OneMain Holdings, Inc. Q1 FY2020 Earnings Call

Welcome to the OneMain Financial First Quarter 2020 Earnings Conference Call and Webcast. Hosting the call today from OneMain is Kathryn Miller, Head of Investor Relations. Today's call is being recorded. It is now my pleasure to turn the floor over to Kathryn Miller. You may begin.

Thank you, Stephanie. Good morning and thank you for joining us. Let me begin by directing you to Pages 2 and 3 of the first quarter 2020 investor presentation, which contain important disclosures concerning forward-looking statements and the use of non-GAAP measures. The presentation can be found in the Investor Relations section of our website. Our discussion today will contain certain forward-looking statements reflecting management's current beliefs about the company's future financial performance and business prospects, and these forward-looking statements are subject to inherent risks and uncertainties and speak only as of today. Factors that could cause actual results to differ materially from these forward-looking statements are set forth in our earnings press release and include the effects of the 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. If you may be listening to this via replay at some point after today, we remind you that the remarks made herein are as of today, April 28, and have not been updated subsequent to this call. Our call this morning will include formal remarks from Doug Shulman, our President and CEO; and Micah Conrad, our Chief Financial Officer. After the conclusion of our formal remarks, we will conduct a Q&A session. So now let me turn the call over to Doug.

Thanks, Kathryn, and good morning, everyone. Before we get into a discussion of this quarter, I'd like to first acknowledge that this is a challenging time for everyone. We'd also like to express our deep gratitude to all of those on the front lines of this crisis. And I'd like to give a big thank you to all of the OneMain team members, who have really stepped up to serve our customers during this difficult time. At OneMain, we are, first and foremost, focused on the well-being of our customers, team members and the communities we serve. We believe our customer, the average American, is resilient. They are hard-working, employed across a wide variety of industries, ranging from health care to manufacturing to education, government and transportation. We are committed to helping our customers through this time of uncertainty. Because of our essential role in providing credit to hard-working Americans, we've remained open to provide service in person, on the phone and through our digital channels. For our customers who have experienced economic hardship as a result of COVID-19, we are working with them to provide individualized Borrower's Assistance. About 6% of our customers have availed themselves of one of our borrower's assistance options this month. We've also temporarily waived late fees for payments and suspended credit bureau reporting to help customers with newly delinquent accounts. We've also expanded and enhanced our remote closing capabilities, resulting in approximately 50% of our present customer renewals for the first 3 weeks in March closing outside of a branch. These closings still include a detailed conversation with one of our team members and ability to pay underwriting. In addition, we've started seeing an uptick in claims for unemployment insurance. This valuable product that we offer to customers will cover loan payments for those who lose their job during this difficult time. One of the unique strengths of our model is our local and intimate customer relationships. It is times like these when our model is more important than ever. We've also supported our over 9,000 team members and the communities within which we operate. Our central operations functions implemented work-from-home protocols with minimal disruption, and we have adapted the branch processes to protect employees while also remaining open and available to our customers. We've donated $1 million to the Feeding America Response Fund and the CDC Foundation Emergency Response Fund and have also rolled out other philanthropic initiatives across the company. Many of our customers have done business with OneMain for many years and providing them support during these difficult times is a foundational principle of our company. As we highlighted in our Investor Day in November, we have a strong foundation, which makes us uniquely well-positioned to navigate all economic climates. Our long-standing key priorities have always centered around strong and stable credit performance, a disciplined approach to originations, and a conservative balance sheet with a long liquidity runway. These priorities remain the same in the face of this pandemic. Over the last couple of years, we've taken numerous, intentional steps in anticipation of and preparation for a potential downturn. Our business has more than enough operational and financial flexibility to respond to a weakening economic climate. We have deep experience with and proprietary data on the nonprime consumer. We've originated $145 billion of loans since 2006 and have served this customer through previous economic cycles. Our current loan portfolio was originated and constructed with the requirement of profitability through an '08/'09 severe recession. In addition, for the last 2 years, we have been mindful of the late cycle dynamic and have underwritten our loans with that in mind. Our secured lending is also an important component of our portfolio risk management. Having collateral reduces the frequency of loss by about 50%. We have a hybrid operating model that enables us to dynamically reallocate resources to provide efficient and effective support to our customers. This includes a fully scaled team of over 1,000 employees exclusively focused on collections and 6,500 employees in the branches who have reallocated more of their time towards servicing. We generate healthy returns on our receivables, providing cushion to absorb even a dramatic increase in losses. And we have a conservative balance sheet with prudent leverage and a long liquidity runway that enables business continuity and minimizes our reliance on the capital markets. With $4 billion of cash and $3.6 billion of undrawn bank lines, we have liquidity through the end of 2021 even in an extreme scenario, assuming no access to capital markets. In the first quarter, the fundamental drivers of our business were healthy, and the underlying economics of our performance were strong prior to COVID-19. Our C&I adjusted net income was $45 million, and our after-tax loan loss reserve build was $176 million. However, as I've said before, we run our business based on capital and cash generation. C&I adjusted net income, excluding loan loss reserves, which we believe is a good proxy for capital generation, was $221 million for the quarter, and represented a 22% increase year-over-year. These results serve as a reminder of the core strengths of our business, which you've heard us talk about for the last 2 years. Our delinquencies for the quarter were running in line with expectations until the second half of March. Consistent with other consumer lenders, we did experience a moderate increase in 30- to 89-day delinquencies by about 32 basis points year-over-year at the end of March. However, this trend appears to be somewhat moderating in April. We believe this improved performance in April is attributable to enhanced Borrower's Assistance as well as the government stimulus payments. And we've seen a very healthy payment trend over the last couple of weeks. Given the economic uncertainty, we have proactively cut back on the highest risk originations. We tightened our underwriting as well as employment and income verification standards and effectively reduced our credit box by approximately 25%. These credit tightening measures, combined with reduced customer demand, are resulting in significantly lower originations in the month of April and likely lower originations over the coming months, as stay-at-home orders remain in place, and economic uncertainty remains high. While it is still early days in the current downturn, and we anticipate a high level of uncertainty in the near term, we are actively monitoring the environment and economic outlook. We were early and quick to cut back on origination. But we will remain prepared to be opportunistic as the outlook becomes more clear and attractive risk-adjusted return opportunities present themselves. We will be as prudent on the way out as we were on the way in. However, OneMain is uniquely positioned to capitalize on the opportunities that may arise from this dislocation. Now let me discuss portfolio stress testing. Back in November at Investor Day, we walked you through an '08/'09 severity stress test scenario with a significant spike in unemployment to between 9% and 10% for a full year, followed by a gradual decline back to mid-single-digit unemployment over 4 years. Under that scenario, which was adjusted to take into account the composition of our current portfolio, our simulated portfolio losses could increase by 1.6x, implying annualized stress losses of just under 10%. In this scenario, our business would still be profitable. Our strong return on receivables serves as loss absorption capacity. Our full year 2019 return on receivables was about 5.5%. Our 2019 losses would have to more than double to exceed our income generation. And this doesn't even take into account other actions that we are taking, including tightening underwriting, reducing expenses and other actions that would expand our loss absorption capacity even further. As you've seen, economists and market participants have a wide range of estimates for the economic impact of COVID-19. We know that the sudden unemployment increase is unprecedented. What we don't know is where the unemployment rate will settle once we are through the stay-at-home order phase of the pandemic. That is the number that will ultimately determine our losses, although it could be mitigated by the unprecedented government support being given to working Americans in the form of stimulus checks and enhanced unemployment benefits. Regardless, we have added stress factors above and beyond our '08/'09 severe stress case. And under any scenario, we feel confident in our liquidity position. In terms of capital management, our conservative balance sheet and robust liquidity position remain a unique source of strength. Over the past couple of years, we've repositioned our balance sheet to ensure stable long-term funding and a long liquidity runway. As you know, we added more unsecured long-tenured debt to our capital stack and staggered maturities to make us very resilient through an economic downturn. As a benchmark issuer in the ABS and unsecured markets, we priced a $750 million ABS transaction last week, as the first personal loan issuer to access the markets post-COVID-19. This illustrates our differentiated position in the capital markets and our ability to access liquidity. During this period of uncertainty, we have refocused our capital allocation priorities to preserve our strong balance sheet, including tightening our loan origination criteria and suspending our share buyback. Importantly, we are confident that we can maintain our regular dividend, which was instituted at levels that could be sustained even in the event of a severe recession. The ways in which we work and engage with each other have changed dramatically over the last month. With every week that passes, we learn new information and adapt further to the evolving environment. Regardless, we've spent decades building and fortifying our business to ensure that we can continue to serve our customers through any economic cycle, and we are confident that we are operating from a position of strength as we navigate the uncertainties that lie ahead. So with that, let me turn it over to Micah.

