Q4 2019 Earnings Call
[music].
Welcome to the one main financial fourth quarter fiscal year 2019 earnings conference call I'm webcast.
Hosting the call today from one main it's Kathryn Miller head of Investor Relations.
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It is now my pleasure to turn the floor over to Kathryn Miller you may begin.
Thank you Maria good morning, and thank you for joining US let me begin by directing you to pages, two and three of the fourth quarter 2019, investor presentation, which contain important disclosures concerning forward looking statements and the use of non-GAAP measures.
As an occasion can be found in the Investor Relations section of our website.
Our discussion today will contain certain forward looking statements, reflecting management's current beliefs about the company's future financial performance and there's a prospect and these forward looking statements are subject to inherent risks and uncertainties and speak only as of today.
Factors that could cause actual results to differ materially from these forward looking statements are set forth in our earnings press release.
We caution you not to place undue reliance on forward looking statement.
If you may be listening to this via replay at some point. After today, we remind you that the remarks made herein are as of today February 11, and have not been made updated subsequent to this call. Our call. This morning will include formal remarks from Doug Sullivan, our president and CEO and make a Conrad our chief financial officer after the conclusion of.
Formal remarks, we'll conduct acuity session. So now let me turn the call over stuck.
Thanks, Catherine and good morning, everyone I'm pleased to be with you today, we closed out the year on a very strong no. We treat cnine adjusted net income growth a 42% for the fourth quarter 29 feet and see nice return on receivables.
5.9%.
That's an almost 120 basis point improvement compared to the fourth quarter 2018.
For the full year, we generated $916 million Cnine, adjusted net income or $6.72 per diluted share, reflecting a 33% increase versus 2018.
These strong financial results are attributable to many important initiatives underway and our execution against the strategic priorities, which we outlined at Investor day in November we feel really good about the opportunities ahead to continue to.
Enhance our business through improved customer experience and omni channel delivery expanded multi touch marketing enhanced underwriting and automation inefficiencies in our branch and central operation just to name a few weeks.
We made real progress against these priorities in 2019, including improving our customer conversion rate by about 100 basis points.
As a result.
Ending net receivables grew by $2.2 billion or 14% year over year and on lending was anchored around achieving our risk adjusted return criteria.
Simply put we are attracting converting and serving more customers that we want to serve.
Crop business.
We are using advanced analytics to optimize our marketing strategy, our operations and to enhance our credit model and our investment in technology is driving greater productivity across our branch and central operations team as a result.
And being receivables per branch has increased by 18% compared to last year and Cnine profitability per branch is up 37%.
Credit performance also remained strong our net charge off ratio was 5.71% in the fourth quarter and 6% for the full year and our delinquencies are in line with our expectations, which gives us confidence.
The financial health of our customer.
No I want to remind you however of what we said at Investor Day.
Our underwriting is focused on a risk adjusted returns not just losses, we generally look for a 20% return on equity with governors for overall losses, while also ensuring that the company remains profitable even in a severely stressed.
Yes environment.
Overall, we are providing a better customer experience and we are underwriting to generate strong risk adjusted returns, which translates into the strong financial results. We achieved in 2019 as I mentioned, 33%.
Growth in C N O <unk> adjusted earnings and about 90 basis points of improvement in our return on receivables, which reached 5.4% for the year.
As we continued to execute on our initiatives, we expect to continue to generate considerable earnings and capital.
As part of our recent Investor day, we outlined our capital allocation framework.
We will continue to use capital to first fun portfolio growth with loans that meet our risk return criteria.
Second invest in our business and third return capital to shareholders.
Applying this framework to 2019, we funded $2.2 billion of receivables growth.
We invested in technology analytics customer acquisition and talent.
Strategic priorities outlined.
At Investor Day.
And as you know, we commence capital returns to shareholders.
In 2019, we initiated a one dollar per share regular annual dividend and we paid at $2 per share special dividend in the third core.
Today, we're announcing a 32% increase in our regular dividend.
In addition, we are also announcing our second special dividend of $2.50 per share payable this quarter.
This would result in $5.58 per share paid out over the 12 month period, ending March 31, 2020, which is approximately 13% yield on our current share price. These.
Capital actions reflect our confidence in the strong results, we expect to continue to generate over the long run.
And as we've said before the January Onest implementation of Cecil will not impact how we manage our business or the capital we generate we're managing our company to the fundamental economics of the business, which are very strong.
I'm very pleased with the progress we made in 29 team and believe we earned rate position to serve our customers well and drive long term shareholder value with that let me turn the call over to my God.
Good morning, everyone.
We are in 261 million of net income in the fourth quarter or $1.91 per diluted share.
For the full year, we earned 855 million of net income.
Excluding the impact of a fortress transaction in 2018. This was a 55% increase year over year, driven primarily by our strong seeing high performance.
I would like to note that our effective tax rate for 2019 was positively impacted by approximately 30 million of nonrecurring tax benefits, including the release of approximately 23 million valuation allowances against state deferred taxes, we expect our effective tax rate to be around 25% in 22.
Morning.
