Elevate Credit, Inc. files 10-K


Elevate Credit, Inc. files 10-K in a filing on Friday, March 08.

Along with increased revenue growth and improving operating margins, we have also reduced the effective APR of our products for our customers. For the year ended December 31, 2018, our effective APR was 129%, a drop of approximately 49% compared to the year ended December 31, 2013 when the effective APR was 251%. We estimate that, since 2013, our products have saved our customers more than $4.8 billion over what they would have paid for payday loans, based on a comparison of revenues from our combined loan portfolio and the same portfolio with an APR of 400%, which is the approximate average APR for a payday loan according to the Consumer Financial Protection Bureau (“CFPB”). As of December 31, 2018, more than 45,000 Rise customers in good standing were eligible to receive at least a 50% reduction in their APR. Furthermore, with help from our reporting their successful payment history to a major credit bureau, more than 140,000 of our customers have seen their credit scores improve appreciably, according to data from that credit bureau. We believe that these rate reductions and other benefits help differentiate our products in the market and reflect improvements in our underwriting and the maturing of our loan portfolios. Moreover, we believe doing business this way is the right thing to do.

ØIndustry-leading technology and proprietary risk analytics optimized for the non-prime credit market.    We have made substantial investments in our IQ and DORA technology and analytics platforms to support rapid scaling and innovation, robust regulatory compliance, and ongoing improvements in underwriting. Our proven IQ technology platform provides for nimble testing and optimization of our user interface and underwriting strategies, highly automated loan originations, cost-effective servicing, and robust compliance oversight. Our DORA risk analytics infrastructure utilizes a massive (approximately 120 terabyte) Hadoop database composed of more than ten thousand potential data variables related to each of the 2.2 million customers we have served and the over 7.5 million applications that we have processed. Our team of over 50 data scientists uses DORA to build and test scores and strategies across the entire underwriting process, including segmented credit scores, fraud scores, affordability scores and former customer scores. We use a variety of analytical techniques from traditional multivariate regression to machine learning and artificial intelligence to continue to enhance our underwriting accuracy while complying with applicable US and UK lending laws and regulations. As a result of our proprietary technology and risk analytics, approximately 95% of loan applications are automatically decisioned in seconds with no manual review required.

Industry-leading technology and proprietary risk analytics optimized for the non-prime credit market.    We have made substantial investments in our IQ and DORA technology and analytics platforms to support rapid scaling and innovation, robust regulatory compliance, and ongoing improvements in underwriting. Our proven IQ technology platform provides for nimble testing and optimization of our user interface and underwriting strategies, highly automated loan originations, cost-effective servicing, and robust compliance oversight. Our DORA risk analytics infrastructure utilizes a massive (approximately 120 terabyte) Hadoop database composed of more than ten thousand potential data variables related to each of the 2.2 million customers we have served and the over 7.5 million applications that we have processed. Our team of over 50 data scientists uses DORA to build and test scores and strategies across the entire underwriting process, including segmented credit scores, fraud scores, affordability scores and former customer scores. We use a variety of analytical techniques from traditional multivariate regression to machine learning and artificial intelligence to continue to enhance our underwriting accuracy while complying with applicable US and UK lending laws and regulations. As a result of our proprietary technology and risk analytics, approximately 95% of loan applications are automatically decisioned in seconds with no manual review required.

ØIntegrated multi-channel marketing strategy.    We use an integrated multi-channel marketing strategy to directly reach potential customers. Our marketing strategy includes coordinated direct mail programs, TV campaigns, search engine marketing and digital campaigns as well as strategic partnerships. We believe our direct-to-consumer approach allows us to focus on higher quality, lower cost customer acquisitions while maximizing reach and enhancing awareness of our products as trusted brands. We have maintained relatively flat customer acquisition costs (‘CAC’) over the past four years within the range of $200 to $300. Approximately 69% of our customers during 2018 were sourced from direct marketing channels. We continue to invest in new marketing channels that we believe will provide us with further competitive advantages and support our ongoing growth. We expect to continue to expand growth in each of our channels based on improved customer targeting analytics and increasingly sophisticated response models that allow us to expand our marketing reach while maintaining target CAC.

Integrated multi-channel marketing strategy.    We use an integrated multi-channel marketing strategy to directly reach potential customers. Our marketing strategy includes coordinated direct mail programs, TV campaigns, search engine marketing and digital campaigns as well as strategic partnerships. We believe our direct-to-consumer approach allows us to focus on higher quality, lower cost customer acquisitions while maximizing reach and enhancing awareness of our products as trusted brands. We have maintained relatively flat customer acquisition costs (‘CAC’) over the past four years within the range of $200 to $300. Approximately 69% of our customers during 2018 were sourced from direct marketing channels. We continue to invest in new marketing channels that we believe will provide us with further competitive advantages and support our ongoing growth. We expect to continue to expand growth in each of our channels based on improved customer targeting analytics and increasingly sophisticated response models that allow us to expand our marketing reach while maintaining target CAC.

ØAccording to an analysis of FICO credit score data as of 2018, nearly 42% of the US population had non-prime credit score of less than 700, representing approximately 105 million Americans adults.

According to an analysis of FICO credit score data as of 2018, nearly 42% of the US population had non-prime credit score of less than 700, representing approximately 105 million Americans adults.

ØApproximately 22% of Americans over the age of 18, or approximately 53 million Americans, do not have a credit score at all or had credit records that were treated as ‘unscorable’ by traditional credit scoring models used by nationwide credit reporting agencies, according to a 2015 report by Fair Isaac Corporation.

Approximately 22% of Americans over the age of 18, or approximately 53 million Americans, do not have a credit score at all or had credit records that were treated as ‘unscorable’ by traditional credit scoring models used by nationwide credit reporting agencies, according to a 2015 report by Fair Isaac Corporation.

Due to wage stagnation over the past several decades and the continued impact of the last decade’s financial crisis, the New Middle Class is characterized by a lack of savings and significant income volatility. According to a Federal Reserve survey in 2017, 40% of American adults said they could not cover an emergency expense of $400 or would cover it by selling an asset or borrowing money. In the UK, according to a 2018 study published by Zurich UK 24% of adults have no savings at all and 34% feel they would be unable to recover from financial shock. Further, the JPMorgan Chase Institute reported in a 2015 study of 100,000 US customers that 41% saw their incomes vary by more than 30% from month-to-month and noted that the bottom 80% of households by income lacked sufficient savings to cover the volatility observed in income and spending. Compounding these financial realities is the fact that average household income has generally remained flat for over a decade. As a result, our customer base often must rely on credit to fund unexpected expenses, like car and home repairs or medical emergencies.

Following the last decade’s financial crisis, most banks tightened their underwriting standards and increased their minimum FICO score requirements for borrowers, leaving non-prime borrowers with severely reduced access to traditional credit. Despite the improving economy, banks continue to underserve the New Middle Class. According to our analysis of master pool trust data of securitizations for the five major credit card issuers, we estimate that from 2008 to 2016 revolving credit available to US borrowers with a FICO score of less than a 660 was reduced by approximately $142 billion. This reduction has had a profound impact on non-prime consumers in the US and UK who typically have little to no savings. Often, the only credit-like product offered by banks that is available to non-prime borrowers is overdraft protection, which in essence provides credit at extremely high rates. According to a 2008 study by the FDIC, bank overdraft fees can have an effective APR of greater than 3,500%, depending upon the amount of the overdraft transaction and the length of time to bring the account positive.

Consumers are increasingly turning to online and mobile solutions to fulfill their personal finance needs. A 2015 study published by the CFI Group found that 88% of bank customers surveyed in the US conduct about half to all their banking online. In the UK, the Office of National Statistics found in 2018 that seven out of ten adults now bank online, doubling the percentage from ten years before. We believe this growth is an indication of borrower preferences for online and mobile financial products that are more convenient and easier to access than products provided by legacy brick-and-mortar lenders.

ØCompetitive pricing with no hidden or punitive fees.    Our US products offer rates that we believe are typically more than 50% lower than many generally available alternatives from legacy non-prime lenders, and since 2013 have saved our customers more than $4.8 billion over what they would have paid for payday loans. Our products offer rates on subsequent loans (installment loan products) that can decrease over time based on successful loan payment history. For instance, as of December 31, 2018, approximately half of Rise customers in good standing had received a rate reduction, typically after a refinance or on a subsequent loan. In addition, to help our customers facing financial hardships, we have eliminated punitive fees, including returned payment fees and late charges, among others on all products excluding our Today Card credit card, which does include some modest industry-standard fees.

Competitive pricing with no hidden or punitive fees.    Our US products offer rates that we believe are typically more than 50% lower than many generally available alternatives from legacy non-prime lenders, and since 2013 have saved our customers more than $4.8 billion over what they would have paid for payday loans. Our products offer rates on subsequent loans (installment loan products) that can decrease over time based on successful loan payment history. For instance, as of December 31, 2018, approximately half of Rise customers in good standing had received a rate reduction, typically after a refinance or on a subsequent loan. In addition, to help our customers facing financial hardships, we have eliminated punitive fees, including returned payment fees and late charges, among others on all products excluding our Today Card credit card, which does include some modest industry-standard fees.

ØAccess and convenience.    We provide convenient, easy-to-use products via online and mobile platforms. Consumers are able to apply using a mobile-optimized online application, which takes only minutes to complete from a mobile or desktop device. Credit determinations are made in seconds and approximately 95% of loan applications are fully automated with no manual review required. Funds are typically available next-day in the US and within minutes in the UK. Consumers can elect to make payments via preapproved automated clearinghouse (‘ACH’) authorization or other methods such as check or debit card transfer.

Access and convenience.    We provide convenient, easy-to-use products via online and mobile platforms. Consumers are able to apply using a mobile-optimized online application, which takes only minutes to complete from a mobile or desktop device. Credit determinations are made in seconds and approximately 95% of loan applications are fully automated with no manual review required. Funds are typically available next-day in the US and within minutes in the UK. Consumers can elect to make payments via preapproved automated clearinghouse (‘ACH’) authorization or other methods such as check or debit card transfer.

This combination of features has resulted in extremely high customer satisfaction for our products. Internal customer satisfaction ratings were generally over 85% for all of our products during 2018.

