Hello, can you guys hear me? All right, welcome everybody again to the Fintech Conference, our second. We've been doing it for a few years, but this is our second kind of formalized one at a very nice spot here. I appreciate everybody coming. I'm very excited to introduce our next guests or participants, Steve Cunningham with Enova. Steve has been the CFO there for a long time, nine years, so almost a decade. I'm excited to have Steve. He's going to be the CEO starting in January of next year, and Scott in the crowd is going to be the CFO. It is the strongest management team in all of Nasdaq in this room right now. Anyway, welcome, Steve. Like I mentioned, he's been the CFO for the better part of a decade. Before that, with Discover, Capital One, did a stint as a regulator. Was it with the FDIC?
Yeah, the FDIC. Way back.
Obviously, very experienced in financial services and Fintech. Enova's, I think it's got to be one of the first, if not the first, digital lender from way back, you know, in the early 2000s. This is a company that's got a first-mover advantage, or at least an early- mover advantage. It's extraordinarily successful in both online consumer lending and small business lending. The last several years has put up tremendous growth rates with tremendous stability, not only stability in the growth, but also stability in credit, stability in continuing to scale against, you know, the fixed cost or expense structure. It's compounded really good earnings growth, and the stock's done extremely well. I think we were just talking it hit $3 billion just last week. It's, you know, it's moving in the right direction. Welcome.
We're just going to, you know, I think everybody's familiar with the fireside chat concept that we're going to do here. We're just going to go through a few major topics. If anybody in the crowd has any questions, maybe reserve them to the end, but we'll hopefully have a couple of minutes for questions at the end as well. First, you know, the first kind of start high level. I assume most of the people in this room have a reasonable insight to what Enova is, but maybe give us the up-to-date intro of what it is and kind of the recent trendset that you're seeing.
Yeah, thanks, John, for that intro. Thank you all for joining us today. Enova is a machine learning-powered lender to consumers and small businesses, predominantly in the U.S. We've been online- only always. We lean very heavily on machine learning-powered risk management, which has been very key to our ability to manage credit and has led to the stability of our financial results. We've been in business for 21 years. We started as an online-only payday lender way back. We've never been in brick and mortar. We're not in payday lending at all anymore. We've been public for about 11 years. Today, we go to market under several brands. On the consumer side, we market under CashNet and NetCredit, where we offer installment loans and lines of credit to consumers that are underserved, so mainly non-prime and underserved by traditional banks.
These are folks who, it's a large market, and these are folks who have a need for credit. We are there to support what they need in their financial journey. On the small business side, which is about 60% of our portfolio these days, we have two brands. We acquired OnDeck Capital in 2020, and that is our large brand. We also have a brand called Headway Capital, which provides lines of credit to small businesses. Just like consumer, we offer lines of credit and term loans to small business customers as well. We're pretty unique in terms of we have both consumer and small business non-bank, non-prime lending at scale. It's allowed us to be very flexible and be very consistent in the way that we serve those customers and our ability to drive very consistent and stable financial results over different operating environments. I think you can see that in our results over the past couple of years.
All right. Y ou talked about the consumer segment and the small business segment, and the products, installment loans, term loans, lines of credit. Maybe talk about the difference. What's the average size and term and use case for the consumer and then also the small business?
Yeah. O n the consumer side, so CashNet, the use case there, that tends to be a little bit deeper in the subprime space. That's our oldest brand. It's a very well-known brand. Most of you probably don't know it, but in our customer segment, it's a very well-known brand. It really is there to help people meet needs when they have a demand for credit. We're able to offer, they tend to be shorter duration installment loans and shorter duration lines of credit with smaller sizes. For example, if you had a line of credit, which has been a very popular product, if you take a draw on that product, that draw would amortize over a 10-month period. The consumer installment loans in CashNet would be shorter than that from a duration point of view. NetCredit is what we would call more of our near-prime customer segment.
