Operator: Good morning, everyone. Welcome to the OneMain Financial Q3 2026 Earnings Conference Call and Webcast. Hosting the call today from OneMain is Peter Poillon, Head of Investor Relations. Today's call is being recorded. It is now my pleasure to turn the floor over to Mr. Peter Poillon. Please go ahead, sir.
Peter Poillon: Thank you, operator. Good morning, everyone, and thank you for joining us. Let me begin by directing you to page 2, the Q3 2026 Investor Presentation, which contains important disclosures concerning forward-looking statements and the use of non-GAAP measures. The presentation can be found in the Investor Relations section of the OneMain 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. These forward-looking statements are subject to inherent risks and uncertainties, and speak only as of today. Factors that could cause actual results to differ materially from these forward-looking statements are set forth in our earnings press release. We caution you not to place undue reliance on forward-looking statements.
Peter Poillon: If you may be listening to this via replay at some point after today, we remind you that the remarks made herein are as of today, 30 October, 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 Jeannette Osterhout, our Chief Financial Officer. After the conclusion of our formal remarks, we will conduct a question-and-answer session. I would like to now turn the call over to Doug.
Doug Shulman: Thanks, Pete. Good morning, everyone. Thank you for joining us today. Let me begin with a few highlights from the quarter before I discuss momentum across the company as we continue to deliver profitable growth through disciplined execution and progress against our strategic priorities. Financial performance was great this quarter. Receivables continue to grow. Credit is moving in a decidedly positive direction. We further fortified our already strong balance sheet, and capital generation continues to grow. Capital generation for the quarter was $284 million, up 4% year over year. We are seeing excellent growth across our business while maintaining our conservative underwriting posture. The growth is driven by ongoing product innovation in our personal loans business and continued disciplined execution in our newer products, auto finance and credit cards. Receivables reached $28 billion in the quarter, which is a 9% year-over-year growth.
Doug Shulman: We saw good credit performance in the quarter. Our consumer loan, 30 to 89 delinquency declined 12 basis points year over year, better than the 3 basis point decline we saw last quarter. Year to date, the decline has been 28 basis points, which compares positively to low single-digit declines in both the prior year and pre-pandemic years. We also saw improvement in later-stage delinquencies, with 90-plus delinquencies declining 9 basis points year over year, compared to a 3 basis point increase last quarter. These improving delinquency trends point to lower losses going forward, and we expect lower year-over-year losses in 2027, getting us closer to our longer-term normalized loss range for consumer loans. C&I net charge-offs were 7.2%, and consumer loan net charge-offs were 6.9%, both down significantly from last quarter.
Doug Shulman: We also continued to see good recoveries resulting from our efforts over the past several years to improve recovery capabilities across the business. We had 7% year-over-year growth in our consumer loan business. In our personal loan business, secured lending, which carries lower losses, accounted for nearly 60% of our originations this quarter. Our enhanced debt consolidation offering, new home fixture secured loan offering, and increased use of bank data all contributed to higher originations in personal loans. We are pleased with our loan growth, but as I have said before, growth is an outcome. Great lending businesses start with a disciplined credit box and build on that by innovating and executing on a thousand little things that add up to meaningful value creation.
Doug Shulman: Across OneMain, our team members are continuously finding ways to make better use of the rich data our business generates, refine our marketing to reach more customers, better tailor our offers to increase pull-through rates, improve our digital experience to make it easier for customers to do business with us, and drive efficiencies in our branch and operations. It is this focus on continuous improvement and execution that is driving the profitable growth that we see today. Turning to auto finance, receivables grew 16% year over year to $3.2 billion. We have increased application flow while maintaining our conservative underwriting standards by improving sales force productivity, expanding our dealer network, and deepening dealer relationships to generate more applications per dealer.
Doug Shulman: As this business continues to mature, we expect to do more volume with our existing dealers. Importantly, credit performance in auto finance remains good and in line with our expectations.
Doug Shulman: Our credit card business delivered another strong quarter, with excellent results across all key metrics, and we now have 1.5 million customer accounts. Receivables have now reached $1.4 billion. Our expanded card offering and focus on customer experience are helping attract new customers and drive digital engagement. We are seeing this materialize both in our results and also reflected in frequent usage of our highly rated mobile app. Credit performance in the card business continues to improve, building on the momentum from the H1 of the year, with lower losses and better delinquency trends compared to a year ago. We continue to drive down unit cost and generate greater operating leverage as we scale. We are very happy with the trends in our credit card business, which underscore the value this business brings to OneMain in terms of capital generation and diversification.
