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OneMain Holdings, inc (OMF) Q3 2021 Earnings Call Transcript

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OMF earnings call for the period ending September 30, 2021.

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OneMain Holdings, inc (OMF -0.09%)
Q3 2021 Earnings Call
Oct 21, 2021, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to 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.

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Peter Poillon -- Head of Investor Relations

Thank you, Britney. Good morning everyone and thank you for joining us.

Let me begin by directing you to page two of 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 for 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.

Doug Shulman -- Chairman of the Board & Chief Executive Officer

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 hardworking 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's support programs over the last year and a half. 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 sheets 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 it's 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 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 customer's needs today and offer products and services that enable a better financial future. I'm really pleased to tell you that we launched our two 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 scaled rollout that will likely occur at the end of 2022. It's very early days but the initial results showed 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 then, 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 multi-billion 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 Tim 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've 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 return 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 returning capital to shareholders.

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

Micah Conrad -- Executive Vice President and Chief Financial Officer

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 manage receivables growth in 8% to 10% range. We are $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.

Manage 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 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 are 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% this quarter. We continue to expect full year interest expense to be in the range of 5% 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 manage 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 receivable sold that 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 delinquencies 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 toward 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 combined $331 million over the past three quarters, our reserves increased $59 million this quarter to about $2.1 billion while our reserve ratio declined to 11%. 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 seven 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 three ABS deals, we have raised nearly $3 billion and an average coupon of approximately 1.5% and an average term of approximately five 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 and 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 repurchase 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 pay 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.

Doug Shulman -- Chairman of the Board & Chief Executive Officer

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.

Questions and Answers:

Operator

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

Michael Kaye -- Wells Fargo -- Analyst

Hi, guys. Good morning. It seems like some investors were surprised how quickly the delinquency rates snap 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 hit the more 6% to 7% rates, considering the pickup in loan growth that you've seen in is 6% to 7% still considered normal for you folks given more prime originations and the loan sales?

Micah Conrad -- Executive Vice President and Chief Financial Officer

Hey, good morning, Michael. It's Micah. Thanks for your question. I'll start by saying last year and a half 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 toward 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 continued 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. My guest sitting here today would be likely sometime in the back half of 2022.

Michael Kaye -- Wells Fargo -- Analyst

And 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 and maybe into 2022. I think it'd be helpful for all of us, if we could gauge where asset yields could eventually stabilize.

Micah Conrad -- Executive Vice President and Chief Financial Officer

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 yields 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 to any one metric and that includes both credit yield and any other metric in our P&L. We're looking at bottom line profit and we will, as we said in the past, underwrite every loan that meets our return hurdles. So, in this case, the yield was driven by, our trading have a bit of yield, if you will, for higher credit quality growth with long-term positive customer and earnings impacts. This business leverages our improving funding costs. It's also expected to generate some lower losses on this particular set -- this particular group of business and also incremental operating leverage. In terms of the fourth quarter, we, as we noted, our strategic priorities, we expect full 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.

Operator

Our next question comes from Kevin Barker with Piper Sandler.

Kevin Barker -- Piper Sandler -- Analyst

Thank you. Your recovery rates have increased to about 1.3% of total loans outstanding or defaulted loans. Do you expect that 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?

Micah Conrad -- Executive Vice President and Chief Financial Officer

Yes., Kevin. I think that one's hard to really tell also, I mean, we typically run recoveries and 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's 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, it's really hard to pinpoint exactly when but I would expect that to moderate versus falling dramatically in one given quarter would be my view.

Kevin Barker -- Piper Sandler -- Analyst

Okay. And then, you raise secured debt at below 1% in October and your current cost liabilities are over 5% today. Meanwhile, only for 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 toward secured and then where your unsecured debt is now trading in the market?

Micah Conrad -- Executive Vice President and Chief Financial Officer

Yes, so what they're all trying to unpack is Kevin, the -- 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 or 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, year and a half; it was where the unsecured markets had been trading so you've seen our mix move down to that 39% secure that we printed this quarter, that'll move up a bit after the October ABS deal that we just announced the $1 billion. But I, that's certainly an opportunity for us going forward. I know, give me call of staff, I think the gist of your question is, where interest expenses is heading, we certainly feel like we have a lot of tail in there. Not ready to commit to where it will settle; there is a lot still to be found out here with race. But, I mentioned our last three 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 talked about our whole loan sale programs; we've added $700 million of committed funding in whole loan sales which are really debt and capital efficient earnings. Our next maturity is a $1 billion, it's in May at 6 and an 8. We also have about $600 million of callable debt around May or June at 8 and 7, 8. 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 minimum, hopefully I've captured all of your questions there.

Operator

Our next question comes from Vincent Caintic with Stephens.

Vincent Caintic -- Stephens Inc. -- Analyst

Hi, thanks. Good morning. Thanks for taking my questions. 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's anything you could do there. And with your trials going on right now, what are you looking for before you fully roll out? Thank you.

Doug Shulman -- Chairman of the Board & Chief Executive Officer

Yes, hey, 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, yes, there's different drivers of it and different inputs. But I think when it all shakes out, our model shows that 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'll give us a big enough statistical sample to validate all of our models. And the three main things we're looking at is take-up in marketing, of both 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 have two 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'll 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 six 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 two 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'll be closer to the back half of 2022.

Vincent Caintic -- Stephens Inc. -- Analyst

Perfect, thank you for that. And second question just a quick follow up for 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 pre-pandemic. I am just may be clarifying, if we get back to kind of your normalized charge-off rates, is the current reserve ratio about where you think it should be or is there any other thoughts to that? Thank you.

Micah Conrad -- Executive Vice President and Chief Financial Officer

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 in 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 forecasts 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.

Operator

Our next question comes from Moshe Orenbuch with Credit Suisse.

