CURO Group Holdings Corp.
Q1 2020 Earnings Call Transcript

Published: 1 May 2020

[Operator:]

Hello, and welcome to the CURO Group Holdings First Quarter 2020 Conference Call. All participants will be in listen-only mode. [Operator Instructions]. Please note, this event is being recorded.I would now like to turn the conference over to, Gar Jackson, Investor Relations for CURO. Please go ahead.

[Gar Jackson:]

Thank you. And good morning, everyone. After the market closed yesterday, CURO released results for the first quarter 2020, which are available on the Investors section of our website at ir.curo.com.With me on today's call are CURO's President and Chief Executive Officer, Don Gayhardt; Chief Operating Officer, Bill Baker; Chief Financial Officer, Roger Dean; and Chief Accounting Officer, Dave Strano. This call is being webcast and will be archived on the Investors section of our website.Before I turn the call over to Don, I would like to note that today's discussion will contain forward-looking statements based on the business environment as we currently see it. As such, it does include certain risks and uncertainties. Please refer to our press release in our SEC filings for more information on the specific risk factors that could cause our actual results to differ materially from the projections described in today's discussion.Any forward-looking statements that we make 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 US GAAP reporting, we report certain financial measures that do not conform to Generally Accepted Accounting Principles. We believe these non-GAAP measures enhance the understanding of our performance. Reconciliation between these GAAP and non-GAAP measures are included in the tables found in yesterday's press release.With that, I'd like to turn the call over to Don.

[Don Gayhardt:]