Non cnine net income impacts were 61 million in 2019, which included the previously mentioned tax benefits. We expect non cnine net income impacts to be between 50 and $60 million in 2020.
Moving onto our CFO <unk> segment results.
We earned 268 million on an adjusted net income basis or $1.96 per diluted share for the fourth quarter of 2019.
Compared to 189 million or $1.39 per diluted share in the fourth quarter 2018.
For the full year of 29 team. We are 916 million adjusted net income or 672 per diluted share, reflecting a 33% increase versus 2018.
Lets review the key drivers of our fourth quarter see an eye performance.
Originations for the fourth quarter were 3.7 billion up from 3.3 billion.
These originations left to ending net receivables growth of 2.2 billion or 14% year over year.
Our secured portfolio grew by 1.8 billion or 24% over the same period.
Interest income was 1.1 billion up 15% from last year.
The increased primarily reflected higher average receivables and higher yield which was 24.1% in the fourth quarter.
Yes, It was 31 basis points higher than last year's fourth quarter generally reflecting continued strength in origination ATP ours and lower late stage delinquency.
Total other revenue was 158 million in the fourth quarter up 10% versus last year, driven by higher insurance and investment income.
The 8 billion dollar year over year growth in insurance income was largely in line with our receivables growth.
8 billion increase in investment income generally reflected a favorable comparison to last year's fourth quarter, which had mark to market losses on equity securities in our insurance portfolio.
Let's move on to credit, which continued to perform well or 30 to 89 delinquency rate of 2.47% was essentially flat with last year's fourth quarter.
Our 90, plus delinquency rate was two point 11 down from 14 down about 14 basis points from last year.
And our net charge off ratio was 5.71% 62 basis point improvement from last year.
Keep in mind, we do not expect year over year improvements of this same magnitude in future quarters, given the portfolios moderating growth of secured lending.
I want to emphasize with Doug mentioned earlier, we underwrite to optimize risk adjusted returns not losses, our long term operating framework assuming are relatively stable economic environment is to have charge offs in the 6% to 7% range given the strong macro backdrop.
Rob and benign credit environment, we expect losses to be in the lower part of that range. This year.
Fourth quarter operating expenses were 327 million about 5% higher than last year's fourth quarter.
The full year, however expenses were up three about 3% versus 2018. This increase reflected the investments in technology customer experience and customer acquisition, we discussed earlier.
These investments were partially offset by continued operating efficiencies across our business, particularly in our branches and our central operations.
So the year, our operating expense ratio was 7.5% down about 55 basis points for the comparable period last year.
Lastly, interest expense was 247 million in the fourth quarter up from 220 million a year ago.
System prior quarters, the increase reflected higher average debt balances to support our portfolio growth as well as a greater proportion of unsecured debt.
Before I move on to discuss our balance sheet. Please recall that during our Investor day, we highlighted the long term framework within which we expect to operate our business in 2020 and beyond.
We're intently focused on enhancing long term value in capital creation, which will continue to be driven primarily by the initiatives we highlighted earlier.
With that let's move onto our balance sheet.
Our loan loss reserves for the fourth quarter increased sequentially by about $30 million, reflecting portfolio growth and seasonally higher delinquency.
Our reserve rate was 4.6% unchanged compared to the third quarter and down 16 basis points year over year.
As you know January Onest, Mark the adoption of seasonal which led to an increase in our reserves, a 1.1 billion and a reduction to tangible equity of about 800 million.
As a result, our total reserve rate increased from 4.6% at yearend, 210.6% at the start of 2020.
Over the first half 2020, we anticipate that our reserve rate under Cecil will be between 10.6% and 10.9% assuming stable economic conditions.
As we've highlighted in the past.
We have always viewed reserves and tangible equity as the combined loss absorption capacity for the business Csos, an accounting change that simply moves this capacity from one account to the other with the aggregate amount remaining the same.
Accordingly, going forward, we will manage our capital adequacy through a ratio of net adjusted debt to adjusted capital, which is highlighted on slide 13 or earnings presentation.
We believe this metric provides consistent view of our loss absorption capacity pre and post Cecil.
Our loss absorption capacity on January 1st was this strong as it was on December 31st at $3.4 billion.
That's more than four times, our after tax losses, and as you can see from our 2019 financial performance, we generate annual earnings well in excess of our annual after tax losses.
These earnings can be used to cushion losses in changing economic conditions or can be returned to shareholders, while still preserving the significant loss coverage capacity, we have on our balance sheet today.
We see our balance sheet is being well capitalized regardless of this seasonal accounting change and do not anticipate Cecil having any impact on our capital adequacy or our ability to invest in the business or return capital to shareholders.
As you know our priority is to maintain a conservative balance sheet, a long liquidity runway both of which we continue to enhance during the fourth quarter.
As we highlighted during Investor day, we issued 750 million of 10 year unsecured bonds at five in three states. This this issuance demonstrated the strength of our funding program as well as our confidence in the resiliency of our business over the long term.
Our tangible leverage ratio was 6.2 times at year end net of our available cash our leverage ratio was 5.8 times.
