Earnings Call: Q1 2020

May 7, 2020

Earnings release

Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter 2020 Financial Results Conference Call. At this time, all participants' 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 our speaker today, Mr. Hal Curry, Chief Financial Officer. Please go ahead. Thank you, operator, and good morning, everyone. My name is Hal Curry, the company's Chief Financial Officer, and thank you for joining us to discuss Goeasy Limited's results for the Q1 ended March 31, 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 talk about the company's response to COVID-nineteen, view the results for the Q1 and provide an outlook for the business before we open the lines for questions from investors. David Ingram, the company's Executive Chairman and Jason Appel, the company's Chief Risk Officer, are 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 However, we would ask that they do not quote callers unless that individual has granted their consent.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 including included in the MD and A. Now, I'll turn the call over to Jason Bauer. Thanks, Al. Good morning, everyone, and thank you for joining today's call. Given the current environment, while we plan to provide some brief comments on the quarter, we'll spend most of our time this morning focused on taking a deeper look at the resilience of our business model and sharing more detail on current performance trends and our expectations for the next several months. Before we begin, I want to acknowledge the difficulty and severity of the situation we are all facing together. Our hearts go out to the many families and communities around the world being affected by the COVID-nineteen pandemic. I wish to thank all of those in the front lines of this crisis for the remarkable work they are doing to keep our economy running and to our 2,000 Goeasy team members that have stood by our customers through this unprecedented event. Thank you. As the outbreak arrived, the first phase of our response was to protect the health and safety of our team, while supporting our customers during this difficult time. A COVID-nineteen task force was quickly mobilized to put in place a multi stage plan. Beginning in February, we began taking swift action to help curb the spread of the virus by increasing our cleaning and hygiene practices, mandating periods of self isolation where required and canceling all travel, events and group gatherings. In the weeks following, we moved our support center to a full remote working model and divided our call center operations between remote work and separate floors throughout our buildings, while employing strict physical distancing protocols. We were also the 1st and one of the few in our industry to proactively close our stores and branches to the public. We are fortunate that unlike many businesses, we were fully prepared to take our entire operations virtual. By leveraging our existing technology and the capability to offer leasing and lending services through our digital and phone channels, along with moving our retail leasing business to a doorstep delivery model, we have kept our team members safe and our business fully operational. With only 3 cases of the illness across our entire workforce, who are home and nearly fully recovered, we are fortunate to have greatly minimized the impact of the virus on our team. Lastly, we maintain significant credit and underwriting flexibility. Our proprietary custom scoring models can be adjusted to increase or decrease our tolerance for credit risk quickly. In addition, all direct to consumer loans are reviewed by a central loan approval team, which conduct a series of extra evaluation measures. Through this team, we were able to quickly implement a series of new underwriting protocols, such as additional income verification checks to ensure only qualified loans that meet our risk adjusted return profile were being originated. With those measures in place, our focus immediately shifted from acquiring new business to serving and supporting our existing customers. Our customers are everyday Canadians, making approximately $46,000 per year within $1,000 of the national average. However, only 20% of our customers own their home as compared to a 70% homeownership rate nationally. As a result, they have a total debt to income level that is much lower than the average Canadian at 115% versus 175%. They are hardworking and apply across a wide variety of industries, including manufacturing, healthcare, public sector government jobs and retail staples. Our local branch and store staff have developed deep and meaningful relationships with our customers and we have always stood by to support them. For those that have faced financial challenges, we have utilized our customer assistance program, which consists of a suite of loan amendment solutions that support borrowers. These include temporarily deferring a loan payment or extending the term of a loan to reduce the regular payment obligation. These loan modifications have long been part of our toolkit and have proven effective in helping a customer manage through a period of financial strain. In April, we saw approximately 12% of our customers benefit from a form of support as compared to the approximately 7% to 8% that would normally utilize this program in a typical month. This level of support is consistent with the many reports suggesting that Canadian banks have deferred approximately 10% of their mortgages to prime borrowers. We have also seen assistance being provided by our optional loan protection plan, which the majority of our customers purchase at the time of loan origination. This insurance, which is offered by Assurant Inc, a global provider of risk management solutions, protects the customer in the event of death or disability and covers their loan payments for a period of 6 consecutive months in the event of unemployment. If at the end of 6 months, the consumer remains unemployed, the insurer pays a one time lump sum payment of $2,000 to reduce the remaining loan balance. Claims under the program are funded through premiums collected from borrowers. And while elevated claims can serve to reduce the amount of commission earned by Easy Financial from this program, a fixed portion of the premiums we collect are guaranteed, while the insurer carries the additional underwriting risk. In April, approximately $7,800,000 of claims payments were made to Easy Financial on behalf of our borrowers. Since March, the Canadian government has announced over $145,000,000,000 in aid packages to help Canadians cope with the COVID-nineteen pandemic, including income support, wage subsidies and tax deferrals. As the income of an Easy Financial customer is consistent with the national average, this financial support, much like the standard federal unemployment insurance, is helping to soften the