Q4 2022 OneMain Holdings Inc Earnings Call

Speaker 2: Welcome to OneMain Financial fourth quarter and full year 2022 earnings conference call and webcast. Hosting the call today from OneMain is Peter Polian, Head of Investor Relations. This call is being recorded.

Speaker 3: At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star 1 on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star 2.

Speaker 4: We do ask that you limit yourself to one question and one follow-up, and please pick up your handset to allow optimal sound quality.

Speaker 5: Lastly, if you should require operator assistance, please press star zero. It is now my pleasure to turn the floor over to Peter Pullian. You may begin. Thank you, Gretchen. Good morning, everyone, and thank you for joining us.

Speaker 6: Let me begin by directing you to page 2 of the fourth 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.

Speaker 7: 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.

Speaker 8: Factors that could cause actual results to differ materially from these forward looking statements are set forth in our earnings press release.

Speaker 9: We caution you not to place undue reliance on forward-looking statements.

Speaker 10: 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, February 7th, and have not been updated subsequent to this call.

Speaker 11: Our call this morning will include formal remarks from Doug Shulman, our Chairman and Chief Executive Officer, and Micah Conrad, our Chief Financial Officer.

Speaker 12: After the conclusion of our formal remarks, we will conduct a question and answer session.

Speaker 13: Let me turn the call over to Doug.

Speaker 14: Thanks Pete, and good morning everyone. Thank you for joining us today.

Speaker 15: I'd like to start today's call by providing a brief overview of some of our accomplishments in 2022. And then I'll cover our performance for the fourth quarter, the current credit and macro economic environment, and discuss our key strategic initiatives.

Speaker 16: As you all know, inflation started to impact the win-win-win-the-liquancy levels for many non-prime consumers in the second quarter.

Speaker 17: We demonstrated our agility by quickly pivoting our credit posture and operations.

Speaker 18: On credit, we significantly tightened our credit box over the summer, and our new originations are performing as expected.

Speaker 19: Operationally, we pivoted more of our team to collections and to supporting customers who were having difficulty making ends meet.

Speaker 20: The result is that for the last two quarters, we have seen stabilization of our credit results.

Speaker 21: Despite a significantly tightened credit box through much of the year, we originated $13.9 billion of loans and served over 2.6 million customers in 2022.

Speaker 22: This highlights our commitment to serving hardworking Americans in good times and in bad.

Speaker 23: and also underscores the strength of our balance sheet. We had plenty of access to funding, even in a very difficult year in the capital markets, and in the bond markets in particular.

Speaker 24: We made significant progress in 2022, building out our credit card and new secured lending distribution channels.

Speaker 25: both of which will drive significant growth in the year ahead.

Speaker 26: And through this very difficult environment, we generated almost $1.1 billion of capital demonstrating the incredible business model we have built over the years.

Speaker 27: We also made significant progress in our ongoing commitment to be a socially responsible company highly focused on our customers, communities, and employees.

Speaker 28: We rolled out TRMM, our money-saving and financial wellness platform, to all of our customers in 2022 as we continue to help our customers improve their financial well-being.

Speaker 29: We launched Creditworthy by one main in thousands of high schools across the country.

Speaker 30: And we made a $50 million deposit commitment to support minority depository institutions and military veterans. Last week, we were informed that one main has been included in Morningstar's Sustainalytics top-rated ESG companies list for 2023, ranking in the top 10% of rated companies in the diversified financials industry category. One main was also named.

Speaker 31: to America's 100 most loved workplaces for 2022 by Newsweek.

Speaker 32: Together, these accolades showcase our deep commitment to our team members, who serve our customers so well every day and to the communities in which we work.

Now, let me provide a brief overview of the quarter.

We had capital generation of $233 million in the quarter, and demand for loan products remained strong.

Originations totaled $3.5 billion in the quarter, even with the significant tightening actions we took earlier this year. Considering our more conservative underwriting posture, we're really pleased with the volume of originations, as well as the overall credit quality.

Our 6% year-over-year receivables growth was supported by our expanded products and distribution channels.

This is in line with normal seasonal trends. We are optimistic about this continued stabilization and credit performance following our quick pivots last year. Net charge-offs in the quarter were 6.9% also within our expectations. And we're aided by good performance in our later stage collections and strong post charge-off recoveries. Regarding the macroeconomic environment as well as the non-prime consumer.

were encouraged by the continued strong employment numbers.

However, elevated levels of inflation are impacting consumers.

particularly those at the lower end of the credit spectrum.

We remain highly focused on supporting our customers, especially those most pressured by inflation.