Lastly in terms of liquidity, we had 9.9 billion of unencumbered assets and 7.1 billion of Undrawn conduit capacity at quarter end.
This combined with over 1.2 billion of cash and cash equivalents as well as our balanced and longer duration maturities provide an extended runway to operate our business without access to the capital markets.
Our business continues to be uniquely well positioned for the future.
We'd have a conservative and well capitalized balance sheet.
For a long liquidity runway.
And our business generates very attractive returns in a considerable amount of capital that can be utilized for receivables growth investment and shareholder returns.
With that I'll turn the call back over to tough.
Thanks, Mike.
We closed out the year on a very strong note we made great progress in how we attract engage and serve our customer.
I'm very proud of our companies focus on understanding our customers' needs and treating each person who comes to us for alone as an individual not just a credit score our business model and focus on our customer has driven both.
Customer and earnings growth. This produced the considerable capital that we in turn used to invest in our business and return to our shareholders in 2019.
I'm confident that our business will continue to benefit as we execute on our plans to strengthen the business and how we serve our customer with that let me. Thank all of you for joining us and I'll turn the call over to the operator for questions.
[noise] thinking on the phone is now open for questions.
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And thank you. Our first question that's coming from the line Michael tank of Wells Fargo.
Hi, good morning this.
This quarter sore celebration of origination growth to 13% year over year that compares to 26% last quarter and 21% in Q2, maybe can you talk little bit about what you're seeing in terms of loan demand.
Yeah, Hey, Michael It's Doug [noise].
No I think.
You'll see that business has some seasonality and looking quarter by quarter isn't necessarily you know the best God you up what's happening we're seeing a lot of demand as I've said before.
We're working to optimize our business and a lot of ways and our goal is to make sure that our marketing targets the customers that qualify for along with US and then once we get to customers attention and.
They're in the market for alone we create a good customer experience, whether that's on our website when they call into a lot through the application process all the way through walking into the branch and having a good customer experience with one of our associates. So.
We think demand.
His strong right now for our customer base, and we didnt see much variation in that.
Okay. Thank you second question in terms of the level of expected second semi annual dividend later this year.
Should we assume it will be equal to that Q1 special dividend or perhaps there are some conservatism in the initial hurdles in 50 cents dividend as it's still early in the year.
Yeah. Thanks for the question.
As you know, we make capital allocation and distribution decisions based on earning capital leverage all the factors that we have so I think it's just too early to speculate.
On the side that you know any any forward looking special dividends.
Okay. Thanks.
You know with that said, Michael we tried to give you a sense at Investor day up the capacity of the business.
To generate capital there could be distributed.
Okay.
Our next question comes from one of John.
Jefferies.
Thanks, guys very much and congratulations on a good year.
First question I know that.
I know this is real early on here, but I'm just wondering.
There has been implemented implementation of the new a bill in California, and I'm wondering you have you seen any changes in the not a framework of demand or are you a lot when patterns in California at this point in time.
Yeah, I think it's too early John you know at as you know we were quite supportive of the bill we voluntarily cap our interest rates at 36% and all the states we operate in and that's what California did you know there's.
Lot of activity there we were already Underpenetrated in California. So we've been opening branches in California, and I think our plan remains on course, I think it's too early to say, whether the bill has an effect or not.
Okay.
Then.
The day two impacts from C. so yes.
It is simple is or I guess the framework to think about it. It's about 6% increase may allow so for every billion dollars net roes that would imply about $60 million incremental provision is that fair way to think about it and then just compare the provisioning rate would that in mind.
Prior years of net growth.
Yeah. Good morning, John's Micah, that's that's exactly the right way to think about it and keep in mind that assumes that you up stable portfolio attributes and of course under Cecil stayed stable macro conditions. So yeah, just to step back for a minute remind everyone how csos different from the incurred methodology.
In general the seasonal reserving is going to be more sensitive to originations growth than the prior methodology and it would be less sensitive to seasonal patterns in delinquency due to the fact that you reserving on a life of loan so.
One season is going to produce an increased level of reserving and a growing portfolio.
To be attributes of the portfolio, we'll just have a larger impact when your provisioning on the life of loan basis, and then third that those macroeconomic conditions that that get imparted on the model, but that is the right way to think about a 10 six versus four six.
Using those reserve ratios and just applying it against the growth.
Okay. Thank you.
Question.
Doug you reflect referred to improve customer excuse me well do customer conversion rates.
What are the drivers of that and over overtime is that insinuate that you'll have an improved customer acquisition cost dynamic.
Yeah look theres on a lot different drivers and as you know in this kind of business a lot of small changes can add up to a real numbers that impact the bottom line. So if you think about the conversion rate from.
Customers that we have approved for alone to them actually booking alone and the drivers are on AD. They make it through our on all how quickly do they get a phone call from a what does that experience like on a phone.
Do they need to come into the branch or not depending on how they're returning customer or not you know what does it feel like when you walk into the branch does our associates give them all up their choices treat them Wow make sure they understand.
There are options. So it's everything from the technology they experience to the phone call. They experience to the personal experience and then obviously that product attributes, which we're always working on and so I think you can expect to see odd yeah at every little step.
