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spk00: Ladies and gentlemen, thank you for standing by. Today's conference is scheduled to begin momentarily. Until that time, you will again be placed on music loans. Thank you. Welcome to OneMain Financial second quarter 2021 earnings conference call and webcast. Hosting the call today from OneMain is Peter Pullian, head of Investor Relations. Today's call is being recorded. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star one on your touchtone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. We do ask that you limit yourself to one question and one follow-up, and please pick up your handset to allow optimal sound quality. Lastly, if you should require operator assistance, please press star zero. It is now my pleasure to turn the floor over to Peter Pullian. You may begin.
spk05: Thank you, Nicole. Good morning, everyone, and thank you for joining us. Let me begin by directing you to pages two and three of the second quarter 2021 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, July 22nd, and have not been updated subsequent to this call. Our call this morning will include formal remarks from Doug Schulman, 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. Now let me turn the call over to Doug.
spk02: Thanks, Peter, and good morning, everyone. We appreciate you joining us today. We'll spend the majority of our time on today's call covering our second quarter performance, but I will also spend time discussing some of the strategic initiatives underway that will allow us to continue to realize our mission of improving the financial well-being of hardworking Americans. Our second quarter performance demonstrates the resilience of our business model, as we saw strong loan originations in the latter half of the quarter, resulting in notable growth in receivables, as well as record low losses. Capital generation was strong in the quarter, and we remain well positioned for continued growth as the economic recovery continues. In the quarter, we generated $310 million of capital, $98 million more than the prior year, up 46%. CNI adjusted earnings for the quarter were $2.66 per share. Our credit performance remains very strong and continues to benefit from the proactive credit tightening actions that we implemented at the start of the pandemic. the unprecedented levels of government support over the past 15 months, and our robust underwriting capabilities. Second quarter losses were 4.4%, and we feel confident about the continuation of this excellent credit performance over the remainder of this year. Receivables, which we refer to as managed receivables in our presentation, grew 3% year over year and 4% sequentially. It's worth highlighting the growth in our loan book was higher than the overall near-prime installment loan market, which declined about 3% year over year. We believe our strong performance in comparison to the market is driven by our growth initiatives, including our continued product innovation, new channels, and advanced analytics across multiple functions within the company. Recall that in early 2020, as the pandemic began, we committed to working closely with our customers to help them through a difficult time. But we also said we would continue to stay focused on our longer-term initiatives that would position us for growth as the pandemic waned and the economy strengthened. we are now starting to see positive results from many of those initiatives. The economic and business trends we observed in the quarter were positive. Unemployment rates and jobless claims have started to normalize, and after a year of economic uncertainty driven by pandemic restrictions, a recession, and multiple government stimulus packages, we are now seeing consumer demand pick up. Recent Fed data shows personal consumption is up sharply since the start of the year. Importantly, demand for our product has rebounded to pre-pandemic levels. We saw originations improve each month of the quarter, with June activity resulting in a record high for the company. With that said, we will closely monitor economic conditions, including the potential for a The recent strong economic backdrop is positive for our current suite of products, but also for the products we expect to offer customers in the near future. Let me elaborate a bit on that. If you turn to slide seven of the presentation, I'd like to touch on the future vision that we discussed on this call last quarter because it is guiding our priorities and the actions we are taking at one main. Our vision is to be the lender of choice to near prime consumers, meeting their current needs when they have a mismatch between income and savings on the one hand and expenses on the other, while also providing products and services that help customers progress to a more promising financial future. We will leverage our foundational strengths to continue to be the leader in near prime installment lending. but we are also expanding our suite of products, services, and experiences to deepen our customer relationships, increase engagement, and enhance our proprietary data set, all of which will provide real value to customers and make it more likely that they will want to do business with us