Q1 2020 Earnings Call
Ladies and gentlemen, this is the operator your line is working on music cold.
Until the conference begins the conference will begin momentarily we thank you for your patience.
[music].
Ladies and gentlemen, thank you for standing by welcome to the Ondecks first quarter 2020 earnings Conference call.
This time, all participants are in a listen only mode.
After the speakers presentation, there will be a question and answer session to ask a question. During the session. You want me to press Star one on your telephone keypad. If you require any further assistance. Please press star zero. Thank you I would now like to hand, the converts over to your speaker for today, Steve climates head of Investor Relations. Please.
Go ahead.
Thank you Jack and good morning, everyone welcome to Ondecks first quarter earnings call.
Joining me on the call. This morning, our Noah Breslow, our Chief Executive Officer can browse, 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 supplements in the Investor Relations section of our web site.
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 FCC 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 statements limitations in the earnings release, and our actual results could differ materially and adversely from there was anticipated.
During this call we will use terms to find in 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 know.
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 half months of the first quarter. It was business as usual I mean, we're executing well.
However, as the Kobin 19 spread accelerated and its effect on main street businesses started to take hold it became evident the twentytwenty was going to be a very different year in just about every respect.
So we're going to have a different flow today to reflect the reality is that the environment.
Ken will walk through our first quarter results a little later in the call rather than spend their time looking back we thought we would focus on two general areas first what we're seeing in the business today.
And second what we're doing to address it and position on deck for the future.
So that it and I will start the call with our overall cobot 19 update in 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'll 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 or strategic priorities to respond to the current environment.
As Colin began to spread in the U.S., we were early movers in transitioning to a fully remote workforce.
Or mid town, New York Office was the first to go fully remote on March 10th.
And then our Denver, Colorado, Arlington, Virginia, and international offices in Canada, and Australia, followed suit for shortly thereafter.
I could not be prouder of the way our teams banded together to get this done almost seamlessly.
I've 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 coal volume into our customer service center almost exclusively driven by co good 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 types, but the conversations quickly change to discussions about the impact on our customers business of cobot 19, and their need for payment relief.
Our inbound call an E mail volume peaked at approximately six times normal levels in the second week of April.
Let's stay at home and business closure order spread throughout the country.
Inbound volume has come down significantly since that what 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 locked down but 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 March 20 Threerd.
Turning to portfolio performance and Nick will go into a much greater detail on the shortly.
Surprisingly, we have seen reduced principal and interest collections that are resulting in higher delinquency rates.
As of March 30, Onest, 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 or one to 14 day delinquency, which normally runs about 2% to 3% increased to nearly 17% at March 30, Onest. So you can see how the cobot impact starting to work its way through the portfolio.
We also announced in March that our top near term priority shifted to enhancing liquidity and protecting our financial resources.
And we'll go into more detail here, 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 our selectively lending to them.
However, the preservation of liquidity in capital in this environment are 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, you'll be pausing, new term loan and lot of credit originations as we focus our resources on serving our existing customers and supporting the P.P. program, including facilitating TPP loans for current customers.
We've also taken aggressive measures to immediately reduce costs in the second quarter by over $10 billion 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 including 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% cuts.
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 points we can scaled 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 generic 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.
Thank you know.
I'm glad to be here this morning to provide more insight into our portfolio composition.
Friend and strategy for managing through this unprecedented small business lending environment.
For those reviewing our earnings presentation slides eight or 10 provide some context to the trends that I'll be discussing.
Portfolio performance in January and February was in line with a trend we described on our fourth quarter earnings call.
Typically we did see some softness in the wholesale trade manufacturing and transportation industry.
The portfolio overall performing in line with our expectation.
Then there's no with said things started cutting Denmark. Initially we saw an increase in call volume and payment threaten the geography is initially impact like Seattle in New York and then the industry's most associated with discretionary spending like travel hotels restaurants and entertainment.
And that's an individual account level, we saw some of the late stage delinquent accounts that had already been struggling procure basically throwing the towel.
As a result, our first quarter charge off were elevated despite the broad based pressure from cobot not emerging until much later in the quarter.
Now as you can see on slide nine we have a very diverse portfolio with a broad right of risk our portfolio metrics coming into the year were strong as ever in terms of weighted average business credit score customer revenue and time and business.
But this pandemic is adversely impacting nearly all small businesses.