The way getting very granular seeing what we can do to improve our experience all with the focus on.
Making sure we have a lot I mean, I've said it before had a great product at a fair price with an excellent customer experience and all of those different pieces, you know effect conversion rates.
Great. Thanks very much.
Our next question comes from I know John Rowan Jamie.
Morning, guys.
Good morning, I want to draw so or we did just assume that the guidance that you gave out for kind of Oh, I don't recall the stable state or wherever you called it is kind of what we should be baselining 2020 off of.
The United You gave in the Investor day.
Sure. Thanks, John appreciate the question. We you know we provided that long term operating framework at Investor day added referring to.
We plan to operate in and now that was designed to be some guardrails that we operate the business out and you know that was true for.
More of a longer term period, but inclusive of 2020, we'll keep you updated if any of those change.
But any particular modeling questions certainly came from can also help with that.
Well here, so just kind of modeling question, but I'll ask it.
I was looking at the the the finance portfolio.
As of the ended the year. If you know if we don't see a seasonal pay down in March which usually we don't always see with your portfolio. The growth rate also the year ago is gonna have to be well in excess of the 5% to 10% growth that you modeled off of the.
That's stable state guidance that you gave so either we're going have growth. That's an excess of yours is that that number in one Q or the portfolio will come down a little bit in one Q, which isn't which isn't atypical in the group, but now that we have Cecil if we do have that seasonal pay down could there be a big reserve release in one Q that.
Could actually I'm, just trying to gauge whether or not there is a seasonal bump up in earnings in one Q.
Or if we have that growth continue into one Q, that's an excess of the guidance number.
Okay. So I think there's a couple of questions in there John Let me take the first one around growth certainly as Doug pointed out and Michael asked on the first question. This is a seasonal business, we do have patterns.
Seasonality not only in the income statement, but also just in our originations and growth as you pointed out.
So the first quarter does tend to be a quarter that is challenging if you will have to use that term a from a growth perspective, a lot of that has to do with IRS tax returns and just people's behavior around borrowing.
Of course, second and third third quarter being a couple of the stronger quarters for originations growth. So.
That being said that long term framework that we gave you sort of and and overtime and on average metric that will change by quarter and that's something you can get a sense for back going back and looking at some of our seasonal and historical originations and receivable trends.
So that's one piece.
And the second question I think gas was how that's going to influence cease all you know we gave out a.
As part of our fared remarks, our expectation on what the reserve ratio in aggregate as a percentage of receivables that we expect look like over the next couple of quarters, you know and you probably remember we gave you an original estimate of 10% to 11% we came in pretty darn close to the middle.
About a 10.6% for January one we now have more experience with that model and so we're narrowing that range. We gave you from 10 six to 10 nine.
The of course, the seasonal model incorporates many attributes across the portfolio as I mentioned this sensitive to originations mix, which is why we gave that that range of a of the ratio. So.
To answer the question on how that wouldn't necessarily play out against the receivables that is the ratio you would use a against the ending receivables for whatever period.
You're looking at and I was wrong I can't comment at this point, whether there's going to be a release build or flat in the first quarter.
Well whatever your release, but if if the finance receivable comes down in one Qs. It does have a lot of installment lenders right. It's not a release, but if you just hold the allowance steady you would conceivably have provisions blow charge offs right and that's I'm just trying to figure out if you know one Q expectations are live.
Will too low because that could potentially play out.
Yeah, Yeah, something definitely you should follow up and Catherine on just on your modeling, but I think in general you're thinking about at the right way as a percentage of the receivables and where I'd like to thank you may play out sure.
Thanks, Mike.
Welcome John Thank you.
Our next question comes from one of Kevin Barker of Piper Sandler.
Good morning, finally ours.
Opex your operating expense growth came in slightly below plan here, especially with the fourth quarter year over year growth rate slowing or when you go into 2020 do you expect that momentum to continue where opex growth maybe at the lower part of your 3% to 5% guidance range.
Thanks, Kevin Mike.
I think the with respect to where it came in relative to expectations. We had signaled at the beginning of year, we thought that full year see an eye opex would be around 3% growth for the year ports a lot goes on during the year, but we ended up with 3%, finishing at 12 90 or the expense in the quarter was.
Five versus the prior year again seasonal business is gonna be influenced by customer acquisition costs and different things that are going on in the opex as well as what we've talked about with Investor day, which as you know we continue to maintain a significant amount of cost discipline over this business. We are managing it very very closely drive.
Further efficiencies into the business as you heard from Doug.
In his remarks with branch receivables per branch up 18% year over year again, as we talked about Investor day, we're reinvesting those savings in our core technology, our customer experience and other enhancements were make into the business. So there is going to be a little bit of up and down it's not going to be a steady growth rate on every quarter.
Depending on again, how how the receivables growth and our originations play out in the customer acquisition costs have come around with that as well as the timing of when we're driving efficiencies and and investing in the business. So the 3% to 5% again meant to be on average and over time.
