OneMain Holdings, Inc. Q4 FY2021 Earnings Call

Welcome to OneMain Financial's Fourth Quarter 2021 Earnings Conference Call and Webcast. Hosting the call today is Peter Poillon, Head of Investor Relations. Today's call is being recorded. 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 two of the Fourth Quarter 2021 Investor presentation, which contains important disclosures concerning forward-looking statements and the use of non-GAAP measures. The presentation can be found in the Investor Relations section of our website. Our discussion today will contain certain forward-looking statements reflecting management's current beliefs about the company's future, financial performance and business prospects. And these forward-looking statements are subject to inherent risks and uncertainties and speak only as of today. Factors that could cause actual results to differ materially from these forward-looking statements are set forth in our earnings press release and include the effects of the COVID-19 pandemic on our business, our customers and the economy in general. We caution you not to place undue reliance on forward-looking statements. If you may be listening to this via replay at some point after today, we remind you that the remarks made herein are as of today, February 3, 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. So now let me turn the call over to Doug.

Thanks, Peter, and good morning, everyone. This morning, I'd like to take a few minutes to look back at our progress over the past several years. I will then review our strong financial performance for the quarter. I'll then spend some time updating you on our key strategic initiatives and finally, provide an updated framework for capital returns in 2022 and beyond. As we start the New Year, I want to reflect on the strength and resiliency of our business. Since I've been with the company, I have often said that our expertise and history with serving the non-prime customer, together with our conservative balance sheet with excess liquidity, uniquely positions us to drive outstanding business results through any economic environment. I believe the last couple of years have proven that point. During 2020, when the capital markets were dislocated and many competitors had to step out of the market, we continued to lend and serve our customers and we even issued debt during the depth of the capital markets dislocation in 2020. In 2021, when our originations had headwinds due to government stimulus, we stayed the course and we're positioned well when demand returned. We also built new digital and analytics as well as new product capabilities throughout 2020 and 2021, which position us extremely well for the future. So where does this lead us now? In 2022, we are right back on the course we laid out for you at our 2019 Investor Day. Most people would agree that 2020 and 2021 were anomalous years and the right way to look at our business is we are back on track after 2019, the last year that did not have any major exogenous events like the pandemic and the resulting $6 trillion of government stimulus, which depressed both originations and losses. In 2022, we expect loan growth of 5% to 10%. We expect losses to end the year between 5.6% and 6%, which is favorable to our long-term operating framework of 6% to 7%. And our return on receivables or profitability will be above 2019 levels even while we invest in new products and channels. With regard to the strength of our customers, let me remind you of a simple truth. We lend money to people who have jobs and income, and the single largest predictor of whether we will be repaid is whether people keep their jobs. In the spring of 2020, unemployment hit mid-teens. Today, it is around 4%, almost back to pre-pandemic levels. While this varies some by sector, it is a very constructive environment for our business, and we feel good about the business that we are underwriting today. As I've said before, we run our business based on the economics or capital generation of the business. This year, we anticipate generating between $1.15 billion and $1.2 billion of capital, and we are well on our way to exceeding our previously stated goal of at least $1.5 billion of annual capital generation in 2025, driven by the strength of our core business, combined with our new products and initiatives. Despite the pandemic and the resulting market turmoil, we are on track to generate approximately $4 billion of capital cumulatively over the next 3 years, barring any unforeseen macro events. Let me shift to some 2021 highlights. It was a very strong year for OneMain. For the full year, we grew our receivables by $1.5 billion and generated over $1.3 billion of capital. Our strong financial performance allowed us to continue to invest in our future and also return significant capital to our shareholders. While maintaining this sharp focus on our financial performance and service to our customers, we also achieved some important strategic milestones in 2021. We launched our differentiated credit cards, Brightway and Brightway+. We acquired and successfully integrated Trim, our customer-focused, financial wellness FinTech. We've developed new partner distribution channels, which are already making contributions to our growth. And most importantly, we helped millions of customers take steps towards a better financial future, advancing our mission to be the lender of choice for non-prime customers. It was an eventful year, and we look forward to maintaining the momentum and success through 2022 and beyond. I'm very pleased with our fourth quarter financial performance. In the quarter, we generated $334 million of capital. Fourth quarter charge-offs were 4.2%, reflecting the credit tightening actions we took in 2020 in response to the pandemic and the significant impact from government support programs in early 2021. Micah will provide an overview of our credit results, and you will see that our credit performance is on an orderly path of returning to normal levels as we get further and further away from government stimulus. As I've said before, this is healthy and expected. If our credit losses stayed in the low 4% range, it would mean we are not serving enough customers. We continued to generate strong loan originations in the quarter, resulting in a nearly $500 million increase in receivables in the fourth quarter. The healthy level of origination is driven by strong demand for our core personal loan products and bolstered by growth from our new products introduced as part of our recent strategic growth initiatives. As you can see on