Q2 2020 OneMain Holdings Inc Earnings Call
Ladies and gentleman just as the operator today's conference is scheduled to begin an approximately two minutes until that time your bonds will again be placed on musical. Thank you for your patience.
[music].
Welcome to the one main financial second quarter, 2020, <unk> earnings conference call and webcast.
Hosting the call today from one main it's Kathryn Miller head of Investor Relations.
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It's now my pleasure to turn the floor over to Kathryn Miller you may begin.
Thank you Maria good morning, Thank you for joining US let me begin by directing you to pages, two and three of the second quarter 2020, investor presentation, which contain important disclosures concerning forward looking statements and the use of non-GAAP measures. The presentation can be found any investor relations section of our web.
So.
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.
Include the effects of the coded 19 pandemic on our business our customers and the economy in general.
We caution you not to place undue reliance on forward looking statement.
If you may be listening to this via replay at some point Dr. today, we remind you that the remarks made herein are as of today July 28, and have not been updated subsequent to this call.
Our call. This morning will include formal remarks from Doug Sheldon, President and CEO and make a Conrad our chief financial Officer.
After the conclusion of or formal remarks, we will conduct acuity Justin So now let me turn the call over to Doug.
Thanks, Catherine and good morning, everyone.
This remains a challenging time for every one.
The Cobot 19 pandemic continues to impact every aspect of our lives I would like to thank the one main team members, who continue to provide the highest quality service to our customers and support to each other through these unprecedented times.
One main remains focused on the wellbeing of our customers team members and communities.
Our highly flexible omni channel model is well positioned to adapt to current market in public health conditions and ensures we can continue to serve our customers supporting our customers through good times in bad is a hallmark of one main.
How we have gained the trust of millions of customers.
As we've said before.
One main have several fundamental strengths and these strengths have been parent through this crisis and are evident in our second quarter performance.
They include our deep experience and proprietary data supporting best in class underwriting and analytics.
Hybrid operating model that optimizes, the customer experience and performance.
Our strong conservative balance sheet, and deep capital markets access and our superior return profile and consistent capital generation.
We continue to be guided by our key operating principles strong and stable credit performance disciplined originations and a conservative balance sheet.
Given the continued uncertainty in the economic climate, we're being conservative in how we manage the business.
In early March we implemented the downturn planning playbook that we had developed in 29 team. We took quick action and tightened our credit box underwriting only loans that met all return hurdles in a 2008 2009 recession scenario, which is.
Polluted cutting out the higher risk unsecured lending.
Increasing income verification requirements, and adjusting collateral and net disposable income requirements.
Since then we've refined our underwriting even more by adding stress factors to certain high risk industries, such as travel and leisure entertainment and dining.
During this time of uncertainty, we're being hyper vigilant about monitoring and adjusting our underwriting we look at our delinquency trends every week by state and industry.
Parents to external data, including state unemployment claims and make adjustments as needed.
We're now given the uncertainty in the macro environment, we're maintaining a conservative approach.
This crisis has also shown how our investments in the omni channel experience have benefited our customers.
Well before the pandemic, we had been very focused on innovating for our customer so they could interact with one main through a number of channels, including digital over the phone and in person.
Our investments in digital and omni channel capabilities are paying off in the current environment.
We've accelerated our ability to close loans outside of the branch with new capabilities, including two way video chat and co browsing with customers.
Many customers now have the option to fully close alone without coming into the branch and during the second quarter about a third of our customers took advantage of that option.
Importantly, these out of branch closings.
We'll retain the critical components of our proven underwriting, including a detailed discussion with a one main team member ability to pay assessment and income verification.
As we continue to innovate and improve the customer experience, we remain equally focused on credit quality and we will remain disciplined in our underwriting.
Our second quarter credit performance was strong although we are mindful that a number of factors and especially the government support afforded to consumers influence. This performance our second quarter 30 to 89 day delinquency was 1.6.
3% a year over year decline, a 52 basis points. This was the lowest quarterly delinquency since one means merger with Springleaf in 2015.
Our mission is to be there for our customers, especially in times of need.
We had lives conversations with 1.6 million up our 2.3 million customers. During this quarter to understand their individual financial situations and Taylor an approach that was appropriate.
For some of our customers. This meant taking advantage of our borrowers systems options, which we were pleased to extend especially during this very challenging time.
That said borrowers assistance enrollments steadily declined during the quarter, reaching about 2.3% in June and approaching pre cobot levels in July.
Notwithstanding our strong second quarter credit performance, we're prudently managing the business assuming that at some point when government stimulus is decreased or eliminated credit trends will start to reflect the normal relationship with increased unemployment.
These assumptions are embedded in our second quarter loan loss reserve calculation and increases in our reserves. We have also performed a rigorous stress tests on the portfolio and we remain highly confident in our loss absorption capacity.
Originations for the full quarter were down 47% year over year, driven by reduced customer demand and the credit tightening that I mentioned earlier.
However June originations improved significantly visa be April as the country moved out of the most stringent stay at home orders and customer demand increased we moved quickly to tighten our underwriting at the beginning of the crisis, but remain prepared to be opportunistic.
If the outlook improves and opportunities present themselves with that said because the economic future remains highly uncertain, we're taking a conservative approach and assuming a slow economic recovery with elevated unemployment and therefore, we will continue to be concern.
