UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-35503
Enova International, Inc.
(Exact name of registrant as specified in its charter)
Delaware
45-3190813
(State or other jurisdiction of
Incorporation or organization)
(I.R.S. Employer
Identification No.)
175 West Jackson Blvd.
Chicago, Illinois
60604
(Address of principal executive offices)
(Zip Code)
(312) 568-4200
(Registrant’s telephone number, including area code)
NONE
(Former name, former address and former fiscal year, if changed since last report)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common Stock, $.00001 par value per share
ENVA
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
36,421,332 of the Registrant’s common shares, $.00001 par value, were outstanding as of October 27, 2021.
CAUTIONARY NOTE CONCERNING FACTORS THAT MAY AFFECT FUTURE RESULTS
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You should not place undue reliance on these statements. These forward-looking statements give current expectations or forecasts of future events and reflect the views and assumptions of senior management with respect to the business, financial condition, operations and prospects of Enova International, Inc. and its subsidiaries (collectively, the “Company”). When used in this report, terms such as “believes,” “estimates,” “should,” “could,” “would,” “plans,” “expects,” “intends,” “anticipates,” “may,” “forecast,” “project” and similar expressions or variations as they relate to the Company or its management are intended to identify forward-looking statements. Forward-looking statements address matters that involve risks and uncertainties that are beyond the ability of the Company to control and, in some cases, predict. Accordingly, there are or will be important factors that could cause the Company’s actual results to differ materially from those indicated in these statements. Key factors that could cause the Company’s actual financial results, performance or condition to differ from the expectations expressed or implied in such forward-looking statements include, but are not limited to, the following:
•
the effect of the COVID-19 pandemic on our operations;
the effect of laws and regulations targeting our industry that directly or indirectly regulate or prohibit our operations or render them unprofitable or impractical;
the effect of and compliance with domestic and international consumer credit, tax and other laws and government rules and regulations applicable to our business, including changes in such laws, rules and regulations, or changes in the interpretation or enforcement thereof, and the regulatory and examination authority of the Consumer Financial Protection Bureau with respect to providers of consumer financial products and services in the United States;
the effect of and compliance with enforcement actions, orders and agreements issued by applicable regulators, such as the January 2019 Consent Order issued by the Consumer Financial Protection Bureau;
changes in federal or state laws or regulations, or judicial decisions involving licensing or supervision of commercial lenders, interest rate limitations, the enforceability of choice of law provisions in loan agreements, the validity of bank sponsor partnerships, the use of brokers or other significant changes;
our ability to process or collect loans and finance receivables through the Automated Clearing House system;
the deterioration of the political, regulatory or economic environment in countries where we operate or in the future may operate;
the actions of third parties who provide, acquire or offer products and services to, from or for us;
public and regulatory perception of the consumer loan business, small business financing and our business practices;
the effect of any current or future litigation proceedings and any judicial decisions or rulemaking that affects us, our products or the legality or enforceability of our arbitration agreements;
changes in demand for our services, changes in competition and the continued acceptance of the online channel by our customers;
changes in our ability to satisfy our debt obligations or to refinance existing debt obligations or obtain new capital to finance growth;
a prolonged interruption in the operations of our facilities, systems and business functions, including our information technology and other business systems;
compliance with laws and regulations applicable to our international operations, including anti-corruption laws such as the Foreign Corrupt Practices Act and international anti-money laundering, trade and economic sanctions laws;
our ability to attract and retain qualified officers;
cyber-attacks or security breaches;
acts of God, war or terrorism, pandemics and other events;
the ability to successfully integrate newly acquired businesses into our operations;
interest rate and foreign currency exchange rate fluctuations;
changes in the capital markets, including the debt and equity markets;
the effect of any of the above changes on our business or the markets in which we operate;
the risk that the Company will not successfully integrate acquired companies or that costs associated with integration are higher than anticipated;
the risk that the cost savings, synergies, growth and cash flows from acquisitions will not be fully realized or will take longer to realize than expected;
litigation risk related to acquisitions; and
other risks and uncertainties described herein.
The foregoing list of factors is not exhaustive and new factors may emerge or changes to these factors may occur that would impact the Company’s business and cause actual results to differ materially from those expressed in any of our forward-looking statements. Additional information regarding these and other factors may be contained in the Company’s filings with the Securities and Exchange Commission (the “SEC”). Readers of this report are encouraged to review all of the Risk Factors contained in the Company’s filings with the SEC to obtain more detail about the Company’s risks and uncertainties. All forward-looking statements involve risks, assumptions and uncertainties. The occurrence of the events described, and the achievement of the expected results, depends on many events, some or all of which are not predictable or within the Company’s control. If one or more events related to these or other risks or uncertainties materialize, or if management’s underlying assumptions prove to be incorrect, actual results may differ materially from what the Company anticipates. The forward-looking statements in this report are made as of the date of this report, and the Company disclaims any intention or obligation to update or revise any forward-looking statements to reflect events or circumstances occurring after the date of this report. All forward-looking statements in this report are expressly qualified in their entirety by the foregoing cautionary statements.
ENOVA INTERNATIONAL, INC.
INDEX TO FORM 10-Q
Page
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements (Unaudited)
Consolidated Balance Sheets – September 30, 2021 and 2020 and December 31, 2020
1
Consolidated Statements of Income – Three and Nine Months Ended September 30, 2021 and 2020
3
Consolidated Statements of Comprehensive Income – Three and Nine Months Ended September 30, 2021 and 2020
4
Consolidated Statements of Stockholders’ Equity – Three and Nine Months Ended September 30, 2021 and 2020
5
Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2021 and 2020
7
Notes to Consolidated Financial Statements
8
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
23
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
43
Item 4.
Controls and Procedures
PART II. OTHER INFORMATION
Legal Proceedings
45
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
46
SIGNATURES
47
ITEM 1. FINANCIAL STATEMENTS
ENOVA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
(Unaudited)
September 30,
December 31,
2021
2020
Assets
Cash and cash equivalents(1)
$
229,088
490,033
297,273
Restricted cash(1)
59,053
45,017
71,927
Loans and finance receivables at fair value(1)
1,635,282
693,370
1,241,506
Income taxes receivable
4,799
—
Other receivables and prepaid expenses(1)
52,975
25,117
40,301
Property and equipment, net
81,149
63,403
79,417
Operating lease right-of-use assets
36,105
20,370
40,123
Goodwill
279,275
267,868
267,974
Intangible assets, net
37,458
1,623
26,008
Other assets(1)
52,315
27,363
43,546
Total assets
2,467,499
1,634,164
2,108,075
Liabilities and Stockholders’ Equity
Accounts payable and accrued expenses(1)
124,584
76,526
124,071
Operating lease liabilities
61,985
35,258
67,956
Income taxes currently payable
15,339
2,624
Deferred tax liabilities, net
71,297
69,874
48,129
Long-term debt(1)
1,075,380
863,472
946,461
Total liabilities
1,333,246
1,060,469
1,189,241
Commitments and contingencies (Note 8)
Stockholders’ equity:
Common stock, $0.00001 par value, 250,000,000 shares authorized, 43,224,666, 36,190,857 and 41,936,784 shares issued and 36,427,705, 30,111,727 and 35,762,926 outstanding as of September 30, 2021 and 2020 and December 31, 2020, respectively
Preferred stock, $0.00001 par value, 25,000,000 shares authorized, no shares issued and outstanding
Additional paid in capital
217,051
74,868
187,981
Retained earnings
1,057,111
618,775
849,466
Accumulated other comprehensive loss
(8,185
)
(8,547
(6,898
Treasury stock, at cost (6,796,961, 6,079,130 and 6,173,858 shares as of September 30, 2021 and 2020 and December 31, 2020, respectively)
(133,041
(111,401
(113,201
Total Enova International, Inc. stockholders’ equity
1,132,936
573,695
917,348
Noncontrolling interest
1,317
1,486
Total stockholders’ equity
1,134,253
918,834
Total liabilities and stockholders’ equity
(1)
Includes amounts in wholly owned, bankruptcy-remote special purpose subsidiaries (“VIEs”) presented separately in the table below.
The following table presents the aggregated assets and liabilities of consolidated VIEs, which are included in the Consolidated Balance Sheets above. The assets in the table below may only be used to settle obligations of consolidated VIEs and are in excess of those obligations. See Note 1 for additional information.
Assets of consolidated VIEs, included in total assets above
Cash and cash equivalents
1,807
525
420
Restricted cash
47,183
42,656
64,811
Loans and finance receivables at fair value
573,303
339,445
528,877
Other receivables and prepaid expenses
3,983
4,449
4,827
Other assets
2,176
1,870
1,639
628,452
388,945
600,574
Liabilities of consolidated VIEs, included in total liabilities above
Accounts payable and accrued expenses
3,610
1,953
3,056
Affiliate note payable
5,692
4,065
Long-term debt
457,537
247,372
329,855
466,839
249,325
336,976
See notes to consolidated financial statements.
2
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Three Months Ended
Nine Months Ended
Revenue
320,160
204,545
844,324
819,858
Change in Fair Value
(73,778
(22,777
(100,443
(379,168
Net Revenue
246,382
181,768
743,881
440,690
Expenses
Marketing
79,726
4,629
163,548
42,175
Operations and technology
37,966
17,702
108,628
65,472
General and administrative
33,557
33,656
116,321
83,943
Depreciation and amortization
8,914
3,770
23,001
11,444
Total Expenses
160,163
59,757
411,498
203,034
Income from Operations
86,219
122,011
332,383
237,656
Interest expense, net
(18,163
(18,634
(57,493
(59,387
Foreign currency transaction loss
(109
(30
(383
(7
Equity method investment income
529
2,558
Other nonoperating expenses
(1,128
Income before Income Taxes
68,476
103,347
275,937
178,262
Provision for income taxes
16,667
9,671
67,607
30,812
Net income from continuing operations before noncontrolling interest
51,809
93,676
208,330
147,450
Less: Net income attributable to noncontrolling interest
261
685
Net income from continuing operations
51,548
207,645
Net loss from discontinued operations
(9
(297
Net income attributable to Enova International, Inc.
93,667
147,153
Earnings (Loss) Per Share attributable to Enova International, Inc.:
Earnings (loss) per common share – basic:
Continuing operations
1.40
3.11
5.68
4.78
Discontinued operations
(0.01
Earnings (loss) per common share – basic
4.77
Earnings (loss) per common share – diluted:
1.36
3.09
5.48
4.73
Earnings (loss) per common share – diluted
4.72
Weighted average common shares outstanding:
Basic
36,744
30,108
36,554
30,880
Diluted
37,984
30,363
37,874
31,180
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Other comprehensive loss, net of tax:
Foreign currency translation (loss) gain(1)
(2,174
52
(1,017
(5,481
Ownership change in noncontrolling interest
(270
Total other comprehensive (loss) gain, net of tax
(1,287
Comprehensive Income
49,635
93,719
207,043
141,672
Net income attributable to noncontrolling interest
(261
(685
Foreign currency translation loss attributable to noncontrolling interests
40
802
Comprehensive (income) loss attributable to the noncontrolling interest
(221
169
Comprehensive income attributable to Enova International, Inc.
49,414
207,212
Net of tax benefit of $682 and $621 for the three months ended September 30, 2021 and 2020, respectively, and $426 and $2,326 for the nine months ended September 30, 2021 and 2020, respectively.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Total Enova
Accumulated
International,
Additional
Other
Inc.
Total
Common Stock
Paid in
Retained
Comprehensive
Treasury Stock, at cost
Stockholders'
Noncontrolling
Shares
Amount
Capital
Earnings
Loss
Equity
Interest
Balance at June 30, 2020
36,180
71,100
525,108
(8,599
(6,078
(111,389
476,220
Stock-based compensation expense
3,768
Shares issued for vested RSUs
11
Shares issued for stock option exercises
Foreign currency translation loss, net of tax
Purchases of treasury shares, at cost
(1
(12
Balance at September 30, 2020
36,191
(6,079
Balance at June 30, 2021
43,185
211,548
1,005,563
(6,011
(6,313
(117,439
1,093,661
1,096
1,094,757
5,018
14
26
485
(40
(2,214
(484
(15,602
Balance at September 30, 2021
43,225
(6,797
Stockholders’
Balance at December 31, 2019
35,765
63,791
372,681
(3,066
(2,790
(56,793
376,613
10,888
410
16
189
(3,289
(54,608
Cumulative effect of accounting change
98,941
Balance at December 31, 2020
41,937
(6,174
16,072
757
531
11,926
(52
(1,069
(623
(19,840
1,072
(802
.
6
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Flows from Operating Activities
Net income before noncontrolling interest
Add: net loss from discontinued operations
297
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred loan costs and debt discount
5,022
4,607
Change in fair value of loans and finance receivables
98,254
379,168
Loss on early extinguishment of debt
378
Operating leases, net
(1,835
(1,255
Lease termination and cease-use loss (gain)
(113
Deferred income taxes, net
23,580
(4,174
Changes in operating assets and liabilities:
Finance and service charges on loans and finance receivables
(18,265
67,323
Other receivables and prepaid expenses and other assets
(10,505
(1,747
(7,560
(25,094
Current income taxes
(11,202
34,920
Cash flows from operating activities - continuing operations
325,157
623,530
Cash flows from operating activities - discontinued operations
Net cash provided by operating activities
623,233
Cash Flows from Investing Activities
Loans and finance receivables originated or acquired
(1,832,008
(584,515
Loans and finance receivables repaid
1,361,592
625,020
Acquisitions, net of cash acquired
(29,153
(3,597
Purchases of property and equipment
(22,031
(19,835
Other investing activities
25
57
Net cash (used in) provided by investing activities
(521,575
17,130
Cash Flows from Financing Activities
Borrowings under revolving line of credit
102,000
100,250
Repayments under revolving line of credit
(102,000
(172,250
Borrowings under securitization facilities
390,054
119,200
Repayments under securitization facilities
(260,798
(178,496
Debt issuance costs paid
(5,909
(388
Proceeds from exercise of stock options
Treasury shares purchased
Net cash provided by (used in) financing activities
115,433
(186,103
Effect of exchange rates on cash, cash equivalents and restricted cash
(74
(174
Net (decrease) increase in cash, cash equivalents and restricted cash
(81,059
454,086
Cash, cash equivalents and restricted cash at beginning of year
369,200
80,964
Cash, cash equivalents and restricted cash at end of period
288,141
535,050
Supplemental Disclosures
Loans and finance receivables renewed
152,498
34,554
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1.
