OneMain Holdings Inc (OMF) 2016 Q2 法說會逐字稿

Welcome to the OneMain Financial second-quarter 2016 earnings conference call and webcast. Hosting the call today from OneMain Holdings is Craig Streem, Senior Vice President, Investor Relations.

Today's call is being recorded.

(Operator Instructions)

It is now my pleasure to turn the floor over to Craig Streem. You may begin.

Thanks, Jackie. Good morning, everybody. Thank you for joining us.

Let me begin, as always, by directing you, this time to the back of the deck, pages 29 and 30 with our important Safe Harbor disclosures. The presentation itself can be found in the Investor Relations section of our website and we will be referencing that presentation during this morning's call. Our discussion today contains certain forward-looking statements about the Company's future financial performance and business prospects and these are subject to risks and uncertainties and speak only as of today.

The factors that could cause actual results to differ materially from these forward-looking statements are set forth within today's earnings press release, which was furnished to the SEC in an 8-K report, and in our Annual Report on Form 10-K which was filed with the SEC back on February 29, as well as in the second-quarter 2016 earnings presentation that has been posted on our IR website. We encourage you, of course, to refer to these documents for additional information regarding the risks associated with forward-looking statements.

In the second-quarter 2016 earnings material we have provided information that compares and reconciles our non-GAAP financial measures with the GAAP financial information, and we also explained why these presentations are useful to management and investors and we would urge you to review that information in conjunction with today's discussion.

And if you may be listening to the replay down the road at some point after today, we want to remind you that the remarks made today are as of today, August 4, and have not been updated subsequent to this call.

Our call this morning will include formal remarks from Jay Levine, our President and CEO, and Scott Parker, our Chief Financial Officer, and as Jackie said, after we conclude our formal remarks we will have plenty of time for Q&A, so now it is my pleasure to turn the call over to Jay.

Thanks, Craig, and thanks for joining of this morning. Before we get into the slides, I want to say that the second-quarter was a very good quarter for us with consumer insurance EPS of $0.96 versus $0.36 in last year's quarter, with solid performance on credit, growth, operating expenses, funding, and importantly, integration. We feel very good about our business, our operating model, and our competitive position.

Let me begin on slide 2 with some comments about our second-quarter performance, and a discussion of the key drivers of our business. First, average net receivables were up 12% year over year. Total receivables growth was a tad slower this quarter as the blocking and tackling of the integration of OneMain became more tangible. The timing of our integration activities is meeting all of our expectations, and in some cases, even ahead of plan.

Given the near-term introduction of new programs and the associated training requirements, it's not surprising that loan growth has slowed down this quarter, but our focus remains on capturing the fall long-term benefits of the acquisition, principally around responsible profitable growth.

Credit performance this quarter was consistent with our expectations of lower credit charges with net charge-offs improving to 6.95% from 7.5% in the first quarter, and with delinquencies stable as well. Keep in mind that the 6.95% charge-off ratio includes a 35 basis point net benefit from the alignment of our credit policies. Both our own customers' [set] performance as well as the overall economic environment, which is a key driver of our customers performance, continue to look healthy. We are seeing continued positive trends in job growth, including the addition of almost 180,000 private sector jobs in July, and no signs of deterioration in the economy.

Given our market opportunity, we have no plans to relax our underwriting standards to gain volume and we continue to manage credit risk with the same conservative orientation we have always had. As a result, we remain confident in our outlook for the full-year 2016 net charge-offs in a range of 6.8% to 7.3%. With respect to the balance sheet, we have brought our leverage down to just over 11 times and we remain highly focused on working towards our long-term leverage target of 5 to 7 times debt-to-tangible equity. We expect to be within that range by mid 2018.

In terms of funding, in spite of market volatility, we are pleased to have completed four ABS transaction so far this year, including our first and highly successful Auto ABS issuance. In addition, after the end of the quarter, we completed the sale of a portfolio of mortgage loans from our legacy real estate portfolio, with proceeds of approximately $250 million, which will also help further reduce leverage and minimize future borrowings. Our mortgage portfolio is now under $450 million from almost $10 billion at the time of our IPO in October of 2013, and we will continue to look for opportunities to reduce it further.

Turning to slide 3, I want to begin with a couple comments on our business model in the context of today's environment. As we've said in the past, our model is built on a footprint of 1,800-plus branches in 44 states with a presence in communities all across the country. Our market opportunity is enormous, representing between 75 million and 100 million people with approximately $250 billion of refinanceable debt and borrowing needs.

