Earnings Call: Q2 2020

Aug 13, 2020

Ladies and gentlemen, thank you for standing by, and welcome to the GoEasy Second Quarter 2020 Financial Results Conference Call. At this time, all participant lines are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Hal Curry, Chief Financial Officer. Thank you. Please go ahead, sir. Thank you, operator, and good morning, everyone. My name is Hal Currie, the company's Chief Financial Officer, and thank you for joining us to discuss Goeasy Limited's results for the Q2 ended June 30, 2020. The news release, which was issued yesterday after the close of market, is available on GlobeNewswire and on the GoEZ website. Today, Jason Mullins, GoEZ's President and Chief Executive Officer, will update you on the company's response to COVID-nineteen, review the results for the Q2 and provide an outlook for the business before we open the lines for questions from investors. Jason Appel, the company's Chief Risk Officer, is also on the call. Before we begin, I remind you that this conference call is open to all investors and is being webcast through the company's investor website. All shareholders, analysts and portfolio managers are welcome to ask questions over the phone after management has finished. The operator will poll for questions and will provide instructions at the appropriate time. Business media are welcome to listen to this call and to use management's comments and responses to questions in any coverage. However, we would ask that they do not quote callers unless that individual has granted their consent. Today's discussion may contain forward looking statements. I'm not going to read the full statement, but I will direct you to the caution regarding forward looking statements included in the MD and A. Now, I will turn the call over to Jason Mullins. Thanks, Hal, and welcome to today's call, everyone. During the Q2, we continued to navigate through the effects of the COVID-nineteen pandemic. We prioritized the health and safety of our teams, our customers and our communities, while remaining fully operational and ready to serve the millions of Canadian families that have come to rely on non prime lending as a source of credit. Our response plan, which included quickly pivoting our resources towards managing our existing portfolio, supporting our customers, adjusting our credit and underwriting tolerance and carefully managing our expenses has helped us produce strong operating results and increased cash flows, highlighting the unique strength and resilience of our business model. We have also benefited from our omni channel lending platform. While our stores and branches have been open to the public since mid May, we have taken advantage of our digital lending capabilities to ensure that we can serve customers throughout the entire crisis and when visiting us is not possible. By working directly with branch personnel through calls, email, SMS and digital contracts, we have been able to preserve the strength of our local customer relationships, while catering to the health and safety of our team and our customers. Furthermore, we have been fortunate to see steady improvements in the performance of our point of sale channel, particularly with the rise in online e commerce. Year to date, we have acquired almost 6,000 new customers from this channel and they will now enjoy the opportunity to the effects the effects of the COVID-nineteen pandemic, which included stay at home orders, increased government subsidies and reduced living expenses for consumers served to temporarily reduce overall demand. When combined with our stricter credit and underwriting criteria and the shift in focus towards managing our existing loan portfolio, specifically during the month of April early May, we saw a lower level of origination volume. During the quarter, we generated $171,000,000 in total loan originations, down 38% from the $276,000,000 in the Q2 of 2019. The lower level of originations led to the previously guided reduction in the loan portfolio of $31,600,000 which finished at $1,130,000,000 at the end of the quarter, up 18% from $960,000,000 as of June 30, 2019. As the economy has progressively reopened, however, we have seen a corresponding and gradual increase in demand. In April, during the peak period of the economic shutdown, loan originations were $38,000,000 down 56% year over year. In May, loan origination volume improved to $51,000,000 down 50% followed by $83,000,000 in June, down only 8%. In July, demand has elevated further as loan originations climbed to approximately $97,000,000 down only 7% compared to the same period of the prior year and the highest month year to date in 2020. Revenue for the Q2 was a total of 151,000,000 dollars up 2% over the same period in 2019. Given the support provided to borrowers during the quarter, along with the lower level of ancillary product sales and a higher level of loan protection insurance claims, which lower the net commission earned by the company, the total yield generated on the loan portfolio reduced temporarily to 42.6% in the 2nd quarter. While a lower level of commission from this program results in a reduction to revenue, it is more than offset by the long term protection it provides for the customer and the company's future credit losses. During the quarter, we experienced very strong credit and payment performance. Use of the loan protection insurance program, increased government subsidies, assistance provided by banks and other lenders such as payment deferral programs and reduced overall living expenses combined with the credit model enhancements made over the course of 2019 conspired to result in an improvement to credit losses. The net charge off rate for the Q2 was a record low 10% compared to 13.5% in the Q2 of 2019 and 13.2% in the Q1 of 2020. Much like we have seen with consumer demand, we've seen many encouraging trends in consumer payment activity, including