On Deck Capital (ONDK) Q2 2019 Earnings Call Transcript

On Deck Capital (ONDK)
Q2 2019 Earnings Call
Jul 29, 2019, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning. My name is Jack and I will be your conference operator today. This time I would like to welcome everyone to the On Deck second-quarter earnings call. [Operator instructions].

Steve Klimas, head of investor relations. You may begin your conference.

Steve Klimas -- Head of Investor Relations

Thank you, Jack, and good morning, everyone. Welcome to OnDeck second-quarter earnings call. I'm here this morning with Noah Breslow, our chief executive officer; and Ken Brause, our chief financial officer. Our earnings release was issued earlier this morning and is available with our earnings presentation and financial supplement in the investor relations section of our website.

Certain statements, including those relating to our third quarter and full-year 2019 financial guidance are forward-looking statements. They are not facts and are subject to material risks and uncertainties described in our SEC filings. These statements are based on currently available information, and we undertake no duty to update them except as required by law. Today's discussion is also subject to the forward-looking statement limitations in the earnings release and our actual results could differ materially and adversely from those anticipated.

During this call, we will use terms defined in the earnings release and refer to non-GAAP financial measures. For definitions and reconciliations to GAAP, please refer to the non-GAAP tables in the earnings release and the appendix of the earnings presentation posted on our website. With that, I'll turn the call over to Noah.

Noah Breslow -- Chief Executive Officer

Thank you, Steve, and thank you all for joining us. We have a lot of ground to cover today, starting with the quarter's results. Our net income of $4 million and adjusted net income of $7 million were at the lower end of guidance range, and our gross revenue of $110 million was at the midpoint. The second quarter is typically our softest in terms of originations, and portfolio assets and revenues were essentially flat sequentially.

However, compared to the year-ago quarter, asset and revenue growth was solid at 15%. Net interest margin of 29% was up 80 basis points from a year ago and remains fairly steady and strong by industry standards. Credit trends were mixed. Our quarterly provision and net charge-off rates were above our target ranges at 7.3% and 15.1% respectively, as we recognized losses from the credit testing we performed in the second half of 2018.

On a positive note, total 15-plus day delinquency improved sequentially to 8.5%, and our earlier-stage delinquencies of 15 to 89 days past due loans improved 50 basis points sequentially as a result of our decision to tighten underwriting earlier this year. As we discussed on the first quarter call, we are working to increase the booking rate on approved customers at the higher end of our target demographic. We are doing this by improving offer quality, including lengthening maturity which reduces payment stress. Accordingly, the weighted average term of our Q2 originations was 12.2 months.

That is up roughly half month from recent periods, and we expected to increase another one month or two as we fully implement strategy. This shift will negatively impact our near-term financials due to a lower yield and higher upfront provision. However, the aggregate risk-adjusted margin dollars we expect to earn over the life of the loan is greater due to the extended term. Ken will walk through the detail when he covers guidance but this is the primary driver behind the reduced earnings forecast for the balance of 2019.

Turning to the business. We continue to execute on our strategic priorities for the year, which include: building upon our success in the U.S. lending franchise; investing in our growth adjacencies, including international, equipment finance and ODX; and advancing our risk and technology capabilities, while improving our funding profile, and we continue to make significant progress on multiple fronts. Our line of credit offering continues to see strong demand, resulting in over 50% growth in outstanding balances from a year ago.

Our commitment to a multichannel distribution strategy continues to bear fruit, with portfolio growth from each channel compared to the year-ago quarter. We signed several new referral partners in the quarter, including Upserve, a restaurant management platform and Coast Capital, the largest credit union by membership in Canada. Our referral partner pipeline remains very strong with some great brand names. We also continued to advance our international businesses.