It is just the degree of impact that differ.
To that and we summarized for you the areas of the portfolio by the most of the lease 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 the science healthcare and technology or least impacted but to be clear delinquency is up from year end all industry sector.
It is this differentiated view of industry and customer performance.
That is informing our current underwriting decisions and estimates of the expected losses.
Before I get into the specifics behind how we determined the appropriate first quarter credit reserve I want to spend a minute on the quality of our data we track and we disclosed delinquency metrics for account one day plus.
We also track it internally by industry geography and product.
Provides real time data to inform real time decision.
That compares to industry norms reporting commencing at 30 days or more passive which left us respond faster and more precisely than others.
So now let's get into our allowance for credit losses.
First our adoption of diesel standard on January Onest had little impact on the starting reserve level for the quarter. In fact, we saw a slight reduction in that required reserves day. One is required reserve for a line of credit to the people standards were slightly less than what we were previously holding.
So the vast majority of the 55 million or 36% reserve build in the first quarter with coated 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 that the normal delinquencies and delinquencies that occurred on or after March 11, which we define that the post pandemic delinquency.
We further stratified the ladder.
Five distinct categories based on accounts that that ranges from those who may be behind on payments.
But are still making some all the way to accounts that are in bankruptcy.
We then set reserve levels based on expected lifetime loss for each of those cohort.
This culminated in a 206 million dollar reserve at March 30, Onest, and a reserve ratio over 16% significantly higher than our usual reserve ratio around 12%.
Given the stress small businesses are experiencing from co, but let me spend time sharing how we are working with customers.
It isn't our customers and the company's best interest to maintain a pain relationship.
And this the least guided our approach we are proactively reaching out to cobot impacted customer and offering temporary payment reduction.
Payment deferrals or term extension.
Concurrently are one plus delinquency increase from 28% at March 31st to approximately 45% today.
But over 40% of the delinquent book is currently in a paying relationship meaning we have received a payment within the prior seven days for that population.
Well delinquency is high we are still receiving payments from nearly 80% of our portfolio today.
Also well I'm hesitant to be overly optimistic in such an uncertain environment.
We had our first daily declined the delinquency inventory on April 23rd and the trend has continued into this week so that is encouraging.
Finally ill update you on our portfolio management strategies, essentially what we're doing to mitigate future losses.
As mentioned, we are actively managing collection and offering flexible repayment options to our existing customer.
That includes restructuring loan terms to reduce payment stress and offering grace days or forbearance, a certain accounts when warranted.
We've been focused on maximizing collectability from existing account and maximizing near term cash retention net cash out on renewal loads has been significantly reduced and we have restricted draws on certain lines of credit.
And finally, we recently pause new origination of our traditional products.
Allow us to focus on helping provide access to PPP loan 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.
Well, thanks, Nick and good morning, everyone.
After seven consecutive quarters of profitability, we reported a net loss in the first quarter of $59 million or 94 cents per diluted share.
Which was primarily driven by the higher provision expense that Nick just walk through.
Loans in finance receivables grew 2% sequentially to 1.3 billion driven by growth in lines of credit balances as origination volumes at 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 two balances and the lower blended yield on new originations.
Interest expense increased from the prior quarter to $12 million, reflecting higher debt balances to fund portfolio grew share repurchases and enhance 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 didnt benefits first quarter interest cost.
As a result, net interest margin declined to 27.6%.
Sure the lower yields on the portfolio.
Increased leverage and a higher proportion of cash interest earning assets.
And the slight sequential increase in other revenue was driven by LDX reflection growing revenues from new customers.
Turning to credit.
Provision for credit losses was $108 million up 64 million sequentially due to the increase for me allowance for credit losses related to cobot 19.
The March 30, Onest 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 reduce 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 base 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 an elevated expenses.
Both our efficiency ratio and adjusted efficiency ratio improved to 46% and 45% respectively.
As I 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 a split evenly between people cost and other items with the remaining 3 million from our international operations.
And 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 are committed debt facilities totaled $1.3 billion and cash and equivalents was $121 million up 65 million Premier ends.
In March we amended and extended our Canadian borrowing facility, increasing committed capacity by 15 million Canadian dollars from the prior facility.
Our liquidity in funding position became our top priority as the koby crisis emerged.
We quickly took actions to bolster our available cash.
Fully drawn 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 price profile over the past few years, including the elimination of cross defaults in our warehouse facilities.