Rooted in our underwriting.
Our cnine adjusted net income was $107 million for the quarter.
However, as I've said before we run our business based on capital generation Cnine adjusted net income excluding loan loss reserves, which we believe is a good proxy for capital generation was $212 million for the quarter.
In the past we've talked about how we manage our business to drive returns generate capital how we allocate that capital may shift depending on the macroeconomic environment and the relative opportunities, we see but our priorities remain the same.
First to make every loan that meets our risk return criteria.
Second to continue to invest in our business and third to return excess capital to our shareholders.
So.
After originating.
Every loan that met our more conservative risk adjusted return criteria in the second quarter.
And after reducing our leverage and enhancing our liquidity runway.
And also continuing to invest in our business to enhance our customer experience data analytics technology and digital capabilities, our business generated access capital they could be returned to shareholders.
As a result, we declared a dividend of $2.33 per share.
We will maintain a minimum quarterly dividend.
33 cents per share going forward.
Dividends above.
The minimum will be evaluated by our board every first and third quarter consistent with past practice and cadence and in line with the capital allocation framework I just mentioned.
We expect to end the year between 4.3, and 4.5 times leverage down from 4.8 times at year end 2019, and at the lower end of our stated leverage range of four to six times.
As shown on slide 19 of our earnings deck, one means ability to simultaneously grow.
Invest in the business de lever and also drive capital returns is a testament to the strong fundamentals of our business model.
We've spent the last several years building and fortifying our business to ensure that we can continue to serve our customers through any economic environment or phase of the cycle.
We have built and maintained a strong balance sheet with robust liquidity and demonstrated capital markets access a track record, which was further underscored by our ABS issuance in April and an unsecured bond offering in Maine.
With $2.7 billion of cash and $7.1 billion of Undrawn conduits, we have liquidity through 2022.
Even in an extreme stress scenario, assuming no access to capital markets.
We will continue to leverage each of the core strengths of our business. During these uncertain times with that let me turn it over to Mike.
Thanks, Doug and good morning, everyone.
Let's move right into our second quarter results.
We earned $89 million of net income or 66 cents per diluted share.
On an adjusted see it I basis, we earned 107 million or 80 cents per diluted share.
Originations for the quarter were 2 billion down 47% from the second quarter of last year.
As Doug mentioned, we took quick action in early March tightening, our credit box and safeguarding our portfolio, which in combination with lower demand led to the decline in originations for the second quarter.
This tightening also led to a 57% mix of secured originations compared to 55% in last year's second quarter.
Customer demand and loan originations up steadily improved as consumer spending and employment have improved throughout the quarter.
June originations were down 26% from a year ago as compared to our April originations, which were down 63% year over year.
Our ending net receivables were 17.7 billion for the quarter.
Down 551 million sequentially, but still 716 million or 4% higher than the second quarter of 2019.
Assuming current trends, we expect the rate of receivables liquidation to decelerate in the near term relative to the 551 million dollar liquidation we experienced in Q2.
Interest income was 1.1 billion in the second quarter.
7% from last year, primarily reflecting 8% higher average receivables compared to the prior year period.
Yield was eight basis points lower than last year's second quarter, reflecting the impact of increased borrower assistance.
However yield was up two basis points sequentially as the impact of borrower assistance was more than offset by the sequential improvement in late stage delinquency.
Interest expense for the quarter was 266 million up about 14% versus the prior year, reflecting a 4 billion dollar increase in average debt balances.
A third of this increase supported the 8% growth in average receivables.
The remainder was primarily related to enhance liquidity kept on hand in the quarter. After conservatively drawing some of our conduit lines, which at the end of this quarter were completely repaid and remain undrawn today.
On July 29th 1 billion of eight and a quarter December 2020 bonds will be retired and as a result, we expect interest expense in the second half to run closer to first quarter levels.
Total other revenue was 144 million in the second quarter.
12 million lower than the prior year quarter, mainly driven by lower optional product related revenue in commissions, which generally track our originations.
Policyholder benefits and claims increased by 40 million year over year.
And 22 million sequentially, reflecting the current and expected are you I claims associated with increased levels of unemployment in our borrower base.
New I claim trends have moderated significantly with June levels down, 62% when compared to April.
Let's move onto our credit performance.
Net charge offs for the second quarter were 6.33% about 13 basis points higher than last year's second quarter, primarily reflecting the denominator impact of slower growth in our portfolio.
As Doug noted our 30 to 89 day delinquency rate of 1.63% reached the lowest level in the history of our combined portfolio driven by a combination of factors, including our borrower outreach and individualized assistance programs and the benefit of government stimulus, which has provided critical.
Financial support to consumers.
Let me spend a minute talking about what we've seen in terms of our borrower assistance trends as you can see on slide 11.
Enrollments peaked in April and 8% and have since declined 2.3% in June.
Up the approximately 300000 customers who enrolled in borrower assistance during the second quarter.
Approximately 85% of those 300000 have rolled off the borrower assistance program and are no longer in the program going into July.
July borrower assistance enrollments are trending towards prequalified levels of approximately 1.8%.
