OneMain Holdings, Inc. (OMF) Q3 2019 Earnings Report, Transcript and Summary

Welcome to the OneMain Financial Third Quarter 2019 Earnings Conference Call and Webcast. Hosting the call today from OneMain is Kathryn Miller, Head of Investor Relations. Today’s call is being recorded. At this time, all participants have been placed in a listen-only mode and the floor will be opened for your questions. [Operator Instructions] It is now my pleasure to turn the floor over to Kathryn Miller. You may begin.

Thank you, Maria. Good morning and thank you for joining us. Let me begin by directing you to Pages 2 and 3 of the third quarter 2019 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. 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, October 29, 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’ll conduct a Q&A session. So now let me turn the call over to Doug.

Thanks, Kathryn, and good morning, everyone. I’m pleased to be with you today. We produced significant earnings growth during the third quarter, driven by the continued execution of our strategic priorities for the year and our ongoing commitment to enhance our customer experience. We generated C&I adjusted earnings growth of 35% year-over-year and drove a 90 basis point improvement in our return on receivable, which reached 5.5% for the quarter. Credit performance continued to be strong. Our net charge-off rate was 5.2%, about 60 basis points better than last year’s third quarter. Our 30 to 89 day delinquency ratio was flat year-over-year and our 90-day ratio came in about 10 basis points better than last year. We’re also continuing to exercise expense discipline and driving operating leverage in our business. Our third quarter operating expense ratio declined by about 60 basis points year-over-year even as we continued to invest in the business. From a funding perspective, we issued a total of $1.7 billion of seven-year revolving secure debt at a blended interest rate of about 3.5%. This was an important milestone for our funding program as we became the first ever personal lender to complete a seven-year revolving securitization. We’re very committed to maintaining a conservative balance sheet and significant liquidity cushion. Overall, core drivers of our business are performing very well and reflecting the benefit of the initiatives we’ve undertaken to enhance our customer experience and the profitability of the platform. We are using advanced analytics to optimize our marketing strategy and drive our credit model. Our streamlined application are expanded after our support and our build out of analytics tool. All improving our customer pull through. And our investment in technology is driving greater productivity across our branch and central operations team. Simply put, we are attracting, converting, and serving more of the customers that we want to serve. This has contributed to the strong originations growth we’ve achieved over the last two quarters in particular. We’re excited to talk about these and other initiative at our upcoming Investor Day. We’ll provide an overview of our longer-term plans for the company including enhanced digital capabilities and a number of opportunities we see to further optimize our business better serve our customers and enhance profitability. We will also provide insight into the resilience of our business regardless of the economic environment and discuss our reinvestment and capital return priorities. We look forward to seeing you all there. With that, let me turn the call over to Micah.

