Enova International - Q2 2024

Executive Summary

• Q2 revenue was $628.4M, up 26% YoY and 3% QoQ; adjusted EPS was $2.21 (+28% YoY, +16% QoQ), GAAP diluted EPS was $1.93 (+29% YoY), and adjusted EBITDA reached $162.5M (+29% YoY).
• Net revenue margin was 59% (vs. 60% in Q2’23), supported by stable credit; total originations were ~$1.41B (+27% YoY) and combined loans/receivables rose 25% YoY to a record ~$3.6B.
• Segment performance: SMB revenue hit a record $252M (+32% YoY; +6% QoQ), consumer revenue was $368M (+22% YoY; +1% QoQ).
• Liquidity ended Q2 at ~$891M (cash/marketables + facility capacity); management repurchased ~$62M of stock in Q2 and reiterated a focus on opportunistic buybacks as a capital return catalyst.
• Outlook: Q3 revenue guided to >5% sequential growth and >20% YoY, net revenue margin in the “upper 50%” range; Q4 revenue guided to ~20% YoY growth and adjusted EPS +20–25% YoY—potential positive narrative for shares if execution continues.

What Went Well and What Went Wrong

What Went Well

• Strong growth and stable credit: “originations, receivables, revenue, EBITDA, and EPS all up 25% or more year-over-year,” with net charge-offs falling to 7.7% from 8.5% in Q1 and remaining well below pre-pandemic levels.
• Segment breadth and demand: SMB revenue hit a record while consumer remained resilient; marketing efficiency held at 19% of revenue, demonstrating scalable demand capture.
• Funding access and cost: Three Q2 financing transactions totaling just over $1B executed at cost-effective terms; term securitization spreads ~100 bps better vs. last year and 2028 notes trading above par, indicating constructive markets.

Management quote:

• “We delivered another quarter of strong results driven by…machine learning analytics…diversified product offerings and solid balance sheet…[with] stable credit across our entire product range.” — CEO David Fisher.

What Went Wrong

• Net revenue margin modestly lower YoY (59% vs. 60%) as portfolio mix shifted toward lines of credit and consumer seasonality, though still “upper 50%” and in-line with expectations.
• Delinquencies >30 days ticked up YoY in dollar terms (to $268.1M) though % of balance was 7.5% vs. 7.7% last year; charge-offs as % of average balance edged up to 7.7% vs. 7.6% in Q2’23.
• Interest expense increased vs. prior year amid higher short-term rates; cost of funds steady at 9.3% and interest as % of revenue expected at 10.5–11% for 2024, pressuring GAAP EPS leverage vs. revenue growth.

Transcript

Operator (participant)

Good day, and welcome to the Enova International Q2 2024 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal conference specialists by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone, and to withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Ms. Lindsay Savarese, Investor Relations for Enova. Please go ahead, ma'am.

Lindsay Savarese (Head of Investor Relations)

Thank you, Operator, and good afternoon, everyone. Enova released results for the Q2 2024 ended June 30th, 2024, this afternoon after market close. If you did not receive a copy of our earnings press release, you may obtain it from the Investor Relations section of our website at ir.enova.com. With me on today's call are David Fisher, Chief Executive Officer, and Steve Cunningham, Chief Financial Officer. This call is being webcast and will be archived on the Investor Relations section of our website. Before I turn the call over to David, I'd like to note that today's discussion will contain forward-looking statements and, as such, is subject to risks and uncertainties.

Actual results may differ materially as a result of various important risk factors, including those discussed in our earnings press release and in our annual report on Form 10-K, quarterly reports on Forms 10-Q, and current reports on Forms 8-K. Please note that any forward-looking statements that are made on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. In addition to U.S. GAAP reporting, Enova reports certain financial measures that do not conform to generally accepted accounting principles. We believe these non-GAAP measures enhance the understanding of our performance. Reconciliations between these GAAP and non-GAAP measures are included in the tables found in today's press release. As noted in our earnings release, we have posted supplemental financial information on the IR portion of our website.

With that, I'd like to turn the call over to David.