Thanks, Doug, and good morning, everyone. I'd like to also express my appreciation for those who continue to work on the front lines of this pandemic. My thoughts are with those affected. First, I'd like to run through some of the key financial items from the first quarter and then focus the rest of my discussion on how we are managing the business considering COVID-19 and the associated performance impacts. Let's move on to our first quarter 2020 financial performance. We achieved $32 million of net income, or $0.24 per diluted share. On an adjusted C&I basis, we achieved $45 million, or $0.33 per diluted share. As Doug mentioned, we run the business using C&I adjusted net income, excluding changes in the loan loss reserve. We believe this is an appropriate way to think about the capital generation of our business that is consistent with our views of capital adequacy. To that end, we generated $221 million of capital in the first quarter, which you will see in the context of the overall adjusted capital walk on Slide 17. I'll talk a little more about this later. Originations for the first quarter were $2.6 billion, virtually flat with the first quarter of last year. We took quick action in the early weeks of March, as COVID-19 began to impact the country. We implemented significant reductions to our credit box to prioritize our risk-adjusted returns given the current market uncertainty. These underwriting actions combined with lower demand for our loans in the second half of March led to an approximately $300 million impact on originations for the quarter. Our ending net receivables were $18.3 billion for the quarter, down $138 million sequentially but still $2.1 billion, or 13% higher than the first quarter of 2019. Given our tightened credit box and lower borrower demand from stay-at-home orders, we expect near-term origination volume to be significantly lower than last year's levels. Consumers typically seek access to credit when they feel confident about their financial situation and their ability to repay obligations. For the first 3 weeks of April, originations are running approximately 60% to 65% lower than April of 2019. Interest income was $1.1 billion in the first quarter, up 15% from last year, primarily reflecting higher average receivables compared to last year's first quarter. Yield was 15 basis points higher than last year's first quarter, generally reflecting continued strength in origination APRs. Moving forward, we expect to see lower yields, which will primarily reflect the combination of the following: a shift in originations towards lower-yielding secured lending as a result of our credit box tightening; higher potential late-stage delinquency impacts and the impact of our borrower assistance programs, including our decision to waive late fees in March and April. Interest expense for the quarter was $249 million, up about 9%, reflecting higher average levels of debt outstanding. We expect interest expense to be higher in the short term as a result of our conduit draws and cash levels we are currently carrying on our balance sheet. We view carrying this excess cash as a prudent and relatively inexpensive insurance policy given today's uncertain conditions. We will continue to evaluate our cash levels, taking into consideration the stability of debt markets, among other factors. Total other revenue was $136 million in the first quarter, down 10% versus last year, primarily due to lower investment income from equity mark-to-market losses in the quarter. Insurance revenues were about $7 million higher compared to last year's first quarter, generally due to higher loan production in prior periods. You'll also note, policyholder benefits and claims increased by $23 million compared to the first quarter of 2019. This increase reflected a noncash reserve for our Involuntary Insurance product, or IUI, associated with the late March rise in unemployment claims. Approximately 25% of our portfolio is covered by the IUI product. Similar to our other insurance products, IUI helps our customers keep their financial commitments on track, even in the case of unforeseen life events. During the '08/'09 recession, loans with insurance were about 15% to 20% less likely to charge-off. Let's move on to credit. Our net charge-off ratio for the quarter was 6.46%, a 65 basis point improvement from last year and the lowest first quarter loss rate since the merger of Springleaf and OneMain. Our business was performing at a very high level through the first quarter, and we've positioned our portfolio to be resilient even as macroeconomic conditions evolve. Our portfolio is 52% secured. We've been proactively tightening our credit box for the last year, and we have over 1,000 team members dedicated to collections with the added flexibility of our hybrid model, which allows us to dynamically reallocate branch team members to collections if needed. As you will see on Page 7 of our earnings presentation, our delinquency rates were tracking in line with expectations throughout most of the first quarter. Our March results reflected some payment softening towards the end of the month as COVID-19 disruption began to impact our customers. We've seen positive signs in our April delinquency, as the impact of our Borrower Assistance programs and government stimulus have developed. While trends have improved, given the various uncertainties related to the impact of COVID-19, we are withdrawing the net charge-off outlook we provided during our fourth quarter earnings call. Let's pause here for a minute to talk about how we are thinking about credit performance and our ability to manage through the uncertainty that lies ahead. We are experts in this segment of the market, and our business is uniquely positioned to manage through this environment. Our model is specifically designed to help our customers through periods of stress while also protecting the profitability of our business. First, we have significant loss absorption capacity in our income statement. We underwrite to optimize risk-adjusted returns, not losses; the returns