OneMain Holdings, Inc. (OMF) Q3 2020 Earnings Report, Transcript and Summary

Welcome to the OneMain Financial’s Third 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. At this time, all participants have been placed in a listen-only mode and the floor will be open 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 third 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, October 27, 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. During the third quarter, we continue to ensure that our employees are safe and that we meet the needs of our customers during this period of uncertainty. Our prudent historical underwriting and conservative balance sheet, combined with the actions we've taken to innovate and strategically evolve our business over the last 10 months has led to our strong operating performance through the pandemic and enabled us to serve and support our customers effectively during these unprecedented times. Our third quarter financial results demonstrated this and reflected strength across the core drivers of our business. Both our early and late-stage delinquencies improved year-over-year by more than 30 basis points. And our net charge-offs remained essentially flat with last year. In addition, the combination of improved customer demand and the initiatives we've undertaken supported a return to sequential growth of our portfolio by about $94 million. Our C&I adjusted net income was $294 million for the quarter, a significant improvement sequentially and a 22% increase over last year's third quarter. As I've said before, we run our business based on capital generation, our C&I adjusted net income excluding changes in loan loss reserves. Since our loan loss reserves were unchanged in Q3, our capital generation was equivalent to our C&I adjusted net income of $294 million, up about 39% sequentially and 5% compared to last year's third quarter. This considerable capital generation reflects the stability of our loan portfolio and the strength of our business. We remain confident in our ability to continue to navigate the uncertainties of this downturn while also driving significant value for all of our stakeholders. This is underscored by our 36% increase in our minimum quarterly dividend to $0.45 per diluted share. Data and advanced analytics continue to be a foundational advantage for our company. We use advanced analytics with our proprietary data across the company, including to optimize our credit underwriting, to support growth initiatives and to serve customers better. Our underwriting continues to utilize best-in-class artificial intelligence and machine learning models that incorporate more than a thousand data points in each application. Most recently, we refined the industry classification in which the borrower works as additional inputs into underwriting. We also improved geographic precision. Given the uneven nature of this pandemic driven recession, this surgical approach allows us to continue lending to hardworking Americans while prudently managing our risks. We continue to maintain an appropriately conservative underwriting posture and only originate loans that meet our greater than 20% return on equity hurdle. Since early March, we've been underwriting only the loans that meet our return hurdles in a 2008-2009 recession scenario, which included cutting out higher risk unsecured lending, increasing income verification requirements, and adjusting collateral and net disposable income requirements. We further refined our underwriting in the months that followed by adding stress factors to certain high-risk industries, such as travel, leisure and hospitality. And we implemented changes to our underwriting that adjust for the impact of increased forbearance from other lenders. By the end of the third quarter, about 25% of our portfolio has been underwritten using the standard of 20% return on equity in a 2008-2009 style recession that we implemented back in March. In recent months, our customer health and portfolio credit trends have shown stability. Annual income remains strong around 2019 levels. Revolving debt to annual income levels have declined from about 15% at the beginning of the year to 13% in the third quarter, reflecting lower levels of indebtedness across our customer base. Cash payment activity continues to be strong and Borrower Assistance enrollments have returned to almost business as usual levels. We recently further refined our stress loss assumptions for certain industries and geographies. Given the greater visibility, we have gained into unemployment trends and our portfolio trends by industry and geography. While some sectors like leisure and hospitality have seen unemployment increase from about 6% pre-pandemic to about 19% in September. Other industries like education and health services only saw unemployment increase from about 