Enova International, Inc.

Good afternoon and welcome to the ANOVA International Third Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. To need assistance, please signal 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. To withdraw a question, please press star then two. Please note this event is being recorded. I'd like to turn the call to Dr. Lindsay Satter-Reese, Investor Relations for Innova International. Please go ahead.

Thank you, Operator, and good afternoon, everyone. The Innova release results for the third quarter of 2022 ended September 30, 2022, 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 and in our annual report on Form 10-K, quarterly reports on Forms 10-Q, and current reports on Forms 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 US GAAP reporting, ANOVA 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 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.

Thanks, and good afternoon, everyone. I appreciate you joining our call today. I'll start with an overview of our third quarter results, and then I'll discuss our strategy and outlook for the fourth quarter of 2022. After that, I'll turn the call over to Steve Cunningham, our CFO, who will discuss our financial results and outlook in more detail. The third quarter was another strong one for Inova. Revenue in the third quarter increased 42% year-over-year and 12% sequentially to $456 million. Adjusted EBITDA was $115 million and adjusted EPS was $1.74. Both increases from Q3 of last year. As these results demonstrate, the Inova team executed extremely well to deliver solid top and bottom line results despite the economic uncertainty. Last quarter, I know some questioned whether we were being overly optimistic in our forward-looking commentary. believing that we would not be able to effectively manage credit given high levels of inflation and the corresponding rising interest rates. But our deep experience, sophisticated and proven machine learning-driven analytics, diversified product offerings, strong balance sheet, and a world-class team enabled us to adapt to the changing landscape. As a result, credit quality across our portfolio remains solid. Net charge-offs were 8.4% in the third quarter. This is slightly higher than Q2 as we continue to add a large number of new customers, which were 43% of total origination. Despite the increase over Q2, net charge-offs remain well below pre-COVID levels of 13.4% in Q3 of 2019 and 13.8% in Q3 of 2018. In addition, at the end of the quarter we saw improvement in early payment performance across recent vintages, which is an encouraging sign as we head into what is typically our busiest season. For years, we have spoken about the strength of our technology, our analytics, our team, and our consistent financial performance. Underwriting non-prime customers is not easy, and that's where these strengths give us a big advantage. In a less certain environment, like the one we are currently in, really highlights our differentiation from our competitors in these areas. In addition, the high payment frequency and relatively short duration of our portfolio provides fast feedback that we can incorporate into ongoing decision-making, enabling us to react quickly if needed. Additionally, our diversified portfolio enables us to lean into the products that are doing well in a particular environment while being more conservative with those that are maybe a bit more challenging. Recently, we've been moderately more aggressive with our shorter maturity products while being a bit more conservative with our longer-term products. This provides us with more visibility and allows us to adapt more quickly in an uncertain macroeconomic environment. So in this last quarter, we emphasized our shorter-term subprime line of credit products as well as our SMB products which all have average effective terms of under a year, while pulling back a bit on our near-prime installment loans that have the longest average duration of any of our products. In the third quarter, small business products represented 60% of our portfolio, while consumer accounted for 40%. Within consumer, line of credit products increased to 33% of our portfolio, while installment products decreased to 67%. Given our continued focus on short maturity products, we expect the percentage of consumer installment loans in our portfolio to decrease over the next several quarters. In addition, it is likely that SMB originations will continue to grow as a percentage of the total, as we are seeing strong demand and strong unit economics. Credit performance of the SMB portfolio remains solid, and despite setting higher ROE targets during the quarter, originations remain strong. We continue to analyze real-time cash flows as well as external data to monitor industries that are more prone to recessions and inflationary pressures. And we are pleased with the portfolio we have curated over the last several quarters. Our small business brand presence as well as the diversity of our three SMB products positions us well to continue to capture share in this market. Finally, as Steve will discuss in more detail, Due to our consistent and predictable results, we've been able to build a strong balance sheet, ending the quarter with almost $800 million of total liquidity. As we look forward to Q4 in early 2023, we are maintaining the balanced approach to growth and risk I mentioned a few minutes ago, and have increased the ROE targets across all of our products. While this approach will likely result in us originating a little less volume than we would have if we had a more growth-focused approach, we were still able to generate strong growth in Q3 and are optimistic that we will have strong originations in Q4 as well. This optimism is in part due to us observing some of the strongest demand and lowest levels of competition in my nine years at Inova. Total company originations for the quarter reached 1.2 billion up 10% sequentially and up 40% compared to the third quarter of 2021, while our portfolio grew 59% year-over-year to just over $2.6 billion. On the demand side, while many consumers still have elevated savings from pandemic stimulus, these savings levels are declining, in part due to the high levels of inflation we are currently experiencing. This is resulting in an uptick in demand for credit. We believe that customers will be able to effectively manage these higher credit levels due to the historically high employment levels and strong wage growth. It is important to understand that our customers are familiar with living paycheck to paycheck and are sophisticated at managing variabilities in their cash flows. Demand has also remained strong for our SMB products. Small business government stimulus has been exhausted and we believe that we're seeing additional tailwinds as banks have tightened credit, resulting in high credit quality borrowers who may have otherwise gone to a bank coming to us. On the competitive side, we are seeing both consumer and SMB competitors pull back meaningfully on originations as they struggle to manage both credit and their loan portfolios and access to capital, problems that we are not experiencing. Before I wrap up, I want to spend a minute on the recent ruling in the Fifth Circuit CFPB case. It now appears likely that the payment provision of the CFPB small dollar rule will not become effective. The work to comply with this provision would have been significant, and those efforts will now be focused on our balanced approach to growth and better serving our customers. Also, if the original rule would have been implemented as proposed, would have likely required us to reduce lending to our lowest credit quality customers who are the ones most in need of credit. Notwithstanding the court's ruling in this case, we continue to support sensible regulation that balances appropriate consumer protections with access to credit for all. In sum, our continued success is a testament to our strong team, diversified product offerings, and the strength of our proprietary technology and analytics. Looking ahead, we remain dedicated to our mission of helping hardworking people get access to fast, trustworthy credit. We will continue to manage the business to produce sustainable and profitable growth. I would like to turn the call over to Steve. We'll 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?

