OneMain Holdings, Inc. Q2 FY2022 Earnings Call

Welcome to the OneMain Financial Second Quarter 2022 Earnings Conference Call and Webcast. Hosting the call today from OneMain 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. Good morning, everyone, and thank you for joining us. Let me begin by directing you to Page 2 of the second quarter 2022 investor presentation, which contains important disclosures concerning forward-looking statements and the use of non-GAAP measures. The presentation can be found in the Investor Relations section of our website. Our discussion today will contain certain forward-looking statements reflecting management's current beliefs about the company's future financial performance and business prospects, and these forward-looking statements are subject to inherent risks and uncertainties and speak only as of today. Factors that could cause actual results to differ materially from these forward-looking statements are set forth in our earnings press release. We caution you not to place any undue reliance on forward-looking statements. If you may be listening to this via replay at some point after today, we remind you that the remarks made herein are as of today, July 28, and have not been updated subsequent to this call. Our call this morning will include formal remarks from Doug Shulman, our Chairman and Chief Executive Officer; and Micah Conrad, our Chief Financial Officer. After the conclusion of our formal remarks, we will conduct a question-and-answer session. Let me turn the call over to Doug.

Thanks, Pete. Good morning, everyone, and thank you for joining us today. This morning, I'll take some time to review our financial performance in the quarter, discuss the credit and macroeconomic environment, and also provide an update on our key strategic initiatives. I'm pleased with our financial performance in the quarter as we generated $275 million of capital, and demand for our loan products remained quite strong. Originations were $3.9 billion, up modestly year-over-year. Similar to last quarter, a healthy demand for our core personal loan product was supported by our expanded products and new distribution partnerships. The strong originations in the quarter led to solid managed receivables growth of 10% year-over-year. Loan losses were 6%, below second quarter loan losses in previous years before the pandemic. In a difficult funding market, we continued to show the strength of our balance sheet by raising more than $1.5 billion, while also improving our liquidity. With regard to the macroeconomic environment, over the last several quarters, we've discussed our expectation that credit performance will follow an orderly path to normalization. Through the first quarter of this year, that orderly path was evident in our portfolio performance. We also said that we would be monitoring credit performance closely and be prepared to act in this evolving economic environment as stimulus wears off, savings decline, and inflation persists. In May, we began to see an uptick in early-stage delinquency for certain lower credit quality, lower FICO customers, primarily concentrated in 2021 vintages. We closely track various sources of credit performance of the nonprime consumer, including ABS trust information as well as other public industry sources. It is clear to us that there has been an increase in early-stage delinquency across the nonprime space over the past couple of months. Having said that, our higher credit quality customers have shown performance very much in line with our expectations, and we continue to see very strong back-end collections and recoveries that are contributing positively to our charge-off performance. As you know, what distinguishes us in the nonprime space is our long history with this customer and our ability to adjust our underwriting quickly when needed. We began selectively tightening our credit box as far back as late 2021, including reducing assumptions of collateral values, adjusting our definition of thin file, and enhancing verification requirements on certain new loan applicants. We've taken more significant tightening actions in the last 2 months. We feel very comfortable with our current credit posture, having limited underwriting in the higher risk segments, and we continue to monitor the environment closely and will remain prepared to make further adjustments as necessary. Over the past few months, we've seen some competition pull back even with better credit quality customers, presumably due to a lack of balance sheet funding for loans. This has created an opportunity for us to originate higher credit quality business and continue to drive receivables growth despite the credit adjustments we've made. We like this competitive positioning, using our incredibly strong balance sheet to move our overall portfolio to higher ground as we are starting to see some challenges in the lower credit quality consumer. Given what we are seeing, we now expect net charge-offs for the year to end about 50 basis points higher than our original range of expectations, which is still well within our long-term target range, and we'll continue to have robust capital generation. As a reminder, we underwrite our loans to a minimum 20% return on equity hurdle. This gives us significant cushion. Even the current vintages that have shown more elevated delinquency than anticipated in May and June, in aggregate, are expected to remain very profitable with returns well in excess of our 20% return thresholds. It's also important to note that despite a tighter credit box, originations remained quite strong. Demand for our core loan products has been bolstered by some positive competitive dynamics as well as our continued investments in new products and