Q2 2023 OneMain Holdings Inc Earnings Call
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Welcome to the one main financial second quarter 2023 earnings conference call and webcast hosting the call today from Onemain is Peter playing head of Investor Relations.
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It is now my pleasure to turn the floor over to Peter playing you may begin.
Thank you Shelby.
Good morning, everyone and thank you for joining us let.
Let me begin by directing you to page two of the second quarter 2023, 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 factor.
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 July 26 and.
And have not been updated subsequent to this call.
Our call. This morning will include formal remarks from Doug Shulman, Our chairman and Chief Executive Officer, and Mike Conrad, Our Chief Financial Officer.
After the conclusion of our formal remarks, we will conduct a question and answer session.
I'd like to now turn the call over to Doug.
Thanks, Pete and good morning, everyone. Thank you for joining us today today I'll cover our results for the quarter, our competitive positioning in the current economic environment and our strategic initiatives. Let me begin by mentioning the important progress Onemain has made this year.
<unk> and growing our products and channels to serve more hard working Americans. This includes our bright rate credit card and our expanded secured distribution channels, both of which have continued to show steady growth and strong credit performance.
Through our expanded product set we've been able to grow our customer base from 2.3 million customers two years ago to 2.7 million today.
As we grow our customer base, we will be able to do more business with an expanding universe of customers and products.
This quarter capital generation, the metric against which we measure and manage our business was $192 million demand for our loan products remained strong this quarter, our originations totaled three $7 billion.
Ahead of our expectations at the beginning of the year and only modestly below originations a year ago. Despite our significantly tighter underwriting posture today are.
Our continued strong origination volume is testament to our competitive positioning strong balance sheet and excellent access to capital markets, which allows us to continue to make all of the loans that meet our risk return criteria and consistently provide our customers responsible.
Access to credit across a range of products, regardless of the economic environment.
As we've discussed on previous calls we've seen notable increases in the credit quality of our originations.
64% of new customer originations since our major credit tightening in August of 2022 had been in our top two risk grades those with the best credit quality and lowest risk customers.
And while we haven't made an across the board macro adjustment to our credit box since last August we've continued to tighten our underwriting at a more granular level during 2023 by closely examining bespoke segments of underperformance by channel.
<unk> geography, and customer attributes examples of this include reducing the size of loans in certain geographies.
Do you think ltvs and auto lending.
Tightening standards for thinner file customers moving some lower our OE business to more affordable smaller dollar loans and increasing pricing with some decrease in volume in segments that make sense, we're already seeing the incremental positive.
Credit results from these adjustments in our early vintage tracking.
Given the current economic uncertainty as well as strong demand and our strong competitive positioning we expect to maintain this conservative underwriting posture until the economic picture becomes more clear.
The results of the actions we've taken are evident in our credit performance. Our 30 to 89 delinquency rate finished the quarter at 2.76%.
Only 18 basis points from the first quarter and in line with normal seasonal trends for context recall, the delinquency rose 48 basis points in the second quarter of 2022, while back in the second quarter of 2019 delinquency was up approximately two.
<unk> one basis points from the first quarter.
Loan net charge offs in the quarter were seven 6% in line with our expectations aided by continued good performance in late stage collection and post charge off recoveries.
Our portfolio is now split about 50 50 between loans, we originated before August 2022, and those underwritten after our credit tightening.
While we are encouraged by the trends we see in our credit we continue to be cautious as we navigate an uncertain economic environment with some headwinds and some tailwind on the positive side unemployment remains near historic lows and our customers have benefited from wage growth.
With our average customer income up about 10% compared to 2019 levels. However, while we have seen the pace of inflation decrease.
Some of the basic costs for the average American, notably food housing and gas remain elevated and we are working hard to support our customers who are affected by this.
We are pleased that our decisive credit tightening and our differentiated business model have resulted in performance that is superior to what we see from most other non prime lenders and as our post tightening vintages continue to grow in proportion to the total.
Portfolio, we expect credit performance will normalize over time to more historic levels.
During the second quarter, we demonstrated our deep access to the capital markets raising more than $1.3 billion through two debt offerings, one in the ABS market and one in the unsecured market.
We've raised over $2 billion of funding so far in 2023 and continue to feel great about our access to markets, our strong balance sheet liquidity and outstanding capital access are important competitive differentiators for onemain.
