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On Deck Capital (NYSE:ONDK)
Q1 2020 Earnings Call
Apr 30, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Ladies and gentlemen, thank you for standing by, and welcome to the OnDeck first-quarter 2020 earnings conference call. [Operator instructions] I would now like to hand the conference over to your speaker for today, Steve Klimas, head of investor relations. Please go ahead.

Steve Klimas -- Head of Investor Relations

Thank you, Jack, and good morning, everyone. Welcome to OnDeck's first-quarter earnings call. Joining me on the call this morning are Noah Breslow, our chief executive officer; Ken Brause, our chief financial officer; and Nick Brown, our chief risk officer. Our earnings release was issued earlier this morning and is available with our earnings presentation and financial supplement in the Investor Relations section of our website.

Certain statements, including those relating to our outlook for 2020, are forward-looking statements. They are not facts and are subject to material risks and uncertainties described in our SEC filings. These statements are based on currently available information, and we undertake no duty to update them, except as required by law. Today's discussion is also subject to the forward-looking statement limitations in the earnings release, and our actual results could differ materially and adversely from those anticipated.

During this call, we will use terms defined in the earnings release and refer to non-GAAP financial measures. For definitions and reconciliations to GAAP, please refer to the non-GAAP tables in the earnings release and the appendix of the earnings presentation on our website. With that, I'll turn the call over to Noah.

Noah Breslow -- Chief Executive Officer

Thank you, Steve, and thank you all for joining us today. We came into the year well-positioned to grow our core U.S. lending business and execute on our strategic priorities, and for the first two and a half months of the first quarter, it was business as usual, and we were executing well. However, as the COVID-19 spread accelerated, and its effects on Main Street businesses started to take hold, it became evident that 2020 was going to be a very different year in just about every respect.

So we are going to have a different flow today to reflect the realities of the environment. Ken will walk through our first-quarter results a little later in the call, but rather than spend our time looking back, we thought we would focus on two general areas: first, what we are seeing in the business today; and second, what we are doing to address it and position OnDeck for the future. To that end, I will start the call with our overall COVID-19 update and response, then I will turn the call over to Nick Brown, our chief risk officer, to provide a more granular view of portfolio performance and insight into our reserve methodology. We will then turn the call to Ken, who will review our first-quarter results and provide an update on liquidity and funding.

And finally, before opening the call to take your questions, I will share with you how we have modified our strategic priorities to respond to the current environment. As COVID began to spread in the U.S., we were early movers in transitioning to a fully remote workforce. Our Midtown, New York office was the first to go fully remote on March 10, and then our Denver, Colorado, Arlington, Virginia, and international offices in Canada and Australia followed suit shortly thereafter. I could not be prouder of the way our team has banded together to get this done almost seamlessly.

We have been working remotely for nearly eight weeks now, and the transition has gone smoothly. From a customer perspective, we saw no material change in customer payment patterns, borrower behavior, or loan demand through mid-March. Beginning in the third week of March, we started to see an increase in call volume into our customer service center, almost exclusively driven by COVID-related concerns. Initially, many of the inbound calls were proactive in nature, small business owners trying to understand what flexibility they would have if things got worse and cash flow tightened.

But the conversations quickly change to discussions about the impact on our customers' business of COVID-19 and their need for payment relief. Our inbound call and email volume peaked at approximately six times normal levels in the second week of April as stay-at-home and business closure ordered spread throughout the country. Inbound volume has come down significantly since then but is still running higher than pre-crisis levels. In mid- to late March, we also saw a surge in new loan applications and line of credit draws as borrowers anticipated needing cash for the slowing of economic activity and the lockdowns that were coming.

Recognizing that these requests carried a higher degree of risk, we proactively tightened credit policies and slowed originations dramatically. We suspended new originations to certain industries, limited draws on certain customer lines of credit, tightened underwriting standards, as described in our 8-K of March 23. Turning to portfolio performance, and Nick will go into much greater detail on this shortly. Unsurprisingly, we have seen reduced principal and interest collections that are resulting in higher delinquency rates.

As of March 31, our 15-plus delinquency rate was up 130 basis points from year-end. But if you look at our detailed disclosures in the financial supplement posted on our website, our one-day to 14-day delinquency, which normally runs about 2% to 3%, increased to nearly 17% at March 31. So you can see how the COVID impact started to work its way through the portfolio. We also announced in March that our top near-term priorities shifted to enhancing liquidity and protecting our financial resources, and we'll go into more detail here.

But we have been proactively working with our lenders to amend certain of our debt facilities and have made good progress. We are continuing to serve and support our existing customers and are selectively lending to them. However, the preservation of liquidity and capital in this environment are of paramount importance. And so we have significantly dialed back new origination volumes and expect to originate less than 20% of our normal quarterly volumes for the second quarter.

For the very near term, we will be pausing new term loan and line of credit originations as we focus our resources on serving our existing customers and supporting the PPP program, including facilitating PPP loans for current customers. We've also taken aggressive measures to immediately reduce costs in the second quarter by over $10 million in our U.S. business and $3 million in our international businesses, which should drive overall operating expenses about 25% lower than they were in the first quarter. Actions taken include an almost complete elimination of marketing spend, a significant reduction in other discretionary costs, and broad-based employee actions, including a hiring freeze and the placement of approximately 30% of employees on part-time or furlough status.