David Fisher (CEO)

Thanks, and good afternoon, everyone. I appreciate you joining our call today. I'll begin with an overview of our Q2 results, and then I'll discuss our strategy going forward. After that, I'll turn the call over to Steve Cunningham, our CFO, who will discuss our financial results and outlook in more detail. We are pleased to have produced another strong quarter of financial results driven by the strength of our talented team, our world-class machine learning analytics, our flexible online-only business model, diversified product offerings, and solid balance sheet. We believe we are in a strong position heading into the back half of 2024 with considerable momentum, a conducive macroeconomic environment, and stable credit across our entire product range. In Q2, originations increased 27% year-over-year and 2% sequentially to $1.4 billion.

Strong demand across both the small business and consumer sides of our business, combined with continued solid credit performance, enabled us to be moderately more aggressive with originations and generate strong year-over-year growth. As a result of the strong originations growth, our combined loan and finance receivables increased 25% year-over-year to a record $3.6 billion. Small business products represented 64% of the total portfolio, and consumer was 36%. The growth in receivables led to a 26% year-over-year increase and a 3% sequential increase in revenue to $628 million. As a result of strong revenue growth combined with skillful credit management and cost efficiency, adjusted EBITDA in Q2 increased 29% year-over-year and 9% sequentially to $163 million, and adjusted EPS increased 28% year-over-year and 16% sequentially to $2.21.

SMB revenue increased 32% year-over-year and 6% sequentially to a record $252 million, while our consumer revenue increased 22% year-over-year and 1% sequentially to $368 million. Our growth continues to be driven by our diversified product offering and efficient marketing. In Q2, marketing was 19% of our total revenue, in line with our expectations for the quarter and flat to Q2 of last year. As I mentioned, credit quality across our entire portfolio remained solid. Total company net charge-offs as a percent of average combined loan and finance receivables was 7.7% in Q2 compared to 8.5% last quarter, which remains well below pre-pandemic levels. Before closing, I'd like to take a few moments to discuss our strategy and outlook. We're encouraged by the strong start to the first half of the year.

Recently, there has been significant talk from both pundits and our competitors about an uncertain macro environment. But our Q2 performance, as well as internal and external data, confirm that both our SMB and consumer customers remain on solid footing as our customers continue to benefit from job growth, low unemployment rates, easing inflation, and rising real wages. As we've discussed previously, demand and credit in our consumer business are driven largely by jobs and wage growth. The job market continues to be strong with rising wages and historically low levels of unemployment. We've been lending profitably for over 20 years during many fluctuations in the job market. This has included periods in which the unemployment rate has been more than triple where it is today. It's also important to highlight that we are underwriting to customers who are underserved by the mainstream financial institutions.

So when you hear the large banks commenting on what they are seeing in their customer bases, it is frequently not applicable to ours. For small businesses, the two main drivers of growth are business owners' confidence in the economy and consumer spending. Small businesses continue to show resilience, with their outlook remaining positive as they successfully navigate challenges related to inflation and managing cash flow. In conjunction with Ocrolus, we recently released the second iteration of our Small Business Cash Flow Trend Report. This offers key insights into small business cash flow trends, inflation challenges, and growth opportunities. Our research shows that small businesses feel increasingly optimistic about future growth as expenses decrease. Further, external data points show optimism as well. In June, we saw U.S. small business confidence increase to a six-month high, according to the National Federation of Independent Business.

As I mentioned, our confidence in the conducive economic environment isn't just theoretical. You can see it in our Q2 results with originations, receivables, revenue, EBITDA, and EPS all up 25% or more year-over-year. While we feel good about the current environment, we believe one of the key reasons we've been able to generate strong results over the years in a variety of economic environments and why we've been able to take market share in the non-prime lending landscape is due to our deep experience and expertise, our diversified portfolio, and our sophisticated and disciplined approach to managing risk. We are very disciplined when it comes to our unit economics approach to decisioning. Further, the short duration of our portfolio and nimbleness of our model allows for more controlled outcomes relative to others.

