ENOVA INTERNATIONAL, INC. 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, ofEnova 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 endedDecember 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 six months endedJune 30, 2021 , we extended approximately$1.2 billion in credit or financing to borrowers. As ofJune 30, 2021 , we offered or arranged loans or draws on lines of credit to consumers in 38 states inthe United States andBrazil . We also offered financing to small businesses in all 50 states andWashington D.C. inthe 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 throughJune 30, 2021 , we have completed over 54.1 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 inthe United States designed to serve near-prime customers. InJune 2014 , we launched our business inBrazil , where we arrange financing for borrowers through a third-party lender. In addition, inJuly 2014 , we introduced a new line of credit product inthe United States to serve the needs of small businesses. InJune 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. InJanuary 2020 , we acquiredCumulus Funding, Inc. (doing business as Align, "Align"), which offers income share agreements toU.S. consumers with repayment rates based on a percentage of customers' income. InOctober 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 theU.S. ,Australia andCanada , to expand our small business offerings. InMarch 2021 , we acquiredPangea Universal Holdings ("Pangea"), which provides mobile international money transfer services to customers in theU.S with a focus onLatin America andAsia . 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
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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 also offer an analytics-as-a-service
solution for 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
business installment loans in 47 states and in
or arrange multi-payment unsecured consumer installment loan products in
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 38 states (and continue to service existing line of credit
accounts in one additional state) in
credit accounts in 47 states and in
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
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
• 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
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, generally have terms of less
than 90 days, and specific installment loans, which have terms of four to 12
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
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.
• Decision Management Platform-as-a-Service ("dmPaaS") andAnalytics-as-a-Service ("AaaS"). Launched under our Enova Decisions brand in
2016, we help businesses make better decisions faster by providing our
decision management platform and analytics expertise as a service. Our
solutions are designed to automate or augment customer decisions including,
but not limited to, credit risk, fraud risk, identity verification, customer
profitability, payments, and collection. Services offered under our dmPaaS
include machine learning model deployment, business rules management, data
source connectivity, decision flow authoring, decision simulation,
experiments, and real-time decision flow execution via API. Through our AaaS
offerings, we provide tailored predictive/prescriptive analytic model
development, explainable machine learning, and mathematical optimization.
Industries served include financial services, communications,
telecommunications, healthcare, and higher education in
to continue to grow this program through increasing the size of our sales
team, adding new partners, and continued enhancement of our technology.
• Money transfer business. Through the acquisition of Pangea, we operate a money
transfer platform that allows customers to send money from
to
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:
•
As of
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.
•
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
•
installment loans to small businesses in
subsidiary.
•
installment loans and line of credit accounts to small businesses in
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
OnOctober 6, 2017 , theCFPB 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 25 -------------------------------------------------------------------------------- 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. OnJune 7, 2019 , theCFPB issued a final rule to set the compliance date for the mandatory underwriting provisions of the Small Dollar Rule toNovember 19, 2020 . OnJuly 7, 2020 , theCFPB 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
OnMarch 7, 2020 , SB 421 passed through both houses of theVirginia 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 allowVirginia -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 onJanuary 1, 2021 .
Illinois SB 1792
OnMarch 23, 2021 , the Economic Equity Act ("EEA") became effective inIllinois . 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
OnAugust 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 theEuropean 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 onFebruary 15, 2020 ; however, several amendments to LGPD delayed the effective date. LGPD took effect onSeptember 18, 2020 , although the penalties and sanctions for non-compliance are not scheduled to be enforced untilAugust 1, 2021 . Compliance with LGPD may increase the cost of conducting business inBrazil , 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 ofMarch 31, 2020 , after adjusting the discount rate for the decrease in underling 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 ofMarch 31, 2021 by 100 basis points and as ofJune 30, 2021 by another 100 basis points. 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. 26 -------------------------------------------------------------------------------- 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 ofJune 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 atJune 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. TheU.S. government passed additional stimulus packages inDecember 2020 andMarch 2021 , which included stimulus checks to consumers and additional funding into the Paycheck Protection Program ("PPP") for businesses. Positive COVID-19 test counts in theU.S. have generally decreased across the first half of 2021. However, 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 ofJune 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 atDecember 31, 2020 andMarch 31, 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 atJune 30, 2021 . We deemed the resulting fair value to be an appropriate market-based exit price that considers current market conditions atJune 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
• Consolidated total revenue increased
in the current quarter compared to
• Consolidated net revenue was
prior year quarter.
• Consolidated income from operations increased
year quarter.