We closed the Evolocity transaction on April 1 and the integration is proceeding on track. We are excited about the team and are working toward relaunching the consolidated OnDeck Canada brand later this summer. In Australia, the economy has pockets of softness, and we are reacting accordingly by hampering growth and increasing reserves for that business. International profitability was more of a headwind to earnings than we expected this quarter as credit costs were higher but we were in a well positioned -- we are well positioned to capitalize on opportunities in those markets as we approach scale and the businesses remain on track to turn profitable in 2020.

In equipment finance, we continue to methodically roll out our new offering while adding important capabilities. We now offer equipment loans in all 50 states and have expanded the small number of pilot partners from whom we are expecting applications. We expect originations to grow each successive quarter as we add more partners, and we are still just tapping a fraction of our distribution network. Turning now to ODX.

The PNC program is scaling as anticipated, and we are making great progress building configurability and new features as part of the platform. Additionally, we're continuing to grow our pipeline of potential bank partners and are making progress converting the pipeline to signed relationships. However, Chase recently informed us that that they intend to conclude their relationship with us in an orderly process over the next two years. Their decision follows a change in strategic priorities within their business banking unit.

So, Chase will no longer be originating new loans through our platform starting next week. However, we will continue to service the Chase loans previously originated through the platform for up to two years. While disappointed, we appreciate that Chase recognized at a very early stage the opportunity to serve small businesses through online lending and that our technology and platform were the right tools to support their efforts. Since the original pilot in 2016, they originated a large volume of loans through our platform with high customer satisfaction.

I'm very proud of the value and service we deliver to Chase and how much we have grown ODX from both a customer and capability standpoint. We've learned a tremendous amount from this inaugural bank service program. Today, we have a broader, more flexible and more efficient platform to offer new clients because of our learnings from this experience. Based on the traction we're seeing we remain confident in and committed to the growth and success of the ODX business.

The addressable market for ODX is large and continues to be supported by secular trends toward online borrowing for small businesses. We're seeing accelerating momentum to digitize loan originations and our pipeline is the strongest it has ever been. We have said we expect to announce additional your programs this year and we remain on track to do so. I would like to now turn from ODX to cover two important strategic decisions we have made.

The first has to do with our balance sheet and our use of capital. We have been highlighting the strength of our capital and liquidity positions and with our transition to profitability last year, we are generating capital each quarter to support our growth. Given our excess capital and strong liquidity position, the Board has approved a $50 million share repurchase program. While $50 million or approximately 16% of our current equity base is significant, we will still have sufficient capital to support our strong growth prospects and maintain a buffer against economic uncertainty.

Ken will walk you through the specific metric impacts but ultimately this capital return reflects our confidence in our business and our commitment to improving shareholder value. And the second update has to do with both our business strategy and our future financial and regulatory profile. After careful consideration and evaluation, we've decided to pursue obtaining a bank charter, either de novo or through a transaction. While we have operated successfully as a non-bank lending institution since our inception and foresee no immediate challenges in continuing to do so, we believe there is a substantial opportunity in digital banking for small businesses and have concluded that the benefits of becoming a bank outweigh the cost.

Specifically, having a bank charter will enable us to better serve small businesses and our shareholders by increasing the products and services we can offer, both in the lending and non-lending fronts, improving our financial profile, particularly with respect to funding and providing greater regulatory clarity and certainty. We are excited about the prospects for On Deck with the charter and look forward to talking more about this endeavor as our plans progress. With that, I'll turn it over to Ken to walk through the financials and our updated guidance.

Ken Brause -- Chief Financial Officer

Well, thank you, Noah, and good morning, everyone. Noah covered many of the key items in the quarter, and I'm going to provide some additional details on this quarter's results, our strategic initiatives and our outlook for the remainder of the year. First, as described in our release, we made an immaterial revision to our historic financials related to commissions on a small portion of our renewal loans. All prior period numbers in today's materials contain the revised figures, although the impact is de minimis.

