OneMain Holdings, Inc. (OMF) Q2 2019 Earnings Call Transcript

OMF earnings call for the period ending July 30, 2019.

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OneMain Holdings, Inc. (NYSE:OMF)
Q2 2019 Earnings Call
Jul 30, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the OneMain Financial Second Quarter 2019 Earnings Conference Call and Webcast. Hosting the call today from OneMain is Kathryn Miller, Head of Investor Relations. [Operator Instructions] It is now my pleasure to turn the floor over to Kathryn Miller. You may begin.

Kathryn Miller -- Head, Investor Relations

Thank you, Stephanie. Good morning and thank you for joining us. Let me begin by directing you to Pages 2 and 3 of the second quarter 2019 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. We caution you not to place undue reliance on forward-looking statements. If you maybe listening to this via replay at some point after today, we remind you that the remarks made herein are as of today July 30 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 Michael 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.

Doug Shulman -- Head, Investor Relations

Thanks, Kathryn and good morning everybody. I am pleased to be with you here today and for joining us. We had another great quarter. We continue to execute on our key strategic priorities, which include disciplined receivables growth driven by improved customer experience, strong credit performance, extended discipline and conservative balance sheet with a long liquidity runway. We generated consumer and insurance adjusted earnings growth of 38% year-over-year and a strong return on receivables of 5.4%, up 120 basis points year-over-year. At the end of this call, I am going to spend some time discussing some of the key initiatives under way at the company, that together with a favorable economic environment, are driving the great performance this year.

Credit continues to be strong. Our net charge-off rate was 6.2%, about 40 basis points better than last year's second quarter. Delinquency trends were also good. Our 30 to 89 ratio was flat year-over-year and our 90-day ratio came in about 20 basis points better than last year. Our customer remains healthy and we are not seeing signs of stress in our portfolio. Our operating expense ratio also improved, down almost 70 basis points from the second quarter of 2018, reflecting the benefit of our ongoing cost and expense discipline coupled with the inherent operating leverage of our business.

We also continue to enhance our capital and liquidity position in the second quarter. We issued a total of $1.1 billion of unsecured debt, $300 million of which was closed in July and we added a 12th conduit bank. The combination of $6.7 billion of un-drawn conduit capacity and $8.9 billion of unencumbered collateral provides us significant flexibility and stability. We believe that we are uniquely strong and that our conservative balance sheet gives us a differentiated position among non-bank lenders.

As we continue to execute on our core priorities, OneMain generates significant capital with our return on tangible common equity in excess of 25%. As you know, the first phase of our capital return program began earlier this year when we announced the initiation of our regular dividend an important milestone for the company following a period of significant de-leveraging. It was the strong signal regarding our confidence in the business and our ability to execute through all economic conditions and it also created an attractive yield for investors.

As our second quarter and year-to-date results clearly demonstrate, our business is performing very, very well. We are on track to achieve the strategic priorities we outlined for 2019 and we are generating considerable excess capital beyond what is required to grow and invest in the business. Our capital structure is in a great position and we are comfortable that we are well within a comfortable leverage range that we think is appropriate for the business.

As a result, our Board approved a $2 per share special dividend to be payable in the third quarter. When we think about how we use the capital generated by our business, we focus on a number of things. First, we will make investments in the business to ensure we are serving our customers well, innovating and driving greater profitability over the long run. Second, we will also invest in the growth of our business, which generates significant return on tangible common equity. We will make every loan that meets our risk adjusted return hurdles with underwriting that uses best-in-class technology data and the analytics. And third, we will continue to prioritize our conservative balance sheet with prudent leverage levels and a long liquidity runway. We believe that given the strength of our business, we will continue to generate capital in excess of those three priorities in the future. And this excess capital will be returned to shareholders. Going forward, we will consider all forms of capital returns and we are very pleased to be in a position to provide this additional direct return to shareholders this quarter in the form of a special dividend.

With that, let me turn the call over to Michael.

Michael Conrad -- CFO

Thank you, Doug. Good morning, everyone. As Doug mentioned, we delivered strong results in the second quarter. We earned $194 million of net income or $1.42 per diluted share. This was up 72% from $113 million or $0.83 in the same period last year excluding the $106 million impact related to the Fortress transaction. Our C&I segment earned $221 million on an adjusted net income basis or a $1.62 per diluted share. This was up 38% from $160 million $1.18 in the second quarter of 2018.