2.5% pre-pandemic to about 5% in September. We also continue to closely monitor and take into account other key trends by industry and geography, including initial claims, consumer sentiment, as well as our credit performance and Borrower Assistance trends. These insights led us to selectively adjust our underwriting at the margins. Specifically, we reduced the peak loss assumptions for certain low-risk industries to levels below our original 2008-2009 recessionary assumptions. While we are still assuming recessionary loss levels for these particular low-risk industries, our revised expectations are no longer as severe as the 2008-2009 scenario. That said, we continue to assume peak loss assumptions above 2008 and 2009 levels for high-risk industries. And regardless, loans across all industries are still underwritten to be profitable even in a 2008-2009 type recession. Given the uncertainty that remains in the economic outlook, we remain hypervigilant in our monitoring and we'll continue to make adjustments as new data emerges. As I've discussed before, we are intensely focused on serving our customers well. Our continued innovation over the last 10 months has enabled us to provide support to our customers during these uncertain times. And our comprehensive data and analytics have allowed us to enhance the ways in which we engage and serve them. As you know, we started building our digital capabilities in 2018. We accelerated our digital investments early in 2020, and have since launched new tools, including two-way video, chat and co-browsing with customers. During the third quarter, about 33% of loans were closed digitally, a significant increase versus prior year. We've invested over $70 million over the last 24 months, enhancing our technology and processes and optimizing the customer experience. As a reminder, over 80% of our prospective borrowers have always initiated their application online. Now we are accelerating the portion of borrowers who can also close remotely without ever coming into a branch. Our philosophy is that we need to evolve the way we serve our customers as their preferences change. All of our applications, regardless of whether they are completed over the phone, online, or in-person go through the same best-in-class underwriting processes, including a detailed discussion with a OneMain team member, ability to pay assessment and budgeting, income verification, and centralized and automated credit decisioning. The early performance data of our digital originations is trending very similar to that of loans closed in person. Our innovation efforts have also focused on how we can better address the needs of our current and potential customer base. The advancements we've made in our data and analytics have enabled us to segment customers and prospects and better understand and anticipate the types of credit offerings that will best suit their financial circumstances and priorities. We will always enter new products or segments in a prudent manner, utilizing a test and learn approach. Last quarter, we launched a new small-dollar loan product to provide borrowers who traditionally were only offered a secured loan with another option. These unsecured loans average about $2,500. To-date, the initial customer response has been very strong. During the last few months of testing, we've seen a three-fold increase in the booking rate across this customer segment. It's still early and we have some more testing to do, but we're excited about the prospect of being able to reach and support more customers. These are customers that as their credit history grows, we will likely be able to offer larger loans in the future. This is, but one example of how we're innovating and adding new products to increase our reach and serve more customers. Our data and analytics are also driving our prime price testing for customers in the 650 to 725 FICO range. While we serve a number of customers in this range today, our conversion rate of those customers is meaningfully lower than that in our core segment. As we've monitored the competitive landscape since the start of the pandemic, we've seen an opportunity in this credit segment. Given the strength of our capital and liquidity and our comfort with this credit, we felt this was clearly the right time for us to lean in and test more competitive pricing to engage and serve this customer better. Early data suggests that the price tests that we are running will be more than offset by lower loss content and higher booking rates. But we still have more testing analysis to run on this initiative. We are excited about the new products we're testing to better attract, serve, and retain our core customer base, as well as expand that customer base over time. In doing so, we'll continue to drive long-term value for our shareholders. With that, let me turn it over to Micah.

