OneMain Holdings Inc (OMF) 2021 Q3 法說會逐字稿

Welcome to the OneMain Financial Third Quarter 2021 Earnings Conference Call and Webcast. Hosting the call today from OneMain is Peter Poillon, Head of Investor Relations. Today's call is being recorded.

(Operator Instructions) It is now my pleasure to turn the floor over to Peter Poillon. You may begin.

Thank you, Brittany. Good morning, everyone, and thank you for joining us. Let me begin by directing you to Page 2 of the third quarter 2021 investor presentation, which contains 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 21, and have not been updated subsequent to this call.

Our call this morning will include formal remarks from Doug Shulman, our Chairman and Chief Executive Officer; and Micah Conrad, our Chief Financial Officer. After the conclusion of our formal remarks, we will conduct a question-and-answer session.

So now let me turn the call over to Doug.

Thanks, Peter, and good morning, everyone. We appreciate you joining us today. After I take a few minutes this morning reviewing our financial performance for the quarter, I'd like to spend the bulk of my time discussing the economic climate for our lending products and the progress we're making on the strategic initiatives that will allow us to continue to realize our mission of improving the financial well-being of hard-working Americans.

I'm quite pleased with our third quarter performance as we once again saw strong loan originations throughout the quarter resulting in an $800 million increase in receivables. Our capital generation was excellent in the quarter, and we remain well-positioned for continued growth with healthy demand bolstered by our strategic growth initiatives.

In the quarter, we generated $360 million of capital, $66 million more than the prior year, up 22%.

C&I adjusted earnings for the quarter were $2.37 per share, up 8% over the third quarter of 2020. Our record low loss performance largely reflects the credit tightening actions that we took in 2020 and the government support programs over the last 1.5 years. Third quarter losses reached an all-time low for OneMain of 3.5%. And while we anticipate credit normalizing over time, we feel confident about our ability to continue to generate strong risk-adjusted returns.

The economic and business trends we observed in the quarter remain positive. Labor markets continue to improve and wages are rising modestly, which is a positive for our customer base.

Household balance sheet remain healthy. Savings rates and retail deposit levels remain elevated, and revolving credit balances have declined. Consumers are confident and continue to support economic growth through personal consumption. Importantly, demand for our product has picked up to pre-pandemic levels and is again driving portfolio growth. We saw strong originations in the quarter, up 34% compared to a year ago and 6% higher than 2019.

This resulted in third quarter receivables growing 7% year-over-year and 4% over the quarter. The environment is currently positive for consumer lending. But nonetheless, we will remain vigilant and continue to closely monitor economic conditions as we emerge from the pandemic.

Let me now pivot to provide an update on a few of our key growth initiatives.

As I've said before, our vision is to be the lender of choice for non-prime consumers. We're leveraging our core strength, lending to the non-prime consumer while also expanding our suite of products, services and experiences to deepen our customer relationships, increase engagement and enhance our proprietary data set.

We will provide a range of responsible lending options to meet customers' needs today and offer products and services that enable a better financial future. I'm really pleased to tell you that we launched our 2 digital first credit cards in late August. As we've discussed in the past, the cards are designed specifically for the non-prime consumer by reinforcing credit-building behaviors. If you haven't seen them already, they are Brightway and Brightway+, and we encourage you to go to the website to check out our differentiated offering.

As I've described before, we're starting with a very deliberate pilot program designed to test marketing effectiveness, line usage and credit results. We anticipate issuing about 60,000 cards this year, which will give us a big enough sample for our pilot before we have scale rollout that will likely occur at the end of 2022. It's very early days, but the initial results show strong take-up rates by our customers and usage of the card for everyday purchases like gas, groceries and dining out.

These early results confirm our hypothesis that our customers' affinity to the brand will drive adoption and that pairing a daily transactional product with our more episodic loan product will provide value to our customers.

The card is currently available to customers in about 60 branches on the West Coast, and we recently began a direct mail campaign.

We plan to scale our branch footprint and other origination channels further in the weeks and the months ahead. We're very excited about our card offering and the value that it will provide to customers. We anticipate cards will be a multibillion dollar receivables business for us over the coming years.

