OneMain Holdings, Inc. (OMF) Q1 2022 Earnings Report, Transcript and Summary

Welcome to the OneMain Financial First Quarter 2022 Earnings Conference Call and Webcast. Hosting the call today from OneMain is Peter Poillon, Head of Investor Relations. Today's call is being recorded. [Operator Instructions] It is now my pleasure to turn the floor over to Peter Poillon. You may begin.

Thank you, operator. Good morning, everyone, and thank you for joining us. Let me begin by directing you to page two of the first 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 and include the effects of the COVID-19 pandemic on our business, our customers and the economy in general. 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, April 29, and have not been updated subsequent to this call. Our call this morning will include formal remarks from Doug Shulman, our Chairman and Chief Executive Officer; and Micah Conrad, our Chief Financial Officer. After the conclusion of our formal remarks, we will conduct a question-and-answer session. So now let me turn the call over to Doug.

Thanks, Peter. Good morning, everyone, and thank you for joining us today. This morning, I'd like to take some time to review our strong financial performance for the quarter. Then I'll spend some time updating you on our key strategic initiatives. Before I provide the financial overview, let me say that we continue to view the current economic environment as constructive for our business. The predominance of data suggests that the financial health of our customer base remains quite good, with savings in excess of pre-pandemic levels and debt service levels comfortably below pre-pandemic levels. Importantly, employment remains strong with more job openings than job applicants, especially in the segment of the population that we serve. As you know, the primary factor that impacts our customers' ability to repay their loan is employment status. So we feel that our customer base is positioned quite well. However, given all the uncertainty in the world, including rising interest rates, inflation in the war in Ukraine, as a management team, we are closely monitoring the economic environment and our customers' financial health and will be ready to pivot quickly if we see any changes that warrant it. I also want to mention our issuance this week of a $600 million social ABS bond. This was the first ever social ABS issued by a US-based company, which continues to highlight our position as a leader in this space. The social ABS underscores our mission to serve hard-working Americans and demonstrates our commitment to providing access to responsible credit for lower and middle income consumers with the proceeds of this bond focused on lending in rural communities across the United States. As you know, OneMain plays an important role in the lives of many customers who often have a hard time gaining access to credit. Our history and expertise in lending to non-prime customers and our responsible approach to lending is highlighted in this ABS offering focused on lending to rural communities that are often not served by other lenders. Mike is going to speak more about our incredibly strong balance sheet with a long liquidity runway that is a real competitive advantage for us in this economic environment. This bond issuance, again, demonstrates our ability to continue to access markets even during a volatile time in the bond market. Demand for our loan products remain strong. Originations in the quarter were above seasonal pre-pandemic levels, as healthy demand for our core personal loan product, was bolstered by our expanded products and channels, including smaller dollar loans and partnerships at the point of purchase. The strong originations in the quarter led to excellent managed receivables growth of 11% year-over-year. This is another sign that our customers feel good about their financial prospects. Our experience is that when demand is robust, it means that customers are feeling good about their finances. I'm very pleased with our first quarter performance. We run this business with the goal of maximizing the underlying economics, what we define as capital generation. In the quarter, we generated $280 million of capital. First quarter charge-offs were 5.6%. Our portfolio of loans is performing quite well. Comfortably in the range we anticipate to meet our risk-adjusted returns and return on equity hurdles. Even as we get further away in time from our own credit tightening actions that we took back in 2020 and the significant pandemic-driven government support programs. The strategic pivots that we have made over the last few years are paying off. We continue to leverage our strong branch network and decades of experience underwriting and serving non-prime customers. But we have added leading digital capabilities with almost half of all lending now occurring outside of the branch. We are also now well on our way to being a multi-product company, most evident by our rollout of the credit card. As I discussed last quarter, the BrightWay and BrightWay Plus credit cards were successfully launched late last year. As a reminder, we set out to create and distribute a limited number of cards to customers so that we could test and learn around three primary criteria. The first is take-up rates, does the value proposition resonate and do customers want the card. Second is utilization. Once they take the card, do they use it? And third is credit performance. Do they pay what they owe on time. We've been very pleased with the key metrics that will drive the ultimate success of the card product, as take-up rates and utilization rates, along with digital engagement have all been strong. Importantly, we've been really pleased with the early indicators of card usage levels, as well as where and how the card is being used. We believe the BrightWay card is top of wallet for many of our customers. Customers are using the card at gas stations, grocery stores, restaurants and retailers. The fact that these types of transactions are being made on the card are a validation of our strategy of adding a daily transactional product to our larger, more episodic installment lending product, thereby expanding both the total addressable market and the utility of our products for non-prime customers. And while our user experience and engineering teams are making weekly improvements, we're pleased with our initial feedback from customers about the digital experience and have seen the BrightWay app getting great traffic and reviews. This is important to our longer-term strategy, as having digital real estate that customers go to on a regular basis will give us opportunities to deepen our relationships with our customers and offer more products and services in a seamless low-cost way. Card holders increased modestly during the quarter to 74,000 from 66,000 at the end of last year, while card receivables doubled to 50 million during this time frame. This is in line with our expectations, as we are using the first half of 2022 to concentrate on improving customer experience and to deeply analyze the performance of the pilot portfolio to validate our risk models. As I've mentioned before, we've run tests to determine the segments that we will lend to and are monitoring across a number of different variables, including risk grade, acquisition channel, history with OneMain, spend patterns, geography and more. We will continue to closely monitor and evaluate the data to determine the right segments that combined will allow us to meet our return hurdles for each of our two products, BrightWay and BrightWay Plus. We are encouraged by what we see and remain on target to meaningfully scale the business in select segments in the second half of this year. As a reminder, given our confidence in the value that these differentiated cards bring to customers, we expect our cards portfolio to generate at least $100 million to $150 million of capital by 2025, with more growth in the years beyond. We are also making good progress with Trim, our financial wellness fintech platform. It is now available as a set of features to all of our customers. We're really pleased to be able to reward our customers with Trims unique expense saving tools, like build negotiation and subscription monitoring and cancellation, and the feedback from customers has been great. Trim is another tool in our toolbox to deepen our engagement with customers, while helping them advance to a better financial future. I've also mentioned to you in the past that we continue to innovate in our traditional installment lending product. A great example of this is our smaller dollar loan product that we launched less than two years ago. Smaller dollar loans, as you may recall, are $2,500 loans that we offer to customers that do not quite meet our criteria for a larger loan. With a smaller loan and a smaller monthly payment, the program opens eligibility to a wider group of customers with payments that fit their budgets, while developing improved credit habits and discipline. Since its inception in 2020, we generated about $350 million of originations, while adding more than 140,000 new customers. These are customers that we've now brought into our ecosystem to whom we can provide even more value over time. Finally, let me update you on our capital return in the quarter. We followed the capital allocation priorities that we laid out on our fourth quarter earnings call. Our first and highest priority remains investing in our business that generates 6% return on receivables, translating to very attractive return on adjusted capital in excess of 30%. We will continue to prioritize in balance sheet growth that meets these hurdles, while also continuing to invest in key growth initiatives, like digital, technology, data science and new products and channels, while also managing our leverage within our long-standing range of four to six times. Excess capital will continue to be returned to shareholders in the form of dividends and share repurchases. During the first quarter, we paid a regular dividend of $0.95 per share and expect to do so over the remaining quarters of 2022. This $3.80 annual regular dividend yields a very healthy return of approximately 8% at the current share price. We are also executing our share repurchase program, which has a $1 billion authorization through 2024. During the quarter, we utilized $110 million of capital to repurchase 2.3 million shares or nearly 2% of shares outstanding. With that, let me turn the call over to Micah to take you through the financial details of the first quarter.

