Earnings Call
OneMain Holdings, Inc. (OMF)
Earnings Call Transcript - OMF Q4 2022
Operator, Operator
Welcome to OneMain Financial's Fourth Quarter and Full Year 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. All participants are currently in listen-only mode, and there will be an opportunity for questions after the presentation. Now, I will turn the floor over to Peter Poillon. You may begin.
Peter Poillon, Head of Investor Relations
Thank you, Gretchen. Good morning, everyone, and thank you for joining us. Let me begin by directing you to page 2 of the fourth 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 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 7th 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.
Doug Shulman, Chairman and CEO
Thanks, Pete, and good morning everyone. Thank you for joining us today. I'd like to start today's call by providing a brief overview of some of our accomplishments in 2022. And then I'll cover our performance for the fourth quarter, the current credit and macroeconomic environment and discuss our key strategic initiatives. As you all know, inflation started to impact delinquency levels for many non-prime consumers in the second quarter. We demonstrated our agility by quickly pivoting our credit posture and operations. On credit, we significantly tightened our credit box over the summer and our new originations are performing as expected. Operationally, we pivoted more of our team to collections and to supporting customers who are having difficulty making ends meet. The result is that for the last two quarters, we have seen stabilization of our credit results. Despite a significantly tightened credit box through much of the year, we originated $13.9 billion of loans and served over 2.6 million customers in 2022. This highlights our commitment to serving hard-working Americans in good times and in bad and also underscores the strength of our balance sheet. We had plenty of access to funding even in a very difficult year in the capital markets and in the bond markets in particular. We made significant progress in 2022 building out our credit card and new secured lending distribution channels, both of which will drive significant growth in the year ahead. And through this very difficult environment, we generated almost $1.1 billion of capital demonstrating the incredible business model we have built over the years. We also made significant progress in our ongoing commitment to be a socially responsible company, highly focused on our customers, communities and employees. We rolled out Trim, our money-saving and financial wellness platform to all of our customers in 2022, as we continue to help our customers improve their financial well-being. We launched Credit Worthy by OneMain in thousands of high schools across the country. We issued a first of its kind social ABS fund, highlighting our mission to help hard-working Americans make progress to a better future. And we made a $50 million deposit commitment to support minority depository institutions and military veterans. Last week, we were informed that OneMain has been included in MorningStar's Sustainalytics Top Rated ESG Companies List for 2023, ranking in the top 10% of rated companies in the Diversified Financials Industry category. OneMain was also named to America's 100 Most Loved Workplaces for 2022 by Newsweek. Together, these accolades showcase our deep commitment to our team members who serve our customers so well every day and to the communities in which we work. Now let me provide a brief overview of the quarter. We had capital generation of $233 million in the quarter and demand for loan products remained strong. Originations totaled $3.5 billion in the quarter. Even with the significant tightening actions we took earlier this year. Considering our more conservative underwriting posture, we're really pleased with the volume of originations, as well as the overall credit quality. Our 6% year-over-year receivables growth was supported by our expanded products and distribution channels. Our 30 to 89 delinquency levels finished the quarter at 3.07%. This is in line with normal seasonal trends. We are optimistic about this continued stabilization and credit performance, following our quick pivots last year. Net charge-offs in the quarter were 6.9%, also within our expectations and were aided by good performance in our later stage collections and strong post charge-off recoveries. Regarding the macroeconomic environment as well as the non-prime consumer, we're encouraged by the continued strong employment numbers. However, elevated levels of inflation are impacting consumers, particularly those at the lower end of the credit spectrum. We remain highly focused on supporting our customers, especially those most pressured by inflation. We have several advantages that allow us to better serve our customers and set us apart from the competition. They include our community-based branch network that keeps us close to our customers, so we can work with each of them based on their own individual circumstances. Our long history serving the non-prime consumer through economic cycles, and this includes our proprietary data as well as our strong credit and data science teams and models. And we have an incredibly strong balance sheet, which we positioned with a long liquidity runway and staggered maturities exactly for times like this. The data that we analyze shows that we are performing quite well in comparison to other non-prime lenders. And you can see that illustrated on Slide 10 of our presentation. We continue to have a very conservative underwriting posture. Today we are only making loans that will meet our return hurdles even if the macroeconomic environment worsens. Notwithstanding, our current conservative credit box, we expect to continue to grow our balance sheet in the year ahead. We expect growth in 2023 to continue to come from higher credit quality customers along with growth from credit card and new distribution channels. To better illustrate the point on improved credit quality, I'll point out that our top two risk grades those with the best credit quality and lowest risk customers make up about 60% of our new customer originations today versus just 37% in mid-2021. Let me now spend a few minutes on strategic initiatives. Our top focus is managing our credit and balance sheet through this complex macroeconomic environment. But we also continue to focus on strategic initiatives that will fuel growth