As we discussed last quarter, we're also in the process of integrating Trim, our financial wellness FinTech with a focus on helping customers save money by analyzing bills and spending. As of today, we are on track to offer Trim to OneMain customers by the first quarter of 2022 and are excited about the long-term value Trim will bring to our customers and our company.

We also added new channel partners this quarter. One example is Sunlight Financial, a financing platform provider for home improvement contractors. The partnership allows us to provide credit to consumers at the point of sale with loans of similar size and economics to our core product. We anticipate further such partnerships in the future, and it is another example of how we have built a flexible platform that allows us to meet customers where and how they want to do business.

The critical investments we have made and are continuing to make in technology, new channels and products and digital capabilities continue to have a positive impact on our results. Our strong quarterly performance would not have occurred without our strategic product innovations, data-driven operational enhancements and expanded digital capabilities. It's worth noting that we continue to see about half of our originations closed digitally.

Finally, let me briefly comment on capital deployment. During the quarter, we returned about $560 million to shareholders via our regular, quarterly and our enhanced dividends. In addition, we returned more than $140 million via share repurchases that included programmatic purchases under our current authorization as well as a nearly $100 million block purchase we made in the July secondary offering.

Using our capital allocation framework as a guide, we will continue to invest in loans that provide value to our customers and meet our risk-return criteria, invest in the business to position us for the future and return capital to shareholders.

With that, let me turn the call over to Micah to take you through the financial details of the third quarter.

Thanks, Doug, and good morning, everyone. We had a great quarter as the strategic growth initiatives we've been executing over the past several quarters, combined with strong consumer demand to drive healthy receivables growth. Delinquency levels remain below the comparable period of 2019 and net charge-offs reached an historic low of 3.5%. We remain confident in our full year guidance for net charge-offs of approximately 4.2% and managed receivables growth in the 8% to 10% range. We earned $288 million of net income or $2.17 per diluted share in the quarter, up 17% on a per share basis from the third quarter of 2020.

On an adjusted C&I basis, we earned $316 million or $2.37 per diluted share, up 8% on a per share basis from the third quarter of 2020. Capital generation or C&I adjusted earnings, excluding the impact of changes in loan loss reserves, was $360 million in the third quarter, up $66 million or 22% over prior year.

Managed receivables grew to $19.1 billion, up over $800 million from the second quarter and up $1.3 billion or 7% from a year ago, reflecting strong consumer demand and the continued impact of our growth initiatives.

Interest income was $1.1 billion in the third quarter, up 2% compared to the prior year, primarily driven by higher average net receivables. Portfolio yield was 23.8% as compared to 24.3% in the third quarter of last year and 24.1% in the third quarter of 2019. The modest decline was a result of competitive risk-based pricing with better credit quality customers, which has contributed meaningfully to our receivables growth while exceeding our minimum 20% return on tangible common equity threshold. For the full year, we continue to expect yield to be approximately 24%.

Interest expense was $235 million, down $15 million or 6% versus the prior year as we continue to benefit from the ongoing liability management actions we're taking to reduce our cost of funds. Interest expense as a percentage of average receivables improved year-over-year from 5.6% a year ago to 5.0% this quarter. We continue to expect full year interest expense to be in the range of 5.0% to 5.2%.

Other revenue was $152 million in the third quarter, up 13% compared to the prior year quarter. The increase was driven by economics from our whole loan sale program, primarily $15 million of gain on sale revenue from the $160 million of loans sold during the quarter. In August, we added a third partner to our whole loan sale program, which increased our ongoing sales to $180 million per quarter.

Our intent has been to scale these partnerships to a meaningful level, which we have done. On an annual basis, our current level of loan sales will add $720 million of committed funding to our already strong capital markets programs. Policyholder benefits and claims expense was $45 million in the third quarter, up 3% compared to the prior year. As discussed previously, over the last few quarters, our IUI claims have consistently moderated since the second quarter 2020 pandemic-driven peak and are now back to normal levels.