Those remaining full-time are taking a 15% salary reduction, and I am taking a 30% cut. The board also reduced its compensation by 30%. We decided to take an approach that enabled us to act quickly and that gives us maximum optionality while preserving franchise value in this uncertain environment. We implemented these changes for a 90-day period, after which point, we can scale the business back up if the environment warrants, continue the austerity program or make more permanent changes to the cost structure, if appropriate.

With that, I'm going to turn the call over to Nick, but we'll be back to provide an update on our key business focus areas in the coming months before opening the call for questions.

Nick Brown -- Chief Risk Officer

Thank you, Noah. I am glad to be here this morning to provide some more insight into our portfolio composition, brands and strategy for managing through this unprecedented small business-lending environment. For those reviewing our earnings presentation, Slide 8 through Slide 10 provides some context to the trends that I'll be discussing. Portfolio performance in January and February was in line with the trends we described on our fourth-quarter earnings call.

Specifically, we did see some softness in the wholesale trade manufacturing and transportation industry, but the portfolio overall was performing in line with our expectations. Then, as Noah said, things started to change in March. Initially, we saw an increase in call volume and payment stress in the geographies initially impacted, like Seattle and New York, and in the industries most associated with discretionary spending, like travel, hotels, restaurants, and entertainment. And at the individual account level, we saw some of the late-stage delinquent accounts that had already been struggling to cure basically throw in the towel.

As a result, our first-quarter charge-offs were elevated despite the broad-based pressure from COVID not emerging until much later in the quarter. Now as you can see on Slide 9, we have a very diverse portfolio with a broad spread of risk. Our portfolio metrics coming into the year were as strong as ever in terms of weighted average business credit score, customer revenue and time in business. But this pandemic is adversely impacting nearly all small businesses.

It is just the degree of impact that differs. To that end, we summarized for you the areas of the portfolio by the most to the least pressure in terms of increased delinquency. Probably not a surprise to anyone, but the accommodations and food services industry is under the most pressure in our portfolio. Conversely, professional service sectors related to science, healthcare, and technology are least impacted.

But to be clear, delinquency is up from year-end in all industry sectors. It is this differentiated view of industry and customer performance that it is informing our current underwriting decisions and estimates of expected losses. Before I get into the specifics behind how we determine the appropriate first-quarter credit reserve, I want to spend a minute on the quality of our data. We track and we disclose delinquency metrics for accounts one-day plus.

We also track it internally by industry, geography and product, which provide real-time data to inform real-time decisions. That compares to industry norms for reporting commencing at 30 days or more past due, which lets us respond faster and more precisely than others. So now let's get into our allowance for credit losses. First, our adoption of CECL standard on January 1 had little impact on the starting reserve level for the quarter.

In fact, we saw a slight reduction in net required reserve day one as required reserves for our line of credits in the CECL standards were slightly less than what we were previously holding. For the vast majority of the $55 million or 36% reserves build in the first quarter was COVID-related. And we summarized our approach to estimating that reserve on Slide 10 of the earnings presentation. Essentially, we bifurcated the delinquent receivable pools into two groups: delinquencies that existed prior to March 11, which we define as the normal delinquencies; and delinquencies that occurred on or after March 11, which we define as the post-pandemic delinquency.

We further stratified the ladder into five distinct categories based on account status that ranges from those who may be behind on payments but are still making some, all the way through accounts that are in bankruptcy. We then set reserve levels based on expected lifetime loss for each of those cohorts. This culminated in a $206 million reserve at March 31 and a reserve ratio of over 16%, significantly higher than our usual reserve ratio of around 12%. Given the stress small businesses are experiencing from COVID, let me spend time sharing how we are working with customers.

It is in our customers' and the company's best interest to maintain a paying relationship, and this belief guided our approach. We are proactively reaching out to COVID impacted customers, and offering temporary payment reductions, payment deferrals or term extensions. Concurrently, our one-plus delinquency increased from 28% at March 31 to approximately 45% today, but over 40% of the delinquent book is currently in a paying relationship, meaning we have received payment within the prior seven days for that population. So while delinquency is high, we are still receiving payments from nearly 80% of our portfolio today.

Also, while I am hesitant to be overly optimistic in such an uncertain environment, we had our first daily decline in delinquency inventory on April 23, and the trend has continued into this week, so that is encouraging. Finally, I will update you on our portfolio management strategies, essentially what we are doing to mitigate future losses. As mentioned, we are actively managing collections and offering flexible repayment options to our existing customers. That includes restructuring loan terms to reduce payment stress and offering grace days or forbearance to certain accounts when warranted.

We have been focused on maximizing collectability from existing accounts and maximizing near-term cash retention. Net cash out on renewal loans has been significantly reduced, and we have restricted draws on certain lines of credit. And finally, we recently paused new origination of our traditional products to allow us to focus on helping provide access to PPP loans for our and additional small business customers in dire need across the U.S. With that, I'll turn it over to Ken to walk through the first-quarter financial results and give an update on our liquidity funding and capital position.