channels. So, while cutting our credit box at the lower end of the risk profile will reduce originations and receivables growth, we believe there are excellent opportunities to originate more loans at the higher end at very attractive returns. Let me say one more thing about the macroeconomic environment and our business model. It is not surprising that a subset of our customers have less cushion and are having a harder time making ends meet as government stimulus wears off and inflation pressures continue. The hallmark of our business model is to be there for customers in good times and bad, and we are very comfortable managing through difficult economic cycles. When we saw an uptick in early-stage delinquencies in discrete segments of our customer base, we quickly adjusted our underwriting, shifted resources to work with customers who need extra help, and activated our robust borrower assistance programs. Let me now turn to our strategic initiatives. The strategic pivots we've made during the last few years continue to be a major focus at OneMain. We continue to invest in providing customers with an experience that meets their needs, whether in-person, on the phone, or through our app and web properties. Our digital capability spans beyond just the ability to take digital applications and close loans outside of a branch. It includes digital servicing that allows us to contact customers and service loans more efficiently. We are investing in these capabilities across all areas of customer engagement. As you know, we are closing almost 50% of our loans digitally. We're using machine learning algorithms to generate high-quality workflow assistance to our team members. We're engaging more customers in two-way text messaging for servicing and collections with integrated text-to-pay capabilities. These are just a few examples of the digital enhancements we are making to serve our customers and continuously improve our performance. On our BrightWay credit card, we are really pleased with the progress we have made, and we'll be expanding in select segments in the second half of the year. As I've said in the past, we are executing a very careful and disciplined expansion. In late 2021, we tested the product value proposition and marketing, and we had excellent take rates, confirming that we had a unique card product to bring to market. We then tested activations, line usage, digital adoption, and other key metrics. Our last data point to test was credit. Most of the key metrics to date have been in line with or better than our initial expectations. Our test segments did just what we had hoped, revealing where we can have high confidence in unit economics. You should expect card balances to grow in the second half of 2022, albeit with a different mix than the original 70,000 cards issued over the last 9 months. Those cards tested many combinations of product, channel, and risk segments. For this next expansion, we have selected certain lower risk segments and lower risk channels that met our return hurdles in the tests. I remain very excited about our ability to pair a daily transactional card product with our installment loan product, thereby expanding our total addressable market and deepening our relationship with current and future customers. We also continue to see good traction through our product and channel expansion efforts. One example we discussed last quarter was our smaller dollar loan product, $2,500 loans that we offer to certain customers. We've also spoken about our channel distribution partnerships with a focus on partnerships such as Dealertrack, which allows us to use our long history and expertise in auto underwriting to expand our lending. These distribution partnerships allow us to leverage our operational capabilities, including central underwriting and collateral verification and management, and our deep understanding of the nonprime consumer. These outside-the-branch channels are already tracking towards several hundred million dollars of originations in 2022, and the credit performance in our distribution partnerships has been strong. This is another example of a product and channel expansion that allows us to use our unique core competencies and competitive advantages to expand our business. We're also seeing more and more customers adopt Trim, OneMain's money-saving and budgeting app. As a reminder, Trim helps people track, negotiate, and save money on everyday bills, such as cellphone, cable, and utilities. It also helps people compare rates on auto insurance and other products. As inflation continues to challenge hard-working Americans, this is another valuable tool we offer customers to help them improve their financial well-being, and it also helps us deepen and broaden our relationship with them. Finally, let me discuss capital allocation. Our first and highest priority remains investing in our business to generate strong returns with a return on capital in excess of 30%. We will continue to prioritize investment in loans that meet our return hurdles, while also continuing to invest in key growth initiatives that will drive robust capital generation in the future. While we expect to maintain a strong and efficient capital position, we also plan to return excess capital to shareholders through our regular dividend and share repurchases. During the second quarter, we paid a regular dividend of $0.95 per share. The $3.80 annual dividend yields a very healthy return of approximately 10% at current share price. We also continued to execute against our share repurchase authorization during the quarter, utilizing $94 million to repurchase 2.1 million shares. Through the end of the second quarter, we've repurchased 4.4 million shares, representing about 3.5% of shares outstanding.

