Q2 2022 OneMain Holdings Inc Earnings Call
Welcome to the Onemain financial second quarter, 2022 earnings conference call and webcast hosting the call today from Onemain is Peter Polian head of Investor Relations. Today's call is being recorded at this time all participants have been placed in a listen only mode and the.
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It is now my pleasure to turn the floor over to Peter Polian you may begin.
Thank you good morning, everyone and thank you for joining us.
Let me begin by directing you to page to the second quarter 2022, 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.
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 any undue reliance on forward looking statements.
If you may be listening to this via replay at some point after today.
Remind you that the remarks made herein are as of today July 28, 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 Mike Conrad, Our Chief Financial Officer.
After the conclusion of our formal remarks, we will conduct a question and answer session. Let me turn the call over to Doug.
Thanks, Pete Good morning, everyone and thank you for joining us today.
This morning, I'll take some time to review our financial performance in the quarter discuss the credit and macro economic environment and also provide an update of our key strategic initiatives.
I'm pleased with our financial performance in the quarter as we.
<unk> $275 million of capital and demand for our loan products remained quite strong.
Originations were $3 9 billion up modestly year over year.
Similar to last quarter.
Healthy demand for our core personal loan product was supported by our expanded products and new distribution partnerships the.
The strong originations in the quarter led to solid managed receivables growth of 10% year over year.
Loan losses were 6% below second quarter loan losses in previous years before the pandemic.
And in a difficult funding market, we continued to show the strength of our balance sheet by raising more than $1.5 billion, while also improving our liquidity.
With regard to the macroeconomic environment over the last several quarters, we've discussed our expectation that credit performance will follow an orderly path to normalization in.
And through the first quarter of this year that orderly path was evident in our portfolio performance.
We also said that we would be monitoring credit performance closely and be prepared to act in this.
All being economic environment and stimulus wears off savings decline.
Inflation persists.
In May we began to see an uptick in early stage delinquency for certain lower credit quality lower FICO customers, primarily concentrated in 2021 vintages.
We closely track various sources of credit performance of the non prime consumer, including ABS Trust information as well as other public industry sources and it is clear to us that there has been an increase in early stage delinquency across the <unk>.
Non prime space over the past couple of months.
Having said that our higher credit quality customers have shown performance very much in line with our expectations and we continue to see very strong backend collections and recoveries that are contributing positively to our charge off performance.
As you know what distinguishes us in the non prime space is our long history with this customer and our ability to adjust our underwriting quickly when needed.
We began selectively tightening our credit box as far back as late 2021, including reducing assumptions of collateral values adjusting our definition of thin file and enhancing verification requirements on certain new loan applicants.
We've taken more significant tightening actions in the last two months, we feel very comfortable with our current credit posture, having limited underwriting in the higher risk segments, and we continue to monitor the environment closely and we will remain prepared to make further adjustments as necessary.
Yeah.
Over the past few months, we've seen some competition pull back even with better credit quality customers, presumably due to a lack of balance sheet funding per loans. This has created opportunity for us to originate higher credit quality business and continue to drive.
<unk> growth.
The credit adjustments, we've made we like this competitive positioning using our incredibly strong balance sheet to move our overall portfolio to higher ground as we are starting to see some challenges in the lower credit quality consumer.
Given what we are seeing we now expect net charge offs for the year to end about 50 basis points higher than our original range of expectations, which is still well within our long term target range and we will continue to have robust capital generation.
As a reminder, we underwrite our loans to a minimum 20% return on equity hurdle.
This gives us significant cushion.
Even the current vintages that have shown more elevated delinquency and anticipated in may and June in aggregate are expected to remain very profitable with returns well in excess of our 20% return thresholds.
It's also important to note that despite a tighter credit box originations remained quite strong.
Demand for our core loan products has been bolstered by some positive competitive dynamics as well as our continued investment in new products and channels.
So while cutting our credit box at the lower end of the risk profile will reduce originations and receivables growth. We believe there are excellent opportunities to originate more loans at the higher end at very attractive returns.
Let me say, one more thing about the macroeconomic environment and our business model.
It is not surprising that a subset of our customers have less cushion and are having a harder time, making ends meet as government stimulus wears off and inflation pressures continue.
The hallmark of our business model is to be there for customers in good times and bad and we are very comfortable managing through difficult economic cycles.
When we saw an uptick in early stage delinquencies and discrete segments of our customer base, we quickly adjusted our underwriting shifted resources to work with customers, who need extra help and activated our robust borrower's assistance programs.
Let me now turn to our strategic initiatives.
The strategic pivots, we've made during the last few years continue to be a major focus at Onemain.
