CURO Group Holdings Corp.
Q1 2019 Earnings Call Transcript

Published: 4 May 2019

[Operator:]

Good morning, and welcome to the CURO Holdings First Quarter 2019 Earnings Call. All participants will be in a 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 evening, CURO released results for the first quarter 2019. You may obtain a copy of our earnings release from 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 Investor Relations section of our website. Before I turn the call over to Don, I would like to note that today's discussion contains forward-looking statements, which include our expectations regarding the financial impact of exiting the UK market, macro factors impacting the US economy and the advertising and customer acquisition market, our financial guidance for 2019 and its underlying assumptions, timing of the MetaBank product launch and the potential for arrangements with other banks, impact and timing of regulatory activity, the prospects of our Revolve Finance demand deposit product, the financial performance of Zibby, timing of commencement, execution and outcome of our share repurchase plan, timing of the run-off of CSO revenues and commencement of private launch for new online product in Ohio, and level of US tax benefits, resulting from exiting the UK market and timing of realization. Please refer to our press release and the SEC filings for more information on the specific risk factors that could cause our actual results to differ materially from the statements made in today's call. 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. Reconciliations between these GAAP and non-GAAP measures are included in the tables found in our earnings release. As noted in our earnings release, we have posted supplemental financial information on the investor portion of our website. With that, I would like to turn the call over to Don.

[Don Gayhardt:]

