Q1 2020 Earnings Call
Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily until that time Airlines will again be placed on music cold. Thank you for your patience.
[music].
Welcome to the one main financial first quarter Twentytwenty earnings conference call Im webcast hosting the call today from one main is Kathryn Miller.
Head of Investor Relations today's call is being recorded.
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It is now my pleasure to turn the floor over to Kathryn Miller you may begin.
Thank you Stephanie good morning, and thank you for joining US let me begin by directing you to pages, two and three of the first quarter 2020, investor presentation, which contain important disclosures concerning forward looking statements and the use of non-GAAP measures.
The presentation 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 business prospects 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 and include the effects of the coated 90 doesn't make on her business or customers and the economy in general.
We caution you not to place undue reliance on forward looking statements.
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 April 28, and have not been updated subsequent to this call.
Our call. This morning will include formal remarks from Doug Showman, <unk>, President and CEO, it's like a Conrad our chief financial officer. After the conclusion of or formal remarks, we'll conduct acuity session. So now let me turn the call over to Doug.
Thanks, Catherine and good morning, everyone before we get into a discussion of this quarter I'd like to first acknowledge that this is a challenging time for everyone.
We'd also like to express our deep gratitude to all of those on the front lines up this crisis.
And I'd like to give a big thank you to all of the one main team members would really stepped up to serve our customers. During this difficult time.
At one main we're first and foremost focused on the well being of our customers team members and the communities we serve.
We believe our customer the average American is resilient they are hard working employees across a wide variety of industries, ranging from health care to manufacturing the education government and transportation.
We are committed to helping our customers through this time of uncertainty.
Because the bar, a central role and providing credit to hard working Americans. We have remained open to provide service in person on the phone and through our digital channels for our customers who have experienced economic hardship as a result of cobot 19, we're work.
And with them to provide individualized errors assistance about 6% of our customers have availed themselves of one of our borrowers assistance options. This month. We've also temporarily waived late fees for payments and suspended credit Bureau.
According to help customers with newly delinquent accounts.
We've also expanded and enhanced our remote closing capabilities, resulting in approximately 50% of our present customer renewals for the first three weeks in March closing outside of a branch.
These closings still include a detailed conversation with one of our team members and ability to pay underwriting.
In addition, we've started seeing an uptick in claims for unemployment insurance. This valuable product that we offered to customers well covered loan payments for those who lose their jobs during this difficult time.
One of the new unique strengths of our model is our local an intimate customer relationships. It is times like these when our model is more important than ever.
We also supported our over 9000 team members and the communities within which we operate our central operations functions implemented work from home protocols with minimal disruption and we have adapted the branch process is to protect employees.
Well also remaining open and available to our customers.
We donated $1 million to the feeding America response fund and the CDC Foundation Emergency response fun and have also rolled out other philanthropic initiatives across the company.
We have a strong foundation, which makes us uniquely well positioned to navigate all economic climate.
Art longstanding key priorities have always centered around strong unstable credit performance.
Disciplined approach to originations and a conservative balance sheet with a long liquidity runway.
These priorities remain the same in the face of this pandemic.
Over the last couple of years, we've taken numerous intentional steps.
<unk> and preparation for potential downturn.
Our business has more than enough operational and financial flexibility to respond to a weakening economic climate.
We have deep experience with and proprietary data on the Nonprime consumer.
We have originated $145 billion of loans since 2006 and observed to this customer through previous economic cycles. Our current loan portfolio was originated and constructed with a requirement of profitability through and Oh wait Oh not.
Line severe recession.
In addition for the last two years, we have been mindful of the late cycle dynamic and of underwritten our loans with that in mind.
Are secured lending is also an important component of our portfolio risk management.
Having collateral reduces the frequency of loss by about 50 per cent.
We have a hybrid operating model the Naples us to dynamically reallocate resources to provide efficient and effective support to our customers.
This includes a fully scaled team of over a thousand employees exclusively focused on collections.
6500 employees in the branches, who have reallocated more of their time toward servicing.
We generate healthy returns on our receivables, providing cushion to absorb even a dramatic increase in losses, and we have a conservative balance sheet with prudent leverage and along liquidity runway.
Enables business continuity and minimize is our reliance on the capital markets.
With $4 billion of cash and $3.6 billion been drawn bank lines, we have liquidity through the end of 2021, even in an extreme scenario, assuming no access to capital markets.
In the first quarter the fundamental drivers a bar business were healthy and the underlying economics, our performance were strong prior to covert 19.
C.N.I. adjusted net income was $45 million and our after tax loanloss reserved build was $176 million.
However, as I've said before we run our business based on Capitol and cash generation.
C.N. I adjusted net income, excluding Loanloss reserves, which we believe is a good proxy for capital generation with $221 million for the quarter and represented a 22% increase year over year.
These results serve as a reminder of the course strengths of our business, which you've hurt us talk about for the last two years.
Are delinquencies for the quarter, we're running in line with expectations until the second half of March.
Consistent with other consumer lenders, we did experience a moderate increase in 30 to 89 day delinquencies by about 32 basis points year over year at the end of March. However, this trend appears to be somewhat moderating in April we believe this <unk>.
Proved performance in April is attributable to enhance birth systems as well as the government's stimulus payments.
And we've seen a very healthy payment trend over the last couple of weeks.
Given the economic uncertainty, we have proactively cut back on the highest risk originations, we tightened are underwriting.
As well as employment and income verification standards and effectively reduced our credit box by approximately 25%.
These credit tightening measures combined with reduced customer demand are resulting in significantly lower originations in the month of April.
And likely lower originations over the coming months as stay at home orders remain in place and the economic uncertainty remains high.
Well it it's still early days in the current downturn and we anticipate a high level of uncertainty in the near term.
We are actively monitoring the environment and economic outlook.
We were early and quick to cut back on origination <unk>.
Well, we will remain prepared to be opportunistic as the outlook becomes more clear and attractive risk adjusted return opportunities present themselves.
