Q4 2020 OneMain Holdings Inc Earnings Call
Yeah.
Welcome to Onemain financial fourth quarter, and fiscal year, and 2000, and 'twenty earnings conference call and webcast.
Hosting the call today from Onemain is Rohit Dewan interim head of Investor Relations.
Today's call is being recorded.
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It is now my pleasure to turn the floor over to Rohit Dewan you may begin.
Thank you Crystal.
Good morning, and thank you for joining us on.
And we begin by directing you to pages, two and three of the fourth quarter of 2020, investor presentation, which contain important disclosures concerning forward looking statements and the use of non-GAAP measures.
The presentation can be found on the Investor Relations section of our website.
Our discussion today will contain certain forward looking statements, reflecting management's current beliefs about the company's future financial performance and business prospects and these forward looking statements are subject to inherent risks and uncertainties and speak only as of today.
Factors that could cause actual results to differ materially from these forward looking statements are set forth and 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.
And maybe listening to this via replay at some point. After today, we remind you that the remarks made herein are as of today February nine and have not been updated subsequent to this call.
Our call. This morning will include formal remarks from Doug Shulman, our chairman and Chief Executive Officer, and Micah Conrad Our Chief Financial Officer. After the conclusion of our formal remarks, we will conduct a question and answer session. So now let me turn the call over to Doug.
Thanks, Rohit and good morning, everyone. We appreciate all of you joining us today.
Let me start by discussing 2020.
This past year more than any other highlighted the importance of being intensely focused on the wellbeing of our customers.
Our team members demonstrated our value by connecting with the vast majority of our customers during the year to check in and make sure. They know we want to be there for them to offer assistance when they need. It. We also worked diligently throughout the year to ensure the safety of our customers.
And our team members across the country.
And I'm very proud of our team, who pulled together and a difficult year to support our customers and each other.
'twenty and 'twenty was a year of strong financial performance as we generated $1.1 billion of capital $81 million more than 2019 and drove net charge offs to an all time low of five 5%.
This significant capital generation allowed us to simultaneously originate attractive loans reinvest and growth initiatives and distribute meaningful capital to shareholders. We returned $6.27 per share to our shareholders.
<unk> and 'twenty and 'twenty and this capital return is continuing into the first quarter with the declared dividend of $3.95 per share.
We've now declared almost $13 and dividends since we started paying a regular dividend in February 2019, two years ago.
In 'twenty and 'twenty, we increased our investment to accelerate key strategic initiatives drive future growth and deepen our relationships with our customers. We enhanced our underwriting models with next generation artificial intelligence technology that uses.
1400 pieces of data and is constantly improving through machine learning.
We continued to invest and our digital capabilities, thereby significantly improving our customer experience.
This enabled over 40% of our customers to close their loans digitally in the fourth quarter on.
Offering a digital option increases our application pull through rates and the early delinquency metrics on digital loans look as strong as our branch originated loans.
Our unique hybrid capabilities provide customers the flexibility to originate and service their loans. However, they choose through our nationwide branch network, our call centers or our new digital customer experience.
We also launched new products, including smaller dollar loans and new optional product offerings and initiated the build of our credit card business. We're also testing loan pricing for customers with higher credit scores.
These expanded products and initiatives allow us to broaden and deepen our customer relationships our customers have a strong loyalty and appreciation per onemain and they've given us feedback that they like to do more with us.
Let me spend a minute to provide additional detail on our new credit card business. We will provide further detail as the year goes on but I want to take this opportunity to share our thinking and our strategic rationale.
We believe credit cards are highly synergistic with our installment loan business and net onemain is uniquely position to succeed in this market.
By leveraging our core competencies.
First credit cards represent a large market with $430 billion of near Prime balances five times the size of the installment loan market.
Our average customer has about five cards and their wallet.
Second they are highly synergistic.
Credit card deepens, our relationship with our customers enhancing our existing offerings and improves our ability to underwrite by incorporating transactional data on an everyday spend in.
In addition, it allows us to bring in new and different customers into the Onemain ecosystem over time, we also anticipate developing new combination products merging the best feature of cards and loans into one.
Our customers have a strong loyalty to onemain and this card will engage our customer base and enhance customer lifetime value and enable us to bring more customers into the fold.
Third we are developing a differentiated product focused on our unique value proposition to customers.
Digitally focused card that rewards consistent payment habits, and reinforces credit building behaviors.
Providing responsible credit which improves our customers' financial wellbeing is a foundational principle of onemain.
This card product will be designed with unique features consistent with that objective.
We're building a new team focused exclusively on the card product led by Nick Clements, a great entrepreneurial executive with deep experience and credit card risk management and digital first businesses. He joined us from lending tree, which he joined after founding and running magnify money.
Our financial Education, and comparison website and marketplace that was purchased by lending tree prior to that he ran the largest consumer business and Barclay card in the United Kingdom.
We expect to be in market and the second half of the year. We're very excited by this opportunity, which we anticipate will be a multibillion dollar receivable product for one main over the coming years.
Throughout 2020, we invested $50 million into these various initiatives and our technology to position onemain for future growth.
And we plan to invest another $100 million into these initiatives in 2021, and we remain committed to investing in our business to develop new capabilities, while leveraging our core competencies and customer focus credit expertise and discipline and distribution.
And and a bullet proof balance sheet Onemain is uniquely positioned given these foundational strengths to broaden and deepen our customer relationships and a dynamic and growing market.
We look forward to providing more information on these initiatives throughout 2021.