Great. Thanks, Gar. And thanks to everyone for joining us today. To discuss, it was really a solid first quarter and a really good start to 2019. We exceeded our expectations by executing well in a number of key areas and saw good growth in earning assets, revenue and net earnings. Our new customer accounts is very solid, including in our expanding leads to stores program and we invested about the same amount in our ad spend in Q1 as we did in Q1 2018. Our omnichannel model gives us a lower cost refund of loan, which is a fancy way of saying the new customers who come to a store don't cost as much -- don't cost much in the way of ad spend dollars. But we spent just under $60 million in advertising in the US and Canada in 2018 and expect that number to grow modestly in 2019 to help us to continue to grow the top line. Credit results were in line with our expectations and we exited the quarter on good footing across our bigger and more seasoned portfolios. Overall, our revenue grew 10.8% with the US growing 10.5% and Canada growing 12% in US dollars, but I should point out that Canada actually grew 13.9% at constant currency. So really terrific quarter turned in by our Canadian colleagues. In the US, we had a very solid quarter, as we managed our way through the uncertain timing of tax refund seizing quite well. By being a bit delayed at the start, personal tax refunds, particularly those related to earned income and child tax credits came in about as expected overall. We do think that some of the uncertainty fueled in part by a lot of media attention and much of which was a bit off-based, led to some lower volumes later in the quarter and our earning asset base was a bit smaller than planned as we exited the quarter. Overall, we believe the US economy continues to perform quite well as employment and earnings trends remain strong, and in some cases at record levels. For the quarter, revenue in the US was $226.1 million, which is a record for the first quarter in the US, as we saw solid performance in our larger core markets, such as Texas and California and really good growth in newer markets such as Virginia. Loan loss provision increased as a percentage of revenue in -- versus Q1 of 2018 in part due to the change in our loss recognition policy for open ended loans which Roger will review in more detail later, as well as ongoing mix shift to longer term products and channel shift to online originations. We continue to invest in our risk and analytics personnel and technologies and we've begun to incorporate some advanced machine learning methodologies into our latest underwriting -- series of underwriting models. As we've discussed over the past couple of quarters, an important focus in Canada is the ongoing product conversion in Ontario, where we introduced a line of credit product in February 2018 and converted a substantial portion of our customers to this product, which provides a very flexible open-ended contract with generally more available credit and a lower rate structure. We were confident that our customers in Canada will like and appreciate this product and we think that this quarter's results validate that approach. As I mentioned, our Canadian revenue grew 12% and adjusted EBITDA grew 8.9% year-over-year. Further, adjusted EBITDA from Canada was $11.7 million for the quarter versus $8.8 million in 4Q 2018, as we met our goals in another sequential increase on earnings from that market. And credit performance for the open-end product met our target for the quarter. You can see in the release that we're affirming our guidance for the full year. We're a bit ahead of those targets after Q1 and feel good about the full year numbers that we have out there today. We don't believe there are any major gating elements in terms of product or process development that will prevent us from meeting or potentially exceeding our current guidance. However, we're mindful we continue to need to execute on our operating plan, allocate ad spend dollars correctly. So we're very disciplined on credit and collections and most of all continue to deliver great value and service to our under bank customers and we think we’ll have a very strong year. Here are a few other key topics before turning it over to Roger. In terms of regulation at the state level, we're spending most of our time in California, where there is again a bill to place to uneconomical rate cap on loans over $2,500. The first hearing in the assembly was held just the week before last. So we don't expect a floor vote in the Assembly until later in May, so a long way to go in what's a comparatively long state legislative season. I should note that a similar bill did not pass out at the Assembly last year. And we're actively engaged in California and other states with a broad coalition of lenders and service providers and we'll continue to support legislation that helps our under bank consumers access there in responsible credit. We should note that Oklahoma recently passed legislation that adds a new installment loan to the state finance code and we'll begin offering this product when the new regs take effect there next year. On the Federal side, we're working to submit comments on the new proposed CFPB rulemaking and that comment period closes May 15th. The current effective date for rulemaking is still uncertain as a court order is still in place staying in the current August 2019 implementation date, and the new rule making process is likely to result in a new implementation date. On the new product front, we continue to work with Meta to move to an eventual product launch. We're standing by and waiting for Meta to clear some internal hurdles. We're also continuing to have good discussions with other potential bank partners. I will remind you that our agreement with Meta does not contain any exclusive dealing provisions. We've been very pleased so far with the launch of our demand deposit or DDA account called Revolve Finance, which is sponsored by Republic Bank based in Chicago. This product provides our customers with full functionality of a bank account. Direct deposit of the customer's paycheck, debit card bill payment and even optional overdraft protection in addition to an FDI ensured account for their deposits. The early uptake rates are above our expectations as are the payroll direct deposit rates. Revolve demonstrates our ability to partner with banks, new product design and introduction and also demonstrates the ongoing value of our branch network. Also on the new business front, we recently participated in a follow-on investment run with Zibby, an online lease-to-own platform which brought our pro forma ownership to approximately 35%. As a reminder, we account for Zibby as a non-controlling equity investment. Under new leadership that we help recruit in the fourth quarter 2017, Zibby has made great strides in stabilizing our operating platform, improving credit results and developing key new online retail partners such as Lenovo and Affirm. The Company is expecting to more than double its lease originations this year to between $90 million and $100 million with total revenue of between $70 million and $80 million. A quick word about our decision, which we came about reluctantly to exit the UK. We had a very long and what we thought was very productive discussions with our UK regulators. But in the end, they were unwilling or unable to give us the necessary clarity on a process to resolve consumer redress claims. We hated to part ways with our UK colleagues as we've worked hard together to build a very good business. The two benefits have come out of this action. First, an ability to focus all of our corporate resources on our North American operations. The UK had become almost a daily commitment for our senior team from about September on. And second, increased free cash flow in 2019 from the likely small recovery from the administration process and more importantly, an estimated $47 million increase in cash from the elimination of federal tax -- for cash tax payments in the US for 2019 and part of 2020 resulting from tax deductions for the disposable -- the disposal of the UK subsidiary. Finally, on April 29, 2019, our Board of Directors authorized a share repurchase program, providing for the repurchases of up to $50 million of our common shares. I think it's important to reiterate our ongoing focus on cash, liquidity and our leverage levels and to affirm that we feel confident that we have the -- we will have more than adequate liquidity and cash flow to fund our growth initiatives. It's worth noting that the bulk of the funding for this buyback program is coming from the expected elimination of federal cash tax payments in the US, which I mentioned above and the benefit of which was obviously not in our previous cash flow guidance. So in summary, 2019 is off to a very good start for us. And I think this quarter has once again demonstrated the strength of our company and our operating model. We are a strongly growing company with strong cash generation capabilities, we have the strongest omnichannel model in the consumer finance industry, we continue to prove our ability to successfully navigate and rapidly adapt to regulatory and competitive changes across the markets we serve and we continue to invest in our people, processes and technologies to remain at the forefront of innovation and to use this innovation as well as our scale for the benefit of our under bank consumers. And with that, I will turn it over to Roger.

