OneMain Holdings, Inc. Q3 FY2024 Earnings Call

Good day, everyone, and welcome to today's OneMain Financial Q3 2024 Earnings Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. Today's call is being recorded. I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Mr. Peter Poillon.

Thank you, operator. Good morning, everyone, and thank you for joining us. Let me begin by directing you to page 2 of the third 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. These forward-looking statements are subject to inherent risks and uncertainties and speak only as of today. Factors that could cause actual results to differ materially from these forward-looking statements are set forth in our earnings press release. We caution you not to place undue reliance on forward-looking statements. If you may be listening to this via replay at some point after today, we remind you that the remarks made herein are as of today, October 30, 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 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. We feel very good about our results for the quarter and year-to-date. Credit results are trending in a positive direction, and we continue to make good progress on our strategic initiatives to position OneMain for success in the years to come. Capital generation was $211 million and C&I adjusted earnings were $1.26 per share this quarter, both up significantly from last quarter. Our receivables grew 11% year-over-year, driven by an increase in loan originations and our expanded product offerings, while total revenue grew 8%. Despite our very tight underwriting pause, third-quarter origination volume grew 13% year-over-year. This is the first time since we tightened our credit box more than two years ago that we've seen year-over-year growth in originations and we expect to see continued growth going forward. The momentum we saw this quarter in originations was the result of two factors that I discussed briefly last quarter: the current constructive competitive environment and our continued use of granular data analytics and product innovation to find profitable pockets of growth. We are pleased to have strong originations even as we maintain a tight underwriting posture. Turning to credit, any way you look at it, we like the trends we are seeing. Our 30 to 89-day delinquency was 3.01%, which is down 27 basis points year-to-date as compared to down 9 basis points last year and only down 12 basis points on average in pre-pandemic years. These better-than-normal seasonal trends hold true for the quarter-over-quarter movements as well. Delinquency was up four basis points from last quarter, as compared to up 22 basis points last year in the same quarter and up 18 basis points on average pre-pandemic. These positive credit trends are a result of the swift action we took on credit two years ago, our disciplined underwriting since that time, our unique business model, and an unparalleled understanding of how to best serve the non-prime consumer. Net charge-offs were 7.5% in the quarter, down about 100 basis points from last quarter and consistent with our expectations given the delinquency levels earlier in the year. Our credit trends make us feel very positive about the earnings trajectory of our business. Barring a recession, we believe we saw peak losses in our consumer loan business in the first half of 2024. We expect this will lead to growth in capital generation in 2025 and future years. Continued positive macroeconomic trends like lower interest rates, stable employment, and reduced inflation could provide even more tailwinds going forward. Our strong balance and mature funding program continue to stand out as clear competitive advantages for us. In August, we completed a $750 million unsecured social bond at an interest rate of just over 7%. The net proceeds of the offering will finance loans to individuals residing in credit-secure or credit-at-risk counties as defined by the Federal Reserve. This kind of focused lending is part of the fabric of OneMain and illustrates how we provide responsible access to credit across the entire nation. Moving to our newer products, both auto finance and credit cards are important parts of our commitment to help more customers meet their needs today and progress to a better financial future while driving profitable growth for our shareholders. We now have about 3.3 million customers, and our multiple products are allowing us to meet more consumers with different needs and at different times in their financial journey. Auto finance receivables were $2.3 billion at quarter end. Credit performance in the auto business remains in line with our expectations and better than comparable industry performance. The integration of Foursight is going well, and we are now operating our entire auto finance business under the OneMain auto brand. All of the moving parts of the integration are progressing on plan, including technology, platform consolidation, data integration, vendor cost consolidation, and more. We feel great about our competitive positioning in the auto business and now have the capability to serve both franchise and independent card users. We'll be cautious in our growth and maintain very tight underwriting, but believe we are well positioned for the future years. In our credit card business, we added 122,000 new accounts and $84 million in receivables during the quarter. We've been measured in our credit card growth, given our cautious view of the environment, but we continue to invest in data analytics that help us run the business more efficiently and profitably, as well as improved customer self-service features that enhance the digital user experience while also reducing costs. This has led to our service calls per customer being down more than 40% year-over-year as more customers are using the app to make payments, check balances, redeem rewards, and more. We're also launching and developing more online partnerships to broaden our acquisition channels. So when the time comes to accelerate growth, we are ready. We are confident that we have a differentiated card product that resonates well with our target customer, and we will continue to develop the business to position us for future expansion. Finally, let me touch on capital allocation. Our priorities remain unchanged. First and foremost, we invest in the business to position us for ongoing success, including making all the loans that meet our risk-return hurdles while also continuing to invest in new products and channels as well as data science and technology to further advance our competitive position. We are also committed to our regular dividend, which at $4.16 per share annually yields 9% at today's price. In the quarter, we repurchased about 420,000 shares for approximately $19 million. Share repurchases will be an important part of our capital return strategy in the years to come. The pace of future share repurchases will be determined by a number of factors, including our excess capital, capital needed for growth, economic conditions, and market dynamics. With that, let me turn the call over to Jenny.

