OneMain Holdings, Inc. (NYSE:OMF) Q4 2023 Earnings Call Transcript
OneMain Holdings, Inc. (NYSE:OMF) Q4 2023 Earnings Call Transcript February 7, 2024
OneMain Holdings, Inc. beats earnings expectations. Reported EPS is $1.37, expectations were $1.35. OneMain Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Welcome to the OneMain Financial Fourth Quarter and Full-Year 2023 Earnings Conference Call and Webcast. Hosting the call today from OneMain is Peter Poillon, Head of Investor Relations. Today's call is being recorded. At this time, all participants have been placed on a listen-only mode. And the floor will be open for your questions following the presentation. [Operator Instructions]. It is now my pleasure to turn the floor over to Peter Poillon. You may begin.
Peter Poillon: Thank you, operator. Good morning, everyone, and thank you for joining us. Let me begin by directing you to Page 2 of the fourth quarter 2023 investor presentation, which contains important disclosures concerning forward-looking statements and the use of non-GAAP measures. The presentation can be found in the Investor Relations section of the OneMain website. Our discussion today will contain certain forward-looking statements reflecting management's current beliefs about the company's future financial performance and business prospects, and these forward-looking statements are subject to inherent risks and uncertainties and speak only as of today. Factors that could cause actual results to differ materially from these forward-looking statements are set forth in our earnings press release.
We caution you not to place undue reliance on forward-looking statements. If you may be listening to this via replay at some point after today, we remind you that the remarks made herein are as of today, February 7th, and that have not been updated subsequent to this call. Our call this morning will include the 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. I'd like to now turn the call over to Doug.
Douglas Shulman: Thanks, Pete, and good morning, everyone. Thank you for joining us today. I'm going to provide a brief overview of 2023, and then I'll discuss our performance for the fourth quarter and our progress against key strategic initiatives. As many of you heard at Investor Day in December, while we continue to navigate the current credit environment, we feel that OneMain has never been better positioned for medium and long-term outperformance. In 2023, capital generation was nearly $800 million and our receivables reached $22 billion, supplemented by growth in our new products. In the year, we also grew our customer base to 3 million customers. We maintained our underwriting discipline in 2023, tightening our credit box throughout the year and increasing pricing and continue to feel very good about the loans we are originating today.
In what was a difficult funding environment, the strength of our balance sheet and capital markets program was evident. We raised $4.6 billion including issuing 3x in the unsecured market and we continue to strengthen our already industry-leading liquidity profile. We made significant progress in the development and growth of our new products, most notably credit cards and auto finance and also announced the acquisition of Foursight to give us a platform to access franchise auto dealers. The nearly $800 million of capital generated in 2023 is a testament to OneMain strong business model. If you attended our Investor Day in December, you heard that we have a line of sight to significant capital generation growth over the medium term as the economic environment stabilizes and our new product scale.
In 2023, we remained cautious in our approach to growing the credit card business, but still grew our book to $330 million in receivables and 430,000 customers. We're really pleased with the progress made last year in terms of maturing the business and customer experience. Our auto finance business grew more than $350 million in 2023. And with the acquisition of Foursight, which we expect to close this quarter, we're well positioned to drive profitable growth in this business in the years ahead. Trim by OneMain, our financial wellness platform which helps customers save money on household bills and manage everyday expenses continues to help our customers improve their financial well-being. Credit worthy by OneMain our community program that teaches young people, the importance of responsible management of credit has now provided three financial education programs to over 275,000 students in more than 3,400 high schools across the country and OneMain was certified as a most loved workplace by the Best Practice Institute for the second year in a row showcasing our deep commitment to our team members who serve our customers so well every day.