Thanks, Doug, and good morning, everyone. We had a great quarter with improving originations, strong credit performance and lower operating expense, setting us up for continued financial strength in the coming quarters. We are in $250 million of net income or $1.86 per diluted share in the third quarter. On an adjusted C&I basis, we earned $294 million or $2.19 per diluted share. Originations for the third quarter were $2.9 billion, down 21% from the third quarter of last year, but up 41% sequentially. As you can see from Slide 7, we've seen improvement in originations throughout the quarter with September production down only 6% versus 2019 reflecting improvements in customer demand and our targeted initiatives. 53% of the quarter’s originations were secured, slightly down from last year's third quarter. Ending net receivables for the quarter were $17.8 billion, up $94 million sequentially and roughly flat year-over-year. Assuming our current origination trends continue, we expect our portfolio to end the year at around $18.1 billion, just two percentage points below the prior year. Interest income was $1.1 billion in the third quarter, up 2% from last year, primarily reflecting higher average receivables compared to the prior year period. Yield for the quarter was 27 basis points higher, reflecting the year-over-year improvement in late-stage delinquency. Interest expense was $250 million, up 5% versus the prior year, reflecting a $1.3 billion increase in average debt balances as we built the defensive liquidity position over the last six months. During the quarter, we retired $1 billion of 8.25% December 2020 bonds and issued $1 billion of five-year revolving ABS at a record low coupon of 2%. As result of these actions, we expect fourth quarter interest expense to trend a bit below third quarter levels. Total other revenue was $134 million in the third quarter, $20 million lower than the prior year quarter, mainly driven by lower optional product-related revenue, which generally tracks our originations. Policyholder benefits and claims expense was $43 million in the third quarter, down $4 million year-over-year and down $47 million sequentially. This expense includes both claims payments and reserves for expected claims related to our insurance products, including involuntary unemployment insurance. IUI claims have moderated significantly with September down 80% from April's peak. And while IUI claims remain slightly elevated, we've experienced shorter claims duration than originally anticipated and have adjusted our expectations accordingly. This led to a $10 million decrease in our claims reserves in the third quarter. Assuming current trends continue, we would expect fourth quarter expense to trend around $50 million. Let's move on to our credit performance in the quarter. Net charge-offs were 5.2% essentially flat with last year's third quarter. Our 30 to 89 delinquency rate was 1.95%. This was down 35 basis points year-over-year, but up 32 basis points from a historically low second quarter. The sequential increased was moderately higher than the 15 to 25 basis point increase we typically see from the second to third quarter. October's delinquency is trending in line with September levels. As we have shown on Slide 10, Borrower Assistance enrollments have returned to more than historical levels in the third quarter. And importantly, those customers who enrolled during the second quarter are performing 50% better than the normal Borrower Assistance vintage. Cash payments also remained strong in the quarter. September's payment rate, including principal and interest was 4.7% above our full year 2019 average of 4.6%. Given these strong payment trends and the resulting level of delinquency in the portfolio, we now expect our net charge-offs for the full year to be around 5.6%, down from 6% in 2019. That brings us to our loan loss reserve, which was $2.3 billion and remain unchanged for the quarter. Our reserve rate remained stable at 13.1%. Sitting here today, we are confident in the resilience of our portfolio and the adequacy of our reserves. As I just mentioned, we continue to see very strong portfolio performance in terms of both payments and delinquency and the effects one would typically expect to see in an economic downturn have not emerged. That said, we continue to apply conservative assumptions when we develop our reserves, including the emergence rate of delinquency in our portfolio, the pace of recovery in labor markets and the absence of further stimulus from the federal government. We use economic inputs from a number of different sources and expect continued recovery in the labor markets, but at a slower pace than we have seen today. Third quarter’s operating expense was $302 million about 10% lower than last year's third quarter and 6.8% of receivables versus 7.6% in the same period last year. Year-to-date 2020 operating expense is down 3% compared to the same period last year, and we remain on track to come in below full year 2019 levels. With that, let's move on to our balance sheet. At the end of the quarter, we had $1.7 billion of available cash, $7.2 billion of undrawn conduit capacity and $8.3 billion of unencumbered receivables. These sources provide sufficient liquidity to cover continued originations, company operations and all upcoming maturities through at least 2022 without accessing the capital markets. Our third quarter leverage ratio was 4.7. We expect to finish 2020 between 4.3 and 4.5, which as a reminder is towards the lower end of our target range of four to six. Our total adjusted capital, which includes after-tax reserves and adjusted tangible equity was $3.3 billion at the end of the quarter, equal to approximately four times our 2019 after-tax losses. This is in addition to the coverage we have through our return on assets, which was 4.5% in the quarter. The strong performance we have achieved thus far this year has allowed us to return to portfolio growth in a disciplined manner, invest in our business and develop the initiatives that we highlighted today, maintain conservative loss reserves, enhance our capital position and continue to return considerable capital to our shareholders. Slide 15 highlights the capital generation power of our business, which supports these objectives. Consistent with this, we are raising our quarterly minimum dividend by 36% to $0.45 per share. This is the second increase to our quarterly minimum in the last year and reflects our continued confidence in the sustainable capital generation of the business. We will continue to evaluate capital returns above the minimum every first and third quarter, consistent with the previous cadence and guidance. With that, I'll turn the call back over to Doug.