Doug Shulman: The strength of our balance sheet and funding program were again evident this quarter. in August, we raised $2.3 billion at very attractive pricing with tight spreads through three separate issuances on a single day. Once again, we demonstrated our leading access to the capital markets, even further fortifying our incredibly strong balance sheet with a long liquidity runway. Let me spend a minute discussing how we are investing in technology and digital capabilities to make it easier for customers to do business with us, support profitable growth, and improve efficiency. Over the past year, we have built a new mobile and web experience that has brought personal loans, credit cards, and our MyMoney financial wellness tool together in one place. We have now made this new mobile app experience available to all of our customers.
Doug Shulman: Customers can more easily manage their accounts, access tools to help with their financial lives, and explore personalized offers across our products. We are seeing growing engagement with our digital channels, creating additional opportunities to serve our existing customers, attract more customers, and make our business more efficient. We also recognize how AI could have significant potential across our business, and we are approaching it with discipline. Our approach is to apply the technology in those places where we see the clearest opportunities, starting with targeted use cases and expanding where the evidence supports further investment. Our internal use has focused on deploying AI to improve how our team members work today, with an eye towards automating high-volume manual processes and operations, helping team members in corporate functions work more effectively, and driving productivity and innovation in product and software development.
Doug Shulman: While we are also starting to pilot AI in selected lower-risk customer-facing interactions, these use cases carry a very high bar for accuracy, transparency, and trust. We will move very deliberately there and scale over time only where the results and customer experience support it. As we expand our use of AI, we have put in place a governance framework in which security, privacy, human accountability, and customer trust are foundational to how we deploy the technology. It is also important to remember that our branch network, deep customer relationships, and personalized service will remain key differentiators of OneMain, particularly when, as adoption of AI increases, customers will ascribe more value to trusted human interactions and guidance. Let me briefly touch on the consumer. The positive credit trends we see on our book are pointing to continued resiliency in our consumer base.
Doug Shulman: While higher oil prices and some inflationary pressure continue to create uncertainty in the macro picture, the labor market remains strong. Importantly, we don't underwrite to the generalized consumer. We offer personal loans, credit cards, and auto loans to customers who meet our conservative underwriting standards. At the end of the day, we hold a nationwide portfolio of risk, which is only a subset of the overall non-prime consumer base, and our data points to a stable and resilient customer. Turning to capital allocation, our priorities remain unchanged. We will continue to extend credit to every customer that meets our risk-return criteria, and we will invest in the business to innovate, meet customer needs, drive efficiency, and create long-term shareholder value. Our regular dividend, currently $4.20 per share on an annualized basis, represents a 7% yield at today's share price.
Doug Shulman: In the Q3, we repurchased 538,000 shares for $34 million, bringing our total repurchases year-to-date to $171 million. As I have said, all things being equal, we expect incremental capital returns to be more weighted towards share repurchases going forward, while still maintaining our current dividend. As you can see, we had another strong quarter. OneMain's best-in-class data science and underwriting, experienced team with unparalleled expertise in serving the non-prime consumer, our digital and technology innovation, diverse product offering, and strong balance sheet create unique competitive advantages for our company, which are evident in the results this quarter. We are focused on building on these strengths by executing our strategic priorities and driving profitable growth across the business. With that, let me turn the call over to Jenny.
Jeannette Osterhout: Thanks, Doug, and good morning, everyone. Let me begin by summarizing our strong Q3 results. We delivered excellent high-quality originations and good credit performance with lower losses that are better than seasonal trends, and improved delinquency metrics across all products, providing a tailwind for further loss improvement ahead. We enhanced operating efficiency through disciplined expense management while continuing to invest in initiatives that strengthen the business. We also bolstered our balance sheet during the quarter with both unsecured and ABS issuances. Taken together, these results position us well for continued profitable growth over the medium and longer term.
Jeannette Osterhout: Consumer loan originations increased 17% year-on-year in the quarter, while credit card unit originations and purchase volume each grew more than 80%, consistent with our plan to scale the credit card business over time. Managed receivables grew 9% year on year, accelerating from 7% growth last quarter.
