OneMain Holdings, Inc. (OMF) Q4 2019 Earnings Report, Transcript and Summary

Welcome to the OneMain Financial Fourth 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 following the presentation [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 fourth 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 Web site. 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, February 11th, 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 being with you today. We closed out the year on a very strong note. We achieved C&I adjusted net income growth of 42% for the fourth quarter 2019, and a C&I return on receivable of 5.9%, that's an almost 120 basis point improvement compared to the fourth quarter 2018. For the full year, we generated $916 million of C&I adjusted net income or $6.72 per diluted share, reflecting 33% increase versus 2018. These strong financial results are attributable to many important initiatives underway, and our execution against the strategic priorities, which we outlined in Investor Day in November. We feel really good about the opportunities ahead to continue to enhance our business through improved customer experience and omnichannel delivery, expanded multi-touch marketing, enhanced underwriting and automation and efficiencies in our branch and central operations, just to name a few. We made real progress against these priorities in 2019, including improving our customer conversion rate by about 100 basis points. As a result, ending net receivables grew by $2.2 billion or 14% year-over-year, and our lending was anchored around achieving our risk adjusted returns criteria. Simply put, we are attracting, converting and serving more of the customers that we want to serve. Across the business, we're using advanced analytics to optimize our marketing strategy, our operations and to enhance our credit model and our investment in technology is driving greater productivity across our branch and central operations teams. As a result, ending receivables per branch has increased by 18% compared to last year, and C&I profitability per branch is up 37%. Credit performance also remained strong. Our net charge off ratio was 5.71% in the fourth quarter and 6% for the full year, and our delinquencies are in line with our expectations, which gives us confidence in the financial health of our customer. Now I want to remind you, however, of what we said Investor Day. Our underwriting is focused on risk adjusted returns, not just losses. We generally look for 20% return on equity with governance for overall losses, while also ensuring that the company remains profitable even in a severely stressed environment. Overall, we are providing a better customer experience and we are underwriting to generate strong risk adjusted returns, which translates into the strong financial results we achieved in 2019. As I mentioned, 33% growth in C&I adjusted earnings and about 90 basis points of improvement in our return on receivables, which reached 5.4% for the year. As we continue to execute on our initiatives, we expect to continue to generate considerable earnings and capital. As part of our recent Investor Day, we outlined our capital allocation framework. We will continue to use capital to; first, fund portfolio growth with loans that meet our risk return criteria; second, invest in our business; and third, return capital to shareholders. Applying this framework to 2019, we funded $2.2 billion of receivables growth. We invested in technology, analytics, customer acquisition and talent, to support the strategic priorities outlined at Investor Day. And as you know, we commenced capital returns to shareholders. In 2019, we initiated $1 per share regular annual dividend and we paid $2 per share special dividend in the third quarter. Today, we are announcing 32% increase in our regular dividend. In addition, we are also announcing our second special dividend of $2.50 per share, payable this quarter. This will result in $5.58 per share paid out over the 12 month period ending March 31, 2020, which is approximately 13% yield on our current share price. These capital actions reflect our confidence in the strong results we expect to continue to generate over the long-run. And as we said before, the January 1st implementation of CECL will not impact how we manage our business or the capital we generate. We're managing our company to the fundamental economics of the business, which are very strong. I'm very pleased with the progress we made in 2019 and believe we are in a great position to serve our customers well and drive long-term shareholder value. With that, let me turn the call over to Micah.