Slide 9, a sizable portion of our growth in the quarter came from these initiatives. Over the past year, we've been leveraging the strength of our balance sheet and operating model to diversify our product offerings and distribution channels. About $360 million of our growth in the quarter was from our core products, representing a healthy annual growth rate on its own. The incremental growth of approximately $140 million came from our new products and distribution channels, including cards and loans to higher credit quality customers. These are just a couple of examples of taking advantage of our scale, operating leverage, deep customer knowledge and superior data and analytics to drive profitable incremental growth. During the quarter, we made notable progress with the integration of Trim. Trim's slate of expense-saving tools like bill negotiation, subscription monitoring and cancellation, account aggregation and spend tracking in auto insurance price comparison supports OneMain's commitment to improving the financial well-being of hard-working Americans. When we help customers lower their monthly bills, cancel unneeded subscriptions or help them to track and reduce their spending, it results in tangible dollars that go back into customers' pockets. When a customer uses Trim, it also deepens our engagement with that customer, builds loyalty, and increases the chance of them doing future business with us. Key to our product diversification strategy is our recently launched credit cards, Brightway and Brightway+. In 2021, we were able to build a team, launched two separate credit cards and a mobile app and booked 66,000 cards by year-end. Take-up rates and our cost to acquire were both in line with our expectations. We are very pleased that the reciprocity aspect of the card where consistent on-time payments result in improved terms for customers is resonating very well with our target market. Recognizing it is still very early in the process, we are encouraged by several key metrics, especially the digital engagement. Over 90% of our approved customers have already downloaded and installed the app and nearly 90% of payments are being made in the app. Activation and spend metrics are in line with our projections, and we're pleased to see that customers are using the cards for everyday purchases, including groceries, dining out and gas. We're taking a very measured and deliberate approach to the cards rollout, recognizing the importance of validating our credit risk models before scaling. During the first half of this year, we are tempering volume, and we expect to begin meaningfully scaling in the second half of this year, and we'll continue to monitor credit performance closely. As you see on Slide 7, we are encouraged by the early results and the value that our credit cards provide to customers. As a reminder, the total addressable market for non-prime credit cards is $420 billion, five times the size of the installment loan market. So we anticipate this to be a source of growth for us. We expect our cards portfolio to generate $100 million to $150 million of capital by 2025, with more growth in the years beyond. Finally, let me shift to our capital allocation and return framework. Our business strategy, execution, and capital allocation policy over the past several years have paid off for investors. Our total shareholder return for the past three years has been 215% as compared with 100% for the S&P 500 and 84% for our peers. Our capital return program has been historically biased towards dividends, driven by the existence of a 40% shareholder, which limited liquidity in our stock. Over the past year, that shareholder has sold its stake. Liquidity in the stock has doubled as average daily volume increased from about 700,000 shares at the beginning of the year to about 1.4 million shares today. And we have been evolving to a more predictable and regular cadence of capital returns, including share repurchases. In the fourth quarter, we bought back 3.7 million shares. Our shares are trading at levels we believe are extremely attractive. And as such, we've been prioritizing buybacks for the last few months. We are incredibly confident in our business model and our strategic positioning over the next few years. So let me discuss our path forward. Our first and highest priority remains investing in the business. Our business generates a greater than 6% return on receivables, which translates into a return on adjusted capital of over 30%. We will continue to prioritize investment in balance sheet growth that meets these attractive returns. We will also continue to invest in digital, technology, data science, and new products. These investments are essential fuel for the approximately $4 billion of cumulative capital generation that we anticipate over the next three years. We will also continue to consider acquisitions to drive our strategy and shareholder value. We have made small investments in the FinTech space over the past couple of years, including our acquisition of Trim last year. We looked at several credit card platforms but chose to build our own card, taking advantage of the synergies with our customer base and operating platform. We will continue looking at other opportunities to enhance our business and we'll remain open to strategically and opportunistically deploying capital to acquisitions that drive shareholder value. Any capital that we don't deploy to our balance sheet or growth initiatives will be returned to shareholders in a manner we believe maximizes value. Yesterday, we announced that we are increasing our regular dividend by $1 or 36%. We've said in the past that we are shifting our capital allocation to be more consistent and predictable. This robust regular dividend is well within our comfort range and downturn planning scenarios. This $3.80 regular dividend translates into over 7% yield at our current share price. At this time, we decided to have a large step-up in our regular dividend, given our confidence in the business and as we transition our capital return policy to one that shareholders can count on year in and year out. We also plan to increase the regular dividend annually. Our Board has also authorized a $1 billion share repurchase plan, and we expect to utilize approximately one-third of that in 2022. We expect share repurchases to be a meaningful per-share growth lever to our already strong prospects for organic business growth. With that, let me turn the call over to Micah to take you through the financial details of the fourth quarter and provide our 2022 strategic priorities.