Thank you, David. And good afternoon, everyone. We're pleased to report another quarter of solid top and bottom line financial performance that was in line with our expectations and characterized by focused growth, stable credit, operating cost discipline, and balance sheet flexibility. Turning to our third quarter results, total company revenue rose 12% sequentially and increased 42% from the third quarter of 2021 to $456 million. The increase in revenue was driven by the growth of total company combined loan and finance receivables balances, which on an amortized basis were $2.6 billion at the end of the third quarter, up 11% sequentially and nearly 60% higher than the third quarter of 2021. As David noted, total company originations for the third quarter totaled $1.2 billion, up 10% sequentially and 40% higher than originations during the third quarter of 2021. Originations from new customers remain strong, totaling 43% of total originations as our marketing activities continue to attract new customers across our products. Small business revenue increased 15% sequentially and 72% from the third quarter of the prior year to $173 million. Small business receivables on an amortized basis totaled $1.6 billion at September 30th, a 16% sequential increase and 80% higher than the end of the third quarter of 2021, as small business originations increased 75% from the prior year quarter to $807 million. Revenue from our consumer businesses increased 10% sequentially and 29% from the third quarter of 2021, to $277 million. Consumer receivables on an amortized basis ended the quarter at $1.1 billion, up 3% from June 30th, and 35% higher than the end of the third quarter of 2021, as consumer originations of $396 million were flat to the prior year quarter. Looking ahead, we expect total company revenue for the fourth quarter to grow sequentially but at a slower rate than the sequential growth rate for the third quarter, as we maintain our balanced approach between growth and risk that David discussed. This expectation will depend upon the level, timing, and mix of originations growth. Now turning to credit, our net revenue margin was sequentially stable at 64%, and the fair value of the consolidated portfolio as a percentage of principal increased more than a full percentage point during the quarter to 108%, These results indicate that credit during the quarter, including our future outlook, remains stable and that our risk balance origination strategy is increasing the resiliency of our portfolio. For the third quarter, net charge-off and delinquency rates for the total company, as well as for both the small business and consumer portfolios, reflect the expected seasoning of recently originated vintages. The total company ratio of net charge-offs as a percentage of average combined loan and finance receivables for the third quarter was 8.4%, up from 7.2% last quarter and 4.2% in the third quarter of 2021, which preceded the acceleration of growth in receivables over recent quarters, especially from new customers. The ratio of net charge-offs as a percentage of average combined loan and finance receivables for both the small business and consumer portfolios increased sequentially, but are similar or better than pre-pandemic levels, as $3.3 billion of origination so far this year continue to season in line with expectations in our unit economics framework. The percentage of total portfolio receivables past due 30 days or more was 5.6% at September 30th. and is flat compared to the end of the third quarter a year ago. As we would typically expect between the second and third quarters, due to an acceleration of originations to new customers, the ratio of total receivables passed through 30 days or more increased sequentially from 5.1% at the end of the second quarter. Importantly, we saw a sequential decline in early stage delinquencies driven by our consumer portfolio, which demonstrates our ability to effectively manage credit risk in the current operating environment. As I mentioned last quarter, while there may be quarter-to-quarter variations in credit metrics for our consumer and small business portfolios as vintage is seasoned, stability or improvement in the fair value premium as a percentage of principal typically reflects stability or improvement in the cumulative lifetime loss outlook for the portfolio, which was the case this quarter. As a reminder, these lifetime loss forecasts and related fair value estimates receive significant review and validation internally from senior management and our analytics, accounting, and model risk teams, and externally by our independent auditors from Deloitte, who have built their own models to test the accuracy of our fair value calculations each quarter. Similar to the past two quarters, we increased the discount rate used in the fair value calculations for our products, to incorporate observed market information. The increase this quarter of 40 basis points for each of our products decreased the fair value of our loan portfolio and the net revenue margin. Despite the impact of the discount rate adjustment, the fair value of the consolidated portfolio as a percentage of principal at September 30th increased from the end of the second quarter to 108%, reflecting a stable outlook for the expected lifetime credit performance