Thanks, Doug, and good morning, everyone. We had another good quarter as demand for our loans was strong, and we continued to expand our customer value proposition with new products and distribution channels. The financial health of our customer has been solid, and net charge-offs for the quarter were well within our expected range, coming off the heels of historically strong credit performance in 2021. We earned $301 million on a GAAP basis or $2.36 per diluted share in the quarter. On an adjusted C&I basis, we earned $299 million or $2.35 per diluted share, down 30% on a per share basis from the first quarter of 2021. However, recall that the prior year results had the benefit of a significant loan loss reserve reduction of $208 million and historically low stimulus-driven net charge-offs of $205 million. Capital generation was $280 million in the quarter, down 6% compared to the prior year, primarily driven by the year-over-year increase in net charge-offs and modestly higher operating expenses associated with an increase in originations and continued investment in our business. Managed receivables were $19.5 billion, up $1.9 billion or 11% from a year ago, reflecting strong consumer demand and the continued positive impact from our growth initiatives. Our net interest margin was strong at 18.5% in the quarter. Interest income was $1.1 million, up 3% compared to the prior year, primarily driven by higher receivables and partially offset by lower yield. Portfolio yield was 23.1% in the quarter, as compared to 23.3% in the fourth quarter. As discussed on our last call, we expect our full year portfolio yield to be around fourth quarter 2021 levels. Interest expense was $217 million for the quarter, down 7% versus the prior year. Interest expense as a percentage of average receivables improved from 5.3% a year ago to 4.6% this quarter and also improved 23 basis points sequentially. Other revenue was $158 million in the first quarter, up 17% compared to the prior year quarter. The increase was primarily driven by economics from our whole loan sale program. As a reminder, our whole loan sale program comprises two year flow agreements with three select partners. As I've said in the past, these sales programs provide us with additional flexibility in our funding, but we intend to maintain the vast majority of our receivables on balance sheet for the foreseeable future. Finally, policyholder benefits and claims expense was $45 million in the quarter, up from $33 million in the prior year. The prior year result reflected a positive reserve adjustment related to favorable involuntary unemployment insurance experience, as expected losses at the onset of the pandemic in 2020 did not materialize as many customers got back to work sooner than we had originally anticipated. Let's now turn to slide seven to review our originations and receivables trends. Originations were $3 billion in the first quarter, up 30% year-over-year, leading to managed receivables growth of 11%. Receivables were relatively flat sequentially, as our new products and distribution channels helped offset what is typically a quarterly seasonal decline. Note that our managed receivables this quarter also include $50 million of credit card receivables and $528 million of receivables sold but serviced by OneMain for our whole loan sale partners. Turning to slide eight. The credit performance of our portfolio continues to track within expectations. Our 30 to 89 delinquency was 2.25%, down from 2.43% in the fourth quarter and up from the historical low 1.57% in the first quarter of 2021, which, as you know, was positively impacted by federal stimulus programs. 90-plus delinquency was 2.21%, up seasonally as anticipated from 2.0% in the fourth quarter. Recoveries remained strong at $67 million in the quarter or 1.4% of average receivables, well above our historical levels of about 90 basis points. We continue to see strong underlying performance in our recoveries. However, this first quarter was further enhanced by a sale of charge-off receivables. Net charge-offs were $262 million or 5.6% compared to a historically low 4.7% in the first quarter of 2021. We remain confident in our full year 2022 guidance for net charge-offs of 5.6% to 6.0%. Our loan loss reserve trends are shown on slide nine. We ended the first quarter with $2.1 billion of reserves and a reserve ratio of 10.9%, flat to last quarter and modestly above our CECL day one levels of 10.7%. The $25 million reduction in reserves in the quarter was driven by the small reduction in balance sheet receivables during the period. Turning to slide 10. First quarter operating expense was $348 million, up 8% year-over-year and flat sequentially. The year-over-year growth is a bit higher than our expected full year growth rate, primarily due to the path of quarterly expenses in 2021. First quarter '21 was still unusually low after the aggressive cost cutting we did in 2020, as a result of the pandemic. Our operating expense ratio in the quarter was stable at 7.2%, even as we continue to invest in new products and channels, technology, expanded digital capabilities and data science, all of which we expect will drive future growth. I'd like to spend a few extra minutes today on our balance sheet and funding programs in light of the current environment. Over the years, we've talked a lot about the strength of our balance sheet built on a foundation of significant liquidity and maintaining a balance of maturities and funding mix. I've also discussed the importance of diversifying