Jeannette Osterhout: As Doug said, we view growth as an outcome, and this quarter's combination of portfolio growth and improving credit performance is particularly encouraging. Funding and the strength of our balance sheet were once again highlights in the quarter. We raised $2.3 billion in the public markets through three separate issuances across the ABS and unsecured markets, providing excellent flexibility for future funding needs. Additionally, we continued our share repurchases. Year to date, we've repurchased $171 million of our shares, which, combined with our healthy dividend, resulted in more than a half a billion dollars returned to shareholders so far this year. Q3 GAAP net income was $185 million, or $1.60 per diluted share. We generated C&I adjusted net income of $174 million, or $1.51 per diluted share in the quarter.
Jeannette Osterhout: The strong loan originations and credit card purchase volume I mentioned earlier drove a $1.1 billion sequential increase in net finance receivables in the quarter. This strong receivables growth resulted in a $146 million increase in our CECL loan loss reserve in the quarter, $85 million higher than in Q3 of last year. Capital generation, the metric against which we manage and measure our business, totaled $284 million, up 4% from $272 million in Q3 of 2025, reflecting the continued growth of the business. Managed receivables ended the quarter at $28.1 billion, up $2.2 billion, or 9% from a year ago. Managed receivables at the end of September included $1.8 billion of finance receivables serviced for others. Q3 originations of $4.5 billion increased 17% year on year.
Jeannette Osterhout: In personal loans, we delivered strong growth while maintaining our consistent and conservative underwriting, driven by our innovative personal loans initiatives and continued scaling of our auto finance business. The personal loans initiatives we have progressed over the past several quarters continue to gain traction and attract customers to OneMain. Encouragingly, their early credit performance is in line or better than our expectations. The auto finance business delivered strong growth, with Q3 originations up 26% year on year, as we continue to grow our dealer network and further penetrate dealer relationships. Our credit card business continued to build momentum, with unit originations up 84% and purchase volume up 82% year on year. We continue to benefit from the enhancements to our BrightWay offering, as we appeal to more customers and deepen engagement with existing customers.
Jeannette Osterhout: Overall, we are pleased with the pace and quality of the growth across the businesses, which was achieved through superior execution while maintaining our conservative credit posture. Turning to yield. Q3 personal loan yield was 22.6%, up slightly year on year, even as the mix of our personal loans portfolio has shifted towards more secured lending. Our asset yields remain strong as we continue to maintain our disciplined pricing. As market rates adjust in this dynamic rate environment, we will continue to monitor the market for opportunities to optimize pricing, but we expect our personal loan yields to hold at current levels through year-end. Q3 revenue yield in our credit card portfolio was 34.9%, up from last quarter and a year ago. Total revenue in Q3 was $1.7 billion, up 7% year on year.
Jeannette Osterhout: Interest income of $1.5 billion grew 7% from Q3 of last year, outpacing the 6% growth in average net receivables on our balance sheet. Other revenue of $211 million was up 5% from last year, primarily due to higher credit card revenue as we grow the card business, as well as higher servicing fees from our growing portfolio of loans serviced for third parties. Interest expense for the quarter was $345 million, up 8% compared to Q3 of 2025, driven by higher average debt to support our receivables growth. Our interest expense as a percentage of net receivables was 5.3% this quarter, an increase of three basis points to last quarter. As we look forward, we expect our funding costs to remain at approximately this level through year-end.
Jeannette Osterhout: Our longer-term staggered debt maturity profile will mitigate the impact of potentially higher market interest rates into the future. Q3 provision expense was $615 million, consisting of $469 million of net charge-offs and a $146 million increase in reserves, which, as I mentioned earlier, was driven by the strong receivables growth during Q3. Policyholder benefits and claims expense for the quarter was $53 million, up from $48 million in Q3 of last year. We continue to expect quarterly PB&C expenses in the mid-$50 million range going forward. Let's turn to credit, starting on slide 8. I would like to first highlight that unlike in prior quarters, all delinquency metrics on slide 8 now reflect personal loans, including Foursight, the auto finance business we acquired.
Jeannette Osterhout: We now have enough combined quarterly results to provide a consolidated view of personal loan delinquency metrics, which helps simplify the analysis of credit trends. As a reminder, including Foursight in our delinquency metrics increases early-stage delinquency rates, but lowers the roll to loss, consistent with typical auto finance industry dynamics. 30 to 89 delinquency on 30 September was 3.08%, down 12 basis points compared to a year ago, an improvement from the 3 basis point decline we saw last quarter. On slide 9, you will see that the 28 basis point year-to-date improvement in 30 to 89 delinquency was better than the low single-digit improvements both last year and in the pre-pandemic period, as delinquency continues to trend lower. 90 plus delinquency declined 9 basis points from a year ago, following the improvements in our 30 to 89 delinquency last quarter.