of our total company portfolio. The increase in the total company fair value premium this quarter was driven primarily by the fair value of the consumer portfolio, which increased to 109% from 106% at the end of last quarter, as the rate of early-stage consumer delinquencies declined sequentially. To summarize, the change in fair value line item this quarter was driven primarily by credit metrics and modeling at the end of the third quarter that continue to reflect a solid outlook for expected future credit performance, partially offset by higher discount rates and increases in net charge-offs during the third quarter as recently originated vintages have seasoned in line with our unit economics expectations. Looking ahead, we expect the total company net revenue margin for the fourth quarter of 2022 to be in the range of 60 to 65%. Our future net revenue margin expectations will depend upon portfolio payment performance and the level, timing, and mix of originations growth. Now turning to expenses. Our operating costs this quarter continue to reflect the operating leverage inherent in our online model and thoughtful expense management to support our businesses. Total operating expenses for the third quarter including marketing, were $184 million, or 40% of revenue, compared to $151 million, or 47% of revenue, in the third quarter of 2021. Marketing expenses totaled $101 million, or 22% of revenue, compared to $80 million, or 25% of revenue, in the third quarter of 2021. As a reminder, under fair value accounting, we recognize marketing expenses in the period they are incurred instead of deferring a portion or recognizing them over the life of the loans as we did prior to 2020, and as many in the industry still do. Looking forward, we expect marketing expenses as a percentage of revenue to be in the low 20% range in the near term, but will depend upon the mix and growth of originations, especially from new customers. Operations and technology expenses for the third quarter totaled $46 million, or 10% of revenue, compared to $38 million or 12% of revenue in the third quarter of 2021. Given the significant variable component of this expense category, sequential increases in ONT costs should be expected in an environment where originations and receivables are growing. It should range between 10 and 11% of revenue. General and administrative expenses for the third quarter total $37 million or 8% of revenue compared to $34 million or 10% of revenue in the third quarter of 2021. While there may be slight variations from quarter to quarter, we expect G&A expenses as a percentage of revenue to remain below 9% in the near term. We recognized adjusted earnings, a non-GAAP measure of $57 million or $1.74 per diluted share compared to $1.64 per diluted share last quarter and $1.50 per diluted share in the third quarter of the prior year. We ended the third quarter with $769 million of liquidity, including $189 million of cash and marketable securities, $580 million of available capacity on committed facilities. With the addition of a new $125 million facility this week to support our near-prime consumer installment business, we continue to demonstrate our ability to successfully access new liquidity at favorable terms. Our cost of funds for the third quarter was 6.5%, down from 6.7% for the third quarter of 2021. And at the end of the third quarter, our marginal cost of funds ranged from approximately 2.1% to 6.7%, depending on the facility utilized. Demonstrating our confidence in the continued strength of our business relative to our current valuation, during the third quarter we acquired 588,000 shares at a cost of approximately $20 million. At September 30th, we had $27 million remaining under our $100 million share repurchase program. Our solid balance sheet and ample liquidity give us the financial flexibility to successfully navigate a range of operating environments, and to continue to deliver on our commitments to long-term shareholder value through both continued investments in our business as well as share repurchases. To summarize our fourth quarter outlook, as we continue to execute an origination strategy that balances growth and risk against the current macro environment, we expect revenue to increase sequentially, but at a lower sequential rate than in the third quarter. We also expect to see stable credit and a total company net revenue margin in the range of 60 to 65%. In addition, we expect marketing expenses to be in the low 20% of revenue, and we expect our fixed costs to continue to scale with growth. These expectations should lead to an adjusted EBITDA margin in the mid 20% range, and we expect quarterly year-over-year increases in adjusted EPS to continue in the fourth quarter of 2022. Our fourth quarter expectations will depend upon the level, timing, and mix of Originations growth. We remain confident that the demonstrated ability of our talented team has us well positioned to adapt to the evolving macro environment. Our resilient direct online-only business model, diversified product offerings, nimble machine learning-powered credit risk management capabilities, and solid balance sheet support our ability to continue to drive profitable growth. while also effectively managing risk. And with that, we'd be happy to take your questions.