Thanks, Micah. To close our discussion today, I'd like to leave you with this. OneMain is unlike any other consumer lender. Our business model combined decades of experience and proprietary data with powerful data analytics. This enables us to underwrite and manage our portfolio in a precise and effective manner to better serve customers as well as optimize returns and capital generation. We maintain a fortress balance sheet that enables business continuity, conservative capital coverage, and flexibility through changing economic conditions. And as a result, OneMain has been able to serve customers, invest in our business and drive growth and value creation for our shareholders. 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 comes from the line of Michael Kaye of Wells Fargo.

Hi guys, good morning. I wanted to see if you could provide more color on customer demand trends and where you see it coming back to strongest and where it's lagging and how does that match up to your appetite to open up the credit box as you look into 2021? And lastly is the September minus 6% year-over-year origination growth a good run rate, or do you expect further improvement?

Yes. Hey, Michael. it's Doug here. Thanks for the question. Customer demand has steadily picked up since it was very suppressed in April and we saw a nice increase. What I would say is there's still a lot of uncertainty in the environment. And we continue to manage conservatively. I think that's 6% tough to say. Demand is improving, but it's still down year-on-year demand. We've been able to offset that and see some growth with the customer experience initiatives that I talked about. Our digital originations, we've also behind the scenes continued to optimize our business. We have new pre-qualified offers for present customers. We have dynamic routing that we've been tuning. And then, I talked earlier about our innovations and testing new products like small-dollar loans and prime. Regarding the credit box, we're staying conservative for now. But our philosophy is to tune the business. So we are positioned for growth once we're out of a recession and COVID is behind us. So what I would say is they're still suppressed demand from customers. I am pleased we've been able to offset with the way we're driving the business and creating value for customers. And I think it's still a little too early to say, what's going to happen next year because we still have some uncertainty in the environment.

Okay. That's helpful. Second question is you clearly have a lot of capital and liquidity, is there any potential opportunities to go on offense here, perhaps maybe buying a portfolio from a distressed competitor or maybe, acquiring some sort of new capabilities for the company?

Yes, we are in the market looking opportunistically. I think we get a look at most of the portfolios and platforms that would make sense. What I would tell you there's nothing imminent. As you can see, we're investing in our platform and our products ourselves, and we think we've got a very good team and runway to do that. And so for sure if we see the right opportunity that's accretive, we'll do something. But right now there's nothing imminent.

Okay. Thank you.

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

Kevin your line is on mute.

Kevin, we can't hear you.

I'm sorry. Can you hear me?

Yes.

Yes, I can hear now.

I’m sorry. Sorry about that. Good morning. Either to follow-up on some of Michael's questions, where are you seeing the incremental demand in the last few months, is it from more – near prime customers just given your tightening underwriting standards or are you seeing it from a broad spectrum of potential customers or clients?

Yes, it's been pretty broad-based. There hasn't been any big standouts as far as on the credit spectrum. We've stayed in the market with our marketing and we, because of our capital position and our business model, and because were deemed in the central business throughout the pandemic, we've been able to serve customers all along. So I'd say, across the Board we've seen a steady uptick in demand over the last seven, eight months.

Okay. And then you've also seen an uptick in your yields as well. It seems like you are having a decent amount of pricing power just given the environment. I mean, do you expect that to continue? Or do you think you're still firming up on pricing just given the near term environment?