impact associated with an increase in unemployment. Furthermore, precautions taken to combat the spread of the virus have caused a reduction in many of the typical and discretionary expenses our customers deal with day to day. For example, according to Staff Canada, the average Canadian household spends nearly 30% of their after tax income on a combination of transportation, recreation and dining out. With less travel, gas prices down approximately 40%, most recreational activities canceled and bars and restaurants closed, these are just a few examples of the reduced burden on Canadian consumers. Notwithstanding the critical support that all of 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 payments we would normally collect, representing over $70,000,000 worth of customer payments, demonstrating the strength in the current capacity of our customer to repay their loan. Although it is difficult to predict how long it will take for the economy to recover or where unemployment settles post crisis, we know that our business model is equipped to withstand great economic pressure. In Alberta in 2015, we experienced a province wide recession when the sharp decline in oil prices led to a doubling of the unemployment rate to approximately 9% in that province. During this time, our in period loss rate in Alberta increased by approximately 2 50 basis points from roughly 14% in 2014 to approximately 16.5% in 2015. We have also stressed the business model under extreme conditions and know that we can withstand a material increase in credit losses. Due to the return on our receivables, the strong risk adjusted margins and numerous levers to reduce operating costs, our net charge off rate would have to more than double from 13% to approximately 30% before the business would become unprofitable and impact our capital. Since implementing central credit decisioning in 20 12, the highest loss rate we've ever experienced at a national level was less than 16%. Before passing it over to Hal to provide an update on our balance sheet and liquidity, I'll briefly summarize the results for the Q1. During the quarter, we generated $242,000,000 of total loan originations, up 10% from the $219,000,000 in the Q1 of 2019. As outlined earlier, our response to the pandemic served to moderate our focus on loan originations, particularly in the month of March. The originations we produced combined with the previously announced acquisition of an approximately 31,000,000 consumer loan portfolio from Mogo led to the growth in the loan portfolio of $55,400,000 which reached $1,170,000,000 at the end of the quarter, up 33% from $879,000,000 a year ago. Revenue for the Q1 increased to a record $167,000,000 dollars up 20% over the same period in 2019. The net charge off rate for the quarter remained stable at 13.2% compared to 13.1% in the Q1 of 2019 and 13.3% in the Q4 of 2019. During the quarter, we also increased our allowance for future credit losses, recording an additional $5,100,000 before tax provision expense or approximately $0.23 in diluted earnings per share based on the economic conditions generated by the pandemic and modest shifts in the consumer loan portfolio at quarter end. Under IFRS 9, it is required that forward looking macroeconomic indicators be considered in developing the provision for future losses. Given the extreme volatility of the economic indicators at quarter end and the vast array of forecasts, it was prudent that a more tailored approach be considered in developing the estimate. As a result, we utilized our historical loss rate experience in Alberta and assessed the relationship with the 4 macroeconomic indicators we have historically used, specifically the unemployment rate, the price of oil, the growth rate in GDP and the rate of inflation. This allowed us to develop a baseline for future loss rate volatility under a moderate recession scenario. These macroeconomic factors were then further stressed to provide a range of future loss outcomes under a more severe recession scenario. We then probability weighted these outcomes to determine the appropriate increase to the allowance that would fairly account for the future expected credit losses. Including this incremental expense, operating income grew to $44,200,000 up 14% from $38,800,000 in the Q1 of 2019, while the operating margin was 26.4%, down slightly from 27.7% in the prior year. Net income in the Q1 was 22,000,000 dollars up 20% from $18,300,000 in 20 19, which resulted in diluted earnings per share of 1.41 up 20% from the $1.18 in the Q1 of 2019. I'll now pass it over to Hal to discuss our balance sheet and liquidity position. Thanks, Jason. We were fortunate to enter this crisis from a position of strength. Late last year, we made several enhancements to our balance sheet, including amendments to our revolving credit facility and refinancing of our unsecured notes. The revolving credit facility was increased to $310,000,000 while reducing the cost of borrowing and extending the maturity out to February 2022. Additionally, the unsecured notes were refinanced and increased to US550 $1,000,000 while reducing the cost of borrowing and extending the maturity out to December 2024. Collectively, these amendments increased our liquidity while extending the maturities and providing us with a stable and long term capital. At quarter end, our fully drawn weighted average cost of borrowing reduced to 5.4%, down from 6.8% in the prior year. In addition, incremental draws on our revolving credit facility currently bear a rate of approximately 4.3% due to the lower interest rate environment. During the quarter, we maintained our conservative leverage position with a net debt to net capitalization of 72% and increased the equity on our balance sheet to $349,000,000 Cash provided by operating activities before the net issuance of consumer loans and purchase of leased assets was $103,000,000 during the quarter, an increase of 34% from $77,000,000 in the Q1 of 2019. Based on the cash at hand at the end of the quarter and the borrowing capacity under our revolving credit facility, we had approximately $214,000,000 in funding capacity, which will allow us to fund the growth of the business through the Q4 of 2021. 