We have several advantages that allow us to better serve our customers and set us apart from the competition.

They include our community-based branch network that keeps us close to our customers.

So we can work with each of them based on their own individual circumstances.

And this includes our proprietary data, as well as our strong credit and data science teams and models. And we have an incredibly strong balance sheet, which we positioned with a long liquidity runway and staggered maturities, exactly for times like this.

The data that we analyze shows that we are performing quite well in comparison to other non-prime lenders.

And you can see that illustrated on slide 10 of our presentation.

We continue to have a very conservative underwriting posture.

Today, we are only making loans that will meet our return hurdles, even if the macroeconomic environment worsens.

Notwithstanding our current conservative credit box, we expect to continue to grow our balance sheet in the year ahead.

We expect growth in 2023 to continue to come from higher credit quality customers, along with growth from credit card and new distribution channels.

To better illustrate the point on improved credit quality, I'll point out that our top two risk rates.

Those with the best credit quality and lowest risk customers make up about 60% of our new customer originations today versus just 37% in mid-2021.

Let me now spend a few minutes on strategic initiatives.

Our top focus is managing our credit and balance sheet through this complex macroeconomic environment.

But we also continue to focus on strategic initiatives that will fuel growth and profitability over the medium and long term.

We continue to close about half of our loans outside of a branch, engaging customers through our mobile app, website, text, and email.

screen share, phone, and more.

We also have advanced our mobile and two-way tech strategies.

and now have the ability to digitally engage with customers in collections, payments, and servicing.

We are confident that our Omni Channel strategy, leveraging the best of digital, phone, and in-person interactions, will advance our competitive position.

On new products, we continue to make excellent progress in our digital first Brightway credit card.

During the holiday season, we saw our customers regularly reach for our card to spend on holiday purchases.

We're now seeing many of our early customers hitting on-time payment milestone.

At which point they can choose to lower their APR or increase their credit line.

the overwhelming majority of our customers are engaging directly through our mobile app.

We continue to closely analyze the performance of our cards across a number of metrics like spend volume, balance build, revolve rate, and most importantly credit.

Even as we maintain a conservative credit posture, we see a lot of opportunity to grow our card portfolio.

At year end, we had approximately 135,000 card customers and $107 million of card receivables.

We're going to continue to scale this business in profitable segments, and we remain confident that our credit card business will drive meaningful growth with excellent returns in the future.

This year, as we scale the credit card business, it will have a mild drag on capital generation before expecting it to turn positive in 2024.

In 2025 and beyond, we expect the business will be quite profitable and begin meaningfully contributing to our capital generation growth.

We also continue to see excellent results from our efforts to expand distribution channels in our secured lending business.

which grew to nearly 400 million of receivables in 2022.

Let me end by touching on capital allocation.

Our top priority is always investment in our business.

First, to underwrite high-quality loans to meet our return hurdles. And second, continued investment in the initiatives that will drive excellent capital generation growth in the future. Thank you, thank you Report.

We will also continue to return capital to shareholders.

This morning we announced an increase to our quarterly dividend by more than 5% to $1 or $4 annually.

This translates to a yield of approximately 9% at our current share price.

Even in a difficult economic environment, our business has strong capital generation and we are committed to a healthy dividend level.

During the fourth quarter, we repurchased 1.6 million shares.

bringing the full year repurchase to 7.2 million, or about 5.5% of shares outstanding at the beginning of the year.

With that, let me turn the call over to Micah to take you through the financial results of the fourth quarter. Welcome Micah and your k SSL community to a Thanks and Masters of Technology to you.

Thanks, Doug, and good morning, everyone.

Our conservative underwriting posture combined with a company-wide focus on supporting our customers is helping to deliver strong financial results.

Fourth quarter net income was $180 million, or $1.48 per diluted share, down from $2.02 per diluted share in the fourth quarter of 2021.

C&I adjusted net income was $191 million.

or $1.56 per diluted share down from $2.38 per diluted share in the prior year quarter.

Both variances reflect an increase in provision expense from the stimulus driven historic lows we experienced in 2021.

Capital Generation was strong at $233 million in the fourth quarter and came in at $1.0 for the full year.

Managed receivables reached $20.8 billion, up 1.1 billion, or 6%, from a year ago.

Interest income was $1.1 billion.

flat to the prior year quarter as higher average receivables were offset by lower portfolio yield.

Yeilden the fourth quarter was 22.3%. Down a hundred basis points year-over-year, reflecting higher 90-plus delinquency and the impacts of payment assistance we are providing to customers where needed.

We expect first quarter 2023 yield to be around the same level, as 90 plus generally reaches normal seasonal highs in February .