Thanks, Doug, and good morning, everyone. We had a great quarter as strong demand for our loans, combined with execution against our growth initiatives continues to drive healthy receivables growth. As Doug mentioned, net charge-offs were strong, coming in at 4.2% for both the quarter and the full year. We earned $262 million on a GAAP basis or $2.02 per diluted share in the quarter. On an adjusted C&I basis, we earned $310 million or $2.38 per diluted share, down 14% on a per-share basis from the fourth quarter of 2020. Recall that prior year results benefited from loan loss reserve reductions of nearly $60 million, whereas, in the current quarter, we've increased loan loss reserves by $32 million driven by solid growth in our receivables. Capital generation was $334 million in the fourth quarter, up 2% compared to the prior year. For the full year, capital generation was $1.3 billion, up 23% over the prior year. Managed receivables grew to $19.6 billion, up $499 million from the third quarter and up $1.5 billion or 9% from a year ago, reflecting strong consumer demand and the continued positive impact from our growth initiatives. Interest income was $1.1 billion in the fourth quarter, up 2% compared to the prior year, primarily driven by higher receivables. Portfolio yield was 23.3% in the quarter as compared to 23.8% in the third quarter. Fourth quarter yield reflects normal seasonal increases in 90-plus delinquency as well as the impact from new initiatives, including growth in our prime pricing and new distribution channels. As you can see on Slide 9, these originations are driving very attractive returns of 6%, but do shift some of the metrics when compared to our core loans. We anticipate full year 2022 yield to be at similar levels to 4Q '21. However, we expect the first quarter to reflect normal and seasonal 90-plus delinquency trends. While yield has moved around a bit, we expect to see continued improvement in our interest expense and other metrics and expect overall improvement in our 2022 profitability when compared to historical levels. Interest expense was $233 million for the quarter, down 4% versus the prior year despite an increase in average debt. Interest expense as a percentage of average receivables improved 51 basis points year-over-year from 5.4% a year ago to 4.9% this quarter and improved 19 basis points sequentially. We expect to see continued improvement in our interest expense over the next several quarters as our funding costs benefit from the last few years of balance sheet strategy and liability management. We remain acutely aware of the potential for rising interest rates, yet we are very confident in our projections as nearly 90% of our 2022 debt is already on the books at fixed interest rates. And as we look out over the next two years, we have $3.3 billion of debt maturing at an average cost of funds of about 5%. As a comparison point, we issued $3.2 billion at an average cost of 2.3% in 2021. We have created a great deal of flexibility in our funding profile as a result of years of balance sheet development and a very deliberate strategy to extend the duration of our maturities and shift our debt to a larger mix of unsecured. This strategy has supported our liquidity over the years and is now paying off in our financial results. Let me move on to other revenue, which was $161 million in the fourth quarter, up 18% compared to the prior year quarter. The increase was primarily driven by economics from our whole loan sale program, including $17 million of gain on sale revenue from the approximately $180 million of loans sold during the quarter. We anticipate this level of sales and gains to continue in future quarters. Finally, policyholder benefits and claims expense was $50 million in the quarter, up from $41 million in the prior year. Let's now turn to Slide 8 to review our originations and receivables trends. Originations were $3.8 billion in the fourth quarter, up 20% from 4Q '20. Our originations led to managed receivables growth of 9% year-over-year and 3% sequentially. As a reminder, our managed receivables this quarter include $414 million of receivables sold but serviced by OneMain for our whole loan sale partners. The credit performance of our portfolio continues to be in line with expectations and trending back to normal levels. Our early-stage 30 to 89 delinquency came in at 2.43%, up seasonally from 2.20% in the third quarter and up from 2.28% in the fourth quarter of 2020. 90-plus delinquency came in at 1.99%, also up seasonally from 1.57% in the third quarter and up from 1.75% in fourth quarter '20. Recoveries remained strong at $57 million in the quarter or 1.18% of average receivables. Recoveries remain above historical levels of 90 basis points and contributed positively to our fourth quarter net charge-offs of 4.2%. For the year, net charge-offs were also 4.2% as we had projected. As we look forward to 2022, we expect full year charge-offs to be in the range of 5.6% to 6.0%. Our loan loss reserve trends are shown on Slide 11. We ended the fourth quarter with $2.1 billion of reserves and a reserve ratio of 10.9%, slightly below last quarter and modestly above CECL day 1 levels of 10.7%. We increased our reserves in the quarter by $32 million due to strong receivables growth in the quarter. Turning to Slide 12. Fourth quarter operating expense was $348 million. Our full year operating expense was $1.3 billion, within our guidance for the year and just 4% higher than 2019 levels, even as we have accelerated investment in our business and generated significant growth in our receivables. Let's turn to Slide 13 for a little deeper dive into our expenses over the last few years. You see on this slide that we have maintained our core C&I expense, the dark blue portions of the bar graph, at a very balanced level. In fact, core C&I expense is flat to 2019 despite nearly 8% growth in average receivables and accelerated investment over that period. This reflects our disciplined expense management, operating efficiency efforts, and the operating leverage inherent in our business. For 2022, we expect modest growth in our core expenses and within our long-term operating framework of 3% to 5%. We have also been accelerating investment in our future in new tech, digital, customer experience, data science, and new products. In 2022, we expect to invest an additional $50 million in these areas, about 60% of which we plan to direct to growth-related investment in new products and distribution channels, including our credit card. The remainder, we plan to invest in our technology capabilities, digital and customer experience capabilities, and data science to drive growth and continue to enhance our underwriting. Even with these investments for the future, we expect our OpEx ratio to improve against 2019 levels as we continue to drive incremental operating efficiencies across our business. Let's now move on to discuss our funding, liquidity, and capital on Slide 14. As we discussed on our last call, in October, we issued a $1 billion ABS deal at a weighted average coupon of just 0.98%. Later in the quarter, we redeemed our $1 billion unsecured notes that were due in May of this year. Our next unsecured maturity is now March of 2023, giving us a good deal of issuance flexibility in 2022, as I discussed a bit earlier. During the quarter, we continued to enhance our liquidity position by closing a new $1 billion 5-year unsecured corporate revolver, which has enabled us to reduce our conduit capacity to $6 billion. Unsecured corporate revolvers are rarely available to non-investment-grade companies, and we believe our success is very much a reflection of our track record of strong business performance and our bank partners' confidence in our balance sheet and our business. Our total committed capacity now stands at our targeted level of $7 billion, which supports a liquidity runway in excess of 24 months under numerous economic scenarios. You see on the slide that we ended the year with $400 million of available cash and unencumbered receivables of $10.2 billion, so our liquidity resources remain robust. Going forward, we plan to use our secured conduit facilities as a source of flexible funding in between our capital markets issuance, driving even more efficiencies through our best-in-class balance sheet. We had $600 million of drawn conduit as of December 31. At year-end, our leverage was 5.5x, relatively flat to Q3, as strong capital generation in the quarter allowed us to repurchase $192 million of OneMain stock and return another $90 million to shareholders through our regular dividend. Going forward, we expect to continue to run our business within our long-standing leverage range of 4 to 6x. Let me end by recapping some of our 2022 guidance. We expect managed receivables to grow 5% to 10%, in line with our long-term operating framework. We expect net charge-offs in the range of 5.6% to 6.0%. We expect capital generation return on receivables to be approximately 6%. This target compares very favorably to 2018 and 2019 years that, of course, were unaffected by the pandemic. And as you know, we run our business to optimize capital generation and we expect to generate a very healthy $1.15 billion to $1.2 billion in 2022. As we incorporate the announced share buyback program, we expect capital generation per share to be between $9.10 and $9.50. With that, I'd like to turn the call back to Doug.