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. As a portfolio business with an average remaining term on our loans of approximately 40 months, the company generates significant free cash flow. In normal course, we choose to invest our free capital in growing the loan portfolio as that produces the best return on our investment and fuels earnings growth into the future. However, if the growth of our portfolio moderates, we then produce incremental free cash that can be used either to pay down debt, invest in new lines of business or acquisitions or return capital to shareholders through dividends or share repurchases. During the quarter, we invested $10,000,000 in share repurchases, buying back approximately 205,000 common shares at a weighted average price of $49 through our normal course issuer bid. Importantly, we are also confident that we can maintain our dividend, which is set at a level that can be sustained even in the event of a severe recession. While the environment remains challenging, our balance sheet and capital position is well equipped to navigate through a period of extreme stress. We maintain strong relationships with our lenders, a level of liquidity that can carry us well into 2021 and a business model that produces significant levels of cash flow. I'll now pass the call back over to Jason for some comments on our outlook. Thanks, Hal. Given the effects of COVID-nineteen, we plan to provide an update to our long range forecast once the environment begins to stabilize and we can better assess the timing and pace of our recovery. We are hopeful we will be able to do so at our next quarterly earnings release at midyear. In the meantime, our portfolio continues to perform well and our business model is proving itself strong and resilient. As highlighted earlier, the first phase of our response was to prioritize the health and safety of our team and focus on taking care of our customers. This has meant reducing our advertising spend, tightening our underwriting criteria and working with our customers to ensure they are supported. Furthermore, the strength of government subsidies combined with the effects of stay at home orders have reduced consumers' expense burden and therefore temporarily softened demand. Taken together, we do not plan to grow the consumer loan portfolio during the Q2, which should finish down slightly between 1% 3%. However, as the provinces begin to slowly reopen over the coming weeks months, we will have our full complement of team members ready to transition into our next phase of gradually returning to a balanced focus on generating profitable loan growth. Given the support provided to borrowers during this time, along with the lower level of ancillary product sales and the higher loan insurance claims, which reduced the net commission earned by the company, we expect the total yield generated in the loan portfolio to temporarily reduce to approximately 41% to 42% in the second quarter. As the impact of elevated insurance claims on the net commission earned by the company is then capped at a fixed level going forward, we would expect the portfolio yield to lift in the subsequent periods, returning to north of 44%. While the temporary lower level of commission from this program does result 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. And turning to credit, although we don't yet know the long term effects of this pandemic and where the unemployment rate settles, our credit performance remains strong. During the month of April, our average delinquency rate was 5.1%, which was down slightly from last year. Based on the current collection repayment and delinquency trends, we would expect our net charge off rate in the Q2 to reduce from the prior year and finish below 13%. Complementing the stable credit performance, we have also been carefully evaluating and deferring discretionary expenses where the long term impact on the business is minimal. As such, we would expect operating expenses outside of credit losses and financing costs to also reduce quarter over quarter. For our staff, in addition to the commitment to not laying off team members, we've invested a new benefit to provide them with virtual healthcare and support their mental well-being. Our team, especially those at the frontline, will make all the difference in helping us manage through the crisis and capture the many opportunities that lie ahead. In closing, there is no denying that we are living through unprecedented and challenging conditions and that the path to recovery is not entirely clear. However, with several provinces beginning to reveal their reopening agenda and the cases of COVID-nineteen appearing to flatten through Canada and around the world, signs of reemergence are starting to appear. The strength of our team and our balance sheet means we are well prepared to pursue opportunities that may emerge from this event. As prime lenders tighten credit criteria, the role we play at filling the gap left by the banks will become more important than ever. We feel confident that with our deep expertise in consumer lending, strong relationships with our customers and a business model that has been built to weather economic cycles, we are well equipped to navigate through the crisis and resume our ambitious growth plan. With those comments complete, we will now open the call for questions. Your first question comes from Nick Faribhiravi with BMO Capital Markets. Okay, thanks. Good morning. Hi, Nick. I just wanted to direct most of my questions towards credit performance. I'm sure there's a big area of interest this morning. So I found the observation about performance in April surprising in the sense that average delinquencies were actually lower year over year. So I just wanted to ask to clarify like in a scenario where a borrower receives loan amendment enabling them to defer payment because, let's say, they've encountered a period of financial stress, is that loan counted as delinquent or is it only counted as delinquent when the borrower misses a scheduled payment? Yes, that's right. It's only delinquent if they miss a scheduled payment. So each of our borrowers is entitled to a certain number of payment deferrals over the life of their loan. And if a customer utilizes a payment of deferral, then that scheduled payment is just no longer due. The effects of that would mean that that payment is ultimately collected on the back end of their loan. But for that one payment cycle, they're still considered current and they're not required to make that payment. Got it. Okay. And then I was wondering if I could ask for a bit of additional color, just on how you've approached provisioning for increased losses as a consequence of COVID-nineteen. The step up in the provision rate was a bit more modest than I think I had anticipated. It would just be interesting to hear what your probability weighted scenarios would entail in terms of peak net charge off rates to this period. Like should we think of that as being comparable to the Alberta loss experience that you alluded to earlier? Yes, it's a great question. Maybe I'll just take a quick stab at it and then I'll see if Jason and Mikhail has anything to add. So the way that we looked at it is, as I mentioned in the comments, we took our experience in Alberta and the probabilities of default that we experienced at that time and then use that to establish a baseline recession scenario. And then we further stress that again in order to create a more severe scenario and then probability weighted various degrees of severity. What's a