OneMain Holdings, Inc. (OMF) Earnings Call Transcript & Summary

Okay. Good morning, and thank you all for joining us. I'm Barclays' consumer finance analyst, Mark DeVries. And I'm pleased to be joined by OneMain Financial's CEO, Doug Shulman; and CFO, Micah Conrad. We'll be conducting a fireside chat, but we'll break it up with some polling of the audience. And we'll also leave time for any questions that come in from the audience during the session. [Operator Instructions] Before my first question for management, I'd like to lead off with a question for the audience. To participate, please click through to the polls on the left side of your screen. After you respond, you should be able to toggle back to the video discussion. Now turning to the first question for the audience, what factor do you view as most likely to determine whether OneMain outperforms over the next year? Accelerating loan growth, continued capital returns, stable to only modestly worsening credit, upside to NIM or other.

Now moving to questions for management. Can you talk about how you approach managing the business and how that's changed given the uncertainty in the environment currently? Have you been shifting more resources to digital capabilities as part of that? And how are you thinking about the impact on your branch network and what types of changes you've observed in branch traffic?

Yes. Thanks, Mark. And thanks for having Micah and I here. I appreciate it. I hope everyone out there is doing well given all the circumstances with back-to-school and into the fall season. Look, we've tried to stay disciplined and focused on the core priorities of the company that we had before the pandemic. And I'll talk about some of the shifts we've made because of the pandemic, but the priorities remain the same, which is have a great customer experience and add more and more value to our customers, have a conservative balance sheet, have very disciplined underwriting that meets our risk-adjusted returns to invest in the business, and I'll talk about it. The last 2 years, I've been talking about investing in digital and omni, and those investments have really paid off during this time. And then to be disciplined with expense management and just running the business in a very granular manner. The pandemic shifted things for everybody, and including our business. And we -- the environment, while we performed, I think, much better than a lot of people would expect and we're pleased with our performance, I think there's still a fair amount of uncertainty ahead. And so we're continuing to be conservative. With that said, we accelerated a number of key initiatives. And the way I think about it is any sort of downturn or market disruption creates a lot of opportunity for companies and management teams who keep their eye on the ball and really lean in. And so what we did is we took all of our initiatives from things to improve the technology, to product initiatives, to our digital experience, to our analytics and basically did a reassessment in April, where we said, what do we want to stop, what do we want to start that's different and what do we want to accelerate. And so we've been accelerating places to make sure that we come out of this super strong. So let me give you 3 examples. One is our omnichannel or digital closing. I've talked about since -- I've been here for 2 years, we've been talking about building out omnichannel experience where you can, as a customer, access us either to get a loan, to have servicing in questions or even in the collection capacity in the branch in person, on the phone or digitally, either through our website or on mobile app. And we always -- we're a dominant branch-based lender. We've been kind of developing things and testing things, and we really accelerated it. And so since the pandemic, we've closed over 1/3 of our loans digitally or kind of branch assisted. Most of those have a phone conversation that happens. We had already started the testing, but we really accelerated 2-way video with customers, live chat with customers. And the thing that actually has ended up being the most used feature of the technology features we have to smooth the interaction and to have the experience to be similar to a branch is co-browsing, where we can look at somebody's computer screen with them, take them through, show them their different loan options or their insurance options, talk about different pricing options, talk about loan size and go there. So we've accelerated those. We took what had been kind of beta tests and put them into full production very quickly. Importantly, when we close a loan remotely, it has all the hallmarks of our branch-based closing, which allows us to have superior credit performance. So we do an ability-to-pay assessment or a budget with the customer to go through, what is their other expenses? We look at their credit lines, we talk about housing and school and food and utilities. And so we underwrite to ability to pay. We've enhanced our income verification, and we can use tools that can plug into databases that show employment, but we're also making 100% calls just to make sure even if you were getting paid last week that you're getting paid this week and that you're not on a list to be laid off. So we actually talk to customers. And we have this detailed discussion with them. So that's been great. I think this was always going to be part of our future. The pandemic has accelerated that. Second is we do a lot of product innovation and have had a couple of products that were in testing in our pipeline that we're rolling out in a more fulsome way starting this summer. One is a prime product where we lowered the price some to make us more competitive and we have more -- and this is for customers 670-plus FICO scores, we don't underwrite to FICO, but that's kind of rearview mirror of what it would be, and into the 700s, where we had been running tests that if we lower price some, whatever we give up in yield will make up for in lower loss content as well as just a lot more people booking those loans with us rather than price shopping with somebody else. And so we've got a prime product, which we think is great in this environment. We'd like it taking advantage of some of the customers pulling back. And then we also put into market a small dollar loan product. So there's a number of our customers at the lower tier of credit who we will only offer, if they're going to get an $8,000 or $10,000 loan, it has to be secured. So we had been testing a $2,000 or $2,500 product that is less risk to us on the books, but has a much higher take-up rate. And so we've actually increased the take-up rates of that group by about 3x just over the last couple of months of testing. And so what we've done is we'll get into layer, we've been incredibly conservative around our balance sheet. We cut our credit box. We're not making any exceptions for standards. But we've really driven into this omnichannel lending. And so we're now a full-fledged, we've got a digital channel, we've got a phone channel, and we've got a branch channel. That's slowly been the case, but it's now gone a lot faster, and this is going to be part of our future going forward. And we've also used the time to do some product innovation.