Next, as Noah mentioned, we closed the Evolocity transaction on April 1, so we had a full quarter impact reflected in our financials. This deal was accounted for as a business combination. OnDeck owns just under 60% of the combined Canadian entity, which is fully consolidated into our financial statements with minority interest accounted for separately. From a balance sheet perspective, it added about $35 million of loans and finance receivables, $13 million of goodwill and intangibles that are included in other assets and $23 million of debt.

It also added $15 million of mezzanine equity, which represent the former owner's noncontrolling interest in the business. The P&L treatment is identical to Australia, with 100% of the results included in all lines and the net portion attributable to minority interest backed up below the line to get to net income attributable to OnDeck. I'll describe the impacts on individual line items and KPIs as I review the consolidated results. But from a bottom line perspective, the transaction reduced income attributable to OnDeck by about $2 million this quarter.

This is somewhat more than we initially forecast primarily due to higher credit cost that should normalize in future quarters. Turning to the consolidated results. Net income was $4 million or $0.05 per diluted share compared to $6 million or $0.07 per diluted share in the prior end year ago quarters. Adjusted net income, which excludes stock-based compensation and other noteworthy items and which there were none this quarter, was $7 million or $0.09 per diluted share.

Getting into the details. Portfolio assets grew 15% from a year ago to $1.2 billion driven by growth in both term loans and lines of credit. Portfolio assets were essentially flat from last quarter as growth in lines of credit and the addition of Evolocity more than offset a contraction in terms loans related to the pullbacks we discussed last quarter. Likewise, gross revenue of $110 million rose 15% from the year-ago quarter, driven by growth in average earning assets and was unchanged from the first quarter.

Portfolio yield decreased 60 basis points sequentially to 35%, with roughly half of the decline due to the addition of Evolocity whose portfolio has a lower blended yield. The balance reflects a combination of factors, including a lower yield on new originations and a greater proportion of lines of credit in the portfolio. These factors were partially mitigated by a slight improvement in portfolio performance. Interest expense of $11 million and our cost of funds rate of 5.5% each rose slightly from the first quarter as a result of the addition of the Evolocity debt at a blended cost of about 10%.

Exclusive of that debt, our cost of funds rate would have declined slightly due to the improved spreads on the roughly $600 million of financings we completed in the first quarter. We expect to refinance the Evolocity debt at a lower cost later this year to bring it in line with our other funding sources. Net interest margin was 29%, a 50 basis point sequential decline in line with the change in yield, but improved 80 basis points from a year ago, reflecting the favorable debt refinancings we've completed. Turning to credit.

The macro trends in our credit metrics continues to be one of normalization. That said, our provision in net charge-off rates did drift above the upper end of our target ranges this quarter. Our net charge-off rate was 15.1% as we recognized losses from some of the credit testing we performed in the back half of 2018, which have rolling through delinquencies. Total 15-day plus delinquency improved 20 basis points since March to 8.5%.

Looking at the components, the15 to 89-day delinquency rate improved 50 basis points, a positive indicator. Conversely, the 90-plus delinquency ratio increased 30 basis points as the impact from the insourcing of collections continues. As we've said before, we expect that impact to abate and the level of late-stage delinquencies to stabilize in the next quarter or two. Provision expense was unchanged from the first quarter at $43 million but given the lower origination volume, the provision rate rose to 7.3%.

Going forward, our strategy to pursue higher quality credits will result in longer and origination loan centers. Because we book in upfront provision for estimated lifetime losses, our provision rate will increase even though the expected annual loss is lower on this population. The allowance for credit losses remained steady at $146 million and the reserve ratio was 12.3%. That ratio is down slightly from last quarter, reflecting the improved portfolio quality, charge-offs in the quarter and better performance by early 2019 vintages.

Moving on. Total operating expense was $52 million, up $4 million sequentially. More than half of that increase related to the addition of Evolocity, which added about 65 employees. Second-quarter operating expense also includes $1 million impairment on Chase-related technology.