You know, where we come out in that range for a specific years, just going to be relative to the opportunities. We see it is driving efficiencies in the business and those opportunities on investment.
Okay.
And then your loan growth came in above your operating framework in 2019, and it seems like you continue to have momentum, especially in the back half this year.
I'm doing a lot it initiatives that you haven't place do you continue to see that momentum going for the next few quarters, just given what you know some of the operating.
Levers that you put into place just through analytics and so forth.
Yeah, I mean look.
I want to repeat what I think I'd say at every conference call, which is growth is an output we really don't manage to growth you know we're gonna.
Try to attract customers that we think meet our risk return criteria and then do a great job with them on their hair and Adam do business with us and what comes out in the back end will be our growth number, but we manage it on a on a granular.
Basis, one of the thing that drove the loan growth. This year in this quarter was when we did you do secured lending we we generally have larger loan amounts and as Mike has that we give our customers choice.
If they qualify for both the secured or unsecured loans certain customers only qualified for a secured loan.
When it's up to them to make the choice what works better for them.
We've been running and kind of the low fiftys rate up secured lending and the portfolio will probably that's going to moderate and so that by definition will slow down the overall receivables growth.
With that said, we've got lot of initiatives underway and you know will we'll we'll see where the growth comes out this year.
Okay, and then do you do you expect a mix shift more towards secured to have.
I'm, an incremental impact on the day to see so incremental reserves.
Yeah, Kevin So certainly that is one of the attributes that goes into the seasonal reserves. So as you look at our our three main lending product the hard secured the direct auto in the unsecured each of them has different reserving rates. So.
Certainly the originations will have an influence on on what that reserve rate is going to be hence the range. We gave out to 10 six to 10 nine.
But we have seen as you can.
Serve in our published results our originations rate on secured is sort of converging with that the portfolio rates. So we.
We don't again expect continued God expect secured to really be it a large catalyst for our receivables growth going forward as it has been in the past.
Okay. Thanks for taking my question.
Thanks [noise].
Our next question comes online and Eric Hagen KBW.
Hi, good morning, Thanks, and congrats on a great here just any outlook for the yields that you expect to earn in the portfolio going forward I hear you that the percentage of secured might taper off but if the loss rates are lower and those products, presumably that means the yield might compressed relative to what you had been.
Turning when your receivables are more concentrated an unsecured I'm just curious how you're able to routine that strong neal despite the mix shift.
Sure. So you thanks, Thanks, Eric.
This has been going on for a couple of years, we've talked about it on last quarter's well we've been actively.
Testing our pricing in different markets since 2017.
We've seen a market shift in secured but we've been able to see the portfolio yield.
We continue to be relatively stable and of course, that's influenced by our eighth yours.
No, we're originating or loans, but is also indicative of the portfolio delinquency rates. So I'll remind you win when we have a loan that becomes 90 days past due not only do we reverse income we have accrued on that longer. We also stop accruing. So when we see 90 plus improvement year over year.
For that continues to be this stabilizer for yield.
And that's certainly a contributor from our secured mix and a contributor to what ends up being stable yields.
Ill point back to the long term framework, we provided which was we expect stable yields going forward, particularly with that secured mix moderating.
And that's kind of guardrail, we put out there and what we expect going forward.
Got it thanks for that that outlook.
Fight FICO recently announced that they were there were some changes being made to the methodology for how the score consumer credit I know that credit score isn't the only criteria that you use for new originations, but it is obviously an important one I'm just curious how you've interpreted those changes and just any impacts that could drive to demand or the total addressed.
Market in general or just any tweaks your underwriting criteria as a result of those changes going forward.
Yeah.
First I want to be clear, we actually don't use FICO scores.
In our underwriting or any you know vantage scores or either so we actually.
Anticipate any impact.
FICA with just one model by fair Isaac.
A lot more consumers a lot of times, what consumers actually see a lot of the you know what's my credit score services are actually vantage scores, which aren't.
Affected by that.
I actually think than the noise around this highlights why our model is so great which is we have years of proprietary data arguably more proprietary data than anybody else in installment lending around near prime customers we have.
Highly predictive models.
That we're continually tweaking and adding new data sources to and attributes and we think that allows us to underwrite near prime customers and in a unique way. So no I read all the articles followed all of this but we don't expect any impact on our business.
Great. Thank you for the comments.
Our next question comes from one of Rick Shane JP Morgan.
Hey, guys. Thanks for taking my questions. This morning, Hey, Rick.
I'd like to talk a little bit about channel obviously, the branch network has significant competitive advantages.
And in benefits, but there is obviously also a shift in terms of customer preference to online how do you balance that what are you seeing in terms of difference between the origination channels and how do you optimize that.
Yeah.
So Rick one what I would say is you know the vast majority of our loans are booked with someone sitting across a face to face with a customer talking through their needs doing individual budgeting with them and as you know we underwrite.
From an ability to pay not just what the income is in so we actually think it's a big differentiator with that said the vast majority of our customers start online so whether it's on they get a piece of mail from a they come in through an affiliate.
They find up on a social network, where you know were quite active they're doing a search and usually starts online where they learn about one main actually go out the application.
