Welcome to the OneMain Financial Third Quarter 2022 Earnings Conference Call and Webcast. Hosting the call today from OneMain is Peter Poillon, Head of Investor Relations. [Operator Instructions]. It is now my please to turn the floor over to Peter Poillon. Sir, you may begin.

Thank you, Chelsea. Good morning, everyone, and thank you for joining us. Let me begin by directing you to Page 2 of the third quarter 2022 investor presentation, which contains important disclosures concerning forward-looking statements and the use of non-GAAP measures. The presentation can be found in the Investor Relations section of our website. Our discussion today will contain certain forward-looking statements reflecting management's current beliefs about the company's future financial performance and business prospects, and these forward-looking statements are subject to inherent risks and uncertainties and speak only as of today. Factors that could cause actual results to differ materially from these forward-looking statements are set forth in our earnings press release. We caution you not to place undue reliance on forward-looking statements. If you may be listening to this via replay at some point after today, we remind you that the remarks made herein are as of today, October 27, have not been updated subsequent to this call. Our call this morning will include formal remarks from Doug Shulman, our Chairman and Chief Executive Officer; and Mike Conrad, our Chief Financial Officer. After the conclusion of our formal remarks, we will conduct a question-and-answer session. Let me turn the call over to Doug.

Thanks, Pete, and good morning, everyone. Thanks for joining us today. This morning, I'll take some time to review our quarterly performance, the current credit and macroeconomic environment and provide an update on our key strategic initiatives. Our capital generation remains strong, coming in at $283 million for the quarter. As I touched on last quarter, demand remains strong, and we've seen improvements in the competitive environment, which has led to an increase in attracting higher credit quality business. Originations were $3.6 billion for the quarter, down 8% from the third quarter last year, but relatively strong given our cautious underwriting posture. Originations this year have also been supported by our expanded products and distribution channels, which made a meaningful contribution to our 7% year-over-year receivables growth. Our 30 to 89 delinquency finished at 2.81%. This is in line with or slightly better than normal seasonal trends. We're encouraged by the stabilization of delinquency this quarter given the worsening we saw in the second quarter. Net charge-offs in the quarter were 5.9%, supported by continued positive performance in our later stage delinquency and also in post charge-off recoveries. I'm also really pleased that we continue to demonstrate one of our core strengths, our balance sheet and funding capabilities by raising $1 billion in a difficult funding market. Regarding the nonprime consumer overall, while unemployment rates remain at historically low levels, it is clear that inflation has presented challenges to some consumers, especially those at the lower end of the credit spectrum. We've reflected this in our tighter underwriting. We started to see inflation become a challenge for consumers across the entire industry in the second quarter. However, from the data we see, which we provided on Page 9 of our presentation, our book is performing quite well in comparison to…

Thanks, Doug, and good morning, everyone. The company's focus on supporting our customers through a challenging environment, combined with a more conservative underwriting posture has helped to bend the curve a bit on early-stage credit performance. And our best-in-class balance sheet was further strengthened as we successfully completed a $1 billion ABS transaction in the quarter. In terms of our Q3 financial results, we earned $188 million on a GAAP basis or $1.52 per diluted share in the quarter. Capital generation was $283 million, down $77 million from the third quarter of 2021, reflecting a $128 million increase in net charge-offs from the historic lows we saw in the year ago period. On an adjusted C&I basis, we earned $187 million or $1.51 per diluted share, down from $2.37 per diluted share in the third quarter of 2021. This difference was also driven by the normalization of charge-offs as well as increases to our loan loss reserves. Our managed receivables reached $20.5 billion this quarter, up $1.3 billion or 7% from a year ago. Net interest income was $895 million, up 2% compared to the prior year quarter, driven by higher average receivables. Net interest margin remained strong at 18.1% in the quarter. Portfolio yield was 22.6%, down 55 basis points sequentially. And importantly, our top line APR on new originations was flat sequentially and up modestly from the third quarter of 2021. We -- we have found recent opportunities to take positive pricing actions, which has offset impacts from our credit tightening. So while yield is being temporarily impacted by the current environment, we anticipate that over time, these effects will subside and yield will return to more normal levels. Interest expense was $221 million, down 6% versus the prior year. Interest expense as a percentage of average receivables…

