Q3 2022 OneMain Holdings Inc Earnings Call
Hosting the call today from Onemain as Peter play on head of Investor Relations.
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It is now my pleasure to turn the floor over to Peter play on Sir you may begin.
Thank you Chelsea and good morning, everyone and thank you for joining US let me begin by directing you to page two of the third 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 factors that could cause actual results to differ materially from these forward looking.
Statements are set forth in our earnings press release, we caution you not to place undue reliance on forward looking statements.
If you 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 27th 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. Let me turn the call over to Doug.
Thanks, Pete and good morning, everyone. Thanks for joining US today. This morning, I'll take some time to review our quarterly performance.
Current credit and macro economic environment and provide an update on our key strategic initiatives.
Our capital generation remains strong coming in at $283 million for the quarter.
As I touched on last quarter demand remains strong and we've seen improvements in the competitive environment, which has led to an increase in attracting higher credit quality business.
Originations were $3 $6 billion for the quarter.
<unk>, 8% from the third quarter last year, but relatively strong given our cautious underwriting posture originations.
Our 30 to 89 delinquency finished at 281%.
This is in line with or slightly better than normal seasonal trends. We are encouraged by the stabilization of delinquency this quarter given the worsening we saw in the second quarter.
Net charge offs in the quarter were five 9% supported by continued positive performance in our later stage delinquency and also in post charge off recoveries.
I'm also really pleased that we continued to demonstrate one of our core strengths, our balance sheet and funding capabilities by raising $1 billion in a difficult funding market.
Regarding the non prime consumer overall, while unemployment rates remain at historically low levels. It is clear that inflation has presented challenges to some consumers, especially those at the lower end of the credit spectrum. We've reflected this in our.
Tighter underwriting.
We started to see inflation become a challenge for consumers across the entire industry in the second quarter. However.
However from the data, we see which we provided on page nine of our presentation. Our book is performing quite well in comparison to other non prime lenders. This is due to the competitive advantages we have developed in our business model.
These include our branch based network, which enables us to work closely with our customers.
The relationships that our community based team members have with their customers is especially valuable during challenging times.
We also have a long history of serving the non prime consumer during which we have developed a suite of tools and techniques to help customers stay on track, we tailor collections and assistance treatments based on sophisticated analytics.
This increases the likelihood that we will be repaid even when a customer hits a rough patch.
This is a result that is both good for our customers and good for our business.
And we stayed very disciplined in our underwriting and had been tightening our credit box for almost a year now we were early to selectively cut our credit box in late 2021, and early 2022 and it followed on with very meaningful tightening.
This summer.
Our current credit posture is conservative given the uncertainty associated with the persistent elevated inflation and the weakened macroeconomic outlook.
As you May recall, we underwrite each loan to meet an expected return hurdle.
Embedded in the return hurdle calculation are many assumptions, including pricing acquisition costs funding costs and charge off assumptions just to name a few of them.
Our current underwriting is set so that even if the macro environment deteriorates meaningfully further beyond the delinquency levels. We are seeing today. The loans, we are booking today will meet our return hurdles.
We see this as a no regrets move given the current environment. If we have a significant economic downturn, we are ready for it and the business. We are booking today will be quite profitable.
But we have the ability to dynamically adjust our box. So we can make changes in the future as the economic picture evolves.
The net effect of this posture is a moderation of balance sheet growth and the migration of our originations to better credit quality loans for instance, we have significantly decreased unsecured loans to new customers.
And our top two risk grades those with the best credit quality and lowest risk customers make up 60% of our new originations today versus 37% a year ago.
We're seeing strong application flow in higher credit quality segments, partly driven by competitive dynamics as competitors without our stable funding and strong balance sheet have reduced their originations, we're seeing a lot of opportunity to right.
Profitable new business, even with our more conservative credit box.
And while we are beginning to see the benefits of our tighter underwriting in recent vintages. These changes will take some time to fully materialize and our $20 billion portfolio, we expect to maintain.
Conservative underwriting posture until we have more clarity about how the environment will evolve.
Let me now spend a few minutes on our strategic initiatives first let me be perfectly clear our focus right now is on credit and balance sheet management, given the uncertain macroeconomic environment.
