Enova International Inc (ENVA) 2018 Q3 法說會逐字稿

Good afternoon and welcome to the Enova International Third Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Monica Gould, Investor Relations for Enova. Please go ahead.

Thank you, Phil. And good afternoon, everyone. Enova released results for the third quarter of 2018 ended September 30, 2018, this afternoon after the market closed. If you did not receive a copy of our earnings press release, you may obtain it from the Investor Relations section of our website at ir.enova.com.

With me on today's call are David Fisher, Chief Executive Officer; and Steve Cunningham, Chief Financial Officer.

This call is being webcast and will be archived on the Investor Relations section of our website.

Before I turn the call over to David, I'd like to note that today's discussion will contain forward-looking statements based on the business environment as we currently see it and, as such, does include certain risks and uncertainties. Please refer to our press release and our SEC filings for more information on the specific risk factors that could cause our actual results to differ materially from the projections described in today's discussion. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events.

In addition to U.S. GAAP reporting, we report certain financial measures that do not conform to generally accepted accounting principles. We believe these non-GAAP measures enhance the understanding of our performance. Reconciliation between these GAAP and non-GAAP measures are included in the tables found in today's press release.

As noted in our earnings release, we have posted supplemental financial information on the IR portion of our website.

And with that, I'd like to turn the call over to David.

Thanks, Monica. Good afternoon, everyone, and thanks for joining our call today. I am going to start by giving a brief overview of the quarter and I'll update you on our 2018 strategy. And finally, I will share our perspective looking forward. After my remarks, I'll turn the call over to Steve Cunningham, our CFO, to discuss our financial results and guidance in more detail.

The third quarter was another impressive quarter for Enova. We once again, produced strong new customer growth that drove record revenue, and stable credit and efficient marketing allowed us to deliver solid profitability even with the high mix of new customers. Revenue increased 35% year-over-year to $294 million. This is well above the high end of our guidance range and marks the 10th consecutive quarter of double-digit year-over-year revenue growth and the third consecutive quarter of growth in excess of 30%.

Adjusted EBITDA for the quarter rose 30% year-over-year to $44 million and adjusted EPS increased 84% to $0.46. Both of these metrics were in line with the midpoint of our guidance.

Due to the strong demand, loans to new customers represented 31% of total originations in the quarter. This is the highest level we have seen since 2004, our first year in business. As we've mentioned in the past, these new customers ultimately expand our returning customer base and our revenue potential going forward. As we've commented on many times, strong revenue growth, particularly from new customers typically leads to more muted earnings as we incur marketing dollars to attract those new customers and reserve a larger provision for losses upfront. However, we've shown our ability to overcome this challenge by keeping marketing expenses low and credit performance high, all while leveraging our efficient online model, which has enabled us to significantly grow the business without adding large amounts of infrastructure and expense. This is how we produced 30-plus percent adjusted EBITDA growth, even with a sizable revenue growth.

The strong new customer growth we've been generating, combined with a solid base of loyal, returning customers and stable credit across the portfolio, creates significant tailwinds for us.

Our total AR has increased 32% year-over-year, which is built in earnings, especially when you layer on expected additional growth from all of the new customers we've been acquiring.

Based on these strong tailwinds, we're raising both our Q4 and full year guidance, as Steve will discuss in more detail. We're also very optimistic about 2019 and our ability to generate continued growth and increasing profitability.

While we are seeing strength across all of our businesses, our installment and line of credit products are resonating the strongest with our customers, proving out the merits of our diversification strategy.

Total company-wide originations in Q3 increased 16% sequentially and 23% year-over-year. Installment loans and lines of credit now comprise 80% of our total revenue and 90% of our total portfolio. Our success and positive results across our short-term line of credit and installment and receivable purchase agreement segments is attributable to our focus on our 6 growth businesses. Namely, our U.S. subprime business, our U.S. near-prime offering; our U.K. consumer brands, U.S. small business financing, our installment loan business in Brazil; and Enova Decisions, our Analytics-as-a-Service business.