We will be as prudent on the way out as we were on the way in however, one main is uniquely positioned to capitalize on the opportunities which may arise from this this location.
Now, let me discuss portfolio stress testing.
Back in November and Investor Day, we walk through through and Oh wait Oh, nine severity stress test scenario with a significant spike in unemployment to between nine and 10% for a full year followed by a gradual decline back to mid single digit unemployment over.
Four years.
Under that scenario, which was adjusted to take into account the composition of our current portfolio.
Simulated portfolio losses could increase by 1.6 times.
Implying annualized stress losses of just under 10%.
In this scenario our business would still be profitable.
Are strong return on receivables serves as loss absorption capacity.
Our full year 2019 return on receivables was about 5.5%.
Howard 2019 losses would have to more than double to exceed our income generation.
This doesn't even take into account other actions that we are taking including tightening underwriting reducing expenses and other actions that would expand our loss absorption capacity even further.
As you've seen economist and market participants have a wide range of estimates for the economic impact of covert 19.
We know that the sudden unemployment increase is unprecedented.
What we don't know is where the unemployment rate will settle once we go through the stayed home order phase of the pandemic.
That is the number that will ultimately determine our losses, although it could be mitigated by the unprecedented government support being given to working Americans in the form of stimulus checks and enhance unemployment benefits.
Regardless, we have added stress factors above and beyond our <unk> severe stress case and the under any scenario, we feel confident in our liquidity position.
In terms of capital management are conservative balance sheet and robust liquidity position remain a unique source of strength.
Over the past couple of years, we have repositioned our balance sheet to ensure stable longterm funding and a long liquidity runway.
As you know we added more unsecured long tender debt to our capital stack and staggered maturity to make us very resilient through an economic downturn.
Add the benchmark issue or in the A.B.S. and unsecured markets. We priced 750 million dollar A.B.S. transaction last week as the first personal loan issuer to access the markets post covert 19.
This illustrates hour differentiated position in the capital markets and our ability to access liquidity.
During this period of uncertainty, we have refocus our capital allocation priorities to preserve our strong balance sheet, including tightening our loan origination criteria and suspending our share buyback.
Importantly, we're confident that we can maintain our regular dividend, which was instituted at levels that could be sustained even in the event of a severe recession.
[noise] ways in which we work and engage with each other is changed dramatically over the last month with every week that passes we learn new information and adopt further to the evolving environment, regardless, we've spent decades building and fortifying our business to ensure.
That we can continue to serve our customers through any economic cycle and we are confident that we're operating from a position of strength as we navigate the uncertainties that lie ahead.
But that let me turn it over to mica.
Thanks Dog and good morning, everyone.
I'd like to also express my appreciation for those who continue to work on the front lines of this pandemic.
Thoughts are with those affected.
First I'd like to run through some of the key financial items from the first quarter.
And then focus the rest of my discussion on how we're managing the business considering covert 19 and the associated performance impacts.
Let's move onto our first quarter 2020 financial performance.
We are in 32 million of net income or 24 cents per diluted chair.
On an adjusted C.N.I. basis, we are in 45 million or 33 cents per diluted chair.
As Doug mentioned, we run the business using C. and I adjusted net income excluding changes in the loan loss reserve.
I believe this is an appropriate way to think about the capital generation of our business and is consistent with our views of capital adequacy.
To that and we generated 221 million of capital in the first quarter.
Which you will see in the context of overall adjusted capital walk on Slide 17.
I'll talk a little bit more about this later.
Originations for the first quarter were 2.6 billion virtually flat with the first quarter of last year.
We took quick action in the early weeks of March as covert 19 began to in fact the country.
Implemented significant reductions to our credit box to prioritize our risk adjusted returns given the current market uncertainty.
These underwriting actions combined with lower demand for our loans and the second half of March led to an approximately 300 million dollar impact on originations for the quarter.
Are ending that receivables, where 18.3 billion for the quarter down 138 million sequentially, but still 2.1 billion or 13% higher than the first quarter of 2019.
Given our tightened credit box and lower borrower demand from stay at home orders, we expect near term origination volume to be significantly lower than last year's levels.
Consumers typically seek access to credit when they feel confident about their financial situation and their ability to repay obligations for the first three weeks of April originations are running approximately 60% to 65% lower than April of 2019.
Interest income was 1.1 billion in the first quarter, 15% from last year, primarily reflecting higher average receivables compared to last year's first quarter.
Yield was 15 basis points higher than last year's first quarter, generally reflecting continued strength and origination A.P.R.'s.
Moving forward, we expect to see lower yields, which will primarily reflect the combination of the following a shift in originations towards lower yielding secured lending as a result of our credit Bucks tightening.
Higher potential late stage delinquency impacts.
And the impact of our borrower assistance programs, including our decision to wave late fees in March and April.
Interest expense for the quarter was 249 million up about 9%, reflecting higher average levels of debt outstanding.
We expect to interest expense to be higher in the short term as a result of our conduit draws and cash levels. We are currently carrying on our balance sheet.
We've you carrying this excess cash as a prudent and relatively inexpensive insurance policy given today's on certain conditions.
We will continue to evaluate our cash levels, taking into consideration the stability of debt markets among other factors.
Total other revenue was 136 million in the first quarter down 10 per cent versus last year, primarily due to lower investment income from equity mark to market losses in the quarter.
Insurance revenues were about 7 million higher compared to last year's first quarter generally due to a higher loan production in prior periods.
You also know policyholder benefits and claims increased by 23 million compared to the first quarter of 2019.
This increase reflective noncash reserve for involuntary insurance product or I, you I associated with the late March rise in unemployment claims.
Approximately 25% of our portfolio is covered by the I.U.I. product.
Similar to our other insurance products are you I helps our customers keep their financial commitments on track even in the case of unforeseen life events.
During the Oh wait on nine recession loans with insurance or about 15% to 20% less likely to charge off.
Let's move on credit.
