OneMain Holdings, Inc. (OMF) Q1 2020 Earnings Report, Transcript and Summary

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

Thank you, Stephanie. Good morning and thank you for joining us. Let me begin by directing you to Pages 2 and 3 of the first quarter 2020 investor presentation, which contain important disclosures concerning forward-looking statements and the use of non-GAAP measures. The presentation can be found in the Investor Relations section of our website. Our discussion today will contain certain forward-looking statements reflecting management's current beliefs about the company's future financial performance and business prospects, and these forward-looking statements are subject to inherent risks and uncertainties and speak only as of today. Factors that could cause actual results to differ materially from these forward-looking statements are set forth in our earnings press release and include the effects of the COVID-19 pandemic on our business, our customers and the economy, in general. We caution you not to place undue reliance on forward-looking statements. If you may be listening to this via replay at some point after today, we remind you that the remarks made herein are as of today, April 28, and have not been updated subsequent to this call. Our call this morning will include formal remarks from Doug Shulman, our President and CEO; and Micah Conrad, our Chief Financial Officer. After the conclusion of our formal remarks, we will conduct a Q&A session. So now let me turn the call over to Doug.

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

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

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

[Operator Instructions] Our first question comes from Michael Kaye with Wells Fargo.

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

Michael, this is Micah. Hope you're well. I would point you really to Page 7, I'll talk around this a little bit. We -- in terms of our overall payment rates on the portfolio, and -- on -- this page, focuses really on delinquency here on the bottom. But as we look at our payment rates, we were seeing very consistent rates through January and February. March, even in the first half, rates on the portfolio were really consistent. And in the second half of March, we started to see some softening in payments, largely due to customer became dislocated...

Michael, you may want to mute your phone.

Okay, no problem, sorry about that.

Okay. Okay. My kids are still asleep. So sorry, getting back to this. We saw some payments softening in the second half of March, just as our customers became dislocated from the sort of emergence of the pandemic, and the initial job was claimed. What we've seen in April to date through the 24, which was last Friday, we've seen an improvement in our payment rates. And that has contributed in part to the delinquency improvement you see on the page. So situation, as I think everyone knows, but we're somewhat encouraged by just what we're seeing in the early parts of April in terms of those payment rates.

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

Yes. Michael, it's Doug. Look, this current situation, from pandemic-induced stress in the economy, is, as everybody knows, unusual. There's a lot of variations depending on region and geography. I would tell you, generally, urban areas with high population densities on the coast are showing more weaknesses, both in terms of demand and originations, but also our customers needing assistance. We're also seeing some of the early, the states that were hit pretty early and pretty hard, like California, New York and Washington, the trends are running higher again with customers needing assistance. And I think as we -- as states have stay-at-home orders, but also start opening them up, and as we've seen over the last couple of days, they're going to be opening up in different ways. I think those kinds of dynamics are the ones affecting our customer more than any other trends at this point. I think regarding trends, we've seen a pretty steady trend in April. Micah said that we've seen a nice uptick in payments over the last couple of weeks. I actually went out and visited a bunch of our branches last week and listened into customer calls. And there's a number of customers either who have some kind of lumpy expenses because of this specific issue or got their government stimulus check that then maybe were on Borrower Assistance for a very short time and able to pay. So I think it's a little too early to talk about broad trends where they're headed, but the last couple of weeks, we've been pretty encouraged.

Your next question comes from David Scharf with JMP Securities.

Hopefully, everybody is safe and well over there.

Same with you, David. Thanks for joining.

Doug, a little longer-term question for you. Obviously, we're all dealing with unprecedented uncertainties near-term as evident by the outlook. I'm sure you're -- this is maybe a question you're getting a lot more frequently. But can you speak to what you've learned thus far from a process standpoint from all of the remote closings? And whether on the other end, if you will, when we emerge from this. Do you think there may be an acceleration in your investment in and expectation for the digital channel versus the branches?

