Let's just kick it off then. Good morning, everyone, and welcome to RBC Capital Markets Financial Institutions Conference. My name is Kenneth Lee, and I'm a Senior Equity Analyst at the firm. Welcome to our fireside chat with OneMain Financial. I'm very pleased to have with us here Doug Shulman, Chairman and CEO. As a reminder, OneMain Financial is the nation's largest non-prime lender with a hybrid operating model which includes a digital footprint and national branch network. The company's products include unsecured and secured personal loans, as well as credit cards, auto financing, and other products. OneMain has a 100-plus-year operating history and had over $22 billion in managed receivables at year-end. Mr. Shulman has served as CEO since 2018. Mr. Shulman, thank you again for joining us today.
Thanks for having me here.
We're going to keep this discussion relatively interactive. Periodically, we will open it up for questions from the floor. I will start off with a few questions. So, Doug, OneMain has been focused on personal loans for a while now and recently started adding new products including credit cards and, more recently, auto financing. Could you talk about OneMain and where you see it longer term?
Sure. You gave a pretty good summary. I mean, we've been around for 100 years. We are focused on the non-prime consumer. Our vision is to be the lender of choice to the non-prime consumer, doing two things. One is meeting their financial needs at a variety of moments in time, but also once a customer starts working with us, trying to help them get to a better financial position over the medium and longer term. You know, what's important about our vision is we're sticking to our roots, and it's two things. We're not looking to be a financial services supermarket or superstore. We're focused on lending, and we're focused on the non-prime consumer. So we're saying quite focused, but we have been expanding our product set, as you said. And so our roots are around personal loans, secured and unsecured.
A few years ago, we added a credit card product. More recently, we've moved into auto finance. We've traditionally had insurance that we offer with products, but we also bought a couple of years ago a company called Trim, which helps our customers save money on things like subscriptions, everyday bills, medical expenses, and we offer that free of charge to our customers. We've also expanded our channels. Our roots are a branch-based lender. We now have digital channels, and we have channels at the point of sale. And so the real vision is that over time, we'll have more customers, we'll mean more to customers, and we'll be able to help them in different moments and with different needs. So we have our personal loan product, which, you know, a big episodic need.
Think about it as your hot water heater breaks down, you want to do a renovation on a bathroom, you want to go on a vacation. And so that's an $8,000-$15,000 loan that you come to every once in a while. Then we added credit card, which is everyday needs. So you're going to get gas, you're going to get groceries, you're going to pick up your school supplies for your kid. And now we've added auto finance. So when you're purchasing an auto, you can come to us. You know, at the end of the day, our vision for OneMain is, again, to meet more needs at more points in time, but also really to win in the market because of our core strengths. And we think of our core strengths as four. One is we have nationwide distribution.
We have 1,400 branches, we have digital footprint. We're nationwide. Very few other non-prime lenders that are nationwide. Second is we actually do the distribution and have a real omnichannel model. We have branches so you can work with us in person. We've got call centers so you can call us at any time. And we've got a digital presence so you can do 24/7 get your business done with us online. We underwrite, I'd argue, and the data will show, better than anybody else in the non-prime sector. I mean, just interesting stat. Since 2016, our average losses have been about 6%. Other non-prime lenders, and our average FICO is around 630. Other non-prime lenders, if you look at some of the indices, their losses are about 11%.
Prime lenders, whose average FICO is 730, so a full 100 points higher than ours, their average losses, if you look at indexes, have been about 5%. So our underwriting is really differentiated. Then our funding, we've got deep access to funding, which we can talk about more. Our vision is stick with our roots, build our balance sheet, do more with our customers at more really important moments in their life.
Great. And I wonder if you could talk about some of the recent leadership changes that have been made. Micah Conrad being appointed as COO, Jenny Osterhout as CFO. Perhaps talk about some of the motivations behind the changes.