Jeannette Osterhout: 30 plus delinquency was 5.34%, down 21 basis points from the prior year, an improvement from the flat year-on-year trend last quarter. We are encouraged by the improvement across all delinquency metrics this quarter, which helps support our confidence in lower year-on-year losses in Q4 and into 2027. Before turning to net charge-offs, I want to highlight the continued impact of our back book, which consists of loans originated before August 2022. While representing just 3% of our total portfolio, it accounts for 10% of 30 plus delinquencies, which is more than twice the expected level for similarly seasoned loans.
Jeannette Osterhout: While our front book continues to perform in line with expectations, the negative impact of the relatively small aging back book continues to linger on our balance sheet and disproportionately weighs on credit performance. As we move into 2027, we expect this impact to continue to subside.
Jeannette Osterhout: Moving to net charge-offs for the quarter, as shown on slide 10. Q3 C&I net charge-offs, which include the results from our growing higher yield, higher loss credit card portfolio, were 7.2%, down 96 basis points sequentially, a notable improvement from the 56 basis point sequential decline in this quarter last year. Personal loan net charge-offs, which exclude credit cards, were 6.9% in Q3, down 88 basis points sequentially, also a notable improvement over prior year's sequential drop. We are pleased to see the improvement we anticipated in year-over-year roll rate trends this quarter, which we believe will continue through the end of the year. Combined with the recent improvement in delinquency rates, these trends should drive notably lower loss rates year-on-year in Q4. Recoveries remained strong in the quarter, increasing 15% year-on-year to $101 million.
Jeannette Osterhout: Recoveries as a percentage of average net receivables increased to 1.6% from 1.5% a year ago, reflecting continued enhancements to our comprehensive loss recovery strategy. C&I net charge-offs include a 35 basis point contribution from our small but growing credit card business, which has higher yields and higher losses. However, I would like to highlight the continued strong improvement in credit performance in our credit card business. Net charge-offs declined 274 basis points year-on-year to 13.9% in the quarter. Given our strong performance throughout 2026, we expect full-year credit card net charge-offs to land comfortably within our longer-term target range of 15% to 17%. 30 plus delinquency in our card business declined 135 basis points year-on-year, giving us greater confidence that the loss improvement tailwind should continue. Our card business has delivered consistently strong credit performance over the past several quarters.
Jeannette Osterhout: As we look ahead, we expect to continue to pursue growth with the same conservative approach we have taken since inception. Loan loss reserves ended the quarter at $3.1 billion, with a reserve coverage ratio of 11.7%. Our loan loss ratio increased five basis points from 11.6% last quarter, as expected, driven by the change in mix of our portfolio as our credit card business continues to grow in proportion to the total portfolio. In Q3, credit card receivables grew by $239 million, or 21% sequentially, accounting for approximately 20% of total net receivables growth in the quarter. While the credit card reserve ratio was largely unchanged from prior quarter, it is nearly two times higher than the reserve rate on personal loans.
Jeannette Osterhout: As strong credit card growth is expected to continue to shift our portfolio mix, we expect the overall reserve rate will reach 11.8% in Q4. While there is a modest impact to our reserve ratio, the growth of the credit card business brings strong risk-adjusted margins, positive capital generation, and further diversifies our overall business for the longer term. Now let us turn to expenses on slide 11. Operating expenses were $453 million, up 6% from a year ago, compared to the 9% growth we saw in managed receivables. The operating expense increase reflects continued investments in credit cards and auto finance, as well as enhancements to our data science, technology, and digital capabilities. These initiatives support growth across our businesses by improving customer experiences, increasing team member productivity, and expanding our data and analytical capabilities, while driving greater efficiency and scalability over time.
Jeannette Osterhout: Our Opex ratio was 6.5%, down from 6.7% last quarter and 6.6% a year ago. This improvement reflects our continued focus on expense discipline and our ability to drive operating leverage while supporting business growth. Looking ahead, we will remain focused on balancing investment in opportunities that support future profitable growth and operating expense efficiency. Now, turning to funding on slide 12, where I will provide a bit more detail on our balance sheet. As I touched on earlier, we strengthened our balance sheet during the quarter. In August, we raised $2.3 billion across three issuances in one day, a record for OneMain. We issued a $1 billion two-year revolving ABS at 5.15%, a $680 million five-year revolving ABS at 5.47%, and a $600 million unsecured bond due in 2034 at 7 1/8%.