gradual declines in loan protection insurance claims, lower usage of our customer assistance programs and true payment performance that exceeds pre COVID levels. As we've highlighted previously, the majority of Easy Financial customers have loan protection insurance offered by Assurant Inc, a global provider of risk management solutions, which covers a borrower's full loan payment for a period of 6 consecutive months in the event of unemployment. At the peak period in April, approximately 7 point $8,000,000 of claims payments were made to Easy Financial on behalf of its customers. In May, the total claims paid reduced slightly to $7,700,000 while in June, they reduced further to $6,200,000 In the month of July, claims paid have subsequently declined further to $4,400,000 and more than half of all customers who previously submitted an insurance claim have now returned to making their regularly scheduled payments. The performance of this program through difficult times highlights the tremendous value add that it provides to our customers as the insurance has now paid out almost $30,000,000 in claims on our customers' behalf since the beginning of the pandemic in March. As we always have, we continue to provide our customers with a suite of loan amendment solutions that support them through a difficult financial period. These include temporarily deferring loan payments or extending the term of a loan to reduce the regular payment obligation. In April, approximately 12% of our customers utilized a form of support as compared to approximately 7% to 8% in a typical month prior to the pandemic. In May, the portion of borrowers utilizing the form of support were reduced to below pre COVID levels at approximately 6.3%, followed by 6% in June. In July, the portion of customers that use support continued to remain below pre COVID levels at approximately 6.8%. Notwithstanding the critical support these programs provide to our customers, we have also continued to observe a strong level of true overall payment performance. In the month of April, we collected 93% of the customer payments that we would normally collect under normal conditions relative to the size of the consumer loan portfolio. In May, this figure increased to 95%, rising further to 100% in June. In July, we collected 102% of the customer payment volume we would normally collect prior to the pandemic, highlighting the condition of the consumer to meet their debt obligations. While we have seen significant improvements in underlying credit performance, along with some positive trends in the general macroeconomic environment, there also remains uncertainty about the possibility of further spread of the virus and the exact timing and pace of an economic recovery. As such, we continue to employ the use of probability weighted economic scenarios to determine the appropriate loan loss provision allowance that would fairly account for the future expected credit losses in the event we faced further economic disruption. As such, our allowance for future credit losses was held broadly flat at 10.05%, down only slightly from 10.1% in the first quarter. We also carefully managed operating expenses during the quarter. Most discretionary spend was curtailed, we reduced advertising spend and several projects were put on a brief hold to ensure maximum focus was on guiding the business through the crisis. Together, the expense controls record low credit losses led to operating income of $54,000,000 up 32% from $40,900,000 in the Q2 of 2019, while the operating margin for the business expanded to 35.8%, up from 27.7% in the prior year. During the quarter, we also recorded a $4,000,000 pretax increase to the carrying value of our minority equity investment in PayBright, our Canadian instant point of sale consumer financing and buy now, pay later platform partner. Since arranging our investment last year, Prairie has grown revenue by over 85% and onboarded dozens of marquee clients, including the Source, Samsung, Tailormade and Sephora. With a significant presence in e commerce and the launch of their Pay in 4 product for smaller ticket items, PayBright has been the beneficiary of the worldwide shift to online retailing caused by the pandemic. Although we quantified the return on our equity investment solely on the basis of the customer acquisition opportunities available through this channel, we are pleased that their business is performing well and with the rise in their value, we are now exceeding our investment thesis. Altogether, net income in the 2nd quarter was a record $32,500,000 up 66% from $19,600,000 in 20 19, which resulted in diluted earnings per share of $2.11 up 67% from the $1.26 in the Q2 of 2019. Return on equity was a record 37%, up from 25.2% in the Q2 of 2019. If we adjust for the increase taken into the carrying value of our equity investment in PayBright, net income was a record $29,100,000 and diluted earnings per share was 1.89 dollars an increase of 48.6% 50% respectively, while return on equity was a record 33.1%. I'll now pass it over to Hal to discuss our balance sheet and liquidity position before providing some comments on our outlook. Thanks, Jason. 