Ken Brause -- Chief Financial Officer

Well, thanks, Nick, and morning to everyone. After seven consecutive quarters of profitability, we reported a net loss in the first quarter of $59 million or $0.94 per diluted share, which was primarily driven by the higher provision expense that Nick just walked through. Loans and finance receivables grew 2% sequentially to $1.3 billion, driven by growth in lines of credit balances as origination volumes of $592 million was down 4% from the fourth quarter. As previously mentioned, we tightened underwriting to reduce origination volume in the second half of March.

Gross revenue was $111 million, essentially flat with the prior quarter, as loan growth and an increase in other revenue was offset by a decline in portfolio yield. Portfolio yield declined 150 basis points sequentially to 33.3%, reflecting the higher past due balances and a lower blended yield on new originations. Interest expense increased from the prior quarter to $12 million, reflecting higher debt balances to fund portfolio growth, share repurchases and enhanced liquidity. Our cost of funds rate was flat with the prior quarter at 4.8% as the reduction in market interest rates that occurred in March didn't benefit first-quarter interest costs.

As a result, net interest margin declined to 27.6% due to the lower yield on the portfolio, increased leverage and a higher proportion of cash and interest-earning assets. And the slight sequential increase in other revenue was driven by ODX, reflecting growing revenues from new customers. Now turning to credit. Our provision for credit losses was $108 million, up $64 million sequentially due to the increase in the allowance for credit losses related to COVID-19.

The March 31 allowance for credit losses of $206 million represented 16% of loans. The first-quarter net charge-off ratio increased to 15.8%, reflecting higher gross charge-offs and reduced recoveries largely related to late stage delinquencies. And our 15-day plus delinquency ratio increased 130 basis points from year-end to 10.3%, reflecting the broad-based decline in portfolio collections that started in mid-March. Operating expenses decreased to $51 million, down $3 million from the prior quarter, which included some discrete items such as elevated expenses.

Both our efficiency ratio and adjusted efficiency ratio improved to 46% and 45%, respectively. As Noah mentioned, we quickly took actions in April to reduce operating expenses by over $13 million or approximately 25% in the second quarter. About $10 million of the reduction is in the U.S. and is split evenly between people costs and other items, with the remaining $3 million from our international operations.

Finally, we recorded no income tax benefit in the first quarter given current uncertainties around full-year forecast for taxable income. Turning to the balance sheet. At quarter-end, our committed debt facilities totaled $1.3 billion, and cash and equivalents was $121 million, up $65 million from year-end. In March, we amended and extended our Canadian borrowing facility, increasing committed capacity by CAD15 million from the prior facility.

Our liquidity and funding position became our top priority as the COVID crisis emerged. We quickly took actions to bolster our available cash, fully drawing on our corporate line, and managing both origination and operating cost outflows. Our cash position today is basically unchanged from where it was at quarter-end. We have made significant improvements in our funding profile over the past few years, including the elimination of cross defaults in our warehouse facilities.

We have a strong and diverse group of lenders and are proactively working with them to amend our debt facilities. These amendments will enable us to remain in compliance with performance in other criteria in light of increased delinquency in other portfolio dynamics that result from COVID-impacted loans. We completed the amendment of the Pioneers Gate facility earlier this week, and discussions with other warehouse lenders are progressing. While these actions will likely reduce our immediate borrowing capacity, we do not envision requiring incremental liquidity, given the significant reductions in near-term originations.

We began the year with a strong capital position, providing us flexibility as we navigate through this challenging period. As a result of the current-period loss and share repurchases completed in January and February, OnDeck stockholders' equity declined to $212 million, down $82 million from year-end, representing 17% of assets. Book value per diluted common share was $3.49 at quarter-end. Our diluted share count decreased to 60.8 million shares from 69 million at year-end and 79.5 million shares a year ago as a result of our share buyback activities.

We stopped repurchasing shares in late February. However, our authorization to resume repurchases remains. We are focused on maintaining our capital and liquidity, which will likely involve shrinking the loan portfolio and debt balances. Before I turn the call back to Noah for closing remarks, I want to share some thoughts on our near-term outlook.

Given the ongoing uncertainties, we are not providing second-quarter or updated 2020 financial guidance at this time. However, as mentioned in the press release, we expect our financial results to reflect the following trends, portfolio contraction, reflecting an over 80% reduction in the second-quarter origination volume, increased delinquency and charge-offs stemming from related economic deterioration, reduced net interest margin, reflecting a lower portfolio yield, and reduced operating expenses, reflecting our recent actions. Our allowance for credit losses and financial outlook for 2020 assume the macroeconomic, small business lending and capital market environments remain stressed in the near term with a recovery beginning in the second half of 2020. With that, I'll turn the call back to Noah for some closing thoughts.