I think we all know that the near term future remains uncertain with Covid impacting every business and every person across the globe.
And while we need to continue to navigate these continued uncertain times, we feel very good about the fundamentals of our core business and the strategic pivots, we have made to position us to serve our customers and grow our business as we emerge from the pandemic.
With that let me turn it over to Mike to take you through the financial details of the fourth quarter and the full year.
Thanks, Doug and good morning, everyone.
We had a strong fourth quarter as originations improved credit performance remained healthy and our operating expense continued to track below prior year levels and improving macro outlook also allowed us to moderately reduce our loan loss reserve coverage.
We are on 359 million of net income or $2 and 67 per diluted share in the quarter.
On an adjusted C&I basis, we earned $373 million or $2 77 per diluted share.
Capital generation or C&I earnings, excluding the impact of changes and loan loss reserves was $329 million and the fourth quarter.
Ending receivables for the quarter were $18 1 billion up from $17 8 billion and the third quarter and down just 2% from <unk> 19.
Interest income was $1 1 billion and the fourth quarter essentially flat with prior year at slightly higher yield offset moderately lower receivables.
Interest expense was $242 million down $5 million or 2% versus the prior year and down $8 million sequentially.
We continue to benefit from proactive liability management that has provided a material benefit to our cost of funds, while extending our maturities. We expect this trend to continue.
During the quarter, we again took advantage of a favorable credit market and issuing and $850 million 10 year bond at 4%.
And in early January we used proceeds from that bond to redeemed $650 million of seven and three quarter percent bonds that were originally scheduled to mature in October of this year. Our next bond maturity is now may of 2022.
Other revenue was 137 million and the fourth quarter $21 million lower than the prior year quarter, driven by lower optional product related revenue, which generally tracks our receivables and originations.
Benefits and claims expense was $41 million and the fourth quarter down $3 million year over year and down $2 million sequentially.
And as a reminder, this expense includes both claims payments and changes to claims reserves related to our insurance products, concluding and voluntary unemployment insurance.
Are you on claims have moderated throughout the year with new claims and December down by more than 80% from April peak.
Our fourth quarter expense of $41 million included a positive reserve adjustments related to favorable experience and our iui portfolio.
As the year has gone by our iui customers have been going back to work sooner than we originally anticipated and our reserves have been adjusted accordingly.
Let's turn to slide nine to review, our receivables and origination trends.
We originated $3 2 billion and the fourth quarter down 13% from fourth quarter, and 19, but up 11% from the prior quarter. This is a trend we saw throughout the year.
The economic recovery drove an increase in demand our targeted initiatives enhanced our ability to serve our customers and loan production improved.
While government relief measures have been incredibly helpful for our customers. During this challenging year as reflected in our strong credit performance, we have seen an inverse correlation between relief and consumer demand with direct payments, perhaps having the most significant impact this is evident and our lower second quarter 2020 originations.
After the passing of the cares act, which provided $3400 to the average family of four.
Looking ahead, we have historically experienced seasonally lower demand and the first quarter due to tax refunds and lower discretionary spending by consumers. This is followed by a significant increase in demand and receivables growth and the second quarter as you can see happened in 2019.
We expect these seasonal trends to continue in the first quarter with additional demand pressure from stimulus checks and our loan sale agreement that I will discuss shortly.
As we progress into the second quarter and through the year, we expect the effective stimulus payments to wear off demand to return to normal levels and receivables growth to resume.
Let's now turn to page 10, and walk through our recent credit trends.
Fourth quarter net charge offs were four 2% a 153 basis point reduction from last year's fourth quarter.
Our full year net charge offs came in at five 5% slightly lower than our expectation of around five 6% and 48 basis points lower than full year 2019.
30 to 89 delinquency and December was 228% down 19 basis points year over year.
90, plus delinquency was 175% down 36 basis points year over year, you can see from these charts that government stimulus along with our decisive credit tightening and March has had a very positive effect on delinquency and losses in 2020.
Our delinquency levels give us confidence that we will continue to see strong net charge off performance through 2021, and while there are a number of unknowns and the macro environment. We feel good about the outlook for credit and expect full year 2021, net charge offs to come in below 6%.
Our loan loss reserve trends are shown on page 11 and.
We began the year pre COVID-19 with just under $2 billion of reserves and.
And a reserve ratio of 10, 7% under the seesaw methodology.
We added 374 million to our reserves over the next two quarters and incorporating future macro conditions that we're forecasting unemployment rates as high as 8% to 10% and 2021.
This brought our reserve ratio to 13, 2% in the second quarter.
And remained at that level and <unk>.
And the fourth quarter, we grew our receivables by $265 million, which under Cecil brings in addition to the reserves around $26 million.
Our credit performance and lower expectations for future unemployment contributed to a reduction and the reserve ratio of 50 basis points or $85 million to.
And to 12, 6% and led to an overall reduction of 50 $59 million.
While macro expectations have improved throughout the year uncertainty remains and we continue to take a prudent approach with our reserves.
I remain confident and the resilience of our portfolio and the adequacy of our reserves, which remain nearly 200 basis points higher than pre COVID-19 levels.
Yes.
Fourth quarter operating expense was $319 million, 2% lower than last year's fourth quarter and seven 1% of receivables you can see on page 12, the impact of cost reductions, we took and reaction to the emergence of the pandemic and <unk> and our expense growth is generally.
<unk> tracked and increase in customer demand and loan volume since April.
And the fourth quarter, we continued to accelerate investment and our operating platform and our technology, which contributed to the sequential increase and our operating expense.