Provision for income taxes was essentially flat with the prior quarter at $1.8 million and reflects U.S. taxable income. However, as we don't record a tax benefit on the losses from our international operations which increased in the second quarter, our consolidated effective tax rate increased to 45%. Turning to the balance sheet.

OnDeck stockholders' equity increased $6 million to $318 million at June 30. Book value per diluted share grew to $3.98, and we continue to have evaluation allowance against our net deferred tax assets of approximately $0.50 per share. Liquidity remained strong. At quarter end, we had approximately $380 million of available borrowing capacity under our $1.2 billion of committed debt facilities and about $60 million of cash and equivalents, and we continue to have success improving our funding profile.

Last week, we announced a new $20 million commitment from Regions bank to our syndicated corporate debt facility, bringing total commitments to $105 million. And we doubled the size of our borrowing facility in Australia to AUD 150 million and extended the maturity of that facility to the end of 2021. Our capital levels remain robust, with equity to assets of roughly 27% and a debt to total liquidity ratio of just 2.5x. We did see strong liquidity and capital positions that support the share repurchase program we announced today.

As Noah mentioned, the authorization is up -- for up to $50 million, which if fully executed is roughly 16% of current OnDeck shareholders' equity. Funding for the buyback will come from a combination of operating cash flow and available debt capacity, including the recently upsized corporate facility. The buyback will be accretive to our EPS and return on equity, the benefits of which will become more evident in 2020. On a pro forma basis to June 30, if fully debt funded, the buyback would increase our leverage ratio from 2.5 to three times and decrease our total equity to total assets ratio from 27% to 23%.

These pro forma capital metrics are still very strong relative to other lending institutions, leaving us with continuous flexibility to execute on our strategic initiatives. With regard to the strategic initiatives, specifically ODX, there was a minimal financial impact in the second quarter from the Chase position as their origination volume and the size of the service portfolio was in line with the first quarter. The only notable item in the second quarter was an impairment of just under $1 million and operating expense related to the remaining capitalized technology supporting those originations. Going forward, we will continue to receive servicing fees on the portfolio as it liquidates over the next two years, and ODX is taking actions on the expense side to mitigate the bottom line impact, including the reallocation of resources and cuts to planned spending.

These expectations are incorporated in our guidance, which I'll now discuss. For full-year 2019, we now expect gross revenue between $438 million and $448 million, net income attributable to OnDeck between $12 million and $20 million and adjusted net income between $22 million and $30 million. The reduction to our income guidance primarily reflects the slightly lower yield as we increase offer quality on better credits, a higher provision rate as we extend loan maturities, lower ODX revenue and an updated forecast for our international businesses. In terms of the other key performance indicator trends, our outlook on some remains unchanged.

We continue to expect the portfolio to grow at a high single-digit rate, net interest margin to remain stable as lower yields are mitigated by a lower cost of funds and our adjusted efficiency ratio to increase from 2018, although we are managing our expenses to offset the slowdown in revenue growth. However, we now expect the provision rate for the year to be around 7% as we execute on our credit strategies and extend duration in other credit metrics normalized. And while the expected rate on U.S. taxable income remains unchanged, we now estimate a 2019 consolidated effective tax rate of 30% to 35%, reflecting the mix of U.S.

and international results. For the third quarter, we expect gross revenue between $108 million and $112 million; net income attributable to OnDeck between $1 million and $5 million and adjusted net income between $4 million and $8 million. Finally, in terms of the share repurchase. We will be disciplined in our approach, so we'll be prudent to assume a ratable purchase over the next year.

Though, we will be opportunistic and execute faster if appropriate. With that, I'll turn the call back to Noah for some final comments before we open the call for your questions.

Noah Breslow -- Chief Executive Officer

Thanks, Ken. We are not pleased about taking current year guidance down. The changes we are making are positioning us for greater success in 2020 and beyond. Importantly, I want to reiterate the significant progress the company has made, which has put us in a much better financial position.

