Q3 2020 OneMain Holdings Inc Earnings Call
Ladies and gentlemen, this is the operator today's call scheduled to begin momentarily until that time your lunch will again be placed on music hold thank you for your patience.
[music].
Hosting the call today for one thing, it's Kathryn Miller head of Investor.
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It is now my pleasure to turn the floor over to Kathryn Miller you may begin.
Thank you Maria good morning, and thank you for joining US let me begin by directing you to pages, two and three of the third quarter 2020, investor presentation, which contain important disclosures concerning forward looking statements and the use of non-GAAP measures the.
The presentation can be found in the Investor Relations section of our website.
Our discussion today will contain certain forward looking statements, reflecting managements current beliefs about the companys future financial performance and business prospects.
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 COVID-19 pandemic on our business our customers and the economy in general.
We caution you not to place undue reliance on forward looking statements.
He may be listening to this via replay at some point. After today, we remind you that the remarks made herein are as of today October 27th and have not been updated subsequent to this call.
Our call. This morning will include formal remarks from Doug Sullivan, our president and CEO and like the Conrad our Chief Financial Officer.
After the conclusion of a formal remarks, we will conduct acuity session. So now let me turn the call over to Doug.
Thanks, Catherine and good morning, everyone.
During the third quarter, we continued to ensure that our employees are safe and that we meet the needs of our customers. During this period of uncertainty.
Prudent historical underwriting and conservative balance sheet combined with the actions, we've taken to innovate and strategically a ballpark business over the last 10 months has led to our strong operating performance through the pandemic and enabled us to serve and support our customers effectively during the.
These unprecedented times.
Our third quarter financial results Dan.
I'm in straight did this and reflected strength across the core drivers of our business.
Both our early and late stage delinquencies improved year over year by more than 30 basis points and our net charge offs remained essentially flat with last year.
In addition, the combination of improved customer demand and the initiatives. We've undertaken supported a return to sequential growth of our portfolio by about $94 million.
Our C.N.I. adjusted net income was $294 million for the quarter, a significant improvement sequentially and a 22% increase over last years third quarter.
As I've said before we run our business based on capital generation RCM <unk> adjusted net income excluding changes in loan loss reserves.
Since our loan loss reserves were unchanged in Q3, our capital generation was equivalent to our C. N I adjusted net income of $294 million up about 39% sequentially and 5% compared to last years third quarter.
Just consider all capital generation reflects the stability of our loan portfolio and the strength of our business. We remain confident in our ability to continue to navigate the uncertainties of this downturn, while also driving significant value for all of our stakeholders.
This is underscored by our 36% increase in our minimum quarterly dividend to 45 cents per diluted share.
Data and advanced analytics continued to be a foundational advantage for our company.
We use advanced analytics with our proprietary data across the company, including to optimize our credit underwriting to support growth initiatives and to serve customers better.
Our underwriting continues to utilize best in class artificial intelligence and machine learning models that incorporate more than a thousand data points in each application.
Most recently, we refined the industry classification in which the borrower works.
As additional input into underwriting.
We also improved geographic precision.
Given the uneven nature of this pandemic driven recession.
This surgical approach allows us to continue lending to hard working Americans, while prudently managing our risk.
We continue to maintain an appropriately conservative underwriting posture and only originate loans that meet our greater than 20% return on equity hurdle.
Since early March we've been underwriting only the loans that meet our return hurdles in a 2008 2009 recession scenario.
Which included cutting out higher risk unsecured lending increasing income verification requirements and adjusting collateral enough disposable income requirements.
We further refined our underwriting in the months that followed by adding stress factors to certain high risk industries, such as travel leisure and hospitality.
And we implemented changes to our underwriting that adjust for the impact of increased forbearance from other lenders.
Why the ended the third quarter about 25% of our portfolio has been underwritten using the standard of 20% return on equity in the 2008 2009 style recession that we implemented back in March.
In recent months, our customer health and portfolio credit trends have shown stability.
Annual income remained strong around 2019 levels revolving debt to annual income levels have declined from about 15% at the beginning of the year to 13% in the third quarter, reflecting lower levels of indebtedness across our customer base.
Yes.