Let me now turn to the results of the quarter. Capital generation. The key metric against which we measure financial performance and manage our business was $191 million. Our competitive positioning deep experience with the nonprime consumer and broadened product offering allowed us to grow receivables and our customer base despite a markedly tightened credit box. Our originations in the quarter totaled $3 billion. Even though demand for our loan products remains very strong, we deliberately reduced the pace of originations as we have taken a conservative view on credit and continued to tighten our underwriting and increase pricing in certain segments. Loan net charge-offs in the quarter were 7.7%, up seasonally from the third quarter and in line with our expectations for the quarter.
Full-year net charge-offs were 7.4%, in line with our expectations at the beginning of the year. We feel good about the actions we have taken on credit over the past 18 months. Our front book continues to perform in line with expectations. And the majority of our elevated delinquency is coming from our back book, which is running off, but still represented over half of our delinquent receivables in December. Our pace of originations has slowed down the front book transition, resulting in a greater mix of higher delinquency back book receivables in our overall portfolio. This has created a dynamic in delinquency and loss metrics, which Micah will discuss later. Importantly, we feel very good about the performance of newer vintages. We are confident that this is moving the credit performance of our entire portfolio in the right direction, and we expect losses to peak in 2024 as long as the current macro environment stays relatively stable.
Operating expenses are a key lever we have control over in our business, and we are taking cost actions to ensure that we keep producing operating leverage. We are driving efficiency across the business by closely examining every expense, making cuts where appropriate, but also investing in our future, whether it be in technology and digital, new products, data science or other key areas. I am very pleased with our expense management in 2023 and we expect to reduce our operating expense ratio again in 2024. Turning now to our strategic initiatives. During our Investor Day, we spent some time discussing our plans to expand OneMain's business across two complementary products with attractive returns, credit cards and auto finance, both of which are key components of our long-term strategy.
Our customer base grew 15% in 2023, a sizable portion of that was driven by our stage rollout of these new products. We like the continued metrics we are seeing across our credit card portfolio. The utilization rate is excellent, and the card continues to be used regularly for groceries, gas and household goods. Our customers also really like the product and digital engagement is high, driving customer satisfaction and operating efficiencies. Given the macroeconomic uncertainty, we have tilted our new originations towards our lower line cards with an annual fee and continue to book business that meets our return thresholds even if the economic outlook changes. We're maintaining our disciplined approach to the rollout of cards as we enter 2024, but think we've built a great product and value proposition for customers, which we will be able to scale in future years.
Our auto finance business loans sourced at a growing network of independent dealerships across the United States reached almost $750 million of receivables at year-end. We expect that the business we have built combined with the platform and network of franchise dealerships that we acquired with Foursight will drive profitable growth long into the future. I'll close by briefly touching on capital allocation. Our long-stated strategy remains the same. Our top priority remains investing in the business to position us for ongoing success. We will continue to invest in high-quality loans that meet our return hurdles, while also investing in new products and channels like card and auto and in data science and digital capabilities that improve the customer experience and further advance our competitive positioning.
We are committed to our strong regular dividend, which is $1 per share on a quarterly basis and $4 per share annually. Our Board will continue to consider raising the dividend likely when the macro and credit environment is less uncertain. We purchased about 1.7 million shares of our stock for $65 million in 2023 and we expect to maintain a disciplined approach to repurchases in 2024. With that, let me turn the call over to Micah.
Micah Conrad: Thanks, Doug, and good morning, everyone. Our final quarter of 2023 was highlighted by continued prudent execution of credit and pricing, ongoing expense discipline and another quarter of strong funding and balance sheet management. Fourth quarter net income was $165 million or $1.38 per diluted share, down 4% from $1.44 per diluted share in the fourth quarter of 2022. C&I adjusted net income was $1.39 per diluted share, down 9% from $1.53 per diluted share in the prior year quarter. Capital generation was $191 million for the quarter compared to $229 million a year ago, reflecting the impacts of the current macro environment on our interest expense yield and net charge-offs. For full year 2023, net income was $641 million.