Our business is strong, with a more diverse product offering and more balanced distribution channels. Our revenue and operating cash flow have increased considerably, the breadth and depth of our funding sources has never been stronger, and we have been profitable for six of the last seven quarters, and we are generating capital to support our growth. In terms of our core lending business, last quarter, we said that we thought taking a slightly derisked stamp was appropriate, and we have been an early mover in shifting emphasis to better quality credits within our target demographics. We believe that move, coupled with the lengthening of the book, will put us in a better place in 2020 in terms of both portfolio size and quality.

In our adjacencies, our international businesses are achieving scale and our equipment finance offering is off to a good start. In terms of ODX, we experienced a setback, but we remain confident in the business and the team running it and we expect to announce positive news from ODX as the year unfolds. Finally, we're stewards of your capital, and we are in the fortunate position of being able to both invest in our growth initiatives and return excess capital to shareholders through the share repurchase. With that, we will turn the call over to our operator, Jack, for your questions.

Questions & Answers:

Operator

[Operator instructions] Eric Wasserstrom with UBS. Your line is open.

Eric Wasserstrom -- UBS -- Analyst

Thanks very much. Maybe one strategic question and one question about the numbers. Just on the bank charter, can you give us some expectation about the milestones and the timing related to them and, sort of, how you sort of envision this process unfolding and over what time frame?

Noah Breslow -- Chief Executive Officer

Yes. Thanks, Eric. This is Noah. I'll take that.

So the bank charter is something that we've been studying for quite some time. We said we were evaluating charter options the last year, and we're far enough along in our thinking now to feel that the timing is right. OnDeck has profitability, scale. We've added some bank talent to our Board over the last year, and we think the environment is conducive.

And from a milestone perspective, we're not prepared on this call to go into a lot of detail on that, but again, we're far enough in our thinking here that we didn't want the stakeholders in OnDeck and around OnDeck to be surprised by any announcements that might come out over the coming months or years. But I think the next logical milestone would be to look for something kind of either application for such a charter. But again, we're not prepared to talk today about what time frame over which that will occur.

Eric Wasserstrom -- UBS -- Analyst

OK. Thank you. And as it is related to the JPMorgan ODX relationship, on net, was that relationship profitable to OnDeck?

Ken Brause -- Chief Financial Officer

On a stand-alone basis, it was a positive contributor. Although, as you know we were continuing to invest in the ODX business so we've talked about the entire business being a net investment, and therefore, not a contributor to the bottom line profits.

Noah Breslow -- Chief Executive Officer

Yes, and Eric, maybe I'll just add one thing there. There was some costs associated with the Chase relationship because it was our first, it was a little bit built more as a one-off, whereas the PNC and future banks will be on a more scalable technology platform. And so you'll see in our numbers this quarter, we did do a write down of some of the Chase-specific technology. So yes, Ken said don't want to sugarcoat it.

This is a headwind to earnings in the short term but it does free us up a little bit from some legacy technology as well.

Eric Wasserstrom -- UBS -- Analyst

And if I may just sneak in one more. The -- if not for the change in the tax rate guidance, what ballpark would the net income guidance have? What would have been the delta in net income guidance from the prior?

Noah Breslow -- Chief Executive Officer

So I have -- I mean, we went from a 25% to a 30% to 35% tax rate. So I mean other than that, the main headwinds that we talked about were the higher provision as we change the origination strategy as well as the lost revenue from the ODX relationship.

Eric Wasserstrom -- UBS -- Analyst

All right. Thanks very much.

Operator

Robert Wildhack with Autonomous Research. Your line is open.

Robert Wildhack -- Autonomous Research -- Analyst

Just on the JPM decision and understanding that you may not be able to comment a ton on what they're doing but I did want to ask about their changing priorities and why you wouldn't expect that to be a readthrough to other potential ODX partners?