Let's turn to Slide 9 to review our originations and receivables trends. We originated $3.9 billion in the third quarter, up 34% from third quarter of 2020 and 6% higher than the third quarter of 2019. You may recall that last quarter, originations improved progressively each month of the quarter. Originations remained strong throughout this quarter, resulting in managed receivables growth of 7% year-over-year and 6% since the end of last year.

Our managed receivables this quarter include about $283 million of receivables sold, but serviced by OneMain for our whole loan sale partners.

Let's now turn to Slide 10 and walk through our recent credit trends. Strong credit performance continued into the third quarter as net charge-offs reached an all-time low of 3.5%. This strong performance reflects the impact of government stimulus and the resulting low for 30 to 89 delinquency in the first quarter of this year.

Strong late-stage delinquency performance also contributed positively to our charge-offs. As an example, third quarter recoveries were $58 million, $22 million or 61% better than the pre-pandemic comparison period of third quarter 2019.

We expect net charge-offs to show a modest seasonal increase in Q4, yet remains still well below 2019 levels, and we remain confident in our full year 2021 net charge-off guidance of approximately 4.2%.

30 to 89 delinquency in the quarter was 2.20%, 10 basis points below the third quarter of 2019. 90-plus delinquency was 1.57%, 36 basis points below the third quarter of 2019. As we've discussed previously, delinquency will trend towards normal levels as the positive impacts of government stimulus are further behind us.

Our loan loss reserve trends are shown on Slide 11. After reducing our loan loss reserves by a combined $331 million over the past 3 quarters, our reserves increased $59 million this quarter to about $2.1 billion, while our reserve ratio declined to 11.0%. Our reserve increase was driven entirely by portfolio growth, and our loan loss reserve ratio reflects improving economic forecasts, yet some level of uncertainty that continues in the environment.

As of the end of the third quarter, we have released nearly all of the reserves we had built associated with the pandemic in 2020. We have strong confidence in the future credit performance of our portfolio, as indicated by our loan loss reserve ratio, which is now just 3% above pre-pandemic levels.

Turning to Slide 12. Third quarter operating expense was $338 million. Our third quarter operating expense grew 1% against comparable third quarter 2019 levels even as we continue to accelerate investment and growth initiatives and while our receivables grew by more than 7% over that period.

Our current period OpEx ratio of 7.2% is well below the 7.6% ratio achieved in third quarter 2019, benefiting from the efficiencies we've driven over the past several years and illustrating the strong operating leverage of our business. We expect full year 2021 operating expense to be at the higher end of our 5% to 7% growth range given our continued investment in the business and continued strong loan growth.

Let's now move on to the balance sheet on Slide 13. Our significant liquidity sources include about $600 million of available cash, $7.3 billion in undrawn conduit capacity and $11 billion of unencumbered receivables. Once again, we've been busy on the funding side of our business. In August, we raised $600 million of 7-year unsecured notes at 3.875%. And earlier this month, we issued a $1 billion ABS deal at a weighted average coupon of just 0.98%, reflecting strong demand for our paper and once again demonstrating the strength and maturity of our funding capabilities.

Across our last 3 ABS deals, we have raised nearly $3 billion at an average coupon of approximately 1.5% and an average term of approximately 5 years. Our balance sheet has never been stronger, and we believe our funding cost improvements will give us even more leverage to grow our balance sheet in future years.

I'm also very pleased the strength and momentum in our business was recognized by Moody's, who recently upgraded our long-term corporate rating to Ba2. We continue to focus on delivering on our capital allocation framework, which includes delivering portfolio growth at attractive returns, investing in our business and our future and returning considerable capital to our shareholders. At September 30, our leverage was 5.4x. Leverage was up modestly from last quarter, reflecting capital return actions in the quarter. We paid our regular $0.70 per share quarterly dividend plus an enhanced dividend of $3.50 per share. We also repurchased more than 2.4 million shares for $141 million.

On Slide 16, we've laid out our consistently strong dividend history, including the $0.70 per share regular dividend to be paid in November, we will have paid out $9.55 per share during the last 12 months, equating to a dividend yield of approximately 16% at the recent share price.

With that, I'll turn the call back over to Doug.