Significant Accounting Policies
Nature of the Company
Enova International, Inc. and its subsidiaries (collectively, the “Company”) operates an internet-based lending platform to serve customers in need of cash to fulfill their financial responsibilities. Through a network of direct and indirect marketing channels, the Company offers funds to its customers through a variety of unsecured loan and finance receivable products. The business is operated primarily through the internet to provide convenient, fully-automated financial solutions to its customers. The Company originates, arranges, guarantees or purchases consumer loans and provides financing to small businesses through a line of credit account, installment loan or receivables purchase agreement product (“RPAs”). Consumer loans include installment loans and line of credit accounts. RPAs represent a right to receive future receivables from a small business. The Company also provides services related to third-party lenders’ consumer loan products by acting as a credit services organization or credit access business on behalf of consumers in accordance with applicable state laws (“CSO program”).
Basis of Presentation
The consolidated financial statements of the Company reflect the historical results of operations and cash flows of the Company during each respective period. The consolidated financial statements include goodwill and intangible assets arising from businesses previously acquired. The financial information included herein may not be indicative of the consolidated financial position, operating results, changes in stockholders’ equity and cash flows of the Company in the future. Intercompany transactions are eliminated.
The Company consolidates any variable interest entity (“VIE”) where it has been determined it is the primary beneficiary. The primary beneficiary is the entity which has both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance as well as the obligation to absorb losses or receive benefits of the entity that could potentially be significant to the VIE.
On July 28, 2020, the Company and OnDeck Capital Inc. (“OnDeck”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) among the Company, OnDeck and Energy Merger Sub, Inc., a wholly owned subsidiary of the Company (“Merger Sub”), pursuant to which, subject to the satisfaction or waiver of the conditions set forth therein, Merger Sub would merge with and into OnDeck, with OnDeck surviving as an indirect wholly owned subsidiary of the Company. On October 13, 2020, the Company and OnDeck completed the transaction following the approval of OnDeck’s stockholders and the satisfaction of all other closing conditions. The accompanying unaudited consolidated results of operations for the three and nine months ended September 30, 2021 include the results of operations for OnDeck, affecting comparability of 2021 and 2020 amounts. The Company has performed a valuation analysis of identifiable assets acquired and liabilities assumed and allocated the aggregate purchase consideration based on the fair values of those identifiable assets and liabilities.
With the acquisition of OnDeck, the Company owns a controlling interest in On Deck Capital Australia PTY LTD (“OnDeck Australia”). The remaining interests are owned by an unrelated third party. The Company consolidates the financial position and results of operations of this entity under the voting interest model. The noncontrolling interest, which is presented as a separate component of consolidated equity, represents the minority owners’ proportionate share of the equity of the entity and is adjusted for the minority owners’ share of the earnings, losses, investments and distributions.
The consolidated financial statements presented as of September 30, 2021 and 2020 and for the three and nine-month periods ended September 30, 2021 and 2020 are unaudited but, in management’s opinion, include all adjustments necessary for a fair presentation of the results for such interim periods. Operating results for the three and nine-month periods are not necessarily indicative of the results that may be expected for the full fiscal year. Certain prior period amounts have been reclassified to conform to the current year presentation. With the acquisition of OnDeck, small business loans comprise a significantly larger portion of the Company’s overall loan portfolio. Where presented on a disaggregated basis, loans and finance receivables that were previously grouped as line of credit accounts and installment loans and RPAs, are now grouped at the consumer and small business levels as management has deemed these groupings to be more meaningful to users of the financial statements.
These consolidated financial statements and related notes should be read in conjunction with the Company’s audited consolidated financial statements as of December 31, 2020 and 2019 and for the years ended December 31, 2020, 2019 and 2018 and related notes, which are included on Form 10-K filed with the SEC on February 26, 2021.
Discontinued Operations
Beginning in 2007, the Company provided services in the United Kingdom under various brands, including QuickQuid, Pounds to Pocket and On Stride. Due in part to the level of claim and legal settlement costs incurred in conducting its U.K. business and unsuccessful discussions with U.K regulators, on October 24, 2019, the Company announced its intent to exit the U.K. market. On October 25, 2019, Grant Thornton LLP, a licensed U.K. insolvency practitioner, was appointed as administrators (“Administrators”) to take control of management of the U.K. businesses. The effect of the U.K. businesses’ entry into administration was to place their management, affairs, business and property under the direct control of the Administrators. During the first quarter of 2020, the Company recorded an impairment charge of $0.4 million ($0.3 million net of taxes) to write down a receivable on certain expenses incurred by the Company prior to administration that were deemed non-reimbursable by the Administrators.
The Company entered into a service agreement with the Administrators under which the Company provides certain administrative, technical and other services in exchange for compensation by the Administrators. The agreement was extended and is scheduled to expire January 8, 2022 but with options to extend the term for three-month periods. During the three months ended September 30, 2021 and 2020, the Company recorded $0.8 million and $1.0 million, respectively, and during the nine months ended September 30, 2021 and 2020 the Company recorded $2.4 million and $4.1 million, respectively, in revenue related to these services. As of September 30, 2021 and 2020 and December 31, 2020, the Administrators owed the Company $0.7 million, $1.0 million and $0.9 million, respectively, related to services provided.
Cash, Cash Equivalents and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents and restricted cash to amounts reported within the consolidated balance sheets (in thousands):
Total cash, cash equivalents and restricted cash
Loans and Finance Receivables
The Company utilizes the fair value option on its entire loan and finance receivable portfolio. As such, loans and finance receivables are carried at fair value in the consolidated balance sheet with changes in fair value recorded in the consolidated income statement. To derive the fair value, the Company generally utilizes discounted cash flow analyses that factor in estimated losses, prepayments, utilization rates and servicing costs over the estimated duration of the underlying assets. Loss, prepayment, utilization and servicing cost assumptions are determined using historical loss data and include appropriate consideration of recent trends and anticipated future performance. Future cash flows are discounted using a rate of return that the Company believes a market participant would require. Accrued and unpaid interest and fees are included in “Loans and finance receivables at fair value” in the consolidated balance sheets.
Current and Delinquent Loans and Finance Receivables
The Company classifies its loans and finance receivables as either current or delinquent. Excluding OnDeck loans and finance receivables, when a customer does not make a scheduled payment as of the due date, that payment is considered delinquent, and the remainder of the receivable balance is considered current. If the customer does not make two consecutive payments, the entire account or loan is classified as delinquent and placed on a non-accrual status. For the OnDeck portfolio, a loan is considered to be delinquent when the scheduled payments are one day past due. Loans are placed in nonaccrual status and the accrual of interest income is stopped on loans that are delinquent and non-paying. Loans are returned to accrual status if they are brought to non-delinquent status or have performed in accordance with the contractual terms for a reasonable period of time and, in the Company’s judgment, will continue to make periodic principal and interest payments as scheduled. The Company allows for normal payment processing time before considering a loan delinquent but does not provide for any additional grace period.
Where permitted by law and as long as a loan is not considered delinquent, a customer may choose to renew or extend the due date on certain installment loans. In order to renew or extend a single-pay loan, a customer must agree to pay the current finance charge for the right to make a later payment of the outstanding principal balance plus an additional finance charge. In order to renew an installment loan, the customer enters into a new installment loan contract and agrees to pay the principal balance and finance charge in accordance with the terms of the new loan contract.
9
In response to the COVID-19 pandemic, the Company enhanced the forbearance options on its loan products, offering additional relief to impacted customers with features such as payment deferrals without the incurrence of additional finance charges or late fees. If a loan is deemed to be current and the customer makes a deferral or payment modification, the loan is still deemed to be current until the next scheduled payment is missed.
The Company generally charges off loans and finance receivables between 60 and 65 days delinquent. If a loan or finance receivable is deemed uncollectible prior to this, it is charged off at that point. For the OnDeck portfolio, the Company generally charges off a loan when it is probable that it will be unable to collect all of the remaining principal payments, which is generally after 90 days of delinquency and 30 days of non-activity. Loans and finance receivables classified as delinquent generally have an age of one to 64 days from the date any portion of the receivable became delinquent, as defined above. Recoveries on loans and finance receivables that were previously charged off are generally recognized when collected or sold.
Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in each business combination. In accordance with Accounting Standards Codification (“ASC”) 350, Goodwill, the Company tests goodwill and intangible assets with an indefinite life for potential impairment annually as of June 30 and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value below its carrying amount.
The Company first assesses qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. In assessing the qualitative factors, management considers relevant events and circumstances including but not limited to macroeconomic conditions, industry and market environment, overall financial performance of the Company, cash flow from operating activities, market capitalization and stock price. If the Company determines that the quantitative impairment test is required, management uses the income approach to complete its annual goodwill assessment. The income approach uses future cash flows and estimated terminal values for the Company that are discounted using a market participant perspective to determine the fair value, which is then compared to the carrying value to determine if there is impairment. The income approach includes assumptions about revenue growth rates, operating margins and terminal growth rates discounted by an estimated weighted-average cost of capital derived from other publicly-traded companies that are similar but not identical from an operational and economic standpoint.
The Company completed its annual assessment of goodwill as of June 30, 2021 based on qualitative factors and determined that a quantitative analysis was not required; as such, no impairment existed at that date. The Company expects that its entire goodwill balance will be deductible for tax purposes.
Revenue Recognition
The Company recognizes revenue based on the financing products and services it offers and on loans it acquires. “Revenue” in the consolidated statements of income includes: interest income, finance charges, fees for services provided through the Company’s CSO programs (“CSO fees”), revenue on RPAs, service charges, draw fees, minimum billing fees, purchase fees, origination fees, late fees and non-sufficient funds fees as permitted by applicable laws and pursuant to the agreement with the customer. Interest is generally recognized on an effective yield basis over the contractual term of the loan on installment loans, the estimated outstanding period of the draw on line of credit accounts, or the projected delivery term on RPAs. CSO fees are recognized over the term of the loan. Late and nonsufficient funds fees are recognized when assessed to the customer.
Marketing Expenses
Marketing expenses consist of digital costs, lead purchase costs and offline marketing costs such as television and direct mail advertising. All marketing expenses are expensed as incurred.
Equity Method Investments
With the acquisition of OnDeck, as discussed in Note 2, the Company records its interest in On Deck Capital Canada Holdings, Inc. (“OnDeck Canada”) under the equity method of accounting. As of September 30, 2021 and December 31, 2020, the carrying value of the Company’s investment in OnDeck Canada was $13.3 and $10.5 million, respectively, which the Company has included in “Other assets” on the consolidated balance sheets.
On February 24, 2021 the Company contributed the platform-as-service business assumed in the OnDeck acquisition to Linear Financial Technologies Holding LLC (“Linear”) in exchange for ownership units in that entity. The Company records its interest in
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Linear under the equity method of accounting. As of September 30, 2021, the carrying value of the Company’s investment in Linear was $5.6 million, which the Company has included in “Other assets” on the consolidated balance sheets.
Equity method income has been included in “Equity method investment income” in the consolidated income statements.
Variable Interest Entities
As part of the Company’s overall funding strategy and as part of its efforts to support its liquidity from varying sources, the Company has established a securitization program through several securitization facilities. The Company transfers certain loan receivables to VIEs, which issue notes backed by the underlying loan receivables and are serviced by another wholly-owned subsidiary of the Company. The cash flows from the loans held by the VIEs are used to repay obligations under the notes.
The Company is required to evaluate the VIEs for consolidation. The Company has the ability to direct the activities of the VIEs that most significantly impact the economic performance of the entities as the servicer of the securitized loan receivables. Additionally, the Company has the right to receive residual payments, which expose it to potentially significant losses and returns. Accordingly, the Company determined it is the primary beneficiary of the VIEs and is required to consolidate them. The assets and liabilities related to the VIEs are included in the Company’s consolidated financial statements and are accounted for as secured borrowings.
Adopted Accounting Standards
In November 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 is intended to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and also clarifying and amending existing guidance to improve consistent application. ASU 2019-12 is effective in fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The adoption of ASU 2019-12 as of January 1, 2021 did not have a material effect on the Company’s consolidated financial statements.
2.
Acquisitions
On July 28, 2020, the Company and OnDeck entered into an Agreement and Plan of Merger among the Company, OnDeck and Energy Merger Sub, Inc., a wholly owned subsidiary of the Company, pursuant to which, subject to the satisfaction or waiver of the conditions set forth therein, Energy Merger Sub, Inc. would merge with and into OnDeck, with OnDeck surviving as an indirect wholly owned subsidiary of the Company. On October 13, 2020, the Company and OnDeck completed the transaction following the approval of OnDeck’s stockholders and the satisfaction of all other closing conditions. The acquisition increases the scale and portfolio diversification of the Company. OnDeck offers a range of term loans and lines of credit customized for the needs of small business owners.
Under the terms of the transaction, each holder of OnDeck common stock received $0.12 per share in cash and a fixed exchange ratio of 0.092 shares of the Company’s common stock for each OnDeck share they owned as of the acquisition date. As a result, the Company issued 5.6 million shares of common stock to OnDeck stockholders. Based on the closing share price of the Company as of October 12, 2020 of $18.74, the value of Company common stock and cash provided in exchange for OnDeck common stock was $111.5 million. In addition to the exchange of common stock, the consideration transferred also included the cancellation or replacement of certain equity awards of OnDeck employees in effect prior to the transaction valued at approximately $4.2 million. For additional information, see “Note 2. Acquisitions” of the Annual Report on Form 10-K for the year ended December 31, 2020.
On March 19, 2021, the Company completed the purchase of Pangea Universal Holdings, Inc. (“PUH”), a Chicago-based payments platform offering mobile international money transfer services. In accordance with the terms of the transaction, PUH was merged into Pangea Transfer Company, LLC (“Pangea”) with the separate corporate existence of PUH thereupon ceasing and Pangea continuing as the surviving, wholly-owned subsidiary of the Company. Pangea serves the international money transfer market with a focus on Latin America and Asia. Customers have the option to transfer funds directly into bank accounts or have cash picked up from partners in minutes. The total consideration of $32.9 million consists of $30.0 million in cash and $2.9 million in loan forgiveness. The Company has performed a valuation analysis of identifiable assets acquired and liabilities assumed and allocated the aggregate purchase consideration based on the fair values of those identifiable assets and liabilities. The preliminary allocation of the purchase consideration includes $19.8 million and $11.3 million of intangible assets and goodwill, respectively, with all other assets acquired and liabilities assumed being nominal. The purchase price allocation is subject to change as the Company finalizes the analysis of the fair value as of the acquisition date. The final determination of the fair value of assets acquired and liabilities assumed will be completed within the twelve-month measurement period from the acquisition date as required by applicable accounting guidance.
