OMF - NYSE

Please standby we're about to begin. Welcome to the OneMain Financial Second Quarter 2024 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 in 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.

Thank you, Operator. Good morning, everyone, and thank you for joining us. Let me begin by directing you to Page 2 of the second quarter 2024 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, July 31st, and 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 Jenny Osterhout, 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. Good morning, everyone, and thank you for joining us today. I'll start by saying that we feel very good about our results in the first half of the year. The tightened underwriting standards that we've been operating with for almost two years are resulting in our credit metrics continuing to head in the right direction. During the second quarter, we also saw originations volumes start to pick up and we expect to see stronger originations in the second half of the year. We also continue to make progress advancing our long-term strategy of building world class credit card and auto finance businesses. Capital generation was $136 million this quarter, affected by the Foursight acquisition, which closed in April, and Jenny will discuss in a few minutes. Our receivables grew 11% year-over-year, driven by this acquisition of Foursight as well as our expanded product offerings. Total revenue grew 7% year-over-year. Even with continued tight underwriting standards, we've started to drive improvement in origination trends and the competitive environment is quite constructive for us right now, supporting our ability to increase pricing where appropriate. We also continue to use data science and product innovation to find profitable pockets of growth. We now see a path to $24.5 billion of receivables by year-end up from our original expectation of $24 billion. But I do want to emphasize again that we remain quite conservative in our underwriting posture. Let me spend a moment discussing the health of the consumer. Before I do so, let me remind you that while we monitor overall trends, we lend customer by customer based on their individual credit risk, taking into consideration geography, net disposable income, our proprietary data on current and former customers, and hundreds of other variables. I've talked in the past about the cross currents our customers face. On the positive side, from the macroeconomic data, we've seen the labor markets remain resilient and cumulative wage growth has caught up with cumulative inflation as compared to 2019. This holds true with our customer base as well. And for the customers, we are bringing into our business today, wages have caught up with everyday expenses and they have a higher net disposable income than they did pre-pandemic. However, many of our non-prime customers are still stressed about the cumulative effect of higher costs, particularly food, housing, and transportation. Our approach remains consistent to provide non-prime customers responsible access to credit, but to do so with a disciplined approach to underwriting. This allows us to continually serve this customer regardless of the macroeconomic environment. Looking at trends, our 30 to 89-day delinquency was 2.97%, down 31 basis points from the end of last year and in line with normal seasonal patterns. Adjusting for the continued growth dynamic headwinds that Jenny will discuss, our delinquency trends are better than normal seasonal patterns. Loan net charge-offs were 8.3% in the quarter, consistent with our expectations. We continue to feel very good about our newer vintages, which are performing in line with expectations. The front book now comprises about 75% of our receivables, and as that portion of our portfolio continues to grow, we expect our overall portfolio performance to improve. Our operating expense ratio in the second quarter was 6.4%, benefiting from our focused on disciplined expense management as well as the operating leverage of our business, which was enhanced with the acquisition of Foursight. We continue to demonstrate conservative management of our balance sheet and the strength of our capital markets access. This quarter we raised $1.9 billion of secured and unsecured debt. We used some of the proceeds to redeem our unsecured debt coming due in 2025 and our next unsecured debt maturity is not due until March 2026. Our balance sheet with staggered maturities, a diversified funding program, and a long liquidity runway, continues to be a core strength of our business and a competitive differentiator. Let me now discuss our credit card and auto finance products, both of which leverage our key competitive advantages and open up very large non-prime markets for us. During the quarter, we served 3.2 million total customers, up 19% from a year ago. Much of that growth is attributable to these new products. Our auto finance receivables were $2.2 billion at quarter end, including $1.3 billion of receivables from Foursight. Credit performance in the auto business is in line with our expectations and better than comparable industry performance. The integration of Foursight is going very well. We put together our organically grown auto finance business and Foursight into a single OneMain auto finance organization. This structure ensures that we have consistent go-to-market strategies across the entire business. We remain excited about all of the strategic benefits of the acquisition, including an experienced leadership team, great technology, and a franchise dealer network. We now have a scalable auto finance platform with access to a large network of both independent and franchise auto dealers and are very well-positioned to expand this business in a disciplined manner. In our credit card business, we added more than 100,000 accounts and $80 million in receivables in the quarter, and as of June 30, we had over 600,000 accounts and $466 million of receivables. We feel great about the key metrics of our card business and the BrightWay mobile app and product features that reward customers for on time payments continue to resonate well with our target customers. While we're maintaining a tight credit posture in cards similar to our other products, we continue to develop the business to position us for future expansion. We remain quite confident that both our credit card and auto finance businesses will be significant drivers of profitable growth in the years ahead. Let me briefly touch on capital allocation. Our top priority is to invest in the business to position us for ongoing success. We continue to lend to every customer that meets our disciplined underwriting standards and return hurdles and also continue to invest in new products and channels, data science, technology and digital capabilities that improve the customer experience and further advance our competitive positioning. Additionally, this quarter, we allocated some capital to the tuck-in acquisition of Foursight. As I mentioned earlier, this gives us the platform to continue to expand into the $600 billion non-prime auto finance market. We are also committed to a strong regular dividend, which is now $4.16 per share on an annual basis, delivering a healthy 8% yield at today's price. Share repurchases in the second quarter were about 150,000 shares for approximately $8 million. With that, let me turn the call over to Jenny.