Great. Along the lines of kind of the acceleration that you've observed around the digital channel, in particular, how much of that is just change in customer behavior preferring those and how much of it is services that you've added that have enabled you to move certain aspects of the origination of the loan from in-store to these more digital alternatives.

I think it's some of both. I mean, clearly, over time, I think all of us on the line, me -- and my bank, I do a lot more on my phone now. And I can deposit a check without having to go to an ATM. It's been a game changer, those kinds of things. And so I think everybody has been migrating more towards having a different expectation of digital, and it's no exception for our customers, especially younger customers. But I think all the surveys have shown that actually people over 60 are using digital channels a lot in financial services as well. I think May -- or March, April, May, people were super hesitant to leave their house and have an in-person interaction. So that took what had been a trend and really accelerated it. I think that acceleration of the trend over the last few months, we found customers are way more willing to come into the branch now. And if they need the money same day, they can walk out with a check or a deposit in branch, especially with secured lending, we can do same-day lending, unsecured remotely. So I do think customer preference has changed and the pandemic is just -- my parents are 79 and 82, and they had never ordered groceries online. And I don't think they're going back. They're going to now get their milk and their cereal and their staples online. And so I do think this accelerated things. With that said, 2 years ago, we wouldn't have had the capability to have 1/3 of our customers book online and feel really great about the credit quality and the experience and the customer felt great about our experience because our customers tell us what do they like about a branch. They like that it's consultative, they like that it's educational. They kind of learn something about managing their finances; debt consolidation potentially; credit, how much can they afford; how to do a budget. And then they really appreciate having a professional. A bunch of our customers in other financial service institutions, they've been put into 100% online channels or they've been put into call centers that don't have a local person that they can call and have a name with it. And they like the kind of VIP service in a world where they're often not treated as a VIP. So as we built out our digital capabilities, there was just some back-end plumbing that allowed you to income verification, automation, get your information in there, get your ACH and your transfer of money. There was a bunch of back end, but there was also a ton of customer experience beta testing we did, which is, okay, what's the journey? At what point does a person start interacting and somebody wants to hear this. This stuff like chat, so you can be online doing your application and the chat box will pop up if you have a question, offering video because some people like to see someone and not just have them on the phone. And then as I said, this co-browse capability. So I think we've done a really nice job, and our team working on this, of creating a great customer experience. And I think that's helped. And I think you add that to the customer demand, and they've both come together. And this strange situation we're all on in where a lot of people were forced to do things more remotely just accelerated that for us.

Got it. I think you touched on a little bit of this with your initial comments, but can you just remind investors about the measures you put in place since the start of the pandemic to manage credit risk? And kind of what are you most focused on in terms of underwriting and risk management here?

Yes. So we -- our team, we've got -- we developed in early 2019, a downturn planning playbook where we knew what levers we were going to pull if we started seeing weakness in the economy. And in early February, when things were starting to look bad in Europe, we were kind of going into full gear around both contingency planning for our physical operations and just pure disaster recovery and redundancy and remote work. But also the credit and what credit levers we would pull. And so in early March, even before all the stay-at-home levers, we decided we were going to pull the most extreme lever which was our '08, '09 scenario planning. And just a reminder, we underwrite our loans to 20% return on equity. So we put equity into every loan. We have debt in every loan. We need to get 20% return on equity. The reason we do that is that gives us actually some cushion if we're wrong, so it's a pretty conservative stance. And these are good performing, high-returning assets. And we manage -- so we manage not necessarily to losses. Losses are one factor, but we really managed a risk-adjusted return. In '08, '09, to get 20% return on equity, you would have had to assume 1.7x losses to 2019 or normalized levels. So what we did is we basically said, we are going to assume for every loan we write, starting in early March, losses are going to be a minimum of 1.7x higher than we were assuming before we made this cut. And what that does is you cut out your lowest -- or your highest risk, lowest risk score customers who are unsecured. So you cut out a bunch of unsecured lending. You also increase net disposable income on a number of customers. We did do enhanced income verification, like I told you in the past, you can bring in a paycheck from last Friday, that was good income verification. Now we actually make a phone call. There's a number of services that employers feed in payroll data and you can ping those. So we ping those for the key information or people can share bank accounts, which shows their paycheck coming in, but we still do the enhanced income verification. And then we increase collateral requirements. So in the past, maybe we would say a car, the minimum collateral you could have in your car was $2,500. We increased it to $3,000 in certain customers. The other thing to keep in mind is we're now over 6 months into this pandemic, unfortunately. And so our average loan between renewals and payoffs and everything else is usually on the books about 18 months. So at this point, 20% of our overall receivables, our overall portfolio, is -- has been underwritten at that '08, '09 level. And so every day we're here, people's loan come up, they pay it off. New loans go on and our book gets a lot stronger, which is a good thing, especially in this because we actually had some time, like losses and delinquencies did not correlate with unemployment, but we cut our credit box, which makes it that we think our portfolio is even stronger than it was going into this. Immediately after, we have been doing a lot of work to really tune our credit box by state, by metropolitan service areas. So it's like MSAs, big metro regions and then also by industry. So we actually added stress factors after we did the kind of, what I would call, hatch it and just went '08, '09 playbook, we knew what that playbook was. We then refined it and put additional stress factors up to 2.5x losses. So losses would have to be 2.5x, even if you were still employed in travel, entertainment, leisure, dining, things like that. And then we've been hyper vigilant. Our team meets regularly. Every couple of weeks, I sit down and look at the results. And we basically look at now unemployment data by week, by state. We look at our delinquency trends in those states. We look at other economic indicators. We try to figure out. And so we're monitoring it just being hypervigilant, by customer type, by state, by industry, by metro region, et cetera. And we can talk about this later, but the correlation between unemployment and delinquencies and losses has not materialized. But we have, at least, to date, maintained a very conservative stance. And we've said in early March, we said no regrets. We leave a little bit about -- of money on the table, but we derisk the business. That's a good trade. We've remained very conservative in the credit box. Our steady increase in originations has been through the things I talked about before, platform innovations, customer service innovations, product innovations, all without compromising credit quality.