Let's review the key drivers of our C&I financial performance. Originations for the second quarter, was $3.9 billion, of which 55% was secured, up from $3.2 billion and 47% secured last year. Ending net receivables were $17 billion, reflecting $1.6 billion of growth year-over-year. Our secured portfolio over the same period grew by $1.7 billion or 25%, which will continue to enhance the profitability and stability of our business over the longer term. Given the growth we have achieved thus far, we now expect ending receivables growth for the year to be between 8% and 10%. Yield in the second quarter was 24.2%, up 10 basis points from last year. This increase primarily reflected an improvement in 90-day delinquency. Interest income was $999 million, up 10% from last year. The increase reflected higher average receivables, which were also up 10% from last year.

Total other revenue was $156 million in the second quarter, up about 11% versus last year primarily due to higher insurance revenue, which tends to follow our receivables growth. As Doug mentioned, credit performance continued to be strong. Our 30 to 89 delinquency rate was 2.1% for the second quarter. Our 90 plus delinquency rate was 1.7%. And our net charge-off ratio was 6.2%, a 40 basis point improvement from the same period last year.

For the full year 2019, we expect our net charge-off ratio to be between 6.1% and 6.3%. Our loan loss reserves increased sequentially by $7 million largely reflecting our growth in receivables. That said our reserve rate declined sequentially by 20 basis points to 4.5% reflecting seasonally lower late stage delinquency as well as the continued portfolio migration toward more secured lending. Second quarter operating expenses were $319 million, about 1% higher than last year. With almost 10% growth in average receivables, we continue to leverage the scale of our platform and delivered about 70 basis points of year-over-year improvements in our OpEx ratio. And lastly, interest expense was $232 million in the second quarter, up from $212 million a year ago. As expected, the increase primarily reflected both higher average debt balances as well as a greater proportion of unsecured debt. We expect interest expense to trend moderately upward for the reminder of the year in line with the expected growth in the portfolio.

Let's move on to our balance sheet. As you know, our priority is to maintain a conservative balance sheet, long liquidity runway, both of which we continued to enhance during the quarter. Specifically, we issued $800 million of 2028 notes at 6 5/8s in May. We also redeemed a June 2020 maturity of $300 million. And in July, we completed a $300 million add-on to our 2024 notes at an attractive 4.5% yield. Our 2024 maturity is now $1.3 billion as a blended cost of about 5.7%. The average tenure of our unsecured debt has increased to 4.7 years compared to 3.6 years at the end of 2017. Our next scheduled maturity is not until the end of 2020. Our tangible leverage ratio was 6.1 times at the end of quarter. We remain on track to achieve our leverage target at the end of the year.

In terms of liquidity, as Doug mentioned, we added 12th conduit bank during the second quarter and expanded our total un-drawn capacity to about $6.7 billion. At quarter end, we had $8.9 billion of unencumbered assets and almost $800 million of cash. These liquidity sources along with our longer maturities provides significant runway without accessing the capital markets. Overall, our second quarter performance reflected strength across the board and we remained in a great position to take our business to the next level.

And with that, I will turn the call back to Doug.

Doug Shulman -- CFO

Thanks, Micah. I want to conclude with a few other comments about the business. First, we announced a few weeks ago that Rajive Chadha has joined us as Chief Operating Officer. He is a great addition to the team with deep consumer finance experience. Before joining OneMain, Rajive led all consumer bank products, including secured and unsecured lending and fin-tech partnerships at Regions Bank. He also previously served as President of Diners Club International Discover and President of Citi Financial Auto, among other leadership roles within Citibank consumer lending business. I am very pleased that Rajive is the most recent addition to a very, very strong executive team.

I also want to spend a few minutes discussing some of the initiatives under way at the company that underpin our strategic priorities. As a reminder, the priorities are disciplined receivables growth driven by improved customer experience, strong credit performance, expense discipline and a conservative balance sheet with a long liquidity runway. Here is just a few of the initiatives. We are investing in customer experience, including redesigning our loan application to make it more simple and streamlined and developing omni-channel tools to enhance the operating efficiency and improve our service.

We have invested in our central sales and servicing team to support our customers after hours when branches are closed contributing to our ability to book loans with customers that meet our risk return hurdles. And we also are upping our game in the analytics across the company. We are using advanced analytics in multiple facets of the business from marketing optimization through enhanced underwriting, through improved management of the mix of products across geographies. We are also investing in technology in a number of ways. We are creating micro services and APIs in our core systems to increase our agility and ability to innovate and move its speed to use new data sources for our underwriting and to integrate third-party applications. There is a lot happening in the company and I hope these examples give you a sense of that. We are thriving a number of initiatives and I believe there is more opportunity to optimize performance and even better serve our customers and over the long run grow earnings.