Thanks, Doug, and good morning, everyone. Our second quarter was highlighted by continued revenue growth, good credit performance, continued expense discipline, well executed funding, and excellent progress on the acquisition and integration of Foursight, furthering our long-term objectives and multiproduct strategy. Second quarter GAAP net income was $71 million, or $0.59 per diluted share, down from $0.85 per diluted share in the second quarter of 2023. The current quarter GAAP results included purchase accounting adjustments associated with the acquisition of Foursight, which are excluded from our C&I adjusted results. C&I adjusted net income was $1.02 per diluted share, up 1% from the second quarter of 2023. With the acquisition of Foursight this quarter, we aligned our policies related to certain secured loans to ensure consistency and timing of loss recognition. This had no impact on our earnings. It simply accelerated losses on those secured loans with an equal offsetting reserve relief. It did, however, impact capital generation this quarter by $22 million. As a reminder, capital generation does include our loan losses but does not include changes in reserves. The resulting capital generation this quarter was $136 million, which compares to $155 million in the first quarter. We won't see this impact in future quarters. Managed receivables this quarter were $23.7 billion, up $2.3 billion, or 11% from a year ago. Excluding the receivables acquired with Foursight on April 1, managed receivables grew by 5% in the quarter as compared to last year. Second quarter originations of $3.6 billion were down 4% year-over-year. As Doug said, we have maintained our conservative underwriting as we continue to closely monitor the macroeconomic environment. However, this quarter we were able to take advantage of favorable market conditions and find pockets of growth to improve our originations trajectory as the quarter progressed. We utilized new data sources and tools to expand in certain segments, improve our offers and improve growth in originations. As a result, our new originations accelerated throughout the quarter and we now expect originations to increase in the second half of 2024 and push managed receivables closer to $24.5 billion by year-end. It is also worth noting that given the constructive competitive environment, as we've discussed in the past, we've been focused on improving pricing where appropriate. The average APR on consumer loan originations, excluding Foursight has increased by around 100 basis points from a year ago. Total revenue was $1.4 billion, up 7% compared to second quarter 2023, in line with our full year growth guidance of 6% to 8%. Interest income was $1.2 billion, up 9% year-over-year, driven by higher average receivables, including the impact from acquisition of Foursight, offset by a modest reduction in yield. Consumer loan yield in the second quarter was 21.9%. Excluding the impact of Foursight, our yield would have been 22.4%, which is up about 25 basis points from last quarter. So we are clearly seeing the accretive impact of our pricing actions on our loan book as well as the stability in our credit performance. Other revenue was $184 million, up 1% from the prior year, primarily driven by healthy growth in investment income. Interest expense for the quarter was $295 million, up $53 million versus the prior year, driven by an increase in average debt to support our receivables growth and modestly higher cost of funds. Interest expense as a percent of receivables in the quarter was 5.4% and continues to be impacted by our excess cash balances. This was a result of our proactive management of the balance sheet as we raised $1.9 billion of debt during the quarter at attractive coupons and used a portion of those proceeds to fully redeem our March 2025 bond late in the quarter. Excluding the impact of the excess cash, our interest expense would have been 5.1%. It is also worth noting that we have a healthy coupon on our cash in the current environment. Looking forward, we continue to expect full year interest expense of approximately 5.2%. Provision expense was $515 million, comprising net charge-offs of $496 million and a $19 million increase to our allowance, driven almost entirely by the organic increase in receivables during the quarter. I'll further discuss delinquency and loss provisioning in a few moments. Policyholder benefits and claims expense for the quarter was $47 million, compared to $44 million in second quarter 2023. We remain comfortable with our previously stated expectation of approximately $50 million each quarter. Let's turn to Slide 8 and look at consumer loan delinquency trends. Our 30 to 89-day delinquency on June 30, excluding Foursight was 2.97%, which is 31 basis points down since the end of