Turning now to our strategic initiatives, let me start with our bright way credit card. We continue to be very pleased with the progress of our rollout as well as the credit performance of our cards and the early results are confirming our hypothesis that our card product.
Divides a very significant opportunity for our customers and our business.
As you know our disciplined rollout has been a multi year journey.
We began offering cards in 2021 by booking about 65000 test accounts and spa.
The better part of 2022 monitoring marketing and channel effectiveness spend and credit performance.
We focused heavily on building a digital first product by enhancing the customer experience in our bright way App and have been very pleased to see the customers are primarily engaging with and paying us in the mobile app.
Since that time, we've been focusing on our readiness to scale the card product by building out our operational and servicing infrastructure.
At quarter end, we had roughly 230000 card customers and $159 million of card receivables and we're very excited that this month, we had our first cargo only customer take alone through a pop up offering and our mobile app.
We've always thought that card customers, who show positive credit behavior would be a very attractive low or no cost acquisition channel for loans, while it's still early days, we now have the capability to offer more than one product through our mobile app and we're excited.
Is it about the possibilities this brings to our business and customers going forward.
As we've started to scale, we've maintained our conservative credit posture and have been disciplined in our rollout through the two plus years, we've been working on our card product.
We're also pleased with the continued progress in our secured distribution channels, where we continue to deliberately and carefully build a portfolio of secured loans through relationships with auto dealerships power sports dealers and home contractors.
Origination volume remains solid and credit performance is excellent.
Loans sourced through these channels use the same hallmark ability to pay underwriting we use in the rest of the business and almost always include a phone call directly between us and the customer.
Importantly, these secured lending channels help expand our distribution capabilities and provide a growth channel with attractive returns for us in the years to come.
Loans from these channels today total more than $550 million of our receivables.
I'll close by briefly touching on capital allocation.
Our top priority remains investing in the business and this quarter. We grew our receivables by about $700 million invested in new products and channels and continued to build out our technology and digital capabilities.
Our next priority is our dividend and our $4 per share annual dividend translates into an approximately 8% yield at our current share price.
And finally during the second quarter, we repurchased about 170000 shares for $7 million as.
As we've discussed over the past few quarters, we've moderated our share repurchases given the uncertain economic environment and our desire to maintain strategic optionality.
However, we remain active in the market and will continue to adapt the pace of repurchases as the environment evolves with that let me turn the call over to Micah.
Thanks, Doug and good morning, everyone.
This quarter's financial performance was highlighted by strong receivables growth and credit trends that continue to follow normal seasonal patterns.
We had a solid quarter for funding raising $1 $3 billion, including accessing the unsecured market for the first time in nearly two years.
Second quarter net income was $103 million or <unk> 85 per diluted share down from $1 67 per diluted share in the second quarter of 2022.
Second quarter net income was impacted by seasonal reserve builds resulting from our strong growth and two nonrecurring regulatory settlements. Please keep in mind that prior period comparisons also reflect a historically lower level of net charge offs.
C&I adjusted net income was $122 million or $1 <unk> per diluted share.
<unk> from $1 86 per diluted share in the prior year quarter.
Capital generation was $192 million for the quarter compared to $273 million a year ago.
Recall capital generation excludes changes in seasonal reserves, considering only the current period's charge offs.
Demand for our loan products remains strong supported by a constructive competitive environment and continued progress in our new products and channels.
Managed receivables were $21 4 billion at June 30, up $1 3 billion or 6% from a year ago with approximately one third of that growth coming from our secured distribution channels and bright way credit cards.
As a reminder, managed receivables also includes $849 million of receivables sold through our forward flow agreements.
Given our second quarter performance and what we can see ahead. We are now estimating full year receivables growth to be between five and 8%.
You may recall last quarter, we signaled that we were trending toward mid single digits an improvement from our initial guide in early February as a constructive competitive environment and lower early payments have offset the impacts of continued credit tightening.
Second quarter interest income was $1 1 billion flat to the prior year quarter.
Yield was 22, 2% in the quarter down five basis points from the first quarter.
Yield continues to reflect the ongoing impacts of higher delinquency levels borrower payment assistance and the strong originations in our secured distribution channels.
We expect yield will gradually improve over time as our back book runs off and we see the benefits of our credit tightening and our recent pricing actions.
Pricing for the second quarter originations.
It was up modestly from first quarter and since the end of June we've made even further pricing adjustments that will support yield in the quarters to come.