The operating results of Pangea are included in, but not material to, the Company’s consolidated financial statements from the date of acquisition. Its revenues and cost of revenues are included in “Revenues” and “Change in Fair Value,” respectively, in the Consolidated Statements of Income.
3.
Revenue generated from the Company’s loans and finance receivables for the three and nine months ended September 30, 2021 and 2020 was as follows (dollars in thousands):
Consumer loans and finance receivables revenue
215,432
192,567
571,681
765,239
Small business loans and finance receivables revenue
100,610
10,830
261,731
49,666
Total loans and finance receivables revenue
316,042
203,397
833,412
814,905
4,118
1,148
10,912
4,953
Total revenue
Loans and Finance Receivables at Fair Value
The components of Company-owned loans and finance receivables at September 30, 2021 and 2020 and December 31, 2020 were as follows (dollars in thousands):
As of September 30, 2021
Small
Consumer
Business
Principal balance - accrual
650,377
840,778
1,491,155
Principal balance - non-accrual
59,404
35,890
95,294
Total principal balance
709,781
876,668
1,586,449
Loans and finance receivables at fair value - accrual
718,194
891,722
1,609,916
Loans and finance receivables at fair value - non-accrual
5,359
20,007
25,366
723,553
911,729
Difference between principal balance and fair value
13,772
35,061
48,833
As of September 30, 2020
551,541
72,664
624,205
18,015
9,069
27,084
569,556
81,733
651,289
613,975
69,934
683,909
3,946
5,515
9,461
617,921
75,449
48,365
(6,284
42,081
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As of December 31, 2020
547,015
634,476
1,181,491
29,389
52,254
81,643
576,404
686,730
1,263,134
621,257
592,654
1,213,911
3,962
23,633
27,595
625,219
616,287
48,815
(70,443
(21,628
As of September 30, 2021 and 2020 and December 31, 2020, the aggregate fair value of loans and finance receivables that were 90 days or more past due was $6.2 million, $0.5 million and $14.3 million, respectively, of which, $6.1 million, $0.3 million and $14.1 million, respectively, was in non-accrual status. The aggregate unpaid principal balance for loans and finance receivables that were 90 days or more past due was $11.6 million, $1.9 million and $33.9 million, respectively.
Changes in the fair value of Company-owned loans and finance receivables during the three and nine months ended September 30, 2021 and 2020 were as follows (dollars in thousands):
Three Months Ended September 30, 2021
Balance at beginning of period
623,975
784,728
1,408,703
Originations or acquisitions
370,791
461,595
832,386
Interest and fees(1)
Repayments
(389,035
(458,212
(847,247
Charge-offs, net(2)
(57,836
(7,060
(64,896
Net change in fair value(2)
(39,225
31,575
(7,650
Effect of foreign currency translation
(549
(1,507
(2,056
Balance at end of period
Three Months Ended September 30, 2020
690,957
108,705
799,662
120,838
2,500
123,338
(362,010
(48,187
(410,197
(30,670
(4,496
(35,166
6,292
6,097
12,389
(53
Nine Months Ended September 30, 2021
800,101
1,184,405
1,984,506
(1,100,366
(1,222,675
(2,323,041
(121,294
(30,204
(151,498
(51,547
104,791
53,244
(241
(2,606
(2,847
13
Nine Months Ended September 30, 2020
1,015,798
171,785
1,187,583
539,960
79,109
619,069
(1,362,099
(183,205
(1,545,304
(363,169
(31,196
(394,365
25,907
(10,710
15,197
(3,715
Included in “Revenue” in the consolidated statements of income.
(2)
Included in “Change in Fair Value” in the consolidated statements of income.
Guarantees of Consumer Loans
In connection with its CSO programs, the Company guarantees consumer loan payment obligations to unrelated third-party lenders for consumer loans and is required to purchase any defaulted loans it has guaranteed. The guarantee represents an obligation to purchase specific loans that go into default. As of September 30, 2021 and 2020 and December 31, 2020, the consumer loans guaranteed by the Company had an estimated fair value of $16.9 million, $7.4 million and $10.3 million, respectively and an outstanding principal balance of $11.4 million, $6.9 million and $8.8 million, respectively. As of September 30, 2021 and 2020 and December 31, 2020, the amount of consumer loans, including principal, fees and interest, guaranteed by the Company were $13.2 million, $8.1 million and $10.2 million, respectively. These loans are not included in the consolidated balance sheets as the Company does not own the loans prior to default.
4.
The Company’s long-term debt instruments and balances outstanding as of September 30, 2021 and 2020 and December 31, 2020, including maturity date, weighted average interest rate and borrowing capacity as of September 30, 2021, were as follows (dollars in thousands):
Weighted
Outstanding
average
Borrowing
Maturity date
interest rate(1)
capacity
Funding Debt:
2018-1 Securitization Facility
September 2026
(2
4.34%
150,000
17,705
41,152
39,901
2018-2 Securitization Facility
July 2025
(3
4.19%
75,000
70,858
49,519
2019-1 Securitization Facility
February 2022
(4
30,000
2018-A Notes
May 2026
7.37%
3,925
23,291
18,140
2019-A Notes
June 2026
6.99%
29,418
83,302
68,782
OnDeck Account Receivables Trust 2013-1
May 2021
(5
29,728
Receivable Assets of OnDeck
December 2023
(6
2.57%
177,632
22,915
OnDeck Asset Funding II
August 2022
52,773
OnDeck Asset Securitization Trust III
May 2027
(8
2.07%
300,000
Other funding debt(9)
Various
(10
4.66%
58,250
34,651
19,885
Total funding debt
3.10%
869,225
460,699
248,603
331,643
Corporate Debt:
8.50% Senior Notes Due 2024
September 2024
8.50%
250,000
8.50% Senior Notes Due 2025
September 2025
375,000
Revolving line of credit
June 2025
4.00%
310,000
(11
Total corporate debt
935,000
625,000
Less: Long-term debt issuance costs
(8,578
(10,126
(9,171
Less: Debt discounts
(1,742
(1,011
Total long-term debt
The weighted average interest rate is determined based on the rates and principal balances on September 30, 2021. It does not include the impact of the amortization of deferred loan origination costs or debt discounts.
The period during which new borrowings may be made under this facility expires in September 2024.
(3)
The period during which new borrowings may be made under this facility expires in July 2023.
(4)
The period during which new borrowings may be made under this facility expired in February 2021. This facility was repaid and terminated on February 25, 2021.
(5)
The period during which new borrowings may be made under this facility expired in October 2020. This facility was repaid and terminated on February 19, 2021.
(6)
The period during which new borrowings may be made under this facility expires in December 2022.
(7)
This facility was repaid and terminated on June 15, 2021.
(8)
The period during which new borrowings may be made under this facility expires in April 2024.
(9)
These debt facilities support the Company’s operations in Australia and are denominated in Australian dollars. The total local currency borrowing capacity is AU$80.6 million, of which there is AU$47.9 million in principal outstanding at September 30, 2021.
(10)
The periods during which new borrowings may be made under the various agreements expire between June 2021 and March 2024. Maturity dates range from December 2021 through March 2024.
(11)
The Company had outstanding letters of credit under the Revolving line of credit of $0.8 million, $1.0 million and $1.0 million as of September 30, 2021 and 2020 and December 31, 2020, respectively.
Weighted average interest rates on long-term debt were 7.65% and 8.15% during the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021 and 2020 and December 31, 2020, the Company was in compliance with all covenants and other requirements set forth in the prevailing long-term debt agreements.
Recent Updates to Debt Facilities
2018-1 Facility
On September 15, 2021, the loan securitization facility (the “2018-1 Securitization Facility”) for EFR 2018-1, LLC, a wholly-owned indirect subsidiary of the Company, was amended to increase the advance rate from 80% to 90% and to reopen and extend the
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revolving period to September 15, 2024 and the final maturity date to September 15, 2026. The amendment also increased the eligibility criteria around acceptable collateral and increased flexibility around certain financial covenants.
2018-2 Facility
On July 23, 2021, the loan securitization facility (the “2018-2 Securitization Facility”) for EFR 2018-2, LLC was amended to increase the advance rate from 80% to 90% and to reopen and extend the revolving period for two years to July 23, 2023. The amendment also made certain changes in the scope of eligibility criteria for acceptable collateral.
RAOD Facility
Assumed in the OnDeck acquisition, the loan securitization facility (“RAOD Facility”) for Receivable Assets of OnDeck, LLC (“RAOD”), a wholly-owned indirect subsidiary of the Company, collateralizes certain eligible installment loans originated or purchased by OnDeck or certain other subsidiaries. On July 16, 2021, the RAOD facility was amended to increase the commitment from $100 million to $178 million and the advance rate from 76% to 90%. The scope of acceptable collateral was also expanded to include line of credit products from OnDeck in addition to installment loans.
Revolving Credit Facility
On May 10, 2021, the Company and certain of its subsidiaries amended their secured asset-backed revolving credit agreement (as previously amended, the “Credit Agreement”) by entering into the Fifth Amendment, Consent and Joinder to Credit Agreement and Amendment to Security Agreement (the “Fifth Amendment”) with TBK Bank, SSB, as administrative agent and collateral agent, and the lenders party thereto.
The following table summarizes certain key terms of the Credit Agreement, as amended by the Fifth Amendment (dollars in thousands):
Original Credit Agreement
Amended Credit Agreement
Commitment amount
125,000
June 2022
Advance rate
65.0%
75.0%
Interest rate
Prime Rate + 1.00%
Prime Rate + 0.75%
In addition to the above, the Fifth Amendment provides for certain prepayment penalties if the Credit Agreement, as amended by the Fifth Amendment, is terminated on or before the first and second anniversaries of the Fifth Amendment, subject to certain exceptions, including early renewal or extension. The syndicate of lenders in the TBK Facility, as amended by the Fifth Amendment, increased from four lenders to seven lenders.
ODAST III Facility
On May 5, 2021, OnDeck Asset Securitization Trust III LLC (“ODAST III”), a wholly-owned subsidiary of the Company, issued $300 million initial principal amount of Fixed-Rate Asset Backed Notes (the “Series 2021-1 Notes”) in a securitization transaction (the “Series 2021-1 Transaction” and such series, the “2021-1 Series”). The Series 2021-1 Notes are the first series of notes ever issued by ODAST III. On May 5, 2021, the proceeds of the Series 2021-1 Transaction were used to purchase small business loans from On Deck Capital, Inc. (“ODC”) and ODK Capital, LLC (“ODK”), each of which is a wholly-owned subsidiary of the Company, that will be pledged as collateral for the Series 2021-1 Notes. The Company used substantially all the proceeds from ODAST III to purchase such small business loans from certain of its subsidiaries and for other general corporate purposes.
The Series 2021-1 Notes were issued in four classes with a weighted average fixed interest coupon of 2.07% per annum. The revolving period during which a certain portion of collections received on the portfolio of loans held by ODAST III may be used to continue to purchase loans from ODC and ODK ends in April 2024. The Series 2021-1 Notes have a final maturity in May 2027 with optional prepayment beginning in May 2023. The Series 2021-1 Notes are, and future series of notes, if any, issued under the Base Indenture will be, secured by and payable from such series pro rata allocation of collections received on a revolving pool of small business loans transferred from time to time from the Company to ODAST III. At the time of issuance of the Series 2021-1 Notes, the portfolio of loans held by ODAST III and pledged to secure the Series 2021-1 Notes was approximately $316 million.
The loans and other assets transferred by the Company to ODAST III are owned by ODAST III, are pledged to secure the payment of the notes issued by ODAST III, are assets of ODAST III and are not available to satisfy any of the Company’s obligations. Investors in the Series 2021-1 Transaction do not have direct recourse to the Company or OnDeck and the transaction is structured to be bankruptcy remote.
ODAF II Facility
On March 31, 2021, OnDeck Asset Funding II, LLC (“ODAF II”), a wholly-owned subsidiary of the Company, amended (the “ODAF II Amendment”) its asset-backed revolving debt facility (the “ODAF II Facility”) to modify the Credit Agreement, dated as of August 8, 2018, by and among ODAF II, as Borrower, the Lenders party thereto from time to time, Ares Agent Services, L.P., as Administrative Agent and Collateral Agent, and Wells Fargo Bank, N.A, as Paying Agent. The ODAF II Amendment extended the period during which an Enova Merger Change of Control (as defined in the ODAF II Facility) would not trigger any amortization event under the ODAF II Facility through June 30, 2021, and made certain technical, definitional, conforming and other changes. On June 15, 2021 all amounts outstanding under the ODAF II Facility were paid in full, and the ODAF II Facility and related credit documents were terminated along with the obligations thereunder and all security interests, pledges and liens were released.
5.
Income Taxes
The Company’s effective tax rate for the nine months ended September 30, 2021 was 24.5%, compared to 17.3% for the nine months ended September 30, 2020. The increase is primarily attributable to the re-measurement of unrecognized tax benefits for the nine months ended September 30, 2020. In the quarter ended September 30, 2020, the Company closed a Joint Committee on Taxation review of certain tax returns that were filed during 2018 in conjunction with the refunds claimed on those returns. The closing of the Joint Committee on Taxation review resulted in re-measurement of unrecognized tax benefit, and a discrete benefit of $11.6 million was recognized as a component of the effective tax rate for the quarter ended September 30, 2020.
As of September 30, 2021, the balance of unrecognized tax benefits was $35.3 million, which is included in “Accounts payable and accrued expenses” on the consolidated balance sheet, $11.7 million of which, if recognized, would favorably affect the effective tax rate in the period of recognition. The Company had $31.5 million and $39.0 million of unrecognized tax benefits as of September 30, 2020 and December 31, 2020, respectively. The Company believes that it has adequately accounted for any material tax uncertainties in its existing reserves for all open tax years.