little bit different about our outlook in this event versus that event is that in that event, as you will recall, the build of the unemployment occurred over an extended period. It was about 12 months that the unemployment gradually built. It then hit a peak and then it was about another 12 months that it came down. So it was about a 24 month period for that sort of full event. I think in this case, because most people believe that by the time we get 1 year out, which is the period of time that our provisions are trying to sort of capture, we are going to start to experience some level of recovery. The unknown is exactly how much recovery, but some level of recovery. We also consider that when concluding what levels of probability to put on each of the scenarios and how severely distressed the probability is a default that we experienced in Alberta. So I think the way we think about is that the provision level increase we've taken would adequately account for a change in losses if we were to experience the same level of losses or slightly greater as we did in Alberta. Okay. Okay, that's good. And then last one for me. Do you have a sense either through the increasing frequency of loan modification requests or claims experienced for your insured borrowers, what proportion of borrowers have experienced job loss or some form of irregular financial stress brought on by deteriorating economic and employment conditions? Because the charge offs look good so far. I'm just wondering how we should think about that a bit further out. Yes, it's a good question. A few comments. So I don't think we know definitively the exact number in our base that has had some level of impacts. We obviously shared the data as it relates to the number that utilized some form of support. Although we also know some of those customers that use some form of support didn't necessarily lose their job, but may have been feeling a sense of stress and pressure and wanted a little bit of relief. So it's hard to say for sure. I think looking forward, there is where the risk lies, if there is risk will be that as the current government subsidies subside and then markets reopen and consumers need to go back to work is where does the unemployment rate then ultimately settle. The only positive thing I think I would note there though is that the standard unemployment insurance program in Canada is still fairly strong. So under the CERB benefit, the customers that are unemployed are getting $24,000 of income. And under the standard unemployment program, a typical average consumer making $46,000 a year would get $20,000 of regular EI coverage. So the exposure is really for the customer that's currently making $24,000 today on CERB, they would go to $20,000 under the typical EI program. So certainly there'll be a little bit of a possibility of pressure there, but there is still a fairly strong social safety net for customers to lean on if they do remain unemployed even post the expiry of the current benefits program. Okay, that's good. That's it for me. Thank you. Your next question comes from the line of Gary Ho with Deschamps Capital. Thanks. Good morning. Just wondering if you can elaborate a bit more on your revenue yield guidance here. Is it the profit sharing component of the ancillary product that is taking it down? Or kind of can you walk me through kind of some of the assumptions behind the 41% to 42% that you guide into for Q2? And also, maybe some color in terms of expectations of clients that might be using these loan protection programs to arrive at that 41% to 42% as well as the 44% that you guided to maybe in Q3 and onwards? Yes, sure. Happy to. So I think the way to think about the yield temporarily coming down is there's a few components to it. So one would be, if we're generating lower levels of loan origination for a period, then because when we generate a loan, if we offer an ancillary product, there is at least to the first biweekly or monthly pay cycle of subscription revenue from that product, whether it's the credit monitoring or the loan protection plan. If you therefore generate lower originations, you have slightly lower levels of revenue coming from that pipeline of new business. That would be a smaller part, but that would be one part of it. The second part of it would be in a period where you're using slightly higher levels of customer support, such as a payment deferral, the effect of that is that we ultimately collect less of the accrued interest. And so therefore, we have to account for that in recording our net interest that we would produce as revenue in the quarter. So there's a small bit attributed to that. And then the lion's share of it would come from the higher level of insurance claims. And the way that that product works is, when there is a higher level of insurance claims, that first comes out of a predetermined claims pool that's established from the premiums collected from borrowers in a given period. First, it utilizes that pool. If it then exceeds that pool, the insurer can draw upon the prior 90 days of any surplus that existed in that claims pool. So prior to the COVID event, where claims were at traditionally normal levels, there would often be a surplus in the claims pool from the portion of premiums collected in a given month. They can draw upon up to 90 days of that surplus in order to cover excess claims. Once that surplus has been utilized, then the loss of the claims exposure to us is then capped. We get a fixed and guaranteed portion of the premiums and the balance of the risk then falls onto the insurers books and the risk reserves that they've accumulated. So what that means is when you have a higher and elevated period of claims, there's going to be a 90 day window, which in our case corresponds directly with the 2nd quarter, where you're going to have a higher level of claims and therefore no surplus in the pool, plus you've got 90 days of surplus that will be drawn upon. As we look forward, we expect in the Q3 that you'll not only have had that surplus been fully utilized even if claims remain high, And therefore, that will reduce the impact and buoy the yield again. But we also expect we'll see the payment performance improve. We've already seen the number of borrower support requests week by week taper off. And so the net effect of those things is what will drive the yield back up as we said north of 44%. And then what I would expect is over the next couple of quarters, it will gradually get back to where we would have normally expected to be, which as you recall, was guided for originally kind of that 46% to 48% range. So it will gradually climb back towards that level intersect with where we expected it would have been. Great. That's perfect. That's good color. And then my second question, I know there's different paths as to kind of how the economy will unfold over the next 6 to 12 months. But kind of maybe