Thanks, Doug, and good morning, everyone. Demand for our loans remains strong, and we continue to deliver on our customer value proposition with added digital enhancements and further adoption of our financial wellness tools. We continued BrightWay credit card development and the measured expansion of our distribution channel partnerships. While we've seen some elevated levels of early-stage delinquency in certain segments of our book, we are very positive about the prospects for our business. Our Q2 financial results were strong. We earned $209 million on a GAAP basis or $1.68 per diluted share in the quarter. Our results included a $28 million charge associated with the early redemption of a $600 million bond issued in May of 2020 at a coupon of 8 and 7/8%. This redemption reflects the continued proactive management of our balance sheet that I discussed in detail on our last call. Capital generation in the quarter was $275 million, down $35 million from the second quarter of 2021. This primarily reflected an increase of $89 million in charge-offs from the historic lows we saw in 2021. That increase was partially offset by net interest income growth of $47 million year-over-year. On an adjusted C&I basis, we earned $233 million or $1.87 per diluted share, down from $2.66 per diluted share in the second quarter of 2021. The difference is driven largely by the normalization of charge-offs as well as in-period changes to our loan loss reserves, which you will see on Slide 9 of our presentation. The second quarter 2021 provision reflected a $64 million net reduction in loan loss reserves, which included a reversal of 2020 pandemic-related builds, offset by an increase of $58 million associated with on-book receivables growth in that quarter. Our current quarter reflects a similar level of receivables growth and a resulting increase in our loan loss reserves of $55 million. As you may recall, under CECL, we reserved for projected lifetime losses at the time of origination, which creates a growth impact in our financial results. Our managed receivables reached $20.1 billion this quarter, up $1.7 billion or 10% from a year ago, reflecting strong consumer demand and the continued positive impact from our investments in new products and distribution channels. Note this includes receivables sold through our whole loan sale partnership and serviced by OneMain as well as our credit card receivables. Our net interest margin remained strong at 18.6% in the quarter. Net interest income was $886 million, up 6% compared to the prior year quarter, driven by higher average receivables. Portfolio yield was 23.1% in the quarter, flat to last quarter. Interest expense was $218 million for the quarter, down 5% versus the prior year, despite an increase in debt supporting our balance sheet growth. Interest expense as a percentage of average receivables improved from 5.2% in the year-ago period to 4.6% this quarter. We accomplished this through the proactive management of our funding structure despite this year's increase in benchmark rates. Other revenue was $153 million in the second quarter, up $5 million from the prior year quarter. Year-over-year increases from our whole loan sale program more than offset a $6 million current period market adjustment related to equity values within our $1.8 billion investment portfolio. As a reminder, this portfolio supports our insurance policy claims reserves. Our policyholder benefits and claims expense for the quarter was $40 million, down from $48 million in the second quarter of 2021, driven by positive year-over-year claims experience across several insurance products including life and disability credit insurance. Let's now turn to Slide 7 to review our originations and receivables trends. Originations were $3.9 billion in the second quarter, up modestly from $3.8 billion in the second quarter of 2021. We are seeing continued strong demand for our core loan product, which has been a partial offset to the impact of our underwriting adjustments. We're also seeing continued strength in our product and channel initiatives. We've talked in the past about testing with better credit quality customers within the more price-sensitive and competitive affiliate channels. Very recently, we've seen stronger application flow in these better credit quality segments, presumably a result of competition lacking the strength of our funding programs and our balance sheet. Additionally, our distribution channel initiatives continued to show strong performance with $90 million of originations in the quarter compared to $30 million in the second quarter of 2021. These loans are originated and serviced by a specialized central team, and importantly, outside of our branch network, demonstrating the value of our omnichannel model and giving us another scalable distribution channel for our loan products. Turning to Slide 8 and our credit performance. Personal loan net charge-offs were $283 million or 6.0%, above the historic low of 4.4% in the second quarter of 2021, but still below normal historical levels. After tracking in line with expectations throughout the first quarter, segments of lower credit quality, lower FICO customers, concentrated mainly in our 2021 vintages, began to show increased levels of delinquency in May and June amidst an evolving macro environment, specifically persistent and elevated inflation levels. 30-89 delinquency increased to 2.73% in the second quarter, while 90-plus fell to 2.15%. 