and profitability over the medium and long-term. We continue to close about half of our loans outside of a branch, engaging customers through our mobile application, website, text, screen share, phone and more. We also have advanced our mobile and two-way tech strategies and now have the ability to digitally engage with customers in collections, payments and servicing. We are confident that our omni-channel strategy leveraging the best of digital phone and in-person interactions will advance our competitive position. On new products, we continue to make excellent progress in our digital-first BrightWay credit card. During the holiday season, we saw customers regularly reach for our card to spend on holiday purchases. We're now seeing many of our early customers hitting on-time payment milestones at which point they can choose to lower their APR or increase their credit line. The overwhelming majority of our customers are engaging directly through our mobile app. We continue to closely analyze the performance of our cards across a number of metrics like spend volume, balance build, revolve rates and most importantly credit. Even as we maintain a conservative credit posture, we see a lot of opportunity to grow our card portfolio. At year-end, we had approximately 135,000 card customers and $107 million of card receivables. We're going to continue to scale this business in profitable segments, and we remain confident that our credit card business will drive meaningful growth with excellent returns in the future. This year as we scale the credit card business, it will have a mild drag on capital generation before expecting it to turn positive in 2024. In 2025 and beyond, we expect the business will be quite profitable and begin meaningfully contributing to our capital generation growth. We also continue to see excellent results from our efforts to expand distribution channels in our secured lending business, which grew to nearly $400 million of receivables in 2022. Let me end by touching on capital allocation. Our top priority is always investment in our business; first to underwrite high-quality loans that meet our return hurdles; and second, continued investment in the initiatives that will drive excellent capital generation growth in the future. We will also continue to return capital to shareholders. This morning, we announced an increase to our quarterly dividend by more than 5% to $1 or $4 annually. This translates to a yield of approximately 9% at our current share price. Even in a difficult economic environment, our business has strong capital generation and we are committed to a healthy dividend level. During the fourth quarter we repurchased 1.6 million shares bringing the full year repurchase to $7.2 million or about 5.5% of shares outstanding at the beginning of the year. With that, let me turn the call over to Micah to take you through the financial results of the fourth quarter.
Micah Conrad, CFO
Thanks, Doug and good morning, everyone. Our conservative underwriting costs here combined with a company-wide focus on supporting our customer results is helping to deliver strong financial results. Fourth quarter net income was $180 million or $48 per diluted share down from $2.02 per diluted share in the fourth quarter of 2021. C&I adjusted net income was $191 million or $1.56 per diluted share down from $2.38 per diluted share in the prior year quarter. Both variances reflect an increase in provision expense from the stimulus-driven historic lows we experienced in 2021. Capital generation was strong at $233 million in the fourth quarter and came in at $1.70 billion for the full year. Managed receivables reached $20.8 billion up $1.1 billion or 6% from a year ago. Interest income was $1.1 billion flat to the prior year quarter as higher average receivables were offset by lower portfolio yield. Yield in the fourth quarter was 22.3% down 100 basis points year-over-year reflecting higher 90-plus delinquency and the impacts of payment assistance we are providing to customers where needed. We expect first quarter 2023 yield to be around the same level as 90-plus generally reaches normal seasonal highs in February. We then expect to see a gradual improvement during the year as 90-plus seasonally declines to its natural low in the summer and the impacts of our credit tightening begin to show through. Pricing on new originations remains above 2021 levels as we continue to monitor the competitive environment and opportunistically take positive actions to offset the impact of a tighter credit box. We expect that current pricing will support portfolio yield in the future as new originations become a bigger part of our portfolio and the current macroeconomic impacts subside over time. Interest expense was $230 million in the quarter, down $3 million or 1% versus the prior year. Interest expense, as a percentage of average receivables, was 4.6% this quarter, down from 4.9% a year ago, a result of the proactive actions we've taken to manage our funding profile over the last several years. As you know, we've been extending and staggering our maturities and therefore current higher issuance rates did not meaningfully impact 2022 interest expense. Looking forward, we estimate that about 90% of our average debt for 2023 is already on the books at fixed rates. And if you want to look a little further out to 2024, it's about 80%. This is what gives us confidence in projecting very modest increases to interest expense ahead. Other revenue was $168 million in the fourth quarter, up $7 million or 4% from the prior year quarter. The increase was primarily associated with higher yields on our $2 billion investment portfolio. Provision expense was $404 million, including current period net charge-offs of $348 million and a $56 million increase to our allowance. About half of the allowance build was from growth in receivables, with the remainder reflecting a modest increase in our reserve ratio to 11.6% as we remain cautious about the macroeconomic environment. Policyholder benefits and claims expense for the quarter was $34 million, down from $50 million in the fourth quarter of 2021. The reduction was driven by adjustments to our claims reserves due to lower loss experience. We anticipate claims expense to return to more normal levels over the coming quarters. Originations were $3.5 billion in the fourth quarter, down from $3.8 billion in the fourth quarter of 2021, primarily a result of our tighter underwriting posture. Managed receivables