We continue to invest in providing customers with an experience that meets their needs whether in person on the phone or through our app and web properties are.
Our digital capability spans beyond just the ability to take digital applications and closed loans outside of our branch.
It includes digital servicing that allows us to contact customers and service loans more efficiently.
We are investing in these capabilities across all areas of customer engagement.
As you know we are closing almost 50% of our loans digitally we are using machine learning algorithms to generate high quality workflow assistance to our team members, we're engaging more customers in two way text messaging for servicing and collections with integrated text to pay.
Abilities.
These are just a few examples of the digital enhancements, we're making to serve our customers and continuously improve our performance.
On a bright way credit card, we are really pleased with the progress we have made and will be expanding in select segments in the second half of the year.
As I've said in the past we are executing it very careful and disciplined expansion.
In late 2021, we tested the product value proposition and marketing and we had excellent take rates confirming that we had a unique card product to bring to market.
Then tested Activations line usage digital adoption and other key metrics, our last data point to test was credit.
Most of the key metrics to date have been in line with or better than our initial expectations. Our test segments did just what we had hoped revealing where we can have high confidence in unit economics.
You should expect card balances to grow in the second half of 2022.
Be it with a different mix than the original 70000 cards issued over the last nine months.
Those cards tested many many combinations of product channel and risk segments for this next expansion, we've selected certain lower risk segments and lower risk channels that met our return hurdles in the tests.
I remain very excited about our ability to pair of daily transactional card product with our installment loan product, thereby expanding our total addressable market and deepening our relationship with current and future customers.
We also continue to see good traction through our product and channel expansion efforts.
One example, we discussed last quarter with our smaller dollar loan product.
500 dollar loans that we offered to certain customers.
We've also spoken about our channel distribution partnerships with a focus on partnerships such as dealer track, which allows us to use our long history and expertise in auto underwriting to expand our lending.
These distribution partnerships.
Allow us to leverage our operational capabilities, including central underwriting and collateral verification and management.
And our deep understanding of the non prime consumer.
These outside the branch channels are already tracking towards several hundred million dollars of originations in 2022.
And the credit performance in our distribution partnerships has been strong.
This is another example of a product and channel expansion and allows us to use our unique core competencies and competitive advantages to expand our business.
We're also seeing more and more customers adopt trim onemain money saving and budgeting app.
As a reminder, trim helps people track negotiate and save money on everyday bills, such as cell phone cable and utilities. It also helps people compare rates on auto insurance and other products.
As inflation continues to challenge hard working Americans. This is another valuable tool, we offer customers to help them improve their financial wellbeing.
And it also helps us deepen and broaden our relationship with them.
Finally, let me discuss capital allocation.
Our first and highest priority remains investing in our business to generate strong returns with return on capital in excess of 30%.
We will continue to prioritize investment in loans that meet our return hurdles. While also continuing to invest in key growth initiatives that will drive robust capital generation in the future.
While we expect to maintain a strong and efficient capital position. We also plan to return excess capital to shareholders through our regular dividend and share repurchases.
During the second quarter, we paid a regular dividend at <unk> 95 per share the $3 80.
Annual dividend yields a very healthy return of approximately 10% at current share price.
We also continued to execute against our share repurchase authorization during the quarter utilizing $94 million to repurchase $2 1 million shares.
Through the end of the second quarter, we've repurchased four 4 million shares.
Presenting about three 5% of shares outstanding with that let me turn the call over to Mike.
Take you through the financial results of the second quarter.
Thanks, Doug and good morning, everyone.
Demand for our loans remains strong and we continued to deliver on our customer value proposition with added digital enhancements and further adoption of our financial wellness tools. We continued bright way credit card development and the measured expansion of our distribution channel partnerships.
And while we've seen some elevated levels of early stage delinquency in certain segments of our book, we are very positive about the prospects for our business.
Our Q2 financial results were strong.
We earned $209 million on a GAAP basis, or $1 68 per diluted share in the quarter.
Our results included a $28 million charge associated with the early redemption of our $600 million bond issued in May of 2020 at a coupon of 8% and seven eighths.
This redemption reflects the continued proactive management of our balance sheet that I discussed in detail on our last call.
Capital generation in the quarter was $275 million down $35 million from the second quarter of 2021.
This primarily reflected an increase of $89 million in charge offs from the historic lows we saw in 2021.
That increase was partially offset by net interest income growth of $47 million year over year.
On an adjusted C&I basis, we earned $233 million or $1 87 per diluted share down from $2 66 per diluted share in the second quarter of 2021.
The difference is driven largely by the normalization of charge offs as well as in period changes to our loan loss reserves, which you will see on slide nine of our presentation.