Thanks, Micah. OneMain occupies a unique and important place in the lending market for non-prime consumers. As many banks have vacated this space, we remain as a responsible place for customers to get access to credit at a fair price with excellent service. We pride ourselves on providing access to credit to our customers with a focus on ensuring they can afford it and pay us back. This means success for our customers and for our business. We've doubled down on our mission of improving the financial well-being of hard-working Americans and the foundational strength of our business and the investments in innovation are propelling us to our vision of being the lender of choice for the non-prime consumer. At the start of the call, I mentioned the strong financial results and some of the significant milestones achieved in 2021. I never lose sight of the fact that our success is a result of the effort, dedication, and accomplishments of our more than 8,500 OneMain team members who come to work every day to make a difference for our customers and our shareholders. I thank them for that dedication and hard work throughout a particularly difficult environment in 2021. Thank you all for joining us today, and we're happy to take your questions.

And we will take our first question from Michael Kaye with Wells Fargo.

You're seeing a large ramp-up in net charge-offs and delinquencies ahead of most of the consumer finance industry. Can you talk a little bit more about what gives you confidence this is just credit normalization and not a more broad deterioration in credit? Like for example, are there any underlying trends from your advantage point that give you confidence in any part of the portfolio that's overperforming or underperforming your credit expectations?