We remain focused and actively building out each of these businesses and adding additional products within them to drive further growth.

We're seeing growth accelerate in our large U.S. subprime consumer business even with its large size. Originations in this business increased 28% year-over-year. The portfolio remains well diversified, consisting of 48% line of credit products, 34% installment products and only 18% single-pay products.

According to the OCC, millions of consumers in the United States borrow nearly $90 billion every year in short-term small-dollar loans. We're committed to helping these hardworking people get access to fast, trustworthy credit. Given our single-digit market share in this large and fragmented market, our vast experience and continued strong demand, we believe we have significant runway ahead of us to further grow our U.S. subprime offering.

In the U.K., we are also seeing very strong growth. We remain the leading subprime lender by market share and we believe we are well positioned to capture additional share. As many of you are aware, one of our largest competitors in the U.K. went into administration during the third quarter, primarily driven by company-specific factors and lack of profitability, combined with elevated customer complaints. While the entire subprime industry in the U.K. is facing higher complaints to the financial opposition we believe our compliance lending and best practices position us well to succeed long term in the U.K.

We'd like to provide some additional color on our performance in the U.K. this quarter. Third quarter U.K. revenue increased nearly 20% compared to the same period last year, primarily driven by strong growth in our installment loan product. Loan originations rose 17% from Q3 of last year, led by a robust new customer growth. And while complaint-related expenses have increased, you can see that it has had little impact on Enova overall, given our significant scale. Operations and technology expenses, which includes cost related to U.K. complaints only increased 4% year-over-year, even with the 35% overall revenue growth for Enova.

As we've mentioned before, our U.K. business continues to be profitable and our results reflect sustainable steady growth even with the rise in complaints.

Net credit loan balances increased 37% year-over-year to $453 million and originations increased 21% year-over-year.

Our U.S. near-prime product, represented 50% of our total portfolio at the end of Q3. We have been very successful at growing this business by taking share from incumbent brick-and-mortar installment lenders due to the ease of use and flexibility of our online model. As Steve will discuss in more detail, to support net credit's rapid growth, we've added additional liquidity this year, which has also lowered our cost of capital.

Our small business financing portfolio represented 8% of our total book at the end of Q3. Originations were flat year-over-year, and our loan portfolio contracted 5%, reflecting our cautious approach to business trending as the market rationalizes.

Our hard work over the last couple of years to build a stable and robust lending and operating platform in Brazil is starting to yield results. Our Brazilian loan portfolio increased 17% year-over-year to $20 million at the end of Q3. On a constant currency basis, Q3 originations rose 59% year-over-year and 30% sequentially.

We continue to see significant opportunity in Brazil with a huge population, growing middle-class and stable regulatory environment. And we believe we are uniquely positioned to grow our market share with our great team there and flexible online model.

Lastly, Enova Decisions, a real-time Analytics-as-a-Service business, continues to gain momentum. While this business is still in the very early stages, we are active in building out our pipeline and are excited about the opportunity to increase our rate of customer acquisition.

Before wrapping up my remarks, I want to provide a brief regulatory update. A few weeks ago, the California Department of Business Oversight sent a request for information to lenders, asking about their interaction with lead providers in the state. Our CashNetUSA business received this request and will provide a response. That DBO has said that this request is intended to obtain data to support legislation requiring the licensing of lead providers. Our team is engaged with our industry partners and with the legislators to address this and other areas that can provide good regulation based on data and protect consumers' access to credits. As you know, our dependence on lead providers has decreased dramatically over the last few years. In fact, lead providers are a competitor of ours across all of our marketing channels. And we believe we can be a significant beneficiary, if they're more strictly regulated.

On the federal level, 2 weeks ago, the CFPB announced that it intends to engage in rulemaking to reconsider the small dollar rule, which currently has a scheduled implementation date of August 2019.