We then expect to see gradual improvement during the year as 90-plus seasonally declines to its natural low in the summer and the impacts of our credit tightening begin to show through.

Pricing on new originations remains above 2021 levels as we continue to monitor the competitive environment and opportunistically take positive actions to offset the impact of a tighter credit box.

We expect that current pricing will support portfolio yield in the future, as new originations become a bigger part of our portfolio and the current macroeconomic impacts subside over time.

Interest expense was $230 million in the corner. Down $3 million or 1% versus the prior year.

Interest expense as a percentage of average receivables was 4.6% this quarter, down from 4.9% a year ago, a result of the proactive actions we've taken to manage our funding profile over the last several years.

As you know, we've been extending and staggering our maturities, and therefore current higher issuance rates did not meaningfully impact 2022 interest expense.

Looking forward, we estimate that about 90% of our average debt for 2023 is already on the books at fixed rates. And if you want to look a little further out to 2024, it's about 80%. This is what gives us confidence in projecting very modest increases to interest expense ahead.

Other revenue was $168 million in the fourth quarter, up $7 million or 4% from the prior year quarter.

The increase was primarily associated with higher yields on our $2 billion investment portfolio.

Provision expense was $404 million, including current period net charge of $348 million and a $56 million increase to our allowance.

About half of the allowance bill was from growth and receivables with the remainder reflecting a modest increase in our reserve ratio to 11.6 percent as we remain cautious about the macroeconomic environment.

Policyholder benefits and claims expense for the quarter was $34 million, down from $50 million in the fourth quarter of 2021. The reduction was driven by adjustments to our claims reserves.

due to lower loss experience.

We anticipate claims expense to return to more normal levels over the coming quarters.

Originations were $3.5 billion in the fourth quarter, down from $3.8 billion in the fourth quarter of 2021, primarily a result of our tighter underwriting posture.

Manager, group of 300 million sequentially on the demand, and continued growth from credit cards partnerships. Deducing channel partnerships.arte Guest notifications. Ad bean and

Please note managed receivables of $20.8 billion, includes $766 million of receivables sold through our forward flow arrangements and $107 million of credit card balances.

As Doug mentioned, we continue to see positive results from our credit card rollout, and we expect card receivables to be between $400 and $500 million by the end of 2023.

While this rollout will create a small drag on capital generation this year, we anticipate capital generation will turn positive late this year or in early 2024.

And as you know, CECL requires maintenance of lifetime loss reserves, and so you should expect

to see us building reserves as we scale the business.

Let's turn to our credit trends highlighted on slide 9. 30 to 89 to link when C was 3.07% in the fourth corner, up from 2.81% in the third corner.

Since we first reported an elevated level of 30 to 89 delinquency in the second quarter of 2022, performance has generally followed expected seasonal patterns.

From second to fourth quarter, 30 to 89 delinquency increased 34 basis points this year, as compared to approximately 30 basis points in 2018 and 2019.

If seasonal patterns continue, we should see improved performance in the first corner as payments typically increased during the tax refund season.

Our January 3089 results were in line with these seasonal patterns declining a few basis points from December levels.

Lone net charge offs were 344 million or 6.9% for the quarter.

Full year net charge-offs came in at the low end of our guidance at 6.1%.

Net charge-offs continue to be supported by strong recoveries, which were 1.2% of average receivables in the quarter. Recoveries remain above pre-pandemic levels of approximately 0.9%, driven by a strategic investment to bring this activity in-house, combined with opportunistic sales.

I wanted to draw your attention to slide 11 of our deck.

As you know, we've been gradually tightening our credit box since late 2021. However, the most significant adjustment we've made over the last year was in early August 2022.

On the left side of the page, we show an estimate of how we expect receivables concentration to change over the coming quarters between loans-originated pre-tightening and those originated post-typing.

On the right side of the page, we show the performance of those post-tightening vintages for which we have at least three months of data.

As you can see, the ventures are performing in line with pre-pandemic levels, and these ventures are expected to have more influence in our portfolio results as we get into the back half this year.

We anticipate that by year end 2023, approximately 70% of our book will be from loans originated since that major August tightening.

Turning to slide 12, fourth quarter operating expenses with $367 million, a 5% year-over-year.

Full year operating expense was 1.4 billion, and operating leverage for the year was 7.1%. Down from 7.3% in 2021, and down from 7.5% in 2019.

Slide 13 looks at our expense trends over the last few years and our expectation for the year ahead.

You will see on this slide that we've maintained core expense within a very tight range over the past four years The 2022 expense coming in below 2019 levels

That is despite mid-teens growth in average receivables over the same period.