The Company’s U.S. tax returns are subject to examination by federal and state taxing authorities. The statute of limitations related to the Company’s consolidated Federal income tax returns is closed for all tax years up to and including 2016. However, the 2014 tax year is still open to the extent of the net operating loss that was carried back from the 2019 tax return. The years open to examination by state, local and foreign government authorities vary by jurisdiction, but the statute of limitation is generally three years from the date the tax return is filed. For jurisdictions that have generated net operating losses, carryovers may be subject to the statute of limitations applicable for the year those carryovers are utilized. In these cases, the period for which the losses may be adjusted will extend to conform with the statute of limitations for the year in which the losses are utilized. In most circumstances, this is expected to increase the length of time that the applicable taxing authority may examine the carryovers by one year or longer, in limited cases.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was enacted and signed into U.S. law to provide economic relief to individuals and businesses facing economic hardship as a result of the COVID-19 pandemic. The Company deferred the timing of federal tax estimates and payroll taxes as permitted by the CARES Act and has availed itself of net operating loss carryback provisions.
6.
Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by giving effect to the potential dilution that could occur if securities or other contracts to issue common shares were exercised and converted into common shares during the period. Restricted stock units issued under the Company’s stock-based employee compensation plans are included in diluted shares upon the granting of the awards even though the vesting of shares will occur over time.
17
The following table sets forth the reconciliation of numerators and denominators of basic and diluted earnings per share computations for the three and nine months ended September 30, 2021 and 2020 (in thousands, except per share amounts):
Numerator:
Net income
Denominator:
Total weighted average basic shares
Shares applicable to stock-based compensation
1,240
255
1,320
300
Total weighted average diluted shares
Earnings per common share – basic:
Earnings per common share – basic
Earnings per common share – diluted:
Earnings per common share – diluted
For the three months ended September 30, 2021 and 2020, 76,307 and 2,014,449 shares of common stock underlying stock options, respectively, and 57,398 and 970,273 shares of common stock underlying restricted stock units, respectively, were excluded from the calculation of diluted net income per share because their effect would have been antidilutive. For the nine months ended September 30, 2021 and 2020, 39,399 and 2,064,966 shares of common stock underlying stock options, respectively, and 57,349 and 835,192 shares of common stock underlying restricted stock units, respectively, were excluded from the calculation of diluted net income per share because their effect would have been antidilutive.
7.
Operating Segment Information
The Company provides online financial services to non-prime credit consumers and small businesses in the United States, Australia and Brazil and has one reportable segment. The Company has aggregated all components of its business into a single operating segment based on the similarities of the economic characteristics, the nature of the products and services, the nature of the production and distribution methods, the shared technology platforms, the type of customer and the nature of the regulatory environment.
Geographic Information
The following table presents the Company’s revenue by geographic region for the three and nine months ended September 30, 2021 and 2020 (dollars in thousands):
United States
313,502
203,122
826,923
811,321
Other international countries
6,658
1,423
17,401
8,537
The Company’s long-lived assets, which consist of the Company’s property and equipment, were $81.1 million, $63.4 million and $79.4 million at September 30, 2021 and 2020 and December 31, 2020, respectively. The operations for the Company’s businesses are primarily located within the United States, and the value of any long-lived assets located outside of the United States is immaterial.
18
8.
Commitments and Contingencies
Litigation
On April 23, 2018, the Commonwealth of Virginia, through Attorney General Mark R. Herring, filed a lawsuit in the Circuit Court for the County of Fairfax, Virginia against NC Financial Solutions of Utah, LLC (“NC Utah”), a subsidiary of the Company. The lawsuit alleges violations of the Virginia Consumer Protection Act (“VCPA”) relating to NC Utah’s communications with customers, collections of certain payments, its loan agreements, and the rates it charged to Virginia borrowers. The plaintiff sought to enjoin NC Utah from continuing its then-existing lending practices in Virginia, and still seeks restitution, civil penalties, and costs and expenses in connection with the same. Due to a change in the law, NC Utah no longer lends to Virginia residents and the injunctive remedies sought against NC Utah’s lending practices are no longer applicable. Neither the likelihood of an unfavorable decision nor the ultimate liability, if any, with respect to this matter can be determined at this time, and the Company is currently unable to estimate a range of reasonably possible losses, as defined by ASC 450-20-20, Contingencies–Loss Contingencies–Glossary, for this litigation. The Company carefully considered applicable Virginia law before NC Utah began lending in Virginia and, as a result, believes that the Plaintiff’s claims in the complaint are without merit and intends to vigorously defend this lawsuit.
The Company is also involved in certain routine legal proceedings, claims and litigation matters encountered in the ordinary course of its business. Certain of these matters may be covered to an extent by insurance or by indemnification agreements with third parties. The Company has recorded accruals in its consolidated financial statements for those matters in which it is probable that it has incurred a loss and the amount of the loss, or range of loss, can be reasonably estimated. In the opinion of management, the resolution of these matters will not have a material adverse effect on the Company’s financial position, results of operations or liquidity.
9.
Related Party Transactions
With the acquisition of OnDeck, the Company records its interest in OnDeck Canada under the equity method of accounting; as such, OnDeck Canada is deemed a related party. As of September 30, 2021 and December 31, 2020, the Company had a due from affiliate balance of $1.2 million and $1.2 million, respectively, related to OnDeck Canada that is primarily the result of labor and software charges from people and technology assets at the OnDeck parent company.
On February 24, 2021 the Company contributed the platform-as-service business assumed in the OnDeck acquisition to Linear in exchange for ownership units in that entity. The Company records its interest in Linear under the equity method of accounting. As of September 30, 2021, the Company had a due from affiliate balance of $0.7 million from Linear that is primarily comprised of reimbursable expenses paid by the Company on behalf of Linear and fees for services provided.
10.
Fair Value Measurements
Recurring Fair Value Measurements
The Company uses a hierarchical framework that prioritizes and ranks the market observability of inputs used in its fair value measurements. Market price observability is affected by a number of factors, including the type of asset or liability and the characteristics specific to the asset or liability being measured. Assets and liabilities with readily available, active, quoted market prices or for which fair value can be measured from actively quoted prices generally are deemed to have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. The Company classifies the inputs used to measure fair value into one of three levels as follows:
Level 1: Quoted prices in active markets for identical assets or liabilities.
Level 2: Inputs other than Level 1, quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and model-derived prices whose inputs are observable or whose significant value drivers are observable.
Level 3: Unobservable inputs for the asset or liability measured.
Observable inputs are based on market data obtained from independent sources, while unobservable inputs are based on the Company’s market assumptions. Unobservable inputs require significant management judgment or estimation. In some cases, the inputs used to measure an asset or liability may fall into different levels of the fair value hierarchy. In those cases, the fair value measurement is categorized in its entirety in the same level of the fair value hierarchy as the lowest level of input that is significant to the entire measurement. Such determination requires significant management judgment.
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During the three and nine months ended September 30, 2021 and 2020, there were no transfers of assets or liabilities in or out of Level 1, Level 2 or Level 3 fair value measurements. It is the Company’s policy to value any transfers between levels of the fair value hierarchy based on end of period fair values.
The Company’s financial assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2021 and 2020 and December 31, 2020 are as follows (dollars in thousands):
Fair Value Measurements Using
Level 1
Level 2
Level 3
Financial assets:
Consumer loans and finance receivables(1)(2)
Small business loans and finance receivables(1)(2)
Non-qualified savings plan assets(3)
5,192
Investment in trading security(4)
17,937
1,658,411
23,129
Small business loans and finance receivables(1)
3,544
16,657
713,571
20,201
3,972
19,273
1,264,751
23,245
Consumer and small business loans and finance receivables are included in “Loans and finance receivables at fair value” in the consolidated balance sheets.
Consumer loans and finance receivables include $189.3 million, $339.4 million and $277.6 million in assets of consolidated VIEs as of September 30, 2021 and 2020 and December 31, 2020, respectively. Small business loans and finance receivables include $384.0 million and $251.3 million in assets of consolidated VIEs as of September 30, 2021 and December 31, 2020, respectively.
The non-qualified savings plan assets are included in “Other receivables and prepaid expenses” in the Company’s consolidated balance sheets and have an offsetting liability of equal amount, which is included in “Accounts payable and accrued expenses” in the Company’s consolidated balance sheets.
Investment in trading security is included in “Other assets” in the Company’s consolidated balance sheets.
The Company primarily estimates the fair value of its loan and finance receivables portfolio using discounted cash flow models that have been internally developed. The models use inputs, such as estimated losses, prepayments, utilization rates, servicing costs and discount rates, that are unobservable but reflect the Company’s best estimates of the assumptions a market participant would use to calculate fair value. Certain unobservable inputs may, in isolation, have either a directionally consistent or opposite impact on the fair value of the financial instrument for a given change in that input. An increase to the net loss rate, prepayment rate, servicing cost, or discount rate would decrease the fair value of the Company’s loans and finance receivables. When multiple inputs are used within the valuation techniques for loans, a change in one input in a certain direction may be offset by an opposite change from another input.
The fair value of the nonqualified savings plan assets was deemed Level 1 as they are publicly traded equity securities for which market prices of identical assets are readily observable.
The fair value of the investment in trading security was deemed Level 1 as it is a publicly traded fund with active market pricing that is readily available.
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The Company had no liabilities measured at fair value on a recurring basis as of September 30, 2021 and 2020 and December 31, 2020.
Fair Value Measurements on a Non-Recurring Basis
The Company measures non-financial assets and liabilities such as property and equipment and intangible assets at fair value on a non-recurring basis or when events or circumstances indicate that the carrying amount of the assets may be impaired. At September 30, 2021 and 2020 and December 31, 2020, there were no assets or liabilities recorded at fair value on a non-recurring basis.
Financial Assets and Liabilities Not Measured at Fair Value
The Company’s financial assets and liabilities as of September 30, 2021 and 2020 and December 31, 2020 that are not measured at fair value in the consolidated balance sheets are as follows (dollars in thousands):
Balance at
Restricted cash (1)
Investment in unconsolidated investee (2)
6,918
295,059
Financial liabilities:
Securitization notes
458,958
463,030
8.50% senior notes due 2024
254,495
8.50% senior notes due 2025
387,116
1,083,958
1,104,641
541,968
248,598
250,510
234,383
355,140
873,598
840,033
376,118
330,632
333,532
247,680
367,770
955,632
948,982
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Restricted cash includes $47.2 million, $42.7 million and $64.8 million in assets of consolidated VIEs as of September 30, 2021 and 2020 and December 31, 2020, respectively.
Investment in unconsolidated investee is included in “Other assets” in the consolidated balance sheets.
Cash and cash equivalents and restricted cash bear interest at market rates and have maturities of less than 90 days. The carrying amount of restricted cash and cash equivalents approximates fair value.
The Company measures the fair value of its investment in unconsolidated investee using Level 3 inputs. Because the unconsolidated investee is a private company and financial information is limited, the Company estimates the fair value based on the best available information at the measurement date.
The Company measures the fair value of its revolving line of credit using Level 3 inputs. The Company considered the fair value of its other long-term debt and the timing of expected payment(s).
The fair values of the Company’s Securitization Notes and senior notes are estimated based on quoted prices in markets that are not active, which are deemed Level 2 inputs.
11.
Subsequent Events
Subsequent events have been reviewed through the date these financial statements were issued.
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ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of financial condition, results of operations, liquidity and capital resources and certain factors that may affect future results, including economic and industry-wide factors, of Enova International, Inc. and its subsidiaries should be read in conjunction with our consolidated financial statements and accompanying notes included under Part I, Item 1 of this Quarterly Report on Form 10-Q, as well as with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2020. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. The matters discussed in these forward-looking statements are subject to risk, uncertainties, and other factors that could cause actual results to differ materially from those made, projected or implied in the forward-looking statements. Please see “Risk Factors” and “Cautionary Statement Concerning Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements.
BUSINESS OVERVIEW
We are a leading technology and analytics company focused on providing online financial services. In 2020, we extended approximately $1.2 billion in credit or financing to borrowers and for the nine months ended September 30, 2021, we extended approximately $2.0 billion in credit or financing to borrowers. As of September 30, 2021, we offered or arranged loans or draws on lines of credit to consumers in 38 states in the United States and Brazil. We also offered financing to small businesses in all 50 states and Washington D.C. in the United States. We use our proprietary technology, analytics and customer service capabilities to quickly evaluate, underwrite and fund loans or provide financing, allowing us to offer consumers and small businesses credit or financing when and how they want it. Our customers include the large and growing number of consumers who and small businesses which have bank accounts but use alternative financial services because of their limited access to more traditional credit from banks, credit card companies and other lenders. We were an early entrant into online lending, launching our online business in 2004, and through September 30, 2021, we have completed approximately 54.7 million customer transactions and collected more than 49 terabytes of currently accessible customer behavior data since launch, allowing us to better analyze and underwrite our specific customer base. We have significantly diversified our business over the past several years having expanded the markets we serve and the financing products we offer. These financing products include installment loans and receivables purchase agreements (“RPAs”) and line of credit accounts.
We believe our customers highly value our products and services as an important component of their personal or business finances because our products are convenient, quick and often less expensive than other available alternatives. We attribute the success of our business to our advanced and innovative technology systems, the proprietary analytical models we use to predict the performance of loans and finance receivables, our sophisticated customer acquisition programs, our dedication to customer service and our talented employees.
We have developed proprietary underwriting systems based on data we have collected over our more than 17 years of experience. These systems employ advanced risk analytics, including machine learning and artificial intelligence, to decide whether to approve financing transactions, to structure the amount and terms of the financings we offer pursuant to jurisdiction-specific regulations and to provide customers with their funds quickly and efficiently. Our systems closely monitor collection and portfolio performance data that we use to continually refine machine learning-enabled analytical models and statistical measures used in making our credit, purchase, marketing and collection decisions. Approximately 90% of models used in our analytical environment are machine learning-enabled.