Thanks, Doug, and good morning, everyone. Our third quarter was highlighted by the continued improvement in credit trends, high-quality originations growth, strong revenue growth, thoughtful expense management, and great execution of our balance sheet funding with our second-ever unsecured social bond issuance. Third-quarter GAAP net income was $157 million or $1.31 per diluted share, down from $1.61 per diluted share in the third quarter of 2023. C&I adjusted net income was $1.26 per diluted share, down from $1.57 in the third quarter of 2023. Capital generation this quarter amounted to $211 million, which compares to $232 million in the third quarter last year, reflecting the impacts of the current macroeconomic environment on our net charge-offs, partially offset by higher revenues from portfolio growth. Managed receivables finished the quarter at $24.3 billion, up $2.4 billion or 11% from a year ago. Adjusting for the acquisition of Foursight, our organic growth was $1.1 billion, up 5%. Demand for our products remains quite strong. Third-quarter originations of $3.7 billion were up 13% year-over-year. And as Doug discussed, this strong growth is the result of a constructive competitive environment along with our focused efforts to drive originations while maintaining our conservative underwriting posture. We are continuously analyzing our credit box for segments where we can expand or tighten, but there is no net change in our overall approach to our return requirements or credit appetite. We expect this origination growth to continue through the fourth quarter and feel very comfortable that we will end the year with at least $24.5 billion of receivables. This growth in originations has been achieved while maintaining pricing discipline. The third-quarter consumer loan originations APR was 26.8%, up approximately 40 basis points since last quarter and 10 basis points over the prior year. In fact, cumulatively, since the second quarter of 2023, we have raised pricing approximately 100 basis points. These pricing levels are above the average APR in our portfolio and will gradually support our yields going forward as the book matures. You can see this starting to take hold in our third-quarter consumer loan yield of 22.1%, which was up 15 basis points compared to the second quarter. And while the consumer loan yield remains 10 basis points below the prior year due to our expanded auto finance portfolio, the year-on-year compare has improved from last quarter. Moving to revenue, this quarter total revenue was $1.5 billion, up 8% compared to the third quarter of 2023. Total revenue comprises interest income of $1.3 billion, which was up 9% year-over-year driven by higher average receivables and other revenue of $181 million, down 1% from the prior year. Interest expense for the quarter was $299 million, up $34 million versus the prior year, driven by an increase in average debt to support our receivables growth and modestly higher cost of funds since last year. It is worth noting that interest expense, as a percent of receivables in the quarter, was 5.2%, down from 5.4% in the second quarter, which as I mentioned last quarter was elevated due to the timing of our issuance and use of those proceeds to proactively manage our debt maturity stack. Provision expense was $512 million comprising net charge-offs of $432 million and an $80 million increase to our allowance driven by the increase in receivables during the quarter. I will touch on lawsuits in a bit more detail in a minute. Policyholder benefits and claims expense for the quarter was $43 million compared to $48 million in the third quarter of 2023, reflecting positive reserve adjustments from favorable claims performance in our portfolio. In the quarters ahead, we expect around $50 million for policyholder benefits and claims expense. Let's turn to slide 8 and look at consumer loan delinquency trends. Our 30 to 89-day delinquency on September 30, excluding Foursight, was 3.01%. This is down 27 basis points since the end of last year and up 4 basis points quarter-over-quarter, both of which are notably better than normal seasonal patterns as you can see on slide 9. If you adjust for the slower pace of growth on our book from our conservative credit box, our year-over-year 30 to 