Noah Breslow -- Chief Executive Officer

Thanks, Ken. Clearly, the COVID pandemic is having a profound impact on all of us, and it is impacting our near-term business strategies and focus. We entered 2020 focused on our strategic priorities of enhancing and growing our core U.S. lending business, transitioning our international operations to profitability, building our equipment finance capabilities and portfolio, scaling ODX and obtaining a bank charter while improving the capital efficiency.

While our confidence in these strategies for the long-term has not changed, we are adapting our near-term focus. We will continue to support our customers to the best of our ability because it is through those relationships that we will ultimately succeed as a company, but our 2020 focus is no longer on growth in the core business or our adjacencies. Rather, our current focus is on improving cash flow and mitigating risk for our small business customers and ourselves alike. On the customer side, we are encouraged by the significant amount of stimulus being offered to small businesses.

We are uniquely positioned to assist in getting these vital funds into the hands of small business owners, including a significant number of our current customers, quickly and efficiently. We have been participating in the SBA Paycheck Protection Program initially as an agent through partnerships with SBA lender banks. Applications processed in the first round of PPP funding were de minimis, but we are processing increased volume as an agent in round two and are working with the Fed to access its PPP lending facility, which would enable us to become a direct lender. Regardless of our direct participation in the PPP, we believe our ability to guide our clients to the PPP loan product and other government stimulus support programs will benefit current portfolio performance.

And processing PPP loans for non-customers will create a positive affiliation with the OnDeck brand that will serve us well in the future. Internally, our top focus is liquidity and capital preservation. We are slowing originations and have suspended all equipment finance lending, not because we don't like the asset class but because we haven't yet created dedicated financing for this product. And our international operations are following a very similar playbook in terms of curtailing originations and cutting expenses in response to a similar, albeit less severe, economic backdrop.

Conversely, as you might expect, ODX is seeing a spike in interest in leveraging its online lending platform. We signed another client, a top 40 bank in the first quarter who accelerated their vendor selection process in response to the crisis. That said, traditional lending volume from existing partners is down in concert with overall industrywide small business lending volume. We have decided to pause our efforts to obtain a bank charter in order to focus on our core business operations, and we suspended share repurchase activity in late February to preserve liquidity and capital.

Finally, this challenging and dynamic operating environment clearly has a very direct impact on the small business lending landscape in which we operate, creating near term headwinds, as well as long-term opportunities including potential consolidation within our industry. We continue to work with our board to explore all options to maximize shareholder value. During this period, we remain focused on helping our small business customers manage through this crisis and committed to we are committed is maintaining transparency with all stakeholders as we take the steps necessary to position the business, to navigate this rapidly changing environment. And now will turn the call back to the operator for your questions.

Questions & Answers:


Operator

Certainly. [Operator instructions] Eric Wasserstrom with UBS, your line is open.

Eric Wasserstrom -- UBS -- Analyst

Thanks. Can you hear me OK?

Noah Breslow -- Chief Executive Officer

Yes, we can, Eric. Good morning.

Eric Wasserstrom -- UBS -- Analyst

Good morning. First, let me preface my comments by saying that my hat is off to you and to every member of the OnDeck team for managing through what must be unimaginably difficult circumstances.

Noah Breslow -- Chief Executive Officer

We appreciate it, Eric. Thank you.

Eric Wasserstrom -- UBS -- Analyst

I guess my first question, a couple of points of clarification but then a more of a strategic question. Just on the point of clarification, and I know you indicated and the chart indicated that you're one-plus day to past due ended the quarter of '17, but can you give us a sense of where that figure is at this moment?

Noah Breslow -- Chief Executive Officer

Yes, we can. Nick, do you want to take that one?

Nick Brown -- Chief Risk Officer

Sure. So our delinquency has continued to rise up until the last few days in April, and today, our one-plus delinquency sits at about 45% now. As I mentioned, that is a different number than the number of customers that are not paying us because nearly 80% of our portfolio continues to make payments and have made payments within the last seven days. But the one-plus delinquency is sitting at 45% approximately.

Eric Wasserstrom -- UBS -- Analyst

Got it. And just, Nick, on that last point, can you give a sense of how many of the paying customers are paying a full amount versus a partial or reduced figure?

Nick Brown -- Chief Risk Officer

Yes. In our collections programs, most customers are paying somewhere between 50% and 75%. So out of that 45% delinquent population, the 40% of them that are making payments are paying again between 50% and 75%. There are a handful of customers that are paying down as low as 25%, but again, that's very rare.

Most of the customers that are having extreme cash flow difficulties are asking for a short-term deferral of two to four weeks as opposed to greatly reduced payments.

Eric Wasserstrom -- UBS -- Analyst

Got it. OK. Thank you. And I guess, Noah, my strategic question -- and you addressed some of these topics, but if I might just come back to it.

In many senses, of course, this is the perfect storm for small business, and it's difficult to conceive of how something could be worse than this circumstance. But what do you think? Does this, in any way, create changes to what you considered previously as the priorities? Or does it change the scope in contour of OnDeck's focus when we inevitably and hopefully soon enter some form of recovery?