Thanks, Doug, and good morning everyone. I’ll start by reviewing the core drivers of our third quarter results followed with some comments on CECL and its expected impact. We earned $248 million of net income in the third quarter or a $1.82 per diluted share, primarily driven by our strong C&I performance. Our income for the quarter included the benefit of $22 million of non-recurring discrete tax items. As a result of these tax items, we now expect non-C&I impacts to be about $70 million for the full year 2019, down from the $90 million I guided to during our first quarter conference call. Our C&I segment earned $241 million on an adjusted net income basis or a $1.77 per diluted share. This was up 35% from $179 million or a $1.31 in the third quarter of 2018. Originations for the third quarter were $3.7 billion of which 55% was secured, up from $2.9 billion and 54% secured last year. These strong originations led to ending net receivables growth of $2 billion year-over-year. Our secured portfolio grew by $1.9 billion or 26% over the same period reflecting our continued focus on building a resilient portfolio that will continue to perform in all economic conditions. Given the growth we’ve achieved thus far, we are now expecting ending net receivables growth for the year to be between 12% and 14%. Interest income was $1.1 billion, up 13% from last year. The increase primarily reflected higher average receivables and higher yield, which was 24.1% in the third quarter. The year-over-year increase in yield reflected improvement in our 90-day delinquencies and continued strength in origination APRs. The positive dynamics continued to provide stability in our yields despite continued growth in our secured portfolio mix. Total other revenue was $154 million in the third quarter, up 10% versus last year consistent with our originations and receivables growth. Let’s move on to credit which continued to be stable. Our 30 to 89 delinquency rate of 2.3% remained consistent with last year’s third quarter. Our 90 plus delinquency rate was 1.9%, down to about 10 basis points from last year. And our net charge-off ratio was 5.2% and approximate 60 basis point improvement compared to last year. Keep in mind, this was driven by a particularly strong 30 to 89 delinquency rates in the first quarter of this year. We do not expect year-over-year improvements of this same magnitude in future quarters given the portfolios moderating growth of secured lending. Our loan loss reserves increased sequentially by $50 million or by 10 basis points to 4.6% of receivables. This increase was in line with expectations and reflected seasonally higher delinquency. Our reserve rate was down 20 basis points year-over-year driven by the lower loss profile of our portfolio compared to last year. Third quarter operating expenses were $335 million, about 5% higher than last year. On a year-to-date basis, expenses were $963 million, up 3% versus 2018. This increase reflected continued investment in technology, customer experience and customer acquisition, which has been partially offset by continued operating efficiency in our branches and our central operations. Year-to-date, our operating expense ratio was 7.7%, down about 50 basis points from the comparable period last year. And lastly, interest expense was $238 million in the third quarter, up from $218 million a year ago. Consistent with prior quarters, the increase reflected higher average debt balances to support our portfolio growth as well as a greater proportion of unsecured debt. Let’s move onto our balance sheet. As you know, our priority is to maintain a conservative balance sheet and a long liquidity runway, both of which we continued to enhance during the quarter. As Doug mentioned, we issued $1.7 billion of secured debt through two seven-year revolving securitizations at a blended rate of 3.5%. As a result of this longer issuance, the average tenor of our secure debt maturities is now about three years, up from two years at the end of 2016. Our third quarter tangible leverage ratio was 6.8 times and we are well positioned to deliver on our target of six times by year end. As you all know, we are a wholesale funded business that regularly accesses the capital markets to pre-fund upcoming maturities and growth. As a result, our cash levels fluctuate from quarter-to-quarter reflecting the timing differences between debt issuance, receivables, growth and debt redemptions. At the end of the third quarter, we had roughly $1.2 billion of available and excess cash. Net of this available cash on leverage ratio was about 6.3 times for the quarter. In terms of liquidity, during the quarter, we expanded our undrawn capacity to $6.9 billion. In addition to the $1.2 billion of available cash on our balance sheet, we also had $8.5 billion of unencumbered assets at quarter end. These liquidity sources along with our balanced and longer maturities provide an extended runway to operate our business without access to the capital markets. Now let’s move on to CECL. As you all know, CECL requires us to move away from our current incurred loss reserving to a lifetime projected loss methodology. Keep in mind this is simply an accounting change and does not affect the cash flow or fundamental economics of the business. Accordingly, when we adopt CECL on January 1, 2020, we expect our reserve ratio to increase from the current 4.6% to between 10% and 11%. This estimate is reflective of the portfolio attributes and economic outlook as of September 30. The ultimate amount that will be recorded on January 1 will be dependent on our portfolio composition and economic outlook at that time. Reserve bills will be accompanied by an increase to our deferred tax asset of approximately 24%, the net of these two resulting in an offsetting reduction to retained earnings. As we’ve highlighted in the past, we’ve always viewed reserves in tangible equity as the combined loss absorption capacity for the business. CECL simply move this capital from one account to the other with the aggregate amount remaining the same. Unlike a bank, regulatory agencies do not govern our capital levels. We see our balance sheet is very well capitalized regardless of this CECL accounting change and do not anticipate it having any impact on our capital adequacy or ability to invest in the business or return capital to shareholders. Let me finish by saying this. CECL is purely an accounting change. It does not impact fundamental drivers or underlying economics of our business. Our business generates very attractive returns and a considerable amount of capital for reinvestment and shareholder returns. And we remain well capitalized with significant liquidity to run the business through all economic conditions. With that, I’ll turn the call back to Doug.

Thanks, Micah. As you can see, we continue to drive very strong results. Our key metric, whether it be earnings, return on receivable losses or liquidity are great. What really excites me is the underlying fundamental of the business and initiative that are gaining momentum and driving these great financial results. We have a world-class executive team that is working extremely well together and are totally aligned against the company’s priorities. We are hyper focused on our customers and recently surpassed 2.4 million customer accounts for the first time in the company’s history. This is the result of a number of factors including a finely tuned credit box that allows us to better target customers that meet our risk return profile. Marketing optimization that is starting to pay off with more customers applying who meet our risk return criteria and to operational and customer experience improvements that have more customers who we approved for a loan, booking those loans with us once they start the process and interact with us. I look forward to discussing these and other initiatives and plans with you at our upcoming Investor Day. With that, let me thank all of you for joining us and I’ll turn the call over to the operator for questions.

Thank you. The floor is now open for questions. [Operator Instructions] Thank you. Our first question coming from the line of Kevin Barker of Piper Jaffray.

Thank you. Just a follow-up on your comments about the net charge-off rate and the stabilization of that going forward. At what point do you think the portfolio will be basically stabilized between secured and unsecured? And at what point do you feel like the net charge-offs will start to stabilizing a range given the balance between secured and unsecured?

