OMF - NYSE

Good day and welcome to the OneMain Financial Third Quarter 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. [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 2 of the third 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 our website. Our discussion today will contain certain forward-looking statements reflecting management's current beliefs about the company's future financial performance and business prospects. And these forward-looking statements are subject to inherent risks and uncertainties and speak only as of today. Factors that could cause actual results to differ materially from these forward-looking statements are set forth in our earnings press release. We caution you not to place undue reliance on forward-looking statements. If you may be listening to this via replay at some point after today, we remind you that the remarks made herein are as of today, October 25 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. I'd like to now turn the call over to Doug.

Thanks, Pete and good morning, everyone and thank you all for joining us today. Today, I'll cover our results for the quarter as well as some of our strategic priorities. I'll start by saying that I'm really pleased with the results of the quarter, especially in light of the current economic environment. Capital generation, the key metric against which we measure financial performance and manage our business, was $232 million, up $40 million from last quarter. Demand for our loan products remains strong. Our originations totaled $3.3 billion, ahead of our expectations considering the major credit tightening we did a year ago and the continued tightening we've done this year. Receivables are up 7% year-over-year as we continue to underwrite high-quality loans that we expect will be profitable even if the macroeconomic environment worsens. 2/3 of our new customer originations during the quarter were in our top 2 risk rates. This speaks to our excellent competitive positioning, where even with a tight credit posture, we are able to grow receivables by making loans to lower risk customers. At quarter end, we had 2.8 million customers, up from about 2.3 million just 2 years ago and we are well positioned to do more business with our customers over time. Our 30 to 89 delinquency rate finished the quarter at 2.98%, up 22 basis points from the second quarter and in line with normal seasonal trends. For context, delinquency increased 21 basis points and 15 basis points from second quarter to third quarter in 2018 and 2019, respectively. Loan net charge-offs in the quarter were 6.7% and down seasonally from 7.6% in the second quarter and in line with our expectations. Loans originated after our major credit tightening in August 2022 which we refer to as the front book now represent about 59% of our total portfolio and should represent about 2/3 of our portfolio by year-end. We are confident that as our post tightening vintages continue to grow in proportion to the total portfolio, our overall credit performance will improve over time. As we've discussed previously, that portion of our portfolio originated before our credit tightening actions which we call our back book continues to impact overall performance. Despite unemployment levels at near historic lows and our average customer income being up since the onset of the pandemic, there are some customers that continue to struggle with higher costs. We remain highly focused on supporting those customers. A hallmark of our business is being there for customers when they need us. And that philosophy is a cornerstone to our businesses' resiliency and to shareholder value creation through the cycle. This quarter, once again, we demonstrated our deep access to capital markets by issuing the largest ABS transaction in OneMain's history. We raised nearly $3.5 billion of funding so far in 2023 and our strong balance sheet, excellent liquidity and deep access to capital markets remains a key competitive advantage for OneMain. Turning now to our strategic initiatives. As I mentioned, our customer base continues to grow and our new products and secured distribution channels are a key driver of that growth. Importantly, credit performance from these products has been strong. Our conviction has never been higher about the ability of these products to meet the needs of and deepen the relationships with our customers and to drive profitable growth in the years ahead. Key metrics for our BrightWay credit cards, including spending categories, utilization rate, digital customer engagement and importantly, credit performance are encouraging. We're continuing our rollout of cards, albeit at a slower pace than we expected at the beginning of the year with a watchful eye on the macroeconomic environment. At quarter end, we had roughly 340,000 card customers and $232 million of card receivables. We remain very disciplined in the rollout of this product, including focusing on lower credit limits and increasing pricing where appropriate. The BrightWay card is attractive to our customers because it offers a digital-first experience and it rewards our customers for positive credit behavior. We are starting to see the first class of BrightWay customers graduate to our BrightWay+ card after achieving 24 months of on-time monthly payments. Not only have these customers enjoyed the benefits of a lower APR or higher credit line for each previous 6-month period of on-time payments. They now move to a no annual fee card and the potential to receive even more benefits if they continue to exhibit positive credit behaviors. This graduation is an important milestone because it shows that the concept of payment equals progress is not just an idea. It's a reality and it helps customers improve their financial wellbeing. We also continue to build and grow our portfolio of secured loans sourced at the point of purchase through a growing network of independent auto dealerships. These loans are subject to our rigorous underwriting standards and the credit performance has been excellent, far better than comparative industry performance. Receivables from these distribution channels totaled more than $650 million today and we plan to continue to build our auto purchase lending program in a disciplined way. We also continue to help our customers improve their financial wellbeing with Trim by OneMain, our financial wellness platform that helps our customers negotiate bills, manage subscriptions, track transactions and more. These financial wellness tools provide real economic value to our customers and allow us to deepen our relationship and build loyalty with them. I'll close by briefly touching on capital allocation. Our strategy is unchanged. Our top priority is investing in the business to drive profitable growth. This quarter, we grew our receivables by $572 million invested in our new products and channels and in digital capabilities that improve the customer experience and further advance our competitive positioning. Our $4 per share annual dividend translates into a yield in excess of 10% at our current share price. And consistent with the last few quarters, we've maintained our cautious stance on share repurchases, given our desire to maintain strategic optionality. We repurchased about 270,000 shares of our stock for $11 million in the quarter. With that, let me turn the call over to Micah.

