Q2 2020 Enova International Inc Earnings and Acquisition of On Deck Capital Inc Call
[music].
Good afternoon, everyone and welcome to the.
Second quarter 2020 earnings conference call.
All participants will be in listen only mode.
Assistance, placing all conference specialist by pressing the star key followed by zero.
After today's presentation, there will be an opportunity to ask questions.
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Withdraw your questions you May press our true.
Please also note today's event is being recorded.
And at this time I'd like to turn the conference call ever to Monica Gould Investor Relations for Nova.
Please go ahead.
Thank you operator, and good afternoon, everyone and ever released results for the second quarter of 2020 ended June Thirtyth 2020. This afternoon after market close.
No. The also announced its intent to acquire on debt capital. If he did not receive a copy of either earnings press released by the transaction release.
<unk> those documents from the Investor Relations section of our website at <unk> Dot Dot com, along with a presentation discussion discussing the transaction.
Today's call, David Fischer, Chief Executive Officer for Nova.
No what breslow, chairman and CEO of on deck, and Steve Cunningham, Chief Financial Officer of another.
This call is being webcast will be archived on the Investor Relations section now that's website.
Before I turn the call over to David I'd like to know that today's discussion will contain forward looking statements and 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, 10-K filed by each company as well. This does discussed in the joint press release announcing 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 result of new information or future events.
In addition to U.S. GAAP reporting and never reports certain financial measures that do not conform to generally accepted accounting principles. We believe these non-GAAP measures enhanced see understanding of our performance.
Conciliations between these GAAP and non-GAAP measures are included in the tables found in today's press release.
No. It in our earnings release, we have posted supplemental financial information.
Yeah, our portion of our website.
And with that I'd like to turn the call over to David.
Thanks, a lot of kind of good afternoon, everyone. Thank you for joining our call that.
As I'm sure you're both anybody know when she also no. We have signed an agreement to acquire odd that capital first our view the transaction and joining me, there's no breathable Ondecks CEO control motherboard, who chairs thoughts as well.
That will provide an overview of our second quarter results adult that you are strategy 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 without back there a leader and not take wanting to small businesses.
We believe this transaction brings together two highly complimentary market, leading businesses with world class capabilities, both consumer and small business funding.
Together, we had approximately $5 billion an origination for 2019.
Tumor doubly we served approximately 7 million customers.
Like an old object is 100% online, but also like us as a pioneer and using analytics data and technology to make real time lending decisions.
We welcome it's helped the team turnover, who will increase our scale and resources, enabling us to accelerate growth are increasingly diversified portfolio.
We believe we have wells online innovative customer oriented cultures my bike spirits management teams, we're committed to creating a great place to work for PNM for team members.
In terms of leadership.
Oh will become vice Chairman opened although I will join my management team I will continue to serve a CEO and chairman of the board of an old.
Bringing our two companies together will meaningfully expand our small business.
Offering to create a combined company with significant scale and expanded diversified products and consumer and small business markets banks and credit unions difficulty service.
As of March 31, 2020.
Combined companies had gross receivables of 2.4 billion, 61% of which are small business assets, a 39% consumer assets.
For the full year 2019 on a pro forma basis, including anticipated synergies and no but not that wouldn't have estimated combined gross revenue of over 1.6 billion.
Adjusted EBITDA of over 425 million.
Adjusted earnings of 215 noise.
We expect to industry, leading profitability metrics and with an overall strong liquidity proven ability, Texas capital markets, well capitalized balance sheet.
We learned a great position to drive growth and help small businesses and consumers need for access to credit is even more critical and the weight to the covert pandemic current economic environments.
We will also benefit from increased scale and financial strength diversified revenues robust cash flows increased flexibility to drive growth profitability and shareholder value.
Finally, I team and I have a strong history of executing integrating successful transactions, which allow us to create significant shareholder value.