As you can see from our performance this quarter, fees and other initiatives are starting to impact the financial performance of our business in a very positive way. Let me end by letting you know that we plan to hold our first ever Investor Day later this year. We look forward to talking to you about the future of our business, our strategic initiatives, our credit and funding and our capital allocation strategy at that time.

So with that, thanks again for joining us and let me turn it over to the operator for questions.


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Questions and Answers:

Operator

[Operator Instructions] Thank you. Our first question comes from Eric Wasserstrom with UBS.

Eric Edmund Wasserstrom -- USB Investment

Thanks very much. Just a couple of questions please. The first is obviously you have articulated this capital return expectation which is very exciting, but can you give us a sense of how you are thinking about capital adequacy through the seasonal implementation period and on a go forward basis, just given what seasonal will require with respect to go forward growth?

Michael Conrad -- CFO

Yes. So this is Mike here. Good morning. Thanks for the question. I mean, with respect to CECL we view reserves as another form of capital and really CECL just moved capital around the balance sheet. We don't expect CECL to change it all the way we think about financial leverage for the health and performance of our business.

Eric Edmund Wasserstrom -- USB Investment

Okay. If I may just follow-up on that point and is that a position that you vetted with the rating agencies and funding constituencies and is that a broadly shared view?

Michael Conrad -- CFO

Yes. I mean, we talk with our rating agencies, a lot of us can expect. We don't speak for them, but we do believe that the rating agencies understand CECL is not a credit.

Doug Shulman -- CEO

And Eric, what I would say is this is Doug, the company has come an incredibly long way and is deleveraged at times. We feel really comfortable that we are in a very responsible prudent range or leverage now. We are carrying a lot of excess liquidity on our balance sheet to make sure we are strong -- now that we are strong through any economic cycle and obviously we wouldn't be doing capital returns now if we didn't feel we had plenty of capital now and we will have plenty of capital in the future to run a prudent business with a conservative balance sheet.

Eric Edmund Wasserstrom -- USB Investment

Great. Thanks very much.

Operator

Thank you. Your next question is from the line of Michael Kaye with Wells Fargo.

Michael Kaye -- Wells Fargo. -- Analyst

Hi, good morning. One of the things that struck me with the results was the very large pickup in year-over-year growth originations this quarter, it went over 20%, way up from under 2% last quarter. So I just want to understand some of the factors that led to some of that growth, was it some of those initiatives that you were talking about at the end of the call that started to finally head, it seems like a dramatic swing?

Doug Shulman -- CEO

Yes. I mean a couple of things. One, we will remind you that there is definitely seasonal pickup so I wouldn't compare it quarter-over-quarter as much, because first quarter is usually a lot less. So, some of the quarter-over-quarter is seasonal pickup. I think the growth is a combination of factors. One is if you look at the year-over-year growth, actually over 100% of the growth though is $1.7 billion of growth -- or $1.6 billion of growth, $1.7 billion of secured growth. So the portfolio we are growing is a secured portfolio, which generally has larger loan sizes. So that's one factor. It's also credit that we are very comfortable with and has lower losses. Second is our customers near time prime customer does remain healthy, I mentioned. Just the income ratios look very good on unemployment low delinquencies are looking good. So, there is healthy demand, but we are making sure we are incredibly disciplined around our underwriting and are only booking loan that meet our risk return criteria. And then the third as you mentioned is we are doing a lot to optimize the business. So, we are actively managing what we call the funnel which is the top of the funnel, which is attracting all the customers that we think meet our risk return demand whether that's through digital or mail or partners making sure that there is a good experience when they come in and that both our web experience, our phone experience and our in-person experience is great. As I said, we have a credit box to make sure once they come in that they need our underwriting criteria, including ability to pay and then we are doing a better job in the branches with the loans that we think we want that our sense of them pulling those through. And that's through a variety of factors both giving them information about the loans, but they feel comfortable that they are getting more transparency even though the underwriting decisions are made by the underwriting department and then just really focusing on performance. So, it's a number of things from the mix shift in secured, demand remaining healthy and then us running the business at a very granular level to make sure that we are performing well.

