Great. Good afternoon, everyone. Welcome to Virtual Day of, you know, the Needham Tech, Media, and Consumer Conference. My name's Kyle Peterson, one of the Fintech research analysts here. Spend a lot of time on, you know, the Fintech and digital lending space. Up next, we're gonna be doing a fireside chat with Enova. We have Steve and Scott here, CEO and CFO that are gonna be joining me today.
We're gonna talk a little more Fintech lending and Enova. Steve and Scott, thanks for joining us. Really appreciate it. Maybe for those that are a little less familiar, with the story, if you could just kinda give everyone a quick, elevator pitch on, you know, the company, the history, the different brands you guys have. I think that would be a really helpful primer for people.
Yeah, sure. Kyle, thanks for having us. We appreciate being able to join and connect with everybody today. As Kyle said, I'm Steve Cunningham, I'm the CEO. I've been with the company for a dozen years, and I took over as CEO at the beginning of this year after being longtime CFO. Enova, we've been in business for more than 20 years. We started in 2004 as the first online-only company focused on payday lending at the time. We were sold to Cash America, you know, soon after that, was spun out as a public company in 2014 as an independent public company, have been publicly traded since then.
While, you know, we recognize our non-prime lending roots, I mean, at the heart of it, we are an online-only financial services company that today not only serves underserved consumers, but also underserved small businesses. We're a bit of a unique animal in that we're doing both of those at scale across a pretty broad credit spectrum of underserved. In our history, just to give you a little bit of context, we've originated about $70 billion of loans and have touched around 15 million customers. We've always originated for our own portfolio, so we're not an originate-to-sell or forward flow type shop. We're a balance sheet company. In the consumer space, we have really two focuses. One is in the subprime space, and we go to market with CashNet USA, which is our oldest brand.
It's a very highly regarded, highly considered brand in that space, very well-known. We offer line of credit and installment products to those customers no longer in payday. We also have a NetCredit brand, which is our near-prime brand. Again, very well-known in the space. We also offer a line of credit and installment products. That covers a pretty broad spectrum of consumers from, you know, around 36% APR is where we start, up into some higher APRs, serving, you know, customers that have not been traditionally well-served by traditional financial institutions or more traditional banks. On the small business side, we go to market with OnDeck. That was an acquisition that we made in 2020. We've done very well with that.
We also offer term loans, installment loans, and line of credit into that space as well. We cover a wide range of APR segments in that space, all 50 states and, you know, roughly 900 industries that we lend into. We're very diversified geographic and by industry portfolio. The big news is that, you know, we're expecting to make a transition here very soon to our next chapter, and we announced in December the acquisition of Grasshopper Bancorp. You know, we're expecting to close that deal in the second half of this year, and I'm sure we'll get into that during our Q&A today. That's kind of a quick overview of the company.
Yeah, no, that is really helpful, and appreciate, yeah, the primer there. You know, maybe as a, as a follow-up to that, you know, maybe on a per product or brand level, who are you guys consistently bumping into competitively? I mean, I think you guys are pretty diverse, so I'm sure it varies depending on, you know, what brand you guys are talking about. Maybe an overview of kinda who you guys are bumping into and, you know, it does seem like you guys serve some pockets that I think are probably harder to underwrite profitably, and you guys know how to do it. It seems like there's some areas that are a little less competitive too.
I guess, like, who are you consistently running into and kinda what are some of the key, niche areas that you guys have been able to carve out that a lot of other folks maybe haven't figured out how to profitably underwrite?
Yeah. It's a good question. Number one, I would just tell you, like, overall, we've been very consistent financially over the years, so very predictable on our credit underwriting and credit management capabilities, which has led to that financial consistency, which has allowed us to continue to serve these markets very consistently over time. That's very important for staying power and what these customers want the most, which is they want fast decisions, they want loan amounts close to what they want, and they wanna get it in their account very quickly. Being online only, we are not dealing with cash or checks. We have no brick-and-mortar. Let me talk about the markets and the competitive set a little bit.