[Roger Dean:]

Thanks, Don. Good morning, everyone. Thanks for joining us. Consolidated revenue for the quarter was 277.9 million, which was up 10.8% compared with last year’s first quarter. Adjusted EBITDA came in at 72.9 million. That was down 5.1% versus the same quarter a year ago, but Canadian adjusted EBITDA was up 8.9%. But as expected, US adjusted EBITDA was down a bit year-over-year because of last year's favorable provision expense from some allowance adjustments concentrating in the CSO product. The current quarter's higher advertising and variable compensation and higher professional fees associated with completing our first year end as a SOX Section 404, fully compliant company. Adjusted net income was up slightly year-over-year on lower interest expense following last summer's refinancings and adjusted EPS rose 2.6%. As you know from our filings, during the quarter and as Don mentioned earlier, we are now out of the UK completely and all UK financial results have been deconsolidated and treated as discontinued operations. We previously disclosed that we expected to incur an additional non-cash charge to this first quarter to write-off our remaining net investment in the UK. However, because of the favorable US tax consequences of the disposal, the net write-off actually resulted in a credit of 8.4 million and you can see that on page 9 of our release in the results of discontinued operations. Next, I'll comment on advertising customer counts and cost per funded loan before moving to loan portfolio performance. We added almost 123,000 new customers in the US and Canada this quarter, that's pretty much flat to Q1 of last year. Breaking it down along with related advertising spend by country. Consolidated cost per funded was fairly flat year-over-year at $60, that's up $0.75 versus same quarter a year ago. Breaking it down by country, US advertising rose 23.2% year-over-year driven entirely by online. Store spend was flat year-over-year. US new customer accounts were up 2.9% with Internet customers up 17.05% and stores down 9.3%. 51.9% of our US new customers were acquired online this quarter. Our site to store capability added 23,000 new customers for the stores this quarter, that's compared to 18,000 in the same quarter a year ago. Because of Internet mix shift and the effect of -- and pretty much because of Internet mix shift and the effect of our Avio product on application to funded conversion rates, US cost per funded was $60, that's up $11 versus the same quarter a year ago. Canadian advertising dollars increased almost 50% year-over-year and cost per funded in Canada was very similar to the US at $61. Advertising in Canada was elevated in the first quarter of 2018 because Ontario rate changes went into effect on January 1st of 2018 and we were spending at higher levels to attract returning customers at reduced rates and gain market share from many related market disruption from that big change in Ontario. All Canadian customer account and cost metrics are affected by the product mix shift there, this time last year, we were requiring a much larger percentage of small dollar, short-term single paid loans. Next, I'll spend a little time covering overall loan growth and portfolio performance. First, I'll cover a few highlights at the product level. US Company-owned unsecured installment loans grew 28.4 million, that's up 23.8% in the US versus the same quarter a year ago. However, Canadian installment balance has shrunk because of expected mix shift to open-end, so consolidated unsecured installment balances grew 3.7%. CSO loans grew a healthy 8.4% year-over-year. As we've discussed, the law change in Ohio eliminating the CSO model became effective last Saturday, April 27th. At quarter end, we had 5.1 million of our 61.9 million of CSO loan balances in Ohio. We expect those balances to pretty much run-off by the end of this second quarter and that was built into our expectations for the balance of the year. We were the first license for direct loan product in Ohio and we expect to begin piloting the new product online next month. As expected, Single-Pay loan balances were affected by Canadian regulatory change and transition to multi-pay loan products. Canadian Single-Pay balances declined 15.4 million or 31.5% versus the same quarter a year ago. US Single-Pay loan balances actually grew 9.3% year-over-year. Now