• Consolidated net income was
was
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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 June 30, Six Months Ended June 30,
2021 2020 2021 2020
Revenue
Loans and finance receivables revenue $ 260,073 $ 251,702 $ 517,370 $ 611,508
Other 4,647 1,359 6,794 3,805
Total Revenue 264,720 253,061 524,164 615,313
Change in Fair Value (5,587 ) (120,672 ) (26,665 ) (356,391 )
Net Revenue 259,133 132,389 497,499 258,922
Expenses
Marketing 55,254 2,988 83,822 37,546
Operations and technology 35,035 16,504 70,662 47,770
General and administrative 38,675 22,336 82,764 50,287
Depreciation and amortization 7,460 4,004 14,087 7,674
Total Expenses 136,424 45,832 251,335 143,277
Income from Operations 122,709 86,557 246,164 115,645
Interest expense, net (19,416 ) (20,372 ) (39,330 ) (40,753 )
Foreign currency transaction (loss) gain (240 ) (18 ) (274 ) 23
Equity method investment income 1,471 - 2,029 -
Other nonoperating expenses (750 ) - (1,128 ) -
Income before Income Taxes 103,774 66,167 207,461 74,915
Provision for income taxes 23,224 18,141 50,940 21,141
Net income from continuing operations
before noncontrolling interest 80,550 48,026 156,521 53,774
Less: Net income attributable to
noncontrolling interest 373 - 424 -
Net income from continuing operations 80,177 48,026 156,097 53,774
Net loss from discontinued operations - - - (288 )
Net income attributable to Enova
International, Inc. $ 80,177 $ 48,026 $ 156,097 $ 53,486
Earnings (Loss) Per Share attributable
to Enova International, Inc. :
Earnings (loss) per common share -
diluted:
Continuing operations $ 2.10 $ 1.58 $ 4.13 $ 1.70
Discontinued operations - - - (0.01 )
Total earnings (loss) per common share -
diluted $ 2.10 $
1.58
Revenue
Loans and finance receivables revenue 98.2 % 99.5 % 98.7 % 99.4 %
Other 1.8 0.5 1.3 0.6
Total Revenue 100.0 100.0 100.0 100.0
Change in Fair Value (2.1 ) (47.7 ) (5.1 ) (57.9 )
Net Revenue 97.9 52.3 94.9 42.1
Expenses
Marketing 20.9 1.2 16.0 6.1
Operations and technology 13.2 6.5 13.5 7.8
General and administrative 14.6 8.8 15.8 8.2
Depreciation and amortization 2.8 1.6 2.6 1.2
Total Expenses 51.5 18.1 47.9 23.3
Income from Operations 46.4 34.2 47.0 18.8
Interest expense, net (7.3 ) (8.1 ) (7.5 ) (6.6 )
Foreign currency transaction (loss) gain (0.1 ) - (0.1 ) -
Equity method investment income 0.5 - 0.4 -
Other nonoperating expenses (0.3 ) - (0.2 ) -
Income before Income Taxes 39.2 26.1 39.6 12.2
Provision for income taxes 8.8 7.1 9.7 3.5
Net income from continuing operations
before noncontrolling interest 30.4 19.0 29.9 8.7
Less: Net income attributable to
noncontrolling interest 0.1 - 0.1 -
Net income from continuing operations 30.3 19.0 29.8 8.7
Net loss from discontinued operations - - - -
Net income attributable to Enova
International, Inc. 30.3 % 19.0 % 29.8 % 8.7 %
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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):
Three Months Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
Net income from continuing operations $ 80,177 $ 48,026 $ 156,097 $ 53,774
Adjustments:
Transaction-related costs(a) 12 - 1,424 -
Other nonoperating expenses(b) 750 - 1,128 -
Intangible asset amortization 1,684 268 2,835 535
Stock-based compensation expense 5,250 3,660 11,054 7,120
Foreign currency transaction loss (gain) 237 18 271 (23 )
Cumulative tax effect of adjustments (2,053 ) (929 ) (4,262 ) (1,797 )
Adjusted earnings $ 86,057 $ 51,043 $
168,547
Diluted earnings per share from continuing operations$ 2.10 $ 1.58 $ 4.13 $ 1.70 Adjustments: Transaction-related costs - - 0.04 - Other nonoperating expenses 0.02 - 0.03 - Intangible asset amortization 0.04 0.01 0.07 0.02 Stock-based compensation expense 0.14 0.12 0.29 0.23 Foreign currency transaction loss (gain) 0.01 - 0.01 - Cumulative tax effect of adjustments (0.05 ) (0.03 ) (0.11 ) (0.06 ) Adjusted earnings per share$ 2.26 $ 1.68 $ 4.46 $ 1.89
(a) In the first quarter of 2021, we incurred expenses totaling
($1.1 million net of tax) related to acquisitions and a divestiture of a
subsidiary.