Thanks, Doug and good morning, everyone. Our third quarter financial performance was highlighted by solid receivables growth even with our ongoing efforts to prioritize higher-quality originations. We once again saw typical seasonal patterns in our portfolio delinquency and our post tightening originations continued to perform well. We also advanced our funding objectives with a $1.4 billion ABS transaction, the largest in our history. We continue to successfully navigate the current environment and we are confident that our competitive positioning and our strategy will continue to deliver strong results. Third quarter net income was $194 million or $1.61 per diluted share, up 8% from $1.49 per diluted share in the third quarter of 2022. C&I adjusted net income was $189 million or $1.57 per diluted share up 5% from $1.49 per diluted share in the prior year quarter. Capital generation was $232 million for the quarter compared to $280 million a year ago, reflecting the impacts of the current macro environment on yield, interest expense and net charge-offs. Managed receivables finished the third quarter just shy of $22 billion, up $1.5 billion or 7% from a year ago. Demand remained strong and our growth has been further supported by a constructive competitive environment. We remain focused on generating higher-quality loan business from our top 2 risk grades and we continue to see significant contributions from our new products and distribution channels. Approximately 1/3 of our year-over-year receivables growth came from our strategic investments in secured distribution channels and the BrightWay credit cards. We expect full year receivables growth of around 7% at the higher end of our July estimate of 5% to 8%. Third quarter interest income was $1.2 billion, up 4% year-over-year. Yield was flat to the prior quarter at 22.2%, reflecting the ongoing impacts of higher delinquency levels, borrower payment assistance and the strong originations in our secured distribution channels which have lower pricing than our core loans. Throughout this year, we've been increasing pricing in select loan segments which has generated an overall increase to our blended APR of over 100 basis points since early June. It will take some time for pricing on new loans to have a meaningful impact on our portfolio yield. But for this quarter, our pricing actions are helping to offset the impacts from seasonal increases in 90-plus delinquency. Over time and absent any major changes in the macroeconomic environment, we expect the combination of these price increases and the lower delinquency in our recent originations to increase yield. Interest expense for the quarter was $265 million, up $44 million versus the prior year primarily from an increase in average debt to support receivables growth as well as modestly higher average cost. Interest expense as a percentage of receivables was 5.0% in the quarter. Keep in mind, interest expense this quarter was impacted by our $1.4 billion August ABS issuance and the resulting excess cash on our balance sheet. Adjusting for this impact, interest expense would have been closer to 4.8%, compared to 4.5% a year ago. Despite what has been an historic increase in benchmark rates we've seen more gradual increases in our interest expense because of our diversified fixed rate and long-duration funding strategy. Other revenue was $182 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 yield we are earning on that cash. Provision expense was $410 million, including net charge-offs of $353 million and a $57 million increase to our allowance which was entirely driven by receivables growth. Our allowance ratio was essentially flat to the second quarter and continues to reflect a cautious view of the future macroeconomic environment. Finally, policyholder benefits and claims expense for the quarter was $48 million compared to $35 million in the third quarter of 2022. Prior year period included nonrecurring reserve adjustments relating to improvements in claims experience, mainly in our credit life product. $45 million to $50 million per quarter is a more normal level for our claims expense as we have seen throughout the year. Let's now turn to the C&I credit trends highlighted on Slide 8. Loan net charge-offs for the quarter were 6.7%. We continue to see strong recoveries at 1.2% this quarter. And while well above pre-pandemic levels of 0.8% to 0.9%, recoveries were a bit lower than the prior 2 quarters due to the timing of charged-off loan sales. We expect full year 2023 net charge-offs to be approximately 7.4%. 30 to 89 delinquency was 2.98% and 90-plus delinquency finished the quarter at 2.57%. Both delinquency measures continue to track in line with normal seasonal patterns and remain 25% to 30% higher than pre-pandemic levels, driven by the delinquency of our back book specifically those loans written prior to our August 2022 credit tightening. We expect to see improvements in delinquency over time as the better performing front book continues to grow. Our front book accounted for 59% of our total portfolio at the end of the third quarter, up from 50% a quarter ago. This population of originations continues to perform in line with pre-pandemic delinquency levels and is expected to represent approximately 65% of our portfolio by year-end and about 75% by the middle of 2024. Turning to Slide 11. C&I operating expenses were $373 million in the quarter, up 4% year-over-year. Our expense growth versus the prior year was entirely driven by strategic investments in technology and data science and growth in our new products and channels. We continue to manage our operating expenses closely and remain focused on driving operating leverage even with those investments for the future. Our OpEx ratio was 6.8% in the third quarter and we now expect the full year to be approximately 7.0%, an improvement from our previous estimate of 7.1%. Let's now turn to Slide 12. One of our core strengths is our balance sheet management and our access to funding. As I noted earlier, in August, we completed the largest ABS transaction in our history. This $1.4 billion 3-year revolving securitization priced at a blended rate of 6.4%. The issuance was substantially upsized into strong demand with 3 large anchor orders and a deep order book that included 6 new investors. In September, we redeemed $558 million or half of what remained on our March 2024 unsecured bond maturity. You may recall the original maturity on this bond was $1.3 billion. Through this redemption and other market purchase of our bond, we have strategically reduced this maturity to a much smaller size. This proactive balance sheet and maturity management gives us issuance and cash flow flexibility going into 2024, with the remaining $558 million, representing the only bullet maturity we have in 2024. And even after this partial redemption, we had $1.2 billion of cash remaining on our balance sheet at September 30. Our liquidity remains strong supported by $7.4 billion of undrawn and committed bank facilities spread across 15 geographically diverse and well-established financial institutions. During the quarter, we renewed one of these relationships and have renewed nearly all of our bank lines since the beginning of last year which will provide strong support for our liquidity position well into 2025. With our current cash position and our undrawn bank facilities, we remain well positioned to be selective as we look for windows of opportunity to access the markets going forward. I'll wrap by quickly recapping our expectations for full year 2023. We expect receivables growth of around 7%, driven by strong demand and contributions from new products and channels, we expect net charge-offs to be approximately 7.4% and we expect our operating expense ratio to be about 7.0%. I'd now like to turn the call back over to Doug.