last year in line with pre-pandemic seasonal patterns. If you adjust for the slower pace of growth in our book from our conservative credit box, our year-to-date 30 to 89-day delinquency trends would be approximately 25% better than pre-pandemic seasonal patterns in the first half of the year. You can see this in the chart on Slide 9. So while the year-to-date results look steady, we feel good because there are underlying improvements in the performance of our book that are masked by this growth effect. Front book vintages, which we define as originations starting as of August 2022, now comprise 76% of total receivables as compared to 71% a quarter ago. We remain pleased with the performance of the loans we are booking today and the performance of the front book remains in line with expectations. And it is worth noting that while the back book only represents about a quarter of the total portfolio, it still contains 43% of our 30 plus delinquencies. We are confident that as the back book runs down, there will be further improvement in our delinquency and loss metrics. Let's now turn to the C&I net charge-off trends shown on Slide 10. The net charge-off rate for consumer loans was 8.3% of average net receivables in the second quarter, down seasonally from the first quarter and in line with our expectations. And looking to the second half of the year, we expect continued seasonal patterns for net charge-offs. Recoveries remained strong in the quarter amounting to $75 million, or 1.4% of receivables as we remain opportunistic with our recovery strategy. Our loan loss reserve trends are shown on Slide 11. Loan loss reserves ended the quarter at $2.6 billion. Our reserves increased by $117 million, $98 million of which were associated with acquisition of Foursight. The acquisition also impacted our reserve coverage. Our loan loss reserve ratio was 11.5% on June 30, slightly down from 11.6% a quarter ago. Our reserve coverage of our legacy portfolio remains the same and given the current macroeconomic environment, we're comfortable with this level of reserves. Now, let's turn to Slide 12. Operating expenses were $374 million in the quarter, up 1% year-over-year, driven by the addition of the Foursight expense base in the quarter and our continued investment for future growth with some offset from our expense initiatives discussed last quarter. Our operating expense ratio in the quarter improved to 6.4% from 6.6% last quarter, benefiting from the inherent operating leverage from the acquisition of Foursight as well as our continued expense management discipline. We expect to continue to invest for current and future growth in our new products, technology and data through the remainder of the year and are on track for the full year operating expense ratio guidance of approximately 6.7%. Now, let's turn to funding and our balance sheet on Slide 13. During the second quarter, we raised $1.9 billion, comprising a $1.1 billion seven-year revolving securitization priced at a blended rate of 5.99% issued in April and a $750 million seven-year unsecured bond at 7.5% issued in May. The unsecured offering was one of our strongest executions to-date with significant demand and included more than a dozen new investors in our paper. As I mentioned earlier, we utilized a portion of the funds from our issuances to redeem the remaining $1.1 billion of our March 2025 unsecured bonds. This has significantly extended the maturity profile of our debt stack and we now have no unsecured maturities until March 2026, affording us even further funding flexibility over the remainder of this year and next. Wrapping up the balance sheet, our net leverage at the end of the second quarter was 5.8x, which is within our 4x to 6x leverage range, impacted primarily by the Foursight acquisition. Turning briefly to Slide 15. Our 2024 priorities, we continue to feel good about the priorities we laid out at the beginning of this year. As I said earlier, we now expect to end the year with managed receivables of approximately $24.5 billion, which includes about $1.3 billion from Foursight, as well as growth in originations in the back half of the year. We maintain our guidance of 6% to 8% revenue growth for the year. Interest expense is expected to land at approximately 5.2% for the year and we expect our full year net charge-offs will be in our 7.7% to 8.3% guidance range. Finally, we maintain our operating expense ratio guidance for the year at around 6.7%. I'll leave off with how I started. We're pleased with the quarter and are tracking to our full year 2024 strategic priorities. Importantly, we are also making excellent progress on key strategic initiatives focused on expanding products and capabilities that position us well for the future. With that, let me turn the call back over to Doug.