Michael Kaye -- Wells Fargo. -- Analyst

Okay, that's fine. That's great. I wanted to also talk about the updated charge-off guidance, it's employing better charge-offs about 20 to 40 basis points better than last year. I know you don't give 2020 charge-off guidance yet, but I was just hoping for some high level thoughts and how we should think about charge-offs next year with secured loan growth like with the slower debt and some of those loans begin to season?

Michael Conrad -- CFO

Yes. Hi, this is Micah. Largely, what we are seeing this year is a continued mix toward secured. We have seen pretty stable product loss rates. Our unsecured remains around 9% on an annualized basis, which is pretty consistent with what it's been over the last couple of years as you are starting to see the slowing down if you will or leveling off of our secured mix just coming off a very, very much lows when we integrated OneMain into the platform. And I think what we expect is that, that portfolio shift moderates, the moderation in terms of loss performance will also take place. So we are ready to give out 2020 guidance next year. We feel really good about where the portfolio stands and where our loss rate is in terms of our range for this year, but we will continue to move forward with that.

Michael Kaye -- Wells Fargo. -- Analyst

All right. Thank you.

Michael Conrad -- CFO

Sure.

Operator

Thank you. Your next question comes from Moshe Orenbuch with Credit Suisse.

Moshe Ari Orenbuch -- Credit Suisse AG -- MD and Equity Research Analyst

Great. Thanks and congratulations, Doug and Michael.

Doug Shulman -- CEO

Thank you, Moshe.

Moshe Ari Orenbuch -- Credit Suisse AG -- MD and Equity Research Analyst

Could you talk a little bit about the thinking behind the special dividend this quarter versus other forms of capital return and how to kind of think about obviously you have got a lot of options with the capital generation, but how we should think about which directions it gets deployed?

Doug Shulman -- CEO

Yes, Moshe. Look, first of all, business is performing great. We have got excess capital. It's evidenced by the strong returns second quarter and this year second quarter, we had over 30% return on tangible common equity. So, I feel very fortunate and we feel very fortunate that the business has come such a long way as we are having these discussions and we are distributing capital to shareholders. As I mentioned before, priority one is invest in the business whether that technology analytics customer experience, we want to make sure we have a profitable business for the long-term, this year, next year and 5 years from now we are able to keep serving customers well driving profitability. So that's always going to be first. We also have a very attractive asset that we put on our books and so as long as the loan meets our risk return hurdles, we will put it on and we think that's a good investment of capital. I want to be clear we are not looking for growth for good growth sake it's an output of all the factors I talked about on the last question, but we are seeing attractive opportunities and we will keep making loans. Third is our balance sheet. Having a lot of liquidity is paramount in this business. We are never going to take our eye off a bit and we are going to use capital for that purposes. For those purposes, we are going to make sure we always are running with prudent leverage levels and we have got liquidity. You know what I didn't mention it over the long run, we will look at our organic opportunities in the business. The market is quite frothy right now. There is nothing on the horizon, but over time and especially if the economy moderates, there might be some attractive opportunities that would be accretive to the business that we will consider. And then capital generated in excess of what we need to run the business prudently, we plan to return to shareholders. We started this year with a regular dividend that created an attractive yield for shareholders, because the business is performing well and we have a good line of sight to achieving our 2019 goals for the year, we feel really good about adding a special dividend. As you said, there is a number of things you can do with the capital. I outlined most of them, going forward we are going to consider all forms of capital return and we are going to talk to you more about it when we hold an Investor Day later in the year. What I would say is we feel really good about the stages of business and very confident that over the long run that the holders of our stocks are going to get excellent total shareholder return and you are starting to see that now.

Moshe Ari Orenbuch -- Credit Suisse AG -- MD and Equity Research Analyst

Great. Doug, you had also outlined a number of different initiatives that you are kind of working, are those things that you think will -- I mean, are the primary objectives of that to add to growth to reduce losses, to reduce expenses and what's the impact on expenses kind of for the balance of this year?