we generate on our receivables are such that losses would have to increase by a factor of more than 2x from 2019 levels before impacting our capital. Second, we believe the government stimulus package and enhanced unemployment benefits will be a meaningful source of support to our borrowers as they manage their monthly cash flows. Third, we expect the IUI coverage in our own portfolio will provide a mitigating benefit to future delinquency and charge-offs. And fourth, our Borrower Assistance tools should be an effective cash management resource for our customers as they balance the timing mismatch between their financial obligations and the unemployment benefits they may expect to receive. Our Borrower Assistance tools are robust and have been part of our business for years. These tools include both free and partial payment deferments, temporary and permanent loan modifications and loan reaging. Our model is uniquely positioned to engage with each individual customer and ensure we provide the best solution for them. The vast majority of borrowers who have enrolled in Borrower Assistance thus far have elected to make a partial payment. We think this is a very important indicator of our borrowers' desire to meet their financial obligations to the best of their ability. History tells us that borrower outcomes are dramatically improved when we tailor assistance uniquely to each circumstance. Let's now move on to operating expense. First quarter operating expenses were $330 million or about 7% higher than last year's first quarter. This increase primarily reflected investments in technology, customer experience and customer acquisition that we've discussed in the past. For the quarter, our operating expense ratio was 7.2%, down 53 basis points from the comparable period last year. Given what we're currently seeing in terms of lower customer demand and our tightened credit box, we expect to incur lower marketing and customer acquisition expense over the near term as these costs tend to vary with production. We will also continue to evaluate and tighten other expenses and defer certain discretionary investments in our business over the interim, where we anticipate minimal impact on the business's long-term value creation prospects. As a result of the reductions we are currently contemplating, we expect 2020 operating expense ratios to be consistent with 2019, with absolute expense levels ending flat to down from 2019. With that, let's move on to our balance sheet. Following this January 1 CECL reserve adjustment of $1.1 billion, we increased our loan loss reserves in the first quarter by $234 million. As you know, CECL requires future loss expectations to include a forecast of macroeconomic conditions within the reserving period. We use a number of third-party indicators and forecasts for our macroeconomic modeling and leverage our own internal regression models to correlate unemployment trends with future expected loss. Our first quarter reserve ultimately utilized a set of assumptions that assume a peak of unemployment at over 9%, followed by a gradual improvement during 2020 and into 2021. As a reference point, these assumptions are similar to the Moody's baseline forecast at the end of March. We also incorporated an estimate of the impact of government stimulus as well as our portfolios and IUI coverage and Borrower Assistance tools. Our C&I loan loss reserve is now approximately $2.2 billion or 12% of receivables, up from 10.7% at the start of the quarter. It is important to note that our first quarter reserves reflect information that was available to us at the time we closed our books. Since that time, there have been numerous revisions and publications of macroeconomic forecasts, and many uncertainties still remain, in particular, the shape of the unemployment curve. We will certainly learn more over the coming months, and as the economic outlook evolves, we will adjust our quarterly allowance accordingly. As you have heard us say before, our priority has been to maintain a conservative balance sheet with strong capital and a long liquidity runway. We've been rebuilding our balance sheet over the past few years and feel we are well-positioned for the uncertainty that lies ahead. At March 31, our adjusted capital, which, as a reminder, includes after-tax reserves and adjusted tangible equity, was $3.1 billion, about 4x our after-tax losses. From a capital adequacy perspective, our adjusted net debt to adjusted capital ratio was 5.2x, comfortably within our 4 to 6x target range and up modestly, reflecting the capital we returned to shareholders in the quarter, the largest portion of which was a special dividend announced in February. Lastly, and perhaps most importantly, let's discuss our liquidity. At quarter end, we had $4 billion of available cash, which we believe is enough to maintain operations and cover our upcoming maturities through 2021 under numerous stress scenarios with no access to the capital markets. We also had $6.1 billion of unencumbered assets and $3.6 billion of undrawn conduit capacity, which could significantly extend that runway if needed out to the roughly $3-4 billion range based on the structure of our conduit and ABS structures. The specific terms vary, but the performance triggers are generally similar and conservatively set. We are currently well inside our performance triggers. And through our stress testing, we are confident that the recession and unemployment levels would need to be much more severe than current forecasts to raise concerns. We have numerous tools at our disposal to protect our structured programs, which include collateral exchanges, exclusions and overcollateralization, to name a few. In closing, we remain confident in our ability to navigate the evolving market conditions of COVID-19. We manage our business to generate strong economic returns. We are utilizing the strengths of our business model to optimize performance, and we've built one of the strongest balance sheets in the non-bank consumer lending space. With that, I'll turn the call back over to Doug.

