diversified by sector in our small business portfolio. And in particular, we do not have large exposures to entertainment, hospitality and restaurants. And so many other small businesses where we actually have larger exposures are doing okay. So we do a fair amount of construction, which has held up obviously a little bit of weakness that held up okay. and trucking, transportation, and warehousing, which have all done fairly well. So, you know, obviously that portfolio is stressed like all others. But, again, defaults there have not increased anywhere near as much as we would have expected. Lots of payment deferrals and modifications. But with the PPP checks coming in and states opening back up, we are somewhat encouraged that we haven't seen very high levels of default yet.

Thanks, guys, very much.

Our next question will come from David Scharf with JMP. Please go ahead.

Good afternoon. Thanks for taking my questions as well. Hey, first off, maybe just following up on the initial question about just some trends in April, it sounds like You're speculating a lot of what you're seeing is likely being impacted by state and federal stimulus. Just curious, I couldn't write down quickly enough the metrics around the percentage of the portfolio that had one to three payments due recently or since mid-March, but can you give us a sense for what percentage of your borrowers are I guess, in forbearance or have requested some form of relief from you, just to put things into context that way maybe?

Yeah, let me grab the first part of that, and then I'll hand it over to Steve for the second part. In terms of April performance, I think the most interesting thing is we haven't seen deterioration. We haven't seen a pop of improvement necessarily in with this stimulus, but we haven't seen the deterioration we would have expected with the high levels of unemployment. It's actually been much steadier, certainly in terms of default rate, than we would have guessed. And the improvement we've seen is in the deferral modification rates coming down over time. Now, part of that is just a lot of customers got the deferrals they need and now they're moving on. But part of that could also be the stimulus, but certainly we're not chalking up the overall performance of the portfolio being better than we would have expected six weeks ago to stimulus because it's actually been more stable. We haven't seen a sharp increase as stimulus has increased. So I think we chalk it up more to some of the comments I made around the recession worthiness of our customers, being very familiar with living paycheck to paycheck, having to manage variability in cash flow, and so being somewhat familiar with how to operate in an environment like this.

David?

Yeah.

I was just going to say, David, in terms of payment frequency, a couple of the things that I threw out were about three-quarters of the portfolio had a payment due in the second half of March, so we got a handle on some of those things David mentioned very quickly. And a little over half of our portfolio has had a payment due since mid-March, has had at least three or more payments due. And so you might recall I talked about, you know, two-thirds of our portfolio has a payment frequency of every other week or faster, essentially. And keep in mind, too, we have a very short duration on our portfolio, even though contractual maturities for a portfolio like net credit It might look a little longer when you weight the cash flows that come off of that portfolio, the weighted average lives. It's very short, and everything else is inside of that. So that helps us really get a handle on what's happening with the customer. It helps us recover more of the portfolio and cash collect more quickly. And so I think being able to work with customers is a win-win as we can help customers manage through what we hope is sort of a short-lived situation, but also helps us to financially collect.

Right, and actually that foreshadowed kind of my next question, which was sort of related to the payment rate. I mean, I guess with a June 30th target of, you know, $350 million, $400 million in cash in combination with I think you said, depending on product, as much as 80% drop in origination. There's a plug in there, obviously, for payment rate that would help us kind of try to forecast at least near term the drop off in the portfolio. Your comment about average life probably is part of the answer. I mean, is there an ballpark sort of payment rate, whether it's a percentage of beginning balance per month or per quarter, that's a good way to think about the life of the portfolio right now?

Well, I think, as Steve mentioned, the average life of the net credit portfolio is about, the weighted average life is right around 12 months. And then your prime portfolio and the rest of the portfolio, it's beneath that, somewhere like in the 10-month range. So that's probably kind of using those weighted average of lives is probably the best way of thinking it. We're below a year on the entire portfolio.

Perfect, perfect. Hey, if you don't mind, one last, I hate to give you an accounting question here on sphere of value, but if I oversimplify because the sphere of value line is primarily the mark-to-market adjustment plus credit losses, you mentioned a $60 million markdown And if I add that to 203 million charge-offs, it gives me a change in fair value closer to 263 versus the reported 238. Is there some other sort of contra item in there, Steve, that offsets those two?

Yeah, I mean, we can go into more detail, but, you know, that's not the only thing I've kind of generalized. There are some puts and takes in there that might not get you exactly to that number that are a little bit more, that are a little bit smaller that I won't necessarily detail.