The CFPB said they expect to issue a notice of proposed rulemaking in early 2019 that will address reconsideration of the rule on its merits as well as address changes to the compliance date. It isn't clear what the outcome would be of the new rulemaking, but we have identified areas where the current rule would benefit from improvement and we're committed to work with the bureau as it seeks to improve the rule.

Our ongoing diversification efforts have reduced our regulatory risk and the flexibility of our online model provides us with a significant advantage to adapt to new regulation. As a result, we are confident in our ability to continue to have a robust U.S. business under any likely final rule, and believe we will have a significant advantage over storefront lenders.

Overall, we are excited about the strong growth and sustained momentum at Enova. Revenue is up 30% year-to-date versus last year, driven by strong demand and stable credit across each of our 6 growth businesses, as we've shown our ability to obtain larger and larger numbers of new customers. And we remain determined on managing the business to maintain consistent profitability even with strong growth, as evidenced by adjusted EPS being up 86% year-to-date.

Finally, we believe our focused growth strategy, ongoing diversification, scalable online model and world-class team position us well for long-term profitable growth.

Now, I will turn the call over to Steve, our CFO, who'll provide more details on our financials and guidance. And following his remarks, we'll be happy to answer any questions that you may have. Steve?

Thank you, David, and good afternoon, everyone. I'll start by reviewing our financial and operating performance for the third quarter and then provide our outlook for the fourth quarter and the full year 2018.

We're pleased to report another quarter of strong financial results, with the receivables growth again above 30%, revenues substantially above our expectations and adjusted EBITDA and adjusted earnings per share at the midpoint of our guidance.

Total third quarter 2018 revenue increased 35% to $294 million, exceeding our guidance range of $260 million to $275 million, and rose 16% sequentially. On a constant currency basis, revenue increased 36% year-over-year.

And we are growing faster. Revenue growth accelerated from a year ago in the second quarter, driven by an increase in total company combined loan and finance receivables balances, which rose 32% year-over-year to $1.02 billion from $772 million at the end of the third quarter of 2017. Installment loan and line of credit products continue to drive the growth in total loan and finance receivables balances.

Total company originations during the quarter increased 23% year-over-year to $698 million, while originations in our installment and RPA and line of credit products increased 27% and 44%, respectively.

As we've discussed in the past, the ongoing diversification of our receivables portfolio has been generating faster receivables growth in our line of credit and installment loan products. These products have longer durations and higher average loan amounts. As a result, we're able to drive higher total company receivables and revenue growth with fewer originations, which generally should result in less effort and lower cost to grow over time. This is a leading factor of the recent trend of lower operating expense, as a percentage of revenue.

Domestically, revenue increased 38% on a year-over-year basis and rose 18% sequentially to $251 million in the third quarter of 2018. Domestic revenue accounted for 85% of our total revenue in the third quarter. Revenue growth in our domestic operations was driven by a 41% year-over-year increase in installment loan and finance receivable revenue and 43% increase in line of credit revenue. Continued strong demand for these products drove our domestic combined loan and finance receivables balances up 34% year-over-year.

Driven by the strong growth of NetCredit, domestic near-prime installment loans grew 37% year-over-year and comprised 44% of total company combined loan and finance receivables balances at the end of the third quarter.

International revenue increased 18% from the year-ago quarter to $43 million and accounted for 15% of total revenue in the third quarter. On a constant currency basis, international revenue rose 23% on a year-over-year basis. Year-over-year international revenue growth was driven by a 29% increase in international installment loan revenue and a 7% increase in short-term loan revenue. International loan balances were up 20% year-over-year, as international installment loans grew 23%. International installment originations rose 43%, compared to the year-ago quarter. On a constant currency basis, international loan balances were up 28% year-over-year.

Turning to gross profit margins. Our third quarter gross profit margin for the total company was 44%, which compares to 51% in the year-ago quarter and a gross profit margin of 52% in the second quarter of 2018. We typically see a decline in gross profit margin during the second half of the year, as we move into our seasonal growth periods. This can be especially pronounced during periods of accelerating growth like we've experienced in recent quarters, and if a higher proportion of growth is coming from new customers.