However, it is also critical to continue to drive our longer term strategic initiatives that will fuel future growth and profitability.
We continue to invest in customer experience technology and data analytics I've spoken at length in the past about how our digital investments have helped us maintain our competitive position in loan originations.
Let me talk for a moment about how newer digital and analytics tools are also generating positive results in servicing and collections.
We risk score our entire portfolio on a monthly basis. The scores are generated using machine learning models that leverage internal and external credit payment and behavioral data. We then optimize who we reach out to when to reach out.
And how to reach out.
Based on payment patterns responsiveness and demonstrated changes in circumstances, we will dynamically evolve our interactions with customers whether it be through phone calls texts or E. Mails. We've developed these techniques over a number of years and you can see.
See the positive results in the back end delinquency performance of the last several quarters.
Said, another way, our digital tools and advanced analytics combined with our locally based team members are resulting in fewer customers moving to charge off even if they fall behind on a payment at some point in time.
We continue to make excellent progress on our bright rate credit card. Our customers are excited about the reciprocity value proposition our commitment to reward them for their positive payment behavior.
At quarter end, we had 104000 cards issued and $79 million of card receivables up from 79000 cards and $64 million of receivables as of June 30th.
<unk> been very disciplined in the rollout of our credit card. We ended 2021 with approximately 66000 accounts across a range of test cells and throughout 2022, we've been monitoring the performance of these tests accounts.
Across a range of metrics, including spend balanced build revolve rates and credit.
This quarter, we began our targeted rollout into select segments identified from our test cells.
We've taken a conservative credit card underwriting posture similar to the very tight credit box, we have in our personal loans, which gives us plenty of cushion and a high level of confidence that the cards. We are booking today will be profitable regardless.
The economic picture in.
In addition to credit performance, we're seeing positive signs in spend patterns and digital engagement, our customers are engaging and paying us in our bright way mobile app as well as giving us very high ratings and customer experience across this mainly digital.
Channel.
We also continue to see growth and strong credit performance from our expanded distribution channels. These include partnerships such as dealer track, which allow us to use our core capabilities and expertise to expand our secured lending.
Let me touch on capital allocation.
As always our first and highest priority is investing in our business to generate strong returns as I discussed earlier, we're focusing on underwriting higher credit quality loans, while continuing to invest in important growth initiatives that will drive strong capital generation in the future.
<unk>.
Our current $3 and 80 annual dividend provides a very healthy yield of approximately 12% at the current share price. We also repurchased another one 2 million shares this quarter year to date, we've repurchased approximately $5 6 million.
Shares or about four 5% of shares outstanding at the beginning of the year.
Let me finish by saying, we really like our competitive positioning, especially in turbulent economic times.
We've built our business with a fortress balance sheet, which allows us to keep making every loan that meets our return hurdles.
We are strategically investing in the business to put us in a position of strength for the long run and we have decades of experience lending the non prime consumers, including in difficult environments, which gives us great confidence that we can adjust our credit box and worked with our <unk>.
Customers as needed whatever the future may bring with that let me turn the call over to Mike to take you through the financial results of the third quarter.
Thanks, Doug and good morning, everyone.
The company's focus on supporting our customers through a challenging environment combined with a more conservative underwriting posture has helped to bend the curve a bit on early stage credit performance and our best in class balance sheet was further strengthened as we successfully completed a $1 billion ABS transaction in the quarter.
In terms of our Q3 financial results, we earned $188 million on a GAAP basis or $1 52 per diluted share in the quarter.
Capital generation was $283 million down $77 million from the third quarter of 2021, reflecting a $128 million increase in net charge offs from the historic lows, we saw in the year ago period.
On an adjusted C&I basis, we earned $187 million or $1 51 per diluted share down from $2 37 per diluted share in the third quarter of 2021.
This difference was also driven by the normalization of charge offs as well as increases to our loan loss reserves.
Our managed receivables reached $25 billion this quarter up $1 3 billion or 7% from a year ago.
Net interest income was $895 million up 2% compared to the prior year quarter, driven by higher average receivables.