Yes. Good morning, Kevin. This is Micah. Thanks for your question. As we call those in the script, we can see our portfolio has started to level off a little bit. I mean, it’s going up by about one percentage point per quarter if you look over the last few quarters with originations at around 55 and that portfolio at 51 as you could imagine mathematically that’s going to converge. And I’ll remind everyone over the last few years, the secured mix has really moved from 36% at the end of 2016 to where it is today 51%, so it’s been a pretty market shift and losses over that point in time have declined from 7% in 2017 down to our current range of 6.1 to 6.3 which we still feel good about, but secured mix is moderating. So we would expect a loss improvement will also moderate. We’re not ready to call it anything for 2020 yet, but you can see in the delinquency trends, you look over the last couple of quarters 30 to 89 delinquency rate has been flat to the prior year. So the portfolio remains really strong. We really feel good about it, but the secured mix is moderating and as such will the losses.

Okay. And then at what point do you feel like you’re going to hit that stabilized rate? Do you think it’s probably sometime in mid 2020, or later in 2020 just given that mix shift?

Yes, it's hard to say it now, right. We’re not calling up 2020 yet, but I would direct it back to the delinquency trends.

Okay. Thanks for taking my questions.

Perfect.

Our next question comes from the line of Michael Kaye of Wells Fargo.

Hi, good morning. On CECL, how should we think about the provision expense post CECL versus under the current GAAP accounting any thoughts on that? And also an early thoughts on if you plan to give some additional pro forma EPS metrics post CECL just to normalize some of the noise around the provision expense?

Yes. Good morning, Michael. Thanks. So just to back up on CECL and our day one reserve bill that we called out again, we’re going – we’re expecting at this point our current reserving to go from 4.6% is the ratio of receivables upwards to a range of between 10% and 11%. We are running about 40 models under CECL. We incorporate up to 20 loan level attributes and a variety of macroeconomic variables. I was talking to you that our current estimate is reflective of our portfolio attributes in the macroeconomic outlook as of today or September 30. Ultimately what we report on January 1 will be dependent on the portfolio composition and macro views at that time. With respect to the day two or earnings impact going forward one of the things about CECL that’s different from our current reserving methodology, it’s really the sensitivity of that model and how it reacts to the different things that are going on in this portfolio. So in general, reserve changes under CECL will be more sensitive to portfolio growth and less sensitive to seasonal delinquency than our current reserving methodology. And there’s a few drivers under CECL that’ll impact the quarterly provision. First in a growing portfolio, there’ll be an increase level of reserving. Rest of the methodology we have today just by virtue of having that 10% to 11% versus 4.6. Second, again, the composition and attributes of the portfolio are very important than any given quarter though have a larger impact on the provision wins, projecting losses on a life-of-loan basis. And third, of course, as we’ve mentioned, the macroeconomic conditions will drive future loss forecasts that can create fluctuation in the reserves. Again, this is accounting change only as we’ve mentioned and talked about a lot. The fundamental economics of the business don’t change. And in terms of the future, we’ve got a few quarters of parallel testing on our belts if you really good about where we are with CECL. So it’s a little premature for us to guide around that expected earnings impact quite yet. But in future calls, we’ll provide more clarity on this as well as the non-GAAP metrics to allow for year-over-year comparisons with 2019 financials.

Okay. Thank you. Just given your current, a lot of that excess cash, is there anything you could say about potentially using that to pay down that $1 billion of unsecured due in December, 2020. I think it has 8.25 coupon was it in terms of your waiting for a specific date to pay that down or if that’s the plan?

Yes I don’t have any specific comments on that Michael I mean the $1 billion that we have on the balance sheet was really a result of our $1.7 billion of very, very successful ABS issuance. And as we mentioned that in about 3.5%, which is very, very attractive funding for us. We will tend to access the markets when they’re supportive and as you know, we raised about $4 billion a year just to run the business grow and satisfy maturities. Nothing specific on next year’s maturity at the end of December.

Okay. Thank you.

Right, Michael.

Our next question comes from the line from John Hecht of Jefferies.

Good morning, guys. Thanks very much for taking my questions.

Hey, John.

Yes, how are you guys? I think the first one is what do you guys think is driving the incremental growth? Is it market share gains? Is that your borrowers be more willing to take on more credits, these are just the overall macroeconomic trends.