ØDifferentiated online and mobile products for non-prime consumers.    Our product development is driven by a deep commitment to solving customers’ immediate financial need for credit and helping them improve their long-term financial future. We call this mission ‘Good Today, Better Tomorrow.’ Our products are ‘good today’ due to their convenience, cost, transparency and flexibility. Our average customer receives an interest rate that we believe is more than 50% less than that offered by many legacy non-prime lenders. In fact, since 2013 our customers have saved more than $4.8 billion over what they would have paid for payday loans based on a comparison of revenues from our combined loan portfolio and the same portfolio with an APR of 400%, which is the approximate average APR for a payday loan according to the CFPB. Furthermore, the convenience of online and mobile access and flexible repayment options distinguish our products from many legacy non-prime credit options. However, we go even further in creating credit products that can help enable customers to have a ‘better tomorrow.’ Based on successful payment history, rates on subsequent loans (installment loan products) can decrease over time, and we provide a path to prime credit for struggling consumers by reporting to credit bureaus, providing free credit monitoring (for US products), and offering online financial literacy videos and tools to help build better financial management skills. With help from our reporting their successful payment history to a major credit bureau, more than 140,000 of our customers have seen their credit scores improve appreciably, according to data from that credit bureau.

Differentiated online and mobile products for non-prime consumers.    Our product development is driven by a deep commitment to solving customers’ immediate financial need for credit and helping them improve their long-term financial future. We call this mission ‘Good Today, Better Tomorrow.’ Our products are ‘good today’ due to their convenience, cost, transparency and flexibility. Our average customer receives an interest rate that we believe is more than 50% less than that offered by many legacy non-prime lenders. In fact, since 2013 our customers have saved more than $4.8 billion over what they would have paid for payday loans based on a comparison of revenues from our combined loan portfolio and the same portfolio with an APR of 400%, which is the approximate average APR for a payday loan according to the CFPB. Furthermore, the convenience of online and mobile access and flexible repayment options distinguish our products from many legacy non-prime credit options. However, we go even further in creating credit products that can help enable customers to have a ‘better tomorrow.’ Based on successful payment history, rates on subsequent loans (installment loan products) can decrease over time, and we provide a path to prime credit for struggling consumers by reporting to credit bureaus, providing free credit monitoring (for US products), and offering online financial literacy videos and tools to help build better financial management skills. With help from our reporting their successful payment history to a major credit bureau, more than 140,000 of our customers have seen their credit scores improve appreciably, according to data from that credit bureau.

ØIndustry-leading DORA risk analytics infrastructure and underwriting scores.    Traditional approaches for underwriting credit such as FICO scores are not adequate for non-prime consumers who may have significant derogatory credit history or no credit history at all. Because continued leadership in non-prime underwriting is essential to drive growth, support continued rate reductions to customers, and manage losses, we built our DORA risk analytics infrastructure to support the development and enhancement of our underwriting scores and strategies. The DORA risk analytics infrastructure utilizes a massive (approximately 120 terabyte) Hadoop database composed of more than ten thousand potential data variables related to each of the 2.2 million customers we have served and the over 7.5 million applications that we have processed. This data is composed of variables from consumer applications and website behavior, credit bureaus, bank account transaction data, numerous other alternative third-party data providers as well as performance history for funded customers. Our team of over 50 data scientists uses DORA to build and test scores and strategies across the entire underwriting process including segmented credit scores, fraud scores, affordability scores and former customer scores. They use a variety of analytical techniques from traditional multivariate regression to machine learning to continue to enhance our underwriting accuracy while complying with applicable US and UK lending laws and regulations. See ‘-Advanced Analytics and Risk Management-Segmentation strategies across the entire underwriting process.’ Across the portfolio of products we currently offer, we have maintained stable credit quality as evidenced by charge-off rates that are generally between 20% and 30% of the original principal loan balances. While we experience month-to-month variability in our loan losses for any variety of reasons, including due to seasonality, on an annual basis, our annual principal charge-off rates have remained consistent since the launch of our current generation of products in 2013. See ‘Management’s discussion and analysis of financial condition and results of operations-Key Financial and Operating Metrics-Credit quality.’ Furthermore, our proprietary credit and fraud scoring models allow not only for the scoring of a broad range of non-prime consumers, but also across a variety of products, channels, geographies and regulatory requirements.

Industry-leading DORA risk analytics infrastructure and underwriting scores.    Traditional approaches for underwriting credit such as FICO scores are not adequate for non-prime consumers who may have significant derogatory credit history or no credit history at all. Because continued leadership in non-prime underwriting is essential to drive growth, support continued rate reductions to customers, and manage losses, we built our DORA risk analytics infrastructure to support the development and enhancement of our underwriting scores and strategies. The DORA risk analytics infrastructure utilizes a massive (approximately 120 terabyte) Hadoop database composed of more than ten thousand potential data variables related to each of the 2.2 million customers we have served and the over 7.5 million applications that we have processed. This data is composed of variables from consumer applications and website behavior, credit bureaus, bank account transaction data, numerous other alternative third-party data providers as well as performance history for funded customers. Our team of over 50 data scientists uses DORA to build and test scores and strategies across the entire underwriting process including segmented credit scores, fraud scores, affordability scores and former customer scores. They use a variety of analytical techniques from traditional multivariate regression to machine learning to continue to enhance our underwriting accuracy while complying with applicable US and UK lending laws and regulations. See ‘-Advanced Analytics and Risk Management-Segmentation strategies across the entire underwriting process.’ Across the portfolio of products we currently offer, we have maintained stable credit quality as evidenced by charge-off rates that are generally between 20% and 30% of the original principal loan balances. While we experience month-to-month variability in our loan losses for any variety of reasons, including due to seasonality, on an annual basis, our annual principal charge-off rates have remained consistent since the launch of our current generation of products in 2013. See ‘Management’s discussion and analysis of financial condition and results of operations-Key Financial and Operating Metrics-Credit quality.’ Furthermore, our proprietary credit and fraud scoring models allow not only for the scoring of a broad range of non-prime consumers, but also across a variety of products, channels, geographies and regulatory requirements.

ØIntegrated multi-channel marketing approach.    Unlike other online non-prime lenders, who typically rely on lead generators to identify potential customers, we use an integrated multi-channel marketing strategy to market directly to potential customers, which includes coordinated direct mail programs, TV campaigns, search engine marketing and digital campaigns, and strategic partnerships. We have created unique capabilities to effectively identify and attract qualified customers, which supports our long-term growth objectives at target CAC. We have maintained a relatively flat CAC over the past four years within the range of $200 to $300. Approximately 69% of our customers for the year ended December 31, 2018 were sourced from direct marketing channels. We believe this approach allows us to focus on higher quality, lower cost customer acquisition while maximizing reach and enhancing awareness of our products as trusted brands. We continue to invest in new marketing channels, including social media and geo-fencing campaigns, which we believe will provide us with further competitive advantages and support our ongoing growth. In 2018, we focused on strategic partner marketing channels, including traffic from Credit Karma, Lending Tree and Quint. While our work to develop this channel continues, we see partner traffic as one of our continued differentiators in the market.

Integrated multi-channel marketing approach.    Unlike other online non-prime lenders, who typically rely on lead generators to identify potential customers, we use an integrated multi-channel marketing strategy to market directly to potential customers, which includes coordinated direct mail programs, TV campaigns, search engine marketing and digital campaigns, and strategic partnerships. We have created unique capabilities to effectively identify and attract qualified customers, which supports our long-term growth objectives at target CAC. We have maintained a relatively flat CAC over the past four years within the range of $200 to $300. Approximately 69% of our customers for the year ended December 31, 2018 were sourced from direct marketing channels. We believe this approach allows us to focus on higher quality, lower cost customer acquisition while maximizing reach and enhancing awareness of our products as trusted brands. We continue to invest in new marketing channels, including social media and geo-fencing campaigns, which we believe will provide us with further competitive advantages and support our ongoing growth. In 2018, we focused on strategic partner marketing channels, including traffic from Credit Karma, Lending Tree and Quint. While our work to develop this channel continues, we see partner traffic as one of our continued differentiators in the market.

(2)As of December 31, 2018. Some legacy customers will have rates as high as 365%, the previous maximum rate.

As of December 31, 2018. Some legacy customers will have rates as high as 365%, the previous maximum rate.

(3)As of December 31, 2018. Some legacy customers will have rates as low as 36%.

As of December 31, 2018. Some legacy customers will have rates as low as 36%.

(1)Elastic term is based on minimum principal payments of 10% of last draw amount per month.

Elastic term is based on minimum principal payments of 10% of last draw amount per month.

We utilize risk-based pricing across the portfolio to optimally serve a large percentage of non-prime customers with rates ranging from 36% to 299%. There are no origination fees, monthly fees, late fees, over-limit fees, or fees for returned payments on the product. Eligible customers may receive a rate reduction on their next loan if certain eligibility criteria are met. The installment loan product is available in 31 states. As of December 31, 2018, more than 50% of Rise installment customers in good standing had received a rate reduction mid-loan or after a refinance or on a subsequent loan. Approximately 53% of Rise installment customers in good standing had refinanced or taken out a subsequent loan as of December 31, 2018, with 31% of the outstanding Rise installment loan balances on that date consisting of new customer loans and 69% related to returning customer loans. The Rise installment effective APR was 133% for the year ended December 31, 2018, which we believe is almost two-thirds lower than the average effective rate of a typical payday loan, based on the CFPB’s findings that the average APR for a payday loan is approximately 400%.

The Rise line of credit product, which was launched in 2017, is available in two states under current applicable state law. Rise line of credit offers a maximum credit limit of $5,000 and charges interest based on the APR of the loan and the average balance for the period. The Rise line of credit effective APR was 183% for the year ended December 31, 2018.