Doug Shulman -- CEO

Yes. So, the answer to growth losses expenses is yes. A combination of things, I think they are all. Everything we do, we want to make sure that's a good ROI for the business and strengthen it for the long-term. So I talked about customer experience should both add to growth that more customers will want to do business with us, won't drop-off in the funnel, because they don't have a good experience and the more we streamline our application and make it simpler also be less expensive for us to apply our customers. Similar with central sales, our analytics will both help us see where we have opportunities to drive more efficiency, but also see the mix that we have in marketing, for instance, between digital and mail and how people come in and interact with us and where there is falloff. So again it will help with both cost and growth and the analytics will also help us with underwriting as we get more refined as we see how investors perform or I am sorry how our customers perform over time. The tech initiatives clearly are a number of things from stability of platform, customer experience ease of doing business. All of these will make sure that once we attract the customers we want to meet our risk return profiles and we think we can help them with their financial needs make sure we book them which will help across the board. And it will be a better customer with less losses with more growth and more of those customers either joining us or staying with us. So, we will give you a flavor when we do investor day but, we have initiatives driving on all cylinders of the business.

Michael Conrad -- CFO

Most of it Micah -- I was just kind of pile on that in terms of your second part of your question what does it mean for expenses for the year Doug mentioned we are already doing a bunch of investments for the future we are continuing to drive efficiencies and focused on general cost controls our expenses do tend to fluctuate also with seasonally with our originations and customer acquisitions so that quarterly timing will vary I think the first quarter we are up somewhere on a 3.5% this quarter year over year we are at 2% year to date we still feel comfortable that at the end of the year we will be up above 3% incorporating all those factors.

Moshe Ari Orenbuch -- Credit Suisse AG -- MD and Equity Research Analyst

Perfect. Thank you so much.

Operator

Your next question comes from the line of Kyle Joseph with Jefferies.

Kyle Joseph -- Jefferies

Hey, good morning. And let me echo others congratulations on a strong quarter just two questions for me given what you guys did with the balance sheet in the quarter. How should we think about your debt mix between secured and unsecured going forward?

Michael Conrad -- CFO

Yes, I think. Thanks for the question. We as Doug mentioned we talked about as a lot we run a conservative in Brazilian balance sheet really with a focus on health of the business on a long liquidity run rate our strategic mix toward unsecured overtime has increased our duration not just from the mix impacts but also lengthening the average tenure of our unsecured debt it is also increased our unencumbered receivables and those become available to pledge in our of our conduit for adjusting general use as liquidity if and when we need them so, this strategy have definitely led to increase liquidity. We have extended our runway significantly and our increasing duration also reduces our interest rate risk. Obviously these things are critical to the long term health of the company. The increase in the interest expense year over year is really an output of that strategy. Our average debt was up $400 million year over year for growth. But, then the impact of having that additional unsecured has contributed also to that year-over-year increase. We feel that's important to the business and from a long term point of view in terms of our mixed funding in debt we had stated strategy to be approximately 50-50 that will move around from quarter to quarter depending on our issuance calendar and the timing. But, I think when we migrate up you will see us migrate back down toward secured and run really a balanced program overtime.

Kyle Joseph -- Jefferies

Got it. And then one follow-up from me obviously there has been some regulatory developments in California. Can you just give us a high level sort of how you are thinking about that as an opportunity for your business?

Michael Conrad -- CFO

Yes, look. We support the proposed California legislation that would cap lending rates at 36% it's been through the assembly it's been through some committees and senate from what we here it is going to be picked up when the senate comes back in fashion. We operate as a responsible lender. We already voluntarily limit our rates to 36% even in uncap state like California and others that don't have a cap. So, we like this legislation we think it is really good for consumers we think it is good public policy and we support it.

Kyle Joseph -- Jefferies

Got it. Thanks very much for answering my questions

Michael Conrad -- CFO

Thanks, Kyle.

Operator

Thank you your next question is from Rick Shane with JPMorgan.

Rick Shane -- JPMorgan

Hey guys, thanks for taking my questions this morning. So when we look at the dividend distributions for this year, it probably represents somewhere between 35% and 40% payout ratio. Which is a good trajectory in first year of return to capital I am curious where you think that could go longer term. The other question I would like to explore is just when you consider either repurchase versus dividend decision. Can you talk a little bit about what metrics you are looking at in terms of tangible growth versus gap value and also given the concentrated position from the sponsor and the relatively low flow how do you think about that in terms of returning capital?

Doug Shulman -- CEO

Yes, sure. So, regarding going forward as you said, we are really pleased that we have a nice payout ratio this year. And as you know, this is new to the company to be doing capital returns and so we legged in with a regular dividend, then a special dividend. You named a whole bunch of factors that can go in to the decision. Obviously when we think about capital, we look at GAAP and GAAP earnings and what capital is generated and that's how we will be looking at it going forward. I think around like all of the metrics, the factors that go into it, we are going to give you more color at our Investor Day later in the year. For us, the key was -- how are we doing this year, what do we need to fund both investments in the business and the growth of the business, what we need from a prudent leverage level and gives us excess capital this year, we are sticking with dividends. With that said I mentioned that we will consider all forms of capital returns going forward and we will talk to you more about it later in the year.