Great. Thanks, Gar. Before we begin, I'd like to thank everyone for joining us today. And I hope that you're all healthy, safe and managing as well as you can through this COVID-19 health crisis.As we speak today, on May 1, we're still faced with a very uncertain economic outlook, and we'll try our best to help to understand how the public health emergency is impacting our business.There are some signs that the worst phase, or at least what we hope is the worst phase of the health crisis in certain parts of the country, has passed as indicated by slowing infection rates, reduced stress on our healthcare system and the preliminary steps to reopen the economy. However, the broad impact of this pandemic are likely to be felt for quite some time.We think the first step in addressing the economic crisis is solving the health crisis. And because we're businesspeople and not doctors, we can't accurately predict the duration and severity of the pandemic and its impact on businesses and communities. As a result, we're just not in a position today to offer any guidance or estimates for future performance. That said, we do plan to revisit guidance when we have more clarity on the widespread disruption of the coronavirus.During this uncertain stressful time, we are focusing our energy and resources on a few key areas, namely, one, taking care of our customers; two, supporting our employees, especially those on the frontlines and the communities where we operate; three, lending responsibly; and four, carefully managing cash and liquidity to ensure that we are well positioned to weather a sustained economic downturn.We addressed some of these initiatives in our April 8 update and I'll start by providing some additional detail.For our customers, in mid-March, we formalized the COVID-19 Customer Care Plan. In line with this plan, we created a dedicated toll free number and email address, so customers could contact us directly with their concerns.At the same time, we empowered our customer care specialists to provide relief to our customers based upon their specific situations. That relief included payment waivers and deferrals, interest and fee forgiveness, due date changes, and extended payment plans and the temporary suspension of returned item fees.Finally, we aligned our credit bureau reporting for customers with delinquent accounts in accordance with the CARES Act.Through April 29, under CURO's Customer Care Plan, we have granted concessions to 35,000 customers, providing relief to 5% of our active borrowers. In addition, we've cashed over $13 million of stimulus checks in the US and Canada free of charge.We granted the majority of these concessions in April, so you'll see the financial impact in our second quarter. We're pleased to have been part of the solution for so many people under extreme stress during this unanticipated crisis.Our stores in the US and Canada are considered essential and remain open to serve our customers, albeit with reduced hours, Monday through Saturday, 10am to 6pm, and provide some relief to our associates.In addition to loans, our customers use our stores to cash checks, pay bills, send money to family and friends, and reload and use their debit cards and demand deposit accounts. We've always been and will always be essential to our customers. Consequently, we're deeply committed to providing our services with minimal disruption.We're pleased that, across our 426 locations in the US and Canada, we experienced temporary closures at only 19 locations. And last week alone, we processed more than 90,000 in-person transactions across our store network in North America.Of course, all in-person transactions are conducted with the health and safety of our customers and employees foremost in mind. We worked hard to protect the safety and wellbeing of our employees by enhancing cleaning protocols for all of our facilities and employees are adhering to strict social distancing and care guidelines in operating stores.Nearly 100% of our employees in our corporate and contact centers in Wichita, Chicago and Toronto have been working from home since the end of March.We implemented an emergency leave pay plan to ensure that employees are paid when they're unable to work due to COVID-19. And we're paying stipends to our frontline teammates as additional relief.And finally, we've been paying all of our store personnel full time wages regardless of scheduling changes that have come about because of COVID-19.We have an enormously talented and tenured group of employees at CURO. And while we'll continue to evaluate our employment practices as the healthcare crisis unfolds, we believe that our business model and capital plan will allow us to keep our employees in place, serve our customers and prepare for a return to a more normalized business environment.On the demand side, as expected, we saw meaningful reduction in new customer applications from reduced store traffic and lower online demand since the pandemic began.The resulting decline in origination volume, along with ongoing repayments, decreased our earning asset balances through April. Total owned and managed earning asset volumes declined 13% as of April 29 from first quarter balances. And by comparison, sequential monthly earning asset balances grew 1% last April.While we would prefer to see normal seasonal increases in loan applications and approvals, these trends are not surprising in this environment. Consumers appear to be borrowing and spending with much more caution, and our loan application volumes have declined by approximately 60% since mid-March.We've also increased minimum credit scores, and added additional income, and income and employment verification procedures which have reduced our loan approval rate by more than 50%.In terms of credit quality, in the four-week period beginning the week ending March 15, early stage delinquencies, which we define as 1 to 30 days late, increased on a sequential basis by approximately 35%, peaking on April 12. While it's still too early to tell the longer range outcomes for delinquencies and net charge-offs, as of April 26, delinquencies have improved and are now only 14% higher than the comparable data as of March 15.Using the same sequential weekly data, Canadian delinquencies have declined over the past two weeks, but remain more elevated on a relative basis. We suspect this is related, at least in part to the US' earlier enactment of various economic stimulus measures.Roger will provide more detail on operating expenses and liquidity. However, it is important to note that our business model has an adequate margin of safety to accommodate a substantial increase in our loan loss provision, without impacting our ability to generate pre-tax cash flows, which we define as pre-tax income, plus depreciation and amortization.After taking into account expense reduction measures that Roger will discuss that will generate $45 million to $50 million in annual savings, our loan loss provision could increase by 50% before our pretax cash flow would fall to zero.In addition to the early results on delinquencies we previously mentioned, it is worth noting that, during the 2007 to 2009 financial crisis, our loan loss provision increased by 