The strength of our customer is evident in our cash payment trends, which in June was 4.8% of receivables 20 basis points higher than the prior year average as a reminder, these payment rates include both interest and principal.
Given these trends and the resulting level of delinquency in the portfolio, we expect our net charge offs for the year to be between 5.8 and 6.0%.
As we think about loss performance beyond December 30, Onest. However, there are many unknowns, including any further government support and the extension and level of any federal unemployment benefits as well as the rate and speed of job creation.
That brings me to the second quarters loan loss reserve build of 140 million.
Which results in a C N I loan loss reserve of approximately 2.3 billion or 13.2% of receivables up from 12.0% at the end of the first quarter.
The reserves, we added this quarter, primarily reflect the impact of an updated macroeconomic outlook using third party economic projections.
We have assumed unemployment levels of 10% to 11% at the end of Twentytwenty.
Followed by a gradual reduction down to 8% to 9% by year end 2021.
And we've assumed no benefit beyond the existing government stimulus, which begins to run out in July.
The impact of our updated macroeconomic assumptions was partially offset by a base reserve reduction of approximately $50 million, primarily associated with the second quarter reduction in receivables.
Let me move onto operating expense second quarter operating expense was 297 million about 7% lower than last year's second quarter.
First half 2020 operating expense was flat with the same period last year and our expense as a percentage of receivables was 7.0% as compared to 7.7% in the same period last year.
We continue to expect operating expense to be below 2019 levels for the full year.
As you know, we utilize advanced data and analytics to manage our business and our operating footprint and we can react quickly to changing demand.
Since mid March we have taken many precautions to reduce our discretionary spend and adapt our business for the current environment.
We've also seen lower customer acquisition spend in accordance with our lower originations.
We continue to invest in critical initiatives, including customer experience technology, and our omni channel efforts.
With that let's move onto the balance sheet.
Over the last several years, we have been strengthening our balance sheet and enhancing our liquidity runway, we've been balancing our issuance of ABS and unsecured debt, allowing us to extend our maturities and free up unencumbered receivables.
The result has been a prudently levered balance sheet with strong liquidity and consistent access to the capital markets even in periods of market dislocation.
We were the first personal loan issuer to tap the debt markets. Following the initial market shock of cobot issuing an $820 million two year revolving ABS transaction as well as a $600 million of senior notes due 2025.
The second quarter issuance significantly enhanced our liquidity and our cash position.
At June Thirtyth, we had $2.7 billion of cash 8.7 billion of unencumbered receivables and 7.1 billion of Undrawn conduit capacity.
That's enough liquidity to cover continued originations our company operations and all upcoming maturities through twentytwenty to without accessing the capital markets.
As we've said before we have significant loss absorption capacity in both our income statement and our balance sheet.
We underwrite to achieve risk adjusted returns and the returns we generate on our receivables are such that in general losses would have to more than double 2019 levels before impacting our ability to generate capital.
To that end, we run the business using Cnf adjusted net income excluding changes in the loan loss reserve. We believe this is an appropriate way to think about the capital generation of our business and it is consistent with our views of capital adequacy.
You will see that laid out on slide 17 of our presentation, we generated 212 million of capital in the second quarter and over $1 billion in the last 12 months.
Our total adjusted capital, which includes after tax reserves and adjusted tangible equity was 3.3 billion at the end of the quarter equal to approximately four times, our after tax 2019 losses.
Our second quarter leverage ratio was 4.6 times, we expect to finished 2020, tween 4.3, and 4.5, which as a reminder is toward the lower and our target range of four to six times.
As you see on slide 19 of the earnings presentation, we continued to improve the capital adequacy of our business, while returning capital to shareholders.
In closing we have built one of the strongest balance sheets in the non bank consumer lending space and we are utilizing the strengths of our business model to optimize our performance and drive strong economic returns as market conditions change.
With that I'll turn the call back over to Doug.
Thanks, Mike.
Let me close by reiterating what we've been saying for quite some time.
Our business model and the value we provide to our customers gives us real competitive advantage in the consumer lending space.
And while there are uncertainties that lie ahead, we believe that we are very well positioned for success.
The core strengths of our business and the strategic initiatives, we are driving our enabling us to improve the ways in which we serve and support our customers, while optimizing our financial performance for long term value creation.
With that let me. Thank all of you for joining us and I'll turn the call over to the operator for questions.
Thank you Sir the floor is not open for questions. At this time, if you have a question or comment. Please press star one on your Touchtone phone.
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Thank you My first question is coming from Mike, Okay, and Wells Fargo.
Hi, good morning.
Let's start lower 2020 net losses represent just a push out of the timing of losses until 2021 or are we seeing a real improvement in the credit loss trajectory.
Got you contemplate it back during the Q1 earnings call.
Yeah, So Michael good morning to Mike.
You know, obviously credit is performing well I would say a better than they expected frankly.
Our 30 to 89 day delinquency at 1.63 for the quarter, Doug mentioned that was the lowest quarter. We've had in the history of the combined company.
So you know really tough to say beyond the end of this year I think we feel really comfortable just because of where the roll rates are and where our early delinquency is performing.
Calling out the 5.8 to 6.0 times, the 4% excuse me this year.
There's a lot still to be to be known here. We're in the early stages and.