Rick Shane -- JPMorgan

Terrific. Thank you very much.

Operator

Your next question is from Kevin Barker with Piper Jaffray.

Unidentified Participant

Hey, this is actually [Indecipherable] on for Kevin. Good morning. Most of my questions have been answered, but maybe just looking at the average size of your loans kind of continue to trend higher here in recent quarters. Is that any particular strategy attributable to the change or just maybe a result of the sharper focus of lending on the auto side?

Doug Shulman -- CEO

Yes, that's a good question. I mean, really it's just a function of the mix of secured customers. We get our customers largely choice. Some customers come in. We will only offer them a secured loan spending on the credits, but a good portion of our customers do have the choice. And whether that mix of originations of secured will change from quarter-to-quarter as a result, then certainly the higher loan size on the secured will have an impact on that year-over-year.

Unidentified Participant

Okay, great. Thanks.

Operator

Your next question is from Sanjay Sakhrani with KBW.

Unidentified Participant

Thanks. Good morning. It's Eric on for Sanjay. Maybe you could take the end of the portfolio a little bit and hopefully shine some light on the credit profile of the borrower between secured and unsecured. Specifically, how does the debt to income ratio differ between the two buckets?

Doug Shulman

Well, I guess, I will say for our secured products and our unsecured largely the differences in credit and in terms of expressing it through FICO are not materially different. In terms of our ability to pay and income ratio, it's really a function of each loan and the tenor and cost of that loan on a monthly basis. So Doug alluded to this a little bit in his comments that we breakup from our end. They have a certain risk profile that are available for one or more products and then when we walk them through the process and talk to them above their specific financial situation we make sure that their residual income is sufficient enough to cover their monthly obligations and also the obligation on the OneMain loan. So depending on the size of that loan and the tenor that can change, but we don't see significant impacts other than that.

Unidentified Participant

Thank you. And then last question just how does the federal rate cut factor into your outlook for the consumer I guess if at all and how should we think about the impact of lower interest rates on the financing side of OneMain's business and does the impact that again if any on credit spreads? Thanks.

Doug Shulman

Yes. So on the funding side, I will remind everyone, our debt is nearly 100% fixed rate, so immediately not an impact. We do issue $3.5 billion to $4 billion a year to fund the business that is exposed to benchmark rates. That said, we think it will have a relatively minimal impact. So, if you run about 50 basis point parallel shift across the curve, keep in mind that we issue across all tenors with our ABS and unsecured issuance, but if you were to see a 50 basis point change in your example a reduction we expect to see approximately $15 million increase in net income, so relatively small. On the customer side, our customers are relatively from a pricing point of view insensitive to benchmark rates. We operate within each state's unique pricing rates and rate structures and we are continuously pricing as we talk before continuously testing pricing to make sure we are competitive in our market. And that's really what drives the APRs and pricing we have on the front-end.

Unidentified Participant

Great. Thank you for the color.

Doug Shulman

Sure.

Operator

Your next question is from the line of Mike Grondahl with Northland Securities.

Mike Grondahl -- Northland Securities

Yes. Thanks, guys and congratulations on the quarter. Just a question on leveraging capital return, your leverage got down to 6.1x, you announced the special dividend, do you need to get it back to 6.1 or 6 flat before you do another kind of capital initiative or are you saying hey, you are close enough to that to [Indecipherable] ?

Michael Conrad -- CFO

Yes, Michael. As Doug mentioned and as you are seeing from this special business does produce a lot of excess capital. We felt comfortable with where the business was in order to initiate this original special dividend. Yes, we did achieve 6.1x leverage for the third quarter. We remain committed to our year end leverage target and we will kind of go from there.

Doug Shulman

Yes. I mean, all I would say is it is similar to our balance sheet we are going to be raising debt every quarter. We are going to have different growth rates. And so end of quarter numbers are interesting and we will always come and talk to you about them. They are going to fluctuate. And when we think about the business and when we think about leverage, we think we need to be in a prudent range where we have a conservative balance sheet, lots of liquidity. We feel really good now and we feel really good should the economy moderate and so you will see fluctuations at quarter end, but we are going to manage it in a responsible range.

