Enova International, Inc. (ENVA) Q2 2020 Earnings Report, Transcript and Summary

Good afternoon, everyone, and welcome to the Enova International Second Quarter 2020 Earnings Conference Call. [Operator Instructions] Please also note, today's even is being recorded. And at this time I'd like to turn the conference call over to Monica Gould, Investor Relations for Enova. Ma'am, please go ahead.

Thank you, operator, and good afternoon, everyone. Enova released results for the second quarter of 2020, ended June 30, 2020, this afternoon after the market closed. Enova also announced its intent to acquire OnDeck Capital. If you did not receive a copy of the earnings press release or the transaction release, you may obtain both documents from the Investor Relations section of our website, at ir.enova.com, along with a presentation discussing the transaction. With me on today's call are David Fisher, Chief Executive Officer of Enova; Noah Breslow, Chairman and CEO of OnDeck; and Steve Cunningham, Chief Financial Officer of Enova. This call is being webcast and will be archived on the Investor Relations section of Enova's website. Before I turn the call over to David, I'd like to note that today's discussion will contain forward-looking statements and, as such, is subject to risks and uncertainties. These risks and uncertainties include those risk factors discussed in the most recent reports on Form 10-Q and 10-K filed by each company as well as those discussed in the joint press release announced in this acquisition. Any forward-looking statements that are made on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. In addition to the U.S. GAAP reporting, Enova reports certain financial measures that do not conform to Generally Accepted Accounting Principles. We believe these non-GAAP measures enhance the understanding of our performance, reconciliations between these GAAP and non-GAAP measures are included in the tables found in today;s press release. As noted in our earnings release, we have posted supplemental financial information on the IR portion of our website. And with that, I'd like to turn the call over to David.

Thanks, Monica, and good afternoon, everyone. Thank you for joining our call today. As I'm sure you've all seen by now, we just announced that we have singed an agreement to acquire OnDeck Capital. But first I'll review the transaction. And joining me is Noah Breslow, OnDeck's CEO and Chairman of the Board, who will share his thoughts as well. Then I will provide an overview of our second quarter results and update you on our strategy and outlook for 2020. After that, I'll turn the call over to Steve Cunningham, our CFO, who will discuss our financial results and outlook in more detail. I know many of you are very familiar with OnDeck. They are a leader in non-bank lendings to small businesses. And we believe this transaction brings together two highly complementary market-leading businesses with world-class capabilities in both consumer and small business lending. Together we had approximately $5 billion in originations in 2019. Intuitively, we served approximately 7 million customers. Like Enova, OnDeck is 100% online and also like us, is a pioneer in using analytics, data and technology to make real-time lending decisions. We welcome its talented team to Enova who will increase our scale and resources, enabling us to accelerate growth and are increasingly diversified portfolio. We believe we have well-aligned, innovative and customer oriented cultures led by experienced management teams, are committed to creating a great place to work for team members. In terms of leadership, Noah will become Vice Chairman of Enova, and will join my management team. I will continue to serve as CEO and Chairman of the Board of Enova. Bringing our two companies together will meaningfully expand our small business offering to create a combined company with significant scale and expanded diversified products in consumer and small business markets that banks and credit unions have difficulty serving. As of March 31, 2020, the combined companies had gross receivables of $2.4 billion, 61% of which are small business assets and 39% consumer assets. For the full year 2019, on a pro forma basis, including anticipated synergies, Enova and OnDeck would have estimated combined gross revenue of over $1.6 billion, adjusted EBITDA of over $425 million and adjusted earnings of $215 million. We expect to have industry-leading profitability metrics, and with Enova's strong liquidity, proven ability to access capital markets and a well-capitalized balance sheet, we are in a great position to drive growth and help small businesses and consumers whose need for access to credit is even more critical in the wake of the COVID pandemic and current economic environment. We will also benefit from increased scale and financial strength, diversified revenues, robust cash flows and increased flexibility to drive growth, profitability and shareholder value. Finally, our team and I have a strong history of executing and integrating successful transactions, which allow us to create significant shareholder value. We expect to achieve $15 million in annual cost synergies by 2022, primarily from eliminated duplicative resources as well as $15 million in run rate revenue synergies. The transaction is expected to be accretive in the first year post-closing and generate non-GAAP earnings per share accretion of more than 40% when the synergies are fully realized. Before I discuss our second quarter results, I would like to introduce Noah Breslow, OnDeck's Chairman and CEO, to tell you a little bit more about OnDeck. Noah?