Thanks, Jenny. I'm very pleased with the results from the first half of 2024. The positive direction of our credit performance, improved pace of originations, and the continued progress in our credit card and auto finance businesses have positioned the company quite well for the second half of the year and beyond. We remain laser-focused on our customers and growing our relationship with them as we build on OneMain's position as the lender of choice to the non-prime consumer. I'm also pleased that in June, for the third year in a row, OneMain was named as a Most Loved Workplace by the Best Practice Institute. This honor is based on feedback from team members across the company about OneMain's great culture. I'm extremely proud and thankful to work with such a talented group of people across the United States and want to extend my heartfelt thank you to our team members for their continued commitment to excellence as they support each other and serve our customers. With that, let me open it up to questions.

Thank you. The floor is now open for questions. [Operator Instructions]. Our first question will come from Terry Ma with Barclays. Please go ahead.

Hey, thanks. Good morning. I think you indicated --

Hey, Terry.

Hey, thanks. I think you indicated in your prepared remarks that there was a policy adjustment for Foursight in the quarter. It looks like it impacted the charge-off ratio, which you reported as 8.29%. But based on the dollar charge-offs, I'm getting something higher. So maybe just walk us through what the adjustment was, why you made it and what's the right charge-off metric for investors to focus on?

Hi Terry, it's Jenny. Thanks for the question. Let me start with why we did it, and then I can walk through a little bit about what it means. So we acquired Foursight and when we did that, we aligned our practices, which is pretty common when you do an acquisition. This brought forward the timing of loss recognition for certain loans that we have secured by an auto. And I said this earlier, but there are some really important points to keep in mind. The net charge-off increase was offset by an equal amount of reserve release. So there was no impact to net income. There was impact to capital generation because cap gen does include losses but does not include changes to reserves. That impact was $22 million to cap gen, and that's an after-tax impact. And remember, we have a 25% tax rate, so it's a $29 million impact on losses and an equal $29 million release on reserves. And that increase will not repeat in future quarters. So you shouldn't include it for your annualized loss rate.

Got it. That's helpful. And then as a follow-up just on the delinquency trends, you mentioned, 30 to 89 delinquencies ex-Foursight of 2.97%, which was better than seasonal trend. But I guess, in terms of the year-over-year increase, it's still increasing. And I think the magnitude actually is greater than last quarter. So maybe just talk about your confidence in the credit outlook and maybe peak charge-offs this year. And I guess, do we need to see that 30 to 89-day delinquency metric to start decreasing year-over-year in the back half to get maybe lower charge-off trends next year? Thanks.

Okay. Let me take that in a few pieces, Terry, this is Jenny again. First, let me take on peak losses. Really, our view hasn't changed since the first quarter. We're confident in losses are going to go down for the rest of the year. And sitting here today, we like the trajectory of our credit performance. In terms of our guide for the annualized loss rate, our 7.7% to 8.3% guide we maintained, and you should expect that for the full year. So we're feeling good about our guide and good about the trajectory for the rest of the year.

Got it. And what about the outlook past 2024?

We don't provide guidance beyond 2024, but.

Okay. Great. Thank you.

We'll take our next question from Moshe Orenbuch with TD Cowen. Please go ahead.

Great. Thanks. Doug and Jenny, you talked about seeing -- expecting better growth and resumption of that in the second half. Could you talk a little bit more in detail about what you're seeing, whether it's the competitive environment, just a little more fleshing out of what you're seeing both from your borrowers and the competitive environment that kind of led you to that point?

Yes. Thanks, Moshe. A couple things. One, as you mentioned, we slightly increased our guidance of what we thought our ending net receivables would be. And near the end of the second quarter, we saw an uptick in originations. I want to put it in perspective though. First quarter we were -- our originations were 10% below first quarter of 2023. This quarter we were 4% below 2023. So while we've seen an uptick in originations and seen some light with growth and the trajectory is positive, we still have a very tight credit box. We still have had higher pricing where we like the trade of a little bit lower volume, but more profitability. So I just want to make sure it's tempered. I think from a competitive environment, it's very constructive for us right now. I mean, as Jenny mentioned, we've increased average APR by 100 basis points or close to that over the last year, and we're still seeing a nice uptick in volume. There's plenty of competitors in the market, but there are some competitors who have pulled back. Most banks, credit unions, and some of the digital competitors have moved to more prime and aren't participating as much with our customers. So that's very good for us. And then we actually have now a suite of products, notably even in our core loan product. Given that we have a secured product, which gives us collateral and lower loss content, we can still be in the market making loans to people who have at a lower credit profile, but still will meet our 20% return hurdle. So in general, we still are very tight on the credit box. We're not increasing the risk we're taking on, but we're finding pockets of growth. And so together with the pockets we're finding and the competitive environment, we feel very good about it.