These capabilities have enabled us to meaningfully and profitably expand our business and, as a result, support both small businesses and consumers with their capital needs by offering them safe, transparent, and appropriate lending solutions. We also benefit from diversification within our SMB and consumer businesses. Our SMB businesses operate in all 50 states across 900+ industries, and our portfolios diversify within those industries and states without significant concentration. On the consumer side, we have a wide breadth of products and segments that services the non-prime and subprime consumers. To wrap up, we continue to believe there's significant upside to our valuation given our consistent and strong results, solid balance sheet, and business fundamentals. We remain committed to returning capital to our shareholders while still maintaining significant liquidity to generate attractive growth. We ended Q2 with nearly $900 million of total liquidity.

This gives us the flexibility to continue to deliver on this commitment to drive long-term value for our shareholders. As we've stated previously, we will continue to explore avenues to unlock shareholder value, but our near-term focus is to do so through opportunistic stock buybacks. Overall, we are pleased to have delivered another strong quarter, and we believe that we are well-positioned to deliver sustainable and profitable long-term growth. We are confident that we have the right strategy, products, proven machine learning and credit risk management capabilities, and a strong balance sheet in place to build on our success in 2024 and into 2025. While both internal and external data show positive signs, we are mindful that the macroeconomic environment can change. We remain balanced in our approach to generating growth and managing risk and believe this will allow us to successfully navigate any such changes.

With that, I would like to turn the call over to Steve, who will discuss our financial results and outlook in more detail. Following Steve's remarks, we will be happy to answer any questions you may have. Steve?

Steven Cunningham (CFO)

Thank you, David, and good afternoon, everyone. We're pleased to report another quarter of strong growth and strong top and bottom-line financial results that were in line or better than our expectations. A constructive operating environment has resulted in solid demand, stable credit, and cost-effective access to capital, while our diversified product offerings, scalable operating model, and world-class risk management capabilities continue to enable our consistent and differentiated financial performance. Turning to our Q2 results, total company revenue of $628 million increased 26% from the Q2 of 2023 as total company combined loan and finance receivables balances on an amortized basis increased 25% from the end of the Q2 of last year to $3.6 billion at June 30th. Total company originations during the Q2 rose 27% from the Q2 of 2023 to just over $1.4 billion.

Revenue from small business lending increased 32% from the Q2 of 2023 to $252 million. Small business receivables on an amortized basis end of the quarter at $2.3 billion were 28% higher than the end of the Q2 of last year. Small business originations rose 29% year-over-year to $918 million. Revenue from our consumer businesses increased 22% from the Q2 of 2023 to $368 million. Consumer receivables on an amortized basis end of the quarter at $1.3 billion were 20% higher than the end of the Q2 of 2023. Consumer originations grew 22% from the Q2 of 2023 to $491 million. For the Q3, we expect total company revenue to increase more than 5% sequentially, resulting in year-over-year growth and expected Q3 consolidated revenue in excess of 20%.

The expectation will depend upon the level, timing, and mix of originations growth during the quarter. Now turning to credit, which is the most significant driver of net revenue and portfolio fair value. The consolidated net revenue margin of 59% for the Q2 was in line with our expectations and reflects our strong credit trends. Credit in the Q2 reflected our typical consumer seasonality as the total company ratio of net charge-offs as a percentage of average combined loan and finance receivables decreased sequentially to 7.7% from 8.5% last quarter and was flat compared to a year ago. Additionally, the Q2 net charge-off ratios for both small business and consumer were flat compared to the Q2 of 2023.

As a reminder, consumer credit losses typically follow the sequential pattern of portfolio growth through the year, peaking in the Q4 and reaching their lowest point during the Q2. We continue to expect credit losses for our consumer portfolio to generally follow the seasonal pattern during 2024, but it will depend upon the timing and level of consumer originations throughout the year. Expectations for future credit performance remain stable as the consolidated ratio of receivables that were past due 30 days or more at the end of the quarter declined both sequentially and compared to the year-ago quarter. In addition, the consolidated consumer and small business fair value premiums were generally unchanged from last quarter, reflecting a stable outlook for future credit performance. Looking ahead, we expect the total company net revenue margin for the Q3 of 2024 to remain in the upper 50% range.