For the full year, our expenses were $40 million or 3% below 2019 levels, including our continued investment and the business.
We expect that with improvements in demand and acceleration of our investment expenses will grow in 2021.
With that let's move on to the balance sheet and.
And I mentioned earlier, we issued it.
$850 million 10 year bond during the quarter at 4% coupon.
We also executed our first ever loan sales flow agreement that provides committed liquidity for two years.
We are always looking for ways to further diversify our funding sources and create flexibility for the business.
And while we remain committed to keeping the vast majority of our loan production on balance sheet. This initial sale at a price well above par validates the market for our loans and creates a whole new dimension to our funding program.
Over time, we see the potential to use this strategy to expand the range of customers, we can effectively serve and to position the business for long term growth.
We.
To maintain significant sources of liquidity with $2 1 billion of available cash and $7 2 billion and Undrawn conduit capacity and $9 2 billion of unencumbered receivables.
Our leverage ratio was four three times.
We finished 2020 at the lower end of our leverage guidance and our longer term target range of four to six we anticipate future quarters will be closer to the midpoint of this range in line with our leverage level going into the Covid crisis.
And the fourth quarter, we had $329 million of capital generation up 14% from the fourth quarter of 2019 and for the full year. Despite the pandemic and ongoing economic challenges, we generated nearly $1 1 billion of capital compared to just under $1 billion in 2019.
Our total adjusted capital, which includes after tax reserves and adjusted tangible equity was $3 6 billion at the end of the quarter six 5% higher than a year ago and approximately four seven times, our 2019 net charge offs.
The strong performance. We have achieved this year has allowed us to return to portfolio growth and a disciplined manner invest on our business enhance our capital position and continue to return considerable capital to our shareholders.
Consistent with this we've maintained our minimum quarterly dividend of 45 per share and declared and enhanced dividend of $3 50.
For a total of $3 95 per share to be paid in February.
We will continue to evaluate capital returns above our minimum commitment every first and third quarter consistent with the previous cadence and guidance.
With that I'll turn the call back to Doug.
Thanks, Mike.
While 2020 was a challenging year due to the pandemic onemain performed well the core fundamentals of our business remains strong and we are investing and our future.
We've been building out our customer facing digital capabilities since late 2018, and clearly this investment paid off in 2020 with almost half of our customers closing their loans digitally and the fourth quarter.
Early results from our digitally closed loans and other new product initiatives are positive and we are excited to continue to offer customers innovations and valuable new products in 2021 and beyond.
Overall, we had a strong 2020, where we delivered great credit results robust financial performance strengthened and deepened our customer relationships and invested to position onemain to take advantage of growth opportunities as the country eventually emerges.
From the pandemic and.
As we enter 2021, we expect a strong credit environment with growing demand as Covid gets under control. We also believe the investments we have made over the past several years and debt, we accelerated in 'twenty and 'twenty and into 'twenty and 'twenty one will.
<unk> us for growth in the years to come with.
With that let me. Thank you for joining us today, and we're happy to take your questions.
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Okay.
Yes.
What happens.
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Your first question comes from the line of Michael Kaye with Wells Fargo.
Hi, Good morning, I wanted to see wondering Mike provide more.
Morning, I wanted to see if you could provide more color on customer demand trends and where you see it coming back is strongest and where it's been lagging in terms of credit profile of products and geography, and how does this match up with your appetite to open up the credit box as you look ahead to 2021, and how does the December stimulus and potentially more.
Stimulus coming impact your outlook on consumer demand.
Hey, Michael its Doug.
Let me, let me try to.
Cover most of that and it's a lot in there.
First I'd say in the fourth quarter, we saw demand come back some but not a lot third quarter demand was down about 23% fourth quarter It was down.
And improved about 5% from there so down 15% to 20%.
On.
A couple of things driving the decreased demand.
One is the robust government stimulus, which led to increased.
Savings of really consumers across the board, including near Prime consumers and then second as with a lot of people.
And just unable to move around decreasing their travel and they're eating out and theyre spending overall, they had more and more money.
Yes.
The way, we think about it is there there remains uncertainty and the short term.
But we think that as more people are vaccinated and economic activity picks up demand will increase exactly when that is.
Hard to say, but probably into the second and third quarter, we've been doing a lot, though our loan production is up more than demand because of.
Digital has higher pull through rates and allows people to.
Book loans, not coming into a into a branch and we've added things like co browsing on a computer with customers to make sure they understand their options chat and video.
Our new product initiatives are smaller dollar loan and our pricing has added to what kind of being not being down as much as demand and then we've been doing a lot of just optimizing the business over the last couple of years, so whether it's in and underwriting and using new data sources and alternative data that allows us.
The book more loans without taking additional risk or operational enhancements like di dynamic routing.
On.
As far as across the board.
And the impact on demand is.
It's really been pretty much geographically across the board there haven't been huge difference as you can see a little bit of different.
Sometimes when there is an immediate shuts down in an area, but demand generally has been kind of down across the country for the last call. It six months.
Okay. Thank you. Thank you for that I wanted to ask Mike and multiple micro but I wonder if we could get any color on how to think about asset yields in 2021.
Slide where you're going and what gives you some increased and late stage delinquencies and you talked about doing additional and maybe higher credit quality and product customers. So I'll share I think about 2021 versus 2020 per asset yields.
Hey, Michael Good morning.
Yes, I would say our asset yields have been remarkably stable over the last couple of years, even despite a trend towards a higher mix of secured lending, which as you know has.
A lower coupon.