Noah Breslow -- Chief Executive Officer

It's a good question, Eric. And certainly, the last section of my prepared remarks got to this, and I think one sort of obvious piece is some of the strategic initiatives we have been pursuing at the end of last year coming into the early part of 2020 such as the bank charter we put on hold. So the immediate focus, really, is working with our customers, bringing collectability and collections up in the portfolio, managing liquidity and positioning ourselves to grow with our customers on the other side of this. I think we've taken similar cost-reduction actions in our international businesses and in ODX as well to sort of manage through the next kind of 90-day period.

It's probably too early for us to comment on the longer-term strategic implication with COVID, but we don't anticipate the world to be exactly the same coming out of it as it was going in. And I think what's good about our business is we can adapt it. And particularly the shape of the portfolio, the industries we lend to, sort of the structure, duration of our loans, our product structures, we can be pretty nimble there, and I think we'll be able to adapt to the recovery when that starts to take hold.

Eric Wasserstrom -- UBS -- Analyst

Thanks very much for taking my questions.

Operator

Steven Kwok with KBW, your line is open.

Steven Kwok -- KBW -- Analyst

Hi. Thanks for taking my questions. Hope everyone is safe and well. Our first question is just around if you could drill down a little bit more on your economic assumptions that you're using for the reserve rates.

Noah Breslow -- Chief Executive Officer

Sure, Steven. Nick, would you like to take that?

Nick Brown -- Chief Risk Officer

Absolutely. So generally speaking, we have a similar forecast as most of the financial services. The specific scenario that we were using was the one that Moody's put out in the very last few days of March and that assumes that Q1 goes down slightly, Q2 goes down severely. And from that very, very low base you start building up in Q3 and Q4.

Steven Kwok -- KBW -- Analyst

Right. And within your reserves, are you taking in any of your own estimates around how things will be? And on top of that, any potential benefits from government actions that has been taken?

Noah Breslow -- Chief Executive Officer

So yes and no. When it comes to the overall stimulus impact, we do believe that that's part of what helps the third quarter and the fourth quarter start to recover again. Otherwise, it would potentially be a longer period than that. But we have not assumed specific benefits for the PPP program.

We still need to see how that manifests itself and how many customers get benefited from that, so that is not assumed as a benefit in our numbers.

Steven Kwok -- KBW -- Analyst

And just my last question as a follow-up for the PPP program. How big can that eventually be? I know you said currently it's de minimis, but it should grow over time. So just wanted to see if you can provide a little bit more color around that.

Noah Breslow -- Chief Executive Officer

Do you want to take that one?

Ken Brause -- Chief Financial Officer

Sure. I will take that one. Yes, no problem. Yes, in tranche 1, our participation was pretty de minimis.

Fintech, we're really only set up to participate at the very end of when the funds were available. But in tranche 2, we're able to process more volume. I would caution that we don't expect a huge revenue impact from this. We are serving as an agent to SBA-enabled banks, but we are working with a significant fraction of our customers to help them access PPP loans, as well as a decent number of non-customers as well.

I will say two data points to be aware of. One is we did a survey of our customers and prior customers earlier this week, and we had about 1,600 responses, which is pretty good for our quick survey like that. And we found that 15% of the folks we surveyed had received PPP funding, and so I assume that's mostly from the first tranche. However, over 80% of the customers said they have applied or will be applying for a PPP loan.

So hopefully, that number of customers who gets funded comes up substantially in the second tranche and the risk talk of a third tranche as well. So we haven't assumed, as Nick noted, anything in our reserve methodology around that. But as we get more data in the second quarter on who's received these loans and how that impacts their payment behavior and their survivability, we may update that going forward.

Steven Kwok -- KBW -- Analyst

Great. Thanks for taking the questions.

Operator

John Rowan with Janney, your line is open.

John Rowan -- Janney Montgomery Scott LLC -- Analyst

Good morning, guys. So I just want to make sure I understand. You obviously built a reserve at the end of Q1. I just want to make sure that that was for the outlook as of the end of Q1.

And obviously, things have gotten worse, just given the one-day delinquency bucket. Will there be another reserve build in Q2?

Noah Breslow -- Chief Executive Officer

Ken, do you want to take that one, or if you want to take it, Nick?

Nick Brown -- Chief Risk Officer

I'll take that question, Noah.

Noah Breslow -- Chief Executive Officer

You want to take it, Nick?

Ken Brause -- Chief Financial Officer

Nick, why don't you start? I can jump in then if I need to.

Nick Brown -- Chief Risk Officer

Sounds good. So yes, the reserve estimation that we did was based on the portfolio composition as of quarter-end. However, it did take into account the progression of deterioration that we expected afterward for those customers. So the deterioration that we've seen in terms of the economic environment, the impact on small businesses was all taken into account as part of that projection.

Obviously, the second quarter will be done based on the most current information at that point in time and if things get worse than our expectations that we would have a build. And if not, then we won't. But it did take into account the deterioration that we're seeing so far.

John Rowan -- Janney Montgomery Scott LLC -- Analyst

OK. And with originations going down substantially, how fast does the portfolio amortize off?

Noah Breslow -- Chief Executive Officer

Ken, do you want to take that one?