This expectation will depend upon portfolio payment performance and the level, timing, and mix of originations growth during the Q3. Now turning to expenses, we continue to see the benefits of our efficient marketing activities, the leverage inherent in our online-only model, and thoughtful expense management as total operating expenses for the Q2, including marketing, were 34% of revenue compared to 36% of revenue in the Q2 of 2023. Q2 marketing spend remained efficient and was within our expected range. Marketing costs increased to $121 million or 19% of revenue compared to $96 million or 19% of revenue in the Q2 of 2023. We expect marketing expenses will be around 20% of revenue for the Q3, but will depend upon the growth and mix of originations.

Operations and technology expenses for the Q2 increased to $55 million or 9% of revenue compared to $47 million or 9% of revenue in the Q2 of 2023, driven by growth in receivables and originations over the past year. Given the significant variable component of this expense category, sequential increases in O&T costs should be expected in an environment where originations and receivables are growing and should remain around 9% of total revenue. Our fixed costs continue to reflect our focus on operating efficiency and thoughtful expense management. General and administrative expenses for the Q2 increased to $40 million or 6% of revenue from $36 million or 7% of revenue in the Q2 of 2023. While there may be slight variations from quarter to quarter, we expect G&A expenses in the near term will be around 6% of total revenue.

Our balance sheet and liquidity position remain strong and give us the financial flexibility to successfully navigate a range of operating environments while delivering on our commitment to drive long-term shareholder value through both continued investments in our business and share repurchases. We ended the Q2 with $891 million of liquidity, including $280 million of cash and marketable securities and $611 million of available capacity on debt facilities. Our stable financial and credit performance has allowed us to consistently access funding from a diversified group of lenders and fixed-income investors. During the Q2, we completed three financing transactions totaling just over $1 billion with efficient and cost-effective terms, including a consumer term securitization, a small business term securitization, and the renewal of a warehouse secured by small business receivables.

In addition, during the Q2, we acquired more than 1 million shares at a cost of $62 million, and we started the Q3 with share repurchase capacity of approximately $30 million under our senior note covenants. Our cost of funds for the Q2 was steady at 9.3%, or roughly 120 basis points higher than the Q2 of 2023, primarily due to higher short-term interest rates. While there may be some quarter-to-quarter variations in the near term, we continue to expect interest expense as a percentage of revenue for the full year 2024 to remain in the 10.5%-11% range. That being said, the impact of lower market rates in the future should create longer-term tailwinds for Enova's profitability.

Finally, we continue to deliver solid profitability this quarter as our non-GAAP measures of adjusted EBITDA and adjusted EPS both increased 29% from the Q2 of 2023 to $163 million and $2.21 per diluted share, respectively. To wrap up, let me summarize our near-term expectations. For the Q3, we expect consolidated revenue to increase more than 5% sequentially, with a net revenue margin in the upper 50% range. Additionally, we expect marketing, O&T, and G&A expenses to be around 20%, 9%, and 6% of revenue, respectively. These expectations should result in sequential growth and adjusted EPS of more than 5%. For the Q4 of 2024, we would expect revenue to increase around 20% compared to the Q4 of 2023.

With stable credit and continued operating leverage, adjusted EPS for the Q4 of 2024 could increase between 20% and 25% compared to the Q4 of 2023. Our expectations for the remainder of this year will depend upon the macroeconomic environment and the resulting impact on demand, customer payment rates, and the level, timing, and mix of originations growth. In closing, we remain optimistic that the macroeconomic environment will remain constructive. In any event, we're confident in our ability to generate meaningful financial results this year and beyond as we leverage our diversified product offerings, world-class machine learning risk management algorithms, and nimble online-only model to continue to meet customer needs while creating significant value for our shareholders. In addition, our solid balance sheet enables our ability to efficiently fund our growth while also supporting our ability to return significant capital to shareholders through share repurchases.

With that, we'd be happy to take your questions. Operator?