Michael, this is Micah. As you know, we underwrite by state. We underwrite by industry. We have a long history of credit profile in performance with this customer base. We also underwrite to income which is unique in the industry. We're constantly evaluating credit performance, and we're adjusting as we see results. Overall, I think consumer balance sheets remain strong. We feel really good about the overall performance of the portfolio. And that view is embedded in our 5.6% to 6.0% loss guidance for 2022. We remain focused on the long-term profitability of the business, but we feel good about both.

And I thought I heard Doug mention a 6% to 7% net loss operating framework. I was a little surprised it's not a little bit lower now, just given that some of those new products to higher prime originations, the distribution partnerships, the whole loan sales. I was wondering why that 6% to 7% doesn't really become something lower, let's say, 6% to 6.5%?

Yes. Michael, look, I think on an annual basis, we'll give you some sense of loss ranges. We really don't manage the business to losses. We manage it to return on receivables and capital generation. And so I think that's just a long-term framework that I wanted to remind everyone that we're well within and we're actually going to be under this year. And I think the way to think about it is we managed to risk-adjusted returns. And we have different profiles of different customers. And what we're looking at is the bottom line of the business. So that's how we think about it.

We will take our next question from Vincent Caintic with Stephens.

Okay. First, on the credit card, so excited to see that that's launched. Maybe if you could talk about the initial learnings there and what you're thinking about for illustrative economics of the card. And that pathway to $100 million to $150 million by 2025, any initial thoughts you can give on that path?

Yes. It’s still early days, but everything we’ve seen is positive. Our goal was to have 60,000 pilot accounts opened by the end of the year, and we are close to that target. We have sufficient accounts in the test phases of both our Brightway card, a lower credit line option, and Brightway+, which targets existing customers with higher credit lines and better uptake rates. Our customer acquisition costs have been excellent and better than anticipated. We’ve developed a strong digital-first card and an app that encourages users to engage with us. Currently, 90% of the approved cardholders have installed the app, and 90% of payments are processed through it, allowing us to foster deeper engagement with our customers. The next six months will likely be a cooling-off period during which we won’t issue many new cards, though we may issue a few. We are monitoring three key factors: the uptake of our card, usage of the credit line, and credit results related to our models, which will need another six months to evaluate. We expect to see a ramp-up towards the end of the year if the results meet our expectations. If not, we will still see growth in areas that perform well since we have various channels, card types, and customer profiles. Economically, we anticipate a return on receivables of 7% as we reach a steady state, which is favorable compared to our current product. We need additional time, but we are confident in our trajectory and will provide more information about profitability and milestones as we move towards 2025. Overall, everything looks promising, and we plan to proceed with caution to ensure we achieve the desired credit results.

Great. Next question. Can you explain how you arrive at the low and high ends of the range for the originations and also for the charge-offs? Does the charge-off range relate to the risk-adjusted return and will it be influenced by the yield we can expect in 2022?

Thanks, Vincent. Let me address the first part of your question and then I'll ask you to remind me of the second part. Regarding our guidance and ranges, we anticipate a 5% to 10% growth in managed receivables, which is informed by our overall operating framework linked to the market we operate in. We believe it's reasonable to expect that level of growth over time, so we begin the year with that outlook and feel confident about it. As for credit, there are numerous factors that could affect the range of 5.6% to 6.0%, such as unemployment, wage growth, and inflation. Importantly, we have a well-diversified portfolio by state, meaning state-level economic conditions are just as crucial as national statistics. Within our portfolio, delinquency levels are significant, but the speed at which delinquency turns into loss is also essential. In 2021, the ratio of accounts over 90 days past due to losses in the following quarter was lower than historical averages, largely due to continued strong performance in delinquency roll rates and strong recoveries. Both of these factors will influence the range of charge-offs and, to a lesser extent, receivables growth, which is the denominator. On the receivables side, following up on our operating framework, it is somewhat less sensitive to credit and macro factors. Generally, consumers seek credit when they are optimistic about the future, so a positive economic environment is vital. Competition is also a factor, but we are not encountering any barriers to growth in that area. Regarding your second question about net interest margin and yield, we expect the full-year yield to be in line with the levels seen in the fourth quarter of 2021. We anticipate that the first quarter might be slightly lower due to normal seasonal trends. However, we believe that our net interest margin will be strong next year, considering the significant tailwinds on interest expense, which we think will counterbalance the year-over-year decline in yield. Additionally, with our guidance on capital generation and return on receivables, we expect to have very strong performance relative to pre-pandemic levels.

We will take our next question from Kevin Barker with Piper Sandler.