We had 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 and other criteria in light of increased delinquency and other portfolio dynamics that result from cobot impacted loans.
We completed the amendment to the pioneer escape 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.
Advising 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 your end.
Representing 17% of assets.
Book value per common share 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, and a half million shares a year ago as a result of our share buyback activities.
We stopped repurchasing shares in late February however, our authorization to receive repurchases remains.
We are focused on maintaining adequate capital and liquidity, which will likely involve shrinking the loan portfolio and debt balances.
Before I turn the call back to know what for closing remarks, I wanted to share some thoughts on our near term outlook.
Given the ongoing uncertainties, we're 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 over 80% reduction in second quarter origination volume.
Increase delinquency and charge offs stemming from Kobin related economic deterioration.
Reduce 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 assumed the macroeconomic small business lending and capital market environment remains stress in the near term with a recovery beginning in the second half from 2020.
With that I'll turn the call about you know or for some closing thoughts.
Thanks, Ken.
Clearly the cobot pandemic is having a profound impact on all of us and it is impacting our near term business strategies and focus.
We entered Twentytwenty 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 in portfolio scaling OTI acts and obtaining a bank charter while approving cap capital efficiency.
While our confidence in these strategies for the long term has not changed we are adapting our near term focus.
We'll continue to support our customers to the best of our ability because it is through those relationships that we will ultimately succeeded the company.
Our Twentytwenty focus is no longer on growth in the core business or our adjacent sees.
Rather our current focuses on improving cash flow and mitigating risk for our small business customers and ourselves alike.
On the customer side, we were 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 Espeed Paycheck protection program initially as an agent through partnerships with SPD lender banks.
Fluctuations processed in the first round of PPP funding were de Minimis, but we're processing increased volume as an agent and round two and are working with the fed to access its TPP 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 brands that will serve us well in the future.
Internally, our top focus is liquidity and capital preservation we.
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.
He asked to seeing a spike in interest and leveraging its online lending platform. We signed another client a top 40 bank in the first quarter two accelerated their vendor selection process in response to the crisis.
That said traditional lending volume from existing partners is down in concert with overall industry wide 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 mean to and we are committed to maintaining transparency with all stakeholders as we take the steps necessary to position the business to navigate this rapidly changing environment.
And now we'll turn the call back to the operator for your questions.
Certainly.
This time, if you'd like to ask a question. Please press star one on your telephone keypad withdraw your question press the pound.
Eric Wasserstrom.
Yes. Your line is open.
Hi, Thanks can can you hear me okay.
Yes, we can Eric good morning.
Hi, good morning.
First let me preface my comments by saying that my hats off to to you and to every member of the of the Ondeck team for.
Jim through it must be.
Unimaginably difficult circumstances.
I appreciate it thank you.
My.
My I guess my first question a couple of.
The point of clarification, but but then.
No more of a strategic question just on the point of clarification.
I know you indicated and the chart indicated that Youre.
You know one plus their pets to ended the quarter 17, but can you give us a sense of where that figure is it at this moment.
Yes, we can nicked you want to take that one.
Sure.
So our delinquency has continued to rise up until the last few days in April and today are one plus delinquencies.
About 45%.
Now as I mentioned.
That is a different number then 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.
In sitting at 45% approximately.
Got it and just pick on that last point.
Can you give this a sense of how many of.
Of the paying customers are paying a full amount versus a partial or reduced figure.
Yes, so in our in our collection program 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 reduce payment.
Got it okay. Thank you.
And I guess, you know am I.
My strategic question, then you've got some of these topics, but if I might just come back to it but in many instances of course. This is the perfect storm for for small business and it's difficult to conceive of power something could be could be worse than this the circumstance.
What do you think does this in any way Creek changes to what you considered previously as the priorities or does it change with the scope in cone tour of Ondecks focus when we inevitably and hopefully soon enter enter some form of recovery.
It's a good question, Eric and certainly the last section of my prepared remarks got to this and I think one sort of.
You know obvious piece is.
Some of the strategic initiatives, we had 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 you know, bringing collectability in collections up in the portfolio, managing liquidity and and positioning ourselves to grow with our customers you know on the other side.
Side of this I think we've taken similar cost reduction actions in our international businesses and they know Dx as well to sort of managed to the next kind of 90 day period, it's probably too early for us to comment on the longer term strategic implications of co bid.