our funding sources. The construction of our balance sheet today reflects a very deliberate effort to shift our liabilities to a greater mix of unsecured debt and to extend and strategically place each of our unsecured maturities. Since December of 2020, while rates lingered at all-time lows, we issued $2.2 billion of unsecured debt with maturities spanning from 2027 to 2030 at an average cost of 3.8%. As you can see on page 11, this strategy has reduced our current mix of secured funding to 44% at the end of Q1, below our strategic target of 50%. On the right side of the page, you'll see that this strategy began years ago with our near term maturities having been staggered to create funding flexibility. I say all of this to illustrate the proactive manner in which we've managed our liabilities. We actively took advantage of a cost-efficient unsecured debt market over the past 15 months, while preserving the optionality of being able to lean back into lower cost secured funding when that time came. In this current period of volatility and rising rates, our positioning is a competitive advantage as it affords us the luxury to be selective and look for windows of opportunity to access the markets. To that end, this week, we completed a three year revolving $600 million social ABS. This was the first ever social ABS by a US issuer and highlights our commitment to providing access to responsible credit for consumers in rural communities across America. This is our second social capital markets issuance with last June's unsecured social bond of $750 million, supporting credit underserved areas with 75% of proceeds being directed to racial minorities and women. Our efforts were widely recognized as that bond was recently awarded Social Bond of the Year by Environmental Finance. We are incredibly proud of our social bond programs, as they highlight our corporate mission to serve hard-working Americans. Earlier this week, we also completed $350 million of private secured funding with one of our long-term banking partners at very attractive rates. This funding is similar to one of our market ABS structures with a three year revolving period followed by an amortization period. Finally, and to put a finer point on the comment I made earlier about balance sheet flexibility and preparedness. As you may remember, in May of 2020, during the height of COVID market dislocation, we issued a $600 million five year bond at a coupon of 8 7/8% [ph] While this bond demonstrated our ability to issue in very difficult markets, it also presented an opportunity to add a callable feature to our bond program, which we expected would give us even greater flexibility to manage our funding in the future. To that end, this week, we issued a call notice for that bond, and combined with our social ABS, we have effectively replaced $600 million of 9% funding with funding closer to 4% for the next three years. Of course, we cannot control the rate environment, but we've prepared ourselves for this type of situation. And as a team, we are very confident that our balance sheet positioning and our funding programs will continue to be a competitive advantage. Let me now spend a few minutes discussing our liquidity. As you know, this is another hallmark of our balance sheet and critical for any company accessing the capital markets for funding. We have, over the years, invested in our liquidity position, having increased our runway from 12 to 24 plus months. This runway is the period in which we can operate the company under stressed macroeconomic conditions with no access to the capital markets whatsoever. We remain above that 24 month runway as we sit here today. The foundation of our runway is our committed bank capacity, which at the end of March was $7 billion. This includes $6 billion of committed conduits across 14 bank partners, as well as a $1 billion five year unsecured revolving credit facility that we completed in late 2021. We renewed two of our conduits in the recent quarter, and we're always actively engaged with potential new partners. With $10.2 billion of unencumbered loans at the end of the quarter, you can see that our liquidity resources to support these facilities remain robust. Moving on to page 12. Our strong capital generation of $280 million allowed us to repurchase 2.3 million shares, nearly 2% of shares outstanding for $110 million and returned another $123 million to shareholders through our regular dividend, all while maintaining our capital levels. Our net leverage at the end of the quarter was 5.5 times or flat to the prior quarter. As has been the case for years, we will continue to run our business within our long-standing leverage range of 4 to 6 times. I'll wrap up by reminding you of our full year 2022 guidance, all unchanged since we spoke earlier in the year. We continue to expect managed receivables to grow 5% to 10%, in line with our long-term operating framework. While the first quarter was above that range, the comparison period of 1Q '21 was heavily influenced by federal stimulus, as receivables fell by more than $500 million in that quarter. As discussed earlier, we continue to expect full year net charge-offs to be in the 5.6% to 6.0% range. We expect capital generation return on receivables to be approximately 6%. And as you know, we run our business to optimize capital generation, and we expect to generate $1.15 billion to $1.2 billion in 2022, and we expect capital generation per share to be between $9.10 and $9.50. With that, I'd like to turn the call back to Doug.