Jeannette Osterhout: Demand was strong across the three transactions, resulting in attractive spreads ahead of recent market rate increases. This strong execution reinforces the strength of our funding platform and our ability to raise capital even with an uncertain market backdrop. Our bank lines are unchanged at $7.5 billion, providing substantial liquidity and additional flexibility to our funding program. Our net leverage at the end of Q3 was 5.5x, flat compared to prior quarter and a year ago, and within our target range. Our balance sheet remains a key competitive advantage, supported by staggered long-term maturities, a diversified funding mix, ample liquidity, and consistent market access. This combination provides flexibility, supports stable execution, and positions us well through economic cycles and volatile credit markets. Turning to our full year 2026 guidance, shown on slide 14. We are narrowing our full year managed receivables growth guidance range.
Jeannette Osterhout: We now expect managed receivables to grow at the high end of our previous guidance range of 6% to 9%, reflecting the strong momentum across our three businesses. We are also narrowing our C&I net charge-off guidance range. We now expect C&I net charge-offs to come in at the higher end of our previous guidance range of 7.4% to 7.9%. As I mentioned earlier, lower delinquencies and improving roll rate trends support our expectation for further year-on-year loss improvement in Q4 and into 2027. We are maintaining our Opex ratio guide of approximately 6.6% for the year. In closing, we are pleased with our performance and the momentum we continue to build across the business. Healthy originations growth, improving credit trends, disciplined expense management, and our diversified funding program support our ability to drive continued capital generation growth in the years ahead.
Jeannette Osterhout: With that, let me turn the call back over to Doug.
Doug Shulman: Thanks, Jenny. We had another strong quarter, and I feel great about the trajectory of our business. Growth accelerated across all products, further demonstrating our ability to grow while maintaining our consistent and conservative underwriting posture. Credit performance improved, providing a clear path to lower and more normalized losses moving into 2027. These trends demonstrate the strength of our core business and the value of our investments in new products and innovation in driving profitable growth. Looking ahead, we will build on this progress through disciplined execution to drive further gains in performance. Combined with our strong balance sheet and consistent capital access, we are well-positioned to deliver sustained growth in capital generation and strong returns to our shareholders for the years to come.
Doug Shulman: Before I close, I would like to thank our team members across all of OneMain, whose hard work and dedication are at the heart of our success and our mission to help hardworking Americans improve their financial well-being. With that, let me open it up to questions.
Operator: Thank you. If you would like to ask a question, you may press star 1 from your telephone keypad. We will now go to our first question, which is from the line of John Hecht with Jefferies. Please proceed with your question.
John Hecht: Morning, guys. Thanks for taking my questions. First one.
Doug Shulman: Morning, John.
John Hecht: Yeah. Thanks. First one is just related to the accelerating growth in receivables. I know some of this is related to the success of credit cards and the auto segments, but you also have very good momentum in personal loans. We have also seen other, some of them are peers, some of them may be, call it, indirect peers of yours, that have also had pretty strong growth and momentum in that category. Doug, I guess, is there something going on, like a structural shift where maybe borrowers are using personal loans more than alternatives, and the market is shifting? What is your perspective on what is going on there?
Doug Shulman: I do not think there is necessarily a structural shift, or at least we are not seeing evidence of it. I think we are picking up market share. We are especially pleased with the growth given how tight our credit box is and that we are staying disciplined around that. I think the growth we are generating, we have been doing a lot of innovation around our personal loan product. I have talked about debt consolidation, a home fixture secured product. Bank data, about 40% of our originations now, people share bank data with us. That is up from 30% a year ago. That is a much more streamlined process than having to produce multiple pay stubs, get them verified. It is just an easier process for folks.
Doug Shulman: A lot of our digital processes are adding. Obviously, we have very good brand pull-through because customers know we have got an excellent product at a fair price, that we treat them well, that we work with them when they have issues. Then you add to that, about 5 years ago, we decided to expand into auto and credit cards. We have done it in a very slow, disciplined manner, again, with super tight credit posture, and those are now maturing and coming to bear. We do not have evidence that it is a structural shift. We think it is just us continually improving the business and taking some market share from others.
John Hecht: Okay. That is great color. Then in the credit card segment, still good growth and I guess good credit trajectory there. Maybe can you talk about the customer behavior? How much of these are, call it, unique customers versus cross-sells? What is the behavior of the customer? How quickly do they ramp in terms of revolving and so forth? Maybe just a little bit of detail there.