Net interest margin remained strong at 18, 1% in the quarter.
Portfolio yield was 222, 6% down 55 basis points sequentially.
Portly, our topline APR on new originations was flat sequentially and up modestly from the third quarter of 2021, we.
We have found recent opportunities to take positive pricing actions, which is offset impacts from our credit tightening.
So while yield is being temporarily impacted by the current environment. We anticipate that over time. These effects will subside and yield will return to more normal levels.
Interest expense was $221 million down 6% versus the prior year interest expense as a percentage of average receivables improved to four 5% this quarter from 5.0% a year ago.
That is largely fixed rate and we intentionally stagger our maturities to manage cash flow, but also to absorb periodic volatility and interest rates. As a result, it takes some time for increased rates to have a meaningful impact on our interest expense.
Other revenue was $165 million in the third quarter up 9% from the prior year quarter, reflecting the positive impacts from our loan sale agreements.
Policyholder benefits and claims expense for the quarter was $31 million down from $45 million in the third quarter of 2021.
The reduction was driven by current period reserve adjustments relating to continued strength in claims experience across products, but primarily in our credit life book.
Let's now turn to slide seven to review, our originations and receivables trends.
Originations were $3 $6 billion in the third quarter down from $3 9 billion in the third quarter of 2021 due to a significantly tighter credit box the ability to quickly adjust our underwriting as circumstances dictate as a foundational strength of our company.
Despite those adjustments we continued to see strong demand for our core loan product driven by improved competitive dynamics as well as growth in our credit card and distribution channel partnerships and as a result, we were able to grow receivables by nearly $400 million sequentially.
Turning to slide eight and our credit performance 30 to 89 delinquency increased eight basis points to 281% in the third quarter from $2, 73% in the second quarter.
As we discussed in some detail last quarter after tracking in line with expectations throughout the first four months of this year. We saw an increase in our early stage delinquency starting in may primarily within the lower credit quality lower FICO customer segments.
We've seen some modest improvement in these segments in the third quarter and as a result, the sequential 30 to 89 performance look more like a normal seasonal increase.
90, plus delinquency was 241% an increase of 26 basis points sequentially. Following the 30 to 89 trend we saw in the second quarter.
Loan net charge offs were $290 million.
Or five 9%.
Above the historically low three 5% we reported in the third quarter of 2021, but in line with the 6% we reported last quarter.
Charge offs were supported by continued strength in post charge off recoveries recoveries in the quarter were one 2% of average receivables well above pre pandemic levels of approximately 0.9%.
This performance is the result of a diverse and balanced strategy of internal and external collections and opportunistic sales.
We continue to closely monitor performance and we will adjust our underwriting and our operations accordingly.
Turning to slide 11.
Our third quarter allowance increased by $127 million to $2 3 billion with a coverage ratio of 11, 4%.
This compares to a second quarter reserve ratio of 11.0%.
The $127 million increase included approximately $35 million to $40 million related to growth in our receivables with the remaining increase reflecting the weakened macroeconomic environment.
Turning to slide 12 third quarter operating expenses were $359 million up 6% year over year as we continue to invest in new products and channels technology digital and data science, while maintaining expense discipline across our business.
Our operating leverage remains on target for the year at seven 1% as compared to seven 3% in 2021.
Turning to slide 13, let me briefly provide an update on our balance sheet.
I'm sure you all know the funding markets remains quite challenged and it is during these times with a strong balance sheet and a mature sophisticated funding program becomes a big advantage.
In late August we initiated a $500 million ABS transaction that was received with strong demand and was subsequently upsized to $1 billion and tightened to an average coupon of 517%. We saw strong support from returning investors and we added some new investors to our.
Our program.
This year through one of the most difficult funding environments in recent memory, we've issued $2 2 billion in the ABS market at an average rate of about four 8% and an average life of just over three years. This is just below our portfolio rate of approximately 5%.
Our liquidity runway, which we define as the length of time in which we can operate the company under stress macroeconomic conditions and with no access to the capital markets remained strong at more than 24 months.
A foundation of our liquidity runway as our committed bank capacity, which increased by $400 million in the quarter to $7 4 billion at quarter end.
