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spk03: Good day and welcome to the Innova International fourth quarter 2021 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 telephone keypad. And 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 Ms. Cassidy Fuller. Please go ahead, ma'am.
spk01: Thank you, operator, and good afternoon, everyone. Inova released results for the fourth quarter and full year 2021 ended December 31, 2021, 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 and, as such, is subject to risks and uncertainties. Actual results may differ materially as a result from various important risk factors, including those discussed in our earnings press release in our annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K. Please note that any forward-looking statements that are made 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, Inova reports 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 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.
spk04: Good afternoon, everyone. Thanks for joining our call today. I'll first provide an overview of our fourth quarter and full year results. Then I'll discuss our strategy and outlook for 2022. After that, I'll turn the call over to Steve Cunningham, our CFO. We'll discuss our financial results and outlook in more detail. Looking back on 2021, our strong results demonstrated the power of an experienced and talented team combined with world-class machine learning powered analytical and risk management capabilities. We skillfully navigated a complex and rapidly changing market environment, quickly accelerating our originations as the economy recovered and helping our customers get access to fast, trustworthy credit. At the same time, we kept a close eye on credit performance, which has remained much better than pre-pandemic levels. As a result, total company originations doubled year-over-year to $1 billion, and total company combined loan and finance receivables increased by 48% to $2 billion. This growth in our portfolio provides Inova a lot of momentum heading into 2022, and we believe we are extremely well positioned to continue taking advantage of the improving economy and improving consumer and SMB demand. As we anticipated, during the fourth quarter, we saw demand increase, with particularly strong growth in our near-prime and SMB businesses. As I just mentioned, credit quality remains solid across all of our products, including recent vintages, which continue to perform better than pre-pandemic levels. Given these dynamics, we continue to be aggressive with our marketing, resulting in marketing spent as a percentage of revenue of just under 30%. While marketing spend is higher than pre-COVID levels, a portion of that increase is due to our switch to fair value accounting, where no marketing costs are deferred. Steve will provide a little bit more detail on this impact later. But more importantly, At these levels of spend, our expected unit economics on our recent vintages remain well above our targets at our current customer acquisition costs and with the strong credit metrics in our portfolio. But as always, we will keep a close eye on these metrics as we continue to grow the portfolio as we are committed to producing sustainable and profitable growth over the long term. Fourth quarter originations were up 100% from the fourth quarter of last year and increased 25% to last quarter, our third consecutive quarter with greater than 20% sequential origination growth. Importantly, originations from new customers were 46% of total originations, the highest since our first year of business and up from 43% in Q3 and 28% in Q4 of last year. The large number of new customers over the last several quarters is exciting to see, as provides a big tailwind as those customers return for additional credit over time. As a result of the strong origination growth, revenue in the fourth quarter increased 38% year-over-year and 14% sequentially to $364 million. And benefiting from the strong credit performance, we also produced solid bottom line results with adjusted EBITDA of $101 million and adjusted EPS of $1.61. Over the last several years, we've been emphasizing the importance of having a diversified portfolio. In the fourth quarter, small business products represented 52% of our portfolio, while consumer products accounted for 48%. Within consumer, line of credit products represented 31%, and settlement products accounted for 67%, and short-term loans represented just 2%. As is evident by these numbers, our acquisition of OnDeck continues to pay dividends. SMB Q4 originations were 26% higher than Q3 and 99% higher than a year ago, as we've been able to effectively leverage the strong OnDeck brand and expertise. The diversification of our portfolio has been very intentional. The mix between consumer and small business will fluctuate over time based on both macroeconomic factors as well as seasonality. And we do not have specific targets for the mix between consumer and small business funding. Instead, our strategy is to optimize that mix based on the competitive and economic environment to maximize our unit economics and the returns we can generate on our invested capital while providing attractive products to the consumer and small business marketplace that allow us to capture additional share. Thanks to the skillful execution of our team during the last two years since the pandemic began, we believe we are continuing to take share in both the SMB and consumer markets with our diversified product offerings and customer-friendly online-only model. As the economy continues its recovery, we are seeing consumers increasing their spend, which is driving demand for credits. In addition, as we have been predicting, small businesses have been beneficiaries of pent-up consumer demand and the resulting increase in spending. We are encouraged by these dynamics heading into 2022 and believe our strong execution in 2021 not only generated great results, but also gives us strong momentum. And encouragingly, we are not currently seeing any major impacts from the most recent spike in COVID cases. That being said, Our highly flexible, online-only business model gives us the ability to quickly adapt to changes in market conditions. And we will, of course, continue to monitor the trends and market environment closely. In particular, while we're keeping an eye on inflation, we do not think it will have a significant impact on either demand or credit. At the moment, wages are rising at a slightly slower rate than overall inflation. This provides our customers additional capital to repay our loans. However, at the same time, spending is increasing, which provides the fuel for additional demand. And given the spreads in our average EPRs over our cost of capital, small increases in the Fed funds rate will not have a meaningful impact on our profitability. In summary, our business has come a long way in the last several years, and as evidenced by our recent stock buybacks, we are confident that we have the right products and the right team to adapt to changing market environments and capture additional shares. Now, I'd like to turn the call over to Steve Cunningham, our CFO, who will discuss our financial results and outlook in more detail. And following Steve's remarks, we'll be happy to answer any questions that you may have. Steve?