Elastic, currently available in 40 US states, is an online line of credit designed to be a financial safety net for non-prime consumers. It is originated by a third-party lender, Republic Bank. See ‘Management’s discussion and analysis of financial condition and results of operations-Components of our Results of Operations-Revenues.’ Elastic offers a maximum credit limit of $4,500 and charges an initial advance fee of $5 for each $100 advanced against the credit line, as well as a fixed charge of approximately 5% of open balances each payment period. Elastic’s effective APR based on this was approximately 97% for the year ended December 31, 2018, more than 75% lower than the average effective rate of a typical payday loan, based on the above-mentioned findings by the CFPB. There are no origination fees, monthly fees, late fees, over-limit fees or fees for returned payments on the product. Additionally, consumers must make a 10% mandatory principal reduction each month designed to encourage the full repayment of the original loan amount in approximately 10 months or less.

Sunny is our online UK installment loan product, currently offering loans of up to £2,500. Rates range from 10.5% per month to 24% per month. It has a differentiated offering based on a wider range of loan amounts, a no-fee guarantee, price promotions and more flexible repayment options than most other providers in the UK short-term lending market.

After six years, we believe Sunny has become one of the top online, high-cost short-term loan products in the UK. In 2018 alone, Sunny helped more than 104,800 new customers gain access to credit, and generated revenue of more than $120 million. This 20% year-over-year growth, and data provided by a major UK credit reporting bureau, indicates we have approximately 20% market share.

As our lowest APR product, Today Card now allows us to serve a broader spectrum of non-prime Americans. We plan to offer Today Card nationwide. As of December 31, 2018, we have only cross marketed Today Card to existing and former Rise customers. It is our plan to continue testing throughout 2019 and scale this product in 2020. Our initial marketing of the Today Card to Rise customers resulted in a very high 8% response and activation rate.

Today Card features an app and mobile-first interface. After hearing from our existing customers about the need for unsecured non-prime credit cards, we designed Today Card to offer a larger than industry norm credit line with expanded features. These features include an on/off switch, family sharing, fraud protection and credit score monitoring. Today Card also features our lowest APR, at 29.99% to 34.99% variable. The Today Card also has an annual fee, late fees, returned payment fees and other customary fees.

Credit and fraud determinations are made in seconds and approximately 95% of loan applications for all products are fully automated with no manual review required, based on our proprietary credit and fraud scoring models and affordability assessments. Once approved, the customer is provided the loan amount and relevant terms of the credit being offered. Of the approximately 5% of loan applications requiring manual review, in the US, the majority require further documentation, which can be provided via scanning, fax, email or mail. Others may have failed a fraud rule in the applicable underwriting methodology and are managed based on the rule failed, and others are reviewed to address ‘know your customer’ and/or OFAC requirements. In the UK, of the loan applications requiring manual review, the vast majority require further verifications or other forms of identification, while the remaining portion requires further review based on fraud alerts by an industry database of fraudulent consumer activity, known as CIFAS. We provide declined customers with the reasons for the decision as per regulatory requirements.

In the UK, digital advertising has been a focus for business marketing efforts in 2018. With increased use by consumers of digital platforms, and the importance of digital marketing efforts to Sunny’s business performance, we have sought to ensure a strong brand presence at multiple touchpoints across a customer’s user journey. We undertook a technical audit of the core Sunny website and content management system in 2018, which has transformed the SEO performance of Sunny. With new creative content including financial education, savings around the home and research, Sunny’s website’s health measure (the total number of internal URLs crawled by Google) has improved from 48% to 84% which, in turn, has tripled the site’s visibility within Google. This has resulted in the site’s appearance on page one in Google Rankings for more than eighty keyword searches by year-end, which we believe has boosted our business performance. Data analysis has shown an increase in our monthly traffic by more than 25%, which has, in turn, doubled the monthly loan applications from this channel by the end of 2018.

We have witnessed strong repeat customer use of our products. Historically, more than 50% of Rise installment customers who repay their loan have taken out an additional loan, often at a lower rate. Because there is no additional CAC for originating those additional loans, these transactions are highly profitable and can support offering a lower APR for consumers.

In addition, bank overdrafts often function as an expensive form of emergency credit. According to a 2008 study by the FDIC, bank overdraft fees can have an effective APR greater than 3,500%, depending upon the amount of the overdraft transaction and length of time to bring the account positive.

Most legacy non-prime lenders still operate primarily out of legacy brick-and-mortar locations and require extensive documentation and face-to-face interactions. With online and mobile-only products, Elevate eliminates the potential need for our customers to drive across town and stand in line to apply for credit. In fact, with our products, the credit determination is made in seconds and approximately 95% of loan applications are fully automated with no manual review required.

Military Lending Act.    The Military Lending Act (‘MLA’) restricts, among other things, the interest rate and other terms that can be offered to active military personnel and their dependents on most types of consumer credit. The MLA caps the interest rate that may be offered to a covered borrower to a 36% military annual percentage rate (‘MAPR’), which includes certain fees such as application fees, participation fees and fees for add-on products. The MLA also requires certain disclosures and prohibits certain terms, such as mandatory arbitration if a dispute arises concerning the consumer credit product.

Privacy laws.    In the UK, we are subject to the requirements of the EU General Data Protection Regulation (“GDPR”). The GDPR is designed to harmonize data privacy laws across Europe, to protect and empower all EU citizens’ data privacy and to reshape the way organizations across the region approach data privacy. The GDPR is more prescriptive than the existing regime and includes new obligations on businesses, for example, the appointment of a data protection officer, self-reporting of breaches, and obtaining express consent for data processing and providing more rights to individuals whose data is processed, including the ‘right to be forgotten,’ by having such individuals’ records erased. Penalties for non-compliance under the GDPR are up to 4% of annual global turnover (a.k.a. total revenues) for the preceding year or €20 Million (whichever is greater).

The table below presents the maximum APR allowed by state for states in which Rise is offered through state licenses or through CSO lenders. Sunny is subject to a 24% monthly APR limit, which is nationwide in the UK. Elastic is a fee-based product without a periodic rate that requires the disclosure of an APR. The Today Card’s variable APR ranges from 29.99% to 34.99% and also has certain additional fees that may be charged, including late fees, returned payment fees, an annual fee and other customary fees.

(6)Tennessee has a statutory maximum APR allowed equal to periodic interest of 24% per year (this only applies to periodic interest and not fees) plus a daily fee of 0.7% of the average daily principal balance in any billing cycle.

Tennessee has a statutory maximum APR allowed equal to periodic interest of 24% per year (this only applies to periodic interest and not fees) plus a daily fee of 0.7% of the average daily principal balance in any billing cycle.

In recent years, consumer loans, and in particular the category commonly referred to as ‘payday loans,’ have come under increased regulatory scrutiny that has resulted in increasingly restrictive regulations and legislation that makes offering consumer loans in certain states in the US or the UK less profitable or unattractive. On October 5, 2017 the Consumer Financial Protection Bureau (the “CFPB”) issued a final rule covering loans that require consumers to repay all or most of the debt at once, including payday loans, auto title loans, deposit advance products, longer-term loans with balloon payments and any loan with an annual percentage rate over 36% that includes authorization for the lender to access the borrower’s checking or prepaid account (the “2017 Rule”). See “The CFPB issued proposed revisions to its 2017 rules affecting the consumer lending industry, and these or subsequent new rules and regulations, if they are finalized, may impact our US consumer lending business” below for more information.

Our net charge-offs as a percentage of revenues for the years ended December 31, 2018 and 2017 were 52% for both periods. Because of the non-prime nature of our customers, it is essential that our products are appropriately priced, taking this and all other relevant factors into account. In making a decision whether to extend credit to prospective customers, and the terms on which we or the originating lenders are willing to provide credit, including the price, we and the originating lenders rely heavily on our proprietary credit and fraud scoring models, which comprise an empirically derived suite of statistical models built using third-party data, data from customers and our credit experience gained through monitoring the performance of customers over time. Our proprietary credit and fraud scoring models are based on previous historical experience. Typically, however, our models will become less effective over time and need to be rebuilt regularly to perform optimally. This is particularly true in the context of our preapproved direct mail campaigns. If we are unable to rebuild our proprietary credit and fraud scoring models, or if they do not perform up to target standards the products will experience increasing defaults or higher customer acquisition costs. In addition, any upgrades or planned improvements to our technology and credit models may not be implemented on the timeline that we expect or may not drive improvements in credit quality for our US products as anticipated, which may have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

We market Rise, Sunny and the Today Card and provide marketing services to the originating lender in connection with Elastic and the Rise bank originated loans. Direct mailings and electronic offers of preapproved loans and Today Cards to potential loan customers comprise significant marketing channels for both the loans we originate and credit card product we offer, as well as those loans originated by third-party lenders. We estimate that approximately 47% and 80% of new Rise and Elastic loan customers, respectively, in the year ended December 31, 2018 obtained loans as a result of receiving such preapproved offers. The Today Card, which expanded its test launch in November 2018, has not yet had a direct mailing but is expected to in the future. Our marketing techniques identify candidates for preapproved loan or credit card mailings in part through the use of preapproved marketing lists purchased from credit bureaus. If access to such preapproved marketing lists were lost or limited due to regulatory changes prohibiting credit bureaus from sharing such information or for other reasons, our growth could be significantly adversely affected. If the cost of obtaining such lists increases significantly, it could substantially increase customer acquisition costs and decrease profitability.

We rely on strategic marketing affiliate relationships with certain companies for referrals of some of the customers to whom we issue loans, and our growth depends in part on the growth of these referrals. In the year ended December 31, 2018, loans issued to Rise, Elastic and Sunny customers referred to us by our strategic partners constituted 29%, 10% and 54% of total respective new customer loans. Many of our marketing affiliate relationships do not contain exclusivity provisions that would prevent such marketing affiliates from providing customer referrals to competing companies. In addition, the agreements governing these partnerships, generally, contain termination provisions, including provisions that in certain circumstances would allow our partners to terminate if convenient, that, if exercised, would terminate our relationship with these partners. These agreements also contain no requirement that a marketing affiliate refer us any minimum number of customers. There can be no assurance that these marketing affiliates will not terminate our relationship with them or continue referring business to us in the future, and a termination of any of these relationships or reduction in customer referrals to us could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

The Elastic line of credit product, which is originated by a third-party lender and contributed approximately 33% of our revenues for the year ended December 31, 2018, and the portions of the Rise installment loan product that we offer through CSO programs, which contributed approximately 8% of our revenues for the year ended December 31, 2018, and the Rise loans originated by a third-party lender, which contributed approximately 1% of our revenues for the year ended December 31, 2018, depend in part on the willingness and ability of unaffiliated third-party lenders to make loans to customers. Additionally, as described above, our business, including our Elastic loans and Rise loans made through the CSO programs and Rise loans originated by a third-party lender, depends on the ACH system, and ACH transactions are processed by third-party banks. See ‘-Regulators and payment processors are scrutinizing certain online lenders’ access to the Automated Clearing House system to disburse and collect loan proceeds and repayments, and any interruption or limitation on our ability to access this critical system would materially adversely affect our business.’ We also utilize many other third parties to provide services to facilitate lending, loan underwriting, payment processing, customer service, collections and recoveries, as well as to support and maintain certain of our communication systems and information systems, and we may need to expand our relationships with third parties, or develop relationships with new third parties, to support any new product offerings that we may pursue.