As we've highlighted in the past, higher mix of new customers and originations requires higher loss provisions upfront as new customers default at a higher rate than returning customers with a successful history of payment performance. Originations from new customers across all of our businesses were 31% of the total, which, as David mentioned, is the highest quarterly proportion we've seen since 2004. New customer originations accounted for 37% of the quarterly year-over-year change in total company originations.

Through the first 9 months of 2018, new customer originations have totaled 29% of total company originations compared to 26% for the same period a year ago, and have accounted for 43% of the year-over-year increase in total company originations for that period.

Net charge-offs, as a percentage of average combined loan and finance receivables, increased in the third quarter to 13.8% from 11.9% in the prior year quarter. This increase was expected, given the rising proportion of new customers in our portfolio. Overall, the credit performance of the portfolio was stable during the quarter and in line with our expectations, given the significant increase in new customer volume so far this year.

Similarly, the allowance and liability for losses for the consolidated company as a percentage of combined growth, loan and finance receivables at the end of the third quarter was 15.1% compared to the year-ago quarter at 13.9%. As you can see in our supplemental earnings release tables, the increase in the consolidated net charge-off ratio is driven by the year-over-year increases in the line of credit and installment loan in RPA segments, which are experiencing the fastest growth and the highest proportion of new customer volume and originations.

Let me use the line of credit segment as a simplified example of how significant increases in new customer volume can increase the provisional expense in line with our credit expectations. For the first 9 months of 2018, about 1/3 of our originations for the line of credit segment were from new customers. This compares to 24% for the same period in 2017.

In addition, in recent vintages, new customers in this segment charge off, on average, at a rate roughly 3x higher than for returning customers. So if about 9% more of the line of credit segment portfolio was comprised of new customers that on average will charge off at roughly 3x higher then, all things being equal, you would expect to see the ratio of portfolio charge-offs to rise above 36%.

Net charge-offs as a percentage of average combined loan and finance receivables, in this segment increased in the third quarter to 18.1% from 13.4% a year ago, or about 35%. The same new versus returning customer dynamic apply to all of our segments, as it relates to net charge-offs and allowance coverage levels and trends.

And our marginal investment decisions for acquiring vintages of new customers considers not just the expected performance on the first loan, but also the expected lifetime value of customers as they become recurring customers. We are very pleased with our ability to continue to attract new customers, as this sets us up very well for continued profitable growth in the future.

We expect the fourth quarter and full year consolidated gross profit margin to be within our expected range of 47% to 57%. You may recall that the fourth quarter gross profit margin typically falls in the low end of our range due to seasonality and in fact, our gross profit margin for the fourth quarter of 2017 was 48%. Ultimately, the fourth quarter and full year consolidated gross profit margins will be influenced by the pace of growth in originations, the mix of new versus returning customers and originations and the mix of loans and financings in the portfolio.

Our domestic gross profit margin was 43% in the third quarter compared to 51% in the third quarter of 2017. Gross margin declined from 52% in the second quarter, driven by the reasons I've previously discussed.

Our international gross profit margin was 51% in the third quarter compared to 48% in the prior year quarter. The increase in international gross profit margin from the year-ago quarter was driven primarily by higher U.K. installment yields and a lower cost of revenue for U.K. short-term products. We expect our international gross profit margin for the full year to be at the low end of our range of 50% to 60%, driven by the pace of growth we see, especially in the U.K., as well as the mix of new and returning customers.

Turning to expenses, strong operating leverage from our scalable online model has allowed us to continue to meet strong customer demand while maintaining attractive levels of EBITDA. Total non-marketing operating expenses of $53 million for the third quarter were flat to the year-ago quarter and our total operating expense, including marketing, were $89 million or 30% of revenue in the third quarter, compared to $79 million or 36% of revenue in the third quarter of 2017. Marketing expenses in the third quarter grew 33% compared to the year-ago quarter to $36 million or 12% of revenue, compared to $27 million or 12% of revenue in the third quarter of 2017. The increase in marketing spend drove strong customer volumes this quarter while maintaining attractive CPS. We expect marketing spend will likely range in the mid-teens percentage of revenue for the remainder of the year.