Thanks, Micah. We're excited about our initiatives as we continue to invest for growth and roll out products that provide real value to current and new customers. I'm pleased that we launched our credit card that is specifically designed for near-prime consumers and rewards customers for their credit-building behavior. We are also pleased to see the very strong growth of our core loan product. And while there's a lot more work to do, I'm incredibly proud of our more than 8,500 OneMain team members who serve our customers every day. I thank them for their incredibly hard work, especially throughout the pandemic.

With that, I want to thank you for joining us today, and we're happy to take your questions.

(Operator Instructions) Our first question is coming from Michael Kaye with Wells Fargo.

It seems like some investors were surprised how quickly the delinquency rates snapped back this quarter. I understand you're not likely ready to give 2022 guidance, but could you give a little more color on the trajectory of delinquency and net loss rates from here? When could we see net loss rates at a more 6% to 7% rate considering the pickup in loan growth that you've seen? And is 6% to 7% still considered normal for you folks, given more prime originations and the loan sales?

Michael, it's Micah. Thanks for your question. I'll start by saying, the last 1.5 years has certainly been highly unusual and impacted by a very large federal stimulus, obviously, and that helped drive the expected 4.2% loss rate we have this year. We're certainly not underwriting to an expectation of 4% losses. If we did that, we wouldn't be serving as many customers as we should be. We do expect delinquency and losses to trend towards normal levels over time. That's what our underwriting assumes, it's also what our reserves assume.

And so at the same time, we see portfolio collections and late-stage delinquency performance continue to be really, really strong. I mentioned recoveries in the prepared remarks, which was 60% higher than normal levels. We're still seeing strength there. So with all that said, it's very hard to pinpoint exactly when credit performance will normalize on the charge-off line, I guess sitting here today would be likely sometime in the back half of 2022.

Okay. And I want to talk a little bit more about the quarter-over-quarter decline in asset yields. Could you just go over some of the bigger drivers there? And any thoughts on Q4 asset yields this year maybe into 2022? I think it would be helpful for all of us if we could gauge where asset yields could eventually stabilize?

Yes. So let me -- I can comment on that. I don't think we're ready to give out 2022 guidance on yields quite yet. In terms of the yield in the current quarter being modestly down against the prior year quarter and 2019 levels. As we've said in the past, we don't underwrite any one metric, and that includes both credit yield or any other metric in our P&L, we're looking at bottom line profit. And we will, as we've said in the past, underwrite every loan that meets our return hurdles. So in this case, the yield was driven by our trading of a bit of yield, if you will, for higher credit quality growth with long-term positive customer and earnings' impact. This business leverages our improving funding costs. It's also expected to generate some lower losses on this particular group of business and also incremental operating leverage.

In terms of the fourth quarter, we -- as we noted on strategic priorities, we expect full year yield to still be around 24%. I'd expect fourth quarter yield to be in a similar range as to where we are today and again, supported by our continued year-over-year strength in our funding costs.

Our next question comes from Kevin Barker with Piper Sandler.

Your recovery rates have increased to about 1.3% of total loans outstanding or defaulted loans. Do you expect the recovery rates to remain near that level going forward, just given some of the initiatives that you put in place with any defaulted loans you have?

Yes, Kevin, I think that one is hard to really tell also. I mean we typically run recoveries in an average range of around $35 million per quarter, going back to looking at '19 levels. That certainly -- those levels certainly did impact -- did increase during the pandemic and have continued to be really, really strong, as we mentioned, with the $58 million we had this quarter.

I think some of it's strategy, we've done a really good job at just optimizing our collection strategy with post charge-off recoveries. But clearly, there is also some indication of continued strength in consumer balance sheet. So I would expect this to trend down over time, again, just like with the losses that Michael asked about, it's really hard to pinpoint exactly when, but I would expect that to moderate versus falling dramatically in one given quarter in my view.

Okay. Okay. And then you raised secured debt at below 1% in October, and your current cost of liabilities is over 5% today, meanwhile only 40% of your funding is secured versus 60% unsecured. When you look out over the next year to maybe 18 months, where do you think you can get your cost of funding down to just given the improving ratings you've received, the mix shift towards secured and then where your unsecured debt is now trading in the market?