Operator? 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 stick up your hands before pressing the keys. To withdraw your question, please press Star then 2. At this time, we will pause momentarily to assemble our roster. Our first question will come from David Scharf with JMP. You may now go ahead.

Thank you. Good afternoon. Thanks for taking my questions.

Hey, David.

Hey. So it wouldn't be 2022 if I didn't start off just asking about credit. And what I'm wondering is, Dave, obviously Fed actions and inflation are impacting credit you know, consumer household liquidity, but we haven't really seen a meaningful change in the employment backdrop. And if there is unemployment, it may be more of a white-collar kind of phenomenon. But I'm wondering, you know, since the fair value mark was more pronounced for your consumer loans as opposed to small business, you know, is there an implied unemployment rate in 2023 since these are less than a year duration that's embedded in sort of your loss forecasting?

No, it's more analytical than macroeconomic. We're not putting macro, big macroeconomic adjustments into our fair value calculations. But, I mean, we've run this business for almost the entirety of it with unemployment rates much higher than where they are today. So, if unemployment rates do move up in 23 or 24, you know, even somewhat meaningful, I mean, they can double, I mean, and that's still kind of getting back to a more normal level of a more normal unemployment, unemployment rate. So that, that's not a big concern of ours. Um, uh, in addition, you know, wages have been very, very strong. Wage, wage growth has been very strong. Um, And, you know, that kind of supports people being able to, you know, to pay back their loans also. So, you know, there is some, you know, choppiness and bumpiness in the credit markets and individuals and, you know, kind of pockets that can be impacted. But that's where our experience and our analytics has worked really, really well. And, yeah, we have to put in a lot of hard work to, you know, keep it on the right path. But it's something we absolutely know how to do. We know how to put in that hard work and, seeing how stable, not only has our credit been good, but it's been just really stable over the last several quarters, despite how much the macroeconomic environment has changed.

