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CURO Group Holdings Corp. (NYSE:CURO)
Q1 2020 Earnings Call
May 1, 2020, 8:15 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to CURO Group Holdings First Quarter 2020 Conference Call. [Operator Instructions]

I would now like to turn the conference over to Gar Jackson, Investor Relations for CURO. Please go ahead.

Gar Jackson -- Investor Relations

Thank you, and good morning, everyone. After the market closed yesterday, CURO released results for the first quarter 2020, which are available on the Investors section of our website at ir.curo.com. With me on today's call are CURO's President and Chief Executive Officer, Don Gayhardt; Chief Operating Officer, Bill Baker; Chief Financial Officer, Roger Dean; and Chief Accounting Officer, Dave Strano. This call is being webcast and will be archived on the Investors section of our website. Before I turn the call over to Don, I'd like to note that today's discussion will contain forward-looking statements based on the business environment as we currently see it. As such, it does include certain risks and uncertainties. Please refer to our press release and our SEC filings for more information on the specific risk factors that could cause our actual results to differ materially from the projections described in today's discussion. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. In addition to U.S. GAAP reporting, we report certain financial measures that do not conform to generally accepted accounting principles. We believe these non-GAAP measures enhance the understanding of our performance. Reconciliation between these GAAP and non-GAAP measures are included in the tables found in yesterday's press release.

With that, I would like to turn the call over to Don.

Don Gayhardt -- President and Chief Executive Officer

Great. Thanks, Gar. Before we begin, I'd like to thank everyone for joining us today. And I hope that you're all healthy, safe and managing as well as you can through this COVID-19 health crisis. As we speak today on May 1, we're still faced with a very uncertain economic outlook, and we'll try our best to help you understand how the public health emergency is impacting our business. There are some signs at the worst phase, or at least what we hope is the worst phase of the health crisis in certain parts of the country, has passed, as indicated by slowing infection rates, reduced stress in our healthcare system and the preliminary steps to reopen the economy. However, the broad impacts of this pandemic are likely to be felt for quite some time. We think the first step in addressing the economic crisis is solving the health crisis and because we're business people and not doctors, we can't accurately predict the duration and severity of the pandemic and its impact on businesses and communities. As a result, we're just not in a position today to offer any guidance or estimates for future performance. That said, we do plan to revisit guidance when we have more clarity on the widespread disruption of the coronavirus. During this uncertain and stressful time, we are focusing our energy and resources on a few key areas, namely: one, taking care of our customers; two, supporting our employees, especially those on the front lines, and the communities where we operate; three, lending responsibly; and four, carefully managing cash and liquidity to ensure that we are well positioned to weather a sustained economic downturn.

We addressed some of these initiatives on our April eight update, and I'll start by providing some additional detail. For our customers in mid-March, we formalized the COVID-19 Customer Care Plan. In line with this plan, we created a dedicated toll-free number and email address, so customers could contact us directly with their concerns. At the same time, we empowered our customer care specialists to provide relief to our customers based upon their specific situations. That relief included: payment waivers and deferrals, interest and fee forgiveness, due date changes and extended payment plans and the temporary suspension of returned item fees. Finally, we aligned our credit bureau reporting for customers with delinquent accounts in accordance with the CARES Act. Through April 29, under CURO's Customer Care Plan, we have granted concessions to 35,000 customers, providing relief to 5% of our active borrowers. In addition, we cashed over $13 million of stimulus checks in the U.S. and Canada free of charge. We granted the majority of these concessions in April, so you'll see the financial impact in our second quarter. We're pleased to have been part of this solution for so many people under extreme stress during this unanticipated crisis. Our stores in the U.S. and Canada are considered essential and remain open to serve our customers, albeit with reduced hours, Monday through Saturday, 10:00 a.m. to 6:00 p.m. and provide some relief to our associates. In addition to loans, our customers use our stores to cash checks, pay bills, send money to family and friends and reload and use their debit cards and demand deposit accounts.