On the small business side, small businesses, you know, about 70% of our portfolio these days, they are larger loans, a little bit larger loans than the consumer side, obviously. That market is probably the non-bank market on small business is probably a little less mature. It's very large, and it's probably growing fairly quickly just because of the new business formation. Every year, if you just look at new business applications, over the past five or six years, you can see, new business formation has been pretty quick. As those businesses become, you know, two years old, they start to become our target market. We're competing mainly with more private companies. There's really no other public, publicly traded companies in that space. It tends to be a more indirect business.
A lot of originations are coming through broker and advisor networks and affiliates that we work with, as well as strategic partners. One of the things that's very important there is you need to be there all the time. You need to be predictable. We've got some pretty strong competitive advantages from our ability. Even before we bought OnDeck, we were in the business. We're very well known in those very large origination channels. Increasingly, we've been focused on direct to the small business as well, which again, you need the wherewithal, the financial wherewithal and the scale to do that effectively. If you take a step back, you know, we've been very effective in the way that we've run our unit economics, which is an ROE-based model.
It's allowed us to consistently serve those customers, consistently be able to manage our credit, which has allowed us to fund efficiently as well. Scott and his team have done a great job of diversifying our securitization and secured financing capabilities, which is another great competitive advantage for us. Scale funding costs and name brand has allowed us to be very effective, and you've seen our growth rates over the past two years. On the consumer side, that's a little more mature market. You know, I think there's a mix of players in there. You have the traditional brick-and-mortar, which could be more of your locally owned, single branch spaces in certain cities. It could be some of your public names you might know that are brick-and-mortar. It could be tribal lenders, it could be private lenders.
I think one of the things that we've done, again, very, very well to generate that high consideration and high satisfaction scores is we try to meet the customer where they want to be, which is being attuned to, you know, being very fast in terms of making a decision. We've leveraged our technology and our world-class risk analytics to be able to do that. Being online only ever has allowed us to focus on that channel, which increasingly consumers are doing more and more of that, and they tend to visit physical locations less. It's given us a lot of advantages to be able to service that customer the way they want to be serviced.
The other piece of the competitive advantage we have is we're doing both installment and line of credit. I think what you'll find are plenty of payday-type lenders that are out there, but also a lot of installment-focused lenders, fewer that are doing both products across the range of credit spectrum that we're doing it across. We feel really good about, you know, where we sit today with the investments we've made in our proprietary technology and our risk management and, you know, the competitive moats that we built with our strong performance.
Awesome. You know, that's really helpful. Maybe we could switch over to funding. I think, I'd argue that side of the balance sheet is where a lot of, you know, the value, is built over, you know, a long duration. You guys, over a very long period of time, have been really resilient and consistent on the funding side. I think you guys have pretty much always been, fully on balance sheet focus, have been really sophisticated and good on the capital markets front, just on the execution side. I guess, one, I guess, like, how have you guys taken this approach, versus, you know, a lot of other folks have, you know, experimented with different kind of funding vehicles.
I guess what's led you to believe that on balance sheet is definitely the right way to go? And then also on the execution side, maybe, if you could give us a little bit of how you guys have approached it historically, and how you guys have taken this approach to build value with that side of the business.
Yeah. Kyle, I'll jump in there. you know, Steve and I come from treasury and banking backgrounds, right? We've always said there's really a couple things that can get finance and lending companies in trouble, and that's if you lose focus on credit risk or liquidity. On the liquidity part, we've been, as you said, very thoughtful about how we've structured the balance sheet for flexibility, and really focused on contingent liquidity to see us through our growth and any hiccups in the macro as well. We do that through a variety of ways, and a lot of it's around secured debt, and we mentioned securitization a lot. To do that and be successful, you have to have stable
You know, loan performance and credit performance, that's really core to our success and how we've been successful in the funding markets and keeping costs down and always having the headroom for growth. Given our product diversification, as we've mentioned, you know, we're not like a monoline finance company that has to grow for the sake of growth. With our measured growth and stable credit, it really has, you know, less volatility, and the credit markets, you know, respond to that very well. Our approach has just been, again, stable sources of funding, diverse sources of funding, and it always helps in the securitization markets especially to have a high amount of excess spread and margin that I think our creditors like compared to some others.