In 2023, we expect core expenses to grow very modestly in the 2-3% range.

We also plan to invest an additional $50 million for growth, mainly in cards and distribution channels as we continue to scale those businesses.

With that said, we expect an operating expense ratio that is very much in line with what you've come to expect from us. About 7.1% in 2023.

That's flat to 2022 and down from historic levels.

Let's now turn to slide 14 for an update on our balance sheet and funding.

Funding markets remain quite challenged in the fourth quarter, and it is during these times that a strong balance sheet and a mature, sophisticated funding program like ours is a significant advantage.

In December , we complete an $800 million ABS issuance with an average coupon of 6%.

We once again saw strong support from returning investors while also attracting some new investors to our program.

Despite the market challenges, 2022 was overall a very productive year for 1Main.

We raised $3 billion of market funding with an average coupon of about 5%.

including issuing a first-of-its-kind social ABS in April .

We also completed a $350 million, three-year private funding deal with one of our long-standing bank partners.

We continue to enhance our already strong liquidity profile, adding $400 million to our committed bank capacity, which totaled $7.4 billion at year end.

We renewed seven secured lines during the year, and we added three banks to our unsecured corporate revolver, which now totals $1.25 billion.

I'm also pleased to say that in December , we renewed our inaugural loan sale partnership through the end of 2023. We did so at the same level of purchases, $75 million per quarter, and at similar economics to our original agreement.

This agreement demonstrates the confidence our partners have in one main.

Rounding out the balance sheet, our net leverage remained within range at 5.5 times, down from 5.6 times in 3Q.

On slide 16, we provided some expectations for 2023.

Please note, these estimates assume a relatively stable macroeconomic environment.

And should the environment change, we will update our expectations accordingly.

We expect managed receivables to grow in the low to mid single digits.

This assumes we maintain our current credit box for all products and see continued growth in our distribution channel partnerships and our credit card.

Low net charge-offs for the year are expected to be 7 to 7.5 percent, and we expect to see normal seasonal patterns resume.

We anticipate first half charge-offs to be above the full year range, with second half expected to be below.

First half losses are typically seasonally higher and will reflect the elevated delinquency we saw in the second half of 2022.

We expect charge-offs to improve in the second half in line with normal seasonal trends, and as our current underwriting becomes a bigger part of our receivables.

And as I discussed earlier, we expect operating leverage to be roughly flat to 2022 at approximately 7.1%.

With that, I'd like to turn the call back to done.

Thanks Micah. The 2022 accomplishments that I highlighted at the beginning of this call demonstrates our ability to thrive in any market environment.

As we look ahead, we feel really good about how our business is positioned.

We're actively managing our underwriting and have seen credit performance stabilize over the last two quarters.

and the business we are booking today is performing in line with expectations.

Our balance sheet, which we positioned with a long liquidity runway just for difficult markets like today, allows us to book all of the good business that we see.

and the foundation we are laying with our strategic initiative.

including credit card and new distribution channels will drive capital generation growth whenever we emerge out of this uncertain environment.

We will remain alert and agile as the economic picture evolves and are prepared to adjust our credit box to drive the best possible results for our shareholders.

Finally, I just want to take a moment to thank all of our OneMain team members who come to work every day to make a difference for our customers, our communities, and our shareholders.

With that, let me turn the call over to the operator and we're happy to take your questions.

The floor is now open for questions. At this time, if you have a question or comment, please press star 1 on your touch tone phone. If at any point your question is answered, you may remove yourself from the queue by pressing star 2. Again, we do ask that while you pose your question that you pick up your handset to provide optimal sound quality.

Thank you. Our first question is coming from Mosha or in Bath, from Credit Suisse.

Thanks Doug and Mike and Doug appreciate that comment at the end about being prepared to adjust the credit box. Maybe could you just talk a little bit about, you know, obviously your guidance you'd like it to be to some degree on the conservative side, you know, when you think about the environment, you know.

range. Yeah, no thanks Moshe. We still have quite an uncertain economic picture. I think which everybody knows it's a tricky environment to operate in.

You know, unemployment has been a real bright spot, but inflation is still impacting our customers. And as you mentioned, Moshe, we're seeing in our recent Vintages, since we tightened our credit box, you know, they're performing very good. You know, our basic operating principle is...

We want to be careful stewards of our shareholders' capital. And so right now we may have a tighter box than needed, but given the uncertainty in the environment, we're being quite careful. So, you know, if we have room in our current box, we talked about it before, for unemployment to tick up, meaning...