Thanks, Micah. I'm really proud of how our team is navigating 2023. We are focused on executing the business today with a set of appropriate credit tightening actions and also ensuring we have a strong and conservative balance sheet. But at the same time, we're building for the future with our credit cards, secured distribution channels and digital capabilities. We feel great about our positioning and our ability to serve more customers with more products over time. Let me end by thanking all of the OneMain team members for the dedication and passion they bring to work every day to help hard-working Americans improve their financial well-being. With that, let's open it up for questions.

[Operator Instructions] Our first question comes from Michael Kaye with Wells Fargo.

Origination growth has been below our expectations. It's still running lower year-over-year. That said, you're still seeing pretty healthy loan growth but that seems more driven by lower payment rates. So how much longer does the lower payment rates have to go to normalize? Putting aside the growth of credit cards, if this keeps up the core personal loan growth turn negative as we get closer to payment rate normalization?

Michael, it's Micah. I'll take that one. As you heard in our prepared remarks, we continue to see strong demand in our originations, we continue to see an accretive and constructive competitive environment. So as you also heard, we've been really able to continue and actually increase the percentage of our originations that are coming from our top 2 tier risk grades. We're seeing some decent contributions from the strategic investments we've made over the last couple of years in both our distribution channels as well as our or credit cards. So we feel good about the growth. We feel it's a very disciplined growth as we continue to focus on tightening credit throughout the year and picking our spots and make sure we're writing loans that we have a high degree of confidence in, will perform even if we see some deterioration in the macro environment from here. But also, as we talked about last quarter, the receivables have been supported by those lower early payoffs. They are certainly well below what we were seeing in 2021 which was really a function of government stimulus still just marginally below where they are in 2019. But we feel good about those payment trends. We've talked about this before. We think that's a sign of the competitive environment, the most of almost 98%, in fact, of those early payoffs were not delinquent in the month before. So these are customers that we like to see retained on our balance sheet.