Rounding out the balance sheet, our net leverage at the end of the quarter was five six times flat to the second quarter.
We continue to expect managed receivables to grow at the low end of our long term operating framework, but we are pleased with the volume of loans that were booking at the higher end of the credit spectrum.
Last quarter, we had increased our expectations for net charge offs by 50 basis points. So in the range of six 1% to six 5%.
And finally last quarter, we have reduced our capital generation estimate by approximately 12%, which equated to a range of $1 10 to $1 60, given the improved outlook for net charge offs, we expect full year capital generation to be at the higher end of that range with that.
I'd like to turn the call back over to Doug.
Thanks, Mike.
We feel really good about how onemain is positioned today the combination of our incredibly strong balance sheet superior knowledge of the non prime consumer.
<unk> data through multiple economic cycles, and world class underwriting and servicing capabilities put us in a position of strength in this uncertain macroeconomic environment.
While we remain cautious we also feel confident in our ability to navigate this environment and continue to generate it advantages for our business over the long run.
I want to again, thank all of our team members.
This month Onemain was named to Newsweek's list of the top 100, most loved workplaces for 2022.
This external recognition is a reflection of what those of US who work at the company already knew that.
Our team members are exceptional they.
They come to work every day committed to making a difference for our customers our communities and each other.
It is our team members, who make onemain such a special place to work and I want to congratulate them on this honor.
With that let me turn it over to the operator, and we're happy to take questions.
Thank you Sir.
The floor is now opened for questions. At this time, if you have a question or comment. Please press star one on your Touchtone phone.
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Thank you. Our first question is coming from Moshe Orenbuch with credit Suisse. Your line is open.
Thanks very much.
Yeah.
Doug, Doug and Mike I'm, hoping that given what you talked about in terms of your ability tightening of the credit box the the strong funding.
Could you talk a little bit about how that fits in with the overall competitive environment like what are you seeing from competitors.
Are there.
Either.
Kind of prime lenders that are tightening that have given you greater opportunities or other sorts of opportunities from a competitive.
With competitive stance.
We are seeing opportunities in the competitive landscape and I think one you mentioned.
In 2021 in early 2022, there is a number of players who traditionally focused on prime.
Move down into non Prime I think many of them have now kind of moved up and out of the market, which.
Create less supply, which we have a very strong balance sheet and so we can offer customers.
We can keep lending as much as.
Any any loans that meet our return hurdles.
Similarly, there is a number of non prime lenders.
Who I think most people have cut their credit box in this environment and we put a slide in the deck that shows yes.
Delinquency is going up across the board in the non prime sector. So most people have appropriately cut their credit box.
Thank folks who rely more on partnerships loan flow agreements et cetera.
The people that supply the capital have become much tighter and so the fact that we put a lot a lot of long.
<unk> long tenured unsecured debt eight and 10 years on our book the last couple of years.
In fact, we've got such a strong funding program.
We've got plenty of supply and so.
As you've seen.
Our credit box.
We've cut quite significantly and <unk>.
Competition, it's stayed exactly where it was before we cut.
We'd be originating a lot less loans, but instead, we're getting a bunch of higher quality better credit customers.
And we're continuing to add balances, albeit better balances or <unk>.
On purpose built the business to be in a strong position if there's economic distress at turmoil in the market.
Gotcha.
And just from a from a financial standpoint, you talked about improved approved outlook for capital generation, So kind of the the.
The reserve did go up again in the reserve now stands as you mentioned 11, 4% I would note that at the end of the first quarter of 2020. The reserve was at 12% can you kind of square for US like how you think about.
That level I mean, it seems to me the economic uncertainty back then was probably a little greater than it is now, but maybe talk about how we should think about the reserve trends from here.
Yeah, Hey, Moshe it's Mike. Thanks for the question I think if you go back to first quarter, you're right. It was around 12. If you go to the second quarter of that same year. It actually went up to 13, 2%. So.
The world was a much different place than I think we were staring at forecasts of unemployment and the.
In the mid to low to mid teens at that time. So everyone was kind of building with that expectation of course that turned out to be.
To never kind of come to pass and a lot of folks.