C&I adjusted earnings were $5.43 per diluted share and capital generation was $794 million. Capital generation return on receivables was just below 4%. Managed receivables finished the year at $22.2 billion, up $1.5 billion or 7% from a year ago. Fourth quarter originations were down 13% year-over-year as we continue to tighten our underwriting and maintain a conservative approach to new originations. Part of our tightening has come through pricing actions that we've been taking throughout the year. The average APR on our loan originations is currently around 27% compared to 26% a year ago. That higher pricing has naturally led to reductions in loan volume. However, the net earnings result is expected to be positive. We plan to maintain this conservative posture until we see sustained improvement in the macro environment.
Interest income was $1.2 billion, up 6% year-over-year, driven by higher average receivables and partially offset by modestly lower yield. Yield in the fourth quarter was 22.1% versus 22.3% in the prior year quarter as our pricing actions partially offset the impacts of what continues to be a challenging credit environment. Receivables from our auto finance business impacted yield by approximately 20 basis points in the fourth quarter. As we discussed in early December at Investor Day, the auto finance market is 5x larger than the personal loan market and will be a significant growth product for us in the coming years. While auto has lower pricing, it also brings a stable lower loss profile and attractive risk-adjusted returns. Interest expense for the quarter was $271 million, up $41 million versus the prior year driven by an increase in average debt to support receivables growth as well as a higher cost of funds.
Interest expense as a percentage of receivables in 2023 was 4.9% up just 30 basis points from 4.6% in 2022 despite the considerable increase we saw in benchmark rates over the past two years. Fourth quarter interest expense of 5.0% was impacted by the excess cash we've been carrying on our balance sheet. Excluding these impacts, interest expense would have been around 4.8%. Looking ahead, over 90% of our average debt for 2024 is on the books today at fixed rates. So we're confident in projecting a very manageable increase in interest expense in the year ahead with an estimate of approximately 5.2% for 2024. Other revenue was $185 million, up $17 million or 10% from the prior year quarter. The increase was primarily driven by our excess cash balances as well as the higher interest we're earning on our cash.
Provision expense for the quarter was $446 million, comprising current period net charge-offs of $415 million and a $31 million increase to our allowance which was driven by growth in receivables. Our allowance ratio was flat to the third quarter at 11.6%. Policyholder benefits and claims expense for the quarter was $49 million, compared to $39 million in the year ago quarter. The prior year period included some nonrecurring reserve adjustments related to observed improvements in claims experience. We generally expect claims will be around $50 million per quarter in 2024. Let's now turn to the C&I credit trends highlighted on Slide 10. Loan net charge-offs for the quarter were 7.7% with the full year coming in at 7.4%. Recoveries were 1.1% in the quarter.
While recoveries fluctuate from period to period and can be impacted by the timing of charged-off loan sales and other factors, we expect recoveries to generally remain at or above this level in 2024. 30 to 89 delinquency at December 31 was 3.28% and 90-plus delinquency finished the quarter at 2.88%. Delinquency remains elevated relative to pre-pandemic levels, driven primarily by our back book. While continuing to run off, our back book still represented 57% of our delinquent receivables at year-end. Our front book is performing well and is continuing to grow, but at a slower pace due to our tighter credit box and pricing actions. This has created a growth map dynamic in our delinquency and our loss metrics. In fact, the 21 basis point year-over-year increase in our 30 to 89 delinquency is entirely driven by the slowdown in our originations.
To explain this a little further, newer origination vintages carry relatively low delinquency levels. For instance, the 30 to 89 delinquency you would expect to see at year-end for loans originated in the last six months is around 1%. So when you reduce the pace of new vintages as we've done in 2023, the overall portfolio will skew to a greater mix of older, higher delinquency receivables. Importantly, as Doug mentioned earlier, we like the performance of loans we're booking today and assuming a stable macro environment, our losses are expected to peak in 2024 as the back book runs down and the better front book continues to grow. Turning to Slide 13. C&I operating expenses were $382 million in the quarter, up 4% year-over-year driven by our investments in technology, data science and growth in our new products.