Ken Brause -- Chief Financial Officer

Yes, I can take that. It probably runs off at about 20%-25% in the quarter. And if you think about the average term loan a bit, a year or so.

John Rowan -- Janney Montgomery Scott LLC -- Analyst

OK. And then I know you guys gave the list of targeted industries that are "paying." Maybe I'm just curious, do you have a number for what percent of your customers are open and considered a central business versus what's considered non-essential business and therefore not operating?

Noah Breslow -- Chief Executive Officer

I don't think we have an exact number cut on essential versus non-essential. Internally, we do have industry groupings, and so the essential businesses are kind of in our most favorable industry grouping. But you know, as Nick said in his prepared remarks, we do expect most businesses to be affected from a delinquency perspective due to COVID, even if they are central businesses to some degree.

John Rowan -- Janney Montgomery Scott LLC -- Analyst

OK. All right. Thank you.

Operator

Steven Wald with Morgan Stanley, your line is open.

Steven Wald -- Morgan Stanley -- Analyst

Good morning, and I hope you guys are safe and healthy. Maybe just starting off on -- I know we touched about it on the stimulus and the PPP, but maybe just thinking about the effectiveness of it. I appreciate the customers survey and all of that, but as we think about how it's tangibly impacting delinquencies -- maybe this is more for Nick. I think you talked about the delinquency sort of maybe coming down a touch to the last few days.

Maybe if you could just walk us through how you're seeing stimulus effects coming into the results in terms of what you're seeing on the portfolio. Or if there isn't, could you just walk us through what you're seeing there in terms of cannibal impact from the stimulus?

Nick Brown -- Chief Risk Officer

Yes, I'd be happy to. So the first thing I would say is that so far, at least PPP has not had a large impact on our portfolio. We've had a handful of accounts who received PPP money, and that has certainly helped their position, and some of them have brought themselves current. But again, because of how that has distributed out across businesses in America, it hasn't necessarily hit the small businesses that we serve as fast as you would like.

What we are seeing is a lot of our customers were preserving capital. And as they start to be optimistic themselves about the future, they are now using the capital and cash that they had been preserving to start making their payments in increased fashion versus where they were doing it in the first two to three weeks. And that's been a lot of what we've seen with the backward role in our bucket. Those customers are really falling into increased optimism, and they're using cash that they had on hand.

Not a lot of them are seeing cash flows increase yet, but they are anticipating that, and they are becoming more optimistic.

Steven Wald -- Morgan Stanley -- Analyst

Got it. OK. And that brings me into the next question I have, which is as we think about the path out of here -- and it sounds like you all have outlined that there are sort of an expectation, maybe it's Moody's but also somewhat internally, second half starting the rebound as things get reopen over the next few months. But as we think about what that means, who you can lend to and where cash flows are going to be, it's been a lot of data out there about businesses, small businesses, particularly saying that they don't have cash beyond three months, and that's the majority of them.

But just thinking high level about where the growth can come back after you tail down originations over 80% in the second quarter. Who can you lend to coming out of this? So just from a philosophical perspective, how are you going to be thinking about that?

Noah Breslow -- Chief Executive Officer

I can talk a little bit about the initial thinking from an underwriting perspective. Obviously, we're a data-driven company, and so one of the things that we're doing is looking at the performance of our current book and which industries have been able to weather this. And the second thing we're looking at is when it comes to any type of recession, and this is an extreme recession, but it is still a recession, small businesses tend to go early. And they come back faster, and that is because they modified the business model to adapt to whatever those new structural characteristics coming out of a recession are.

So we are going to be looking for the industries and the businesses that demonstrate an ability to adapt to whatever that new normal is in terms of what those are right now. Obviously, we have some thoughts, but it is very speculative because it's very early, and the recovery hasn't happened yet.

Steven Wald -- Morgan Stanley -- Analyst

Understood. OK. That's very helpful. And then maybe if I could just squeeze in one more.

On Slide 10, you guys talked about the breakdown of the unpaid balance in terms of COVID impacted versus normal. I just want to make sure I'm understanding how that's laid out in the 82% of "normal bucket." Would that be normal in terms of fully healthy or normal in terms of fitting the risk parameters of the -- I guess you were in the sort of 12% to 14% net charge-off range on those types of loans.

Nick Brown -- Chief Risk Officer

So that's a great question, and I'm glad I can clarify that. So in the normal bucket, you have both customers that are very, very healthy, and they are still current as of today, as well as customers that were already starting to experience stress before COVID-9 hit. And therefore, our normal estimation and reserved approaches will, in a stressed environment, work for them, right? We use the normal CECL-stress approaches. For the COVID population, because it is somewhat idiosyncratic in nature, those are the ones that we are breaking into those five categories and using a different methodology to come up with the ALLL estimation.

Steven Wald -- Morgan Stanley -- Analyst

OK. Understood. And just maybe to clarify on that even further, the 82% bucket represents the type of normal stress that was like 12% to 14% losses in normal times, and the incremental 18% means that roughly 30% of the book is what you're sort of watching from a reserve methodology perspective.