We expect to achieve a $15 million an annual cost synergies by 2022, primarily from eliminating duplicative resources as was $15 million and run rate revenue synergy.
The transaction is expected to be accretive in the first year post closing generate non-GAAP earnings per share accretion of more than 40% on the synergies are fully realized.
Before I discuss our second quarter results I would like to introduce Noah Breslow objects, Chairman and CEO tell you a little bit more about on that no.
Thanks, David.
I'm equally excited about partnering with the Nova and this opportunity to bring enhanced value diverse products and broadened origination channels to our combined customer base.
I'm proud of the business, we have built nearly $14 billion a financing ondeck has provided the under for 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 the do about highly respected well capitalized leader in online.
Leveraging our combined scale and strike.
Provides the best opportunity for our long term success.
Our mission at on deck has been to make Wendy easier for our small business class and this opportunity delivers that promise a larger scale.
On that brings to window about a diversified distribution model three distinct origination channels.
Our analytics capabilities and advanced fraud detection will build upon those existing platform.
And our investment city and our next generation technology infrastructure are complementary to notice as well.
Together and nobody that can support the rapid growth the bottom line.
And bring new products to market faster.
Both companies at the legal was an analytics driven blending inhibition and we look forward to combining our complimentary 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 your noble leadership team to close this transaction and integrate our businesses.
Now I will hand back over to David.
Thanks, So much known of course, we completely sure you're out your thoughts on the transaction.
Now turning to the second quarter. Despite the challenging environment, we're pleased with our financial results, which came in above the range that we previewed at our mid June update.
Total second quarter revenue of $253 million decline, just 2.5% year over year.
Adjusted EBITDA of 94 million Boes, 45%, an adjusted EPS of $1.68 cents grew 73%.
As we discussed last quarter when the seriousness other cobot crisis increased in early March regrettably began to reduce originations and shift our focus to our existing customers and managing our portfolio block.
We rapidly and effectively acted based on the data we saw an adjusted our sophisticated analytics models to take into account uniqueness or the economic deterioration.
Because of our fast actions Wolf delinquency and charge off rates stabilize and have returned to pre kogut bubbles.
Across the board.
Hardship accommodations have been successful and helping many of our in part to customers stay on track with their loan obligations under devoid default and our data from recent customer performance shows that these efforts are doing more than just delayed default for.
For example, 84% I see a new customers were many good standing after an adjustment is granted to that.
In addition, the race of accommodations have to quite see.
From the highs of late March in early April.
Are you now experiencing fewer deferrals and higher payment rates and pre called it impacts.
For our near Prime net credit business as of last week over 94% of customers sweater and the modification March since made another payment.
And we're seeing success rates were modified pain, Oh, what we've seen pre pandemic.
The moly for small business product the percentage of non paying customers is below pre covenant cobot levels of 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 covert crisis.
Second quarter originations, the quite 83% from a year ago, an 81% sequentially.
We have focused origination efforts, primarily on existing cost first and our products with the highest unit economic.
Well being more patient with longer duration and larger principal value law.
Our originations from new customers declined to just 7.4% total compared to an average of 37.5% of the total over the prior four corners.
Due to our thoughtful approach to originations our loan portfolio contracted 15% on a year over year basis from the second quarter at 29% from the first quarter.
We've seen the most significant run off in or short term book, which now represents less than 1% or total portfolio.
The second quarter installment products represented 72% of our portfolio and line of credit products accounted for 20%.
Our U.S. near Prime product represented 59% up 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 quarter with a very strong balance sheet and liquidity position, which will enable us to re accelerate quickly when conditions dictate.
Well before looking forward I want to provide a brief regulatory update.
As you May know the CFPB finalized its long awaited small dollar roll in early July.
Its final rule retracted the ability to repay underwriting provision well keeping payment protections intact.
We expect the final rolling to have a negligible financial impact on or no.
As we look for remote for natural 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.