Thanks Doug and good morning, everyone. We earned $161 million of net income in the fourth quarter or $1.91 per diluted share. For the full year, we earned $855 million of net income. Excluding the impact of the Fortress transaction in 2018, this was a 55% increase year-over-year, driven primarily by our strong C&I performance. I'd like to note that our effective tax rate for 2019 was positively impacted by approximately $30 million of nonrecurring tax benefits, including the release of approximately $23 million of valuation allowances against state deferred taxes. We expect our effective tax rate to be around 25% in 2020. Non-C&I net income impact was $61 million in 2019, which included the previously mentioned tax benefit. We expect non-C&I net income impacts to be between $50 million and $60 million in 2020. Moving on to our C&I segment results. We earned $268 million on an adjusted net income basis or $1.96 per diluted share for the fourth quarter of 2019 compared to $189 million or $1.39 per diluted share in the fourth quarter of 2018. For the full year of 2019, we earned $916 million of adjusted net income or $6.72 per diluted share, reflecting 33% increase versus 2018. Let's review the key drivers of our fourth quarter C&I performance. Originations for the fourth quarter were $3.7 billion, up from $3.3 billion. These originations led to ending net receivables growth of $2.2 billion or 14% year-over-year. Our secured portfolio grew by $1.8 billion or 24% over the same period. Interest income was $1.1 billion, up 15% from last year. The increase primarily reflected higher average receivables and higher yield, which was 24.1% in the fourth quarter. Yield was 31 basis points higher than last year's fourth quarter, generally reflecting continued strength in origination APRs and lower league stage delinquency. Total other revenue was $158 million in the fourth quarter, up 10% versus last year, driven by higher insurance and investment income. The $8 million year-over-year growth in insurance income was largely in line with our receivables growth. The $8 million increase in investment income generally reflected a favorable comparison to last year's fourth quarter, which had mark-to-market losses on equity securities in our insurance portfolio. Let's move on to credit, which continues to perform well. Our 30 to 89 delinquency rate of 2.47% was essentially flat with last year's fourth quarter. Our 90 plus delinquency rate was 2.11, down from 14 -- down about 14 basis points from last year, and our net charge off ratio was 5.71%, a 62 basis point improvement from last year. Keep in mind we do not expect year-over-year improvements of this same magnitude in future quarters given the portfolio’s moderating growth of secured lending. I want to emphasize what Doug mentioned earlier. We underwrite to optimize risk adjusted returns, not losses. Our long term operating framework, assuming a relatively stable economic environment, is to have charge offs in the 6% to 7% range. Given the strong macro backdrop and benign credit environment, we expect losses to be in the lower part of that range this year. Fourth quarter operating expenses were $327 million, about 5% higher than last year's fourth quarter. For the full year, however, expenses were up about 3% versus 2018. This increase reflected the investments in technology, customer experience and customer acquisition we discussed earlier. These investments were partially offset by continued operating efficiencies across our business, particularly in our branches and our central operations. For the year, our operating expense ratio was 7.5%, down about 55 basis points for the comparable period last year. Lastly, interest expense was 247 million in the fourth quarter, up from $220 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. Before I move on to discuss our balance sheet, please recall that during our Investor Day, we highlighted the long term framework within which we expect to operate our business in 2020 and beyond. We are intently focused on enhancing long term value in capital creation, which will continue to be driven primarily by the initiatives we highlighted earlier. With that, let's move on to our balance sheet. Our loan loss reserves for the fourth quarter increased sequentially by about $30 million, reflecting portfolio growth and seasonally higher delinquency. Our reserve rate was 4.6%, unchanged compared to the third quarter and down 16 basis points year-over-year. As you know, January 1st marked the adoption of CECL, which led to an increase in our reserves of $1.1 billion and a reduction to tangible equities about $800 million. As a result, our total reserve rates increased 4.6% at year end to 10.6% at the start of 2020. Over the first half of 2020, we anticipate that our reserve rate under CECL will be between 10.6% and 10.9%, assuming stable economic conditions. As we highlighted in the past, we have always viewed reserves and tangible equity as a combined loss absorption capacity for the business. CECL is an accounting change that simply moves this capacity from one account to the other with the aggregate amount remaining the same. Accordingly, going forward, we will manage our capital adequacy to a ratio of net adjusted debt to adjusted capital, which is highlighted on Slide 13 of our earnings presentation. We believe this metric provides a consistent view of our loss absorption capacity pre and post CECL. Our loss absorption capacity on January 1st was as strong as it was on December 31st at $3.4 billion, that's more than 4 times our after-tax losses. And as you can see from our 2019 financial performance, we generate annual earnings well in excess of our annual after-tax losses. These earnings can be used to cushion losses and changing economic conditions or can be returned to shareholders, while still preserving the significant loss coverage capacity we have on our balance sheet today. We see our balance sheet as being well-capitalized regardless of the CECL accounting change and do not anticipate CECL having any impact on our capital adequacy or our ability to invest in the business or return capital to shareholders. As you know, our priority is to maintain a conservative balance sheet and a long liquidity runway, both of which we continue to enhance during the fourth quarter. As we highlighted during Investor Day, we issued $750 million of 10 year unsecured bonds at five and three eights. This issuance demonstrated the strength of our funding program, as well as our confidence in the resiliency of our business over the long-term. Our tangible leverage ratio was 6.2 times at year end. Net of our available cash, our leverage ratio was 5.8 times. Lastly, in terms of liquidity, we had $9.9 billion of uncovered assets and $7.1 billion of undrawn conduit capacity at quarter end. This combined with over $1.2 billion of cash and cash equivalents as well as our balanced and longer duration maturities provide an extended runway to operate our business without access to the capital markets. Our business continues to be uniquely well-positioned for the future. We have a conservative and well-capitalized balance sheet. We have a long liquidity runway and our business generates very attractive returns and a considerable amount of capital that can be utilized for receivables growth, investment and shareholder returns. With that, I'll turn the call back over to Doug.