Operations and technology expenses totaled $28 million or 10% of revenue in the third quarter compared to $27 million or 12% of revenue in the third quarter of 2017, and were higher primarily on volume-related variable expenses, including the ongoing expenses associated with complaints in the U.K.

General and administrative expenses were $24 million or 8% of revenue in the third quarter compared to $25 million or 12% of revenue in the third quarter of the prior year and reflect lower legal, compliance and personnel expenses.

Adjusted EBITDA, a non-GAAP measure of $44 million increased 30% year-over-year in the third quarter. Our adjusted EBITDA margin was 15.1% compared to 15.7% in the third quarter of the prior year.

Our stock-based compensation expense was $2.9 million in the third quarter, which compares to $3 million in the third quarter of 2017.

Our tax provision for the third quarter benefited primarily from utilizing available tax methods and elections to accelerate tax deductions on the 2017 tax return filing. In typical years, these deductions would have only resulted in changes to the timing of recognition of taxes between financial reporting and tax returns. However, because of the recent tax -- federal tax law change, onetime permanent savings from these deductions were required to be recognized in the tax provision line. We continue to believe that our normalized effective tax rate will be in the mid-20%.

Net income was $15.3 million in the third quarter or $0.43 per diluted share, which compares to a net loss of $3.4 million or a loss of $0.10 per diluted share in the third quarter of 2017. Net income was benefited from rising EBITDA, a drop in the company's cost of financing and the drop in the effective tax rate. Net income includes a loss on the early extinguishment of debt during the quarter of $12.5 million, as a result of retiring $179 million of our 9.75% 2021 notes during the quarter with a portion of the proceeds from our 8.5% unsecured senior note issuance during September.

The remaining 9.75% 2021 notes were called during October, using unrestricted cash and cash equivalents.

Adjusted earnings, a non-GAAP measure, increased 89% to $16.3 million or $0.46 per diluted share from $8.6 million or $0.25 per diluted share in the third quarter of the prior year.

During the third quarter, cash flows from operations totaled $172 million. And we ended the quarter with unrestricted cash and cash equivalents of $164 million and total debt of $951 million. Our debt balance at the end of the quarter included $226 million outstanding under our $445 million of combined installment loans securitization facilities.

We continue to successfully access financing markets to provide new sources of efficient capital to support growth or [reladder] and refinance existing debt. During the quarter, we accessed the unsecured senior note market to raise $375 million of 7-year notes at 8.5%, which were used to retire existing 9.75% notes and support liquidity, as we move into our seasonal peaks for growth.

Also in October, we amended our bank-led secured revolving line of credit to increase borrowing capacity from $75 million to $125 million with no change in the borrowing cost of prime plus 1%. Today, we announced 2 additional transactions. First, we added a new 2-year $150 million secured facility at a cost of 1-month LIBOR plus 375 basis points to support the growth of our NetCredit near-prime installment product. The new facility brings our total near-prime secured facility capacity to $595 million. And finally, today, we also announced the pricing of our inaugural multiclass NetCredit term securitization. The $125 million security has a blended fixed cost of 6%. The transaction reflects our ability to access a new market, expand our investor base and further lowers our cost of financing. In total, so far this year, we have raised $885 million of funding from diverse sources at competitive costs, resulting in our lowest public company quarterly cost of funds ever, despite increases in market interest rates. Our cost of funds for the third quarter was 9.6%, a 70 basis point decrease from the same quarter a year ago. We expect our cost of funds to continue to improve into 2019, as we recognize the cost benefits of recent transactions.

Now I'd like to turn to our outlook for the fourth quarter and full year 2018. Our outlook reflects continued strong growth in each of our businesses, stable credit, a sustained higher mix of new customers and originations and no significant impact to our businesses from regulatory changes. Any significant volatility in the British pound from current levels could impact our results. We expect to experience our typical quarterly seasonality during the fourth quarter of 2018, as we continue to add new customers across our businesses. During our peak growth period, gross margin, EBITDA and earnings per share could be impacted by higher marketing spend and provisions for losses.