Those loans will be a little larger, a little longer duration. For example, an installment loan there typically, you know, around three, three and a half years on contractual maturity and $3,500- $4,000 on average. Keep in mind the repayment frequencies are typically every other week or faster. We don't really have monthly pays. The repayment frequency and the weighted average life of these loans is even shorter when you think about it on a weighted average cash flow basis. On the SMB side, the loans are a little larger. The durations tend to be, you know, around a year or contractual maturities around a year or so. The average loan size there is probably $45,000.
Again, very similar to the consumer side, most of the repayments are every other week or faster, not a lot of monthly pays, which allows us to get quick feedback on how the new money that we've put out is performing. It allows us to course-correct very quickly. Obviously, it allows us to be very nimble in terms of getting cash back quickly and going back out to serve the customers with new loans at terms that we think will meet what we're seeing in the marketplace and customer demand as well.
Maybe give us, before we go a little bit deeper to the business, what are your main competitive advantages or differentiators, and maybe describe the competitive framework that you operate in?
Yeah. W e don't have a pure play competitor. We feel really good about our competitive positioning in both the consumer and the small business segments. On the small business side, predominantly, most of our competition are smaller private organizations. With OnDeck and Headway Capital, we have really significant presence in the marketing channels there and very significant scale. The steady performance has allowed us to raise money in the capital markets to support the growth, which creates a real strong competitive advantage when you think about being able to serve those customers at the most efficient cost that we can. On the consumer side, CashNet and NetCredit each have their own set of competitors, some public, some private, some a mix. The names there are pretty consistent, a lot more brick and mortar. There are a few online-only competitors in there, but they tend to be more narrow.
The thing about our consumer products is that there are very few competitors out there, public or private, that have both installment loans and lines of credit products. Most have one or the other. Actually, very few have the line of credit capabilities, which has been a real source of growth and a real source of consumer preference over the past several years.
I guess diving a little deeper into the business, let's spend a moment on the technology. As I mentioned, you were the first digital lender 21 years ago, digital-only lender, at least in the customer segment you serve. Maybe talk about what that first-mover advantage provides you, talk about the journey and how it's developed over time.
Yeah. I mean, I think, as I mentioned, we've been online only always. I think over the years, the non-prime customer segments that we serve have the same expectations for being able to complete all of their financial services activities online. They have the same expectation that prime customers do, that might be doing it with their commercial banks. We've had a great advantage in terms of a head start, being able to provide and evolve to meet those needs. I think today, in particular after COVID, I think COVID probably pulled forward the need for better online capabilities for a lot of organizations. Everybody was online. Nobody was out and about. I think it pulled forward a number of years' worth probably of people using digital services to perform their financial services, even if they weren't a fan of it before.
For us, it allows us to be, we're not, you know, like an online application portal, which is what you might see from, you know, maybe a brick and mortar who is trying to make that evolution over to an online digital capability. Today, you can go online, you can get a very fast response, you can customize your offer, and you can get a quick reply. For the lifetime of your loan, you can service your loan. You can do a draw on your line of credit, you can set up a repayment if you need, and you can do servicing online as well. We think we are far ahead of most of our competitors in terms of being able to fulfill that preference in the market. We think that's only going to increase as we move through time.
You know, AI, machine learning, maybe talk about how you use those and where you are in the cycle of deploying those.
Yeah. S o we've talked about machine learning. We've been a machine learning shop for many, many years, particularly as it relates to the development of our models. We use models throughout the customer lifecycle for both consumers and small businesses, everything from origination, underwriting, fraud, all the way through collections on the backend. All really, machine learning is applied AI. We would call it applied AI. It's a way to retune your models so that you can make better decisions, but the humans are still involved. Generative AI obviously has its uses as well. We've been adopting Generative AI within the walls to help support, if you think about the areas that's most applicable, think about greater efficiencies. Allowing you to jumpstart coding or to draft, you know, standard communications much more quickly than you would otherwise. There's also ways to get faster insights.
A number of platforms have tools that allow you to more ask questions from an interface point of view to get an answer or an insight back that you can then move forward on what to do next. A better customer experience, using it in our contact centers to make the customer service experience more streamlined, smoother, and better feedback so that our reps and management there can adapt and continue to serve customers well. Underwriting is not a space where we would go out and wave the flag on Generative AI. We think machine learning or the applied AI has served us very, very well and is a path that we will continue to follow.