Yeah, no worries.

Got it.

Okay. Thank you very much.

Our next question will come from Vincent Kaintick with Stevens. Please go ahead.

Hey, thanks. Good afternoon, guys. First question, and it's another one on fair value assumptions. I'm just wondering if you could detail what sort of macroeconomic scenarios you're assuming in your fair value marks. And then since this is kind of a new concept to us, how are you thinking about what your fair value adjustment would look like and what would move it for the second quarter?

Steve, you want to handle this?

Yeah, sure. So as you heard, you know, Vincent, in my remarks, I think what we tried to do instead of trying to, you know, pull out the crystal ball and figure out, you know, the timing and the shape of a recovery or some type of economic scenario, we felt the best way to accommodate the fair value adjustment was to look at where are we at the end of March, given, again, we had some quick visibility given the payment rate for the books. but also to take into consideration that volatility just like you would in a typical sort of fixed income approach in that discount rate. So you would require a higher level of return in a period of increased volatility in your cash flow. And so that's the way we tried to tackle it. And we looked at a bunch of different ways that the economy could play out, and as I mentioned, None of those, you know, or it was really hard for us to determine one that could create a real liquidity or solvency issue for us. So, again, that's the way we've accommodated this quarter. And I think as we roll forward, as things become clearer and a little bit more stable and predictable, you could see a bit of a movement between those buckets in a fair value calculation where, you know, you could have your required returns move in a different direction, whereas you start to see some of the credit rolling through that calculation, if that makes sense.

Okay. Yeah, that does make sense. And just to clarify, so it sounds like things have stabilized, maybe not improved, but not worsened currently. Has it changed much, say, from the end of April to today? Because I think usually your portfolio moves quicker than other guys'. have trends stabilized since the end of March?

Yeah, I would say in terms of defaults, we saw, you know, a tick up, again, not huge. I want to make that clear. I mean, we called it tick up for a reason. It wasn't a massive spike. But we did see the tick up at the end of March. And that has remained very stable, actually, all the way through really up until today. The bigger impact we saw in the beginning of the month of April was increased deferrals and loan modifications, especially during the, you know, very end of March and the first couple weeks, accelerating the first couple weeks of April. And that has not only stabilized but improved and come down somewhat. So, you know, pretty good trends there with the stable, stabilizing, the stabilized default rate and improving uh, deferral and loan mod, uh, rate. Now it's, you know, obviously hard to predict where we go from here. A lot will depend on where the economy goes from here, but, um, yeah, it's looking kind of across the, you know, customer performance metrics. You would definitely call them stable at the moment.

Okay, great. That's really helpful. Um, second question, when you, um, talk about tightening your underwriting, um, and your origination volume declining, when you tighten your underwriting, is that through pricing? And so I just am wondering if the originations you're having right now, if the margins on that business is going up, because usually I think if you look at the prior recession, we saw the business that you were writing being really strong coming out of the recession. I'm just wondering your thoughts there.

Yeah, so primarily not through pricing. I mean, a little bit moving people forward, through the kind of buckets of risk-based pricing, more cherry-picking, you know, the highest credit quality customers originating to them and originating to them with very little marketing cost. So while most of the tightening of the credit model isn't on pricing, we do think the originations we are doing now probably have much better unit and economics than typical because we really are cherry-picking the best of the best, spending very, very little on marketing. And then to the second part coming out of the recession, yeah, late 2009, 2010 was very, very strong years for our business. We have no reason to expect that this wouldn't be different. And just to reiterate a point I made in my prepared marks, we don't need a recovery to begin actively originating and actually originating at some pretty aggressive levels. We just need unemployment rates and really more new jobless claims to be even kind of more a leading indicator than a lagging indicator, really new jobless claims to stabilize wherever we may be. Even if unemployment is 30%, Once the new jobless claims stabilize, our underwriting models can very quickly get back to analyzing who's good credit quality and who's not good credit quality. Obviously the market's bigger when unemployment rates are 5%, than when they're at 30%, but we think there's going to be a huge amount of pent up demand. And as employment improves over the next couple of years, that just grows the market again, the addressable market. And so, you know, we're hopeful that the recovery is very positive for the business like it was after the Great Recession.

Please go ahead.