Yes. Look, I think a number of things. First of all, the business is performing well and you’re seeing the benefit of a number of initiatives that we started in the fourth quarter of last year and the first quarter of this year. We have marketing efforts that are driving more customers that we want to apply for loans – to apply for those loans. We’re using advanced analytics to help refine our understanding of the total lifetime value of a customer when they come in the door which helps us approve customers that have the right risk adjusted returns. I mentioned on the last call we have a streamlined application. We’ve expanded our afterhours central support and we build out a number of analytical tools which are all helping with the customer pull through. And our investments in technology are starting to pay off and drive better efficiency and productivity across our branch and central operation. So, a piece of the driver is these initiatives that are resolving, attracting and converting more of the customers we want to convert. However, the mix shift that Micah had talked about earlier, which is usually for a larger secured loan than an unsecured loan has also been a driver. And so I think, between the two of the trends of us attracting the right customer and doing a good job operationally and with marketing and all throughout our processes together with more customers are choosing a secured loan at this point. Those are the two main drivers of the growth.

Okay. That’s great color. Thank you. Second is with respect to the – you had a slightly high-yield this quarter, I know Micah you attributed some of that to go with DCUs, would you also mention pricing strength that I believe – is there any kind of target market for your push the pricing up or is it just more of a mix shift or how do we think about that?

Yes, John, that’s been going on for a number of years. It’s the second quarter 2017 it’s really when we started a lot of our price testing. We insure all of our markets we remain competitive from a price standpoint. We feel really good about where our APRs have been trending the last couple of years. On the trend in yield that’s obviously a function of those APRs, but it’s also a function of 90 plus delinquency, which refers us out of yield when we get to that 90 day plus point. So to the extent, we continue to have really positive trends on the back end of our collections and our delinquency buckets, that’s supportive of yield. It’s a function of product mix and also stable payments. And I think all of those have been relatively supportive which is driving the continued stability in our yields. We feel really good about.

Great. Thanks guys. And congratulations on a good quarter.

Thank you.

Thanks.

Our next question comes from the line of Eric Wasserstrom of UBS.

Great. Thanks very much. Maybe just going back to the investment in the centralized operations, can you just remind us what functions those actually take on and sort of how it manifests itself in terms of the operating, typically more specifically rather the cost component of the income statement?

Yes. So we have large centralized operation that does a number of things. Traditionally, it was focused on collections after 90 days and then recovery activities. Over the last year, we’ve also increased our central sales and servicing team. And so, when I’m referring to some of the things that are happening in central operations, we’ve been running tests where sometimes we sweep delinquencies earlier than 90 days into central, which helps with both overflow. And it also allows you to do a champion challenger test to seek out what is more effective. We also have after hours when somebody applies online and a branch is closed rather than waiting until the next day is to be contacted by one man, they can be contacted immediately, process their application, schedule to go into a branch. We also have just overflow calling. So if a branch is busy and there’s a lot of people in there and there’s more people who want to talk to the branch, they can flip over to our central operations. So we have a whole number of things happening and I think we refer to it as our hybrid model that we’ve got branch in central that can complement each other. And we’ve also talked about this before. One of the great things is should we ever end up in a situation where we want to ramp up collection that provides quite a bit of overflow where we can talk over where we’ve got a lot of branch staff central that were both trained to do servicing and closing of loan, but also to do collection, which gives us a lot of operational flexibility depending on where the focus is.

Thanks. And how do we think about the accretion of this functionality to the operating leverage?

Yes, this is Micah. So it's some of what Doug talked about accretes to portfolio growth, right? And being able to get the applications quicker with some of our central operations and just pairing that together with our branches to enhance some of the growth in unit production and receivables growth we’re seeing that. And then of course, some of the growth results in operating efficiency and expense reductions. We have continued to maintain cost discipline within the company and drive these efficiencies. One of the things we’ll see this year enhancing our branch productivity, which is really a result of what Doug talked about. Our receivables per branch are up 17%, so somewhat of a cost wise but also more adding receivables without adding that extra dollar we expect. We are also leveraging our scale to reduce third party vendor costs. And I’d be remiss if I didn’t say that we’re reinvesting the savings in our core technology to be continued to be efficient and invest in our customer experience and enhancements to the business. And you’ll hear more about this in our upcoming Investor Day for sure.

And if I could just sneak in one last clarification on CECL, Micah, you gave the detailed impacts, but can you just help me with my arithmetic and what DCU level approximately does that suggest?

Yes. So Eric, we’ve come a long way from our 17 times leverage. Feel really good about where we are. I want to remind folks that the economics of the business won’t change. Our balance sheet remains strong. I’m not ready to give that out at this point.

All right, great. Thanks very much.

Thanks.

Our next question comes from the line of Moshe Orenbuch of Credit Suisse.

Great, thanks. And given all of those things that you talked about with respect to the operating side of their ability to help you grow – continue to grow loans at a very, very healthy rate. As you get feedback from your customers, are there other products that you can kind of, maybe not completely different products, but the tweaks to this that could kind of keep that going, even longer other things that you’re learning that’ll allow that growth to continue?