Thanks, Micah. As you heard, we had another great quarter. And as I said to investors two years ago, when the pandemic was in its early stages, we believe that our business is resilient and well positioned, regardless of the macroeconomic environment. We remain very focused on the core fundamentals of our business, granular detailed underwriting the benefits from advanced analytics and machine learning, our nationwide branch network as well as a long history and expertise in serving the non-prime customer and a conservative balance sheet with a long liquidity runway. We also used the past couple of years to double down on investing in our future. We built digital distribution capabilities. And now almost half of all of the lending is happening outside of the branch. We evolved our installment loan offerings to provide value to more customers through products such as our smaller dollar loans. We added new partnerships to drive more lending volume at the point of purchase, and we launched a totally new lending product, the BrightWay credit cards, which opens up a market five times as big, as our traditional core loan products. We feel very good about the fundamentals of our core business, as well as our new products and channels, which will drive growth in the future. All of our focus and efforts are coming through in our results this quarter and position us extremely well to serve more customers in the years to come. With that, I'll conclude today's call by thanking our team members across the country for making all of this happen and continuing to come to work every day to make a difference for our customers and our shareholders. Thank you for joining us today, and we are happy to take your questions.

[Operator Instructions] Our first question is coming from Michael Kaye with Wells Fargo. Your line is now open.

Good morning. Any more color you can give us on delinquency trends, which were up on a sizable basis year-over-year. I understand it's comping against all that stimulus last year. But how is delinquencies tracking versus your expectations? And how do you expect delinquencies to trend throughout 2022?

Hey. Good morning, Michael. Thanks for the question. Let me say a couple of things here. One on delinquency, I think you clearly mentioned like the prior period 1Q '21 was heavily influenced by government stimulus. And in fact, it was the lowest 30-to-89 delinquency we had ever seen in the history of the company as a result of that. So it's not really a great compare. But unlike charge-offs and other things in our income statement, delinquencies reported on one day at the end of a quarter. So comparing that particular day to any day in years past is not an ideal or perfect benchmark. That said, if you want to compare, let's say, to a pre-COVID period, March of 2020 is probably the most recent and best estimate. We were tracking that month to about a 215 finish on our 30 to 89 before those COVID disruptions began in the later part of the month in that year. But that's within 10 basis points of where we are today or at least at the end of March at our 225 number. And while early delinquency levels certainly are important, the velocity of which delinquency moves to loss is also important. Our back-end collections and recoveries continue to remain strong, as you heard on my remarks earlier and also in our printed results. Our March 30 to 89 is performing within our comfort levels and certainly within our risk-adjusted return expectations. Our guidance for the full year remains at 5.6% to 6% on losses. And as you know, that's still below our long-term operating framework of 6% to 7%. So net-net, we feel great about the portfolio and where things stand right now, and I appreciate the question.