Could you just clarify the term capital generation for the listeners here? I assume it's net income plus adjustments for any reserve build to reserve releases relative to the loan portfolio. Could you just clarify that?

Sure, Kevin. Yes, that's exactly right. So I come back to capital generation as it relates to the way we view our capital. We use for our leverage metric and adjusted capital measure, which is defined quite clearly in the appendix of our earnings materials. We look at loss absorption capital, which is a combination of our adjusted tangible equity plus our reserves after tax. So that forms the basis for our capital. When we look at capital formation, our adjusted capital is roughly $3 billion in that neighborhood. When we look at capital generation that we put out here, $1.15 billion to $1.2 billion, that becomes the capital formation of the business as it relates to our existing and beginning capital levels. So that capital generation is tied directly to the way we view capital and the way we manage and run the business. What it excludes, and you articulated it well, all it excludes is the loan loss reserve changes in our portfolio due to that, the way we look at those within our capital base.

And could you remind us the per share number you put out, I believe, was $910 million to $950 million, is that correct?

$910 million to $950 million, correct.

Okay. And then on your targeted reserve levels, you're at 10.9% on your portfolio today, you're guiding to lower net charge-offs for this year relative to what you've had in pre-pandemic levels. And it seems like you could bring that lower just given the shifts in the portfolio. Is there anything within the newer products and the shifts in the portfolio that would either impact the reserve level, whether it's net charge-offs or the duration of the portfolio?

Yes. I mean all those certainly could impact where we end up on the sort of resting reserve rate, if you will. We were at 10.7% when we installed CECL several years ago, and it was the first quarter of 2020, which is almost 2 years ago. So I will say the portfolio is different today than it was 2 years ago. We have some of these new products coming in. And we sit today at about 10.9% of receivables. So call that roughly $50 million higher than pre-COVID levels. I certainly can see if macroeconomic trends continue to be strong, and we expect and see strong performance in the portfolio. The coming quarters that reserve certainly could move back towards those day 1 CECL levels. I think there's a lot to still be determined. We tend to be conservative in our balance sheet, as we've said, and very aggressive in managing our business and our performance. So we take a degree of conservatism here with our reserving until we really feel confident with the level that we feel we can be sustained at.

We will take our next question from Moshe Orenbuch with Credit Suisse.

I think Micah, you had referred to the fact that your growth guidance has been consistent and went back to look and it was kind of the same pretty much in 2018 and '19. I think in 2018, you kind of came at the high end and ’19 a little bit above. As you look out now with the benefit of these other elements, can you talk about how kind of the new products kind of enter into that idea of selling loans? Like how should we think about those in the context of your 5% to 10% guidance?

Yes, thank you, Moshe. The 5% to 10% guidance reflects our new products and also incorporates our projected credit card balances for the year-end. We'll consider the complete picture of credit card and loan receivables, and we'll provide more detail on that in the future. The guidance also includes credit cards, new distribution channels, and our prime pricing, which aligns with past trends. We have a positive outlook on the consumer credit environment, which is why we're reaffirming the 5% to 10% guidance. This is based on managed receivables. By year-end, we expect to have just over $400 million in managed receivables associated with loans sold and serviced by our loan sale partners. We're selling around $180 million per quarter, so you can factor this into your year-end receivables estimate. Consider managed receivables growth, include assumptions for credit cards, add the $180 million of asset sales to the end-of-year balances for the loans we've sold, and account for some runoff, which will help you estimate the ending balance sheet receivables.

Understood. I should have included this in the previous question, but can you share any insights on your trends in January? Additionally, you mentioned that your efforts on the unsecured funding side are now yielding results. Is there an opportunity to increase the secured portion of funding throughout 2022?

Yes. That's a great question, and I appreciate it. We feel very positive about our balance sheet. Over the past few years, we have positioned ourselves to be able to take advantage of opportunities in our issuance. I believe there is a chance to increase the secured portion of our debt slightly. We have typically mentioned a 50-50 mix, which is not intended to be exact but rather a general guideline. We aim for a healthy balance between lower-cost asset-backed securities (ABS) and the efficient use of our receivables, while also leveraging the advantages and stability of unsecured debt for liquidity. Given the strength of the unsecured markets, we issued unsecured debt at rates of 3.5% and 3.875% in 2021. Those rates have increased, likely falling in the 4.5% to 5% range now. However, we have been strategic. The opportunities in the unsecured market have allowed us to extend our duration and liquidity, and we may now explore options on the lower-cost asset-backed side. We issued debt in August at 1%, a rate I never expected to see, but ABS rates have since increased a bit. We still believe we can issue in the 2% to 2.5% range. Overall, we feel confident, especially since about 5% of our debt is at a floating rate, giving us substantial protection against rising rates and providing flexibility in our issuance strategy.