spk06: Thank you, David, and good afternoon, everyone. As David mentioned in his remarks, we finished 2021 with strong results and great momentum as fourth quarter and full year 2021 total company originations, originations from new customers, ending receivables and revenue were all the largest and among the most diverse in our company's history. Our diversified product offerings, scalable online only business model, machine learning powered risk management and analytical capabilities combined with our solid balance sheet have us well positioned to continue this momentum into 2022 and beyond to consistently generate profitable growth. Turning to Inova's fourth quarter results, total company revenue for the fourth quarter rose 14% sequentially, with 38% from the fourth quarter of 2020 to $364 million. Revenue was driven by the continued acceleration and growth of total company combined loan and finance receivables balances, which on an amortized basis were $2 billion at the end of the fourth quarter, up 18% sequentially, and up 48% compared to the fourth quarter of the prior year. Total company originations rose 25% sequentially to $1.1 billion and doubled from the fourth quarter of 2020. Originations from new customers once again set a record, totaling 46% of total originations, as our accelerated marketing activities remain highly effective. Small business revenue increased 14% sequentially and 79% from the fourth quarter of the prior year when we closed the OnDeck acquisitions. Small business receivables on an amortized basis totaled $1 billion at December 31st, a 15% sequential increase, and 47% higher than the end of the fourth quarter of 2020, as small business originations increased 26% sequentially to $580 million. Revenue from our consumer businesses increased 13% sequentially and 24% from the fourth quarter of 2020. Consumer receivables on an amortized basis ended the year at $941 million, up 20% sequentially and 50% higher than the fourth quarter of 2020, as consumer originations increased 24% sequentially to $490 million. Looking ahead, we expect revenue to follow our typical quarterly seasonality. The net revenue margin for the fourth quarter was 77%. unchanged from the third quarter as credit quality, which is the most significant driver of portfolio fair value, remains solid. The change in the fair value line item included two main components, net charge-offs and changes to the portfolio's fair value, resulting from updates to key valuation inputs, including future credit loss expectations, prepayment assumptions, and the discount rate. I'll discuss both items in more detail. First, the total company ratio of net charge-offs as a percentage of average combined loan and finance receivables for the fourth quarter was 6.7%, up from 4.2% last quarter and up from 4.7% in the fourth quarter of 2020. It's still well below the pre-pandemic rate of 15.6% during the fourth quarter of 2019. Credit performance across our recent consumer and small business vintages continues to perform in line or better than our expectations. As we've noted in previous quarters, with accelerating originations growth and newer less-seasoned receivables comprising a larger proportion of our portfolio, we expect total company credit metrics to trend toward more typical historical levels as newer origination vintages track along their expected loss curves over time. That being said, credit is still performing better than pre-pandemic, including our most recent vintages and new customers. The fourth quarter net charge-off ratio for small business receivables was 80 basis points, which was flat to the previous quarter, but well below the prior year ratio of 3.9%, as we continue to see strong credit performance across all of our small business brands. With the acceleration in consumer origination during 2021, especially from new customers, we expected some credit normalization in the consumer portfolio from unsustainably low levels. The consumer net charge-off ratio for the fourth quarter increased to 13.3% from 8.1% last quarter and 5.5% in the prior year quarter. The ratio remains well below the pre-pandemic rate of 17.2%. that we reported for the fourth quarter of 2019. As I previously mentioned, net charge-off rates for both our subprime and near-prime consumer businesses were within our expectations. These expectations are key inputs into our unit economics framework that has allowed us to consistently deliver solid margins, strong returns on shareholder equity. The fair value of the consolidated portfolio as a percentage of principal was 105% at December 31, up from 103% on September 30. The improvement in the fair value of the consolidated portfolio resulted from an improved credit outlook and a reduction in discount rates. The fair value of the small business portfolio as a percentage of principal increased to 106% at December 31, from 104% at September 30th, and the credit outlook for the portfolio continues to improve. The fair value of the consumer portfolio as a percentage of principal was steady at 103% on December 31st and continues to reflect a solid credit profile, even though loans to new customers have temporarily become a larger proportion of the consumer portfolio. The relatively low and steady level of delinquent receivables as