Thanks, Micha. We feel really good about how OneMain is positioned today. The combination of our incredibly strong balance sheet, superior knowledge of the nonprime consumer proprietary data through multiple economic cycles and world-class underwriting and servicing capabilities put us in a position of strength in this uncertain macroeconomic environment. While we remain cautious, we also feel confident in our ability to navigate this environment and continue to generate advantages for our business over the long run. I want to again thank all of our team members. This month, OneMain was named to Newsweek's list of the top 100 most loved workplaces for 2022. This external recognition is a reflection of what those of us who work at the company already knew that our team members are exceptional. They come to work every day committed to making a difference for our customers, our communities and each other. It is our team members who make OneMain such a special place to work, and I want to congratulate them on this honor. With that, -- let me turn it over to the operator, and we're happy to take questions.

[Operator Instructions]. Our first question is coming from Moshe Orenbuch with Credit Suisse.

Doug and Micah, I'm hoping that given what you talked about in terms of your ability, tightening of the credit box, the strong funding, could you talk a little bit about how that fits in with the overall competitive environment? Like what are you seeing from competitors? Are there either kind of prime lenders that are tightening that have given you greater opportunities or other sorts of opportunities from a competitive stance.

Yes. Thanks for the question, Moshe. It's Doug. We are seeing opportunities in the competitive landscape. And I think one, you mentioned in 2021 and early 2022, there's a number of players who traditionally focused on prime moved down into non-prime. I think many of them have now kind of moved up and out of the market, which creates less supply, which we have a very strong balance sheet, and so we can offer customers -- we can keep lending as much as any loans that meet our return hurdles. Similarly, there's a number of nonprime lenders who I think most people have cut their credit box in this environment, and we put a slide in the deck that showed delinquencies going up across the board in the nonprime sector. So most people have appropriately cut their credit box. I think folks who rely more on partnerships, loan flow agreements, et cetera, the people who supply the capital have become much tighter. And so the fact that we put a lot of long-tenured unsecured debt, 8 and 10 years on our book the last couple of years, the fact we've got such a strong funding program means we've got plenty of supply. And so as you've seen, our credit box, we've cut quite significantly. And if competition had stayed exactly where it was before we cut we'd be originating a lot less loans. But instead, we're getting a bunch of higher quality, better credit customers and we're continuing to add balances, albeit better balances or less risky balances onto our book. And so we like the competitive environment, we on purpose built a business to be in a strong position if there's economic distress or a turmoil in the market.

Got you. And just from a financial standpoint, you talked about an improved outlook for capital generation. So kind of the combination of revenues, expenses and credit losses all a little better. The reserve did go up again, and the reserve now stands, as you mentioned, 11.4%. I would note that at the end of like the first quarter of 2020, the reserve was at 12%. Can you kind of square for us like how you think about that level -- I mean it seems to me the economic uncertainty back then was probably a little greater than it is now. But maybe talk about how we should think about the reserve trends from here?

Yes. Moshe, it's Micah. Thanks for the question. I think if you go back to first quarter, you're right, it was around 12%. If you go to second quarter of that same year, it actually went up to 13.2%. So the world was a much different place then. I think we were staring at forecast of unemployment in the mid- to -- low to mid-teens at that time. So everyone was kind of building with that expectation. Of course, that turned out to be -- to never kind of come to pass and a lot of folks including us had to then move our reserves back down as the macro economy improved. But for today, I think reserves is a quarterly exercise for us. We want to make sure we're accurately and appropriately reserved at each point in time. There's a lot that goes into our reserving. We're projecting lifetime gross loss assumptions for our delinquent receivables. And now, of course, under CECL, we have to generate assumptions, loss assumptions and book reserves for our nondelinquent receivables, which makes up 95% of our book. So very, very different under this accounting regime. But then we also factor in our post charge-off recovery expectations, not just for loans that will go to loss but also recoveries on our back book of historical losses. And so there's a lot that goes into the reserves. Of course, we have to under CECL and do consider the future macro environment and its overall impact on these losses. We look at a variety of sources to generate these assumptions. Our macro this quarter blends a number of different economic scenarios and potential outcomes that result in moderately elevated unemployment assumptions for 2023, which is an increase from where we were in the second quarter. We also consider the impact to credit performance of other economic factors such as continued elevated levels of inflation. And so I say all this to you, just to give you a sense for there's a lot of moving parts in CECL we run our reserve models. We calibrate the outputs to several different loss projections to make sure we feel we are appropriately reserved at a given time. And of course, we continually refine our estimates just based on actual experience and how things play out over the next few quarters, we really determine where our reserves go.