Thanks, Micah. Let me close by saying this. Although we are operating under unprecedented circumstances with a lot of unknowns ahead of us, we feel confident that we have positioned our business well for an economic downturn. We have a conservative balance sheet with plenty of liquidity. Our unique model, with deep customer relationships and branch, central, and digital capabilities, will allow us to stay close to our customers and continue to serve them in this difficult time. And we have underwritten our portfolio to sustain a severe downturn. The core strengths of our business and the key levers we have within our control will help us navigate whatever lies ahead. So with that, let me thank all of you for joining us, and I'll turn the call over to the operator for questions.

Our first question comes from Michael Kaye with Wells Fargo.

In terms of thinking about net receivable balances as we move forward, how should we think about slower payment rates by your borrowers, providing a partial offset to the weaker origination volumes? Seems like by my calculation that the payment rate was much lower year-over-year in Q1?

Michael, this is Micah. Hope you're well. I would point you really to Page 7. In terms of our overall payment rates on the portfolio, this page focuses on delinquency here on the bottom. But as we look at our payment rates, we were seeing very consistent rates through January and February. March, even in the first half, rates on the portfolio were really consistent. And in the second half of March, we started to see some softening in payments, largely due to customers becoming dislocated from the emergence of the pandemic and the initial job claims. What we've seen in April to date through the 24, which was last Friday, we've seen an improvement in our payment rates. And that has contributed in part to the delinquency improvement you see on the page. So situation, as I think everyone knows, but we're somewhat encouraged by just what we're seeing in the early parts of April in terms of those payment rates.

In terms of what kind of profile are you seeing from your borrowers, who are in your COVID-assistance programs? Is it more kind of broad-based? Or is it hitting a certain credit profile? And lastly, are you seeing borrower enrollments in these assistance programs beginning to level off at this point?

Yes, Michael, it's Doug. The current situation, caused by pandemic-related economic stress, is unusual. There's a lot of variation based on region and geography. Generally, urban areas with high population densities along the coast are experiencing more weaknesses in demand and originations, along with an increase in customers needing assistance. We're also seeing that states which were affected early and hard, like California, New York, and Washington, are seeing a rise again in customers requiring help. As states implement and then lift stay-at-home orders, we are observing different approaches to reopening. These dynamics are currently having a greater impact on our customers than any other trends. In terms of trends, we noticed a consistent trend in April. Micah mentioned that we've observed a welcome increase in payments over the last couple of weeks. I visited several of our branches last week and listened to customer calls. There are many customers who are facing irregular expenses due to this situation or who received government stimulus checks, allowing them to briefly go on Borrower's Assistance and then make payments. It's still early to discuss broad trends moving forward, but we have been encouraged by the developments over the last couple of weeks.

Your next question comes from David Scharf with JMP Securities.