Okay. The second question I wanted to talk a little bit about the Q4 net charge rate. I understand it's a function of DQs rolling through. But just taking a step back, why is it up so much quarter-on-quarter? And it seems higher quarter-on-quarter than what I reserved from the pre-COVID quarterly trends. It just feels like there's been a change from your prior expectations. I was looking over your prior comments on the Q1 earnings call and you said that the expected NCOs to fall in the mid- to high 6% in the second half of this year.

Yes. So I would say, Michael, we are still operating in an environment of continued higher levels of inflation and interest rates also impacting our consumers. So as you can see from some of the slides we put in our earnings deck as well, we believe our performance continues to outperform peers. But there's a lot going on within the book, in the front book and the back book. As we've talked about before and we said in our prepared remarks, the front book is still performing in line with pre-pandemic benchmarks. Every quarter that goes by, that becomes a larger part of the portfolio. But our back book continues to be the driver of delinquency and subsequently lost in our current portfolio. So I think we -- when we first called this out at the beginning of the year, it was an estimate. It's hard to do that at the beginning of the year for 4 quarters later but we still feel good about where we are. We're right within the range of where we expected to be from a full year perspective. And I've given you some of the multiples of delinquency that have given you the math over prior periods. And the fourth quarter is well within the range of what we would expect to see from this quarter's 90-plus to next quarter's charge-off.

Our next question comes from Kevin Barker with Piper Sandler.

I just wanted to follow up on the credit comments. I noticed that the early-stage delinquencies have turned slightly higher on a year-over-year basis, up 18 basis points year-over-year versus 4 basis points last quarter. Would have expected a little bit more improvement just given the tightening of underwriting you've done over the last year. Could you just dig into that a little bit more on what you're seeing on the 2021 or 2022 vintages and whether they are performing in line with your expectations that were slightly worse Obviously, a lot of your competitors are seeing weakness but love to see you dig into a little bit more on the vintage-by-vintage basis.

Yes, Kevin. So I think -- it's Micah again. The -- as we showed on Page 9 of our earnings presentation and Doug talked about it a little bit as well. The seasonal patterns we're seeing in 3Q continue to be what I would call in line with what we saw pre-pandemic. So '18 and '19, 30-plus was down 35 and 45 basis points. We're down 25 on the 30 plus. And I think Doug talked a little bit about the 30 to 89 trends being very similar. 2022, if you go back to that third quarter, I think you might remember, we saw a pretty unusual sort of flattening of delinquency from second to third. And that was coming off a more dramatic increase in the second quarter of 2022 than we were used to seeing. So I think when you put those 2 quarters together, last year, you would have seen something a little bit more muted, if you will. But I think any year is difficult to benchmark exactly and I think '22 becomes even more so given the dramatic amount of tightening we did in August of last year. So that part of that question, I'll address. I think in terms of the front book and the back book and this whole transition. It is slowing a bit. That's just part of the nature of how these vintages and the book will emerge. It grew by about -- front book grew by about 9 percentage points this quarter. We would expect that to slow down a little bit. I think we called out 65% end of year, so slowing down to about 7% growth. And again, it continues to perform in line with pre-pandemic benchmarks. And we're very happy that, that will continue to grow and we expect to see changes from that over time. But the back book, I think, is also important to remember, the back book is very, very seasoned. When I talk about the back book, it's sort of everything prior to that August tightening, including older loans. So at this point, even the newest loan in that back book is 13 months old. So as a result of that, the absolute delinquency in that back book is multiples higher than the delinquency in the front book just because of seasoning. There's a lot of loans in the front book that are 1-month, 2-month, 3-month old, et cetera. But as a result, you just get this difference in absolute delinquency level. So small percentage changes in the performance of that back book which is still 41% of our portfolio. can easily offset and are offsetting the positive impacts that we're seeing from front book growth. Good news is, over time, we'll continue to see growth in that current front book and we'll anticipate that becomes a bigger driver of portfolio delinquency as we move forward.

Okay. And just a follow-up on the front book comments. Are your underwriting standards since August of last year, significantly tighter than what they were pre-pandemic. And is that front book performing in line with pre-pandemic or better than pre-pandemic?