Thanks, Micah. We closed out the year on a very strong note. We made great progress in how we attract, engage and serve our customers. I'm very proud of our company's focus on understanding our customers’ needs and treating each person who comes to us for a loan as an individual, not just a credit score. Our business model and focus on our customer has driven both customer and earnings growth. This produced the considerable capital that we in turn used to invest in our business and return to our shareholders in 2019. I am confident that our business will continue to benefit as we execute on our plans to strengthen the business and how we serve our customer. 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]. Our first question is coming from the line of Michael Kaye of Wells Fargo.

This quarter saw the celebration of origination growth to 13% year-over-year that compares to 26% last quarter and 21% in Q2. Maybe can you talk a little bit about what you're seeing in terms of loan demand?

Michael it’s Doug. I think you'll see this business has some seasonality and looking quarter by quarter isn't necessarily the best dodge of what's happening. We're seeing a lot of demand. As I said before, we're working to optimize our business in a lot of ways. And our goal is to make sure that our marketing targets with the customers that qualifies for loan with us and then once we get customers’ attention and they're in the market for a loan, we create good customer experience, whether that's on our Web site when they call into us through the application process, all the way through walking into the branch and having a good customer experience with one of our associates. So we think demand is strong right now for our customer base and we didn't see much variation in that.

Second question, in terms of the level of expected second semiannual dividend later this year. Should we assume it will be equal to the Q1 special dividend or perhaps though some conservatism in the initial $2.50 dividend as it's still early in the year?

As you know, we make capital allocation and distribution decisions based on earning capital leverage, all the factors that we have. So I think it's just too early to speculate on the size of any forward looking special dividends. And with that said, Michael, we try to give you a sense at Investor Day of the capacity of the business to generate capital that could be distributed.

Okay, thank you.

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

First question, I know this is real early on here. But I'm just wondering, though, there's been an inflammation implementation of a new bill in California. And I'm wondering, have you seen any changes in the framework of demand or your lending patterns in California at this point in time?

Yes, I think it’s too early John. As you know, we were quite supportive of the bill. We voluntarily cap our interest rates at 36% in all of the states we operate in, and that's what California did. There’s a lot of activity there. We were already under penetrated California, so we have been opening branches in California and I think our plan remains on course. I think it’s too early to say whether that the bill has an effect or not.

And then the day two impact from CECL. Is it simple or I guess as a framework to think about it, it's about 6% increase in ALL. So for every billion dollars of net growth that would imply about $60 million incremental provision. Is that a fair way to think about it and just compare the provisioning rate with that in mind to prior years of net growth?

John, this is Micah. That's exactly the right way to think about it. And keep in mind that assumes that you have stable portfolio attributes and of course under CECL stable macro condition. So just to step back for a minute and remind everyone how CECL is different from the incurred methodology. In general, CECL reserving is going to be more sensitive to originations growth than the prior methodology and it will be less sensitive to seasonal patterns and delinquency due to the fact that you’re reserving on life of loans. So one, CECL is going to produce an increased level of reserving in a growing portfolio. Two, the attributes of the portfolio will just have a larger impact from your provisioning on a life of loan basis. And then third, the macroeconomic conditions that get imparted on the model. But that is the right way to think about it, 10.6 versus 4.6 using those reserve ratios and just applying against the growth.

And then final question, Doug, you referred to improved customer conversion rates. What are the drivers of that and overtime, is that if any way that you’ll have an improved customer acquisition cost dynamic?

Look, there is a lot of different drivers. And as you know in this kind of business a lot of small changes can add up to real numbers that impact the bottom-line. So if you think about -- this is a conversion rate from customers that we have approved for loan to them actually booking a loan. And the drivers are, as they make it through our funnel? How quickly do they get a phone call from us? What is that experience like on a phone? Do they need to come in to the branch or not depending on if they’re returning customer or not? What does it feel like when you walk into the branch? Does our associates given them all of their choices, treat them well, make sure they understand their options? So it’s everything from the technology they experience, to the phone call experience, to the personnel experience and then the product attributes, which we're always working on. And so, I think you can expect to see us at every little step of the way getting very granular, seeing what we can do to improve our experience all with a focus on making sure we have a, as I’ve said before, have a great product, have fair price with an excellent customer experience, and all of those different pieces affect conversion rates.