for Open-End. As we previewed on our last -- year-end earnings call, we extended to 90 days the past due aging period for Open-End loans. The change is explained in full on Page 7 of our release and it affects year-over-year comparability for loan balances, net charge-offs and loan loss provision. We added supplemental information in our release to help you understand and recalibrate to the implied new level of NCO rates, provision rates and allowance levels as a result of the change. As a reminder, our 2019 earnings guidance incorporated the expected effects of this change on revenue and net revenue. Excluding the effect of this change, Open-End loan balances grew $156.8 million, that's over three times -- grew over 3x versus Q1 of 2018. Moving on to loan loss reserves and credit quality. At a consolidated level and excluding Open-End, where the rates aren't comparable because of the aforementioned agent change, CURO's overall net charge-off rate rose 143 basis points year-over-year. As a general or overriding comment to start, as I've said in the past, we have over 70 loan products in 28 states in the US and three loan products in Canada. Payments are due on the customer's pay date, so differences in the calendar can affect NCO comparisons. And of course, in US, tax refunds and credits affect the metrics. Along with the fact we have a lot of small loan portfolios with varying characteristics, these characteristics can -- and factors can cause our NCO rates to fluctuate more than in a case of very large homogeneous portfolios. In terms of year-over-year credit quality metrics, I'll just take a minute to discuss or to call Unsecured Installment. For Company-owned Unsecured Installment, the quarterly net charge-off rate rose 377 basis points and past dues also rose modestly year-over-year. This was primarily driven by two factors. First, as we've talked about in the past, part of the increase continues to be due simply to mix shift away from Canada, where the absolute level of NCO and delinquency rates are lower. Second, NCO rates for the US Unsecured Installment book rose 280 basis points because of credit line increases and our immature Avio product portfolio. Because of these upticks, we also increased allowance coverage for Company-owned Unsecured Installment by 100 basis points versus where we were at the end of the year. For CSO, I'll also talk a little bit about CSO loans. The NCO rate for CSO improved by 314 basis points year-over-year and past dues improved 220 basis points versus Q1 of 2018. This is partly due to seasoning and better performance in the Ohio portfolio, but we also saw a modest improvement in credit quality year-over-year in Texas. Accordingly, we lowered allowance coverage a bit for CSO. Moving on to our capital structure and liquidity, our total available liquidity position at the end of the quarter was nearly $170 million. This is comprised of unrestricted cash of 83 million, US revolver capacity of 50 million, Canadian revolver capacity of 7.5 million and undrawn borrowing base availability on our Canadian SPV Facility of 28 million. In addition, after considering that undrawn borrowing base availability that we have today in the Canadian facility, we have additional capacity in that facility of 70 million, which takes our liquidity and funding capacity up to 240 million. This month, we also extended the revolving period for our Canadian SPV facility by 12 months to August 2023. On a related note, Don mentioned earlier that we feel good about our full year guidance. Because of healthy cash flow generation, we're borrowing less than planned right now, that's on the Canadian SPV Facility, and that reduction, if we maintain these levels, could add $0.03 or $0.04 to EPS for the year. And if we execute a good portion of the buyback program, that could likely add a like amount of EPS accretion. So, we do have some potential tailwinds there. Finally, Don mentioned earlier, that the UK disposal generated favorable cash tax consequences to the US which could add to our previous estimates of 2019 cash flow generation. It's important to point out that these tax benefits are estimates at this point. But we estimate the full benefit on US cash taxes to be up to 47 million, which would extend the benefit into 2020 at this point. This concludes our prepared remarks, and we'll now ask the operator to begin Q&A.