Benefit from the higher margins and lower credit volatility as a non prime consumer wonder first as a prime or Super Prime Wonder.
And we have sufficient liquidity and operating capacity to expand lending once unemployment.
Economic conditions continue to stabilize.
Well over 19 has created uncertainty in the near term we.
We believe the fundamentals of our business are strong.
We remain committed to produce like long term sustainable profitable growth.
As I mentioned, we are well positioned to navigate through the downturn at a ready to re accelerate lending has economy stabilized.
As we've seen in the past most notably the financial crisis of 2008 economic downturns are typically followed by periods of rapid growth and Nonprime. One day. This was definitely true in 2009, 2010, which were very strong growth years for you know.
We believe that dynamic in this downturn will be similar.
The impact of covert diminishes millions of people will be going back to work, increasing our addressable market substantial.
In addition, many customers have been deferring purchases and paying down debt.
What does the comedy re accelerate their expenses will increase whether it's back to school close for the kids deferred medical procedures Carmanahs missed vacations and other unexpected expenses.
Because they're doubles or lower they will have capacity to borrow.
As a result, we fully believe that coming out of cobot demand will be very strong and we will be prepared to sell it.
To be clear, we are ready today to Reaccelerate originations, we've got new tools and new models to address the uniqueness of this recession and the anticipated recovery.
And we have plenty of liquidity.
We will be as aggressive as we can without being reckless and in the meantime, because you have hurt the business isn't a very stable place.
With that I'll turn the call over to Steve will provide more details on our financial performance and outlook. Following Steve's remarks, we'll be happy to answer any questions that you may have.
<unk>.
Thank you David and good afternoon, everyone.
David mentioned in his remarks or 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 are deep organizational operating in cost discipline.
Our fishing operating model and resourceful culture have allowed us to avoid disrupted 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 good covers.
These cake capabilities in combination with our strong liquidity and balance sheet.
Provide a significant strategic flexibility as we accelerate origination expansion in the coming months.
Also as David I know a mentioned we're pleased to announce the acquisition of on deck.
Combination will create a leading online financial services company with increased scale diversified revenues robust cash flows you 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.
We combine or our operations recognize synergies can drive meaningful EPS accretion.
Let me start my comments for the 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 $287 million 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 have returned to pre covert levels.
In a reduced origination environment, we expect our cash position to grow even if we experienced an unexpected increasing default.
Given the relatively short duration of our receivables revenue yields and the frequency contractual payments.
We continue to believe our cash position.
<unk> facility capacity the portfolio repayment characteristics will provide us with a long runway of available liquidity before needing to raise new external funding.
Even when we returned 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 15% year over year decrease in total company combined loan in finance receivables balances, which ended the quarter at $823 million unamortized cost basis.
Sequentially the portfolio declined 29%.
David mentioned the decline in the portfolio during the quarter was driven primarily by or deliberate reduction in originations in the current economic environment.
We expect limited marketing to new customers into lending, we re acceleration test that it started nearly 30 states across our footprint reflect signs of credit stability acceptable unit economics.
We stated previously we're well positioned to rapidly react celebrate originations as the economy stabilized.
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 stabilize credit quality on the fair value the portfolio.
Payment rates delinquency rates hardship requests charge off rates all leveled off for improved.
As you'll recall the change in the fair value line item is driven mostly by changes to key valuation assumptions.
Leading credit loss expectations prepayment assumptions and the discount rate.
T valuation assumptions for the portfolio at June Thirtyth, largely unchanged from the first quarter sequential improvements in the net revenue margin in the fair value the portfolio driven by improvements in the credit profile of the portfolio.
The second quarter. The total company ratio of net charge offs as a percentage of average combined loan in finance receivables.
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 in RPH products was mostly unchanged from the same quarter a year ago.
We saw steady improvement during the quarter in total net charge offs across the portfolio.
After net charge off ratio as Pete during April.