in the future. Over the past few quarters, we've discussed our plans to extend our product offering with the rollout of a differentiated, digitally-enabled credit card designed specifically for the near-prime consumer. I'm pleased to say that we remain on target to be in market later this year with the initial tests beginning in the next several months. As with our other product rollouts, we will be deliberate and run a pilot before a full rollout. The pilot will test uptake, line usage, and credit before scaling receivables in the latter part of 2022, with the expectation that our credit card will be a multibillion-dollar receivables product over the coming years. Once we get through the initial launch and testing, In addition to scaling the credit card, we also anticipate further expanding our lending products to include a hybrid product, which will combine characteristics of both card and loan solutions to provide even more financial flexibility for qualified customers. We're really excited about the future of our product set and the value that it will provide to customers. We also closed on the acquisition of Trim during the quarter. We are now in the integration process and look forward to offering the multitude of trim solutions to our current loan customers as we continue to focus on our mission of improving the financial well-being of hardworking Americans. Finally, as I mentioned earlier, the significant investments we are making in technology, new channels, new products, and digital capabilities continue to have a positive impact on our results. There is no doubt that the growth in receivables we reported this quarter would not have occurred without our innovations in product size and pricing, as well as our expanded digital channels. Before I turn the call over to Micah, I'd like to briefly comment on capital deployment. Consistent with our previously established framework of considering an enhanced dividend each first and third quarter and recognizing the strength and resilience of our business, we announced a third quarter enhanced dividend of $3.50 per share, which combined with our regular quarterly dividend of $0.70 per share, returns $4.20 per share to shareholders this quarter. In addition, as we discussed on our last call, we commenced a programmatic share repurchase program and bought back 612,000 shares for a total of $35 million during the second quarter. Using our capital allocation framework as a guide, we will continue to invest in loans that provide value to our customers and meet our risk return criteria. invest in the business to position us for the future, and return capital to shareholders. With that, let me turn the call over to Micah to take you through the financial detail of the second quarter.
spk06: Thanks, Doug, and good morning, everyone. We had another great quarter as consumer demand returned to pre-pandemic levels, resulting in healthy receivables growth both year-over-year and sequentially. In the second quarter, credit performance continued to exceed our expectations while interest expense also declined. The improving economic outlook gives us confidence in the future performance of our portfolio and allowed us to further reduce loan loss reserve coverage. We earned $350 million of net income or $2.60 per diluted share in the quarter. That compares to $89 million or $0.66 per diluted share in the second quarter of last year, which was impacted by COVID-related reserve bills. On an adjusted CNI basis, we earned $358 million or $2.66 per diluted share. That compares to $107 million or $0.80 per diluted share in the second quarter of 2020. Capital generation or CNI adjusted earnings excluding the impact of changes in loan loss reserves was $310 million in the second quarter, up 98 million or 46% over prior year. As Doug mentioned earlier, we've included in our materials a new metric called managed receivables. This represents the ending balances of CNI loan receivables that we hold on our books plus those receivables we've sold as part of our loan sale program that began earlier this year. We believe this is an important and relevant metric as it encompasses the full balance of CNI loans that have been originated by and are serviced by OneMain. Managed receivables for the quarter were $18.3 billion. up $705 million from the first quarter and up 3% from a year ago, reflecting a strong rebound in consumer demand and the accelerating impact of our growth and efficiency initiatives. We will continue to report the balance sheet equivalents of ending net receivables and average net receivables, both of which exclude loans that have been sold and are important for loan loss reserves, charge-off rates, yield, and other income statement metrics. And keep in mind, for all prior year comparisons, managed and ending receivables are one and the same as the whole loan sale program started in the first quarter of this year. Interest income was $1.1 billion in the second quarter, largely flat to prior year, as slightly lower average net receivables was partially offset by higher yields. Interest expense was $230 million, down 36 million or 14% versus the prior year as we continue to benefit from the ongoing liability management actions that we're taking to reduce