grew $300 million sequentially on the strength of solid consumer demand, a positive competitive environment and continued growth from credit cards and new distribution channel partnerships. Please note, managed receivables of $20.8 billion includes $766 million of receivables sold through our forward flow arrangements and $107 million of credit card balances. As Doug mentioned we continue to see positive results from our credit card rollout and we expect card receivables to be between $400 million and $500 million by the end of 2023. While this rollout will create a small drag on capital generation this year, we anticipate capital generation will turn positive late this year or in early 2024. And as you know, CECL requires maintenance of lifetime loss reserves and so you should expect to see us building reserves as we scale the business. Let's turn to our credit trends, highlighted on slide nine. 30 to 89 delinquency was 3.07% in the fourth quarter, up from 2.81% in the third quarter. Since we first reported an elevated level of 30 to 89 delinquency in the second quarter of 2022, performance has generally followed expected seasonal patterns. From second to fourth quarter, 30 to 89 delinquency increased 34 basis points this year, as compared to approximately 30 basis points in 2018 and 2019. If seasonal patterns continue, we should see improved performance in the first quarter, as payments typically increase during the tax refund season. Our January 30 to 89 results were in line with these seasonal patterns, declining a few basis points from December levels. Loan net charge-offs were $344 million or 6.9% for the quarter. Full year net charge-offs came in at the low-end of our guidance at 6.1%. Net charge-offs continue to be supported by strong recoveries which were 1.2% of average receivables in the quarter. Recoveries remain above pre-pandemic levels of approximately 0.9%, driven by a strategic investment to bring this activity in-house combined with opportunistic sales. I wanted to draw your attention to slide 11, of our deck. As you know we've been gradually tightening our credit box since late 2021. However, the most significant adjustment we've made over the last year was in early August 2022. On the left side of the page, we show an estimate of how we expect receivables concentration to change over the coming quarters, between loans originated pre-tightening and those originated post tightening. On the right side of the page, we show the performance of those post-tightening vintages for which we have at least three months of data. As you can see the vintages are performing in line with pre-pandemic levels and these vintages are expected to have more influence in our portfolio results as we get into the back half of this year. We anticipate that by year-end 2023 approximately 70% of our book will be from loans originated since that major August tightening. Turning to slide 12, fourth quarter operating expenses were $367 million, up 5% year-over-year. Full year operating expense was $1.4 billion and operating leverage for the year was 7.1%, down from 7.3% in 2021 and down from 7.5% in 2019. Slide 13 looks at our expense trends over the last few years, and our expectation for the year ahead. You will see on this slide that we've maintained core expense within a very tight range over the past four years with 2022 expense coming in below 2019 levels. That is despite mid-teens growth in average receivables over the same period. In 2023, we expect core expenses to grow very modestly, in the 2% to 3% range. We also plan to invest an additional $50 million for growth, mainly in cards and distribution channels as we continue to scale those businesses. With that said, we expect an operating expense ratio that is very much in line with what you've come to expect from us, about 7.1% in 2023. That's flat to 2022 and down from historic levels. Let's now turn to slide 14 for an update on our balance sheet and funding. Funding markets remain quite challenged in the fourth quarter, and it is during these times that a strong balance sheet and a mature sophisticated funding program like ours is a significant advantage. In December, we completed an $800 million ABS issuance with an average coupon of 6%. We once again we saw strong support from returning investors, while also attracting some new investors to our program. Despite the market challenges, 2022 was overall a very productive year for OneMain. We raised $3 billion of market funding with an average coupon of about 5%, including issuing a first-of-its-kind social ABS in April. We also completed a $350 million, three-year private funding deal with one of our long-standing bank partners. We continue to enhance our already strong liquidity profile adding $400 million to our committed bank capacity which totaled $7.4 billion at year-end. We renewed seven secured lines during the year and we added three banks to our unsecured corporate revolver which now totals $1.25 billion. I'm also pleased to say that in December we renewed our inaugural loan sale partnership through the end of 2023. We did so at the same level of purchases $75 million per quarter and at similar economics to our original agreement. This agreement demonstrates the confidence our partners have in OneMain. Rounding out the balance sheet our net leverage remained within range at 5.5 times down from 5.6 times in 3Q. On slide 16, we've provided some expectations for 2023. Please note these estimates assume a relatively stable macroeconomic environment. And should the environment change, we will update our expectations accordingly. We expect managed receivables to grow in the low to mid-single-digits. This assumes we maintain our current credit box for all products and see continued growth in our distribution channel partnerships and our credit card. Loan net charge-offs for the year are expected to be 7% to 7.5% and we expect to see normal seasonal patterns resume. We anticipate first half charge-offs to be above the full year range with second half expected to be below. First half losses are typically seasonally higher and will reflect the elevated delinquency we saw in the second half of 2022. We expect charge-offs to improve in the second half, in line with normal seasonal trends and as our current underwriting becomes a bigger part of our receivables. And as I discussed earlier, we expect operating leverage to be roughly flat to 2022 at approximately 7.1%. With that, I'd like to turn the call back to Doug.
