OneMain Holdings, Inc.

Welcome to the OneMain Financial second quarter 2022 earnings conference call and webcast. Hosting the call today from OneMain is Peter Pollion, 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 1 on your telephone keypad. 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.

Thank you. Good morning, everyone, and thank you for joining us. Let me begin by directing you to page two of the second 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 any 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 28th, 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. Let me turn the call over to Doug.

Thanks, Pete. Good morning, everyone, and thank you for joining us today. This morning, I'll take some time to review our financial performance in the quarter. discuss the credit and macroeconomic environment, and also provide an update of our key strategic initiatives. I'm pleased with our financial performance in the quarter, as we generated $275 million of capital and demand for our loan products remained quite strong. Originations were $3.9 billion, up modestly year over year. Similar to last quarter, healthy demand for our core personal loan product was supported by our expanded products and new distribution partnerships. The strong originations in the quarter led to solid managed receivables growth of 10% year over year. Loan losses were 6%, below second quarter loan losses in previous years before the pandemic, And in a difficult funding market, we continued to show the strength of our balance sheet by raising more than $1.5 billion while also improving our liquidity. With regard to the macroeconomic environment, over the last several quarters, we've discussed our expectation that credit performance will follow an orderly path to normalization. And through the first quarter of this year, that orderly path was evident in our portfolio performance. We also said that we would be monitoring credit performance closely and be prepared to act in this evolving economic environment. As stimulus wears off, savings decline, and inflation persists. In May, we began to see an uptick in early stage delinquency for certain lower credit quality, lower FICO customers, primarily concentrated in 2021 vintages. We closely track various sources of credit performance of the non-prime consumer, including ABS trust information, as well as other public industry sources. And it is clear to us that there has been an increase in early stage delinquency across the non-prime space over the past couple of months. Having said that, our higher credit quality customers have shown performance very much in line with our expectations. And we continue to see very strong back-end collections and recoveries. that are contributing positively to our charge-off performance. As you know, what distinguishes us in the non-prime space is our long history with this customer and our ability to adjust our underwriting quickly when needed. We began selectively tightening our credit box as far back as late 2021, including reducing assumptions of collateral values adjusting our definition of thin file, and enhancing verification requirements on certain new loan applicants. We've taken more significant tightening actions in the last two months. We feel very comfortable with our current credit posture, having limited underwriting in the higher risk segments, and we continue to monitor the environment closely and will remain prepared to make further adjustments as necessary. Over the past few months, we've seen some competition pull back even with better credit quality customers, presumably due to a lack of balance sheet funding for loans. This has created opportunity for us to originate higher credit quality business and continue to drive receivables growth despite the credit adjustments we've made. We like this competitive positioning. using our incredibly strong balance sheet to move our overall portfolio to higher ground as we are starting to see some challenges in the lower credit quality consumer. Given what we are seeing, we now expect net charge-offs for the year to end about 50 basis points higher than our original range of expectations, which is still well within our long-term target range, and we'll continue to have robust capital generation. As a reminder, we underwrite our loans to a minimum 20% return on equity hurdle. This gives us significant cushion. Even the current vintages that have shown more elevated delinquency than anticipated in May and June in aggregate are expected to remain very profitable with returns well in excess of our 20% return thresholds. It's also important to note that despite a tighter credit box, originations remain quite strong. Demand for our core loan products has been bolstered by some positive competitive dynamics, as well as our continued investments in new products and channels. So while cutting our credit box at the lower end of the risk profile will reduce originations and receivables growth, we believe there are excellent opportunities to originate more loans at the higher end at very attractive returns. Let me say one more thing about the macroeconomic environment and our business model. It is not surprising that a subset of our customers have less cushion and are having a harder time making ends meet as government stimulus wears off and inflation pressures continue. The hallmark of our business model is to be there for customers in good times and bad. And we are very comfortable managing through difficult economic cycles. When we saw an uptick in early stage delinquencies, In discrete segments of our customer base, we quickly adjusted our underwriting, shifted resources to work with customers who need extra help, and activated our robust borrower's assistance programs. Let me now turn to our strategic initiatives. The strategic pivots we've made during the last few years continue to be a major focus at OneMain. We continue to invest in providing customers with an experience that meets their needs, whether in person, on the phone, or through our app and web properties. Our digital capability spans beyond just the ability to take digital applications and close loans outside of a branch. It includes digital servicing that allows us to contact customers and service loans more efficiently. We are investing in these capabilities across all areas of customer engagement. As you know, we are closing almost 50% of our loans digitally. We're using machine learning algorithms to generate high-quality workflow assistance to our team members. We're engaging more customers in two-way text messaging for servicing and collections with integrated text-to-pay capabilities. These are just a few examples of the digital enhancements we are making to serve our customers and continuously improve our performance. On our Brightway credit card, we are really pleased with the progress we have made and will be expanding in select segments in the second half of the year. As I've said in the past, we are executing a very careful and disciplined expansion. In late 2021, we tested the product value proposition and marketing, and we had excellent take rates, confirming that we had a unique card product to bring to market. We then tested activations, line usage, digital adoption, and other key metrics. Our last data point to test was credit. Most of the key metrics to date have been in line with or better than our initial expectations. Our test segments did just what we had hoped, revealing where we can have high confidence in unit economics. You should expect card balances to grow in the second half of 2022, albeit with a different mix than the original 70,000 cards issued over the last nine months. Those cards tested many, many combinations of product, channel, and risk segments. For this next expansion, we have selected certain lower risk segments and lower risk channels that met our return hurdles in the tests. I remain very excited about our ability to pair a daily transactional card product with our installment loan product thereby expanding our total addressable market and deepening our relationship with current and future customers. We also continue to see good traction through our product and channel expansion efforts. One example we discussed last quarter was our smaller dollar loan product, $2,500 loans that we offer to certain customers. We've also spoken about our channel distribution partnerships. with a focus on partnerships such as dealer track, which allows us to use our long history and expertise in auto underwriting to expand our lending. These distribution partnerships allow us to leverage our operational capabilities, including central underwriting and collateral verification and management, and our deep understanding of the non-prime consumer. These outside the branch channels are already tracking towards several hundred million dollars of originations in 2022 and the credit performance in our distribution partnerships has been strong. This is another example of a product and channel expansion that allows us to use our unique core competencies and competitive advantages to expand our business. We're also seeing more and more customers adopt Trim, one main money-saving and budgeting app. As a reminder, Trim helps people track, negotiate, and save money on everyday bills, such as cell phone, cable, and utilities. It also helps people compare rates on auto insurance and other products. As inflation continues to challenge hardworking Americans, This is another valuable tool we offer customers to help them improve their financial well-being, and it also helps us deepen and broaden our relationship with them. Finally, let me discuss capital allocation. Our first and highest priority remains investing in our business to generate strong returns with return on capital in excess of 30%. We will continue to prioritize investment in loans that meet our return hurdles, while also continuing to invest in key growth initiatives that will drive robust capital generation in the future. While we expect to maintain a strong and efficient capital position, we also plan to return excess capital to shareholders through our regular dividend and share repurchases. During the second quarter, we paid a regular dividend at 95 cents per share. The $3.80 annual dividend yields a very healthy return of approximately 10% at current share price. We also continued to execute against our share repurchase authorization during the quarter, utilizing $94 million to repurchase 2.1 million shares. Through the end of the second quarter, We've repurchased 4.4 million shares, representing about 3.5% of shares outstanding. With that, let me turn the call over to Micah to take you through the financial results of the second quarter.