Online we highlighted that we're have read on the application over the last six months to cut down the time considerably opt for customers against the same amount of information of better customer experience and it takes a lot less time for our are the people on our branch to finish completing it so drives both efficiency.
And better customer experience. So it's only after they the channel.
Tom that they come into a branch to close there alone and so you know.
So it.
That's why we call ourselves a hybrid model, where a lot of our interactions are actually happening online and happening on the phone. It's just the closing process generally happens in the branch.
I also mentioned at Investor day that we're working on testing in a very small way online lending, which will we will see is there a subset of customers, who don't want to come into a branch that otherwise we would lose to a competitor who we can book online.
And we'll only do that if our.
We find that we can underwrite them well fraud in credit remains a good. So that you know that's how we think about it but we spent a lot of a lot of time, you know on our online presence because it is where the.
The vast vast majority of our customers start and obviously as you said.
As more and more people are using their mobile phone and their computer to conduct business. It's important that were pfaffle with in a digital world.
Got it so really you're using the online channel for the consumers using it for price and product discovery, and then you're getting them into the branch to actually close in had that one on one interaction.
Yes, generally now that we do have customers, who you know come back there is someone in the neighborhood or there's a branch in the neighborhood they've gotten alone from US before three years later, they have an episodic need they'll walk in or call and come in but you can't do business today.
Hey, a consumer business without having to a very robust customer interaction model mobile.
And digital and customer acquisition mobile and digital.
Great. That's very helpful color. Thank you guys very much yeah. Thanks.
Our next question comes from London, Moshe Orenbuch from Credit Suisse.
Great. Thanks, So most of my questions have been asked and answered but just.
I guess when you when you kind of put it all together it's it does feel like you know the consumer.
Demand stories, you know those consumers availability and desire for credit should be at least a strong in 2020, and perhaps a little stronger.
And maybe also just just DG your comments on your willingness to lend seems to be there as well maybe could you kind of just talk about that as well from just an overall setting for.
Supplies consumer credit demand from the consumer and your ability to provide that.
Yeah Moshe.
We tried to give you a sense, but at Investor day of how we think about Oh, our market and we kind of look at the overall on secured credit market, which includes a personal loans and credit cards and if you look at that at the very broad.
Market Theres quite a bit a room for consumer loans to continue to.
Be a product that people would like and we've talked about the attributes of of a installment loan that has a fixed price you pay down over time.
A good chunk of our customers come to us because they want to get their credit under control. So one is we think there's there's room to grow our core customer base in this market.
Yeah look guide you, we we look hard at all of the macro statistics I think both on a macro view the overall U.S. consumer but also the nonprime consumer remains healthy over the last couple of years, we've seen growth in annual income.
Our customers in particular, well debt to income ratios have generally been flat, we though operate in 44 states and so yeah, we pay a lot of attention to state trends.
Both the unemployment other macro trends in a state as well as our own on up data and I've mentioned before we actually do.
Whole surveys of our branch managers just to see our they hearing seeing anything else and so.
We feel that the backdrop remains positive for us.
We're always going to stay disciplined and never rest on our laurels, we continually modify our credit exposure at the margins.
But we do it all around this framework.
Not managing a portfolio nationwide portfolio of risk.
That meets our return hurdles so.
Generally that's kind of how we see the business, but where we try to do it on a very granular level and you know I certainly.
Don't like to manage the business based on like the broad stroke pictures of how things look its state by state product by product return by return customer by customer and that's how will.
You know keep driving and.
Depending on what we see in each of those elements, then we'll have a growth and output that comps.
Gotcha, and then I think there's an aspect of your business model that hasn't gotten enough attention shoot your funding and leverage I mean, you talked about the deal that you did in the quarter can you talk a little bit about your funding plans for 2020 and what your leverage what do you leverage targets that youre.
Our kind of Britain towards.
Sure Moshe Thanks, a question that I'll hit the funding piece first a we've you know we've talked about at length that we run a diversified and balanced funding program, what really that means that we continue to emphasize a mix of ABS an unsecured.
Both markets are strong they have been incredibly strong this year in a lot of bond issuance in the unsecured market, particularly in high yield.
Arts the strength of our program continues to develop we feel great about it the team has put in a a lot of work getting it to where it is and of course the business performance also contributes to that you know as an example, our five in Threeg 10 year that we issued in November is trading at around 4.7% yields today. So.
A very very happy with the program, but you know much as Doug said, we don't rest on our laurels with the business. We don't do that funding either so we are continuously looking to develop our markets.
What we see today that investors are that are looking for yield are prioritizing double b credits within the high yield space and in our programs what really attractive.
Remote go forward funding perspective, we're going to be programmatic in both of the markets that we we issue in you know we've got the balance sheet in a really good place after our after a couple of years agree mixing it more towards unsecured which has obviously you've done a lot to improve our liquidity.
Overtime covered a lot of that during investor day.
Liquidity continues to remain a very very important piece of the balance sheet help story with almost 10 billion of unencumbered receivables and 7.1 billion of Undrawn pot lines at the end of the year.