Got it. Thanks. Maybe as a follow-up, you talked a little bit about the integration of Foursight with your core auto finance business. Maybe if you could just flesh out a little bit as to how that is going to impact your plans for growing the auto business at OneMain over the course of the next year or two.

Yes. So when we bought Foursight, there were several key factors, and I've talked about them before. One is they've got a great team overall and a great executive team. Their CEO, Mark Miller, is now going to be our Head of Auto across OneMain, our purchase money auto product. They've got a tech platform that we did a lot of diligence on. We like the architecture, we think it's scalable, and that'll be the core of our auto tech platform. Our -- we have our traditional personal loan secured by an auto, where somebody's looking for a loan and we buyout their auto loan and make it a secured loan. So that's not a traditional auto loan, that's a different product, but we've also built our own portfolio, which is close to $900 million of direct auto loans. We've built an independent dealer network organically. We did not have a franchise dealer network, which is a different business. And so what we've done is by buying Foursight, we added the franchise dealer network. Now, we're going to be able to work with both franchise and independent dealers have a consolidated sales force across the U.S. We're putting our collections and collateral management teams together. There'll be a unified auto credit team. I think in terms of growth, we are being deliberate. We are nothing chasing growth across any of our products right now. We have very tight credit boxes across personal loans, auto and card. But as I've talked about before, Foursight gives us now a platform that as we scale this business deliberately, we'll be able to build it over time. I imagine the significant growth will happen once we feel that some of the macro uncertainty is cleared and things have turned fully.

We'll go next to Michael Kaye with Wells Fargo. Please go ahead.

Hi, I was hoping you could talk about the trend going forward with asset yields at least for the second half of the year. You have the lower yielding auto finance continues to grow in the mix, but there could be some offset from the higher personal loan APRs. Any sort of guidance on that?

You heard me mention -- hi Michael, this is Jenny. You heard me mention that excluding Foursight, our portfolio yield in the second quarter was 22.4. So that's up 25 basis points from the first quarter, and that's really from those pricing actions that we took in our personal loan book. And so with Foursight, obviously, consumer loan yield went down modestly from the first quarter. And there are a number of things that are going into that, so one is those pricing actions we've discussed, which are about 100 basis points and they are starting to take hold, but they're going to take full effect throughout the year. So there's still some momentum on those and offsetting that in yield is the continuing impact of the current macro environment. So as that improves, our yields will get better. And then there's also the impact of Foursight and our auto business, which is lower yielding but also has lower loss content. So we like that trade-off. Obviously, we're choosing to make that trade-off. We like the lower loss volatility for lower yield. But remember, we're guiding to that 6% to 8% revenue growth, which includes some of the cards revenue in the quarter. And today, as we sit here in this quarter, we were at 7%. So going forward, we want to also look at revenue and yield. And then you asked for the year, but over time, in a normalized environment, you can expect personal loans to come closer to 23% and 24% in terms of their yield and auto should be in the 15% to 17% range. So it really depends then on the product mix of that portfolio going forward, and that's sort of more of a long-term trajectory in a normalized environment.

I mean, could we expect like as big of a quarter-on-quarter increase like you had in Q1 ex-Foursight in Q3?

I would think of it more like flat in terms of what you would put for the go-forward for the year.

We'll go next to Rick Shane with JPMorgan.

Thanks, everybody for taking my question. Look, there are a lot of moving parts this quarter, but it looks to me like the repayment rate on the core portfolio slowed down a little bit. Is that correct? And can you talk about the trends there and how much that is potentially contributing to the higher year-end loan growth expectations.

So we continue to see good customer payment behavior with early payoffs that are continuing to trend a little below our pre-pandemic levels. So on an early pay perspective; those have come down from the early 2022 peak. But we think that this trend is really partially driven by this constructive environment that Doug spoke about earlier as they're not refinancing away from us and going to the competition.

Got it. So you attribute this more to stickiness of the loans not going away versus some change in individual payment behaviors or some factor that's driving that?

Yes. And I think really, as we think about our customer payment behavior, I mean, I wouldn't -- I would not attribute it to a change in customer behavior and more to sort of the environment and access.

We'll hear next from Mihir Bhatia with Bank of America.

Hi, thanks for taking my question.

Hi, Mihir.

Just starting on credit, just firstly, I just wanted to clarify, the guidance for credit losses for the full year, does that include Foursight and like the noise from this quarter, like or should we like use 8.3% for this quarter as the base? And just want to make sure I understand if there's any moving parts there?