Hopefully, everybody is safe and well over there.

Same with you, David. Thanks for joining.

Doug, I have a longer-term question for you. Clearly, we are all facing unprecedented uncertainties in the near term, as reflected in our outlook. This might be a question you are frequently getting. Can you share what you have learned so far from a process perspective regarding remote closings? Additionally, once we emerge from this situation, do you anticipate an acceleration in your investment in and expectations for the digital channel compared to the branches?

Yes, that's a great question. Having worked in financial institutions during various crises, including economic downturns and events like 9/11, I can attest that such situations pose many challenges, especially on the human side, with this particular crisis being health-related. Many people are suffering and experiencing loss, which is tragic. Economically, it's clear we're entering a downturn, and we have already begun that process. However, these disruptions can also present unique opportunities, and we, as a business, are closely monitoring the situation. For instance, we have a significant number of digital-native customers, particularly millennials and younger, who are comfortable conducting business via their mobile apps. Many of our customers still enjoy visiting physical stores; however, we are seeing an increase in app usage. We have long provided the option for existing customers to close transactions remotely if they meet specific criteria, which requires income verification and pay underwriting. Leading up to the pandemic in early 2020, around 20% of our existing customers completed closings without visiting a branch, although this process did include detailed phone conversations and income checks. We have since refined several processes, such as enabling co-browsing so our branch associates can view the same information as customers during the closing process. We are also piloting video closings and have introduced chat features, allowing customers to accomplish tasks without needing to be on the phone. Looking forward, it remains essential for us to maintain the unique aspects of our model, like deep relationships with customers and thorough underwriting, while also enhancing customer experience and accessibility. Interestingly, this month alone, we've engaged in phone conversations with 900,000 customers through proactive outreach before their payment due dates. We're not waiting for delinquencies; instead, we’re checking in and offering assistance. A key opportunity is to maintain close relationships with our customers, ensuring that those in need receive help while continuing to do business with well-qualified clients. We are committed to investing in our evolving model.

Got it. No, that's helpful perspective. And maybe just one follow-up. It's related to it. And once again, I realize how many variables are at play here. But as you think about the capabilities to close remotely, and one of the outcomes of stay-at-home being people getting more comfortable doing that. How do you think that may impact the future mix of direct auto? I mean, that isn't that still a product that ultimately not only requires somebody to come in to have the car appraised, but I would imagine it's a higher touch in-person kind of upsell as well at times?

Yes. Some customers are only eligible for a secured loan due to lower credit quality, preventing us from offering them an unsecured loan. When customers qualify for both types of loans, we provide them with options and guide them to choose the best fit. Our secured lending percentages are consistent with previous levels, slightly increasing in April. For existing customers, we have established a process that allows for remote closings since we already have access to the title. They can upload photos of their car without needing to visit us in person. For new customers, we offer various remote closing options, especially in regions with strict stay-at-home orders, where there is concern about coming into contact with others. We guide them through the entire loan closing process, document uploads, and they can complete the inspection while remaining in their parked car. They can also pass the title through a mail slot to one of our associates, ensuring a socially distanced lending experience. We are adapting our model and gaining valuable insights during this period, which will benefit us moving forward.

Your next question is from Arren Cyganovich with Citi.

Looking at the provision build for the quarter, I was a bit surprised that, although it was significant, with $1.1 billion compared to the $234 million from day one, it seemed less than I had anticipated. Could you explain the day one build? Was there any recessionary period during that time? Is the assumed life of these loans relatively short? I'm trying to grasp the potential for additional builds as we move forward.

Thank you for your question, Arren. I'll address your first inquiry regarding the day 1 reserve build that took place on January 1, as mandated by the day 1 CECL requirements. At that time, we assessed the macro conditions, which appeared stable. When we look ahead to March 31, it’s important to note that we base our reserves on the information available at that moment. In my earlier comments, I mentioned that we considered various macro forecasts and indicators and ultimately opted for an unemployment curve projecting a peak of just over 9% in the second quarter, with a gradual decrease expected through 2020 and into 2021. Since then, forecasts have risen somewhat, suggesting that for Q2 we will encounter some challenges. However, we have also factored in numerous mitigating influences in our reserve expectations, such as government support that impacts our borrowers' ability to make payments. We have around 25% coverage in our portfolio for customers with involuntary unemployment coverage, which helps make loan payments during periods of unemployment. Additionally, borrower assistance contributes positively to our outlook. We have incorporated all these factors into our reserve calculations. It’s clear that a persistent high unemployment rate forecast could present challenges in the coming months, but we also need to consider potential advantages from the factors I've mentioned, along with the effects of tighter underwriting and likely lower receivables in the portfolio. As we have discussed regarding CECL in previous quarters, we build CECL reserves when receivables increase, and we would expect to see a release when they decrease. All these considerations will play a role in what transpires in the next quarter, and we will reassess our reserves based on the information available at the end of June.

The comment you made about the mitigating factors, and I would imagine with the originations coming down so much that you would have some downward pressure on your loan balances. And I know Michael asked this question before, but I would assume that a good portion or a portion of your repayments or new consolidation loans from existing customers that kind of roll through. Is there a way to kind of gauge how much of that essentially goes away since the originations will be coming down so much?