Moshe Orenbuch -- Credit Suisse -- Analyst

Great, thanks. You've sized this fairly well so far in terms of the yields, kind of talking about stabilizing into the fourth quarter. But is there any extra kind of detail you can give us just as you think about those higher quality, lower yielding balances, like what portion of your origination that they are currently or what portion of your balances you do expect them to become overtime?

Micah Conrad -- Executive Vice President and Chief Financial Officer

Yes, Moshe. I mean, as we've discussed on our originations, we're right at about 4%, 5%, 6% thing of the month, if 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. It 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.

Moshe Orenbuch -- Credit Suisse -- Analyst

Sure. And as things have developed over the last several years, I mean, you've returned a significant amount of capital continue to 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, kind of guidance you can give us on that?

Doug Shulman -- Chairman of the Board & Chief Executive Officer

Yes, I mean, let's let me give you just some thoughts on our capital return strategy. Just as you know, it's evolved over time. It was only two years ago, or two and a half 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 of 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 dividend 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.

Operator

Our next question comes from Rick Shane with JP Morgan.

Rick Shane -- JP Morgan -- Analyst

Thanks guys for taking my questions this morning. 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 card 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?

Micah Conrad -- Executive Vice President and Chief Financial Officer

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 we have a lot of opportunities there. We have significant relationships with many banks in our conduit block, 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 capabilities that we have today for our loan product. 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 the success on the credit card growth.

Doug Shulman -- Chairman of the Board & Chief Executive Officer

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 strengths of nationwide distribution, of funding of our understanding in 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.

Rick Shane -- JP Morgan -- Analyst

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 financed 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?

Micah Conrad -- Executive Vice President and Chief Financial Officer

I think the -- as we 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 in our leverage in totality.

Doug Shulman -- Chairman of the Board & Chief Executive Officer

Yes. So we think -- I mean, look our models show that they 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 to 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 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. And looking at expenses, we have a great app for there. 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.

Rick Shane -- JP Morgan -- Analyst

Got it, OK. 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 the 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 recap the book as quickly?

Micah Conrad -- Executive Vice President and Chief Financial Officer

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

Operator

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

Mengxian Jiao -- Deutsche Bank -- Analyst

Hi, good morning, guys. Thanks for taking my questions. I want to touch on the near-prime credit card space and the competition overall, we've sort of seen other companies go the inorganic path of 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.

Doug Shulman -- Chairman of the Board & Chief Executive Officer

Look, we -- 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 multi-billion dollar receivables product over the next several years. And so 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 is differentiated and is focused on rewarding good behavior and credit building behavior of customers and that, as they make progress will have the ability to grow with them.

Mengxian Jiao -- Deutsche Bank -- Analyst

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

Micah Conrad -- Executive Vice President and Chief Financial Officer

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

Operator

Our next question is from John Rowan with Janney.

John Rowan -- Janney -- Analyst

Good morning, guys. 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, I am trying to figure out what the inputs are there?

Micah Conrad -- Executive Vice President and Chief Financial Officer

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 recovery through debt sales. We made some decisions over the last couple of years just looking at NPV 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 talked a little bit when 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 and we still have a multi-channel and multi-faceted 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 the sign of consumer balance sheets but also the work we've put in to optimize our own internal post charge-off recoveries.

John Rowan -- Janney -- Analyst

Okay. And just next on the credit card business, obviously what you're using as 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 in, products buy now pay later or lease to own? Thank you.

Doug Shulman -- Chairman of the Board & Chief Executive Officer

Yes. Look, one of the things that we've said about the card is that there's a lot of synergy. So we have loans that are average, $8,000 to $10,000, we're 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, they'll have some open to buy line on the loan but also on the card if somebody buys $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 accretive 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.

Operator

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

Kenneth Lee -- RBC Capital Markets -- Analyst

Hi, thanks for taking my question. And this would just a follow up on some of the previous questions. Wondering 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. Thanks.

Micah Conrad -- Executive Vice President and Chief Financial Officer

Yes. Again, and 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 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're also, as we mentioned, utilizing the improvements 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 adjust -- this risk, sort of higher credit quality customer well exceeds our 20% return thresholds and should be accretive to earnings, both from a profitability and just regular way earnings going forward.

Kenneth Lee -- RBC Capital Markets -- Analyst

Right, very helpful. And just one follow up, if I may, just more broadly, wonder if you could talk about the current competitive landscape within that nonprime near-prime segments. And whether you're seeing any appetite to either increase or decrease in competitive activity? Thanks.

Doug Shulman -- Chairman of the Board & Chief Executive Officer

Yes. Look, we are -- I think there's quite a bit of competition in the market. It is more or less, everybody's 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 of group of competitors going after the installment lending business but what I would say is, it appears that, everybody's 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 counted 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 and our products and our technology and our digital channel, in 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 year and a half. Strategic pricing for better credit quality customers, innovations around size of loan, all the analytics and 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.

Operator

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

Doug Shulman -- Chairman of the Board & Chief Executive Officer

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.

Operator

[Operator Closing Remarks]

Duration: 55 minutes

Call participants:

Peter Poillon -- Head of Investor Relations

Doug Shulman -- Chairman of the Board & Chief Executive Officer

Micah Conrad -- Executive Vice President and Chief Financial Officer

Michael Kaye -- Wells Fargo -- Analyst

Kevin Barker -- Piper Sandler -- Analyst

Vincent Caintic -- Stephens Inc. -- Analyst

Moshe Orenbuch -- Credit Suisse -- Analyst

Rick Shane -- JP Morgan -- Analyst

Mengxian Jiao -- Deutsche Bank -- Analyst

John Rowan -- Janney -- Analyst

Kenneth Lee -- RBC Capital Markets -- Analyst

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