Importantly, about 88% of Americans live within driving distance of one of our branches. This presence is highly valuable in today's environment as it gives us a tangible understanding of what is going on in every market we serve which helps us manage credit risk in real time. Our local branch presence creates a unique and very personal engagement with our customers and a real understanding of their individual financial circumstances.

Importantly, it also allows us to verify the borrowers income, which is an important element of our underwriting process, and focuses on each borrowers ability to pay. The powerful combination of our branch presence and sophisticated analytical capabilities represent a significant competitive edge that is virtually unmatched today.

Importantly, even with our extensive footprint, we are benefiting from changes in technology which allows us to see far more applications than ever before as increasing numbers of prospective customers choose to begin the loan process by applying online. Our branch network has a much broader reach today as a result of the most significant initiative this Company has undertaken, the acquisition of OneMain last November.

The integration of Springleaf and OneMain remains on track and I would like to share a couple of highlights of our progress. First, later this year we plan a full rebranding of the Springleaf branch into OneMain, which will allow us to present one unified branch to our customers and further enhance the recognition of the OneMain brand. Second, we have made meaningful progress on implementing the technology integration required of the two networks. By bringing the two branch networks together onto one technology platform, we will be well positioned to generate incremental growth and meaningful cost savings.

Turning to slide 4, I want to emphasize how significant the OneMain acquisition has been to realize in the long-term earnings power of our Company and how positive we remain about the acquisition. Our principal focus continues to be on reinvigorating profitable growth and risk adjusted returns at OneMain, with our first initiative being the rollout of direct auto lending.

We introduced direct auto lending to the former OneMain branches in December of last year and shortly after closing and by the end of April of this year we were originating direct auto loans in all 1,800 of our branches. Our early success with the rollout contributed to a meaningful improvement in origination growth at the former OneMain branches.

It's worth noting, that while the rollout of direct auto at OneMain has been very successful, it does come with a trade-off of giving up some growth on the unsecured side. Historically at OneMain, certain higher risk customers would have been offered unsecured loans, but with our approach to credit risk we would require the additional security in order to make the loan and not every potential customer is willing to provide that collateral. While this does impact our growth it reflects our conservative orientation toward credit risk management.

Looking at earnings per share as a simple measure, in the second quarter of 2015, our consumer insurance segment at Springleaf earned $0.38 per share, and in the second quarter of this year we earned $0.96 with the benefits of the acquisition just starting to kick in. Looking ahead, by capturing the benefits of the acquisition and continuing to execute, we expect to reach a run rate in consumer insurance segment earnings exceeding $1.50 per share by the third quarter of 2017 and we see continued upside from there as we grow receivables against our largely fixed-cost branch network.

Let's turn now to slide 5. As I've already highlighted this morning, our plans call for an acceleration of growth at OneMain, and on this slide I will walk you through some of our larger scale initiatives, all of which were key parts of the Springleaf play-book as we re-invigorated growth over the past few years.

Bringing OneMain to the level of Springleaf on these key initiatives will dramatically increase average net receivable growth and we believe should add at least $1.5 billion of incremental annual originations over time. As you all know, we have had tremendous success with our direct auto program, generating over $1.7 billion of loans since rollout, and we see a similar opportunity at OneMain. We have already originated about $250 million of new auto receivables at OneMain, and we see this initiative adding over $1 billion of new originations over the next 12 months.

Our local merchant referral program has been another important growth channel at Springleaf. We launched this program in 2013, and in the first half of 2016 generated about $360 million of receivables on an annual run rate basis. We're in the process of rolling out the program to the 1,100 OneMain branches, so it's too early to quote numbers, but we expect this program to be well received. This program is all about leveraging our local community relationships to assist local merchants whose customers need financing for big-ticket purchases such as ATVs or HVAC equipment.

Outside of new products and channels, we also see a large opportunity to enhance origination growth at OneMain through more effective management of digital leads and conversions. Conversion rates for Springleaf on applications that start online are about double those of OneMain where historically there was less emphasis and resources committed to this channel. As we bring the OneMain branch into the same level of efficiency as Springleaf, with similar systems and additional applications, we expect to see significant origination growth.

Turning to slide 6, I want to discuss the significant progress we've made on a couple of integration initiatives. Since closing on the acquisition, we have highlighted the opportunity to re-invigorate growth while increasing the level of secured lending at the former OneMain. We showed good progress on these goals in the second quarter. Average net receivables, excluding the receivables in the main branch sale, reached $13.1 billion in the quarter, up 2% sequentially from the first quarter.