Our net charge off ratio for the quarter was 6.46% 65 basis point improvement from last year and the lowest first quarter loss rate since the merger of Springleaf in one main.
Our business was performing at a very high level through the first quarter and we have positioned our portfolio to be resilient, even as macro economic conditions evolve.
Or portfolio is 52% secured.
We've been proactively tightening our credit box for the last year.
And we have over a thousand team members dedicated to collections with the added flexibility of our hybrid model, which allows us to dynamically reallocate branch team members to collections if needed.
As you will see on page seven of our earnings presentation or delinquency rates were tracking in line with expectations throughout most of the first quarter.
Or March results reflected sum payments softening towards the end of the month as covert 19 disruption began to impact our customers.
We've seen positive signs and our April delinquency as the impact of our borrower assistance programs and government stimulus have developed.
Well trends have improved given the various uncertainties related to the impact of covert 19 were withdrawing the net charge off outlook, we provided during our fourth quarter earnings cool.
Let's pause here for a minute to talk about how we are thinking about credit performance in our ability to manage through the uncertainty that wise ahead.
We are experts in this segment of the market and our businesses uniquely positioned to manage through this environment.
Or model is specifically designed to help our customers through periods of stress well also protecting the profitability of our business.
First we have significant loss absorption capacity in our income statement.
Call that we underwrite to optimize risk adjusted returns not losses. The returns we generate on our receivables are such that losses would have to increase by a factor of more than two times from 2019 levels before impacting our capital.
Second we believe the government's stimulus package and enhanced unemployment benefits will be a meaningful source of support to our borrowers as they manage their monthly cash flows.
Third we expect the I.U.I. coverage in our own portfolio will provide a mitigating benefit to future delinquency and charge offs.
And fourth or borrow assistance tools should be an effective cash management resource for our customers as they balance the timing mismatch between their financial obligations and the unemployment benefits they may expect to receive.
Or borrow assistance tools are robust and have been part of our business for years.
Tool tools include both free and partial payment fuhrman's temporary and permanent loan modifications and loan re aging.
Or model is uniquely positioned to engage with each individual customer and then sure we provide the best solution for them.
The vast majority of borrowers who have enrolled and borrower assistance, thus far have elected to make a partial payment.
I think this is a very important indicator of our borrowers desire to meet their financial obligations to the best of their ability.
History tells us that bar or outcomes are dramatically improved when we Taylor assistance uniquely to each circumstance.
Let's now move on to operating expense.
First quarter operating expenses were 330 million for about 7% higher than the last year's first quarter.
This increase primarily reflected investments in technology.
Summer experience and customer acquisition that we've discussed in the past.
But the quarter or operating expense ratio was 7.2%.
Around 53 basis points from the comparable period last year.
Given what we're currently seeing in terms of lower cost or demand and our tightened credit box, we expect to incur lower marketing and customer acquisition expense over the near term as these costs tend to vary with production.
We will also continued to evaluate and Titan other expenses and differ a certain discretionary investments in our business over the entire room, where we anticipate minimal impact on the businesses long term value creation prospects.
As a result of <unk>. We are currently contemplating we expect 2020 operating expense ratios to be consistent with 2019.
With absolute expense levels, ending flat to down from 2019.
With that let's move onto our balance sheet.
Following this January 1st Cecil Reserve adjustment of 1.1 billion, we increased our loan loss reserves in the first quarter by 234 million.
You know Cecil requires future loss expectations to include a forecast macro economic conditions within the reserving period.
We use a number of third party indicators and forecast for our metric macro economic modeling and leverage our own internal regression models to correlate unemployment trends future expected loss.
Our first quarter reserve ultimately utilized a set of assumptions that assume a peak of unemployment at over 9% followed by a gradual improvement during 2020 and into 2021.
As a reference point these assumptions are similar to the Moody's baseline forecast at the end of March.
We also incorporated an estimate of the impact of government stimulus as well as our portfolios I.U.I. coverage and borrow assistance tools.
Or C.N.I. loan loss reserve is now approximately 2.2 billion or 12 per cent of receivables up from 10.7% at the start of the quarter.
It is important to know that our first quarter reserves reflect information that was available to us at the time, we closed our books.
Since that time, there have been numerous revisions and publications of macro economic forecasts and many uncertainties still remain in particular the shape of the unemployment curve.
We will certainly learn more over the coming months and as the economic outlook evolves, we will adjust our quarterly allowance accordingly.
As you have hurt us say before our priority has been to maintain a conservative balance sheet with strong capital and long liquidity runway.
We have been rebuilding our balance sheet over the past few years and feel we are well position for the uncertainty that lies ahead.
At March 31st are adjusted capital, which as a reminder includes after tax reserves and adjusted tangible equity was 3.1 billion.
About four times are after tax losses.
From a capital adequacy perspective are adjusted net debt to adjusted capital ratio was 5.2 times comfortably within our four to six times target range and <unk> modestly, reflecting the capital <unk>, we return to shareholders in the quarter, the largest portion of which was a special dividend.
Just in February.
Lastly, and perhaps most importantly, let's discuss our liquidity.
At quarter, and we had 4 billion of available cash, which we believe is enough to maintain operations and cover upcoming maturities through 2021 under numerous stressed scenarios with no access to the capital markets.
We also had 6.1 billion about uncovered assets and 3.6 billion undrawn conduit capacity, which could significantly extend that runway if needed to the roughly 36 months, we've talked about in the past.
Are conduits or diversified across 13 bags and our free of Mac clauses corporate covenants and cross default.
Which always ensures access to these lines.
Let me spend a minute talking about the performance triggers underlying our conduit and it'd be a structures. The specific terms Valerie but the performance triggers are generally similar and conservatively set.
We are currently well inside our performance triggers and through our stress testing, we are confident that the recession and unemployment levels would need to me much more severe than current forecast to raise concerns.
We have numerous tools at our disposal to protect our structured programs, which include collateral exchanges exclusions and overcollateralization to name a few.
In closing, we remain confident in our ability to navigate the evolving market conditions of covert 19.