11% during a period of sustained unemployment before it returned to more normalized levels.Finally, and while I don't want to date myself too much, I've been in the small dollar lending industry for a long time, and this will be my fourth experience helping to manage a business through an economic downturn.While the speed and severity of this decline is unlike anything we've seen before, my experience, which is shared by many members of the CURO leadership team, is that subprime and underbanked consumers have consistently shown a greater ability to manage credit as measured by the relative change in our delinquency and charge-offs in an economic downturn than prime and near prime customers.We don't usually spend much time addressing the competitive landscape, but given the current environment, I think it bears some mention here. Our objective to keep our store, contact center and corporate teams together during this crisis is motivated by our desire to do the right thing by our people, and to ensure that we're prepared for when businesses reopen and the economy begins to recover.While we expect this recovery to be muted at first, small dollar lenders that serve underbanked consumers have generally performed well in the aftermath of broad economic downturns. That was the case for us and other lenders coming out of the 2007-2009 crisis.And looking ahead at recovery, we think that lenders like CURO that have scale, liquidity and access to capital, omnichannel operations that allow store customers to also use mobile and contact center solutions, geographic and product line diversification, and little or no reliance on outsourced operations, particularly operations in other countries that may have a disproportionate or delayed impact from COVID-19, we think these lenders will fare better.Based on conversation within our industry and a limited review of available public company information, we believe all lenders have seen declines in originations and new customer accounts.A fair number of small lenders are dramatically scaling back operations and engaging in broad layoffs and furloughs. Some of these lenders are even winding down or liquidating portfolios to conserve cash or reduce credit exposure.As I said earlier, the economic crisis won't end until the healthcare crisis abates. That said, we believe we're well prepared for a protracted downturn and positioned to benefit from a different competitive environment on the other side of this pandemic.On a related note, we believe that our relationship with Stride Bank is an important competitive advantage for CURO. Stride Bank licenses our underwriting, origination and servicing platforms to originate online installment loans. They have been offering pilot loans in two states, and plan to expand in 8 to 12 additional states over the next several months.To anticipate a question, we have no current plans to work with Stride to offer consumer loans in California.For our investors, we continue to make disciplined decisions, while ensuring that we're well positioned to benefit on the eventual recovery. Shortly after quarter-end, we closed on a new non-recourse asset-backed credit facility in the US and drew down $35.2 million based upon the eligible borrowing base of loans sold to the related SPV. Today, our nearest debt maturity is our senior revolver, which matures on June 30, 2021. We also suspended a previously announced $25 million share repurchase program.As of April 29, we had a strong balance sheet, including over $230 million of unrestricted cash. Our Board of Directors declared a $0.055 per share second quarter cash dividend on common shares outstanding, which will be paid on May 27 to stockholders of record as of May 13. We'll continue to evaluate the dividend on a quarterly basis.Moving on to our first quarter results. For the quarter ended March 31, 2020, we posted revenue growth of just 1%, primarily due to the year-over-year impact of the California regulatory change that went into effect at the start of the year. Excluding the impact of our California installment loans, revenue grew 6.7% versus the year-ago quarter.Adjusted EBITDA declined 9.7% to $65.8 million and adjusted diluted earnings per share declined 3.8% to $0.77 per share for the quarter. These metrics include a $12 million, or $0.21 per share, impact for incremental loan loss provision or what normally would have been required as we strengthen our allowance for loan losses related to COVID-19's impact on delinquencies.While we increased the allowance by 13.7%, we have not yet seen the impact of COVID-19 on credit losses as first quarter net charge-off rates improved approximately 70 basis points year-over-year.In the US, revenue was down 1.9% from the prior year and adjusted EBITDA decreased 6%. As a result of regulatory changes, we stopped originating installment loans in California on January 1, so these portfolios are in runoff. US revenue outside of California grew year-over-year by 4.6%, primarily due to growth in our open end loan portfolio. US adjusted EBITDA included $5.3 million of incremental provision for allowance build.Loss rates in the US was 135 basis points. But that was almost entire due to California runoff and a related mixture for installment, as well as a late quarter drop in single pay loans that affected the denominator in the NCO rate for single pay loans.In Canada, revenue grew 13.9% over the prior-year quarter. Adjusted EBITDA of $8.3 million is down 29% versus the prior-year quarter. First quarter 2020 included a $6.7 million incremental provision expense for allowance build. Net charge-off rates in Canada improved 95 basis points year-over-year.I'll close with a brief update on Katapult. As you may recall, we have a 43% ownership stake in Katapult, an online virtual lease to own business that primarily serves online retailers. Katapult's leasing volumes have increased over the past six weeks, even while it has, like us, meaningfully tightened credit decisioning for new applications. Katapult was posting record daily origination volumes and higher approval rates as stay at home customers are shopping online and prime and near prime online financing providers are tightening credit, and to date has not seen any meaningful deterioration in its credit metrics.We think that the non-prime segment of the consumer durables market that Katapult serves is probably around a $50 billion category. And with its online integration, underwriting and servicing capabilities, we think that it continues to have a durable advantage over competitors that focus mainly on brick and mortar retailers.In summary, after a promising first two months, we ended Q1 2020 tackling the many challenges associated with the pandemic.I'd like to express my gratitude to our over 3,900 dedicated employees who continue to serve our customers day in and day out, regardless of the challenges or obstacles that they face.We continue to believe that the strength of our company lies in our people and our culture, and I've never been more proud of our employees that I am today. We're working hard to meet the challenges brought on by COVID-19, while continuing to care for our people and our customers.And with that, I will turn it over to Roger.