Our next question comes from the line of John Rowan of Janney.

So are we just assume that the guidance that you gave out for kind of the, I don’t recall, stable state or whatever you call it, is kind of what we should be based on in 2020 off of. Though, you’ve obviously gave in the Investor Day?

We provided that long term operating framework at Investor Day that you’re referring to, that we plan to operate in and that was designed to be some guardrails that we operate the business at. And that was true for more of the longer term period, but inclusive of 2020. We'll keep you updated, if any of those change. But any particular modeling questions, certainly, Kathryn can also help with that.

So here’s kind of a modeling question, but I'll ask it. Looking at the finance portfolio, as of the end of the year, if we don’t see a seasonal pay down in March, which usually we don't always see with your portfolio, the growth rate off of the year ago is going to have to be well in excess of the 5% to 10% growth that you modeled off of the net stable state guidance that your genius. So either we're going to have growth that's in excess of your, that number in 1Q or the portfolio will come down a little bit in 1Q, which is in a typical in the group. But now that we have CECL, if we do have that seasonal paydown, could there be a big reserve release in 1Q that could actually -- I'm just trying to gauge whether or not there's a seasonal bump up in earnings in 1Q, or if we have that growth continue into 1Q that's in excess of the guidance number?

So I think there's a couple questions in there, John. Let me take the first one around growth. Certainly, as Doug pointed out and Michael asked on the first question, this is a seasonal business. We do have patterns of seasonality, not only in the income statement but also just in our originations and growth, as you pointed out. So the first quarter does tend to be a quarter that is challenging, if you will, to use that term. From a growth perspective, a lot of that has to do with IRS tax returns and just people's behavior around borrowing. Of course, second and third quarter being a couple of the stronger quarters for origination’s growth. So that being said, that long term framework that we gave you is sort of an overtime and on average, metric that will change by quarter and that's something you can get a sense for by going back and looking at some of our seasonal and historical originations and receivable trends. So that's one piece. And the second question I think you asked was how that's going to influence CECL. We gave out, as part of our prepared remarks, our expectation on what the reserve ratio in aggregate as a percentage of receivables that we expect to look like over the next couple of quarters. As you probably remember, we gave you an original estimate of 10% to 11%. We came in pretty darn close to the middle of that at 10.6% for January 1. We now have more experience with that model, and so we're narrowing that range we gave you from 10.6 to 10.9. Of course the CECL model incorporates many attributes across the portfolio, as I mentioned, and a bit sensitive to originations mix, which is why we gave that range of the ratio. So the answer to the question on how that would necessarily play out against the receivable, that is the ratio you would use against the ending receivables for whatever period you're looking at. And I can't comment at this point whether there's going to be a release build or flat in the first quarter.

Well, wouldn't be a release, but if the finance receivable comes down in 1Q, as it does with a lot of installment lenders, right? It's not a release. But if you just hold the allowance steady, you would conceivably have provisions below charge-offs, right? And I'm just trying to figure out, if you know 1Q expectations are a little too low, because that could potentially play out.

Yes, it's something definitely you should follow up with Kathryn just on your modeling. But I think in general, you're thinking about it the right way, as a percentage of receivables and where we'd like to think it may play out, sure.

Our next question comes from line of Kevin Barker of Piper Sandler.

Your OpEx, your operating expense growth came in slightly below plan here, especially with the fourth quarter year-over-year growth rates slowing. When you go into 2020, do you expect that momentum to continue where OpEx growth maybe at the lower part of your 3% to 5% guidance range?

Thanks Kevin. It's Micah. I think with respect to where it came in relative to expectations, we had signaled at the beginning of year, we thought that full year C&I OpEx would be around 3% growth for the year. Of course, lot goes on during the year but we ended up with 3%, finishing at 12.90. The expense in the quarter was up five versus the prior year. Again, seasonal business is going to be influenced by customer acquisition costs and different things that are going on in the OpEx, as well as what we talked about at Investor Day, which is we continue to maintain a significant amount of cost discipline over this business. We're managing it very, very closely, driving further efficiencies into the business as you heard from Doug in his remarks with receivables per branch up 18% year-over-year. Again, as we talked about at Investor Day, we're being investing those savings in our core technology, our experience and other enhancements we're making to the business. So there is going to be a little bit of up and down, it’s not going to be a steady growth rate on every quarter, depending on again how the receivables growth in our originations play out and the customer acquisition costs that come around with that, as well as the timing of when we're driving efficiencies and investing in the business. So the 3% to 5% again meant to be on average and over time where we come out in that range for a specific year it’s just going to be relative to the opportunities we see driving efficiencies in the business and those opportunities on investments.