Yes. So a lot there. I'll try to unpack it, Kevin. In terms of the secured mix, we've always said we target about a 50-50 split. There's no science to that. It's -- we're trying to indicate we want to see a balance of the longer duration, longer tenure unsecured debt against our shorter -- somewhat shorter tenure and lower-cost ABS deals. We've been very opportunistic in the market for the last year, 1.5 years, was where the unsecured market has been trading. So you've seen our mix move down to that 39% secured that we printed this quarter.

That will move up a bit after the October ABS deal that we just announced, the $1 billion, but that's certainly an opportunity for us going forward. Give you a couple of stats, I think the gist of your question is where interest expense is heading. We certainly feel like we have a lot of tailwind there, not ready to commit to where it will settle, a lot still to be found out here with rates. But I mentioned our last 3 ABS deals in our prepared remarks. We've raised $3 billion this year, including both unsecured and ABS.

We've raised about $3 billion, which is 18% of our debt at about 2.3% and we also talk about our whole loan sale programs. We've added $700 million of committed funding in whole loan sales, which is really debt and capital-efficient earnings. Our next maturity is $1 billion. It's in May, at 6th and on 8th. We also have about $600 million of callable debt around May or June at (inaudible). So there is certainly a lot of opportunity here. And I think secured mix is another one if we choose to move that up from 40 to closer to the strategic 50-50. Hopefully, that captured all of your questions there.

Our next question comes from Vincent Caintic with Stephens.

First one on the credit card business. So I know it's early days, very exciting. I was wondering if you could maybe share how you're thinking about the economics of that business versus the existing portfolio if there is anything you could do there? And with your trial going under now, what are you looking for before you pull the rollout?

Yes. Thanks, Vincent. Look, we said before, we think the economics and the return on assets are going to be very similar to the current business. There's different drivers of it and different inputs. But I think when it all shakes out, our models show that it will be very similar to the current business. As I mentioned, we've launched in 60 branches. Within the next couple of weeks, we'll be in 400 branches. And then we're opening up other distribution channels like direct internet channels as well as direct mail.

Our goal is to have about 60,000 plus or minus cards in the market by the end of the year. That will give us a big enough statistical sample to validate all of our models. And the 3 main things we're looking at is take-up in marketing, both of current customers and new customers. Second, we'll look at line usage. And third, we'll look at credit. It's going to take a while to have credit play itself through.

So you can anticipate first half of 2022 will be us both validating the performance of the cards that are in market and then tweaking anything we need to tweak to get back to what our model assumptions are. We've -- you've seen in the presentation, we had 2 cards: one is called Brightway. It's a lower line, it's a starter card and a feeder product, and we think that's going to be a great pipeline to bring in new customers; there's also Brightway+, which is a larger line, it has points. It will be offered to current customers and customers with higher credit quality.

The sample that we've launched will include both of those. And we do think it's quite differentiated. It's rewarding credit building behavior. Every 6 months that people have on-time payments, they'll have an option for either a decreased rate or an increased line. And so we're going to be looking at all of those things. We're going to be iterating the product this quarter, the first 2 quarters of 2022, if everything hits right on target and all our models are exactly what we thought second half of the year, we'll see a ramp if we need to tweak it some more, it will be closer to the back half of 2022.

Okay. Perfect. And second question, just a quick follow-up, Micah. So sort of that expectation for normalized credit maybe over next year. When you're thinking about your reserve ratios, you're very close to where you were at pre pandemic. I'm just maybe clarifying, if we get back to kind of your normalized charge-off rates, is the current reserve ratio that what you think it should be? Or is there any other thoughts to that?

Yes. Sure, Vincent. I mean as we've talked about the expectation of normalizing credit is certainly present in our reserving. We are very, very close to pre-COVID levels. Right now, we remain about $50 million above when you adjust for size of the balance sheet. So it's really just 3% above pre-pandemic levels. Throughout the year, we've significantly reduced our reserve coverage as we've gotten more comfortable with economic forecast for unemployment and then confidence in the future credit performance of our book. And so I think it's certainly possible for us to move down to the 10.7%, but relatively speaking, it's a pretty small difference when you look at it as being $50 million on a $2.1 billion reserve.