As far as, you know, balance sheet, we've never sold a loan. We've done everything on balance sheet in our financing arrangements. You know, we talk about unit economics as being core to what we do. Well, we like our unit economics a lot, so why give that up, I think is the short answer. We take an ROE framework, we apply it to all of our products, we make sure that those are healthy, and if we like that risk-return profile, we wanna keep that on the balance sheet and get the benefit. Some of the forward flow, you know, I think have accelerated, folks that are focused on growth and origination machines. We're just a little different in that way given the markets we serve.
We've enjoyed those margins and keeping those on balance sheet, and we haven't really given too much thought to forward flow and whole loan sales. We just haven't had the funding constraints to need to go that route.
Yeah. Yeah. No, I mean, that makes sense, and I think as, you know, some folks are learning, it's like, you know, forward flow is really nice when it's working and spreads are good, but, you know, it can be, you know, fickle, and we've seen that a few times over the, I don't know, the last couple cycles. But that's really helpful. Maybe staying on that and kinda going also to the next chapter, you know, that Steve mentioned, obviously, with Grasshopper that you guys announced, you know, in December, I believe, that will, you know, give you guys access to bank deposits, which seems, you know, very attractive, you know, from a cost and stability and diversification point of view.
Also seems to have a lot of other, you know, benefits across the board, a lot of synergy opportunities that you guys have aligned. Maybe if you could give us an update on that transaction, how you see it fitting in, and what some of these synergy opportunities are, I think that would be, you know, really helpful for everyone.
It's definitely the question that we get a lot these days. You know, first I would just tell you, like, this is something that we have been working on for a number of years. The really the thrust behind it was the way we go to market. If you think about the way we do that, we have direct licenses, you know, across the states, we also have a number of commercial banks that we service as well to go into other markets. If you think about that for a minute, if you could simplify that through, you know, a national bank charter, you can simplify your product variations, how you're meeting the customer needs, also your back office as it's related to operations and compliance.
That overall was the thrust of why we were most interested. It wasn't about necessarily about deposits, because we felt like we had a pretty good funding strategy. The deposit part of it, with Grasshopper, we felt like we were very fortunate to be patient, and we found the perfect partner for us. I'll just tell you, I mean, we talked to, between me personally and the team and our advisors, we talked to probably 100 management teams out there. For me, I was looking for, at my background, Kyle, as you know, I spent most of my career in banking and as a regulator before joining Enova, so a lot of knowledge in the space.
Looking for something very specific in terms of we're not really interested in branch banking. We're definitely interested in finding a digital infrastructure that could support what we were thinking. Most importantly, a team with a culture that would fit very well with our roots around technology and innovation, Grasshopper's sort of that perfect partner. Very complementary capabilities. They are really good at deposit gathering. They have built a powerful deposit franchise through banking as a service, as well as through direct programs to customers, both commercial and consumer. They do have some lending capabilities, we will be able to accelerate, you know, their lending desires by many, many years, they're able to pull forward our deposit desires by many, many years.
A lot of complementary capabilities, very few overlapping capabilities. I think it's gonna be a pretty powerful combination, and you've seen the synergies that we've talked about. One thing I wanna be very clear on, the synergies are significant. We would expect 25% + EPS accretion fairly quickly, like, you know, within, you know, two years. That's coming from things that are inside the walls of both companies today, so we're not gonna have to rely on being innovative and getting new things in the market. The big synergies are gonna come from market expansion with our NetCredit consumer products In the ability to fully utilize the deposits that Grasshopper has originated that today they have both on their balance sheet and they have sold off the balance sheet.
We'll be able to pull all those back, utilize them for our combined franchise and continue to grow going forward. I think it's a really important point that the new capabilities that we are gonna be staring at, in terms of new products, new innovation, being a depository with the combined capabilities of the two companies, that's not even in the synergies that we've laid out, which are very powerful. Those opportunities we think will be significant as you move through time. Just the combination of the two companies, and the new capabilities under a national bank charter are gonna be very powerful for, you know, our new company, you know, once we close later this year.
Great. you know, that's really helpful color and, you know, maybe staying to Grasshopper, but switching more over to, you know, the asset side of their balance sheet. you know, I don't have their call report in front of me, but I guess what is the asset side of their balance sheet look like? What are the loan book size, securities, all of like what's the mix impact? How long does some of this stuff run off? And any impact on like whether it's net earning asset yields or anything like that, you know, investors should be mindful of?