Cash payment activity continues to be strong and borrower assistance enrollments have returned to almost business as usual levels.
We recently further refined our stress loss assumptions for certain industries and geographies given the greater visibility, we have gained into unemployment trends and our portfolio trends by industry and geography.
While some sectors like leisure and hospitality have seen unemployment increase from about 6% pre pandemic.
[music] about 19% in September.
Other industries like education, and health services, only saw unemployment increase from about 2.5% pre pandemic to about 5% in September we.
We also continue to closely monitor and take into account other key trends by industry and geography, including initial claims.
Consumer sentiment as well as our credit performance and borrowers assistance trends.
These insights, let us to selectively adjust our underwriting at the margins.
Specifically, we reduced the peak loss assumptions for certain low risk industries to levels below our original 2008 2009 recession area assumptions.
While we are still assuming recessionary loss levels for these particular low risk industries, our revised expectations are no longer as severe as the 2008 2009 scenario.
That said, we continue to assume peak loss assumptions above 2008 in 2009 levels for high risk industries.
And regardless loans across all industries are still underwritten to be profitable even in a 2008 2009 type recession.
Given the uncertainty that remains in the economic outlook, we remain hyper vigilant in our monitoring and we'll continue to make adjustments as new data emerges.
As I've discussed before we are intensely focused on serving our customers while.
Our continued innovation over the last 10 months has enabled us to provide support to our customers. During these uncertain times.
And our comprehensive data and analytics have allowed us to enhance the ways in which we engage and serve them.
As you know we started building our digital capabilities in 2018.
We accelerated our digital investments early in 2020, and since launched new tools, including two way video chat and co browsing with customers.
During the third quarter about 33% of loans workloads digitally a significant increase versus prior year.
We've invested over $70 million over the last 24 months enhancing our technology.
And processes and optimizing the customer experience.
As a reminder, over 80% of our perspective borrowers have always initiated their application online.
Now we are accelerating the portion of borrowers who can also closed remotely without ever coming into a branch. Our philosophy is that we need to evolve the way we serve our customers as their preferences change.
All of our applications, regardless of whether they are completed over the phone online or in person go through the same best in class underwriting processes, including a detailed discussion with the one main team member a.
Ability to pay assessment and budgeting.
Income verification and centralized and automated credit decisioning.
The early performance data of our digital originations is trending very similar to that of loans closed in person.
Our innovation efforts have also focused on how we can better address the needs of our current and potential customer base.
The advancements we've made in our data and analytics have enabled us to segment customers and prospects and better understand and anticipate the types of credit offerings that will best suit their financial circumstances and priorities.
We will always enter new products or segments in a prudent manner utilizing a test and learn approach.
Last quarter, we launched a new small dollar loan product.
To provide borrowers who traditionally were only offered a secured loan with another option.
These unsecured loans average about $2500 to date. The initial customer response has been very strong during.
During the last few months of testing, we've seen a threefold increase in the booking rate across this customer segment. It's.
It's still early and we have some more testing to do but we're excited about the prospect of being able to reach and support more customers. These are customers that as their credit history grows we will likely be able to offer larger loans in the future. This is but one example of how we're innovating.
Adding and adding new products to increase our reach and serve more customers.
Our data and analytics are also driving our prime price testing for customers and the 650 725 FICO range.
We serve a number of customers in this range today, our conversion rate of those customers is meaningfully lower than that in our core segment.
As we monitor the competitive landscape since the start of the pandemic, we've seen an opportunity in this credit segment, given the strength of our capital and liquidity and our comfort with this credit. We felt this was clearly the right time for us to lean in and test more competitive pricing to engage.
And serve this customer better.
Early data suggests that the price tests that we are running will be more than offset by lower loss content and higher booking rates, but we still have more testing and analysis to run on this initiative.
We are excited about the new products, we're testing to better attract serve and retain our core customer base as well as expand that customer base over time in.
In doing so we'll continue to drive long term value for our shareholders with that let me turn it over to Mike.
Thanks, Doug and good morning, everyone.
We had a great quarter with improving originations strong credit performance and lower operating expense setting us up for continued financial strength in the coming quarters.
We are in 250 million of net income or $1.86 per diluted share in the third quarter.