89-day delinquency has improved notably as compared to last year. These positive delinquency trends are indicators of future loss performance. As you know, as delinquency trends improve, charge-off trends will follow. So we're pleased that our active management of credit over the last two years is making a positive impact on our delinquency results today and that should translate to improved loss performance in the quarters ahead. Our front book vintages, which we define as originations starting as of August 2022, now comprise 81% of total receivables as compared to 76% a quarter ago. We remain pleased with the quality and performance of the loans we are booking today and the performance of the front book remains in line with expectations. It is also worth noting that while the back book makes up 19% of the total portfolio, it represents 37% of our 30-plus delinquencies. We continue to see the overall book transition to front book vintages which should further benefit our delinquency and loss metrics going forward. Let's now turn to charge-offs and reserves, as shown on Slide 10. C&I net charge-offs were 7.5% of average net receivables in the third quarter. That's down about 100 basis points from the second quarter and in line with our expectations and seasonal patterns in our portfolio. Consumer loan net charge-offs, which exclude credit card, were 7.3% in the quarter. We remain confident that consumer loan losses peaked in the first half of 2024 assuming a steady macroeconomic environment ahead. Recoveries remained steady and strong in the quarter amounting to $79 million or 1.4% of receivables, as we remain diligent in our strategies where we look to maximize recovery value. Loan loss reserve ended the quarter at $2.7 billion. Our reserves increased by $80 million in the quarter, driven by portfolio growth, while our reserve coverage remained steady at 11.5%. For the rest of the year, we expect to remain at approximately this coverage level, subject to any macroeconomic changes. Now let's turn to Slide 11. Operating expenses were $396 million in the quarter, up 6% compared to a year ago, driven by the acquisition of Foursight on April 1 and our continued investment for future growth. Our operating expense ratio was 6.5% in the quarter, down 28 basis points from the third quarter a year ago and up modestly from last quarter. As we mentioned on our last call, we are tireless in our focus on expense management, while also committed to investing for the future in new products, data science, and technology. And while the OpEx ratio may moderate from quarter to quarter, we expect it to continue to trend down over time. Now, let's turn to funding in our balance sheet, on Slide 12. During the third quarter, we issued a $750 million 7-year unsecured social bond at 7.18%. The offering this quarter was once again well executed and oversubscribed with a strong list of investors. We have no unsecured maturities until March 2026 and have excellent funding flexibility over the remainder of this year and next. Net leverage at the end of the third quarter was 5.7 times, comfortably within our four to six times leverage range. Let me finish up briefly with Slide 14, reviewing our 2024 priority. We expect to end the year with managed receivables of at least $24.5 billion, above our original guidance. We expect revenue growth to be at the higher end of our range. Interest expense is expected to land at approximately 5.2% for the year, and we expect our full year net charge-offs at the higher end of our range. Finally, we expect our operating expense ratio to be around 6.7%. Other than managed receivables, which is better than our original expectations, all of our current guidance metrics are within the range of expectations we have laid out at the beginning of the year, demonstrating the team's constant commitment to driving positive outcomes for our customers and strong financial performance for our shareholders. I'll conclude by saying we're pleased with our results this quarter. And as we look forward with a steady macroeconomic environment supporting these trends in credit, origination, yields, and operating leverage, we believe we can drive significant capital generation growth in the future. With that, let me turn the call back over to Doug.