Doug Shulman, Chairman and CEO
Thanks Micah. The 2022 accomplishments that I highlighted at the beginning of this call demonstrate our ability to thrive in any market environment. As we look ahead, we feel really good about how our business is positioned. We're actively managing our underwriting and have seen credit performance stabilize over the last two quarters and the business we are booking today is performing in line with expectations. Our balance sheet, which we positioned with a long liquidity runway just for difficult markets like today, allows us to book all of the good business that we see, and the foundation we are saying with our strategic initiatives including credit card and new distribution channels will drive capital generation growth whenever we emerge out of this uncertain environment. We will remain alert and agile as the economic picture evolves and are prepared to adjust our credit box to drive the best possible results for our shareholders. Finally, I just want to take a moment to thank all of our OneMain team members who come to work every day to make a difference for our customers, our communities, and our shareholders. With that, let me turn the call over to the operator and we're happy to take your questions.
Operator, Operator
The floor is now open for questions. Our first question is coming from Moshe Orenbuch from Credit Suisse.
Moshe Orenbuch, Analyst
Thank you, Doug and Micah. Doug, I appreciate your final comment about being ready to adjust the credit criteria. Could you elaborate on your guidance being somewhat conservative? Considering the current environment and the advantages you have in funding, as well as the tightening occurring, what factors could influence whether your growth ends up exceeding or falling short of the guidance range?
Doug Shulman, Chairman and CEO
Yes. No, thanks, Moshe. We still have quite an uncertain economic picture. I think which everybody knows. It's a tricky environment to operate in. Unemployment has been a real bright spot, but inflation is still impacting our customers. And as you mentioned Moshe, we're seeing in our recent vintages since we tightened our credit box they're performing very good. Our basic operating principle is, we want to be careful stewards of our shareholders' capital. And so right now, we may have a tighter box than needed. But given the uncertainty in the environment, we're being quite careful. So if we have room in our current box we talked about it before for unemployment to tick up, meaning, we've already incorporated in the business we're underwriting to both the stress we saw in our book in 2022, plus deterioration in the macro environment. And so said another way, the business we're booking today are going to meet our return hurdles even if we see some stress. And so if we see continued stabilization, if we see a few more months of the new vintages we're booking, performing as expected. If we see some of the clouds lift from the economic environment it feels a little less uncertain, we could open up our box, then we could have growth above where we said. But if there's a sudden quick move in unemployment and things go south in the economy, we could tighten up our box. And so it's a very difficult year to give guidance because of the uncertainty. What we're doing is, being very careful with our balance sheet, being very careful with our underwriting and making sure we are investing for the future growth of the company whenever things become less uncertain.
Moshe Orenbuch, Analyst
Great. Thanks for that. I certainly appreciate all of those difficulties. You mentioned the levels of unemployment, but a bigger factor for your customers is the increase in inflation. Are there any signs that inflation for goods is slowing down compared to wage inflation in your specific customer base? If so, how do you think that will affect you throughout 2023?
Doug Shulman, Chairman and CEO
Very hard to pinpoint like the exact movements in inflation and goods versus services. Obviously, deceleration of inflation in goods means people have more disposable income because things cost less, but deceleration in services can also mean less income. And so it's very hard to pinpoint in the short term exactly in our customer base. What I will tell you is and you can see from our delinquency trends, things have stabilized. We saw a spike in delinquency in the second quarter of 2022. The last couple of quarters we've seen good stabilization and our new originations albeit with a tighter credit box are performing spot on where we thought they would. And so if inflation keeps stabilizing and going down and unemployment stays low, I think we'll be in very good shape. But again, we got to just keep an eye on it. It will play itself out.