Interest expense was $242 million in the quarter up $24 million or 11% versus the prior year, primarily from an increase in average debt to support our receivables growth.
Interest expense as a percentage of receivables was four 8%.
Modestly from four 6% a year ago, a sharp contrast to the significant increase we've seen in base rates.
We expect that future changes in our interest expense will be gradual given our primarily fixed rate longer duration maturities and our recent mix of lower cost secured funding.
Other revenue in the second quarter was $182 million up $29 million or 19% from the prior year quarter.
The increase was primarily attributable to higher yields on our investment portfolio.
And on our cash balances.
Provision expense was $479 million, reflecting net charge offs of $385 million and a $94 million increase to our loan loss allowance.
Note that the increase in the allowance is primarily driven by portfolio growth as our reserve ratio was up just six basis points to 11, 66%.
We continue to maintain a cautious view of the future macro environment and our reserves with assumptions similar to recent quarters.
Finally, policyholder benefits and claims expense for the quarter was $44 million compared to $42 million in the second quarter of 2022.
Let's now turn to the C&I credit trends highlighted on slide eight.
Loan net charge offs were 379 million or seven 6% for the quarter.
Net charge offs were supported by strong recoveries equaled a one 3% of average receivables our net charge off estimate for the year remains unchanged at 7.0 to seven 5%.
30 to 89 loan delinquency was 276% in the second quarter up from $2 five 8% in March this sequential increase of 18 basis points is consistent with typical seasonal patterns.
As Youll see on slide nine our post August 2022 originations or our front book has now grown to represent about 50% of our total portfolio.
These originations continue to perform within our expectations.
Our expected to represent 65% to 70% of our portfolio by year end.
The performance of our front book is supporting a return to more normal seasonal patterns in our portfolio.
30, plus delinquency of 5.09% was down 20 basis points in the second quarter and down 71 basis points year to date very much in line with pre pandemic comparison periods and a stark improvement from what we saw a year ago.
And while we continue to be encouraged by the performance of our new originations are older vintages continued to track above pre pandemic levels and we are proactively working with customers through what continues to be a challenging time.
Turning to slide 11.
Ni operating expenses were $370 million in the quarter up 5% year over year, while our operating expense ratio remained unchanged at seven 1%.
The majority of our expense growth came from investment in our new products and channels with our core expense up just 2% versus the second quarter of 2022, despite higher levels of growth in receivables.
We continue to manage our expenses closely and expect our full year opex ratio to be approximately seven 1% of average receivables unchanged from our previous guidance.
Let's now turn to slide 12 for an update on our balance sheet and our funding.
One of the fundamental advantages of our business is our proven access to funding in the capital markets that was on display once again this quarter as we successfully tapped both the ABS and unsecured debt markets to raise more than one 3 billion.
Importantly, both debt issuances in the quarter had maturities of over five years as we begin to fill out the longer end of our balanced maturity profile.
In May we issued in the ABS market for the second time in 2023, with an $825 million five year revolving deal at five 8%.
The issuance was well supported with long term investors and a great lineup of new investors.
In June we issued in the unsecured market for the first time since August of 2021, with a $500 million, 9% note due in January 2029.
We saw participation from more than 20, new investors and this issuance and we were pleased with the execution in what has proven to be a choppy market.
Each of our unsecured issuances since 2020 have contained a callable feature which for this 2029 bond will begin in the middle of 2025. This is yet another important tool for us to manage our interest expense and our debt profile overtime.
Our secured funding mix at quarter end was 55% of outstanding debt.
That to the prior quarter due to the balance of our issuance in <unk>.
Our liquidity remains strong and is supported by $7 4 billion of committed bank facilities spread across 15, geographically diverse and well established financial institutions.
During the quarter, we renewed three of these facilities totaling more than $1 billion of capacity extended beyond 2026.
And we have now renewed 12 of our facilities since the beginning of last year, showing the strength of our key bank relationships and our liquidity position.
And to wrap up the balance sheet, our capital adequacy also remains strong with net leverage of five five times up modestly from five four times last quarter.
With that I'd like to turn the call back over to Doug.
Thanks, Mike.
<unk> remains in a very strong competitive position as we continue to provide access to credit for our customers and help them through this uncertain time.
Our delinquencies are in line with seasonal trends and the loans. We have originated post tightening are performing well.
Our balance sheet is strong enabling us to make every loan that meets our risk return criteria and we continue to invest in new products and channels, allowing us to better serve more customers over time.