We've talked on past about art and today about small dollar loans and also price testing that we're doing.
I think those two things sort of offset one another one being a little bit higher.
And one being a little bit on the lower and.
But 90, plus as you point out has been a big driver of our.
And at least support for the yield this year and in 2020.
With our credit outlook that we provided I think we will continue to see strong 90, plus yields you look at our 30 day 89 from fourth quarter. It was still below 22019 levels. So that 30 to 89 from fourth quarter turns into 90, plus and the first.
So I do expect we'll see fairly fairly good stability in our yields at least and the in the near term.
Thank you very much.
Your next question comes from the line of Mark Devries with Barclays.
Yes. Thank you.
And the past you've talked about underwriting new loans kind of post pandemic to generate 20% returns on and more like a global financial crisis loss scenarios can you just expand on what this means in terms of.
Loss expectations that are priced in and then how those loans are actually performing compared to loss expectations.
Presumably much better and kind of what the implications are for the returns you might actually realize on those loans.
Hey, Mark Thanks for the questions Mike.
When we talk about required returns this is over the lifetime of a concern.
Customer so we bring and the customer knew we pay and acquisition costs that goes into the the algorithm. We of course, then plug in our expectations for a loss on that customer as well as.
Our yields and our and our renewal activities and the expectations that come.
With a business like ours, where half of our customers renew at some point and their loans, so that factors into the lifetime value.
And we then will discount those flows and look at does this meet the return hurdle that you mentioned is 20% ROE at 20% ROE and it gives us a little cushion on on perspective should things turn out to be a little bit different than what we anticipated we still make a return that we think is healthy.
And adequate for our business in terms of how we incorporate incremental losses, we simply increase the losses that we would normally see from that particular customer and we will look at it by risk grade is and our secured or unsecured loan.
And we will we will have an expectation for <unk>.
A higher losses as we've talked about when we tightened the credit box back in March and April so.
And throughout the year, we've adjusted that.
A bit and certain places.
No we underwrite.
And with geography, and also industry and mine so higher risk industries, we applied a little bit higher stress factor.
And low risk industries, maybe something a little lower but just to put it in context and OE dollars nine type of downturn look like that would be about 1516 X our normal annual loss rate call somewhere in the six to six and a half context. So.
That's how we're thinking about it and hope.
That's helpful.
Yeah that is thank you.
And then I think you're on the last call you mentioned starting to loosen underwriting and certain segments can you just update us on.
How are you approaching underwriting over the next couple of quarters.
Yeah.
Just a reminder, we had to play book for severe <unk> non kind of recession, and we made what we call it and no regrets move and March just to see how this all played out and did a full pullback and assumed debt loans would have 1617.
Times their normal loss on average with what Mike and just referred to.
And as.
From March till now we continue to look at our data and we look at it and on very granular basis by state and by industry and.
And we looked at unemployment rates, we looked at our actual delinquency rates and trends we looked at use a borrower's assistance trend and then a host of other macro data housing starts consumer sentiment et cetera.
And so we very surgically.
Adjusted our underwriting and we took some of those constraints down.
Because as you've seen we havent experienced severe losses, the combination of decreased spending and boosted.
Government stimulus has allowed our.
Consumer to stay strong together with some of the actions we took in the and the early days like helping them with paid deferments and those kinds of things and so we will make very surgical changes. We look at this we have a team looking at a daily I spend time with the team weekly.
And the combination of state and industry adjustment together with our lots of other data points, we have from these consumers.
<unk> done this for 100 years and.
<unk> booked 15 million.
Millions and customers over the last 10 years, we've got a lot of data to look at.
At this point, what we've done is for lower risk and lower geography.
Yeah.
Segments of of our borrowers we decreased the loss assumptions and so it's very dynamic.
Depending on what government stimulus looks like and how the economy opens we're still not back to assuming pre pandemic.
Stress on our credit, but we definitely moved in that direction and at some point. This year, we anticipate we'll be back to that.
Makes sense. Thank you.
Your next question comes from the line of Moshe Orenbuch with credit Suisse.
Great.
Thanks, and thanks for the detail on the credit card.
Maybe could you just.
And a little bit on the type of customer that you're.
And that your debt you are looking for is it.
Be displacing what theyre doing.
Alright, they're going to be customers, new to the credit card business and just a little bit about maybe the kinds of the size of balances and how you might think about the yield and the loss content.
Okay.
Okay.
I guess on your first two questions.
We think that this product has a lot of appeal to a lot of different customers. We think it's a natural extension of our business and very synergistic and strategically I mentioned it it pairs and ongoing daily transaction relationship with our current large.
<unk> lending transaction.
And so I think generally we'll be able to serve current customers.
And who have cards. So there may be some displacement or maybe as they look for their next.
Line of credit on a card they'll.
Come for US. We also think we will be able to bring some new customers and to the fold, who we might not give and $8000 loan too.
But.
We will give a a credit card and we think it's going to have really lead to deeper engagement with current and future and customers and increase the customer lifetime value.
And over time.
On the specifics Moshe we'll talk more about that later in the year the size the pricing the.
The lines et cetera, that's something we will.
As we get closer to launch we'll be ready to talk about.
Okay, Thanks, and maybe just as a follow up.
On the loan sale I mean, I'm, a huge fan of debt as a tactic because I think it's.
Kind of gifts gifts companies and appreciation for how much debt loans are actually worth to other people and gives us.
Evidence about it, but maybe could either Doug or Mike could talk a little bit about what your motivations were.