We'll take the next question from Kevin Barker. One moment, please. Our next question will come from Kevin Barker with Piper Sandler.

Sorry, I was talking a little bit there.

We didn't to hear you, Kevin. We didn't hear anything though.

Anyway, so could you help us -- could you detail what you're seeing within the credit book to indicate that net charge-offs are at the lower end, in particular, like what exit rate would you expect on net charge-offs in 2022? And then what would you expect for like year-over-year growth rates in net charge-offs and delinquency rates as we had in fourth quarter and then into the first quarter.

Okay. Kevin this is Micah. I'll try to unpack that a little bit for you. I mean, obviously, it's kind of an uncertain environment. So I think that played into certainly how we were setting what we felt was a reasonable assumption when we last talked to you in late July of 6.1 to 6.5%. I think built into that estimate was a range of potential outcomes, mostly with respect to our recoveries and our late-stage flows. By the time we get to this point in the year, any early-stage delinquency, we're booking today, call it, our September results will really impact first quarter just because of the way things roll through the buckets to charge off at 180 days. So if you go back and look at some of the look at all of our historical data of 30 to 89, 2 quarters later to charge-offs and 90 plus 1 quarter later to charge-offs. So those ratios will give you a pretty good sense for how to think about losses over the next couple of quarters. We're tightening our guidance today to be at the lower end of that range. It's really a function of some of our -- we've been very disciplined with our underwriting. As you know, we've been tightening for a while. So we are starting to see some of the benefits of the tightening we did before the summer. I think the summer significant tightening we've done is still taking hold, and we will see some of those tailwinds coming in the future. Our back-end roll rates, our performance continues to be strong I think this is a function of our business model. It's our tools that we have in Central. We talked a little bit earlier about the algorithms and the data we use…

Mike, thank you for the detailed answer. And regardless to the year-over-year growth rates, it seems like your guidance would imply that the year-over-year growth has plateaued on the charge-off rate? And then likely, will decline into the early part of '23. Am I thinking about that correctly just given your guidance and the growth rates?

Yes. I think maybe on a long-term trend, that's potentially possible. Again, you have to -- you start at the 30 to 89. We -- against 2019 we were, call it, 60 basis points higher in June than 2019 levels. We were 50 basis points higher when we got to the third quarter. So I would say modest improvement. We were still very mindful of the environment, but we'll have to track where 30 to 89 goes from here. That should really start to inform you when we see a trend in that early-stage delinquency where things are headed. I would caution you on first quarter and second quarter of 2022, the year-over-year compare is going to be a little bit difficult because of the fact that we still had some of the tailwinds from stimulus and think about where the 30 to 89 was in the third quarter of it was still pretty low coming off that massive stimulus we saw in March of '21. So that third quarter, 30 to 89 then led to first quarter charge-offs. So you're always kind of 2 quarters behind, if you will, on the charge-offs into where that turn is. So I would just keep watching the 30 to 89 and of course, we'll keep updating you as we go.

Our next question will come from Michael Kaye with Wells Fargo.

This quarter, we saw a pretty substantial reduction in asset yields, and you mentioned the crude interest reversals. And I suspect there's probably a heavy amount of borrower assistance programs implemented. But then you noted that origination APRs were flat quarter-on-quarter. Could you just talk a little bit more about the near-term outlook on asset yield? Should they begin to stabilize a bit next quarter at these levels or even head up a bit as delinquency stabilize?