On an adjusted see Eni basis, we earned 294 million or $2.19 per diluted share.
Originations for the third quarter were 2.9 billion.
21% from the third quarter of last year, but up 41% sequentially.
As you can see from slide seven we've seen improvement in originations throughout the quarter with September production down only 6% versus 2019.
Flipping improvements in customer demand and our targeted initiatives.
53% of the quarter's originations were secured.
Lately down from last years third quarter.
Ending net receivables for the quarter were 17.8 billion up 94 million sequentially and roughly flat year over year.
Assuming our current origination trends continue we expect our portfolio to end the year at around 18.1 billion.
Just two percentage points below the prior year.
Interest income was $1.1 billion in the third quarter up 2% from last year, primarily reflecting higher average receivables compared to the prior year period.
Yield for the quarter was 27 basis points higher reflecting the year over year improvement in late stage delinquency.
Interest expense was 250 million up 5% versus the prior year.
Flipping a 1.3 billion dollar increase in average debt balances as we built a defensive liquidity position over the last six months.
During the quarter. We retired 1 billion up 8.25% December Twentytwenty bonds and issued 1 billion of five year revolving ABS at a record low coupon of 2%.
As a result of these actions, we expect fourth quarter interest expense to trend a bit below third quarter levels.
Total other revenue was 134 million in the third quarter.
20 million lower than the prior year quarter, mainly driven by lower optional product related revenue, which generally tracks our originations.
Policyholder benefits and claims expense was 43 million in the third quarter down $4 million year over year and down 47 million sequentially.
This expansion includes both claims payments and reserves for expected claims related to our insurance products, including involuntary unemployment insurance.
Slide claims have moderated significantly with September down 80% from April peak.
And while our you why claims remains slightly elevated we've experienced shorter claims duration than originally anticipated and have adjusted our expectations Accordingly.
This led to a $10 million a decrease in our claims reserves in the third quarter. So.
Assuming current trends continue we would expect fourth quarter expense to trend around $50 million.
Let's move on to our credit performance in the quarter.
Net charge offs were 5.2% essentially flat with last years third quarter.
30 to 89 delinquency rate was 1.95%.
This was down 35 basis points year over year, but up 32 basis points from a historically low second quarter.
Sequential increase was moderately higher than the 15 to 25 basis point increase we typically see from the second to third quarter.
October's delinquency is trending in line with September levels.
As we have shown on slide 10, borrower assistance enrollments have returned to more historical levels in the third quarter.
And importantly, those customers who enrolled during the second quarter, our performing 50% better than a normal borrower assistance vintage.
Cash payments also remained strong in the quarter september's payment rate, including principal and interest was 4.7% above our full year 19 average 4.6%.
Given these strong payment trends and the resulting level of delinquency in the portfolio. We now expect our net charge offs for the full year to be around 5.6%.
Down from 6% in 2019.
That brings us to our loan loss reserve, which was 2.3 billion.
And remain unchanged for the quarter.
Our reserve rate remains stable at 13.1%.
Sitting here today, we're confident in the resilience of our portfolio and the adequacy of our reserves as I. Just mentioned, we continue to see very strong portfolio performance in terms of both payments and delinquency and the effects. One would typically expect to see in an economic downturn have not emerge.
That said, we continue to apply conservative assumptions, when we develop our reserves, including the emergence rate of delinquency in our portfolio the pace of recovery and labor markets and the absence of further stimulus from the federal government.
We use economic inputs from a number of different sources and expect continued recovery in the labor markets, but at a slower pace than we have seen to date.
Third quarter's operating expense was 302 million about 10% lower than last years third quarter, and 6.8% of receivables versus 7.6% in the same period last year.
Year to date 2020 operating expense is down 3% compared to the same period last year.
And we remain on track to come in below full year 2019 levels.
With that let's move on to our balance sheet.
At the end of the quarter, we had $1.7 billion of available cash 7.2 billion of Undrawn conduit capacity and 8.3 billion of unencumbered receivables.
These sources provides sufficient liquidity to cover continued originations company operation and all upcoming maturities through at least 2022.
Without accessing the capital markets.
Our third quarter leverage ratio was 4.7.