Total company net charge off ratio for the month in June which is 4% higher in the same on 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 70.5% at the end of the first quarter.
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 a sharp decline in customer request for modifications that Peter earlier in the quarter.
See bubbles balances at the ended the second quarter tied to customers that we granted request for payment deferrals or modifications remains elevated across our businesses.
Well loans performing as agreed under modified plans are not consider delinquent.
We expect customers that have received deferrals or modifications to present higher default rates than typical non delinquent customers that continued to pay on time.
As we did last quarter, we adjusted to 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. They remain 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.
We 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 the portfolio increased slightly to 104% of principal at June Thirtyth from 103% at March 31st.
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 cobot levels.
Even if some government government stimulus programs had wound down.
Turning to operating expenses consistent with our expectations total operating expenses for the second quarter, including marketing was $42 million or 17% of revenue compared to $74 million or 29% of revenue in the second quarter of 29 team.
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 a 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, a 1% of revenue compared to $26 million or 10% of revenue in the second quarter of 29 team.
Similarly operations and technology expenses declined 18% from a year ago quarter to $17 million were 7% of revenue.
Compared to $20 million or 8% of revenue in the second quarter of 29 team.
General and administrative expenses for the second quarter declined 21% of from a year ago quarter to $22 million, 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 Gionee extends it 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 that 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 previously discussed.
Our adjusted EBITDA margin increased to 37%, 25% 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, increasing the vesting period for restricted stock units, it's 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 29, chief.
The increase in the effective tax rate was driven primarily by reduced tax benefit from restricted stock units that invested 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 at $48 million or $1.58 cents per diluted share in the quarter compared to $31 million.89 per diluted share in the second quarter of 29 team.
Adjusted earnings and non-GAAP measure increased to $51 million or $1.68 cents per diluted share from 33 million or 97 cents 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% year ago.
Our debt balance at the ended the quarter includes $163 million outstanding under our $350 million, a combined installment loan securitization facilities.
We had no borrowings outstanding under our $125 million.
Okay.
Our cost of funds for the second quarter declined to 7.97%.
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.
Cost of funds improvement contributed nearly $2 million a pre tax income this quarter.
During the second quarter, we acquired nearly a million shares at a cost of approximately $13 million under our 75 million dollar share repurchase program.
And this was the case last quarter, we're not providing guidance for future periods at this time, given the ongoing economic uncertainty.
In conclusion, we are encouraged by or credit and financial performance this quarter.
We 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 <unk> our acquisition of on deck.
With that we'd be happy to take your questions operator.
Ladies and gentlemen at this time will begin the question and answer session.
To ask a question you mean press Star then one on your Touchtone telephones. If you are using the speaker phone. They do you actually you. Please pick up the handset before pressing the keys.
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Once again that is star and then one to ask your question well pause momentarily to assemble the Ross.
And our first question today comes from Vincent Caintic from Stephens. Please go ahead with your question.
Hey, Thanks, Good afternoon, guys. So a very interesting news, which fell on backup solution. That's my first question.
So I'm just kind of wondering claimed businesses together I'm just kind of thinking about.
Any changes when you think about slaw skis here just on the portfolio.
Well I think about it there had been differences between deal done on Dec approaches to small business lending.
Sometimes when do you know the said no small business lending is tough Ondeck said, it's straight back and forth understand when I speak of on backing up great revenue gross has tripled little bit of profitability Ondeck has done really well with profitability, but a small isn't all that sometimes just wondering when you put the two companies together.
What you think any changes you think might need to be made an equal philosophical differences in how do you think about like for thank you.
Sure No no problem. That's I think you just kind of highlighted some of the key attributes of this deal. This is our complimentary I make sure there's a little bit of overlap, but we did CAD to tap into slightly different markets from from time to time as you kind of highlighted that's not always having the same view as to what the market embargo.