I mean, the things I think we've talked about when we've talked about Grasshopper is they have a few different lending businesses. There's a couple that we think have a lot of potential in the future franchise. For example, SBA lending, which is an adjacency to our OnDeck lending. Seeing how the two companies can, you know, push that forward with our very large small business franchise. Then they have a secured auto product too, which we haven't really been a secured consumer, but there's definitely some opportunities to think about how we could use a product like that across some of our existing customer sets. We're pretty excited about those.
I think if you look at their balance sheet in general, they have some of what you would see, you know, most banks have an investment securities book that, you know, it's really set up against, you know, really for liquidity purposes against the deposit book. Pretty typical concentration levels there. I wouldn't say there's anything in terms of the mix and size. They have some other lending businesses that, you know, over the long- term are probably not as interesting given the lending franchise that we're bringing to them. I think what you should expect on the other side is a pretty unique digital bank that's gonna be focused on meeting the needs of a customer set that for a very long time has not been met by banking.
You'll see, you know, strong yields and margins, strong ROE, which will support being able to grow at pretty significant rates like we have historically while maintaining very strong regulatory capital ratios. I think there'll be some differences if you're used to looking at a traditional super prime commercial bank in terms of what our bank's gonna look like, but I think most investors will like what they see when they look at that.
Awesome. Yeah, that's really helpful. I think you've kind of alluded to a few of these things where I wanted to go to next, kind of throughout our conversation here. You know, you guys are gonna be, you know, regulated as a bank and that comes with, I guess, some additional responsibility and oversight. I think, you know, you guys are pretty unique in how sophisticated a lot of your risk management and approach and infrastructure is just given the team you've put together there.
I guess maybe could you give us an overview on the risk management culture and everything that you got and infrastructure that Enova's built, how you guys think about risk capital and all of these kind of key metrics that, you know, you're just gonna have kinda at least a couple other parties looking a little closer at things and how you guys are prepared for that. I think that'd be super helpful.
Yeah, it's a great question. you know, before I go into that, just to give you a little context, the last role I had before I came to Enova is I was the Chief Risk Officer for Discover Financial, very large, you know, bank holding company and specialty bank. I was a regulator, as I mentioned before. I have a really good understanding of the prudential expectations around risk management and the methods that will be required to assess, put in place risk management where you need it and ensuring it's functioning effectively as you are growing and changing.
Where we start from today, there's a couple of nuances that I would say that are very important because I think the change into a regulated bank environment, I would call in many cases is gonna be a lot more of a pivot versus like an overhaul. The reason for that is, we're very good at focusing in on existential risks. Obviously credit, and Scott mentioned liquidity. The things we do today around that, we set risk appetites. We have a lot of governance around where we are against those risk appetites, and we set those against very clear unit economic and risk-return trade-offs. Sounds pretty familiar, right, with what a prudential regulator might look at. Will we need to document a few things and adjust, you know, some of the language we use?
For sure. I would call that a little bit more of a. There are other areas, because we've been servicing commercial banks for almost 10 years now. As a third-party provider to a commercial bank, you'll find that our compliance, our model risk, our IT risk, a lot of those look like a bank today. In terms of some changes that we might need to make in terms of the way we document those, yeah, for sure. Those, again, I would say are pivots. I think we're in a really good spot to make that transition from an ERM overall risk management point of view.
I think Grasshopper has a very good risk management approach that we'll be able to take and extend across what Enova is doing today, sort of fold in those things I mentioned into that broader risk management framework under a CRO at both the bank and the holding company. I feel really good about where we are. We'll make a few investments here and there. I wouldn't call those material investments, but to make sure that we're staying, you know, in line with where we need to be with the size of the organization and where we're headed. I'd say the other thing is, you know, stress testing and, you know, we have a very strong balance sheet, like Scott mentioned.
Today we have a 17% or so tangible capital ratio, which is analogous to a Tier 1 leverage ratio. You know, where we sit with that, we'll be advised by our growth, our mix, our stress testing, and I think we do a good job of that, and I think our new regulators will be pleased with our approach there.