Our next question comes from Moshe Orenbuch with Credit Suisse.

Great. You've sized this fairly well so far in terms of the yields, kind of talking about it stabilizing into the fourth quarter. But is there any extra kind of detail you can give us as to -- as you think about those higher-quality, lower-yielding balances, like what portion of your originations (inaudible) they are currently? Or what portion of your balances, you do expect them to become over time?

Yes. Moshe , I mean, as we've discussed on our originations, we're right at about 4%, 5%, 6%. It's depending on the month you look at, middle -- sort of middle single digits above 2019 levels as a result of all of our strategic initiatives. This sort of risk-based pricing with higher credit quality customers is part of that. But also includes a lot of operational enhancements and channel initiatives we've spoken about over the last several quarters.

I would say we're -- it's a good -- it's a decent portion of our originations. I don't think we're prepared to really comment on exactly the levels.

Sure. And as things have developed over the last several years, I mean, you've returned a significant amount of capital and continue to generate capital. Is there a way to think about just the proportion between dividends and buybacks? Is that something that, as you think about that going forward, like how should we -- maybe is there a kind of guidance you can give us on that?

Yes. I mean, look, let me give you just some thoughts on our capital return strategy. Just as you know, it's evolved over time. It was only 2 years ago or 2.5 years ago, we actually started returning capital to shareholders after we deleveraged very significantly. We started out with a $1 regular dividend. We then added specials. We've moved that dividend up the regular dividend now up to $2.80. We've always said that we kind of modulate that around our stress tests and -- because we want to make sure even in a severely stressed environment that we're able to pay that dividend. So -- and then we added buybacks at the beginning of this year, and you saw we did about $140 million on buybacks in the quarter.

So as you've seen over time, we've put a lot more regularity and predictability into our capital return. And I think people should think about that regularity and predictability, that's the path that we're continuing on. We don't -- we can't give you an exact dividends versus buybacks. I do think we're going to continue to be a high-yielding stock, but buybacks are now part of our capital return strategy, and we anticipate it being part of our capital return strategy going forward.

Great. Pretty rapid evolution, I guess.

Our next question comes from Rick Shane with JPMorgan.

Look, I'd like to delve a little bit deeper into the card business. I've been around long enough to have seen some non-prime current issuers over the years. And I'm curious, when you think about the risk-adjusted margin on that product and the financing, how do you think about it in the context of your overall borrowing?

Yes. I mean, this is Micah. As Doug mentioned, we expect from the card business to see RORs and ROEs that are similar to our current loan business. In terms of financing. And when we have a lot of opportunity there. We have significant relationships with many banks in our conduit book. We think we certainly can fund some of the credit cards to get started through those warehouse facilities and then eventually develop the kind of ABS capability that we have today for our loan products.

So we feel very good about that. And we think we feel great about the ability to underwrite the credit, and we feel good about the ability to grow the book. And I would say the same thing on the funding side. We feel very, very strongly about our funding and capital markets capabilities and certainly, that will translate into this success on the credit card growth.

Yes. And the only thing I'd add, Rick, is we have built a card business that has synergy with the current business, that utilizes our core strength of nationwide distribution, of funding, of our understanding of near-prime credit, our deep proprietary data. And so we think we have cost advantages, and we think it's quite synergistic with our current business funding being one of the synergies we think we'll find.

Got it. And if we think about that business historically in the context of your core business, it is a lower risk-adjusted margin business. So in order to get to the same ROE and historically, we've seen it finance this way you would run that business with slightly higher leverage. The securitization markets would certainly support that. Is that the right way to be looking at it?

I think -- as we've said, Rick, the returns we expect to be very similar to the core business. And we're going to run our business overall as a portfolio. Obviously, we're going to think about the product pricing and the dynamics and loss profile, et cetera, of the credit card differently. But I think we're going to try to leverage our existing funding programs and our strong capital markets programs across the business. And maybe internally, we'll think differently about leverage levels, but I would continue to think about our book in totality and our leverage in totality.