Great. Thank you. You know, forgetting about the effect of product mix, how are the interest rates you charging a key loan products trending considering rising rates and debt costs? How much pricing power do you have to offset these rising funding costs? And also secondarily, are you bumping into any state rate caps?

Michael, a couple of things. As you know, we have a number of different products that are priced differently. We actually gave you some exposure to it in the last conference call, the fourth quarter conference call, where we showed pricing for higher credit customers and partnerships is well below our average stated yield, but it all - it's still returning 6% of return on receivables. And so we try to use pricing and dynamically price for two reasons. One is it has to meet our returns, which we're targeting 6% return on receivables. And second is to be competitive. Micah also mentioned earlier in his remarks that our cost of funds are not going to be going up. If anything, this year and probably next year, our cost of funds are going down the way we constructed our balance sheet. So we're not going to actually be forced to move pricing to keep margin at this point. With that said, I think given the market environment, there may be some opportunities. Competition may move their pricing up, which means there's some room to move pricing and gain - still be gaining market share. But it's all going to depend on market dynamics. You also might see competition forced to move their pricing up because they don't have as strong a balance sheet to plan for this as we did. We can keep our pricing where it is, and we can pick up market share. So this is all going to be very dynamic. What we like about it is we built a balance sheet, so we're not going to be forced to drive up pricing. We may do some up if there's opportunities, though.

Thank you.

We will take our next question from Vincent Caintic with Stephens. Your line is open.

Hey, good morning. Thanks for taking my questions. And I appreciate all the color on the capital markets, and so maybe a follow-up on that one. So first, I appreciate that you've have a very defensive or very stable balance sheet. But if you can you maybe talk about the demand that you're seeing from the capital markets, your execution seems to be better than what others are getting. And then kind of relatedly, to the point about competition, it seems like some of these other competitors are getting worse execution, particularly on the fintech side. So maybe if you can talk about how competition is? Are you seeing some of these competitors maybe back off or other maybe weaker competition? Thank you.

Hey, Vince. Good morning. Thanks for the question. In terms of capital markets execution, obviously, we've got a very, very strong program. We actually years and years ago, or eight or nine at this point in time, we actually created the consumer ABS asset class. So we've got a lot of experience. We've spent a great deal of time building our programs and building relationships with investors and importantly, delivering on our commitment to those investors. And so all of that takes a long time to build and is really, really important when you get into times like this. In addition to all the things that I said about how we've constructed the balance sheet and put ourselves in this position. So we feel good about demand. We just did the social ABS, as we talked a lot about earlier. We marketed a $500 million transaction there. We were able to upsize it into good demand up to $600 million. And so we felt strongly and good about that. Obviously, benchmark rates have increased, that influence price. Our spreads increased just a tiny bit on top of that. But we feel great with the execution and where we are. I think we'll continue to watch the markets closely. I won't comment on other peers or other fintechs, but we feel really good about our programs. We feel strongly in terms of their performance and our ability to access these markets going forward.

Yes. And Vincent, let me just add to this. It's Doug. First of all, we've got a lot of respect for our competitors. We think having a good strong competition keeps us on our toes and make sure customers are served well. We did talk about - we've positioned our balance sheet and our business through a cycle. So we underwrite to healthy returns, and we make sure we're profitable. We've got a lot of liquidity runway on our balance sheet and we're programmatic issuers regardless of capital markets. So we do think the whole package of managing through the cycle of both your credit box and your balance sheet and making sure that it's very resilient gives us competitive advantage. Like Micah has said, we can't comment on kind of the customer - other competitors' balance sheet, and whether they'll be able to access funds and therefore, whether they left to trim back or not, time will tell.

Okay. Thank you. I appreciate that. Follow-up question, just kind of on the macro. Now I appreciate all the good learnings you've had with the credit card business and wrapping up with that. One of the questions I've been getting is sort of there's a lot of macro balls in the air, whether you've got credit normalization and rising interest rates and rising inflation. So if you could maybe talk about like you see the confidence to be leaning in on growing the credit card business and what you're seeing there? Thank you.

Yeah. Look, we are building out and launching our credit card in a very derisked way. I talked through in detail because I think it's important, our approach, which is we put a number of cards out testing a wide range of credit, geography, customer types, channel. We're now looking at spend patterns and we're getting the early read on payment data. We won't scale the credit card until we have a lot of confidence in the early reads we've gotten. And we're not going to scale - like we put out, call it, 70,000 credit cards so far, there's going to be variables in those credit card of risk-grade spend pattern channel that we don't like the performance and doesn't meet all of our hurdles. We're not going to scale those. And so you can expect later in the year when we start scaling, it will be in the lower risk subsegment of the card. We'll keep testing into it, and then we'll be continually looking at performance. And so if the macro environment changes, similar to - with our loan product will change our credit box, will change. We've got a number of variables we can change to make sure we still hit our return on receivables. So I actually think we're well positioned because we're entering the market. And so if any sort of economic uncertainty that comes to pass in the future, we won't have a ton of cards out there, and we'll be able to throttle back or throttle forward depending on the environment.