(b) In the first quarter of 2021, we recorded other nonoperating expenses of
million (
notes. In the second quarter of 2021, we recorded other nonoperating expenses
of
transaction.
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
29
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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, 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):
Three Months Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
Net income from continuing operations $ 80,177 $ 48,026 $ 156,097 $ 53,774
Depreciation and amortization expenses 7,457 4,004 14,078 7,674
Interest expense, net 19,292 20,372 39,047 40,753
Foreign currency transaction loss 237 18 271 (23 )
Provision for income taxes 23,224 18,141 50,940 21,141
Stock-based compensation expense 5,250 3,660 11,054 7,120
Adjustment:
Transaction-related costs(a) 12 - 1,424 -
Other nonoperating expenses(b) 750 - 1,128 -
Equity method investment income (1,471 ) - (2,029 ) -
Adjusted EBITDA $ 134,928 $ 94,221 $
272,010
Adjusted EBITDA margin calculated as follows: Total Revenue$ 264,720 $ 253,061 $ 524,164 $ 615,313 Adjusted EBITDA 134,928 94,221 272,010 130,439 Adjusted EBITDA as a percentage of total revenue 51.0 % 37.2 % 51.9 % 21.2 %
(a) In the first quarter of 2021, we incurred expenses totaling
($1.1 million net of tax) related to acquisitions and a divestiture of a
subsidiary.
(b) In the first quarter of 2021, we recorded other nonoperating expenses of
million (
notes. In the second quarter of 2021, we recorded other nonoperating expenses
of
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, 2.3% 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:
Three Months Ended
June 30,
2021 2020 % Change
Australian dollar 0.7700 N/A N/A
Brazilian real 0.1893 0.1858 1.9 %
Six Months Ended
June 30,
2021 2020 % Change
Australian dollar 0.7713 N/A N/A
Brazilian real 0.1860 0.2054 (9.4 )%
We believe that our non-GAAP constant currency assessments are a useful measure, as they indicate the actual growth and profitability of our operations.
30
--------------------------------------------------------------------------------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
Revenue and Net Revenue
Revenue increased$11.6 million , or 4.6%, to$264.7 million for the current quarter as compared to$253.1 million for the prior year quarter. On a constant currency basis, revenue increased by$11.1 million , or 4.4%, for the current quarter compared to the prior year quarter. The increase was driven by a 473.1% increase in revenue from our small business portfolio, primarily due to the acquisition of OnDeck, partially offset by a 26.3% decrease in revenue from our consumer portfolio as originations were reduced due to the COVID19 pandemic. Net revenue for the current quarter was$259.1 million compared to$132.4 million for the prior year quarter. Our consolidated net revenue margin was 97.9% for the current quarter compared to 52.3% for the prior year quarter. The increase in net revenue margin was driven by lower delinquency rates and lower than expected charge-offs as a result of portfolio seasoning and lower originations. The following table sets forth the components of revenue and gross profit, separated by product for the current quarter and the prior year quarter (in thousands): Three Months Ended June 30, 2021 2020 $ Change % Change Revenue by product: Consumer loans and finance receivables revenue$ 174,512 $ 236,772 $ (62,260 ) (26.3 )% Small business loans and finance receivables revenue 85,561 14,930 70,631 473.1 Total loans and finance receivables revenue 260,073 251,702 8,371 3.3 Other 4,647 1,359 3,288 241.9 Total revenue 264,720 253,061 11,659 4.6 Change in fair value (5,587 ) (120,672 ) 115,085 (95.4 ) Net revenue$ 259,133 $ 132,389 $ 126,744 95.7 % Revenue by product (% to total): Consumer loans and finance receivables revenue 65.9 % 93.6 % Small business loans and finance receivables revenue 32.3
5.9
Total loans and finance receivables revenue 98.2 99.5 Other 1.8 0.5 Total revenue 100.0 100.0 Change in fair value (2.1 ) (47.7 ) Net revenue 97.9 % 52.3 %
Loan and Finance Receivable Balances
The fair value of our loan and finance receivable portfolio in our consolidated financial statements atJune 30, 2021 was$1,408.7 million and$799.7 million as ofJune 30, 2021 and 2020, respectively. The outstanding principal balance of our loan and finance receivables portfolio was$1,366.9 million and$767.6 million as ofJune 30, 2021 and 2020, respectively. The fair value of the combined loan and finance receivables portfolio includes$10.8 million and$6.6 million with an outstanding principal balance of$8.3 31 -------------------------------------------------------------------------------- million and$5.2 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 ofJune 30, 2021 and 2020, respectively. Our small business portfolio of loans and finance receivables increased significantly to 55.3% of our combined loan and finance receivable portfolio as ofJune 30, 2021 , compared to 13.5% as ofJune 30, 2020 due primarily to the acquisition of OnDeck inOctober 2020 . The consumer portfolio balance decreased to 44.7% of our combined loan and finance receivable portfolio balance as ofJune 30, 2021 , compared to 86.5% as ofJune 30, 2020 . See "-Non-GAAP Disclosure-Combined Loans and Finance Receivables Measures" above for additional information related to combined loans and finance receivables.