I think it's too early to say, what's going to happen in 21, but we feel comfortable at this point, where we are for this year.
Okay I wanted to see what you're observing in that competitive environment right. Now is there an opportunity for you to move up perhaps like higher FICO customers and you can make attractive risk reward returns.
Yes, Hey, Michael how are you it's Doug.
Hi, Yes look the I think a number of competitors have pulled back I think most competitors have tightened their credit box like we have.
We have the advantage over some of the competitors, which is we built a more liquidity in a longer liquidity runway. So there are number of competitors, who you know are originating less for the same reasons. We are because we tightened our credit box and demand is down.
The third reason is there some that just don't have the money or the cash to make loans.
We have seen.
In what I would call the.
Lower and the rhyme or the higher end of non prime kind of that 675 to 725 FICO scores.
Competitors take their pricing up on you know our pricing is always been relatively competitive there and so.
We are picking up some share and that kind of range the the.
Higher quality credit, where some competitors, maybe pulling back or for a number of reasons and we are definitely focused there because it's good high quality.
Credit so those are some of the dynamics.
Thank very much.
Our next question comes from one of the Eric Wasserstrom Oh, yes.
Great Thanks, and good morning.
Good morning.
Mike just to follow up on on the prior question around the cadence of losses. It seems as if mining industry are basically suggesting.
One of two to loss curves that really more like like step functions.
One is is an expectation of a fairly benign third quarter, but a more significant step up in the fourth those.
As stimulus abates, and and deferrals of members systems.
The head of the benefits of that diminish.
And then the alternative model is is more of a peaking.
At some point next year as those same effects diminish and and on them and loss content more converge on on unemployment and I'm. Just wondering if you have a view on on where all the math, Mike Sison among those different options.
Right. So it's a good question, thanks and good morning.
So let me let me just step back for a moment on losses. So.
In order for us to see losses, we first up to see delinquency right and we have not seen delinquency a rise in our portfolio I mentioned do well in Michael's question, where we were in as far as the second quarter early stage delinquency, we have 180 day charge off policy and we're about.
Hundred 80 days from the ended the year and so really what needs to happen to move the needle on 2020 losses is either a change in early delinquency and that's I would say behind us at this point just from a flow rate perspective, and then what happens with more of our late stage delinquency and how many of those long.
In his role to loss. So you know again in terms of the year. When we're talking about losses, we really feel like you where we have these losses in the buckets today and it's it's it's not going to move the needle that much on the full year loss number now with respect to 2021.
And your question around the step function in the third or fourth quarter, certainly that will be a function of job creation and and where we are with government support which you know we're not sure yet where that's going to land from extension point of view, but I think people are referring to levels of delinquency at that point, which will then.
Influence your 2021 losses.
You know I would say in our Cecil reserving we've assumed just that so you know we start with our reserving with a baseline lost forecasts and then we implement stress on the portfolio. We've assumed in that reserving that theres no extension of government stimulus as I mentioned in the prepared remarks and.
We assume in that reserving that the delinquency rates begin to deteriorate pretty immediately that's a reserving point of view, we haven't seen that yet in in our results, but you know that will be more of an influence on 2021 than any then it will on 20 that's helpful.
Yes very helpful. Thank you and if I may just a follow up with a question on the bar as if the programs.
Again, Michael we would you potentially give us any granularity on.
The 85%.
On the program or how many flow to current how many moved back into delinquency and how many potentially flow to loss.
Yeah sure I mean, as you know with our programs you know there individualized and tailored really come with the combination of single pay deferments and also a shorter term modifications to help customers to a little bit longer term of stress.
I would make two important points here on borrower assistance. One is that this isn't new for US we average borrowing assistance enrollment was about 2% per month normally.
We've been using these programs for a long time.
As the second point is that a in addition to their them being tailored. We also you almost always include a partial payment from customers and you know so we've talked about those 85% customers who have rolled off.
I would say it as evident in our.
Our loss in our delinquency rates excuse me for the month a those are performing as we expect we're seeing very very strong payment rates as you can see on in our earnings presentation.
In June so that indicates that a lot of those customers coming off the borrower systems are paying I would tell you those trends remain fairly consistent in the month of July from both the payment and delinquencies standpoint. So we it's too early to tell how those well how those loans and bar assistance will ultimately perform.
But given our underlying delinquency and payment trends in the portfolio. It we feel very good about where it is right now.
Thanks very much.
Thank you.
Our next question comes on line of Mark Hammond of Bank of America.
Thanks, Hi, Doug like a in Kathryn.
Within our public hey, with public equity valuations of consumer credit companies materially lower this year and your ear.
Significant liquidity position. So wondering if I can get you take on what you're seeing as far as inorganic growth opportunities in market right now or you think they will have a yet to come and will come in the future.
Yeah.
Thanks, Mark we are yeah, we've been we've been innovating in our platform you know all from a customer perspective, which is you know what else could we do for our customer or how do we attract more customers.
How do we make sure the value we provide to customers continues to grow and so our our lands for either product.
Innovation.
Or evolution.
Or a channel different channels, whether its digital channel phone channels partnership channels.
I was kind of that the areas that we've been exploring and I've talked before about about some of those on there are you know a number of companies that.