The second quarter 2021 provision reflected a $64 million net reduction in loan loss reserves, which included a reversal of 2020 pandemic related builds.
Offset by an increase of $58 million associated with on book receivables growth in that quarter.
Our current quarter reflects a similar level of receivables growth and the resulting increase in our loan loss reserves of $55 million.
As you may recall under sea. So we reserve for projected lifetime losses at the time of origination, which create the growth impact in our financial results.
Our managed receivables reached $21 billion this quarter up $1 7 billion or 10% from a year ago, reflecting strong consumer demand and the continued positive impact from our investments in new products and distribution channels.
Note. This includes receivables sold through our whole loan sale partnerships and serviced by Onemain as well as our credit card receivables.
Our net interest margin remained strong at 18, 6% in the quarter net interest income was $886 million up 6% compared to the prior year quarter, driven by higher average receivables.
Portfolio yield was 23, 1% in the quarter flat to last quarter.
Interest expense was $218 million for the quarter down 5% versus the prior year, Despite an increase in debt supporting our balance sheet growth.
Interest expense as a percentage of average receivables improved from five 2% in the year ago period to four 6% this quarter.
We accomplished this through the proactive management of our funding structure. Despite this year's increase in benchmark rates.
Other revenue was $153 million in the second quarter up $5 million from the prior year quarter.
Year over year increases from our whole loan sale program more than offset a $6 million current period market adjustment related to equity values within our $1 $8 billion investment portfolio.
As a reminder, this portfolio supports our insurance policy claims reserves.
Our policyholder benefits and claims expense for the quarter was $40 million down from $48 million in the second quarter of 2021, driven by positive year over year claims experienced across several insurance products, including life and disability credit insurance.
Let's now turn to slide seven to review, our originations and receivables trends.
Originations were $3 9 billion in the second quarter up modestly from $3 8 billion in the second quarter of 2021.
We are seeing continued strong demand for our core loan product, which has been a partial offset to the impact of our underwriting adjustments.
We're also seeing continued strength in our product and channel initiatives.
We've talked in the past about testing with better credit quality customers within the more price sensitive and competitive affiliate channels.
Very recently, we've seen stronger application flow in these better credit quality segments, presumably as a result of competition lacking the strength of our funding programs and our balance sheet.
Additionally, our distribution channel initiatives continue to show strong performance with $90 million of originations in the quarter compared to $30 million in the second quarter of 2021.
These loans are originated and serviced by a specialized central team and importantly outside of our branch network demonstrating the value of our Omnichannel model and giving us another scalable distribution channel for our loan products.
Turning to slide eight and our credit performance.
Personal loan net charge offs were $283 million or 6.0% above the historic low four 4% in the second quarter of 2021, but still below normal historical levels.
After tracking in line with expectations throughout the first quarter.
Segments of lower credit quality, lower FICO customers concentrated mainly in our 2021 vintages began to show increased levels of delinquency in May and June amidst an evolving macro environment, specifically persistent and elevated inflation levels.
30 to 89 delinquency increased to $2, 73% in the second quarter, while 90 plus fell to 215%.
30, plus delinquency at the end of the quarter was 488%.
As Doug mentioned, we've been making selective adjustments to our credit box since late 2021.
And while we saw good performance in the first quarter, we've done some additional tightening in recent weeks due to the trends we saw in May and June .
We of course will continue to monitor the environment closely and will adjust our underwriting accordingly.
We continued to see strong backend performance in the quarter with late stage roll rates and post charge off recoveries better than pre pandemic levels recoveries.
Recoveries were $68 million, including $7 million from our bulk charge off sale.
Recoveries were one 4% of average receivables significantly above our pre pandemic levels of approximately 90 basis points.
Let me touch quickly again on our loan loss reserve shown on slide nine.
We ended the first quarter with $2 1 billion of reserves and a reserve ratio of 11% our reserve ratio remains above seasonal day, one levels of 10, 7%, reflecting a healthy level of caution given the continued uncertain environment.
Turning to slide 10 second quarter operating expenses were $350 million up 6% year over year.
Note that operating expenses have been largely flat for the past three quarters.
Our year to date operating leverage was seven 2% 20 basis points better than a year ago.
As you know we have a culture of expense discipline within our company and we've recently taken some proactive actions in accordance with the evolving environment.
As an example, we are making some targeted adjustments to our marketing spend especially in the direct mail segment to better align with our tighter credit appetite and the competitive dynamics, we are seeing in the market.
While we are actively managing our expenses. We also continued to invest in new products and channels technology digital capabilities and data science, all of which we expect will drive future growth and performance within our business.