We've always been and will always be essential to our customers. Subsequently, we're deeply committed to providing our services with minimal disruption. We are pleased that across our 426 locations in the U.S. and Canada, we experienced temporary closures at only 19 locations. And last week alone, we processed more than 90,000 in-person transactions across our store network in North America. Of course, all in-person transactions are conducted with the health and safety of our customers and employees foremost in mind. We worked hard to protect the safety and well-being of our employees by enhancing cleaning protocols for all of our facilities and employees are adhering to strict social distancing and care guidelines in operating the stores. Nearly 100% of our employees in our corporate and contact centers in Wichita, Chicago and Toronto have been working from home since the end of March. We implemented an emergency leave pay plan to ensure that employees are paid when they're unable to work due to COVID-19. And we are paying stipends to our front-line teammates as additional relief. And finally, we've been paying all of our store personnel full-time wages regardless of scheduling changes that have come about because of COVID-19.

We have an enormously talented and tenured group of employees at CURO and while we continue to evaluate our appointed practices as the healthcare crisis unfolds, we believe that our business model and capital plan will allow us to keep our employees in place, serve our customers and prepare for a return to a more normalized business environment. On the demand side, as expected, we saw a meaningful reduction in new customer applications from reduced store traffic and lower online demand since the pandemic began. Resulting decline in origination volume, along with ongoing repayments, decreased our earning asset balances through April. Total owned and managed earning asset volumes declined 13% as of April 29 from 1st quarter balances. And by comparison, sequential monthly earning asset balances grew 1% last April. While we would prefer to see normal seasonal increases in loan applications and approvals, these trends are not surprising in this environment. Consumers appear to be borrowing and spending with much more caution and our loan application volumes have declined by approximately 60% since mid-March.

We have also increased minimum credit scores and added additional income and income and employment verification procedures, which have reduced our loan approval rate by more than 50%.In terms of credit quality, in the 4-week period beginning the week ending March 15, early stage delinquencies, which we define as one to 30 days late, increased on a sequential basis by approximately 35%, peaking on April 12. While it's still too early to tell the longer-range outcomes for delinquencies and net charge-offs, as of April 26, delinquencies have improved and are now only 14% higher than the comparable data as of March 15. Using the same sequential weekly data, Canadian delinquencies have declined over the past two weeks, but remain more elevated on a relative basis. We suspect this is related at least in part to the U.S.' earlier enactment of various economic stimulus measures. Roger will provide more detail on operating expenses and liquidity. However, it is important to note that our business model has an adequate margin of safety to accommodate a substantial increase in our loan loss provision without impacting our ability to generate pre-tax cash flows, which we define as pre-tax income plus depreciation and amortization. After taking into account expense reduction measures that Roger will discuss, that would generate $45 million to $50 million in annual savings, our loan loss provision would increase by could increase by 50% before our pre-tax cash flow would fall to zero.

In addition to the early results on delinquencies we previously mentioned, it is worth noting that during the 2007 to 2009 financial crisis, our loan loss provision increased by 11% during a period of sustained unemployment before it returned to more normalized levels. Finally, and while I don't want to date myself too much, I've been in the small-dollar lending industry for a long time, and this will be my fourth experience, helping to manage a business through an economic downturn. While the speed and severity of this decline is unlike anything we've seen before, my experience, which is shared by many members of the CURO leadership team is that subprime and underbanked consumers have consistently shown a greater ability to manage credit as measured by the relative change in our delinquency and charge-offs in an economic downturn on prime and near prime customers. We don't usually spend much time addressing the competitive landscape, but given the current environment, I think it bears some mention here. Our objective to keep our store contact center and corporate teams together during this crisis is motivated by our desire to do the right thing by our people and to ensure that we are prepared for when businesses reopen and the economy begins to recover.

While we expect this recovery to be muted at first, small-dollar lenders that serve underbanked consumers have generally performed well in the aftermath of broad economic downturns. That was the case for us and other lenders coming out of the '07 to '09 crisis. And looking ahead at recovery, we think that lenders like CURO that have scale, liquidity and access to capital, omni-channel operations that allow store customers to also use mobile and contact center solutions, geographic and product line diversification and little or no reliance on outsourced operations, particularly operations in other countries that may have a disproportionate or delayed impact from COVID-19, we think these lenders will fare better. Based on conversations within our industry and a limited review of available public company information, we believe all lenders have seen declines in originations and new customer counts. A fair number of small lenders are dramatically scaling back operations and engaging in broad layoffs and furloughs. Some of these lenders are even winding down or liquidating portfolios to conserve cash and reduce credit exposure. As I said earlier, the economic crisis won't end until healthcare crisis abates.