<unk> had to then move our reserves back down at the macro economy improved but.
Today, I think reserves as a quarterly exercise for us we want to make sure we're accurately and appropriately reserved at each point in time, there's a lot that goes into our reserving.
We are projecting lifetime gross loss assumptions for our delinquent receivables and now of course under C. So we have to generate assumption lots of assumptions and book reserves for our non delinquent receivables, which makes up 95% of our book so very very different.
This accounting regime, but then we also factor in our post charge off recovery expectations not just for loans that will go to loss, but also recoveries on our back book of historical losses, and so there's a lot that goes into the reserves. You know of course, we have to we have two under Cecil and do consider the future macro environment and its.
Overall impact on these losses, we look at a variety of sources to generate these assumptions are macro this quarter blends a number of different economic scenarios and potential outcomes that result in moderately elevated unemployment assumptions for 2023, which is an increase from where we were in the second quarter.
We also consider the impacts to credit performance of other economic factors such as continued elevated levels of inflation and so I say all this to you just to give you a sense for there's a lot of moving parts and seasonal.
We run our reserve models, we calibrate the outputs to several different loss projections to make sure. We feel we're appropriately reserved at a given time and of course we.
Continually refine our estimate just based on actual experience and how things play out over the next few quarters, we really.
Determine where our reserves go.
Yes.
Next question Courtney.
Yes.
Operator can we get the next question.
Hello.
We'll take the next question from Kevin Barker Your line is open.
Hey, operator, we cannot hear the question.
One moment please.
Our next question will come from Kevin Barker with Piper Sandler.
Hear you, Kevin we didn't hear anything.
Yeah.
Could you help us detail could you detail what you are seeing within the credit book to indicate that net charge offs are at the lower end and.
Okay, Kevin Thanks, Mike I'll try to unpack that a little bit for you I mean, obviously, it's a you know an kind of an uncertain environment. So I think that played into certainly how we were setting what we felt was a reasonable assumption when we last talked to you in late July of six 1% to 65.
I think built into that.
Estimate was a range of potential outcomes, mostly with respect to our recoveries in our late stage flows by the time, we get to this point in the year or any early stage delinquency we're booking.
Today call. It our September results will really impact first quarter, just because of the way things.
Things roll through the buckets to charge off at 180 days. So if you go back and look at some of the and look at all of our historical data of 30 to 89, two quarters later to charge offs and 90, plus one quarter later to charge offs. So those ratios will give you a pretty good sense for how to think about.
Losses over the next couple of quarters.
We're tightening our guidance today to be at the lower end of that range. It's really a function of some of our we've been very disciplined with our underwriting as you know we've been tightening for a while so we are starting to see some of the benefits of the tightening we did before the summer.
Number.
Significant tightening we've done is still taking hold and we will see some of those tailwind is coming in the future.
I think this is a function of our business model. It's our our tools that we have in central we talked a little bit earlier about the.
2018, I know you've talked about it before where we started to do a lot more internal.
Collections and our current recovery rates are well above 19 levels I think there is now.
And think about where the 30 to 89 was in the third quarter of 2021, it was still pretty low coming off that massive stimulus. We saw in March of 'twenty. One so that third quarter 30 to 89, then led to first quarter charge offs. So youre always kind of two quarters behind if you will on the charge offs.
Where that turn is so I would just keep watching the 30 to 89 and of course, we'll keep updating you as we go.
Thank you.
Our next question will come from Michael Kaye with Wells Fargo. Your line is open.
Hi, Good morning, this quarter, we saw a pretty substantial reduction in asset yields and you mentioned.
The COVID-19 interest reversals and I suspect that's probably.
Heavy amount of borrower assistance programs implemented like I know you noted that originations origination apr's were flat quarter on quarter can you just talk a little bit more about the near term outlook on asset yields today.
And to stabilize a bit next quarter at these levels or even head up a bit as delinquency stabilized.
Yes, So I think I think in terms of fourth quarter I would expect to see something similar to maybe a tiny bit below.