Yes. Moshe, it’s a good question. A quite a bit of time on, our core product, the installment loan, we’ll go through some of this in our Investor Day, the market has been growing and we don’t feel reason that it’s not going to continue to grow into the future because there’s a fair amount of our customers that come in for debt consolidation who are looking to a regular monthly payment that’s controllable, that cannot move debt out of the cycle of debt as opposed to add a number of credit cards that they hold. So there’s been a bunch of conversion from credit cards to personal loans which is a big market that has quite a bit of room to grow. We are always looking and asking what else can we do to help our customers, because as we spent time with our customers we’re often there for them in a time of need. And because we have proprietary underwriting that isn’t just a credit score we can help them sometimes when people who just have more simpler models and not a 100 years of experience working with the near problem, a customer won’t pick on that risk and as you see we have the risk adjusted returns. So we’re looking at both innovations to our current product set, as well as new products. What I would say is over the last year since I've been here, our main focus has been on strengthening the current business and optimizing it, because we think there was a lot to be done there and we have a good runway for growth just within the core. And I think you're seeing some of that producing now. With that that said we're certainly going to continue to evaluate opportunities to expand our product set in the future.

Great. And just on a slightly different tack, I mean there were some questions about specific debt issues. But maybe Micah you could just talk a little bit about the philosophy of kind of managing the right hand side of the balance sheet now given the fact that the capital markets have been pretty favorable and both in terms of sprints and rates what you might be doing over the next several quarters?

Yes. Moshe, we're obviously very, very happy with our capital markets program. Certainly the markets have been favorable, but there has been a lot of effort from the team here, OneMain to really do a lot of outreach with our fixed income base, we spend a lot of time with our rating agencies and we’ve really built quite the program here. And just from a high level point of view, we've said it before, our goal is to manage and run a conservative and resilience balance sheet. Long liquidity runway is very, very important to us. We typically issue about $4 million a year. It's going to be in a mix of ABS and unsecured. So I think our philosophy is still to have a balanced mix of the two. ABS has been very, very attractive for us as you see from the $1.7 billion we did it at 3.5%, I mean, both of those were seven-year revolvers which gives about an eight-year life on those securitizations. So we're not only getting great rates from ABS, we're also getting tenor. And that doesn't come without building a program over the years and building relationships with all of our investors. So I think you'll continue to see us use a mix of about half and half. That's going be opportunistic as well. So we will issue when the markets are supportive.

Great. Thanks so much.

Our next question comes from the line of Vincent Caintic of Stephens.

Hey, thanks. Good morning. And a very strong third quarter and it’s impressively across the Board. I'm wondering as we're thinking about a 2020, sort of are there any particular items in the third quarter and as we're thinking about the fourth quarter that are more one timer? So I know you mentioned the losses maybe a little bit of moderation of the loan growth side, but how should we think about 2020 from the base of third quarter? And then just because you beat so much versus the prior guidance of spooning what sort of change in the actual versuswhat you were thinking earlier this year with prior guidance?

Okay. That's a lot. Thank you, Vincent. I'll try to unpack that a little bit. We did call up the losses as we talked about the secured mix in the portfolio is moderating and very much expectedly so. So we do expect loss improvements to also moderate. In terms of yields we feel comfortable with our call out on stable yields for the rest of this year. Not quite ready to give any further guidance on 2020 at this point, we'll certainly do that in the fourth quarter call as we get into the early part of next year. The one item that I did call out in the third quarter was that discreet tax item on a GAAP basis, you will not see that in our C&I results as we use the statutory rate throughout the year for those results. But that $22 million certainly is something that we don't expect to recur. That was driven by the release of evaluation allowance on some of our state deferred tax assets which came from a combination of our strong earnings growth and our internal continued efforts to streamline our legal entity structure. Those are the big items for the quarter I would call out.

Okay, great. Thank you. And I guess when I think about the third quarter and one of the questions I've been getting from investors on the strong third quarter results is usually when you have the three different things so very strong loan growth, very strong yield and in lower losses usually you kind of take two and give up the third. So when the yields are strong it’s because underwriting for higher loss rate or when loan growth is strong, so maybe you could give up on something else, but just wondering, first if we could get a comment on you from that. And then the if you could talk about your recent vintage performance, how have they been doing and if you've been underwriting to a different level or things at different system? Thank you.