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 what's good about our business as we can adapt it and particularly the shape of the portfolio the industry, we lend to.
Sort of the structure duration of our of our loans our product structures, we can be pretty nimble, there and I think we'll be able to adapt to the recovery.
And that starts to take hold.
Thanks, very much work because of my question.
Steven Kwok with KBW Your line is open.
Hi, Thanks for taking my question.
When you say for model.
Good question. It's just so brown, if you could drill down a little bit more on your economic assumptions that you're using for the reserve grade.
Sure Steve It Nick would you like to take that.
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 Mark 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 in Q4.
Great and within your reserves are you.
Taking in any of your own estimates around how.
And we'll be and on top of that have event potential benefits from government actions that hasn't taken.
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 in the fourth quarter start to recover again, otherwise it would potentially be a longer period than that but we have not assumed specific benefit.
For the PPD program.
We still need to see how that manifests itself and how many customers get benefited from that so that is not assumed that the benefit in our numbers.
And just my last question as a follow up the TTP program, how big can that bench CB 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.
Sure I know you want to pick that one.
No problem, so yes in tranche one.
Our participation was pretty de Minimis Fintechs, we're really only set up to participate at the very end of when the funds were available on but in tranche two were able to process more volume I would caution that we don't expect a huge revenue impact from this we're serving as an agent.
You SPD and be able banks.
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 due to be aware of one is.
We did a survey of our customers and prior customers earlier. This week and we had about 1600 responses, which is pretty good for a 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 on however over 80% of the customers.
They had applied or will be applying for a PPP loan. So hopefully that number of customers. It gets funded comes up substantially in the second tranche and there is 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 low.
Loans, how that impacts their payment behavior and their survivability.
Update that going forward.
Great. Thanks for taking my question.
John Rowan with GE.
Okay.
Good morning, guys.
So the actually make sure I understand you obviously built a reserve at the end of one Q. I try to make sure that that was for the outlook as of the end of one queuing, obviously things have gotten worse given.
The one day delinquency bucket.
In other reserve build into Q.
Okay no.
You want to do you want me to do so why don't you started I could get something that you too.
Sounds good so.
Yes, the reserve estimation that we did was based off of the portfolio composition.
As of quarter end. However, it did take into account the progression of deterioration that we expected afterwards 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 off of 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.
Okay, and you know with originations going down.
Substantially how fast those the portfolio amortize off.
10 joint because I can yes, I can take that it probably runs off at about 20% to 25% in the quarter. If you think about the average term loan it.
The year or so.
Okay, and then you know I know you guys gave you the list of.
Targeted industries that are no clinical paying but just curious do you have a number for what percent of your customers are opening consider a central business versus what's considered non essential business and therefore not operating.
I don't think we have an exact number cut on essential versus non essential internally, we do have industry groupings.
And and so the essential businesses are kind of in our most favorable industry grouping.
But but you know as Nick said in his prepared remarks, we do expect most businesses to be affected from a delinquency perspective due to co bid even if they are essential businesses to some degree.
Okay.
Alright, thank you.
Steven walled with Morgan Stanley Your line is open.
Hey, good morning, and because there is safe and healthy.
Maybe just starting off on and we touched about it on it and the stimulus in the PPP, but maybe just thinking about the effectiveness of it I appreciate the customer survey and all that but as we think about how it tangibly impacting delinquencies maybe is more for Nick I think you talked about the delinquency sort of.
Maybe coming down a touch the last few days that 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 on the portfolio or if there isn't you could you just walk us through what you're seeing there and there is a tangible impact from the stimulus.
Yes, I'd be happy too 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 have received PPP money and that has certainly helped their position in some of them have brought themselves current but again because of.
How that has distributed across businesses in America 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 customer we're preserving capital and as they start to be optimistic themselves about the future. There now using the capital and task that they had been preserving to start making their payments in.
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 pass that they had on hand.
Not a lot of them are seeing cask load increase yet, but they are anticipating that and they are becoming more optimistic.
Got it okay and that brings me into the next question I have which is as we think about the path out here and it sounds like you all have outlined that sort of an expectation.
Maybe as 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 for you.
You can lend to and where cash was they're going to be spent a lot of data out there about businesses small business, particularly saying that they don't have cash beyond three months and thus the majority of them, but just thinking high level about where the growth can come back on after youd tail down originations over 80% and second quarter, who.