Awesome. Yeah, that's really helpful. Maybe shifting over to kinda how you guys think about capital in general and, you know, with or without the bank. I mean, I think your asset book and ROEs is pretty unique in the fact that, like, things turn over very quickly, and the ROEs are very good, so you guys can internally kinda self-fund quite a bit of growth. I guess could you give us a little bit more insight into how you guys think of this, what these metrics and turnover and everything is, and what sort of organic growth you guys can sustain, obviously, like, responsibly. Like, what sort of organic growth can you guys sustain given what your book looks like, while still generating healthy returns and not needing, like, external capital, basically?
I'll make a couple of general comments, and then I can let Scott weigh in as well. I think, you know, if you take a step back and look at our asset growth trajectory, you know, we've been a fairly fast grower. Like over post-COVID, we needed to deleverage, or I'm sorry, we needed to leverage a bit more 'cause we came out of that with very high capital ratios, tangible capital ratios. I think over the past, you know, couple of years, we've settled in at levels we're much more comfortable with, and that's really a function of even if you look at Q1, where we had very significant growth rates, our tangible capital ratio really did not budge.
The reason for that is the high returns on equity that we've been able to generate. I think that gets back into some of the unit economics that Scott mentioned earlier in the way we're thinking about that. Scott, I don't know if you wanna say anything else about that.
Yeah. I mean, that's the crux of it is, you know, the ROE we usually have around high 20s, 30 on a consolidated basis. Unless we're growing faster than that, you know, we've been a high growth. A typical growth rate, those ROEs can outpace, and then that's accretive to capital, and that's kind of how we've been seeing it. The other comment I'd make is we also have, you know, pretty unique, but we have $300 million- $400 million every quarter in operational cash flow that kind of starts us off in terms of funding the business and the growth. We use, you know, securitization and our revolver on top of that to fund the growth on top of that.
SMB becoming a bigger part, you know, larger loans, a little longer duration, relative to our consumer book. We need that in the stack, but it's a pretty efficient model.
I think, I would say, I think we're in great shape on, you know, in terms of where we sit with liquidity and capital as we close Grasshopper, get off to a good start, and then, you know, make the transition to making those changes to the balance sheet that we mentioned before. I think we're starting from a great position without having to do, you know, a whole lot of things to get prepared for that.
Awesome. Yeah, no, that is, that's really helpful. Maybe kind of a follow-up on, you know, uses of capital, given that you guys are super efficient. I think historically, you know, you guys have been active on both the M&A front, with, you know, OnDeck. Seems like it was an absolute home run for you guys. Grasshopper looks super intriguing too. But you guys have also been, you know, buying back your own stock. How, how have you guys thought about, you know, additional uses of capital? Are there other M&A things or product gaps or something I'm assuming you wanna integrate Grasshopper first, but are there other things that are interesting longer term areas that you might consider?
How do you guys think about, you know, potential M&A versus buybacks for excess capital?
I mean, I would say our long- term, the way we thought about capital allocation was number one. By the way, these aren't mutually exclusive because we could really do all of them with the funding profile that we have. Number one was grow the organic business because the returns that we just talked about are pretty significant, great for shareholders. Number two is if you have excess capital, you know, after you've funded your growth and have the appropriate amount of leverage, send it back as buyback through buybacks. We've chosen buybacks because we think they're more efficient at this stage of our company than dividends. We've chosen that.
We've also have historically used that to, you know, lean in on some of the valuation, undervaluation issues that I think we've suffered from through the years, where our valuation hasn't really kept up with the growth rate and the consistency of profitability that we've shown over the years. That was another powerful tool for that, you know, and we're still using that today opportunistically to do that. I think third, and it intended to be a pretty distant third, was inorganic and M&A. We are definitely not a serial acquirer. We're pretty selective, as you mentioned. We tend to focus on the things that are really gonna move the needle.
As you look forward, I think, number one and number two is like, yeah, organic growth because we think we're gonna be able to drive, you know, significant returns, as we have for a long time. We think ideally, we will have excess capital at some point, but we're gonna be very focused also on maintaining, you know, appropriate capitalization. The things that I would say without a bank charter that might, that might have been more inorganic are now gonna be in our walls. I think the combination, our combination with Grasshopper is gonna create a lot more organic innovation opportunities that historically we might have had to go find to buy an adjacency.