Yes. Kevin, the front book is -- the underwriting standards are tighter. We put a level of stress and assumed extra level of stress in the event that there was a recession. And the way our customer lifetime value models work as we assume certain interest rate, we -- length of loan, the type of loan, whether it's secured or unsecured and then we also assume a certain amount of losses. And so when we put extra stress on it, all we mean is even if unemployment rises and losses go up, it would still meet our 20% return on equity hurdle. So that's what extra stress means. So it is tighter than pre-pandemic when we didn't put an extra level of stress on. With that said, as Micah had mentioned before, it's very hard to do apples-to-apples because the box is always being adjusted based on performance we've seen in the last couple of months, the algorithms we put in place, et cetera. It is performing very similar, the overall portfolio that we are originating now to pre-pandemic. And we have the luxury of being able to craft the portfolio given the length of time we've been in the market, our brand recognition, our distribution channels, our customer loyalty, both a credit box that we're super comfortable with as well as a nice pipeline of growth that allows us to construct a loss profile that we're comfortable with and meets our return hurdles.

Our next question comes from Vincent Caintic with Stephens.

I want to dig into the front -- that front book and back book dynamic in more detail. The -- so with 13 months having passed since the -- since that August 22 update. I guess the losses that we're seeing implied in the fourth quarter net charge-offs, is that I guess, being driven by the loss of merchants since we're kind of in the meat of that what would typically happen with a kind of a 12-month loss emerging cycle? And then is there a way to break out sort of how you're thinking about a credit allowance for your blended portfolio, so you have that versus like once you're -- once the book is primarily the new originations, the front book originations.

Let me try to unpack that a little bit, Vincent. This is Micah. I think the fourth quarter losses are going to come from 30 to 89 delinquency that happened in the second quarter. Our third quarter losses are going to come from 30 to 89 that occurred in the first quarter of this year. So, the vast majority of that 30 to 89 emerging to loss now and in the fourth quarter will have come from a lot of pre tightening vintages. It just takes some time for those -- particularly for losses for the new book to become a larger part of that; so that's piece one. I think you asked about just sort of the front and back book in terms of reserves and losses. I think in terms of the reserves. We've got a reserve model that really is focused and built around delinquency buckets. So while our vintages are certainly a part of that, we use vintages for back testing and model validation, not necessarily building the model directly from those vintage expectations. But what we do in our reserving is largely, we look at delinquency buckets and we look at the roll rates historically and the expected roll rates and performance of those delinquency buckets as they emerge into loss, by virtue of the front book becoming a larger part of the portfolio. We, of course, will see those have a lower level of delinquency as we've called out, so that will influence our loss reserves. And again, on the back book, with the back book being very seasoned with a higher level of delinquency than that front book we're going to have naturally higher reserves on that book because of the delinquent stock. And so the two things are kind of right now sort of mixing into our reserves. And of course, we also have macro overlays in there, as we've talked about before, with expected unemployment 4.5% to 5%. So we would expect to see as the front book becomes a larger part of the portfolio, those reserves will start to be impacted more so by that front book as time goes on. Did I -- I think you had a third question in there? Did I hit what you were looking for?

Yes, I think that's -- I mean, I guess, presumably, the mid-2024 with the front book being 75% of that, that all else equal, the reserve freight would be lower at that time. Is sort of how we're interpreting that because of lower losses and lower delinquencies and/or losses with the front book.

Yes. I mean I think it's a decent general expectation. There's a lot of things that will go on between now in the middle of 2024 with the macro environment, we got to see how the back book continues to perform and does the front book continue to perform where we expected to be. So a lot out there. I don't want to commit to any particular number but I think your hypothesis is sound.

Great. Very helpful. And second question separately on the auto purchase lending program that's $650 million. So it's good to see the growth there. I know broadly, with the pure auto lenders that I cover, it's been sort of volatile in some banks, for instance, FX into that space and just volatility there. And so I'm wondering if you could talk about your thoughts about that market and the opportunities that you're seeing where you can beat in and grow that program.

