Moshe Orenbuch: Got it. Maybe just a quick follow up. You mentioned, Micah, that half the expense growth is coming from new initiatives. Can you just give us like the biggest — where the biggest dollar investments are going? And is that going to — as you look forward, is that going to be the same?
Micah Conrad: Yes. Thanks, Moshe. It’s mostly — I think the answer is simple frankly. It’s really coming from our credit card initiative and the acquisition costs and the servicing costs associated with building out that business. And the same is true for our secure distribution channels. Again, acquisition costs, servicing costs and building out the folks and infrastructure associated with those two businesses. That’s the majority of the investment that I called out year-over-year.
Moshe Orenbuch: Okay. Thank you.
Micah Conrad: Thanks.
Operator: Thank you. Our next question will come from David Scharf with JMP Securities. Your line is open.
David Scharf: Thanks. Good morning and thanks for taking my question. I wanted to follow up a little on not just the competitive dynamic, but maybe how to think about or how you’re thinking about your target market kind of longer term. And specifically, we’re obviously kind of appropriately focused on all the cyclical matters right now. But as your funding profile continues to improve structurally, is your overall cost of funding on a comparative basis continues to get better. Is the 660 and above increase of your mix, is that just something we should think of as cyclically as we typically do when you tighten, or are you starting to feel that you can meet your longer term return requirements by actually moving up the credit spectrum longer term?
Doug Shulman: Yes, look, it’s a good question. 660 plus has always been a part of our business, call it the lower end of prime, higher end of near prime, however you want to define it. And we like that business. As you mentioned, we also think we have some competitive advantages in our balance sheet. One of the reasons we built out a whole loan program isn’t because we needed it for funding, but we wanted to build the pipes and get the expertise of having an off balance sheet option for the distribution that we have that’s quite powerful. As you mentioned, we’re in a cycle now. So it’s always hard to predict what it looks like coming out of a cycle and how much competition will be there coming out of a cycle. But I could envision this being a higher percentage than it was historically, especially given now that we have balance sheet optionality in different places to put this business.
So we know how to serve this customer. Generally, it’s unsecured loans. We’ve been working on our cost structure. And as Micah said, we have a lot of operating leverage. And between efficiencies in our branches, efficiencies in our central operation and our new digital capabilities, we’ve got a very good cost structure that we can service potentially lower yielding assets over the long run. So it’s a long way of saying that it’s certainly a possibility. We’re not going to declare that we’re going to keep this kind of market share as the cycle moves, but we’re getting these customers now. We’re serving them well. We’re clearly meeting a need. It’s clearly profitable for us. And we’ve done it for a long time. Exactly what part of the book it’s going to be over the long run I think will depend on how we evolve and the market evolves.
David Scharf: Got it. That’s very helpful. It sounds like lost in all the cyclical, hand wringing is potentially your TAM may be increasing over the long haul. Just a quick follow up on card balances. I know Q1 obviously, we typically see pay downs with tax refund season, or in this case kind of modest growth for a new product. It only increased about 15 million sequentially. Are you still comfortable with that year end 400 million to 500 million balance target that I think you’ve provided last call?
Doug Shulman: Yes, I think it’ll be in that range. We’re having a very targeted and disciplined rollout. And our goal this year for cards is to prove out the model, make sure we’re really focused on spend patterns, usage, credit performance, digital engagement. And the plan was to always get more data and the second half would be a bigger rollout. So we’re on plan with the rollout now. With that said, we’re watching the environment, we’re going to be super careful, we’re going to keep a tight credit box for now, and so we’re really not managing it to grow. As we mentioned, receivables overall we think are going to be in the top end of our guidance, which is in the mid single digits. Exactly how much cards contributes will depend on what we see for the next few months and the decisions we make about the second half of the year and how big of a rollout we do. But we think it’ll be somewhere in that range.
David Scharf: Got it. Thank you very much.
Operator: Thank you. Our next question will come from Rick Shane with JPMorgan. Your line is open.
Rick Shane: Thanks guys for taking my questions this morning. Look, when we think back about last year, one of the conclusions is that not only is your customer base sensitive to employment, but they’re also extremely sensitive to inflation. We’ve seen gas prices decline very significantly since mid year last year. We’re starting to see some other prices come down. Is there anything that you’re seeing in terms of the portfolio that suggests that the reversal of some of those inflated prices is having an impact on credit?