Thanks, Jenny. All of the work that we've done in the last two years to manage the business and serve our customers is showing up in the continued positive direction of credit. We are proud of how our experienced team has navigated the company through the many uncertainties affecting the nonprime consumer, demonstrating our long history and understanding of how to best serve our customers and drive our financial performance. We like our competitive positioning, including the growth potential of our core business and new products, and believe we have many tailwinds in the business going forward. So while we're pleased with how the business is performing today, we're even more excited about the future. All of this is driven by the great team members of OneMain, who come to work every day to make a difference in the lives of our customers and to drive value for our shareholders. With that, let me open it up for questions.

Thank you. And the floor is now open for questions. And our first question is coming from Terry Ma with Barclays. Please go ahead.

Thank you. Good morning. Just almost a housekeeping question to start off with, does your net charge-off guidance range for the full year of 7.7% to 8.3% include the impact of the Foursight policy adjustment last quarter or not?

That does include the impact of the Foursight policy in the last quarter or two.

So got it. So it does not strip out the incremental charge-offs from the policy adjustment is what you mean?

Correct.

Got it. Okay. That's helpful. And then, I guess, when you guys constructed the guide at the beginning of this year I'm assuming the base case was the midpoint. So any color you can kind of provide on what's driving the guide to be closer to the higher end of the range? Whether or not it's driven by the front book or back book? Any color you can provide?

We're meeting our guidance and are pleased with our current position. This isn't surprising given the delinquency trends we've observed recently, which impact our costs. At the beginning of the year, we outlined our expected loss rates. We experienced slower growth in origination early in the year, but the macro environment has improved significantly. This overall context leads us to anticipate outcomes toward the higher end of our range.

Got it. That's helpful. And then maybe just one more follow-up, you indicated you expect charge-offs to peak in the first half of this year. Maybe provide some color on kind of just what gives you confidence of that going forward? Thank you.

I think really when you look at delinquencies, they drive your charge-offs about two quarters later. So really, what we're seeing is like the trends that we're seeing in delinquency. If you look at delinquency this quarter, they were relatively flat but would have been better than last year if you took into account growth. And so we're liking that direction of travel and you should see that start to translate.

And I think Terry is all the things we've been talking about, which is much tighter credit box for the last couple of years that becomes a bigger part of our delinquency numbers. I think it's all about how we're managing the business.

Thank you. And next, we'll take our next question from Michael Kaye with Wells Fargo.

I had a question about originations. They were a lot higher than our expectations, but it really didn't translate into higher loan balances for the quarter, at least compared to my projections. So I'm wondering, is there anything in that mix of originations like perhaps a higher percentage of renewals or maybe more prepayments this quarter or some other factor I should consider?

I think Michael. We're happy with our originations. But as you know, we view growth as an outcome. So we have a tight credit box. We have a really good competitive positioning. Some of the competitors, especially banks, are still kind of out of the market. We've been able to have pricing with our originations. And so we're happy to see originations uptick. It's as expected, I think, in the numbers. So not sure our team can follow up with you about translating originating balances, but there's nothing surprising.

Okay. I want to talk a little bit about the asset yields. They're up nicely I think, 15 basis points quarter-on-quarter. And someone asked last quarter, you thought they would be more flattish quarter-on-quarter. I was surprised to see them up so much. So was there anything that surprised to the upside on asset yields versus your expectations? And should we see that kind of momentum continue at least in the near term?