Thanks, David. I am equally excited about partnering with Enova and this opportunity to bring enhanced value, diverse products and broadened origination channels to our combined customer base. I am proud of the business we have built and the nearly $14 billion of financing that OnDeck has provided to underserved small businesses since our founding in 2006. Following an extensive review of our strategic options, we believe this is the right path forward for our customers, employees and shareholders. Joining forces with Enova, a highly respected and well-capitalized leader in online lending and leveraging our combined scale and strength, provides the best opportunity for our long-term success. Our mission at OnDeck has been to make lending easier for our small business clients, and this opportunity delivers that promise on a larger scale. OnDeck brings to Enova, a diversified distribution model with 3 distinct origination channels. Our analytics capabilities and advanced fraud detection will build upon Enova's existing platform. And our investments to date in our next-generation technology infrastructure are a complement to Enova's as well. Together, Enova and OnDeck can support the rapid growth of online lending and bring new products to market faster. Both companies have been leaders in analytics-driven lending innovation, and we look forward to combining our complementary solutions and driving even greater value for our customers. We are incredibly pleased to announce this combination. And I look forward to working closely with David, Steve and the rest of the Enova leadership team to close this transaction and integrate our businesses. Now I will hand it back over to David.

Thanks so much, Noah. And of course, we completely share your thoughts on the transaction. And now turning to the second quarter. Despite the challenging environment, we are pleased with our financial results, which came in above the range that we previewed in our mid-June update. Total second quarter revenue of $253 million declined just 2.5% year-over-year, while adjusted EBITDA of $94 million rose 45% and adjusted EPS of $1.68 grew 73%. As we discussed last quarter, when the seriousness of the COVID crisis increased in early March, we aggressively began to reduce originations and shift our focus to our existing customers and managing our portfolio of loans. We rapidly and effectively acted based on the data we saw and adjusted our sophisticated analytics models to take into account the uniqueness of the economic deterioration. Because of our FAS actions, both delinquency and charge-off rates stabilized and have returned to pre-COVID levels. Across the board, it appears that hardship accommodations have been successful in helping many of our impacted customers stay on track with their loan obligations, and it avoids default. And our data from recent customer performance shows that these efforts are doing more than just delaying defaults. For example, 84% of CNU customers remain in good standing after an adjustment is granted to them. In addition, the rates of accommodations have declined significantly from the highs of late March and early April. CNU is now experiencing fewer deferrals and higher payment rates and pre-COVID impact. For our near-prime NetCredit business, as of last week, over 94% of customers who had a payment modification in March has since made another payment. And we're seeing success rates for modified payments above what we've seen prepandemic. Similarly, for small business products, the percent of nonpaying customers is below pre-COVID levels with close to 98% of customers making a payment in recent weeks. As a result of the meaningful reduction in originations across all of our products to address the COVID crisis, second quarter originations declined 83% from a year ago and 81% sequentially. We have focused origination efforts primarily on existing customers and our products with the highest unit economics while being more patient with longer duration and larger principal value loans. Our originations from new customers declined to just 7.4% of total compared to an average of 37.5% of the total over the prior 4 quarters. Due to our thoughtful approach to originations, our loan portfolio contracted 15% on a year-over-year basis from the second quarter and 29% from the first quarter. We have seen the most significant runoff in our short-term book, which now represents less than 1% of our total portfolio. In the second quarter, installment products represented 72% of our portfolio and line of credit products accounted for 28%. Our U.S. near-prime product represented 59% of our portfolio at the end of Q2, while small business represented 15%. On the cost side, our flexible business model and substantial operating leverage allowed us to quickly reduce our operating costs to align with lower business activity. And we ended the quarter with a very strong balance sheet and liquidity position, which will enable us to reaccelerate quickly when conditions dictate. But before looking forward, I want to provide a brief regulatory update. As you may know, the CFPB finalized its long-awaited small-dollar rule in early July. This final rule retracted the ability to repay underwriting provision while keeping payment protections intact. We expect the final rolling to have a negligible financial impact on Enova. As we look forward, from a financial perspective, we have a strong balance sheet and ample liquidity to manage us through this economic downturn as Steve will discuss in further detail. Our cash position is growing, and our online-only business model has significant operating leverage so we can continue to adjust our expenses quickly to adapt to changes in our business activity, as a result of market conditions. Additionally, we benefit from the higher margins and lower credit volatility as a non-prime consumer lender versus a prime or super prime lender. And we have sufficient liquidity and operating capacity to expand lending once unemployment and economic conditions continue to stabilize. While COVID-19 has created uncertainty in the near term, we believe the fundamentals of our business are strong, and we remain committed to producing long-term, sustainable and profitable growth. As I mentioned, we are well positioned to navigate through the downturn and are ready to reaccelerate lending as the economy stabilizes. As we've seen in the past, most notably the financial crisis of 2008, economic downturns are typically followed by periods of rapid growth in non-prime lending. This was definitely true in 2009 and 2010, which were very strong growth years for Enova. We believe that dynamic in this downturn will be similar. As the impact of COVID diminishes, millions of people will be going back to work, increasing our addressable market substantially. In addition, many customers have been deferring purchases and paying down debt. But as the economy reaccelerates, their expenses will increase, whether it's back-to-school clothes for the kids, deferred medical procedures, car maintenance, missed vacations and other unexpected expenses. And because their debt loads are lower, they will have capacity to borrow. As a result, we fully believe that coming out of COVID, demand will be very strong, and we will be prepared to fill it. To be clear, we are ready today to reaccelerate originations. We built new tools and new models to address the uniqueness of this recession and the anticipated recovery, and we have plenty of liquidity. So we will be as aggressive as we can without being reckless. And in the meantime, as you have heard, the business is in a very stable place. With that, I'll turn the call over to Steve to provide more details on our financial performance and outlook. Following Steve's remarks, we will be happy to answer any questions that you may have. Steve?