under your base case scenario, when do you expect to see the peak net charge offs come through? Is that still in that Q2 kind of Q3 or should it be kind of more Q3, Q4 as the loan protection insurance rolls off and some of these guys might still be unemployed? Any help on this would be helpful. Yes. I mean, this is where, obviously, it gets a little bit more difficult to predict and hence why we reserved the reproduction of our longer range forecast for 1 more quarter to pass behind us to get a little bit more visibility. I think what we've done is we've modeled out a number of scenarios from a low to a medium to a high impact and modeled out 3 possible versions of how the recovery looks. In the best case scenario, we would see the gradual reopening that's beginning to take effect now continue to progressively work well and that we don't see any resurgence of cases and therefore the economy just continues to slowly, slowly, slowly reopen over the next several quarters, in which case that we would expect that, while we might see a further increase in losses from where they are in Q2, we would expect them to be quite moderate and that peak is probably the 3rd or 4th quarter period. As you then graduate closer towards a high impact scenario, where there's the possibility of another spike in cases, possibility of a second wave in the fall or the winter, then that's going to put a higher pressure on losses. We still believe that our Alberta case is a great proxy for how the business would look even under that level of extreme stress. Hard to say exactly where, but that's a great proxy. And in that scenario, it's hard to know if the peak period would then be maybe the Q4 or maybe roll into the Q1 of next year. It will really depend on, again, the success of the recovery. So I think that no one is going to be able to know for sure right now, which of those versions occurs. It does look like it's more favorably trending towards the better case outcome given that cases have stabilized enough that we're starting to see the provinces gradually reopen. So provided we all manage that well, we're hopeful that we steer through this in very good shape. So those are the considerations and it's not entirely clear for us and difficult for us to predict the exact timing of those things though. Okay, perfect. And then just last question for me, Hal. Just given the slower loan book growth and you mentioned the free cash flow that you guys generate, just wondering your thoughts on use of capital and specifically buyback expectations at current share price looking out? Yes. No, it's a good question, Gary. I think that we are in a positive and strong position as it relates to our cash flow and liquidity position. So I would have a view that we would look to reinvest back in buying back shares given some of the surplus that we have in our cash in the coming quarter, somewhere in the range of $10,000,000 or so is what I would say. Okay. Great. Those are my questions. Thank you. Your next question comes from the line of Jeff Fenwick with Cormark. Hi, good morning, everyone. I just wanted to start off following on the credit team here. Jason, can you just describe the approach you've taken to providing those deferrals or loan modifications for clients? Has there been any change in the way that you approach those along with the changes they make to the rest of the underwriting? Hey, Jeff, it's Jason. I'll take that one. I'd say broadly speaking, we more or less followed the same approach we've been following in previous periods. The toolkit that we offer our customers hasn't fundamentally changed with the onset of the COVID pandemic. We've always serviced the non prime consumer with this toolkit. And as you know, we've typically have referenced the fact that this customer often lives in a permanent state of recession. So the way in which we go about targeting that customer for appropriate tools, the mechanism by which our frontline staff and our collection staff go out and offer those tools hasn't fundamentally changed with the onset. The only difference, obviously, as Jason noted earlier, is that we have a modest increase in the number of those customers who are taking advantage of those opportunities, but still relatively modest when you consider the severity of the outcome that we're dealing with. Okay. So you're not getting anyone the benefit of the doubt necessarily, I guess, is what people might be concerned about that you may be a little too generous in offering those deferrals? No. I mean, we continue we're pretty strict on how we do those deferrals. I would simply have you think about it this way. I mean, in many cases, the banks are giving up to 6 months of payment deferrals. Our deferral programs don't go nearly that long. They're much more periodic in nature. They're designed to give the customer a temporary assistance. We have more permanent assistance offerings as part of our toolkit. And we're more likely to obviously look at customers on a case by case basis rather than necessarily put them out where they have now owe 6 months or more worth of payments because that doesn't actually help them get back on the path to better lending. Yes, Jeff, if you look at the deferrals we have done, the majority of those are customers that have utilized just one payment cycle deferral. So for a lot of these customers, just simply being able to have the breathing room of 1 biweekly cycle, which can mean a couple of $100 pressure taken off them, has been enough to help many of them out. And so as Jason said, we don't we do do some longer term structural adjustments where we might extend the term of the loan so that it structurally lowers the payment for them on a go forward basis. But the majority of customers when they need the assistance just need a little bit of breathing room for typically one biweekly cycle or 30 days and that's enough to usually help them out. Okay. That's helpful. And then I just want to ask about the revolver and with the expectations that the charge offs likely progress a bit higher over the course of the year. I know the revolver has a max charge off level covenant. So have you had any discussions about things like that or just general discussions with the lenders as you move through this environment? Yes, Jeff, I'll just make one quick comment on the covenant itself and then Hal can make a few comments on the discussions you've had with our lenders. So the charge off rate covenant metric is a 12 month rolling average metric. So effectively, that means that at 15%, you have to have either 1 or 2 quarters that are significantly higher in order to elevate the full 12 month rolling period or you have to have an elevated level for an extended period. And obviously, given that Q1 was stable at 13.2%, Q2 we're expecting as we noted that rate will come down into the 12%. We would have to see quite a material disruption in the 3rd