Noah Breslow -- Chief Executive Officer

Yes. We obviously can't speak for Chase and their change in priorities. I think it was a change in priority that spanned a variety of initiatives across Chase, I don't think it was specific to us. In terms of the other partners, we previewed this with a number of our partners in the pipeline and they remain committed to the program.

We said we expect to announce positive news on ODX by the end of the year. That's probably as far as I could speculate today. But we do believe the drivers of this are not some fundamental readout on the ODX model. Again, we had a product that performed very well from an underwriting perspective, customers loved it.

And I think we gave but we can't speculate on why Chase made this particular decision, we just know that it's specific to them.

Ken Brause -- Chief Financial Officer

And to reiterate what Noah has said before, the pipeline has never been better and we continue to progress on new opportunities. So therefore, we think this is a specific, not a secular trend.

Robert Wildhack -- Autonomous Research -- Analyst

Got it. OK. And then again acknowledging it certainly on the bank partner or the bank charter decision, do you anticipate significant hiring or compliance buildout there?

Noah Breslow -- Chief Executive Officer

We've really concluded that the benefits here strongly outweigh the costs. I think there are some costs that we incur today as a nonbank lender, there are other costs we incur on the compliance side because we're doing ODX and because we're a publicly traded company. And so we actually think the delta is manageable but we're not giving out specific guidance at this time.

Robert Wildhack -- Autonomous Research -- Analyst

OK. Thanks.

Operator

Giuliano Bologna with BTIG. Your line is open. 

Giuliano Bologna -- BTIG -- Analyst

Can you hear me now?

Noah Breslow -- Chief Executive Officer

Yes.

Ken Brause -- Chief Financial Officer

Yes.

Giuliano Bologna -- BTIG -- Analyst

Sorry about that. Thinking about the international business, you're obviously refinancing a portion of the funding on the -- on that business, especially in Canada. Is that really the primary driver of achieving profitability or is it also a little bit of leverage on the expense base?

Ken Brause -- Chief Financial Officer

So Giuliano you're correct in pointing out that there will be opportunities in Canada to make a meaningful difference in their profitability by bringing their funding costs in line with the rest of our business and particularly in the international businesses. But what we talked about in the past is that the key to profitability in both these markets is scale. So your point about leveraging the expense base is spot on. And we did talk about Australia, expecting to reach scale sometime toward the latter half of this year, which would put us in a position to achieve total profitability in that market next year.

And similarly, as we talked about the reasons for doing the transaction in Canada, it was to accelerate getting to scale. So we are very optimistic with the relaunch of the brand and the marketing that Noah talked about and being some of the other changes we've made as we've gotten to know our new partners in Canada better. We're very optimistic about the outlook in Canada for profitability next year as well.

Giuliano Bologna -- BTIG -- Analyst

That's great. And just on to a slightly different topic. You obviously mentioned your leverage ratio post share repurchase. Is there a sense of where you're comfortable with your leverage ratio going to or kind of stabilizing in the future?

Ken Brause -- Chief Financial Officer

So we've not formally given out leverage or capital targets but I think in the past, we've talked about the fact that we thought something around a 4x would be a level that would be very appropriate given peer lenders and still be very conservative.

Giuliano Bologna -- BTIG -- Analyst

Thank you very much.

Operator

John Rowan with Janney. Your line is open.

John Rowan -- Janney MontgomeryScott LLC -- Analyst

Morning, guys. I missed the very beginning of the call so I'm repetitive, forgive me. The charge-off rate, that's outside of -- if you remind me, your historical guidance that you write the book to is like 12% to 14% correct? Or is...

Ken Brause -- Chief Financial Officer

That's correct. That's correct.

John Rowan -- Janney MontgomeryScott LLC -- Analyst

OK. So I mean are you feeling back on your risk appetite a little bit till you get it back to what's in that range?