2nd quarter demonstrated strong cash producing capabilities of our business and the preparedness of our balance sheet to weather an extended period of economic stress. Cash provided by operating activities before the net issuance of consumer loans receivable and purchase of lease assets was $83,400,000 during the quarter, an increase of 24% from $67,300,000 in the Q2 of 2019. After investing in the temporarily low level of organic loan originations generated during the quarter, the business produced excess free cash flow, which was used to simultaneously strengthen our balance sheet while also allowing for the repurchase of our shares at an attractive return level. During the quarter, we preserved a portion of our capital and increased our liquidity by $45,000,000,000 through a combination of debt reduction and an increase in our cash position. Based on the cash on hand at the end of the quarter and the borrowing capacity under our revolving credit facility, we had approximately $260,000,000 in funding capacity, which we now estimate would allow us to fund the organic growth of the business through to the Q4 of 2022. We also estimate that once our existing available sources of capital are fully utilized, we could continue to grow the loan portfolio by approximately $150,000,000 per year solely from internal cash flows. We also used a portion of our free cash flow to invest in repurchasing our shares at an attractive level of return that we consider to be below the intrinsic value of our company. During the quarter, we completed $20,000,000 in share repurchases, buying back approximately 375,000 common shares at a weighted average price of $53 through our normal course issuer bid, bringing our total repurchases year to date to 579,000 shares. Importantly, both our dividend and share repurchase decisions are made on the basis that we can fund all organic loan volume that meets our credit criteria and that they can be sustained even in the event of severe recession. With respect to our funding sources, our secured senior revolving credit facility and the unsecured notes payable we issued last year continue to provide us with stable and long term capital with maturities in 2022 2024, respectively. At quarter end, our fully drawn weighted average cost of borrowing also further reduced to 5.1%, down from 6.8% in the prior year. In addition, incremental draws on our revolving credit facility currently bear a rate of approximately 3.6% due to the lower interest rate environment. With the retention of cash flow, we also reduced our leverage position with our net debt to net capitalization declining to 70%, while increasing the equity on our balance sheet to 353,000,000 dollars On June 29, we also issued a notice to redeem all of our 5.75 percent convertible unsecured subordinated debentures that were due to mature on July 31, 2022. The convertible debentures were redeemable at a reduction price equal to their principal amount plus accrued and unpaid interest. As of the close of business on June 28, 2020, there was approximately $43,800,000 principal amount of convertible debentures issued and outstanding, of which the holders of approximately $41,400,000 in aggregate amount elected to convert into approximately 954,000 common shares prior to the redemption date of July 31 this year. We then redeemed the remaining $2,400,000 and converted those on that date in cash. The early conversion produces the benefit of reducing our balance sheet financial leverage, resulting in a pro form a net debt to net capitalization of approximately 67%, while also reducing cash flows as the effective dividend yield is lower than that of the coupon rate on the debentures. Lastly, while our balance sheet and capital position remains strong and well equipped to fund the growth of our business for several years into the future, we will continue to focus on diversifying our funding sources, lowering our cost of borrowing and increasing our liquidity so that we can take advantage of opportunistic investments. As such, we continue to believe that there are opportunities for us to access securitized funding facility in the near future and expect to make progress in this area over the coming quarters. I'll now pass the call back over to Jason for some comments on our outlook. Thanks, Hal. As there continues to be uncertainty around the ongoing and future effects of COVID-nineteen, we plan to defer providing an updated long range forecast until the environment begins to stabilize and we can better assess the timing and pace of a recovery. In the meantime, our portfolio is performing well and we will continue to provide a regular near term outlook. As highlighted last quarter, the first phase of our response was to prioritize the health and safety of our team and focus on taking care of our customers. We are now in the 2nd phase of our response plan, which is to continue carefully managing the existing business, while shifting our focus toward growth and strategic initiatives. With sales volume gradually improving, we expect to grow the consumer loan portfolio during the Q3 between 3% 5% with sales improvements continuing into the 4th quarter. With the level of support being provided to borrowers declining, the volume of loan protection insurance claims gradually reducing and the capped level of exposure that we have to higher claims levels, we expect the total yield generated on the loan portfolio to begin to improve climbing to approximately 44% to 45% in the 3rd quarter. And while we still face a temporarily lower level of commission from the insurance program, it is more than offset by the long term protection it provides for our customers and the company's credit losses. And turning to credit, we continue to expect credit losses to eventually normalize. However, our consumer payment and default trends continue to perform remarkably well. During the month of July, our average delinquency rate was 4.1%, which was down by over 20% from last year. Based on the current collection repayment and delinquency trends, we would expect our net charge off rate in the Q3 to finish at or below 10%. We also continue to carefully evaluate and defer discretionary expenses only where the impact on the business is minimal, while continuing to invest in our growth initiatives. With the gradual rise in sales activity, we want to ensure that we have leveraged the current strength of our balance sheet and operating results to be the most prominent non prime lender in our space. As such, we will increase our investment in marketing and advertising to approximately $7,500,000 in the Q3, so that we can capture the rising consumer demand and continue building brand