We manage our business to generate strong economic returns, we're utilizing the strengths of our business model to optimize performance and we have built one of the strongest balance sheets in the non backed consumer lending space.
With that I'll turn the call back over to Duck.
Thanks, Mike.
Let me close by saying this.
Although we are operating under unprecedented circumstances with a lot of unknowns ahead about we feel confident that we have positioned our business Wow for an economic downturn.
We have a conservative balance sheet with plenty of liquidity.
Are unique model would beep customer relationships and branch central and digital capability will allow us to stay close to our customers and continue to serve them in this difficult time.
And we have underwritten our portfolio to sustain a severe downturn.
<unk> strengths of our business and the <unk>, we have within our control will help us navigate whatever lies ahead.
So but that let me. Thank all of you for joining us and altering the call over to the operator for question.
The floors now open for questions. At this time, if you have a question or comment please plus star one on your Touchtone phone if at any point. Your question is answered you may remove yourself from key by pressing the pound key again, we do asked that while you pose your question that you pick up your handset to provide optimal sound quality.
<unk>.
Thank you are first question comes from Michael K. with Wells Fargo.
Hi, I like the morning in terms of thinking about net <unk> bold balances. This remote forward how should we think about you know slower payment rates by your bar was providing a partial offset to the weaker origination volumes seems like by my <unk> was much lower year over year into your one.
[noise] Hey, good morning, Michael This is Mike Oh, well. Thanks for the question I would points you really to page seven I'll talk around us a little bit. We you know in terms of our overall payment rate form of course polio.
This page focus is really on delinquency here on the bottom but.
We look at our payments.
We were seeing very consistent raged through January February.
March even in the first half rapes on the portfolio were really consistent and then the second half of March we started to see some softening in payments largely due to contain Michael.
Yeah, Michael you may want to your phone.
Okay. Okay.
Sorry.
That's a good my kids are still asleep, so [laughter] sorry getting back to this we saw some payment softening in the second half of March just as our customers became dislocated from.
The sort of emergence of the pandemic and the initial jobless claims what we've seen in April to date through the 24th which was last Friday, we've seen a a improvement in our payment rates and that has contributed in part to the delinquency improvement you see on the page so.
I would say as a lot of uncertainty with this situation as I think everyone knows but we're we're somewhat encouraged by this what we're seeing in the early parts of April in terms of those payment rates.
Oh. Thank you you know in terms of you know what kind of profile are you, saying from your borrowers war or in your cold bit assistance programs is it more kind of broad base, Dorset, hitting a certain credit profile and lastly are you seeing bar enrollments a needs assessment programs beginning to level walk at this point.
Yeah, Hey, Michael it's Doug.
You know look this current situation you know come pandemic induced stress in the economy is as everybody knows unusual there's a lot of variations depending on regional.
Geography.
I I would tell you generally.
Urban areas with Hi, <unk> population density.
On the coast.
Are showing more weakness is both in terms of demand in originations, but also our customers needing assistance.
We're also seeing some of the.
Early in the states that were hit pretty early in pretty hard like California, and New York and Washington, The trends are running higher again with customers needing assistance and I I think you know as we as dates have stayed home orders, but also start opening them up.
And as we've seen over the last couple of days, they're gonna be opening up in different ways. I think those kinds of dynamic are the ones affecting our customer more than any other trends that at this point I think it you know regarding trends you know, we've seen a pretty steady trend.
And in April your Mike I said.
That we have we've seen a nice uptick in payments over the last couple of weeks I actually went out and visited a bunch of our branch and last week and listened into customer calls and there's a number of customers you know either who have some kind of lumpy expenses because of this specific.
Issue or got there government stimulus check that then you'll maybe we're on bars distance very very short time unable to pay so I think it's a little too early to talk about you know broad trends, where they're headed last couple of weeks, we've been pretty encouraging.
Thank you.
Your next question comes from David <unk> J.M.P. Securities.
I good morning, and thanks for taking my question, hopefully everybody's safe in well over there.
Some of the David Thanks for it.
<unk> little longer term question for you obviously, we're all.
Dealing with unprecedented uncertainties near term.
Is evident by the outlook.
I'm sure. Your this is it maybe a question you're getting a lot more frequently but.
You speak to.
What you've learned us far from a process standpoint.
[noise] from all of the remote closings.
And whether on the other end if you will when we emerged from <unk> do you think there may be an acceleration in your investment in in expectation for.
The digital channel versus the branches.
Yeah look at a it's a great question and having you know navigated in financial institutions, a couple of both economic crisis. Another.
The other yeah unfortunate events like 911, Yeah anytime you have a crisis, there's a lot of yes, very difficult things from a human factor. This one being a health crisis, obviously, there's a number of people suffering people passing away and it's horrible and economically you know I think we're all.
Where we're headed into a downturn and started one with that said, yes location all always presents certain opportunities and you know we as a business are making sure that we keep an eye on it one.
Them is the one you mentioned, which you know every customer yeah. There were plenty of customers, who are digital natives millennials in younger than millennials, who very comfortable on their AP and on their I phone, Iran. Droid and doing business. There were a number of our customers, who really preferred to walk into.
Store, they can still walk into one of our retail store fronts, but they can actually do more online and so we're seeing a big optic and people using our app.
We always with present customers gave them the ability to close remotely if they.
If they met certain criteria, we need to still do a whole income verification, we need to do ability to pay underwriting with a budget you know in fact, leading into this in early 2020 before co bad about 20% of our present customers were closing <unk>.
Walking into a branch, but that included a detailed phone conversation and included income verification those kinds of things you know I I think we have now really perfect did a number of things you know are putting in place the ability to co browse on a browser and have our branch associates made.
See the same exact thing is the customer as they're walking through the closing process <unk> piloting some video closing we've actually rolled out chat. So people can get a lot more work done without even being on the phone with our customers and so I think as you look ahead I've always said.