Yes. So we'll take that look, our model show that it can be a very profitable business. But we've really pivoted the company to be a very customer-centric, customer-first business. And we've talked about our overall strategy, which is provide credit. And we now have a large loan product, and we're now moving into a daily transactional product. And like we said, the early cards, people are using it on just [events], we would thought it would be gas, groceries, dining out, which we weren't -- we didn't have a foothold in that market for credit before.

And then if you look at the benefits, it's also part of our vision to help people move to a better financial future. And the whole card is built on reciprocity. And so people get something as they're good payers and as they're building credit. And for us, it deepens our relationship and lengthens it. It increases engagement because people will be much more involved in looking at expenses.

We have a great app for their, and it gives us a lot -- it gives us transactional proprietary data that we can use both in the card business and the loan business. And so the strategic view of us being there for our customers and being the lender of choice is the main focus. Obviously, we feel very confident the economics will work with our business as well.

Got it. Okay. And then you hit upon something interesting, which is the daily use and I see the strategic vision here. One of the things that tactically really helped you over the last year was your ability to very, very quickly curtail your underwriting.

If you put a daily use card in people's hands, you arguably lose that ability. I realize you can cut off credit, but as soon as you do that on a card, you erode goodwill significantly. Do you think that you're changing your risk profile in terms of your ability to recast the book as quickly?

Yes. I mean, certainly, that's a dynamic that other credit card issuers have faced. Unprecedented over the last 18 months, actually saw significant pay-downs and improvement in credit card delinquencies and also in losses on the book. I think that's something we'll have to look at in the years to come.

We will take our next question from Meng Jiao with Deutsche Bank.

I wanted to touch on the near-prime credit card space and the competition overall. We've sort of seen other companies build the inorganic path to getting a foothold in the space. I'm just wondering if the competition in your eyes is becoming sort of more intense within that space?

Look, it's a very big market. It's a $400 billion plus market. We have a brand in the non-prime space because for many years, we've been serving customers with responsible lending products. We've been there for them through good times and bad. A lot of banks and others have pulled out of the space, and we fill a unique niche. With a $400 billion market, our brand and competitive advantages, we think there's plenty of room for us to have this be a multibillion dollar receivables product over the next several years.

And so yes, we think we've got a lot of opportunity to compete. Early take-up rates, super early days are confirming that hypothesis. So yes, there's lots of competition. We need to compete. We think our card is like no other card in the market and it's differentiated and is focused on rewarding good behavior and credit building behavior of customers and that as they make progress, we'll have the ability to grow with them.

Got you. Great. And then I guess, secondly, 3 weeks into the new quarter, I'm guessing, are you sort of seeing the seasonally higher origination volume that you normally expect? Just sort of any color as we go into the fourth quarter would be helpful.

Yes. So we're still early days in the fourth quarter, obviously, only through about 20 days of October. But what I would say is what we're seeing on originations, it looks very, very similar to what we saw in the third quarter.

When I say that, let me be more specific, just relative to 2019 levels. Obviously, you pointed out there's a little bit of seasonality in our business. So we always look at things at this point gets normal '19 levels, and we're sort of in the same ballpark of where we were growth-wise in the third quarter.

We will take our next question from John Rowan with Janney.

I just want to touch quickly on the recovery rate. It sounded to me, Micah, like you said it was post charge recovery. I'm wondering if there was -- were any debt sales in there? And I'm wondering if the strong auto prices have anything to do with the high recovery rate? Obviously, we'd like to figure out when that recovery will normalize and trying to figure out what the inputs are there?

Yes. That's a good question. In terms of sales, if you go back several years ago, we were doing a good portion of our post charge-off of probably through debt sales. We made some decisions over the last couple of years just looking at NPVs and returns based on where prevailing prices were for charged-off stock and we decided we were better served doing things internally, which is when I talk a little bit, I talked earlier about change in charge-off strategy, that was what I was referring to.

This was probably late '18, early '19, we really decided to start doing more of our collections in-house. We still have a multi channel and multifaceted strategy for recoveries. We do a little bit with third party just to keep a warm touch there if we ever needed it. The vast majority of it is internally collected. And I would look at the recovery rate improvement as just being somewhat of a sign of consumer balance sheet, but also the work we've put in to optimize our own internal post charge-off recoveries.