Before I end I want to thank all of the Onemain team members for the dedication and passion. They bring to work every day to help hard working Americans improve their financial well being with that let me open it up for questions.
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We'll take our first question from Vincent <unk> with Stephens.
Hi, good morning, Thanks for taking my questions.
Nice to see the loan growth.
This quarter and raising the loan growth range for the year. Just curious if you could talk about what youre seeing thats different and what gives you confidence in in higher growth given your conservative stance.
Hey, good morning, Vince Thanks for the questions Mike.
Yes, I mean, we've been pleasantly supply surprised and happy of course, but we're sort of the receivables are tracking I think it is.
It's a bit of a mix.
Question or answer I suppose we've seen certainly some improved some improved payment behavior in the in the existing portfolio. So payments as I mentioned in the prepared remarks, we're seeing them down versus prior periods. These are really early pay offs.
In terms of loans that are getting paid off by our customers and fall and we think that's partially a function of the competitive environment.
So those receivables are sticking around a lot longer importantly, those are those are receivables that are paying we've also seen strong demand as we mentioned the competitive environment has been really good. So those two those two three things really are causing us to.
Lead us to increase our estimates for the year.
I want to make sure I mentioned, that's also Oh.
Allowed us to continue to tightened credit as well and be really selective about the loans that we're putting on our books and making sure.
They really have returns that we like and so all of that gets incorporated into our receivables expectation, but I think you know.
Net of all this is a little bit better growth for gone up 5% to 8%, but with also much stronger and better credit quality.
Better credit quality growth.
Okay, great. Thank you Mike.
Second question talking about the.
Credit reserve range, so just a slight increase quarter to quarter.
Could talk about your comfort level about the.
The credit reserves at this current level and what expectations are built into that thank you.
Yes, I think they havent changed much Vincent from quarter to quarter. So I think we certainly feel comfortable with them.
We've been monitoring the environment closely really looking at the portfolio on a quarter to quarter basis has anything dramatically changing.
What youll see in our credit results, obviously is very normal seasonal trends. So that leads us to not really feel like we have to put it aside any additional reserves I think it also gives us confidence that the reserve level is good we do have a degree of caution.
And I guess, you could call it conservatism, but we'll see how the macro environment plays out we do have some caution in the reserves. We continue to have a four 5% to 5% unemployment rate.
Factoring into our macro period and.
As I've mentioned before.
To make sure you mentioned again that macro overlay couldnt cover unemployment increases, but also persistent levels of inflation and so those two are factored in that's roughly 100 $115 million.
Macro overlay, so we feel really comfortable with the reserves at.
<unk> 11, as you know this quarter over quarter, we went up about six basis points with the majority of that increase of $94 million coming from growth in our portfolio.
Okay, great very helpful. Thanks, very much thanks a lot.
We will take our next question from Michael Kaye with Wells Fargo.
Hi, Good morning, I wanted to dig more into the loan growth.
Coming in better than expectations, whereas the guidance, but the wind generation growth still seems kind of lackluster at least versus my estimates are.
I wanted to just talk more about that decline annually.
I mean is this really good or bad.
The company in terms of maybe credit is thats really whats driving the payment relief.
Can you. Please if there's more normalization.
Just give us some historical perspective on these patients where they stand today versus and dynamic versus historical averages and do you expect these payment rates to continue to moderate.
Yeah. So let me, let me give a little bit more context, there and my answer was not completely fulsome, but as.
As I said the receivables growth certainly is driven by stronger demand and I would call that stronger demand in a.
It really constructed competitive environment offset by our continued credit tightening that Doug had mentioned in his prepared remarks.
Now take those that sort of answers or at least gets to your originations question. So originations in the quarter.
They were down 4% year over year.
In light of the aggressive tightening that we made in August of last year as well as July and continue to make throughout this year I think down 4% on originations were pretty happy about that given the aggressive tightening we made I mean I think.
Last year, when we did our August tightening we had called out approximately $1 billion of annual originations being affected and so I think you've got to keep that in context. When you look at the year over year originations performance.
In terms of the receivables growth and the impact of payments I'll call out a couple of things and metrics that we track when you look at number of customers, making a payment it's relatively.
Close or within earshot of what the.
The number of customers, making a payment it's in the high eighties.
Versus pre pandemic levels. What we are seeing is customers are paying and in some cases can't make the full payment. So we're using some of our borrower assistance tools to help them through this difficult time in.