a percentage of loan and finance receivable balances at the end of the quarter also reflects strong customer payment rates and the continued solid credit profile of the portfolio. The percentage of total portfolio receivables past two 30 days or more was 5.3% at December 31st, down slightly from 5.5% at the end of the third quarter and lower than the 9.3% ratio at the end of the fourth quarter a year ago. The percentage of small business receivables passed through 30 days or more declined during the quarter to 4.3 percent December 31st, from 5.1 percent at September 30th. The decline was driven by continued improvement in delinquency levels and strong payment and recovery rates across all of our small business brands, as small business delinquency rates continue to trend toward more normal historical levels. The percentage of consumer receivables past 230 days or more was 6.3% at December 31st, compared to 5.9% at September 30th, and 3.9% at the end of the fourth quarter of 2020. With the recent sequential acceleration in consumer origination, especially from new customers, some normalization in consumer delinquencies was expected from the unsustainably low levels recently observed. In addition to future credit loss expectations, every quarter we also evaluate discount rates and other key valuation assumptions used in our fair value models. As a result of this analysis for the fourth quarter, we reduced the discount rates used in the fair value calculations to incorporate observed market information and the continued improvement in the economic environment. If the operating environment continues to stabilize during 2022, we would expect additional reversals of other downward adjustments that we made to the fair value calculations at the peak of the COVID pandemic. To summarize, the change in fair value line item this quarter is driven by strong growth in originations, relatively low levels of net charge-offs, lower discount rates, and credit metrics and modeling at the end of the fourth quarter that continue to reflect a solid outlook for expected future credit performance for our rapidly growing portfolio. Looking ahead, we expect the net revenue margin for the first quarter of 2022 to range between 65 and 70%. As the economy recovers and demand and originations continue to rise, the net revenue margin should begin to normalize over the next several quarters and stabilize in a range of 55 to 65% as less season loans become an increasingly larger proportion of the portfolio. Our future net revenue margin expectations and the degree and timing of future normalization in the ratio will depend upon the timing, speed, and mix of originations growth. Now, turning to expenses, our operating expenses this quarter reflect our accelerated marketing activities and the continued scaling of our fixed costs. Total operating expenses for the fourth quarter, including marketing, were $187 million, or 52 percent of revenue, compared to $115 million, or 44% of revenue, in the fourth quarter of 2020. Marketing expenses increased to $108 million, or 30% of revenue, in the fourth quarter, from $28 million, or 10% of revenue, in the fourth quarter of 2020. With the strong unit economics we're seeing from new originations, we captured rising consumer demand to meaningfully increase originations during the fourth quarter. with an increasing proportion from new customers. As a reminder, under fair value accounting, we recognize marketing expenses in the period they are incurred, instead of deferring a portion and recognizing them over the life of the loan, as we did prior to 2020, and as many in the industry still do. As a result, in periods of strong growth, marketing expenses as a percentage of revenue will be higher when compared to reporting periods prior to 2020. For example, we would have deferred about 45% of our marketing spend during the fourth quarter of 2021 had we been following our accounting practices prior to the adoption of fair value. Looking forward, we expect marketing expenses as a percentage of revenue to be approximately 20% for the first quarter of 2022 and to be slightly higher for the remainder of the year, but will depend upon growth and origination, especially from new customers. Operations and technology expenses for the fourth quarter totaled $39 million, or 11 percent of revenue, compared to $31 million, or 12 percent of revenue, in the fourth quarter of 2020. Given the significant variable component of this expense category, sequential increases in ONT costs should be expected in an environment where originations are accelerating and receivables are growing, and should range between 10 and 12 percent of revenue. General and administrative expenses for the fourth quarter totaled $41 million or 11% of revenue compared to $57 million or 21% of revenue in the fourth quarter of 2020. Excluding one-time cost related to a lease termination, G&A expenses would have totaled $37 million or 10% of revenue. As a reminder, there were $13 million of one-time expenses associated with the on-deck acquisition. in the fourth quarter of 2020. While there may be slight variations from quarter to quarter, we expect G&A expenses as a percentage of revenue to trim below 10% as we move through 2022 as these expenses scale with growth. Adjusted