30-plus delinquency at the end of the quarter was 4.88%. As Doug mentioned, we've been making selective adjustments to our credit box since late 2021. While we saw good performance in the first quarter, we've done some additional tightening in recent weeks due to the trends we saw in May and June. We, of course, will continue to monitor the environment closely and will adjust our underwriting accordingly. We continue to see strong back-end performance in the quarter with late-stage roll rates and post charge-off recoveries better than pre-pandemic levels. Recoveries were $68 million, including $7 million from a bulk charge-off sale. Recoveries were 1.4% of average receivables, significantly above our pre-pandemic levels of approximately 90 basis points. Let me touch quickly again on our loan loss reserves shown on Slide 9. We ended the first quarter with $2.1 billion of reserves and a reserve ratio of 11%. Our reserve ratio remains above CECL day 1 levels of 10.7%, reflecting a healthy level of caution given the continued uncertain environment. Turning to Slide 10. Second quarter operating expenses were $350 million, up 6% year-over-year. Note that operating expenses have been largely flat for the past 3 quarters. Our year-to-date operating leverage was 7.2%, 20 basis points better than a year ago. As you know, we have a culture of expense discipline within our company, and we've recently taken some proactive actions in accordance with the evolving environment. As an example, we are making some targeted adjustments to our marketing spend, especially in the direct mail segment, to better align with our tighter credit appetite and the competitive dynamics we are seeing in the market. While we are actively managing our expenses, we also continue to invest in new products and channels, technology, digital capabilities, and data science, all of which we expect will drive future growth and performance within our business. We now expect our full year OpEx ratio to be approximately 7.1%, below our original estimate for this year and down from last year. Last quarter, I spent some time discussing the strength of our balance sheet and our funding programs, given the challenging rate environment with rising benchmark rates and widening spreads. The funding environment remained challenging in the second quarter. Despite that, we raised $1.2 billion in the ABS markets. We completed a $600 million social ABS, the first of its kind, at 4.3% in April, and followed that with a $600 million ABS deal at 4.6% in June. We've seen demand from a steady group of returning investors and have also seen solid interest from new investors this year. As we mentioned on our last call, we also structured a $350 million private secured funding transaction with one of our long-term banking partners at very attractive rates in April. We redeemed $600 million of unsecured debt with a coupon of 8 and 7/8% that was issued in June of 2020 during the heart of the pandemic. That bond included, for the first time, a callable feature, providing us additional flexibility to manage our funding costs. Every subsequent bond issuance has included this callable feature in addition to our long-standing investment-grade covenants, a true differentiator for our bond program in the market. We remain very well-positioned during this period of rate and market volatility to be selective and look for windows of opportunity to access the markets. As you know, another hallmark of our strong balance sheet is our liquidity runway of over 24 months. This is the length of time in which we can operate the company under stressed macroeconomic conditions and with no access to the capital markets. A foundation of our runway is our committed bank capacity, which at the end of June was just over $7 billion, comprising nearly $5.8 billion of conduits and a 5-year unsecured revolving facility of $1.25 billion, spread across a geographically diverse group of 15 bank partners. In the quarter, we added 3 new banks to our unsecured revolver and just recently closed a $400 million conduit with a new partner bank in early July. We now have over $7.4 billion of committed bank capacity as well as over $9 billion of unencumbered loans. So our liquidity resources that support these facilities remain robust. Our balance sheet investment over the years provides sleep-at-night assurance that supports the resiliency of our business through uncertain economic conditions. We are confident that our balance sheet positioning and our industry-leading funding programs will continue to be a competitive advantage. Moving on to Page 12. Our strong capital generation of $275 million allowed us to repurchase 2.1 million shares for $94 million and return another $120 million to shareholders through our regular dividend, all while maintaining our capital levels. Our net leverage at the end of the quarter was 5.6x. On Page 14, we've updated our full year strategic priorities to reflect the current environment. Given our cautious stance on credit and the actions we've taken to tighten our underwriting, we expect managed receivables to grow at the low end of our previously stated range and also at the lower end of our long-term operating framework. As we discussed earlier, there remains an abundance of attractive loans at the higher end of the credit scale given the competitive dynamics noted thus far in 2022. We also now expect full year net charge-offs to be approximately 50 basis points higher than our original expected range, still comfortably within our long-term framework of 6% to 7%. We are also taking appropriate actions to manage our expense base under the current conditions and are updating the full year estimate for our operating expense ratio to approximately 7.1%. To wrap up, we anticipate capital generation to be approximately 12% below our original expected range but still generate a very strong return of 30% on our adjusted capital. With that, I'd like to turn the call back to Doug.

