Earnings Call Transcript - ENVA Q2 2020

Operator, Operator

Good afternoon, everyone, and welcome to the Enova International Second Quarter 2020 Earnings Conference Call. Please note that today's event is being recorded. I would now like to turn the conference call over to Monica Gould, Investor Relations for Enova. Ma'am, please go ahead.

Monica Gould, Investor Relations

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 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 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.

David Fisher, CEO

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 signed 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 lending 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, and we served approximately 7 million customers. Like Enova, OnDeck is 100% online and 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 Diversify our portfolio. We believe we have well-aligned, innovative, and customer-oriented cultures led by experienced management teams committed to creating a great place to work for our 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?

Noah Breslow, Chairman and CEO, OnDeck

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 three distinct origination channels. Our analytics capabilities and advanced fraud detection will build upon Enova's existing platform. And our investments 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.

David Fisher, CEO

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 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 avoid default. 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. Additionally, 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 compared to pre-COVID levels. For our near-prime NetCredit business, as of last week, over 94% of customers who had a payment modification in March have since made another payment, and we're seeing success rates for modified payments above what we've seen pre-pandemic. Similarly, for small business products, the percentage 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 four 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. 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 ruling 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 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. 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 during the financial crisis of 2008, economic downturns are typically followed by periods of rapid growth in non-prime lending. This was true in 2009 and 2010, which were very strong growth years for Enova. We believe this 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. 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. 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.

Steve Cunningham, CFO

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 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 in 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 were largely unchanged from the first quarter, with the sequential improvement in 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. 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 remain 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 a 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 as 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 allowed 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. We expect total operating expenses, including marketing, to normalize in the mid-to-upper 20% of revenue by the end of 2020, but this will depend 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 the 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 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

Our first question today comes from Vincent Caintic from Stephens.

Vincent Caintic, Analyst

So very interesting news with the OnDeck acquisition, and that's my first question. I'm just kind of wondering, putting the businesses together, just thinking about any changes regarding the philosophies or adjustments to the OnDeck portfolio. Because when I think about it, there have been differences between Enova and OnDeck pertaining to small business lending. Sometimes when Enova said small business lending is tough, OnDeck said it was great, and back and forth. When I think of OnDeck, I see great revenue growth, but profitability has been a little bit tougher compared to OnDeck. I'm kind of wondering, when you put the two companies together, what changes do you think might need to be made, any philosophical differences? And how do you foresee it going forward?

David Fisher, CEO

Sure. No problem. I think you just 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 tended to tap into slightly different markets from time to time, as you highlighted with us not always having the same view of what the market environment looks like. And just on the product side, while there's certainly some overlap in the products, they are not the same, which gives us more products to market with as well. And then finally, you highlighted profitability. With the scale of the combined business and how much operating leverage both of our online businesses have, it will certainly be beneficial from a profitability standpoint.

Vincent Caintic, Analyst

Okay, great. Switching gears to the discussions around a second stimulus with the government, and the Republicans announced their proposal last night. I'm just kind of wondering about your thoughts on how this potential second stimulus, such as another $1,200 check or increases to the length of unemployment benefits, may impact your business.

David Fisher, CEO

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

Operator, Operator

Our next question comes from John Rowan from Janney.

John Rowan, Analyst

Your commentary that the OnDeck acquisition will be profitable in the first year post-closing suggests this deal could close at the end of 2020. Does that mean in 2021, this deal will be profitable on an EPS basis? If so, is that on a GAAP basis or an adjusted basis?

David Fisher, CEO

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

Steve Cunningham, CFO

Yes. Sure. John, I think what we were trying to convey 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 one-time charges in that first period right after close.

John Rowan, Analyst

So would we also be excluding stock-based compensation from that accretion figure, or is that included?

Steve Cunningham, CFO

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

David Fisher, CEO

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

John Rowan, Analyst

Okay. Given that this is mostly stock, is there a fill or kill clause? Or is there something around the Enova stock price where OnDeck shareholders would have recourse to exit the deal?

David Fisher, CEO

No, it's a straight fixed exchange ratio.

John Rowan, Analyst

So your stock price can fluctuate, and if it fell, OnDeck shareholders would have no recourse to get out of the deal?

David Fisher, CEO

That's correct.

John Rowan, Analyst

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

David Fisher, CEO

That's not something we're going to discuss right now. But it's certainly something we'll continue to explore as part of the closing transaction.