So that's sort of the funding side of things on your other question about leverage.
We've said it before we've come a long way from 17 times leverage shortly after acquiring one main we've been in a period of deleveraging over the last couple of years, we feel we're operating in a really really good place.
Which is under the old rubric of leverage that five to seven times and we would continue to expect to operate in that range consistent with the strategic framework, we laid out in November.
Thanks very much.
Thanks Moshe.
Our next question comes from the line as Mark Devries of Barclays.
Yeah. Thank you direct auto was down a little bit year over year wall hard secured was up.
You know driving the total secured makes up.
What's kind of driving that in what are your expectations here for for direct auto does it feel like you've kind of research study state there.
Yeah.
Direct auto just to be clear is not shrinking it actually grew 10% year on year.
Our hard secured simply grew faster and so we provide customers with a choice alone offers offers based on their specific need and their financial qualifications and you know some customers a lot of what determines whether you've which bucket you get in it.
But the.
Age of your car so your car needs to be less than 10 years old to be a direct auto. So I think I my view of the numbers is its direct auto.
Is growing just fine and it remains a very viable product is just in comparison to some of the other growth it was a little slower.
You know I think the direct auto is incredibly.
It's a great product for us and it's quite differentiated differentiated and our business model, where we had been branches, but we also have central operations and we have fully scaled out.
Servicing capabilities nation wide, whether its collateral management.
Or other things you need for during entitling in states in and with local areas. It really gives us unique competitive advantage and so I think there's going to be ebbs and flows in the growth of one product over another based on customer choice and who comes in the door, but we think direct auto remains.
Great product that 10% growth rate is.
Seems good.
Okay got it.
I think you also alluded to in your prepared comments a 37% here your improvement soon I per branch I was hoping to drill down a little more on what's driving that is it the the strong gross and receivables per branch or is are you also getting a lot more productivity out of each branch.
Yeah, Mark This is Mike I think it's really a combination of both you know more we had strengthen our and growth in our profit. We also at the same point reduced our branches.
Year over year. So it's really just these efficiencies in the initiatives that Doug has been talking about and we've talked about before with respect to just using our central operations at our hybrid model to be more efficient and not only does that that drive efficiencies, but it also drives better customer experience in Medicaid.
Cases. So this is really a function of just lower branches lower branch count and higher profit multiplication of those two.
Got it thank you.
Thank you.
Our next question comes from a lot of Vincent Camtek of Stephens.
Hey, Thanks, Good morning, just a follow up on the.
Discussion about risk adjusted margin. So its fourth quarter had a really good loss rate on the tickets I carry that forward I'm getting to a like a better than 6% loss rate for 2020 and.
Sort of thinking when you think about risk adjusted margins is there any thought too.
Improving risk adjusted block margins by opening up the credit box or otherwise optimizing the credit box or is it sort of just.
Keeping the credit thoughts the same it's just we're in a recession that just with some for some loss rate into kind of bracket that just kind of wondering if there's any thoughts there.
Okay. So I'll cover the 2020 piece Vince.
And I'll take one of the one piece of the time if I can so just in terms of what were thinking upper 2020 vis-a-vis the fourth quarter, a number keep in mind that our charge offs, just like delinquency and other things in this business Rcs and also I would caution you just taking fourth quarter charge offs and running that out.
Fourth quarter does tend to be a pretty good charge off quarter for us or is one of our better too.
We've laid out in our operating framework, the expectation of 6% to 7% losses over the long term that is simply the optimal level at which we think we can optimize and maximize our risk adjusted returns for the business.
In terms of 2020 I mentioned, our secured growth is moderating that has been a driver of loss improvement in fact, it's probably the biggest driver of loss improvement over the last three years as we've seen loss rates go from 7% to six and a half down to the six that we had 2019 secured growth.
Is moderating so not only is that not when do we not expect that to be a meaningful catalyst for growth, but we also don't expect it to be meaningful catalyst for credit improvement going forward as much as it's been in the past. So you know all that said you look at our delinquency metrics 930 to 89 flat 90, plus down Uh huh.
Down 14 basis points, yeah. The combination of these things leads us to expect 2020 charge offs to be in the lower part of that strategic range of 6% to 7%.
And let me let me just that.
You asked about like opening the credit box. It's you know, we would never think of product or marketing decision as opening the credit box, because we really don't manage to odd that we manage to returns and so.
We're very focused on our customers what our customers want what do they need where do we have competitive advantage to be able to keep serving them and so.
If theres something else, we can do with current customers that would add value to them and would be accretive to the business were always looking for those opportunities and our their customers, who don't come to us who have a different profile, where our unique combination of nationwide distribution expert underwriting.
Near Prime assets, the funding with work and so on.
The way we would think about this is.
Our their products that meet our return hurdles or product modifications that would meet our return hurdles that we think would be valuable to the customers and would enhance the franchise. There may be some of those in the future that have.
Different lost content, and that's where you would see potential movement in lock on patent not by per Se opening the credit box.
Okay very helpful. Thanks very much.
Thanks Vince.
Our next question comes from one of Henry Coffey of Wedbush.