Nick Brown -- Chief Risk Officer

Yes. Although even with the normal, because again, we believe that in a recession, our books still increased losses, we did stress the normal reserve for that population as well.

Steven Wald -- Morgan Stanley -- Analyst

Understood. OK. That's very helpful. Thank you.

Operator

David Scharf with JMP Securities, your line is open.

David Scharf -- JMP Securities --Analyst

Hi. Good morning. Thanks for taking my questions. I'll echo Eric's comments regarding your efforts, particularly for those of us not in New York.

We realize there's even added stress given just your geographic situation. Wondering along those lines, as it relates to the vertical breakdown that you provided, are there any unique geographic concentrations, particularly as it relates to this kind of odd staggered effort that we have in this country with no national policy toward reopening? Is there anything that's impacting kind of how you're thinking about the potential for coming out of the bottom in the third quarter in terms of big states like California being more conservative, states like Texas obviously looking to open up more aggressively?

Nick Brown -- Chief Risk Officer

Do you want me to take that one?

Ken Brause -- Chief Financial Officer

Go ahead, Nick. Yes.

Nick Brown -- Chief Risk Officer

So we are certainly monitoring and doing modeling around what characteristics are predictive of the risk expression in our portfolio, and there was some timing that was based on geographies. And we think that there might be some timing as well on the recovery side of things, but for the most part, geography hasn't proved to be a strong predictor of where the stress is being felt. Industry tends to be much stronger. We do believe that there will be some faster recovery in places that open up early if they do it in a smart way, but as of right now, geography isn't showing to be the stronger predictor.

It is industry.

David Scharf -- JMP Securities --Analyst

Got it. Got it. Makes sense. Just a mechanical question because I wasn't writing down some of the payment metrics quickly enough.

But as we think about the magnitude of the portfolio decline, June 30, it's potentially a trough, obviously with a 12-month average life. As you mentioned, it's, give or take, a 25% typical amortization rate, payment rate. But how much should we be thinking about reducing March 31 balances potentially given what current payment rates look like right now?

Nick Brown -- Chief Risk Officer

Ken, do you want to take that?

Ken Brause -- Chief Financial Officer

Sure. And again, as we said, we're not giving guidance specifically, but I think given some of the origination numbers that we provided, I think looking at balances dropping in the 15% to 20% range over the course of the quarter would certainly be in the realm of the possible. And again, a lot has to do with what happens later in the quarter for all the reasons that we just discussed. If we're able to reopen, we will see balances grow.

If things stay closed longer and we need to continue to tamp down originations, we'll continue to see the run-off.

David Scharf -- JMP Securities --Analyst

Understood. Yes, it was more magnitude of kind of the near-term amortization rate based on late April trends. Lastly, Ken, not to delve into too much of your existing discussions with lenders, but based on the maturities that are listed on Slide 13, I mean, it looks like close to 60% of your US balances right now mature within 12 months, March-April 2022, some at the end of this year. And our most -- I mean, is the near-term focus on your negotiations simply some covenant relief modification of event triggers? Or are you seeking and hoping to be able to extend maturities at this point?

Ken Brause -- Chief Financial Officer

So good question. And I'd say the focus, as I've indicated in my remarks, it's really about the near term, right? So when these facilities were put in place -- and again, thank you for pointing out that. Again, we have nothing that is maturing in this calendar year, and there are some early next year. But nobody anticipated this type of scenario when these facilities were put in place, and so therefore -- and I don't want to get into the specific details, but there are different ways to approach us, whether it's just sort of the concept of a pause or the concept of some modification in criteria around performance that would take a little bit of leniency for some period of time for this affected population.

But the focus is managing through this bubble that we are seeing of COVID population and having a path forward. But I presume that when that path to earlier discussion, when the path forward becomes more clear, we would have follow-up conversations about, OK, now that we can see what the path looks like, to who we'll be lending, at what pace we'll be lending, the terms of those new loans. We would then be able to go back and have further conversations about what the appropriate structures and modifications might be to support that new approach.

David Scharf -- JMP Securities --Analyst

Got it. Understood. Thank you very much.

Operator

Melissa Wedel with JP Morgan, your line is open.

Melissa Wedel -- J.P. Morgan -- Analyst

Thanks. Good morning, everyone. I appreciate you taking the questions. I'd like to explore how you guys are thinking about setting a target reserve ratio.

I'm curious, at this point, is that going to be more impacted by macro factors or underlying fundamentals of your borrowers?

Ken Brause -- Chief Financial Officer

Nick, do you want to take that one?

Nick Brown -- Chief Risk Officer

Absolutely. So it's definitely both, and we are waiting very heavily in our methodology willingness to pay, as evidenced by the conversations with the customers and the level of accommodation that they are requesting. And then the shape of the recovery is obviously going to factor in for those customers that want to continue in a paying relationship whether they're going to be able to. So that is one of the balancing acts that we're doing in our reserve estimation, is trying to weigh in both the willingness and the ability to come up with a quantitative approach for each of those segments.