[Roger Dean:]

Thanks, Don. Good morning, everyone. As Don mentioned earlier, consolidated revenue for the quarter was $280.8 million, up 1% compared with last year's first quarter. US loan balances and revenue decreased 10.3% and 1.9% respectively year-over-year, primarily due to California portfolio repositioning in late 2019 and the run-off of that portfolio that began when we stopped originating California installment loans on January 1, 2020.Canada loan balances increased 19.3% on continued open-end loan growth. Consolidated adjusted EBITDA came in at $65.8 million, down 9.7%, but this quarter included a $12 million charge for incremental provision expense for allowance build over what would have normally been required, as Don mentioned earlier.Consolidated adjusted net income and adjusted EPS for the quarter declined year-over-year by 15% and 3.8% respectively, again, including the $12 million pretax or $0.21 per share of incremental loan loss provision for allowance build.From a high level, COVID-19 related unemployment and consumer behavior changes during the last half of March affected our financial results in three major areas.First, loan volume and demand. We began tightening credit in mid-March. In addition, demand, as measured by application volume, declined as fewer customers visited our stores during the stay at home orders and, to a lesser extent, online application volume declined. Don already mentioned the sequential loan trends for April.Second, delinquency trends As expected, given the timing of the unemployment trends and the lockdown orders late in the quarter, we did not see an impact on net charge-off rates in the first quarter from COVID-19. However, delinquencies rose at quarter-end and through April and that drove the $12 million of incremental loan loss provision expense for allowance build.Third, operating expense reductions. We took actions in mid-March to reduce operating expenses across several major categories, including advertising, variable compensation, a freeze on hiring, suspension of merit increases and savings from work from home initiatives. On a combined basis, these actions position us to drive $11 million to $13 million of quarterly cost reductions compared to our original operating plans. We intend to keep these expense measures in place until business volumes and operations begin to return to normal.Next, some brief comments on advertising, customer counts and cost per funded loan or CPF before moving on to loan portfolio performance.Year-over-year comparisons are challenging due to COVID-19 impacts, as well as the fundamental shift in the composition and growth trends of our portfolios year-over-year. In the first quarter of 2019, especially in California and Canada, we acquired a high number of new customers compared to the first quarter of 2020. This drove a meaningful change year-over-year in advertising patterns and new customer accounts.So, while metrics on new customer accounts are lower, they were generally anticipated as we slowed the pace of new customer acquisition. The number of new customer additions dropped considerably over the last two weeks of the quarter due to early impacts of the COVID-19 pandemic.Looking at consolidated new customer accounts, we added 113,800 new customers this quarter. That was down 7.3% from last year. Our site to store capability added 21,500 new customers during Q1.Breaking down advertising and new customers by country, starting with the US. US advertising expense was $4.6 million and that's up 72.3% over the same quarter a year ago. We've historically reduced advertising and customer acquisition seasonally in the first quarter of the year, concentrated in February, considering the impact on customers of US federal income tax refunds.In the first quarter of 2020, based on improved underwriting and evaluation of the seasonal opportunity, we increased advertising over prior levels through the tax refund season. We then, of course, reduced advertising in the last three weeks of March 2020 due to COVID-19 related considerations. And total new customer accounts were down 6.1% year-over-year, but that's primarily due to California and Ohio and, to a lesser extent, in late March to credit tightening.We stopped acquiring new installment loans in California in October of 2019 to prepare for the January 1, 2020 law change there and our new customer volume in Ohio was lower after the April 2019 law change there.Moving on to Canada, Canadian advertising expense for the quarter was flat year-over-year as higher open-end loan advertising was offset by mix shift and fewer first loan promotions for single pay loans.Canada's new customer accounts were down 13.1% for the first quarter of 2020 compared to the first quarter of 2019. This reflected the outsized growth of the open end portfolio in Ontario in the prior year and the overall shift from rapidly turning single pay loans to longer-term open-end loans in Canada.Next, I'll cover overall loan growth and portfolio performance. First, a few highlights at the product level. Company-owned unsecured installment loan balances declined $38.6 million or 23.9% versus the same quarter last year. The decline was driven almost entirely by California portfolio repositioning and optimization.Non-California US balances grew slightly and Canadian unsecured installment balances shrank modestly, resulting in about flat balances year-over-year, if you take out California.US secured installment loan balances declined $8.7 million or 10.5% versus the same quarter last year, also reflecting the California portfolio optimization. Excluding California, the portfolio grew 15.5% year-over-year.CSO loan balances were down $6 million year-over-year. But you'll recall that the law change in Ohio that eliminated the CSO model became effective in April 2019. Subsequently, the CSO balances in Ohio have run off, while balances in Texas are effectively flat year-over-year.Open-end loan balances grew 30.4% year-over-year. Both the US and Canada each grew by about 30% as reported on a US dollar basis. But on a constant currency basis, Canadian open-end loan balances grew 39.5%.Looking at single pay, Canadian single pay balances declined $9.6 million or 28.7% versus the same quarter a year ago on mix shift. US single pay loan balances declined $5.4 million or 15% year-over-year. Single pay products in general, and especially in Canada, are more sensitive to store traffic. And as such, loan volumes were significantly impacted by COVID-19 over the last three weeks of the quarter.Moving on to loan loss reserves and credit quality. Our consolidated net charge-off rate improved 70 basis points versus the first quarter of 2019.Looking at credit metrics by product, open-end net charge-off rates improved 155 basis points year-over-year. The positive effect of Canadian open-end seasoning was partially offset by an increase for open-end NCO rate in the US from a combination of loan growth, mix shift and more online volume and advertising channel shifts.Just a quick reminder that approximately 70% of our Canadian open-end customers elect to purchase payment protection insurance, which covers their monthly payments in the event of job loss or disability. We have seen claims increase. And at present, about 2.2% of customers with insurance have made a claim that is being paid by the insurer, Canadian Premier Life.Canadian Premier Life is a subsidiary of Securian, a $63 billion asset, A-plus rated US insurance company, so we have a very strong counterparty there.We have a sharing and retention agreement with CPL. So, increased claims will reduce the net amount of ancillary revenue that we recognize on the sale of this product, while claims are elevated.CSO net charge-off rates improved 110 basis points versus the same quarter a year ago, partly because of higher relative loss rates in the former Ohio portfolio and better credit performance in Texas.Unsecured and secured installment loan net charge-off rates were up 155 basis points and 150 basis points respectively and impacted negatively by the fact that the California portfolios are running off with shrinking balances.Single pay net charge-off rates rose 400 basis points year-over-year. Canada was up 550 basis points, while US single pay net charge off rates rose 295 basis points year-over-year.Due to the significant late quarter declines in single pay earning assets, the rate is distorted as gross net charge-off dollars were driven by higher daily average loan balance than what existed at quarter-end.One quick point on the CARES Act from a corporate perspective. The act permits federal loss carrybacks to years in which the corporate tax rate was higher than today, generally years with a tax rate of 36% versus 21% today. We have approximately $60 million in net operating losses. So, when we re-measured the value of those NOLs, we picked up a $9 million tax benefit in the quarter. But if you look at our tables, the benefit is excluded from our adjusted net income numbers.Turning to our capital structure and liquidity, Don already cover the good news on our new US non-recourse SPV credit facility, so I won't repeat that here.We were also pleased to extend the maturity date on our US senior revolver to June 30, 2021. As of April 29, we had over $230 million of unrestricted cash and nearly $70 million of availability on our revolving credit facilities.For the trailing 12 months ended March 31, 2020, we generated a little over $125 million of free cash flow from operations after funding loan growth and capital expenditures. As Don mentioned earlier, we suspended our share repurchase program and we've also suspended all non-essential capital expenditures, including Canadian LendDirect store expansion that was previously planned.Based on our first quarter net income and the strong cash flows, we declared a quarterly dividend of $0.55 per share to shareholders of record as of May 13. We will continue to evaluate quarterly dividends as we move through 2020.Looking at our current liquidity position, our operating cash flow generation capabilities and the availability of our four revolving credit facilities to fund future growth, we believe we have adequate liquidity to fund our business through 2021 under various scenarios, without requiring access to the capital markets.We believe our strong liquidity position allows us to manage the near-term impacts of COVID-9, while positioning us for opportunities as we move closer to the eventual recovery.This concludes our prepared remarks and we'll now ask the operator to begin Q&A.