I meant looked like it is just on the product side, while there's certainly some overlap the products. The products are not not certainly the same and so gives us more products 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 and.
Both of our online businesses. It is certainly going to be beneficial from the profitability standpoint as well.
Okay, great. Thank you.
Switching gears scares Felipe.
Have talk of a second stimulus so with the car minutes of Republican stood up the proposed last night and just kind of wondering your thoughts so.
How the business gets impacted by potential second seamless just another 500, all check any increases to up the likes of unemployment and that's a lot.
Yeah.
So I got it certainly can't hurt I think it can only help both on the consumer side and the small business side I am not the small business I am because a lot of small business owners will be getting stimulus checks, but also because consumers a lot more money to spend at small businesses.
That being said I don't think it's an absolutely imperative for business to be successful over the next couple of quarters.
As stimulus ran out and over the last several weeks an a mall we didn't see any change in consumer small business.
Credit behavior.
The thing actually got better near the end of the stimulus so.
You know, we certainly welcome it can only help but again certainly not not necessary for our success.
Okay, great. Thanks very much.
[noise] once again, if he would like to ask your question. Please press Star then one.
To make yourself from the question could you made press star and too.
Our next question comes from John Rowan from Janney. Please go with your question.
[noise] peering guys.
Hey, John.
So [noise].
Your commentary is that or the Ondeck acquisition will be profitable in the first year post closing and the deck for the on Dec acquisition No pun intended says it all close a deal in 2020, so does that mean the 2021.
This deal is.
Profitable.
On a U.P.S. basis, and if so is that on a GAAP basis or an adjusted basis.
Sure Steve do you want to talk with Alan.
Yes, sure Hey, John how are you doing good though I think what we were we were trying to to let you know is that the in the first year post close we expect to be accretive to two S and I would say the focus should be on adjusted EPS, because we will have some some onetime related charges in that you on that first piece.
Period right after close.
[noise] ways died so would we also be excluding stock based comp from that accretion figure or is that included.
[noise] up I mean, we will probably continue to exclude that as we have historically done for that non-GAAP measure.
Okay. Given that this is John sorry, but just just on that there's not a ton of additional stock based comp as far this deal, where it's gonna be materially different with or without it.
Okay.
And given that this is mostly stock is there a filler killers or some of the color around the you know the stock price, where you know the there'll be some type of breakup.
Clause.
No, it's a straight fixed exchange ratio.
[noise] so your stock price can do.
I mean, if it fell do you ondecks shareholders would have no recourse to get out to be the deal.
That's correct.
Okay and it does this change the outlook to get a bank charter for on deck.
That's not something we're going to talk about right now, but certainly you know something we'll continue to explore sparked a what if and when the transaction closes.
Okay, and then Steve can you just quickly repeat what you guys I didn't get a 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 re normalize 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 you know the timing of marketing and how the acceleration of originations plays out.
Okay, and then just lastly, it looks like the the blended yield on the portfolio came down quite a bit. This quarter is that just a function of the lower C.S.. So loans and you know if so just I want to get a 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 at a higher revenue yield associated with them have run off more quickly than some of the other longer term installment loans that were glory PR. So I think you're seeing a bit of a mix shift what we're in.
Yes.
Usual time.
You are likely to see err on the other side as we start to grow where we where we focus will probably emphasize some of those shorter.
Duration smaller loans as we move out of this this downturn as well so there maybe a little bit just as a mixture of the just as a reminder.
From a unit economics perspective, the loans that have to 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 backtracked mean that this year. So loan balance came down quite a bit sequentially and I mean is that directly trace back to the stimulus trucks.
So I can hand, I, let me grab that Steve a lot of that has to do with their switch of our product in Ohio, which was a big see associate away from C. S. All lending as well as the fact that those CFL loans tended to be okay, and that the shorter duration loans in our portfolio.
Okay. Thank you very much.
[laughter].
And our next question is a follow up from Vincent Caintic from Stephens. Please go ahead with your follow up.