Operator (participant)

Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster. The first question will come from Moshe Orenbuch with TD Cowen. Please go ahead.

Moshe Orenbuch (Managing Director and Senior Analyst)

Great. Thanks. Congratulations. Very strong numbers, particularly loan origination and growth. Maybe, Steve, could you or David, could you just talk a little bit about the competitive environment in each of the major businesses and kind of what obviously, you did talk about your strong credit performance, but anything else that's kind of leading you towards that better growth kind of experience and outlook?

David Fisher (CEO)

Yeah, sure. Thanks for the question. I think competitively, nothing I would say there's very little has changed. There haven't been new entrants in the space. We haven't seen any of our competitors get particularly more aggressive. There's always a little bit of ebb and flow, but certainly no trends. As I mentioned in my comments, certainly over the last couple of quarters, we've heard some lack of confidence, I think, from some of the other players in the space. And it's probably holding them back a bit when I think we're seeing somewhat of the opposite. You kind of mentioned on the credit side, we have very credit's been very strong. And as we talked about, we think our customers are in a really, really good place. Job growth has remained good. Wages continue to rise. Inflation is coming down.

I think it's a very beneficial place for both consumers and small businesses. So we've been able to grow at kind of very high rates, like at 25% kind of throughout the entire from top line to bottom line over the last year without being particularly aggressive. Certainly leaning into the growth, and we're not afraid of it, but by no means are we being very aggressive in our approach.

Moshe Orenbuch (Managing Director and Senior Analyst)

Thanks. And maybe as a follow-up, Steve, you mentioned that the fair value marks were basically flat. I guess they were a little better on the small business side and a little lower on the consumer side. Is there anything to kind of learn from that? Are there differences in the products or differences in the way you're doing that and how we should kind of think about that also going forward?

Steven Cunningham (CFO)

No, I think your takeaway from that is, I mean, our product characteristics haven't changed. Our mix is tilted maybe just a little bit towards line of credit, but quarter-over-quarter, it doesn't move significantly. But I think the stability in the fair value marks is basically telling you that we expect that the discounted risk-adjusted cash flows from the portfolio, which are largely dependent on credit, are very, very stable.

Moshe Orenbuch (Managing Director and Senior Analyst)

Thanks very much.

Operator (participant)

The next question will come from David Scharf with Citizens JMP. Please go ahead.

David Scharf (Managing Director)

Hi. Good afternoon. Thanks for taking my questions. I guess a couple of things. One question for you, Steve, on the funding side. Since you were in the market last quarter with, I guess, three different transactions for both consumer and SMB, irrespective of the timing of Fed cuts, can you talk a little bit about just some of the qualitative feedback and spreads, just the price talk? I'm kind of curious if some of your fixed-income investors are kind of sharing your more constructive outlook on your consumer or if spreads are reflecting maybe their broader outlook listening to some other lenders as well.

Steven Cunningham (CFO)

Yeah. I mean, I think there's a couple of things you can look at with our deals, in particular the two term deals that we completed. We did both an SMB, small business, and a consumer. Both of those trades compared to a year ago were nearly 100 basis points better with benchmarks that were pretty much the same. So that gives you a little bit of an indication of maybe feeling better about the future. But I would also say if you just take a look at high-yield indexes for the unsecured, you can look at our unsecured bonds, even our 2028 notes that we issued late last year trading well above par, indicating some spread compression relative to benchmarks. So it feels like the market is constructive.

That's, I think, largely based on the outlook that the market is starting to see as it relates to potential rate paths and the impact on the economy and comfort with investing in the fixed-income market.

David Scharf (Managing Director)

Got it. Great news. Maybe staying on the funding discussion, any update on, I guess, the timing for, I believe, refinancing the 2025 notes is kind of on the front burner? And if there's any kind of visibility into maybe the restricted payments covenant there and whether you may be able to buy back a higher percentage of net income towards buybacks versus the existing covenants?