Yeah, look, we have a very deep and talented bench, and our goal is to continue to expand the skill set and the experience of that bench, which just makes us a stronger company. So two world-class executives, they're both here right now, Micah and Jenny; they both been with us on the last five-year journey that we've been on where we delivered excellent shareholder returns. Micah's been the CFO. He was CFO of OneMain when it was part of Citi. Then he transitioned here, and he's been CFO of the public company for a while. He knows the business as well or better than anybody else in the company. He's got a long history understanding our branch network, our central operations, our technology. And so the idea is to have a really analytical, numbers-driven COO just to help take us to the next level.
Jenny joined us from Bank of New York, where she was CFO of their $1.2 trillion asset management arm. So she's got a lot of finance experience. She's been running strategy, corporate development, launching all of our new products, technology, and digital. And so the idea is to take someone who's been on the business operating side and to be the CFO. So this is part of long-term talent development planning that we've been doing for a while, and you know, they're both great. I think it'll be a very seamless transition.
Great. Now, OneMain focuses on the subprime, near-prime customer segment. While the economy's doing relatively well, it may be unevenly felt. Could you talk about what you're seeing within your customer base and how has the demand for credit been changing there?
Yeah, look, our demand's been great. We're in the market. We have outstanding customer acquisition, whether it's digital, direct mail through partnerships, email, etc. And so we've seen consistently high demand the last several years. If you track the marketplace, demand really peaked in the first half of 2022 when there was about 2 times or, I'm sorry, 1.5 times as much demand for personal loans and originations that at that period than there was back in 2018 and 2019. And so things were, you know, the market was running quite hot. I'd say now the market overall demand is kind of normalized to pre-pandemic, but we're getting more than our fair share because we've got funding, we've been in the market the whole time, we haven't had some of the hiccups that some of the competition has had.
I think, you know, the question about the consumer and the non-prime consumer, I think it's mixed. I think there's cross-currents. In one respect, you look at some of the economic data, most importantly is jobs, and the jobs data is very good. People can get a job. But if you look underneath that, I think, hours have shrunk since 2021 and 2022.
You've got falling pretty sharply.
Yeah, just government stimulus in the market. Sometimes, you know, there are two income households, one person now has a job, not both of those. And then you've got inflation, and you've got interest rates that are high. Now, inflation, while it's come down, it still was up in double-digit numbers. So it was up, you know, prices for things were up 20%. They haven't come back down. It's just they're not, they're not growing as quickly. So, you know, what I would say, our position as a company is, consumer's fine, but we are being cautious. And so we have a very tight credit box now until we see, you know, inflation really normalize.
The economic data, some of it RBC's put out and others, is showing that wages for the lower two deciles of income are just this year, sometime mid this year, going to catch up with inflation over the last couple of years. And so I think we're probably getting to a better place, but there's cross-currents. And so I'd say, you know, all is not well. You know, it's not like, you know, people look at the stock market, everybody says the economy's great. You know, if you make $100,000 a year and food prices are up and gas prices are up and clothing prices are up and school supplies are up and you've got a couple of kids, you know, a lot of people are doing fine. Some people aren't doing as well.
Gotcha. At this moment, let's just take a pause here and see if there's any questions from the audience before we go on.
Yeah.
Have you tightened it up again?
Yeah, I mean, the question was, we did a big credit tightening or a big underwriting tightening in August of 2022, and the question was, you know, have we done it again? Look, back in the summer of 2022, we saw delinquencies rising, late payments rising. The whole industry saw it, but, you know, ours were actually less than the rest of the industry. And so we put a qualitative underwriting decision on top. And so what we said is the way we underwrite is we underwrite to 20% return on equity. Every loan we make, we've got debt that goes into it, our borrowing, and then about 15% of it is we actually put equity into it, and put our own money to work in the loans. Every loan we underwrite, you know, the minimum threshold is 20%. And the formula's pretty straightforward.
We've got the interest rate we charge, you know, minus our operating expenses, minus our cost of the debt we raise, minus our expected loss assumptions. So back then, because we saw things getting creaky in the economy, we just put an extra 30% loss assumption in every loan we underwrote. So said another way, even if things got 30% worse with our losses, we would still make our 20% return on equity. And so that was a very big tightening. Over the next, you know, year, year and a half, we do what we do all the time. Like, we don't have a big box that we underwrite to.