That said, we believe we are well prepared for a protracted downturn and positioned to benefit from a different competitive environment on the other side of this pandemic. On a related note, we believe that our relationship with Stride Bank is an important competitive advantage for CURO. Stride Bank licenses our underwriting, origination and servicing platforms to originate online installment loans. They have been offering pilot loans in two states and plan to expand in eight to 12 additional states over the next several months. To anticipate a question, we have no current plans to work with Stride to offer consumer loans in California. For our investors, we continue to make disciplined decisions while ensuring that we're well positioned to benefit on the eventual recovery. Shortly after quarter end, we closed on a new nonrecourse asset-backed credit facility in the U.S. and drew down $35.2 million based upon the eligible borrowing base of loans sold to the related SPV. Today, our nearest debt maturity is our senior revolver, which matures on June 30, 2021.

We also suspended our previously announced $25 million share repurchase program. As of April 29, we had a strong balance sheet, including over $230 million of unrestricted cash. Our Board of Directors declared a $0.055 per share second quarter cash dividend on common shares outstanding, which will be paid on May 27 to stockholders of record as of May 13. We'll continue to evaluate the dividend on a quarterly basis. Moving on to our first quarter results. For the quarter ended March 31, 2020, we posted revenue growth of just 1%, primarily due to the year-over-year impact of the California regulatory change that went into effect at the start of the year. Excluding the impact of our California installment loans, revenue grew 6.7% versus the year ago quarter. Adjusted EBITDA declined 9.7% to $65.8 million, and adjusted diluted earnings per share declined 3.8% to $0.77 per share for the quarter. These metrics include a $12 million or $0.21 per share impact for incremental loan loss provision or what normally would have been required as we strengthened our allowance for loan losses related to COVID-19 impact on delinquencies. While we increased the allowance by 13.7%, we have not yet seen the impact of COVID-19 on credit losses, as first quarter net charge-off rates improved approximately 70 basis points year-over-year.

In the U.S., revenue was down 1.9% from the prior year, and adjusted EBITDA decreased 6%. As a result of regulatory changes, we stopped originating installment loans in California on January 1, so these portfolios are in runoff. U.S. revenue outside of California grew year-over-year by 4.6%, primarily due to growth in our open-end loan portfolio. U.S. adjusted EBITDA included $5.3 million of incremental provision for Allowance Build. Loss rates in the U.S. rose 135 basis points, but that was almost entirely due to California runoff and a related mix shift for installment as well as a late quarter drop in Single-Pay loans that affected the denominator in the NCO rate for Single-Pay loans. In Canada, revenue grew 13.9% over the prior year quarter. Adjusted EBITDA of $8.3 million is down 29% versus the prior year quarter. First quarter 2020 included a $6.7 million incremental provision expense for Allowance Build. Net charge-off rates in Canada improved 95 basis points year-over-year. I'll close with a brief update on Katapult. As you may recall, we have a 43% ownership stake in Katapult, an online virtual lease-to-own business that primarily serves online retailers. Katapult's leasing volumes have increased over the past six weeks, even while it has like us, meaningfully tightened credit decisioning for new applications. Katapult was posting record daily origination volumes and higher approval rates, stay-at-home customers are shopping online and prime and near prime online financing providers are tightening credit.

And to date, has not seen any meaningful deterioration in its credit metrics. We think that the non-prime segment of the consumer durables market the Katapult serves is probably around a $50 billion category. And with its online integration, underwriting and servicing capabilities, we think that it continues to have a durable advantage over competitors that focus mainly on brick-and-mortar retailers. In summary, after a promising first two months, we ended Q1 2020 tackling the many challenges associated with the pandemic. I'd like to express my gratitude to our over 3,900 dedicated employees who continue to serve our customers day in and day out, regardless of the challenges or obstacles that they face. We continue to believe that the strength of our company lies in our people and our culture, and I've never been more proud of our employees than I am today. We're working hard to meet the challenges brought on by COVID-19 while continuing to care for our people and our customers.

And with that, I will turn it over to Roger.