To start doing this and how might that and any any kind of further granularity about the pricing that you're able to get and what it helps you kind of think you can do over time.
Yes, let me give you.
A little bit on the strategy.
Motion, Mike, Mike and Mike wanted to ask look.
Our rationale was pretty simple, which is to create strategic optionality and.
And we wanted to start out small and work out the plumbing.
And this.
It allows us to diversify our balance sheet on.
For our core product, but it also gives us strategic optionality of.
Creating a mechanism where we can utilize our distribution network and our customer demand and our brand and our reputation to potentially.
Originated products that we don't want to keep on our balance sheet.
And it comes with some of the core principles is we.
We will keep the customer relationship.
We got a healthy servicing fee and while we're not giving the detail on the price and we got very good pricing above par. So we view this as a very small part of it now it gives us strategic optionality and we will.
We'll look at opportunities as we move forward.
Yeah, I mean, I think Thats, well said and Moshe I view this lessens the transaction more than a relationship agreement.
And this was done with a strong counterparty and respected financial institution.
Doug mentioned it gives us a lot of business Optionality in terms of how we grow customers and the future, but just like everything we do around our funding programs just I would view as an enhancement to our already terrific program.
We have no intentions of this being a material portion or displacing either of our core funding programs.
Again, just and enhancement and a diversification of the platform and a district and addition to the strategic benefits and Dr.
Great. Thanks very much.
Your next question comes from the line of John Rowan with Janney.
Good morning, guys.
Good morning, John Jeff.
Doug you mentioned $100 million worth of expenses for the credit card business can you just kind of break that up but whats operating what's you know our capital expense and.
I assume that that goes in with the comment that there'll be higher operating expenses and 2021.
Yes, John This is Mike good morning, I'll take that the most of this is operating expense I would call bolt out of the 100 about two thirds of that spend is for the new products and channels, including our digital channel that we talked about and our prepared remarks and then the other third is really reflects investments and technology day.
Data and cyber to support these initiatives as well as our core business.
In terms of overall.
Impact to 'twenty, one expenses, if you think about the $100 million versus the 50.
We spent and in 2020, just that incremental investment alone puts us on about 4% higher than prior year. So.
It's early to say at this point, but I think you know this.
This year, we could end up being and at the higher end of our long term target of 3% to 5%.
I would also consider the fact that we are operating also and starting from a much lower 2020 base due to some of the aggressive cost cutting actions we.
Took.
In 2020 and John.
John I, just also wanted to clarify because what you stated wasn't accurate so I want to make sure. There's no confusion on the call. We're investing $100 million as Mike has said across the business not a $100 million on credit card credit card debt.
A very small part of that.
Okay and then.
And then Mike you also mentioned that you would move up to the higher end of the leverage range is there something that gets you there perhaps.
And acquisition or moving over 100% payout and I'm just trying to understand how you get from the bottom of the range to the middle part of the range, Yes, yes, so Jon middle Middle part of the range that the higher and what I said I think if you just go back and look at it even looking at the page and our earnings deck about.
And when we when we pay enhanced dividends and the leverage will move up next quarter because of our strong capital generation and the leverage levels will move down and you can see we were operating towards the lower and of our target range and simply just trying to message that we expect in 2021 and beyond will probably be closer to the middle of that.
Range on average on a per ton alright.
Alright, that's it for me. Thank you. Thanks.
Thanks, John.
Question comes on the line of Rick Shane with J P. Morgan.
Hey, guys. Thanks.
Question is on the card product this morning.
Look as you move from.
Your traditional loan product, which is upfront underwriting and fraud detection to card product, which is basically upfront underwriting and real time fraud detection.
Are you planning to use off the shelf fraud tools are you planning to develop around.
Where we first of all we've got some off the shelf fraud tools that we utilize for our digital underwriting already which a lot of the work we've done on digital sets sets us up to be able to add.
Other products that look different from our traditional approach on.
Like I said, we're going to get more detail on on broad product or I'm, sorry on the credit card product.
During the year, but.
There's a good chance, we'll use some off the shelf fraud products.
Two.
To start.
Got it and.
And then the second question on the regulatory side for the card product. How are you going to structure. This when you think about it and most card issuers.
Rely on day charters for rate exportation.
It's never been your business model sort of actually empathetic to your business model in terms of bank model. So curious how youll structure. This from a regulatory perspective.
Yes, all good questions at this point, we wanted to make sure you knew we were launching a card that we're excited about that we think is highly synergistic.
We think we've got a bunch of core competencies in our business, which we.
Will.
Generate efficiencies for us and create and ability to really launch this card efficiently and have it be successful whether it's our customer base, our corporate cost based on marketing and distribution and our funding capabilities, we're not getting into the details on.
On the deep structure of this how we're structuring and from regulatory et cetera at this point.
Got it I appreciate that.
Yes, no. Thanks for the question.
Yeah, no I understood and and I realize it's early and the buses pivoting just slightly not slightly but pivoting on can.
Can we talk a little bit about dividend policy and as you said dividend, particularly the supplemental dividend how much of thats forward looking versus how much of that backward looking what should we glean from.
The substantial increase in the first quarter supplement.
Rick and Mike. So you know I think the answer the short answer to your question as we look both ways.
Certainly we are considering where we are at the end of a quarter when.
When we are setting the XP.
Vacation for these enhanced dividends and as we mentioned.
And in the fourth quarter and our decision on this first quarter dividend I think is evidence of the strong capital generation, we have and both the quarter and the year, but also the confidence we have and our portfolio and the business. We set out here and also gave you a little bit of preview into what we thought losses, we're going to look like in <unk>.