Good afternoon, guys. Hi. I mean, more on the fair value, but I'm just trying to conceptualize what the cost of revenue looks like into 2Q. I know you're not giving guidance, but it kind of sounded to me like the run rate for the number would be the 235 less the 60 million in additional fair value adjustments, which would put it at about 170. Am I thinking about that completely wrong, or is that correct just conceptually?

Steve?

Yeah, sure. So I think, John, I think you're thinking about it generally correctly. There is a little bit of seasonality, and all things being equal, if we weren't dealing with the COVID crisis, you would see a little bit of seasonality, not like you saw under our old accounting method, where you would typically see a little bit of a drift up in the fair value at the end of Q1 and then see some of that drift back down in terms of Q2. So like I had mentioned on an earlier question, I think depending on how we see credit playing out from here and the stability and predictability, have we captured it all? There may be more to come, but that's yet to be seen, which is one reason why we did the gift guidance. You can definitely see a situation where the required returns may come down as you start to recognize some of that, you know, recognize some of the credit rolling through from folks who aren't able to repay. So we can talk more, you know, offline about, you know, how to think about some of those things, but that's generally how you should be thinking about it.

Okay. Just, you know, you gave the guidance for the cash at the end of the quarter, and then, you know, kind of backfilling that into, you know, my model, it would indicate that there's a you know, a little bit of a... I mean, not gigantic, but there is a reduction in the loan portfolio sequentially between first quarter and second quarter. I mean, does that sound about right? Is this the only way I can get you up to that level of cash by the end of 2Q?

Yeah, absolutely. I mean, as we mentioned, we've cut back on origination 60% to 80% at the end of Q1 and haven't reaccelerated that yet. So... That combined with the short average life of our portfolios we were talking about a little earlier would mean it's very likely the portfolio is smaller at the end of the quarter.

Okay. And then you mentioned that you're bringing paid marketing expenses down to zero effectively. How much of the marketing line is that paid number or is it all of it?

That's all of it. Now, that line won't be exactly zero. There's still small bits of marketing we defer. There's some stuff that, you know, we couldn't cancel that will flow through into Q1. But that line item is likely to be very, very low in Q2.

So the 34 goes to something nominal. Yes. Okay. And then just, you know, thinking about, you know, your California book – I assume you started with the large installment loans liquidating the portfolio on January 1st. I mean, is that almost a blessing in disguise at this point? How much of that book did you liquidate? I mean, it kind of seems like it was a law that no one really wanted, but it kind of preempted possibly a bigger loss on that portfolio given the crisis.

Yeah, Steve, do you want to handle that one?

Yeah, I mean, I think, John, that I think we had plans to continue to navigate that market. So we weren't necessarily relying on California for some of our 2020 outlook, as we had previously mentioned on prior calls. I wouldn't call it a blessing by any means. I think we're eager to get the economy and these markets going again and moving past this crisis and Once we do, we'll be ready to operate in all of the states where we have products that are ready to go.

All right. Thank you very much.

Our next question will come from David Sharp with JMP. Please go ahead.

Thanks. Just one follow-up. Application volume. Listen, we heard you loud and clear about the cessation and underwriting until things stabilize. But trying to think longer term whether this pandemic kind of serves as a catalyst with all the sheltering in place for perhaps accelerating even more of the migration online. Notwithstanding the cessation and underwriting, has there been any noticeable change? since mid-March, particularly since shelter-at-home and credit application volume, kind of inbound traffic?

Yeah, I mean, it's down. Probably not down, to your point, not as much as we would have expected, given how much we cut marketing. So that's why it's difficult to say exactly when you turn off so much marketing so much quickly. You're expecting application volume to be way down. I've never done that before, so it's We didn't have a great estimate of how much they would be down. Clearly, in the small business space, we're seeing huge demand still that is largely going unfilled. I think anecdotally, we have the sense that there's still plenty of demand out there. We're able to originate everything we want to originate, even with spending almost nothing on marketing right now. it's a pretty good indication that there is strong demand that will likely only continue once the economy stabilizes and people get back to work and back to spending a little more money.

Got it. Got it. Great. Thank you.

Yep. This concludes our question and answer session. I would like to turn the conference back over to David Fisher for any closing remarks. Please go ahead, sir.

Just thanks again, everybody, for joining our call today. I know these are difficult times for all, and we certainly appreciate your time and your questions. So have a good evening, and we'll speak with you soon.

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