We now expect our full year opex ratio to be approximately seven 1%.
Below our original estimate for this year and down from last year.
Last quarter I spent some time discussing the strength of our balance sheet.
And our funding programs, given the challenging rate environment with rising benchmark rates and widening spreads.
The funding environment remained challenging in the second quarter.
Despite that we raised $1 2 billion in the ABS markets, we completed a $600 million social avs. The first of its kind at four 3% in April and followed that with a $600 million ABS deal at four 6% in June .
We've seen demand from a steady group of returning investors and have also seen solid interest from new investors. This year.
As we mentioned on our last call. We also structured a $350 million private secured funding transaction with one of our long term banking partners at very attractive rates in April .
We redeemed $600 million of unsecured debt with a coupon of 8% and 78% that was issued in June of 2020 during the heart of the pandemic.
That bond included for the first time, a callable feature providing us additional flexibility to manage our funding costs.
Every subsequent bond issuance has included this callable feature in addition to our long standing investment grade covenants, a true differentiator for our bond program in the market.
We remain very well positioned during this period of rate and market volatility to be selective and look for windows of opportunity to access the markets.
As you know another hallmark of our strong balance sheet as our liquidity runway of over 24 months.
This is the length of time in which we can operate the company under stress macroeconomic conditions and with no access to the capital markets.
A foundation of our runway is our committed bank capacity, which at the end of June was just over $7 billion.
Comprising nearly $5 8 billion of conduits and a five year unsecured revolving facility of 125 billion.
Spread across our geographically diverse group of Bank 15 Bank partners.
In the quarter, we added three new banks to our unsecured revolver and just recently closed a $400 million conduit with a new partner bank in early July .
We now have over $7 4 billion of committed bank capacity as well as over $9 billion of unencumbered loans. So our liquidity resources that support these facilities also remains robust.
Our balance sheet investment over the years provides sleep at night assurance that supports the resiliency of our business through uncertain economic conditions, we are confident that our balance sheet positioning and our industry, leading funding programs will continue to be a competitive advantage.
Moving on to page 12.
Our strong capital generation of $275 million allowed us to repurchase $2 1 million shares for $94 million and returned another $120 million to shareholders through our regular dividend all while maintaining our capital levels. Our net leverage at the end of the quarter was five six times.
On page 14, we've updated our full year strategic priorities to reflect the current environment.
Given our cautious stance on credit and the actions we've taken to tighten our underwriting we expect managed receivables to grow at the low end of our previously stated range and also at the lower end of our long term operating framework.
As we discussed earlier, there remains an abundance of attractive loans at the higher end of credit scale, given the competitive dynamics noted thus far in 2022.
We also now expect full year net charge offs to be approximately 50 basis points higher than our original expected range still comfortably within our long term framework of 6% to 7%.
We are also taking appropriate actions to manage our expense base under the current conditions and are updating the full year estimate for our operating expense ratio to approximately seven 1%.
And to wrap up we anticipate capital generation to be approximately 12% below our original expected range, but still generate a very strong return of 30% on our adjusted capital with that I'd like to turn the call back to Doug.
Thanks, Mike.
As you can see we had strong financial results in the quarter, while we are starting to see the impacts of high inflation and economic uncertainty weigh on the discrete segment of our lower credit quality customers.
We are prepared for it.
<unk> credit adjustments quickly and continue to originate loans to customers, who meet our return hurdles.
There is a lot of demand from better credit quality customers at some of our competitors with less strong balance sheets have had to pull back. So we really like the business. We are booking today with our tightened credit box.
We continue to invest in our digital capabilities, new products and distribution partnerships.
We have been serving the non prime consumer for decades and through multiple macroeconomic cycles.
We like our strategic position strong balance sheet plenty of cushion and profitability, our seasoned credit team and new products and channels, we will be cautious and alert as we navigate through whatever the economy brings while also taking advantage of our strong compare.
<unk> position to serve our customers consistently generate robust capital and build our business for the long term.
Finally, as always I want to thank our team members across the nation, who come to work every day to make a difference for our customers and for you our shareholders with that let me turn it over to the operator and we are happy to take your questions.
Yes.
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Thank you. Our first question comes from Michael Kaye with Wells Fargo. Your line is open.
Hi, good morning.
Understanding is that when you underwrite.
Cushing and your net disposable income calculation.
Seemingly handle a good bit of higher inflation.
So that's why our delinquencies deteriorate into this particularly.
With unemployment still very low could you, perhaps underestimated the borrowers wherewithal and a higher inflationary environment.
Yes.
Doug Thanks for the question.
We underwrite as you know to a 20% return on equity.