EBITDA, a non-GAAP measure, was $101 million in the fourth quarter, flat sequentially, and down 32% from the year-ago quarter for the reasons I've previously discussed. Our adjusted EBITDA margin for the quarter was 28% compared to 31% last quarter, and down from 56% in the fourth quarter of 2020. We expect that adjusted EBITDA margins will likely see some slight declines in the coming quarters before stabilizing, primarily as a result of the aforementioned normalization in net revenue margin. As previously noted, the degree and timing of any changes to the adjusted EBITDA margin will depend upon the timing, speed, and mix of originations growth. Our stock-based compensation expense was $5.1 million in the fourth quarter, which compares to $7.2 million in the fourth quarter of 2020. The decrease was related to expenses associated with the closing of the on-deck acquisition during the fourth quarter of 2020. We expect normalized stock-based compensation expense should approximate $5 million per quarter going forward. Our effective tax rate was 20% in the fourth quarter, which increased from 10% in the fourth quarter of 2020. The increase was primarily from a one-time reduction in taxable income related to the on-deck acquisition that lowered the effective tax rate in the prior year quarter. We expect our normalized effective tax rate to be in the mid to upper 20% range. We recognize net income from continuing operations of $49 million or $1.30 per diluted share in the fourth quarter compared to $231 million or $6.47 per diluted share in the fourth quarter of 2020. Adjusted earnings, a non-GAAP measure, decreased to $60 million or $1.61 per diluted share from $85 million or $2.39 per diluted share in the fourth quarter of the prior year. The trailing 12-month return on average shareholder equity using adjusted earnings was 27% during the quarter compared to 42% a year ago. We ended the fourth quarter with $242 million of cash in marketable securities, including $165 million in unrestricted cash and had an additional $488 million of available capacity on $938 million of domestic committed facilities. Our debt balance at the end of the quarter includes $449 million outstanding under committed facilities. As we announced during November, we continue to expand our liquidity and lender relationships during the quarter. With the addition of a new two-year $150 million revolving warehouse, with JP Morgan to support small business growth. Our cost of funds for the fourth quarter was 6.5% versus 8.3% for the fourth quarter of 2020 after adjusting for one-time costs related to the closing of the on-deck acquisition in the prior year quarter. The decline in our cost of funds reflects the impact of completed financing transactions over the past year that have lowered our marginal cost of funds. Demonstrating our confidence in the continued strength of our business relative to our current valuation, during the fourth quarter, we acquired approximately 2.5 million shares at a cost of approximately $96 million. At December 31st, we had $63 million remaining under our $150 million share repurchase program. Our solid balance sheet and ample liquidity give us the flexibility to continue to deliver on our commitment to long-term shareholder value through both share repurchases and investments in our business to drive meaningful, sustainable, and profitable growth. To summarize my earlier comments, with the return of customer demand and meaningful growth in originations and receivables, we expect the net revenue margin to range between 65% and 70% next quarter. and to normalize in the range of 55% to 65% over time. In addition, we expect marketing expenses to approximate 20% of revenue next quarter and to be slightly higher as a percentage of revenue for the remainder of the year and anticipate continued scaling of our fixed costs. This should lead to some slight normalization in the adjusted EBITDA margins from recent levels. The degree and timing of these expected trends and any normalization will depend upon the timing, speed, and mix of originations growth. Adjusted EPS in 2022 should benefit from strong receivables growth, solid EBITDA margins, a falling cost of funds, and a declining share count, with quarterly year-over-year increases expected to resume in the second half of 2022. In closing, I'd like to provide a reminder regarding the impact of fair value accounting. Fair value aligns more closely with how we view the business, especially since our marginal decision-making process is anchored in unit economics that rely on risk-based pricing and discounted cash flow methodologies that are also utilized in fair value modeling. As a result, our financial performance under fair value should be generally more positively correlated to portfolio growth. than for reporting periods prior to adoption in 2020, or if we had adopted CECL. We are well positioned to deliver meaningful and consistent top and bottom line growth as we leverage the benefits of the scale and efficiency of our direct online only operating model, our broad and diversified consumer and small business product offerings, our machine learning powered credit risk management capabilities, and our solid balance sheet. And with that, we'd be happy to take your questions. Operator?