As noted in our earnings release, we are raising our fourth quarter of 2018 guidance. We expect total revenue to be between $290 million and $310 million, diluted earnings per share to be between $0.17 and $0.38 per share, adjusted EBITDA to be between $43 million and $53 million and adjusted earnings per share to be between $0.40 and $0.61 per share. For the full year 2018, we are again raising our guidance, and now expect total revenue to be between $1.091 billion, and $1.111 billion, diluted earnings per share to be between $1.92 and $2.13 per share, adjusted EBITDA to be between $205 million and $215 million, and adjusted earnings per share to be between $2.46 and $2.67 per share.

We'll provide detailed guidance for 2019 on our Q4 call early next year. But as David mentioned, we are very optimistic about 2019 and our ability to generate growth and increasing profitability.

And with that, we would be happy to take your questions. Operator?

(Operator Instructions) The first question comes from David Scharf with JMP Securities.

It's probably similar to what I've asked the last couple quarters, but maybe just starting on the demand side. I know you've acknowledged, David, that you still have a very limited market share in this overall TAM. But I'm just curious, I mean, any sense for where some of the -- where a lot of these new customers are coming from? And whether there are other products that they may be refinancing with yours as well?

I mean, I think, David, you're overthinking this a little bit. These are shorter term-ish loans, even our NetCredit product with an average term of 4 to 5 years and average duration of only 2 plus. People aren't refinancing to go into these short-term, they're taking loans when they need them. So they're continually back in the market. And when they're in the market, they're going to what they view as the most attractive source. And because of the new products we've rolled out, our efficient marketing, our pricing, our website, we are continually winning when they're in the market. It's a nice thing about the product, right? It's not like a 30-year mortgage, where if you lose the customer, it's a long time until you have another to bite at the apple. We continually have bites at the apple and with single-digit market share, we've lots of opportunity to continue to grow by winning those continuous opportunities. So it's been -- it's really a combination of those factors. It's great product, continuous improvement on the product side, continual shift to installment and line of credit, and those aren't one-off things, and we've numerous installment products and numerous line of credit products. When you combine those with really good marketing, we are winning when those customers are in the -- when they're in the marketplace for credit. If the advantage over our business over a like a long -- any kind of other longer-term product, loan product or any other product, you have -- when you're doing well, you have lots of opportunity to take share.

Yes. Well, and maybe what I was getting at obviously, these are short term in nature, and so are a lot of the store-based installment lenders that you're taking share from. And I didn't know if any of your customers may be in situations where they pay down 50% to 75% of a store-based loan, didn't get re-upped maybe by that lender and then are coming online but it sounds like...

Yes, no, it's not that. Storefront lenders, historically, will continue to fund their customers forever, the storefront guys. I think what we're seeing is customers would much rather go online and the efficiency of just logging on with their phone anytime, anyplace, anywhere, not having to schlep down from the storefront lender with kids in tow, and bringing their paperwork along with them, instead just apply to Enova, be approved in as little as 5 minutes and increasingly, we're able to do same-day funding with our customers. So some of the historic benefits of the storefront lenders in terms of speed are quickly going away with the rapid rise of same-date funding.

Got it. And turning to the credit side, it's been a recurring theme obviously, with the percentage of new customers, within the origination pool that it requires more provisioning upfront. I've probably asked in the past whether you wanted to go much beyond 30% of volumes, being attributable to new customers. It looks like you approached that this quarter. Just trying to get a sense, should we be thinking about an inflection point in terms of the percentage of the overall portfolio that consists of repeat borrowers and when loss rates might peak? It's such a fluid moving target in terms of modeling. Expected losses, trying to get a little more of a road map into sort of this 14 percent-ish range for blended quarterly losses, if we should be thinking of that as a peak or should it go beyond that?