Yes. Look, it's a great question. And having navigated in financial institutions, a couple of both economic crisis and other unfortunate events like 9/11, anytime you have a crisis, there's a lot of very difficult things from a human factor, this one being a health crisis. Obviously, there's a number of people suffering and people passing away and a horrible. And economically, I think we're all aware we're headed into a downturn and have started one. With that said, dislocation always presents certain opportunities. And we, as a business, are making sure that we keep an eye on it. One of them is the one you mentioned, which every customer -- there are plenty of customers who are digital natives, millennials and younger than millennials, who are very comfortable on their app and on their iPhone or Android in doing business. There were a number of our customers, who really preferred to walk into a store, they can still walk into one of our retail storefronts, but they can actually do more online, and so we're seeing a big uptick in people using our app. We always, with present customers, gave them the ability to close remotely. If they met certain criteria, we need to still do a full income verification, we need to do ability to pay underwriting with a budget. In fact, leading into this in early 2020 before COVID, about 20% of our present customers were closing, not walking into a branch, but that included a detailed phone conversation, it included income verification, those kinds of things. I think we have now really perfected a number of things are putting in place, the ability to co-browse on a browser and have our branch associates, they'd see the same exact thing as the customer as they're walking through the closing process. We're piloting on some video closings. We've actually rolled out chat, so people can get a lot more work done without even being on the phone with our customers. And so I think as you look ahead, I've always said that we need to make sure the things that are special about our model, which is a deep relationship, a conversation with the customers, ability to pay underwriting, are all in place, but the things we can do to make it more -- make it easier for customers and have a better customer experience, we are absolutely focused on. One tidbit for you. This month alone, we've had phone conversations with 900,000 customers because we're proactively doing outreach to our customers before their payment, not waiting for people to be delinquent and just checking in on them, seeing if there's anything we can do for them. And so one of the real opportunities of this is make sure we just stay close to the customers, ones that need help, we'll give them help. Ones that want to do business with us and have good credit, we'll do business with. And for sure, we're making sure we continue to invest in our evolving model.

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

Yes. Look, as you know, certain customers only qualify for a secured loan. And it's people with lower credit quality, who we won't make an unsecured loan to. If a customer qualifies for a secured loan and an unsecured loan, we give them choice, and we walk them through the options and they get to choose which loan is best for them. We actually -- our secured lending percentages are running pretty similar to what they were before, even a little bit more in April. These remote closes, we've actually worked out a protocol for present customers where we already have access to the title. We can do photo uploads of the car and they don't need to come in. For new customers, we've actually worked out a number of options, including some of the reasons we're doing more remote close, is because customers, especially at states where there's higher concern in the stay-at-home orders are more restrictive, they're worried about coming in and interacting with someone, depending on who they are. And so what we'll do is, we'll take them all the way through the loan closing, we'll upload the documents. It'll all be done and they can then drive their car, sit in the parking lot. We can go take pictures and do the inspection. They can flip the title through the mail slot with one of our associates on the other side of the door, and it can be a proper social distancing auto-secured lending experience. And so we're really evolving our model, and we're learning a lot during this time, which I think will pay dividends in the future.

Your next question is from Arren Cyganovich with Citi.

Just looking at the provision build for the quarter, I think what kind of struck me a bit was the -- while it was definitely large, relative to the day 1 build, $1.1 billion versus $234 million, it seems a little bit smaller than I would have guessed. And maybe you could just talk about the day 1 build. Was there any kind of recessionary period in there? Is the assumed life of these loans relatively short? I'm just trying to understand like what the potential for additional builds, as we kind of head through this?

Arren, thanks for the question. So I'll answer -- try to answer your first question on the day 1 build when we were striking that reserve on January 1, as required under the day 1 CECL requirements. We looked at the macro conditions, and at that point in time, the macro environment looked very, very stable. So I would say, as we fast forward then to 3/31 and keeping in mind that any time we strike these reserves, we use information that's available to us at that point in time. So we -- our reserves were based on information at 3/31. I had talked a little bit about in the prepared remarks that looked at a number of different macro forecasts and indicators and ultimately ended up using an unemployment curve with a peak of about 9 -- a little bit over 9% in the second quarter with gradual improvement to net unemployment rate through '20 and into 2021. Obviously, since then, things have moved a little bit, forecasts have gotten a little bit higher. So as we think about 2Q, that would be a headwind. But we got a lot of mitigating impacts that we built into our expectations of the reserve as well, things like the government support that we're seeing and how that's going to expect to influence our borrowers and their ability to make their payments. Our IUI coverage talked about a little bit in the remarks, so we've about 25% coverage on our portfolio of customers who have involuntary unemployment coverage, a product that makes the payment on the loan when those customers are unemployed. And then of course, Borrower Assistance being another factor, but we've included all of those in our reserve assumptions. Clearly, the higher unemployment rate forecast, if they hang around for the next couple of months, will be a headwind. But then we also need to include some of these tailwinds that I just talked about as well as the impact of our underwriting tightening and likely just lower receivables on the portfolio. We've talked about CECL a lot in the last few quarters. CECL, when we're increasing our receivables, we're going to build CECL reserves. When the receivables are declining, we would naturally expect to see a release. So all of those factors will be in play in terms of what happens over the next quarter. And again, we'll use the information available to us at the end of June to restrike our reserves at that time.