Yes, the originations we publish will influence the receivables. The originations we report are on a gross basis and include new customer business as well as renewals from existing customers, which typically account for about 50% to 60% of our originations each quarter. It's important to note that not all of this represents new money added to the receivables, so we don't classify it as a payoff, but it does play a role in what affects the receivables. Our average payment rate for the portfolio is around 3% per month, which can be influenced by timing and early payoffs. All these factors contribute to what is reflected in our earning receivables for the quarter. We've provided some information regarding April, but there are still many uncertainties, and the situation will largely depend on how May and June unfold.

There's one thing I'd add is that we are in a position with a lot of liquidity. Some of our competitors have had to pull back for various reasons. We're looking for good customers, especially those with much higher credit quality, who might not have as much supply in the market. We believe it's a bit early right now. We made the decision to significantly reduce our credit offerings, and we are being very cautious with originations. This is why our numbers are down during this uncertain period. However, as things become clearer, we think there could be opportunities in areas like loan consolidation, particularly with card issuers, due to capital requirements or similar factors that might lead them to cut lines or refrain from extending them. We may find good credit quality out there that others are not underwriting. Again, it's still early, and we're focusing on conserving capital and being careful given the uncertainty. However, we are also looking for opportunities due to the strength of our balance sheet and our unique ability to underwrite these customers.

Your next question comes from the line of Moshe Orenbuch with Crédit Suisse.

Great. I have a couple of questions. First, as you assess the borrowers participating in these Borrower Benefit-type programs, how long do you anticipate they will remain in the programs? Additionally, when will you be able to evaluate and determine if outcomes have been positive for one group while considering a different approach for another group? What does the timeline look like for that?

Moshe, it's Micah. So they do vary. We have internal policies that only allow us a certain amount of these things, these Borrower Assistance programs, for instance, deferments in a given year. But that's all during normal periods. I think we'll see how this plays out. First and foremost, our Borrower Assistance tools are there to help our customers in difficult times. We have a couple of different sort of flavors of that, if you will. We do have payment deferments, which allow the customer to make either a partial payment or, in some certain instances, no payment at all and move the borrower forward to the next payment. And the other flavor of what we would do is temporary modifications. So there is an option for a customer to reduce their payment over a period of, say, 3 months, at which point the loan would revert back to the original payment level after that period. So a few different options for it. I think, again, a lot of uncertainties here. We're going to try to help our customers as best we can through this difficult time and offer them these solutions that we think help quite a bit. I think the most important dynamic that's maybe different with our company and what we see with Borrower Assistance is the fact that a lot of our customers are participating in Borrower Assistance through a form of payment. We know that, that improves the outcome of the situation for borrowers dramatically over the coming months.

Understood. Micah, also on the funding side, I mean, you were able to do a securitization here, kind of, as you mentioned, the first one in the installment loan space. When you think about the liquidity that you're carrying, how long you might be doing that until things are something closer to normal? What signals would you need to see? Would it need to be better execution on the secured front? Would it be the need to be able to do an unsecured deal? Like how do you think about the time frame for carrying that liquidity and kind of being able to get back to more normal on a funding basis?

Yes. No, it's a great question. And certainly, all the points you hit on are things we will be looking at, including the environment that's around this, right? But access to funding is an important element of it. Both the ABS market and the high-yield market were closed for about a month. We've seen both open up. So over the last 4 weeks for high yield, we've seen about 40 transactions there. The market does continue to improve. We're starting to see some longer transactions there. Most of the deals to date have been in the 5-year category. On the ABS market, ABS opened up about 2 weeks ago. And in general, we saw autos, one equipment transactions for the first 5, 6 trades. We were actually the first personal loan issuer to open the market. So we were really, really proud about that in pricing that $750 million deal. But I think as we go forward with the relative cash we have on the balance sheet, we want to make sure we retain that liquidity runway that's really important to us. We will certainly be looking at availability of both of those markets and how readily available we can access both of them. We feel very, very confident in our programs. And we'll see how it plays out over time, but I wish I had a perfect answer for you on this. So I think it's just a wait-and-see and evaluate all the different factors that are present in the environment today.

Your next question comes from the line of Kenneth Lee with RBC Capital Markets.

Just one at a higher level. How do you think this potential downturn could change the competitive landscape OneMain versus other lenders or other online lenders?

I believe we are starting from a strong position. Our funding model provides us with ample liquidity through secured and unsecured debt, including staggered 10-year terms. Last year, we completed an 8-year and a 10-year deal that gives us considerable flexibility. We also have bank lines that ensure we remain conservative and maintain sufficient cash, setting us apart from others. This enables us to meet the demands of consumers who need support. Historically, some competitors with bank balance sheets tend to be slower to resume lending, and it will be interesting to see how off-balance-sheet lenders cope during tough times. I am confident in our capital and liquidity strategy. Our focus on enhancing customer experience will yield benefits, especially as we invest in digital solutions. Building strong relationships with our customers, particularly during challenging times, fosters loyalty; over half of our customers return to us. We expect to emerge strongly from this situation if we adhere to our core practices, maintain robust liquidity, apply disciplined underwriting, and improve our customer engagement outside of traditional branches. We feel optimistic about our position, while weaker competitors may face challenges with their balance sheets, presenting us with lending opportunities.