awareness going into the Q4 season. We also look forward to the launch of some major merchants in our point of sale channel over the next few months, which should result in a healthy step up in our new customers and we are making great progress on the development of our new core lending platform, which will give us the capacity to scale the business for years into the future. In the Q3, we will launch our 1st generation of new proprietary scoring models that will leverage consumer banking data to help us assess risk and underwrite loans to new segments of consumers such as new Canadians and students. Lastly, we continue to make progress in the design and development of our direct to consumer auto loan offering, which will launch as a pilot in early 2021. Although the future impact of the pandemic is not clear, our business is performing well despite the conditions and we are well prepared to navigate through future term deals in the event we are faced with another outbreak. Our customers who are everyday Canadians making approximately $46,000 per year have a total debt to income level that is much lower than the average Canadian at 115% versus 175% as only 20% have a mortgage obligation. They are hardworking and employed across a wide variety of industries, including manufacturing, healthcare, public sector government jobs and retail staples, positioning them well to remain or become employed again. Lastly, with the federal government announcing new revisions to the unemployment insurance program, those customers relying on the $2,000 per month of income from CERB will transition to standard with the average Canadian being eligible for a nearly identical level of pretax benefit income. In the meantime, we are focused on capturing the many new growth opportunities that lie ahead. We believe as prime lenders tighten credit criteria, the role we play in filling the gap left by the banks will become greater than ever. We will also continue to consider strategic acquisition investments if and when they make sense, carefully evaluating opportunities that fit within our strategy to develop a full suite omnichannel nonprime lending institution. With our deep expertise in consumer lending, strong relationships with our customers and a business model that's been built to weather economic cycles, we are well equipped to navigate through the crisis and resume our ambitious growth plans. In closing, I would like to extend my sincere thanks and gratitude to our 2,000 Goeasy team members that have resiliently stood by our customers. I'm inspired by the way they have rallied around our vision of providing everyday Canadians the path to a better tomorrow, and I'm truly proud of what they have accomplished. With those comments complete, we will now open the call for questions. Thank you. Desjardins Capital. Your line is open. Thanks. Good morning. Just first question, Jason, you talked about your revenue guidance for Q3, 44% to 45%. So maybe if you can comment at a more normalized rate, if you kind of look out 12 to 18 months from now, where do you see that trending to or perhaps some of the drivers to look at any mix shifts that we should be aware of looking at? Sure. So I think that the way to think about the yield on our book is that we still have a strategy to continually offer more risk based pricing, continue to diversify the product offering through the secured product and eventually the auto product. And that strategy, which while it lowers the yield, also increases the average loan size, allows us to attract wider segment of the non prime consumer market and extend the lifetime value of our customer and therefore the long term profitability of the business continues to be our strategy. And as such, despite the effects of COVID, that would be what we would expect to happen and that yield will gradually decline over time anyway. If you recall back to our original forecast that we provided before the effects of COVID, we estimated this year would be between 46.5% to 48.5%. That would step down next year to 43% to 45% and then step down only slightly to 42% to 44%, based on what we estimated to be how that portfolio mix would evolve. Clearly, there was an accelerated step down with the higher level of claims that we've discussed, finishing at just over 42 this quarter, That will rise back to 44 to 45 in the Q3. And then I think you should think about it that at some point over the course of the Q4 and into next year, as the claims levels return to normal, our yields will then just intersect with our original strategy, which was that gradual decline in that 43% to 45% range over the course of 2021. So we'll obviously provide a new more specific range once we rebuild our forecasts in the next little while here. But you should certainly think about it as it will eventually intersect with our original strategy. So maybe to paraphrase it, we should see a slight pickup in the yield over the next, call it, 3 to 6, 9 months before declining back to your original trend that you guys disclosed in your previous guidance? Yes, I think you should see it pick up a little further beyond the Q3. We'll obviously provide that level of specificity at the next result. But yes, you should see it pick back up a little further. And then I would suggest as we go into next year, that intersects with our strategy and we see that product mix lead to that slow gradual decline that we had previously expected, yes. Okay, great. And then you kind of touched on your 3 year outlook And I guess there's still a lot of uncertainty in the marketplace. Maybe you can comment like what do you need to see to maybe reinstate your 3 year outlook here? Is it going to be kind of stabilization in terms of the market? Like what are the factors? Yes. I think the main factor probably is just that there is a possibility that as we hit the fall and winter season, it's unclear on what that means for the pandemic. There's a