Is there anything on the innovation side other than those factors you were just talking about or topics you were talking about that's worth noting that you guys are focused on as a company?
Yeah. I mean, the one thing I wouldn't say is there's like broad strokes of huge innovation, but we're very good at adapting and innovating around the customer preferences that we see. We do quite a bit of marketing research, customer research, and intelligence around what are our customers doing, how are they using our products, how are they using competitor products, and how are we adapting to meet those needs. I think a lot of our, I'll call them, you know, little- eye innovations. They're not going to be things that you might see advertised broad strokes, but we're doing it every day. How do we continue to innovate and adapt around those consumer preferences to make sure that we can maintain our competitive position and serve as many customers as we possibly can with the products that we're developing?
You talked about some of the competitive differentiators on the product side and the technology side. Maybe a couple other things just in terms of details on customer acquisition. What are the main channels, what's evolved over time, and where do you see it going from that perspective?
Yeah, so the marketing channels across the two businesses are a little different. On the consumer side, we're very evolved. Today, probably 2/3 of our marketing is direct, and that would be, you know, things that you would see in the media, traditional social media. That would also be search engine optimization, pay-per-click, direct mail, anything that, you know, we're touching a consumer directly. The remaining 1/3 is indirect, where we work with lead providers and affiliates and offer walls. Names that you might know, LendingTree, Credit Karma, and then, you know, other lead providers that are out there that we worked with for many, many years. On the SMB side, on the small business side, that's a predominantly indirect business today with a growing direct presence. Between our brands, we're very well known with the broker and advisor network that these small businesses across the country work with.
As you know, with indirect businesses, being there and being predictable, being there all the time and being predictable is very, very important. I think we've got some real competitive advantages there, given our size and scale and capabilities. We've also been investing in a direct-to-small-business approach as well. You may have seen our OnDeck ads on the news channels over the years where we're pulling customers more directly to us. That's a growing part of our business as it relates to attracting new customers into the franchise. We spend, you know, upwards of around 20% of our revenue on marketing to attract new customers into the franchise. Every quarter, about 60% of our originations are to our existing customer base. It's very important to us to bring in new customers into the franchise over time because we know over time we're able to keep them and, you know, meet their needs for credit over time.
I guess it behooves me to kind of ask about your perspective on the consumer. How is the consumer, how's your borrower doing both in the small business and the consumer side? What are you looking out for? What trends are you seeing? Anything changing for the better or worse?
Yeah, sure. There's been a lot of noise since the beginning of the year around what could happen, what's to come. If you think about the consumer side of the business, employment obviously is very, very important. Even though the job market may have softened a bit, it's still pretty robust. When you look at claims, when you look at the jobs report, when you look at continuing claims, it's still a healthy job market. Our consumers are probably not the white-collar computer programmers that are out there that if you lose your job, it's going to take you a while to get that back. They're going to be more in those areas where it's a little bit more fungible in terms of moving jobs. Having a stable job market is really good for our customers and their ability to repay us.
That's one reason why you see a lot less volatility through the cycle in subprime. It's a little bit of the paradox, a lot less volatility through the cycle in subprime versus prime because of the fungibility of employment for the customers in our space. That has kind of been that way now for quite a while, even though there's been a lot of naysayers looking for a collapse in the labor market. It just has not happened. Consumers still continue to be spending for the most part, which means that's good for small businesses. The small business side of the house, obviously, there's a lot of noise around trade and tariffs. If you just look at the hard data and the sentiment data across the board, small businesses are continuing to feel good about the future. They're still planning to expand and grow.
That doesn't mean we're not paying attention. In particular, with small business, one of the things we like about small business being married to our consumer business, it's less homogeneous. Whereas the consumer side is going to be very employment-driven, on the SMB side, we underwrite into around 900 industries or so. At any point in the cycle, there's going to be opportunities and there's going to be risks. In this environment, we're obviously keeping a close eye on things like manufacturing, wholesalers, retailers, just because of the potential for disruption from some of the trade issues that are floating around out there, which, as we talked about on our call, we haven't really seen that. There's been a lot of chatter about it, but that's not actually occurring.