The following tables summarize loan and finance receivable balances outstanding
as of
As of June 30, 2021 As of June 30, 2020
Guaranteed Guaranteed
Company by the Company by the
Owned(a) Company(a) Combined(b) Owned(a) Company(a) Combined(b)
Consumer loans and finance
receivables
Principal $ 585,087 $ 8,284 $ 593,371 $ 646,534 $ 5,195 $ 651,729
Fair value 623,975 10,824 634,799 690,957 6,614 697,571
Fair value as a % of principal 106.6 % 130.7 % 107.0 % 106.9 % 127.3 % 107.0 %
Small business loans and finance
receivables
Principal $ 781,793 $ - $ 781,793 $ 121,070 $ - $ 121,070
Fair value 784,728 - 784,728 108,705 - 108,705
Fair value as a % of principal 100.4 % - % 100.4 % 89.8 % - % 89.8 %
Total loans and finance
receivables
Principal $ 1,366,880 $ 8,284 $ 1,375,164 $ 767,604 $ 5,195 $ 772,799
Fair value 1,408,703 10,824 1,419,527 799,662 6,614 806,276
Fair value as a % of principal 103.1 % 130.7 % 103.2 % 104.2 % 127.3 % 104.3 %
(a) 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.
(b) Except for allowance and liability for estimated losses, amounts shown
represent non-GAAP measures.
AtJune 30, 2021 and 2020, the ratio of fair value as a percentage of principal was 103.1% and 104.2%, respectively, on company owned loans and finance receivables and 103.2% and 104.3%, respectively, on combined loans and finance receivables. These ratios decreased compared to the prior year due primarily to loans acquired in the OnDeck acquisition inOctober 2020 , as these loans have a lower ratio of fair value as a percentage of principal compared to the legacy Enova portfolio. These decreases were partially offset by the seasoning of the portfolio due to a reduction in originations in 2020 following the onset of the COVID 19 pandemic, 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 atJune 30, 2021 and 2020: As of June 30, 2021 2020 Average amount outstanding per loan and finance receivable (in ones)(a) Consumer loans and finance receivables(b)$ 1,774 $
1,979
Small business loans and finance receivables 31,126
18,717
Total loans and finance receivables(b)$ 3,696 $ 2,285
(a) The disclosure regarding the average amount per loan and finance receivable
is statistical data that is not included in our consolidated financial
statements.
(b) 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.
32
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The average amount outstanding per loan and finance receivable increased to
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:
Three Months Ended
June 30,
2021 2020
Average loan and finance receivable origination
amount (in ones)(a)
Consumer loans and finance receivables(b)(c) $ 612 $ 287
Small business loans and finance receivables(c) 15,737
4,569
Total loans and finance receivables(b)$ 1,409 $ 288
(a) The disclosure regarding the average loan origination amount is statistical
data that is not included in our consolidated financial statements.
(b) 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.
(c) 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$1,409 from$288 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):
2020 2021
Second Third Fourth First Second
Quarter Quarter Quarter Quarter Quarter
Ending combined loans and finance
receivables, including principal
and accrued fees/interest
outstanding:
Company owned $ 816,905 $ 698,964 $ 1,310,171 $ 1,265,987 $ 1,416,533
Guaranteed by the Company(a) 6,054 8,100 10,163 6,792 9,655
Ending combined loan and finance
receivables balance(b) $ 822,959 $ 707,064 $ 1,320,334 $ 1,272,779 $ 1,426,188
> 30 days delinquent 36,797 25,841 122,666 96,228 81,883
> 30 days delinquency rate 4.5 % 3.7 % 9.3 % 7.6 % 5.7 %
(a) 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.
(b) Non-GAAP measure.