And then you loan growth came in above your operating frame work in 2019, and it seems like you continue to have momentum, especially in the back of this year and a lot of initiatives that you have in place. Do you continue to see that momentum going for the next few quarters, just given what you -- some of the operating leverage that you put in place just through analytics and so forth?

Yes, I mean, look, I want to repeat what I think I say at every conference call, which is growth is an output. We really don't manage to growth. We're going to try to attract customers that we think meet our risk return criteria and then do a breakout with them once they’re here and have them do business with us and what comes out the back end will be our growth number. But we manage it on a on a granular basis. One of the things that drove the loan growth this year in this quarter was when we do secured lending we generally have larger loan amounts. And as Micah said, we give our customers choice if they qualify for both a secured or an unsecured loan, certain customers only qualify for a secured loan, when it's up to them to make the choice what works better for them. We've been running in kind of the low 50s rate of secured lending and the portfolio will probably, that's going to moderate. And so that by definition will slow down the overall receivables growth. With that said, we've got a lot of initiatives underway and we'll see where the growth comes out this year.

And then do you expect that mix shift more towards secure to have an incremental impact on the day CECL incremental reserve?

Yes, Kevin. So certainly that is one of the attributes that goes into the CECL reserve. So if you look at our three main lending product, the hard secure, the direct auto and the unsecured, each of them has different reserving rate. So certainly, the originations will have an influence on what that reserve rate is going to be, hence the range we gave out, the 10.6 to 10.9. But we have seen as you can observe in our published results, our originations rate on secure is sort of converging with that with the portfolio rate. So we don't again expect continued -- expect secured to really be a large catalyst for our receivables growth going forward and it has been in the past.

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

Just any outlook for the yields that you expect to earn in the portfolio going forward, I hear you that the percentage of secured might taper off. But if the loss rates are lower in those products, presumably that means the yield might compress relative to what you had been earning when your receivables were more concentrated in unsecured. I'm just curious how you're able to retain that strong yield despite the mix shift?

This has been going on for a couple of years. We've talked about it on the last quarter as well. We've been actively testing our pricing in different markets since 2017. We've seen a market shift in secured, but we've been able to see the portfolio yield continue to be relatively stable and of course, that's influenced by our APRs that we’re originating our loans, but it is also indicative of the portfolio of delinquency rate. So I'll remind you when we have a loan that becomes 90 days past due, not only can we reverse income we have accrued on that moment but we also stop accruing. So when we see 90 plus improvement year-over-year that continues to be a stabilizer for yield and that's certainly a contributor from our secured mix and a contributor to what ends up being stable yields. Again, I’ll point back to the long term framework we’ve provided, which was we expect stable yields going forward, particularly with that secured mix moderating and that's kind of the guardrail we put out there in what we expect going forward.

FICO recently announced that there were some changes being made to the methodology for how they score consumer credit. I know that credit score isn't the only criteria that you use for new originations, but it is obviously an important one. I'm just curious how you’ve interpreted those changes and just any impact that could drive to demand or the total addressable market in general or just any tweaks to your underwriting criteria as a result of those changes going forward?

You know, first, I want to be clear. We actually don't use FICO scores in our underwriting or any advantage scores or either. So we actually don't anticipate any impact. FICO is just one model by Fair Isaac. Consumers, a lot of times where consumers actually see, a lot of the -- what's my credit score services are actually advantage scores, which aren't affected by that. I actually think the noise around this highlights why our model is so great, which is we have years of proprietary data, arguably more our proprietary data than anybody else in installment lending around near prime customers. We have highly predictive models that we're continually tweaking and adding new data sources to and attributes. And we think that allows us to underwrite near prime customers in a unique way. So the article has followed all of this, but we don't expect any impact on our business.

Our next question comes from line of Rick Shane, JP Morgan.

I'd like to talk a little bit about channel. Obviously, the branch network has significant competitive advantages and benefits, but there is obviously also a shift in terms of customer preference to online. How do you balance that? What do you seen in terms of difference between the origination channels, and how do you optimize that?