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

Yes. So certainly, that is a factor in how the originations that we publish will ultimately end up with an impact on receivables. So those originations that we do report are on a gross basis. So part of that includes an association with new customer business and then also what we call present customer renewals. So renewals tend to be somewhere 50%, 60% of our originations in any given quarter. And you're right to point out that not all of that is what we would refer to as new money that comes into the receivables. So we don't consider that a payoff, but it is a factor in what ultimately ends up influencing the receivables. Our average payment rate outside of that, just on the portfolio is around 3% per month. That obviously is influenced by, a lot of that is timing, it's influenced by early payoffs as well. And all of that -- all of those calculations end up going into what ultimately ends up in our earning receivables for the quarter. And we gave you some information about April. There's obviously a lot of unknowns out there, and it's really -- really will be dependent on how May and June play out from that standpoint.

There's one thing I'd add to that is -- this is Doug. You mentioned kind of loan consolidation, et cetera. We're in a position, as we talked about with a lot of liquidity. Some of our competitors have had to pull back for other reasons. We're keeping our eye out for good customers that at, especially much higher credit quality, who might not have as much supply in the market. We think it's a little early now. We did and, no regrets, move and cut our credit box pretty extensively, and we're being very, very careful with originations. That's why they're down now while there's uncertainty. But as things clarify, we think things like loan consolidation, potentially with card issuers just because of capital requirements or other things, are either cutting lines or not extending them, we might see some very good credit quality out there that people aren't underwriting and see opportunities throughout this. Again, it's early days. We're spending more time right now conserving capital and being careful with the uncertainty. But I propose some of the other questions, we're also going to have our eye out for opportunities, given the strength of our balance sheet and our unique ability to underwrite this customer.

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

Great. Couple of questions. I guess the first one really is, as you look at the borrowers that have gone into these programs, borrower benefit type programs, how long do you expect them to be there? And I guess, when will you be able to kind of look at that and say, for this cohort, things have worked out well. For the -- for this other cohort, we have to add a different program, like what's the time frame look like on that?

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

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

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

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

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

Yes. Look, I think, as I mentioned earlier in the call, I think we enter from a position of strength. I think that we have a lot of liquidity in our funding model, which includes issuing secured debt, unsecured debt, staggered 10 years. Last year, we did an 8-year and a 10-year deal that gives us plenty of room. And having the bank lines, which we've always said that we'll never hesitate to make sure we've got -- we're conservative and have plenty of cash, I think it differentiates us. So I think throughout this, we're going to have the ability to provide supply to consumers who are in need. And if history is any guide, is some competitors with balance sheets, especially bank balance sheets are a little slower to come out and start lending, and then I think people who sell their loans off balance sheet, we'll see what a downturn looks like for them. I like the way we're positioned from a capital and a liquidity standpoint. I think all the things we've been doing, which is to really focus on the customer experience are going to pay off. We have the ability to do a lot of our work on the phone or online, and we've been making investments there. So I think that will pay off through the cycle. But I also think history has shown that being close to your customers, being in dialogue with your customers, helping them in times of need, builds a lot of loyalty. And we have, well over a half of our customers are, repeat customers. So we think we'll come out at the back end in a very strong place. And if we just stick to our fundamentals, have plenty of liquidity, disciplined underwriting, focus on the customer experience, evolve the models in the way I talked about before, get better at engaging with customers who don't want to come into the branch, all of those things, we feel good about this. And I think some weaker competitors may have a hard time with their balance sheet, which will give us lending opportunities throughout this.