Okay. Just next on the credit card business, obviously, what you're using is a daily use type credit card. Do you foresee this changing over time to a larger ticket type credit card? And if that's the case, do you see running into competition from any of the new point-of-sale products, buy now, pay later or lease-to-own?

Yes. Look, one of the things that we've said about the card is that there's a lot of synergies. So we have loans that are average $8,000 to $10,000 were having cards. The lines are going to be kind of in the $500 to $3,000 range. The next in line from product will be hybrid. So people who have a loan will be able to put -- will have some open-to-buy line on the loan, but also on the card, if somebody buys a $1,000 TV, they'll be able to put it into installments.

And so we do think the card gives us the opportunity to be with the consumer when they're buying products and extend credit in creative ways at that point. So to the extent that's what point-of-sale providers are doing. Sure, there'll be some overlap there. But again, we know this customer. It's a very large market. We're exclusively focused on the non-prime consumer. And so while we're moving into a new space that has a different competitive set, we think there's plenty of room for us to grow.

And we will take our next question from Kenneth Lee with RBC Capital Markets.

And this is just a follow-up on some of the previous questions. Wonder if you could just talk a little bit more on how you think about the potential returns from that higher quality credit receivables, especially how they compare to the rest of the business?

Yes. Again, I think, Ken, we've talked about at length about making sure that all of our loans meet a minimum return on tangible common equity threshold of 20%. In the case of this risk-based pricing for higher credit quality customers, we give up a little bit of yield, we attract more of those customers. So there's a loan volume implication as well. We're doing more volume in that particular area. That more volume comes with little extra costs. So it gives us a lot of operating leverage using the existing fixed costs that we have.

There is also a benefit on losses for that business. So a lot of what we're doing is just more of what we do today, but we do believe that there will be some loss improvement there. And of course, we are also, as we mentioned, utilizing the improvement in our funding costs to be able to maintain our existing returns on that business. So I would say all of this that we're writing in this risk sort of higher credit quality customer well exceeds our 20% return threshold and should be accretive to earnings, both from a profitability and just regular way earnings going forward.

Great. Very helpful. And just one follow-up, if I may. Just more broadly, I wonder if you could talk about the current competitive landscape within that non-prime, near-prime segments? And whether you're seeing any potentially either increase or decrease in competitive activity?

Yes. Look, we are -- I think there's quite a bit of competition in the market. It is more or less everybody is open for business now. It looks like most people have opened their credit box back up to pre-pandemic underwriting we're back kind of underwriting to 2019 type losses. My assumption, it's hard to normalize looking at all the competition for their credit boxes. But my assumption is some people have probably opened up more than that and are being lacked with credit. And so look, we're not seeing a lot of big changes in the competitive environment right now. It's a pretty big market, and there's a set group of competitors going after the installment lending business. But what I would say is it appears that everybody is back in the market, full steam.

What I would tell you is -- we told you in early 2020 that we didn't -- it was uncertain. We didn't know what the pandemic would bring. I don't think anybody had it on $6 trillion of government stimulus coming in, but we made a commitment that we were going to double down on investing in our business, in our products, in our technology, in our digital channel and all of our analytics so that we were positioned for growth on the back end of the pandemic. And I think that's what you're seeing.

And so if you look at overall demand for our product, it is very similar to 2019, but our production and originations are actually running in the mid- to high-single digits above that. And I think that is a result of our -- all of the things we put in place over the last 1.5 years; strategic pricing for better credit quality, customers, innovations around size of loan, all the analytics in operation and marketing, our digital channel, which continues to be a bit now about 50% of our origination plus adding new channel partners. So we could find customers and be available to customers wherever they want to do their -- take their credit. So quite competitive, we like our positioning vis-a-vis the competitors.

And we have no further questions on the line at this time.

Great. Well, look, thanks, everyone, for joining us. We appreciate all your continued support and interest, and we're obviously here if you have any questions. So everybody, have a great day.

Thank you. This does conclude today's OneMain Financial Third Quarter 2021 Earnings Conference Call. Please disconnect your line at this time, and have a wonderful day.