And Moshe, this is Doug. Just hopping into your kind of first question, I just want to make sure people understand the way we see it, which is we think we're incredibly well positioned, our core product, our branches, we added digital distribution. We've added new products. We've done a lot of innovation. That's going to allow us to grow our balance sheet. As we've told you, we don't really manage the balance sheet to a certain growth number. We manage it to position it to serve the customers well and have a good return. So you have a growing balance sheet with a 6% return, that means we can grow our bottom line and generate capital. That means we can put more capital back into growing our balance sheet and allow us to also return capital to shareholders as we grow our dividend and do buybacks, which will allow us to grow our per share capital generation even more. So we see this cycle, obviously, growing the balance sheet is key to it, but we're going to be disciplined and we're going to grow it based on risk-adjusted returns.

And we will take our next question from John Hecht with Jefferies.

Doug, I think you mentioned tapering in the first half of this year. I just want to make sure I understood. Is that just in the credit card product or is that across the board? And if it's across the board, what's the kind of driving impetus there?

Yes. Let me clarify, it's not a universal approach. I was specifically mentioning the credit card aspect. Our strategy was always to introduce around 60,000 test accounts in the third and fourth quarters of 2021, followed by a six-month period to track payment history. This was essential to identify any delinquencies and to forecast future outcomes accurately. After this six-month timeframe and analyzing the delinquencies, we can gain meaningful insights. Essentially, it means that the credit card rollout will not be a consistent increase; it involves starting with over 60,000 cards, assessing credit quality, and then gradually increasing based on the validation of our credit models.

Great. I appreciate that color, that makes 100% logical sense to pursue it that way. Follow-up question is there's been the Fed loan officer survey or the bank loan officer survey showed a little bit of a pivot in underwriting for installment loans. And there's a lot of, call it, emerging participants, particularly in the digital channel out there right now. Doug, I wonder can you comment on the competitive environment and how that impacts your kind of ability to flex your underwriting model and any kind of impacts that has on just the overall business?

Yes. Look, I think in second quarter of 2021, a lot of people from what we can see through the data, opened up their credit box and there was a lot of competition. As you saw in 2021, we grew our balance sheet by 9%. And so we think we are very well positioned. We've been doing this for a long time. So we don't just open and close based on macro environments. We've got more proprietary customer data than any installment lender. And so we loan to people who can pay us back with very high NPS scores and customer loyalty. And a lot of the things you've seen us doing are making sure that in an evolving market environment, we stay competitive. So just under half of our loans are originated digitally now. Trim allows us to help customers in other ways and also increase engagement with customers. So it's a stickier customer. The card allows us to do lending to customers for daily transactions rather than a larger episodic transaction. And again, we're bringing people in with a $500 or $1,000 card product that will have the opportunity for them to cross-buy a loan and vice versa. And so Micah had talked a little bit about new channels. So it is definitely a competitive market. Anytime there's market dislocation, things usually open up some. We've done this for many years, and we feel very good about our competitive position.

And we will take our next question from Meng Jiao with Deutsche Bank.

I wanted to ask a question on sort of your appetite for future strategic acquisitions. Just wanted to get a sense on whether they might be similar to sort of your Trim acquisition in terms of bolt-on FinTech or sort of what you consider portfolio acquisitions as well. And then sort of separately, but related to that, how have valuations trended in the FinTech space over the past couple of months? Any color there would be helpful.

Our corporate development team has been very active, and we remain disciplined in our approach. We will consider acquisitions that we believe have the right return on investment and strategically enhance our position, but we will be careful. The pricing in the market is quite high, particularly for private companies, and although public tech markets have fluctuated and decreased somewhat, the multiples for many potential tech acquisitions remain elevated. We have made significant investments; for instance, in the case of credit cards, we saw various portfolios and teams available for purchase. Instead, we chose to create a highly synergistic credit card leveraging our scale, underwriting capabilities, distribution, and customer base, deciding it was more beneficial to build it from the ground up. We consistently analyze whether to build or partner in our undertakings. While I can’t specify what opportunities may arise, I can say we've explored numerous options over the past three years and have remained disciplined, undertaking only smaller bolt-on acquisitions. We will continue to prioritize discipline as we manage our shareholders' capital.

Got it. Great. And then secondly, just on the sort of the taper on the credit card in the first half of this year, is that just mainly based on your decision to see how that portfolio sort of seasoned or is there sort of anything else that leads to your decision to taper that in the first half of this year?

Yes, I want to be really clear. We started talking about the credit card a year ago, and this is the exact plan I've laid out repeatedly and publicly, which was second half of 2021, we put a bunch of pilot accounts on, and then we see how they season and make sure we validate the models. So there's been absolutely no change. This is the plan, and it's the plan we're sticking to.