That we need to make sure the things that are special about our model, which is a deep relationship a conversation with the customers ability to pay underwriting are all in place, but the things we can do to make it more make it easier for customers and have a better customers <unk>.
<unk>, we are absolutely focused on one tidbit for you.
This month alone we've had phone conversations with 900000 customers because we're proactively doing outreach to our customers before their payment not waiting for people to be delinquent and just checking in on them seeing if there's anything we can do for them and so.
One of the real opportunities of this is make sure. We just stay close to the customers ones that need help we'll give them help ones that want to do business with us and have good credit will do business with and for sure. We're we're making sure we continued to invest in our involving model.
Got to know that it's helpful perspective, and maybe just went when follow up it's it's it's related to it and.
<unk> once again I realize how many variables are at play here.
But as you think about the capabilities to close remotely.
And what are the outcomes of stay at home.
Being people getting more comfortable doing that.
How do you think that may impact.
Future mix of direct auto I mean that isn't that still a product that ultimately not only requires somebody to come in debit car appraised, but I would imagine it's a higher touch in person kinda up sell as well at times.
[noise], Yeah look as you know certain customers only qualify for secured loans and it's it's people would lower credit quality, who we won't make and unsecured lung too if a customer qualifies for a secured loans and and unsecured loan we.
Them choice and you know, we walk them through the options and they get to choose which loan is best for them. We actually are secured lending percentages are you know running pretty similar to what they were before even a little bit more in April these rooms.
<unk> closes we've actually worked out a protocol for present customers, where we already have access to the title. We can do photo up load of the car and they don't need to come in for new customers. We've actually worked out a number of options.
Including you know some of the reasons, we're doing more remote close is because you know customers, especially at states you know where there's higher concern in the stayed home orders are more restrictive they're worried about coming in and interacting with someone you know depending on who they are.
So what we'll do is we'll take them all the way through the loan closing well upload the document it'll all be done and they can then drive their car fit in the parking lot. We can go take pictures and do the inspection they can flip the title through the mail slot with one of our associates on the other side.
The door and it can be a you know proper social defining thing.
Auto secured lending experience and so we're really you know evolving our motto and we're learning a lot. During this time, which I think we'll we'll pay dividends in the future.
Terrific. Thanks, so much.
Nor next question is from Aaron Cyganovich with city.
<unk> you know just looking at the at the provision build for the quarter I think it would kind of struck me a bit was you know while this was definitely large you know relative to the day. One build you know 1.1 billion versus 234 million.
It seems you know a little bit you know smaller than I would've guessed you know and then maybe you could just talk about.
The the day, one build was there any kind of recessionary period in there is the assumed life of these loans you know relatively short I'm, just trying to understand like with with the potential for no additional builders, we kind of pet through this.
Running an errand things for the question. So I'll answer try to answer your your first question on the day one build when we were striking that reserve on January 1st as required under the day, one Cecil requirements, we looked at the macro conditions and you know at that point in time macro.
Environment look very very stable.
[noise], so I would say as we.
Forward and then two to 331 and keeping in mind that anytime we strike. These reserves we use information that's available to us at that point in time. So you know we are reserves were based on information at 331 talk a little bit about in the prepared remarks that we looked at a number of different macro forecast.
Send indicators and ultimately ended up using and unemployment curved with the peak of about nine little bit over 9% in the second quarter with gradual improvement in that unemployment rate for <unk> into 2021, obviously since then things have moved a little bit forecasts have gotten.
A little bit higher so as we think about two two you know that it'd be a headwind, but we've got a lot of mitigating impacts that we built into our expectations are the reserve as well things like the government support that we're seeing and how that's gonna expect to influence our borrowers and and their ability to make their payments Ah argh.
Q wide coverage talked about a little bit and the remarks, we were we have about 25% coverage on our portfolio of customers, who have involuntarily employment <unk> product that makes the payment on the loan.
When those customers are unemployed and then of course bar or systems being another factor, but we we've included all those in our reserves as a a reserve assumptions.
Clearly the higher unemployment rate forecast if they hang around the next couple of months will be a headwind. But then we also need to include some of these tail wins and I just talked about as well as the impact of our underwriting tightening and likely just lower receivables on the portfolio a we've talked about seasonal a lot in the last few.
Orders Cecil when we're we're increasing our receivables we're going to build Cecil reserves when <unk>. When the receivables are declining we would naturally expect to see a release. So all of those factors will be in play and in terms of what happens over the next quarter and again, we'll use the information available to us at the end of June.
To restrict our reserves at that time.
<unk> you know in the the comedy amid above the the <unk> mitigating factors and I would imagine with the originations can be down so much that you would have some downward pressure on your moon balances and then I know Michael asked this question before but <unk> I would I would assume that.
A good portion or a portion of your repayments or <unk>, new consolidation loans from existing customers that kind of roll through is there a way to kind of gauge how much of of that you know essentially goes away the originations will be coming down so.
<unk>.
Yeah. So <unk> certainly does a factor in how the originations that we publish.
Will ultimately end up with an impact on receivable. So those <unk> those originations that we do report are on a gross basis. So part of that includes an association with Newt with new customer business and then also what we call present customer renewal, so Ah Knowles tend to be somewhere 56.
The per cent are rich nations in any given quarter and you're right to point out that not all of that is what we would refer to as new money that comes into the receivables. So we don't consider that to pay off but it is a factor in what ultimately ends up influencing the receivables our average.
Payment rate outside of that just on the portfolios around 3% per month.
But obviously is influenced by a lot about as time anyway, it's influenced by really pay offs as well and all of that all of those calculations end up going into what ultimately and job in our in our on hunting receivables quarter and you know we gave you some information about April.
You know, there's an obviously a lot of unknowns out there and it's really really will be dependent on how may and June.
Standpoint.
Yeah. The one thing I'd add to that is this is Doug.
You know you mentioned.
A kind of loan consolidation et cetera.
You know we're in a position as we talked about with a lot of liquidity.