Thanks for that question. Our yield for the third quarter was 22.1%, which is an increase of about 15 basis points compared to the second quarter. During the last quarter, we discussed some pricing actions we've implemented in this competitive environment, and we are starting to see the effects gradually over time. It's difficult to pinpoint exactly when these effects will fully materialize. Most of the increase is attributed to our personal loan portfolio, which has driven a 100 basis points increase since the second quarter of 2023 that I mentioned earlier. We've been discussing this trend for a while now while also expanding our book and increasing originations in our lower yielding, lower loss auto finance segment. All of this is contributing, but it takes time for pricing changes to impact yield. We experienced a slight bump, but I wouldn't anticipate a significant increase; however, over time, we should see that pricing positively influence yields if we remain in this competitive landscape.

Thank you. And our next question comes from Vincent Caintic with BTIG. Please go ahead.

Hi. Good morning. Thank you for answering my questions. My first question is about credit. The insights on credit this morning were very helpful. At what point do you anticipate seeing a year-over-year positive change in the net charge-off rate? Additionally, could you remind us about the typical seasonality we should expect with the net charge-off rate? Thank you.

Yes. So let me take the second one first, Vincent. I'll just start with we're not providing 2025 guidance on this call; we'll come back with our fourth-quarter results and give a better sense of 2025. But in terms of the loss seasonality, the first quarter is our typical low delinquencies where we have tax refunds. And that translates into what you're seeing in our losses now at the 7.52% in the third quarter. We expect to see our delinquencies be better year-on-year soon, and they would have been better this quarter if we had been growing at a higher growth rate. So excluding growth, they would have been better than last year. And then those translate into losses about two quarters later. So I think that should really give you a sense of when you're going to see losses start to trend down. But again, we're not going to give a specific guide on 2025 right now.

Okay. That's helpful. Thank you very much. And then kind of relatedly, so it was nice to see that the origination volume did grow year-over-year. I'm just wondering how you think we should be thinking about that growth rate going forward? And we've been talking about the front book dynamic for some time. I'm curious at what point do you think we should be primarily just talking about that front book and the positive trends from that. Thank you.

We are pleased with the growth in originations that we've experienced. Our approach is guided by our credit criteria, which ensures we originate loans that will help our customers succeed. We are not easing our credit standards; in fact, we are maintaining a strict credit box at the moment. Alongside effective marketing, offering a great product at a fair price, a strong value proposition, positive customer experience, and ongoing investments in digital, we expect to see strong originations in the future. We are encouraged by the strong demand, which relies on effective marketing strategies.

Thank you. And our next question comes from John Hecht with Jefferies. Please go ahead.

Good morning, everyone. Thank you for taking my question. Doug mentioned a generally positive competitive environment, and I'm curious if that applies to all three product areas: auto, personal loans, and credit cards. Are there any notable differences?

Yes. No, it's a good question. I mean, we have a very tight and similar credit box across all three, which is just to remind everyone, we have a 30% stress overlay in our credit box. That means, we run our model based on what we're seeing in the market and then we actually have the overlays. Even if we move into a recession and there's an uptick in volumes, we'll still need our 20% return hurdle. So, we're quite tight. I think in each of those products, we've got plenty of demand, especially in the auto part. We're modulating those pretty tightly to see their new products testing in the market. We're only pursuing pockets that we feel very confident. I think in the place where you can really see the market dynamics is in some of the affiliate sites where we make a loan offer and someone else takes the loan. That's most prevalent in our small personal loans business. There we see that we're winning a lot of business, and we're doing it at attractive prices and producing higher credit quality customers. So that's where the bulk of what we're seeing. I think it's auto and card where such small players are challengers just growing that business that is frankly less important plenty of business for us too.

Okay. That's helpful. And then maybe just a related follow-on to that is, we've seen a lot of private credit enter the space, with the various forward flow agreements and just outright purchases of portfolios. How does that influence your strategic thinking? And does that also maybe over the course of time affect the competitive dynamics?