[Operator:]

Thank you. [Operator Instructions]. The first question comes from Bob Napoli of William Blair. Please go ahead.

[Robert Napoli:]

Thank you. Good morning. Good to hear your voices and hope you're all doing well. I guess so much to ask here, but just focusing on liquidity and you guys went through a lot of good information there. But, Roger, are there covenants that as you stress that and you don't have any payments due until – any facilities due until mid-2021. What are the covenants – is there anything that could accelerate that time frame of needing to repay loans or…?

[Roger Dean:]

No. First of all, good morning, Bob. No, the short answer is no, but the only thing that's worth noting is, as you know, the ABL facility, the SPV facilities in Canada and the new one in the US have asset performance requirements in them that would affect if those asset performance covenants aren't met, then it affects our ability to draw on the facility. As of the end of April, we cleared the Canadian levels. And obviously, we had a [indiscernible] facility that we just closed, was underwritten and designed for the current environment. So, obviously we are managing very, very carefully around the performance requirements of the ABL facilities.

[Robert Napoli:]

How much room do you have there? I know, Don, you had brought up – and is this kind of a second question – that credit losses would have to go up by 50%, I think you said, from current levels to get to breakeven and credit losses only went up 11% in the Great Recession. So, two questions there. How much room, Roger? And the metrics that you had mentioned, Don.

[Don Gayhardt:]

Hey, Bob. It's Don. Good to hear your voice as well. Hope everyone's okay. I think you've correctly characterized the remarks about where we are and the headroom we have on pre-tax earnings. We don't break down and disclose all the covenants, although as Roger said, we're managing it carefully, we're in good shape by the end of April and we feel like we've got – the levels are set where we intended to perform well. We have good relationships with [indiscernible] on this new US facility and with Waterfall on the Canadian facility been necessarily for a while with them. So, we feel good about the ability to kind of manage through with those facilities intact.

[Robert Napoli:]

Okay, great. Last question, I guess. I think you said your originations were down 60%. On the 40% that you're still originating, how much have you tightened? Can you give some commentary? Obviously, unemployment is still going up. How are you confident that even with the 40% that you're making that those new unemployment claims are not going to be – a lot of those new customers are going to lead to credit losses?