[Operator:]

[Operator Instructions] And we will now take our first question from John Rowan from Janney.

[John Rowan:]

Roger, just to be clear, the buyback is not in guidance, correct?

[Roger Dean:]

No.

[John Rowan:]

Okay. And then when you say a reduction, no cash taxes in 2019, you’re referencing cash taxes, not GAAP taxes. I assume, you're still going to be improving your tax expense?

[Roger Dean:]

Oh yes, absolutely. There're no change on the effective tax rate, it's -- this is all just cash.

[John Rowan:]

Okay. Have you done BC roll out yet of the Open-End products?

[Don Gayhardt:]

No, John, we have not yet.

[John Rowan:]

Okay. And then, there is a lot of growth in Unsecured in California. Can you tell me if that’s changed the concentration of that? I assume that's all the plus $2,400 installment product. Has that changed the kind of 10% EBITDA concentration of that product in your consolidated results?

[Roger Dean:]

No, that's -- that was -- that would be incorporated in that range that we talked about.

[John Rowan:]

Okay, and last Don. How do you feel about getting the MetaBank product off the ground by the end of the year?

[Don Gayhardt:]

We've said, I guess, I can leave it at what we said. We continue to -- we've worked hard with them from a system standpoint, from an underwriting standpoint, from a process standpoint. As I said, they've got some internal hurdles to clear. So we continue to have a lot of good dialog with them and we'll remain hopeful we'll get it going here soon.

[Operator:]

We will now take our next question from Kyle Joseph from Jefferies.

[Unidentified Analyst:]

Actually, guys, this is John here. How are you? Thanks very much. First question is related to the accounting change in the Open-Ended line of credit. I guess, is there more kind of residual effects we should observe in the coming quarter is number one. And number two is the -- I think you kind of got to 19.5% AOL. Is that the kind of run rate AOL we should think in that product?

[Roger Dean:]

Exactly, John. Yeah, I mean, there won't be any more -- it will affect -- it will affect year-over-year comparability similarly every quarter of this year. But you're right on the kind of the recalibration, the allowance coverage at 19.5%, 20% range plus or minus and in charge-offs -- net charge-off rates in the teens.

[Unidentified Analyst:]

Okay. And then, how should we think about your run rate expenses. I know you guys tightened up some expenses. How do we think about run rate expenses coming out of the first quarter here?

[Roger Dean:]

Yeah. I think, we incurred some extra -- as we mentioned, we incurred some extra costs in Q1 both from a variable comp perspective that affected year-over-year and also from some extra fees or professional fees. But I think if you take all the noise out of our quarter, Corporate OpEx was in the mid-30s or probably 37-ish range, if you take all the noise out of it and that's up maybe – that’s up by about 8% year-over-year. That's sequentially -- there's nothing that's going to cause that to jump around very much. So somewhere between $35 million and $40 million for corporate cost on a run rate basis. And then on the -- and then for the non-advertising costs of providing services, Q1 was pretty good. There's nothing that's going to cause that to jump around quarter-to-quarter on a sequential basis.

[Unidentified Analyst:]

Okay. And then final question. As you guys announced the Revolve Finance product sponsored by Republic Bank, I am wondering, can you talk about revenue opportunities there? And how you see -- I guess just generally speaking, the growth opportunity tied to that product?

[Bill Baker:]

Sure, John. This is Bill. I think, we're most focused right now on just -- on the roll out of it and getting it to our branch customers. We do think -- obviously, there's an overdraft protection component with it that offers a nice opportunity for our consumers, additional revenue stream. But I think the current plan is to get it rolled out in our branch network and then consider a broader roll out beyond the speedy cash branch network in the US, you may think there are opportunities there. So it's probably a little early to give guidance on what revenue opportunities are. But we would say that none of it is in our plan. So everything that we do with Revolve will be additive to what we do in 2019.

[Operator:]

We will now take our next question from Moshe Orenbuch from Credit Suisse.

[Moshe Orenbuch:]

I guess, you guys had mentioned that you're in kind of discussions with some other potential partners. Are they for similar type products, are they different products? Like are there -- could you just talk a little bit about that? Obviously, you did announce the debit card product which is an extension. Are there other things like that or just give us some thoughts on that?

[Don Gayhardt:]

This is Don. I think for the most part, they would be for credit price. I think in terms of the, we have our, we have our up plus kind reloadable card product that we're the program manager and we've been, that’s a product that we had out for around eight years now and we've added a DDA product, which gives you some additional functionality and features. And as Bill mentioned, including overdraft protection and over and above what you can get on a reloadable debit product. So I think in terms of those kinds of -- what I’ll call the account base kind of transaction products, I think we're probably good for now with bank partnerships. I think that the additional partnerships we're looking at would be for additional credit products. So whether it's a line of credit product or it's probably focused in the line of credit product and the Unsecured Installment products are the conversation we're having right now.

[Moshe Orenbuch:]

Got it. And I may have missed this if you said at the beginning of the call. I had some other things going on this morning. But the pace of buyback, like how are you, how are you thinking about it? Does it -- because you talked about better cash generation, so how should we think about what you're likely to do?

[Don Gayhardt:]

Yeah. I think Moshe, I think we’re just -- we've got some mechanics to do to kind of get the plan in place. So to be safe, you see impact from and it'll likely be in the back half of the year. And I think, we're looking at kind of probably more of a dollar based plan as opposed to a specific number of shares. And I think we're in a -- it's important -- as I mentioned in my remarks, it's largely funded by the reduction in cash taxes in the US. So it will pace to that -- the tax benefits that we see. And so I think, it's fair to look at it as maybe kind of an 18 month kind of program as we run through '19 and into '20, starting kind of late 2Q this year, whether it averages exactly over that period of time, it's hard to say.