Yes, Kevin, good morning. It’s Micah. We look at our yield as really the impact year-over-year of our yield is almost entirely explained by 90 plus delinquencies. As you remember when a loan reaches 90 plus we'll reverse incomes. So when those are lower year-over-year, it's going to provide stability to yield. In terms of coupon, APR and pricing, it's been very, very stable for at least the last six, seven quarters.

And to the competitive environment it seems fairly stable in your view. Is that right?

Well it's a different question.

It is a different question. Doug do you want to…

Yes. I mean, look, we saw some competitors pull out who had weaker balance sheets than we did. I think a lot of competitors are coming back in. At this point I do think our digital initiatives and being able to serve more customers, some of our new products, some of our work on customer experience is giving us an edge. And so we'll price appropriately in the market. I don't see huge price moves on our part. We may pick up some at the margin depending on demand, depending on options that people have.

Yes, thank you for taking my questions.

Thanks.

Our next question comes from the line of Rick Shane of JPMorgan.

Good morning guys. And thanks for taking my question.

Good morning.

Doug, you started your comments by talking about innovating and evolving. And I think in many ways we're seeing that in the context of tactical innovation and evolution in terms of what you were facing starting in March. When we think about the company going forward, or when you think about the company going forward, what are the lessons that you learned that are going to change the business longer term when we return to a more normal environment? And how do you think that potentially impacts long-term profitability?

Yes, that's a great question. Look, I've said before we set out a strategy a year and a half ago, which included expanding our distribution channels to include a digital channel. And I think the pandemic gave us an opportunity to really pass that and it's proven to be something our customers want and that we can do well. And so I think going forward, our customers are going have the option of originating loans digitally, or on the phone, or in person. I think that creates a growth opportunity for us especially for younger customers that might not have come in the door before, as things normalize. Around customer experience, there's – it's not just digital originations, the ability for us to do chat all along the life cycle. You've got a question for us. You've got a question about your insurance product. You've got a question about your payment or in a collection context to us, really perfecting chats, setting up the backbone around that and using a broader set of tools, whether it's chat, or video, or co-browsing with customers, I think, that'll be part of our model going forward. And then we're very focused on expanding the relationship with our customers with new products. So take the small dollar loan product, what it does is it's a smaller product, a smaller loan, a $2,500 loan versus a $7,500 loan. It brings more customers in the door either because they didn't want $7,500, or we weren't going to give them an unsecured $7,500 loan, but it's a lower risk option to give a $2,500 loan at the margin. And then if you look at customer lifetime value you can graduate those customers into a larger loan. Over time lost content should be somewhat lower because it's a lower monthly payment. That's just one of the many products that we are either at or at some point in the development. So when I think about prospects in the future, we're taking this time which is obviously a difficult time for the country and for our customers, and for our employees, it's a really doubled down on having a great business in the future that has distribution beyond just branch distribution and products beyond just our original product. So we think on the backend of this, whenever the virus gets under control and the economy takes a turn, we'll have a better growth trajectory.

Got it. It's helpful. And again, look this is a challenging time, but there's a lot to be learned from it. It sounds like in a lot of ways the customer engagement in terms of interacting digitally, not just in terms of origination, but actually sort of that consultative function is going to be a big part of it.

Yes, no, exactly. I think look at OneMain, it's customer, customer, customer. We're super focused on providing value to our customers, having a valuable product at a fair price and giving them great service and to really focus in on both what products do they want, how can we do more with them to add value and how can we make sure we meet them where they want to be met, it's been a focus of ours and this time has given us an opportunity to really accelerate that.

Hey, thank you so much for taking my questions this morning.

Yes, thanks for the question.