We've already incorporated in the business we're underwriting.

both the stress we saw in our book in 2022, plus

deterioration in the macro environment. And so said another way, the business we're booking today are going to meet our return hurdles even if we see some stress. And so if we see continued stabilization, if we see, you know, a few more months of the new vintages we're booking.

performing as expected. If we see some of the clouds lift from the economic environment and it feels a little less uncertain, we could open up our box and we could have growth above where we said. But if there's a sudden quick move in unemployment and things go south in the economy, we could tighten up our box.

You know, it's a very difficult year to give guidance because of the uncertainty. What we're doing is being very careful with our balance sheet, being very careful with our underwriting, and making sure we are investing for the future growth of the company whenever things become less uncertain.

Great, and thanks for that and certainly appreciate all of those difficulties. Given what you had mentioned about the levels of unemployment, but the bigger factor on your customers being the increase in inflation.

Are there any signs of the inflation in goods kind of decelerating relative to the inflation in...

you know in wages you know in your in your specific customer base and if so you know how do you think that will impact you over the course of 23?

You know, very hard to pinpoint like the exact movements in inflation and goods versus services. You know, obviously deceleration of inflation and goods means people have more disposable income because things cost less.

But deceleration in services can also mean less income. And so, you know, it's very hard to pinpoint in the short term exactly in our customer base. What I will tell you is, you know, and you can see from our delinquency trends, things have stabilized.

You know, we saw a spike in delinquency in the second quarter of 2022. The last couple of quarters, we've seen good stabilization and our new originations, albeit with a tighter credit box, are performing, you know, spot on where we thought they would. And so... I'm gonna make that own.

You know, if inflation keeps stabilizing and going down and unemployment stays low, I think we'll be in very good shape. But again, we've got to just keep an eye on it and it'll play itself out.

stabilizing and going down and unemployment stays low, I think we'll be in very good shape. But again, we gotta just keep an eye on it and it'll play itself out. Thanks very much.

Next question comes from Vincent Cantek from Stevens.

Good morning, thanks for taking my questions. First question, Tug and Micah. Maybe taking a step back and just kind of looking at the path to normalization here. If we look at what's already happened, we've had two tightenings with underwriting and then...

the customer maybe hasn't, we haven't officially gone through a recession yet, but we've already had felt the impact of inflation. So maybe taking time out of the equation since we're still in a certain environment, but could you maybe describe and play out how one may kind of goes through normalization and what you're looking for before you feel comfortable. Thank you. Yeah, hey.

economic environment in Texas versus Florida, etc. And all of that influences our, you know, credit appetite. I think ultimately, what we're looking for is to continue to see a little bit more of these vintages. And we showed you a little bit on that page, how recent vintages are performing. We're very, very pleased with that.

We're also engaging in a little bit of testing in loans that don't necessarily meet our underwriting criteria, but we want to keep our finger on the pulse of what's going on with some risk grades that we may not be underwriting in volume today, but we still want to look at leaning into those.

You know, I think for us we've got some different options nowadays than we had a few years ago. We've got the small dollar loan that gives us a lever to kind of move back in with a smaller loan value going out than our typical $7,000-$8,000 loan. We've also got the credit card. So I think a lot of different options there.

Okay, thank you for that. And then follow up specifically on cards. So nice to see that business starting to ramp up. The, you know, as kind of putting that alongside with your discussion about maybe still being conservative with overall business, can you talk about how you feel comfortable growing with card in 2023? And do the metrics when we think about card versus the rest of your business? Are those metrics much different when we think about saying the reserve ratio or yields? Thank you.

Yeah, no, thanks, Vincent. So, look, a couple of years ago, when we told you we were going to roll out cards, we said we were going to be very deliberate and methodical. So, over a year ago, so in late 21, we put over 60,000 cards out.

which we called test cells. And so we had two different types of cards that had different economics that could take different amount of risk. We had different risk profiles, you know, we had some higher credit and lower credit in there. And we pushed the edges because this was going to get us data about the cards and how the cards performed.

And then we went through a number of different channels, branch channel, direct mail, affiliates, and usually how you acquire customer differ. We then let those 60-plus thousand cards season, and last summer we picked the most profitable sales.

that we're performing the best to start to build our book. And just a reminder, this is, you know, the non-prime credit card market is a $400 billion market, and we've got $100 million of cards that we think will get up to $400 or $500 million. So there's a lot of room for us to book very profitable business.

to what we saw with performance, we assumed losses as if there were a recession, and we're only booking customers now that would still be profitable and meet our hurdles with the performance we saw plus with extra loss. So said another way, the business we're growing right now is very concerned.