We've got 100 different risk grades, you know, cut across a lot of different products, cut across different states where we can charge more, cut across proprietary data on current and former customers where we can do different underwriting than new customers. And then we've got different channels where, you know, we acquire, if we acquire someone in Credit Karma, it performs differently than if we acquire somebody who walks into a branch. And so, you know, we're always refining our box. But since that time, we've opened up a little bit certain places, we tighten certain places, but net-net, it's been tightening. And so, yeah, we've continued to tighten during that period. The important thing is we really like the performance.
You know, our whole book from August 2022 forward is performing in line with expectations, and that's in line with our 6%-7% long-term loss targets that we have.
Any other questions before we proceed? Well, that's, that is an excellent segue into my next question. And, and this is in regards to the 2024 outlook you put out. What's driving the pickup in net charge-off to that range of 7.7%-8.3%? And how do you think about the potential trajectory of net charge-offs getting back down to that normalized 6%-7% you were talking about?
Yeah, look, it's a front book, back book dynamic or a pre-August 2022 and a post-August 2022. So again, you know, the last, let's call it 18 months post-August 2022, that book's performing great. It's performing in line with our expectations, you know, and how we've cut the box. It's the loans that were already on our books before August 2022. And you remember inflation really spiked in at the beginning, you know, kind of May, June 2022 is when we saw a big run-up in inflation. There's just a dynamic of getting that book to run through. So at the end of the fourth quarter, our back book, pre-August 2022, accounted for 45% of our receivables, of our $22 billion of receivables, but it was 57% of our delinquencies.
The reason for that is, you know, when you underwrite a loan, people don't get delinquent for a while. So the majority is in our back book. At some time, you know, probably early second quarter is when the front book's going to account for the majority of our delinquencies. At that point, you know, the math would tell you if the macro remains relatively stable, even if it deteriorates a little bit, that delinquencies will start to go down, losses will follow that. So we've called and we've, you know, said that the first half of this year is going to be our peak losses from what was on the books before. And from there, it should go down.
And so, like, we feel actually quite good that, you know, the last several years, there's been two big headwinds, which have been, you know, increased delinquencies and losses and increased interest rates. There's a good chance that the second half of this year, those will turn into tailwinds, that, you know, losses, will start to come down. If interest rates come down, that's a bonus for us. And, you know, as the book rolls through, we will see, you know, we will get back to that normal loss rate. The timing of it depends. You know, we have a tighter book now, so we're putting on less new receivables than we were putting on, you know, back in 2021 and 2022. So it'll take a while to run through. But that's the trajectory we see, which, you know, makes us feel great.
Okay. Great. Now let's talk about medium-term targets, which you had laid out during most recent Investor Day. And just as Rowan and you're here, it's growth of managed receivables to roughly $30 billion, roughly 5% Capital Generation return on receivables. What are the key factors giving you the most confidence in achieving these targets? And then on the flip side, what are some of the biggest risks to attaining these targets?
Yeah, just for the audience out there, we manage our business to Capital Generation, which is basically cash. And what that does is it gets rid of the noise of putting reserves on, taking reserves off. Because if you manage to that, you'd never grow your business because reserves are going on. But we care about the cash that kicks out to the bottom line, which is our Capital Generation. We put out a medium-term vision, which we said is 3-5 years, really depending on macro factors, that we will double our Capital Generation from where it is today. We put out a number of $12.50 a share. It's, you know, a lot of that is just executing our plan. If that's over 3 years, that's a 10% CAGR.
If it's over five years, it's only a 5% CAGR. So we think it's very achievable. And it includes an acquisition we did, which is Foursight, which is a small auto finance company, which will add some receivables, but more importantly, gives us a platform to grow that business when we decide to step on the accelerator. We've just opened up a huge total addressable market for ourselves. And just to give you the numbers, credit card non-prime credit cards is a $500 billion market. Non-prime auto is about a $600 billion market. Non-prime personal loans is only about a $100 billion market. And we already have, you know, about 20% of it. So we think there are multiple paths to getting to the $30 billion and doubling our Cap Gen with very attractive economics, really great value proposition to our customers.