33
--------------------------------------------------------------------------------
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):
2020 2021
Second Third Fourth First Second
Quarter Quarter Quarter Quarter Quarter
Consumer loans and finance
receivables:
Consumer combined loan and finance
receivable principal balance:
Company owned $ 646,534 $ 569,556 $ 576,404 $ 523,170 $ 585,087
Guaranteed by the Company(a) 5,195 6,905 8,845 5,691 8,284
Total combined loan and finance
receivable principal balance(b) $ 651,729 $ 576,461 $ 585,249 $ 528,861 $ 593,371
Consumer combined loan and finance
receivable fair value balance:
Company owned $ 690,957 $ 617,921 $ 625,219 $ 581,398 $ 623,975
Guaranteed by the Company(a) 6,614 7,411 10,289 7,246 10,824
Ending combined loan and finance
receivable fair value balance(b) $ 697,571 $ 625,332 $ 635,508 $ 588,644 $ 634,799
Fair value as a % of
principal(b)(c) 107.0 % 108.5 % 108.6 % 111.3 % 107.0 %
Consumer combined loan and finance
receivable balance, including
principal and accrued fees/interest
outstanding:
Company owned $ 693,991 $ 614,676 $ 619,088 $ 564,934 $ 630,203
Guaranteed by the Company(a) 6,054 8,100 10,163 6,792 9,655
Ending combined loan and finance
receivable balance(b) $ 700,045 $ 622,776 $ 629,251 $ 571,726 $ 639,858
Average consumer combined loan and
finance receivable balance,
including principal and accrued
fees/interest outstanding:
Company owned(d) $ 813,497 $ 646,137 $ 613,683 $ 598,900 $ 580,704
Guaranteed by the Company(a)(d) 7,553 6,855 8,861 8,670 7,585
Average combined loan and finance
receivable balance(b)(d) $ 821,050 $ 652,992 $
622,544
Revenue$ 236,772 $ 192,567 $ 196,880 $ 181,737 $ 174,512 Change in fair value (102,159 ) (24,378 ) (31,167 ) (26,073 ) (49,708 ) Net revenue 134,613 168,189 165,713 155,664 124,804 Net revenue margin 56.9 % 87.3 % 84.2 % 85.7 % 71.5 % Change in fair value as a % of average combined loan and finance receivable balance(b)(d) 12.4 % 3.7 % 5.0 % 4.3 % 8.4 % Delinquencies: > 30 days delinquent$ 31,149 $ 21,559 $ 24,793 $ 24,589 $ 26,201 > 30 days delinquent as a % of combined loan and finance receivable balance(b)(c) 4.4 % 3.5 %
3.9 % 4.3 % 4.1 %
Charge-offs:
Charge-offs (net of recoveries)$ 141,193 $ 30,670 $ 34,035 $ 36,408 $ 27,050 Charge-offs (net of recoveries) as a % of average combined loan and finance receivable balance(b)(d) 17.2 % 4.7 % 5.5 % 6.0 % 4.6 %
(a) 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.
(b) Non-GAAP measure.
(c) 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.
34
-------------------------------------------------------------------------------- The ending balance, including principal and accrued fees/interest outstanding, of combined consumer loans and finance receivables atJune 30, 2021 decreased 8.6% to$639.9 million compared to$700.0 million atJune 30, 2020 , due primarily to lower originations driven by our strategic efforts to mitigate risks associated with the COVID-19 pandemic sinceMarch 2020 .
The percentage of loans greater than 30 days delinquent decreased to 4.1% at
Charge-offs (net of recoveries) as a percentage of average combined loan balance decreased to 4.6% for the current quarter, compared to 17.2% for the prior year quarter, driven primarily by having a more seasoned and lower risk portfolio remaining as originations since the onset of the COVID-19 pandemic have been significantly lower and the majority of higher risk loans to new customers originated in prior quarters have been charged off. The ratio of fair value as a percentage of principal on consumer loans and finance receivables was 107.0% atJune 30, 2021 , compared to 107.0% atJune 30, 2020 and 111.3% atMarch 31, 2021 . The decrease fromMarch 31, 2021 was primarily driven by the acceleration of originations across the second quarter, particularly to new customers, which carry a higher risk of charge-off, partially offset by lower discount rates. 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):
2020 2021
Second Third Fourth First Second
Quarter Quarter Quarter Quarter Quarter
Small business loans and finance
receivables:
Total loan and finance receivable
principal balance $ 121,070 $ 81,733 $ 686,730 $ 696,678 $ 781,793
Ending loan and finance receivable
fair value balance 108,705 75,449 616,287 649,313 784,728 Fair value as a % of principal(a) 89.8 % 92.3 % 89.7 % 93.2 % 100.4 %
Ending loan and finance receivable balance, including principal and accrued fees/interest outstanding$ 122,914 $ 84,288 $ 691,083 $ 701,053 $ 786,330 Average loan and finance receivable balance(b)$ 158,684 $ 101,819 $ 539,675 $ 700,348 $ 739,378 Revenue$ 14,930 $ 10,830 $ 64,419 $ 75,560 $ 85,561 Change in fair value (18,513 ) 1,601 10,818 4,995 45,078 Net revenue (3,583 ) 12,431 75,237 80,555 130,639 Net revenue margin (24.0 )% 114.8 % 116.8 % 106.6 % 152.7 % Change in fair value as a % of average loan balance(b) 11.7 % (1.6 )% (2.0 )% (0.7 )% (6.1 )% Delinquencies: > 30 days delinquent$ 5,648 $ 4,282 $ 97,873 $ 71,639 $ 55,682 > 30 days delinquent as a % of loan balance(a) 4.6 % 5.1 %
14.2 % 10.2 % 7.1 %
Charge-offs:
Charge-offs (net of recoveries)$ 14,782 $ 4,496 $ 21,052 $ 18,042 $ 5,102 Charge-offs (net of recoveries) as a % of average loan and finance receivable balance(b) 9.3 % 4.4 % 3.9 % 2.6 % 0.7 %
(a) Determined using period-end balances.