Yes. So I think in terms of fourth quarter, I would expect to see something similar to maybe a tiny bit below where we were -- where we are in the third quarter on the overall asset yield. Certainly, we are watching APRs on the front end as originations come in because that tells us where yield is going to be heading in the future. But just like charge-offs, you're always kind of working a little bit behind here where the stuff we're putting on the books today, while it's flat to second quarter and up modestly versus prior year, -- it's going to take some time for that to sort of hold in a $20 billion portfolio. But it is a good benchmark for where yields kind of will settle once we get through a little bit of this challenging macro environment. The yield this quarter, particularly as it relates to prior year, but also last quarter, Certainly, Michael, as you've acknowledged, has been impacted by the sequential increase in 90 plus. As you know, we reversed accrued interest on our receivables once they reach 90 plus past due, and we stop accruing. So that's a significant impact on the yield. But also just in terms of the payment assistance we're providing to some customers results in really a yield -- a delay in yield recognition for any accrued interest on that account. And we know that these tools provide produce better outcomes when we use them. And so we expect yield will return to more normal levels as the macro environment improves.

Second question is I wanted to just talk about your funding needs for the rest of this year and into 2023. How long can you go without raising unsecured debt? And how high would you let that secured funding mix go?

Yes, that's a great question. Let me just -- let me talk first just about how our rates -- how issuance rates interest expense. I think it's important. We've designed our balance sheet, as I said earlier, with staggered maturities and fixed rates to sort of insulate us a little bit from issuance rates. We issued aggressively in the unsecured market, including putting on some 8- and 10-year debt over that period. So we tilted our secured debt down to about 40%. I think it reached 39% even in third quarter '21. So we took advantage of that market, set ourselves up to be in a position where we could lean back into ABS when the time came. And certainly, that time has come in 2022. We've issued only ABS debt. As we think about impact that we've seen on our interest expense, the issuance that we've done in ABS still sits a little bit inside our average portfolio rate for our debt. And now as we look forward, so you think about roughly speaking, if we did our issuance over the next month -- I mean, on the next 12 months, excuse me, will reflect just 6% to 7% of our average debt in 2023, okay? Issuance over our next 24 months, will make up just 22% of our average debt in 2024. And so it takes some time for changes in issuance rates and just changes in the complexion of the balance sheet to really take hold in our interest expense. Regarding ABS, we -- because we started from a position of 39%, we're roughly half and half today we feel pretty comfortable that if we needed to, we could issue nothing but ABS in 2023. I think what we're going to say and what we always do is make sure that we are putting ourselves in a very strong position from a balance sheet perspective. We're never going to sort of prioritize earnings over debt, over balance sheet strength. And so we hope to be issuing some unsecured, but we don't have to right now, and we put ourselves into that position. We're going to continue to be opportunistic and run this thing for the long term.

Our next question will come from Rick Shane with JPMorgan.

Two questions. Earlier in the quarter at the conference, you talked about sort of a divergence in the portfolio in terms of credit performance between customers who rent and customers who own their homes. I'm curious if you can provide some context on what the mix within the customer base is.

Yes, Rick, we're seeing that inflation is eating into the cushion of renters more than homeowners. And it's pretty obvious. There's a lot of people who are homeowners, especially kind of working Americans who have 30-year fixed rate debt, they can choose not to move and their expenses don't go up that much. I mean their gas, their food, they're closing, other essentials are going off, but their housing isn't going up that much. In some metro regions, especially, but other places -- parts of the country, not all of the country, rents have gone up a lot. We've adjusted our credit models. And so what the result is -- we usually had a little bit less than 50% of our customers were homeowners. We've now decreased the number of renters just by definition of the way we have our credit box, where we're assuming a higher cost of living, therefore, less net disposable income, therefore, less cushion, which will either bring down the size of your loan or our willingness to spend or whether you have secured or an unsecured loan offered from us. And so we've definitely seen more stress from renters and we've adjusted the box appropriately.