The automated nature of our platform may make it an attractive target for hacking and potentially vulnerable to computer viruses, physical or electronic break-ins and similar disruptions. Despite efforts to ensure the integrity of our platform, it is possible that we may not be able to anticipate or to implement effective preventive measures against all security breaches of these types, in which case there would be an increased risk of fraud or identity theft, and we may experience losses on, or delays in the collection of amounts owed on, a fraudulently induced loan. In addition, the software that we have developed to use in our daily operations is highly complex and may contain undetected technical errors that could cause our computer systems to fail. Because each loan made involves our proprietary credit and fraud scoring models, and over 95% of loan applications are fully automated with no manual review required, any failure of our computer systems involving our proprietary credit and fraud scoring models and any technical or other errors contained in the software pertaining to our proprietary credit and fraud scoring models could compromise the ability to accurately evaluate potential customers, which would negatively impact our results of operations. Furthermore, any failure of our computer systems could cause an interruption in operations and result in disruptions in, or reductions in the amount of, collections from the loans we made to customers. If any of these risks were to materialize, it could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

Under Section 382 of the Internal Revenue Code of 1986, as amended (the ‘Code’), our ability to utilize NOLs or other tax attributes, such as research tax credits, in any taxable year may be limited if we experience an ‘ownership change.’ A Section 382 ‘ownership change’ generally occurs if one or more stockholders or groups of stockholders, who own at least 5% of our stock, increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. Similar rules may apply under state tax laws. We have not completed a Section 382 analysis through December 31, 2018. If we have previously had, or have in the future, one or more Section 382 ‘ownership changes,’ including in connection with our IPO, or if we do not generate sufficient taxable income, we may not be able to utilize a material portion of our NOLs, even if we achieve profitability. If we are limited in our ability to use our NOLs in future years in which we have taxable income, we will pay more taxes than if we were able to fully utilize our NOLs. This could materially and adversely affect our results of operations.

The CFPB released its final ‘Payday, Vehicle Title, and Certain High-Cost Lending Rule’ (the “2017 Rule”) on October 5, 2017, covering certain short-term and longer-term loans with an APR of 36% or higher and have a ‘leveraged payment mechanism’ such as an ACH payment plan. On February 6, 2019, the CFPB issued proposed revisions to the 2017 Rule (the ‘2019 Proposed Revisions’). The 2019 Proposed Revisions leave in place requirements and limitations on attempts to withdraw payments from consumers’ checking, savings or prepaid accounts. Among other requirements, the payment provisions prohibit lenders that have had two consecutive attempts to collect money from a consumers’ account returned for insufficient funds from making any further attempts to collect from the account unless the consumers have provided new authorizations for additional payment transfers. Additionally, the payment provisions require us to give consumers at least three business days’ advance notice before attempting payment withdrawals. The mandatory compliance deadline for the 2019 Proposed Revisions still stands at August 19, 2019. Language in the 2019 Proposed Revisions suggest that the CFPB may be receptive to informal requests to revisit the payment provisions requirements noted above. There are also recordkeeping requirements and compliance plan requirements in the 2019 Proposed Rule that will apply to us. The 2019 Proposed Revisions will go through a 90-day comment period after publication in the Federal Register.

During the years ended December 31, 2018 and 2017, our UK operations represented 16% and 15%, respectively, of our consolidated total revenues. In the UK, we are subject to regulation by the FCA pursuant to the Financial Services and Markets Act 2000 (the ‘FSMA’), the Consumer Credit Act 1974, as amended (the ‘CCA’), and secondary legislation passed under such statutes, among other rules and regulations including the FCA Handbook, which collectively serve to transpose the obligations under the European Consumer Credit Directive into UK law.

In the period since the FCA acquired responsibility for the regulation of consumer credit in the UK in place of the Office of Fair Trading (the “OFT”) in April 2014, there have been a large number of new regulations affecting our UK product offerings. These include the introduction of a rate cap, a prohibition on certain types of line of credit products, the establishment of a price comparison website, and restrictions on payment processing activities, among other changes. The rate cap imposes a maximum interest rate of 0.8% per day and maximum late payment fee of £15; the total amount charged for the loan, including all default charges, must not exceed 100% of the capital sum originally borrowed. This rule translates to a maximum rate of £24 for every £100 borrowed for a 30-day period, or 0.8% per day. The maximum fees that can be earned on the loan (through interest, default fees, and late interest) ensure that a consumer cannot pay back more than twice the amount of principal borrowed.

In July 2017, the FCA announced that it had reviewed the impact of the 0.8% per day price cap and concluded that the current price cap will be left in place. The FCA will review the price cap again in 2020.  Further, the FCA found that regulation of high-cost short-term credit, including the price cap, has led to substantial benefits to consumers. The FCA validated concerns about specific products and segments of the high-cost credit market, including unarranged overdrafts and long-term use of high-cost credit and the rent-to-own, home-collected credit and catalog credit markets. In May 2018, the FCA published the outcome of its high-cost credit review and proposed changes to its regulations of overdrafts, the rent-to-own market, home-collected credit, catalogue credit and store cards. No recommendations were made concerning the high-cost short-term credit loan market. Separately, the FCA has asked companies to review their lending practices regarding repeat borrowing to ensure such lending practices reflect decisions made by the Financial Ombudsman Service. Our UK business has undertaken this exercise and has invited the FCA to discuss its findings. While we believe that our UK business has implemented lending practices for repeat borrowing that are compliant with regulatory requirements, if the FCA were to impose a cap on a number of times a consumer of our Sunny product can borrow from us, this could have a material adverse effect on our business, prospects, results of operations, financial condition and cash flows.

A number of proposals have recently been implemented or are pending before federal, state, and international legislative and regulatory bodies that could impose new obligations in areas such as privacy. For example, the European Union’s new General Data Protection Regulation (“GDPR”) was implemented in the UK in May 28, 2018. The GDPR is more prescriptive than the prior regime and includes new obligations on businesses, including the requirement to appoint a data protection officer, self-report breaches, obtain express consent to data processing and provide more rights to individuals whose data they process, including the “right to be forgotten,” by having their records erased. Penalties for non-compliance with the GDPR are significant, with a maximum fine calculated as the higher of €20 million or 4% of global turnover for the preceding year.

On May 28, 2018, our UK business became subject to the GDPR. As described above in “-Our business is subject to complex and evolving US and international laws and regulations regarding privacy, data protection, and other matters. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in claims, changes to our business practices, monetary penalties, increased cost of operations, or declines in user growth or engagement or otherwise harm our business,” the GDPR is more prescriptive than the prior regime and includes new obligations on businesses, including the requirement to appoint a data protection officer, self-report breaches, obtain express consent to data processing and provide more rights to individuals whose data they process, including the ‘right to be forgotten,’ by having their records erased. Penalties for non-compliance with the GDPR are significant with a maximum fine calculated as the higher of €20 million or 4% of global turnover for the preceding year. There are also strict rules on the use of credit reference data under the CCA regulations and the CONC. We are also subject to laws limiting the transfer of personal data from the European Economic Area to non-European Economic Area countries or territories. There are also strict rules on the instigation of electronic communications such as email, text message and telephone calls under the Privacy and Electronic Communications (EC Directive) Regulations 2003, which prohibit unsolicited direct marketing by electronic means without express consent, as well as the monitoring of devices. When the UK leaves the European Union, it is expected that the UK will establish a new framework for data flow between the UK and the US or will agree to continue the protections of the GDPR for the transfer of personal data into and out of the UK. We expect to comply with any framework established by the UK for the transfer of personal data into and out of the UK but can provide no assurances as to whether such regulation will be more or less burdensome than the GDPR and other European Union regulations, and we may incur significant costs in transitioning to any new regulatory model.

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In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law (the ‘DGCL’) which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us in certain circumstances.

Beginning in the fourth quarter of 2018, the Company also licenses its Rise installment loan brand to a third-party lender, FinWise Bank, which originates Rise installment loans in 16 states. FinWise Bank retains 5% of the balances of all loans originated and then sells a 95% loan participation in those Rise installment loans to a third-party special purpose vehicle, EF SPV, Ltd. (“EF SPV”). We do not own EF SPV, but we have a credit default protection agreement with EF SPV whereby we provide credit protection to the investors in EF SPV against the Rise installment loan losses in return for a credit premium. Per the terms of this agreement, under US GAAP, the Company is the primary beneficiary of EF SPV and is required to consolidate the financial results of EF SPV as a variable interest entity in its consolidated financial results. The consolidated financial statements include revenue, losses and loans receivable related to the 95% of Rise installment loans originated by FinWise Bank and sold to EF SPV. These loan participation purchases are funded through the VPC Facility and through cash flows from operations generated by EF SPV.

The Elastic line of credit product is originated by a third-party lender, Republic Bank, which initially provides all of the funding for that product. Republic Bank retains 10% of the balances of all loans originated and sells a 90% loan participation in the Elastic lines of credit. An SPV structure was implemented such that the loan participations are sold by Republic Bank to Elastic SPV, Ltd. (‘Elastic SPV’) and Elastic SPV receives its funding from VPC in a separate financing facility (the ‘ESPV Facility’), which was finalized on July 13, 2015. We do not own Elastic SPV but we have a credit default protection agreement with Elastic SPV whereby we provide credit protection to the investors in Elastic SPV against Elastic loan losses in return for a credit premium. Per the terms of this agreement, under US GAAP, the Company is the primary beneficiary of Elastic SPV and is required to consolidate the financial results of Elastic SPV as a variable interest entity in its consolidated financial results.