Steven Cunningham (CFO)

Yeah. I mean, I think, like I mentioned last quarter, I think we will continue to be opportunistic as those 2025 notes approach the 12-month mark in terms of going current in September. But I think the current levels, even with improved spreads, are a touch ahead of the coupon that we have on those bonds. So if we're going to refinance them early, we want to make sure we're making a good economic trade-off between additional interest expense and, as you mentioned, the covenant package that we might get. I think the 2028 notes that we issued late last year, I think that covenant package was more reflective of the company that we are today. And I would expect that any new issues would largely reflect that same covenant package, at least where we sit today.

In that case, I would think we would have at least the flexibility to do a higher return of our earnings each quarter so long as we're meeting the restrictions and the covenants under those indentures.

David Scharf (Managing Director)

Understood. Then just one last question to clarify on the guidance. It cut out a little. It looks like the full-year revenue growth outlook was taken up a bit. I believe it had been sort of high teens. Now it's 20%, give or take. Is there any change to the origination outlook? I think the last commentary was 15% or more growth on volumes. Is that still what you're expecting, or is that taken up as well?

Steven Cunningham (CFO)

Yeah. I think last quarter, my commentary was at least 15% originations growth for the full year of 2024 versus 2023. I didn't specifically mention it, but I think you can imply that it's just up a tick, probably moving up between 15%-20% versus at least 15%. And as you noted, you can back into implied full-year revenue and EPS based off the Q3 and Q4 guides. And so both revenue and adjusted EPS are growing faster than originations, which we do expect to be a touch higher than we did last quarter.

David Scharf (Managing Director)

Great. Thanks so much.

Operator (participant)

The next question will come from John Hecht with Jefferies. Please go ahead.

John Hecht (Managing Director)

Afternoon, guys. Congratulations on another good quarter. Thanks for taking my questions. Just wondering about repayment rates on different product lines. It looks pretty stable, but I'm wondering, are you seeing some of the credit card companies are seeing slower revolving payment rates? I mean, are you seeing anything with respect to trends in payment rates, or has it been as stable as the consolidated numbers look?

David Fisher (CEO)

It's been very stable. I think given kind of what's going on in the macroeconomic environment, we're not seeing anything that would have us expect that to change meaningfully. Again, people have the ability to pay us back, but there's not big excess amounts of cash coming into the economy right now that have people be prepaying earlier. So it's been very steady.

John Hecht (Managing Director)

Then how do we think, because I think last quarter, you guys mentioned changing the funnel a little bit in small business lending, but the yields and the payment rate and the credit was real stable. Should we expect any mix shift and changes in that that would affect the metrics there? Or I guess that's the question.

Steven Cunningham (CFO)

Yeah. So I think you should continue to expect that. I think if you look at the earnings supplement that we release and look at the annualized yield on the small business portfolio, you can see that what I mentioned last quarter, sort of that slow grind higher as we focus on those opportunities. And credit has held in fairly steady quarter-over-quarter, but we still think, as we talked about last quarter, you should expect to see yields up a touch and the net charge-off rates on a quarterly basis in SMB at around 5. And we're sitting in the upper 4s right now. So I think that guidance still holds true as you look out.

John Hecht (Managing Director)

Okay. Thanks. And then last question, just because I'm always curious, is maybe an update on Brazil or any of the other kind of newer expansionary projects you're working on?

David Fisher (CEO)

Yeah, sure. We gave a bit of an update on Brazil last quarter. We hadn't talked about it much in the last couple of years just because there wasn't a lot to update. As we said, that business is looking really good, growing at 100-ish% a year. Still small, though, so don't expect updates for us every quarter. But when they hit milestones over time, I'm sure at least once a year, we'll give additional updates on that and more if something particularly interesting happens.

John Hecht (Managing Director)

Okay. Great. Thanks, guys.

David Fisher (CEO)

Yep. Thank you.

Operator (participant)

The next question will come from John Rowan with Janney. Please go ahead.

John Rowan (Managing Director)

Good afternoon, guys. Hey, one quick question for me. I always ask about competition and whether or not things like the late fee rule with the credit cards can impact demand for your product. But now the CFPB is also out with an interpretive rule on earned wage access products. And when you look at the two of them together, how do you think that that's going to impact demand for your products going forward?