Thanks, Micah. As you can see, we had strong financial results in the quarter. While we are starting to see the impacts of high inflation and economic uncertainty weigh on a discrete segment of our lower credit quality customers, we are prepared for it, made credit adjustments quickly, and continue to originate loans to customers who meet our return hurdles. There is a lot of demand from better credit quality customers as some of our competitors with less strong balance sheets have had to pull back. So we really like the business we are booking today with our tightened credit box. We continue to invest in our digital capabilities, new products, and distribution partnerships. We have been serving the nonprime consumer for decades and through multiple macroeconomic cycles. We like our strategic position, strong balance sheet, plenty of cushion in profitability, a seasoned credit team, and new products and channels. We will be cautious and alert as we navigate through whatever the economy brings while also taking advantage of our strong competitive position to serve our customers, consistently generate robust capital, and build our business for the long term. Finally, as always, I want to thank our team members across the nation who come to work every day to make a difference for our customers and for you, our shareholders. With that, let me turn it over to the operator, and we are happy to take your questions.

Our first question comes from Michael Kaye with Wells Fargo.

My understanding is that when you underwrite, there's a cushion in your net disposable income calculation, which would seemingly handle a good bit of higher inflation. If this is so, then why are delinquencies deteriorating to this degree, even with unemployment still very low? Could you perhaps be underestimating the borrowers' wherewithal in a higher inflationary environment?

Yes. Michael, it's Doug. Thanks for the question. We underwrite, as you know, to a 20% return on equity. There are a number of inputs and assumptions we have in our underwriting, including price, the size of the loan, the size of the payment, expenses, our cost of capital, and assumed payment and loss rates. As you mentioned, we also do an ability to pay underwriting. So we look at income, minus debt load, and expenses. We assess the cushion someone has or their net disposable income. We had been underwriting, especially in 2021. We've since changed our box, assuming a certain net disposable income in a relatively non-stressed environment. What we've observed is that lower-income, lower credit quality, and lower FICO customers are having difficulty making ends meet with regard to food, gas, rent, etc., and they obviously do not have enough cushion there. We've seen this, as I mentioned, across the board in the nonprime space, particularly at the lower end. We've adjusted our box over the course of the year, especially tightening it recently. We've transitioned many customers who had been offered unsecured loans to secured loans, which generally leads to better payment performance. We've also put caps on our loan sizes and increased our expense assumptions within our net disposable income. We have included more buffer in our underwriting now. So you are correct that we underwrite assuming an ability to pay, and generally, the portfolio is performing within expectations; however, we do have a segment of loans that aren't performing as expected, and we've made adjustments.