Moshe Orenbuch, Analyst
Got it. Thanks very much.
Operator, Operator
Our next question comes from Vincent Caintic from Stephens.
Vincent Caintic, Analyst
Good morning. Thanks for taking my question. First question Doug and Micah the – and maybe taking a step back and just kind of looking at the path to normalization here. If we look at what's already happened, we've had kind of two tightenings with underwriting and then the customer maybe hasn't – we haven't officially gone through a recession yet but we've already have the impact of inflation. So maybe taking time out of the equation since we're still in a certain environment, but could you maybe describe and play out how OneMain kind of goes through normalization and what you're looking for before you feel comfortable? Thank you.
Micah Conrad, CFO
Yes. Vince, this is Micah. I'll take that one. I think Doug touched on this a little bit just in terms of watching the macroeconomic environment really paying attention to what's going on in unemployment and inflation print, certainly that influences our views. And we also look at it on a state basis. So we're looking at the macroeconomic environment in Texas versus Florida, et cetera. And all of that influences our credit appetite. I think ultimately what we're looking for is to continue to see a little bit more of these vintages. And we showed you a little bit on that page of recent vintages are performing. We're very, very pleased with that. We're also engaging in a little bit of testing in loans that don't necessarily meet our underwriting criteria but we want to keep our finger on the pulse of what's going on with some risk rates that we may not be underwriting in volume today, but we still want to sort of look at leaning into those. And I think, for us we've got some different actions nowadays than we had a few years ago. We've got a small dollar loan that gives us a lever to kind of move back in with a smaller loan value going out than our typical $7,000, $8,000 loan. We've also got the credit card. So I think a lot of different options there. But as Doug mentioned, still kind of maintaining that pretty conservative posture. We'll see how the year plays out and we'll adjust accordingly.
Vincent Caintic, Analyst
Okay. Thank you for that. And then a follow-up specifically on cards. So nice to see that business starting to ramp up. The – as kind of putting that alongside with your discussion about maybe still being conservative with the overall business, can you talk about how you feel comfortable growing with card in 2023? And do the metrics, when we think about card versus the rest of your business? Are those metrics much different when we think about say the reserve ratio or yields? Thank you.
Doug Shulman, Chairman and CEO
Yes, thank you, Vincent. A couple of years ago, we mentioned that we would approach the rollout of cards in a thoughtful and methodical manner. In late 2021, we distributed over 60,000 cards, referred to as test cells, with two different types featuring varying risk profiles. This allowed us to gather data on card performance while managing different levels of risk. We utilized various channels for customer acquisition, including branch channels, direct mail, and affiliates. After allowing these cards to season, we identified the most profitable ones last summer to bolster our portfolio. It's important to note that the non-prime credit card market is worth $400 billion, and we believe our current $100 million in cards can grow to between $400 million and $500 million, providing us ample opportunity for profitable business growth. We have assessed the actual performance of the cards during a high inflation period and applied a stress factor, anticipating potential losses as if a recession were occurring. We are now selectively onboarding customers who can still be profitable under these considerations. Thus, the business we are expanding right now is cautious, and we are quite confident these customers will yield profitability. Each month, we conduct risk assessments for every card customer, enabling us to manage credit lines and adjust the volume of cards issued as we continue to evaluate performance. Regarding your second question, we are currently in a scaling phase, where building a servicing infrastructure and acquiring customers incurs costs. It takes time for balances to accumulate, meaning that initial capital generation from newly booked cards is slower compared to loan customers. We are navigating through what can be described as a J curve, but we have outlined how we plan to progress through it. Once we move past the initial phase, we anticipate the profitability of our card offerings to align closely with that of our loans, making it a strong complementary business for OneMain.
Vincent Caintic, Analyst
Great. Very helpful. Thanks very much.
Operator, Operator
And our next question comes from Kevin Barker from Piper Sandler.
Kevin Barker, Analyst
Good morning. Thank you for taking my questions. You previously provided guidance on capital generation or return on receivables. I understand that you are not doing that now, but could you help us understand some of the components that might give us an idea of where capital generation could be for 2023, considering the challenges from the card side as you expand that portfolio, along with asset yields decreasing slightly due to higher interest rates and stricter underwriting standards? Thank you.