Where we were and where we are in the third quarter on the overall asset yield certainly we are watching apr's on the front end as originations come in because that tells us where yield is going to be heading in the future, but just like charge offs youre always kind of working a little bit behind here, where this stuff.
We're putting on the books today, while it's flat to second quarter and up modestly versus prior year, it's going to take some time for that to sort of hold in a $20 billion portfolio, but it is a good benchmark for where yields kind of will settle once we get through a little bit of this challenging macro environment.
Certainly Michael as you've.
As you've acknowledged has been impacted by the sequential increase in 90, plus as you know we reversed accrued interest on our receivables once they reach 90, plus pass due and we stop accruing so thats a significant impact on the yield.
But also just in terms of the payment assistance, we're providing to some customers. This results in really a yield a delay in yield recognition for any accrued interest on that account.
We know that these tools provide <unk>.
<unk> better outcomes, when we use them and so we expect year will return to more normal levels as the macro environment improves.
Alright, thank you.
Second question I was wondering just talk about your funding needs for the rest of this year and into 2023.
How long can you go without raising unsecured debt and how high would you let that secured funding mix.
Yes, that's a great question, let me just.
Let me talk first just about how our rates how issuance rates affect our interest expense I think it's an important we've designed our.
Our balance sheet as I said earlier with staggered maturities and fixed rates to sort of insulate us a little bit from issuance rates.
Issued aggressively in the unsecured markets.
Clothing, putting on some eight and 10 year debt over that period. So we tilted our secured debt down to about 40% I think it reached 39% to even a third third quarter 'twenty. One. So we took advantage of that market set ourselves up to be in a position, where we could lean back into ABS. When the time came and certainly that time has come.
In 2022, we've issued only ABS debt.
As we think about the impact that we've seen on our interest interest expense the issuance that we've done in ABS still sits a little bit inside our average portfolio rate for our debt and now as we look forward. So you think about roughly speaking if we did our issuance over the next month I mean on the next 12 months excuse me.
We'll reflect just 6% to 7% of our average debt in 2023, okay issuance over our next 24 months will make up just 22% of our average debt in 2024 and so it takes some time for changes in issuance rates and just changes in the complexion of the balance sheet to really.
Take hold in our interest expense regarding ABS.
We because we started from a position of 39% were roughly half and half today, we feel pretty comfortable that if we needed to we could issue nothing but ABS in 2023, I think we're going to we're going to say and what we always do is make sure that we are putting ourselves in a very strong position from a balance sheet.
<unk> perspective, we're never going to sort of prioritize earnings over that over over balance sheet strength and so we hope to be issuing some unsecured but we don't have to right now.
And we've put ourselves into that position, we're going to continue to be opportunistic and run this thing for the long term.
Thank you. Our next question will come from Rick Shane with J P. Morgan Your line is open.
Good morning, everybody and thanks for taking my questions two questions.
Earlier in the quarter or at a conference you talked about.
Sort of a divergence in the portfolio in terms of credit performance between customers, who rent and customers who own their homes.
I'm curious if you can provide some context on what the mix within.
The customer base is.
Yeah.
Is eating into the cushion of renters more than homeowners and it's you know it's pretty obvious there's a lot of people who are homeowners, especially.
Kind of working Americans, who have 30 year fixed rate debt. They can choose not to move in there their expenses don't go up that much I mean their gas their food their clothing. Other essentials are going off but their housing isn't going up that much in some.
Metro regions, especially but other places parts of the country not all of the country rents have gone up a lot.
We've adjusted our credit models and so.
What the result is we usually had a little bit less than 50% of.
Our.
Our customers were homeowners.
We've now decrease the number of renters just by definition of.
The way, we have our credit box, where we're assuming a higher cost of living therefore, less net disposable income therefore, less cushion, which will lead to bring down the size of your loan or our willingness to spend or whether you have.
Secured or unsecured loan offered from us and so we've definitely seen more stressed from renters and we've adjusted the box appropriately.
Got it yeah I agree with you. It was a very interesting comment on that at the conference because it struck.
Struck me.
As a stickier source of inflationary pressure for your consumers. So 50 50 is probably.
It sounds like a reasonable place to assume that actually dovetails with my next question, which is that you'd also made the comment on this call about high grading the portfolio in terms of.