Can you lend to.
Coming out of this is just from a philosophical for second how are you got me thinking about that.
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 port Formants of our current book and which industries have been able to whether 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 the modified the business model to adapt to whatever those.
Structural characteristics coming out of a recession.
And so we're going to be looking for the industry and the businesses that demonstrate an ability to adapt to whatever that new normal with.
In terms of what those are right now obviously, we have some thought but it is very speculative because it's very early and the recovery hasn't happened yet.
Understood. Okay. That's very helpful. And then maybe if I could just squeeze in one more on slide 10, you guys talk about the breakdown of the unpaid balances in terms of cobot impacted versus normal I just want make sure I'm understanding how that's laid out in the 82% of quote unquote normal bucket would that be normal in terms of fully healthy or normal in terms of fitting the rich.
Parameters of the I guess you were in the sort of 12% to 14% net charge off range on those so that.
Yes, yes, so that's that's a great question and I'm.
Glad I'm can clarify that so in the normal bucket you have full customers that are very very healthy.
And they are still current as of today as well as customers that we're already starting to experience stratum b for coated 19 hit.
And therefore, our normal estimation and reserve approaches will in a stressed environment work for that right now is the normal seasonal strep approaches.
For the cobot population because it is somewhat idiosyncratic and nature. Those are the ones that we are breaking into those five categories and using a different methodology to come up with the anchor quell estimation.
Okay, I understand just maybe to clarify on that even further the 80 to present bucket represents the tough tough a normal stressed that was like 12% to 14% losses in normal times in the incremental 18% means that roughly 30% of the book is what you're sort of watching from a reserve methodology perspective.
Yes, although even with the normal because again, we believe that in a recession. Our book still increases increased losses, we did stress.
The normal reserve for that population as well.
Understood. Okay. That's very helpful. Thank you.
David Scharf JMP Securities. Your line is open.
Hi, good morning, Thanks for taking my questions and.
Well I'll Echo Eric.
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.
I'm wondering along those lines the.
As it relates to the vertical breakdown that you provided.
Are there any.
Unique geographic concentrations.
Finally, as it relates to.
You know this kind of.
Staggered effort that we have in this country with new national policy towards reopening.
Is there anything that's impacting kind of how you're thinking about.
Potential for.
Coming out at 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.
More aggressively.
So David.
Go ahead, Nick yet.
So we are certainly monitoring and doing modeling around what characteristics, our predictive of the risk expression in our portfolio.
And there was some timing that was based on geography is and we think that there might be some timing.
As well on the 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.
When 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.
Got it got it maybe it makes sense.
Hey, just mechanical question, because I wasn't writing down some of the payment metrics quickly enough, but as we think about.
Yes.
Magnitude of the portfolio decline.
At June Thirtyth.
That's potentially a trough.
Obviously with a 12 month average life as you mentioned its give or take a 25%.
Michael amortization rate.
Payment rate, but.
How much should we be thinking.
Out reducing march 31st balances potentially given given what current payment rates look like right now.
Can you want to take that.
Sure and again as we said we.
We're not giving guidance specifically, but.
I think given some of the origination numbers that we provided.
I think you know looking it's.
Balances dropping in the 15% to 20% range over the course of the quarter would would certainly be in the realm of the possible into getting a lot has to do with what happens later in the quarter for all the reasons that we just discussed.
So if we're able to reopen we will see balances grow if things stay.
Close longer and we need to continue to Tamped down in originations will continue to see the run off.
Understood, Yes, it was more magnitude kind of the.
Near term amortization rate.
Based on late April trends.
Lastly.
Kim.
Not to delve into too much of your.
You know existing discussions with lenders, but.
No.
Based on the.
You know the maturities that are listed on slide 13, I mean, it looks like close to 60% of your U.S.
You know balances right now mature.
Within 12 months March April.
2020 to some of the end of this year and.
Our most I mean is.
Is the near term focus on year negotiations simply some so.
Covenant relief modification of event triggers or are you seeking.
In hoping to be able to to extend maturities at this point.
So so good question, then I'd say.
The focus as I indicated in my remarks is really about the near term.
And right. So when these facilities were put in place and again. Thank you for pointing out that we have nothing that is maturing in this calendar year and there are some early next year.
Nobody anticipated this type scenario.
When these facilities were put in place and so therefore and.