Yes. Look, we talk a lot about our balance sheet, one of the reasons we put on long-term unsecured debt and we have excess bank facilities that we have and then we have a robust ABS program, is to have a fortress balance sheet, one to make sure there's plenty of liquidity in any environment. But two, so we can keep doing all that we’ll be able to do any side. I think you saw, we've seen two cycles at least, the pandemic came and the capital markets grew up. A lot of people didn't have. I think we actually now that we had depths of the market. And then again, in mid-2022, a lot of facilities dried up or competitors who jumped in time and they fold out of the market. As you said, I think a lot of investors are now back in the market looking for yield and searching for yield. So I think it will be lumpy and it will affect competitors who use that avenue block.

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

Great. Thanks. I think you've gotten a bunch of questions on credit. And I think the message was pretty clear that delinquencies are getting better. But the reserve rate has been flat. Can you talk a little bit about your thoughts as to what it would take either from your portfolio or the macro environment or both to see that reserve rate start to come down?

Thank you, Moshe. This quarter, our reserve actually increased by $80 million, which reflected the growth in our portfolio. There was no change in our coverage rate, and we feel confident about our reserve levels today. I don’t anticipate any significant changes this year. We maintain a conservative approach to our reserve levels. Any adjustments to reserves depend on consistent charge-offs, macroeconomic trends, and the mix of products in our portfolio. Therefore, before we reduce reserves, we want to ensure we are comfortable with the current status of our book and the outlook for the future.

Got it. Following up on John's question, I'm wondering if there are other lenders that use their turndowns to create larger revenue streams by selling them through various arrangements, either directly or indirectly. Is that something you have considered as a benefit from the potential for higher participation by private equity firms while continuing to service the loans?

Yes, it's a good question, Moshe. We do something similar in our auto business. In our whole loan sales, we have a variation where we sell off loans not necessarily turned down but rather through a different funding channel. We established our infrastructure in the auto business to enable full loan sales for that flexibility if we decide to pursue it. It's definitely something we've considered. We constantly weigh what we want to keep on our books, what is profitable, the market conditions, and how much we want to pursue loans we might typically decline to assess any potential incremental revenue and returns. So, to sum it up, we would certainly consider it. We do some of this today and will keep an eye on it. If we believe it will yield strong returns on equity and benefits for our shareholders, we will engage in it more.

Yes, this is Jenny. I would add that it's all about the economics. We are constantly reviewing whole loan sale programs and what we can put off balance sheet. The market is quite competitive right now, and we prefer the economics of keeping the most loans on our own balance sheet, as we believe it provides the best return for shareholders. However, we still engage in full loan sales and benefit from the gain on sale and servicing fees. We appreciate the funding flexibility offered by the whole loan sale program, and it remains an option for us if we choose to pursue it.

Thank you. We'll take our next question from Mihir Bhatia with Bank of America. Please go ahead.

Thank you for answering my questions. I'd like to revisit the origination growth this quarter. I'm aware that you've significantly tightened your credit criteria compared to two years ago, but I was curious if you've made any adjustments lately. Are you finding the environment improving and gaining confidence to potentially underwrite a bit more deeply, or have you made any changes to your credit standards this quarter that might indicate a slight loosening?

Thanks, Mihir. We did not loosen the box this quarter in aggregate. But as we've mentioned before, we are always adjusting pockets based on geography, risk rate, product channel, and we look at it in very micro detail. Both Jenny and I talked about earlier some of the product innovation or investment in digital and technology we're doing. Let me give you the example of one of the things we did at the end of the second quarter, which helped drive some growth this quarter, which is for three years we've had access to payroll data. So you apply for a loan with us, you say you make $100,000. We used to ask you to upload documents to prove that, then we put it through fraud and made sure it's accurate. We can actually, with a lot of employers, ask people to just get access directly, and we can tap it into electronics. We're very careful when we introduce new data sources, especially for something like income verification. And so, we put that in place three years ago; we watch the credit of that versus our traditional methods of upload and bringing it into the branch and inspecting documents. We saw the credit was good or even slightly better because it's actually quite reliable. We're plugging into that. But it also says it's a much better customer experience, because you don't have to either upload a document or come into a branch or do something. So it creates a slight uptick in the pull-through rate, the number of customers who apply and go all the way through the process. And so it's product innovations like that, not any relaxing of credit that we're always tweaking our business model just to improve it for the benefit of the customers and obviously for them.