Rick, one, is what I would say is, the vast majority of our loans are booked with someone setting across face-to-face with the customer, talking through their needs, doing individual budgeting with them. And as you know, we underwrite from an ability to pay, not just what the income is and so we actually things it’s a big differentiator. With that said the vast majority of our customers start online. So whether it’s they get piece and mail process, they come in through an affiliate, they find up on a social network where we're quite active they’re doing a search. It usually starts online where they learn about OneMain they actually saw the application online. We highlighted that we have read on the application over the last six months to cut down the time considerably for customers, they get to the same amount of information of better customer experience and it takes a lot less time for our people in our branch to completing it. So it drives both efficiency and better customer experience. So it’s only after the channel comes that they come into a branch to close their loan. And so that’s why we call ourselves a hybrid model where a lot of our interactions are actually happening online and happening on the phone. It's just the closing process generally happens in the branch. I also mentioned at Investor Day that we're working on testing in a very small way online lending, which we will see is there a subset of customers who don't want to come into a branch that otherwise we would lose to a competitor who we can book online, we’ll only do that if we find that we can underwrite them well, fraud and credit remains good. So that's how we think about it. But we spend a lot of time on our online presence, because it is where the vast, vast majority of our customers start. And obviously, as you said, as more and more people are using their mobile phone and their computer to conduct business, it's important that we're baffled with in a digital world.

So really you're using the online channel for -- well, the consumers using it for price and product discovery and then you're getting them into the branch to actually close and have that one-on-one interaction?

Yes, generally. Now that we do have customers who come back, there's someone in the neighborhood, there's a branch in the neighborhood, they've gotten a loan from us before, three years later they have an episodic need, they'll walk in, call and come in. But you can't do business today, a consumer business without having a very robust customer interaction model, mobile and digital end customer acquisition, mobile and digital.

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

So most of my questions have been asked and answered. But just I guess when you kind of put it all together, it's it does feel like the consumer demand stories, both consumers availability and desire for credit, should be at least as strong in 2020 and perhaps a little stronger. And maybe, also just gauging your comments on your willingness to lend seems to be there as well. Maybe could you kind of just talk about that as well from an overall setting for supply of consumer credit demand from the consumer your ability to provide that?

Yes, Moshe, we try to give you a sense at Investor Day of how we think about our market and we kind of look at the overall unsecured credit market, which includes personal loans and credit cards. And you look at that as the very broad market, there's quite a bit of room for consumer loans to continue to be a product that people would like. And we talked about the attribute of installment loans that has a fixed price you pay down overtime, a good chunk of our customers come to us because they want to get their credit under control. So one is, we think there's room to grow our core customer base in this market. We look hard at all of the macro specifics, I think both on a macro view of the overall us consumer but also the non prime consumer, remains healthy. Over the last couple of years, we've seen growth in annual income of our customers, in particular while debt-to-income ratios have generally been flat. We though operate in 44 states and so we pay a lot of attention to state trends, both the unemployment, other macro trends in a state, as well as our own on us data. And I mentioned before, we actually do whole surveys of our branch managers just to see are they hearing, seeing anything else. And so you know, we feel the backdrop remains positive for us. We're always going to stay disciplined and never rest on our laurels. We continually modify our credit exposure at the margins, but we do it all around this framework of managing a nationwide portfolio of risk that meets our return hurdles. So generally that's kind of how we see the business, but we try to do it on a very granular level. And I certainly don't like to manage the business based on like the broad stroke pictures of how things look. It's state-by-state, product-by-product, return-by-return, customer-by-customer, and that's how we'll keep driving. And depending on what we see in each of those elements, then we'll have growth and output that comes.

And I think there's an aspect of your business model that hasn't gotten enough attention it’s your funding and leverage. I mean, you talked about the deal that you did in the quarter. Could you talk a little bit about your funding plans for 2020? And what your leverage targets that you are kind of operating towards?

I'll hit the funding piece first. We've talked about it at length that we run a diversified and balanced funding program. What really that means is that we continue to emphasize a mix of ABS and unsecured. Both markets are strong. They've been incredibly strong this year. We've seen a lot of issuance in the unsecured market, particularly in high yield. The strength of our program continues to develop. We feel great about it. The team has put in a lot of work getting it to where it is and of course the business performance also contributes to that. As an example, our five and three 10 year that we issued in November is trading at around 4.7% yield today, so very, very happy with the program. But much as Doug said, we don't rest on our laurels with the business. We don't do that with funding either. So we are continuously looking to develop our markets. What we see today that investors looking for yield are prioritizing double the credits within the high yield space and our programs look really attractive. From a go forward funding perspective, we're going to be programmatic in both of the markets that we issue in. We've got the balance sheet in a really good place after a couple of years of remixing it more towards unsecured, which has obviously done a lot to improve our liquidity overtime. We've covered a lot of that during Investor Day. Liquidity continues to remain a very, very important piece of the balance sheet health story with almost 10 billion and unencumbered receivables and 7.1 billion of undrawn conduit lines at the end of the year. So that's sort of the funding side of things. On your other question about leverage, we've said it before we've come a long way from 17 times leverage shortly after acquiring OneMain. We've been in a period of de-leveraging over the last couple years. We feel we are operating in a really, really good place, which is under the old rubric of leverage at five to seven times and we would continue to expect to operate in that range, consistent with the strategic framework we laid out in November.