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

Ken, Micah. I would -- what I would say is, I think generally, you're right. When we talked about pricing before, we continuously price test in our market to ensure we're competitive. So we continue to do that. Doug mentioned earlier that under our current conditions, many of our customers will qualify for a secured loan versus an unsecured. As you know, secured loans carry lower pricing. So I would expect to see lower portfolio pricing in the near-term from that mix shift. And as I've mentioned also in the prepared remarks, that should influence yield going forward as well.

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

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

Yes. Obviously, the landscape has changed, Rick, but our set of capital -- use of capital and capital return priorities is really remaining constant, which is we'll make loans that we think have good risk-adjusted returns. We'll make sure that we'll make proper investments for the long-term franchise of the business. I think what's changed is we're going to make sure we're very focused on capital preservation until we see -- have more clarity about where this thing is going to settle out. We created and the level, or we set the level of our regular dividend with a lot of modeling that could even survive a severe downturn, so that's why we're paying the regular dividend. Right now, we have nothing to say about the special dividend. We're going to be prudent stewards of capital, and we're going to see where this plays out, but we're very comfortable with our regular dividend at this point.

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

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

Yes. John, this is Micah. So it's -- that's a tricky question. We do look at levels of Borrower Assistance in the portfolio, which Doug had alluded to in his remarks. The trick with this is would the customer have gone into delinquency, had they not been on the Borrower Assistance. And -- so we don't tend to think about it that way. Again, we look at these programs as available to our customers to help them in times of difficulty. I will continue to come back to the fact that the vast majority of our Borrower Assistance support comes with some commitment and payment from the customer. We know that, that improves the outcome of the situation for borrowers dramatically over the coming months.

Your next question comes from the line of Vincent Caintic.

Hope everyone's well. Just one question on the unemployment insurance. So if you could talk about this product in more detail, how it works, so -- and if I remember correctly, so 25% of your portfolio is insured with this, are you self insured? And if so, do you reserve for that, in advance, like [future claims]. Just trying to think about expense costs going forward?

Yes, sure. Great question. Let me step back and just talk about the product a little bit for a moment. This product is an optional one for our customers. Given the penetration that we have of 25%, it's clear that -- it is evidenced that this product does have value for our customers. And it's really times like this that show that. The product is designed to provide that protection to our customers. It will make the payment on the loan for a period of months over which that borrower is unemployed. I think it's important to note that the product does stand on its own, so our pricing on the product, and it is underwritten. When I say that [mostly] because this is -- it's underwritten as a group, if you will. The pricing is set at a state level. It's all done by our captive insurance company in Fort Worth, Texas. We have pricing set to achieve a reasonable loss ratio and a modest profit over the long-term. And while the product does protect our portfolio, it's not a factor in the way that we price it. On the claims expense side, when you think about just sort of how the expense ends up in the income statement, we have a number of continuing claims and claims that are paid out during the period. So those run through as they're effectively cash claims. And then at the end of every quarter, we will put up a reserve for what we think we've incurred in the portfolio, but have not yet seen the claim come in. It's a little different than CECL and that it's more of that -- a little bit more like the old version of reserving where you look at what's incurred in your portfolio. And so we -- when we saw in late March, the -- somewhere in the neighborhood of $10 million increase in new insurance -- new unemployment claims at the U.S. level, that sort of translates into our need and an expectation to book a reserve for those future claims. So that's really what was represented in the $23 million year-over-year increase, was all reserving for future claims. As we go into the second quarter, those claims then become part of our run rate, and we evaluate where they came in relative to our expectations. We'll go through the same process in June. To say, has anything changed our reserves? Do our reserves need to go up or down based on expectations? It's hard because of that to give a number for 2Q at this point, but we will -- we'll continue -- if we continue to see elevated new jobless claims, we should see elevated levels of insurance claims going forward.

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

Yes, among all the other factors that go into the claims expectations. But yes, the aggregate level of claims is within the period, both a mix of claims -- real cash claims expense versus reserves, but that increase we referred to was almost 100% related to reserves per claims that we expect to see in the second quarter. That's helpful.