Thank you, David, and good afternoon, everyone. As David mentioned in his remarks, our direct online-only business model, world-class analytics and technology, and deep organizational preparedness for a challenging economy have allowed us to react quickly to the uncertain economic environment facing our country. Our financial results this quarter reflect the outstanding work our team has done to stabilize portfolio credit risk while supporting our customers as well as our deep organizational operating and cost discipline. Our efficient operating model and resourceful culture have allowed us to avoid disruptive cost reduction programs, enabling us to maintain an unwavering operating focus while keeping key capabilities in place that will allow us to quickly reaccelerate our businesses as the economy stabilizes and recovers. These capabilities, in combination with our strong liquidity and balance sheet, provide us significant strategic flexibility as we accelerate origination expansion in the coming months. Also, as David and Noah mentioned, we are pleased to announce the acquisition of OnDeck. This combination will create a leading online financial services company with increased scale, diversified revenues, robust cash flows and greater flexibility to drive growth and profitability. We expect the capabilities of our combined organizations to create significant shareholder value opportunities over the next several years as we combine our operations, recognize synergies and drive meaningful EPS accretion. Let me start my comments with a liquidity update. We ended the second quarter with $379 million of cash and marketable securities, including $321 million unrestricted and had an additional $124 million of available capacity on our corporate revolver and $187 million of available capacity on other committed facilities. Our net cash flows from operations for the second quarter totaled $231 million as a result of solid customer payment rates that have returned to pre-COVID levels. In a reduced origination environment, we expect our cash position to grow even if we experience an unexpected increase in defaults, given the relatively short duration of our receivables, our revenue yields, and the frequency of contractual payments. We continue to believe our cash position, available facility capacity and portfolio repayment characteristics will provide us with a long runway of available liquidity before needing to raise new external funding, even when we return to levels of originations experienced in recent years. Now turning to second quarter results. Total company revenue from continuing operations decreased 2.5% to $253 million. The decline in revenue was driven by a 15% year-over-year decrease in total company combined loan and finance receivables balances, which ended the quarter at $823 million on an amortized cost basis. Sequentially, the portfolio declined 29%. As David mentioned, the decline in the portfolio during the quarter was driven primarily by our deliberate reduction in originations in the current economic environment. We expect limited marketing to new customers until lending reacceleration tests, that have started nearly 30 states across our footprint, reflect signs of credit stability and acceptable unit economics. As we stated previously, we are well positioned to rapidly reaccelerate originations as the economy stabilizes. The net revenue margin for the second quarter was 52%. The improvement in net revenue margin from the first quarter was driven primarily by the impact of stabilized credit quality on the fair value of the portfolio as payment rates, delinquency rates, hardship requests and charge-off rates all leveled off or improved. As you'll recall, the change in the fair value line item is driven mostly by changes to key valuation assumptions, including credit loss expectations, prepayment assumptions, and the discount rate. Key valuation assumptions for the portfolio at June 30 was largely unchanged from the first quarter, the sequential improvement in the net revenue margin in the fair value of the portfolio driven by improvements in the credit profile of the portfolio. For the second quarter, the total company ratio of net charge-offs as a percentage of average combined loan and finance receivables was 15.9% compared to 11.8% in the prior year quarter. The increase was driven by line of credit products, while the ratio for installment and RPA products was mostly unchanged from the same quarter a year ago. We saw a steady improvement during the quarter in total net charge-offs across the portfolio after net charge-off ratios peaked during April. In fact, the total company net charge-off ratio for the month of June, which is 4% higher than the same month a year ago. The percentage of total portfolio receivables past due 30 days or more declined to 4.5% at the end of the second quarter from 7.5% at the end of the first quarter, and from 5.2% at the end of the second quarter a year ago. We also saw meaningful declines in early-stage delinquencies during the second quarter. Even with the sharp decline in customer requests for modifications that peaked earlier in the quarter, receivables balances at the end of the second quarter tied to customers that we have granted requests for payment deferrals or modifications remains elevated across our businesses. While loans performing as agreed under modified plans are not considered delinquent, we expect customers that have received deferrals or modifications to present higher default risk than typical nondelinquent