If I had to pick which one is more important in the short term given that it is a driver of whether they are working with us or not, I would say willingness to pay and then secondarily, the shape of the curve.

Melissa Wedel -- J.P. Morgan -- Analyst

OK. I appreciate that. And I guess as a follow-up, I want to make sure I have the right understanding of how you guys are -- who is being included in the DQ numbers right now because, obviously, those who aren't paying at all are going to be incorporated into that, I assume, unless they're receiving -- if they're receiving any kind of relief, deferred payments, how is that impacting the path into delinquency and through delinquency? And ultimately, how could that shape the timing of sort of peak charge-off?

Nick Brown -- Chief Risk Officer

Sure. So the way our reporting work, when the customers go onto a payment hold or a short-term deferral or if we enter into an agreement to make a reduced payment for a period of time, they still show as delinquent. Only when customers fully bring themselves back to current payment schedule amortization where they should be, that is when we would bring them to a non-delinquent status. So all of the customers on workout programs deferral partial payments, etc., are showing in that one-plus number.

So it's fully reflective of 100% of that population.

Melissa Wedel -- J.P. Morgan -- Analyst

OK. Got it. Thanks so much.

Operator

[Operator instructions] Your next question comes from Vincent Caintic with Stephens. Your line is open.

Vincent Caintic -- Stephens Inc. -- Analyst

Thanks. Good morning. First, I wanted to follow up especially on that point about what's considered on your DQ. So could you give us a sense of what sort of forbearance your customers are asking for? So for example, if they're asking for one-month forbearance, should we expect the one-day DQ numbers to drop significantly in the months from now? I don't know -- if you can just tell us from the DQ numbers, how many of those customers were current before going into maybe forbearance relief and, therefore, getting triggered for DQ?

Nick Brown -- Chief Risk Officer

Yes. So let me start with the second part of the question first. So normally, we run between 10% and 12% one-plus delinquency. So our delinquency has more than tripled from that point to where it is today, so it's a very unusual place for us to be at this level of delinquency.

And for those customers that are asking for forbearance or short-term deferral as we refer to it internally, those customers generally are asking for two to four weeks. And when they go back to making payments, even if they make their normal payment, they still would be marked as delinquent. Only if they do a catch-up program and make up the payments that they had missed would they then go back to a current data. So they will not jump back into current unless they make payments in excess of their normal payment schedule.

Vincent Caintic -- Stephens Inc. -- Analyst

OK. That's helpful. Thank you. For next question, just to talk about some of the discussions on the debt and the funding side.

Just to clarify, have there been any covenants triggered? And you mentioned some of the funds. I think the bonds amortizing down.

Ken Brause -- Chief Financial Officer

Vincent, this is Ken. I can take that. So, yes. So you're correct on the securitization that we have two series outstanding, an '18 series and a '19 series.

And just to clarify, the '18 series reached the end of its two-year revolving period at the end of March. You may recall that we had been in testing the ABS market in March and had attempted -- and we're looking to do a deal. But obviously, with the COVID situation, emerging markets were not receptive, and we allowed that securitization to go into its normal amortization as the revolving period ended. But at this point in time, we have not tripped any covenants or triggers, but that is why we are working diligently with our lenders to reach agreements as we're obviously looking forward and want to make sure that we don't reach that point.

And as I did mention, we are completed with one facility and we are in discussions and making good progress with the others.

Vincent Caintic -- Stephens Inc. -- Analyst

OK, great. Thank you. And one last one. Appreciate the help in sort of originations being down 80%.

And my question, assuming -- so you've stopped originations in your traditional products. So let's say 20% that you are originating, is that all PPP loans? Or should we be expecting any more, say, line of franchise from the customer system? Can you help in -- and what's the composition of the remaining originations you're seeing?

Noah Breslow -- Chief Executive Officer

Yes, I can take that one. Vince, this is Noah. So actually, the PPP loans are not counted in our originations numbers. We are serving as an agent for SBA banks right now, and we didn't model any direct lending into our projections, so that is a separate sort of bucket.

The 20% really is -- we did originate some of our term and lock products in the month of April, so it's including that. And we are expecting lock draws to continue, but those line of credit draws will be at a lower rate because many of our customers, again, are temporarily closed and not needing the capital. But we do expect those draws to increase as the quarter continues, so really focused on existing customers right now as opposed to new customers for both the term loan and the lock products.

Vincent Caintic -- Stephens Inc. -- Analyst

OK. Thank you. Very helpful. Thanks so much.

Operator

[Operator signoff]

Duration: 57 minutes

Call participants:

Steve Klimas -- Head of Investor Relations

Noah Breslow -- Chief Executive Officer

Nick Brown -- Chief Risk Officer

Ken Brause -- Chief Financial Officer

Eric Wasserstrom -- UBS -- Analyst

Steven Kwok -- KBW -- Analyst

John Rowan -- Janney Montgomery Scott LLC -- Analyst

Steven Wald -- Morgan Stanley -- Analyst

David Scharf -- JMP Securities --Analyst

Melissa Wedel -- J.P. Morgan -- Analyst

Vincent Caintic -- Stephens Inc. -- Analyst

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