•Revenue growth.   Revenues increased by $113.6 million, or 17%, from $673.1 million for the year ended December 31, 2017 to $786.7 million for the year ended December 31, 2018.  For the year ended December 31, 2017, our total revenues increased 16% as compared to 2016, increasing from $580.4 million to $673.1 million. Key metrics related to revenue growth that we monitor by product include the ending and average combined loan balances outstanding, the effective APR of our product loan portfolios, the total dollar value of loans originated, the number of new customer loans made, the ending number of customer loans outstanding and the related customer acquisition costs (‘CAC’) associated with each new customer loan made. We include CAC as a key metric when analyzing revenue growth (rather than as a key metric within margin expansion).

Revenue growth.   Revenues increased by $113.6 million, or 17%, from $673.1 million for the year ended December 31, 2017 to $786.7 million for the year ended December 31, 2018.  For the year ended December 31, 2017, our total revenues increased 16% as compared to 2016, increasing from $580.4 million to $673.1 million. Key metrics related to revenue growth that we monitor by product include the ending and average combined loan balances outstanding, the effective APR of our product loan portfolios, the total dollar value of loans originated, the number of new customer loans made, the ending number of customer loans outstanding and the related customer acquisition costs (‘CAC’) associated with each new customer loan made. We include CAC as a key metric when analyzing revenue growth (rather than as a key metric within margin expansion).

•Margin expansion.    We expect that our operating margins will continue to expand over the near term as we lower our direct marketing costs and operating expense as a percentage of revenues while continuing to maintain our stable credit quality levels. Over the next several years, as we continue to scale our loan portfolio, we anticipate that our direct marketing costs primarily associated with new customer acquisitions will decline to approximately 10% of revenues and our operating expenses will decline to approximately 20% of revenues. We aim to manage our business to achieve a long-term operating margin of 20%, and do not expect our operating margin to increase beyond that level, as we intend to pass on any improvements over our targeted margins to our customers in the form of lower APRs. We believe this is a critical component of our responsible lending platform and over time will also help us continue to attract new customers and retain existing customers.

Margin expansion.    We expect that our operating margins will continue to expand over the near term as we lower our direct marketing costs and operating expense as a percentage of revenues while continuing to maintain our stable credit quality levels. Over the next several years, as we continue to scale our loan portfolio, we anticipate that our direct marketing costs primarily associated with new customer acquisitions will decline to approximately 10% of revenues and our operating expenses will decline to approximately 20% of revenues. We aim to manage our business to achieve a long-term operating margin of 20%, and do not expect our operating margin to increase beyond that level, as we intend to pass on any improvements over our targeted margins to our customers in the form of lower APRs. We believe this is a critical component of our responsible lending platform and over time will also help us continue to attract new customers and retain existing customers.

Ending and average combined loans receivable – principal.    We calculate the average combined loans receivable – principal by taking a simple daily average of the ending combined loans receivable – principal for each period. Key metrics that drive the ending and average combined loans receivable – principal include the amount of loans originated in a period and the average customer loan balance. All loan balance metrics include only the 90% participation in the related Elastic line of credit advances (we exclude the 10% held by Republic Bank) and the 95% participation in FinWise originated Rise installment loans, but include the full loan balances on CSO loans, which are not presented on our consolidated balance sheets.

The actual amount of revenue we realize on a loan portfolio is also impacted by the amount of prepayments and charged-off customer loans in the portfolio. For a single loan, on average, we typically expect to realize approximately 60% of the revenues that we would otherwise realize if the loan were to fully amortize at the stated APR. From the Rise example above, if we waived $400 of interest for this customer, the effective APR for this loan would decrease to 149%.

Recent trends.    Our revenues for the year ended December 31, 2018 totaled $786.7 million, up 17% versus the year ended December 31, 2017. Our revenues for the year ended December 31, 2017 totaled $673.1 million, up 16% versus the year ended December 31, 2016. This growth in revenues was driven by a 20% and 28% increase in our average combined loans receivable – principal balance for 2018 and 2017, respectively, as we continued to expand our customer base, with the ending number of combined loans outstanding increasing 10% as of December 31, 2018 over the prior year amount. In particular, our Elastic line of credit product had approximately 18% more customer loans outstanding as of December 31, 2018 as compared to a year ago.

The growth in loan balances drove the increase in revenues for the year ended December 31, 2018, offset in part by a decrease in the average APR on the loan portfolio, which declined to 129% during the year ended December 31, 2018 from 131% during the prior year period. In addition, a similar trend took place for the year ended December 31, 2017 with APR declining to 131% during the year ended December 31, 2017 from 146% during the year ended December 31, 2016. This decrease in the average APR resulted primarily from a shift in the mix of our loan portfolio. Elastic, which has grown significantly in volume and as a proportion of our portfolio since 2015, had an average effective APR of approximately 97% during the year ended December 31, 2018 compared to Rise installment, which has an average effective APR of approximately 138% during the year ended December 31, 2018, contributing to the overall reduction in the consolidated APR.

Net charge-offs.    Net charge-offs comprise gross charge-offs offset by recoveries on prior charge-offs. Gross charge-offs include the amount of principal and accrued interest on loans that are more than 60 days past due, or sooner if we receive notice that the loan will not be collected, such as a bankruptcy notice or identified fraud. Any payments received on loans that have been charged off are recorded as recoveries and reduce the amount of gross charge-offs. Recoveries are typically less than 10% of the amount charged off, and thus, we do not view recoveries as a key credit quality metric. Over the past three years, we have generally incurred net charge-offs as a percentage of revenues of approximately 52%.

Net charge-offs as a percentage of average combined loans receivable-principal allow us to determine credit quality and evaluate loss experience trends across our loan portfolio. Over the past three years, our quarterly net charge-offs as a percentage of average combined loans receivable-principal have remained consistent and ranged from 12% to 15%, with quarterly trends based on seasonal growth of the loan portfolio.

Loan loss reserve methodology.    Our loan loss reserve methodology is calculated separately for each product and, in the case of Rise loans originated under the state lending model (including CSO program loans), is calculated separately based on the state in which each customer resides to account for varying state license requirements that affect the amount of the loan offered, repayment terms and other factors. For each product, loss factors are calculated based on the delinquency status of customer loan balances: current, 1 to 30 days past due or 31 to 60 days past due. These loss factors for loans in each delinquency status are based on average historical loss rates by product (or state) associated with each of these three delinquency categories. Hence, another key credit quality metric we monitor is the percentage of past due combined loans receivable – principal, as an increase in past due loans will cause an increase in our combined loan loss reserve and related additional provision for loan losses to increase the reserve. For customers that are not past due, we further stratify these loans into loss rates by payment number, as a new customer that is about to make a first loan payment has a significantly higher risk of loss than a customer who has successfully made ten payments on an existing loan with us. Based on this methodology, during the past three years we have seen our combined loan loss reserve as a percentage of combined loans receivable fluctuate between approximately 13% and 17% depending on the overall mix of new, former and past due customer loans.

Recent trends.    For the year ended December 31, 2018, net charge-offs as a percentage of revenues totaled 52% and fluctuated within a quarterly range of 12% to 14% when measuring net principal charge-offs as a percentage of average combined loans receivable -principal. In balancing the growth, mix and credit quality of our loan portfolio, we aim to manage net charge-offs as a percentage of revenues between 45% and 55% on an annual basis. Over the past three years, our range of net charge-offs as a percentage of revenues is approximately 52% and was within our targeted range. We expect our annual net charge-offs as a percentage of revenues will trend lower in future periods due to continued improvements in our underwriting and the ongoing maturation of the loan portfolio, though there may be quarterly volatility in this metric. Total loan loss provision for the year ended December 31, 2018 was 52% of revenues, lower than 53% for the year ended December 31, 2017 due to slower loan growth in the fourth quarter of 2018 as compared to the same period in 2017.

The Company typically experiences strong loan growth and a corresponding increase in total loan loss provision during the second half of every year. However, during the fourth quarter of 2018 we slowed our loan growth. Sunny UK loan balances were kept relatively flat during the fourth quarter of 2018 due to the uncertainty regarding UK customer complaints. During the second half of 2018, our UK business began to receive an increased number of customer complaints initiated by claims management companies (“CMCs”) related to the affordability assessment of certain loans. If our evidence supports the affordability assessment and we reject the claim, the customer has the right to take the complaint to the Financial Ombudsman Service for further adjudication. The CMCs’ campaign against the high cost lending industry increased significantly during the second half of 2018 resulting in a significant increase in affordability claims against all companies in the industry during this period. We believe that many of the increased claims against us are without merit and reflect the use of abusive and deceptive tactics by the CMCs. The Financial Conduct Authority, a regulator in the UK financial services industry, expects to begin regulating the CMCs in April 2019 in order to ensure that the methods used by the CMCs are in the best interests of the consumer and the industry. While our UK complaint volume dropped approximately 50% in the fourth quarter of 2018 from its peak volume in August 2018, we continue to remain cautious about materially increasing Sunny loan balances until there is more regulatory certainty regarding the UK complaint process.

The combined loan loss reserve as a percentage of combined loans receivable totaled 14%, 14% and 16% as of December 31, 2018, 2017 and 2016, respectively, a result of our stable credit quality and ongoing maturation of the loan portfolio. Past due loan balances were 11% of total combined loans receivable – principal, slightly higher than 10% a year ago.

Additionally, we also look at principal loan charge-offs (including both credit and fraud losses) by vintage as a percentage of combined loans originated – principal. As the below table shows, our cumulative principal loan charge-offs through December 31, 2018 for each annual vintage since the 2013 vintage are generally under 30% and continue to generally trend at or slightly below our 25% to 30% targeted range, with 2017 performing the best of our historical vintages. The 2018 loan vintage, while still early in its life cycle, is performing slightly worse than 2017 but within our targeted range of 25% to 30%. We are prioritizing the roll out of our next generation of credit scores and strategies in early 2019 so that we can continue to drive loss rates lower in coming years.

Recent operating margin trends.    For the year ended December 31, 2018, our operating margin was 12%, which was an improvement from 11% in the prior year period and up from 8% in 2016.