We expect to finish 2020 between 4.3, and 4.5, which as a reminder is towards the lower end of our target range of four to six.
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 2019 after tax losses.
This is in addition to the coverage we have through our return on assets, which was 4.5% in the quarter.
The strong performance, we have achieved thus far this year has allowed us to return to portfolio growth in a disciplined manner.
Best in our business and develop the initiatives that we highlighted today.
Maintain conservative loss reserves enhance our capital position and continue to return considerable capital to our shareholders.
Slide 15 highlights the capital generation power of our business, which supports these objectives.
Consistent with this we are raising our quarterly minimum dividend by 36% to 45 cents per share. This.
This is the second increase to our quarterly minimum in the last year and reflects our continued confidence in the sustainable capital generation of the business. We will continue to evaluate capital returns above the minimum every first and third quarter consistent with the previous cadence and guidance.
With that I'll turn the call back over to Doug.
Thanks, Mike.
Close our discussion today I'd like to leave you with this.
One main is unlike any other consumer lender our business model combined decades of experience and proprietary data with powerful data analytics. This enables us to underwrite and manage our portfolio in a precise and effective manner to better serve customers.
As well as optimized returns and capital generation.
We maintain a fortress balance sheet that enables business continuity conservative capital coverage and flexibility through changing economic conditions and.
As a result, one main has been able to serve customers invest in our business and drive growth and value creation for our shareholders with that let me. Thank all of you for joining us and I will turn the call over to the operator for questions.
Thank you the floor is now 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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Our first question comes from the line of Michael Kaye of Wells Fargo.
Hi, Good morning, I wanted to see if you could provide more color on customer demand trends and where you see it coming back the strongest and where it's lagging and how does that match up to your appetite to open up the credit box as you look into 2021, and lastly is the September minus 6% year over year Richard.
Couldn't growth a good run rate or do you expect further improvement.
Yeah, Hey, Michael its Doug here, Thanks for the question.
No.
Customer demand has steadily ticked up a 10th it was was very suppressed in April and we saw a nice.
Increase.
What I would say is there's still a lot of uncertainty in the environment.
And we continue to manage conservatively I think that 6% tough to say.
Demand is improving but it's still down year on year demand, we've been able to offset that and see some growth with the customer experience initiatives that I talked about our digital originations we've also behind.
This means continued to optimize our business we have new pre qualified offers for present customers. We have dynamic routing that we'd been tuning.
And then well I talked earlier about our innovations and testing new products like small dollar loans and prime.
Regarding the credit box, we're staying conservative for now, but our philosophy is to tune the business. So we are positioned for growth once we're out of a recession and Colm. It is behind US. So you know what I would say, there's still it's still suppressed.
Demand.
From customers I'm pleased we've been able to offset with the way, we're driving the business and creating value for customers and I think it's still a little too early to say, what's going to happen next year, because we still have some uncertainty in the environment.
Okay. That's helpful. And second question is can you clearly have a lot of capital liquidity is there any potential opportunities to go on offense here, perhaps maybe buying a portfolio from a distressed competitor or maybe acquiring some sort of new capabilities for the company.
Yeah Yeah.
When we are in the market looking Opportunistically I think we get we get a look at most of the portfolios and platforms that would make sense.
What I would tell you there is nothing eminent.
As you can see we're investing in our platform and our products ourselves and we think we've got a very good team and run ready to do that and so for sure. If we see the right opportunity that's accretive, we'll we'll do something but right.
Right now there is nothing eminent.
Okay. Thank you.
Our next question comes from the line of Kevin Barker of Piper Sandler.
Kevin revenue can't hear you.
I just sorry can you hear me.
Yes, and again that that's I'm, sorry, I'm sorry about that good morning, you just follow up on some of Michael's questions. You know where are you seeing the incremental demand and in the last few months. The from you know more prime near Prime customers.
Just given your tightening underwriting standards or are you seeing it from abroad.
A broad spectrum of client of the petro customers or clients.
Yeah, it's been pretty broad base, there hasn't been any big.
Standouts as far as on the credit spectrum, we've stayed in the market with our marketing and Weve because of our capital position and our business model and because we were deemed in the central business throughout the pandemic.