Need capital and put themselves up for sale. Our M&A team is pretty active in conversation what I would say is you know until things shake out a little bit more we're not in a big rush, if we see the right opportunity well.
You know will potentially be.
The able to pick up on either a platform or product company.
I've mentioned before publicly that.
Our bias would be more to smaller tuck in kindness situations and so all I would say is theres still lot of uncertainty out there.
There are there is a lot of activity and you know we're open to discussions, but theres nothing eminent at this time.
Thanks, Doug.
And just a follow up besides a platform is thinking a years ago about the springcastle portfolio, where it was just.
Good opportunity in a good price.
How many of those come across a woman's best yet.
Yeah, I mean look there is some portfolios that are out in the market.
As we've said we think there's still a lot of uncertainty in the market. We do think you know a number of factors, including the government stimulus are making the correlation between delinquencies and losses and unemployment not equalize yet.
And we'll have to see where that goes so I think.
You know <unk> you'd have to be very careful about buying portfolios in this environment with that said when there are portfolios you know we've got a.
Servicing capabilities technology to do it expertise and we know how to bring on our portfolio. So there are some out there.
Well keep looking at them, but we also need to take into account that right now there's still a lot of uncertainty and what the future looks like.
Thanks, Doug Mike and Kathy that's all.
Thank you are.
Our next question comes from mine as David Scharf JMP Securities.
Hi, good morning, and thanks for a thanks for taking my questions.
Morning.
The first I'm actually just just to provide some context you know in the course of discussing sort of tightening the credit box and underwriting.
You would specifically called out.
Certain verticals like travel and leisure entertainment and dining and I'm. Just curious is there a rough percentage of the number of borrowers that are employed in those verticals right now or maybe where it's been at a peak and where it is now.
You know we don't have that information, we know when people are coming in who their employer is so we can identify of a vertical I think you know nationally the number of borrowers that are out there in those verticals I don't have.
Got it got it understood.
And then are shifting gears on the origination front and.
The remote closing and I'm curious of the roughly a third of ER volume.
In the quarter in which the.
The borrower didn't actually touched the branch physically where any of those new to the company are those primarily servicing kind of existing.
Customers.
We're kind of re upping their their existing loans and if that's the case if you anticipate over the course into next year kind of.
Expanding that service to.
To new borrowers to one made.
Yeah no. Thanks for that question first I want to be clear like were.
We get customers the choice and our goal is to make it easy for customers to do business with us while at the same time, we make sure that customers, who did business with us meet all of our all of our requirements to extend credit to them.
The remote closing is heavily weighted towards existing customers goes.
It's quite easy we have all of them a lot of information on them. They already have an account with us it's very easy for them to close remotely there are a good number of new customers and just as a reminder.
They when we bring in either a new our present customer. They go through the same process in a branch with a detailed discussion with the team member a budgeting exercise that determines ability to pay income verification and we built the technology to upload and verify.
Hi documents, we have got video assisted so we can have a video call with them.
And it it's weighted more at this point towards unsecured customers because.
To secure a.
To have security on the automobile you have to get access to the title and so we do have a procedure to get the title, but you know.
If somebody comes into a branch they can get to fund the same day.
Because we see the title we inspect the car.
And patches disperse.
If they're closing remotely they might have to wait a day either to overnight the title drive the title through we can upload pictures et cetera, So what what I would say as this is not new for US. This is just something that.
The unique circumstances of the pandemic gave us an opportunity to be available to clients and on customers in a in a unique way and so we had built all of this capability before I do think it will be an important part of the company going forward, which is giving customers an option.
As of channels to interact with us of the channel of their choice on and so it's worked out well and we're happy we had this all set up so we can serve customers there in this through this difficult time.
Got it understood very helpful. Thank you.
Our next question comes from line of Vincent can tick of Stephens.
Hey, Thanks, good morning.
Just wanted to get your thoughts on the second round of government stimulus or the Republican proposals came out.
This morning are late last night, and you're talking about a second round of children call checks and maybe some additional benefits just kind of wondering maybe scenario analysis your thought on.
On the impacts of many of these proposals.
Yes, Thanks Vincent.
You know why having spent some time in Washington I.
I don't hazard to guess what.
Two houses of Congress and an administration will end up landing on so I don't have any great insights on where to land I think obviously the.
Government stimulus gave.
Broadly the American consumer more spending power.
Yes, most consumers in a lot of our customers. We've talked to you are prioritizing paying current bills above.
Large purchases I think more stimulus is better for.
Consumers meeting their financial obligations.
And we're just going to have to see what happens.
Over the next hopefully weaker so.
Gotcha, Thanks, maybe following up on that.
So can see the benefits on credit just any thoughts on them because it seems like on the originations in demand. So that your demand is actually doing well.
Even with a customer PSMC more so any thoughts on how you're thinking about the demand curve going forward with the potential stimulus.
We're kind of going into China.
Yeah. Good luck.
If you look at what happened with demand I think late March and in day parole the whole country was moving into locked down and I think people were in kind of the shop at the beginning of the crisis and people were just restricting all of their activities moving around spending buying.
Anything like that in May.
I think as people got used to a this is the new normal and it might last for a while as well as.
As a different states started opening up their stayed home orders and people started moving around a little bit people got back to you know or started to move in the direction of more normal buying habits and borrowing habits.