Got it. Yes, I agree with you. It was a very interesting comment on at the conference because it struck me as a stickier source of inflationary pressure for your consumer. So 50-50 is probably sounds like a reasonable place to assume. That actually dovetails with my next question, which is you also made a comment on this call about high-grading the portfolio in terms of the credit buckets going from mid-30s to 60% in your highest 2 credit boxes or 2 highest 2 credit buckets. All things being equal, given the duration of the portfolio, how long would it take in terms of number of quarters if you stuck with that to really see the portfolio converge towards that 60% level? I realize that's not going to happen, but just from a hypothetical perspective, so we understand how quickly the portfolio recast.

Yes, Rick, this is Micah. Thanks for that question. It is, of course, hard to say exactly because of what we we've got to predict kind of what will happen in the future with the portfolio, et cetera. But I would expect that the originations from our tighter underwriting, which is basically post August sort of credit box. We tightened most of our tightening was done over the summer. And I think that originations from that tighter underwriting will reach roughly, call it, $35 million maybe by March and then somewhere in that 45% to 50% range by 2Q of next year. So if you kind of think about that, I think you'll start to see some credit tailwinds over the next 3 to 4 quarters, of course, assuming a stable macro environment and to fully reach -- assuming we stick with that box for the entire period, but I think take by end of next year, you would certainly expect, given the trends I just laid out, would be sort of fully incorporated. But again, I think we're going to have to see what happens next year with the environment and where we go. But hopefully, that gives you a little sense for how long it will take to...

No, that's perfect. It was more of a hypothetical because I realize that you are very dynamic in the way that you ship things.

Yes, I appreciate that, Rick. Thanks.

Our next question will come from John Hecht with Jefferies.

I guess this is sort of related to some of the topics you've discussed, but maybe can you -- I don't know if you can quantify or at least characterize the impacts of inflation on disposable income? And how does that influence, say, like average loan size in the current time frame?

Yes. I mean I'll take a shot at it, John. I think in terms of the inflation impact on our consumers, we've talked a lot about the lower sort of credit quality. I think we tend to see also in our scoring that those customers of the highest risk that are having some challenges have much lower average income per month than our, say, our average borrower, certainly our lowest risk cohort. And we've seen some wage growth over the last couple of years, particularly in this in this sort of this consumer base, but inflation has just continued to outpace wage growth. And I think if you look at a lot of the economic data, real incomes have been down for several months. And so that's sort of what leads to the credit performance of these folks. And I think that's probably the biggest impact there. And in terms of loan size, loan size is really a function of your risk scoring. So a lot of these customers that are not fitting our box anymore, not getting a loan size at all because they're just not getting an offer or they're getting a secured offer only where we feel that's a good trade-off and a good return for us. We've seen stability in our loan sizes across risk grade. We're just seeing less of that higher risk customer coming into the book. In terms of secured, we've made a couple of adjustments specifically over the last year or so to make sure that we are not riding up the curve on collateral values. We've cut them a couple of times, probably netting to about a 30% overall reduction, and so we're just moderating loan sizes there. But I think certainly, loan size is part of the equation, along with just who we're actually underwriting on a new customer basis.

And John, I would just add, one of the things we've done over the last couple of years is diversified our product set. And so we had already built a robust smaller dollar loan program, which was a $2,500 loan. And so if you think about someone who -- before we the box, we might have given a $7,000 unsecured loan to. Now we might only offer them a $7,000 secured loan or a $2,500 smaller dollar loan, which is much less of a payment load on a monthly basis. And then as Micah has said, there's a number of customers who, given the risk profile, we don't think it's appropriate to give them a loan because we don't think it would be good for them or us, they wouldn't be able to repay it.

Okay. Super helpful color. And then another question. I think you guys referred to Dealertrack in some of your prepared remarks and you're talking about new channels. Maybe can you just talk about the store versus digital migration and maybe some of the metrics or trends there?