customers that continue to pay on time. As we did last quarter, we adjusted the fair value for these loans downward to reflect the increased risk. The discount rate used in the fair value calculation was unchanged from the prior quarter and remained at the high end of our range to reflect the uncertainty in the current economic environment and the uncertainty of additional government stimulus and benefits. To summarize fair value, we saw improvement in portfolio credit quality at the end of the second quarter and have maintained our approach to addressing future credit uncertainties arising from the level of modified accounts in the current economic environment. As a result, the fair value of the portfolio increased slightly to 104% of principal at June 30 from 103% at March 31. This is the primary reason for the meaningful improvement in our net revenue margin for the second quarter. As of late last week, we have seen a continuation of credit stability, payment rates, delinquency rates, hardship requests, and charge-off rates remain at pre-COVID levels, even if some government stimulus programs have wound down. Turning to operating expenses. Consistent with our expectations, total operating expenses for the second quarter, including marketing, were $42 million or 17% of revenue compared to $74 million or 29% of revenue in the second quarter of 2019. As we discussed last quarter, the operating leverage in our business model allows for rapid reductions in operating expenses during periods of reduced originations. Consistent with the deliberate reduction in originations, we ceased most paid marketing during the quarter. As a result, marketing expenses in the second quarter were just $3 million or 1% of revenue compared to $26 million or 10% of revenue in the second quarter of 2019. Similarly, operations and technology expenses declined 18% from the year ago quarter to $17 million or 7% of revenue compared to $20 million or 8% of revenue in the second quarter of 2019. General and administrative expenses for the second quarter declined 21% from the year ago quarter to $22 million or 9% of revenue compared to $28 million or 11% of revenue in the second quarter of the prior year. The reductions were driven by lower personnel-related costs. So nearly every category of G&A expense was lower by both year-over-year and sequentially. We expect total operating expenses, including marketing, to normalize in the mid upper 20% of revenue by the end of 2020, but this will be dependent upon the timing and level of marketing spend and the resumption of meaningful originations growth. Adjusted EBITDA, a non-GAAP measure, increased 45% year-over-year to $94 million in the first quarter for the reasons I've previously discussed. Our adjusted EBITDA margin increased to 37% from 25% in the second quarter of the prior year. Our stock-based compensation expense was $3.7 million in the second quarter, which compares to $3.3 million in the second quarter of 2019. 2020 is the first year where expense associated with the 2017 increase in the vesting period for restricted stock units is fully reflected, resulting in the year-over-year increase. Our effective tax rate was 27% in the second quarter, which increased from 23% for the second quarter of 2019. The increase in the effective tax rate was driven primarily by a reduced tax benefit from restricted stock units that vested during the second quarter at a price below the original grant price. We expect our normalized effective tax rate to remain in the mid- to upper 20% range, but also expect some near-term volatility depending on the trajectory of our future results. We recognized net income from continuing operations of $48 million or $1.58 per diluted share in the quarter compared to $31 million or $0.89 per diluted share in the second quarter of 2019. Adjusted earnings, a non-GAAP measure increased to $51 million or $1.68 per diluted share from $33 million or $0.97 per diluted share in the first quarter -- in the second quarter of the prior year. The trailing 12-month return on average shareholder equity, using adjusted earnings decreased to 27% during the second quarter from 30% a year ago. Our debt balance at the end of the quarter includes $163 million outstanding under our $350 million of combined installment loan securitization facilities. We had no borrowings outstanding under our $125 million corporate revolver. Our cost of funds for the second quarter declined to 7.97%, a 70 basis point decrease from the same quarter a year ago as we continue to recognize the cost benefits of transactions completed over the past several years as well as the benefit of lower market rates. The cost of funds improvement contributed nearly $2 million of pretax income this quarter. During the second quarter, we acquired nearly 1 million shares at a cost of approximately $13 million under our $75 million share repurchase program. And this was the case last quarter. We are not providing guidance for future periods at this time given the ongoing economic uncertainty. In conclusion, we are encouraged by our credit and financial performance this quarter and remain focused on prudently resuming growth by leveraging our world-class analytics and technology, proven approach to unit economics and solid balance sheet. We remain well positioned to generate long-term profitable growth as the economy stabilizes, loan demand recovers and we recognize the meaningful opportunities from our acquisition of OnDeck. And with that, we'd be happy to take your questions. Operator?