We've been able to serve customers all loans, along so I'd say across the board we've seen a steady uptick in demand over the last seven eight months.
Okay and then we've also seen an uptick in your yields as well it seems like you're having.
Decent about pricing power just given the environment.
I mean do you expect that to continue or you think you're still firming up of pricing.
Just given the near term.
Yeah, Kevin Good morning, It's Mike are.
You know as we look at our yields really the impact year over year of our yield is almost entirely explained by 90 plus delinquencies.
As you remember when we went to a loan reaches 90 plus will reverse income. So when those are lower year over year, it's going to provide stability to yield.
In terms of coupon if you are in pricing, it's been very very stable for at least the last six seven quarters.
Okay.
And to the competitive environment seems fairly stable in your view right.
Well, it's a different question.
It is a good old fashioned Doug do you want to.
Yeah, I mean look we saw some competitors pull out who had weaker balance sheet than we did I think a lot of competitors are coming back in.
At this point I do think our digital initiatives and being able to serve more customers some of our new products some of our work on.
Customer experience is giving us an edge and so we'll price appropriately in the market I don't I don't see huge price moves on our part.
We may pick up some at the margin as as.
You know.
Depending on demand depending on options that people have.
Okay. Thanks for taking my questions.
Thanks.
Our next question comes from the line of Rich Shane of JP Morgan.
Good morning, guys and thanks for taking my question all morning.
Doug you start your comments by talking about innovating and evolving and I think in many ways, we're seeing that in the context of tactical innovation and evolution in terms of what you were facing.
Starting in March.
When we think about the company going forward or when you think about the company going forward one of the lessons that we learned that are going to change the business longer term when we return to a more normal environment and how do you think that potentially impacts long term profitability.
Yeah, that's a great question look UBS.
Before we set out a strategy.
You know a year and a half ago, which included expanding our distribution channels.
Two included digital channel and I think you know the.
The pandemic gave us an opportunity to really pass that and it's proven to be something our customers want and that.
We can do well and so I think going forward our customers are going to have the option of originating loans digitally or on the phone or in person.
I think that creates a growth opportunity for us, especially for younger customers that might not have come in the door before as things normalize.
I.
Around customer experience.
Yes, there's it's not just digital origination the ability for us to do chat all along the lifecycle you've got a question for US you've got a question about your insurance product you've got.
A question about your payment or in a collection contacts to us really perfecting chat setting up the backbone around that and using a broader set of tools, whether its chat or video or co browsing with customers I think that will be part of our model going forward and then you know we're very focused on expanding the relationship.
With our customers with new products, so take the small dollar loan product.
What it does is.
It's a smaller product a smaller loan at 2500 dollar loan versus a 7500 dollar loan it brings more customers in the door either because they didn't want $7500.
Or we weren't going to give them an unsecured $7500 alone, but it's a lower risk option to give an odd 2500 dollar loan that at the margin and then if you look at customer lifetime value.
You can graduate those customers into a larger loan.
Over time lost content should be somewhat lower because it's a lower monthly odd lower monthly payment. That's just one of the many products that we are you know either at or at some point in the development. So when I when I think about prospects in the future we're taking this.
Time.
Which is obviously a difficult time for the country and for our customers and for our employees, but to really double down on having a great business in the future that has.
[music].
Distribution beyond just branch distribution and products beyond just our original product. So we think on the back end of this whenever the virus gets under control and the economy takes a turn we'll have a better growth trajectory.
Got it it's helpful and again.
This this is.
A challenging time, but there is a lot to be learn from it it's.
Sounds like it a lot of ways the.
Customer engagement in terms of interacting digitally not just in terms of origination, but actually sort of that consultative function is going to be a big part of it.
Yep no exactly I I think you know look at it at at one main customer customer customer, we're super focused on providing value to our customers, having a valuable product at a fair price and giving them great service and to really focus and.
Both what products do they want how can we do more with them to add value and how can we make sure we meet them, where they want to be Matt is.
It's been a focus of ours and this time has given us an opportunity to really accelerate that.
Hey, Thank you so much for taking my question. This morning.
Yes, thanks for the question.