Doug Shulman: Yeah. Look, as I said, we actually launched our card business 5 years ago. We started with a whole bunch of test cases to see how our marketing landed, how our product sets landed, what was line usage, and most importantly, what was credit. Then we expanded places where we had good credit and the return on receivables and long-term profitability was going to meet our return hurdles. We have really been kind of step-by-step moving into the market. I think part of what you are seeing is just more refined models with very high confidence in credit, and you are seeing that come through in our credit results. We have also now refined and have more options in the market. Lower fees, higher rewards, no fees, with modest rewards.
Doug Shulman: For different credit segments, we have got a variety of cards, and so we now have more of a full-spectrum offering that allows people to pick the kind of card they want with OneMain, where we started with just two basic cards. Then we have really refined our analytics, and so we are now able to market to customers that are lower risk and more likely to use their line. We have seen a little bit more line usage early on, but that is specific because we have been targeting those customers in our marketing material.
Doug Shulman: I think it is a mix of things that have led us. I think line usage is pretty similar. It ramps in a similar way. We do now have a much more refined line increase and line decrease program, which creates better credit on the decrease side, obviously a little growth on the increase side.
Doug Shulman: I think it is just an amalgamation of 5 years of experience, together with our decades of experience serving the nonprime consumer, and you are seeing really all the metrics come together.
John Hecht: Great. Thanks very much.
Operator: Our next question is from the line of Arren Cyganovich with Truist Securities. Please proceed with your questions.
Arren Cyganovich: Thanks. I wanted to touch on credit. I think Jenny had said that you are seeing roll rate trend improvements. When I look at the, I guess, roll rates from late to charge, at least on the metrics in my model, it looks like they are actually a little bit worse this quarter. But what roll rates were you referring to when you were talking about credit?
Jeannette Osterhout: Yeah. I am looking at the year-over-year roll rates. I think when I look at, let us just say, the 30 to 89 to 90 plus, or the 90 plus to loss, that year-over-year roll rate is what I am looking at and starting to see improve. I think we had started to see this pattern in the Q1, and talked a bit about it last quarter. We are really starting to see that come out. When I look at losses in the Q3, as we went throughout the quarter, we also saw that year-on-year trend get better.
Jeannette Osterhout: If I then look at our year-on-year losses, by the last month, we were seeing better year-on-year losses. I do think that is how I am thinking about it. I think that might be slightly different than how you are looking at it, but I hope that helps.
Arren Cyganovich: Yeah. We can kind of discuss it later with IR. The other question I had is also credit-related. As you are adding Foursight to the delinquencies, how does that change the historical seasonality aspects of it? Also, the stronger growth in auto finance and credit cards, what are you seeing from credit seasoning? Is that one of the aspects that is sort of leading to this more stubborn level of charge-offs, kind of notwithstanding the remaining 3% of legacy book?
Jeannette Osterhout: Let me break that down into a couple pieces. Let us just start with cards, because that is probably the easier piece to pull apart. I mean, we have obviously been seeing really good trends on credit cards, both in delinquency and in losses, and that is helping and clearly a good trend. When you look at personal loans, which now we have, including Foursight, it changes some of the dynamics that we have. Meaning, traditionally, and I talked a little bit about this earlier, but in auto finance, you have higher delinquencies and then better rolls to loss.
Jeannette Osterhout: I think we really see the same trends this quarter, I would just say across the board, when I look at with and without Foursight. I do not think it is changing the trends. You guys, you can see it. There is an appendix that shows you without Foursight in the presentation.
Jeannette Osterhout: Overall, I would say, we are really seeing the improvements in both delinquency and loss across all products. If I look back on Foursight, when we bought them, they were slightly more prime or slightly higher on non-prime, I would say. We have been looking at finding where is the best place for us to compete. There are some slight differences there where we are moving the book, but overall, everything is performing in line with our expectations, and the trends are moving in the right direction.
Arren Cyganovich: Thank you.
Operator: The next questions are from the line of Mihir Bhatia with Bank of America. Please proceed with your questions.
Mihir Bhatia: Hi. Thanks for taking my question. I wanted to maybe start just staying on credit. I think you talked about a path to normalize losses in 2027. Maybe just talk a little bit about what gives you that confidence, and are the Bank of America loans performing better? I am really interested to see, what do you think could go wrong for 2027 to not be a better loss year, given trends currently?
Jeannette Osterhout: Got you. You are right, we did say we see a good path forward. I mean, when we think about getting to those historical levels, we are really focused on the personal loans portfolio, so take cards out of that equation. We think we are getting towards that loss level in 2027, getting towards that normalized, which would get closer to 7%, which is sort of the top end of that normalized range for next year. That sort of assumes a steady macro environment, so I think to the extent you saw some major shifts in inflation or unemployment, obviously those are the two big pieces that would affect that for next year. I always look at sensitivities on both sides.