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

Great, thanks very much. And excellent quarter. Wanted to talk a little bit also about the origination kind of progression. Some very strong – it looks like some pretty strong numbers in September. As you think out, without giving a specific forecast, but as you think out over the coming months, there's a lot of factors that could be coming out, if there's stimulus or not, the actual emergence of losses. How do you think those things affect both the competitive environment and OneMain’s willingness and ability to kind of build on the September origination level?

Yes. Look Moshe it's a good question. We don't have a crystal ball. There still are a number of factors, kind of macro factors that are going affect things. We've got an election that we have a – if and when there's a number, another stimulus, we have the vaccine and if and when that will come and when business returns to total normal, as opposed to incrementally getting better. And when I say business, I mean, kind of across the country for everyone. I'd say our view is that we need to stay nimble and agile and we need to quickly make changes as the environment changes. So, I gave some examples of we have a tightened credit box now in high-risk industries where our loss assumptions are above 2008, 2009, in high-risk industries. But in low-risk industries where you haven't seen that much in stability, never got to 2008, 2009 and are now tracking back down, we're still assuming stress, but a little less stress. I think we're going to be tweaking the credit box along the way. And as we tweak the credit box along the way, we'll be looking at all sorts of things. We'll be looking at macro factors, we'll be looking at unemployment claims, we look at consumer sentiment, we look at our delinquencies, we look at our losses, we look at our bars assistance, we do it by state, we do it by industry. And so, I think, the order of the day is we're just going to have to stay nimble. Some of these big external events, when they happen, we'll adjust and we'll see what it means to consumers. As I said, our consumers quite strong right now, whether it's their income, whether it's a debt to income, whether it's how much revolving loans they have, I'm confident that some of that is the government stimulus. And we're just going to keep an eye on all of it. So again, I wish I could give you more guidance, but what I would say is we were early to pull back and where our bias is conservative right now. But as we see things evolve, we can quickly pivot and grow more if we feel more confident and some of the uncertainty clears up.

Great, thanks. Just as a follow-up, I know that in general, from a capital return standpoint, for a number of reasons, you've had a preference for dividends, both regular and special. And congrats on raising. The regular dividend, obviously, it shows confidence in the earnings level. But given, as you said that you are likely to see 2020 receivables down 2%, I mean, sort of feels like one of the big concerns investors had with installment loans was that you'd be a smaller base and earning less money. So you sort of have 8% to 10% of the company that kind of didn't grow in 2020. Is there some thought to, if you will, almost replacing that with using your share repurchase authorization?

Yes, look Moshe we're sticking with our capital allocation framework. We've got a minimum dividend which we think gives people a nice yield. Every other quarter first quarter, third quarter, we're going to evaluate enhancing that dividend with excess capital returns. We've done that six times, and we don't see reason why that will stop. We did some buybacks early in the year. We halted those for now because we do have a preference for dividend. Every quarter though, the Board will have a discussion and we'll think about it. So never say never, we're going to consider all forms of capital returns going forward, but our bias is dividends.

Got it. Thanks very much.

Next question comes from Kenneth Lee of RBC Capital.

Hi, thanks for taking my question. Just a brief follow-up on that previous question. At a higher level, it just given on the dividend coverage, just wondering if you could just further flesh out what gives you the comfort to increase that minimum quarterly dividend going forward? Just wondering whether the mix is macro versus any other factors. Thanks.

Yes, hey Ken, this is Micah. I'll take that one. Thank you. Good morning. Thanks for the question. I think with respect to the regular, the minimum dividend that we increased this quarter, we will go through a process and stress our book pretty hard well beyond what we really saw in our stress testing when we went through in 2008, 2009 sort of simulation. It's really hard for us given the capital generation of this business, we felt very, very comfortable with the $0.45. And I think there's not too many scenarios that we can come up with even stressing the book really, really hard, where we're not comfortable with maintaining that. I would say it's a combination of macro factors, but ultimately it comes down to capital generation, our ability to cover that.