Mike Grondahl -- Northland Securities

Got it, got it. And then are you seeing anything new on the competitive environment to kind of supplement your growth a little bit. What have you seen there?

Doug Shulman

You know, what we have -- what's unique is we are the only non-bank installment lender at scale nationwide. And so we actually compete with all sorts of different institutions. So, we have some community banks and credit unions that are very local instead of some of our customers. We have got some niche regional players who got similar business models to us. For our unsecured debt, we do a fair amount of credit cards and other debt consolidation. And so there is movement there and some of the fin-tech competitors, most of them are in the prime space, but some of them go down into the near prime, the high 600s. We are very intense to our competitors as Mike has said. We want to make sure our customers have a great customer experience and so the personalized service. We give the ability to pay underwriting to the relationships we build, especially on a smaller count, where lending is a very personal thing. It's very important and we think we outperformed there. We have been investing in technology and in our digital interfaces and in our applications to make sure if there is more tech competitor that we remain at parity. We have been investing in our mobile apps and making sure we are at parity. We are developing chats. There are people from younger demographic who don't want to get on the phone or walk into a branch and get serviced through other means. And we are always testing pricing and making sure we stay competitive with pricing. So what I would say is we feel really comfortable with our competitive position and the results are showing that. But it's also our job is management could never get comfortable with your competitive position and always be looking at ways to better serve customers do underwriting and manage your balance sheet, drive expenses down, but we have a very intense focus on customer experience and part of that is making sure we know what's happening in the competitive landscape.

Mike Grondahl -- Northland Securities

Got it. Then maybe lastly quick just your credit performance is obviously running better, if the improvement was 100 points, what would you allocate to the economy and what would you kind of allocate to your underwriting for that 100 point improvement?

Doug Shulman

Yes, that's a hypothetical that's tough to answer. It's an improvement we are seeing is largely driven as I mentioned before by our secured mix. Our product performance is performing well and has been relatively stable within a few points over the last few years, but as a function of our underwriting and the investments in technology that Doug talked about investments and analytics and strengthening our underwriting models, but the secured mix is a huge part of what we have been able to accomplish over the last few years taking credit down from 7% annual charge-offs, down to our 6.1% to 6.3% range for this year.

Mike Grondahl -- Northland Securities

Okay. Thanks, guys.

Operator

Your next question is from Henry Coffey with Wedbush.

Henry Coffey -- Wedbush -- Analyst

Yes, good morning everyone and thanks for taking my question. Two questions really. One on the capacity front, it is a branch-based system, how do you think your current origination and loan servicing volume would sort of match up to your ultimate capacity for the system?

Doug Shulman

We have the ability to do distribution and servicing at scale. A lot of our loans actually originate online. So it's not like they are walking in and just having that conversation and giving all the information. We have a very good web interface and mobile interface, where you can still add your application. We have got -- there is quite a bit of elasticity in our system both because we have so many branches and we can do branch overflow, we know how to open and close branches. So if we see more demand and we are doing that all the time for opening branches in some areas, where we are under-penetrated and we are closing branches where it's not as profitable or we feel over-penetrated. And as I mentioned, we have been adding to our sales and servicing capability centrally. And so for instance right now our branches both work with customers on products and closed ones, they also do the early stage delinquencies. If there is an issue in the branch where they can't get all the early stage delinquency or they are flooded by applications, we, that day, can do overflow to our central collections who can then pickup some of the collection loads. So, I don't think capacity is the constraint for us. Our constraint is that certain universe of people, we will make loans to who we think is the good financial product for them, meet their financial needs and meets our risk return hurdles in our credit criteria, we market to those people, we bring them in and on to our platform, but I don't think, it's kind of the closing servicing branch network is the capacity constraint.

Henry Coffey -- Wedbush -- Analyst

And then a second somewhat related question in terms of attractive customers, the fin-techs are offering a rate that's comparable with the kinds of rates you offer to customers that at least based on a FICO score basis, they claim a better -- much more in the high 600s than not. Is there ability to do so that you know the instant close -- is that a restraint for you all, are you loosing customers, because you can't decision something as quickly as they can or is that really not turning out to be much of an issue?