and 4th quarters before we would get to a point where that covenant would be compromised. However, I'll let Hal just comment because he has had some good discussions with the letter as well. Yes. Jeff, it's a good question. And what I would say is, I'm not immediately concerned about any of our bank covenants that we have certainly within the next couple of quarters. I think we are coming into this in a position of strength relative to some other players out there in the industry that are having a much more difficult situation. Our relationships with our banks remain very strong. And I think that's actually helped by the refinancing initiatives that we put in place last year, the cash surplus that we're actually experiencing at this point and feel quite confident that the strength of those relationships we're required to draw on would certainly be there in terms of support. I'll just jump to that. As a practical matter, when you look at it and you think about it from a practical lens, we have a balance on the revolver coming out of the last quarter of just over $100,000,000 That is a group of banks who have the senior most security over the entire company. So they're carrying just over $100,000,000 of credit on $1,400,000,000 asset base and a $2,000,000,000 plus runoff value. It's made up of a number of banks with whom we have very good relationships and act as our advisors on doing capital markets activity. So we've got deeper and more extended relationships. And so even in the event we were found ourselves needing some covenant support, which is Hal said we don't foresee at this moment, it wouldn't be practical for a lender in that case with that little amount of credit exposure relative to the size of the security they have, not to be quite flexible and supportive, it just wouldn't make sense practically speaking. So even though you're right, mechanically the covenants there, if you think about from a practical lens, we would expect that we would be in a position to garner their support if needed. Okay. Very helpful. Thanks. And one area I wanted to touch on as well was the operations of EZ Home. It's a little different in terms of the revenue profile and then people typically go physically into the store to look at the items that they would lease. How do we think about the performance of that group through this period? I know it also has a portion of lending income there. How have those locations been functioning? And I'm assuming we could expect a pretty big step down sequentially, I guess, in lease revenues? Yes. It's a good question. So actually so just maybe back up a step. So operationally, the way that we've been running that business is we chose to proactively close the stores to the public in a number of provinces that was due to be required at some point anyway. And we moved to a digital and doorstep delivery model. So customers can phone in, pop or go online and process e commerce orders. We can process the delivery and then our delivery team would safely deliver the product to their doorstep. And then the customer would simply have to then be responsible for taking the product into their home and setting it up as an alternative to what we would normally do. Because the customer there is not all that dissimilar to the Easy Financial customer, in fact, has a slightly lower level of average income, The all of the same effects that we highlighted that are benefiting Easy Financial, including the government subsidies, the lower level of discretionary expenses are all also contributing to that customer as well. So interestingly, we have not seen a material degradation in the lease performance. The lease portfolio has held up very well. The cash collection rates on the portfolio have been very comparable to normal periods. So while there will be a little bit of gradual runoff as we would normally expect that it might be a touch higher than normal, but you should not think about that that portfolio is going experience a dramatic decline. It continues to perform fairly well. And obviously, the EasyHome business as a whole, as a business segment also benefits from the portfolio that it has for Easy Financial Loans, which is over $40,000,000 in that 4 wall business segment. So that's also helping to keep the stability in the income coming from that unit. Okay. And maybe just one last one here on corporate costs. There was a pretty significant step up. We're just wondering whether there's some items there that were unusual in the quarter, perhaps some added spend as you were making the changes to the work from home environment or anything there that might have driven that number much higher? Yes. There was a bit of timing in a few expense lines just when invoices and things were processed that definitely put a temporary bump up in the corporate line for the quarter. You can expect that that corporate line will come back down in the second quarter closer in line with where it was in the 2 quarters ending 2019. So I think it will I can't remember the exact dollar amount, it's like $500,000 or $1,000,000 or something of timing effect that'll adjust itself in the second quarter. And maybe just to add to that, I mean, I think we have a continued focus on expenses right now as we sort of as Jason had alluded to earlier, looking at some of our operating costs to refine and optimize those expenses in the coming quarter. Okay. Thank you. That's all I had. Your next question comes from the line of Jamie Glowen with National Bank Financial. First question, I apologize if I missed your color around this. I'm wondering if you have any sense in talking with your customers, how many of those borrowers are currently using the stimulus initiatives from the government like the CERB, for example, and how that's helping them to continue to stay current on their go easy loans? So I don't think we don't have any data to suggest we know exactly what percentage of our customers are using the product or the benefit. I would say that our customer segment is widely distributed across industry sectors. There's no real one sector that has a high degree of concentration. So we think that our customer, if you consider that they have an average level of income widely distributed across all industry sectors, We've obviously prescreened them for employment at the time we originated the loan. There's no reason to think that they would look any different than the Canadian average population. So, while we don't have an exact data point on our customer, I think it's safe to assume that it's broadly in line with what you would see in the total population. Okay, great. And in terms of the insurance claims being paid on behalf of GoEasy clients, does that require proof of job loss? Or are there other factors that could drive a client to look at tapping into the insurance product? And how do you think about the level of insurance claims today compared to maybe