Okay. Can you just give us an impact on asset yields moving forward, given the shift away from the lower credit quality cohort, and likely your 90-plus-day delinquency rates will be increasing. I know the prior guidance was that 2022 would be around Q4 '21 levels, about 23.3%. Already in the first half, you're around 23.1%, and potentially, I think it could have moved lower in the back half. Any update on that guidance for builds for this year?

Michael, this is Micah. We're not giving any specific guidance right now, but I'll give you a little color around it. Our pricing remains stable. So at the top of the funnel, the key input for yield is our APR and our loans. We've seen stability there over the last year, which is certainly important. We are seeing some opportunities, given the competitive market, to increase prices in certain segments of originations, and we are capitalizing on them. However, it will take some time to see the effect on our yield in a $20 billion portfolio, as these new originations will take time to take shape. Your observation is correct; we expect to see continued pressure in the second half of the year, following our efforts to help our customers, along with the impact of the recent early-stage delinquency as it moves into 90-plus days. While we're not providing specific guidance on yield, this situation is all reflected in the updated strategic priorities we shared.

And we will take our next question today from Rick Shane with JPMorgan.

A couple. I want to make sure I fully understand what is going on in the mix within the portfolio. Are you saying that there is a higher percentage of low FICO scores? Or are you saying specifically that the 2021 vintage of lower FICO scores is underperforming? Is it a mix shift specifically or is it a vintage issue?

Rick, it's Micah. Thanks for the question. I'll try to give you a little bit of color on it. We called out that the performance impact is really being seen in lower credit quality, lower-income customers with less cushion. It's not specifically a 2021 issue, but these customers happen to be concentrated in the 2021 vintages. Remember, 2020 was underwritten to a much tighter standard during COVID, and pre-2020 vintages had the full benefit of government stimulus for a good six quarters. Therefore, those pre-2020 vintages have also amortized down significantly over time. The 2021 vintage just happens to be the dominant vintage in our book right now, which is why we're observing so much impact within those 2021 vintages.

Got it. Okay. That's helpful. Second question, and obviously, May and June were pretty dramatic from a macro perspective. But I am curious — given the pace of the deterioration, I'm curious if you think that your borrowers or your customers are leveraging up away from you with alternative products like Buy Now Pay Later. Is there a way for you to conduct surveillance so that you understand alternative leverage on your customers' balance sheet?

Yes. Look, Rick, it's a good question. First of all, we risk score our customers on an ongoing basis once they're on our book. We evaluate all publicly available data as well as our internal data, so we're always assessing it. I think our customers, if you look across debt loads, credit cards, loans, and others, have some tailwinds and headwinds. I don't think you can isolate it solely to something like Buy Now Pay Later. Tailwinds generally include debt-to-income levels below pre-pandemic levels, although this is less true for lower credit quality customers. Customers still exhibit relatively strong balance sheets or saving rates, but again, this is declining more rapidly for lower-income individuals. Wage growth has occurred, but has not kept pace with inflation. Unemployment remains low, but issues like underemployment and available hours are at play. Headwinds include shrinking balance sheets as stimulus fades, ongoing elevated inflation, and a sense of uncertainty, leading customers to balance their payments and experience less net disposable income, particularly those without sufficient cushion. When we analyze nonprime consumers, our specific customers appear relatively healthy, and the rest of our book is performing within the expected range. We are still making many loans. However, there is strain at the lower end of that segment. Regarding Buy Now Pay Later, some of these loans are reported to credit bureaus, and some are not, typically associated with lower-ticket items than what we're discussing. There has been considerable activity and market shifts in that space in recent months. So I would not isolate the impact to just that product, as there are many factors affecting the economy. We are observing all of this closely. We have adjusted our credit box, targeting underperformers, and implemented precise actions in response. We are also cautious by embedding additional stress assumptions in our underwriting practice, which we continually monitor.