our cost of funds while also extending our maturities. Reiterating the guidance that we provided on our last call, we expect full year interest expense in the range of 5.0 to 5.2%. Other revenue, was $148 million in the second quarter, up 3% compared to the prior year quarter. Other revenue in the current period included $11 million of gain on sale revenue from the 120 million of loans we sold during the quarter. Policyholder benefits and claims expense was $48 million in the second quarter, down 42 million year over year. In the second quarter of 2020, claims expense was significantly elevated at $90 million as we experienced a high level of involuntary unemployment insurance claims during the peak of the pandemic. IUI claims have consistently moderated since that time, and the current quarter expense has trended back to normalized levels as anticipated. Let's turn to slide nine to review our originations and receivable trends. We originated $3.8 billion in the second quarter, up 87% from second quarter 2020. Importantly, our originations this period were essentially flat to the comparable pre-pandemic quarter of 2019. Originations improved meaningfully each month as the quarter progressed, as the impacts of government stimulus programs subsided and economic conditions continued to improve. In fact, our June 2021 originations reached an all-time high at nearly 1.5 billion, and we've seen good momentum continue into July. Slide 10 lays out how originations measured against comparable periods of 2019 trended throughout the second quarter. The bar graphs provide the actual originations, while the percentages below each of the bars show the growth percentage adjusted for differences in the number of business days in each respective period. So, for example, you can see that while May originations were down on a dollar basis from 2019, when adjusting for business days, May was actually 2% better than 2019. June's performance then improved further and ended 10% higher than 2019 levels. Assuming the current economic environment continues, we expect to grow our receivables by 8 to 10% in 2021. We expect receivables at December 31st will include about $350 million of receivables sold but serviced by OneMain for our home loan sale partners. Let's now turn to slide 11 and walk through our recent credit trends. Our credit performance continues to be strong as the adjustments we made last year, combined with multiple rounds of government stimulus and improving economic conditions, have all had a very positive effect on delinquency and losses over recent quarters. Second quarter net charge-offs were 4.4%, a 192 basis point improvement year-over-year and a 26 basis point improvement over last quarter. After an historic low for 30 to 89 day delinquency in the first quarter, second quarter rose seasonally to 1.76%, up a modest 13 basis points against the previous record low set in second quarter of last year. Following the strong 30 to 89 performance from last quarter, our 90 plus delinquency hit a record low of 1.36% in the second quarter. down 53 basis points year-over-year. The delinquency levels achieved over the past two quarters give us confidence that we'll continue to see strong net charge-off performance through the remainder of the year. While there continues to be some level of uncertainty in the macro environment, we feel great about the outlook for credit, and we now expect full-year 2021 net charge-offs of about 4.2%, a significant improvement from our expectations at the beginning of the year. Our loan loss reserve trends are shown on slide 12. We ended the first quarter with just under $2.1 billion of reserves and a reserve ratio of 11.8%. In the second quarter, you can see that we reduced our reserves by $64 million. The net reduction reflected an increase of $58 million. associated with our growth in the quarter and $122 million reduction from the expected performance of our portfolio under improving macroeconomic conditions. This brought our reserves to $2.0 billion and our ratio to 11.1% at the end of second quarter, still 40 basis points higher than the pre-pandemic level of 10.7%. Turning to slide 13, second quarter operating expense was $332 million, 12% higher than the comparable prior year quarter and 7.5% of average receivables. The year-over-year expense growth in the quarter reflects continued investment in new products and growth initiatives, the year-over-year increase in production, as well as the difficult comparison against second quarter 2020 operating expenses, which benefited from the cost actions we took in response to the emergence of the pandemic. We expect that our continued investment in the business, combined with strong loan demand, will result in our operating expenses growing in the upper end of the 5% to 7% range we discussed on our last call, But recall, this is after our OPEX declined 3% in 2020. I think it's important to point out that even with accelerating investment and growth in receivables of $1.3 billion since 2Q19, our OPEX ratio remains below the comparable period in 2019. This reflects the operating leverage of our model and the efficiency actions we continue to drive across the business. Let's now move on to the balance sheet on slide 14. We