Micah Conrad, CFO
Yes, Kevin. This is Micah. I'll take that one. I mean as Doug mentioned, there is – it's pretty tricky in this environment to give full year forecast. We've kind of given you the receivables growth as we mentioned we feel that's pretty resilient, unless we see a major significant or a rapid change in the environment. Obviously, the losses we got it to the 7% to 7.5%. Again, I think it's – this is a matter of having a relatively stable outlook. So our losses the range that we've given you gives some room for unemployment to pick up a bit. And as you know, we have a 180-day charge-off period. So in order for that really to impact losses, it would have to happen pretty quickly generally in the first half of the year to really move the needle on that. In terms of yield, a little bit in my prepared remarks yield also impacted by the macro environment and a level of 90-plus receivables. So, certainly, giving you a little bit of sense for that without calling out a specific full year number. We do expect loan yield to be right around fourth quarter levels in the first quarter. And then sort of as we get through the balance of the year we expect some of the 90-plus levels to just subside because of normal seasonal patterns, but also as our front book or these post-August originations start to take a little bit bigger hold in the receivables book. So that should give us a little bit of runway and upside on yield. I think on interest expense, again, just mentioning generally in the prepared remarks, the way we've staggered our maturities. It just takes a lot to move interest expense quite a bit in one year. So interest expense in 2021, was around 5%, 5.1%; in 2022 4.6%; pretty likely we'll be somewhere in the middle of that in 2023. And so I think that should give you some sense for how to build the interest expense piece of that. And we've given you also the expenses at about 7.1% OpEx ratio. So – that's for the most part, the lion's share of our capital generation. I think, we've seen some year-end improvements in our policyholder benefits and claims line, some reserve adjustments we expect those to normalize back to levels around 45 to 50 a quarter. And I think, when you add all that up, we would expect to see capital generation lower than what we experienced in 2022. But with kind of some runway at the end of the year we think that can pretty much snap back in 2024 back to those levels. And that's kind of where we are.
Kevin Barker, Analyst
Great. Yeah. You touched on some macro factors there where the net charge-off would be closer to the high end with a little bit higher unemployment. Could you help us understand what macro factors you apply within your guidance assumptions for 7% to 7.5% net charge-offs? And then what are you seeing within your customer base? You touched on some stress within the non-prime consumer just given the inflationary outlook but maybe just a little more color on your macro assumptions to get to the net charge-off guide?
Micah Conrad, CFO
We noticed an increase in 30 to 89 delinquency rates during the second quarter, which rose about 50 basis points from the first quarter. Since then, we have observed relative stability, with seasonal patterns emerging similar to 2018 and 2019, where rates went up by about 30 basis points from the second to the fourth quarter. While inflation continues to impact our consumers, we feel positive about the current situation. In January, we did see a slight seasonal decrease in 30 to 89 delinquency rates, and we anticipate the upcoming tech season will further support our consumers. This is influencing our loss guidance, which ranges from a bottom end of 7% to a top end of 7.5%. The higher end aligns with our expectations of an unemployment rate between 4.5% and 5%. Currently, unemployment is low, which provides support. Our charge-off policy remains steady, and any significant changes in losses would require a quick movement in early-stage delinquency, which is difficult to predict right now given current employment and claims data.
Kevin Barker, Analyst
Okay. Thank you, Micah.
Micah Conrad, CFO
You’re welcome.
Operator, Operator
The next question comes from Michael Kaye from Wells Fargo.
Michael Kaye, Analyst
My first question is regarding the credit card. I would like to understand the impact of the CFPB proposal on late fees. How does this affect the launch of loan balances in the next few years? I'm curious if you might prioritize BrightWay+ over BrightWay in light of this situation. Additionally, how do you approach this growth opportunity while also introducing a nonprime credit card, especially given the potential for a recession? I understand this is mainly a testing phase, but I noticed that delinquencies for credit cards have already reached 14.5% as of Q3. I would appreciate your insights. Thank you.
Doug Shulman, Chairman and CEO
Yes, Michael, thank you. I'll address those points in order. Regarding the CFPB credit card fee proposal, we are currently launching a new product, so we are not tied to any specific economic factors. We have various tools at our disposal within the credit card business, including pricing options. We'll keep an eye on the proposal and adapt as necessary, but we don't believe it will impact our outlook or dampen our enthusiasm for the product. Our main focus is our unique value proposition, which is based on reciprocity. If a customer pays on time, we share in the economics by either increasing their credit limit or reducing their APR. We aim to provide access to credit for nonprime customers with a product that benefits both them and us economically. While we are watching the proposal, we feel confident that we have enough flexibility to maintain healthy economics and value. I mentioned earlier that, despite focusing on certain segments, we are targeting areas where our credit cards meet our return expectations even if we face a mild recession. In other words, we base our decisions on expected credit performance, adding stress factors to ensure resilience. Currently, we are not witnessing any stress, as our credit cards are achieving our return targets. If employment rises and we enter a recession, we still anticipate that the business we are acquiring today, as well as our growth projections for this year, will yield profitable growth, even amidst potential economic challenges.