Yes. No, thanks, Caintic. So I guess a couple of things. One is, we've been in the secured lending business for many, many years. About half of our book is secured by an auto, so we actually know the business of making loans against auto as a collateral, very well. We understand underwriting, pricing, perfecting a lean collateral management, all of those pieces. A few years ago, I mentioned we started to expand our secured distribution channels, mostly through dealer track which is we signed up to a platform that's hooked into a lot of auto dealers they would send us potential loans to make for it in auto and we started to inch our way into the market which we viewed as just a separate distribution channel. When those auto potential loan for an auto purchase comes to us, we do a very similar disciplined underwriting that we do when we make an installment loan secured by an auto. So first, we put the 30% extra stress on there. And so we've run a very tight credit box since August 2022. We also work very closely and directly with the customer. So we get on the phone with a customer we talk them through their loan, their loan size, what they can afford, what's their net disposable income. And so we have a very hands-on approach similar to our core business. And as a result, because we are going slow, we have tight underwriting standards and we're more hands-on in the lending process than your typical indirect auto lender, we've seen really good credit results. And so roughly, this is a $500 billion or $600 billion market and we've got under $1 billion of receivables. So there's plenty of opportunity for us to -- in a very slow, measured way add some portfolio growth through this channel with loans that we like a lot. So we're very bullish on it. We think it's a great opportunity for us. but we're also very cautious and disciplined in how we build this out.

Our next question will come from Arren [ph] with Citi.

I was just wondering if you could talk a little bit about the competitive environment. It had kind of moved in your favor when it was a little bit more difficult to finance. Are you still seeing a better inflow of opportunities relative to where you were a few quarters back?

Yes. Look, it remains a very constructive competitive environment for us. our strong balance sheet and our access to funding and having plenty of liquidity, so we can make the loans that meet our return profile clearly stands us in good stead. And I think the fact that we never had to pull out because of funding constraints and our consistency of our brand in the market for customers is an important part of that. As you've seen from our results, even with a much tighter credit posture than we had a year ago, we're still having nice origination growth which speaks to a good competitive environment. We also have been able to take some pricing actions and we're still able to book lower risk customers at a higher price. And so we like the competitive environment different competitors ebb and flow, how much they're in the market and we've got a pretty broad competitor set. And so competitors aren't as funding constrained now as they were 16 months ago. But in general, it's still a very constructive environment for us.

And on the flow sales that you make, are you still selling around $180 million a quarter? And what's the demand for whole loans that you're seeing right now?

Yes. Arren, right now, about $135 million per quarter. You remember, we started this program with 3 partners back in 2021, really with a strategy to diversify funding and really build the plumbing for future optionality as well. First of those relationships, we extended through December 2023 that happened a year ago in December 2022. The second one expired this March, we chose not to renew that one. And the third, we just renewed in August. So I would say the market is decent. I think there's a lot of opportunities for buyers out there with other companies that are struggling a little bit more than we are. So we continue to be open to that market. I think we're also just very happy as well to put loans on our balance sheet with the diversified funding we have. But I would expect it to be a part of our programs in the future and we'll engage and continue to engage with investors and partners there. When the time is right and we think the pricing is right based on what we can generate for holding loans on our balance sheet.

Our next question comes from David Scharf with JMP Securities.

I wanted to quickly just shift to the yield discussion and outlook. And in particular, noted your comments about it obviously takes time for some of the pricing actions to kind of fully work through the portfolio. But I'm wondering, can you -- given that the growth in auto card, I mean it seems like upwards of 1/4 of the portfolio now our newer asset classes, you made reference to the weighted average impact of some lower yielding assets. Could you give us a sense for how we should think about kind of the price increases versus just the product mix and in terms of kind of where the growth is going to come from next year, product mix-wise, are the price increases enough to offset that?

Yes. So let me tackle some of the yield questions in there, David and maybe we can kind of circle back on growth expectations. So card right now is $232 million, the auto purchase and distribution channels receivables that we spoke about are about $660 million. So putting both those together still quite a bit under $1 billion on a $22 billion portfolio; so it's still relatively small. But I also want to point out that when we speak about yield, we're talking about loan yield. And so the 22.2% excludes the credit card. Credit card, we think about it a little bit differently just because it's got a bunch of fee based revenue. So we'll break that out a little bit more going forward when the portfolio for cards becomes a little bit bigger. And I think we've included some of it in our SEC filings as well, the Qs and the Ks. And so when I speak to yield, it's going to be all around loan yield. That auto purchase and distribution channel business is part of it. We talked about pricing changes in the prepared remarks and you referred to it. We've done over 100 basis points since early June. We -- as we're doing about $3 billion a quarter of origination. So for that to flow through a $22 billion portfolio, it's going to take a little bit of time but it is there and is starting to make a difference. We've done a few things there. We've increased loans size -- We've increased pricing through loan size management in certain states that have tiered pricing where the larger loan attracts a lower APR. And so I think that's beneficial because it's credit positive with a marginally lower loan size but also we generate some incremental pricing from that. Also in our affiliate prime segments where we've talked about doing a bunch of risk-based pricing over the last few years, given the competitive environment Doug just talked about, we've seen some opportunity to increase price there. And interestingly, our core APR which excludes the new distribution channels is currently higher than 2019 levels. So we definitely feel like we've taken some good pricing opportunities in the portfolio, that distribution channel pricing is closer to around 17%, 18%. So we like those loans. They have a lower loss -- expected loss rate. I talked about how they're performing from a delinquency and loss standpoint. But they do generate some lower yield. So that is a little bit of a headwind on our overall yield. But again, we like that business and we expect with this higher pricing assuming it continues, we're going to be watchful of course, with the competitive environment but we should start to see improvements in yield from pricing but also as this better performing front book grows as a percentage of the portfolio. When that will be, it's hard for me to say exactly and to what degree. But hopefully, that gives you some sense for what we're thinking.