Roger Dean -- Executive Vice President and Chief Financial Officer

Thanks, Don, and good morning, everyone. As Don mentioned earlier, consolidated revenue for the quarter was $280.8 million, up 1% compared with last year's first quarter. U.S. loan balances and revenue decreased 10.3% and 1.9%, respectively, year-over-year, primarily due to California portfolio repositioning in late 2019 and the runoff of that portfolio that began when we stopped originating California installment loans on January 1, 2020. Canada loan balances increased 19.3% on continued Open-End loan growth. Consolidated adjusted EBITDA came in at $65.8 million, down 9.7%, but this quarter included a $12 million charge for incremental provision expense for Allowance Build over what we would over what would have normally been required, as Don mentioned earlier. Consolidated adjusted net income and adjusted EPS for the quarter declined year-over-year by 15% and 3.8%, respectively, again, including the $12 million pre-tax or $0.21 per share of incremental loan loss provision for Allowance Build. From a high level, COVID-19-related unemployment and consumer behavior changes during the last half of March affected our financial results in three major areas.

First, loan volume and demand. We began tightening credit in mid-March. In addition, demand, as measured by application volume, declined as fewer customers visited our stores during the stay-at-home orders and, to a lesser extent, online application volume declined. Don already mentioned the sequential loan trends for April. Second, delinquency trends. As expected, given the timing of the unemployment trends and the lockdown orders late in the quarter, we did not see an impact on net charge-off rates in the first quarter from COVID-19. However, delinquencies rose at quarter end and through April, and that drove the $12 million of incremental provision loan loss provision expense for Allowance Build. Third, operating expense reductions. We took actions in mid-March to reduce operating expenses across several major categories, including advertising, variable compensation, a freeze on hiring, suspension of merit increases and savings from work-from-home initiatives. On a combined basis, these actions position us to drive $11 million to $13 million of quarterly cost reductions compared to our original operating plans. We intend to keep these expense measures in place until business volumes and operations begin to return to normal. Next, some brief comments on advertising customer counts and cost per funded loan, or CPF, before moving on to loan portfolio performance.

Year-over-year comparisons are challenging due to COVID-19 impacts as well as the fundamental shift in the composition and growth trends of our portfolios year-over-year. In the first quarter of 2019, especially in California and Canada, we acquired a high number of new customers compared to the first quarter of 2020. This drove a meaningful change year-over-year in advertising patterns and new customer accounts. So while metrics on new customer accounts are lower, they were generally anticipated as we slowed the pace of new customer acquisition. The number of new customer additions dropped considerably over the last two weeks of the quarter due to impacts early impacts of the COVID-19 pandemic. Looking at consolidated new customer counts. We added 113,800 new customers this quarter, that was down 7.3% from last year. Our site-to-store capability added 21,500 new customers during Q1. Breaking down advertising and new customers by country, starting with the U.S. U.S. advertising expense was $4.6 million, and that's up 72.3% over the same quarter a year ago. We've historically reduced advertising and customer acquisition seasonally in the first quarter of the year concentrated in February, considering the impact on customers of U.S. federal income tax refunds. In the first quarter of 2020, based on improved underwriting and evaluation of a seasonal opportunity, we increased advertising over prior levels through the tax refund season.

We then, of course, reduced advertising in the last three weeks of March 2020 due to COVID-19-related considerations. In total, new customer accounts were down 6.1% year-over-year, but that's primarily due to California and Ohio and to a lesser extent, in late March, the credit tightening. We stopped acquiring the installment loans in California in late in October of 2019 to prepare for the January 1, 2020, law change there. And our new customer volume in Ohio was lower after the April 2019 law change there. Moving on to Canada. Canadian advertising expense for the quarter was flat year-over-year as higher Open-End loan advertising was offset by mix shift and fewer first loan promotions for Single-Pay loans. Canada new customer accounts were down 13.1% for the first quarter of 2020 compared to the first quarter of 2019. This reflected the outsized growth of the Open-End portfolio in Ontario in the prior year and the overall shift from rapidly turning Single-Pay loans to longer-term Open-End loans in Canada. Next, I'll cover overall loan growth and portfolio performance. First, a few highlights at the product level. Company-owned unsecured installment loan balances declined $38.6 million or 23.9% versus the same quarter of last year. The decline was driven almost entirely by California portfolio repositioning and optimization. Non-California U.S. balances grew slightly, and Canadian unsecured installment balances shrank modestly, resulting in about flat balances year-over-year if you take out California. U.S. secured installment loan balances declined $8.7 million or 10.5% versus the same quarter last year, also reflecting the California portfolio optimization.