There's less capital generation at the beginning, you know, right when you book a card than there is right when you book a loan customer. So we're in the proverbial J-curve, but we gave you a sense of how we would move through that J-curve. Once we get through that J-curve, we expect the cards, the profitability to be very similar to our loans. And so it's a great complementary business for one name. Great. Very helpful. Thanks very much. Our next question comes from Kevin Barker from Piper Sandler.

Good morning. Thanks for taking my questions. You've previously got it to a capital generation or return on receivables. I'm not saying you're not doing that now, but maybe you can help us.

understand some of the components that would make, give an idea of where capital generation could come in for 2023, just given some of the headwinds from the card side. As you grow that portfolio, combined with asset yields.

coming down a bit just because of lower, I mean higher interest rates and tightening, tightening of underwriting standards. Thank you.

Yeah, Kevin, this is Mike. I'll take that one. I mean, as Doug mentioned, it's pretty tricky in this environment to give full year forecasts. We've kind of given you the receivables growth. As we mentioned, we feel that's pretty resilient.

Unless we see a major significant or rapid change in the environment, obviously the losses we got it to the 7 to 7.5%. Again, I think this is the matter of having a relatively stable outlook.

You know, our loss is the range that we've given you gives some room for unemployment to tick up a bit. As you know, we have a 180-day charge-up period. So in order for that really to impact losses, it would have to happen pretty quickly, generally in the first half of the year to really move the needle on that. Fast

In terms of yield, a little bit on my prepared remarks, yield also impacted by the macro environment and the level of 90 plus receivables. So certainly giving you a little bit of sense for that without calling out a specific full year number. We do expect loan yield to be right around fourth quarter levels in the first quarter.

And then sort of as we get through the balance of the year, we expect some of the 90 plus levels to just subside because of normal seasonal patterns, but also as our front book or these post-August originations start to take a little bit bigger hold in the receivables book. So that should give us a little bit of.

runway and upside on yield. I think, you know, on interest expense, again, just mentioning generally in the prepared remarks, the way we've staggered our maturities, it just takes a lot to move interest expense quite a bit in one year. So...

You know, interest expense in 21 was around 5, 5.1%. You know, in 2022, 4.6, pretty likely we'll be somewhere in the middle of that in 2023. And so I think that should give you some sense for how to build, you know, the interest expense piece of that. And you know, we've given you also the

adjustments we expect those to normalize back to levels around 45 to 50 a quarter. And I think when you add all that up, we would expect to see capital generation lower than what we experienced in 2022. But with kind of some runway at the end of the year, we think that can pretty much. And I think we can see capital generation lower than what we experienced in 2020.

snap back in 24 back to those levels. And that's kind of where we are.

You touched on macro factors there where the net charge off would be closer to the high end with a little bit higher unemployment. Could you help us understand what macro factors you apply within your guidance assumptions for a 7 to 7.5% net charge off?

And then what are you seeing within your customer base? You touched on some stress within the non-prime consumer just given the inflationary outlook. But maybe just a little more color on your macro assumptions to get to the net charge up guy.

Yes, let me touch the customer first. As we talked about in numerous forums, we obviously saw a pretty rapid increase in 30 to 89 delinquency in the second quarter when it increased about 50 basis points from the first.

And then since then we've seen relative stability, you know, and what I mean by that is we've seen seasonal patterns kind of emerge Where we went from second quarter fourth quarter up about 30 basis points or so this year In 30 to 89 and it was pretty similar to 2018 and 19. So we've seen some nice

stability there. Certainly inflation is still impacting our consumers, but we feel pretty good about where things stand. I mentioned also in January we saw a little bit of a seasonal downtick in January 30 to 89.

Tech season is coming, so we hope that's going to be really creative and helpful for our consumer. That's influencing some of what we're thinking about in our loss guide. You know, bottom end seven percent, top end seven and a half, I would say on the top end is, you know, an environment that's pretty consistent with what we're...

in what we're assuming in our reserve numbers, which is an unemployment rate somewhere in the four and a half to five percent range, obviously unemployment in the low threes now, and pretty supportive for the time being. So those are kind of the guardrails and keep in mind also with our charge off policy, again, without any really impacts to the back end and what's happening in...

in those 90, 120, and 150 plus receivables. In order to have a really dramatic move, I think, in the back half of the year on losses, you'd have to see something in the early stage delinquency happening pretty quickly. And that's hard to foresee right now, given the employment prints and the claims.

of that CFPB proposal on lead fees, and how does that impact the pace of the loan balance launch over the next few years? I was wondering if you perhaps emphasized Brightway Plus over the Brightway considering that overhang.