And 2021 at below 6%. So I think the answer clearly as we look and book the rearview, but also looking forward as to how we think about this.
We increased our regular last quarter, we finished fourth quarter and the lower part of our range and felt that a $3 50 for and enhanced dividend was prudent for.
For our business and going forward.
And <unk> shared with you on numerous occasions to our allocation framework, which is to put loans on the books that meet our risk adjusted return hurdles.
Invest and the business, which we've clearly done in 2020 and continue to accelerate that and the future and then any excess capital that we create will evaluate for these enhanced dividends and the first and third quarter with our board.
Terrific. Thank you for taking all my questions. This morning.
Thank you.
Your next question comes from the line of John Hecht with Jefferies.
Morning, Doug and Mike and Rohit. Thanks, Thanks very much.
I guess.
More of a thematic question. Initially is that years ago are just over the past few years. There's been this discussion point, where youre digital capabilities and the branch capabilities are very symbiotic.
And kind of work off each other it sounds like the narrative right now is that you're able to do more digitally.
And with maybe less physical customer interaction and I'm wondering can you talk about what's happened and your underwriting model. It sounds like you were using things like artificial intelligence and so forth. This morning, and what's happened to that that gives you more capabilities to interact more fluidly from a digital perspective.
Going forward.
Yeah.
I'm not sure it's the underwriting model, John and let me let me tell you. How we think about this is we're building out and omni channel business. So we can and we're very customer first customer focused and we.
Want to make sure.
Current customers and future customers that we can serve them when and how they want to be served.
So if they want to walk into a branch and have a conversation with someone and sit down and look someone in the eye, that's always going to be an option for our customers.
They really just want to do it on a mobile app.
And Thats now and actual option for them and if they want to do a phone call and talk it through that and option for them.
Most of our digital closed loans per originations.
Include a hybrid approach and so they end up on a phone call with our.
With our.
Somebody on our team to talk them through their loan options product options and Super important the hallmarks of our business of ability to pay underwriting doing a budget doing income verification, we haven't sacrificed.
Any of those what's happened over the last couple of years is we really didn't have the ability to efficiently close.
Loans digitally and have a great customer experience and so 2019, we just had to build a whole bunch of back and things like our systems were built so you had to walk into a branch and when you opened and closed our ledger. It was all it always attached to a branch and so we had to do some back and things and we had to make sure everything from.
Our budgeting tools to our disbursement to showing product options were all available and seamless on a screen. So we did a lot of back end.
And plumbing and 2019 to get ready to do this in 2020, we rolled out a lot of just very forward facing customer features like co browse and so some we can.
Get on the same screen with our customers on to really walk them through the option and make sure they understand exactly.
What we're getting we've got chat capabilities and we've got video capability. So even if you don't walk in and you can replicate.
On that experience and as far as underwriting that.
For sure are having a very fluid underwriting system that allows you to make real time decisions that uses a lot of different data points and can crunch the numbers quickly.
Ben I feel feel good about us staying abreast of.
Everything thats happening in underwriting and just as you know.
And the cost of computing has gone down and the ability to use either AI algorithms and machine learning algorithms to continually improve your underwriting we've continued to invest and that and we've got a great modeling team. We've got a lot of data scientists on staff and Thats only and.
And our ability to accelerate digitally but it's the same underwriting methodology that we use and our branches.
Okay, and then and that's very helpful card.
Context, there and then second question.
Your reserve level.
It's near 13%.
Michael you guys are talking about charge offs at 6% or below this year.
Not thinking that youre, not asking for guidance into 2022% or anything like that but if you're running 6%.
Charge offs whats the whats from a seasonal perspective, what's the long term reserve requirement and I guess I'm, just trying to determine how much extra for balance might still be in there.
Yes.
John Let me, let me step back per minutes.
So on methodology I mean, it's been around close to a year over a year now but still.
And from the way that reserve and used to be done which was to look and incurred loss. So undersea. So we've got to look at economic inputs, which we do we've got to apply some level of expectation.
On losses too.
To those economic inputs and our reserves today assume a level of call it six 7% unemployment.
And in 'twenty one.
Assume no direct impact on government stimulus when we were setting our reserves at the end of December while there was stimulus out there. It was unclear how that was going to influence our.
And our delinquency and future losses, I would say and in fourth quarter, we continued to see normalization a bar on.
Our delinquency levels back more towards 19 levels from a very very low delinquency that we saw in the second quarter coming off of cares Act.
And I think we just generally given the great deal of uncertainty that remains and the environment.
And are continuing to apply a prudent approach to reserving.
As we move into January we see some stronger delinquency trends and most of that potentially dilute delivered and driven by stimulus. So.
So we feel good about where we were putting out the sort.
Sort of loss expectations for 'twenty, one, but the seasonal methodology just takes on a little bit different.
Approach in terms of the overall levels.
As I talked about in my prepared remarks, we ended up putting up.
And getting up to 13, 2% by card summer of last year, when things were looking really uncertain and I would say theres, a little bit more clarity, but.
Still some.
Still some uncertainty and the future. So we feel at 12, 6% for adequately and prudently reserved those reserve levels remain about 18% higher than where we were pre COVID-19 and so on sort of a I would say on a sustained basis pre COVID-19 six to six 5% and.
And then the loss rate is expressed by and by the time out to 11% reserve rate under seasonal per.
Alright, very good thank you very much.
Thanks, John your net.
Question comes from the line of <unk> with RBC.