Got you. Very helpful. And then just one follow-up if I may. Realize that delinquency rates have, have a normal seasonal pattern. And I think you touched upon this in the prepared remarks, wondering if there's any kind of update expectations on how delinquency rates could trend for the rest of the year, just given all the other abnormal factors at play. Thanks.

Sure. So, kind of question on how the loss curve is going to emerge over time and I’ll talk a little bit about fourth quarter, what we're seeing now. But also into 2021, I think, as we've said, a number of times, I think, short answer is it's still too early to tell. With respect to the second to third quarter sequential delinquency, our patterns are very seasonal. As I mentioned in the prepared remarks about 15 to 25 basis points is a typical sequential increase. We were up 32 from the second and the third quarter this year. But keep in mind, those are coming off very, very well delinquency levels. We printed 1.63% on the 30 to 89 in June, which was the lowest delinquency quarter we've ever seen in our history. So I would always keep that into – take that into consideration. As we look at where things are heading for October, October is generally in line trend wise with what we saw in September. And just kind of backing up for a minute, the impacts that you would normally expect to see in this kind of environment have not emerged in the portfolio, right. We've seen some unusually strong payment and delinquency performance over the last six months post the expiration of the CARES Act support and enhanced unemployment specifically. And we've seen a little bit of normalization to our credit trends towards 2019 levels and looking at roll rates and other things that are going on below the macro print of delinquency. And again, delinquency is strong through October. Keep in mind also third quarter and fourth quarter delinquency are what sets up our first quarter and second quarter losses next year. So if unemployment levels continue to persist at higher levels, we would expect to see some impact in 2021, absent any future stimulus. But too early to tell now. We talked a little bit about the reserves too, right. We've taken a conservative approach with our reserving and feel we're adequately reserved for whatever might come at us in 2021.

Very helpful. I appreciate the color. Thanks again.

Sure.

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

Thanks. Good morning. Just actually just quick follow-ups from prior questions. But on the asset yield so a very strong result this quarter, and I understand that the year-over-year increase was due to the delinquencies and maybe some reserve releases there on the interest side. But it's still been fairly elevated and I'm just wondering if there's any other drivers to that? And particularly was there any impact this quarter from the initiatives you are taking on the small dollar loan side, as well as going on the opposite side, going further up market in prime?

Sure. That's a good question, Vince. And good morning it’s Micah. If you look at third quarter 2019, just let's say the last four quarters prior to this quarter, we were around 24.1% on yield. So certainly was supported by the delinquency numbers. Our 90 plus was down quarter-over-quarter by 44 basis points that’s a pretty significant move, which certainly represented the entirety of the increase in yield to 24.3%. With respect to our coupons, I mentioned when Kevin asked the question that our coupons have remained relatively stable over time. It's an important factor in the book, but also around the origination side an $18 billion book it takes a while for origination trends to move through and really impact yield. So I would say on the margin, the small dollar loans and the prime price testing certainly has a little bit different type of – a different size APR just because of the nature of the product, but it certainly wasn't an impact in our yields.

Okay. That's very helpful. Thank you. And second, just a follow-up question from that earlier one, but maybe if you can update us if there were any macro reserve assumption changes that you made this quarter, or if it's the same as last quarter. Thank you.

Yes, sure. I mean, as you can see from our reserve we're confident in the adequacy, it remained flat quarter-over-quarter. We also talked about using economic inputs from a number of sources. We lay those on top of our base loss forecast. I would say our Q3 assumptions are materially similar to what we have assumed in the second quarter, which is continued improvements in labor markets, but at a slower pace than what we've seen over the last few months. We have not assumed any direct, positive impacts of stimulus beyond what's currently in place.

Okay. Thank you very much.

Thanks, Vince.

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

Good morning guys, and congratulations on a good quarter.

Good morning John.