Great. Very helpful. Thank you.

Thanks, Vince.

We will take our next question from Moshe Orenbuch with Credit Suisse. Your line is open.

Great. One of the things that - given that you talked about the small dollar product, the $350 million that you've originated cumulatively over that period. One of the issues that product has always had is customer acquisition costs, although I would assume it's much lower because these are probably customers that are applying to you anyway that you wouldn't have had a product for. So I guess could you talk about that? And maybe given that you've originated a fair bit of these loans, I mean, how do you think about it kind of relative to the credit card where you've put out a target for capital generation over a period of time. I mean, obviously, the ability to expand your market is important given your size in the core market. So maybe if you could just talk about that a little bit? Thank you.

Yeah. Look, the way we think about the smaller dollar loan is there's a set of customers who maybe can't afford after we do their budgeting and look at what is their cushion or what's their net disposable income wouldn't be able to afford a $10,000 loan with a $250 monthly payment, but could afford a lower loan with $100 payment. They need access to credit. And this allows us to get more people access to credit. Once you book the card or the loan with us, we've got then the ability to see your onus behavior. And if the behavior is good and you still want more credit, we've helped you build up your credit, we've got proprietary data, and we can give you a larger loan, if that's something that you were looking for and you can afford. And so it actually similar to the credit card feeds into our core traditional product and allows us to broaden and serve more customers. And so it's as simple as that, as we kind of innovate, look to serve more customers. It also means there's 140,000 customers in our ecosystem that we can help them save money on bills with Trim that we could potentially offer a credit card to, if that's something they're looking for, we can substitute a credit card. And so it's just another way for us to serve more customers and provide more value. We have not put out any sort of kind of capital generation prediction. We did last quarter talk about in aggregate, we think we're going to generate about $4 billion of capital over the next three years. And this is one of the many ways that we'll be able to put more assets on our book, generate more capital and provide more value to customers.

Yeah. Moshe, I'll add to that, the - while Doug's comments about capital generation, we haven't put anything out there. These are still very strong loans. There's a few things we are looking at with the small dollar loans and you mentioned the acquisition costs. These people have already said through their application, they want to do business with us. So the acquisition costs are relatively low on this pace, given that we're already speaking to these folks. And secondly, the other couple of things I think are the - what does the renewal pattern look like, as they grow and move into this loan and renewals have been strong and credit performance as well, credit performance because of the smaller payment is performing a little bit better than what a regular size loan might look like on an unsecured basis. So we've been doing this now for 2.5, 3 years, and I think the performance is really good, and we'll continue to expect this in the future.

Got it. One of the discussions that you've had several times on the call already and consistently over the last couple of quarters has been about this normalization of credit. Could you talk a little bit about the signs that you would be looking for to see whether that consumer performance is better or worse than what you were expecting as of the beginning of the year. Obviously, we all kind of track your monthly data, but I would assume you've got things that you would look at that are kind of more granular or more timely than that?

Yeah, certainly. I mean within our underwriting box, we have a number of attributes. We're looking at cohorts of loans that are originated based on industry, based on state, risk grade and credit profile is also important, NDI trends, et cetera. Anything we can look at within the more granular level of our portfolio, we are evaluating on a monthly basis. That comes down to even how we acquire a loan, whether it's through direct mail or one of our affiliate channels. And they all have varying performance. We obviously have three products as well. And so what we're really looking at is vintage performance. And we've talked about it a little before, without getting too granular into it, the 30-day delinquencies at three months on block and 60-day delinquency at six months on booking those sorts of vintage trends because when you look at delinquency in the overall portfolio, sometimes there's different aging of vintages and noise that's created in the numbers. So as Michael asked earlier, where are your first quarter 30 to 89 relative to prior periods, we feel we're very confident in those delinquency levels being within the range of comfort where we underwrite – we underwrote them and without our risk-adjusted return framework. So we feel good about where things are, and we continue to look at things and adjust as needed as we do always.

Thanks so much.

Thanks, Moshe.

We will take our next question from John Hecht with Jefferies.

Morning, guys. Thanks very much for taking my question. I guess it's a little bit of an extension of the last discussion point. Because if you do the math with your charge-offs for the - your kind of loss rate for the year math in count for the first quarter. I think pre-pandemic, you might have peaked in charge-offs in the first quarter, but it doesn't seem like that's happening this year. So I guess the question is kind of where are we at a seasonality perspective? And does that ever get back to levels we saw pre-pandemic?