[Operator:]

We will now take our next question from Bob Napoli from William Blair.

[Bob Napoli:]

Don just over the -- what is the right top line growth rate for this business over the medium to long term? And what are you guys confident with as far as EBITDA margins are concerned?

[Don Gayhardt:]

So, on the top line side, I think, it should be, I think, a low-double digit number. And I think that, we’ve -- you take the UK, which was growing faster, it wasn't a lot of business. But that probably took a point or so out of the overall top line growth rate. So as we talked about, we're going to continue to spend money on the ad spend side. We don't think -- we think ad spend is a percentage of revenue. Or I would look at it as a percentage of revenue on a cost per funded loan, we don't see a lot of sort of variability in that. Obviously, the first quarter is always seasonally slower because we don't spend as much ad money in the US because of the tax refund season. But it ought to range in that kind of 6%, 6.5% range. So we think that we spend ad dollars in that range. So $60 million to $65 million of total ad spend this year, we should be able to generate low-double digit growth across the US and Canada. And I think that, an adjusted EBITDA margin that's in that kind of 25% range is a fair number. And as Roger talked about, this first quarter was -- there was a little bit of noise in the operating expense numbers and some of that is just we generate. It's seasonally the biggest earnings quarter for us. So we allocate more just bonus dollars and sort of accruals on the comp side in the first quarter just to account for the fact that we earned more money in the first quarter. So it does put a little bit of noise to the OpEx numbers. But I think that by and large -- and we're seeing a little bit of wage pressure here and there. There's some minimum wage loss that are in some of the markets that we operate in. But by and large, I think from a cost structure standpoint, things should -- we should be able to get a little bit of our operating leverage all the way down through the P&L. And obviously, as we talked about, we think -- below that line, interest expense has come down as we refinanced and we paid-off, we have some corporate revolver borrowings we paid-off we paid off in the first quarter and we paid down our Canadian SPV. So we think that -- versus our guidance, we've got some ability to outperform from an interest expense -- on the interest expense line as well.

[Bob Napoli:]

Is there any interest in tuck-in acquisitions at this point? Or probably not given, you are more focused on the buyback at this valuation?

[Don Gayhardt:]

I would say generally that's true. In a static environment, that's probably true. But I think as we say a lot, never say never, but we're not. There's nothing -- we've got something we're looking at here and there. But I think there is nothing that I would consider that's on the front burner from an M&A standpoint right now.

[Operator:]

[Operator Instructions] We will now take our next question from Trent Porter from Guggenheim Securities.

[Trent Porter:]

Hi, guys. Thanks for taking the question. I had some technical issues. I was hoping you could repeat the commentary that you made with regard to Ohio? And how you've adapted to the new rule and how material any impact to be in terms of your volume and profitability there? And then relatedly, can you update us on the progress of California's AB, I think it's AB-539 and what your play book would be there if that were to pass?

[Don Gayhardt:]

This is Dan. Let me -- I'll take the end of the last part of the question first and let these guys comment on Ohio. And we talked about in our -- if you look at my part of the comments, the bill has passed one committee in the assembly, it hasn't gone to floor vote in the assembly and things have to crossover by May in there, let's say, the house of origin by May 31st. So it has to get out of the House by May 31st to cross over the senate. It's a long -- California has a comparatively long session, Texas just kind of runs January to Memorial Day. A lot of states like Virginia, places like that operate very relatively short sessions. So California is a long session. And we're working hard on it. And there's a broad coalition of lenders to work on it out there and we haven't given any guidance about potential impacts. And I think it's probably too early in the process and there's a lot of other -- there are some other bills that have consumer protection measures that we're in favor of out there and again part of the -- being sponsored by the coalition, we're part of. So I think it's a bit early to sort of talk about exact impacts because it's -- there's too wider range of outcomes right now.