I think I just have one question because a lot of them have been asked and answered. But Mic it's about the allowance level. I mean, clearly your guys are adequately reserved for somewhat of a stressed environment and then clearly your delinquency patterns don't reflect a stress environment. So I'm wondering, I guess it is a couple of questions based on this is number one. Is it fair just to think that for the near term, you'll be provisioning at the rate of charge offs plus or minus some growth factors, number one. And number two, what signals would you be looking for to allow you to reconsider where your allowance level is positioned?

Sure. It's a good question, John. And just from a process standpoint, every quarter we evaluate whatever information we have available at that time. And as you know, it's a very uncertain environment. So we felt good about where we were with the reserves, they are roughly 2.3 times, 2019 charge off coverage, which is obviously consistent with what we saw in the second quarter as well, given the reserves were flat. To your point, we are seeing very, very positive delinquency trends and that’s a starting point for our reserve base that could be a tailwind going forward if that continues, certainly any more stimulus could have a positive impact on the reserves. But on the other side, a slower recovery or increased unemployment as we get into the winter months could lead to a headwind against our reserve. So it’s really hard to be specific given all the future uncertainty out there, but we’ll continue to move forward on a quarterly basis just to evaluate everything we’ve in front of us at that point.

Great. Thanks very much.

Thanks, John.

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

Good morning guys.

Good morning.

Just one quick question. Are you planning for any type of asymmetric tax season next year given that some of these states are not withholding federal unemployment benefits from the or federal taxes from the unemployment benefits?

John it’s a good question. Nothing specific at this point. I mean, once we get closer to the first quarter, we'll have a view on that. I think we typically do see tax season having an impact on our receivables in the first quarter. Customers do tend to have a little bit more cash that will impact their borrowing behavior. It also impacts our delinquency in a positive way. But nothing yet. I think we're kind of in a quarter-by-quarter mode here. And we'll keep an eye on the situation, though, for sure.

Okay, thank you.

Thanks, John.

Our next question comes from the line of Mark Hammond of Bank of America.

Hey, hi, Doug, Micah and Kathryn, on leverage, so OneMain leverage has trended lower, and it’ll end the year, as you said, in the low fours. And you're a thoughtful group and choose six times as the high end for a reason. So what event strategy, your choice, would you all pursue that may cause leverage to go to that six times, the high end of the range?

Mark is the question, what would our – what would our view be to increase our leverage to that range?

Right, you've been operating in that…

At that level?

That low end of the range and what could get up to six times? And what would cause that? Or why would you choose to go that high?

Yes, I think, we've been pretty consistent Mark. I don't think we would necessarily say we seek to be at four or we seek to be at six. We operate within the range that we've provided, that range pre-CECL coming along was five to seven. And that's been a long-term strategic target for us. Now, four to six, under the new leverage vernacular. And I think that's a good place to run the business. We create a lot of capital every quarter, as you see on Page 15 of our materials. That's a very strong positive for us. And we also evaluate capital returns and value creation for our shareholders. So those two things are going to move back and forth, and will move us around that range as you see from some of the materials in our deck from quarter-to-quarter. I don't have any specific comments on what might move us to six specifically.

All right, thanks, Mic. And then a follow-up just on the small dollar product. Did you talk about the underwriting process of that particular product, and if it's any different than your other products?

It’s the same underwriting process, whether someone originates digitally and ends up having a conversation with a branch member – team member, a central team member to go through their net disposable income, their budgeting income, verification, all of the hallmarks of our underwriting, it's very much the same process at this point. And I'd emphasize it's – we're still testing it. One of the advantages we have is we're nationwide, we've got a big distribution system, we can run tests, learn as we go before we kind of roll out products more broadly across the whole network. All the hallmarks of our underwriting, which include looking at all the data points, having a conversation with a customer, underwriting to net disposable income, not just the income, which means we do a budget and figure out what cash they have leftover at the end and make sure that they have an ability to repay.

Perfect, thanks, Doug.

And thank you this does conclude today's OneMain Financial’s third quarter 2020 earnings conference call. Please disconnect your line at this time and have a wonderful day.