And then that aside, how do you balance the growth opportunity with rolling out like non-prime credit card ahead of an expected recession? And I know it's mostly a test portfolio at this point, but it couldn't help noticing that the only frequencies for credit cards are already 13.5% as of Q3.

That's what we need some thoughts, thanks. Yeah, hey Michael, thank you. Let me take those in order. The CFPB credit card fee proposal. We've got the advantage that we're just rolling out a new product.

So we're not wed to any of the economic levers. We have a lot of levers in the credit card, including pricing. So we're going to monitor it and see how it rolls. See what happens with that fee proposal. And obviously we'll abide by whatever it lands.

But we don't feel at this point that it really affects our outlook or doesn't affect us being excited about the product. Our real focus is we have this unique value proposition in the market of reciprocity.

where as a customer pays on time, we will share in economics and either increase the line or decrease the APR. And our real focus is access to credit for the non-prime customer and have a great product in the market.

that works for them and obviously economically works for us. And so we'll watch the proposal, but we feel like we've got plenty of room to make sure the economics work as well as the value proposition works.

You know, I tried in my in, you know, the previous question to emphasize that while we are now rolling out in some specific segments, we are rolling out in segments that

the credit card will meet our return hurdles, even if we move into a mild recession. And so said another way, you know, we're assuming from the test sells, a certain credit performance, and we put stress on top of that for our decision criteria for credit cards.

Right now we're not seeing that stress occur. So our credit cards are exceeding our return hurdles. But if unemployment ticks up, we go into a recession, the business we're booking today and the business that we predicted we would book.

today or the growth that we told you we thought we'd have this year is Going to be profitable growth even if we see some deterioration in the in the macro economy

Let me just add to that on the link.

You know, you quoted the 13% or so. Keep in mind, as we mentioned, that's got a lot of these credit cards in it that we would not book. I think it's more than half of the portfolio at year end. And that's got delinquency levels that are, call it twice what we're thinking about originating going forward. So we do expect that to roll down. It's just them.

area for secured and unsecured funding this year. And would you be okay raising unsecured debt in the 8% plus range?

Yeah, it's a good question. I think, you know, as everything with us, you should expect us to be opportunistic. You know, we're going to go in the markets that we think are most accretive for us. We did a good amount of ABS issuance in 2022. As you know, we were leaning heavily into the unsecured markets in the prior two years.

balance of our complex is in the sevens. So eight's a little bit above that. We'd like to see that stick around for a little bit, but I think it's starting to become interesting to us. We tend, even with all the ABS issues we've done, we're still at 51% secured mix on the debt side at the end of fourth quarter. So.

We've got a lot of flexibility. We also have the unique advantage of having $7.4 billion of committed bank lines. So, you know, it gives us a lot of flexibility and I think we'll just be opportunistic this year and see where we go. Okay, thank you.

The next question comes from Rick Shane from JP Morgan.

Thanks guys for taking my question. Most of them have been asked.

I wanted to talk a little bit, a question that comes up for us in the current environment with cost funds ticking up a little bit.

given rates. How much pricing power do you have? And specifically what I'm interested in is that as you high grade your portfolio in terms of credit quality, are you able to do that in this environment and not compromise pricing?

So is there a distortion that we're seeing in terms of yields? Rick, this is Micah. So I think

A couple embedded questions there. We do have some pricing leverage within certain segments of our current business, particularly within the higher credit quality and the secured segments. When we restrict the credit box or tighten a bit, what we end up doing is remixing towards a higher credit quality.

course of the last year, we just because of the competitive environment, we have been able to make some positive influence on price in certain spots and and most of that is in that higher credit quality segment. So I would go the opposite of the question which is we've actually increased price in some of those better credit qualities.

segment and we're still getting a lot more volume in that area. And I think it's because competition has tightened pricing dramatically. Um, not because, you know, more, I guess more because of the underpricing potentially in, in 2021 period. And so we've always had price discipline.

We're always testing in those markets. We feel good about the business we're getting there and we've been able to increase price a little bit accordingly.

Got it. No, that actually I clearly misstated the question because that was exactly what I was trying to understand. And when you think about it now and that pricing power that you have in that segment and the...

remixing of the portfolio. Do you think on a net basis you get to a the same risk-adjusted margin or do you get to a slightly lower risk-adjusted margin but with?

lower volatility and definitionally less risk.

Yeah, I mean, we certainly haven't changed any of the expectations on our sort of at the margin minimum risk minimum return hurdles. So I would say generally speaking, we're going to get to a very similar outcome on ROR, return on our return on receivables. We just have, essentially, less price.

for lower losses and we end up kind of in the same place at the bottom line.