Michael Kaye, Analyst
Okay.
Micah Conrad, CFO
Yeah. Let me just add to that on the delinquency, Michael. Yeah. You quoted the 13% or so. Keep in mind, as we mentioned that's got a lot of these credit cards in it that we would not book, to think it's more than half of the portfolio at year-end, and that's got delinquency levels that are call it twice what we're thinking about originating going forward. So we do expect that to roll down. It's just a function of really that test environment.
Michael Kaye, Analyst
Okay. Okay. That's great. Second follow-up question is on funding. Can you maybe talk about some of your plans to raise debt in 2023? I know, it's partially opportunistic, but what would you consider a base case scenario for secured and unsecured funding this year? And would you be okay raising on secured debt in the 8% plus range?
Micah Conrad, CFO
Yeah. It's a good question. I think as everything with us you should expect us to be opportunistic. We're going to go in the markets that we think are most accretive for us. We did a good amount of ABS issuance in 2022. As you know, we were leaning heavily into the unsecured markets in the prior two years. We – I think – I think we're comfortable, if all we need to do is issue ABS in 2023. Obviously, the unsecured markets have rallied a lot over the last several weeks. And they're starting to look a little bit more interesting to us. I think the balance of are complex is in the 7s, so 8 it's a little bit above that. We – we'd like to see that stick around for a little bit, but I think it's starting to become interesting to us. We tend – even with all the ABS issuance, we've done we're still at 51% secured mix on the debt side at the end of fourth quarter. So – we've got a lot of flexibility. We also have the unique advantage of having $7.4 billion of committed bank lines. So, it gives us a lot of flexibility, and I think we'll just be opportunistic this year and see where we go.
Michael Kaye, Analyst
Okay. Thank you.
Operator, Operator
Our next question comes from Rick Shane from JPMorgan.
Rick Shane, Analyst
Thanks, guys for taking my question. Most of them have been asked. Wanted to talk a little bit – a question that comes up for us in the current environment with cost of funds ticking up a little bit given rates. How much pricing power do you have? And specifically, what I'm interested in is that as you high-grade your portfolio in terms of credit quality, are you able to do that in this environment and not compromise pricing? So, is there a distortion that we're seeing in terms of yields?
Micah Conrad, CFO
Rick, this is Micah. So I think a couple of embedded questions there. We do have some pricing leverage within certain segments of our current business, particularly within the higher credit quality and the secured segments. When we sort of restrict the credit box or tighten a bit what we end up doing is remixing towards a higher credit quality customer. And therefore that tends to have some pressure on the APR because those customers are definitely – there's more offers there. We're giving a little bit of a risk-based pricing and so that does impact APR. But over the course of the last year, we – just because of the competitive environment, we have been able to make some positive influence on price in certain spots. And most of that is in that higher credit quality segment. So I would go the opposite of the question which is we've actually increased price in some of those better credit quality segment and we're still getting a lot more volume in that area. And I think it's because competition has tightened pricing dramatically not because – I guess more because of the underpricing potentially in 2021 period. And so – we've always had price discipline. We're always testing in those markets. We feel good about the business we're getting there and we've been able to increase price a little bit accordingly.
Rick Shane, Analyst
Got it. No that actually clearly misstated the question because that was exactly what I was trying to understand. And when you think about it now and that pricing power that you have in that segment and the remixing of the portfolio do you think on a net basis you get to a the same risk-adjusted margin or do you get to a slightly lower risk-adjusted margin but with lower volatility and definitionally less risk?
Micah Conrad, CFO
Yes. I mean we certainly haven't changed any of the expectations on our sort of at the margin minimum risk – minimum return hurdles. So I would say generally speaking, we're going to get to a very similar outcome on ROR, return on receivables. We just have potentially less price for less – for lower losses and we end up kind of in the same place as the bottom line.
Rick Shane, Analyst
Okay. That’s great. Thanks for taking my questions this morning, guys.
Doug Shulman, Chairman and CEO
Thanks, Rick.
Operator, Operator
Your next question comes from John Hecht from Jefferies.
John Hecht, Analyst
Good morning, guys. Thanks for taking my questions. And most of them have been asked. I'm wondering…
Doug Shulman, Chairman and CEO
Hey, John.