Our direct marketing expense as a percentage of revenue has declined over the past two years primarily due to two reasons. First, approximately 50% of our loan originations, on average each quarter, are from repeat customers, refinancings or Elastic customers utilizing additional funds on their line of credit. There is no direct marketing expense associated with any of these loan originations (all direct marketing expense is allocated to new customer loan originations). Thus, we are able to generate a significant amount of ongoing revenue from loan originations where we incur no additional direct marketing expense. As a result, year-over-year revenue growth was 17% for the year ended December 31, 2018, while direct marketing expenses increased only 7%. For the year ended December 31, 2017, year-over-year revenue growth was 16%, while direct marketing expenses increased only 11%.

Operating expenses as a percentage of revenues has declined over the past year. As we continue to further scale our business, we believe our operating expenses as a percentage of revenues should continue to decline to approximately 20% of revenues.

The Elastic line of credit product is originated by a third-party lender, Republic Bank, which initially provides all of the funding for that product. Republic Bank retains 10% of the balances of all of the loans originated and sells a 90% loan participation in the Elastic lines of credit to a third-party SPV, Elastic SPV. Elevate is required to consolidate Elastic SPV as a variable interest entity under US GAAP and the consolidated financial statements include revenue, losses and loans receivable related to the 90% of Elastic lines of credit originated by Republic Bank and sold to Elastic SPV.

Beginning in the fourth quarter of 2018, the Company also licenses its Rise installment loan brand to a third-party lender, FinWise Bank, which originates Rise installment loans in 16 states. FinWise Bank retains 5% of the balances of all originated loans and sells a 95% loan participation in those Rise installment loans to a third-party SPV, EF SPV. We do not own EF SPV but we are required to consolidate EF SPV as a variable interest entity under US GAAP and the consolidated financial statements include revenue, losses and loans receivable related to the 95% of Rise installment loans originated by FinWise Bank and sold to EF SPV.

Revenues increased by $113.6 million, or 17%, from $673.1 million for the year ended December 31, 2017 to $786.7 million for the year ended December 31, 2018. This growth in revenues was primarily attributable to increased finance charges driven by growth in our average loan balances. The decrease in Other revenues was due primarily to a decrease in marketing and licensing fees related to the Rise CSO programs.

Provision for loan losses.    Provision for loan losses increased by $54.4 million, or 15%, from $357.6 million for the year ended December 31, 2017 to $412.0 million for the year ended December 31, 2018 primarily due to a $62.2 million increase in net charge-offs resulting from an increase in the overall loan portfolio. This increase was accompanied by a decrease of $7.7 million in the additional provision for loan losses due to slower loan growth in the fourth quarter of 2018.

Net charge-offs increased $62.2 million for the year ended December 31, 2018 compared to the year ended December 31, 2017, primarily due to loan growth in the Elastic product during 2018. Net charge-offs as a percentage of revenues for the year ended December 31, 2018 totaled 52%, which was consistent with the prior year and within our targeted range of 45% to 55% as discussed in “-Key Financial and Operating Metrics-Credit quality” above. Our net principal charge-offs as a percentage of average combined loans receivable – principal ranged from 12% to 14% for each quarter in 2018 as compared to 12% to 15% for each quarter in 2017. Loan loss provision for the year ended December 31, 2018 totaled 52% of revenues, down from 53% for the year ended December 31, 2017 due to slower loan growth in the fourth quarter of 2018 as compared to the same period in 2017. Our combined loan loss reserve as a percentage of ending combined loans receivable remained flat at 14% at December 31, 2018 compared with December 31, 2017.

Direct marketing costs.    Direct marketing costs increased by $5.4 million, or 7%, from $72.2 million for the year ended December 31, 2017 to $77.6 million for the year ended December 31, 2018. This increase was driven by growth in the number of new customers acquired, which increased to 316,483 for the year ended December 31, 2018 compared to 305,186 during the year ended December 31, 2017, with the growth in 2018 primarily coming from the Sunny product. The resulting CAC slightly increased by $8, or 3%, increasing to $245 from $237 in the prior year, primarily due to an increase in CAC for Elastic as we expanded our strategic partner channel in 2018.

Other cost of sales.    Other cost of sales increased by $5.8 million, or 28%, from $20.5 million for the year ended December 31, 2017 to $26.4 million for the year ended December 31, 2018 due to increased affordability claim settlement expense related to the Sunny product.

Compensation and benefits.    Compensation and benefits increased by $12.4 million, or 15%, from $82.0 million for the year ended December 31, 2017 to $94.4 million for the year ended December 31, 2018 primarily due to an increase in the number of employees as we continue to grow our business.

Professional services.     Professional services increased by $3.0 million, or 9%, from $32.8 million for the year ended December 31, 2017 to $35.9 million for the year ended December 31, 2018 primarily due to increased legal expenses related to several Company initiatives.

Selling and marketing.    Selling and marketing increased by $1.1 million, or 13%, from $8.4 million for the year ended December 31, 2017 to $9.4 million for the year ended December 31, 2018 primarily due to increased credit monitoring services offered to our customers.

Occupancy and equipment.    Occupancy and equipment increased by $3.7 million, or 26%, from $13.9 million for the year ended December 31, 2017 to $17.5 million for the year ended December 31, 2018 primarily due to increased licenses and rent expense needed to support an increased number of employees as we continue to grow our business.

Depreciation and amortization.     Depreciation and amortization increased by $2.7 million, or 26%, from $10.3 million for the year ended December 31, 2017 to $13.0 million for the year ended December 31, 2018 primarily due to increased purchases of property and equipment and internally developed software capitalization.

Other expenses.    Other expenses increased by $1.0 million, or 23%, from $4.6 million for the year ended December 31, 2017 to $5.6 million for the year ended December 31, 2018 due to costs associated with growing our business.

Net interest expense increased $6.2 million, or 8%, during the year ended December 31, 2018 versus the year ended December 31, 2017. At December 31, 2017, we had an average balance of $482.3 million in notes payable outstanding under our debt facilities, which increased to $534.9 million at December 31, 2018, resulting in additional interest expense of approximately $7.8 million, which was partially offset by a decrease of $1.6 million due to a lower cost of funds. Our average effective cost of funds on our notes payable outstanding decreased to 14.8% from 15.2% on an unadjusted basis for the years ended December 31, 2018 and 2017. The cost of funds decreased for the VPC Facility as a result of a rate reduction on the UK Term Note, partially offset by a rate increase due to the conversion of the Convertible Term Notes to the 4th Tranche Term Note. The cost of funds increased for the ESPV Facility primarily due to borrowings on the higher-interest rate tranches. In January 2018, the Company entered into interest rate caps, which cap 3-month LIBOR at 1.75%, to mitigate the floating interest rate risk on $240 million of the US Term Notes included in the VPC Facility and on $216 million of the ESPV Facility.

Our income tax expense decreased $8.5 million, or 86%, from $9.9 million for the year ended December 31, 2017 to $1.4 million for the year ended December 31, 2018. A cumulative adjustment of $12.5 million was recognized in income tax expense in the year ended December 31, 2017, due to the impact of US tax reform law which was enacted in 2017 to reduce the US corporate tax rate from 35% to 21%. The Company’s consolidated effective tax rates were 10% and 329%, while the Company’s US effective tax rates were 9% and 219% for the years ended December 31, 2018 and 2017, respectively. Our US effective tax rates are different from the standard corporate federal income tax rate of 21% or 35%, as applicable, primarily due to our corporate state tax obligations in the states where we have lending activities, our permanent non-deductible items and the impact of R&D credits. The Company’s US cash effective tax rate was approximately 2% for 2018. Our UK operations have generated net operating losses which have a full valuation allowance provided due to the lack of sufficient objective evidence regarding the realizability of this asset. Therefore, no UK tax benefit has been recognized in the financial statements for the years ended December 31, 2018 and 2017.

Our net income increased $19.4 million, or 281%, from a net loss of $6.9 million for the year ended December 31, 2017 to net income of $12.5 million for the year ended December 31, 2018. This increase was due to an increase in revenue that resulted from an increase in our overall loan portfolio in addition to improved efficiencies as we continue to grow our business. In addition, in 2017, a $12.5 million one-time income tax expense charge was recognized related to the US tax reform law.

Revenues increased by $92.7 million, or 16%, from $580.4 million for the year ended December 31, 2016 to $673.1 million for the year ended December 31, 2017. This growth in revenues was primarily attributable to increased finance charges driven by growth in our average loan balances, partially offset by a decrease in our overall APR, as illustrated in the tables below. In addition, the delay in the 2017 tax refund season cost us approximately $10 million of revenue growth in 2017. We also recognized approximately $5 million less revenue in 2017, primarily related to Elastic, resulting from the 2017 hurricanes. The September and October 2017 direct mail drops for acquiring Elastic customers, which we committed to in early August 2017, had much lower customer response rates in Texas and Florida. The increase in Other revenues was due to an increase in marketing and licensing fees received from the originating lenders related to the Elastic product and Rise CSO programs.

Provision for loan losses.    Provision for loan losses increased by $39.8 million, or 13%, from $317.8 million for the year ended December 31, 2016 to $357.6 million for the year ended December 31, 2017 primarily due to a $47.3 million increase in net charge-offs resulting from an increase in the overall loan portfolio. This increase was accompanied by a decrease of $7.5 million in the additional provision for loan losses due to the improved credit quality of the portfolio.

Net charge-offs increased $47.3 million for the year ended December 31, 2017 compared to the year ended December 31, 2016, primarily due to loan growth in the Elastic product during 2017. Net charge-offs as a percentage of revenues for the year ended December 31, 2017 totaled 52%, which was consistent with the prior year and within our targeted range of 45% to 55% as discussed in “-Key Financial and Operating Metrics-Credit quality” above. Our net principal charge-offs as a percentage of average combined loans receivable – principal ranged from 12% to 15% for each quarter in 2017 as compared to 13% to 15% for each quarter in 2016. Loan loss provision for the year ended December 31, 2017 totaled 53% of revenues, down from 55% for the year ended December 31, 2016 due to a lower percentage of past due loan balances and improving overall portfolio credit quality. As a result, our combined loan loss reserve as a percentage of ending combined loans receivable decreased to 14% at December 31, 2017, down from 16% at December 31, 2016.