Our next question comes from the line of Moshe Orenbuch of Credit Suisse.
Great. Thanks, Thanks, very much and excellent quarter.
Wanted to talk a little bit also about the origination kind of progression and very strong it looks like some pretty strong numbers in September.
As you think out you know without giving a specific forecast as you think out over the coming months. There's a lot of factors you know that that could be coming out their stimulus or not.
The actual emergence of losses, how do you think those things affect both the competitive environment and one means you know.
A willingness and ability to kind of build on the September origination level.
Yeah, I Love Moshe It's a good question, we don't have a crystal ball on it there still are a number of factors that kind.
On a macro factors that are going to affect things. We've got an election that we have a you know if and when there is a number of another stimulus we have.
The vaccine and if and when you know when that will come and win business returns to you know total.
Total normal as opposed to incrementally.
Getting better when I said business I mean, you know kind of across the country.
For every one I'd say you know our view is that we need to stay nimble and agile and we need to quickly make changes as the environment changes so.
I gave some examples of you know we have a tightened credit box now in high risk industries, where we're.
Our our loss assumptions are Bob over eight or nine in high risk industry, but in low risk industries, where you haven't seen that much instability never got to wait on nine and are now tracking back down we're still assuming stress, but a little less stress.
I think we're going to be tweaking the credit box, along the way and.
As we.
Tweak the credit box along the way, we'll be looking at all sorts of things, we'll be looking at macro factors will be looking at.
Unemployment claims we look at consumer sentiment, we look at our delinquencies, we look at our losses, we look at our bars assistance, we do it by state we do it by industry and so I think the order of the days, we're just going to have to stay nimble.
Some of these big external events.
When they happen well the jobs, then we'll see what it what it means to consumers you know as I said our consumers.
Quite strong right now whether it their income whether the debt to income whether it's how much revolving loans they have.
I'm confident that some of that is the government stimulus.
And we're just going to keep an eye on all of it so again I wish I could give you.
More guidance, but what I would say is we were early to pull back and where our bias is conservative right now.
But you know as we think the things evolve we can quickly pivot and.
Grow more if if we feel more confident and some of the uncertainty clears up.
Great. Thanks, just as a follow up you know I know that a in general from a capital return standpoint, you know for a number of reasons you've had a preference for dividends, both regular and special and congrats on raising the regular dividend obviously it shows confidence in the earnings level, but given as you said that that that you're likely to.
See 2020 receivables down 2% I mean sort of feels like you know one of the big concerns investors had with.
Installment loans was that you know you'd be a smaller base and earning less money. So you sort of have 8% to 10% of the company that kind of didnt that didnt grow in Twentytwenty is there some thought to it.
If you will almost replacing that with a you know with using that your share repurchase authorization.
Yes look much I've.
You know, we're we're sticking with our capital allocation framework, we've got to NIM minimum dividend.
Which we think gives people a nice yield.
Every other costs.
Quarter first quarter third quarter, we're going to evaluate.
Enhancing that dividend.
With excess capital returns we've done that.
Yes times, and we don't see any reason why.
That will stop we did some buybacks early in the year.
We halted those for now because we do have a preference.
For dividends.
Every quarter, though the board will have a discussion and we'll think about it. So never say never we are going to consider all forms of capital returns going forward, but our bias is dividends.
Got it thanks very much.
Our next question comes from the line of Kenneth Lee of RBC capital.
Hi, Thanks for taking my question I'm, just just a brief follow up on on that previous question at a higher level just given on the dividend coverage.
Just wondering if you could just further flesh out what gives you the comfort to increase that minimum quarterly dividend going forward just wondering what the mix is macro versus any other factors. Thanks.
Yes, Hey, Ken This is Mike I'll take that one thank you good morning.
Thanks for the question I think you know with respect to the regular the minimum dividend that.
We increased this quarter you know, we we will go through a process and stress our book pretty hard as well.
All beyond what Weve, what we really saw in our stress testing when we went through an eight or nine sort of.
Simulation and it's really hard for us given the given the capital generation of this business, we felt very very comfortable with the 45 cents and I think there's there's not too many scenarios that we can come up with even stressing the book really really art, where we're at.
Not comfortable with maintaining that.