Our flexible and scalable technology platform allows us to process and complete customers’ transactions quickly and efficiently. In 2020, we processed approximately 2.0 million transactions, and we continue to grow our loans and finance receivable portfolios and increase the number of customers we serve through desktop, tablet and mobile platforms. Our highly customizable technology platform allows us to efficiently develop and deploy new products to adapt to evolving regulatory requirements and consumer preference, and to enter new markets quickly. In 2012, we launched a new product in the United States designed to serve near-prime customers. In June 2014, we launched our business in Brazil, where we arrange financing for borrowers through a third-party lender. In addition, in July 2014, we introduced a new line of credit product in the United States to serve the needs of small businesses. In June 2015, we further expanded our product offering by acquiring certain assets of a company that provides financing and installment loans to small businesses by offering RPAs. In January 2020, we acquired Cumulus Funding, Inc. (doing business as Align, “Align”), which offers income share agreements to U.S. consumers with repayment rates based on a percentage of customers’ income. In October 2020, we acquired, through a merger, On Deck Capital Inc. (“OnDeck”), a small business lending company offering lending and funding solutions to small businesses in the U.S., Australia and Canada, to expand our small business offerings. In March 2021, we acquired Pangea Universal Holdings (“Pangea”), which provides mobile international money transfer services to customers in the U.S with a focus on Latin America and Asia. These new products have allowed us to further diversify our product offerings and customer base.
We have been able to consistently acquire new customers and successfully generate repeat business from returning customers when they need financing. We believe our customers are loyal to us because they are satisfied with our products and services. We acquire new customers from a variety of sources, including visits to our own websites, mobile sites or applications, and through direct marketing, affiliate marketing, lead providers and relationships with other lenders. We believe that the online convenience of our products and our 24/7 availability to accept applications with quick approval decisions are important to our customers.
Once a potential customer submits an application, we quickly provide a credit or purchase decision. If a loan or financing is approved, we or our lending partner typically fund the loan or financing the next business day or, in some cases, the same day. During the entire process, from application through payment, we provide access to our well-trained customer service team. All of our operations, from customer acquisition through collections, are structured to build customer satisfaction and loyalty, in the event that a customer has a need for our products in the future. We have developed a series of sophisticated proprietary scoring models to support our various products. We believe that these models are an integral component of our operations and allow us to complete a high volume of customer transactions while actively managing risk and the related credit quality of our loan and finance receivable portfolios. We believe our successful application of these technological innovations differentiates our capabilities relative to competing platforms as evidenced by our history of strong growth and stable credit quality.
PRODUCTS AND SERVICES
Our online financing products and services provide customers with a deposit of funds to their bank account in exchange for a commitment to repay the amount deposited plus fees, interest and/or revenue on the receivables purchased. We originate, arrange, guarantee or purchase installment loans, line of credit accounts, receivables purchase agreements (“RPAs”) and income share agreements to consumers and small businesses. We have one reportable segment that includes all of our online financial services.
Installment loans. Installment loans include longer-term loans that require the outstanding principal balance to be paid down in multiple installments and shorter-term single payment loans. Our installment loans are either written directly by us, purchased as part of our Banking Programs as discussed below, or are those that we arrange and guarantee as part of our credit services organization and credit access business programs, which we refer to as our CSO programs. We offer, or arrange through CSO programs, multi- or single-payment unsecured consumer loan products in 38 states in the United States and small business installment loans in 47 states and in Washington D.C. We also offer or arrange multi-payment unsecured consumer installment loan products in Brazil and small business installment loan products in Australia and Canada. Terms for our installment loan products range between two and 60 months, and single-pay consumer loans generally have terms of seven to 90 days. Loans may be repaid early at any time with no additional prepayment charges.
Line of credit accounts. We directly offer, or purchase a participation interest in receivables through our Bank Programs, new consumer line of credit accounts in 31 states (and continue to service existing line of credit accounts in one additional state) in the United States and business line of credit accounts in 47 states and in Washington D.C. in the United States, which allow customers to draw on their unsecured line of credit in increments of their choosing up to their credit limit. Customers may pay off their account balance in full at any time or make required minimum payments in accordance with the terms of the line of credit account. We also offer small business line of credit accounts in Canada. As long as the customer’s account is in good standing and has credit available, customers may continue to borrow on their line of credit.
Receivables purchase agreements. Under RPAs, small businesses receive funds in exchange for a portion of the business’s future receivables at an agreed upon discount. In contrast, lending is a commitment to repay principal and interest and/or fees. A small business customer who enters into an RPA commits to delivering a percentage of its receivables through ACH or wire debits or by splitting credit card receipts until all purchased receivables are delivered. We offer RPAs in all 50 states and in Washington D.C. in the United States.
Income share agreements. Under income share agreements, consumers receive funds in exchange for a percentage of their future income for a set period of time. Unlike a loan, which is a commitment to repay principal and interest and/or fees, with income share structures, payments are based on the consumer’s income and can go all the way to zero if, among other things, the consumer becomes unemployed. We believe the income share agreement product to be promising but is still a nascent offering for us.
CSO programs. We currently operate a CSO program in Texas. Through CSO programs, we provide services related to third-party lenders’ multi- and single-pay installment consumer loan products by acting as a credit services organization or credit access business on behalf of consumers in accordance with applicable state laws. Services offered under our CSO program include credit-related services such as arranging loans with independent third-party lenders and assisting in the preparation of loan applications and loan documents (“CSO loans”). When a consumer executes an agreement with us under our CSO program, we agree, for a fee payable to us by the consumer, to provide certain services, one of which is to guarantee the consumer’s obligation to repay the loan received by the consumer from the third-party lender if the consumer fails to do so. For CSO loans, each lender is responsible for providing the criteria by which the consumer’s application is underwritten and, if approved, determining the amount of the consumer loan. We, in turn, are responsible for assessing whether or not we will guarantee such
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loan. The guarantee represents an obligation to purchase specific single-payment loans, which for our CSO program, have terms of less than 90 days, and specific installment loans, which have terms of up to six months, if they go into default.
Bank program. We operate a program with a bank to provide marketing services and loan servicing for near-prime unsecured consumer installment loans and, beginning in January 2021, line of credit accounts. Under the program, we receive marketing and servicing fees while the bank receives an origination fee. The bank has the ability to sell and we have the option, but not the requirement, to purchase the loans the bank originates and, in the case of line of credit accounts, a participation interest in the receivables from draws on those accounts. We do not guarantee the performance of the loans and line of credit accounts originated by the bank. As part of the OnDeck business both prior and subsequent to Enova’s acquisition, OnDeck operates a program with a separate bank to provide marketing services and loan servicing for small business installment loans and line of credit accounts. Under the OnDeck program, we receive marketing fees while the bank receives origination fees and certain program fees. The bank has the ability to sell and we have the option, but not the requirement, to purchase the installment loans the bank originates and, in the case of line of credit accounts, extensions under those line of credit accounts. We do not guarantee the performance of the loans or line of credit accounts originated by the bank.
Money transfer business. Through the acquisition of Pangea, we operate a money transfer platform that allows customers to send money from the United States to Mexico, other Latin American countries and Asia. The customer pays us in U.S. dollars, and we then make local currency available to the intended recipient of the transfer in one of many termination countries. Our revenue model includes a fee per transfer and an exchange rate spread. Our customers can access our proprietary platform via the website, Android app, or iOS (Apple) app.
OUR MARKETS
We currently provide our services in the following countries:
United States. We began our online business in the United States in May 2004. As of September 30, 2021, we provided services in all 50 states and Washington D.C. We market our financing products under the names CashNetUSA at www.cashnetusa.com, NetCredit at www.netcredit.com, OnDeck at www.ondeck.com, Headway Capital at www.headwaycapital.com, The Business Backer at www.businessbacker.com, Align at www.helloalign.com and Pangea at www.pangeamoneytransfer.com.
Brazil. In June 2014, we launched our business in Brazil under the name Simplic at www.simplic.com.br, where we arrange installment loans for a third-party lender. We plan to continue to invest in and expand our financial services program in Brazil.
Australia. As part of our acquisition of OnDeck in October 2020, we offer installment loans to small businesses in Australia through a majority-owned subsidiary.
Canada. As part of our acquisition of OnDeck in October 2020, we offer installment loans and line of credit accounts to small businesses in Canada through an affiliate that we classify as an equity method investment.
Our internet websites and the information contained therein or connected thereto are not intended to be incorporated by reference into this Quarterly Report on Form 10-Q.
RECENT REGULATORY DEVELOPMENTS
Consumer Financial Protection Bureau (“CFPB”)
We received a Civil Investigative Demand (“CID”) from the CFPB concerning certain loan processing issues. We have been cooperating fully with the CFPB by providing data and information in response to the CID. We anticipate being able to expeditiously complete the investigation as several of the issues were self‐disclosed and we have provided, and will continue to provide, restitution to customers who may have been negatively impacted.
On October 6, 2017, the CFPB issued its final rule entitled “Payday, Vehicle Title, and Certain High-Cost Installment Loans” (the “Small Dollar Rule”), which covers certain loans that we offer. The Small Dollar Rule requires that lenders who make short-term loans and longer-term loans with balloon payments reasonably determine consumers’ ability to repay the loans according to their terms before issuing the loans. The Small Dollar Rule also introduces new limitations on repayment processes for those lenders as well as lenders of other longer-term loans with an annual percentage rate greater than 36 percent that include an ACH authorization or similar payment provision. If a consumer has two consecutive failed payment attempts, the lender must obtain the consumer’s new and specific authorization to make further withdrawals from the consumer’s bank account. For loans covered by the Small Dollar Rule, lenders must provide certain notices to consumers before attempting a first payment withdrawal or an unusual withdrawal and after two consecutive failed withdrawal attempts. On June 7, 2019, the CFPB issued a final rule to set the compliance date for the mandatory underwriting provisions of the Small Dollar Rule to November 19, 2020. On July 7, 2020, the CFPB issued a final rule rescinding the ability to repay (“ATR”) provisions of the Small Dollar Rule along with related provisions, such as the establishment of registered information systems for checking ATR and reporting loan activity.
Virginia SB 421
On March 7, 2020, SB 421 passed through both houses of the Virginia Legislature. The bill amends laws governing open-end lines of credit to cap interest and fees at 36% annual interest plus a $50 annual participation fee. Further, the law would allow Virginia-licensed lenders to make installment loans at 36% APR plus a loan processing fee equal to the greater of $75 or 5% of the principal loan amount, but not exceeding $150. The law went into effect on January 1, 2021.
Illinois SB 1792
On March 23, 2021, the Economic Equity Act (“EEA”) became effective in Illinois. The EEA implements a 36% rate cap on all consumer lending, with the APR calculated consistent with the Military Lending Act’s Military Annual Percentage Rate. The EEA applies to consumer loans originated on or after the effective date. In addition, the EEA provides for the application of a predominant economic interest test for bank service arrangements. Pursuant to the economic interest test, a broker or service with a predominant economic interest in a loan is considered to be the “true lender” for purposes of applying the EEA and the 36% rate cap.
Brazil General Data Privacy Law
On August 14, 2018, Brazil adopted the General Data Privacy Law (Lei Geral de Proteção de Dados Pessoais or “LGPD”). The key provisions of LGPD are quite similar to the European Union’s General Data Protection Regulation (“GDPR”) in that it grants certain rights to data subjects, imposes obligations on companies with regard to the processing of data, and allows authorities to impose substantial fines on companies that violate the law. LGPD was originally anticipated to go into effect on February 15, 2020; however, several amendments to LGPD delayed the effective date. LGPD took effect on September 18, 2020, and enforcement of the penalties and sanctions for non-compliance began August 1, 2021. Compliance with LGPD may increase the cost of conducting business in Brazil, and we could see regulatory compliance costs and enforcement activity now that the law is in effect.
RESULTS OF OPERATIONS
COVID-19
The COVID-19 pandemic has severely impacted global economic conditions, resulting in substantial volatility in the financial markets, increased unemployment, and operational challenges resulting from measures that governments have imposed to control its spread. We have implemented a number of procedures in response to the pandemic to support the safety and well-being of our employees, customers and stockholders that continue through the date of this report:
As shelter-in-place orders and general distancing guidelines were released, we moved quickly to transition virtually all of our employees to a remote work environment.
We are actively working with our customers to understand their financial situations, waive late fees, offer a variety of repayment options to increase flexibility and reduce or defer payments for impacted customers.
We took measures to adjust our underwriting procedures, which reduced exposure to more heavily impacted consumers and businesses.
We adjusted loan and draw sizes as well as shortened duration in an effort to reduce risk in this volatile environment.
From a loan valuation perspective, the COVID-19 pandemic significantly increases the potential variability of our expected cash flows. We deemed it appropriate to increase the discount rate to capture the increase in potential volatility in expected cash flows due to the unprecedented nature of this pandemic and governmental response. As of March 31, 2020, after adjusting the discount rate for the decrease in underlying interest rates, we increased the rate by 500 basis points based on what we deemed a market participant would require to assume the additional risk. Consequently, the associated fair values of these loans were adjusted lower as part of the standard process in our internally-developed valuation models. These rates remained consistent for the remainder of 2020. During the first two quarters of 2021, we noted a tightening of credit spreads in observable pricing in the market; as such, we reduced the discount rate used in our valuations as of March 31, 2021 by 100 basis points and as of June 30, 2021 by another 100 basis points. As of September 30, 2021, our discount rates are still higher than those used immediately prior to the COVID-19 pandemic, which we believe is representative of what a market participant would use due to the continued high level of risk and potential volatility.
The number of loans with payment deferrals or other modifications increased meaningfully toward the end of the first quarter and into the second quarter of 2020. These requests for deferrals and modifications decreased meaningfully over the remainder of 2020 and into 2021. Since the beginning of the pandemic, we have assessed performance of borrowers that had elected to defer or modify loan payments during the pandemic. As of September 30, 2021, our collection data does not appear to indicate increased risk with these borrowers. As modifications and deferrals do not appear to be a strong indicator of future activity, we did not make an adjustment to the fair value of these loans at September 30, 2021 based on current or past modification or deferral.
After seeing increases in delinquency and charge-offs early in the pandemic, we experienced significant improvements to these metrics over the remainder of 2020 and into 2021. Both delinquencies and charge-offs in the first quarter of 2021 are below the pre-COVID period. The U.S. government passed additional stimulus packages in December 2020 and March 2021, which included stimulus checks to consumers and additional funding into the Paycheck Protection Program (“PPP”) for businesses. Positive COVID-19 test counts in the U.S. generally decreased across the first half of 2021 although rose again in the third quarter with the spread of the Delta variant. With deceleration in vaccination rates, the emergence of new and more infectious COVID strains, and questions on the efficacy of the vaccines in use against new variants, there remains significant concern among public health officials and governmental bodies on the forward trajectory of the pandemic and its impacts on the economy. In evaluating inputs to our valuation models as of September 30, 2021, we noted that delinquencies and charge-off experience were low, both of which were likely to have been favorably impacted by governmental stimulus efforts. Future stimulus is uncertain and, if not provided at the same levels or at all, could cause future behavior to deviate from past performance. Similar to our loan valuations at December 31, 2020, March 31, 2021 and June 30, 2021, management concluded that the probability of future charge-offs was higher than what we had experienced in the past and, therefore, increased anticipated charge-offs in our fair value models, which reduced the fair value of our portfolio at September 30, 2021. We deemed the resulting fair value to be an appropriate market-based exit price that considers current market conditions at September 30, 2021.