Yes let me start and then Micah might add in. I said it before on these calls, which we think the growth as an output of running the business, where we're going to – market to the customers we want, we're going to underwrite to have loans that meet our risk adjusted return and we're going to try and get people a great customer experience. And once they start interacting with us, they want to book loans with us. And so I think you're seeing us hitting across a number of variables, which is running, I think, of it as we run at disciplined, analytical set of processes to manage a nationwide portfolio of risk. And this quarter you're seeing the output of around both risk, and the price that we have for risk and the losses that come out of that being very good and the result of us putting it together on attractive, powerful platform. My goal is continue with that and we don't necessarily say, hey let's do one and not the other. We try to hit on all cylinders. And we've been doing well over the last bunch of quarters and our intention as management is to keep driving that and hit around again book the right loans with the right risk adjusted return and growth will be whatever growth is based on us hitting on all those levers.

Great, thanks, very helpful. And see you at the Investor Day. Thanks very much.

Okay, thank you.

Our next question comes from one on Rick Shane of JP Morgan.

Hey guys, thanks for taking my question.

Hi Rick.

As we cut into 2020 and look you guys are demonstrating strong growth and very high returns on capital. Obviously sets you up for potential return of capital. I want to go sort of through the thought process, dividend versus repurchase and wondering specifically two factors, one to CECL impact that calculus in any way. For example, does it change the characteristic of a potential dividend from a qualified dividend to a return of capital? And also curious if the concentrated position of a sponsor influences that decision at all as well.

Yes, we've talked before about our capital return priorities. And they remain the same that we've talked about before, which is we have a business that generates excess capital. Our first priority is going to be to invest in the business to ensure we’re serving our customers well, innovating and positioning the platform for long-term profitability. We'll all also invest in growth as long as we see loans that meet our risk return profile and we think have a good return for our investors. We're going to prioritize a conservative balance sheet with a long liquidity runway and capital that gets generated in excess for that. As you see in this year we started to return to shareholders and we plan to continue. Regarding CECL, I'll just repeat what might have been especially CECL vis-à-vis capital return. We have a very strong conservative balance sheet. We're going run the company based on the fundamental economics of the business, not on the accounting treatment of the business. And so CECL is not going to change the way that we think about our capital adequacy, it's not going to change the way that we think about how we're going to invest in the business and it's not going to change our ability to return capital to shareholders.

And Doug just if I can add to that a little bit, just to get a little bit more granular. We said before, we always view the combination of our reserves and our tangible equity as our total loss absorption capital or capacity for the business. So CECL doesn't change that because we're just moving from one account to the other effectively. Post CECL implementation though as a result of this will begin including reserves, net of tax in our leverage calculation, which is consistent with this thought process and methodology. And it's actually a very similar methodology for leverage that's used today by S&P.

Got it. Okay. And by the way I agree with you, look, I think, this is just balance sheet geography more than anything else. I don't think it changes the ability of the company to absorb losses. But I'm curious about this, for example, it does change the optics in terms of things like book multiple. And so in a post CECL environment, buying back stock is more dilutive to book because of the geography. I'm curious that that type of consideration influences how you think about repurchase versus dividend.

Well, I think I have to go back to the statement that we don't see CECL is changing any of the way we think about capital adequacy. And we'll be including reserves in our leverage calculation. As I mentioned in the prepared remarks we aren't a bank. Regulatory agencies don't come in our capital level. So what we need to be mindful of is the rating agencies and how they're thinking about it. We've had extensive conversations with the rating agencies about CECL. And of course, as I said before, while we can't speak to them directly, we are confident that they will understand this is an accounting and not an economic event. And we don't expect any changes in our ratings as a result. As I mentioned S&P sort of specifically already addresses this with the addition of general reserves. So they're already there. And as Doug mentioned as always, we're going to continue to prioritize the conservative balance sheet with prudent levels of leverage.

Terrific. Thank you guys very much.

Thanks Rick.

Our next question comes from the line of Eric Hagen of KBW.

Hey, thanks. Good morning guys. I'm filling in for Sanjay today.

Good morning.

Just a clarification on the leverage. Is that the target for 6x by the end of the year, is that coming down from 6.8 or 6.3 net of cash?

The target for six times is our reported metric. So what the 6.3 does just try to give you a little context around what the impact of pre-funding for growth does for the reported leverage metric. But our six times is based on a report number.

Okay. Got it. Okay. So the liquidity position really should remain strong. It's not necessarily coming down dramatically like almost the full turn, that’s kind what we’re hearing you say?

We feel good about where we are and we feel comfortable with our yearend target for capital, liquidity being a little different may be continue to enhance our liquidity, saw us increase our conduit capacity in the quarter. We do count that cash as liquidity until it's used. And also our unencumbered receivables remain strong at over $8 billion.