There's a number of input.
And assumptions, we have in our underwriting there is price.
Size alone the size of the payment.
There is the expenses, we have our cost of capital and assumed payment and loss rates and then as as you mentioned, we also do an ability to pay underwriting. So we look at.
Income minus debt load minus People's expenses, and we'd look for the question someone has a net disposable income.
We had been underwriting, especially in 2021.
We've now we've changed our box.
Assuming a certain net disposable income and a relatively non stressed environment.
<unk>.
What we've now seen is.
Lower income lower credit quality lower FICO. However, you want to define it at the lower end of the spectrum people are having a hard time need.
Making ends meet with food gas.
Grant.
And they obviously have not enough cushion there.
We've actually seen this as I mentioned kind of across the board in the non prime space happening at the lower end, we've adjusted our box over the course of the year, but especially made more tighter.
Adjustments.
We've moved a number of folks who had been offered unsecured loans to only have secured loans, which having collateral leads usually to better payment.
Put some caps on our loan sizes.
And we have increased.
The expense assumptions.
Within our net disposable income we put some more buffer in there as we're doing our underwriting now. So you are correct that we underwrite assuming an inability to pay generally the portfolios.
Forming within expectations, we've got a segment of loans that arent, we've now made adjustments.
Okay.
<unk>.
Impact on asset yields moving forward, given that's like really focus away from the lower credit quality cohort and likely 90, plus days are 90, plus day delinquency rates are going to be increasing in all the prior guidance was.
That 2022 would be around the Q4 'twenty one levels about 23, 3%.
Already in the first half you only around 23, 1%.
Potentially it could.
Could it potentially move lower in the back half any update on that guidance for <unk> for this year.
Good morning, Michael This is Mike.
We're not giving any call out specifically on guidance right now, but I'll give you a little color around it.
Pricing remained stable so thats the top of the <unk>.
Final when it comes to yield as our EPR and our loans and now we've seen a lot of stability there over the last year. So thats certainly an important input.
That remained stable we are seeing some opportunities given the competitive advantage the competitive market to increase price in certain segments of origination. So we're doing that.
That will take some time to play through our yield.
$20 billion portfolio of those new originations to take some time to take shape.
I think your observation is correct I think in the second half of the year, we do expect to see some continued pressure from our efforts to help our customers.
And also the impact of the recent early stage delinquency as it moves into 90 plus.
While we're not giving any additional specific guide on yield. This is all reflected in the updated strategic priorities that we gave to you.
Okay, alright, thank you so much.
Thanks, Michael.
And we will take our next question today from Rick Shane with Jpmorgan. Your line is open.
Hey, guys. Thanks for taking my questions. This morning, a couple for Greg.
I want to make sure I fully understand what is going on in the mix within the portfolio.
Are you, saying that there is a higher percentage of low FICO scores or are you seeing specifically that the 2021 vintage of lower FICO scores is underperforming is it a mix shift.
Specifically or is it a.
Vintage issue.
Rick It's Mike Thanks for the question.
Ill try to give you a little bit of color on it.
We called out that.
These are really.
Where we're seeing a little bit of a performance impacted in those lower credit quality lower income customers.
Customers with less cushion if.
Not specifically at 2021 thing, but they happen to be concentrated in 'twenty. One vintages. So remember 2020 was underwritten to a much tighter standard during COVID-19.
And pre 2020 vintages also had the full benefit of government stimulus for good.
Six quarters and so those pre 2020 vintages have also just amortize down significantly over the period of time and so 'twenty one just happens to be the dominant vintage thats in our book now.
And so that's why we're seeing a lot of its impact within those 2021 vintages.
Got it okay. That's helpful.
Second question, and obviously May and June were pretty dramatic from a.
Macro perspective.
But I am curious given the pace of the deterioration.
I'm curious if you think that.
Your borrowers or your customers are levering up away from you with alternative products like buy now pay later and is there for you too.
Basically conduct surveillance, so that you understand alternative leverage on your customers' balance sheet.
Yes look Rick.
It's a good question, we first of all we risk score our customers on an ongoing basis. Once they are on our book and so all of the publicly available data we can see our internal data. So we're always kind of.
Evaluating yet.
I think our customers generally if you look across.
Debt loads credit cards loans, others debt to income savings net disposable income employment there.
Some tailwind and headwind and so I don't think you can.
<unk> selected to something like buy now pay later.
Is what's happening tailwind are generally debt to income levels are below pre pandemic. Although this is less true with lower credit quality customers.
Customers still have relatively strong balance sheets are saving rates, but again coming down much quicker the lower your income.
There has been some wage growth, but not enough to keep pace with inflation.