Our next question comes from Mark DeVries of Barclays.

Direct auto was down a little bit year-over-year, while hard secured was up driving the total secured mix up. But what's kind of driving that? And what are your expectations here for direct auto? Does it feel like you’ve kind of reached a steady state there?

Yes, direct auto just to be clear, is not shrinking, it actually grew 10% year-on-year. Our hard secured simply grew faster. And so we provide customers with a choice of loan offers based on their specific need and their financial qualifications and some customers a lot of what determines whether which bucket you get in is, the age of your car, so your car needs to be less than 10 years old to be direct auto. So I think my view of the numbers is its direct auto is growing just fine and it remains a very viable product it’s just in comparison to some of the other growth, it was a little slower. I think the direct auto is incredibly, it's a great product for us and it's quite differentiated. And our business model where we have the branches but we also have central operations and we have fully scaled out servicing capabilities nationwide, whether it's collateral management or other things you need for titling in states in and with local areas, it really gives us unique competitive advantage. And so I think, there's going to be ebbs and flows in the growth of one product over another based on customer choice and who comes in the door, but we think direct auto remains a great product that 10% growth rate is, seems good.

And I think you also alluded to in your prepared comments of 37% year-over-year improvement in C&I per branch. I was hoping to drill down a little more on what's driving that. Is it the strong growth in receivables per branch? Or are you also getting a lot more productivity out of each branch?

I think it's really a combination of both. We have strength and growth in our profit. We also at the same point reduced our branches year-over-year. So it's really just these efficiencies and the initiatives that Doug has been talking about and we've talked about before with respect to just using our central operations and our hybrid model to be more efficient. And not only does that that drive efficiencies but it also drives better customer experience in many cases. So this is really a function of just lower branches, lower branch count and higher profit and the multiplication of those two.

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

Just a follow up on the discussion about risk-adjusted margin. So fourth quarter had a really good loss rate, and I think if I carry that forward, I'm getting to like a better than 6% loss rate for 2020. And I'm just sort of thinking when you think about risk-adjusted margins, is there any thought to improving risk-adjusted margins by opening up the credit box or otherwise optimizing the credit box? Or is it sort of just keeping the credit policy the same and if we're in a recession, it goes with 7% loss rate and you kind of bracket that, so just kind of wondering if there's any thoughts there? Thank you.

So I'll take the 2020 piece, Vince and I'll take one piece at a time, if I can. So just in terms of what we're thinking for 2020 vis-à-vis the fourth quarter number. Keep in mind that our charge-offs just like delinquency and other things in this business are seasonal. So I would caution you just taking fourth quarter charge-offs and running that out. Fourth quarter does tend to be a pretty good charge-off quarter for us, it's one of our better too. We laid out in our operating framework the expectation of 6% to 7% losses over the long-term. That is simply the optimal level at which we think we can optimize and maximize our risk-adjusted returns for the business. In terms of 2020, I mentioned our secured growth is moderating, that has been a driver of loss improvement. In fact, it's probably the biggest driver of loss improvement over the last three years as we've seen loss rates go from 7% to 6.5%, down to the 6% that we have in 2019. Secured growth is moderating. So not only do we not expect that to be a meaningful catalyst for growth, but we also don’t expect it to be a meaningful catalyst for credit improvement going forward as much as it's been in the past. So all that said, you look at our delinquency metrics 30 to 89, flat 90 plus down 14 basis points. The combination of these things leads us to expect 2020 charge-offs to be in the lower part of that strategic range of 6% to 7%.

And let me just add, you asked about like opening the credit box. We would never think of product or marketing division as opening the credit box, because we really don't manage to do that, we manage to returns and so we're very focused on our customers. What do our customers want, what do they need, where do we have competitive advantage to be able to keep serving them? And so, if there's something else we can do with current customers that would add value to them and would be accretive to the business, we're always looking for those opportunities. And are there customers who don't come to us who have a different profile where our unique combination of nationwide distribution, expert underwriting in near prime access to funding with work. And so the way we would think about this is are there products that meet our return hurdles, or product modifications that would meet our return hurdles that we think would be valuable to the customers and would enhance the franchise. There maybe some of those in the future that have different loss content, and that's where you would see potential movement in loss content and not by per se opening the credit box.