[Operator Instructions] Our first question today comes from Vincent Caintic from Stephens.

So very interesting news with the OnDeck acquisition, and that's my first question. So I'm just kind of wondering, putting the businesses together, just kind of thinking about any changes when you think about philosophies or adjustments to the OnDeck portfolio. Because when I think about it, there have been differences between the Enova and OnDeck purchase to small business lending. So sometimes when Enova said small business lending is tough, OnDeck said, it was great and back and forth. And there's been -- when I think of OnDeck, great revenue growth has [indiscernible] a little bit of a profitability. OnDeck has done really well with profitability, but smaller than OnDeck. I'm kind of just wondering when you put the 2 companies together, what you think any changes you think might need to be made, any philosophical differences? And how do you think about it going forward?

Sure. No problem. I think you just kind of highlighted some of the key attributes of this deal. The businesses are complementary. I mean, sure, there's a little bit of overlap, but we did tend to tap into slightly different markets from time to time as you kind of highlighted it, us not always having the same view as to what the market environment look like. And just on the product side, while there's certainly some overlap in the products, the products are not certainly the same. And so it gives us more product to go to market with as well. And then finally, you highlighted profitability. I mean, certainly, with the scale of the combined business and how much operating leverage there are in both of our online businesses, it is certainly going to be beneficial from the profitability standpoint as well.

Okay. Great. Switching gears to [indiscernible]. We have talk of a second stimulus with the government, and the republicans stood out their proposal last night. I'm just kind of wondering if your thoughts of how the business gets impacted by potential second stream is another $1,200 check. Any increases to the length of unemployment and so on?

Yes. So it certainly can't hurt. And I think it can only help both on the consumer side and the small business side. A -- on the small business side, a, because a lot of the small business owners will be getting stimulus checks, but also because consumers will have more money to spend at small businesses. That being said, I don't think it's an absolute imperative for our business to be successful over the next couple of quarters. As stimulus ran out over the last several weeks in a month, we didn't see any change in consumer or small business credit behavior. If anything, it actually got better near the end of the stimulus. So we certainly welcome it. It can only help. But again, certainly not necessary for our success.

[Operator Instructions] Our next question comes from John Rowan from Janney.

So your commentary is that -- on the OnDeck acquisition will be profitable in the first year post closing. And the deck for the OnDeck acquisition, no pun intended. It says that it will close and the end in 2020. So does that mean that 2021, this deal is profitable on an EPS basis. And if so, is that on a GAAP basis or an adjusted basis?

Sure. Steve, do you want to tackle that one?

Yes. Sure. John, I think what we were trying to let you know is that in the first year post close. We expect it to be accretive to EPS. And I would say the focus should be on adjusted EPS because we will have some onetime-related charges in that first period right after close.

That -- so would we also be excluding stock-based comp from that accretion figure? Or is that included?

I mean we'd probably continue to exclude that as we have historically done for that non-GAAP measure.

Okay. Given that this is...

Just on that. There's not a ton of additional stock-based comp as part of this deal, where it's going to be materially different with or without it.

Okay. Given that this is mostly stock, is there a fill or kill? Or is there something of a color around the Enova stock price where there will be some type of breakup clause?

No. It's a straight fixed exchange ratio.

So your stock price can do -- I mean, if it fell, OnDeck shareholders would have no recourse to get out of the deal?

That's correct.

Okay. And does this change the outlook to get a bank charter for OnDeck?

That's not something we're going to talk about right now. But it's certainly something we'll continue to explore as part if and when the transaction closes.

Okay. And then, Steve, can you just quickly repeat what you -- I didn't get it written down, the guidance for expenses?