As you can see on the chart, Springleaf continues to grow at a healthy pace, 16% annualized, while the former OneMain growth is coming in slower. Also, auto secured loans as a percentage of production have grown meaningfully to 33% of originations at OneMain in the second quarter, terrific early progress.

Turning to slide 7, we remain confident in our full-year charge-up guidance of 6.8% to 7.3%, and from where we are today, believe we are likely to come in near the midpoint of the range. In the second quarter we experienced a typical seasonal decline in credit losses, as well as a benefit from aligning our credit policies, as well as a negative impact from the branch sale.

The net effect of these was 35 basis points with the principal impact coming from the bankruptcy policy change. On a full-year basis, the net effect of these is reflected in our guidance. Excluding the 35 basis point benefit, our net charge-off ratio was 7.3% for the second-quarter, well within our expectations. The quarter rate also included the impact of the drag from the sale of $600 million in current receivables to Lendmark. In the second half of this year, the denominator effect of the branch sale will continue to impact the charge-off rate, in addition to the flow through of losses on the delinquent accounts retained in the branch sale transaction.

As we discussed last quarter, our [Q1] charge-offs are supported by the stable trends we're seeing in early stage delinquency, demonstrated in the chart on the right hand side of the slide. We have laid out the actual net charge-off rate for each quarter beginning with the first quarter of 2015 with an overlay of our 30 to 89 day delinquency rate on a two quarter lag basis.

As you can see, delinquency is seasonally lower than the first quarter, which is the primary driver of seasonally lower charge-off rates in the third quarter. Our second-quarter early stage delinquencies will largely determine our fourth-quarter charge-offs. The sequential increase of 28 basis points from 1Q to 2Q is largely in line with last year's increase of about 22 basis points. Let me add that we're also seeing improvement in late-stage roles.

Now I would like to turn the call over to Scott to continue with our financial review.

Thank you, Jay. Now let's turn to slide 8 and review the highlights of our second-quarter performance. We earned $26 million or $0.19 per share in the second quarter. As a reminder, our reported results for the quarter included $155 million of pretax acquisition related and other adjustments.

With the sale of our SpringCastle investment last quarter, we are now focusing our commentary on the consumer and insurance segment. We will continue to report results for the acquisition and servicing segment, but we expect that contribution to be minimal going forward. Our consumer insurance segment earned $130 million or $0.96 per share in the second quarter. C&I earnings were up $0.02 versus the previous quarter, and 2.5 times the prior year.

Before we get to the book value per share numbers, I want to discuss the impact of our change in accounting policy regarding the application of ASC 310-30 and the treatment of our purchase credit impaired loans. This change is consistent with the preferred method used by the industry, and you will be able to see the details in our 10-Q filing. This change increased our shareholders' equity, at the end of the second quarter, by $59 million.

It is important to note that this is a change only in the timing of when the PCI discount is accreted. The net performance over the life of the portfolio is not impacted. With that said, the numbers in the earnings summary are reflective of the policy change in all periods.

On the right side of slide 8, you will see the analysis of the performance of our C&I segment for the second quarter, walking down to a 3.9% after-tax return on receivables. Return on receivables is up from 3.7% in the first quarter, showing the benefit of cost saves and normal seasonality and credit. Average net receivables was $13.1 billion in the quarter, up about $200 million from the first quarter excluding the receivables associated with the May 1 branch sale in both periods.

Looking forward to the second half of the year, we expect to see higher returns as we reap the full-period benefit of the cost saves and the continued asset growth. I would also note that in line with our seasonal trends of prior years, we expect to build our loan-loss allowance in the third quarter in order to maintain our allowance at a forward coverage rate of about nine months.

In the second quarter, we released about $18 million of reserves with a build in our non-TDR reserves offset by our release related to our TDR portfolio. As part of our ongoing policy alignment, the number of former OneMain loans being classified as TDRs has declined, resulting in a corresponding decrease in reserves for $34 million in the second quarter. Our non-TDR reserves have grown by approximately $16 million from the first quarter, largely due to the receivable growth.

Included in today's earnings presentation, you will see that we have provided a financial supplement for the first time. We've presented adjusted results for our C&I segment going back to the beginning of 2015, as if the two companies had been combined. This is intended to give our investors and analysts a better view of the prior-period comparisons. Included in this supplement is a historical view of our loan-loss reserves split between TDR and non-TDR.