Oh, sorry, thanks, guys.
Couple of of quick ones. When you talk about revenue synergies with the Ondeck acquisition.
Just kind of wondering what that what that could be in terms of so.
Oh synergies for the topline.
Right sure, Steve you want to grab that well.
Yes. So I think that's you know 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 you know crossed the two businesses.
And working with our partners for a for distribution so I.
I think that's largely related to that obviously, we'll talk a lot more about as as we move through time, but that's our that's our expectation.
Okay, great. Thank you and so looking forward and <unk> for the consumer and small business lending space. When we think about kind of wherever you are in this recession that 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 are near term things you're looking at sea.
Or that would be a driver of demand improving and where we.
But.
Good spiking up and alleged which initially.
Yeah sure I mean, there's a whole number of factors our models are extremely sophisticated taking into thousands and thousands of factors both.
Internal and external looking about demand, but also risk as well I mean, it you know kind of there they're both important theres excess demand, but you're much risky, but you need to be careful and.
Oh, vice versa, but I think you know the economy's opening up and people getting back to spending money. They said in my prepared remarks, and just any kind of get back to normal a normal world where there are those unexpected expenses.
That's a required people access credit and then on the small business side, obviously as the economy continues to improve and people are getting out and going about their normal days those are the.
Small businesses tend to be those huge beneficiaries.
That.
No I mentioned, I think 99.9% businesses in America or small businesses.
I think there they're the most impacted by economy shutting down but the benefit the most from the economy opening back up and as they do their obviously get hasn't deficit from not having that kind of revenue they've had in prior years I think access to capital of them will be critical and it will be there will be extremely strong.
Long demand from a from small businesses as the economy begins to improve and then they'll come back up.
Got you saw the on the small business side have you really start to see that sort of.
Growth there a demand from small businesses for false.
Yeah, we've seen it a little bit not gone on has seen it a little bit more now would you like to comment on that.
Sure happy to David.
So I think what we're seeing is you know the need your own small business since been performance was kind of in April and then you saw really rising trends going into you know kind of the ended the quarter, but 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 are you are and what you do.
We are seeing certain industries that are.
Turning to really increase their demand and open up and scaled back their businesses, creating demand for loans, but others, obviously, it's not a secret or hit more more hard Ah we see it really phasing in over the next couple of quarters, but certainly there is some demand out there if you know to find it.
Gotcha, Thanks, and muscle for me the I'm, sorry, I remember it at the beginning of or I.
I guess to the onset of this recession.
We were talking about maybe the models had a completely said or maybe there's additional volatility with the models or we have to point now where everything stabilized.
I feel like.
Hi confidence level and models are able to.
Can't points, the risk adjusted returns and.
And with a high degree of confidence.
Yeah, Great question, because I think we're feeling really good about our portfolio stand extremely stable.
Over the next over the last kind of 60 to 90 days that actually improving how we think we ever really good handle on both consumer and small business behavior. The testing we've done, especially over the last 60 days into Reaccelerating originations I'll come back pretty much as expected so a big.
Less fire team to readjust those models taken okay. All the new data that you know the different types of behaviors from the this unique economic environment, but we're feeling really good about.
I understand consumer and small business behavior at this point.
Okay, great. Thanks.
<unk>.
And our next question comes from David Scharf from JMP. Please go ahead with your question.
Yeah. Good good afternoon, thanks for taking my questions and.
Yes, David no congratulations to both companies.
HM.
I was wondering.
Maybe more of a a high level question on the.
On the business combination a I know, it's hard to completely separate the two.
But if if we set aside the math.
Around accretion for a moment.
Just kind of put that over in a box.
You know the this this business combination, obviously transforms inovas balance sheet from being almost a pure play consumer lender to.
To a majority.
Small business lender in terms of the assets and.
Which is more than just diversification, it's really kind of slipping.
The concentration.