what you would have expected in light of all the stimulus or excluding the stimulus that's in place? So on your first question, in order to be eligible for an unemployment insurance claim, the customer has to prove that they've either lost their income or that their income is reduced by more than 30 percent. And they have to demonstrate proof of that, which means they have to supply documents from their employer or most commonly they are usually fully unemployed and simply provide evidence that they've applied and been approved for unemployment insurance. They have to then resubmit that proof every 30 days. So that's why as customers begin to become gainfully employed again, you'll see that we would expect claims to slowly taper off over time in the next several months quarters. And as they if you look at the case we had in Alberta, the average customer that did file an unemployment insurance claim was on claim for about 4 months. So obviously, this event is a little bit different than that one. So it's hard to say exactly whether the customers will be using it for 2 or 4 or 6, but that would be the typical period of time an average customer when they use the product would use it for, before they're able to find some form of new employment. When you look at the amount of claims we're paying out and the portion of customers using it, nothing seems to us to be unusual. If you think about it in the context of the unemployment in the market and the other data points that we've seen around borrower support, I think it's a very appropriate level relative to what's going on in the conditions in the market. So I don't think I have any comments to suggest that it's a level we think is disproportionate to the environment and the circumstances. Okay, great. And my next question is, given the relief measures that have been put in place by the government around payment deferrals or waiving late fees in some of these prime products. Do you have any sense within your government relations group as to whether the topic of high cost credit is back on the table in any way, shape or form? So we do have a sense and the answer would be no, it isn't. We're very fortunate that our internal team led by our Chief Counsel and a charge of corporate affairs, has great government relations experience and regularly liaisons with regulators at both the provincial and federal level. And she has been doing so for the last number of weeks on a regular basis. Nothing would indicate that there's any desire or attempt at this point to clamp down on regulations. In fact, if anything, those conversations have been more the opposite, which is, hey, how do we get comfortable and make sure that there's going to continue to be a flow of an access of consumer credit for customers. Provinces are thinking now about how do we make sure that the recovery period is set up for success. And in a couple of cases, the provinces have actually been proactive in reaching out to us because of our strong government relations experience. Just to check-in and say, hey, we recall meeting, we know how your program works and is there any reason to be concerned that customers won't have access to regular consumer credit as we come out of this crisis? So those conversations have all been very positive and welcoming. So nothing that we would see or have heard would suggest they try to tighten regulations right now. It's more of the opposite that they're trying to ensure and be comfortable. There will be access to credit, which people will need once they get back to work and the expenses start to build again. And as I said earlier in my closing comments, that's where, if anything, I see a silver lining opportunity for us and why we think coming out of this, we can be the beneficiary of some real opportunities because credit might be a little bit more challenging to get. Some of our competitors aren't necessarily in as strong of shape on their balance sheet. Some have been acquired by deposit taking lenders who now have bank regulations to consider. We would usually see prime bank lenders tighten credit criteria. And so all of that's likely to conspire to mean good opportunities for us in a few quarters as we make our way out of this. Okay, great. And last one, as you're currently in a pretty solid balance sheet position, cash flow position, liquidity position, I heard Hal talk about understand like how you're weighing share buybacks against the organic growth initiatives in place around secured auto loans, channel expansion, geographic within Canada expansion. Has the dislocation caused you to reassess any of those organic strategies for capital deployment? And then also maybe a brief comment on the M and A outlook given the dislocation in both Canada and the U. S. In certain markets as well, If you can wrap up with that. Yes, sure. So I think as Hal said, from a capital allocation point of view, our first choice for deploying capital is into organic loan growth. Organic loan growth provides us a very strong return on investment. It allows us to fuel earnings for the future. You get the most scale and leverage from organic growth that's being added to your existing system and infrastructure. So obviously, in an ideal world, we're always deploying our capital first towards demand for growing organic loan growth. In the event that loan growth as it is in the second quarter is more moderate, our choices, as he said, would be to pay down debt, consider investing in a new initiative or a new business or an acquisition or return capital to shareholders. Obviously, given our conservative leverage position at this point, we would not choose to focus on paying down debt. We want to be thinking about how else can we use that capital next best. And really, I think there's 2 ways to look at it. Given the share price today and our confidence in the outlook for the business, we see the investment in our own common shares to the buybacks as being a very strong return on capital that would be several times even greater than the return on investment we generate from just simply investing in organic loan growth. Hence why both in the Q1 and as Hal said, to a certain degree in the Q2, we will continue to allocate a portion of that free excess cash flow towards buying back stock. We're obviously mindful of the situation and the uncertainty in the outlook. So we're not going to swing the pendulum too far. Still want to be prudent and conservative, but there's definitely an allocation of capital where the next best thing to do would be to buy back some shares. As it relates to our new initiatives or acquisitions, we continue to believe those things should proceed and move forward. So while we've obviously temporarily refocused our attention away from some of our longer term strategic initiatives while we manage through the crisis, we are now thinking about the next several months starting to be able to put