Very helpful. Appreciate that color. Just one follow-up, if I may. Historically, loan APRs have been relatively constant. Just wondering in a potential downturn, especially with customer demand, sounds as if it's going to be much lower. Do you expect any change within that trend?

Ken, Micah. What I would say is that you are generally correct. When we previously discussed pricing, we mentioned that we are continuously testing our prices in the market to remain competitive. We will keep doing this. Doug earlier pointed out that, given our current conditions, many of our customers are likely to qualify for a secured loan rather than an unsecured one. As you know, secured loans tend to have lower pricing, so I anticipate we will see lower portfolio pricing in the near term due to that shift in mix. Additionally, as I noted in the prepared remarks, this should also affect yield in the future.

Your next question comes from the line of Rick Shane with JPMorgan.

I hope everybody is doing well. I just wanted to talk a little bit about dividend outlook. You guys provided the economic outlook used for setting the reserves. And again, I think that's come to be realized as sort of optimistic. The slowing loan growth certainly has an impact on capital. But I'm curious, as you look forward towards the target leverage and the economic uncertainty, how you think about the special dividend as we move through the year?

Yes, the landscape has changed, but our use of capital and capital return priorities remain consistent. We will make loans that we believe offer good risk-adjusted returns and ensure that we are making appropriate investments for the long-term health of the business. What has changed is our increased focus on preserving capital until we gain more clarity on the situation. We established our regular dividend level through extensive modeling that can withstand a significant downturn, which is why we continue to pay it. Currently, we have no updates regarding the special dividend. We will act as prudent stewards of capital and assess how things unfold, but we are confident in maintaining our regular dividend at this time.

Your next question comes from the line of John Hecht with Jefferies.

I'm glad to hear everybody is doing okay. First question is just a little deeper dive into the lower delinquencies as we stretched through April here. Are you able to determine of the reduction, how much of it's tied to deferrals versus cash from stimulus? And is there any noticeable differences in the performance, whether it's payments or delinquencies and secured versus unsecured?

Yes, John, this is Micah. That's a tricky question. We do consider the levels of Borrower Assistance in our portfolio, as Doug mentioned earlier. The challenge is determining whether the customer would have become delinquent without the Borrower Assistance. We don't typically analyze it in that manner. Instead, we view these programs as support available to our customers during difficult times. It's important to highlight that the majority of our Borrower Assistance comes with some commitment and payment from the customer, which significantly improves outcomes for borrowers in the following months.

Your next question comes from the line of Vincent Caintic.

Hope everyone's well. I have a question about the unemployment insurance. Could you provide more details about how this product works? If I remember correctly, 25% of your portfolio is insured with this. Are you self-insured? If that's the case, do you set aside reserves for future claims? I'm trying to understand the expense costs going forward.

Yes, that's a great question. Let me take a moment to discuss the product. This product is optional for our customers, and with a penetration rate of 25%, it's evident that it holds value for them. Situations like these highlight its importance. The product is designed to protect our customers by covering loan payments for a period while the borrower is unemployed. It's crucial to note that the product operates independently, and our pricing is established at the state level, managed by our captive insurance company in Fort Worth, Texas. We set pricing to achieve a reasonable loss ratio along with a modest long-term profit. While the product does offer protection to our portfolio, it does not influence our pricing strategy. In terms of claims expense as it appears in the income statement, we have ongoing claims and those paid out during the period that are treated as cash claims. At the end of each quarter, we establish a reserve for incurred but unreported claims. This is somewhat different from CECL, resembling traditional reserving practices where we focus on what's incurred. In late March, we noted a roughly $10 million increase in new unemployment claims nationwide, which drives our need to book reserves for anticipated future claims. This explains the $23 million year-over-year increase, which pertains entirely to reserving for these future claims. As we enter the second quarter, these claims will be integrated into our routine assessments, and we'll evaluate how they align with our expectations. We'll repeat this evaluation in June to determine whether our reserves need adjustment. At this point, it's challenging to provide a specific number for Q2, but if new jobless claims remain elevated, we can expect higher insurance claims moving forward.

Okay. Got you. So just to confirm, so the first quarter expense is reserving from what you've kind of seen as incurred, right, as you've seen unemployment at that time. If you have increases in unemployment expectations in the second quarter, then you'd book an increased expense to reserve for that. Is that right?

Yes, there are several factors influencing the claims expectations. However, the overall level of claims during this period consists of both actual cash claims expenses and reserves. The increase we mentioned was almost entirely due to reserves for claims that we anticipate in the second quarter. That information is useful.

Okay. That makes sense. And then just maybe a last quick follow-up on that. The government assistance, have you seen that fully impact or start to taper off in terms of the impact to your customers? Or is that still continuing to build as a benefit?

Yes. I think it's more based on observations rather than scientific data. It's only been a couple of weeks; we're currently in mid-April. There are several factors related to government assistance. The Paycheck Protection Program is providing forgivable loans to many small businesses, helping them maintain their payrolls, which means more people are able to make payments despite being affected. Additionally, stimulus payments are being distributed, and we noticed an increase in payments around that time. However, I don't want to exaggerate its impact, and there is also extended and enhanced unemployment insurance for our customers. We'll have to wait and see how this develops. Overall, it's a significant government stimulus package that should have some influence. Hopefully, it enables Americans to meet their financial obligations, but it's quite challenging at this stage to determine the precise effect it will have.