The business it would seem <unk> can you just talk a little bit about maybe.
You view.
This small business and market in terms of the opportunity relative to the consumer.
Asset classes you currently plan.
Sure Yeah, I mean, it takes us.
From 15% to 60% one five to six zero. So I mean, we had built up a fairly decent size small business portfolio.
For the cope with the recession. This obviously.
Great link increases that are small business portfolios increase something like 400% and the last two years. So we're obviously quite bullish about the small business lending environment, we take a competitively it is not as difficult as a consumer consumer space.
And certainly from a regulatory standpoint, we think they're significantly last regulatory rest and regulatory overhang then the consumer side. So we are no by no means running away from our consumer lending a visit business. We are I think we think we are very good at it we think theres a lot of runway in the future and as we mentioned.
Coming out of this recession, we think there's some you know a huge amount of demand.
But the ability partner with on DAC, 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 you know in terms of thinking about I.
I guess the longer term capitalization.
You you're down to just I I think a junior year at a 1.9.
Times debt equity.
That obviously reflects you know the pullback in lending during this pandemic.
And in the short term nature those assets running off but.
It will go from 1.9 to four and a half times pro forma I believe based on the deck that was provided is there a long term.
Like a 24 36 month plan for for where you want the combined companies leveraged to look like.
Sure Steve why don't you a jump in an hour.
Yeah sure So hi, David you're right, we had been running sort of very on the very low end of leverage.
And so you know we've got the purpose of that to some extent was too.
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.
You know somewhere between three and a half to Florida has or four to five wouldn't be no out of the question.
But obviously.
You know that'll help as we drive these high ROI, we use 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.
And just lastly, Ah <unk>.
Immediate.
Focused on just the core consumer business.
I I didn't quite get the sense, Steve 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.
Q3 from Q2 levels I'm, just wondering you know if the run off 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.
Yeah. So I think you should expect the run off rate that we saw that sequential 29%, it's probably going to slow down a bit as I mentioned, we saw a lot of our.
No shorter duration, a quick repayment parts of the portfolio come off a most quickly and then you're left with a you know a little bit slower amortizing you know 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 he would ER.
I think you would see it slowed down.
Outside of an a pick up.
Originations.
Got it in the last question what more on the act and the accounting front.
Can you.
Maybe give us just a [laughter] 62nd primer on anything we need to know about Oh fair value accounting.
The impact on Dec assets that would be brought onboard.
Is it just kind of a onetime mark to market and.
This is sort of a onetime markup are marked down how do we think about that.
Yes, So you know as part of the combination why 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 let's see me listen to me go on and on about fair value over the past couple of quarters, you're pretty well a burst and how that works. So there's a go when.
Adjustment to do that which is you know essentially a reversal or the allowance.
In somebody accruals and deferred marketing and then a mark I'm on the portfolio itself.
And then on a go forward basis. It would you know just like it's doing with our business would realign.
Credit in revenue much more closely than it does today in terms of timing. So I think it'll be very similar to the key principles that I've talked about over the past couple of quarters with our business going forward.
Got it.
Okay. That's all I got thank you very much.
Thanks, David.
Your next question guys I'm, John Hecht from Jefferies. Please go ahead with your question.
Afternoon, guys. Thanks, very much for taking my questions.
David do you know in the past has been a lotta discussion a new versus recurring customers in any given quarter and obviously with marketing down in a kind of wire met him I'm I'm sure I'm sure you're focused on more recurring customers, but can you give us that break down number one and over two to the extent you are engaging with new customers. This is there any different.
Crystex, Yeah, maybe it's a higher quality customer for instance that he has lost access to their traditional sources are you seeing any of those opportunities at this point.
Yeah, I mean, you're you're 100% correct. The focus I think for a lotteries insist that existing customers, who we had experience with for the quarter New customers were just 75% of the total which is obviously way down from where we've been.