The credit buckets going from mid <unk> to 60% in your highest two credit boxes are too high too.
Two credit buckets.
All things being equal given the duration of the portfolio how long would it take in terms of number of quarters, if you're stuck with that to really see the portfolio converge towards that 60% level I realize that's not going to happen, but just from a hypothetical perspective, so we understand how.
Quickly the portfolio recast.
Rick This is Mike. Thanks for that question. It is of course hard to say exactly because of what we've got to predict what will happen in the future with the portfolio et cetera, but.
I would expect that the originations from our tighter underwriting which is basically post August sort of credit box. We've taken most of our tightening was done over the summer.
And I think that that originations from that tighter underwriting will reach roughly call. It 35, 40% may be by March and then somewhere in that 45% to 50% range by <unk> <unk> of next year. So if you kind of think about that I think youll start to see some credit.
Tailwind over the next three to four quarters of course, assuming a stable macro environment and the <unk>.
Fully reach it is assuming we stick with that box for the entire period, but I think it'll take by by end of next year, you would certainly expect given the trends I just laid out.
Would be sort of fully incorporated but again I think we're going to have to see what happens next year with the environment and where we go but hopefully hopefully that gives you a little sense for how long it'll take to kind of no thats perfect. It was more of a hypothetical.
Because I realize that you are very dynamic and the way that you ship to ship things. Thank you very much guys I appreciate that thanks.
Our next question will come from John Hecht with Jefferies. Your line is open.
Good morning, guys and thanks for taking my questions.
I guess this is sort of related to some some of the topics you've discussed but maybe.
Maybe can you either I don't know if you can quantify or at least characterize the impacts of inflation.
On disposable income and how does that influence say like average loan size.
In the current timeframe.
Yeah, I mean, I'll take a shot at it Jon I think in terms of the inflation impact on our consumers and we've talked a lot about the lower.
Credit quality I think we tend to see also in our scoring that those customers of the highest risk risk that are having some challenges have much lower average income per month than our say our average borrower certainly our lowest risks risk cohort and we've seen some wage growth.
Over the last couple of years, particularly in this.
And this sort of this consumer base, but inflation has just continued to outpace wage growth and I think if you look at a lot of the economic data.
Incomes have been down for several months and so that's sort of what what leads to the credit performance of these folks.
And I think that's probably the the biggest impact there.
In terms of loan size loan size is really a function of your your risk scoring so a lot of these customers. There that are not fitting our box anymore not getting a loan size at all because theyre, just not getting an offer or theyre getting a secured offer only where we feel.
That's a good trade off in a good risk return for us.
We've seen stability in our loan sizes across risk grade, we're just seeing less of that higher.
Risk customer coming into the book in terms of secured we've made a couple of adjustments specifically over the last year or so to make sure that we are not writing up the curve on collateral values. We've cut them a couple of times, probably netting to about a 30% overall reduction and so we're just moderating loan sizes, there, but I think.
You know certainly loan size as part of the equation, along with just who we're actually underwriting on a new customer basis, and John I would just add.
One of the things we've done over the last couple of years is diversified.
Product set and so we had already built a robust smaller dollar loan.
Graham, which was a 2500 dollar loan and so if you think about someone who.
Before we cover.
The box, we might've, given a $7000 unsecured loan to now we might only offer them a $7000 secured loan or a $2500 smaller dollar alone which is much less of a payment load on a on a monthly basis and then as Micah said Theres a number.
There are customers who.
Given the risk profile, we don't think it's appropriate to give them alone because we don't think it would be good for them or us they wouldn't be able to repay it.
Okay Super helpful color and then another question I think you guys referred to dealer track and some of your prepared remarks, you were talking about new channels. Maybe can you just talk about the store versus digital migration.
And maybe some of the metrics or trends there.
Yeah.
Since the pandemic and we created our ability to close loans outside of branches, it's been pretty steady that somewhere between 40% and 45% of our.
Loans a lot of it is present customers people do not have to.
Come into a branch to close it we built out a set of tools.
Two way video one way video.
Co browsing being the most popular tool, where we actually can show someone on there.