Yes. Sure. So basically, what I was saying is that we would expect to -- our overall expenses, including marketing, to renormalize back to that mid- to upper 20% of revenue range from where we are today, which is more like mid-teens. But the caveat being that will all depend on the timing of marketing and how the acceleration of originations plays out.

Okay. And then just lastly, it kind of looks like the blended yield on the portfolio came down quite a bit this quarter. Is that just a function of the lower CSO loans? And if so, just -- I want to get an idea of what the outlook for the loan portfolio yield looks like going forward.

Yes. So I would tell you, so if you think about our portfolio, some of our shorter-term loans, which might have had a higher revenue yield associated with them, have run off more quickly than some of the other longer-term installment loans that were the lower APR. So I think you're seeing a bit of a mix shift, while we're in this unusual time. But you're likely to see on the other side, as we start to grow, where we focus, we'll probably emphasize some of those shorter duration, smaller loans as we move out of this downturn as well. So there may be a little bit just as a mix shift. But just as a reminder, from a unit economics perspective, the loans that have the lower yields also at the lower credit costs associated with them. So from a margin point of view, there shouldn't be an overall impact from that.

Okay. But the -- just trying to backtrack, I mean the CSO loan balance came down quite a bit sequentially. And I mean is that directly traced back to the stimulus checks?

So I can hand -- let me grab that, Steve. A lot of that has to do with the switch of our product in Ohio, which was a big CSO state away from CSO lending, as well as the fact that those CSO loans tended to be, again, the shortest duration loans in our portfolio.

And our next question is a follow-up from Vincent Caintic from Stephens.

Just a couple of quick ones. When you talk about revenue synergies with the OnDeck acquisition, just kind of wondering what that could be in terms of synergies for the top line?

All right. Sure, Steve, do you want to grab that one?

Yes. So I think that's what we've been talking about with the combination of the businesses and our ability to offer a broader set of products, go deeper with our customers across the 2 businesses and working with our partners for distribution. So I think that's largely related to that. Obviously, we'll talk a lot more about it as we move through time, but that's our expectation.

Okay. Great. And so looking forward -- and for the consumer and small business lending space, when we think about kind of where we are in this recession, and understanding that it's a unique recession. But -- and you were talking a little bit about the demand spikes back up. Any sort of kind of metrics or near-term things you're looking at to see -- or that would be a driver of demand improving on where we should see that spiking up in the origination line?

Yes. Sure. I mean there's a whole number of factors. Our models are extremely sophisticated, taking into dozens and dozens of factors, both internal and external, looking at both demand, but also risk as well. I mean kind of they're both important. There's excess demand, but too much risk. You need to be careful and vice versa. But I think the economy is opening up and people getting back to spending money, as I said in my prepared remarks, and just kind of getting back to a normal world where there are those unexpected expenses that require people to access credit, and then on the small business side, obviously, as the economy continues to improve and people are getting out and going about the normal days, those are the -- small businesses tend to be the huge beneficiaries of that. As Noah mentioned, I think, 99.9% of businesses in America are small businesses. I think they're the most impacted by the economy shutting down, but they benefit the most from the economy opening back up. And as they do, they're obviously going to have some deficits from not having the kind of revenue they've had in prior years. I think access to capital to them will be critical, and it will be -- there will be extremely strong demand from small businesses as the economy begins to improve and open back up.

Got you. So on the small business side, have you already started to see that sort of growth there or demand from small businesses for [indiscernible]?

Yes. We've seen it a little bit. And I think OnDeck has seen it a little bit more. Noah, would you like to comment on that?

Sure. Happy to, David. So I think what we're seeing is the [indiscernible] of small business sentiment and performance was kind of in April, and then you saw really rising trends going into kind of the end of the quarter. That said, I think there is still a fair amount of uncertainty in the small business lending environment right now. And so I think it really depends on where you are and what you do. We are seeing certain industries that are starting to really increase their demand and open up and scale back their businesses, creating demand for loans. But others, obviously, it's not a secret or hit more hard. So we see it really phasing in over the next couple of quarters. But certainly, there is some demand out there, if you know where to find it.

Got you. And last one for me. The -- so I remember at the beginning of I guess the onset of this recession, we were talking about maybe the models hadn't completely set or maybe there's additional volatility with the models. Are we at the point now where everything is stabilized and you kind of feel like high confidence level in that the models are able to pinpoint the risk-adjusted returns and -- with a high degree of confidence?