So that -- thanks, Mihir. That 8.3% -- that 7.7% to 8.3% does include Foursight and you should use 8.3%. As you see from our guidance, we haven't made any changes, it would be within the range, and we remain pretty comfortable with that range, and it includes Foursight. And one way to think about this is, you saw delinquency improve in the first quarter. And then that comes into our charge-offs two quarters later. So in the third quarter, you'd expect to see the impact from that delinquency rate from the first quarter.

Got it. And then just sticking with credit, I wanted to just understand a little bit more just the dynamics in the front and back book, right? So I guess, just a two-part question here. In terms of the back book, the -- are we past the worst of the loss period, it looks by our calculation, the delinquency rates on the back book are still increasing, but I understand the book is getting smaller. That might have an effect there. But -- so just trying to understand like from a cumulative loss vintage curve perspective, do you think you're past the worst of the losses in the back book? And then on the front book, is it trending like I think 2019 was the year we had talked about in the past as like "normal year". Is that the right way to think about the front book credit performance? Thanks.

Yes. Let me take your second question first on the front book. You can think of our benchmark as pre-pandemic, so you can look at 2018 or 2019. And we like what we're booking there and we see it performing in line. And you can think of also as in line as our 6% to 7% loss guide for the front book. And we are seeing that perform. The back book is about 25% -- 24% of our receivables, so about a quarter of our receivables that makes up 43% of our 30-plus delinquency. So clearly, it's still impacting our credit metrics. It continues to run off, and it shows the characteristics of a loss curve that are pretty typical for an aging portfolio. And remember, as the portfolio ages, it goes up the loss curve. So really, right now, what we're focused on is the front book and its performance. If you looked at our 30-plus metrics on the front back book, you'd see typical increases on that back book.

We'll go next to John Rowan with Janney.

Hi, good morning. Just a clarifying point on the last comment on the charge-off rate. So you said we're using the 8.3% charge-off for the quarter when calculating the full year relative to guidance. But the 8.3%, if I'm not mistaken, excludes credit card loans, but the consolidated charge-off guidance for the year would include credit card loans. I just want to make sure that we're comparing apples-to-apples. I get it includes Foursight, but the exclusion of credit card loans from consumer loans relative to the inclusion in C&I, I think is a little confusing.

Yes. So our guide includes cards and is for the total company. And this quarter, our total company loss rate was 8.5%.

And so we're using 8.5% is what's going into 8.5%, not 8.3% is what's included in the total charge-off guide for the year, correct? And that would be also 7% for the first quarter as well, right? That would be the consolidated charge-off.

Exactly.

Okay. I just wanted to -- because I think the prior comment, it would have been a little confusing based off of that. Okay. And then just quickly, so the expense guide for the year does indicate a relatively sharp ramp-up in the back half of the year, right? You were at for the first half of the year, 6.5% operating expense ratio. So obviously, the average out to 6.7%, you have to go up pretty materially. And it's -- based on my math, it certainly exceed $400 million a quarter in operating expenses. Is that correct?

So as a reminder, last quarter, we talked about some of the expense actions that we took. And this quarter, you're seeing the full impact of those and you're also seeing the impact of us acquiring Foursight who has great operating leverage. We also see great operating leverage in our business and see it as a real strength. Just to give you some context, a year ago, we were at 7.1%. So we're really moving in the right direction. I think you're just seeing sort of a very low point this quarter. And it's because of those two pieces that I just mentioned, and we still feel confident in that full year guidance of 6.7%. And that's what we're doing here is trying to demonstrate a good balance between discipline, cost management and focus and investment for the future.

No, I get it. So the investment piece is what I would assume brings up the operating expenses for the back half of the year.

Yes.

Okay. All right. Thank you very much.

We'll go next to Vincent Caintic with BTIG.

Good morning. Thanks for taking my questions. Kind of wanted to sort of going back to credit, I wanted to maybe dig in by product line sort of what you're seeing with credit performance if you could. So I guess to your prior point about the 8.5% includes credit card the 8.3% doesn't. So maybe if you could talk about like how the different product categories are performing. That would be helpful. Thank you.