You know some of our competitors have had to pull back for other reasons. You know, we're we're keeping our eye out for good customers that add add, especially you know much higher credit quality, who might not have as much supply in the market we think.
You know, it's it's a little early now we did a no regrets move and cut our credit box pretty extensively and we're being very very careful with the originations that's why they're down now while there's uncertainty but adds things clarify we think things like you know loan consolidate.
And potentially work hard issue, where is just because of capital requirements or other things. You know are either putting lines are not extending we might see some very good credit quality out there that you know people are known to writing and see opportunities throughout this again, it's early days, we're spending more time right now conserving capital them being careful.
The uncertainty but.
Apropos some of the other questions. We're also going to have our eye out for opportunities given the strength a bar balance sheet and you know our unique ability to underwrite this customer.
<unk>.
[noise]. Your next question comes from the line of Moshe Orenbuch with credit Suisse.
Great. Thanks couple of couple of questions I guess the first one really is as you look at the borrowers that have gone you know into these programs are you know bar benefit type programs.
How long do you expect them to be there and I guess when when will you be able to kind of look at that and say you know for this for this cohort things have worked out well for the.
The other cohort we have you know we have to add a different program like what what's the timeframe look like on that.
Emotions, Mike so they they they do very we have the internal policies and only allow certain them on these things before or assistance programs for instance difference in a given year, but that's all you know during normal periods I think we'll we'll see how this plays out first and foremost aren't borrower systems tools.
There to help our customers in difficult times, we had a couple of different sort of flavor is about if you will we we do have a payment deferments, which you know allow the customer to make either a partial payment or in some certain instances no payment at all and moving bar or forward to the.
The next payment and the the other flavor of what what we would do is temporary modifications. So there was an option for a customer to reduce their payment over a period of say three months at which point the lone would revert back to the original payment level after that period. So a few different options for it I think.
Again, a lot of uncertainties here, we're going to try to help our customers best we can through this difficult time and.
Not for them. These these solutions that we think help quite a good I think the most important.
Dynamic that maybe different with our company and what we see with borrower assistance is the fact that a lot of our customers are participating in bars systems through a form of payment and you know we see.
Much better performance improvement when the customers participating in <unk>. So it works out really well for our customer and for us to keep them at least making some form of payments that period.
Understood.
Mike also on the funding side I mean, you were able to you able to do a securitization here kind of as you mentioned the first one in the installment went on space. When you think about the liquidity that you're carrying and how long you might you know be doing that until things or you know something closer to normal.
What signals would you need to see what it needs to be better execution on the on the secured front would it be the need to be able to do and unsecured deal like how do you. How do you think about the time frame for carrying that liquidity and you know kind of you know being able to get back to more normal on a funding basis.
Yeah, No. It's a great question, then and certainly although the points you hit on our things will we we will be looking at it you know, including the environment gets around that's right, but access to funding.
It is an important elements of it both the A.B.S. market in the high you market were closed for about a month, we've seen both open up so the last four weeks for high yield we've seen about 40 transactions. There. The market does continue to improve we're starting to see some longer transactions there most of the.
Deals to date has been in the five year category on the A.B.S. market A.B.S. opened up about two weeks ago and generally you saw autos one equipment transactions for the first five six trades, we were actually the first personal loan issuer to open the market. So we really really proud about that in pricing.
750 million dollar deal, but I think as we go forward with relative cash we have on the balance sheet, we want to make sure we retain that liquidity runway, that's really important to us we will certainly be looking at availability of both of those markets and how how readily available we can access.
Both of them, we feel very very competent in our programs and you know, we'll see how it plays out over time, but I wish I had a perfect answer for you on this I think it's just oh wait and see and evaluate all of them different different factors that are present in the environment today.
Understood Thanks for much.
Thank you.
Your next question comes on the line of Kenneth lay with RBC capital markets.
Hi, good morning, Thanks for taking the question.
Just one at a higher level, how do you think this potential downturn could change the competitive landscape you know one main versus other lenders or other on my members. Thanks.
[noise].
Yeah look I think you know as I as I mentioned, you know earlier in the call.
I think we enter from a position them strength.
Think that.
Yeah, we have a lot of liquidity and our funding model which includes.
Issuing secured debt unsecured debt staggered 10 years, you know last year, we didn't eight year and a 10 year deal that you know gives us plenty of room.
And having the bank lines, which you know we've always said that you know, we'll never hesitate to make sure. We've got we're conservative and have plenty of cash I think it'd be it differentiates us. So I think throughout this we're going to have the ability to provide supply to consumers who are in need and if history.
She is any guide is you know some competitors with balance sheets, especially bank balance sheets are a little slower to come out and and start lending and then I think you know people who sell their loans off balance sheet, we'll see what a downturn.
Looks like for them I liked the way we're position you know from from a capital and a a liquidity standpoint, I think all the things we've been doing which is to really focus on the customer experience.
Are going to pay off yeah, we have the ability to do a lot of our work on the phone or online and we've been making investments there. So I think that'll pay off through the cycle, but I also think history has shown that being close to your customers being in dialogue with your customer.
Cars, helping them in times of need builds a lot of loyalty and you know we have you know well over half of our customers are repeat customers. So we think you know will come out at the back end in a in a in a very strong place and if we just stick to our fundamental have plenty of.
Of liquidity.
Disciplined underwriting focused on the customer experience involve the models in the way I talked about before get better engaging with customers, who don't want to come into the branch all of those things you know we feel good about this and you know I think some weak our competitors may have.
A hard time with their balance sheet, which will give us lending opportunities.
You know throughout this.
Thanks very helpful. Appreciate that color just one follow up it if I may historically low <unk> have been relatively constant I'm, just wondering <unk> in a in a potential downturn, especially with customer demand sound as if it's going to be much lower.
Or do you expect any change within that trend. Thanks.
It can thanks, Mike I I would would I would say is generally or you're right. We you know we've we've talked about pricing before we continuously price tests and our market to until the competitive. So we continue to do that W. mentioned earlier that under our current conditions. Many of our customers will qualify for a secure.