[Bill Baker:]

Good morning Bob. It's Bill Baker. Hope you are doing well. It's a really good question. So, we've done a couple of things. We have certainly tightened based on our internal CURO score. So, we're lending to sort of the top tier of our scoring customers. In addition, we've put some additional income and also employment verification steps in place, but we've also seen payment performance be very strong throughout this. I think it's really more of a demand question, but we've tightened out of an abundance of caution. We've really seen good performance – even for customers we originated in the last two or three weeks, we still see very good payment behaviors and performance. So, I think we feel good about what we're doing. I think it's really more of a demand question. And we're just managing the risk because it's an uncertain time, but feel good about where we are.

[Don Gayhardt:]

Remember, we do get biweekly payments here. So, we're getting a lot of payment data throughout the month. So, we're not sort of sitting here, waiting for the 1st of the month. And hope this stuff clears. So, that gives us a little more frequency of information. And the stuff that we've originated more recently, the first day default data, that kind of stuff is held up there. It's both a combination of both application reduction, demand reduction and our approval rate coming – being basically kind of cut in half. So, it's a pretty cautious approach right now.

[Robert Napoli:]

Thank you. Appreciate it. Take care.

[Operator:]

The next question comes from Moshe Orenbuch of Credit. Please go ahead.

[Moshe Orenbuch:]

Great, thanks. I know that you guys have withdrawn your guidance as it's appropriate. Could you talk a little bit just about – given what you do know about the patterns and the way consumers are getting cash, just what the likely path is or what sign should we be looking for to see – to be able to say, at this point, we feel confident that we have the credit piece under control and, at this point, we think that's when consumer demand is going to start to return? What are the signposts that you're kind of looking for?

[Don Gayhardt:]

Moshe, it's Don. I'll take the first stab at it and see the guys have any other comments. We feel good about the way both sort of the numbers that we see, but obviously we mentioned we have about 5% to 6% of the portfolio that we help with various customer care measures. But also, we get a lot of feedback from customers we talk to who aren't in customer care. And I think that – I guess the willingness of customers to sort of communicate with us and stay kind of current on stuff and talk to us about what's going on is really kind of encouraging.So, I think we've been sort of conservative in terms of how we run, maybe do a lot on customer care. And obviously, the economic stimulus measures both in the US and in Canada, both at the federal level and the state level, there's a lot of support there. So, I think it's certainly – we certainly look at our numbers and look at some of the other stuff that's out there publicly in terms of – I think most people are kind of feeling those three things are kind of coming together to make credit kind of hold up in the current environment.In terms of demand, I think that – mostly what we're going to look for is that the economic data, the macro data starts to kind of level off. Obviously, we would like the unemployment come down and then start to kind of level off. We're not waiting for return to the economy we had on March 15 before we feel like we can be able to lend again. It's more that we just see a little bit of stability in the overall data. We've talked about this internally. Let's just imagine there was a pool of 100 customers that we thought would be good customers for us. And through the economic downturn, perhaps 6% to 10% of those customers wouldn't qualify now. It still leads to a pool of 90 customers and I think an environment where the competitive dynamics is going to be different where there won't be as many competitors that are looking to – with those 90 customers.The other part that always happens and it's hard to sort of figure out is what happens to lenders who kind of sit above us in the FICO ladder, if you want to look at it that way. And we've certainly heard a number of the installment lenders talk about tightening the credit box, et cetera. And what they're doing is the bottom end of their FICO tiers, they're going to stop lending. So, we think a lot of those customers are going up end up kind of – to use the pool again, the pool of customers that we would want to do business with. So, I guess, we're looking for sort of a leveling off of the macro data and some stability, but we're not looking for return to what we had, the economy we had in March before we feel like we can begin to put more money into the advertising channel.So, when that happens, again – this is a healthcare driven economic decline. Some of the stuff looks promising that's come out in terms of some of the drug therapies and hopefully social distancing and sort of these very measured back to work plans will make this a manageable problem and that you get into the summer and into the fall, you can hopefully gets things back in school and certainly that will start to make things look and feel better.

[Moshe Orenbuch:]

Great, thanks. And when you kind of think about this whole process, between the combination of – a period of less demand now and the period of the pay down of California loans, you'll end up somewhat smaller and the original plan was to employ the capital kind of alongside that pay down of California. Could you talk a little bit just how you think about – like, what it's going to take – in a similar fashion, what it's going to take to know that you're now kind of over the hump from the standpoint of liquidity and can kind of turn to using that capital more productively?