Yes. I'm happy to take that, Vincent. On cards, our 30-plus was at $10.8 million this quarter, and our net charge-offs were at 16.5%. And remember, we have testing that's still flowing through these and we've said, we're booking loans that will have normalized losses in the low teens. We also have the ability and cards to price for the risk that we're taking, and we really like the overall returns that we're seeing. We're running this pretty cautiously for now, and our focus is on risk-adjusted returns. And if you go back to what we said on Investor Day, we're looking for an over 20% risk-adjusted return and we think that's a pretty good trade and really attractive as we scale. On auto, we report based on consumer loan delinquency trends, which is auto and personal loans together, and that's the 8.3% number I mentioned earlier, as compared to the overall 8.5%. And as Doug mentioned earlier, we've seen our book outperform the industry during this time period. But we're pretty cautious on growth of the book, and we're looking now at integrating Foursight, bringing that business together and starting to think about growth and preparing for that.

Let me just add generally because there's been a bunch of questions on credit. One is across the company, we like the trends that we're seeing. I think in our consumer loan, excluding card and this holds for card, but I'm speaking specifically for consumer loans because I think that's where the bulk of our delinquencies and losses come from because the cards are still a very small portfolio. The improvements that we saw in the first quarter have held into the second quarter. And if we look broadly at the consumer, we do feel like we have an inflection point where income now -- this holds for the customers we're bringing on to our books now. Income has caught up with cumulative inflation. And so consumers do have net disposable income that should bring them back to normalized kind of credit trends. I also mentioned we still are just being super cautious. And across all of our products, as we run our models to make sure we get to our 20% return on equity for the equity we put in. We're taking what our model would say around loss content and we're putting 30% stress on that. So the loans we're booking today, whether they're auto or extending credit and cards or personal loans we've got cushion. And that cushion means we have a tighter credit box, so we're booking less loans. But we really like the trends across the trends are all moving in the right direction. But as all of you know, we're still in an environment where there's some caution.

Okay. Great. That's very helpful. And that segues to my next question. So I'm just wondering if you're seeing any differences in the consumers you're originating or you're seeing your applications going forward, you spoke about the competitive environment getting better. So I'm wondering if maybe the credit quality of the consumer you're seeing is better than your typical average. And in terms of what the consumer is looking for, we're seeing, say, credit card rate pricing increasing a lot is encouraging, you're able to pass along price. But I'm wondering if you're seeing maybe more credit card deconsolidation or things like that, we might have a better quality customer who's willing to accept more price for OneMain loan? Thank you.

Yes. Look, we continue to have the majority of our customers. We're booking in our higher credit quality customers than we were pre-pandemic. I think I gave the last call some of this data, and it's held true. Wages in general from 2019 are up around 25% for the customers we're bringing on to our books. But as we put together a basket of inflation, everyday expenses rent and housing, medical care, food, energy, that cumulatively is up about 20% to 25%. This -- and again, this is aggregate across like all the customers we're bringing on. What that leads to is higher net disposable income for the customers we're bringing on. So they have more cushion once they have their income and all their expenses to cover the loan that we're giving them and any other expenses that we have. So the answer is, in aggregate, customers have more cushion, more net disposable income, more excess cash flow right now than they did pre-pandemic. Of course, every customer is different and you still have customers who have to juggle a set of expenses, have unexpected expenses come up. But I think in general, we're feeling like this year, this first half of the year, we've hit this inflection point where incomes have caught up with expenses, which should help credit trends going forward.

We'll go now to Mark DeVries with Deutsche Bank.

I was a little surprised that you haven't tightened up on the guidance range yet for charge-offs given kind of half a year is in the books and current delinquencies are a decent read on kind of six months forward. So what's keeping the range relatively wide? And what kind of scenario gets you to the high end versus the low end?

Yes. The only changes we made, Mark, were changes that are outside of the guidance. Anything within the guidance we left as is, and we'll talk about it more as the year goes on. So we just -- we haven't given any change in guidance.

Okay. Fair enough. Just given some of the positive commentary on still feeling good that the first half of the year is a peak in charge-offs and some of the improving trends you're seeing. Any thoughts you can share on kind of where you see the reserve ratio trending over the course of the year?

Thanks for the question. We've said before that we're going to hold our reserve rates steady. And so you can see that we brought on Foursight and with the impact of the policy alignment we mentioned earlier, our reserve rate -- our coverage ratio went from 8% -- 11.6% to 11.5%, which is really quite modest change in coverage, but I would expect that to continue unless you see a major shift in the macro environment. So I wouldn't expect to see some sudden change in our reserve levels. I think we'll need to feel very good about the future in order to make changes to reserves.

Okay. And then just one last question for me. I just wanted to clarify that the raised receivables guidance does not assume any kind of loosening of the credit box, and if that's true, what are you looking for? Is it the same type of significant improvement in the macro to get a little bit lose or other credit box?