Excluding California, the portfolio grew 15.5% year-over-year. CSO loan balances were down $6 million year-over-year. But you'll recall that the law change in Ohio that eliminated the CSO model became effective in April of 2019. Subsequently, the CSO balances in Ohio have runoff, while balances in Texas are effectively flat year-over-year. Open-End loan balances grew 30.4% year-over-year. Both the U.S. and Canada each grew by about 30% as reported on a U.S. dollar basis, but on a constant currency basis, Canadian Open-End loan balances grew 39.5%.Looking at Single-Pay. Canadian Single-Pay balances declined $9.6 million or 28.7% versus the same quarter a year ago on mix shift. U.S. Single-Pay loan balances declined $5.4 million or 15% year-over-year. Single-Pay products in general and especially in Canada, are more sensitive to store traffic, and as such, loan volumes were significantly impacted by COVID-19 over the last three weeks of the quarter. Moving on to loan loss reserves and credit quality. Our consolidated net charge-off rate improved 70 basis points versus the first quarter of 2019. Looking at credit metrics by product.

Open-End net charge-off rates improved by 155 basis points year-over-year. The positive effect of Canadian Open-End seasoning was partially offset by an increase for Open-End NCO rate in the U.S. from a combination of loan growth, mix shift to more online volume and advertising channel shifts. Just a quick reminder that approximately 70% of our Canadian Open-End customers elect to purchase payment protection insurance, which covers their monthly payments in the event of job loss or disability. We have seen claims increase and at present, about 2.2% of customers with an insurance with insurance have made a claim that is being paid by the insurer, Canadian Premier Life. Canadian Premier Life is a subsidiary of Securian, a $63 billion asset, A-plus rated U.S. insurance company, so we have a very strong counterparty there. We have a sharing and retention agreement with CPL, so increased claims will reduce the net amount of ancillary revenue that we recognize on the sale of this product, while claims are elevated. CSO net charge-off rates improved 110 basis points versus the same quarter a year ago, partly because of higher relative loss rates in the former Ohio portfolio and better credit performance in Texas.

Unsecured and secured installment loan net charge-off rates were up 155 basis points and 150 basis points, respectively, and impacted negatively by the fact that the California portfolios are running off with shrinking balances. Single-Pay net charge-off rates rose 400 basis points year-over-year. Canada was up 550 basis points, while U.S. Single-Pay net charge-off rates rose 295 basis points year-over-year. Due to the significant late quarter declines in Single-Pay earning assets, the rate is distorted, as gross net charge-off dollars were driven by higher daily average loan balance than what existed at quarter end. One quick point on the CARES Act from a corporate perspective, the Act permits federal loss carrybacks to years in which the corporate tax rate was higher than today. Generally, years with a tax rate of 36% versus 21% today. We have approximately $60 million in net operating losses. So when we remeasured the value of those NOLs, we picked up a $9 million tax benefit in the quarter. But if you look at our tables, the benefit is excluded from our adjusted net income numbers. Turning to our capital structure and liquidity.

Don already covered the good news on our new U.S. nonrecourse SPV credit facility, so I won't repeat that here. We were also pleased to extend the maturity date on our U.S. senior revolver to June 30, 2021. As of April 29, we had over $230 million of unrestricted cash and nearly $70 million of availability on our revolving credit facilities. For the trailing 12 months ended March 31, 2020, we generated a little over $125 million of free cash flow from operations after funding loan growth and capital expenditures. As Don mentioned earlier, we suspended our share repurchase program, and we've also suspended all nonessential capital expenditures, including Canadian LendDirect store expansion that was previously planned. Based on our first quarter net income and the strong cash flows, we declared a quarterly dividend of $0.055 per share to shareholders of record as of May 13. We will continue to evaluate quarterly dividends as we move through 2020. Looking at our current liquidity position. Our operating cash flow generation capabilities and the availability of our four revolving credit facilities to fund future growth, we believe we have adequate liquidity to fund our business through 2021 under various scenarios without requiring access to the capital markets. We believe our strong liquidity position allows us to manage the near-term impacts of COVID-19, while positioning us for opportunities as we move closer to the eventual recovery.

This concludes our prepared remarks, and we'll now ask the operator to begin Q&A.

Questions and Answers:

Operator

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

Bob Napoli -- William Blair -- Analyst

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

Roger Dean -- Executive Vice President and Chief Financial Officer

No, no. I think the short answer is, no. But the only thing that's worth noting is, as you know, the ABL facility, the SPV facilities in Canada and the new one in the U.S. have asset performance requirements in them that would affect if those asset performance covenants aren't met, then it affects our ability to draw on the facility. Right, as of the end of April, we cleared the Canadian levels and the obviously, the Adalia facility that we just closed was underwritten and designed for the current environment. So but we're very obviously, we're managing very, very carefully around the performance requirements of the ABL facilities.