our focus back in those areas. So we still intend to proceed with the pilot of our direct to consumer auto loan. Whether or not that gets off the ground later this year or it might spill over into early next, we're not that will be seen, but we're definitely still moving forward and see that opportunity just as strong, if not stronger now than we saw it before. As we said, acquisitions are certainly in our future for a method for growth and expansion. And it is quite likely, as you've noted, that the distressed cause from this crisis will mean some really good opportunities emerge with some attractive valuations where we'll be in good shape that if we find those opportunities here or abroad, we'll be able to take a very serious look at them. So certainly, our hope would be that if there's a silver lining through this, it would be the opportunity to come through and find opportunities like that. That's great. Thank you. Your next question comes from the line of Steven Bolland with Raymond James. Thanks. Good afternoon, I guess at this point or close to it. Jason, if you just go back to the loan protection and the $7,800,000 of claims, is there any kind of specifics that you can give on who has applied for that or who has gotten those payments in terms by geography or the age of loan? I think you said it was you kind of expect like it's been as expected. Is that what that means by geography or age of loan or something to that effect? Yes. It's a very average representation of customers that are in that claim bucket. So distributed provisionally according to the distribution of our portfolio, very typical in terms of the average age of the loans on the books. They obviously are far, far more often uniqueness, I uniqueness, I guess, about those filing claims in our book would be the propensity to come from unsecured borrowers versus secured. All the other makeup and features as it relates to provincial distribution or the age of the loans that they're coming from, everything else would be widely distributed as average. Okay. That's good. And there used to be a chart in the MD and A on about the allowances and sensitivity to oil and change in unemployment. I don't see that chart this quarter and maybe it's just because you've done a deeper dive that it's not relevant, but why would that be pulled in the quarter? Yes, great question. So because as I mentioned earlier, we given the dramatic volatility of those indicators and the vast array and uncertainty around the forecast, we had to move away from the typical formula that we would have used for those macroeconomic indicators and develop the customer strategy we highlighted using our experience in Alberta. The way that the traditional indicators work is they measure the delta between the actual macroeconomic indicator and the 1 year out forecast. And because the actual for each of those indicators plummeted so quickly right after just prior to quarter end, If you were to measure the actual of those indicators and compare that to a forecast a year out, which expects a quite a bit of improvement using the typical formula we've always used would actually lead to a view that there would be a provision reduction or a benefit provided to the business, which of course we know intuitively doesn't make sense. It's not realistic. It's just simply a function of the way those macroeconomic indicators moved so quickly. So the reason we removed the table is not that the relationship between those variables and our historical loss experiences is any different. It's just that given we've not built the provision this quarter using them in the same way we previously had, we've provided a nice description in the MD and A outlining the scenario weighted probability probabilities that we used instead. We just removed the table so as to not create any confusion that we were relying specifically on that prior formula. Once we get to a point where the environment stabilizes and those macroeconomic indicators stabilize and there isn't so much volatility, then we'll be able to reintroduce the usage of them and also reintroduce that table at a later time. Okay. That makes sense. And if I can go back to the capital deployment, I don't want to belabor this, but I think you would agree that the market wouldn't pay you for the growth that you've had in the past right now. So if anything, utilizing a buyback right now, I'm not sure, do you think you would get credit from the market? If anything, I think, wouldn't investors kind of say, look, capital preservation is the utmost thing right now for the next 6 months that has been the calls for cutting the dividend and actually building a bigger balance sheet at this point as opposed to utilizing a buyback? Yes. So I understand the point. I think a few key things for us. One is because as the environment gets more stressed and more difficult, it also leads to just as we've seen in the Q2, a moderation of our loan growth. The reality is that for this business model, when things get tougher and therefore the growth is reduced either because of softer demand or tighter credit criteria, the business actually produces more cash flow and the liquidity position actually increases. So if we look at our business right now, the liquidity is actually building month after month. And if we end the year in our more stressed scenario where loan growth is more moderate, we'll actually end the year with more liquidity than if we finish in a better stressed scenario and the recovery is more positive that we're able to redeploy into organic loan growth. So we think about it as saying, we're not drawing down any of the existing liquidity we came into this with. In fact, that liquidity position as things stay tougher will still actually continue to build. However, given that when we look at our current share price level and where we believe our business will be in the future, we consider it to be a very attractive return on capital for us such that it makes a lot of sense to allocate, again, not a significant, but a well considered amount of capital to repurchasing our own shares. So I don't I wouldn't want to have it misconstrued that we're not thinking about capital preservation and we're not thinking about liquidity. We certainly are. Those things matter a lot, and we expect those to continue to strengthen. But we also want to be conscious that as we have this excess cash flow, we want to be mindful of where is the best place to invest and allocating a portion of buybacks for us makes generates a great return. I am showing no further questions at this time. I would now like to turn the conference back to Mr. Mullen. Great. Thank you, everyone, for joining today's call. We appreciate your time and the thoroughness of the questions. We look forward to updating everyone at the next quarter call. Please stay safe and stay healthy. Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.