We continue to closely monitor this pandemic and expect to make future changes to respond to the situation as it continues to evolve.
HIGHLIGHTS
Our financial results for the three-month period ended September 30, 2021, or the current quarter, are summarized below.
Consolidated total revenue increased $115.7 million, or 56.5%, to $320.2 million in the current quarter compared to $204.5 million for the three months ended September 30, 2020, or the prior year quarter.
Consolidated net revenue was $246.4 million compared to $181.8 million in the prior year quarter.
Consolidated income from operations decreased $35.8 million, or 29.3%, to $86.2 million in the current quarter, compared to $122.0 million in the prior year quarter.
Consolidated net income was $51.5 million in the current quarter compared to $93.7 million in the prior year quarter. Consolidated diluted income per share was $1.36 in the current quarter compared to $3.09 in the prior year quarter.
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OVERVIEW
The following tables reflect our results of operations for the periods indicated, both in dollars and as a percentage of total revenue (dollars in thousands, except per share data):
Three Months Ended September 30,
Nine Months Ended September 30,
Loans and finance receivables revenue
Total Revenue
Earnings (loss) per common share - diluted:
Total earnings (loss) per common share - diluted
98.7
%
99.4
1.3
0.6
100.0
(23.0
(11.1
(11.9
(46.2
77.0
88.9
88.1
53.8
24.9
2.3
19.4
5.2
11.9
8.7
12.8
8.0
10.5
16.5
13.8
10.2
2.8
1.8
2.7
1.4
50.1
29.3
48.7
24.8
26.9
59.6
39.4
29.0
(5.7
(9.1
(6.8
(7.2
0.2
0.3
(0.2
21.4
50.5
32.7
21.8
4.7
3.8
16.2
45.8
24.7
18.0
0.1
16.1
24.6
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NON-GAAP FINANCIAL MEASURES
In addition to the financial information prepared in conformity with generally accepted accounting principles (“GAAP”), we provide historical non-GAAP financial information. We believe that presentation of non-GAAP financial information is meaningful and useful in understanding the activities and business metrics of our operations. We believe that these non-GAAP financial measures reflect an additional way of viewing aspects of our business that, when viewed with our GAAP results, provide a more complete understanding of factors and trends affecting our business. Readers should consider the information in addition to, but not instead of or superior to, our consolidated financial statements prepared in accordance with GAAP. This non-GAAP financial information may be determined or calculated differently by other companies, limiting the usefulness of those measures for comparative purposes.
Adjusted Earnings Measures
In addition to reporting financial results in accordance with GAAP, we have provided adjusted earnings and adjusted earnings per share, or, collectively, the Adjusted Earnings Measures, which are non-GAAP measures. We believe that the presentation of these measures provides investors with greater transparency and facilitates comparison of operating results across a broad spectrum of companies with varying capital structures, compensation strategies, derivative instruments and amortization methods, which provides a more complete understanding of our financial performance, competitive position and prospects for the future. We also believe that investors regularly rely on non-GAAP financial measures, such as the Adjusted Earnings Measures, to assess operating performance and that such measures may highlight trends in our business that may not otherwise be apparent when relying on financial measures calculated in accordance with GAAP. In addition, we believe that the adjustments shown below are useful to investors in order to allow them to compare our financial results during the periods shown without the effect of each of these income or expense items.
The following table provides reconciliations between net income and diluted earnings per share calculated in accordance with GAAP to the Adjusted Earnings Measures (in thousands, except per share data):
Adjustments:
Transaction-related costs(a)
6,593
1,424
Lease termination and cease-use loss (gain)(b)
Other nonoperating expenses(c)
1,128
Intangible asset amortization
2,013
4,848
562
102
30
373
Cumulative tax effect of adjustments
(1,581
(2,454
(5,843
(4,251
Discrete tax adjustments
(11,604
Adjusted earnings
56,987
90,036
225,534
149,645
Diluted earnings per share from continuing operations
Transaction-related costs
0.22
0.04
0.21
0.03
0.05
0.13
0.02
0.12
0.42
0.35
0.01
(0.04
(0.08
(0.16
(0.14
(0.38
(0.37
Adjusted earnings per share
1.50
2.97
5.95
4.80
(a)
In the first quarter of 2021, we incurred expenses totaling $1.4 million ($1.1 million net of tax) related to acquisitions and a divestiture of a subsidiary. In the third quarter of 2020, we incurred expenses totaling $6.6 million ($5.0 million net of tax) related to an acquisition.
(b)
In the third quarter of 2021, we recorded a gain of $0.1 million ($0.1 million net of tax) related to the exit of leased office space.
(c)
In the first quarter of 2021, we recorded other nonoperating expenses of $0.4 million ($0.3 million net of tax) related to the repurchase of securitization notes. In the second quarter of 2021, we recorded other nonoperating expenses of $0.8 million ($0.6 million net of tax) related to an incomplete transaction.
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Adjusted EBITDA
The table below shows Adjusted EBITDA, which is a non-GAAP measure that we define as earnings excluding depreciation, amortization, interest, foreign currency transaction gains or losses, taxes and stock-based compensation expense. We believe Adjusted EBITDA is used by investors to analyze operating performance and evaluate our ability to incur and service debt and our capacity for making capital expenditures. Adjusted EBITDA is also useful to investors to help assess our estimated enterprise value. In addition, we believe that the adjustments for transaction-related costs, lease termination and cease-use loss (gain), other nonoperating expenses and equity method investment income shown below are useful to investors in order to allow them to compare our financial results during the periods shown without the effect of the income or expense items. The computation of Adjusted EBITDA, as presented below, may differ from the computation of similarly-titled measures provided by other companies (in thousands):
Depreciation and amortization expenses
8,912
22,990
17,966
18,634
57,013
59,387
Adjustment:
(529
(2,558
99,571
136,142
371,581
266,581
Adjusted EBITDA margin calculated as follows:
Adjusted EBITDA as a percentage of total revenue
31.1
66.6
44.0
32.5
In the first quarter of 2021, we incurred expenses totaling $1.4 million related to acquisitions and a divestiture of a subsidiary. In the third quarter of 2020, we incurred expenses totaling $6.6 million related to an acquisition.
In the third quarter of 2021, we recorded a gain of $0.1 million related to the exit of leased office space.
In the first quarter of 2021, we recorded other nonoperating expenses of $0.4 million related to the repurchase of securitization notes. In the second quarter of 2021, we recorded other nonoperating expenses of $0.8 million related to an incomplete transaction.
Constant Currency Basis
In addition to reporting financial results in accordance with GAAP, we have provided certain other non-GAAP financial information on a constant currency basis. Outside of the United States, we currently operate in Brazil and, with the acquisition of OnDeck Australia. During the current quarter, 2.1% of our revenue originated in currencies other than the U.S. Dollar, principally the Brazilian Real and Australian Dollar. As a result, changes in our reported revenue and profits include the impacts of changes in foreign currency exchange rates. We provide constant currency assessments in the following discussion and analysis to isolate the impact of the fluctuation in foreign exchange rates and utilize constant currency results in our analysis of performance. Our constant currency assessment assumes foreign exchange rates in the current fiscal periods remained the same as in the prior fiscal year periods. All conversion rates below are based on the U.S. Dollar equivalent to the applicable foreign currency:
% Change
Australian dollar
0.7346
N/A
Brazilian real
0.1911
0.1858
2.9
0.7591
0.1877
0.1989
(5.6
)%
We believe that our non-GAAP constant currency assessments are a useful measure, as they indicate the actual growth and profitability of our operations.
Combined Loans and Finance Receivables Measures
In addition to reporting loans and finance receivables balance information in accordance with GAAP (see Note 2 in the Notes to Consolidated Financial Statements included in this report), we have provided metrics on a combined basis. The Combined Loans and Finance Receivables Measures are non-GAAP measures that include both loans and RPAs we own or have purchased and loans we guarantee, which are either GAAP items or disclosures required by GAAP. See “—Loan and Finance Receivable Balances” and “—Credit Performance of Loans and Finance Receivables” below for reconciliations between Company owned and purchased loans and finance receivables, gross, change in fair value and charge-offs (net of recoveries) calculated in accordance with GAAP to the Combined Loans and Finance Receivables Measures.
We believe these non-GAAP measures provide investors with important information needed to evaluate the magnitude of potential receivable losses and the opportunity for revenue performance of the loans and finance receivable portfolio on an aggregate basis. We also believe that the comparison of the aggregate amounts from period to period is more meaningful than comparing only the amounts reflected on our consolidated balance sheet since both revenue and cost of revenue are impacted by the aggregate amount of receivables we own and those we guarantee as reflected in our consolidated financial statements.
THREE MONTHS ENDED SEPTEMBER 30, 2021 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2020
Revenue and Net Revenue
Revenue increased $115.7 million, or 56.5%, to $320.2 million for the current quarter as compared to $204.5 million for the prior year quarter. On a constant currency basis, revenue increased by $115.4 million, or 56.4%, for the current quarter compared to the prior year quarter. The increase was driven by an 829.0% increase in revenue from our small business portfolio, due primarily to the acquisition of OnDeck, and an 11.9% increase in revenue from our consumer portfolio as originations that had been reduced in the prior year due to the COVID-19 pandemic have increased in the current year.
Net revenue for the current quarter was $246.4 million compared to $181.8 million for the prior year quarter. Our consolidated net revenue margin was 77.0% for the current quarter compared to 88.9% for the prior year quarter. The decrease in net revenue margin was driven by higher delinquency rates and expected charge-offs in the consumer portfolio, which coincide with the increase in originations.
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The following table sets forth the components of revenue and net revenue, separated by product for the current quarter and the prior year quarter (in thousands):
$ Change
Revenue by product:
22,865
89,780
829.0
112,645
55.4
2,970
258.7
115,615
56.5
Change in fair value
(51,001
223.9
Net revenue
64,614
35.5
Revenue by product (% to total):
67.3
94.1
31.4
5.3
Loan and Finance Receivable Balances
The fair value of our loan and finance receivable portfolio in our consolidated financial statements at September 30, 2021 was $1,635.3 million and $693.4 million as of September 30, 2021 and 2020, respectively. The outstanding principal balance of our loan and finance receivables portfolio was $1,586.4 million and $651.3 million as of September 30, 2021 and 2020, respectively. The fair value of the combined loan and finance receivables portfolio includes $16.9 million and $7.4 million with an outstanding principal balance of $11.4 million and $6.9 million of consumer loan balances that are guaranteed by us but not owned by us, which are not included in our consolidated financial statements as of September 30, 2021 and 2020, respectively.
Our small business portfolio of loans and finance receivables increased significantly to 55.2% of our combined loan and finance receivable portfolio as of September 30, 2021, compared to 10.8% as of September 30, 2020 due primarily to the acquisition of OnDeck in October 2020. The consumer portfolio balance decreased to 44.8% of our combined loan and finance receivable portfolio balance as of September 30, 2021, compared to 89.2% as of September 30, 2020. See “—Non-GAAP Disclosure—Combined Loans and Finance Receivables Measures” above for additional information related to combined loans and finance receivables.
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The following tables summarize loan and finance receivable balances outstanding as of September 30, 2021 and 2020 (in thousands):
Guaranteed
Company
by the
Owned(a)
Company(a)
Combined
Combined(b)
Consumer loans and finance receivables
Principal
11,354
721,135
6,905
576,461
Fair value
16,921
740,474
7,411
625,332
Fair value as a % of principal
101.9
149.0
102.7
108.5
107.3
Small business loans and finance receivables
104.0
92.3
Total loans and finance receivables
1,597,803
658,194
1,652,203
700,781
103.1
103.4
106.5
GAAP measure. The loans and finance receivables balances guaranteed by us relate to loans originated by third-party lenders through the CSO programs that we have not yet purchased and, therefore, are not included in our consolidated financial statements.
At September 30, 2021 and 2020, the ratio of fair value as a percentage of principal was 103.1% and 106.5%, respectively, on company owned loans and finance receivables and 103.4% and 106.5%, respectively, on combined loans and finance receivables. These ratios decreased compared to the prior year due primarily to the increase in originations in the consumer portfolio in the current year, particularly to new customers, which carry a higher risk of charge-off.
Average Amount Outstanding per Loan and Finance Receivable
The average amount outstanding per loan and finance receivable is calculated as the total combined loans and finance receivables, gross balance at the end of the period divided by the total number of combined loans and finance receivables outstanding at the end of the period. The following table shows the average amount outstanding per loan and finance receivable by product at September 30, 2021 and 2020:
As of September 30,
Average amount outstanding per loan and finance receivable(a)
Consumer loans and finance receivables(b)
1,812
1,878
33,581
15,770
Total loans and finance receivables(b)
3,633
2,098
The disclosure regarding the average amount per loan and finance receivable is statistical data that is not included in our consolidated financial statements.
Includes loans guaranteed by us, which represent loans originated by third-party lenders through the CSO programs that we have not yet purchased and, therefore, are not included in our consolidated financial statements.
The average amount outstanding per loan and finance receivable increased to $3,633 from $2,098 during the current quarter compared to the prior year quarter, due primarily to an increase in the mix of loans and finance receivables held by small businesses in our portfolio as a result of our acquisition of OnDeck in October 2020.
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Average Loan and Finance Receivable Origination
The average loan and finance receivable origination amount is calculated as the total amount of combined loans and finance receivables originated, renewed and purchased for the period divided by the total number of combined loans and finance receivables originated, renewed and purchased for the period. The following table shows the average loan and finance receivable origination amount by product for the current quarter compared to the prior year quarter:
Average loan and finance receivable origination amount(a)
Consumer loans and finance receivables(b)(c)
664
328
Small business loans and finance receivables(c)
15,610
21,369
1,372
334
The disclosure regarding the average loan origination amount is statistical data that is not included in our consolidated financial statements.