I think a lot of the risks and opportunities aren't rocket science. You know, one is you need the economy to cooperate. You know, if we go deep into a recession, it just means it's going to take us longer. But we're not actually worried that we're going to get there. It's a cyclical business. You know, right now, we think we're about to go out of a cycle. You know, credit, we feel good about. Customer experience, we've been building, and I talked about our omnichannel customer experience, but we got to make sure we win, you know, when a customer comes to us, how we treat them, how they can get their business done, ease of business, access to credit. The product, we think we've got a great product set lined up.
We don't need to add any more products to get to that vision. Then the team, you know, the team just needs to work together. You know, I’ve said before, you know, and we had an Investor Day a couple months ago. You know, most companies, or a lot of companies, I think, are lazy. A lot of what we, the reason we've been driving excellent shareholder results the last bunch of years is we just do the hard work. Everybody on the team does the hard work, which is we analyze the heck out of details. We have, you know, 100, 200 different initiatives in different parts of the business to make it better every single day. We execute it, and then we analyze the results, the things that work.
We keep the ones that don't, we throw out, and we rinse and repeat and grind into the details every day. That's the risk and opportunity. If we don't do that, we won't hit this. If we do it, there's a pretty straightforward path with a really big market, and we've got, you know, a history and a lot of core competitive advantages.
Great. That's good to hear. Let's turn to our next topic, capital allocation. I wonder if you can give us any updated thoughts around priorities for free cash flow and any updated outlook around potential M&A opportunities out there.
Yeah. I mean, look, we have a very clear framework. The number one thing we do with our capital is we invest in the business. So I talked about the, that 15% of equity or the capital that's left over, we put into loans. So we make loans that make our 20% return. We issue credit cards that do that. We do auto loans. And so we put money into the business. We also put money into the business to position it for the long term. So whether it's technology, data, and analytics, product development, and so we're investing there. And that's always going to be our priority because we are focused on being a great company five years from now, 10 years from now. That's going to mean our customers are going to get treated really well.
Our employees are going to like to work there, and our shareholders are going to be rewarded. We then opportunistically look at M&A opportunities. We haven't done a ton. Since I've been here, we've looked at about 100. We've pulled the trigger on two pretty small ones: Trim, which is our financial wellness platform, and Foursight, which was a tuck-in auto acquisition. We don't think that we need to add anything now, and we, we'll close Foursight, you know, sometime soon. Hopefully, we're just waiting for some regulatory approval. And so our priority is to integrate Foursight, make sure we get that tied in with our current auto business. But, you know, we'll opportunistically look at M&A opportunities for that will accelerate, you know, the growth path that, that I laid out. Then we have a dividend, which is a very healthy dividend of $4 per share. It's consistent.
I've said it before. It's sacrosanct. We're not going to cut that dividend. We generate a lot of cash flow, even in a down cycle, which we've been in. We have plenty of capital to pay the dividend. And you know, that helps investors, I think, feel comfortable that there's a floor on the stock and there'll be a certain return every year. And then we do use you know, for excess cash flow, we do some share buybacks. We're programmatic buyers. You know, we're in the market now, doing some buybacks, and we'll do it periodically. That's a more flexible lever for our for us. Last quarter, we didn't do as much because we're keeping some powder dry. The economy's uncertain. You know, we're managing. We want to make sure we manage our leverage, especially for our our bond investors and the rating agencies.
But that's a lever we can flex up and down, as needed.
Great. Why don't we just pause here and see if there's any questions from the floor before we proceed further? Back there.
Thanks. There's obviously been some turmoil in the bank industry. The alternatives are coming in and helping out with balance sheets here and there. Can you just talk about the competitive landscape that you see over the next five years? Obviously, you guys are a little different than a traditional bank, but is, is there any dislocation or any change in competition for new originations that you see over the next half-decade or so?