Loan versus unsecured as you know secured loans carry lower pricing. So I would expect to see lower portfolio pricing in the near term from that mix shift and as I mentioned also in the prepared remarks that should influence yield going forward as well.
Gotcha very helpful. Thank you very much.
Thanks for the questions.
[noise]. Your next question comes on the line of Rick Shane, but J.P. Morgan.
Hey, guys things for taking my question is this morning in Iraq, I hope everybody is doing well.
I just wanted to talk a little bit about dividend outlook.
B realize it's sort of optimistic.
The slow slowing loan growth certainly has an impact on Capitol, but I'm curious as you look forward towards the target leverage in the economic uncertainty how do you think about the special dividend as we moved through the year.
Yeah, Hey, obviously, the landscape has changed a wreck but are set of tap it all use of capital and capital return priorities is you know really remaining constant which is you know we'll make loans that we think have good risk adjusted reach.
Turns we'll make sure that will make proper investments for the long term franchise of the business I think what's changed as you know we're going to make sure. We're very focused on Capitol preservation until we see have more clarity about you know where this thing is going to sat allowed.
We you know.
Created and the level or we we set the level of our regular dividend with a lot of modeling that could even survive a severe downturn. So that you know why we're paying the regular dividend.
You know right now we have nothing to say about the special dividend you know, we we're going to be proven stewards of capital and we're going to see where this plays out but we're very comfortable you know with our with our regular dividend at this point.
[noise] terrific. That's very helpful. Thank you guys.
<unk>.
Your next question comes on the line of John Heck with its Jefferies.
More guys and thanks, thanks, very much pretty happy grabbing everybody's doing okay. First first question, it's just a little deeper dive into the <unk>. The Rover delinquencies is we'd scratched through April here I mean are you able to <unk>.
Determine you know of the reduction how much of its type two deferrals versus your <unk> your passed from stimulus.
Is there any more.
Isn't the performance, whether it's payments or delinquencies when secure verses and secured.
Yeah, John this might go so it's a that's a tricky question. We do look at levels of borrower assistance from the portfolio, which don't get alluded to his remarks, you know the the trick with this is with the customer have gone him took delinquency had the docking on our system and so we don't tend to.
Think about it that way again, we we look at these programs as available to our customers to help them in in time so.
Difficulty I I will continue to come back to the the fact that the vast majority of our borrower assistance support comes with some commitment and payment from the customer and we know that that improves the outcome of the situation for borrowers dramatically over the.
Over the coming months.
Uh-huh all my other questions have been out from you guys very much. Thanks.
Extra.
Your next question comes from the line of Vincent came back.
[noise]. Thanks to morning hope everyone. So will <unk>. It's morning, <unk> one question on the unemployment insurance.
So if you could talk about just caught up in more detail how it works.
So if I remember Christian so 25% of your portfolios insured with his our use sells insurance and if so you reserve for that dance like she's just trying to think about expense costs. So much worse.
Yeah sure Ah Great question for me step back and just talk about the product a little bit for a moment. The this product is as an optional one for our customers given the penetration we have a 25%. It's cool that is evidence that this product does have value for our customers and it's truly times like this that.
Show that the product is designed to provide provide that protection to our customers. It will make the payment on the loan for a period of month, silver, which that borrower is unemployed.
Well I think it's important to know that the product does stand on its own so our our pricing on the product than it is under written I say that loosely because it's it's under written as a group. If you will the pricing is set at a state level. It's all done by our our captive insurance company and.
Fort Worth, Texas, we had.
Pricing set to achieve a reasonable loss ratio in a modest profit over the long term and while the product does protect our portfolio. It's it's not a factor in the way that we price it.
On the on the claims expense side. When you think about just sort of how how the the expense ends up in the income statement. We have a number of continuing claims and claims that are paid out during the period. So those run through is that they're practically cash claims and then at the end of every quarter or we will put up a reserve for.
What we think we've incurred in the portfolio, but have not yet seeing the the clean come in it's a little different than Cecil and that it's more of that a little bit more like the old version of reserving where you look at what's incurred in your portfolio.
And so we when we saw in late March the.
Somewhere in the neighborhood 10 million increase in new insured new unemployment claims that the U.S. level, you know that sort of translates into our need and an expectation to book a reserve for those future quaint. So that's really what was represented in the 23 million year over year increase was all reserving for future.
Names as we go into the second quarter those planes bombed become part of our our run rate and evaluate where they came in relative to our expectations will go through the same process in June.
Has anything changed our reserves to our reserves need to go up or down based on expectation. It's it's hard because of that to give a number four two q. at this point, but we will as you know we'll continue if we continue to see elevated new jobless claims we should see elevated levels of insurance claims.
Forward.
Okay.
For so the first quarter expense is reserving for what you kind of scene as [noise].
As incurred 16 unemployed.
At that time, if you have increased and blunt unemployment.
Expectations and second quarter, then you'd book and increase <unk> right. Yeah. Among all the other factors that go into the claims expectations I guess that the aggregate level of claims is.
Within the period, both a mix of claims you know real cash claims expense versus reserves, but that increase we referred to was was almost 100% related to a reservist claims that we expect to see in second quarter. That's helpful.
Okay that makes sense to know just maybe less we call from that the.
<unk> the government assistance, having listened to slowly impact or start to keep her off in terms of they didn't that's your customers resents still continuing to build as it does it.
Yeah, Hey.
Vincent the look I I think one it's more anecdotal than it is you know scientific it's only been a couple of weeks or in the middle of April I think there's too you know there there's multiple things happening around government assistance, the paycheck protection program.
Means that a lot of small businesses are getting forgivable loans that will keep people on payrolls, which will mean you know more people are just paying who might have been impacted there's the stimulus payments that are coming in again, you know ride around that time, we saw an update.
Payments, but you know we think it affected it but I didn't want to overstate it and then extended unemployment and enhanced unemployment insurance for our customers. You know we'll have to see how it plays out and so you know the <unk> you would.