chance that any level of outbreak is very small and regionalized and that there remains a nice gradual and steady recovery. But there are also those who speculate there might be some larger scale flare ups and the rate of pace in the recovery is then prolonged. I think it's that fall winter season that just leaves us wanting to be a little bit more cautious about firmly providing those numbers. So I think as we get another quarter or 2 in that timeframe, I'm really hopeful that the uncertainty will be mostly behind us and we'll be able to provide that guidance. So call it another quarter or 2 is our thinking and our plan at this point. Obviously, we take pride in that when we put forecasts out there. We believe firmly in the trajectory of the business to achieve them. So we also don't want to put something out there that could harm that history of execution as well. So that's part of the delay. Okay, perfect. Thanks for the color. And then just my last question. Jason, a lot of discussion has been on your current portfolio and credit trends. Maybe a bigger picture question, when will you shift more to more kind of more of an offensive approach versus defensive? Perhaps your team is doing that behind the scenes. Maybe talk about potential acquisition opportunities, international expansion, etcetera. What are you seeing in the marketplace today? Yes, sure. So we're definitely amidst that transition now and moving gradually to some more offense. We're obviously being still very cautious and careful about managing credit collections given the uncertainty. We still have a number of incremental credit and underwriting protocols in place that we've retained since the very beginning of the pandemic. So we're trying to be not too quick to come out of defense. Having said that, we are now in a position where all of our strategic initiatives are up and running again. So as I mentioned, we're full steam ahead on our core loan platform, our auto loan product, working on our point of sale partnership with PayBright. So everything that we had planned to work on, while it was paused or temporarily delayed is now back in full swing. So all of those growth initiatives are underway. On the acquisition front, similar to our comments in the past, we continue to believe there are opportunities for growth via acquisition for us at some point in the future. But given we do have a healthy organic growth plan, we're looking at them very opportunistically or intending to be very disciplined about making sure it would only be something that fits our strategy and is priced really well. So at this point, we're just keeping our eyes and ears open. And with the disruption created by the pandemic, we're starting to see opportunities appear and hopeful that, that could create an opportunity for us that might not have otherwise been there. So we'll obviously update on our progress, but we're certainly keeping our eyes and ears open for opportunities that make sense for our business. And that would include your international expansion ambitions as well, like those comments that you Yes, that's right. Yes, I think we're obviously always interested in opportunities for growth in Canada where we've already built the scale of the infrastructure. But we also continue to believe that there are good opportunities in other markets as well. So as opportunities are presented to us, if they're in other markets, we're just as open to considering them as we are opportunities here in Canada. Got it. Okay, perfect. That's it for me. Thank you. Our next question comes from Jeff Fenwick with Cormark Securities. Your line is open. Hi, good morning. So Jason, I wanted to talk about the credit outlook here in terms of credit quality and we know eventually you'll begin to normalize back towards those prior levels. Maybe you could just help us conceptually understand the split between how impactful it will be when that initial large surge in the loan protection claims and payouts fall away versus the sustained government assistance? It seems like it's going to last with us a bit longer. Will there be a point where that initial wave of loan protection falls away and there's a notable uptick then from that point forward as that gets removed from the numbers? Or is it a little more subtle than that as we go forward? Yes. It's a good question. I think my based on the trends, I think it will be a little more subtle. I think there will be a natural point in time when those remaining customers on loan protection insurance claims will reach their 6 months coverage mark, and we'll see a level of step up. However, I believe that level of step up will be minimal, I. E, it will be part of what contributes to the business going from the 10% it's at today back toward partially toward the pre COVID levels of, call it, 13 or so. But I don't expect it to be significant. The reason for that being, as I said, we are seeing claims run off and gradually decline every week. That trend is continuing. So hopefully, by the time we get out to September, October, November and customers are reaching that 6 month mark. The number of consumers left on the program is not too dramatically beyond normal levels. Secondly, as you know, if a customer does get to the end of that 6 month cycle, they're then entitled to a onetime lump sum payment of $2,000 from the insurer toward the balance of their loan. And with an average unsecured loan of 5 6,000, you assume it was partially into its term and then the 6 months has expired. That does a fairly meaningful job of reducing the actual write off exposure of an individual account if it does get there. And then lastly, it's not necessarily safe to assume that a customer who goes through that process and then receives that lump sum will inevitably charge off. Many of those consumers then just continue to repay. They find a way to manage expenses or borrow from friends and family, with the EI program that's