We will go next to Vincent Caintic with Stephens.

I've got two of them. So first, are you seeing any performance differences relative to your expectations between your unsecured versus your secured auto product? And, relatedly, are car price changes having or will have an impact on your credit trends?

Yes, Vince, it is Micah. I think as we've noted, we are seeing performance impacts across the product spectrum, especially among lower credit quality customers with diminished cushion. It's not a product-specific issue, as secured products typically have stronger credit performance due to having collateral. However, we are experiencing similar dynamics across all products, particularly those targeting lower credit quality customers. Auto prices are likely not directly contributing to these issues; instead, as we've discussed, we've been moderating our loan sizes to account for this. As auto prices have risen, we have reduced loan-to-value ratios on our loans to ensure we have a degree of protection. Auto payments are just a part of consumers' overall payment obligations.

Okay. Great. And then you've touched on this in earlier comments, but regarding the competitive environment — certainly, many fintechs are struggling because of funding issues. It sounds like you're benefiting from that. Could you discuss the potential volume or opportunity set and how you view it in terms of taking share versus possible margin expansion?

Yes. Look, Vincent, as I mentioned before, we don’t have explicit growth targets. Our underwriting framework is based on establishing specific parameters derived from a range of inputs, with a focus on achieving a desired return and sustaining profitability. We strive to create a strong suite of products and services, paired with an exceptional customer experience. As we've noted, we have been innovating around loan size and expanding efforts beyond in-branch closings through our digital platforms. This ensures that when customers approach us, they receive clear information, a positive experience, and can still meet our income verification requirements. We also leverage new channels for product offerings. We're witnessing an uptick in applications from customers with FICO scores above 660 in the past months. Although we've operated in this segment previously, we are disciplined about managing our risk appetite and pricing to maintain margins. Many competitors with weaker balance sheets face rising funding costs, necessitating higher rates. As a result, we find ourselves booking more loans and see opportunities for pricing adjustments. Overall, our strategy remains grounded in underwriting, so we haven't set specific volume targets. However, monitoring our risk appetite and the customer experience allows us to navigate it effectively. We believe that without the uptick in better credit quality applications, we would have been booking considerably less volume today, especially with the underwriting reductions we've initiated.

We will move next to Kevin Barker with Piper Sandler.

Could you detail what economic assumptions you have embedded in the credit reserve today? And then what economic assumptions you also have? I assume they're the same. And what your underwriting standards are today?

Sure, Kevin. It's Micah. I’ll take the reserve question, and then Doug will likely jump in regarding underwriting. As you know, we've maintained a prudent approach to our reserves for several quarters. The unusual credit situation with CECL over the last two years has been significant. We could have built in assumptions reflecting delinquency levels and roll rates informed by the strong performance of the second half of 2020 and early 2021. However, we opted for a more conservative approach, recognizing that market conditions would inevitably shift. Our current non-TDR reserve rates stand around 40 basis points or roughly $70 million higher than CECL day 1 levels, translating to January 1, 2020, pre-pandemic. We continue to prioritize caution in this volatile environment, which has served us well. Doug?

Yes, looking at underwriting, a multitude of factors — price, size, operating expenses, capital cost, payment rates, and loss projections — affect our decisions. In 2021, we maintained an underwriting approach very similar to that of 2019. Presently, we find ourselves in a tighter underwriting framework and have taken further tightening measures as we observed changes in May. For the areas where we noted underperformance, we've transitioned certain customers to secured products only, while others have been completely excluded from our offerings. In response to emerging trends, we've incorporated additional stress assumptions into our underwriting models, denoting a more cautious stance. Essentially, our current assumptions mark a tightening compared to both a year ago and to the start of this year. We actively scrutinize the industry landscape to evaluate credit risks and are content with the current book we're underwriting.