John Hecht, Analyst
How are you, guys? The receivables growth first of all, Micah is that – just remind me is that – when you're saying mid-single-digit receivables growth is that comparing average receivables in 2023 versus 2022? And then given that it appears that the card component will be a reasonable component of overall growth, is there anything from a seasonal perspective that will change given the ramp of cards relative to the normal installment book?
Micah Conrad, CFO
Yes, that's a good question. The straightforward answer regarding receivables is that we are referring to the end-of-period managed receivables that we publish. This figure includes credit card receivables as well as the loans sold through our loan flow agreements. It's not an average calculation. Regarding growth, if we consider low to mid-single digits, using a benchmark of $0.5 billion to $1 billion, we expect credit card growth to reach $400 million to $500 million by year-end, starting from a $100 million base. This translates to about $300 million to $400 million of that growth, while the remaining $200 million to $600 million will come from the loan book. This includes our core loans, where we've maintained a conservative credit box since we tightened significantly in August of last year. Our receivables reflect this conservative approach for the entire year of 2023, along with continued growth in our distribution channels. Typically, we see credit card growth skewed towards the second half of the year, as we remain conservative and want to be confident in performance. Thus, we anticipate more growth in the second half than in the first for credit cards. In the core loan book, we expect to observe typical seasonal patterns, with growth challenges in the first quarter due to tax season, which also affects payments and delinquency. Historically, we don't see growth in the first quarter but rebound into growth in the second, third, and fourth quarters. However, this is still to be determined. That's my perspective for now.
John Hecht, Analyst
Great. Thanks very much guys.
Micah Conrad, CFO
Sure.
Operator, Operator
Our next question comes from David Scharf from JMP Securities.
David Scharf, Analyst
Hi, good morning. Thank you for fitting me in. I just have one question. I wanted to follow up on some comments you made during the last quarter's call, related to some of Rick's inquiries. You mentioned last quarter that you observed considerable competition pulling back, which was reflected in their marketing spending and could have been either credit-related or due to their inability to access resources. Can you provide an update on what you're seeing in terms of competition? Have any of those dynamics changed, or do you still find the landscape for acquiring customers among your main competitors appealing, despite your cautious approach to loan growth?
Doug Shulman, Chairman and CEO
I believe the answer is yes. We see a favorable competitive environment for ourselves. Our company has navigated similar cycles in the past. We've structured our balance sheet in a way that protects us during good times, avoiding just-in-time funding. This means we're more willing to invest in insurance for a longer liquidity runway and a diversified funding program. In challenging times, this strategy proves beneficial as we focus on long-term growth. The capital markets are indeed tough, although slightly improved compared to last fall. Some competitors who faced funding challenges during the summer when delinquencies rose across the non-prime sector are now gaining access to funding again, lending some stability to the market. However, the situation remains tight and costly. Many of our competitors incur higher funding costs than we do, which gives us a pricing advantage. We can take on every loan that meets our criteria as attractive. Despite our more cautious approach to credit, we're still experiencing strong demand for our products. This demand can be attributed to the current state of the capital markets as well as competitors pulling back due to funding shortages. Additionally, our ongoing investments over the past few years in digital innovation, product development, and customer experience have strengthened our brand, earning customer trust and business. We are confident in our competitive position, recognize the importance of earning our customers' trust every day, and will continue to focus on that within our risk appetite.
David Scharf, Analyst
Got it. Very helpful. And then, just one quick follow-up, a clarification, I guess, from Micah. Did I hear you suggest in terms of degree of conservatism that existing reserve levels are effectively, if not contemplating, set at what is the higher end of your loss guidance this year? That if we come in at kind of the lower end of that 7%, 7.5% range, we'd likely see the ALL come down as well?
Micah Conrad, CFO
Yes. That's exactly right. I think, with respect to the first point, David, I think, we've assumed 4.5% to 5% unemployment rate in the reserves. That kind of puts them at an 11.6% reserve ratio versus pre-COVID when we first struck CECL in January 2020 at 10.7%, so almost a full point above that. I think the reduction in the reserve ratio will really be a function of what the future looks like, as we're always kind of pushing forward every quarter. And so, we could come in at the lower end of the charge-off range. And if the world doesn't look great going forward we could still have those reserves in place. So that's really something to watch out for as you think through where the year transpires.
Doug Shulman, Chairman and CEO
Hey, everybody. Thanks for joining the call today. If you have follow-up, obviously, reach out to our team. I hope everyone has a good day and we look forward to continuing to talk about the business with all of you over the next several weeks months and next quarter. So thanks for joining.
Operator, Operator
Thank you. This does conclude today's OneMain financial fourth quarter and full year 2022 earnings conference call. Please disconnect your lines at this time and have a wonderful day.