I would say, it's a combination of macro factors, but ultimately it comes down to capital generation, our ability to cover that.
Got you very helpful. And then just one one follow up if I may realize that delinquency rates have a normal seasonal pattern and I think you touched upon this in the prepared remarks wondering if theres any kind of updated expectations on how a delinquency rates could trend.
For the rest of your just given all the other abnormal factors that play thanks.
Thanks.
Sure.
So you know kind of question on how the loss curve is going to emerge over time and talk a little bit about what we're seeing now but also into 21 I think you know as we've said a number of times I think it's still short answer is it still too early to tell.
With respect to the second to third quarter, a sequential delinquency our patterns are very seasonal as I mentioned in the prepared remarks about 15 to 25 basis points is a typical.
Sequentially increase.
We were up 32 from the second to third quarter. This year, but keep in mind those are coming off very very low delinquency levels. We purchased 1.63% on the 30 to 89 in June which was.
The lowest delinquency quarter, we've ever seen in our history. So.
I would always keep that into can take that into consideration as we look at where things are heading for October october's generally in line trend wise with what we saw in September and just kind of backing up for a minute you know the the impacts you would normally expect to see in this kind of environment.
Have not emerged in the portfolio right we've seen.
Some unusually strong payment and delinquency performance over the last six months.
Post the expiration of the cares act support and enhanced unemployment, specifically and we've seen a little bit of normalization to our credit trends.
Towards 19 levels from looking at roll rates and other things that are going on below the macro print of delinquency and.
Again delinquencies strong through October.
Keep in mind also third quarter and fourth quarter delinquency are what sets up our first quarter and second quarter losses next year. So if unemployment levels continue to persist at higher levels, we would expect to see some impact in 21 absent any future steadily up stimulus but.
Too early to tell now we talked a little bit about the reserves to right Weve taken a conservative approach with our reserving and feel we are adequately reserved for whatever might come at us and 21.
Very helpful. Appreciate the color. Thanks again.
Sure.
Our next question comes from the line of Vincent came Tech Stephens.
Thanks, Good morning, just a actually just quick follow ups from prior questions, but on the asset yield.
So very strong result, this quarter and I understand that the.
The year over year increase was due to.
To the delinquencies and maybe some reserve releases there on the interest side, but.
It's still been fairly elevated and I'm just wondering.
If theres any other drivers to that particularly.
Was there any impact this quarter from that.
The initiatives, you're taking on the small dollar alongside US what was going on the opposite side going further up market than the prime.
Sure. It's a good question, Vince and good morning as Micah.
Since if you look at third COVID-19, just let's say the last four quarters. Prior to this quarter, we were around 24.1 on yield so.
So certainly was supported by the delinquency numbers are 90, plus was down quarter over quarter by 44 basis points, that's a pretty significant move which.
Certainly represented the entirety of the increase in yield to 24 three.
And with respect to our coupons I mentioned with Kevin asked a question that our coupons have remained relatively stable over time.
You know, it's an important factor in the book, but also on a run on the origination side and an $18 billion bucket takes a while for origination.
Origination trends to move through it it really impact yield so I would say on the margin the small dollar loans and the prime price testing certainly.
Has a little bit different type of a different size a PR just because of the nature of the product, but it certainly wasn't an impact in our yields.
Okay. That's very helpful. Thank you and second just a follow up question from the earlier, one but maybe if you can update us if there were any macro a reserve assumption changes that you made this quarter or if it's the same as last quarter. Thank you.
Yes, sure I mean as you can see from our reserve work, we're confident in the adequacy with it remained flat quarter over quarter.
We also talked about using economic inputs from a number of sources, we lay those on top of our base last forecast I would say our Q3 assumptions are materially similar to what we have assumed in the second quarter, which is continued improvement labor markets, but at a slower pace than what we've seen over the last few months.
We have not assumed any direct positive impact of stimulus.
Beyond whats currently in place.
Okay. Thank you very much.
Vince.
Our next question comes from the line of John Hecht of Jefferies.
Morning, guys and congratulations on a good quarter morning Duncan.