been improved a bit. That gives them another source to lean on. So I think it will result in part of the correction for the normalization of the losses, if you will, but it shouldn't be a material shift. And I guess with the continuation of CERB and these other government programs, I mean, that would just, I assume, naturally also keep that charge off rate somewhat lower, below trend? Yes, I think so. I think our view would be that certainly those programs, if they continue to work the way they have, it would appear are trending to act as quite a soft landing, if you will, coming out of the crisis. So we have our reference points. We've got the 10% that we're trending at today, which is obviously record low levels. On the complete other end of the spectrum, we have the outer scenario, which is our upper experience, which now looks progressively more unlikely as being a relevant reference point, but that certainly gives an outer barrier. And then we've got our pre COVID levels, we came into this in the middle at around 13. I think that as we think about the LPP program, insurance product running off, we think about the EI stepping in to replace CERB. We think about the good payment performance we're seeing. We certainly feel pretty confident and optimistic that there will be a gradual return to normal levels and it will be a bit softer. If there is another outbreak, if there's another shutdown, then we know what that outer barrier marker looks like with the Alberta experience, but that scenario at least starts to look less and less probable given how well things are going at the moment. The other thing, Jeff, it's Jason here, that we also have working in our favor is the underlying quality of the originations that we've been seeing since the crisis began is actually better than what we saw prior to COVID. Part of that is a function obviously of the temporary changes we introduced as soon as the crisis became significant. And then the other piece I'd have you think about is we've been making tweaks and adjustments all the way along in the latter part of 2019 and before that into 2018 in an effort to bring the underlying loss rate down over time. So I think in addition to what Jason has offered, that has given us some additional padding, if you will, to cushion ourselves in the event that we see these regional or if unlikely national flare ups that could otherwise put us in harm's way. So those would be 2 other things that have you think about as well. Great. That's helpful. I wanted to direct my next question just on the recovery of activity that you referenced and how originations has sort of progressively been improving down only 7% through July. Can you maybe just give us some color around how much of that is just sort of market activity in general normalizing versus GoEasy beginning to push a bit more on advertising? It just a matter of storefronts being open, people out and about some of that activity resuming? And was this all just happening before you began to push on the marketing spend and what's how does that look? Yes, it's definitely a little bit of both. We are seeing a natural, albeit slow and gradual, but a natural rise in consumer demand for the reasons you cited. As things reopen, people's expenses begin to resume. And as people's expenses begin to resume, the need and use of credit begins to rebuild. So that has been happening as restaurants reopen and as various extracurricular activities for kids start to become available again. That's all contributing to that slow and gradual rebuild of underlying consumer demand. And we can see that just in terms of things like the volume of consumers that search online for keywords that indicate they're in the market for credit. So that's a part of it. And then the other part, you're absolutely right, is us trying to take advantage of the fact that we're in such a strong position. Our investment in marketing and advertising is to make sure that while there might be a lesser volume of consumers out there actively looking for credit, we want to make sure that we don't miss the opportunity given the strength of the business right now to make sure we are the most prominent option and source for credit for them. So we're going to continue to make sure we take advantage of that and make sure we're front and center of those consumers that are looking for credit. Okay, great. Thanks for that color. I'll re queue. Thank you. Our next question comes from Eddy Ann Ricard with BMO Capital Markets. Your line is open. Hi. Thank you and good morning. Good morning. So the first question I have is on credit quality. The allowance rate remains stable sequentially. And I believe you added as a consideration to your modeling assumptions, the level of repayment assistance provided by banks and other lenders. Can you give us a sense of how much of a positive impact it's having the allowance rate in Q2? And just also can you remind us of how your borrowers prioritize paying back their easy financial loan versus other debts they might have? Sure. I can provide a couple of initial comments and then Jason Appel can add. So first of all, with respect to the allowance, we continue to employ the same approach that we did last quarter, which is rather than looking at the actual conditions in the book and the performance of the book and the projections for the specific macroeconomic indicators that we historically used, which if we were to do that, it would imply that the provision should be reducing substantially. We said that we know there are factors at play that are extraneous and untypical that are causing some of that underlying trends and therefore would not be prudent to do so. And as such, we continue to use a model where we took our experience in Alberta. We measured what change in default rates would be expected under a typical set of recession scenarios, a moderate and a more severe scenario. We weighted those outcomes, and