Generally when our customers are feeling good about their financial situation, they're willing to.
Take out alone to do.
You know something that you know either home repair obviously, there's some emergency things, whether it's you know medical or a.
Hot water heater breaks down I think people are very interested in debt consolidation in that remains part of what's happening in so I.
I think stimulants will have an effect I think the bigger effect is probably.
On delinquencies and losses than on demand, but obviously you know more money moving into the economy makes people feel better there's more spending in that that will probably have some impact on originations I think on originations look I. We're now in a.
A recession are technically we might not be in one, but we feel like we're in a.
You know a very murky economic climate that could last.
Yes, I'll have while.
We really don't manage to growth I mean, we set our credit box, we said it based on a 20% or are we.
Returned.
Weve tightened our credit box now, but we'll still do our marketing and make sure once somebody is interested in alone.
We provided great customer experience. So they can move through the company talk with someone see their options and if they qualify will give alone. So it's very hard to say, obviously originations have picked up that seems to be holding.
In July I think a lot of this is what happens with the pandemic and consumer sentiment and mindsets going forward.
Okay. Thanks very helpful.
Our next question comes from like it's Kevin Barker of Piper Sandler.
Good morning could you just help US understand you know the full impact that we're seeing.
From the deferral of tax refunds.
Typically would come through and you know in March and April and how that's impacting just your the potential paydowns on your loan book and the origination volumes that we're seeing today.
Hey, Kevin it's Mike Thanks for the question.
Yes, I'm really hard to say where funds come from where it is certainly our customers are we do see it normally in March and increase in payments associated with tax refunds, you know that seem to be a little but disrupted this year with with what we saw at the end of March with respect to delinquency.
Okay.
But remember we were you know we saw delinquency rise and because people are getting dislocated. So I think that whole timing dynamic of.
Deferrals on tax refunds, certainly had an impact.
If you just look at the page we put in the earnings presentation, you'll see how strong our payments have been on average we will run about 4.6% of the portfolio and never any given month, a we were at bought 4.5% in March and that ticked up to about 4.8% in June.
I'll remind you of that lets just round it to 5% roughly 2% as interest 2% as regular payments on a percentage point dose of Prepays is just the way that breaks down and I think we're seeing strength in payments we.
Are comfortable with where they are really hard to say, where those funds are coming from whether through tax refunds are just support.
Okay. That's helpful. And then I appreciate the month by month origination trends that you put out there could you give us some early indications on how in July is trending given the positive results you start to show in June.
It's it's similar to June.
Okay, all right thank everything of course.
Thanks, Kevin Thanks, Kevin.
Our next question comes from one of John <unk> of Jefferies.
Thanks, very much and good morning, guys and good morning congratulations.
Graduations in a good quarter on.
Most of my questions have been asked.
Yeah, I guess Im a little curious is yes.
One may not be but you guys have been investing in your digit digital infrastructure for as long as I can remember in the Doug I think you were focused on.
On enhancing the consumer experience by deploying some.
Capabilities that enhance convenience within the branch, yes. When you first got there obviously, there's a transition we're accelerating more digital interactive Miss I'm wondering if there any kind of things you've identified in the near term, but maybe change your priorities about how you want to develop them into coin.
I'm not send that business, just didnt meet the changing kind of consumer.
Yes.
Yes. Good question look we.
In March when the stayed home orders happened and a lot of our.
Yeah, corporate teams technology marketing analytics strategy finance teams et cetera started.
Working from home and we anticipated that we were moving into a a different stage of the cycle. We did a full reprioritization in the company and as Mike said, we took out some expenses that.
We didn't need as originations went down and there was going to be less business coming through the pipe.
In the short run we wanted to make sure we were prudent with expenses, but we also looked in said which of the investments we've been making do we want to accelerate.
Because we want to make sure we keep investing in the long term franchise that we're one of the stronger players in the space and we're going to be able to keep originating loans through the cycle and obviously accelerating out of that.
Cycle for sure our investments in digital technology analytics were top of mind in so if you think about the digital experience. There's people apply usually online. So what does that application look like what do our rep web properties look like.
What is our mobile device and many customers are interacting with us on their mobile device. Some are using a browser on their mobile device. Some are using the app and all of those things. We just mentioned, we're making sure that all along the stages of.
The experience with one main so it's it's the application it's self funding its questions. They have its servicing they do it's we've built out a set of robust.
Our consumer financial education tools that you can use you can access it budgeting planning for vacation how to operate in a downturn how to manage your question credit if your and your expenses if your income decreases and so we're investing.
Heavily in there we've also been investing what I would call on ramps and off ran so most customers and most consumer behavior isn't just one channel if you're in your Twentys, maybe all of your channels on your wrapping on your phone, but if you're on your Fortys, you're usually maybe doing something on your phone you move to your computer you want.
To be able to do some two way live chat, which we've implemented over the last six months and you might want to actually walk into a branch and get something done and so yes, one of the keys to what we're investing in isn't just like digital it's how do you make it seem less so that.
You can quickly move between channels to get your business done with one main we think thats a real differentiator a lot of the digital only players only have one channel we think our branches are real strength.