Yes. No, no, it's very helpful. And maybe just a follow-up, digging into auto purchase. Obviously, it failed nicely here. Can you talk about the breadth of distribution? I mean every auto lender franchise and independent is pretty much hooked into dealer track as well as route 1. It's actually getting an application sent to you, that's the trick. Can you talk a little bit about just the profile, how many dealerships are you actually kind of receiving applications from currently? Are they all independents or you penetrated franchise. And are some of these prequalified loans that consumers are getting? Just a little more of the dynamic?

Yes. So we're, at this point, only doing a direct auto business with independent dealers. And we have a dealer network management team who diligences the dealers, does appropriate risk screening before they come on monitors them and also has a dialogue about sending us applications and sending us good applications. So you're absolutely right. It's easy to plug into something. You need to make sure you've got a relationship with the dealers. We've got a couple of thousand dealers right now that are active. We -- I don't think they disclosed that number as this thing grows, we'll talk more about auto. We're not in with franchise dealers now. That's an indirect business. And so ours is currently a direct business but we would consider the indirect business in the future. And like we said, we've got good relationships with them. We've built this slowly and deliberately. We've had a very tight credit box since the beginning, we have a direct relationship with the customers where we have a conversation with them before they get a loan and kind of go through the application and make sure they meet our underwriting standards. And so that's a little more sense of the business.

Our next question comes from John Hecht with Jefferies.

A lot of my questions have been actually asked and answered. I guess, one question is kind of on the -- not the distribution for auto loans but the distributions for the more core kind of consumer unsecured loans. Any changes in consumer behavior there? Is the reliance upon the branch network consistent with where it was a year ago? Is there more demand sort of just from a digital interaction perspective? And does the changes in that affect your strategic outlook for kind of how you perceive the branch versus online channels at this point?

Yes. Look, so we -- our distribution is multifaceted and quite diversified. We've got our branch network both for new customers but also for former customers and existing customers looking to a lending product or a different lending product. We've got digital which we've ramped up quite a bit in the last several years. So whether that's unpaid search on social media, paid search and we've also built up a very large email distribution base with former customers, people who came in and applied in the past, et cetera. So that's a very nice low-cost distribution. We have direct mail which we can quantify, we send out mail, we know response rates. We've actually decreased that some in the year. That will ebb and flow based on return profile and kind of the tightness of our credit box. And then we've got relationships with different distribution affiliates like Credit Karma, LendingTree, all those kind of affiliates. I think the big shift in consumer behavior we've seen in the last several years isn't so much the channel they show up in but it's how they want to engage with us. And that's -- we've talked a lot about our investment in digital. So 95% of people come in through the website or the app more and more people upload their documents through the app and the website, pick their loan, size, length, term, we've built out this co-browsing capability which we use extensively where even if there's someone in a branch booking the loan, somebody doesn't need to come in, except to exchange card title or those kinds of things, where we can be on the computer screen at the same time with them and take them through a very disciplined underwriting discussion, discussion about features and put them in the right loan for them. And then, we have a lot of digital engagement afterwards, whether it's checking your balance, payments, with our card rewards upgrades to the new card, etcetera. So we, like every other financial service institution or every company has had invest in a multi-channel, omnichannel platform where you can do business with us in person, on the phone or digitally. And we're continuing to lean into that digital engagement so that we are on par with everyone else and best-in-class for the places where we have competitive advantage. Broadly for the branch, we have less branches now than we did 5 years ago. And we're not widely growing our branch network but we like our branch network. We think it's a competitive differentiator. Customers tell us they like to be able to walk into a branch even if they choose not to, it's part of our brand and being in the community, working closely with people is super important. So branch will remain important but we've also been building out our central call center capabilities and our digital capabilities to complement that.