Jeannette Osterhout: I would say if we were to start to see some further improvements, I mean, I think we still have not come out with our full 2027 guide, and so when we come back next quarter, we can give you a better view, but I think there is some range of outcomes that we are looking at.
Mihir Bhatia: Got it. Maybe just turning back to credit cards returns for a second. Do credit cards currently clear your return hurdle after the upfront reserve? As the line increases expand, what keeps losses from drifting up as the book seasons?
Jeannette Osterhout: I would say we really look at capital generation, which is not focused on the build, the seasonal build. I would say in terms of capital generation, the credit card book is generating capital, and as I look at its path, it is one of the only products that I think you can have in the consumer lending business that will get you to a CapGen ROR that is above a personal loan CapGen ROR, and we are already on that path and on the positive side of that path. I think we are very happy with the build-out of that J-curve. I think in general on cards, we are feeling quite good. I feel like every metric is moving in the right direction on both the top line and the bottom line.
Jeannette Osterhout: When you sit down and look at the continued, I would say, lower hanging fruit that still sits with the card team in terms of where we can make further improvements and continue to conservatively grow, we feel very good.
Doug Shulman: Our team can take you through it, though, but it is a different cycle of losses. With a personal loan or an auto loan, you immediately have the whole loan on your book. You are generating interest, and it has very low losses the first year, and then more losses as you get to out years. With the card, you do not have the full line. It takes 9 months to a year for the line to build, so you are not immediately getting revenue. Then losses actually peak a lot earlier in the first couple of years, and then you have a stable customer in out years. It is a different profitability trend in card. We run the company for the long term, and we run it based on CapGen, which is just cash on cash.
Doug Shulman: You have to kind of ignore the CECL because you take big reserves up front. There are some penalties in card, but it really sets the business up well for medium to longer term.
Mihir Bhatia: Got it. Thank you.
Operator: The next question is from the line of Moshe Orenbuch with TD Cowen. Please proceed with your question.
Moshe Orenbuch: Great, thanks. Was hoping maybe to put a little bit more of a fine point on the charge-off improvement. I guess when you look at the specific factors, obviously, to the extent the card is growing faster, that will be somewhat of an upward pressure. But I would say, better overall growth, lower losses from the back book, the recoveries that you mentioned. Does it seem that we should see an improvement level that's better than what you're seeing currently in delinquency performance? In other words, if you've got 20 basis points year-over-year improvement in delinquency performance, should we be looking for a level of improvement in losses that's kind of better than that? And if it's not too much, maybe just kind of extend that to thinking about the reserve as well.
Jeannette Osterhout: Yes. Let me take that. So, you're right. We are seeing. Let me just think about the 20 basis point improvement in delinquency. I think really what you can do is take a look at our Q2 delinquency, and you translate that forward for the Q4, and that should get you to a year-on-year improvement. If you take the consumer loan delinquency, you're going to apply more like a 2.4 or 2.5 roll rate to that. So, just to help on the math point there. And that can get you to. I think you're in the range. I think you're spot on. It could be slightly more than the 20 basis point improvement that we saw, but it's in that range for the Q4. And then you asked also about reserves. The reserve coverage and how to think about that going forward.
Jeannette Osterhout: I mentioned that we would expect for it to go up to about 11.8 in Q4. I do think there is going to be some pressure coming from credit cards, but I also see some opportunity in the longer term as the book improves. I really think of that 11.8 as looking at Q4, and then over time, I think there is some potential for those two, sort of the tailwinds and the headwinds to weigh each other out a little bit in terms of the reserve for the longer term. I think I will probably come back next quarter and give you more of a view. It depends so much on how you weight the personal loan portfolio versus the credit card, just that 2 times loan reserve rate that we have for credit cards versus personal loans.
Jeannette Osterhout: Even these smaller changes in credit cards as a percentage of the book can affect that loss ratio going forward.
Moshe Orenbuch: Yeah. I mean, people talk about it offline, but a lot of the other credit card players are closer to 1.6 or 1.7, not 2, and your credit card losses are getting better. Maybe just a quick one just on the yields. You highlighted the pressure from faster secured growth, but you have also got the credit card, which you have mentioned the yield is almost, the revenue yield, or maybe not all interest, but the revenue yield almost 35%.