Give us access to their screen will walk them through the loan.
We still have the personal touch so almost every almost every one of those loans has a phone call where we help them work through what can they afford what's the right loan for them Etsy.
Et cetera, and so the digital.
Our normal channels continues to be a major part of the business and the credit performance of those is very much in line with the credit performance of our branch based lending those a lot of them get service outside of our branch. So if you live in Dayton, Ohio.
Whether you come to a branch or not you get contacted by the branch manager and one of the team members you make a personal contact if you end up in trouble you might sometimes you'll walk into a branch or you end up on the phone. So it has all the hallmarks of our business. We've also built out different distribution partnerships I mentioned dealer track there's one.
Currency, which links us to power sports dealers route one is similar to dealer track, which is autos those really are.
Diversifying our business, giving us a channel that isn't branch that we can then employ everything that we do with a remote close.
And all of the hallmarks of our business Thats made it so successful over time through those channels. So we ended up getting on the phone with them verifying the vehicle securing the title taking it through our underwriting process assigning them, usually a team member who will be their point of contact so we have all of the.
<unk> of what we do but it's a different way to get.
Customers in the door as opposed to our normal digital originations or direct mail or affiliates.
Okay Super helpful. Thanks, guys.
Thanks, John .
Our last question will come from John Rowan with Janney. Your line is open.
Good morning good.
Good morning.
I just wanted to dovetail the conversation on competition with the ABS market.
I guess, Mike maybe give us an update on where spreads would be in the ABS market for you guys. Today, obviously the deal that we saw this quarter was relatively stable relative to the prior deal, but there are definitely pockets in the ABS market, where spreads are widening quite a bit and so maybe just an update as how you think your next spread is going to be.
And how is that relative to other competitors that may be seeing wider spreads and possibly lower liquidity. Thank you.
Yes, sure John I mean, the ABS market has been.
I would say.
Pretty efficient this year over the last couple of weeks, it's gotten a little bit messier.
But.
We're going to obviously pay attention.
The market is volatile.
We'll be we'll be opportunistic when we can if you think about where our coupon was on this deal. It was about five 2% the previous one.
A couple of months prior to that was at four three about half of that increase was on the benchmarks. Another half the other half was spread increase so we did see some.
Spread spread increases in our last deal, but we were opportunistic and did this in August when the time was right I think thats going to be key to our benefits going forward is just making sure we're hitting our spots. If we were to issue in the ABS market today.
Probably in the mid sixes honestly, where spreads are and we will be patient. We the good news is we upsized that $500 million deal to $1 billion, which meant that we didn't have to issue for the rest of the year and first quarter is typically a quarter in which our balance sheet doesn't grow just with taxi.
Season in.
And demand and so I think we're set up here for a lot of flexibility will obviously continue to watch the market closely.
And with respect to competitors, we still feel we're issuing at.
At levels well inside of what our competition is doing I won't speak to anyone specifically, but the data is out there I think we're probably.
Call It 70 basis points inside of what others can issue at.
On the on the top tranche, but that changes from time to time.
Okay. Thank you.
Thanks, John .
<unk>.
We're at the end of the call. Let me just emphasize a couple of things. Mike has said one is we really had been invested in our balance sheet over the last three or four years, we didn't try to pick up every last dollar of the lowest rate instead, we put a lot of long term debt on.
So we're now in our view in a really advantageous position going into an uncertain economic cycle.
I think one of the reasons, we ended up getting better rates and a lot is because we have a long history of serving the non prime customer.
We cut our underwriting quickly when we need to we have a set of servicing tools and so.
Well I think a lot of the questions that came across today, focusing on the strength of our balance sheet and thus able to dynamically manage our underwriting are on point for how we're managing this business and we're being conservative may maybe leaves a little money on the table, but we're protecting the business for the long.
Run as we invest in just position ourselves in the future through the cycle.
So with that thanks, everyone for joining us.
We're happy to take any follow up questions and hope everyone has a great day.
Thank you ladies and gentlemen, this does conclude today's Onemain financial third quarter 2022 earnings conference call.
Please disconnect. Your line at this time and have a wonderful day.
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