that's how we arrived at our initial provision. We applied that same approach this quarter. And as you saw, that resulted in only a very tiny, tiny change effectively being roughly flat. Until such time as we believe the underlying credit performance is more normalized and those economic indicators are a little bit more stable, we'll continue to use that modified approach, and we think that's the prudent thing to do. So that's how we're looking at it right now. With respect to your question around what level of contribution does other lenders' flexibility, if you will, contribute to the performance of the customers today? I don't know we have a firm data point that we can share that would give you an exact response. It's definitely a contributing factor along with all of the other elements that we highlighted. We know that the area consumers got the most relief was in their mortgage payments and only 20% of our customers are mortgage holders. The majority are renters. And I don't think that the relief that's been provided to consumers' rental payments has been as generous given so many independent landlords as was provided for homeowners through the banks. So not to say that means that that factor had less benefit to our customers than the average Canadian. We don't know that. But it's just the data point that I think adds context. And then in regards to your last question around how do our customers prioritize payments? Obviously, we don't have a specific and firm statistic on this, but we have some reference points. One is, if you look at how consumers typically rank order the debts that they repay, Installment loans generally rank next in line to consumers' housing payments and their car payments. And typically, according to data by the credit reporting agencies rank ahead of things like credit cards. So we generally rank middle of the pack in terms of the average Canadian's prioritization of their debt obligations. I think the factor that then skews us a little further favorably in that pyramid or hierarchy, if you will, is that because the customer knows we were there to provide them credit when they were in a tougher time And that were, as a nonprime lender, one of the few sources they can go to, to continue to rely on for credit and some of the other creditors like the loans they have with the banks who have already rejected them from getting access to more credit, they know they cannot lean on in the future. We definitely see many instances where we get prioritized higher in that pyramid because they know that they can continue to trust and lean on us for credit in the future. So again, I can't tell you, therefore, exactly where we rank, but those are some data points as to how that customer generally would look at us relative to their other debt obligations, if that makes sense. Perfect. That's great. I'd like to go over the trend in loan protection insurance claims, dollars 4,400,000 in July, down from $7,800,000 in April. Can you talk about the drivers of this decline? Is it more related to borrowers having found a new employment or is it driven by people benefiting from government assistance? So in this case, it's almost entirely or exclusively gainful employment. The vast majority of all those claims were unemployment claims. The number of, call it, steady state claims that we would receive via death or disability or critical illness is quite small. So the majority of them are unemployment claims. The customer, in the event they remain unemployed, has very little to do to continue to renew their claim other than just submit a form to demonstrate they remain unemployed. And so at the moment that they are unable to demonstrate unemployment because they have now regained employment, then they just simply don't renew their claim and their regular payment becomes due again. And we have seen that all of those customers that have come off of claims have all gone back on regularly scheduled payments and the payment performance of them has been quite healthy. The delinquency rate of customers that have come off claims is a bit higher than the portfolio, given that subset, but that's already embedded into our overall delinquency rate, highlighting that the payment performance of them is actually quite positive. So it's entirely a function of that. As we've gone through the various stages of economic reopening and restaurants have reopened and retail shops have reopened, gyms have reopened, each time a new tranche or industry of the economy reopens, that's another incremental tranche of people that now suddenly can go back to work. The other thing to think about it, Ken, if you look back to our Alberta experience, where we had a fairly severely prolonged recession where the unemployment rate more than doubled, not unlike what we've seen in the COVID experience. When we looked at our LPP claims experience of customers back then, the average claim duration of those people on claim was just over 4 months. And that was similarly for the same reasons that Jason outlined is that the vast majority of these people do find work. And as a result, they don't necessarily need to remain on claim for the full period of time. And it's generally similar to what we're seeing this time around with the COVID period that the people who are coming off claim are actually finding gainful employment, which is obviously allowing them to maintain their payments on their loan obligations going forward. So it is consistent is what I have you think about with what we have seen in the more recent recession that we did experience in the province of Alberta. Perfect. Great details. One last question for me. On the topic of the retail branches, how are you thinking about expanding that network over the coming year given social distancing? And how meaningful do you believe the online channel could become in a post COVID-nineteen environment? Yes. So it's a great question. So despite that, we've