Yeah, no, clearly. And maybe a follow-up on that is, you think about your origination strategies. It sounded like, just given some of the macro uncertainties, it felt like or it sounded like you're leaning more towards limiting duration risk as opposed to weighting originations towards higher quality near prime credits. Can you just walk through some of the reasoning there? It sounds a little, you know, in some ways it may be a little counterintuitive. Yeah.

You know, for some reason the world believes that loans to higher credit quality customers are less risky. And on an individual loan, sure. But in your portfolio where you have great experience estimating loss rates, that's not true at all. You know, we can be off by hundreds of basis points in our default estimates or our charge-off estimates and still be fine. you're a super prime credit card lender and you're off by 50 basis points and your charge off estimates and things start getting bad pretty quickly. So credit quality is what we do super well. And we have no concerns about our ability to underwrite across the near prime and subprime spectrum. Duration risk is what can get more challenging in an uncertain macroeconomic environment. You have loans that are out there, you know, three, four, three, four, five years, and the economy takes a major turn, you have a big portfolio that you now need to deal with. So what we did is pivoted to a portfolio where a large majority of the loans we originated in the last couple of quarters have average durations of less than a year. You can react very quickly if the economy turns. And so that's That's really been our focus over the last quarter or so. As I mentioned in my prepared remarks, that's going to continue to be our focus over the next several quarters. So, for example, if you think about our near-prime installment book, that's probably going to reduce the most. But across the rest of our portfolio, whether it's SMB that has some of our lowest APRs or subprime consumer that has some of our highest APRs, we're going to continue to be moderately aggressive balancing growth with risk because we're comfortable with the duration of those loans.

Got it. Hey, you know what? If I can just squeeze in just a mechanical question as a follow-up to that. The yields came in a little higher than we were forecasting this quarter, particularly for consumer markets. Should they continue to sequentially trend up in consumer because of the mix shift away from near prime or are the third quarter average levels a good sort of benchmark to model over the next few quarters?

Yeah, David, I think – this is Steve. I think some of what you're seeing is some of the mix shift that David talked about in the consumer side. But even if you just take a look at quarter to quarter, this year we've averaged between one of the consumer side, which is not sort of out of range. And I think S&B has been very, very flat. So the top of the house is a little bit more of a mix shift. But underneath, it will be driven by the products, which would be probably a little bit more. Okay. Thanks so much. Thanks, David.

Our next question will come from John Rowan with Jamie.

You may now go ahead.

Good afternoon, guys.

Hey, Jeff.

So I know you gave guidance for the fourth quarter margin of 60% to 65%. Past the fourth quarter is 55% to 65% still the right number?

It is. It's the top of the house, John. That's still what we think our sort of long-term range will be. It will be quarter to quarter.

variations in that obviously because we're not sort of in a in a typical environment but 55 to 65 is the right way to think about consolidated and then you know in the fourth quarter obviously well in the third quarter we did see you know a 16 percent charge off rate in the consumer book um maybe can you just touch on that historically speaking um and whether or not that's a peak uh given some of the early payment default information that you you know provided um in your commentary

Like I mentioned in my commentary, we are seeing early-stage delinquencies in the consumer portfolio down sequentially, which usually is a very positive indicator of what's to come. And if you take a look at this year, our consumer charge-off rates on a quarterly basis have been between 14 and 16. In 2018 and 2019, they tended to range between 13 and 17, so sort of well within the historical norms. and really positioned coming out of the quarter with a pretty resilient book based on what we're seeing with credit quality.

As you think about that number in Q4 and kind of Q1, we're still generating strong numbers of new customers. And Q4 can be a big new customer quarter as well. So you'll see a little bit of that flow through, but it shouldn't be anything dramatic.

Well, and the other point, too, and this kind of dovetails into, you know, what David just mentioned, you know, even if charge-offs are higher in the fourth quarter, with you, you know, focusing in on more of the short-term products, right, there's some yield that comes along with those as well as an offsetting factor, right? Is that something, you know, that will continue into the fourth quarter? Possibly, you know, if we do see a higher charge-off rate, just, you know, would we have a corresponding yield adjustment in the consumer book?