Micah Conrad: Yes, Rick, it’s Micah. It’s a great question. I think it’s one that’s challenging to answer. I think the dynamics year-over-year on bank account balances also has something, there’s something at play there where customers may have still had some inflated bank account balances, particularly in the beginning of last year, from all the stimulus. So as that has kind of run down and inflation continues to be a challenge for them, we really haven’t seen any big change in the dynamics. Doug mentioned the weathervane testing we’re doing, so we are still seeing some challenges with the nonprime consumer. We’re not enough — some green shoots maybe but not enough to cause us to increase or open up our credit box at all. And I think we need to keep remembering also that even if inflation is only up 5%, that’s on top of last year’s high single digits inflation rates, so these things are building on themselves year-over-year, and it’s just — our customers finding challenges, making ends meet with their expenses.
And so we do see some positive signs here as we’ve talked about our new originations are performing in line with expectations. Our back book has stabilized. So we saw delinquency increase pretty dramatically in May and June of last year. And since then, it’s kind of just been following seasonal trends. So we feel good about the book going forward in terms of what we’ve been able to construct, and we’re just going to have to keep watching this thing. But I think the net here in terms of the individual consumer, they’re still challenged with inflation.
Rick Shane: Got it. Okay. Thank you. And, look, I have my own views on the credit card business, but one advantage perhaps is that you are seeing transaction level data for your customers. I’m curious, two things. One, are there insights that you are gathering from that transaction level detail that circles back to your broader lending. And second, can you share any sense of what percentage of spending for your customers is at the pump?
Micah Conrad: Yes, Rick, first of all, on insights, we’ve always said that the credit card business is quite complementary and strategic, and fits in well with our business model for a number of reasons. One is, we get a daily transactional product that matches our more episodic larger loan that gets paid off over time and a credit card customer can stay with us longer. Two is we think we have a lower cost of acquisition because we already have current and former customers to save that cost. And then third is what you mentioned, which is we get daily transactional data. What I would say is, yes, we’re getting insights, not enough yet and not either volume or length of time to put into our credit models yet. But we’re always adding new data to our loan credit models.
And so, for instance, a couple of years ago, we started collecting bank account data as a way of doing income verification, which is now part of our credit models for our lending business. I think eventually, this transactional data in credit cards will be able to use in our lending business, obviously, data from our lending business we can use for the credit card. I think on — I don’t have at the top of my fingers exactly what’s in the pump or the percentage of credit card that’s used at gas stations. But the top three spend patterns are groceries, gas, and dining, which is exactly what we had hoped for, again, the credit card is providing a utility that the loan doesn’t provide, which means we mean more to our customers now than we did before.
Rick Shane: Terrific. Thank you guys very much.
Micah Conrad: Thank you.
Operator: Thank you. Our last question will come from Vincent Caintic with Stephens. Your line is open.
Vincent Caintic: Good morning. Thanks for taking my questions. First one on the pre and post tightening loans, so just wondering if you could compare and contrast those in more detail understanding that the post tightening loans are going to be over two thirds of the portfolio by the end of this year. If there’s anything you can help us with understanding what the impact of that would be say if, for instance, what the underwriting losses are or what the yields are for those loans? Thank you.
Doug Shulman: I would say for the — if we’re tracking right around kind of ’19 levels on those vintages as we put on that — visually showed you on that page, that generally translates to about a 6%, 6.5% loss rate, all right, but that’s on average and over time a portfolio that’s constructed that way that remains that way for the entire life. But hopefully that gives you a little general direction as to where that is heading. I think as this portfolio of front book becomes a bigger part of our overall portfolio, we should start to see delinquency levels moving back down towards those 2019, 2018 levels. But I want to also caution you. I think there’s just so many dynamics that go on in a given year around delinquency and growth of receivables.
So it’s hard to have just the perfect year to compare to, but we do anticipate at least some modular decline in delinquency back down to those normal levels. If the economy stays the way it is, if our underwriting stays the way it does, the back book continues to be stable and we continue to see that ’19 type performance from our newer vintages.
Vincent Caintic: Okay, great. Thank you. And kind of related follow up when I think about return on receivables for OneMain and there have been a lot of moving pieces recently, of course cost of funds seem to maybe be going up, moving up market tightening, the portfolio also getting into credit card. I think this quarter the return on receivables was 3.7%. Just wanted to explore whether I guess the long term 6% return on receivables, is that what we should be looking for as all these moving pieces are happening? Thank you.