Bob Napoli -- William Blair -- Analyst

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

Don Gayhardt -- President and Chief Executive Officer

Bob, it's Don. Good to hear voice as well. Hope that everything's OK. I think you've correctly characterized the remarks about where we are and the headroom we have on pre-tax earnings. We don't break down and disclose all the covenants. As Roger said, we're managing it carefully. We're in good shape as at the end of April, and we feel like we've got the levels of set where we continue to perform well. And we have good relationships with Adalia this new U.S. facility and with Waterfall on the Canadian facility, been necessarily for a while with them. So we feel good about the ability to kind of manage through with those facilities intact.

Bob Napoli -- William Blair -- Analyst

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

Bill Baker -- Executive Vice President and Chief Operating Officer

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

Don Gayhardt -- President and Chief Executive Officer

Bob, just I just want to remember, we do get five weekly payments here. So we are getting a lot of payment data throughout the month. So we're not sort of sitting here waiting for the first of the month and hope is to clear. So that gives us a little more frequency of information. And as Bill said, the stuff that we've originated more recently, the first pay default data, that kind of stuff has held out there, which gives us. But we're still it's both a combination of both application reduction, demand reduction and our approval rate coming being basically kind of cut in half. So it's a pretty cautious approach right now.

Bob Napoli -- William Blair -- Analyst

Thank you. Appreciate it. Take care.

Don Gayhardt -- President and Chief Executive Officer

Thanks.

Operator

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

Moshe Orenbuch -- Credit Suisse -- Analyst

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

Don Gayhardt -- President and Chief Executive Officer

Moshe, it's Don. I'll sort of I'll take a first shot and then see the guys have any other comments. We feel good about the way both sort of the numbers that we see but also, we're we mentioned, we talked we have about 5% to 6% of the portfolio that we've help with various customer care measures. But also we get a lot of feedback from customers we talk to who aren't in customer care. And I think that we're kind of I think the first the I guess, the willingness of customers to sort of that communicate with us and stay kind of current on stuff and talk to us about what's going on is really kind of encouraging. So I think we've been sort of conservative in terms of how we're lending, we do a lot of customer care. And obviously, the economic stimulus measures, both in the U.S. and in Canada, both at the federal level and the state level, there's a lot of support there. So I think it's certainly I think as we start to look at our numbers and look at some of the other stuff that got publicly in terms of, I think most people kind of feeling those three things are kind of coming together to make credit kind of hold up in the current environment. In terms of demand, I think that it's what mostly what we're going to look for is that the economic data the macro data starts to kind of level off.

We don't obviously, I would say, we would like to see unemployment come down and then start to kind of level off. I think it's important we don't we're not waiting for a return to the economy we had on March 15 before we feel like we can be able to lend again. And it's more that we just see a little bit of stability in the overall data. And there's a as I talked about this internally, there, let's just imagine there was a pool of 100 customers that we thought would be good customers for us. And through the economic downturn, perhaps 6% to 10% of those customers wouldn't qualify now. But it still leaves a pool of 90 customers. And I think an environment where the competitive dynamic is going to be different, well, it won't be as many competitors that are looking to do business with those 90 customers. The other part that's hard that always happens and this is hard to sort of figure out is what happens to lenders who will kind of sit above us in like the FICO ladder, if you want to wonder it that way. And we certainly heard a number of the installment lenders talk about tightening of credit box, et cetera. And what they're doing is the bottom end of their FICO tiers, they're going to stop lending there.

So we think a lot of those customers are going to kind of use the pool again to be into the pool of customers that we would want to do business with. So I guess so we're looking for sort of a leveling off of sort of the macro data and some stability, but we're not looking for a return to what we had the economy had in March before we feel like we can begin to put more money into the advertising channel. So when that happens, again, that's all it's this is a healthcare-driven economic decline. And I can't certainly, some of this stuff looks promising in terms of some of the drug therapies and hopefully social distancing and the sort of these very measured back-to-work plans will make this a manageable problem and if you get into summer and into the fall, you can help get things back to school and certainly that will start to make things look and feel better.