(b) The average loan and finance receivable balance is the average of the
month-end balances during the period.
The ending balance, including principal and accrued fees/interest outstanding, of small business loans and finance receivables atJune 30, 2021 increased 539.7% to$786.3 million compared to$122.9 million atJune 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 35 -------------------------------------------------------------------------------- outstanding, of small business loans and finance receivables atJune 30, 2021 increased 19.9% due primarily to a gradual increase in originations that began in the third quarter of 2020 and continued to ramp up in 2021. The percentage of loans greater than 30 days delinquent increased to 7.1% atJune 30, 2021 , compared to 4.6% atJune 30, 2020 . The increase was driven primarily by the inclusion of OnDeck loans, which have a higher percentage of loans greater than 30 days delinquent compared to our legacy small business portfolio. 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 0.7% for the current quarter, compared to 9.3% in the prior year quarter, due primarily to our efforts to assist customers as well as the impact of governmental stimulus. The ratio of fair value as a percentage of principal on small business loans and finance receivables was 100.4% atJune 30, 2021 , compared to 89.8% atJune 30, 2020 . The increase was due primarily to strong cash collections, improvements in anticipated cash flow in our valuation models due to reduced risk, and lower discount rates. 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
Total expenses increased
Marketing expense increased to$55.2 million in the current quarter compared to$3.0 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$35.0 million in the current quarter compared to$16.5 million in the prior year quarter, due primarily to the acquisition of OnDeck inOctober 2020 and higher variable underwriting costs due to the increase in originations. General and administrative expense increased$16.4 million , or 73.2%, to$38.7 million in the current quarter compared to$22.3 million in the prior year quarter, due primarily to the acquisition of OnDeck inOctober 2020 , partially offset by various cost containment initiatives implemented to mitigate the impact of COVID-19 and synergies achieved on the OnDeck acquisition. Depreciation and amortization expense increased$3.5 million or 86.3% 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$1.0 million , or 4.7%, to$19.4 million in the current quarter compared to$20.4 million in the prior year quarter. The decrease was due primarily to a decrease in the average amount of debt outstanding, which decreased$51.3 million to$986.1 million during the current quarter from$1,037.4 million during the prior year quarter, and a decrease in the weighted average interest rate on our outstanding debt to 7.81% during the current quarter from 7.97% during the prior year quarter.
Provision for Income Taxes
The effective tax rate from continuing operations of 22.4% in the current quarter was lower than the 27.4% rate recorded in the prior year quarter due primarily to the significant increase in book operating income as compared to the prior year quarter and a lesser rate impact attributable to nondeductible executive and stock compensation and other nondeductible expenses. As ofJune 30, 2021 , the balance of unrecognized tax benefits was$39.1 million which is included in "Accounts payable and accrued expenses" on the consolidated balance sheet,$11.4 million of which, if recognized, would favorably affect the effective tax rate in the period of recognition. We had$45.3 million and$39.0 million of unrecognized tax benefits as ofJune 30, 2020 andDecember 31, 2020 , respectively. We believe that we have adequately accounted for any material tax uncertainties in our existing reserves for all open tax years. 36 -------------------------------------------------------------------------------- OurU.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. OnMarch 27, 2020 , the Coronavirus Aid, Relief and Economic Security ("CARES") Act was enacted and signed intoU.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 increased$32.2 million , or 66.9%, to$80.2 million during the current quarter compared to$48.0 million during the prior year quarter. The increase was due primarily to favorable credit performance in the loan portfolio in the current quarter.