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

Yes. I think, one, it's more anecdotal than it is scientific. It's only been a couple of weeks, we're in the middle of April. I think there's two -- there's multiple things happening around government assistance. The Paycheck Protection Program means that a lot of small businesses are getting forgivable loans that will keep people on payrolls, which will mean more people are just paying, who might have been impacted. There's the stimulus payments that are coming in. Again, right around that time, we saw an uptick in payments, but we think it affected it, but I don't want to overstate it and then extended unemployment and enhanced unemployment insurance for our customers. We'll have to see how it plays out. And so the -- you would -- it is a major government stimulus package. It will have some effect. Hopefully, it helps Americans generally be able to meet their obligations, but I think it's really hard at this point in the cycle to say exactly how it's going to affect things.

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

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

Yes. Kevin, I know there's a lot of interest in this. First of all, let me just give you a little context. In a normal month last year, we had 2% of our customers. We provided some sort of borrower assistance. And so now we're providing 6%, it's obviously an uptick, but it's something we use on a regular basis. Micah referred to 3 basic types of customer [assistances]. There's deferments, which are month-to-month; there's temporary modifications, which are usually 3 months; and then there's some permanent modifications when somebody has a change of circumstances, it's going to last for a while. Micah referred to the vast majority. In April, 95% of customers, who use Borrower's Assistance chose to pay us something. I think it speaks to our relationship, people wanting to pay their obligation. It also means if you're in Borrower's Assistance, you're picking up your phone, you're having a conversation, you're working through options, and we are doing the right thing with our customers, which is trying to support them through this very difficult time with stay-at-home orders concern in the economy. We will see [technical difficulty] and this will -- it's early to say, but I'd say, over the next quarter or 2, you'll see, and -- you're not going to be on Borrower's Assistance forever with us. So hopefully, that gives you a little more context. Again, I want to like be really clear. Our relationship with our customer and our standing by our customers in their time of need is a core principle of our company. We think it's going to both benefit the customer now and benefit the long-term franchise and loyalty with OneMain, who's been around for a long time. We've helped customers through these kinds of cycles before, and we think it's going to help us and our customers right now to manage through the uncertainty and also help the franchise long-term.

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

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

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

Maybe just moving back to the expectations around loss experience. I think the -- under what circumstance could you potentially realize that 2.3% roughly increase in magnitude to that, I guess, is the threshold around profitability? And I guess, I'm asking that in the context of it sounds like you have stress tested to a roughly 10% expectation. But I think the consensus among economists right now is for peak unemployment, around something like 15 or 16 and year-end employment, something around 12. So you now experience that may be somewhat more stress than the historical?

Yes. Let me give you context, Eric. So we've run a number of stress tests post the one you saw at Investor Day. What we're referring back to is the one we shared with you at Investor Day, which the results are in the deck, which was '08/'09 levels of stress, which got to 10% unemployment on a sustained basis and then tapering off over 4 years. Under that scenario, there was 1.6x loss in a -- and we took what we saw in '08/'09 in the portfolio and then we adjusted it based on the current portfolio composition. We know losses would have to more than double, so go from 6% to 12%, to eat into our current cushion. And that doesn't include a whole bunch of levers, many of which we're already pulling, reducing expenses, tightening underwriting, doesn't take into account unemployment insurance or the government support measures. And so we've actually taken that test and added a number of stress factors to it, including above and beyond severity from '08/'09. And we feel really comfortable that the business is positioned to weather this downturn. So we're not just resting it on kind of '08/'09 10% and then current unemployment.

And sorry, if I can just follow-up on that for a moment. Not-so-much the actions that you're taking, but more around the -- it sounds like you indicated you've done some estimates around how much the stimulus actions will benefit your loss experience. Can you perhaps like frame that in magnitude about how much that can bend the loss curve?

Yes. I wish I could answer that question. I would say when we're -- in terms of bending the loss curve because the truth is, I think, these are -- the government support, our IU guide coverage, Borrower Assistance, we all believed and have included in our reserve results, the expectation that those will be mitigating impacts to the unemployment curve. The ultimate determinant of the loss in this particular situation, the biggest factor will be the sustained level of unemployment rate over time. As Doug mentioned, when we're modeling the stress testing and downturn planning with '08/'09, that was a sustained level of unemployment of 10% over about a year period. So that's really what will -- what will be the biggest factor in determining what happens with our book through this process.

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

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

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

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