There are industries that we've talked about for some time that have been, you know, sort of cyclically out of favor, things like construction, trucking, and distribution, which trucking and distribution were great during the COVID era, but not so good right now. They've been in a little bit of a trucking recession for quite some time. The two businesses, you know, are very different in terms of how you think about the segmentation and the more granular management, but together they create a lot of power for stability and more diversification than having just one or the other alone.
Maybe just going a little further down the discussion around credit and risk management, what are the technological tools that you guys use as a process to manage credit risk? How often do you evaluate the credit trends? How fast are you able to deploy underwriting shifts? Maybe just talk about the procedure or I guess the process that you guys use there.
Yeah, sure. I mean, at the heart of it, we have a unit economics approach that we've talked about on our calls quite a bit. It's an ROE-driven, so return on equity-driven approach. If you think about it, what that means is if we think the contractual cash flows of the customer or advantage is going to exceed the lifetime credit costs and the cost to acquire, and those net cash flows are going to cover the equity that we've allocated, at a point where it covers the hurdle rate that we've allocated to that product, we're going to make those loans. A key piece of that in that risk appetite we have is the lifetime credit. That's obviously the most important piece of the equation and the one that can be more variable.
We have a very robust process in terms of how we evaluate how we're doing with the money that we've put out every week. Every week we are looking at, for example, initial default statistics. We know with a pretty high degree of certainty where our initial default rates on money that we've lent, let's say, two or three weeks ago, where those initial defaults should land, because those translate pretty cleanly into what we think the lifetime losses will be on that vintage. That gives us quick feedback, and we can look at that by marketing channel. We can look at it by geography, any number of different cuts that allow us to course-correct. It may not be like a broad swath across a product, but it could be more granular segments that we're making adjustments. It's not always cutting. It could be that we're expanding as well.
We're trying to optimize the number of customers that we're trying to serve while generating the right returns that are going to make our shareholders happy. That allows us to be very nimble. We talked about it on the call quite a bit and gave a pretty in-depth example of how that works in terms of we take a look. In this example that we talked about, we were cutting. Another period of time goes by, we take a look again. If it's not where we want to be, we continue to adjust. We're doing that all the time, hundreds of decisions a month to make sure that we're landing our credit outlook for every time we're going into the market is consistent with that ROE unit economic framework. That's a recipe we've been following for many, many years and has been sort of the underpinning of our ability to provide such stable credit and financial returns for really a long, long time.
I guess for the audience, we went through somewhat of an extreme credit cycle from 2022- 2024, and you guys really missed it in the sense that your results were much more stable than the market and a high degree of visibility and stability. The question, I guess, is if there is a deeper way to go in talking about this, what have you guys learned over the years in terms of, you talked about your procedures and processes and so forth, but what have you learned in terms of or changed in terms of positioning the business for good times and bad times?
Sure. We have a very formal process for monitoring the risk in each one of our products. Beyond the weekly risk management that I just described, we also, every month, are staring at external data alongside the internal data. In some cases, our internal data may be leading some of the macro things that you will see, but we will take a look at those two things together and risk rate our businesses. We have learned over time. In 2022, for example, on the offer walls, like LendingTree or Credit Karma or those areas, you could see lower interest rate lenders trying to lend into riskier customer categories. Maybe a customer that, to make an acceptable return, needed to be underwritten at 65%, and they were getting a rate much lower than that. It did not turn out so well for a lot of those lenders.
Us being cognizant of that has allowed us to look for that. We can lean out of that when we see that happening because there are some obvious disruptions that we do not want to follow or be a part of. It typically does not last long. It allows us to take a look at other areas where we could expand. That is a type of learning of keeping an eye on what is happening across the competitive set. In our diversification, having both small business and consumer together allows us to continue to grow and pick spots that have opportunities, stay away from the riskier areas that more narrow competitors might not have a chance to avoid. That has allowed us to be a lot more consistent over time.
Turning to the balance sheet, because, you know, a Fintech balance sheet lender, obviously, balance sheet management's key. I guess two questions on that topic. One is liquidity. I know you guys just upsized some of your liquidity yesterday. Talk about comfort with leverage, how you manage the liquidity and the maturity stack. After that, we can talk about how changes in interest rates would affect the business.