I think, as I mentioned, in my prepared remarks, we're still seeing very strong demand. We don't see that abating anytime soon. We can be proven wrong, but from what we see right now, our products are continuing to resonate extremely well in the market. The demand remains strong, and I think, as we try to emphasize on the call, there's really 2 things that are encouraging us to continue to take all of the new customer volume -- good new customer volume that we can. The first is even with those high -- that high level of new customer growth, we're still able to generate strong overall profitability because of the stable credit and kind of the efficient operating structure. And that we are able to -- we are seeing very stable credit performance across our portfolio and across our vintages. So the combination of those factors makes us absolutely willing to take all the new good customer volume we can get because we're building a strong business ahead without having to invest at levels that are challenging our profitability today. So we think we're in a really nice spot that allows us to lean into that strong demand.

Okay. One last quick one and then I'll get back in queue. On the small business product, it's been quite a number of quarters where you've provided similar commentary about being cautious and restrained and I know, the big public comp out there in online small business lending is actually sort of maybe contrasting viewpoint that relative to maybe a couple of years ago, it's not as frothy. I'm wondering, David, is there a -- are there a few things that you're looking for in particular, that sort of drive a decision about whether you want to reaccelerate that business or perhaps wind it down?

Look, the business is profitable today, and it doesn't require as huge amount of focus, it's got a good team that is kind of separate and so it's -- we're able to tread water a little bit here. I hear comments about OnDeck, but keep in mind, their focus over the last 2 years has been retrenching on the origination side and cutting expenses. So it's still unclear with -- even at kind of that size of originations, they're able to make a significant amount of money. So that keeps us actually remaining cautious with the business not being a drain on the rest of our resources, we're willing to be patient, we won't be patient forever, but for now, we believe in the market long term, unlike other businesses where we've exited where we didn't believe in the market long term. So we're still patient and we'll see how the market evolves over the next year or 2 years.

The next question comes from John Rowan with Janney.

So I just want to make sure I understand, in the press release, it says stable credit. Obviously, charge-offs are higher year-over-year. When you talk about stable credit, what we're talking about is just that the charge-off rates between new customers and existing customers are stable but the mix shift toward new customers is causing the overall charge-off rate to go higher? Is that an accurate statement and how that interpret your comments?

That's exactly right. And Steve gave that really detailed example of how -- exactly how it works on line of credit portfolio, how you can see that effect. So yes, that's correct. If you, kind of, isolated credit performance across vintages with new customers and separated them from existing customers, you would see very stable charge-off rates.

And, John, I think if you go back -- I was going to add, John, if you go back and look at our allowance coverage through time, which is really covering the next 90 days of losses, I think you can see we're pretty close from quarter-to-quarter with how we're doing with that, which is another good example of that with expectations in stability.

Okay. What was the data that you gave about new customers? I didn't get it down, if you could repeat it?

Sure. So for the quarter, it was 31%. The other piece I gave for the consolidated company was the year-to-date new customer proportion in originations, which for 2018 year-to-date is 29% versus 2017, it was 26%.

We're talking about new customer origination as a percent of total originations, correct?

That's correct.

Okay. And then just one question on regulations. You guys kind of opened the door to the question. So you guys have always talked about addressing new customers as if -- and assigning a lifetime value to them. Right? Obviously, we're going to -- we're kind of in limbo as far as what the regulations are going to look like. And how do you handicap that? And is there any risk of a change in the way you address a new customer going into 2019, based on how you will assess their lifetime value win, we don't necessarily know what the end product is going to be from the CFPB?

Yes, I mean we've been taking into account the CFPB's proposed rule for quite some time now. It's been out -- the final rule, which is now the not final rule for quite some time now has been a proposed rule for over 2.5 years now, maybe. And so that's -- we've had that calculus for a long time. We don't know what the new final rule -- the new proposed rule which will become the new final rule will look like, but we certainly expect it to give us more area to operate as opposed to less than the current final rule, that won't -- something won't become effective. So that will only likely increase the expected lifetime value of our customers compared to the current final rule.