Direct marketing costs.    Direct marketing costs increased by $7.0 million, or 11%, from $65.2 million for the year ended December 31, 2016 to $72.2 million for the year ended December 31, 2017. This increase was driven by strong growth in the number of new customers acquired, which increased to 305,186 for the year ended December 31, 2017 compared to 277,637 during the year ended December 31, 2016. The resulting CAC slightly increased by $2, or 1%, increasing to $237, from $235 in the prior year. The increase in the number of new customers was due primarily to continued growth in our Elastic product during the year.

Other cost of sales.    Other cost of sales increased by $3.1 million, or 18%, from $17.4 million for the year ended December 31, 2016 to $20.5 million for the year ended December 31, 2017 due to increased data verification costs for all products and settlement expenses primarily related to the Sunny product.

Compensation and benefits.    Compensation and benefits increased by $16.3 million, or 25%, from $65.7 million for the year ended December 31, 2016 to $82.0 million for the year ended December 31, 2017 primarily due to an increase in the number of employees as we continue to scale our business and an increase in share-based compensation expense related to our IPO.

Professional services.     Professional services increased by $2.2 million, or 7%, from $30.7 million for the year ended December 31, 2016 to $32.8 million for the year ended December 31, 2017 primarily due to increased expenses as a result of becoming a public company.

Selling and marketing.    Selling and marketing decreased by $1.3 million, or 14%, from $9.7 million for the year ended December 31, 2016 to $8.4 million for the year ended December 31, 2017 primarily due to decreased advertising agency costs.

Occupancy and equipment.    Occupancy and equipment increased by $2.4 million, or 21%, from $11.5 million for the year ended December 31, 2016 to $13.9 million for the year ended December 31, 2017 primarily due to increased licenses and facilities rent expense needed to support an increased number of employees as we continue to scale our business.

Depreciation and amortization.     Depreciation and amortization decreased by $0.6 million, or 6%, from $10.9 million for the year ended December 31, 2016 to $10.3 million for the year ended December 31, 2017 primarily due to certain capitalized internally developed software costs fully depreciating during the year.

Other expenses.    Other expenses increased by $0.8 million, or 21%, from $3.8 million for the year ended December 31, 2016 to $4.6 million for the year ended December 31, 2017 due to costs associated with scaling our business.

Net interest expense increased $8.8 million, or 14%, during the year ended December 31, 2017 versus the year ended December 31, 2016. This increase was related to increased borrowings under the ESPV Facility used to fund the strong loan growth of our Elastic product during 2017. While our Rise and Sunny loans also experienced loan growth during 2017, we used substantially all of our net IPO proceeds to pay down the VPC Facility used to fund these products, thus reducing the amount of interest expense incurred in 2017 related to these two products.

Our income tax expense increased $12.9 million, or 436%, from a benefit of ($3.0) million for the year ended December 31, 2016 to an expense of $9.9 million for the year ended December 31, 2017. Due to the impact of US tax reform, US GAAP requires the remeasurement of all US deferred income tax assets and liabilities for temporary differences from the current tax rate of 35% to the new corporate tax rate of 21%. A cumulative adjustment of $12.5 million was recognized in income tax expense in the year ended December 31, 2017, which included the enactment date of the US tax reform law. The Company’s consolidated effective tax rates were 329% and 12%, while the Company’s US effective tax rates were 219% and 28% for the years ended December 31, 2017 and 2016, respectively. Excluding the $12.5 million income tax expense charge due to the change in corporate tax reform, our 2017 consolidated and US effective tax rates would have been 84% and 56%, respectively. Our US effective tax rates are different from the standard corporate federal income tax rate of 35% primarily due to our corporate state tax obligations in the states where we have lending activities and our permanent non-deductible items. The Company’s US cash effective tax rate was approximately 23% for the fourth quarter of 2017. Our UK operations have generated net operating losses which have a full valuation allowance provided due to the lack of sufficient objective evidence regarding the realizability of this asset. Therefore, no UK tax benefit has been recognized in the financial statements for the years ended December 31, 2017 and 2016.

Our net loss decreased $15.5 million, or 69%, from a net loss of $22.4 million for the year ended December 31, 2016 to $6.9 million for the year ended December 31, 2017. This decrease was due to an increase in revenue that resulted from an increase in our overall loan portfolio in addition to improved efficiencies as we continue to scale our business, partially offset by a $12.5 million one-time income tax expense charge related to the US tax reform law.

•US Term Note and EF SPV Term Note with a combined maximum borrowing amount of $350 million at a base rate (defined as the 3-month LIBOR with a 1% floor) plus 11% for the outstanding balance used to fund the Rise and EF SPV loan portfolios, respectively. The Company entered into an interest rate cap on January 11, 2018 to mitigate the floating rate interest risk on the $240 million outstanding as of December 31, 2018.

US Term Note and EF SPV Term Note with a combined maximum borrowing amount of $350 million at a base rate (defined as the 3-month LIBOR with a 1% floor) plus 11% for the outstanding balance used to fund the Rise and EF SPV loan portfolios, respectively. The Company entered into an interest rate cap on January 11, 2018 to mitigate the floating rate interest risk on the $240 million outstanding as of December 31, 2018.

•UK Term Note with a maximum borrowing amount of approximately $48 million at a base rate (defined as the 3-month LIBOR rate) plus 14% used to fund the Sunny loan portfolio.

UK Term Note with a maximum borrowing amount of approximately $48 million at a base rate (defined as the 3-month LIBOR rate) plus 14% used to fund the Sunny loan portfolio.

•4th Tranche Term Note with a maximum borrowing amount of $35 million bearing interest at a base rate (defined as the 3-month LIBOR, with a 1% floor) plus 13% used to fund working capital.

4th Tranche Term Note with a maximum borrowing amount of $35 million bearing interest at a base rate (defined as the 3-month LIBOR, with a 1% floor) plus 13% used to fund working capital.

All of our assets are pledged as collateral to secure the VPC Facility. The agreement contains customary financial covenants, including a maximum loan to value ratio of between 0.75 and 0.85, depending on the actual charge-off rate as of the relevant measurement date, a maximum principal charge-off rate of not greater than 20%, determined by the product of the ratio of principal balances charged-off or past due to principal balances due for the current, 1-30 and 31-60 delinquency status periods determined as of the month of charge-off and the preceding two month period, and a maximum first payment default rate of not greater than 20% for any month and not greater than 17.5% for any two months during any three month period. Additionally, our corporate cash balance must exceed $5 million at all times, and the book value of the equity must exceed $5 million as of the last day of any calendar month. We were in compliance with all covenants as of December 31, 2018. There are no principal payments due or scheduled until the credit facility maturity date.

Elastic SPV receives its funding from VPC in the ESPV Facility, which was finalized on July 13, 2015. The ESPV Facility provides for a maximum borrowing amount of $250 million. Interest is charged at a base rate (defined as the greater of the 3-month LIBOR rate or 1% per annum) plus 13% for the outstanding balance up to $50 million, plus 12% for the outstanding balance greater than $50 million up to $100 million, plus 13.5% for any amounts greater than $100 million up to $150 million, and plus 12.75% for borrowing amounts greater than $150 million. All of the tiered rates will decrease by 1% effective July 1, 2019. As of December 31, 2018, the base rate of the ESPV Facility was 2.7361% per annum for the outstanding balance. Effective January 11, 2018, ESPV entered into an interest rate cap to hedge any interest rate risk associated with the 3-month LIBOR. The interest rate cap limits ESPV’s exposure to increases in 3-month LIBOR up to 1.75% on a notional amount of $216 million through February 1, 2019. There are no principal payments due or scheduled until the credit facility maturity date of July 1, 2021.

All of our assets are pledged as collateral to secure the ESPV Facility. The agreement contains customary financial covenants, including a maximum loan to value ratio of between 0.75 and 0.85, depending on the actual charge off rate as of the relevant measurement date, a maximum principal charge-off rate of not greater than 20%, determined by the product of the ratio of principal balances charged-off or past due to principal balances due for the current, 1-30 and 31-60 delinquency status periods determined as of the month of charge-off and the preceding two month period, and a maximum first payment default rate of not greater than 15% for any one calendar month and for two months during any three month period. We were in compliance with all covenants as of December 31, 2018.

•Pricing is the greater of 3-month LIBOR, the five-year LIBOR swap Rate, or 1% plus 7.5% for all product facilities (excluding the 4th Tranche Term Note) effective February 1, 2019 for the VPC Facility and effective July 1, 2019 for the ESPV Facility.

Pricing is the greater of 3-month LIBOR, the five-year LIBOR swap Rate, or 1% plus 7.5% for all product facilities (excluding the 4th Tranche Term Note) effective February 1, 2019 for the VPC Facility and effective July 1, 2019 for the ESPV Facility.

•A 20% revolver in the first quarter of each year for each product facility and a 25 basis points reduction in cost of funds in both 2020 and 2021, subject to meeting certain net income thresholds. The threshold for the 2020 reduction is $22 million in net income for fiscal year 2019. The threshold for the 2021 reduction has not yet been determined.

A 20% revolver in the first quarter of each year for each product facility and a 25 basis points reduction in cost of funds in both 2020 and 2021, subject to meeting certain net income thresholds. The threshold for the 2020 reduction is $22 million in net income for fiscal year 2019. The threshold for the 2021 reduction has not yet been determined.

On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”, or “Tax Reform”) was enacted into law. The Act contains several changes to the US federal tax law including a reduction to the US federal corporate tax rate from 35% to 21%, an acceleration of the expensing of certain business assets, a reduction to the amount of executive pay that could qualify as a tax deduction, and the addition of a repatriation tax on any accumulated offshore earnings and profit.

We recognized a one-time $12.5 million charge as of December 31, 2017 due to the impact of the Tax Reform. This one-time charge was primarily the result of US GAAP requiring remeasurement of all US deferred income tax assets and liabilities for temporary differences from the previous tax rate of 35% to the new corporate tax rate of 21%.