I think I just have one question because a lot of them have been asked and answered but you make it. It's it's about the allowance level. I mean, clearly you are guys are adequately reserved for somewhat of a stressed environment that deal and then it clearly your delinquency patterns don't.
Don't reflect stressed environment. It so I'm wondering I guess it is a couple of questions based on this is number one is is it fair just to think that for the near term you'll be provisioning at the rate of charge offs, plus or minus some growth factors number one and number two what signals would you be looking for to allow you to reconsider.
Her where your allowance level.
It is positioned.
Sure sure. It's good question, John and just from a process standpoint.
Every quarter, we evaluate whatever information we have available at that time and.
As you know, it's a very uncertain environment. So we felt good about where we were with the reserves.
Our roughly 2.3 times 2019 charge off coverage.
Yes, obviously consistent with what we saw in the second quarter as well given the reserves were flat.
To your point, we are seeing very very positive delinquency trends.
And that's a starting point for our reserve base that could be a tailwind going forward if that continues search.
Certainly anymore stimulus could have a positive impact on the reserves, but on the other side a slower recovery or increased unemployment now as we get into the winter months could lead to.
Headwind against our reserve so it's really hard to be specific given all the future uncertainty out there, but we will continue to move forward on a quarterly basis, just evaluate everything we've got in front of us at that point.
Great. Thanks very much.
Thanks, John.
Our next question comes from the line of John Rowan obtaining.
Good morning, guys.
Good morning, just one.
Well. Good question are you planning for any type of asymmetric pack season next year given that some of these states are not withholding federal unemployment benefits from the federal taxes from the unemployment benefits.
John It's a good question nothing specific at this point I mean, we'll want to once we get closer to the first quarter, we'll have a view on that I think you know, we typically do see taxis and having an impact.
On.
On our receivables in the first quarter customers do tend to have a little bit more cash that will impact our their borrowing behavior. It also impacts.
Our delinquency in a positive way, but nothing yet I think we're kind of in a quarter by quarter mode here and we'll we'll keep.
Hi on the situation, though for sure.
Okay. Thank you thanks.
Thanks, Jeff.
Our next question comes from the line of Mark Hammond of Bank of America.
Thanks, Hi, Doug Mike and Catherine.
On leverage so one main leverage has trended lower now and the year as you said in the low fours and you're a thoughtful group and choose six times as the high end for a reason so.
What event strategy your choice or would you all pursue that may cause leverage to go to that six times the high end of the range.
It's Mark is the question what what are what would our view be to increase our leverage to that range right you've been operating at the low end of the range and what could get up to six times and.
What would cause that or why would you choose to go that high.
Yeah, you know I think we've been pretty consistent Mark I don't think we wouldn't necessarily say we see.
Seek to be at four or we seek to be at six you know we operate within the range that we've provided.
That range pre Cecil coming along with five to seven and that's been a long term strategic target for us.
Now four to 600, and the new leverage vernacular and I think that's a good place to run the business. We create a lot of capital every quarter as you see on page 15 of our materials.
Thats, a very strong positive for us and we.
We also evaluate capital returns and value creation for our shareholders. So those two things are going to.
Move back and forth and will move us around that range.
See from some of the materials in our deck from quarter to quarter.
I don't have any specific comments on what might move us to six specifically.
All right. Thanks, Mike and then a follow up just on the small dollar product.
Talk about the.
Underwriting process of that particular product and if it's any different than your other products.
That's the same underwriting process.
You know whether someone originates digitally and ends up having a conversation with the branch men.
Remember a central team member to go through their.
Our net disposable income their budgeting income verification overhauling hallmarks of.
Our underwriting it's very much the same process at this point and I'd emphasize that we're still testing yet.
We one of the advantages we have is where nationwide we've got.
A big distribution system, we can run past learn as we go before we kind of roll out products.
More broadly across the whole network, so but net.
All the hallmarks of our underwriting which include you know looking at all the data points, having a conversation with the customer.
Underwriting to net disposable income not just fee income, which means we do a budget and figure out what cash they have left over at the end and make sure that they have an ability to repay.
Perfect. Thanks, Doug.
Thank you. This does conclude todays one main financial third quarter 2020 earnings Conference call. Please disconnect. Your line at this time and have a wonderful day.
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