Kenneth Lee Your line is open.
Kenneth you may be on mute.
Hi, sorry about that thanks for taking my question.
Just want to follow up on on the net charge off expectations.
I'm wondering if you could just share some of the key factors give you the confidence that net charge offs could below be below 6%. This year I'm wondering specifically whether there are any other factors outside of the very strong second half delinquency trends that you've seen so far thanks.
Thanks, Ken I appreciate the question I mean, I think when we think about all of these things where we're certainly looking at the content of loss and our book today. So a big driver is the second half delinquencies as we've talked about before we have 180 day charge off.
When we get to the point and the year, where we are at the end of December we have a pretty good idea of 180 days out what our charge offs charge offs are going to look like so I would say a lot of confidence and the first half. If you go back and look at some of our charts take 90, plus and then look at what ratio Gerard.
Jobs are 290, plus and the prior quarter because of those 90, plus theyre going on the loss and you can see pretty good stability at two eight to three times and.
And then you can do the same thing with 30 to 89 two quarters prior and look at the ratio of charge offs to two of those 30 day to 89 delinquency levels and that gives you a pretty good idea. So we feel comfortable with first half. So as I said, there's still a lot of uncertainty out there but.
But we've seen that normalization, we saw on the second half of 2020, we saw some early positive trends in January so.
So that gives us comfort as well of course, the degree of performance below six and feel very comfortable and six and below but the degree of performance below that will be continue to be dependent on the speed of the economic recovery, our portfolio growth, which of course contributes to that ratio through the denominator effect and.
And any further government support we might get for consumers.
Yes.
Great. That's very helpful and just one follow up if I may I'm wondering if you could just provide any updated thoughts on potential priorities or excess capital deployment.
And specifically wondering what what's the outlook for any kind of potential deployment to M&A opportunities out there. Thanks.
Yeah, Mike I took you through our framework and we stay very disciplined to our framework. It's one we laid out two years ago, which is first we're going to make loans that meet our risk return hurdles.
Two is we're going to invest in the business, whether it's technology products people analytics data.
Moving to make sure we're world class and innovative and and.
And our business.
As far as M&A, we'll be opportunistic so if we see something that we think is accretive to the business and adds either a capability or a product.
Or a platform, we'll consider it we've got a team whose active.
But we're disciplined about that our bias would be.
And do something smaller and we need to make sure that a.
Strategically it makes sense be financially it makes sense the debt.
Got it.
Can be executed.
And also that it.
We've got a regulatory overlay to make sure anything we do makes a lot of sense and then we will return capital to our shareholders and so I'd say, we view it as opportunistic.
Framework remains.
What it is.
The reality is.
A lot of things that could be additive.
Yes.
Are very pricy, right now, but again never say never but that's.
And that's our framework and that's how we're going to deploy capital.
Very helpful. Thank you very much.
Your next question comes from the line of David Corak with JMP.
Hi, Yes, good morning, everyone. Thanks for taking my questions listen.
All of the.
Specific questions on the quarter and the outlook I had and have been answered.
But.
And maybe.
A very general one.
Doug and.
And <unk>.
Essentially I guess the question is why now meaning.
It seems like an awful lot of initiatives card.
Card small dollar loans.
Moving down the credit or up the credit spectrum that they all seem to be coming at once and.
And I'm curious.
What are these things that were sort of long and the making and it's just sort of coincidence or is there something about the pandemic were lessons you've learned over the course of the last year.
And if perhaps accelerated some of these initiatives but.
Ultimately.
And just sort of curious because the profile of the company is expanding quite a bit and it all seems to be coming together.
Together right now entering 'twenty, one and and maybe if you can talk a little bit about strategically sort of what has led to you.
To this place currently.
Yeah.
We've laid out a lot of our strategy at Investor Day, and if you go back to that I think we've been quite consistent.
Which is we've got a great business and a great core franchise and its a platform that has a number of core competencies.
<unk> got a great set of loyal customers.
We've got marketing and distribution capabilities, we've got superior underwriting capabilities and the near Prime sector and we have it.
Deep from funding capabilities and a great funding program and.
So we.
We for a couple of years have been.
Building all of the infrastructure to be able to keep.
Keep our core product and platform strong and for that core product. We're incredibly disciplined and we are disciplined underwriting that meets our risk return hurdles and for the whole company, we're very conservative and have a bullet proof balance sheet, but we were always planning and we've been saying this to.
Expand the platform I think for each of these.
There is different.
Ways to think about it I think the.
Better credit customers is really we've been building the technology the analytics and the AI that allows us to do more dynamic pricing and so that is still core products core to what we're doing.
We always had.
<unk> number of customers and that's call.
Call it 10% over 700.
FICO. So it's just a matter of being competitive and that market and picking up more volume because we've expanded the platform, including our digital capabilities for.
And for smaller dollar loans again.
I think of it more as an extension of our platform at very similar product just at a different size, which allows you to bring in a different.
Customer who might not qualify for and $8000.
<unk> alone.
I think card has been.
A dialog and in the works.
For a while.
And as I've talked about it's a very natural extension of our business and has a lot of synergies and at pairs and ongoing daily transaction relationship with a large episodic loan transaction and that allows us to link them.
Over time build products and merge the best of.
Both the loan and the card and takes advantage of those core competencies and so we've been very deliberate and staged and this we've been making investments in the backbone of our business over the last couple of years.
And we just didn't slow down and my belief is.
Great business is.
Wow, they're flexible and they respond to external events and conditions like the pandemic you stay focused on the long term and these are all long term initiatives that we think are going to add a lot of value to the franchise debt.