SIX MONTHS ENDED
Revenue and Net Revenue
Revenue decreased$91.1 million , or 14.8%, to$524.2 million for the six-month period endedJune 30, 2021 , or current six-month period, as compared to$615.3 million for the six-month period endedJune 30, 2020 , or prior year six-month period. On a constant currency basis, revenue decreased by$91.8 million , or 14.9%, for the current six-month period compared to the prior year six-month period. The decrease was driven by a 41.5% decrease in revenue from our sub-prime consumer portfolio and a 29.7% decrease in revenue from our near-prime consumer portfolio due to lower average loan balances in the in the current six-month period compared to the prior year six-month period, partially offset by a 314.9% increase in revenue from our small business portfolio, primarily due to the acquisition of OnDeck.
Net revenue for the current six-month period was
The following table sets forth the components of revenue and gross profit, separated by product for the current six-month period and the prior year six-month period (in thousands):
Six Months Ended June 30,
2021 2020 $ Change % Change
Revenue by product:
Consumer loans and finance receivables
revenue $ 356,249 $ 572,672 $ (216,423 ) (37.8 )%
Small business loans and finance
receivables revenue 161,121 38,836 122,285 314.9
Total loans and finance receivables
revenue 517,370 611,508 (94,138 ) (15.4 )
Other 6,794 3,805 2,989 78.6
Total revenue 524,164 615,313 (91,149 ) (14.8 )
Change in fair value (26,665 ) (356,391 ) 329,726 (92.5 )
Net revenue $ 497,499 $ 258,922 $ 238,577 92.1 %
Revenue by product (% to total):
Consumer loans and finance receivables
revenue 68.0 % 93.1 %
Small business loans and finance
receivables revenue 30.7 6.3
Total loans and finance receivables
revenue 98.7 99.4
Other 1.3 0.6
Total revenue 100.0 100.0
Change in fair value (5.1 ) (57.9 )
Net revenue 94.9 % 42.1 %
37
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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 six-month period compared to the prior year six-month
period:
Six Months Ended
June 30,
2021 2020
Average loan and finance receivable origination
amount (in ones)(a)
Consumer loans and finance receivables(b)(c) $ 558 $ 449
Small business loans and finance receivables(c) 15,006
11,072
Total loans and finance receivables(b)$ 1,348 $ 517
(a) The disclosure regarding the average loan origination amount is statistical
data that is not included in our consolidated financial statements.
(b) 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.
(c) Represents the average amount of each incremental draw on line of credit
accounts.
The average loan origination amount increased to$1,348 from$517 during the current six-month period compared to the prior year six-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
Total expenses increased$108.0 million , or 75.4%, to$251.3 million in the current six-month period, compared to$143.3 million in the prior year six-month period. On a constant currency basis, total expenses increased$107.4 million , or 75.0%, for the current six-month period compared to the prior year six-month period. Marketing expense increased to$83.8 million in the current six-month period compared to$37.5 million in the prior year six-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 six-month period. The prior year six-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.
Operations and technology expense increased to
General and administrative expense increased$32.5 million , or 64.6%, to$82.8 million in the current six-month period compared to$50.3 million in the prior year six-month period, due primarily to the inclusion of OnDeck and higher employee-related costs, partially offset by various cost containment initiatives implemented to mitigate the impact of COVID-19. Depreciation and amortization expense increased$6.4 million or 83.6% 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$1.4 million , or 3.5%, to$39.3 million in the current six-month period compared to$40.7 million in the prior year six-month period. The decrease was due primarily to a decrease in the average amount of debt outstanding, which decreased$56.5 million to$966.3 million during the current six-month period from$1,022.8 million during the prior year six-month period, partially offset by an increase in the weighted average interest rate on our outstanding debt to 8.20% during the current six-month period from 8.06% during the prior year six-month period. 38 --------------------------------------------------------------------------------
Provision for Income Taxes
The effective tax rate of 24.6% in the current six-month period was lower than the effective tax rate of 28.2% in the prior year six-month period due primarily to the significant increase in book operating income as compared to the prior year and a lesser rate impact attributable to nondeductible executive and stock compensation and other nondeductible expenses..