Yeah, I mean, the net revenue margin considers that range that we gave you in the guidance there. And like we mentioned in the commentary, a lot of the changes sequentially in what's happening with the credit metric is driven by the expected seasoning of these vintages as we bring them on. So with new customer mix and mix-up of product underneath, there can be some variations from quarter to quarter, but that net revenue guide is sort of your best indicator of how that will sort itself out.

If you think about the makeshift, it's mostly from moderately lower APR loans to higher APR loans.

Last question for me. We've heard a couple of conference calls here now with lenders saying that competition has gotten a lot weaker and they can exploit these pockets of weakness. What do you attribute that to? Is that just credit fear or is it liquidity crunch? We're hearing, frankly, of some dislocation in the ABS markets over the last few weeks. I'm just trying to pinpoint, you know, what it is that's causing competition for you guys specifically to, to, to show up weaker than, than has been in the case that has been in the past. Thank you.

Yeah, I think, I think it's both. And I think you've seen it in, you know, in some of the public companies and there's, we've seen it in some of the private companies as well. There are companies that have struggled with credit, both on the SMB side and on the, On the consumer side, you know, decent-sized public companies, I think you've heard talk about issues in their kind of near-prime book and kind of shifting to higher credit quality customers, which is great for us because we know how to underwrite near-prime customers. We're super comfortable doing it and are not struggling there. And I think there's a little bit of flight to quality in the ABS market, the securitization market, terminal market. They're kind of seasoned issuers that have proven performance like us, have been able to continue to issue. We just had a new warehouse facility in place a few days ago. We have $770 million, I think, Steve said, of liquidity at the end of the quarter. So we're in a super strong position there. But yeah, there are lenders both on the consumer side and the small business side. There's couple in the news in the last couple of days that have pulled back at significant layoffs because they don't have as strong access to liquidity right now. You know, as you've seen, these locations tend to be shorter term in nature. You know, these markets tend not to be shut down for, you know, years on end. But we have plenty of liquidity now. We're still able to access the markets. And, you know, I think that's going to put us in a stronger place going forward.

Okay.

Thank you.

Again, if you have a question, please press star then 1.

Our next question will come from John Hecht with Jefferies. You may now go ahead.

Hey, guys. Thanks very much. I think most of my questions have been asked. I'm wondering, I know you guys to some degree can track the use cases of the credit you provide. Given kind of the emerging inflationary environment, Is there any change in the use case or the behavior of the borrowers, or is it pretty consistent with what you've seen over the last several years?

Very, very minor. But, yes, I think over, especially during COVID where there was a lot of stimulus money, the use cases tend to be a lot more towards big one-time emergencies and you know, and then I guess that would be expected, you know, with all the stimulus, that's why demand was down, you know, a fair amount during 2020 and into 2021. You know, now it's pivoted a teeny bit to, you know, kind of smaller, smaller cash needs than, you know, kind of big, you know, life-changing types of things, but it's really around the edges. I mean, the if you look at kind of what people are using money for now, it's not different than historic numbers. It's just kind of getting a little bit more back to normal kind of post-COVID.

And then I guess pivoting or kind of following on some of the questions about competition, are you able to assess that because of the favorable competitive environment that the customer acquisition costs are going down or you're able to kind of optimize that a little bit more?

I think what we've been able to do is be a bit more conservative on credit and still originate at pretty high levels and show good origination growth. If competition was stronger, us being a bit more conservative on the credit side, it might have resulted in lower levels of origination. It tends not to affect CPF quite as much because you try to you try to originate to your ROE targets. We did raise our ROE targets a bit, and so that helped. But really, it's just keeping origination levels high despite tighter credit. Okay.

And then final, just because it's always interesting to track some of your new growth endeavors, but any update with Brazil or Pangea?