Okay, that's very helpful. I appreciate that. And then second question sort of on the ALL balance and Micah, forgive me if you discussed this but it's been pretty stable. I'm just kind of wondering kind of puts and takes. Is this the kind of proper allowance given the, I don't know, kind of the uncertainty around the macro outlook? And then kind of what are puts and takes that would cause you to move it one direction or the other?

Yes. I think for sure, John. This -- I mean, this is absolutely the right allowance ratio for us given the environment. As we've talked about, there's many inputs to the reserve what we are seeking to achieve with this reserve is that we're -- it's appropriate for the expected losses across the life of the portfolio and also builds in some cushion, if you will, for our expected macro outlook which we've said consistently over the last, I think, 4, 5 quarters at least, we have not really changed this, you've seen our reserve rate go from 11.44% to 11.66% -- or 11.62%, excuse me, over the last 5 quarters. So been very consistent. We've included a macroeconomic assumption in the forecast of 4.5% to 5% for a little bit of extra cushion. I think it's also important for us to continue to point out that you may not see that reserve need necessarily come from unemployment. It's also intended to cover other macroeconomic factors like elevated and continued levels of inflation over the lifetime losses in the book. But we talked a little bit earlier, I'll just reiterate it quickly within the portfolio of losses we're reserving for -- is basically the $21 billion of receivables that we have on the balance sheet, including cards. The vast majority is dominated by the loan book and we've got that front book, back book dynamic going on where the lower delinquency in the front book is sort of causing a lower reserve rate for that portion of the book. And the more seasoned back book with that higher level of delinquency, of course, by nature of it being delinquent, attracts a higher reserve. And so you're seeing a mix of those two things plus the unemployment level. And so our original CECL allowance on day 1, way, way back in January of 2020 was 10.7% or about 100 basis points higher than that, roughly speaking. So it has credit performance continues to improve, we would expect that 11.6% to gradually move down over time, of course, pending the outlook on the macro economy.

Our last question will come from Mihir Bhatia with Bank of America.

A lot of my questions have been answered. But I did want to just very quickly touch on this front book, back book dynamic again. Just want to make sure that -- it's probably more of a clarification question. What I'm trying to understand from your answer to Vincent's question and the comments about the back book being multiples of the front book. When do you expect the back book to be less of a contribute less very immaterial to your credit performance. Are we talking middle of 2024? Are we talking through 2024, maybe even into 2025. Just trying to understand the seasoning and payment paydown dynamics within that book?

Yes. I mean here, I think it's hard for me to pinpoint that given the -- we're continuing to deal with higher levels of inflation and higher levels of delinquency as a result in that back book. I think you've highlighted it but I'll say it again. The -- just because of the seasoning of that portfolio, it's going to have higher delinquency and so a little small changes in the performance of that delinquency relative to the benchmark is going to cause offset any positive impact from that front book, I think the best I can say is we've called out that we expect to be around 75% of the portfolio is going to be front book by middle of next year, that will give you a sense for how much you can think about in terms of the level of contribution. But without being able to forecast where the absolute delinquency is for both the front book and the back book. It's hard for me to really pinpoint an answer. And I think we need to have a little bit of humility in that area to say that consumers generally are still struggling with inflation. And for me to be able to predict where things might be 3 quarters from now is not really knowable.

No, that's fair. And then just the last question -- second question, I guess. Just given the comments about the slower rollout of the card product, any update on full year guidance for card receivables? And do you also think you're on track for the $100 million in capital generation by 2025?

Yes. Look, we haven't updated the guidance on it. We're managing the card to be a long-term profitable product for us. We don't manage the growth. We still like a lot of pockets. And so as you've seen, we're growing some. I think I did mention that we slowed the pace of the rollout given kind of the macro environment that we're seeing and we're just going to be cautious. So I think the ending card portfolio this year will be below where we thought they were going to be at the beginning of the year. We don't have any updates to 2025. We're going to have to just see how the next year happen. So -- but we're not going to push it, meaning looking out to the medium or long term, there's going to be a big business for us. It's going to be very profitable. The timing we will pay based on making sure every card we issue is to a customer who can be successful with that card, use it and also pay us back.

Okay. Now that's -- I think that's what investors want you to do. So...

Thanks, everyone, for joining us. We look forward to talking to you more offline and hope everyone has a great day.