So just to be clear, you are already assessing customers on a lifetime basis, based on what the prior final rule was? Right? And...

We are certainly taking that into account in our calculations, yes.

Okay. So if we get a better new, new final rule those lifetime value will look better and frankly, I am just kind of interpolating your comments here, we can even see more aggressive new customer growth if you're assigning better lifetime values under the new, new rules whatever they may be, if they are not restrictive?

It's certainly possible, but obviously, highly dependent on what that new final rule says.

The next question comes from John Hecht with Jefferies.

The quick first question I have just in terms of modeling, you -- obviously you've refied with the lower cost of funds, but it sounds like you've added a lot of liquidity, or capacity as well. Can you give us a sense for kind of run rate Q4 interest expense? How we should think about that?

Yes, John, I would -- I gave you the third quarter cost of funds. I think you can probably take a couple of the notes that we released today on the new transactions and start to factor those in as well. I mentioned that we're not carrying as much cash now as we were at the end of the quarter because we used that to call the remaining non-tendered 2021s. So, I think we're increasingly focused on carrying reasonable amounts of cash on the balance sheet and keeping our standby ready-to-go at the levels that we've talked about. So you should expect to see that cost of funds, all things being equal, without a big spike in the underlying indexes, to continue to sort of creep down from where we are today.

Yes. Cost of funds certainly is going to go lower, but I'm wondering you -- just you've added some threshold of debt, too, for kind of growth capacity or liquidity. So I'm wondering do you have a sense for what the dollar amount of interest rate should trend for next quarter?

It's all going to depend on the growth, John. So...

Most of the debt we added is capacity, that will get filled with the originations as opposed to debt you're taking upfront, cash you're taking upfront and paying interest on upfront.

The senior note balance is up a little bit. We kind of pre-funded, which is the way we always do it when we issue a new note, but the overall coupon is down. Now at 8.5% versus where you were blended. And as David mentioned, our standby, so most of our financings now are in standby mode and you pull them as you need them versus carrying the cash.

So much more efficient. Okay. Got it.

Yes.

I appreciate that -- sorry, were you going to say something else?

No.

Okay. And then I don't understand there is a huge component of the fluctuation, there is seasonal components of fluctuation in charge-offs and then also the mix of new customer and so forth. In the line of credit product, it's undergone really rapid growth, and I'm just wondering if the kind of -- the range of charge-offs we're in now. Is that more reflective of the maturing mix of new versus used customers? Or should we still expect some kind of migration there?

Yes, I mean, the rate of growth in the line of credit product is still very strong. Now it is becoming, just because of the way, just because that product tends to be newer, it is becoming more existing as a proportion faster than some of the other products. Just because 3 years ago, it's almost 100% new customers, we haven't been in that product for very long, but the rate of growth, new customer growth is very, very strong in that product. So it's still going to have higher charge-offs for some time to come, which is a great -- which is from our standpoint, a great, great thing. I mean, it's really a strong product, customers love it, retention levels are very, very high. We've good profitability in that product. We are extremely excited to be growing that product as fast as we are.

Okay. Great. And then final question is, Steve, had you ever give any -- have you been able to give any thought to what you're able to tell us about CECL at this point? Or is it still something you're kind of working through?

Yes, it's a little early. We still have a little bit to go, but it's definitely something that we're looking and as we go, as we're into 2019, obviously, we will talk more about that as it relates to impacts on our performance or adjustments to the outlook. So stay tuned, it's really just going to be with an implementation of onetime if you recall, sort of a onetime balance sheet adjustment and then from there forward, hopefully, it'll actually maybe stabilize things a bit, compared to our quarterly approach that we have today.

This concludes our question-and-answer session. I would like to turn the conference back over to David Fisher for any closing remarks.

Great. Thanks, everybody, for joining us on our call today. We look forward to catching up in early 2019 to give you the wrap-up on the year. Thanks a lot. Have a good rest of your day.

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