spk03: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. And to withdraw your question, please press star then 2. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from David Sharf with JMP. Please go ahead.
spk05: Hi, good afternoon, and thanks for taking my questions. David, I'm wondering, obviously the demand for both asset classes, consumer and SMB, has really picked up. I guess my question is, given that so many of the various metrics that that we're just guided to, you know, margins, loss rates, net revenue margin, and so forth, are dependent on origination volume. Are you comfortable giving us any kind of, if not explicit guidance, just parameters for how we ought to think about origination volume this year? Or maybe in the, you know, starting with kind of that $1.1 billion in Q4 as a jumping off point, Because it would certainly help kind of frame, you know, the earnings power and velocity of the business.
spk04: Yeah, I mean, you know, the reason why we don't give specific guidance on originations is it's dependent on so many macroeconomic factors that we just don't control. So it's just a guess. It's shot in the dark. But we feel confident about good originations growth in 2022. We ended 2021 with a lot of momentum. It's only one month into the year, but January started the year much stronger than we expected. January is usually a pretty weak month, both on consumer S&B, and that wasn't the case at all this year. So, look, we're not going to see the 20-plus percent sequential quarterly growth that we saw during the last three quarters. That's obviously an unsustainable rate. Um, but we feel really good about the ability to continue to grow originations at a healthy pace.
spk05: Got it. Um, and maybe just to follow up, shifting to, um, kind of just the, uh, the, the asset mix, um, is, you know, are, are you seeing small business demand, um, kind of outpacing consumer demand at this point? Is there anything on the horizon that would kind of result in sort of the mix shift reverting back in terms of balances? And one of the reasons I'm asking is, you know, obviously as we think about loss rates, you know, that mix is so critical and, you know, the loss rates for the SMB product are running relatively low levels. Just kind of, you can maybe... frame the origination outlook in terms of asset class?
spk04: Yeah, again, I mean, as I said in my comments, we don't have specific targets. It's based largely on where we think we can get the highest returns with our capital. S&B isn't necessarily outpacing consumer. Consumer, as you dig in a little deeper on our numbers, had a very strong fourth quarter. I mean, S&B did as well, but I actually think S&B, You know, they were pretty close in terms of growth rate. One had higher origination growth. The other had higher portfolio growth rates. So they were pretty close in Q4. And, you know, look, the mix will likely vary somewhat over time, but we don't expect any dramatic shifts going forward unless, again, something happens, you know, significant from a macroeconomic perspective. And, you know, to your point about it affecting loss, you know, loss rates, yeah, they do have very different loss rates. But their kind of bottom line profitability, the EBITDA margins, the ROEs on the two products are actually not very different. And we do that on purpose. You know, when we have unit economic targets, you know, we don't set them, you know, very different based on the products. You know, we want similar returns on our invested capital. So, you know, the bottom line results aren't affected as much by the mixed shift. Got it. Got it.