continue to maintain significant sources of liquidity with $1.6 billion of available cash, $7.3 billion in undrawn conduit capacity, and $9.7 billion of unencumbered receivables. We had a busy funding quarter, raising $1.7 billion. In May, we issued an $850 million five-year revolving ABS deal with what we believe was a very impressive cost of funds of 1.56%. In June, we completed a $750 million six-year social bond, which was affirmed by S&P to be aligned with social bond principles. Net proceeds of the bond will finance loans to individuals residing in credit-insecure or credit-at-risk counties, as defined by the Federal Reserve Bank of New York, and at least 75% of which will be allocated to minorities and women. We are all very proud of this issuance, as it is emblematic of how we serve all hardworking Americans. As I mentioned earlier, we also completed $120 million of whole loan sales during the quarter, and we expect this level of loan sales to continue in future quarters. Our mature funding programs remain a hallmark of OneMaine, and we believe they stand out as a clear competitive advantage for us. We continue to deliver on our capital allocation framework. which includes delivering portfolio growth at attractive returns, investing in our business and our future, and returning considerable capital to our shareholders. Consistent with this framework, we announced an enhanced dividend of $3.50 per share in addition to our $0.70 per share regular quarterly dividend. On slide 17, we've laid out our consistently strong dividend history, including the $4.20 per share dividend to be paid in August we will have paid out $9.30 per share during the last 12 months, equating to a yield of approximately 16%. In the quarter, we also repurchased over 600,000 shares of our stock for a total of $35 million. As of June 30th, we had $120 million remaining under our current authorization. We continue to execute on our disciplined capital allocation framework while maintaining our leverage ratio. Our net leverage at the end of the second quarter was four and a half times, comfortably in the low end of our strategic range. In closing, let's move to slide 19, where we provide some updated financial strategic priorities for full year 2021. We expect the yield on our average net receivables to remain stable at approximately 24% for the full year 2021. We expect our interest expense to range between 5.0 and 5.2% of average net receivables. As I mentioned earlier, our loss experience in 2021 has been quite strong, and we expect full-year net charge-offs will be approximately 4.2%. We expect operating expenses to come in at the high end of our 5% to 7% year-over-year growth range. And lastly, assuming a continued positive economic backdrop, we expect our receivables to grow 8% to 10% this year. With that, I'll turn the call back to Doug.
spk02: Thanks, Micah. The resiliency and strength of our business model is now showing through as the market stabilizes and consumer demand picks up. We are pleased that the technology and operational enhancements that we made to digitize our business before the pandemic allowed us to continuously provide outstanding service to our customers throughout this unprecedented period. And we will continue to meet our customers where they want to be met, providing service in whatever channel they choose, in person, on the phone, or through digital interactions. We are committed to continuing to invest in our business and to ensure we can meet customer needs and to provide the financial products and solutions to help our customers improve their financial well-being. I'd also like to mention our inaugural social bond that Mike had discussed earlier. I was incredibly pleased by the strong demand we saw for this bond, as the market validated the efforts we've made across our entire organization and to ensure that hardworking Americans from underserved communities have access to the financial solutions they need. I'm proud of OneMain's strong record of supporting our customers and am committed to continually advancing these efforts. The strategic initiatives and innovations we have executed over the past several years are continuing to pay off, as many parts of the economy have reopened and consumer demand has picked up. And we believe that the investment in our business, which we accelerated in 2020 and into 2021, will position us for growth in the years to come. Thank you for joining us today, and we're happy to take your questions.
spk00: The floor is now open for questions. At this time, if you have a question or comment, please press star one on your touch home phone. If at any point your question is answered, you may remove yourself from the queue by pressing the pound key. Again, we do ask that while you pose your question that you pick up your handset to provide optimal sound quality. Thank you. Our first question will come from the line of Michael Kay with Wells Fargo.
spk04: Hi. Good morning. Thanks for taking my questions. You know, with the uptick in inflation, I was wondering what's your view on the impact to the business? For example, how should we think about the potential impact from a loan growth, operating expense, debt cost, and a consumer credit perspective?