Our OpEx ratio was 6.8% in the fourth quarter. And for the full year, it was 7.0%, reflecting our disciplined expense management and the operating leverage inherent in our business. We expect the OpEx ratio to improve again in 2024 to approximately 6.7%. As Doug noted earlier, there are a set of cost savings initiatives we are currently driving across the organization. Growth in new products, the pending acquisition of Foursight and the marginal cost structure of our personal loan business will also contribute to operating efficiency improvements. Let's now turn to Slide 14. We had another strong quarter of funding and balance sheet management. We completed two separate unsecured bond deals. The first was a $400 million add-on to the 2029 bond that we issued back in June.
Note this bond is callable starting in 2025. In December, we issued a new $700 million bond at 7% and seven-eighth due in 2030 and callable starting in 2026. Both bonds were well oversubscribed with strong demand from both new and returning investors. In the quarter, we redeemed what remained of our March 2024 unsecured maturity, our next unsecured maturity is now March of 2025. We also ended the year with $1 billion of cash on our balance sheet, setting ourselves up for significant funding flexibility in 2024. Our liquidity profile is a differentiating strength of the company. And during the fourth quarter, we added $300 million of capacity with $75 million in our unsecured revolver and $225 million in our secured facilities. Our bank facilities totaled $7.7 billion across 16 diverse bank partners with unencumbered receivables ending the quarter at $8.4 billion.
Wrapping up the balance sheet, our net leverage at the end of 2023 was 5.3x down from 5.5x a year ago. Let's now turn to Slide 16 and review our 2024 priorities. Let me first note that all financial metrics for 2024 reflect the expected first quarter closing of the Foursight acquisition. We are projecting 2024 managed receivables of approximately $24 billion with strong contributions from auto finance and credit card. Our estimates reflect the continued conservative credit posture that results in organic receivables growth of 3% to 5% as we focus on originating loans and cards that even if the macro environment were to worsen, we'll still meet our return thresholds. Note, the estimate also includes approximately $1 billion of acquired receivables from Foursight.
2024 revenue growth is expected to be 6% to 8%, this includes both interest income and, on the revenue, and is driven by our expected receivables growth, a modest improvement in yield from our 2023 pricing actions as well as contributions from Foursight. Interest expense is expected to be approximately 5.2% in 2024, illustrating the structural advantages in our balance sheet and our ability to shelter the impact of higher current funding rates. Full year consolidated net charge-offs are expected to be within a range of 7.7% to 8.3%. Please bear in mind this includes all products, personal loans, auto finance and credit cards and also reflects the growth math I discussed earlier. As we've noted, we expect losses to peak in 2024, and we expect to see normal seasonal patterns during the year with higher net charge-offs in the first half and lower net charge-offs in the second.
As previously discussed, we expect our full-year 2024 operating expense ratio to improve from 7.0% to around 6.7%. At Investor Day in December, we laid out a medium-term path to $30 billion in receivables and a 5% capital generation return on receivables with charge-offs normalizing down to our strategic range of 6% to 7%. We are navigating the economic climate with great care, but at the same time, building the foundation for our future and we remain very confident we will achieve these objectives. Let me now turn the call back over to Doug.
Douglas Shulman: Thanks, Micah. Hopefully, you will take away from our comments that we are confident about our competitive positioning, feel very good about our current underwriting posture and the management of our credit box and are optimistic about the opportunities ahead. We remain well positioned to grow once the environment becomes less uncertain. With best-in-class underwriting, a unique business model, a fortress balance sheet and expanding product set with a bigger addressable market and all of the differentiating factors we laid out at our Investor Day two months ago. Most importantly, we remain highly committed to being the lender of choice to the nonprime consumer, helping our customers meet their credit needs today, but also helping them progress to a better financial future.
Let me end by thanking all the OneMain team members for their dedication and hard work throughout 2023, and their continued commitment to our customers each and every day. With that, let me open it up for questions.
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