Yes, good morning, everyone in fourth quarter.
Hi.
A couple of items.
California as as a as John pointed out is put in their own rate.
There are also talking basically about setting up something equivalent to the CFPB rather than wait on.
See.
Just makes things.
I understand Virginia is in the process or is already.
Completed a bill that would also kinda emphasize 36% rate cap.
Military standards are there even though the.
Trump administration isn't doing a very good job, forcing them.
That's a big opportunity for what would I call a responsible lender like yourself.
The other states that your government relations people tell you are also thinking in these directions and as we've asked before.
What is the gross opportunity.
For you to take some of these higher quality payday loan customers and convert them far more responsible product.
Yeah, I mean look first of all we highlighted that the vast majority of the time our offer is already the best price to offer and so people qualify for one main loan Anna payday loan they usually take a one made and so it's not like.
There's a broad universe of people running to pay day already meet our credit box and it depends state by state.
With that said, we were supportive of California, There's some there's a bill moving in Virginia that we were not publicly on one side or the other but we're fine with it because it mirrors.
California.
There's a lot of activities as you know this its.
Rates are state regulated some have low rates on that medium rates, 36% is usually the high end if its state puts a cap on and then there's a bunch of uncapped.
States.
Where we have an active government relations department that tries to make sure that people understand our story, which is responsible lender tries to treat the customer right tries to be transparent has a culture of compliance that coming out of a bank.
And so you know I think these are all opportunities for us, but you know we feel pretty good about our business right now and the way we're driving it you know under kind of current regulatory framework at state get interested we depending on the dynamics will get will get engaged or not.
You know, there's obviously a lot of room for growth here.
Have you thought in the opposite terms of maybe 10% to 12% growth is the right number and you tweaked down to that number but.
Profitability implications are so much higher.
So I know, whether it's been asking about more grows more growth what about the thought of.
More moderate growth.
What is the what is in your from your view the impact on profitability of that shift.
We're trying to run the company for the long run we're trying to run it through the cycle. We're trying to serve our customers Wow I'm I've gone through you know all of the different levers, we use to run the business well and so.
I really mean it when I say, we're not we don't targeted growth number and I think broadly like looking at growth isn't how I or we think about the business. We think about let's make sure that people who were in the market for an installment loan who meet our criteria no about up and we're in front of.
Them and once we're in front of them, let's make sure. They we provide a really good product at a fair price and an excellent customer experience and what comes out the back end will be our growth.
No that's an excellent answer thank you.
Thank you.
Our next question comes from one of Julianna <unk> BTI Jane.
Good morning, and congratulations on a great quarter.
Thank you thanks, Julie Uh huh.
Just looking at the best the business mix are there any areas, where you're seeing any competition or any kind of or I guess more competition or less competition that might be driving the mix shift or is it really more of an utterance customer choice equation.
You know we have not I mean, if your question specifically is in our secured lending, which we again think our business model.
Make that.
Creates a a real competitive advantage around secured lending we haven't seen a lot of it pop out elsewhere. So we haven't seen any market share and competition that would affect.
What kind of what we do.
[laughter], then I'll turn it over to the but that's sort of the balance sheet.
You don't have any kind of really near term maturities be do have a billion dollars of hitting the quarter notes the come due in December.
It is just kind of ticked down some debt cost whether it be during a new securitization deal. We're obviously taking out those notes would be highly accretive given where you are able to issue does now.
Yeah, that's great question, and certainly something that a is on our radar and on our mine that is the closest near term maturity. We have another one other unsecured coming in 2021 as you know with CBS as those maturities are more sort of staggered and blended as a receivables run off in those structures.
In terms of bulletins that.
2020 maturity as a billion dollar to Disney or.
In the quarter debt.
As we've told you before we run a long term focused in a in a balance funding program, we're going to issue three to 4 billion annually to fund the business.
So as we think about those maturities, we think about that the timing of that redemption as a function of just evaluating economic trade offs of of doing so and the overall impact to our funding strategy. So it's on our radar and don't have anything inclusive to share at this point, but we'll certainly keep you updated as we as things develop.
That sounds good and and just in terms of kind of the go forward operating expense rate for fiscal 2000. Obviously you guys are a little bit no I had a friend or give it a little bit benefiting this quarter, but are there is there any investments underwriting flowing through in fiscal 2000, specifically that we should be aware of in terms of investment spending.
Yeah, I mean, nothing nothing that we would call out specifically that we laid out our investment plans for the next few years.
At our Investor day again, the timing of our investments and the efficiencies with it we're creating will move from quarter to quarter I would I wouldn't say, we every day we come in here, we think about managing the opex in the business and and having discipline around that so.
Certainly we expect to continue to see a decreasing opex ratio.
As weve calculated that.
But all within the strategic framework that we provided for annual Opex growth at our annual receivables growth. So it's really a function of those two things.
That's great Oh, I really appreciate it thank you very much.
Thanks.
And thank you ladies and gentlemen, this does concludes todays one main financial fourth quarter fiscal year 2019 earnings Conference call. Please disconnect. Your lines at this time for wonderful day.
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