Got it. Okay, great. I'm going to follow-up on the funding side. I'm hoping you can give just a little bit more color on the feedback that you're actually getting from fixed income investors and their risk appetite to take on longer-term assets, especially just considering the stage of the cycle that we're in. I realize that your ability to price the seven-year deal is probably at least largely based on the fact of the mix shift is changing toward more secured. But in the end, I mean, do you think your ability to get that kind of deal done is really a function of the fixed income environment that we're in and the level of credit spreads? Or are you guys structuring deals differently and there's some enhancement in the deal structure that investors are drawn to?

Okay. So, there's no change in the structure of our deals. So I mean we certainly try to advance as much as we can out of our securitization structures and that remains strong. We haven't done anything to soften that at all, we've actually gotten more advancement lately over the past couple of years. I think the fixed income markets remain very supportive. As I mentioned earlier, part of that is just the programs we sell. We've established a level of trust with our fixed income investors and we spend a lot of time on the road telling the story and working with our fixed income investors on what the platform means and what it can deliver. I would say they feel comfortable. The markets are supportive. I think you're seeing a lot of flows into the high yield sector. I would probably say that those are the issuance and the appetite for risk on that side leaning a little bit more to the BB credits. So we're in a good position there and we're basically, as everyone has figured out, on the fixed income side a very strong platform and one that they're interested in continuing to do a lot of investment in and especially on the longer term.

Got it. That's helpful color. Thank you very much.

Thank you.

Our next question comes from the line of John Rowan of Janney. John, your line is open. Make sure you're not on mute.

Okay, here we go.

Yes, good morning John.

Sorry about that, I had my phone muted. Micah can you give the CECL impact on the DTO, I think at written down, can you just repeat that?

On the DTA, the deferred tax asset?

DTA, yes.

Yes, anytime equipment reserves, you’re going to have an offsetting deferred tax asset just due to the nature when you can take charges against income when you can. So our statutory rate is around 24%. So that's what we're serving.

Okay. And then just to be clear, the day one impact for the reserve bills does not go through the P&L, correct?

Correct [indiscernible].

Okay. And then just lastly any thoughts on AB-539, whether you'll see incremental volume out of California? That's it for me. Thank you.

Thanks John.

Yes, look AB-539, the bill in California that cap lending is 36% was a bill that we publicly supported. And the main reason we publicly supported is because we believe it's the right thing for our customers. We already in California and other states that did not have an interest rate cap, we already voluntarily capped our rate at 30%. So it didn't change our pricing, but we think that’s a good responsible thing to do for our customers. You may recall that as part of the OneMain Springleaf merger, we sold a number of our California branches. So we have been generally underpenetrated in California and we've been opening branches across the state over the last couple of years. So we do think there's some opportunity to gain market share, but it's too early actually to size the opportunity.

Okay. Thank you.

Thanks John.

Our next question comes from the line of Arren Cyganovich of Citi.

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We're pulling through the same customers we always were. So we run – we have a disciplined analytical process that we run. We continue to make adjustments based on our risk adjusted hurdles and we will make adjustments at the edges. Growth in our secured portfolio is a form of credit tightening because it generates lower credit losses and more stable portfolio performance over time. So we feel good that we run a portfolio of risk and return. We know this customer well, we've got world-class underwriting, more of our portfolio has been going to secured over the last couple of years. And so we monitor macro trends, our customers, we've got unique competitive advantage where we actually do pulse surveys of our branch managers to see if there's anything happening in the local economy. So as I said before, we are not targeting growth. We target running our business very well across all the drivers, whether it's marketing the customer experience, but all of it needs to fit within our credit box. And we feel really good about that we're booking high quality growth.

Okay, that's helpful. Thanks. And then maybe in terms of your employee costs very tightly over market, and I think, historically there has been [indiscernible] most of this industry’s employee base. Are you having any challenges in terms of getting employees or how are you thinking about the cost of managing the business from that standpoint?

Well, look, I think any business needs to be obsessed with its employees and needs to be a great place to work. And all the longitudinal studies show if you're employees – maybe you're providing value to customers, and they think there's career growth opportunities there, and they think the company respects them, and pays them a fair wage, and give them opportunity for advancement, that you have lower turnover, you attract more employees, especially we have a 10,000 employee base. So word of mouth is a big and referrals is a big part. And the studies show that you actually have happier customers who were served better and better run the company over time. So I'm very focused on our employees, our employee value proposition. Our attrition has actually been going up down in the last year, because we're very focused on that. We think we pay people fairly. We think we had a great culture where people feel like we do the right thing for customers and treat them well. And we're always looking to improve our management, they feel good about the direction of the company. So glad you asked the question. I've got a lot of passion about focusing on our employees from senior folks, all the way down to the front line folks dealing with our customers and our attrition actually has been going down because we've been hitting on all cylinders around making sure we work directly towards.

Great. Thank you.