spk05: Hey, you know, I apologize. Maybe one question. Quick one for Steve, just on the fair value mark and sort of another 2% increase. How sensitive is the fair value calculation, the discount rate to kind of the rising rate environment that we're in now?
spk06: Well, I think it'll have some impact. David, on base rates, but a lot of the discount rates for us really depend on credit spreads, which have been holding in pretty well or actually coming in. So I'm not sure you'll see a dramatic change if there's a move in the underlying rate environment, but, you know, it's something we'll continue to update on as we need to. Got it. All right. Thanks very much.
spk03: Yeah, thanks, David. The next question will come from John Rowan, with Janney. Please go ahead.
spk00: Good afternoon, guys. Hey, John. I'm trying to just wrap my head around the guidance on gross profit margin. It seems like we're talking about a number, at least in the midpoint of the range, that's slightly above kind of the mid-50% number that you've been guiding to previously. I just want to make sure that I'm kind of interpreting the guidance correctly.
spk06: Yeah, John. We did nudge it up just a bit from... the normalized level that we've been talking about for a few quarters i think there's a there's a couple of reasons uh there's a little bit of variation across uh our different product groupings small business near prime and subprime i think also it's really the first uh big growth quarter we've had if you think about it since we've adopted fair value so i think we've gotten a better handle on as we move into 2022 a better handle on what does that normalized level look like now that we've got, uh, you know, a very different company than when we went into the COVID, uh, and then the fair value, um, the fair value transition. So I think it just reflects a better refined outlook on where we think we'll end up landing in that range. Uh, and right now we think it's 55 to 65 is our more normalized range at a consolidated level.
spk00: Okay. You gave guidance on the ONC cost relative to revenue. If I'm not mistaken, that was 10% to 12%. You gave a G&A number, but I did not get that written down. Can you repeat that?
spk06: Sure. I basically said we would expect that to continue to scale as we move through 2022 and likely trend down below 10%. Okay.
spk00: And then just last for me, there was obviously the CFPB action that you announced last quarter. Any updates on that?
spk04: No. I mean, we continue to make progress and have good conversations with them. As we indicated last quarter, we fully expect this is something we'll be able to work out with them without any major impact given – kind of our cooperativeness, a relatively small impact on customers, and the fact that this was largely self-reported and has already been remediated. So, you know, CFPB takes their time, and we're okay with that. But, you know, we expect over time it will be resolved satisfactorily.
spk00: Okay. Thank you. Yep.
spk03: Again, if you have a question, please press star, then 1. Our next question will come from Vincent Cantick with Stevens. Please go ahead.
spk07: Hey, thanks. Good afternoon. Thanks for taking my questions. First question on marketing. So you had really good results for originations on both products. It's interesting to hear from, you know, other companies and other fintechs talking about, you know, maybe marketing challenges or customer acquisition cost challenges, but it seems like yours has been doing a good job. So if you can maybe talk about what you're seeing in marketing competition there and how your strategy is with marketing where you're able to generate such good origination volume so efficiently.
spk04: Yeah, I think a lot of it has to do with kind of our diversified approach to marketing. We use a number of different channels. We're fairly agnostic to, you know, which one we're stressing. It depends a lot on where we think we're seeing the returns. And so, for example, in Q4 TV, was quite expensive for a whole variety of macroeconomic reasons, including holidays. So, you know, we're able to back down on TV, but kind of up direct mail and digital. Q1, when TV is all of a sudden a lot cheaper, we're able to ramp up TV. And I think that, you know, in part is a reason for a very strong start to 2022. We've also been doing this a long time. So, you know, we've been marketing to these customer bases. um, you know, for over 16 years on the consumer side and, you know, seven or eight years on the small business side. So we just have a lot of experience at it and teams doing a, a terrific job. And yeah, we have not felt, um, you know, some of those issues that, yeah, we we've heard as well. We're, we're really not seeing them at all.
spk07: Okay, great. Thank you. Um, and then next question, just, um, about the fair values, appreciate the detail on the, um, where the fair values are marked at. I was wondering, you know, you've had strong credit performance for the past couple of quarters. When you think about where we are in terms of fair value marks and the discount rates and so on versus maybe a normalized level, just wondering how much, I guess, how much room there is left before you think we're at a kind of a normalized level.