And employment unemployment remains low, but the idea of like under employment and are you getting as many hours all of that is in play.
<unk>.
Headwinds, obviously shrinking balance sheets as stimulus wears off persistent elevated inflation.
General feeling of uncertainty so customers are kind of balancing.
Their payments and less net disposable income as I mentioned in the last question, especially with customers with less cushion. So when we look across the non prime consumer generally with all the data we see conversations were in et cetera, and then our customers in particular.
They remained relatively healthy.
And.
The rest of our book is performing within it within the range of expectations and we feel generally good and we are still making a lot of loans, but theres just strain at the lower end of the segment.
Buy now pay later.
Some of those are reported to bureau, some of it is not it's usually a lot lower ticket items then.
What we're talking about with lending.
There has been obviously the last several months a lot of activity around that and that market shifting so I would not isolate it I. Just think there is a lot of moving parts going on right now in the economy and the last question you have the more you're living on the edge and the more we.
You've got to keep an eye on things and so we're we're.
We're watching all of this what we've done with our credit box is.
Where we've seen the underperformance, we've cut that out and that's very precise but we've also added a little bit extra assumption of stress and our underwriting just to be conservative adds this.
Uncertainty plays out and we're monitoring it on a daily weekly and monthly basis.
Okay. Thank you guys appreciate it.
Thanks, Rick Thanks, Rick.
We will go next to Vincent <unk> with Stephens. Your line is open.
Hey, Thanks, good morning, Thanks for taking my questions.
I've got two of them so first.
Are you seeing any performance differences relative to your expectations between your.
You are unsecured and versus your secured auto secured product and Relatedly curious.
Car price changes.
Are having or will have an impact on your credit trends.
Yes, Michael Thank you.
I think as we've called out here with this really kind of trying to isolate this to lower credit quality customers would that lower cushion we are seeing impacts across the product. It's not really a product dynamic of course, the hard secured and our direct auto our secured products in general tend to have better.
Credit performance by nature of having that security.
The the collateral and the security that comes with it and so we.
We are definitely seeing some of the same dynamics within those three products, particularly focused in the lower credit quality segments. As you may remember with lot of our hard secured prada.
Product and in many cases, we're only able to underwrite a secured loan to a customer based on the risk attributes. So we'll naturally see some of that.
Performance down in that secured segment and so I'd say broadly speaking.
I don't think auto prices are unnecessarily.
Necessarily factoring into that per se.
Our.
You know over the last year or so we've been moderating our loan sizes.
To accommodate for that has auto prices have risen we've reduced ltvs on our loan just to make sure we have a little bit of protection, there just being conservative and so I don't think thats really becoming a problem.
I would say that just following along doug's comments auto payments or just another part of that.
Those obligations that consumers may debate, so from that perspective.
I would say that's part of the part of the mix, but not specifically our product.
Okay, great. Thank you and then you touched on this.
Earlier comments, but on the competitive environment. So certainly been hearing some of these fintech struggling because of funding issues. So.
Encouraging.
Here that maybe you are benefiting from that.
Just maybe if you could talk about what the potential volume of our opportunity set is and how you think about it in terms of.
Taking share versus maybe there's opportunities for margin expansion. Thank you.
Yes look Vincent.
Before.
We don't have real growth targets, we set our box.
We set our underwriting standards.
Based on all the characteristics I talked about before with a goal of having a certain return and running a profitable business and then we.
We try to create a great set of products and services and a great customer experience and a lot of what I talked about before we've been innovating around loan size.
<unk> been innovating around outside of the branch closing our digital properties.
We're really investing quite a bit on it so when people come to us they get really clear information. It's a great experience, it's a vast experience, but it still has all the hallmarks of.
What we do which is income verification and figuring out how much people can.
Ford and then we're adding volume through new channels for the loan product and we're obviously, adding the card. So you take.
Our box what we're willing.
Our risk appetite against our customer experience and the rest will come out I think in the competitive dynamics.
We've seen a real uptick in applications coming in from the above 660, FICO customer over the last several months, we've always played quite a bit in that market and we booked a number of customers, but we've been very disciplined in our risk appetite.
And our pricing to make sure that.
Our margins remained.
With that customer and so we haven't dropped price as much as competitors have and so I think what's happened is.
Some competitors that don't have as much long tenure on the balance sheet and a stronger balance sheet they've seen their cost of funds go up and so they've had to raise their pricing a lot quicker.
Then we have and then some funding has just dried up depending on your business model and so we find we're booking more.
Of those loans.
We do have some opportunities.
Around pricing, but for that cohort of customers.
We like the profitability ratio and so we like the idea of picking up share. So we.