Yes. We have not loosened our credit box. I think what we would need to see to open; a lot of it is we just need to see the recent vintages continue to perform well. And again, we're taking a conservative posture. I've said this before. We don't manage the company to growth. We may be leaving money on the table. But given that there's still some uncertainty in the macro, we're being careful. I think there's the just period of stability in credit headed in the right direction is one of those. We also do weathervane testing. So we're always testing just below our credit box and we're testing around different states and geographies, different risk grades, different product type secured, unsecured different kinds of customers, new customers, former customers, customers we have on our book, which want to extend into a larger loan. And so as we see those tests coming well over our 20% return on equity profile, those will be the pockets that we'll start to open up in. And so again, we -- the credit box is not going to be managed as in aggregate, it's managed in very specific pockets around the kind of variables that I talked about. And so look, I think the time will come and we could see our view is this is -- consumer lending is a cyclical business. And you can see a world where the consumer is feeling a lot better. Interest rates are coming down; credits getting much better and a bunch of things could be moving in the right direction. We feel pretty good that even in a tricky environment, our metrics are now both moving in the right direction where we've seen a modest uptick in origination, and we see the credit trends moving in the right direction.

We'll go now to David Scharf with Citizens JMP.

Yes. Actually, my questions have been answered. They've been largely around what you just addressed, Doug, the credit box. But maybe I try to phrase it a little differently, because it was interesting commentary about consumer wage growth, cumulatively having caught up with inflation, and it almost sounded in your prepared remarks like you said, it's just that the consumer maybe still feel stress and hasn't recognized that. If household liquidity in net disposable income have caught back to 2019 levels, as we think about the indicators that would allow you to more broadly widen the credit box, is there anything in kind of the broader macro environment you're waiting on? Or is some of the weathervaning as you described it in place and you may feel comfortable getting indicators on some of this testing sooner rather than later?

You know what; I'm going to repeat myself a little bit because I just went through it. I mean, we want to see our book continue to perform well over a period of time. We are going -- the weathervane, the pockets we look at is when we decide to open, it won't be a big bang. It will be very specific. We still have the 30% stress overlay that isn't an overlay we're seeing. But to put it in perspective, the 30% stress overlay that we put on our book in August of 2022 when we did our major tightening is the uptick that you would see if unemployment went to 5% to 6%. So the big macro factor we're watching is how are we -- how is the Fed and how is the environment working around kind of interest rates and what does that do to employment rates. And so we look at all of those. But the main factor of our book is not macro. It's what do we see, what's the proprietary data we have, what are the applications that are coming in and where are we seeing our credit trends. Again, not in aggregate, but by channel, by customer, by geography, by product, and that's where we'll see some opening.

Got it. That's helpful. And maybe just a follow-up on that. As we think broadly about how you're underwriting and then the credit box unfolds. Should we be thinking about personal loans any differently from auto and specifically, there are so many things that are nuanced in the auto market. Obviously, loss rates are going to be also improved by recovery rates, which are improved by collateral value, used car prices. Are there differences we should be mindful of or if there is a more broad loosening eventually, should it be felt equally among your asset classes?

Thanks. I'll take it. It's Jenny. So they are different asset classes, and they move differently. And I think what you heard Doug describe is, we're mostly looking at our books. And so you're looking at those individual books and you're looking at pockets within those books. So it comes to these -- you are talking about growth as if it's a singular thing that happens. But really, these smaller decisions that we're making about certain segments and sub-segments based on certain products, whether it's secured or unsecured, and what channel they come in and their risk -- there's a variety of pieces to it. So I do think and you're doing the scene -- on auto, you're doing the same with a different credit box. And you're right, it is different. It has to -- you have a different set of recovery strategies and there's collateral, et cetera. So I do -- I would think of them as slightly different. I think they move at slightly different times. And really, we're looking at the individual books and what we see within those individual books.

Yes. We are out of time on that specific question, we're happy to follow-up. And even within our auto book, franchise dealers, a lot of it is you're managing around the collateral. And there's different delinquency patterns and there's different collection patterns, and we're happy to get into that as a follow-up and on further calls. But let me just end by saying, we do feel good about the quarter. We do feel good about the trajectory of credit. We're encouraged by the slight uptick in originations, which you didn't see the full effect of in the quarter, and that is continuing today. And on card and auto, we now are really setting the base, so that when we do feel we have clear -- more clarity around the macroeconomic environment. We've got really nice base platforms that we can grow from. So we're around. We're happy to do follow-ups with all of you, and thanks for joining the call and hope everyone has a great day.