John Rowan, Analyst

Okay. And Steve, can you just quickly repeat the guidance for expenses?

Steve Cunningham, CFO

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

John Rowan, Analyst

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? If so, I want to get an idea of what the outlook for the loan portfolio yield looks like going forward.

Steve Cunningham, CFO

Yes. I would tell you, 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, which have lower APR. There's likely a mix shift while we're in this unusual time. However, on the other side, as we start to grow, where we focus will 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 caused by the mix shift. But just as a reminder, from a unit economics perspective, the loans that have lower yields also have lower credit costs associated with them. So from a margin point of view, there shouldn't be an overall impact from that.

John Rowan, Analyst

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

David Fisher, CEO

Let me clarify 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 tend to be again the shortest duration loans in our portfolio.

Operator, Operator

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

Vincent Caintic, Analyst

Just a couple of quick ones. When you talk about revenue synergies with the OnDeck acquisition, I'm just wondering what that could look like in terms of top-line synergies?

David Fisher, CEO

Sure, Steve, do you want to grab that one?

Steve Cunningham, CFO

Yes. I think that's what we've been discussing with the combination of the businesses. Our ability to offer a broader set of products, go deeper with our customers across the two businesses, and work with our partners for distribution. We'll talk a lot more about it as we move through time, but that's our expectation.

Vincent Caintic, Analyst

Okay, great. In the consumer and small business lending space, as we consider our position in this unique recession, do you have any metrics or near-term indicators that you're monitoring to gauge when we might see an improvement in demand and a spike in origination?

David Fisher, CEO

Sure. I mean, there are numerous factors. Our models are extremely sophisticated, taking into account dozens of both internal and external factors, looking at both demand as well as risk. Both are important; there's excess demand, but if there's too much risk, you need to be careful, and vice versa. But I think the economy is opening up and people are getting back to spending money. As I stated in my prepared remarks, they're getting back to a normal world where there are unexpected expenses requiring them to access credit. On the small business side, as the economy improves and people are out and about, small businesses are significant beneficiaries. As you noted earlier, 99.9% of businesses in America are small businesses. They are the most impacted by the economy shutting down, but they also benefit the most from the economy opening back up. As they do, they'll obviously face revenue deficits from past years, so access to capital will be critical, and there will be extremely strong demand from small businesses as the economy begins to improve.

Vincent Caintic, Analyst

Got you. So on the small business side, have you started to see growth or demand from small businesses for loans?

David Fisher, CEO

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

Noah Breslow, Chairman and CEO, OnDeck

Sure, happy to, David. I think what we're seeing is the shift in small business sentiment and performance. In April, we saw some decrease, and then we saw improving trends heading into the end of the quarter. That said, I think there's still a fair amount of uncertainty in the small business lending environment right now, which really depends on where you are and what you do. We are noticing certain industries that are beginning to show increased demand and scaling back their businesses, but others are still significantly affected. We foresee this demand phasing in over the next couple of quarters. But there is some demand out there if you know where to look.

Vincent Caintic, Analyst

Got you. And last one for me. At the beginning of the recession, we talked about the models possibly not being fully set, or maybe there was additional volatility with the models. Are we now at a point where everything has stabilized, and you feel confident that your models can pinpoint risk-adjusted returns with a high degree of confidence?

David Fisher, CEO

Great question, Vincent. I think we're feeling really good about it. Our portfolio has been extremely stable over the last 60 to 90 days and has actually improved. We feel we have a solid understanding of both consumer and small business behavior. The testing we've done, particularly over the last 60 days into reaccelerating originations, has come back pretty much as expected. Our team has made significant efforts to readjust those models considering the new data on different behaviors stemming from this unique economic environment. Overall, we're feeling good about our capability to understand consumer and small business behavior at this point.

Operator, Operator

And our next question comes from David Scharf from JMP.

David Scharf, Analyst

Congratulations to both companies on the acquisition. David, I have a broader question regarding the business combination. I understand it's challenging to differentiate between the two. However, if we momentarily focus on the math surrounding accretion, this business combination shifts Enova's balance sheet from being primarily a consumer lender to being predominantly a small business lender in terms of assets. This seems to suggest not just diversification, but a fundamental change in the business's concentration. Could you discuss your perspective on the small business market in comparison to the consumer asset classes in which you currently operate?