David Fisher (CEO)

Yeah. Sure. Look, it's really difficult to predict how much trading there will be from those products to ours and how those businesses are going to react. Certainly, on the earned wage access, it's going to be a long time before that final is impacting those businesses. But if you kind of look at it from a high level, it can only be helpful, right? And the magnitude is harder for us to determine right now. It's certainly too early on both of them to say, but certainly beneficial to us in the long run.

John Rowan (Managing Director)

Okay. All right. Thank you.

David Fisher (CEO)

Yep.

John Rowan (Managing Director)

Thanks.

Operator (participant)

The next question will come from Vincent Caintic with BTIG. Please go ahead.

Vincent Caintic (Managing Director)

Hey, good afternoon. Thanks for taking my question. First one, macro question. So David, I appreciate your comments you were making about how there might be macro concerns that are being expressed industry-wide, but that Enova is doing really well. I'm just curious, as you're hearing some of these other lenders who are maybe expressing concern and pulling back, are the customers that you're seeing and your origination strength, are you seeing a different cohort of customers than you're typically used to? So perhaps better quality credit or anything like that in small business or consumer? I'm just wondering if maybe the macro concerns and the tightening that's resulting is a beneficiary or Enova might be benefiting from that. Thank you.

David Fisher (CEO)

Yeah. It's a really good question. I think on the consumer side, the way our products and our marketing are structured, we kind of really dial in on the credit quality customer we want. And so we would see it more you would say, "Well, then you're going to see it more in your default numbers," which would be true, except we're kind of optimizing for those default numbers over time and charge-off numbers over time. So if charge-offs are too low, we get more aggressive with our originations, right? The goal here isn't to have charge-offs be zero. It's to have charge-offs be optimal to help us hit our ROE target.

So on the consumer side, it's more difficult for us to see the impact of it every day, but we're fairly confident it's there with how stable the default numbers are, how easy it's been to hit our default and our charge-off targets. And that's helping us generate the strong levels of growth that we're generating. On the SMB side, we're definitely seeing it. And it really started in the spring when the banks started pulling back more and more. And I think some of the funding to the non-bank lenders also was got pulled back at the same time. And so we're certainly seeing it on the SMB side because of just the product design and the different pricing tiers we have on the SMB side. It's much easier to see and has definitely been true.

The lower quality borrowers are still there and good business for us if we can charge the right prices. But we are seeing more higher quality customers come in on the SMB side.

Vincent Caintic (Managing Director)

Okay. Great. That's super helpful detail. Thank you. And then, Steve, question about interest rates now that there's higher confidence that the Fed is going to be cutting rates sooner. If you could maybe talk about the sensitivity of the business to following interest rates to benefits there and then to interest expense and then to the fair value marks as well, how sensitive those are. Thank you.

Steven Cunningham (CFO)

Yeah. So we didn't really change our outlook for interest rates in our latest outlook. If you remember, we have one I talked about this last quarter. We have one rate cut by the Fed late in the year, and we stayed the course there in terms of our outlook. So any additional cuts, obviously, would be beneficial, probably more so into next year, given that about 50% of our liabilities are floating rate. But a downdraft in the short end of the curve, we do all of our funding in the securitization markets and in our warehouses in the 3-year and under space. So we'll see some benefits if there's more aggressiveness, particularly as you go into 2025. But we're not assuming an aggressive stance in what we've talked about for our expectation for the rest of this year.

I think on the fair value marks, just given the duration of our portfolio, the fair value marks are not super sensitive to changes in the discount rates. So every 100 basis points change in a discount rate would lead to about a 70 basis points change in the fair value mark. So it would take quite a bit to kind of move from where we are today.

Vincent Caintic (Managing Director)

Okay. That's very helpful. Thanks very much.

Steven Cunningham (CFO)

You bet.

Operator (participant)

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. David Fisher for any closing remarks. Please go ahead, sir.

David Fisher (CEO)

Thanks, everyone, for joining our call today. We appreciate your time, and we look forward to speaking with you again next quarter. Have a good evening.

Operator (participant)

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.