With an average of you know kind of a I think about 37, 38% or the over the prior four quarters. So obviously, a meaningfully down I think what the focus on existing customers as Don as allows to continue to land 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 for and renewed confidence in our revised models.
That proportion of new customers will likely crieff increase over the next several quarters.
Okay. Thanks, and this is what more to curiosity I think it'll help us gauge yep yep modeling the sector. Overall. It is you guys see various geography, you know <unk>.
You opened and then maybe restrict that opening because of do case ways and so forth to is there a correlation to loan demand in those markets or is it fairly consistent you know no matter what a this specific geography is going through.
I think there over the longer period of time, there is a correlation I will obviously, we saw when everything shutdown, but you look at something like Texas. For example were opened up tighten backup a little better for you know short period of time No. My guess is over the next several weeks or months, we'll be opening back off I think those.
Kind of shorter amounts of Ah. Okay change you don't see as much well yeah in states that had been more stable and gradually opening up opening up you can see the demand increasing both on the consumer side.
Okay, and afraid and you gave some good stats about the the change in.
Deferral programs by byproduct right I missed some of this it can you just restate the high level. These facts there.
I'm sorry.
You broke up first I can you say that I'm more time I was just started I was asking to Steve could restate some of the statistics around the deferral programs in the cadence of kind of the peaks and then what's happened since then.
Yeah, John I didn't give any actual specifics on modifications other than to highlight that they are they at peak earlier in the quarter in terms of every quest for hardships modifications.
But that we still had in our portfolio just an ongoing at a higher level and receivables, which.
We're continuing our approach on the fair value to adjust the value those those loans down even if they're performing just because of the uncertainty and 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.
Okay.
Extra money sitting down. In addition in addition, I gave a few stats about kind of payment rates post modifications, which had been very very strong I think.
If you try to compare this period to kind of pre pre cobot, usually customers, who had some form of payment modification or due date adjustment did not perform very well.
Post covert those customers are actually performing very very well well above pre cold and levels in your kind of close to kind of regular customer levels. So.
You know that that's the thing that you know is real live we've learned through up this this period.
Okay. That's helpful. And then you kind of higher level or question, though is that.
Across the <unk> financial services, and Fintech and payments, we've seen yeah, not surprisingly kind of a logical acceleration of just moving to your digital digital commerce, and obviously you guys are well positioned for that but I'm wondering are you seeing <unk> 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 what kind of opportunities exist. This transformation take you get provide you over the next few years.
Sure Yeah, Yeah, and I think it's a little too early to see it just because we're not really leaning into whatever demands out there and obviously demands going to as we've talked about we expect a significantly increases the economy can change. The news continues open up and in an improved but.
Clearly our belief is almost every aspect of our economy is becoming more digital just over time, but greatly accelerated.
I cycle that you can see if the results of for example, Grubhub <unk>, where I'm on the board businesses, just really taken off.
Post Ah <unk> post coded world and I think you know the days of people wanting to you know kind of shut down to a two anomalous to it to a lender consumer lender and have to fill out a bunch paperwork and wait in line and wait for their wait for the alone or just long long behind us I think I'm increasingly people want to pick up.
The phone or long on the computer I pad anytime anywhere and you know in a matter of minutes. The approved for alone. So I think it's a great society will trend for us and began as demand picks up you know as we is it kind of the gate begin to improve we expect to see really strong results from it.
Great guys, thanks very much.
Thank you. Thank you.
And ladies and gentlemen at this time is showing no additional questions I'd like to turn the conference call back over to Mr., David Fischer CEO of Inova, Sir the floor is yours.
Thank you operator, thanks, everyone for joining our call today, we really appreciate your time and I'm asking all the great questions, especially about the on Dec acquisition, which we're incredibly excited about and we look forward to talking you again soon have a great evening.
Ladies and gentleman that does conclude today's conference call. We do thank you for joining you may now disconnect your lines.