Our next question comes from the line of Mike Grondahl of Northland Securities.

Yes, thanks guys. Could you kind of describe your incremental marketing efforts that are kind of pushing a little bit better conversion? And maybe what you're doing with data analytics just so we can understand those better?

Sure. November 20, come to our Investor Day. We will give you a bunch more. On a call, look, we have got a number of customer acquisition channels, we've got a big direct mail program, we worked with a number of affiliate and partners, we've got digital efforts and across all of those we're making sure that we target the right customers, meaning the customers that meet our risk return profile and we're getting to them. We're always running tests, inserts in our mailing, how we do banners online, and what advertising we are picking up online? What's the messaging to make sure people understand our value of proposition? So there is a lot of things on the outbound, that we're spending time on and analytics drive really all of that. And we have got a lot of on us customer data and as we run tests we are continuously testing, and leaning and refining the out bond. Once someone hits us there is a whole set of activities, whether it on the phone, in person or them going to our website, that matters. And I talked about our streamline loan application, making sure it's easy to apply with us, the instructions are clear, that you can pre-populate as much as possible so maybe it’s easier on folks. And then to the point of when a customer is sitting in front of us making sure we have very good technology that allows them to see the options, see the pricing, see how they can work with us and get through the closing process in an efficient, yet extremely thorough way So it's really each of those have analytics behind them, a set of art, and science and testing that we're continually doing. That is all we've been spending time and effort on it as you see kind of throughout that process starting to pay off. Underpinning all of that, let me remind you is, our fresh box, which says whether we'll make a loan to yield or not that is not going to – that continually gets tweaked, but we’re making sure that we have high quality loans when we book them.

Great. Okay. Thanks guys.

Thanks Mike.

Our next question comes from the line of Henry Coffey of Wedbush.

Yes, good morning everyone. Thanks for taking my question.

Good morning Henry.

When we go all the way back – going all the way back to CECL is it an over simplification to sort of say when all the dozens of inputs – if all of the dozens of inputs you've done are perfect, and they freeze, and they don't change a small assumption is loss reserve on new loans essentially going to be 10% to 11%?

Yes, I mean, what we've put out we've put out today for a range [indiscernible] the loss on the portfolio. I have not gotten into the gory details of what the ratio is for new loans versus, season, versus delinquent, but that will grow up in the 11% what’s the embedded lifetime portfolio loss estimate is again given the receivables composition, the portfolio attributes in the macro economic conditions at this point in time.

But I mean just to be really simplistic when we run our models right now we just have to say, well if loans go up to a 100, then we add 10% to 11% of that number to the reserve and then back into our provision. That's the way I'm sort of thinking about it.

Yes the reason we gave you a rate of range as a ratio of receivables was to help you with some of that. So I would look at it as a ratio against the total book.

And then on the competitive front, you had a big change in California, not for you, but for other parties. You've got – the banks don't get to just say, oh it's a matter of geography, for the banks, it's a real – CECL is a real problem, whereas with you the rate rating agencies have basically been using primary capital for 20 years as the basis for all those analysis. So for you it's not a big change. So are there pockets of competitive opportunities, doors that are opening up either because of the change going on in states like California? And maybe you can tell us if there are any other states moving in this direction or on the banks/regulatory capital front where you have some obvious advantages?

Yes look, I think, we stack up very well against our competitors and have a very good value proposition. I told you about California, we've been opening branches there and we're under penetrated, so we're going to continue to do that. It’s hard for me to say on the banks and how it's going to adjust what they do. I can just tell you we have, as you said, the advantage of not being a bank, or not being mandated to build that regulatory capital back up over the next couple of years. And we really are just very focused on running our company based on the economics. So, I would just refer back to what I said before is we are going to provide a great value proposition to our customers with a great employee base. We're going to drive around all the places we can to make sure we bring in the customers we want to book, whether marketing, operation, making sure we keep a disciplined type credit box. We feel really good about our prospects vis-à-vis our competitors, some of our non-bank competitors don't have the kind of funding program and strong balance sheet that we have. So we like our positioning, and we are going keep playing our game, we are aware of competitors, but our plan is to keep running a good business and get good risk adjusted returns for our shareholders.

Are there any states that you can point to that didn't have some form of restriction, rate cap or something that might be putting one in place over the next 12 months to 18 months?

Not in particular different state legislatures, and different governors and administration have their ideas, but California was the big one that was on the radar.

Great. Thank you very much.

Thank you.

Our next question comes from the line of Kevin Barker of Piper Jaffray.

My question has been answered. Thank you.

And thank you ladies and gentlemen, this does conclude today's OneMain Financial’s third quarter 2019 earnings conference call. Please disconnect your lines at this time and have a wonderful day.