I wanted to get into this specific details, but there are different ways, who approached us whether it's just sort of.
The concept of a pause or the concept of some modification in.
Criteria around performance that could 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're seeing of cobot population.
And having a path forward, but I'd presume that when that path to earlier discussions when the path forward.
Becomes more clear we would have follow up conversations about okay. Now that we can see what the path looks like Joe who will be lending at what pace will be lending.
The terms of those those new loans, we would then be able to go back and further conversations about what the appropriate structures and modifications might be to support.
New approach.
Got it understood. Thank you very much.
Melissa.
The P. Morgan your line is open.
Thanks. Good morning, everyone. Appreciate you taking my question.
And.
I'd like to explore the.
How you're thinking about that he turned Mr ratio.
I'm curious to this point is not going to be more impacted by macro factors underlying fundamental.
Your borrowers.
Nick you want to take that one.
Absolutely so.
It's definitely bowl.
And we are leading very heavily in our 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 into paying relationship whether they're going to be able to.
So that is that is one of the.
The balancing act that we're doing in our in our reserve estimation is trying to weigh in both the the willingness and the ability to come up with a quantitative approach for each of those segments.
If I had the pick which one is more important in the short term given that it is a 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.
Okay.
I appreciate that my guess is a follow up.
Want to be it nature I have three understanding of how you guys are.
As being included in the DC numbers right now because obviously those who aren't paying at all.
Going to be incorporated into that I assume unless there is you know if they're receiving any kind of relief different payment.
And.
How is that impacting the path into the delinquency and don't see and ultimately how that shakes, explaining a sort of peak.
Thank God.
Sure so the way our reporting work.
When the customers go onto a payment hold very 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 data. So all of the the customers on workout programs deferral partial payments et cetera are showing in that one plus number.
So with fully reflective of 100% of that population.
Okay got it thanks, so much.
Again, if you'd like to ask your question. Please press star one on your telephone Keypad. Your next question comes from Vincent.
With Stephens your line is open.
Hey, Thanks. Good morning, So just wanted to follow up especially on that.
Points about what's considered on.
So.
Could you give us a sense of what sort of for Barents. Your customers are asking for so for example.
Just to ask for one month forbearance should we expect to the one DPG numbers dropped.
Significantly in the in the months from now I didn't know if you could you could you don't tell us from the DQ numbers, how many of those customers recurrent before going into.
Maybe forbearance relief there for getting trigger for its Q.
[music].
Yes, So let me start with the second part of the question for 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 play for us to be at this level of delinquency.
And for those customers that are asking for forbearance order 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 myth would they then go back to a current data.
So they will not jump back into current in what they make payment in excess of than normal payment schedule.
Okay. That's helpful. Thank you.
So for US Nick's question just to talk about some of the.
Discussions on the dead in the funding side.
Just to clarify have there been any.
Covenants triggered and.
You mentioned some of the performance.
I guess the bonds amortized.
Hey, Vincent and I can take that so.
Yes, so you're correct on the securitization that we have two series outstanding 18, seriousness 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 been testing of us the.
Market in March and head.
Attempted and we're hoping to do a deal, but obviously with the cobot situation emerging markets were not receptive and we allowed that.
Securitization 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.
Yes, I want to make sure that we don't reach that point.
Yes, I did mentioned we are completed with one facility and we are in discussions and making good progress with the others.
Okay, great. Thank you and one last month so the appreciate the.
Helped in sort of originations be down 80% in my question assuming so.
Stopped originations.
And your traditional products of the let's say, 20% Youre originating you said, all TPP loans, where should be expecting anymore straight line for Charles from your customers just.
Can you help and what's the composition of.
Yeah.
Yeah, I can take that one vintages Noah.
So actually the PPP loans are not counted in our originations numbers, we are serving as an agent for SP banks right now.
And we Didnt model any direct lending into our projections. So so that is a separate sort of bucket.
The 20% really is we did originate some of our term analog products in the month of April.
So its including that and we are expecting locked draws to continue.
But those line of credit draws will be at a lower.
Because many of our customers again or temporarily closed and not needing the capital, but we do expect those draws to increase as the quarter continue so really focused on existing customers right now as opposed to new customers on for both the term loan in the lock product.
Okay. Thank you very helpful. Thanks, so much.
This concludes the acuity session and the Ondecks first quarter 2020 earnings conference call. Thank you for your participation you may now disconnect.