And the reference I made to early pay offs are really loans that are paying in full.
And so we saw a lot of it in 2021, when the government was throwing cash at our customers. They had excess cash to pay off loans. We also think that thats a function of the competitive environment, where loans are not getting written away from us.
As frequently as they may have been in the past and so those again those are the pieces that contribute to the receivables growth.
Cause those are loans that are on the books that would presumably be written the way. We think there are customers, who are paying and I look at it as a good thing net net.
Okay. Okay. That's helpful.
Wanted to talk a little bit about the asset yield side that surprised they havent been up a bit.
Longer than what you've been reporting.
Joining that.
So modest improvement and I think they.
Come in below what I would consider modest improvement the declining so I wanted to understand you know what's what's the dynamic that's holding the asset yields back I think you mentioned borrower assistance.
And your last response, so is that part of it that's cleaning are challenging for asset yields.
Yes, so in general Michael yields are still being impacted by the macro environment.
And I think you hit on the two of them that are.
Most impactful one is the higher level of 90 plus.
As a reminder, we reverse.
Any accrued interests when a loan becomes 90 days past due and we stop accruing on that loan at that point. So the higher levels of 90, plus there do create a downward pressure on overall yield.
Also some of the borrower payment assistance that we do create some timing differences in yield where if we extend a temporary modification to a customer for three months. We will we may take the accrued interest on that loan and put it on the back of it alone and recognize it on a cash basis in those.
Two things do have an impact on yield and given the higher levels of activity in 90, plus and also borrower assistance, it's creating that temporary.
Pressure in that area I also mentioned and we had.
We had called out maybe fourth quarter of last year, we had shown some pictures in our earnings deck around R. R. R. R Prime pricing and also our secured distribution channels. So Doug called out the strong growth, we're seeing in that in that secured distribution channel and those do have lower apr's debt.
You have lower losses, and we think very very attractive returns, but the growth in that channel certainly has given a little bit of pressure to yield as well with future earnings to come in and I think also worth certainly mentioning again, we continue to actively manage our originations and our receivables.
We have made some significant pricing increases over the last six weeks in certain segments that we do expect will help.
Yield as we move into the latter part of 'twenty three and into 2024.
And some of these things in terms of the macro environment certainly is what we're looking for to get back to a regular way yield, but I think in the medium term, we can definitely see.
Gaining back a 100 basis points on our yields.
Hey, folks that reside this is Doug I just wanted to hop in since there were two questions about growth and just remind everyone.
We don't manage the business to growth targets. We gave you what we think the growth is going to be you know our view is that growth is an outcome. We're gonna have the credit box that meets our risk return thresholds and then we're going to have excellent marketing.
Excellent customer experience excellent product set.
I think we're very pleased given how tight our credit box is and remember our credit box.
We tightened it because we saw some elevated delinquency in the spring of 2022, and then we layered on metric for a recession. So we're now booking loans that even if we go into a mild recession unemployment goes up into the five ish percent.
Still meet our return on equity thresholds given that we think it's because of our strong competitive position that 65% of the loans. We're booking today are in our top two risk grades and so we're pleased with the output but as you.
Someone told me when I came into this job has been in the business a long time anyone can make a lot of the question is can you make good loans that pay you back and so we are pleased with the growth, but not managing the growth, but we did give you the number where we think it will come in.
Okay, all right. Thanks, Thanks, a lot.
And we'll take our next question from here Bhatia with Bank of America.
Good morning, Thank you for taking my questions.
Hello, a couple of credit questions. So maybe I'll just start with the allowance ratio all the coverage ratio question.
Okay.
I guess like.
What where do you expect it to trend from here and the reason I ask is your guidance implies a meaningful improvement in credit losses.
Over the next couple of quarters, which youll see some evidence of that in the delinquencies than you have you also talked about the higher quality borrowers youre, adding becoming a larger and larger part of the portfolio.
So when does that manifest itself into a lower allowance ratio. It does sound like there is some level of conservatism that you are putting into the allowances, but as the level of conservatism higher today than it was three months ago.
Trying to understand some of those moving pieces within the allowance ratio.
Yes. Thanks, Matt Good question I think in general our expectations embedded in our reserves on the macro environment going forward are pretty consistent with what you see from peers.
Somewhere in that four 5% to 5% unemployment rate.
Going forward. So that is certainly a part of why our reserves are at a level that are higher than seasonal day, one or what we might consider a normal level reserves I'd put that had probably about 60 basis points.