David Fisher, CEO

Sure. Yes. I mean, it takes our small business from 15% to 60%, 1-5 to 6-0. We built a fairly reasonable small business portfolio before the COVID recession. This acquisition significantly increases it. Our small business portfolio grew something like 400% in the last two years. We are very bullish about the small business lending environment. We feel competitively, this arena is not as challenging as the consumer space. Moreover, we believe there is substantially less regulatory risk and regulatory overhang than the consumer side. We are not moving away from our consumer lending business; we excel at it and see a lot of future runway. As mentioned, we anticipate robust demand upon exiting this recession, but we couldn't pass up the opportunity to partner with OnDeck and deepen our commitment to small business lending.

David Scharf, Analyst

That's helpful. In terms of capitalization, you're down to 1.9x debt equity as of June. This reflects the lending pullback during the pandemic and the short-term nature of those assets. But this balloon to 4.5x pro forma, correct? Do you have a long-term plan, say, over the next 2-3 years for where you want the combined companies' leverage to settle?

David Fisher, CEO

Sure. Steve?

Steve Cunningham, CFO

Yes. You're right. We had been running at the low end of leverage. The purpose was to allow us flexibility to grow and seize opportunities like the one we're discussing today. Looking forward, we expect to return to a normalized leverage range, somewhere between 3.5% to 4.5% or 4% to 5% in the not-too-distant future. This will help boost the go-in leverage as well.

David Scharf, Analyst

Got it. On the topic of the core consumer business, Steve, I didn't quite gather whether origination activity will meaningfully pick up in Q3 from Q2 levels, given there are many uncertainties. Can you clarify if the dollar or percentage runoff from Q2 to Q3 will mimic what we saw from March to June?

Steve Cunningham, CFO

Yes. You should expect that the runoff rate we saw from that sequential 29% will probably slow down a bit. As I mentioned, the shorter-duration, quick-repayment parts of the portfolio ran off most quickly, leaving us with slower amortizing loans, such as the near-prime products, to come off more slowly. So, if we were to replicate Q2 to this upcoming quarter, I think we'd see a slower rate without factoring in any uptick in originations.

David Scharf, Analyst

Got it. Lastly, could you give a brief overview of how fair value accounting may impact the OnDeck assets that will come aboard? Will it be a one-time mark-to-market situation, or a periodic adjustment moving forward?

Steve Cunningham, CFO

Yes. As part of the combination, we can bring the entirety of the portfolio over to fair value, which we would intend to do. As you have heard me go on regarding fair value over the past few quarters, there will be a go-in adjustment to do this, which would generally involve a reversal of allowance and some accruals or deferred marketing and then a mark on the portfolio itself. On a go-forward basis, it would realign credit and revenue much more closely than it currently does in terms of timing. So it would be fundamentally similar to the key principles I’ve discussed regarding our business moving forward.

Operator, Operator

Our next question comes from John Hecht from Jefferies.

John Hecht, Analyst

David, previously, there was a lot of discussion regarding new versus recurring customers in any given quarter. Given that marketing is down in the current environment, I’m sure you're more focused on recurring customers. Can you provide that breakdown? Additionally, when you engage with new customers, are you noticing different characteristics, such as perhaps a higher quality customer, especially those with no access to traditional sources? Are there any opportunities you are observing at this time?

David Fisher, CEO

Yes. You are correct. Our focus has been on existing customers for multiple reasons. The proportion of new customers is down to just 7.5% of total, which is significantly reduced from an average of about 37-38% over the prior four quarters. This focus on existing customers has allowed us to lend and manage risk throughout this uncertain environment. As we start to see more certainty and results from testing, we expect that proportion of new customers will increase over the next several quarters.

John Hecht, Analyst

Understood. As we observe various geographies open and potentially restrict access due to new COVID cases, do you notice a correlation to loan demand in those markets or is it fairly consistent regardless of specific geographical challenges?

David Fisher, CEO

Over a longer period, there is indeed a correlation; we observed it when everything shut down. For instance, Texas opened up but then tightened back. That said, such shorter shocks are less impactful. More stable states opening gradually will see increased demand on both the consumer side.

John Hecht, Analyst

Got it. I missed some of the statistics around the deferral programs. Can you restate the high-level stats that encompass that?

David Fisher, CEO

I apologize for the confusion. I mentioned that payment rates post-modifications are performing exceptionally well, significantly exceeding pre-COVID levels. Customers with payment modifications are adhering to agreements better than expected. We have strong performance indicators among customers who received accommodations, which is a marked improvement compared to previous expectations.

Operator, Operator

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

David Fisher, CEO

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

Operator, Operator

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