Got it. No, that is helpful and sounds quite interesting. Maybe just staying along the lines of origination and consumer behavior. Are you seeing consumers increasingly looking at the importance of the branch network? Are you seeing consumers now prefer to engage more online and through apps rather than coming into the branch? Can you discuss that a bit? It feels like your competition is really shifting more towards online. I think you mentioned banks are still quite conservative, so I'm curious if you're noticing any impact from that.

Yes. I mean, post-pandemic, a lot of people shifted behavior to digital and we have the option for our consumers to interact with us on the app or on their browser. We actually can co-browse with you. We can take you through the documents. We can show you the disclosure of the different products. And so we have not seen in the last couple of years any major movements. But the vast majority of our customers start online. So they about apply online. Some of them choose to come into a branch because there are people who want to have that personal interaction; some of them choose to do it on the phone with us and through their browser or through their app. Our strategy is to be omnichannel. We think our branches are a huge competitive differentiator, which is for in-community. People know us. People drive by the branch. We're a real company. Even people who never come into a branch say they like to know that we have a physical presence and it gives them confidence in doing business with us. So I think it has some brand effects in addition to just the pure physical get to know your customer. It makes it much easier to do a secured deal with someone and with someone else. And so trends are more people like to do more digitally. But we and some of the major banks also continue to be very focused on having branches.

Thank you. We'll next go to Rick Shane with JPMorgan. Please go ahead.

Thank you for taking my question this morning. I want to discuss loan yields and mix shifts, considering this on a risk-adjusted receivables basis as well. Clearly, you have been successful in enhancing the portfolio and raising yields on your higher-quality segments. As you expand the alternative products, how should we expect that to impact yield? When might we begin to see those products, especially for Square, start to affect yield on the top line? More importantly, when we consider the bottom line and look at risk-adjusted returns, do you believe those three products will continue to deliver comparable returns, particularly on a leveraged basis, since you likely have more opportunity to leverage some of those new asset classes?

Yes, thank you. Let me address that. Currently, our auto business represents about $2.3 billion of our total $24.5 billion in receivables. You're correct that it is included in our consumer loan yield. As we expand our auto business and it becomes a bigger part of our portfolio, it will impact yield. However, it's included today, along with many other factors affecting yield that are also present. We have been strategic in adjusting pricing and raising the APR on our consumer loan originations, both in our auto and personal loan products. A significant portion of this increase is coming from personal loans, though some is from auto. Our yields are also influenced by credit performance, which we expect to improve over time, although this will depend on the speed of recovery. Additionally, there is an effect from the auto segment, which tends to have a lower yield but also lower loss content. Overall, we are pleased with the returns from this sector. During our Investor Day, we discussed our expectations for those returns. Credit card returns are similar to or slightly higher than those of personal loans, while auto returns are slightly lower. Therefore, as we grow our auto portfolio, you can expect a gradual increase in yield over time.

Got it. Okay. That's helpful. And then just one follow-up, if we can really try to dial in on this, if we think about the personal loan book, can you give us a sense on sort of a like-for-like basis in terms of your top quality loan bucket, how much pricing power you've had in terms of incremental yield maybe over the last 12 months? I think that's what investors are kind of wondering.

I think that is the best one there is the one that I gave earlier that is that we've raised our consumer loan portfolio around 100 basis points since the second quarter of 2023. A lot of that is coming from pricing power that's coming at the higher. If you think about where we're making pricing adjustments, I mean most of that is on the higher end of our book because there's less competition normally on the lower end of the book. So I think over time in this type of environment, I'm not just sure there's that much more room to go on pricing. So again, this is more about seeing the pricing that we've already put in come through.