For line of credit accounts the average represents the average amount of each incremental draw.
The average loan and finance receivable origination amount increased to $1,372 from $334 during the current quarter compared to the prior year quarter, due primarily to an increase in the mix of higher dollar amount loans and finance receivables to small businesses as a result of our acquisition of OnDeck in 2020.
Credit Performance of Loans and Finance Receivables
We monitor the performance of our loans and finance receivables. Internal factors such as portfolio composition (e.g., interest rate, loan term, geography information, customer mix, credit quality) and performance (e.g., delinquency, loss trends, prepayment rates) are reviewed on a regular basis at various levels (e.g., product, vintage). We also weigh the impact of relevant, internal business decisions on portfolio. External factors such as macroeconomic trends, financial market liquidity expectations, competitive landscape and legal/regulatory requirements are also reviewed on a regular basis.
The payment status of a customer, including the degree of any delinquency, is a significant factor in determining estimated charge-offs in the cash flow models that we use to determine fair value. The following table shows payment status on outstanding principal, interest and fees as of the end of each of the last five quarters (in thousands):
Third
Fourth
First
Second
Quarter
Ending combined loans and finance receivables, including principal and accrued fees/interest outstanding:
Company owned
698,964
1,310,171
1,265,987
1,416,533
1,650,771
Guaranteed by the Company(a)
8,100
10,163
6,792
9,655
13,239
Ending combined loan and finance receivables balance(b)
707,064
1,320,334
1,272,779
1,426,188
1,664,010
> 30 days delinquent
25,841
122,666
96,228
81,883
90,782
> 30 days delinquency rate
3.7
9.3
7.6
5.7
5.5
Represents loans originated by third-party lenders through the CSO programs that we have not yet purchased, which are not included in our consolidated balance sheets.
Non-GAAP measure.
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Consumer Loans and Finance Receivables
The following table includes financial information for our consumer loans and finance receivables. Delinquency metrics include principal, interest and fees, and only amounts that are past due (in thousands):
Consumer loans and finance receivables:
Consumer combined loan and finance receivable principal balance:
523,170
585,087
8,845
5,691
8,284
Total combined loan and finance receivable principal balance(b)
585,249
528,861
593,371
Consumer combined loan and finance receivable fair value balance:
581,398
10,289
7,246
10,824
Ending combined loan and finance receivable fair value balance(b)
635,508
588,644
634,799
Fair value as a % of principal(b)(c)
108.6
111.3
107.0
Consumer combined loan and finance receivable balance, including principal and accrued fees/interest outstanding:
614,676
619,088
564,934
630,203
768,964
Ending combined loan and finance receivable balance(b)
622,776
629,251
571,726
639,858
782,203
Average consumer combined loan and finance receivable balance, including principal and accrued fees/interest outstanding:
Company owned(d)
646,137
613,683
598,900
580,704
702,818
Guaranteed by the Company(a)(d)
6,855
8,861
8,670
7,585
11,366
Average combined loan and finance receivable balance(b)(d)
652,992
622,544
607,570
588,289
714,184
196,880
181,737
174,512
(24,378
(31,167
(26,073
(49,708
(97,061
168,189
165,713
155,664
124,804
118,371
Net revenue margin
87.3
84.2
85.7
71.5
54.9
Change in fair value as a % of average combined loan and finance receivable balance(b)(d)
5.0
4.3
8.4
13.6
Delinquencies:
21,559
24,793
24,589
26,201
45,804
> 30 days delinquent as a % of combined loan and finance receivable balance(b)(c)
3.5
3.9
4.1
5.9
Charge-offs:
Charge-offs (net of recoveries)
30,670
34,035
36,408
27,050
57,836
Charge-offs (net of recoveries) as a % of average combined loan and finance receivable balance(b)(d)
6.0
4.6
8.1
Determined using period-end balances.
(d)
The average combined loan and finance receivable balance is the average of the month-end balances during the period.
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The ending balance, including principal and accrued fees/interest outstanding, of combined consumer loans and finance receivables at September 30, 2021 increased 25.6% to $782.2 million compared to $622.8 million at September 30, 2020, due primarily to increased originations in the current year following the strategic reduction in originations in the prior year to mitigate risks associated with the COVID-19 pandemic.
The percentage of loans greater than 30 days delinquent increased to 5.9% at September 30, 2021, compared to 3.5% at September 30, 2020. The increase was driven primarily by growth in originations in the current year, particularly to new customers, which typically default at a higher percentage than returning customers. At September 30, 2020, this delinquency rate was lower due to our having a more seasoned and lower risk portfolio due to reduced originations as well as our belief that credit was favorably impacted by governmental stimulus efforts.
Charge-offs (net of recoveries) as a percentage of average combined loan balance increased to 8.1% for the current quarter, compared to 4.7% for the prior year quarter, driven primarily by growth in originations, particularly to new customers, which typically default at a higher percentage than returning customers. In the prior year quarter, this charge-off rate was lower due primarily to our having a more seasoned and lower risk portfolio remaining as originations since the onset of the COVID-19 pandemic had been significantly lower and the majority of higher risk loans to new customers originated in prior quarters had been charged off.
The ratio of fair value as a percentage of principal on consumer loans and finance receivables was 102.7% at September 30, 2021, compared to 108.5% at September 30, 2020 and 107.0% at June 30, 2021. The decrease from June 30, 2021 was primarily driven by the acceleration of originations across the third quarter, particularly to new customers, which carry a higher risk of charge-off. Refer also to “Results of Operations—COVID-19” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional discussion on loan valuation.
Small Business Loans and Finance Receivables
The following table includes financial information for our small business loans and finance receivables. Delinquency metrics include principal, interest, and fees, and only amounts that are past due (in thousands):
Small business loans and finance receivables:
Total loan and finance receivable principal balance
696,678
781,793
Ending loan and finance receivable fair value balance
649,313
Fair value as a % of principal(a)
89.7
93.2
100.4
Ending loan and finance receivable balance, including principal and accrued fees/interest outstanding
84,288
691,083
701,053
786,330
881,807
Average loan and finance receivable balance(b)
101,819
539,675
700,348
739,378
837,606
64,419
75,560
85,561
1,601
10,818
4,995
45,078
24,515
12,431
75,237
80,555
130,639
125,125
114.8
116.8
106.6
152.7
124.4
Change in fair value as a % of average loan balance(b)
(1.6
(2.0
(0.7
(6.1
(2.9
4,282
97,873
71,639
55,682
44,978
> 30 days delinquent as a % of loan balance(a)
5.1
14.2
7.1
4,496
21,052
18,042
5,102
7,060
Charge-offs (net of recoveries) as a % of average loan and finance receivable balance(b)
4.4
2.6
0.7
0.8
The average loan and finance receivable balance is the average of the month-end balances during the period.
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The ending balance, including principal and accrued fees/interest outstanding, of small business loans and finance receivables at September 30, 2021 increased 946.2% to $881.8 million compared to $84.3 million at September 30, 2020, due primarily to the acquisition of OnDeck in the fourth quarter of 2020. Excluding OnDeck, the ending balance, including principal and accrued fees/interest outstanding, of small business loans and finance receivables at September 30, 2021 increased 120.8% due primarily to increasing originations since the third quarter of 2020.
The percentage of loans greater than 30 days delinquent was flat at 5.1% at September 30, 2021, compared to September 30, 2020. This percentage was impacted favorably by improvement in delinquency metrics in our legacy small business portfolio, offset by the inclusion of OnDeck loans, which have a higher percentage of loans greater than 30 days delinquent. Since the acquisition of OnDeck, delinquency has improved in all of our small business portfolios, as we have actively worked with our customers to understand their financial situations, offering a variety of repayment options to increase flexibility and reducing or deferring payments for impacted customers.
Charge-offs (net of recoveries) as a percentage of average loan balance decreased to 0.8% for the current quarter, compared to 4.4% in the prior year quarter, due primarily to the recovery of the broader economy, our efforts to assist customers and the impact of governmental stimulus.
The ratio of fair value as a percentage of principal on small business loans and finance receivables was 104.0% at September 30, 2021, compared to 92.3% at September 30, 2020 and 100.4% at June 30, 2021. The increase from June 30, 2021 was due primarily to strong cash collections and improvements in anticipated cash flow in our valuation models due to reduced risk. The ratio of fair value as a percentage of principal has improved for the legacy Enova portfolio since the second quarter of 2020 and the OnDeck portfolio since acquisition.
Total expenses increased $100.4 million, or 168.0%, to $160.2 million in the current quarter, compared to $59.8 million in the prior year quarter. On a constant currency basis, total expenses increased $100.3 million, or 167.8%, in the current quarter as compared to the prior year quarter.
Marketing expense increased to $79.7 million in the current quarter compared to $4.6 million in the prior year quarter due primarily to our efforts to capture increasing market demand for loan products in the current quarter. The prior year quarter was abnormally low due to our strategic actions to mitigate risks associated with the COVID-19 pandemic.
Operations and technology expense increased to $38.0 million in the current quarter compared to $17.7 million in the prior year quarter, due primarily to the acquisition of OnDeck in October 2020 and higher variable underwriting costs due to the increase in originations.
General and administrative expense decreased slightly to $33.6 million in the current quarter compared to $33.7 million in the prior year quarter, due primarily to the acquisition of OnDeck in October 2020, partially offset by various cost containment initiatives implemented to mitigate the impact of COVID-19.
Depreciation and amortization expense increased $5.1 million or 136.4% compared to the prior year quarter driven primarily by fixed assets and intangible assets acquired with OnDeck and Pangea and, to a lesser extent, additional internally-developed software placed into service.
Interest Expense, Net
Interest expense, net decreased $0.5 million, or 2.5%, to $18.1 million in the current quarter compared to $18.6 million in the prior year quarter. The decrease was due primarily to a decrease in the weighted average interest rate on our outstanding debt to 6.65% during the current quarter from 8.38% during the prior year quarter, partially offset by an increase in the average amount of debt outstanding, which increased $180.9 million to $1,065.4 million during the current quarter from $884.5 million during the prior year quarter.
Provision for Income Taxes
The effective tax rate from continuing operations of 24.3% in the current quarter was higher than the 9.4% rate recorded in the prior year quarter due primarily to re-measurement of unrecognized tax benefits in the prior year quarter .
As of September 30, 2021, the balance of unrecognized tax benefits was $35.3 million which is included in “Accounts payable and accrued expenses” on the consolidated balance sheet, $11.7 million of which, if recognized, would favorably affect the effective tax
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rate in the period of recognition. We had $31.5 million and $39.0 million of unrecognized tax benefits as of September 30, 2020 and December 31, 2020, respectively. We believe that we have adequately accounted for any material tax uncertainties in our existing reserves for all open tax years.
Our U.S. tax returns are subject to examination by federal and state taxing authorities. The statute of limitations related to our consolidated Federal income tax returns is closed for all tax years up to and including 2016. However, the 2014 tax year is still open to the extent of the net operating loss that was carried back from the 2019 tax return. The years open to examination by state, local and foreign government authorities vary by jurisdiction, but the statute of limitation is generally three years from the date the tax return is filed. For jurisdictions that have generated net operating losses, carryovers may be subject to the statute of limitations applicable for the year those carryovers are utilized. In these cases, the period for which the losses may be adjusted will extend to conform with the statute of limitations for the year in which the losses are utilized. In most circumstances, this is expected to increase the length of time that the applicable taxing authority may examine the carryovers by one year or longer, in limited cases.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was enacted and signed into U.S. law to provide economic relief to individuals and businesses facing economic hardship as a result of the COVID-19 pandemic. We deferred the timing of federal tax estimates and payroll taxes as permitted by the CARES Act and have availed ourselves of net operating loss carryback provisions.
Net Income
Net income decreased $42.2 million, or 45.0%, to $51.5 million during the current quarter compared to $93.7 million during the prior year quarter. The decrease was due primarily to increased marketing efforts in the current quarter and more favorable credit performance in the loan portfolio in the prior year quarter.
NINE MONTHS ENDED SEPTEMBER 30, 2021 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2020
Revenue increased $24.4 million, or 3.0%, to $844.3 million for the nine-month period ended September 30, 2021, or current nine-month period, as compared to $819.9 million for the nine-month period ended September 30, 2020, or prior year nine-month period. On a constant currency basis, revenue increased by $23.7 million, or 2.9%, for the current nine-month period compared to the prior year nine-month period. The increase was driven by a 427.0% increase in revenue from our small business portfolio, due primarily to the acquisition of OnDeck, partially offset by a 25.3% decrease in revenue from our consumer portfolio, due to a reduction in originations in the prior year as a result of our efforts to mitigate the risk of the COVID‑19 pandemic.
Net revenue for the current nine-month period was $743.9 million compared to $440.7 million for the prior year nine-month period. Our consolidated net revenue margin was 88.1% for the current nine-month period compared to 53.8% for the prior year nine-month period.
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The following table sets forth the components of revenue and net revenue, separated by product for the current nine-month period and the prior year nine-month period (in thousands):
(193,558
(25.3
212,065
427.0
18,507
5,959
120.3
24,466
3.0
278,725
(73.5
303,191
68.8
67.7
93.3
31.0
6.1
Average Loan Origination
The average loan and finance receivable origination amount is calculated as the total amount of combined loans and finance receivables originated, renewed and purchased for the period divided by the total number of combined loans and finance receivables originated, renewed and purchased for the period. The following table shows the average loan and finance receivable origination amount by product for the current nine-month period compared to the prior year nine-month period:
602
416
15,236
11,243
1,358
466
Represents the average amount of each incremental draw on line of credit accounts.
The average loan origination amount increased to $1,358 from $466 during the current nine-month period compared to the prior year nine-month period, due primarily to an increase in the mix of higher dollar amount loans and finance receivables to small businesses as a result of our acquisition of OnDeck in 2020.
Total expenses increased $208.5 million, or 102.7%, to $411.5 million in the current nine-month period, compared to $203.0 million in the prior year nine-month period. On a constant currency basis, total expenses increased $207.7 million, or 102.3%, for the current nine-month period compared to the prior year nine-month period.
Marketing expense increased to $163.6 million in the current nine-month period compared to $42.2 million in the prior year nine-month period. The increase was due primarily to the inclusion of OnDeck as well as our efforts to capture increasing market demand for loan products in the current nine-month period. The prior year nine-month period was low due to our strategic reduction of marketing spend beginning late first quarter 2020 to mitigate risks associated with the COVID-19 pandemic.