Yes. Since the pandemic and we created our ability to close loans outside of branches, it's been pretty steady that somewhere between 40% and 45% of our loans. A lot of it is present customers. People do not have to come into a branch to close it. We built out a set of tools, 2-way video, one-way video, co-browsing being the most popular tool where we actually can show someone on their -- they'll give us access to their screen. We'll walk them through the loan. And we still have the personal touch. So almost every almost every one of those loans has a phone call where we help them work through, what can they afford, what's the right loan for them, et cetera. And so the digital -- our normal channels continues to be a major part of the business and the credit performance of those is very much in line with the credit performance of our branch-based lending. Those -- a lot of them get serviced outside of a branch. So if you live in Dayton, Ohio, whether you come to a branch or not, you get contacted by the branch manager, one of team members, you make a personal contact, if you end up in trouble, you must sometimes walk into a branch or you end up on the phone. So it's all the hallmarks of our business. We've also built out different distribution partnerships. I mentioned dealer track, there's one currency, which links us to powersports dealers. is similar to Dealertrack, which is autos. Those really are diversifying our business, giving us a channel that isn't branch that we can then employ everything that we do with a remote close and all of the hallmarks of our business that's made it so successful over time through those channels. So we end up getting on the phone with them, verifying the vehicle, securing the title taking it through our underwriting process, assigning them usually a team member who will be their point of contact. So we have all the hallmarks of what we do, but it's a different way to get customers in the door as opposed to our normal digital originations or direct mail or affiliates.

Our last question will come from John Rowan with Janney.

I just want to dovetail the conversation on competition with the ABS market. I guess, Micah, maybe give us an update on where spreads would be in the ABS market for you guys today. Obviously, the deal that we saw this quarter was relatively stable relative to the prior deal. But there are definitely pockets in the ABS market, where spreads are widening quite a bit. And so maybe just an update as how you think your next spread is going to be? And how is that relative to other competitors that may be seeing wider spreads and possibly lower liquidity?

Yes. Sure, John. I mean, the ABS market has been, I would say, pretty efficient this year. Over the last couple of weeks, it's gotten a little bit messier. But we're going to obviously pay attention and the market is volatile, and we'll be opportunistic when we can. If you think about where our coupon was on this deal, it was about 5.2%. The previous one, a couple of months prior to that, was at 4.3%. About half of that increase was on the benchmarks and another half -- the other half spread increase. So we did see some spread increases in our last deal, but -- we were opportunistic and did this in August when the time was right. I think that's going to be key to our benefits going forward is just making sure we're hitting our spots. If we were to issue in the ABS market today, it's probably in the mid-6s, honestly, where spreads are. And we'll be patient. We -- the good news is we upsized that $500 million deal to $1 billion, which meant that we didn't have to issue for the rest of the year. And first quarter is typically a quarter in which our balance sheet doesn't grow just with tax season and demand. And so I think we're set up here for a lot of flexibility. We'll obviously continue to watch the market closely. And with respect to competitors, we still feel we're issuing at levels well inside of what our competition is doing. I won't speak to anyone specifically, but the data is out there. I think we're probably call it, 70 basis points inside of what others can issue at on the top tranche, but that changes from time to time.

Yes, we're at the end of the call, let me just emphasize a couple of things Mike has said. One is we really have invested in our balance sheet over the last 3 or 4 years. We didn't try to pick up every last dollar of the lowest rate. Instead, we put a lot of long-term debt on. So we're now, in our view, in a really advantageous position going into an uncertain economic cycle. I think one of the reasons we end up getting better rates than a lot is because we have a long history of serving the customer. We cut our underwriting quickly when we need to, we have a set of servicing tools. And so I think a lot of the questions that came across today focusing on the strength of our balance sheet and us able to dynamically manage our underwriting are on point for how we're managing this business. And we're being conservative, maybe leaves a little money on the table but we're protecting the business for the long run as we invest and just position ourselves in the future through the cycle. So with that, thanks, everyone, for joining us. We're happy to take any follow-up questions, and hope everyone has a great day.

Thank you, ladies and gentlemen. This does conclude today's OneMain Financial Third Quarter 2022 Earnings Conference Call. Please disconnect your line at this time, and have a wonderful day.