Our.
We've been had been in the works and had been and a staged rollout and they some of them started earlier some of them are just starting the car to go into market and the second half.
On it.
That's helpful Alyssa and at the end of the day, sometimes coincidence in terms of timing is just debt.
One last follow up.
Different broader topic.
The investment community has been hearing a lot in recent months.
Broadly and the software space and more specifically on consumer lending and on.
And you called it out and your slides and you just mentioned.
AI and in your previous response to me.
I'm wondering can you just.
Be a little more specific on on how youre defining AI and what what specifically and your.
Not just underwriting models, but technology.
Kind of falls under that definition for you I think it's the first time, Inc.
Seem to recall.
The company, specifically highlighting that.
And we've been highlighting it for a while so.
And it's it's not new to us look artificial intelligence and machine learning is just instead of people having to crunch.
The numbers and look at all of the data the technology can do it and the technology learns for itself recognizes patterns and.
And improves on itself over time, we don't get and publically into the specific algorithms, we use because it's proprietary.
What I would say is.
As I told you we have.
A number of data scientists on staff and we've been adding.
To that we built out the core infrastructure needed to make sure that we can keep using the most.
To date techniques, we also on a regular basis send our data out to.
Syntax, and others, who use AI and and a non advised way to see if they can see patterns that we don't.
And so we're always running channel champion challengers to make sure that.
We stay up with any new and then and anything that a fin tech is is doing so that's how we that's how we define AI.
What we have that many fintech don't have is.
A lot of proprietary data over many years with on us behavior of specific.
Customers, who have specific characteristics, how long they lived and at home when they moved on.
How long they were on a job what their credit scores were on a very granular basis over number of years and how that credit performs so if you match.
Using best in class artificial intelligence and underwriting techniques with our proprietary data I think it gives us a real advantage and that's why you see.
Credit performed so well compared to.
People and others and the market.
Got it and I appreciate that very helpful. Thank you.
Your next question comes from the line of Steven <unk> with Piper Sandler.
Hey, guys. Good morning, and thank you very much for taking my question and I'll, let Kevin Barker of Piper Sandler.
I was wondering if you could talk a little bit about the implications of the cancellation cancellation of student debt.
Pertaining to loan growth and credit.
Yeah.
Sure Al.
I'll say a couple of things I mean, one it.
Super hypothetical because there has been no cancellation of debt and if it happens we don't know what the size is but I can say generally.
Decreased debt is going to be helpful for our borrowers and potential borrowers.
It would help their credit and it could mean more people will meet our ability to pay analysis, but it's really hard to say how much impact it would have and.
Pretty hypothetical at this point until we see what emerges.
Yes of course that makes sense and just a little bit of a follow up I was wondering if you guys and deal.
To give us any numbers as to what percentage of the customers below is 30 years old or is 40 years old have.
Student debt.
This is Mike I don't have that stat for you off and maybe something we could follow up on but it's not generally something we track within the portfolio. Our average customers is several years old.
So on that point right.
That's great. Thank you very much.
For the questions.
Yeah.
Your next question comes from the line of Bill Ryan with compost Compass.
Compass point.
Good morning, and thanks for taking my question.
Just a question as it relates to the direct auto loan.
Obviously used car prices are up about call it 15 and 16%.
Based on the Manheim data, which is probably giving you guys a little bit of leeway in the sense of potentially making some larger loans, but I'm curious have you made any adjustments and the underwriting of that particular type of loan may be adjusting for some of the inflation thats, taking place and used car prices over the last nine months. Thanks.
Yes, Bill this is Mike.
We haven't made a great deal of underwriting adjustments related to loan values I mean, we've certainly seen a small.
Relatively moderate adjustment or increase in size across all of our auto.
And secured portfolio and lending, but it hasn't been significant I would say that's come with a little bit larger loan size, but again fairly moderate.
In terms of what Youre describing.
Certainly thats been somewhat accretive to loan size.
Say in terms of loan to values they've remained relatively consistent throughout the year and also remind folks that these are not purchased money loans. We also and we look at them as loan personal loans that are secured by collateral. So they go through additional underwriting and it goes through our standard <unk>.
Risk grade underwriting and expectations of loss, we go through our ability to pay process just like we would with any other loan and then the value of the vehicle.
It's just a third part of that debt exercise.
Thank you.
Your last question comes from the line of Mike Grondahl with Northland Securities.
Hey, guys congrats on the quarter.
Thanks, and I just wanted to get just wanted to get your high level thoughts on the durability of the dividend.
You guys have described the framework, but how do you just think about the durability of the dividend and the special dividend and looking out a couple of years.
Yeah look Mike.
You know at the risk of being redundant and we've got a disciplined framework. So we.
Yeah make loans that meet our risk adjusted return, we invest and the business.
And we return the rest to shareholders and.
Every other quarter, we've committed to look at supper.
Supplemental or enhanced dividend above the minimum dividend.
And given the capital that we generate.
We've been clear with shareholders that they should expect this to be.
You know this stock to have significant yield.
And our board is going to evaluate it every quarter.
And it'll be based on the business performance that we have I think Mike had talked about those those.
Those factors, but I think you can expect day.
Significant yield from onemain into the future.
Great well I think it's clearly helping re rate the stock too so congrats on the strategy.
Thank you thanks.
We share it.
Thank you. This does conclude today's onemain financial fourth quarter and fiscal year and 2020 earnings Conference call. Please disconnect. Your line at this time and have a wonderful day.
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