What's the real strength and the reason we call. It omni channel is putting them altogether, which means we can attract more customers the customers of ours. We we attract we can service more we can put more products on the platform over time and so that is a major focus of investment it Ben and focus.
For the last two years I'd say, we're just accelerating that and the good news is.
A lot of those.
A lot of the key components are in place ones I mentioned.
We can look at the computer screen of a customer while they're looking at it and walk them through alone.
You know we used only be able to do that in a branch we now can do that.
With the customer sitting at home, we can pop up a video so the customer can see and talk to someone if they're more customer would that we have chat features and so all of those things are really important and.
The good news is those investments have been going on for awhile and they are paying off now.
Great. That's that's helpful and very interesting I guess similarly.
And you guys are becoming more precise on your underwriting capabilities and people are using big data and AI and things like that on the front end.
Yes, I, maybe any update on that anything that we should be looking forward to and then in the coming not served and it just commentary about what types of data sets are using that have enhance your ability to operate that's kind of environment.
Yeah, I mean look one is.
Because this recession is induced by a public health emergency in a pandemic.
You know versus the last one which was a capital markets financial market housing induced.
Recession this one's more physical we think theres going to be some asymmetric.
Effects on the consumer and so I mentioned some of them.
We actually pivoted and didn't used to do underwriting or by industry on we quickly built the technology got some external data sets.
We're now looking at a lot of data sets of what's happening by industry. There are also could be some opportunities or industries that aren't hard hit or industries that as we move through the stages the pandemic.
Actually are adding employment, where we can underwrite in a differentiated way right now we're using a defensively, we could potentially use it often sibley you know we.
Almost all of our underwriting is supported by a high and machine learning where the algorithms learn from each other in real time can kind of look for patterns and Cds.
We ran in like starting in 2015, we used to run.
Classical regression testing.
Algorithms for underwriting overtime, we ran kind of champion challenger models, where we saw both we saw some boost than we had some pages in investor day of the different kinds of AI that we use for underwriting and you know our modeling teams are always looking for.
Our new opportunities, we actually are partnering with a couple interesting.
More fintech type players, who specialize in finding unique correlations of either macro or consumer factors.
For underwriting and so we've got a large data that we've got good underwriting we always have tests going with third parties to see how we can enhance that and so I'd say you know overtime.
We've seen a lot of innovations I'm not sure theres any specific pandemic induced ones, except for the pandemic because there could be in asymmetric recovery by geography in industry, having those kinds of tools to use. So you can real time update your underwriting will be important.
Really appreciate it thanks very much guys.
Thank you.
Our next question comes from line, Eric Hagen KBW.
Thanks for taking my question good morning, how should we think about.
The tweaks to the underwriting criteria that you mentioned in your prepared remarks, and its impact on the portfolio yield going forward and then it. Additionally.
You guys have noted a lot of success with renewing borrowers as their loans rollover. So with regard to those same underwriting tweaks.
How meaningful do you think those tweaks might be for some of the so some of that cohort, which has renewed with you in the past.
To qualify for funding based on the new criteria.
Yeah, I look we.
Like I said, we tightened our underwriting.
We did it with kind of blunt instrument, let's no regrets move.
Right and the box in March since then we've taken more about scalpel and refine that.
One of the things I mentioned is.
Taking out higher risk on secured is one of the first moves we made because it has liar higher loss content and so under a more in a way to nine tied stressed scenario or even more than that it won't meet our risk return hurdles.
As a result, I think you could see more secured as Mike us.
Told you saw more secure because more people only qualified for secured loan secured loans have lower yield. So overtime, you could see a little bit lower yield in the portfolio.
Because of that.
With that said.
We also think we'll be able to pick up.
Some unsecured.
Business with higher FICO scores that or even though we don't underwrite. The FICO scores are better credit quality. So I think it's going to be hard to say how that that mix will.
Well, we will sort itself out Mike that you might want to add.
Yeah, No I would comment on the on the yield I think certainly we saw 57% secured in the quarter just because of some of that credit tightening.
It will impact yield over time, because it's a lower a PR product, but it's going to take a while.
Just simply for that to find its way through our significantly size portfolio.
That would be one with respect to the renewal question.
We go through another set of underwriting was our renewals so.
Once along comes on we'll see what it how it performs.
In the vernacular of on US performance, which is how do we see payments have the as a customer been delinquent and the ultimate outcome of whether we see a change in renewals because of that type of criteria is still I think yet to be safe.
Okay got it thanks for that and then you know it's nice to see the capital distribution. This quarter I guess, it's a third quarter and I hear you that the that through through year end the earnings will likely be strong.
But what were the variables that led you to decide to.
Distribute capital now versus keeping a little bit more of a cushion heading into 2021, which I think you acknowledge still had its fair share of uncertainties.
Yeah no. Thanks for that look we are very mindful of the uncertainty in the economy.
But we've taken.
A number of actions to position the company defensively, we tighten credit.
We increased reserves.
We continue to operate at the lower end of the leverage range, we trimmed expenses on and we performed further stress testing, assuming very severe downturn and things turning we pushed it very hard and so we feel super comfortable with our capital position and the could.
And we have.
We've also taken.
I know some good offensive moves with the business investing in omni channel digital I talked about some product innovation and picking up some good higher credit quality customers and so I think the decision that.