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

A couple of items, California as John pointed out, is put in their own rate cap. They are also talking basically about setting up something equivalent to their own CFPB rather than wait on D.C. to fix things. I understand Virginia is in the process or has already completed a bill that would also kind of emphasize 36% rate cap. Military standards are there even though the Trump administration isn't doing a very good job of enforcing them. That's a big opportunity for what would I call a responsible lender like yourself. Are there other states that your government relations people tell you are also thinking in these directions? And as we've asked before, what is the growth opportunity for you to take some of these higher quality payday loan customers and convert them to a more responsible product?

Yes, I mean, look, first of all, we highlighted that the vast majority of the time, our offer is already the best price to offer. And so if people qualify for OneMain loan and a payday loan, they usually take a OneMain loan. So it's not like there's a broad universe of people running to payday to already meet our credit box and it depend state-by-state. With that said, we were supportive of California. There's a bill moving in Virginia that we were not publicly on one side or the other, but we're fine with it, because it mirrors California. There's a lot of activities, as you know, its rates are state regulated, some have low rates, some have medium rates, 36% is usually the high end if a state was to cap on and then there's a bunch of uncapped states. Where we have an active government relations department that tries to make sure that people understand our story, which is responsible lender tries to treat the customer right, tries to be transparent, has a culture of compliance that coming out of a bank roots. And so I think these are all opportunities for us. But we feel pretty good about our business right now and the way we're driving it under kind of the current regulatory framework. As states get interested we, depending on the dynamics, we'll get engaged or not.

There's obviously a lot of room for growth here. Have you thought in the opposite terms of maybe 10%, 12% growth is the right number and you tweak down to that number, but the profitability implications are so much higher? So I know everyone has been asking you about more growth, more growth. What about the thought of more moderate growth? And what is from your view the impact on profitability of that shift?

We're trying to run the company for the long run. We're trying to run it through that cycle. We're trying to serve our customers and well. I've gone through all of the different levers we use to run the business well, and so I really mean it when I say it. We're not -- we don't target a growth number. And I think broadly like looking at growth isn't how I or we think about the business. We think about, let's make sure that people who are in the market for an installment loan who meet our criteria, know about us and we're in front of them. And once we're in front of them, let's make sure we provide a really good product at a fair price and an excellent customer experience, and what comes out the back end will be our growth.

Our next question comes from the line of Giuliano Bologna of BTIG.

Just looking at kind of the business mix. Are there any areas where you're seeing any competition or any kind of -- or I guess more competition or less competition that might be driving the mix shift? Or is it really more of a customer choice equation?

We have not -- I mean, if your question specifically is in our secured lending, which we again think our business model mix creates a real competitive advantage around secured lending, we haven't seen a lot of it pop out elsewhere. So we haven't seen any market shift in competition that would affect kind of what we do.

And then kind of turning over to the debt side of the balance sheet, you don't have any kind of really near term maturities but you do have $1 billion of 8.25% notes that come due in December. Are there any other opportunities to kind of take down some debt costs, whether it’d be kind of doing an securitization deal or obviously taking out those notes to be highly accretive given where you can really able to issue debt now?

Yes, certainly something that is on our radar and our mind that is the closest near-term maturity. We have another one, other unsecured coming in 2021. As you know with ABS's maturities are more sort of staggered and blended as receivables runoff in those structures. But in terms of both, that 2020 maturity is $1 billion, it is an 8.25% debt. As we talked to you before, we run a long-term focus and a balanced funding program. We're going to issue $3 billion to $4 billion annually to fund the business. So as we think about those maturities, we think about the timing of that redemption as a function of just evaluating economic trade-offs of doing so and the overall impact to our funding strategy. So it's on our radar. It don't have anything conclusive to share at this point but we'll certainly keep you updated as things develop.

And just in terms kind of the go forward operating expense rates for fiscal '20, obviously, you guys are a little bit ahead I guess to get a little bit advance this quarter. But is there any investments underwriting flowing through in fiscal '20 specifically that we’d be aware of in terms of investment spending?

Yes, I mean nothing that we would call out specifically. We laid out our investment plans for the next few years at our Investor Day. Again, the timing of our investments and the efficiencies that we're creating will move from quarter-to-quarter. I would say every day we come in here, we think about managing the OpEx in the business and adding discipline around that. So certainly we expect to continue to see a decreasing OpEx ratio as we've calculated it, but all within the strategic framework that we've provided for annual OpEx growth and our annual receivables growth. So it's really a function of those two things.

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