Yes. Great question, Vincent. I think we're feeling really good about it. Our portfolio has been extremely stable over the next -- over the last kind of 60 to 90 days and actually improving. We think we have a really good handle on both consumer and small business behavior. The testing we've done, especially over the last 60 days into reaccelerating originations had a comeback pretty much as expected. So big lift by our team to readjust those models, take into account all the new data on the different types of behaviors from this unique economic environment. But we're feeling really good about our ability to understand consumer and small business behavior at this point.

And our next question comes from David Scharf from JMP.

And I guess -- David, Noah, congratulations to both companies. David, wondering -- maybe more of a high-level question on the business combination. I know it's hard to completely separate the 2. But if we set aside the math around accretion for a moment, and just kind of put that over in a box. This business combination obviously transforms Enova's balance sheet from being almost a pure-play consumer lender to a majority small business lender in terms of the assets. And -- which is more than just diversification, it's really kind of flipping the concentration of the business, it would seem. Can you just talk a little bit about maybe how you view this small business end market in terms of the opportunity relative to the consumer asset classes you currently play in?

Sure. Yes. I mean it takes us from 15% to 60%, 1-5 to 6-0. So I mean we had built up a fairly decent-sized small business portfolio before the COVID recession. This obviously greatly increases it. Our small business portfolios increased something like 400% in the last 2 years. So we're obviously quite bullish about the small business lending environment. We think competitively, it is not as difficult as the consumer space. And certainly, from a regulatory standpoint, we think there's significantly less regulatory risk and regulatory overhang than the consumer side. So we are no -- by no means running away from our consumer lending business. We are -- we think we are very good at it. We think there's a lot of runway in the future. And as we mentioned, coming out of this recession, we think there's going to be a huge amount of demand. But the ability to partner with OnDeck and really double or triple down on the small business side was an opportunity we just couldn't pass by.

Got it. That's helpful. And in terms of thinking about, I guess, the longer-term capitalization. You're down to just -- I think in June, you're at a 1.9x debt equity. That obviously reflects the pullback in lending during this pandemic and the short-term nature of those assets running off. But it will go from 1.9 to 4.5x pro forma, I believe, based on the deck that was provided. Is there a long term -- or sort of like a 24-, 36-month plan for where you want the combined companies' leverage to look like?

Sure. Steve, why don't you jump in on that one?

Yes. Sure. So David, you're right. We had been running sort of very -- on the very low end of leverage. And so really, the purpose of that to some extent was to give us some flexibility to continue to grow or to take on opportunities like the one we're talking about today. As we look down the road, obviously, we'd look to sort of normalize back into a reasonable range, somewhere between 3.5% to 4.5% or 4% to 5% wouldn't be out of the question. But obviously, that will help as we drive these high ROEs, as you've seen on a pro forma basis. That will also sort of level off the go-in leverage as well.

Got it. and just lastly, more immediate -- focused on just the core consumer business. I didn't quite get the sense, Steve, that there's so many unknowns and uncertainties, obviously. Near term couldn't quite gauge whether, other than doing some testing, origination activity was going to pick up meaningfully in Q3 from Q2 levels. I'm just wondering if the runoff in the portfolio, either a dollar basis or percentage basis from Q2 to Q3, is going to resemble what we saw from March to June?

Yes. So I think you should expect the runoff rate that we saw that sequential 29% is probably going to slow down a bit. As I mentioned, we saw a lot of our shorter duration, quick repayment parts of the portfolio come off most quickly. And then you're left with a little bit slower amortizing, the near-prime, for example, that will come up more slowly. So I think you'll see if we were doing exactly what we did in Q2. I think you would see it slow down outside of a pickup in originations.

Got it. Got it. And last question, more on the accounting front, can you maybe give us just a 60-second primer on anything we need to know about how fair value accounting may impact the OnDeck assets that would be brought on board or is it just kind of a onetime mark-to-market, and is it sort of a onetime markup or markdown? How do we think about that?

Yes. So as part of the combination, we have an option to bring the entirety of the portfolio over to fair value, which we would intend to do. And if you've been listening to me go on and on about fair value over the past couple of quarters, you're pretty well versed in how that works. So there's a go-in adjustment to do that, which is essentially a reversal of the allowance and some of the accruals and deferred marketing and then a mark on the portfolio itself. And then on a go-forward basis, it would -- just like it's doing with our business, would realign credit and revenue much more closely than it does today in terms of timing. So I think it will be very similar to the key principles that I've talked about over the past couple of quarters with our business going forward.

Our next question comes from John Hecht from Jefferies.