[Don Gayhardt:]

Yeah. Again, it's so hard to sort of forecast what's going to happen on employment. And obviously, we will watch it on a state by state basis. I think some good news for us is that I think Nevada – for us, Nevada and California are the states that are meaningful to us are above the national average in terms of employment, unemployment as a percentage of the workforce there. The rest of the states that we're in are below that – the big states for us are below the national average. We talked about it. I think we've seen good organic growth domestically in a number of states, particularly with our open-end line of credit product. I think we'll continue soon see reasonable growth in that in Canada as well. We talked about a 14% revenue growth in Canada in the quarter. That's, obviously, going to come down as Canadian customers are acting in the same way and acting very kind of cautiously and volumes are down.I think that we did mention, Stride is – we're expanding with Stride in sort of two pilot states. I think we'll have somewhere in the neighborhood – I think we'll have four more states come online relatively soon. As I talked about, we'll have another 8 to 10 that could come online before the end of the second quarter. But again, we're proceeding very cautiously with Stride in that program. The mechanism out there, it's operational. In some respect, it's given us a good opportunity to more gradually test that entire platform to make sure that it works well for us and works well for the bank from a payment standpoint, the reconciliation settlements, all that stuff really work well.So, I think we have a lot of good things going. The pipeline I think is working well. And when there is demand to fill it up, I think it'll be there for us and work well for us. In the current period, we're okay, watching the cash balances continue to build and give us the best chance to manage through an extended downturn and then really be ready when demand and when businesses start to reopen and demand starts to look and feel better. I know that's not a great answer. But I keep saying internally, people, look, tell me when the healthcare crisis is going to abate and I'll tell you when our volumes will start to move in the right direction.

[Moshe Orenbuch:]

Thanks.

[Operator:]

The next question comes from John Rowan of Janney. Please go ahead.

[John Rowan:]

Good morning guys.

[Don Gayhardt:]

Hey, John.

[John Rowan:]

I just want to be clear. So, the expense guidance you said was, I think, $11 million to $13 million reduction off of your plan. But is that $11 million to $13 million reduction off of the 1Q run rate or how do we frame out what kind of the 2Q ongoing rate is?

[Roger Dean:]

Hey, John. It's Roger. Good morning. A little bit of that would have been realized in late March, but it's really – kind of just think of it in terms of – if you look at our first quarter run rate, fourth quarter run rate, at least for Q2 and Q3, it's just coming off of what would have been in our guidance or previous guidance or what you would have probably had in your model because of our previous guidance that we suspended. But it's coming off of that run rate for a couple of quarters for as long as we keep these measures in place. And we will obviously – to Don's point, when we start to see unemployment stabilize and we start to see some evidence that our customers are back to work and recovering, we'll have to return some of that spend, especially on the advertising side. But when you look at things like variable compensation, that's pretty much gone for the year at this stage for a big chunk of it. So, hope that makes sense.

[John Rowan:]

That's fine. And then, you guys mentioned that as the level of claims in the Canadian insurance product go up, your ancillary fees go down. Can you give us an idea? Is that the entire ancillary revenue piece out of Canada or is there something else in that number? And how much does that number shock down? Is there like a sensitivity to it or something that can help us model? I think it's, what, $11 million last quarter.

[Roger Dean:]

Yeah. Probably 80% of that, 75% of that is related to insurance sales. The rest of it is check cashing, money transfers, things like that in the stores. But the bulk of that revenue is from the sale – the commission on the sale of the insurance product. And then, we also – as we said in our comments, we have a retention sharing agreement, but we don't incur any loss reserves or anything like that. So, the retention sharing agreement is a smaller component, but it historically has been – it does add to the ancillary revenue historically. It will still, under most scenarios, add to it, but it's not going to add as much.In terms of shocking it down, we're still seeing – not surprisingly, we're still seeing the claims being filed and more claims being filed. So, yes, I'm not sure in terms of trying to shock at this point, John, it's probably too early.

[John Rowan:]

Okay. But it doesn't go away though, right?

[Bill Baker:]

No, no, no. John, I think if you want a ballpark number, I think it's on a quarterly basis, it could be impacted $1 million to $2 million on a quarterly basis.

[John Rowan:]

Okay. And then, just to be clear, the guidance was that earning assets are down 13% sequentially 2Q to date, correct?

[Don Gayhardt:]

That's right, yeah.

[John Rowan:]

All right. That's it for me. Thank you.

[Don Gayhardt:]

Okay. Thank you.

[Operator:]

The next question comes from Vincent Caintic of Stephens. Please go ahead.