Roughly speaking in and we will see I think with these reserves were required under seasonal to have a view on the future macro we use a number of different macroeconomic sources to do that and you know there is some judgment calls there as well.
Think what we'll be looking to see is number one we start to see real improvement in delinquency, we've been following seasonal trends, but we'd like to see that trend down given where the portfolio is headed that you mentioned.
Also I would point out that we've got to have a view on the macro environment that continues to improve.
And that's either unemployment doesn't starts to look like we're sort of in the soft landing category. If you if I can use that term.
Or else inflation continues to moderate moderate itself down over time, but.
I think.
Who knows who knows when that will happen with me here, but it's probably a quarter or two away before we start thinking in that direction.
Yes.
And then maybe just staying on the credit upside Thats. The equation just can you talk to us a little bit about some of the internal metrics you are seeing in terms of the pace of credit no.
<unk> or deterioration probably describe it right and like what I mean.
On the outside we see the consolidated picture, which is of course impacted by the credit tightening actions you took so what I was curious about is when you look at your customer sub segments. So on a like for like basis, using a similar risks call risk rate how much credit weakening are you seeing are you seeing signs of stability are you seeing.
The pace of normalization accelerate decelerate like where are we on that kind of core customer health like question.
Yeah I mean.
I think that's a very broad question.
I'll try to answer some of it I think.
There are certainly puts and takes in the macro environment right now.
Unemployment remains low as you know we are seeing some wage growth in our customer base and in the in general in the non prime consumer as Doug highlighted on his remarks.
Costs are up right.
Mortgages rent and all the things you see in the environment food gasoline.
Even if even with inflation.
<unk>, three <unk>, 4% higher than prior year.
Still a multiple of that higher than three years ago. So.
I'd say in general the non prime consumer is still struggling with inflation, we see that on a like for like basis across the FICO FICO spectrum if.
If you were to look a year ago, we probably would have we would have told you and we did tell you that we were seeing more challenges in the lower income lower FICO.
Space you know a year later that has kind of moved itself up into the higher levels of the FICO spectrum and you're hearing that from other <unk>.
Near Prime and even prime lenders.
On on their public calls and so I would put it somewhere in the 20% to 30% higher delinquency level in general on a like for like basis, but through our aggressive tightening last year and our continued.
Sort of surgical management of our originations in the way, we're thinking about deploying capital we've been able to generate a results that on a recent originations looks more like a 2019 level.
And I think you pair that with continued growth and we're pretty happy about where the book is right now.
Got it and then just my last question turning to the credit card product I know, it's early doors, but maybe just update us on what are some of the key learnings. So far are you seeing that product resonated with a certain type of Onemain customer mall I think you mentioned <unk>.
Started rolling out loans within that within the App.
So just why have you needed to tweak and also any changes to the full your expectations there.
Yes.
We.
We're still in the early days of credit card and.
A couple of years ago, when we first started issuing the cards.
We ran.
A lot of different test cells by customer type credit quality product types different kinds of product features.
And we put about 65000 cards into market.
Some of those.
And we pushed the envelope, so we could see where the different breaking points where for profitability. So that we could then decide where we wanted to start rolling things out and so.
The learnings are numerous like.
Depending on what fee you charged and what channel you went through some of those we didn't like the results we were seeing and so we only use those in test and we didnt put those in production similarly, depending on.
What we could charge for the card as far as yield depending on the credit results that met our return on equity thresholds and so after we rolled out in 2021, we watch performance for most of 2022 and now we're rolling out cards in credit back.
And where we can price appropriately with the product features through the channels that make the most sense to us and that we're highly confident profitable and again just like with <unk>.
<unk> loans were only booking cards now that will be profitable, even if losses are higher than our expectation because we have a very conservative credit box. So we've had tons of learnings as you rollout a new.
Product and we as a company just continue to grind on every single detail and analyze all of those different factors I said as we incrementally tweak our box our customer experience and our product and so on.
We like what we've seen.
We think it's a good growth channel similar to loans.
We're not managing to any sort of growth targets, we're managing to profitability and return on equity products and so we like what we've seen with the rollout and we plan to continue the rollout in some very specific segments that we have a lot of confidence in.
Thank you.
Yeah.
Thank you we'll take our next question from Kevin Barker with Piper Sandler.
Good morning, Thanks for taking my questions just wanted to follow up on credit again, one more time.