spk06: Hey, good morning, Michael. It's Micah. Thanks for the question. It's a good one. I think, you know, as we think about inflation with respect to originations, could be marginally positive. Things cost a little bit more than they've cost in the past. I think you hit on the other big piece of this, which is potentially rising rates. I'll remind you less than 5% of our debt is floating. So we feel like we're in a pretty good position with respect to that. We have a long maturity structure. We've been really opportunistically replacing a lot of our higher cost debt that's in our stack with lower-cost debt from the very recent really strong markets. And, you know, base rates have been great, but I think the strength of our programs and our credit spreads have also been a contributor. You know, we issue anywhere from $3 billion to $4 billion a year, you know, which is not a huge portion of our close to $18 billion of debt. So to the extent there's rate increases, we think it'll be sort of ratable over time, but hopefully offset with our continued strong credit spreads. I think those are the two biggest pieces.
spk04: Okay, great. I wanted to ask about the IRS trial tax credit dollars. How should we think about how that impacts your loan growth? I mean, is this more like a Goldilocks scenario where it isn't too big given your average $8,000 average ticket, but it's big enough to be helpful for credit?
spk06: Yeah, I think that sounds right, Michael. I mean, this is in some ways, some of this is an acceleration of credit, and also the credit was increased from $2,000 to $3,000 or $3,600, depending on the age of the child. It only affects maybe about 30% of all filers, but we view it as an incremental monthly amount that I'm sure will be helpful to consumers. But in the grand scheme of things, I don't think it's meaningful enough for it to impact our business or originations in that way.
spk04: Okay. Thank you very much. Thank you.
spk00: The next question will come from the line of Kevin Barker with Piper Sandler.
spk03: Good morning, thanks for taking my questions. Given the tighter underwriting in 2020 and how strong the consumer's been with the amount of cash and savings rates there, do you expect to have structurally lower net charge-off rates as we go into 2022, just given the back book should start to look better, just given the tidy underwriting that we saw?
spk06: Yeah, I mean, the losses we're experiencing today, Kevin, are certainly well below normal for our business. With our second quarter charge-offs, we're 192 basis points below the prior year level. We don't think the losses will stay this low forever, but we do expect them to be below normal for some time. I mean, you can look at our early delinquency trends of 30 to 89 as a good indicator for that. They remain well below about 40 basis points in the quarter, below 2019, 2Q19 levels. And I think consumer balance sheets have continued to be strong. Average credit card debt is down about 25% from a year ago. Applicants that are coming into our business, their revolving debt to annual income is down about 30% or 40% from a year ago. So I think with the strong consumer balance sheets, we should expect to see very strong credit going forward. That said, credit has been strong. So as we saw in 2020, we do expect to see a migration up towards 2019 trends. I think it's just going to happen over time versus a cliff.
spk03: Okay. And then earlier today there was comments about one company that's a consumer lender that was not releasing as much reserves as it had previously or versus peers, and they cited the expiration of foreclosure moratoriums and forbearance programs as that could impact credit in the back half this year in early 2022. Do you anticipate any impact from the expiration of those government programs, just given the outsized impact they had over the last year to 18 months?
spk06: Yeah, we don't see this as a big risk with our customer base. You know, we're monitoring our payment trends very closely, and they remain strong even into July. And I would remind you also as a precaution in our underwriting, since really about 2Q20, we've been adjusting for forbearance in both our risk scoring and our ability to pay underwriting, meaning we would If a loan was in forbearance on the Consumer's Bureau, we would have treated that as an expense for our underwriting, and so we don't expect it to impact us materially.
spk03: Thank you for taking my questions. Thank you.
spk00: The next question will come from the line of John Hetch with Jefferies.
spk01: Morning, guys. Thanks very much for taking my questions. Morning, Jeff. The first one is just because a couple credit card companies have reported. I mean, I guess we're seeing the early stages of demand recovery across the board, but you guys are back to full throttle. And I'm wondering, do you think it's a structural – is it something structural tied to the product or is it that you're gaining market share?
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