We talk with our board is that we should stay disciplined in managing the business and given our results given the cushion we have given the defensive posture.
You know and given our capital profile, we wanted to stick with our capital return strategy.
Got it.
And just to clarify on expenses when you say lower than last years, I don't know gross basis or on a percentage of receivables basis.
Gross expense.
Great. Thank you guys for the comments.
Thanks.
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Our next question comes on line of Moshe Orenbuch of Credit Suisse.
Great. Thanks, and most of my questions have been asked and answered but.
We have noted that you did some pretty consistent and mail volumes, even during the second quarter, while the rest of the industry pretty much when close to or zero and you've talked a little bit about the potential for some share gains, but you know I mean is <unk> and maybe just talk a little bit about what.
You know what could get you back to something even you know kind of even closer to kind of normal levels of origination and obviously, you've got you know you talked a little bit about the stimulus potential being a little bit you know.
Huh.
As an impediment in the near term, but you know as you kind of look out at the back half of the year any any further phones.
Let me Moshe Thanks, Good morning, let me start with the mail volume and then Doug may want to add some thoughts around.
You know, what we might see in terms of future originations, but we're familiar with the data you're looking at I would tell you that that data is not entirely accurate.
Yeah, I would also hey, we as one may not have liquidity challenges, but some others on that list might have so that certainly could influence the the appetite for for doing mail.
We were we run a diversified marketing strategy and we have direct mail, but we also have many affiliates and digital channels as well as our own organic acquisition as you know all of our mail as we've talked about with our risk adjusted returns in our underwriting framework, we send our mail based on our OE threshold and.
Remains a very effective channel for us and we expect to continue to Ah, we expect that continue to perform as expected.
Yeah, and hey motion to.
Hi, where do originations go I don't want to be a broken record, but I will be one.
That is you know, we really don't manage to a growth not from we manage to a.
Hey, much I don't if you want to mute your line, there's a lot of feedback.
The that we manage to a.
Yeah, we manage to book every loan that meets our risk return criteria with that said you know as Mike mentioned, we're continuing with mail, though we've adjusted it.
A bunch of competitors have moved out of.
Digital marketing and.
Some of the paid digital and purchasing of key words et cetera, like personal loan and other things the prices have gone down significantly during this pandemic and so we've actually seen an increase in.
The ROI, we own our digital marketing spend then so we're going to continue to optimize our marketing then optimize once somebody gets interested and not having a great experience with us and then if they meet our credit criteria will bucket.
I think given our tightened credit box and given the uncertainty in the economy and consumers being pretty cautious we don't expect to get up to.
You know odd last years levels in the near future, but as you've seen the trend is going in the right direction and.
We're going to book the loans that meet our risk return criteria.
Thanks, Rick and Mike just a quick follow up I know you mentioned that third quarter interest expense should be kind of similar anything that you're doing from a funding standpoint that could benefit.
In terms of future cost to fund.
Yeah, I mean as you know Moshe we this is a long term strategy for us with our balance sheet. Our thesis on liquidity I think that the big driver of what we expect with with third quarter in fourth quarter is just the redemption of dash eight in the quarter.
2020 volume that.
We'll be paid down as of July 29, So that's really the influencing factor.
Going to continue to run the business and use opportunities to issue where we can.
Thank you.
Thanks.
Our next question comes from one of the Ryan of constantly.
Good morning, and thanks for working here at the end the call.
Question on involuntary unemployment insurance.
If you can maybe give us an idea of maybe what percentage the portfolio that carries it.
How its activated and then once its activated how it sort of impacts the various line items in the personnel.
I just noticed.
And going through the numbers, it's giving.
And going through the numbers.
On the line items for you know.
Quite a bit higher than expectations on the revenue line. So just kind of curious how all that kind of came together. Thanks.
Sure Yeah, let me try to unpack that a little bit and happy to do a follow up with you if required for a little bit more detail, but on our involuntary unemployment insurance, we've talked about that portfolio, having about 25%.
Penetration over all of that product.
The way it arises in terms of.
In expense being incurred as we have a either an expectation to our reserving that are you I claims are going to be made or a customer actually makes one so very much of reserving process.
That influences our expenses, if one of our borrowers our customers were to lose their jobs.
Job and not unfortunate situation. The are you I covers the payment on their loan for up to 12 months. It requires very similar similar requirements to state unemployment you have to be claiming state unemployment you have to be proving.
Demonstrating that you're actively looking for work so very similar in that regard.
We don't disclose the number of claims that were seeing a but I can I can tell you as I mentioned in the prepared remarks, we saw claim levels peak in April.
And they are down about 62% in June which is pretty consistent with what I think broadly we're seeing an initial U.S. jobless claims. So we're seeing some positive trends in final claims payments, which indicate a return to work for many customers.
But all that being said we're still in the early stages in terms of how it shows up in the income statement you are largely going to see it through the policyholder benefits and claims line, which we mentioned was up significantly year over year and also sequentially.
Almost entirely due to that those are you I expect claims.
Right.
Thank you.
Thanks for the question.
And thank you ladies and gentlemen, this does conclude today's one main financial second quarter 2020 earnings Conference call.
You may disconnect your lines at this time and have a wonderful day.
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