Thank you. And we'll take our next question from Mark DeVries with Deutsche Bank. Please go ahead.

Yeah. Thank you. Understanding you don't want to give guidance on charge-offs for 2025. I think it will still be helpful for us to think about what you need to see for charge-offs to trend down year-over-year. Am I right in that thinking the main thing we want to look at is improvement in delinquency trends relative to seasonality kind of similar to what you observed this quarter with the early-stage delinquencies only up 4bps Q-on-Q versus the pre-pandemic average of 18. And if I'm right about that could you also just talk about the trajectory you've seen over the last several quarters is kind of in that trend relative to seasonality?

I think the statement made was quite accurate. What we are focusing on for next year's losses is the trend of delinquency. We observed peak losses in the first half of 2024, and we feel confident about this based on our current delinquency levels. Our front book performance is strong, and those vintages are meeting our expectations, which should further enhance our delinquency performance as they grow in importance. We're witnessing the positive effects of the tightening actions we implemented starting in August 2022 in our results. The pace of improvement and the growth of the front book will play a crucial role, alongside the macroeconomic environment. If the wider economy improves, that would be beneficial. We want to convey that we see the overall direction moving positively. We will provide more detailed loss forecasts for 2025 when we share our fourth-quarter results.

Got it. Could you also remind us what your policies are on recoveries and what the outlook is going forward, just given kind of the larger inventory of charge-off receivables you have today?

Yeah. So we continue to see really strong recovery performance, positive trends. We remain above that pre-pandemic recovery level that we had. This quarter, we had $79 million in recoveries, which is about $9 million of post charge-off net sales. That's in line with last quarter, so not much of a major shift. We're always looking to maximize returns and the value of internal versus external collections versus bulk sales and making decisions there. But overall, right now, we're quite pleased with our recoveries and would expect something similar for the go forward.

Thank you. And next, we're going to go to John Rowan with Janney. Please go ahead. John, your line is open.

Sorry, I was on mute. Can you hear me?

Yeah, we can hear you, John.

Okay. So just on expenses. Year-to-date, the expense ratio is 6.5. You're staying with 6.7% for the year. But obviously, to get to 6.7% for the year after 6.5% for the first nine months, that implies based on my math, a fourth-quarter number of 7.3-ish. That would be well ahead of last year. I think I have 6.9% for an OpEx ratio. Can you just explain how we get to that OpEx number for the fourth quarter? And just if it is higher year-over-year, just compare that to your statement that the OpEx ratio will continue to improve over time. Thank you.

Listen, I think we look at OpEx in terms of the trends still over multiple quarters. So I would just start there when we talk about those trends, we're talking about where they look from a year-on-year perspective. Expenses can be lumpy and we're focused on really running a good business, running it efficiently. We left our guidance unchanged around 6.7%, which has come in that area. So overall, yes, we're seeing great operating leverage in our business and think of it as a real strength. Can we come down a lot from where we've been over the past couple of years? And so we're careful towards our spending. I think in terms of the fourth quarter, back in your math, that's slightly higher than I would expect. But overall, I'd say we kept our guidance around that 6.7% range.

Yes. The only thing I would add is that we are very careful with our spending and focused on avoiding expenses that don't add value. We've implemented a program to evaluate long-standing initiatives and determine their efficiency. We're constantly taking measures to minimize expenses, which has contributed to a decrease in our operating expense ratio. Additionally, we have a solid business model with natural leverage. We are also focused on our long-term goals, ensuring a strong competitive position to create value for our shareholders, which involves making investments. While we don’t become overly focused on quarterly updates to expenses, we work diligently every day to avoid wasting resources and manage our expenditures effectively.

Thank you. I think we are out of time. So, I want to thank everyone for being here today. As always, feel free to follow up with our team. We're here and available. And I hope everyone has a great day. Thank you. This does conclude today's OneMain Financial third-quarter 2024 earnings call. Please disconnect your line at this time and have a wonderful day.