[Vincent Caintic:]

Hey, thanks. Good morning, guys. And hope all of you are well.

[Roger Dean:]

Good morning.

[Vincent Caintic:]

Good morning. So, first, wanted to talk about your omnichannel and the benefits of that, if you could share any statistics you have about how many of your customers are minor, are there any trends there? So, maybe in this time, are we seeing growth in online transactions versus what you're seeing brick and mortar? And just to confirm that you're actually able to completely close and service your loans online or digitally.

[Bill Baker:]

Good morning, Vince. It's Bill Baker. I hope you're doing well. I think it's a very good question. So, I can give you a couple of data points. If you look at the week of February 16, prior to any real COVID-19 impacts, 57% of all lending transactions in the US were done online or through the contact center. If you look at last week, so April 19, that number climbed to 68% in the US. In Canada, same week, so February 16, 19% of all lending transactions were done online or through the contact center. And then, last week, that climbed to 33%. So, a pretty meaningful increase. So, I do think it gives us a lot of confidence in the omnichannel approach.And to answer the question very directly, we absolutely can close these transactions online even without appending process in most cases. Although we have put more income verification and employment verification in place, we still can do that in a very automated fashion. Obviously, the branches are still open, albeit at reduced hours. But I think it gives us a lot of confidence that customers can view the details of their loan, make payments, request adjustments through our apps and mobile website, and I think it's a really, really strong proof point that that's why omnichannel is so important and will continue to be important as we work through this and come out of it.

[Vincent Caintic:]

Okay, great. And thank you for that. Next question. Just if you could update us on the duration of your loans by product type. Because I think if I remember correctly, your loans are relatively short duration. And I think maybe in this situation, there might be benefit. Is there say a point in the year when your portfolio is completely refreshed and newly underwritten for the COVID virus situation.

[Roger Dean:]

Hey, Vincent. It's Roger. The fact the duration of our portfolio is about 9 months including open end, so the installment would be much shorter than that, but, yes, it turns rapidly. Obviously, the open end loan is a different product in terms of managing through situations like this because of the affordability of the payment and our ability to monitor utilization and utilization trends and things like that.I think the point has been made a couple of times this season that the short portfolios turn over very rapidly, which means that we will be positioned – we're not dealing with a long tail. When we start seeing the demand and the quality of the applications improve and we start to see people going back to work, there is a great chance to start leaning back into that again with most of the turn behind us.

[Vincent Caintic:]

Okay, great.. And just one last one for me. So, I understand we've only been a few weeks into this coronavirus crisis. But how quickly do your underwriting models adjust to everything? So, do you feel like your models have picked – maybe picking up and you're able to [Technical Difficulty]?

[Bill Baker:]

Hey, Vince. It's Bill. So, basically, all of our models are dynamic. So, they adjust in real time. But, obviously, we have gone in and done additional work as we talked about some additional tightening. And I think that's been largely successful. The numbers we're seeing even with originations, albeit somewhat limited, still look positive. And so, I think as we think about coming out of this, I think the same thing will happen. We will look state by state, platform by platform, channel by channel and have the ability to adjust very rapidly. And I think somewhat it was confidence aggressively to do that. And I think that's the power of what we've built with the CURO score and, again, store versus Internet versus contact center. I think that's really going to be a benefit as we come out of this and be selective on what we do. But I mean they've adapted very well and we continue to champion challenge and look at really all the data. But I think through this, we've been really pleased with the predictability of what we have, albeit being cautious and being prudent.

[Roger Dean:]

Vince, I just have one thing to add which is that we have the ability to close – a lot of customers close completely online without talking or chatting with one of our customer service reps. We do have a process, though, where we feel like we need additional verification where we can essentially have that application put into a channel where the customer will talk to one of our reps or chat with one of our reps. And I think one of the things we do is just put a lot more of the volume into those channels. That does require some more people and some more contact center time. So, as we start to lean into the volume a little bit more, it'll be leaning into it where – because some of the things we look at is what credit score updates, et cetera, would there be some lag there in terms of information being reported based upon some of the CARES Act restrictions. So, will that mean that we'll continue to have more volume running through the channels? Again, we can do that in a store very easily. Online, we have always had a process to have those – we've always had the ability to have those run through a channel where somebody, where a customer who is applying has to talk to a rep or chat with a rep.

[Vincent Caintic:]

Perfect. Thanks for the color and stay safe. Thanks so much, guys.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Don Gayhardt for any closing remarks.

[Don Gayhardt:]

Thanks everybody for joining us today. I hope everybody stays well and stays healthy and we look forward to talking to you after our second quarter. Thanks.

[Operator:]

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