Okay. That's very helpful. Turning back to another question to the audience, you could all participate. What do you view as the biggest risk to the shares here? Additional reserve builds, no additional capital returns, low or 0 loan growth, margin pressure or other? And as the audience responds, we'll move back to management. Are there any high-level stats that you can provide about the industries your customers are employed in and how they've been affected by the pandemic relative to the broader universe?

We have a really diversified customer base. Like I told you, the 20% of the book that's kind of turned since the pandemic has a lot less people in higher risk industries. But going in, the industries that I talked about, retail, food and beverage, dining, entertainment, travel were not very significant portions of our book. And so the industries that are highest proportion in our book, health care, manufacturing, education, financial services, government employees, were kind of the highest. Those others were pretty low. And so we feel pretty good about the diversification of our portfolio and don't think we're going to have any asymmetric downside given the asymmetric impact of the pandemic.

Okay. Great. Can you talk about your Borrower's Assistance trends to date? You mentioned it was approaching pre-COVID levels in July. But is there anything notable to call out since then? And how is the performance of those borrowers been since coming off forbearance?

Yes. I'll take that one. Thanks, and good morning, everyone. Thanks, Mark. As a reminder, our last update on Borrower's Assistance was on our second quarter earnings call, to your point, it was in late July. For the quarter, second quarter Borrower's Assistance enrollments, which is a borrower coming into the month and saying, I need help with the payment in that particular month, has ran about 8% in April and had declined to approximately 2% by June. I would say July and August enrollments have been generally consistent with the June level. A couple of important points here in our Borrower's Assistance that I want to make sure I communicate. One, we've been using these tools for years. So with this borrower, they tend to need help from time to time. So our programs have all been designed and been used for a long period. And we have a lot of experience with them. A normal month for Borrower's Assistance enrollments for us pre-COVID was about 2%. So the last several months have been right around that level moving up or down by 0.5% or so. These programs are individually tailored for each customer-specific situation. So we go through a dialogue with the customer as to what kind of -- what can they afford to pay, what kind of situation are they in and tailor it to their needs. And on payment, the vast majority of our Borrower's Assistance comes with customer participation in the form of a partial payment that helps to keep our customer engaged. And the result is, we end up seeing pretty good performance once a customer goes back to a full payment. And I would say, what we've seen in our second quarter, Borrower's Assistance has been largely consistent with the performance we've seen from Borrower's Assistance in the past.

Okay. Great. I think you pretty much just addressed this, but I do have a couple of questions coming in from clients on this topic. One is the roll rates, like what are you observing from roll rates to borrowers who have been in assistance? And then a separate question from the investors. What have you seen in terms of behavior, both on early DQs and forbearance requests since we kind of got this fiscal cliff with the enhanced unemployment insurance benefit going away.

Yes. So I would say on roll rates, again, I mean, it's still early on second quarter, but what we've seen to date from those borrowers, the performance is a bit better than what an average Borrower's Assistance roll rate might look like. I'm sure you can attribute that somewhat to the government assistance and payment support that borrowers have had. But it's been -- I think the performance has been really good. And we only have a couple of months on book. But we're watching it really closely. And first and foremost, we're here for our customers. We want to make sure we can help them through difficult situations. So I'm not concerned with it. I think we're heading in the right direction there.

Okay. Excellent. Turning back to the next question for the audience. Current reserve levels are adequate, overreserved or underreserved? If you could register your view there.

When are you going to tell us the audience -- their votes, Mark?