spk06: Yeah, so I think if you think back to the beginning of Fair Value, which was January 1st, 2020, we were a bit more of a consumer-centric portfolio at that time, but we went into Fair Value and we announced that 107 was our original mark. So we're still below where we were back in those days. in a sort of a full growth economy with sort of more normalized credit. So we probably have a few points of room to go. Some of that obviously is going to depend on mix and timing and all those qualifications that I mentioned in my comments. But this is not, today where we are today, is not a normalized level.
spk07: Okay, understood. Great, thanks very much.
spk03: The next question will come from John Hecht with Jefferies. Please go ahead.
spk02: Afternoon, guys. Thanks very much for taking my questions. I guess we talked about, Steve, the kind of cadence for, well, not necessarily the cadence, but the expectations for the normalizing credit. Maybe can you talk about small business credit's been so strong. How do we think about that relative to consumer, or is it pretty correlated in terms of the normalization there.
spk06: I think, I mean, I think what you're going to see is you've seen consumer start to normalize a little bit more quickly. And I think you're seeing delinquencies continue to come down on the small business portfolio overall to more normal levels. And at some point that will start to, you know, as we add, continue to add new vintages and new customers, you'll start to see that begin to normalize to more normal historical levels. That's how we make our marginal decisions. That's how we look at our advantages and our unit economics around those advantages. So I think they're a little out of sequence. I think consumers are starting to get there just a little bit quicker, just mainly because there's probably a little younger portfolio there temporarily. But eventually you'll see the portfolio as we continue to grow At these rates, if we continue to grow at those rates, you'll see those start to look a bit more like pre-COVID delinquency and charge-off levels across the two groupings.
spk02: Okay. We've been getting all sorts of commentary on tax refunds this year, the influence of the child tax credit and the timing and this and that. Do you guys have a firm opinion about how they may change and what that might do to seasonality for the first quarter relative to past years?
spk04: Yeah, I think a firm opinion might be a little strong because we're all going through this for the first time. But our best guess or educated guess is that it'll kind of mute the Q1 seasonality from what we've seen historically because tax returns are likely to be smaller. And maybe that's part of what we're seeing in January as well as consumers anticipating that with their tax returns and leading to higher levels of borrowing to start the year. But, you know, it'll probably be another month to six weeks before we really have, you know, strong visibility on that. And, you know, I guess the second question will be what is the impact, you know, as we get into the summer when we usually see a tick up in originations after tax season, you know, You know, will, will that, you know, be different this year. So it's a little, it's a little hard to guess, but, you know, overall, our view, our view is it'll have, you know, kind of mute seasonality a little bit, which from our perspective is great. It's much easier from an operational perspective, not to have the big drop off and Q1 and then be sitting around, you know, kind of waiting for volume to pick up in May or sometimes not even until June. So we're hopeful that's what will happen when, you know, good, good signs so far, but going through this for the first time, it's certainly not something we're 100% confident in.
spk08: Okay.
spk02: Okay, and then, you know, last one is just because I know these are growing and smaller platforms, but Pangea and then maybe what's going on in Latin America, just any update on those business lines?
spk04: Sure. Yeah, Brazil's doing well. We were waiting for kind of last year, kind of a revamping of how their, their banking system works with electronic debiting. And that kind of went through and it's allowed us to get more aggressive with growing that business again. So still super small and, you know, not worth us providing a lot of detail on in this point, but you know, renewed optimism in Brazil with how it's operating at the moment. And Pangea obviously did tiny, tiny little business, but off to a great start actually with us just in the first six months. I mean, super, super high growth rates, but off a tiny base. So, again, a long time until, you know, it can be meaningful to an open, you know, at which point we'd spend more time talking about it. But off to a really, really nice start. We're kind of pleased with that business so far.
spk02: Great. Thanks very much, guys.
spk03: Yep. This concludes our question and answer session. I would like to turn the conference back over to Mr. David Fisher for any closing remarks. Please go ahead.
spk04: David Fisher Thanks everybody for joining us today. We appreciate you taking your time and we look forward to speaking with you again next quarter. Have a good evening.
spk03: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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