[Bill Baker:]

This is Bill. Good morning. On Ohio, as Roger said, we transitioned from a CSO model to a direct licensed model. And as he said, we were the first licensed lender in Ohio. We actually accelerated our plan and kicked that off last weekend. So it was really a seamless transition for our customers and the fact of transitioning to a CSO offered product to a direct lender product. Like I said, we transitioned to that, we will run-off the CSO model and that's what's in the financial model for the year. So anything that we do in Ohio above and beyond is additive to the plan. We've implemented a new model. We also picked up a direct relationship from another lender who was not able to obtain a license and we think that will be additive as well. So I think although the yield is about half of what we used to offer, we believe that the competitive environment will be reduced, certainly the demand will remain. And I think as we've proven over the years that in the end, we will end up as a winner in that deal.

[Trent Porter:]

Okay. Like the local papers talk about -- I guess a number of players have already exited, so you stand to benefit from that volume I would think?

[Bill Baker:]

Correct. I mean, if you look at -- just based on the local media, there are currently I think just 10 licensed lenders in Ohio, there are another 10 applications pending. But there were -- I believe something like, nearly 700 brick and mortar locations. So yes, I think what you said is correct. We would assume that the competition will be far less, the demand will remain the same. And I think that those who can remain and operate under the new model will tend to benefit.

[Don Gayhardt:]

We see that dynamic in a lot of markets for this regulatory change and larger companies of scale and capital and ability to adapt from a share standpoint and that benefit. And I think that's been the hallmark of a lot of the progress we've made in the business here over a really long period of time.

[Trent Porter:]

Okay. And is there a possibility in states like this or California or wherever to use your MetaBank partnership with the view that the federal -- they're subject to the federal law rather than the state is the first question. And then the second is, in a case like this, where, Ohio's the capital rate at a lower level, is there any maybe offset in terms of also a lower default rate, because you're tightening underwriting standards or whatever?

[Don Gayhardt:]

I think, the question, there are people with, not us, but there are lenders with bank partnerships models in California now and that is one of the benefits of a bank partner, you can get 50 state solutions. One of the complexity of our operating models, so we operate under. We probably manage 70 to 75 [indiscernible] products across different states and provinces in Canada. So there's a lot of complexity in complying with state laws and designing products and contracts, et cetera to comply with almost all the state law. Bank partners should give you single product you can operate with across -- potentially across all 50 states and there are people doing that in California now. From a default standpoint, I think really -- I wouldn't expect that the products would -- if you work with bank partner to design a product and look at underwriting and default sort of guidelines and model, so you may have an operating model that, from a yields prospective and a cost sharing perspective and a funding costs, that may guide you to a bit more restrictive credit and lower default rates just because the operating model, kind of the economic model for that product requires a slightly lower default rate. But I don't think just sort of by definition having a bank partner is going to give you a lower default rate. Just absent any other change, it won't necessarily give you lower default rate.

[Trent Porter:]

My second question was sort of separate or distinct in that. Since you are now in Ohio without a bank partner, the rate is now capped at 28%. So do you -- so are you going to -- because of that, you've got a lower yield, do you tighten your underwriting standards and so you can offset that lower yield with a lower charge off rate there. I'm sorry.

[Roger Dean:]

Yeah, it's a good question. Although, I would say that the initial rate is 28%, but there are additional fees that are allowed under the statute. They get the yield considerably higher than that. But as I said, it's still about half of the yield that we charge under the CSO model. So yes of course, we did have to implement a new model that has tighter approval variables in it. And as Don said, it’s just approval kind of moves with the yield. So half of the yield are more restricted, it's more restricted.

[Don Gayhardt:]

And it's a lower principal amount.

[Roger Dean:]

Exactly.

[Don Gayhardt:]

Well, so it's a lower yielding product, but it's smaller -- it is a smaller, shorter term loan. [indiscernible]

[Bill Baker:]

And as you think about profitability, as Roger said, we had over $5 million open active and in good standing book of business there. So just to be able to service that even at half of the yield is still going to be -- we think additive to the business and something that we are really interested in doing.

[Operator:]

And this does conclude our question-and-answer session. I'd like to turn the conference back over to Mr. Don Gayhardt for closing remarks.

[Don Gayhardt:]

Okay, great. Thanks for everybody for joining us today. We will talk to you again at the end of our second quarter. Thanks.

[Operator:]

And this does conclude today's call. Thank you for your participation. You may now disconnect.