Moshe Orenbuch -- Credit Suisse -- Analyst

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

Don Gayhardt -- President and Chief Executive Officer

Yes. I don't it's I don't again, it's just it's so hard to sort of forecast what's going to happen on employment. And obviously, we watch it on a state-by-state basis. I think some good news for us is that I think Nevada for us Nevada and California that seems to be meaningful for us are above the national average in terms of employment, unemployment as a percentage of the workforce there, the rest of the states that we're in are below that or the big states for us are below the national average. We talked about it. I think we have a we've got we've seen some good organic growth domestically in a number of states, particularly with our Open-End line of credit product. We continue to see I think we'll continue to see reasonable growth in that in Canada as well, is where we talked about 14% revenue growth in Canada in the quarter. That's obviously going to come down as kind of Canadian customers are acting the same way and acting very kind of cautiously and volumes are down. I think that we did mention Stride is we're expanding with Stride in sort of two pilot states. I think we'll have someone in the neighborhood and [Indecipherable]. I think we'll have four more states come online relatively soon. And we talked about, we'll have another eight to 10 that could come online before the end of the second quarter.

So we're but again, we're proceeding very cautiously with Stride in that program. But it's just the fact that we have the it's the mechanisms out there. It's operational. We have in some respect, we feel it's a good opportunity to sort of more gradually sort of test that entire platform to make sure that it works well for us and works well for the bank from a payment standpoint, the reconciliation settlements, all that stuff really work well. So I think we have a lot of good things going. And the pipeline, I think, is working well and when there's demand to fill it up, I think it's going to I think it will be there for us and work well for us. So it's nothing present in the current period, we're sort of we're OK, watching the cash balances continue to build and give us the best chance to be to manage through an extended downturn, and then really be ready when demand and when businesses start to reopen and demand starts to look and feel better. I know it's not a great answer, but a lot I keep saying internally, people tell me when the healthcare prices are going to abate, and I'll tell you when we can when our volumes will start to move in the right direction.

Moshe Orenbuch -- Credit Suisse -- Analyst

Thanks.

Operator

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

John Rowan -- Janney -- Analyst

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

Roger Dean -- Executive Vice President and Chief Financial Officer

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

John Rowan -- Janney -- Analyst

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

Roger Dean -- Executive Vice President and Chief Financial Officer

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

John Rowan -- Janney -- Analyst

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

Don Gayhardt -- President and Chief Executive Officer

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

John Rowan -- Janney -- Analyst

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

Don Gayhardt -- President and Chief Executive Officer

That's right, yes.

Roger Dean -- Executive Vice President and Chief Financial Officer

Correct.

John Rowan -- Janney -- Analyst

Okay, all right. That's it from me. Thank you.

Roger Dean -- Executive Vice President and Chief Financial Officer

Okay, thank you.

Operator

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

Vincent Caintic -- Stephens -- Analyst

Hey, thanks, good morning guys. Hope all of you are well. So first, I wanted to talk about your omni-channel and the benefits of that. If you could share any statistics you have about how many of your customers are online? Or are there any trends there? So maybe in this time, are we seeing growth in online transactions and versus what you're seeing brick-and-mortar? And just to confirm that you're actually able to completely close and service your loans online or digitally.

Bill Baker -- Executive Vice President and Chief Operating Officer

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

Vincent Caintic -- Stephens -- Analyst

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

Roger Dean -- Executive Vice President and Chief Financial Officer

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

Vincent Caintic -- Stephens -- Analyst

Okay. Great. And just one last one for me. So I understand we've only been a few weeks since this coronavirus crisis, but how quickly do your underwriting models adjust to everything? So do you feel like your models have picked everything up and you're able to underrate?

Bill Baker -- Executive Vice President and Chief Operating Officer

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

Don Gayhardt -- President and Chief Executive Officer

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

Vincent Caintic -- Stephens -- Analyst

Perfect, thanks for the color and, thanks so much guys.

Operator

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

Don Gayhardt -- President and Chief Executive Officer

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

Operator

[Operator Closing Remarks]

Duration: 58 minutes

Call participants:

Gar Jackson -- Investor Relations

Don Gayhardt -- President and Chief Executive Officer

Roger Dean -- Executive Vice President and Chief Financial Officer

Bill Baker -- Executive Vice President and Chief Operating Officer

Bob Napoli -- William Blair -- Analyst

Moshe Orenbuch -- Credit Suisse -- Analyst

John Rowan -- Janney -- Analyst

Vincent Caintic -- Stephens -- Analyst

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