Okay, great. Thanks for taking my questions this morning guys.

Thanks, Ru. Our next question comes from John from Jeffries.

More on the guides. Thanks for taking my questions and most of them have been asked. I'm wondering how are you guys? The receivables growth, first of all, Mike, is that just from my means that when you're saying, you know, mid-single-digit receivables growth, is that comparing average receivables in 23 versus 22.

And then given that it appears that the card component will be a reasonable component of overall growth, is there anything from a seasonal perspective that will change given the ramp of cards relative to the normal installment book?

Yeah, that's a good question. I think the straight answer on receivables is that is the end of period managed receivables that we publish. So it will include credit card, it also includes those loans that we are...

selling through our loan flow agreements. It is not an average calculation. On the, in terms of the growth, you know, if you say low to mid single digits, if I sort of benchmark that at half a billion to a billion dollars, you know, we've called out, we expect credit card to be four to 500 at year end.

coming off of 100 base, so we'll call that three to 400 million of that growth, with the other 200 to 600 coming from the loan book. That'll be a combination of our core loans, which as we've talked about have had... The current credit box is pretty conservative. We tightened dramatically in August of last year.

credit card, probably skewed a little bit more towards the second half as we continue to be very conservative there, get comfortable with performance. We will expect to see more growth in the second half than in the first on the card. And then I think in the core loan book, we expect normal seasonal patterns to kind of emerge where typically we have

trouble in terms of growing in the first quarter because of tax season. It's also very accretive to payments and charge and delinquency, but we do tend to not grow in the first quarter and then we re-emerge into that growth pattern from second, third, and fourth. That's how we see it playing out. Obviously, still a lot to be determined, but

That's kind of my views for now. Great, thanks very much guys.

Great. Thanks very much, guys.

A nice question comes from David Sherif from JMP Securities.

Good morning. Thanks for squeezing me in here. Hey, just one question I wanted to follow up on some comments you made on the prior quarter's call and in this.

kind of relates to some of Rick's questions. You know, you had noted, I think last quarter that...

You would notice quite a bit of competition pulling back. You know, it manifested in their marketing spend.

And it could have either been credit driven or lack of ability to access liquidity on their part. But can you provide a little more of an update on competitively what you're seeing, if any of those dynamics have...

It refers course or if you're still saying as you define your primary, near-pronged competitors.

whether it's still an attractive customer acquisition landscape notwithstanding your conservatism on loan growth.

Yeah, I mean, um, I think the answer is yes. We think it's, um, you know, we're, it's a good competitive environment for us. Um, you know, we've been through cycles like this as a company and, you know, specifically we built this balance sheet where

In good times, you know, we're not doing just-in-time funding, and so we're spending more money than competitors, you know, for insurance to have our long liquidity runway diversified funding program. It's in times like this that it pays off because we're building our business for the long term.

competition that couldn't get any access to funding in the summer when delinquencies ticked up across the whole non-prime landscape, probably can get access to funding. So I think that's stabilizing some. And so I think some competitors we've seen come back into the market with access to capital. With that said, it's still very tight. It's very expensive. It's more expensive.

You know, even with our more conservative credit box, we're still seeing very healthy demand coming into our products. I think, you know, some of it is the capital markets.

Some of it is, you know, competitors have had to pull back more either because of lack of equity funding or debt funding. And we think a lot of it is the investments we've been making the last several years in our digital, in our product innovation, in our customer experience. So...

The brand we built over time, people trust and they come to us and they want to do business with us. So we like our competitive positioning. We don't take it for granted. You know, we need to earn our customers business and their trust every day. And so we're going to stay focused on that within our risk appetite.

Got it. Very helpful. And just one quick follow-up, a clarification, I guess, for Micah. Did I hear you?

suggest, you know, in terms of degree of conservatism, that existing reserve levels are, you know, effectively

If not contemplating set at, you know, what is the higher end of your loss guidance this year? That if we come in, you know, at kind of the lower end of that 775 range, we'd likely see the ALL come down as well. Yeah, that's exactly right. I think, you know, with respect to the first point.

So almost a full point above that. I think the reduction in the reserve ratio will really be a function of what the future looks like as we're always kind of pushing forward every quarter. And so we could come in at the lower end of the charge off range. And if

have follow up, obviously reach out to our team. I hope everyone has a good day and we'll look forward to continuing to talk about the business with all of you over the next several weeks, months, and next quarter. So thanks for joining.

Thank you. This does conclude today's one main Financial Fourth Quarter and full year 2022 Earnings Conference call. Please disconnect your line at this time and have a wonderful day.

Thanks for watching!

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