Pangea? Yeah. They're both doing well. This market hasn't hurt either one of them. Brazil's economy is actually starting to turn around a little bit. And they're actually, their currency has done better against the dollar than pretty much any currency in the world over the last six months. So that's been a good sign. And, you know, Pangea is nice that it's a teeny bit recession, not even recession resistant. They kind of benefit a little bit by recessions. As wages go up, people can send more dollars to, you know, kind of to other countries. And so, yeah, you know, Pangea is doing really, really well. I mean, the growth rates are very, very high in that business. It's just still tiny. So that's why we're not talking more about it.

Yep. Okay. Thanks very much, guys.

Yep.

Thank you.

Our next question will come from Vincent Kaintick with Stevens. You may now go ahead.

Hey, good afternoon. Thanks for taking my questions. I wanted to focus on the SMB side since you were discussing that you're looking to kind of grow in the S&P side and maybe scale back on the consumer side. And it's a broad question if you could talk about the health of the small business borrower, what they're using the loans for. To be candid, you know, there's, I think, less of a focus on small business because there's not many other, there's not other publicly traded pure play companies out there. So maybe if you could kind of give us an idea of that, you know, what the health of that small business and Also, are there leading indicators to track when to gauge the health of that small business borrower? Thank you.

Yeah, good questions. I think one thing to keep in mind right off the top on that question is we do a lot of segmentation within our small business lending by industries and by states and by size, which is something we do much less of on the consumer side. So there are definitely industries right now that are hurting. And we've been smart. We've been staying away from them for a while. So construction's been a place where we've really started backing away from three or four quarters ago, which was a great decision in hindsight. Trucking's been a complete mess. That whole industry is just messed up between fuel prices and Supply chain issues, both affecting ability to repair your trucks and also keeping trucks full. I mean, that industry is just a complete mess, and we backed away from trucking very early this year as well. Those are just two examples. At a more micro level, we're really fine-tuning where we're comfortable lending and where we're not. So it's hard to describe SMBs as a whole. Beyond that, the pandemic wiped out a lot of weak small businesses, and the ones that are left look stronger than they did pre-pandemic. Less competition. Businesses that were able to weather the storm tend to be better run, and that's giving us some confidence going into the recession. And then third, they've been able to pass along price, and that's why there's so much inflation. Yeah, there's supply issues. you know, they're paying more for some of the stuff they're doing, but they've been able to pass along price, which is why we're seeing inflation and, you know, the consumer's still spending. And, you know, that's keeping these small businesses, you know, doing well. So, you know, we'll obviously keep a close eye on it and, you know, not only, you know, at a macro level, but the very, very micro level we look at it. But, you know, as of today, credit in that business is looking very, very good.

Okay, great. Thank you. And another question for Steve on the funding side. Maybe you can talk about any additional funding needs and the impact of rising rates and maybe also what you're seeing on spreads. It's nice to see that you recently had a funding completed, but if you could talk about what you're looking at for the next couple of quarters. Thank you.

Sure. As we talked about, we've been very successful raising new facilities and new money with favorable terms. Overall, spreads are a little wider just in terms of the nature of the environment that we're in, but we are definitely on a competitive basis on the good side of that, as you can see with our cost of funds continuing to come down year over year. And I think with further rate increases, You know, only about half of our debt structure is floating rate. And if you just take a look at how much the Fed funds has moved just this year and just take a look at our cost of funds in Q4 is flat to where we are today. I think that demonstrates that we're not entirely floating and we're also still capturing some of that spread benefit that we had locked in. you know, over time. So I feel really good about our ability to continue to bring on capacity as we need it, as we continue to grow going forward and doing that in a very economical way.

Okay, great. And I guess with the plan to shorten duration on the loans, I would think that the velocity of your capital is going to increase. So perhaps I would think maybe the funding needs would actually go down, although being equal, that's a fair comment. Just your thoughts there.

Yeah, I mean, maybe a touch, but we'll still need to be accessing external financing for small business, for example. Maybe a little less on the consumer side, but definitely still needing the markets for small business.

Okay, great. Very helpful. Thanks very much.

This concludes our question and answer session.

I would like to turn the conference back over to David Fisher, CEO, for any closing remarks.

Thanks, everyone. We appreciate you joining our call today and look forward to speaking with you again next quarter.

Have a good evening. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.