Yeah. Look, our competition is pretty diverse and dispersed. So in the nationwide distribution of non-prime personal loans, the competition is some of the newer fintechs. And, you know, they issued a lot of loans back in 2020, 2021, early 2022, and then a lot of their funding got cut off because their credit results weren't great. But we're going to assume they'll be back in the market, and we need to win in that space. In credit cards, it's a very diverse. There's a bunch of smaller players. Capital One is, you know, a credit card player that's there. For us, what's great is we've got 20% market share in non-prime lending with personal loans. We've had, you know, 70 million customers come through over the lifetime who we have data on. You know, it's a $500 billion market.
And so we have about $350 million of balances now. We could get to $5 billion, and we'd just get 1%. So we're a challenger. So we feel really good about credit cards. And then auto finance is pretty dispersed. A lot of it is some of the big, you know, folks. In personal loan, it's, there's some fintechs. There's some regional lenders that are a lot smaller than us. And then credit unions come in and out. They usually are, you know, kind of slow to come in, slow to come out. We, you know, your question about bank, you know, and balance sheets and some of the alternatives, we get access to some of that funding. And so, I don't see banks coming into our space.
You know, there's a variety of reasons that keep banks out of the non-prime space: capital requirements, regulatory requirements, et cetera. For us, I think the competitive landscape's been very constructive. Like, we've been raising pricing and getting more than our fair share over the last several years. But, you know, my view of competition is you got to have a great product at a fair price with excellent customer service, and you should be paranoid as heck about all your competitors and be on your toes and just know you need to outperform them.
Great. I think we're one more question there.
Yep.
You said that you expect the delinquency rates to come down later this year. If the interest rates do not come down from central banks, including the Federal Reserve, do you still stand by that statement?
Yeah. I mean, ours, we, we can manage our book. So we're, we're not, there's nothing in our plan and nothing in our delinquency numbers that is tied to interest rates and from central banks. That would just be a bonus tailwind for us because funding rates would come down, for us. But we are now underwriting the customers we're putting on our books to make 20% return. And unless, you know, there's, there's a macro shock of some sort, our delinquencies will start to come down.
Well, I think we just have time for one more question. Let's talk about the funding side.
Sure.
You don't have any maturities until 2025. Maybe you could just talk about, philosophically, about your approach. What's the right level of dry powder, the runway you're targeting, the mix between ABS and unsecured, and the right leverage for the business overall?
Yeah. Look, I mean, our basic philosophy is we are very conservative with our balance sheet and with our underwriting. We are very aggressive and innovative with our technology, with our customer experience, with our product set. So on the balance sheet side, you know, we always talk about having a fortress balance sheet. We are never going to have a liquidity issue. So we have ABS funding, and we usually target, you know, 60/40. It can flex between 60% unsecured loans that we take out and 40% ABS. Sometimes it's going to be 60% ABS and 40% unsecured. But that's generally the range we operate in. And then we actually keep $7 billion of bank lines that we can tap anytime we want, which is just insurance so that if there is some sort of a shock and the capital markets freeze up, we still have liquidity.
So we don't really think about dry powder. I mean, we had about $1 billion on our balance sheet at the end of the year. But we always keep 24 months of liquidity runway in the company. And so what that means is if capital markets froze and we couldn't raise a single ABS, you know, we couldn't do an ABS deal for 2 full years, and we couldn't do an unsecured deal for 2 full years, we can run our business, make loans to customers, pay our employees, invest in our technology. There's nobody else in our sector who's got that kind of a balance sheet. And, you know, we keep our leverage range in the 4-6 range. We're very comfortable with that. We have a lot of access to capital markets.
I mean, we raised almost $5 billion last year in what's arguably a really tough, you know, a tough market. This year, 90%, you know, at the end of the year of 2023, 90% of the funding we needed for 2024 was already on our books. So we just had to raise 10%. So that gives us, we have a tremendous amount of flexibility. You know, I think the last couple of years have shown that our balance sheet is a real differentiating factor between us and others, you know, in our space because we could make every single loan, issue every single credit card we wanted to issue for customers that met our risk return profile, all through this, you know, what was basically a cycle in non-prime lending. There wasn't anybody else out there who actually could say the same.
Great. Well, that's all we have the time for today. Let's everyone give a round of applause and thank Doug for joining us today. Thank you very much.