Yeah. It's a good question, John. I think there's still - we're still certainly not completely back to normal seasonal patterns. I think we're getting there, but - there's a lot of factors that influence that. And from a charge-off perspective, you can see where we are in the first quarter at 6 - 5.7%. For the first quarter, we are tracking below where we were sort of before the pandemic. If you go back and look at first quarter '19 or first quarter '20 levels, for example. So the charge-offs are always going to follow the delinquency. So I would look for seasonal patterns in our delinquency to emerge first. I think that's certainly begun, but we're not quite there yet. We'll see as time goes on. I think as you look at charge-offs throughout the remainder of this year, they're probably going to look a little bit more like pre-COVID levels than they look the last couple of years, where it was really heavily influenced by stimulus.

Okay. And then second question, understanding you guys have a very good position of liquidity. But as rates rise, Micah, what's your thoughts using the balance of secured versus unsecured debt should that shift at all over the course of this year?

Yeah. I mean it certainly could – John, we've created our situation where we are at below our strategic sort of target level for unsecured and secured, as I talked about. So we can certainly lean back towards that lower cost secured funding to manage things this year, and we started that with our social ABS bond. But we feel, again, really, really good with our current position. We've got a lot of liquidity, so we can lean on those conduit lines as well for funding, while we wait for selective points in the year to be able to issue in the capital markets. We always think about it relative to our 24-month runway. And even with some modest assumptions around conduit renewals, which we're constantly working on, we renewed a couple this quarter. In fact, we don't really need to issue until at least Q4, while still maintaining 24 months of runway under stress. So that puts us in a really good spot. I think you probably - if I were a betting man, I would say we probably would move more towards a little bit more on the secured side this year just because of where the dynamics are, but we'll remain open and the rate market continues to be volatile. So we'll just keep our eye on the ball here and issue selectively as we can.

Great. Thanks very much.

We will take our next question from David Scharf with JMP Securities.

Hi, good morning. Thanks for taking my questions as well.

Good morning, David…

I wanted to maybe shift gears away from the - obviously, topical questions on capital in the macro environment. And maybe revisit something that was more top of mind in the early days of the pandemic, which was sort of digitization, online lending trends and how it might impact you. Other than the quarterly kind of metric we get of roughly 50% of loans now closing digitally, is there any sort of qualitative or strategic updates you can provide vis-à-vis kind of the longer-term strategy in terms of the branch network, potential rationalization or consolidation and thus for?

Sure. So in late 2018, when I first came here, we started talking about we were going to invest heavily in technology, digital and we were going to be an omni-channel lender. And what does that mean? That means you can do business with us in your mode of choice. You can walk into a branch, if you value in-person interaction, you can call us on the phone if you want to do - you want to actually talk to a human being or you can engage with us on your mobile device or your computer, however you choose. And so we actually spent 2019 doing a lot of the back-end work that needed to be done. I haven't talked about it a while, but a trip down memory lane. It used to be because we built technology for branches that you could access it and make it work during the day and it wasn't 24/7 technology necessarily, all of our customer-facing things that had changed. And so we did a lot of kind of back end, call it, plumbing work. In 2020, when the pandemic came, we were ready to allow people to book loans online, and we were going to open the pipe very slowly, but all of a sudden, nobody wanted to come into a branch back in the time where pre-vaccine, people were scared. And so we said you can close remotely or digitally. And we actually quickly built a variety of digital tools. And so we built the ability to co-browse, which means we could be on the phone with somebody who wanted to book a loan, they could go on their computer, and we could see the same thing they're seeing on the computer and really walk them through because a lot of people value this interaction with us, where they understand us, they understand we help them think about their finances and what they can afford. So we built co-browsing. We built two-way video. We've now got as good as anyone in the market document upload, where you take a picture of your documents you upload them. And then on the back end, we have all sorts of ability to kind of analyze for fraud and use state-of-the-art - state-of-the-art tools. As we got them through the pandemic, where we are today, we now have a suite of tools to operate in an omni-channel capability. So you can book your loan online, you can co-browse with us. You can interact with us via text, even in the servicing like collection and overdue payments, people are now getting e-mails from us and text from us and just having the digital experience all the way across the spectrum that they didn't have before. That is where we are headed. I think vis-à-vis the branch, we actually think our branch is a differentiator being in community. It actually supports digital. So people in branches now can have digital interactions with customers, someone calls a branch and they say, hey, I don't want to come in for an appointment and they can close a loan online. We also have gotten a lot of feedback from our customers that they feel comfortable doing business with us without ever walking into a branch because when they're driving to work at the grocery store, they've driven past the branch and they know we're a real company, not a Russian bot [ph] and it gives them a lot of comfort about, if something happens, I can walk in and deal with them. And so I think that is our future, and we're well on our way there. We built up our central servicing capabilities for both originations and servicing to support our digital efforts, and we're going to have world-class digital efforts. And then we've got a branch network. We're always looking at branches. We opened some every year. We close some every year based on demographic flow. We combine them and look at different branch footprints. But I think step way back three years ago, we were a branch-based installment lender. Now we are a company that has both physical and digital presence that's multi product with the credit card rolling out. And so I think that's the direction for our future.