Doug Shulman

Look, my view is that the fin-tech competition that's come in, has done a couple of things, one is it run the market, so they spend a ton of money on advertising. And two, not any one specifically, but folks in Silicon Valley usually start with a customer experience first mentality. Folks like us actually start with a credit liquidity financial services view. I think you know what they have done is kind of make everybody get beyond their toes around customer experience. Throughout my carrier, I have always thought it's a losing proposition. Today, you are great at financing, but you are not great at customer experience. And so we have got a really good focus on our customers. People in the branches perform great. Service to the customers have great deep relationships. A lot of people taking a loan like a personalized approach. With that said, we also had digital capabilities, phone capabilities and we are investing in that. So that as the market evolves, we make sure that we don't have any cracks and that we stay strong and competitive.

Henry Coffey -- Wedbush -- Analyst

It looks like and this is just by looking at the estimated payment rates that you are sort of average life of your loan is about 18 months, I don't know if that's the exact number, but is that likely to change as you originate more and more secured loans that you think that always going to be kind of the profile of what you do?

Michael Conrad -- CFO

Yes, Henry, this is Micah. As we talked about before, the average term in our loans is somewhere between 48 and 60. The average life ends up being a function of payment behavior and also renewals. On the secured side, certainly, the life of that loan is a little bit lengthened from a credit perspective, because you just have fewer charge-offs and a larger loan tends to stay around a little bit longer, but it's moderate and really as we focus on continuing to build customer value and making sure that we are there for when our customers need us, we do tend to have a lot of -- good amount of renewal activity customers coming back and those are, some of our best performing loans. So that's going to impact the average life of the ultimate loan, not necessarily the customer.

Henry Coffey -- Wedbush -- Analyst

Great. And thank you very much and congratulations on a great quarter.

Michael Conrad -- CFO

Thanks, Henry.

Doug Shulman

Thank you.

Operator

Thank you. Your next question comes from Giuliano Bologna.

Giuliano Bologna -- BTIG

Good morning. Thanks for taking my questions. I had a quick question, looking at the portfolio, it seems that the pay-down rate of the portfolio kind of accelerated in the quarter, roughly 350 basis points on an annualized basis. Was there a little bit more refinanced volume internally or did something drive that that would probably explain the higher origination volumes?

Michael Conrad -- CFO

Yes, Giuliano, the relationship between our originations and our receivables growth will tend to change from time to time. And it does fluctuate. It's really a function of the secured mix that we do and the size of the loan. It's also a function of the customer mix when we do a renewal. The customer has an existing balance and we refinance that balance. So even though you might have an origination, it looks like an $8,000 loan on a renewal, the actual change in the receivables will be lower than that, because the customer has an existing loan. So, you will not see a perfect relationship between originations and receivables. If you look at it every quarter from a payment rate point of view, we have seen payments and also we track early payoffs. So customers who will end up paying off their loan and leaving the book, we have seen a lot of stability over that and really over a long period of time. So it's probably something with the mix that's impacting what you are looking at.

Giuliano Bologna -- BTIG

That makes sense. And then thinking about the guide on charge-offs, what sort of really driving that? Is that lower gross charge-offs or is it really more should be driven by higher recovery going forward?

Doug Shulman

No, it's really more on the growth side. We have run a pretty diversified recovery strategy over a long period of time that will tend to run anywhere 80 and 100 basis points as a percentage of receivables each quarter. If you look at where we are from a early stage delinquency point of view, if you look over the last 3 years in the second quarter. We have seen 30 to 89 relatively flat to get over that period of time delivered 3 years of declining charge-offs. And really that is an indication of the benefit secured mix has on our late stage delinquency and ultimately on our charge-offs as our customers a non-brand customer amid a payment from time-to-time, secured lending really helps to prevent those customers rolling into the late stages of delinquency and has a significant impact on our charge-offs. So that's what I have mentioned him before that also as our portfolio mix of secured beginning to stabilize and level off, but we expect the rate of improvement to follow.

Giuliano Bologna -- BTIG

That makes sense. I appreciate it. Thank you very much.

Doug Shulman

Thank you.

Operator

[Operator Closing Remarks].

Duration: 55 minutes

Call participants:

Kathryn Miller -- Head, Investor Relations

Michael Conrad -- CFO

Doug Shulman

Doug Shulman -- CEO

Eric Edmund Wasserstrom -- USB Investment

Michael Kaye -- Wells Fargo. -- Analyst

Moshe Ari Orenbuch -- Credit Suisse AG -- MD and Equity Research Analyst

Kyle Joseph -- Jefferies

Rick Shane -- JPMorgan

Unidentified Participant

Mike Grondahl -- Northland Securities

Henry Coffey -- Wedbush -- Analyst

Giuliano Bologna -- BTIG

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