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Operations and technology expense increased to $108.6 million in the current nine-month period compared to $65.5 million in the prior year nine-month period, due primarily to the inclusion of OnDeck.
General and administrative expense increased $32.4 million, or 38.6%, to $116.3 million in the current nine-month period compared to $83.9 million in the prior year nine-month period, due primarily to the inclusion of OnDeck, partially offset by various cost containment initiatives implemented to mitigate the impact of COVID-19.
Depreciation and amortization expense increased $11.6 million or 101.0% compared to the prior year quarter driven primarily by fixed assets and intangible assets acquired with OnDeck and Pangea and, to a lesser extent, additional internally-developed software placed into service.
Interest expense, net decreased $1.9 million, or 3.2%, to $57.5 million in the current nine-month period compared to $59.4 million in the prior year nine-month period. The decrease was due primarily to a decrease in the weighted average interest rate on our outstanding debt to 7.65% during the current nine-month period from 8.15% during the prior year nine-month period, partially offset by an increase of $22.6 million in the average amount of debt outstanding to $999.3 million during the current nine-month period from $976.7 million during the prior year nine-month period.
The effective tax rate of 24.5% in the current nine-month period was higher than the effective tax rate of 17.3% in the prior year nine-month period due primarily to the re-measurement of unrecognized tax benefits in the prior year nine-month period.
Net income increased $60.4 million, or 41.1%, to $207.6 million during the current nine-month period compared to $147.2 million during the prior year nine-month period. The increase was due primarily to favorable credit performance in the loan portfolio in the current nine-month period and the negative impact of the COVID-19 pandemic on loan values in the prior year nine-month period, partially offset by increased marketing spend.
LIQUIDITY AND CAPITAL RESOURCES
Capital Funding Strategy
Given the unprecedented economic circumstances resulting from the COVID-19 pandemic and high degree of uncertainty, we have taken several actions to create a stable and flexible balance sheet that ensures liquidity and funding available to meet our business obligations. We elected to access our committed funding lines prior to March 31, 2020 to preserve optionality in the face of uncertainty, and prior to June 30, 2020 we repaid the outstanding balance of our revolving credit agreement. Despite our higher than normal cash balances, we drew funds in January 2021 to meet the minimum utilization requirements of the revolving credit agreement and prior to June 30, 2021, we repaid the outstanding balance of our revolving credit agreement. As of September 30, 2021, we had cash, cash equivalents, and restricted cash of $288.1 million, of which $59.1 million was restricted, compared to $369.2 million, of which $71.9 million was restricted, as of December 31, 2020. As of September 30, 2021, we had committed and undrawn funding capacity of $694.2 million for our domestic operations and an additional $23.6 million (AU$32.7 million) available to support our operations in Australia. Based on numerous stressed-case modeling scenarios, we believe we have sufficient liquidity to run our operations for the foreseeable future. Further, we have no recourse debt obligations due until September 2024.
Historically, we have generated significant cash flow through normal operating activities for funding both long-term and short-term needs. Our near-term liquidity is managed to ensure that adequate resources are available to fund our seasonal working capital growth, which is driven by demand for our loan and financing products. On May 30, 2014, we issued and sold $500.0 million in aggregate principal amount of 9.75% senior notes due 2021 (the “2021 Senior Notes”). On September 1, 2017, we issued and sold $250.0 million in aggregate principal amount of 8.50% Senior Notes due 2024 (the “2024 Senior Notes”) and used the net proceeds, in part, to retire $155.0 million in 2021 Senior Notes. On January 21, 2018, we redeemed an additional $50.0 million in principal amount of the outstanding 2021 Senior Notes. On September 19, 2018, we issued and sold $375.0 million in aggregate principal amount of 8.50% Senior Notes due 2025 (the “2025 Senior Notes”) and used the net proceeds, in part, to retire the remaining $295.0 million in principal amount of the outstanding 2021 Senior Notes.
On June 30, 2017, we entered into a secured revolving credit agreement (as amended, the “Credit Agreement”). On April 13, 2018, October 5, 2018, July 1, 2019 and May 10, 2021, we and certain of our operating subsidiaries entered into amendments to our Credit Agreement. As of October 27, 2021, our available borrowings under the Credit Agreement were $309.3 million. Since 2016, we have entered into several loan securitization facilities and offered asset-backed notes to fund our growth, primarily in our near-prime
consumer installment loan business. As a result of our acquisition of OnDeck in 2020, we added several additional securitization facilities and asset-backed notes supported by OnDeck’s small business loans, as summarized below under “Current Debt Facilities.” As of October 27, 2021, we had committed and undrawn funding capacity of $694.2 million for our domestic operations and an additional $24.6 million (AU$32.7 million) available to support our operations in Australia. We expect that our operating needs, including satisfying our obligations under our debt agreements and funding our working capital growth, will be satisfied by a combination of cash flows from operations, borrowings under the Credit Agreement, or any refinancing, replacement thereof or increase in borrowings thereunder, and securitization or sale of loans and finance receivables under our consumer and small business loan securitization facilities.
As of September 30, 2021, we were in compliance with all financial ratios, covenants and other requirements set forth in our debt agreements. Unexpected changes in our financial condition or other unforeseen factors may result in our inability to obtain third-party financing or could increase our borrowing costs in the future. To the extent we experience short-term or long-term funding disruptions, we have the ability to adjust our volume of lending and financing to consumers and small businesses that would reduce cash outflow requirements while increasing cash inflows through repayments. Additional alternatives may include the securitization or sale of assets, increased borrowings under the Credit Agreement, or any refinancing or replacement thereof, and reductions in capital spending, which could be expected to generate additional liquidity.
Our Total stockholders’ equity increased by $215.4 million to $1,134 million at September 30, 2021 from $918.8 million at December 31, 2020. The increase of stockholders’ equity was driven primarily by net income for the nine months ended September 30, 2021. Our book value per share outstanding increased to $31.14 at September 30, 2021 from $25.69 at December 31, 2020, which was primarily driven by our net income in the period.
On November 5, 2020, we announced the Board of Directors had authorized a share repurchase program for up to $50.0 million of our outstanding common stock through December 31, 2021 (the “2020 Authorization”). Repurchases under our repurchase programs will be made in accordance with applicable securities laws from time to time in the open market, through privately negotiated transactions or otherwise. The share repurchase program does not obligate us to purchase any shares of our common stock. The authorization for the share repurchase program may be terminated, increased or decreased by the Board of Directors in its discretion at any time. During the nine months ended September 30, 2021, we had $15.5 million repurchases of common stock under the share repurchase program.
Cash
At September 30, 2021, we had $229.1 million of available unrestricted cash to fund our future operations compared to approximately $297.3 million at December 31, 2020.
Our cash and cash equivalents at September 30, 2021 were held primarily for working capital purposes and will be used to fund a portion of our lending activities. From time to time, we use excess cash and cash equivalents to fund our lending activities. We do not enter into investments for trading or speculative purposes. Our policy is to invest cash in excess of our immediate working capital requirements in short-term investments, deposit accounts or other arrangements designed to preserve the principal balance and maintain adequate liquidity. Our excess cash may be invested primarily in overnight sweep accounts, money market instruments or similar arrangements that provide competitive returns consistent with our polices and market conditions.
Our restricted cash represents funds held in accounts as reserves on certain debt facilities and as collateral for issuing bank partner transactions. We have no ability to draw on such funds as long as they remain restricted under the applicable arrangements but have the ability to use these funds to finance loan originations, subject to meeting borrowing base requirements. Our policy is to invest restricted cash held in debt facility related accounts, to the extent permitted by such debt facility, in investments designed to preserve the principal balance and provide liquidity. Accordingly, such cash is invested primarily in money market instruments that offer daily purchase and redemption and provide competitive returns consistent with our policies and market conditions.
Current Debt Facilities
The following table summarizes our debt facilities as of September 30, 2021.
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Weighted average interest rate(a)
Borrowing capacity
Principal outstanding
(e)
Other funding debt(f)
(g)
(h)
(f)
These debt facilities support our operations in Australia and are denominated in Australian dollars. The total local currency borrowing capacity is AU$80.6 million, of which there is AU$47.9 million in principal outstanding at September 30, 2021.
We had an outstanding letter of credit under the Revolving line of credit of $0.5 million as of September 30, 2021.
Our ability to fully utilize the available capacity of our debt facilities may also be impacted by provisions that limit concentration risk and eligibility.
Cash Flows
Our cash flows and other key indicators of liquidity are summarized as follows (dollars in thousands):
Cash flows provided by operating activities
Total cash flows provided by operating activities
Cash flows used in investing activities
Loans and finance receivables
(470,416
40,505
Total cash flows (used in) provided by investing activities
Cash flows provided by (used in) financing activities
Net cash provided by operating activities from continuing operations decreased $298.3 million, or 47.9%, to $325.2 million in the current nine-month period from $623.5 million for the prior year nine-month period. The decrease was driven primarily by reduced originations in the prior year as a result of our efforts to mitigate the risk of the COVID‑19 pandemic and the mix shift from consumer to small business loans and finance receivables, which generally yield less revenue.
We believe cash flows from operations and available cash balances and borrowings under our consumer loan securitization facilities and Credit Agreement, which may include increased borrowings under our Credit Agreement, any refinancing or replacement thereof,
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and additional securitization of consumer loans, will be sufficient to fund our future operating liquidity needs, including to fund our working capital growth.
Net cash used in investing activities was $521.6 million for the current nine-month period compared to net cash provided by investing activities of $17.1 million for the prior year nine-month period. This change was due primarily to a $510.9 million increase in net loan and finance receivables originations driven by the strategic reduction in originations and acquisitions of loans and finance receivables to mitigate risks associated with the COVID-19 pandemic in the prior year. Additionally, we acquired Pangea for $25.6 million, net of cash acquired, in the current year.
Cash flows provided by financing activities for the current nine-month period were driven primarily by $129.3 million in net borrowings under our securitization facilities. Cash flows used in financing activities for the prior year nine-month period were driven primarily by $72.0 million in net payments made under the Credit Agreement, $59.3 million in net payments made under our securitization facilities and $54.6 million in treasury shares purchased.
On October 24, 2019, we announced the Board of Directors had authorized a share repurchase program totaling $75.0 million that expired December 31, 2020 (the “2019 Authorization”). On November 5, 2020, we announced the Board of Directors had authorized the 2020 Authorization discussed above. The 2020 Authorization was an expansion of the 2019 Authorization. During the current year nine-month period, we repurchased $15.5 million of common stock under the share repurchase program. During the prior year nine-month period, we repurchased $53.5 million of common stock under the share repurchase programs.
CRITICAL ACCOUNTING ESTIMATES
There have been no material changes to the information on critical accounting estimates described in our Annual Report on Form 10‑K for the year ended December 31, 2020.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See Note 1 in the Notes to Consolidated Financial Statements included in this report for a discussion of recent accounting pronouncements.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is a broad term related to economic losses due to adverse changes in the fair value of a financial instrument. While market risk may embody several elements, including liquidity and basis risk, the SEC’s market risk rules focus on pricing risk, which relates to changes in the level of prices due to changes in interest rates, foreign currency exchange rates, commodity prices, equity prices, and other market changes that affect market risk-sensitive instruments.
We carry our loans and finance receivables at fair value with changes in fair value recognized directly in earnings. As of September 30, 2021, we were exposed to interest rate risk on our loans and finance receivables, which have fixed interest rates. The fair values of loans are estimated using a discounted cash flow methodology, where the discount rate represents an estimate of the required rate of return by market participants. The pricing on many fixed income securities is highly dependent upon interest rates and credit spreads that change on a daily basis. The discount rates utilized in the valuation of our products are not as reactive to minor shifts in underlying interest rates as i.) the interest component is relatively minor in size compared with the non-interest rate component of the discount rate and ii.) a market participant’s basis for adjusting the required rate of return is less likely to be impacted by minor shifts in the underlying interest rates.
ITEM 4.
CONTROLS AND PROCEDURES
Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, or the “Exchange Act”) as of September 30, 2021 (the “Evaluation Date”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective and provide reasonable assurance (i) to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms; and (ii) to ensure that information required to be
disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.
There was no change in our internal control over financial reporting during the quarter ended September 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or internal controls will prevent or detect all possible misstatements due to error or fraud. Our disclosure controls and procedures and internal controls are, however, designed to provide reasonable assurance of achieving their objectives, and our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective at that reasonable assurance level.
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ITEM 1.
LEGAL PROCEEDINGS
See the “Litigation” section of Note 8 of the notes to our consolidated financial statements (unaudited) of Part I, “Item 1 Financial Statements.”
ITEM 1A.
RISK FACTORS
There have been no material changes from the Risk Factors described in Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides the information with respect to purchases made by us of shares of our common stock.
Period
Total Number of Shares Purchased(a)
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plan(b)
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan(b)
July 1 – July 31, 2021
32.78
50,000
August 1 – August 31, 2021
235,875
32.00
233,887
42,518
September 1 – September 30, 2021
247,737
32.47
247,184
34,492
483,912
32.24
481,071
Includes shares withheld from employees as tax payments for shares issued under the Company’s stock-based compensation plans of 300, 1,988 and 553 for the months of July, August and September, respectively.
On November 5, 2020, the Board of Directors authorized a share repurchase program for the repurchase of up to $50.0 million of the Company’s common stock through December 31, 2021.
DEFAULTS UPON SENIOR SECURITIES
None.
MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5.
OTHER INFORMATION
ITEM 6.
EXHIBITS
Exhibit No.
Exhibit Description
10.1
Amendment No. 6 to Fourth Amended and Restated Credit Agreement, dated as of July 16, 2021, among Receivable Assets of OnDeck, LLC, as Borrower, the Lenders party thereto and Truist Bank, as Administrative Agent
Amendment to Loan and Security Agreement, dated July 23, 2021, by and between Credit Suisse AG and EFR 2018‑2, LLC
10.3
Amendment to Loan and Security Agreement, dated September 15, 2021, by and between Pacific Western Bank and EFR 2018‑1, LLC
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
#
Certain information has been excluded from this exhibit because it is both not material and would be competitively harmful if publicly disclosed.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: October 29, 2021
By:
/s/ Steven E. Cunningham
Steven E. Cunningham
Chief Financial Officer
(On behalf of the Registrant and as Principal Financial Officer)