And we will take our next question from John Rowan with Janney.

I just wanted to look at kind of your capital generation, and if we use the assumptions that you're going through 1/3 of your repurchase program and you're paying a dividend of $0.95 per quarter, it implies that you're actually going to wind up deleveraging the balance sheet quite a bit if given a lack of special dividends, can you kind of address that comment?

Yes, John, I’m not sure if you’re considering the capital we need to set aside for our anticipated growth this year, as that’s also part of the equation. If we take the high end of the range at $1.2 billion, the annual dividend at $380 million will cost roughly $470 million to $480 million, depending on how many shares we buy back. Within that range, about one-third of the $1 billion share repurchase is approximately $330 million. That gives us roughly $800 million in capital usage, which is about 70% of the total capital generation. The remainder could be utilized for deleveraging, but we also need that capital to sustain our current leverage as our balance sheet grows.

Well, in the balance sheet, the growth has picked up in your assumption for loan portfolio growth, correct?

That's correct.

Okay. Just to clarify, you provided guidance for capital generation per share, but during a growth period when your provision expense exceeds your charge-offs, your net income should be lower than your capital generation per share, right?

Right.

We'll take our final question...

Operator, I think we have time for one more.

I want to follow up on John's question. When I look at the capital generation, and I run the scenarios high end, 1.2, low end 1, 1.5 and I look at the loan growth scenarios of 5% to 10% and then factor in the distributions related dividend and repurchase, we see that excess capital generation and again, a high end is about $240 million, low end if you sort of have the most growth and the least capital generation, about $36 million. But most of the scenarios center around about $150 million to $175 million of excess capital formation. Following up on John's question, to the extent you do wind up in a situation at the end of the year where you're $100 million, $150 million ahead of cap gen needs, would the idea be to delever the business, would it be to increase the buyback? Or would you, at that point, consider another supplemental or special dividend?

Yes. We have integrated a significant amount of distribution into our regular strategy, and with our plans to approach the buyback in a more systematic manner, we've committed a considerable portion of our capital for this year. I think you reviewed the scenarios, and we will need to verify your calculations later. Ultimately, we may have leftover funds, or we may not, and in either case, our Board would definitely evaluate various options. As you mentioned, these options include reducing debt or increasing buybacks, depending on the situation at that time. We are also open to the possibility of a special dividend at the end of the year, if that is the direction we choose. For now, we aim to provide guidance so that people can factor in what is likely to occur with the majority of our capital. If we do have excess capital, we are adaptable and will have a serious discussion about how to proceed.

Got it. Yes. I believe the guidance is very helpful, and there is a reasonable amount of cushion included. If we were facing a situation with a $50 million shortfall, we would be very concerned about that. It's just a matter of considering what options we have to sustain return on equity and returns if things go well.

Yes. I mean, look, the way we look at it is the business is doing incredibly well. We generate a lot of capital. We don't lightly put out that we expect to generate $4 billion of capital over the next three years. And if we have excess capital at the end, we certainly will be very judicious in how we deploy it. And I think all options remain open.

Got it. I realize we're nearing the end here, but I want to ask one last question about loan growth. Are you currently using portfolio sales to manage that? What influences this behavior? I'm asking because we're seeing expectations in the card market that repayment rates will decrease. I understand your loans offer some optionality, although not the same flexibility as a card loan. How do you view repayment rates in relation to your loan growth goals?

I believe I heard two questions there. Regarding the whole loan sale program, we have previously mentioned it as a way to diversify our funding sources and our access to different types of capital. This program also provides us with strategic flexibility for the future by allowing us to consider originations that we might prefer not to put on our balance sheet, as they may be more suitable for whole loan sale buyers. However, we aren't utilizing the whole loan sale program right now to limit receivables growth. We have plenty of opportunities, as I mentioned regarding the funding markets, to continue adding to our balance sheet. We are merely looking to diversify our capital sources. As for payment rates, they remain very strong. We have previously stated that we have been receiving about $900 million to $1 billion in payments monthly. This figure saw a notable increase during the pandemic right after the stimulus, but it has returned to relatively normal levels, around the high 4% in our portfolio. This is all considered in our receivables guidance, which takes into account our mix of new customers and renewals, as well as all elements affecting receivables growth.

Yes, we appreciate it. Look, thanks, everyone, for joining us today. Our team is here. So if you have any questions, please feel free to reach out, and we look forward to speaking with everyone soon.

This does conclude today's OneMain Financial Fourth Quarter 2021 Earnings Conference Call. Please disconnect your line at this time, and have a wonderful day.