Our VPC Facility and ESPV Facility are variable rate in nature and tied to the 3-month LIBOR rate. Thus, any increase in the 3-month LIBOR rate will result in an increase in our net interest expense. The outstanding balance of our VPC Facility at December 31, 2018 was $324.2 million. The outstanding balance of our ESPV Facility was $239.0 million at December 31, 2018. Based on the average outstanding indebtedness through the year ended December 31, 2018, a 1% (100 basis points) increase in interest rates would have increased our interest expense by approximately $1.2 million.

At December 31, 2018, our net GBP-denominated assets were approximately $62.5 million (which excludes the $26.8 million then drawn under the USD-denominated UK term note under the VPC Facility). A hypothetical 10% strengthening or weakening in the value of the USD compared to the GBP at this date would have resulted in a decrease/increase in net assets of approximately $6.2 million. During the year ended December 31, 2018, the GBP-denominated pre-tax loss was approximately $0.2 million. A hypothetical 10% strengthening or weakening in the value of the USD compared to the GBP during this period would have resulted in an immaterial decrease/increase in the pre-tax loss.

Under the CSO program, the Company guarantees the repayment of the customer’s loan to the CSO lenders as part of the credit services it provides to the customer. A customer who obtains a loan through the CSO program pays the Company a fee for the credit services, including the guaranty, and enters into a contract with the CSO lenders governing the credit services arrangement. The CSO fee received is initially recognized as deferred revenue and subsequently recognized over the life of the loan. The Company estimates a liability for losses associated with the guaranty provided to the CSO lenders using assumptions and methodologies similar to the allowance for loan losses detailed previously. The CSO program required that the Company fund a cash reserve equal to 25% – 45% of the outstanding loan principal within the CSO program portfolio. As of December 31, 2018 and 2017, respectively, estimated losses of approximately $4.4 million and $5.8 million for the CSO owned loans receivable guaranteed by the Company of approximately $39.8 million and $45.5 million, respectively, are initially recorded at fair value and are included in Accounts payable and accrued liabilities in the Consolidated Balance Sheets. See Note 3-Loans Receivable and Revenues for additional information on loans receivable and the provision for loan losses.

On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”, or “Tax Reform”) was enacted into law. The Act contains several changes to the US federal tax law including a reduction to the US federal corporate tax rate from 35% to 21%, an acceleration of the expensing of certain business assets, a reduction to the amount of executive pay that could qualify as a tax deduction, and the addition of a repatriation tax on any accumulated offshore earnings and profit.

The Company recognized a one-time $12.5 million charge as of December 31, 2017 due to the impact of US tax reform. This one-time charge was primarily the result of US GAAP requiring remeasurement of all US deferred income tax assets and liabilities for temporary differences from the previous tax rate of 35% to the new corporate tax rate of 21%.

•A maximum borrowing amount of $350 million at a base rate (defined as the 3-month LIBOR, with a 1% floor) plus 11% used to fund the Rise loan portfolio (‘US Term Note’). The blended interest rate on the outstanding balance at December 31, 2018 and 2017 was 12.79% and 12.64%, respectively. The Company entered into an interest rate cap on January 11, 2018 to mitigate the floating rate interest risk on the aggregate $240 million outstanding as of December 31, 2018. In addition, the US Term Note has a 1% unused commitment fee and cost sharing amounts that are recognized as interest expense. In October 2018, the VPC Facility was amended to incorporate EF SPV, Ltd. as a borrower under the US Term Note.

A maximum borrowing amount of $350 million at a base rate (defined as the 3-month LIBOR, with a 1% floor) plus 11% used to fund the Rise loan portfolio (‘US Term Note’). The blended interest rate on the outstanding balance at December 31, 2018 and 2017 was 12.79% and 12.64%, respectively. The Company entered into an interest rate cap on January 11, 2018 to mitigate the floating rate interest risk on the aggregate $240 million outstanding as of December 31, 2018. In addition, the US Term Note has a 1% unused commitment fee and cost sharing amounts that are recognized as interest expense. In October 2018, the VPC Facility was amended to incorporate EF SPV, Ltd. as a borrower under the US Term Note.

•A maximum borrowing amount of $48 million at a base rate (defined as the 3-month LIBOR rate) plus 14% used to fund the UK Sunny loan portfolio (‘UK Term Note’). As of December 31, 2017, the maximum borrowing amount was $48 million bearing interest at a base rate (defined as the 3-month LIBOR) plus 16%. The blended interest rate at December 31, 2018 and 2017 was 16.74% and 17.64%, respectively.

A maximum borrowing amount of $48 million at a base rate (defined as the 3-month LIBOR rate) plus 14% used to fund the UK Sunny loan portfolio (‘UK Term Note’). As of December 31, 2017, the maximum borrowing amount was $48 million bearing interest at a base rate (defined as the 3-month LIBOR) plus 16%. The blended interest rate at December 31, 2018 and 2017 was 16.74% and 17.64%, respectively.

•A maximum borrowing amount of $35 million at a base rate (defined as the 3-month LIBOR, with a 1% floor) plus 13% (“4th Tranche Term Note”) as of December 31, 2018. As of December 31, 2017, the maximum borrowing amount was $25 million bearing interest at the greater of 18% or a base rate (defined as the 3-month LIBOR, with a 1% floor) plus 17%. The blended interest rate at December 31, 2018 and 2017 was 15.74% and 18.64%, respectively.

A maximum borrowing amount of $35 million at a base rate (defined as the 3-month LIBOR, with a 1% floor) plus 13% (“4th Tranche Term Note”) as of December 31, 2018. As of December 31, 2017, the maximum borrowing amount was $25 million bearing interest at the greater of 18% or a base rate (defined as the 3-month LIBOR, with a 1% floor) plus 17%. The blended interest rate at December 31, 2018 and 2017 was 15.74% and 18.64%, respectively.

The ESPV Facility is used to purchase loan participations from a third-party lender and has a $250 million commitment amount. Interest is charged at a base rate (defined as the greater of the 3-month LIBOR rate or 1% per annum) plus 13% for the outstanding balance up to $50 million, plus 12% for the outstanding balance greater than $50 million up to $100 million, plus 13.5% for any amounts greater than $100 million up to $150 million, and plus 12.75% for borrowing amounts greater than $150 million. All of the tiered rates will decrease by 1% effective July 1, 2019. In August 2018, the maturity date of $49 million outstanding under the ESPV Facility, which previously had a maturity date of August 13, 2018, was automatically extended to July 1, 2021 per the terms of the agreement. As a result of this extension, all amounts outstanding under the ESPV Facility have a maturity date of July 1, 2021. The blended interest rate at December 31, 2018 and December 31, 2017 was 14.65% and 14.45%, respectively. The Company entered into an interest rate cap on January 11, 2018 to mitigate the floating rate interest risk on an aggregate $216 million outstanding as of December 31, 2018. See Note 11-Fair Value Measurements.

•Pricing is the greater of 3-month LIBOR, the five-year LIBOR swap Rate, or 1% plus 7.5% for all product facilities (excluding the 4th Tranche Term Note) effective February 1, 2019 for the VPC Facility and effective July 1, 2019 for the ESPV Facility.

Pricing is the greater of 3-month LIBOR, the five-year LIBOR swap Rate, or 1% plus 7.5% for all product facilities (excluding the 4th Tranche Term Note) effective February 1, 2019 for the VPC Facility and effective July 1, 2019 for the ESPV Facility.

•20% revolver in the first quarter of each year for each product facility and a 25 basis points reduction in the cost of funds in both 2020 and 2021, subject to meeting certain net income thresholds. The threshold for the 2020 reduction is $22 million in net income for fiscal year 2019. The threshold for the 2021 reduction has not yet been determined.

20% revolver in the first quarter of each year for each product facility and a 25 basis points reduction in the cost of funds in both 2020 and 2021, subject to meeting certain net income thresholds. The threshold for the 2020 reduction is $22 million in net income for fiscal year 2019. The threshold for the 2021 reduction has not yet been determined.

The weighted-average grant-date fair value for RSUs granted under the 2016 Plan during the year ended December 31, 2018 was $8.38. These RSUs primarily vest 25% on the first anniversary of the effective date, and 25% each year thereafter, until full vesting on the fourth anniversary of the effective date.

On December 22, 2017, the SEC issued SAB 118, which provides guidance on accounting for tax effects of the Act. SAB 118 provides a measurement period of up to one year from the enactment date to complete the accounting. The Company has completed its accounting of the impact of the reduction in the corporate tax rate and remeasurement of certain deferred tax assets and liabilities based on the rate at which they are expected to reverse in the future, generally 21%. There were no material adjustments related to SAB 118 during the year ended December 31, 2018. No SAB 118 adjustments were recognized in the years ended December 31, 2017 and 2016.

•In 2018, the Company continued to grow its operating income (from $48 million in 2016 to $71 million in 2017 and to $95 million in 2018). The US-only pre-tax earnings improved from US-only pre-tax loss of $4.5 million in 2017 to US-only pre-tax income of $14.1 million in 2018, a 412% improvement from the prior year. The primary driver for the increase in operating income is related to our continued margin expansion provided by direct marketing and operating expense while maintaining a stable credit quality in the loan portfolio during the past year.

In 2018, the Company continued to grow its operating income (from $48 million in 2016 to $71 million in 2017 and to $95 million in 2018). The US-only pre-tax earnings improved from US-only pre-tax loss of $4.5 million in 2017 to US-only pre-tax income of $14.1 million in 2018, a 412% improvement from the prior year. The primary driver for the increase in operating income is related to our continued margin expansion provided by direct marketing and operating expense while maintaining a stable credit quality in the loan portfolio during the past year.

The Company adopted a 401(k) Plan (the ‘Plan’) on June 1, 2014. All employees are eligible to participate in the Plan upon reaching the age of 21 years and completing one month of service with the Company. The Plan is a ‘safe harbor 401k plan’ and the Company matches 100% of each participant’s first 5% of compensation that is contributed to the Plan each year. Participants may contribute up to 70% of their eligible earnings to the applicable Plan, subject to regulatory and other plan restrictions. Company and employee contributions are fully vested at the time of contribution. The Company’s consolidated matching contributions in the years ended December 31, 2018, 2017 and 2016 totaled approximately $2.5 million, $1.8 million and $1.5 million, respectively.

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