had to adapt to the current environment and lean more heavily on digital lending capabilities, we continue to believe that the retail branch network plays a very meaningful role. And just to be more specific, what we mean is that even though we might shift to the use of more digital technology to allow for customers to apply for credit, do the underwriting, actually borrow and fulfill their loan contract with us. The role of the retail branch still has a meaningful contribution. For example, onethree of our customers say that they heard about us because that they saw our retail branch in a plaza that they regularly visit as part of their daily routine where they're going to the pharmacy or they're going shopping for groceries. And so we've actually worked out that if you took the base operating costs of our retail network, call it, rent and very basic minimum operating costs to just have that network open. And you reverse engineer that into a cost of acquisition relative to the portion of customers that you acquire because they actually saw your retail footprint, you actually get back to a very attractive source of customer acquisition on a standalone basis only, I. E, your retail branches act as fantastic brand building and awareness contributors, and they also add tremendous credibility to your online presence. Remember, we're only talking about small 1500 Square Foot footprint. So these don't come with significant retail operating costs. The other factor that we are seeing is that even if a customer deals with a company over the phone or through email or digitally, that when they're dealing with someone who is at a local outlet in their local community, and particularly, again, in a plaza that they might frequently travel, there is a different perception of that relationship, a different expectation, a different loyalty factor, a different rapport, particularly if you might run into that same person in your local community than there is if you're dealing with a call center person in a big city far, far away. So our retail branch staff play a very meaningful role in dealing with customers, even though they might be dealing with some of them on a remote basis. So at this point, given all of those factors, even though I think digital will continue to play a more and more meaningful role, particularly as consumer preferences shift and the effects of COVID, as you've noted, our intent will continue to be build out our retail branch network. The retail branch of the future might look different. How it looks, what technology you find in the branch, the labor model of the staff within the branch, we'll evolve those things, but the concept of that footprint we still feel is very meaningful. Thank you for your comments. Thank you. Our next question comes from James Willoughlin with National Bank Financial. Your line is open. Yes, thanks. Good morning. I just want to I'm going to follow-up on the or follow on that last line of question just around the retail branches. How are you thinking about store acquisitions and maybe in particular around the Southern Ontario region. Is that something that's still would be as attractive for you? And how are you thinking about acquisitions on the retail branch side? Acquisitions as in buying other retail outlets that might be available or store expansion just organically opening new, just to clarify? Yes, acquiring stores that are already in existence. Yes. So that continues to be definitely an attractive opportunity for us. We've done this most times before. The most prominent instance was when we picked up what was almost 50 locations from the cash store a number of years ago, where we were able to take over the leases and have them equipped with staff. Those locations today perform very well. They perform consistent with our average branches, so very meaningful contribution. So certainly, as part of our retail expansion, if we identify a network of locations that fits within our targeted expansion plans, It's a fantastic way for us to accelerate retail openings and get that footprint quickly. So if an opportunity were there, we would certainly pursue it. Okay, great. Next question is around the impact of the loan protection plan. I was hoping you could separate, if I'm thinking about the, call it, dollars 16,000,000 decline quarter over quarter from Q1 to Q2 in commissions earned. Could you separate the impact between what was a clawback, what was a claim and maybe what was less demand for the product because of lower origination growth? So I'll give you some qualitative guidance there. So on the demand side, there was not really any change in the propensity to purchase the product. So there would be a small portion attributed to the fact we just had lower volume and did lower level of originations. But that would be small and would only be proportionate to the lower level of originations as opposed to anything more than that, I. E, we haven't seen a change in the customer's propensity to purchase the product. The majority of the decline just comes from the basic premise that when claims are below a certain level of the premiums we collect, that portion comes back to us as a net incremental commission. And with elevated claims, that incremental commission was eaten into by the elevated claims. That's the vast majority of the extra cost that reduces the revenue quarter on quarter. So I would have you think about that as being the primary driver by far relative to anything else. Okay, that's great. Thank you very much. Thank you. And I'm currently showing no further questions at this time. I'd like to turn the call back over to Jason Mullins for closing remarks. Great. Thank you. Well, thank you everyone for joining today's call. We appreciate your participation and we look forward to updating you when we release our Q3 results in the next few months. Have a fantastic day. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.