I'm pretty excited about that as we think about, you know, the having these customer relationships where you have the banking, the lending, potentially the payment relationships and the opportunities to expand the product set around that, which again, is not even in the synergy sets that we've talked about. I think it's pretty exciting. The teams, I can tell you, the teams both at Grasshopper and at Enova, they are pumped. Our focus number one is we're gonna close the deal. We're gonna execute on delivering on these synergies. You know, we're gonna be, you know, quickly pivoting towards what's next, which again, I think is gonna be more in the walls of what we can do with the talented teams that we have.
Awesome. Yeah, that makes a lot of sense. You know, maybe shifting over to, you know, the macro and what you guys are seeing. You guys have access to a lot of, I think pretty interesting and timely data given, you know, you have a lot of consumer data points you guys are getting, but also SMB. I think you guys are getting a pretty good radar and kind of view on economy and, you know, the health of like really the backbone here.
I guess anything you guys are seeing or wanna call out, I know you know, people have perked up their ears a little more as, you know, gas prices have gone up and stuff like that, but at least a lot of the data we've seen seems to show that, you know, the consumer remains reasonably resilient. I guess what are you guys seeing? Any particular insights you would like to share?
I mean, you know what? We've talked about it on our earnings calls a lot over the past couple of years, right? There's been a lot of noise in the system, whether it's geopolitical, domestic policy. It's sort of behind that all. The economy's been sort of chugging along sorta nicely, I think some of that has to do with the employment markets. You know, if you look at unemployment and claims, wage growth continues to be, you know, positive on a real basis. Consumers are still spending. You know, I think there was some new data that came out today, even excluding gas, it's still pretty close to what people expect. I think those are all good signs, you know, a lot of people have used the word resiliency.
That's kind of what it seems like. That's held up pretty well. That's helped small businesses and their optimism as well. I think, you've seen that in our credit metrics, you know, over the past couple of quarters. Our SMB portfolio has been performing very well within our expected ranges for a very long time. The thing about SMB versus consumer, I mean, obviously consumer is more dependent on employment. We're really good at spotting issues that we need to address. For us, you know, for example, this week, I'm gonna stare at the credit metrics for recently originated vintages. I know where those initial defaults on those recent vintages should land to drive the right level of unit economics for us.
If those are off base, we're making changes all the time. If it was, you know, if it was more negative than we would have thought, we're gonna make those adjustments. For us, a credit issue or a macro issue results more in an origination slowdown than it will in a blowout of your credit metrics, which I think in a more super prime type lender. You're gonna see a little of both just because the portfolio we have has faster repayment frequencies and shorter durations and faster loss emergence, given that we charge off on the consumer side at 65 days delinquent and we charge off on the SMB side at 97 days delinquent. The SMB portfolio is much less homogeneous.
At all points in the economy, there's good and there's bad, and you need to be watching for those so that you know where to leverage some opportunities and where you need to trim back your risk. I think the two of those together are nice complements that give us You know, Scott mentioned it before, like we're not just a one-product company where you have to lean in all the time. We can pick our spots, and I think with what we talked about on the call and what we've been seeing, we feel really good about and we guided for the rest of the year, a little bit of nudge up from where we thought we would be earlier in the year. We're feeling pretty good about the opportunities where we sit today.
Awesome. That's really helpful. I know we only have a minute or two left, but I think we've, you know, covered a lot of ground. Any closing remarks or anything that you wanna leave us with or before we wrap?
Yeah. I would just say, you know, we're really proud of what we built at Enova and our track record of being able to serve these customers and deliver consistent results for many, many years. We are thrilled about our next chapter here as we become, you know, a leading digital bank that is gonna, you know, continue that journey in a different way. I think we'll continue to drive a significant amount of value for our investors and shareholders in the future as well.
Great. Well, awesome. I think we've covered a lot of ground here, and we're right up in time, so we'll wrap it here. Appreciate both of you joining us and, you know, thanks to everyone on the line, and hope you guys have a good rest of the conference.
Thanks for having us, Kyle.
Thanks.
Thank you. Bye-bye.