We haven't sized it its coming in but what I would tell you is based on the cuts we've made over the last couple of months, we would be booking a lot less volume today, if we hadn't seen that uptick in better credit quality applications coming in.
Okay perfect very helpful. Thanks, very much.
Sure.
We will move next to Kevin Barker with Piper Sandler Your line is open.
Thank you could you detail what economic assumptions you have embedded in the credit reserve today.
And then what economic assumptions you also have I would assume they are the same and what's your underwriting standards are today.
Sure. Kevin This is Mike I'll take the reserve question.
That will probably jump in on the.
Underwriting.
As you know with our reserves, we've talked about for several quarters, our prudent approach in.
I think we continue to take a prudent approach to our reserves. We went through a very unusual credit situation with seasonal over the last two years.
We could have built into our reserves an assumption that the delinquency levels the roll rates. The backend performance all of those dynamics that we're very very very very strong throughout second half of 2020 and into 2021, we could have built those into our reserves and moved our reserve down a lot more we didn't.
Do that because we knew that this environment would eventually turnaround. So as we were thinking about what is what does the future loss profile look like is embedded into our life of loan reserves. We would go back to what role rates looked like pre pandemic and that turned out to be a very very smart approach.
And it's been serving us well when you look at our non <unk> reserve rates are putting our GDR book to the side right now it stands about 40 basis points or about 70, or so million dollars higher than seasonal day, one levels, which would have been at January one 2020 pre pandemic and so we continue to take a pre.
<unk> approach there, we think that has served us well.
Given the uncertainty that is now somewhat emerging at least in the non prime consumer and we remain well reserved and feel very comfortable with the current levels.
Yes look we don't.
As I mentioned, there is a lot of inputs that go into our underwriting price size.
Our opex, our cost of capital payment great losses.
We've taken.
Think about in 2021.
Our underwriting was very similar to 2019, obviously different characteristics move the market move some but think about it as pretty pretty similar assuming no stress.
We had been.
Over the last year as we've said before doing some tightening around the edges.
Fin file we have been increasing collateral.
We had been adjusting different loan sizes back kind of tweak. Some places. We've asked we had mentioned with neo banks that we've asked for extra income.
Verification all of which is some of its operational some of its verification, but it always net net credit tightening we've now done.
A much more significant tightening once we started seeing things happen in in.
In May and we basically for the band where we saw underperformance, we either move them two secured loans only or are we just cut it out of our box.
Because in June sometimes things happen in a month and Theres aberrations, but we saw continue and Jim Theres No reason to think that it will.
Go on forever, but we said, let's just take a conservative stance because we tend to as we think about underwriting a nationwide portfolio of risk. We look at a number of factors given the strong demand at the high end and our ability to continue to build the book with even better credit quality. We then.
Put a larger we put another stress assumption into our underwriting for the time being in this business dynamic that can go in and out.
Every couple of weeks or every month, we're watching the environment.
So now our assumption is if you think about a year ago with 2019, it was tighter than that going into the beginning of the year just as we tweaked around the edges. We then took out lower credit quality.
The loans, we've now put another stress factor on call it at one or two type of downturn stress.
Just to be cautious as we kind of watch this play out so we have a pretty tight book.
Right now.
So.
I mean, obviously, we've seen some economic deterioration tier impacts of inflation.
We're seeing real savings rates decline.
Are you assuming that.
We have labor deterioration, whether it's higher unemployment or higher.
<unk> unemployment.
Claims.
Over the next six to 12 months or are using.
A lot of the assumptions that are out there for like Moody's or other rating agencies.
Benchmark reserving.
Yeah, I mean, Kevin we use all of that in our assumptions and we make some judgments about where we think.
Appropriate level of reserves are we've got some macroeconomic deterioration.
Filmed in our reserves, whether that plays out or not we will see but again, we take a conservative approach. We look at a lot of different factors. There's a lot of inputs to jussi. So as you think about a portfolio on lifetime reserves and losses over call. It a two year period. So there's a lot that can happen.
And we put in appropriate macro assumptions I will leave it at that without getting into any more detail, but I will say, we take that conservative approach and look at a number of different macro outcomes yes.
And just I mean.
Kevin just stepping back, though I mean.
If you if we ask ourselves of the things that keep me up at night.
Do we have enough reserves, we've got plenty of reserves, regardless of the situation and plenty of cushion in our book and as I mentioned, we feel really good about what we're underwriting today.
Okay. When you think about where your underwriting standards are today or what they have been throughout 2022.
And we say to think about through the cycle net charge off rates what would be your target net charge off rate on the book of business you are underwriting today.