Moshe Orenbuch: I guess, as we sort of think about the mix of your business in 2027, how do you think about it from I mean, it feels like maybe there is a little bit lower yield, I guess, between auto finance and the secured personal loans, but that should also be contributing, I guess, from a standpoint of a loss rate. I do not know if you can kind of think about that and
Jeannette Osterhout: Yeah
Moshe Orenbuch: kind of, are there any things we should kind of take away from that?
Jeannette Osterhout: Yeah. So, today, we sort of have those two separated out. We have our personal loan yield, and then we have credit card revenue yield. What I am hearing is maybe you want to do a total yield because it would be helpful for everybody. If I take the personal loan yield, that has been relatively flat, and you are right, that is some of the movement to secured that we have seen, which is a trade I think we are quite happy to make in terms of looking for the best ROE outcome. I think there is some pressure there. There is also some pressure there from auto. We have said we are at approximately a 60% secured mix on personal loans.
Jeannette Osterhout: I think that is We are probably going to be in around that ballpark as the auto business grows, and depending on what we do sort of with personal loans, you could see that potentially grow some more, and that will put more pressure there. That is right. Credit card revenue yield, we talked about the 34.9%. That will go a little bit. I do not expect for it to continue to just build and build and build. We are pretty close to where I would expect for it to start to peak. You get some benefit there also from your It is both interest and fees, and I do think that is helpful as that business begins to grow, and it is obviously helpful to our overall return.
Jeannette Osterhout: I think in terms of your statement and your hypothesis, we should expect for that to grow going forward, and if you think in terms of a total yield type metric.
Moshe Orenbuch: Thank you.
Operator: The next question is from the line of Terry Ma, Barclays. Please proceed with your question.
Cordelia Deng: Hi. Good morning. This is Cordelia on for Terry. Thanks for taking my question. Just a quick one on recoveries. This year, they have been pretty strong. Could you take a moment to touch upon what is driving the continued strength and just the durability of it moving forward, and what investments you have made to improve it?
Jeannette Osterhout: Hi. Thanks. We are pretty pleased with the strength of our recoveries, and we have talked about it a couple times throughout this year. In Q3, we continued to see it. Recoveries increased about 15% year-on-year, and that recovery ratio, as a percent of ANR, was about 1.56. That is better than what we had seen in Q3 of last year. So those strong recoveries, where are they coming from? A lot of it is improvements that we have made, and I talked about this on the last call, but it is about how we set up our operations, who is making calls, when are you texting versus calling, who are you texting, at what time of day are you texting or calling? All of these pieces. You can think of various analytical models that are put together to help you improve your recoveries.
Jeannette Osterhout: That is the internal recoveries. We are obviously always looking at sales as well and doing analysis. Is it better to hold those customers on our balance sheet and hold them for ourselves to recover, or should we sell them to somebody else? That is really more of an economic trade and a decision based on where the market is and our inventory and what it looks like. I would say most of this improvement this quarter is really due to those internal strategies that we have put in place. In terms of the durability, I think that is part of the game. You have got to constantly get better. That is how we run the company, is just to constantly look for ways that we can improve.
Operator: Our next question is from the line of Michael Dunleavy with Deutsche Bank. Please proceed with your question.
Michael Dunlevy: Hi. Thanks for taking my question.
Jeannette Osterhout: Sure.
Michael Dunlevy: You talked about the impact on credit metrics as card becomes a bigger portion of the portfolio, and you mentioned the card yield as well, very high on the revenue side. Just to get a full picture of a mix shift, is there a normalized CapGen return profile that you would expect on card versus personal loan versus auto, just to have in the back of our head?
Jeannette Osterhout: Sure. Let's see. In terms of CapGen ROR, I can give you sort of the general model, which would be, your personal loans, you are going to be in the 4% to 5% range on a CapGen ROR. On auto, you are looking at something slightly lower, but that comes with lower losses, so we like that diversification there. On cards, I think it is going to build over time, eventually getting to a run rate where it is slightly higher than your personal loans. That is sort of how I would think about it over time. You are building. Obviously, some of that has to do with where you decide to play in the market as well. It is about finding where Auto is a highly competitive place, so you need to sort of find your niche and your appetite on credit.
Jeannette Osterhout: We have come out saying that on our card book, we are looking for more like a 15% to 17% loss rate. That sort of puts us in the niche of where we would like to play on cards. Really, you can take, break down your overall. We are looking at a 20% ROE across all of these products. That is how I would think about it. Then the market dynamics and how you look at yields and losses are obviously.