Sure. We tend to fund the business with secured financing or securitization. It tends to be very efficient. We don't sell loans, never have sold loans. We're not entering into forward- flow arrangements. We originate and hold for our balance sheet. We think that's the best economics, particularly with the evolution of our securitization programs that Scott and his team have led over the years. We've been able to drive very strong advance rates with very cost-effective funding over time. In the example, John, that you just gave on our corporate revolver, we have a syndicate of banks. We just upsized that to $825 million, extended the maturity out to 2029, and we're able to drive a 25 basis point reduction in spread. It is very cost-effective and reflective of the asset performance that we've been able to drive over time.
You'll see we typically carry $1 billion+ of open committed facilities that are available for us at any point in time. Beyond that, the liquidity profile has benefited from that repayment frequency that I mentioned. Before you even get into an external financing need, we tend to have $400 million- $500 million of cash coming off of the portfolio every quarter that can be plowed back into new originations. Our liquidity profile is very strong. Again, it's been supported by that consistent asset performance. In terms of leverage, we tend to focus on the tangible capital ratio. That ratio tends to sit between 17% and 20%.
Depending on our valuation, we may run on the lower side of that, which is kind of where we are today because we've been buying back more shares over the past couple of quarters, given the volatility and where our share price is set versus the valuation that we would expect. We have a very strong ROE. Our ROE tends to be in the upper 20s versus an asset growth level that's below that, pretty far below that, which allows us to have excess capital to plow back into capital returns while still maintaining a very strong capitalization position.
All right, we've got about five minutes left. I do have a couple more questions, but I did want to make sure if anybody in the audience has any questions. All right.
Understood. First of all, thank you for your time. I'd love to understand the strategic decision behind not being in the consumer credit card space. Is it balance sheet treatment, capital efficiency, regulatory concern, acquisition channel? What is, why offer a line of credit product?
Yeah, we've looked at cards through the years. I think most people are familiar with prime cards. In the spaces we are in, more of the subprime space, it's a little bit of a different proposition, particularly with the Card Act, which will limit the fees and rates that you can charge a customer. What that typically will lead to is smaller loan sizes versus what you could do with a more traditional line of credit with a higher APR. Starting from scratch, there is what I call a huge J curve, a huge investment that takes a while to get back out of. Acquisitions haven't, when you take a look at the platforms that might be available that would serve our customer set, we're not interested in getting down into the very crowded prime card space.
There's just not that many that would represent a value proposition that would be appealing to us. We think the line of credit, the line of credit that we offer today to both our CashNet and our NetCredit customers, is a better proposition for that customer set versus something that would have a little less utility for them in the current setup for cards.
Any other questions? All right, my final question to you is, as I mentioned, Steve's going to be taking over the CEO position in early next year. As you step into that role, what's exciting to you? What are the challenges that you're focused on? What's your vision for the future, if you will?
Yeah, so I'm very excited to step into this role. After having spent nearly a decade at Enova , when I started there, it was a much smaller organization, and we've had a tremendous amount of success, and I'm very proud to have been a part of that. I've been very involved in the strategy and the execution of the company over the years. As you kind of take a look out into the future, I think we talked about the time to make these changes is now because we're in such a solid position. We are as strong as ever and competitively positioned as well as ever. As you think about our vision for the future, there's no need to take hard lefts or hard rights from where we are today.
I think as you look down the road, we need to be very cognizant of the things that we've always been aware of, which is our position in the marketplace vis-à-vis our competition, and how do we continue to solidify that position? How do we stay on top of our customer preferences with our product development and product innovation? I think that's what you should continue to expect from us is we'll continue to make changes that allow us to continue to meet our customers, strengthen our competitive position, and continue to drive that success that you all have come to expect from us.
That's perfect. Good time to end. Thank you, everybody. Thank you very, very much, Steve and Scott, for coming. If anybody has any questions, I'm sure you can catch up with them at a one-on-one later or see them in the lobby.
Yeah, thanks, John. Thank you all for joining us today.