Kevin I don't think we want to get into that level of detail I think the book of business. We write today is going to be different from the book of business. We write tomorrow, we have a long term risk framework out there that says we'd like to see charge offs in the 6% to 7% range in a normal economic scenario.
We've also done a lot of downturn planning, while we're not we're not necessarily calling a downturn.
It is not our jobs, but where we're mindful of nimble about our book we've shown you over the past going back to our 2019 Investor day that in the downturn, we still continue to remain profitable and Thats, how our risk framework works.
Okay.
And thank you for the question, we will move next to John Hecht with Jefferies. Your line is open.
Hey, guys. Thanks, very much for taking my question actually most of them Hey, guys. Most of my questions have been asked and I am wondering.
You guys had been.
Selling to third parties your loans.
I'm wondering in this environment.
Kind of rethink.
A portion of your loans I guess are you rethinking that strategy, what's the demand for the collateral.
Kind of more kind of big picture kind of thoughts around that.
Yes, John I mean, remember, we put some agreements and some whole loan sale agreements over the last few years.
We continue to have all three of those agreements in place we continue to sell loans to those third parties.
They're private relationships I would say the relationships are strong and.
We continue to foster those have good conversations and we hope over time.
Some of these things will evolve into.
And two strategically important relationships, where we may be selling some loans or collateral that don't necessarily pixar fit our box for selling those over to those logos those different third parties, but no I don't have a whole lot to report there other than they continue the relationships are strong and we hope for a bright future.
With those folks.
Great. That's it guys. Thanks very much.
Thanks, Chuck Thanks, Sean.
And we will take our final question today from Moshe Orenbuch with credit Suisse. Your line is open.
Thanks.
Yes.
Most of my questions have also been asked I would say.
I'm wondering if you could just talk a little bit about.
What the timeframe would normally be for a vintage two to kind of season and run through.
You are talking about it where those very high delinquencies, you're seeing right now would start would start to normalize for those loans running through charge offs and what that might be given the enhanced collection.
Resources, you're throwing at it.
In this environment.
Yes, so I think very very precise answered Moshe our average life of loan is about 18% to 20 months and so that should give you a good sense for how long the average vintages I would expect these to kind of 'twenty, one vintages to roll through delinquency and charge off over the next four quarter.
Right and just just to kind of put a slightly finer point on that Mike.
The risk of drowning in a lake that's six feet deep on average. The question is are these loans in particular I would assume or at the shorter end of that not the longer end.
Given that they tend to be youre, probably smaller dollar unsecured loans I mean is that a fair way to think about it.
Yes, I mean I think the question was asked earlier about across the spectrum with our products that we are seeing similar similar trends for your top product thing, it's more of a customer.
And lower credit quality customer.
Attribute that's driving it but maybe if I can tell you a little bit how we how we think about risk Doug alluded to this very briefly earlier.
We have an internal scoring methodology for our book.
That takes all of our basically all post originations activity. So every month, we will follow every bond through its life and re score based on current Bureau attributes and how does that customer performing with us what do we see in their bureau, with other creditors and we score that into.
Decile, we use this methodology to inform our internal borrower assistance.
Sure.
We're acting with customers that might be.
A higher risk category, we use it in our collection strategies and.
Customers that we're seeing that are starting to have some challenges have attributes like a little bit higher debt to income level. They tend to be a higher mix of below 600, FICO. They do tend to have a lower mix of secured to your specific question and also tend to skew towards more renters in.
Thinner filed customers. So that's sort of what we're seeing I hope that gives you a little bit more context around what we're saying with lower credit quality, but it is certainly not a product or necessarily loan size type of thing.
Thanks, Thats extremely helpful and just a quick follow up.
The comments in terms of moving forward on the card.
Is it fair to say that youre, not seeing any of that kind of performance deterioration there.
Yes, I think go ahead, yeah look Moshe.
Card Youll remember, we tested a lot of different segments product.
<unk> customer type.
The card that we're going to be expanding into is the lower risk.
Both customers and channels is what we're going to be expanding into in 2020. So just.
Just like with our loans Theres lots of segments, we feel really good about it.
Booking today similar with the card. These are you know we're not the test cells, where we saw any issues, where we assumed we ran pretty wide test just so we knew the margin, but where we're expanding we haven't we haven't seen any issues great. Thanks, so much.
Yes, no. Thanks Moshe look thanks, everyone for joining our call today as always our team is here.
Look forward to hearing from you happy to answer any further questions. So I hope everyone has a great day and thanks for joining the call.
Thank you. This does conclude today's Onemain financial second quarter 2022 earnings Conference call. Please disconnect. Your line at this time and have a wonderful day.
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