I mean, obviously, we've seen economic deterioration and inflation impacts. We're observing real savings rates in decline. Are you anticipating labor market deterioration, either in the form of higher unemployment or increased unemployment claims over the next 6 to 12 months? Or are you employing assumptions similar to those from agencies like Moody's for benchmarking your reserves?

We incorporate various assumptions from multiple sources, including those from agencies like Moody's. There is macroeconomic deterioration factored into our reserves, although the specific outcomes remain uncertain. We apply thoughtful, conservative approaches based on numerous inputs, as assessing portfolio lifetime losses entails an extensive range of factors. We ensure that our assumptions are robust and reflective of the prevailing economic climate without detailing every aspect. Our resilient and reasonable approach remains intact in light of ongoing developments.

Kevin, revisiting the realm of concern, we are confident in our reserves given our ample cushion. Regardless of the circumstances, we believe we have sufficient reserves and feel comfortable with our book's positioning.

Okay. When you think about where your underwriting standards are today or what they've been throughout 2022, and we think about net charge-off rates across the cycle, what would be your target net charge-off rate on the book of business you're underwriting today?

Kevin, we prefer not to disclose specific expectations. We maintain a long-term risk framework that targets charge-offs within the 6% to 7% range under normal economic conditions. We also integrate detailed downturn planning in our strategy. Although we’re not predicting a downturn, we are conscious and agile regarding the dynamics of our book. Our historical trends have shown that even during downturns, we remain profitable. That’s how our risk framework operates.

We will move next to John Hecht with Jefferies.

Actually, most of my questions have been asked. I'm wondering, you guys had been selling to third parties your loans. I'm curious if you are rethinking that strategy in the current environment. What's the demand for the collateral? I seek more broad insights around this topic.

Yes, John. We have maintained our whole loan sale agreements established over the last few years. These relationships continue to thrive, and we engage in ongoing conversations to strengthen them. In time, we hope that these collaborations will evolve into strategically significant partnerships, allowing us to process some loans or collateral that isn’t aligned with our criteria. Although I don't have much to share at this moment, it is evident that our relationships remain strong, and we are optimistic about the future with these partners.

And we will take our final question today from Moshe Orenbuch with Credit Suisse.

Most of my questions have also been addressed. I'm wondering if you could speak about the typical timeframe for a vintage to season and normalize. Specifically, for high delinquencies, what would be the duration before those loans hit charge-offs, especially in context with the enhanced collection resources you're utilizing in this environment?

Yes, Moshe, the average life of a loan is approximately 18 to 20 months, which serves as a good guideline for the duration of a vintage. I would expect the 2021 vintages to progress through the delinquency and charge-off stages over the next four quarters.

Right. To elaborate, given the framework of your comment about being metaphorically 'drowned in a lake that's 6-feet deep on average,' is it accurate to say that these loans are more likely to be on the shorter side of that lifespan, considering that they're typically smaller-dollar unsecured loans? Is this a fair assessment?

Yes. The question regarding performance across the product spectrum regarding trends has been driven more by customer attributes, particularly with lower credit quality customers, rather than specific loan types or products. Enhanced risk assessments are in play for tracking customer behavior in our portfolios, including performing optimally. We have internal scoring methodologies that evaluate ongoing loan performance. The at-risk customers are those on the lower end of credit scoring and income levels, and that is influencing our overall trends. I hope this provide more perspective regarding lower credit quality dynamics.

Yes. Moshe, the card, you'll remember, we tested a lot of different segments, product, channels, and customer types. The card that we're going to be expanding into targets lower-risk customers and channels in 2020. So just like with our loans, there are many segments we feel really good about and we are booking today. The test cells we saw any issues were projects where we assumed we'd run wide tests to understand the margins. But where we are expanding, we haven't observed any issues. Thanks, everyone, for joining the call today. Our team looks forward to hearing from you and is happy to answer any further questions. I wish everyone a great day, and thank you for participating.

Thank you. This does conclude today's OneMain Financial Second Quarter 2022 Earnings Conference Call. Please disconnect your line at this time and have a wonderful day.