Your next question comes from the line of Kevin Barker with Piper Sandler.

In regard to some of the customer assistance that you've put in place, I believe you said there was about 6% of customers that have taken it up so far and it's tailored to each borrower. But given what we've seen out there, how long are you willing to continue to provide the customer assistance just given what has occurred right now? And I know it's a fluid situation, but just trying to get an understanding of how long we could see some of these deferrals or forbearances?

Yes, Kevin, I understand there's significant interest in this topic. To provide some context, last year in a typical month, we had 2% of our customers receiving some form of borrower assistance. Now that number has increased to 6%, which indicates a rise, but this is a practice we regularly employ. Micah mentioned three main types of customer assistance: month-to-month deferments, temporary modifications typically lasting three months, and permanent modifications for those with longer-term changes in circumstances. In April, 95% of the customers using Borrower's Assistance opted to make some payment, highlighting our strong relationship and customers' desire to fulfill their obligations. This also indicates that those in Borrower's Assistance are actively engaging with us to explore their options. We're committed to supporting our customers during this challenging period marked by stay-at-home orders and economic concerns. It's early to predict, but over the next quarter or two, you will see developments regarding Borrower's Assistance, and it’s important to note that this won’t be an indefinite arrangement. I want to emphasize that our commitment to our customers during their times of need is fundamental to our company’s values. We believe this approach will benefit our customers in the short term as well as foster long-term loyalty with OneMain, which has a longstanding history of helping customers through similar challenges. We are confident that this will allow both us and our customers to navigate the current uncertainties effectively while strengthening the franchise for the future.

Okay. And then using different modifications or deferments for the auto product versus unsecured, are you seeing a greater take-up rate between the auto and the unsecured?

Kevin, this is Micah. In general, no. I mean, these products are offered to all of our customers. As you know, with direct auto and hard secured, loss performance on those products are much better, much lower than loss performance on an unsecured. So I would say the assistance needed for those is generally tends to run in line with the various products. I wouldn't expect there would be a major difference between one or the other.

Your next question comes from the line of Eric Wasserstrom with UBS.

Maybe we can return to the expectations regarding loss experience. Under what circumstances could you possibly see that 2.3% increase in magnitude, which I assume is the threshold for profitability? I'm asking this considering that it seems you've stress tested to a roughly 10% expectation. Currently, the consensus among economists suggests a peak unemployment rate around 15 or 16%, with year-end employment projected around 12%. So, you might be facing somewhat more stress than historically experienced.

Yes. Let me provide some context, Eric. We have conducted several stress tests since the one presented at Investor Day. The reference point is the test shared during that event, which showed results based on stress levels from 2008 and 2009, predicting a sustained unemployment rate of 10% decreasing gradually over four years. In this scenario, there was a 1.6 times loss. We analyzed the losses from 2008 and 2009 in our portfolio and made adjustments based on our current portfolio makeup. We anticipate that losses would need to more than double, increasing from 6% to 12%, in order to impact our existing cushion. This assessment does not factor in various measures we are already implementing, such as reducing expenses and tightening underwriting, nor does it consider unemployment insurance or government support. Additionally, we have incorporated several stress factors beyond the severity experienced during 2008 and 2009. We are confident that the business is well-positioned to endure this downturn. Our evaluation is not solely based on the 10% unemployment rate from 2008 and 2009 or current unemployment figures.

I apologize for interrupting, but could you elaborate on the estimates you've made regarding how the stimulus measures will influence your loss experience? Specifically, could you provide some context on the potential impact these measures could have on the loss curve?

Yes. I wish I could provide a clear answer to that question. I would say regarding the bending of the loss curve, we believe that government support, our IUI coverage, and Borrower Assistance have been accounted for in our reserve results, with the expectation that these measures will help mitigate the impacts on the unemployment curve. The main factor determining the losses in this situation will be the prolonged unemployment rate over time. As Doug mentioned, when modeling stress tests and planning for downturns similar to 2008 and 2009, we observed a sustained unemployment level of around 10% over approximately a year. Therefore, that will be the key influence in determining the impact on our portfolio throughout this process.

And just one last question here. Just in terms of the cadence of delinquencies, how should we think about that with respect to, again, the stimulus actions and also some of the assistance programs that you've put in place? How does it influence the overall rates and such?

Yes. Well, the way I would think about it is all of these things, whether it be Borrower Assistance, IUI or government support, we expect to provide payments on the loan, right, through one form or another over the next several months. That obviously impacts delinquency. But again, I keep coming back to this, and I apologize for beating a dead horse, if you will, but it really is going to be determined by the sustained unemployment rate that we see going forward that would be the ultimate determinant of what things look like in the future.

All right. Hey, look, thanks, everybody for joining us. We appreciate it. We'll keep you updated. I hope that everybody stays healthy and safe, and we'll look forward to talking to you next quarter and in between. So everyone, have a great day.

Thank you. If you do have additional questions, you may contact Kathryn Miller for further follow-up. Thank you for joining today's OneMain Financial First Quarter 2020 Earnings Conference Call. Please disconnect your lines at this time, and have a wonderful day.