It is a major government stimulus package. It will have some effect on hopefully you know it helps Americans generally be able to meet their obligations, but you know I think it it's really hard at this point in the cycle to to say exactly how how it's going to affect things.
Okay. Thanks, that's supposed to make sure taking my question some <unk> like.
Your next question types of the lineup, Kevin Barker with Piper Sandler.
Good morning.
So morning, Kevin in regard to some of the customer assistance that you put in place I believe you said there was about 6% of customers, taking it up so far and it tailored to each or but given you know what we've seen out there. How long are you willing to continue to provide the customer assistance just given.
You know what has occurred right now and I know, it's a fluid situation, but just trying to get on understand how long we could see some of these deferrals or forbearances.
Yeah, Hey, I'm.
Kevin No. There's a lot of interest in this first of all let me let me just give you a little context in a normal month last year, we had two per cent of our customers. We provided some sort of bar assistants, and so now we're providing 6%. It's obviously an uptick but it's it's something we usually use on a regular basis Mike.
Referred to.
Two three basic types of customer assessment.
There's deferments, which are month to month.
There's temporary modifications, which are usually three mom and then there's some permanent modifications when somebody has a changed circumstances, it's going to last for a while you know Mike referred to the vast majority in April 95.
Kind of customers, who used bar assistance on chose to pay us something I think it speaks to our relationship people wanting to pay their obligation. It also means if you're in bar assistance, you know you're picking up your phone you're having.
Conversation, you're working through options and we are doing the right thing with our customers, which is trying to support them through this very difficult time would stay at home orders you know concern in the economy, you know we will see.
And and you know this well it's early to say, but you know I'd say over the next quarter or two you'll see and it you know you're not going to be on bars assistant you know.
<unk> forever without so hopefully that gives you a little more context again I want to like be really clear.
Our relationship with our customer and our standing by our customers in their time of need in the core principle of our company. We think it's going to you know both benefit the customer now and benefit the long term franchise and loyalty Ah with one main who's been around for a long.
Time, we'd helped customers through these kinds of cycles before and we think it's going to you know help help us in our customers right now to manage through the uncertainty and also help help the franchise long term.
Okay, and then are you using different modifications fuhrman's for the auto product versus unsecured are you seeing a greater take operate between the auto any unsecured.
Kevin <unk> in general, though I mean these these products are offered to all of our customers.
As you know with direct auto and hard secure lost performance on those products are.
Much much better much lower than last performance on and unsecured so I would say it the the assistance needed for those is generally tends to.
Run in line with various products I wouldn't I wouldn't expect that would be a major difference between one.
Okay. Thank you for them of course <unk>.
<unk>.
Your next question comes on the line of Wasserstrom would you be s.
Thanks, and I'm good morning <unk>.
Moving back to to be expectations around around Los experience I think under what circumstances could you realize that 2.3% roughly you know increase of magnitude to so I listen to the in the threshold around profitability.
From has been out in the context of <unk>, roughly 10% expectation, but I think the the consensus among economists right now is for.
You know peak unemployment around something like 15 or 16 on your end employment something around 12. So you know experience that's been somewhat more more stressful than than this article.
Yeah, Let me give you.
Context, Eric So we have we've we've run a number of stress tests.
The one you saw at Investor day, what we're referring back to is the one we shared with you it Investor day, which the results are in the in the deck, which was Oh wedo nine levels of stress, which got to 10% unemployment on a sustained base.
This and then tapering off over four years under that scenario. There was 1.6 times loss in a you know and we we.
Talk you know what we saw in a way to nine and the portfolios and then we adjusted it based on the current portfolio a composition.
We know losses would have to more than double so you know go from 6% the 12% they eat into our current question.
That doesn't include a whole bunch of <unk>, many of which were already polling reduce inexpensive tightening underwriting doesn't take into account unemployment insurance or the government support measures and so we've actually taken that task and added a.
The number of stress factors to it including you know above and beyond severity from <unk> nine and you know we feel really comfortable that the businesses position to whether this downturn. So we're not just resting it on kind of Oviedo 910 per cent on a darn unemployment.
Up on that for one moment the.
The the you know the not so much the the actions that you're taking bit more around it sounds like you and getting you've done some estimates around how much. The the stimulus actions will will benefit there are lots of experience can you, perhaps like bring that in magnitude about how much that that can be done the locker.
Yeah.
I wish I could answer that question I would say when we're in terms of sending the lost her because the the truth is a the these are the government support or are you guard coverage Forest systems. We all believe and have been pack of included in our reserve results the expectation that those will be mitigating impacts the unemployed.
D. The ultimate determinant of.
The loss in this particular situation the biggest factor will be the sustain level of unemployment rate over time as Doug <unk> modeling the the stress testing and downturn planning was Oh, we don't nine that was a sustain level of unemployment of 10% over about a year period. So that's really what will <unk> will what will be.
The biggest factor in determining what happens with our book through this process.
Just one last question here you know just in terms of the the <unk> of delinquencies you know how how should we think about that with respect to again, but the stimulus actions and also some of the assistance programs that you put in place how does influence the raw rates and such.
Yeah, well the way I would think about it is all all of these things whether it be borrow assistants, I.U.I. or government support we expect to.
<unk>.
Payments on the low.
One form or another over over the next several months if that obviously impacts delinquency, but again I I keep coming back to this and I apologize for for beating a dead horse. If you will but it really is going to be determined by the sustained unemployment rate that we see going forward.
That would be the ultimate determinants of what things look like in the future.
Right. Thanks, so much from taking my question, yeah, thanks or.
Alright, Hey look thanks, everybody for joining us we appreciate it will keep you updated I hope that everybody.
Stays healthy and safe and we'll look toward the talking to you next quarter and Inbetween. So everyone have a great day.
Thank you if you do have additional questions you may contact Catherine Miller for a further follow up. Thank you for joining today's one main financial first call or 2020 earnings Conference call. Please disconnect sure line at this time and have a wonderful day.
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