Noah Breslow -- Chief Executive Officer

Yes. I think we felt that the charge-off rate going outside this quarter was pretty much -- you could draw a straight line from that just some of the credit testing we did last year. Earlier this year, we pulled back on some of that testing. Again, a lot of it was very profitable and good testing for us.

But like any test, it was a chunk that we didn't feel had the right characteristics. And so we do feel again that we don't guide on charge off per se for future quarters and there's some volatility in that metric depending on particular customers. But long story short, we believe that we can get toward our target range again in future quarters, so we hope that this is a onetime event.

Ken Brause -- Chief Financial Officer

And John, obviously -- I'm sorry, go ahead, John. I just had to say charge offs are the lagging indicator, the delinquencies are the leading indicator.

John Rowan -- Janney MontgomeryScott LLC -- Analyst

OK. As far as the bank charter goes, would you -- are you applying for one or would you acquire a bank?

Noah Breslow -- Chief Executive Officer

So the way we stated it in our prepared remarks is that both are our options.

John Rowan -- Janney MontgomeryScott LLC -- Analyst

OK. And then lastly, the tax rate guidance. I know you gave tax rate guidance, is that for the full year or just for the quarter as going forward?

Ken Brause -- Chief Financial Officer

No. That was for the full year.

John Rowan -- Janney MontgomeryScott LLC -- Analyst

OK. All right. Thank you.

Operator

Melissa Wedel with JP Morgan. Your line is open.

Melissa Wedel -- J.P. Morgan -- Analyst

Good morning, guys. I'm wondering if you can talk a little bit more about the wind down, what should probably be the wind down just based on term and timing of the impact of the second half '18 credit testing. Should we be seeing the impact of that all in the next quarter to 2 given the natural shorter term of the loan you guys have on book?

Noah Breslow -- Chief Executive Officer

So I think the short answer is, yes. And that's really what drove the charge offs this quarter. So as you -- we've seen in prior quarters, we saw the elevated delinquency numbers as they roll through the delinquency maturity buckets. And many of those loans reach 90 plus and that is our credit -- our accounting policy around charge-offs is after 90 days of nonpaying is when we charge off.

So I think you saw the bulk of that impact occur in this current quarter -- in the second quarter.

Melissa Wedel -- J.P. Morgan -- Analyst

OK. And then given the increase you're seeing on a provision and charge-offs and some of the other developments, whether it's repurchase and wind down on some ODX business, are you anticipating any change, any ramp of the equipment finance product?

Noah Breslow -- Chief Executive Officer

No. I think right now, we have that sort of staffed and resourced separately with its own plan, and it really doesn't steal resources from other areas. So we, right now, know the equipment finance offering has been growing. I think in the prepared remarks, we commented that we're now expanding the pilot group of partners we've been working with, so we'll start receiving more applications per month in the second half of the year than we did in the first half.

We're now also able to offer the product in all 50 states for something we didn't have at the beginning of the year. So no. We're making progress there and if view that largely as independent from the other activities.

Melissa Wedel -- J.P. Morgan -- Analyst

OK. OK.

Operator

[Operator instructions] James Faucette with Morgan Stanley. Your line is open.

James Faucette -- Morgan Stanley -- Analyst

Great. Thanks. A couple of questions. First, in terms of the buyback, etc., I mean I understand the expression of confidence in etc.

that, that can show, but I'm wondering, just in terms of uses of capital, can you help us understand, kind of, where the friction is such that you're better off at least buying back some of your shares rather than looking at other ways to accelerate the business or even move more aggressively toward the bank charter via acquisition? And then my second question is maybe you can help us understand a little bit in terms of customer ramp for long term loans. Seems like -- kind of just restate what you've said there and I want to understand a little bit the logic of -- around the lower yield versus higher upfront provisions when you're trying to go up market, just looking for a little clarification there. Thank you very much.