So the year over year growth rate on your 30 to 90 day delinquency rate has slowed quite a bit.
I think it's up only three basis points year over year.
Versus previous quarters, which have been much higher.
Given that trend do you expect your consolidated 30 day delinquency rates too.
To have like negative growth by the end of the year and is that embedded in the guidance for net charge offs of seven to seven and a half.
Hey, Kevin it's Mike.
As you probably know by this point in the year, maybe we've got July and a little bit of August where 30 to 89 delinquency will actually impact charge offs in 2023.
I think we feel very very good about the charge offs in the charge off range because of that reason, it's effectively already embedded in our delinquency buckets at this point because we are a 180 day charge off policy. So what we will start to see in the second half of the year will really start to inform where our law.
<unk> will be in the first half of 2024, but to answer your question.
With the front book now being 50% and growing we do anticipate improvement in the 30 to 89 year over year.
When that happens I don't know that is something that remains unseen, but over time as that front book becomes bigger and bigger and performing at 2019 2018 type levels that would be a good assumption.
So given what you reported for the quarter.
And the improvement that we saw particularly in the first quarter. It would imply that were probably already seeing some of that.
Negative growth on a year over year basis on delinquencies are you seeing that maybe in the month of June and maybe the early part of here in July .
Yeah, I mean, I think that's why you pointed it out.
Well as I could that.
If you look at our 30 to 89 relative to 'twenty two in the first quarter.
We were up 35% or so basis points and in the second quarter, it's up only three so.
We are seeing that performance improvement in the portfolio today, and we hope to see it continue.
And then a quick one on the on the macro overlays on the reserves.
Are you anticipating some impact from the repayment of student debt in the fourth quarter.
On your customer base and in general what are your expectations for the impact of the repayment of student debt, particularly for your customers. Thank you.
Look Kevin we're monitoring it really closely we obviously know what trade lines all our customers have.
A lot of our customers have actually been paying their student loans all along.
Historically speaking you know we track this and looked at it.
Loans, where a customer has a student loan trade line perform very much like loans that down.
That said since 2020, when the moratorium on payments started out of abundance of caution we actually had been shooting a monthly payment of a student loan into our net disposable income our ability to pay calculations when we make a loan.
And most of the loans on our books, we've made since 2020, so we actually factored in a student loan payment when making loans to folks.
Over the last year or so we've also made some adjustments to thin file.
Applicants who have student loans on their bureau so.
Generally look we understand the portfolio very well we are not overly concerned because we think we.
Managed this going but we're going to monitor the situation closely there's some talk that there may be some extension of.
While not the moratorium because the Supreme Court wrote it down by the administration may do some sort of phase and payments. So we're watching it not overly concerned, but well follow it and make any adjustments if we need to.
Thanks, Doug Thanks Micah.
Alright, thank you.
And we'll take our next question from Rick Shane with J P. Morgan.
Hey, guys. Thanks for taking my questions. This morning, just to continue that topic, and then something else I want to delve into.
Have you provided or can you provide what percentage of your customers actually have student loans I'm, assuming under index versus the broader population for student loans.
Yes, Rick I don't think we disclosed.
That number.
Any interest in doing it now.
Okay.
No I don't think were going to do new disclosures now.
Okay fair enough.
Anyway, if we could turn to slide nine I'd love to.
I think that's a little bit in the first question is could it be oddly per site.
When you talk about the portfolio mix by vintage here are you talking on a gross or net basis and the reason I.
Is I'm curious if there was a difference in the reserve rate for the describe the portfolio is essentially being two different cohorts.
And should we see a roll down in reserve rate as the mix shifts towards the better cohort.
Rick I'm going to ask you a question if that's okay. When you say gross versus net what do you mean by that.
I mean.
Loan balances versus net of reserves.
I see.
Okay. So on the originations in the receivables that are on the left side of that page those are pre reserves. So in euro terms gross they will match, what we print on our managed receivables page.
That you also have in the deck there okay.
No.
I guess to go a little bit further into that the 50% that's from the front book as we would call. It. They are both 50 obviously.
But that is the balance of receivables.
Related to all loans originated since August 2000, and 2022, so some of them have paid down a little bit from August some of them are brand new okay. Hopefully that is helpful and clarifies your question.
In terms of the reserves, we are certainly incorporating that view into our reserve expectations.