Net Income
Net income increased$102.6 million , or 191.8%, to$156.1 million during the current six-month period compared to$53.5 million during the prior year six-month period. The increase was due primarily to favorable credit performance in the loan portfolio in the current six-month period and the negative impact of the COVID-19 pandemic on loan values in the prior year six-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 toMarch 31, 2020 to preserve optionality in the face of uncertainty, and prior toJune 30, 2020 we repaid the outstanding balance of our revolving credit agreement. Despite our higher than normal cash balances, we drew funds inJanuary 2021 to meet the minimum utilization requirements of the revolving credit agreement and prior toJune 30, 2021 , we repaid the outstanding balance of our revolving credit agreement. As ofJune 30, 2021 , we had cash, cash equivalents, and restricted cash of$447.2 million , of which$52.8 million was restricted, compared to$369.2 million , of which$71.9 million was restricted, as ofDecember 31, 2020 . As ofJune 30, 2021 , we had committed and undrawn funding capacity of$533.9 million for our domestic operations and an additional$27.4 million (AU$36.6 million) available to support our operations inAustralia . 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 untilSeptember 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. OnMay 30, 2014 , we issued and sold$500.0 million in aggregate principal amount of 9.75% senior notes due 2021 (the "2021 Senior Notes"). OnSeptember 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. OnJanuary 21, 2018 , we redeemed an additional$50.0 million in principal amount of the outstanding 2021 Senior Notes. OnSeptember 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. OnJune 30, 2017 , we entered into a secured revolving credit agreement (as amended, the "Credit Agreement"). OnApril 13, 2018 ,October 5, 2018 ,July 1, 2019 andMay 10, 2021 , we and certain of our operating subsidiaries entered into amendments to our Credit Agreement. As ofJuly 29, 2021 , our available borrowings under the Credit Agreement were$309.5 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 ofJuly 29, 2021 , we had committed and undrawn funding capacity of$290.1 million for our domestic operations and an additional$24.5 million (AU$33.1 million) available to support our operations inAustralia . 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 ofJune 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. 39 --------------------------------------------------------------------------------
Capital
Our Total stockholders' equity increased by$175.9 million to$1,094.8 million atJune 30, 2021 from$918.8 million atDecember 31, 2020 . The increase of stockholders' equity was driven primarily by net income for the six months endedJune 30, 2021 . Our book value per share outstanding increased to$29.69 atJune 30, 2021 from$25.69 atDecember 31, 2020 , which was primarily driven by our net income in the period. OnNovember 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 throughDecember 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 six months endedJune 30, 2021 , we had no repurchases of common stock under the share repurchase program.
Cash
AtJune 30, 2021 , we had$394.4 million of available unrestricted cash to fund our future operations compared to approximately$297.3 million atDecember 31, 2020 . Our cash and cash equivalents atJune 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
Weighted
average
interest Borrowing Principal
Maturity date rate(a) capacity outstanding
Funding Debt:
2018-1 Securitization Facility July 2023 (b) 5.00% 150,000 25,628
2018-2 Securitization Facility October 2022 (c) 3.87% 4,962 4,962
2019-1 Securitization Facility February 2022 (d) - - -
2018-A Notes May 2026 7.37% 8,107 8,107
2019-A Notes June 2026 6.74% 42,154 42,154
OnDeck Account Receivables Trust
2013-1 May 2021 (e) - - -
Receivable Assets of OnDeck December 2023 (f) 2.62% 100,000 -
OnDeck Asset Funding II August 2022 (g) - - -
OnDeck Asset Securitization
Trust III May 2027 (h) 2.07% 300,000 300,000
Other funding debt(i) Various (j) 4.60% 60,442 32,996
Total funding debt 3.10% $ 665,665 $ 413,847
Corporate Debt:
8.50% Senior Notes Due 2024 September 2024 8.50% 250,000 250,000
8.50% Senior Notes Due 2025 September 2025 8.50% 375,000 375,000
Revolving line of credit June 2025 4.00% 310,000 (k) -
Other corporate debt April 2022 1.00% 795 795
Total corporate debt 8.50% $ 935,795 $ 625,795
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(a) The weighted average interest rate is determined based on the rates and
principal balances on
amortization of deferred loan origination costs or debt discounts.
(b) The period during which new borrowings may be made under this facility
expires in
(c) The period during which new borrowings may be made under this facility
expired in
(d) The period during which new borrowings may be made under this facility
expired in
25, 2021.
(e) The period during which new borrowings may be made under this facility
expired in
19, 2021.
(f) The period during which new borrowings may be made under this facility
expires in
(g) This facility was repaid and terminated on
(h) The period during which new borrowings may be made under this facility
expires in
(i) These debt facilities support our operations in
in Australian dollars. The total local currency borrowing capacity is AU$80.6
million, of which there is AU$44.0 million in principal outstanding at
(j) The periods during which new borrowings may be made under the various
agreements expire between
(k) We had an outstanding letter of credit under the Revolving line of credit of
Our ability to fully utilize the available capacity of our debt facilities may also be impacted by provisions that limit concentration risk and eligibility.
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