David, in the past, there's been a lot of discussion on new versus recurring customers in any given quarter. And obviously, with marketing down in the current environment, I'm sure you're focused on more recurring customers. But can you give us that breakdown? Number one. And number two, to the extent you are engaging with new customers, is there any different characteristics -- maybe it's a higher quality customer, for instance, he has lost access to the traditional sources? Are you seeing any of those opportunities at this point?

Yes. I mean you're 100% correct. The focus, I think, for a lot of reasons has been on existing customers who we have experience with for the quarter, new customers were just about 7.5% of the total, which is obviously way down from where we've been with an average of kind of, I think, about 37%, 38% over the prior 4 quarters. So obviously, meaningfully down. I think what the focus on existing customers has done is allow us to continue to lend and manage risk during this very uncertain environment. As we're starting to see more certainty, and we have more results from our testing and certain renewed confidence in our revised models. That proportion of new customers will likely increase over the next several quarters.

Okay. And this is more of a curiosity. And I think it will help us gauge -- modeling the sector overall. As you guys see various geographies you open and then maybe restrict that opening because of new case ways and so forth. Is there a correlation to loan demand in those markets? Or is it fairly consistent no matter what the specific geography is going through?

I think they're -- over the longer period of time, there is a correlation, obviously, we saw it when everything shutdown. But you look at something like Texas, for example, where opened up, tightened back up a little bit. It's for a short period of time. My guess is over the next several weeks or months, they'll be opening back up. I think those kind of shorter amounts of kind of change, you don't see as much. But yes, in states it had been more stable and gradually opening up, you can see the demand increasing, both on the consumer side.

Okay. Okay. And you gave some good stats about the change in deferral programs by product, and I missed some of those. Can you just restate the high level stats [indiscernible] back there?

I'm sorry. You broke up for a sec. Can you say that one more time?

I was -- sorry, I was asking if, Steve, could restate some of the statistics around the deferral programs and the cadence of kind of the peaks and then what's happened since then?

Yes. John, I didn't give any actual specifics on modifications other than to highlight that they had peaked earlier in the quarter in terms of the request for hardships and modifications but that we had still had, in our portfolio, just an ongoing at a higher level in the receivables, which we're continuing our approach on the fair value to adjust the value of those loans down, even if they're performing just because of the uncertainty in the environment. Other than that, I was just speaking more on the statistics on 30-day delinquencies, which are down both sequentially and year-over-year.

Yes. John, in addition, I gave a few stats about kind of payment rates post modifications, which have been very, very strong. I think if you try to compare this period to kind of pre-COVID, usually customers who had some form of payment modification or due date adjustment, did not perform very well. Post-COVID, those customers are actually performing very, very well, well above pre-COVID levels kind of close to kind of regular customer levels. So that's the thing that is really -- we've learned throughout this period.

Yes. Okay. That's helpful. And then kind of higher level question, though, is across financial services and fintech and payments, we've seen, not surprisingly, kind of a logical acceleration of just moving to digital commerce. And obviously, you guys are well positioned for that. But I'm wondering, are you seeing that already impact the competition? And have you guys -- are you able to think about how much of the world you see is branch-based versus digital? In other words, what kind of opportunities does this transformation take -- provide you over the next few years?

Sure. Yes. I think it's a little too early to see it just because we're not really leaning into whatever demand is out there. And obviously, demand is going to -- as we've talked about, we expect it to significantly increase as economy continues to open up and improve. But clearly, our belief is almost every aspect of our economy is becoming more digital just over time, but greatly accelerated by COVID. I mean you can see in the results, for example, Grubhub where among the Board, business has just really taken off, post-COVID world. And I think the days that people wanting to kind of swept down to a lender, consumer lender, and have to fill out a bunch of paper work and wait in line and wait for their -- wait for the loan are just long behind us. I think increasingly, people want to pick up their phone or log onto their computer or their iPad anytime, anywhere and in a matter of minutes to be approved for a loan. So I think it's a great societal trend for us. And again, as demand picks up as we kind of begin to improve, we expect to see really strong results from it.

And ladies and gentlemen, at this time and showing no additional questions, I'd like to turn the conference call back over to Mr. David Fisher, CEO of Enova. Sir, floor is yours.

Thank you, operator. And thanks, everyone, for joining our call today. We really appreciate your time and asking all the great questions, especially about the OnDeck acquisition, which we're incredibly excited about. And we look forward to talking to you again soon. Have a great evening.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for joining. You may now disconnect your lines.