Ken Brause -- Chief Financial Officer

Sure. Good morning, James, it's Ken. So I'll start with the repurchase question, and I think the answer is it's both. We think we can do this buyback, which we think has attractive financial characteristics to it given the potential return on the repurchase of the shares.

It's accretive to ROE and EPS and the size that we have dimensions still leaves us with what we think is ample capital. We're generating capital every quarter so that puts into our analysis so obviously the pro forma numbers were the static number based on the current balance sheet. And so we're going to continue to look for opportunities to invest in the business and grow the business and deploy capital into high-return opportunities, and we think we can do that with this share repurchase in place as well.

Noah Breslow -- Chief Executive Officer

And then moving on to the customer ramp question, this is Noah. So yes, our exit velocity on originations was higher than our entry velocity, if you look at, sort of, second quarter. We do expect to return to, kind of, sequential originations growth here in the third quarter. And largely, the provision adjustment, just comes because we reserve for the full life of loan upfront.

So with slightly longer durations of loans, you're going to have slightly larger provisions assuming, kind of, linear losses as a function of time. And so that is really what's the dynamic that's being driven here. But we think that will be counteracted as we get into 2020 by higher UPB, essentially for the same volume of originations. And we've targeted our offer quality improvements really at the upper, kind of, a third of the customers that we approve today.

So we're really trying to weight the book a little bit more toward our higher-quality customers that we approve. And we think to add some benefits at this point in the cycle. So that's really how the dynamic will play it if the profit hit in the short term, a UPB lift and a profit lift in the longer term. And we will see that dynamic play out as we get into 2020, where we do expect to grow net income from where we are this year.

James Faucette -- Morgan Stanley -- Analyst

Great. Thanks, Ken.

Operator

Scott Buck with B. Riley. Your line is open.

Scott Buck -- B. RIley FBR, Inc.-- Analyst

Good morning, guys. Beside the 2018, kind of, credit testing, what are you seeing more broadly on the credit front?

Noah Breslow -- Chief Executive Officer

Yes. I think overall, the economy is chugging along for small businesses but we are seeing some pockets of instability. We're seeing a little bit in manufacturing, seeing a little bit in retail and, sort of, contractors too. So there's a little bit of sector-specific activity that we're sort of aware of.

But overall, again, unemployment remains low and obviously, the Feds sort of changed their stance a little bit. six months ago, we were thinking it was a rate hike year. Obviously, this year, it might be more of a rate cut year. So we're watching and we're sort of keep staying vigilant.

And again, we think our strategy of pivoting a bit toward slightly higher-quality customers and being a bit more concerted in our efforts to book those customers is the right move for us at this point in time.

Scott Buck -- B. RIley FBR, Inc.-- Analyst

Great. And then can you speak a bit toward the competitive landscape, what you're seeing out there in terms of competitive pricing?

Noah Breslow -- Chief Executive Officer

Yes. It seems very similar to last quarter in terms of the competitive dynamic. So if you recall last quarter, we said there was a step-up in intensity from where we were in 2018 just in terms of the level of competitive activity, the number of inquiries on the credit bureaus of customers, for example, which shows that there's more customer choice out there than maybe there was before. So -- but we don't feel that the second quarter got materially worse or better from where we were in first quarter.

Scott Buck -- B. RIley FBR, Inc.-- Analyst

Great. Thanks.

Operator

[Operator signoff]

Duration: 39 minutes

Call participants:

Steve Klimas -- Head of Investor Relations

Noah Breslow -- Chief Executive Officer

Ken Brause -- Chief Financial Officer

Eric Wasserstrom -- UBS -- Analyst

Robert Wildhack -- Autonomous Research -- Analyst

Giuliano Bologna -- BTIG -- Analyst

John Rowan -- Janney MontgomeryScott LLC -- Analyst

Melissa Wedel -- J.P. Morgan -- Analyst

James Faucette -- Morgan Stanley -- Analyst

Scott Buck -- B. RIley FBR, Inc.-- Analyst

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