Got it. No, that's very helpful. I mean it's been a while since we've sort of covered it comprehensively. A quick follow-up, more of data. I'm sure I can do the back of the envelope math, but I'm wondering if you can provide a little shortcut, regarding the credit card comment about capital generation by 2025, I believe. Can you back that into what type of loan balances that would represent?

Yeah, I think we said it was in excess of a couple of billion dollars.

Okay. Got it. Thank you, Micah.

We will take our next question from Mark DeVries with Barclays. Your line is open.

Thank you. Micah, I was hoping you could talk us through kind of the longer-term funding cost tailwinds you have. You obviously significantly reduced your funding cost with the activity this quarter, retiring debt around 9% and replacing it at four. I get that it's not exactly apples-to-apples one being unsecured and unsecured. But how should we think about the opportunity is to lower your funding costs and benefit NIM as we look out at some of these maturities you have upcoming?

Yeah. It's a good question. I think you got to look at the last couple of years because that's really what has given us that the trajectory that we're on. We were closer in 2019 and 2020, we were closer to 5.5% to 6% as a percentage of receivables on our interest expense metric. In 2021, that was 5.1%. And what we've said is we expect that to certainly be lower. We've got a little bit to a flat NIMs. You can do some math based on where we put our yield based for the year. We think our NIM will be very consistent with the last couple of years. So should give you a sense, we expect interest expense to be sort of in that mid-4% context for 2020 - 2022. And we feel really confident in that one, because we have no unsecured bullet maturities until March of 2023. A very large portion of our debt stack that is fixed rate, so call it roughly 95% to 97%. And 90% of our average debt for 2022 is already on the books at the beginning of the year at fixed rates. So there's not a lot that you can do to really move the interest expense in the year. As we look forward to 2023 and beyond, that percentage is about 75% of our debt for next year for 2023 is already on the books. And so this is what gives us a lot of confidence. We've looked at a number of different ways at this, whether it's a 100 basis point parallel shift from where we are today. Obviously, the forward curves give us some idea for where we think things could be issued over the coming years. But we think at current - even at current rates, which is in that 4% to 4.5% context for ABS and roughly 6.5% 7 on unsecured. Even at those rates, we still think for the next couple of years, we'll be in that mid-4% context. So obviously, a lot goes into that, but - and some assumptions. But coming off of a 5.1% last year, we think we're pretty stable in the mid-4s, which is why when Doug talks about the stability of our yield. We feel good about our NIM for the next few years to come. Hopefully that's helpful?

Yeah. That's helpful. Am I right in assuming that you pick up some funding cost benefit from structuring into these social financings? If so, how much, and how much of the lending that you do is actually eligible for those types of financings?

Yeah. So I'll give you a benchmark from last year in terms of our social bond that we issued in June of last year was $750 million. We had somewhere in the range of about $4 billion of collateral that could fit in that. And so it was - the social bonds are as much a commitment to continue to fund those sorts of loans, whether they be in underserved communities or with this ABS, the world communities with - and with a focus on lower income borrowers. We think that there are also a testament and indication and advertisement, if you will, is to all the good that we do within our business in these types of areas. So in terms of the coupon benefits - that's not really what we're out for with these social bonds, but we think last year, we got about a 25 basis point benefit from the social aspects of that bond. I think more importantly, it opens us up to a whole new pocket of investors that really have a lot of focus on ESG. And of course, that is continuing to grow as we sit here today. So we think very positively of these. I'm sure you'll see us do more of these in the future, and we're proud to see to have some of the accolades that we've gotten over the last year for our programs.

Great. Thank you.

We will take our next question from Rick Shane with JPMorgan. Your line is open.

Good morning, everybody. And thanks for taking my question. As we see credit starting to normalize, and it's been observed your credit is normalizing fairly quickly. I am curious when you look across your different products, for example, some of your auto secured, are you seeing a divergence in terms of normalization trends?

Yeah, Rick, I mean, we certainly - we don't publish these results regularly, but we are seeing a very, very similar path for all products because it is really driven by normalization and not anything unusual. So - and I would say, broadly speaking, a lot of obviously this growth math that goes into those different equations, but we feel good about all of our products. And we feel good about our return on receivables going forward and where delinquency and other credit metrics are tracking relative to our expectations.

Great. Thank you very much, guys.

Thanks, Rick.

We have...

I'm sorry, go ahead, operator.

I apologize. You may go ahead, Mr. Shulman.

Yeah. Look, I just want to thank everyone for joining us today. As always, our team is here if you have any questions. And we look forward to hearing from you and talking to you at a future date. So everyone, have a great day.

Thank you. This does conclude today's OneMain Financial first quarter 2022 earnings conference call. Please disconnect your line at this time. And have a wonderful day.