Now, we're going to look at where the portfolio roll rates have been in the past, what we think theyre going to look like in the future with those those better vintages, starting to build and those all get incorporated into our reserve expectations, but I think as you've heard us say numerous times, we do take a.
Conservative or cautious view on our reserves.
Don't feel at this point that there is any strong indication we should be taking those reserves down.
Given the uncertainty in the environment and we'll continue to watch that and.
Of course manage it on a quarterly basis based on what we see out there.
Got it so.
When we look at the reserve build during the quarter and there are couple of ways to look at it. Obviously there was six basis points of increase in reserve rate that implies that 85% of the reserve growth actually 87% of the reserve growth in the quarter was due to growth and that makes sense.
And.
A six basis point increase in the reserve rate is really within the margin of error, but.
Yes.
Portfolio.
Shifting towards front book.
Which is better.
Cohort than the backlog.
It does suggest that perhaps you took the reserve rate.
On the front book, a little bit as well and again I understand being conservative, but I just wanted to make sure that we understand what's going on there.
Yes.
Rick I think.
Absent handing over the model to it.
There's really no way for me to easily explain that to you. There are a lot to go a lot of things that go on.
In our CSO model, you've got the back book aging.
And when loans age they have different reserve rates, you've got elevated levels of delinquency that have different level of reserve rates than than current loans. The front book as I mentioned, we are definitely considering the performance expectations on that front book, but we also can't predict the fee.
<unk> and so we just continue to take a conservative and cautious view, we impute. These macro overlays that are meant to kind of keep that conservatism at that level.
And we'll manage it on a quarterly basis, it's hard for me to get into really granular discussions about that on this type of this type of call.
Got it understood and I guess.
Last part of this is that for the last couple of quarters and I appreciate the disclosure in terms of showing the.
Change in delinquencies on a year over year basis.
But.
In the last couple of quarters, you provided cohort comparisons versus 2019.
On a six month basis and on a three month basis than what you had illustrated.
Was that the front book was performing highly consistently with the 2019 vintage on a like for like basis.
That disclosure is not here.
Just curious if there is any.
And there were at the.
Performance for the back the front book.
Continuing the trend.
Closely with the 19 and if you've mentioned this before I apologize, we're juggling a lot.
No no it's okay I mean.
It's something we don't want to get into the habit every single quarter of looking at vintage level results.
I can tell you they are continuing to perform at our level of expectation.
Some of the challenges with vintage as I'll point out to you or for instance, the late 2019 vintages by the time, we get to June and July of 2020, those vintages started to be heavily influenced by government stimulus and so.
Just getting getting into those granular numbers creates a whole another sort of challenge with year over year comparisons and we decided at this point given that the front book is 50% of our portfolio.
Enough contribution that we can just sort of come back to our 30% to 89% and 30, plus metrics and and really send the same message.
But to answer your question.
But it does continue to perform well.
Great and thank you for the clarification is a subtlety I wouldn't have thought of but it makes a ton of sense because of the way you were showing the EG and all that other stuff. Thank you guys.
Thanks, Rick no problem.
And we will take our last question from Matthew <unk> with Jefferies.
Hi, guys. Good morning, Thanks for taking my question.
And last one for me you said last quarter that you expected yield to improve.
Modestly from from where it was just wondering if that's still the case, what underlies that expectation.
Yes.
Definitely it still feel like it will moderately increase overtime you know again as I said earlier, it's really going to be a function of the macro.
Environment and when we start to see improvement in customers needing help making payments and also our 90 plus.
We are.
In a seasonal pattern now where 90 plus will gradually rise through the first quarter.
No.
Come some element of our forecasting and our expectations I also talked about the.
Secured distribution channels, becoming a bigger part of our portfolio, which has created some pressure on yield of course, we love those loans. They have great returns, but they do have some pressure on the yield topline.
But we've also made increased some really aggressive pricing moves we feel good about them.
Where we are at a level of APR that I think will continue to provide some support and Matthew it's just it's hard to predict exactly when that happens, but I think over the next three or four quarters, where we're certainly going to start to see some gradual improvement.
Okay understood, thanks, very much and congrats on the quarter.
Thanks, a lot thanks, Matt and thanks, everyone for joining us I appreciate you spending time with us this morning.
Our team is here if you've got any follow up and hope everyone has a great day.
Yeah.
Thank you.
This does conclude today's Onemain financial second quarter 2023 earnings Conference call. Please disconnect. Your line at this time and have a wonderful day.
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