Turning to slide 9, I would like to highlight our progress on capturing the expense benefits from the merger and driving operating leverage. First, let's go back to where we started and where we are planning to go. Pre-merger Springleaf, with a smaller footprint, was running at about 13% operating expense ratio. OneMain, with greater scale in terms of branches and receivables per branch, was running at about 9%. The blend of the two companies in the fourth quarter of 2015, at the time of close, was around 10.8%.

Through the first six months since the acquisition, we have already dropped down that ratio to about 10% through the combination of expense reductions and asset growth. We are now on a quarterly run rate of about $325 million, reflecting $100 million of annualized saves for the first quarter of 2016 levels, mainly from Headquarter consolidation and the branch sale. We expect continued momentum going into 2017 as we complete the systems and branch integration.

Now turning to slide 10, you will see a brief summary of our unsecured and asset-backed maturities. Our debt mix is well balanced, not quite 50-50, with a very level maturity profile. We have had a lot of success with our funding this year, as Jay mentioned. Even at a time when overall market conditions have become more challenging for other lenders, we have raised $2.3 billion from four asset-backed transactions this year, including our well received initial $700 million securitization of direct auto collateral in July, which we see as an important step to further diversify our ABS funding.

In addition, we sold the previously retained class-C tranches from our first-quarter ABS transactions. In addition to the ABS transactions, we raised $1 billion in the unsecured bond market in April. Included in this was a $600 million exchange of 2017 maturities for longer duration notes, helping us to achieve, in all the years, our target of $1 billion to $1.5 billion of unsecured maturities, and a smoother maturity profile.

In terms of liquidity, we feel great about our position. We received $600 million of proceeds from the branch sale this quarter, which we used to pay down our conduit lines. We primarily used our conduit facilities as continued liquidity in case of prolonged market dislocation, and through the first six months we reduced our utilization from $2.6 billion at the start of the year, to just $300 million at the end of second quarter, increasing our undrawn capacity to about $4.4 billion.

We continue to operate within our policy of 12 to 18 months forward liquidity runway for all funding needs, including growth, debt maturities, and expenses, assuming no capital markets access. We invest a significant amount of time in investor development, which has paid off handsomely in bringing large global leaders into our 2016 funding programs.

Turning to slide 11, I want to focus on the progress we have made on leverage. We started the year with an adjusted debt at 18.5 times adjusted intangible equity, and a multi-year plan to reduce that to our target level of 5 to 7 times by the second half of 2018. We have taken many steps since the acquisition closed to improve our leverage to about 11 times, a 40% improvement, and we will continue to make progress towards our objective.

On the right side you will see a table that goes into more depth on how we are going to reduce leverage and build tangible capital over the next few years. At the top of the table you will see the strong underlying segment earnings from consumer insurance that we have guided to. Below that, as we have previously provided, we have outlined the more significant elements that walk down to the tangible capital build that we expect. Based on these items, by the end of 2017 we should have around $1.9 billion of tangible capital, about a 90% increase from where we ended 2015 when we closed the acquisition.

As we move past 2017, we would expect a drag from the acquisition related costs in real estate to fall to less than $100 million per year, in turn accelerating our capital generation over the long term in a very positive way.

Now I would like to turn the call back to Jay for closing remarks.

Thanks, Scott. Turning to slide 12, I want to take a step back from the discussion of the quarter and focus on the tremendous opportunity we have to drive significant earnings per share over the long term. With the acquisition of OneMain, we have fundamentally transformed the earnings power of our Company. In fact, virtually tripling it from where we were on a standalone basis.

In addition we have made significant strides in reducing the leverage that we took on to fund the deal. With our largely fixed-cost base, additional asset growth is highly accretive to earnings and we're on track to generate a lower OpEx ratio than either company had as a standalone operator. The integration and the related cost savings give us built-in earnings growth and improved operating leverage.

We remain comfortable with our previously stated EPS guidance for 2017 of $5.60 to $6.10 per share, with an average receivables of $16 billion. Importantly, as we look out over the longer term, both market demand as well as the compelling nature of our business model are such that future asset growth drives progressively higher returns as you can see in the chart on the side. As you can imagine, this would produce very strong ROEs.

To wrap up, as we complete the integration of these two companies, we have a tremendous opportunity to deliver value to all stakeholders as we continue to responsibly grow our business and serve additional customers and their communities. We are very proud of how far we've come since we acquired OneMain last November, but even more excited about the opportunities ahead of us.

With that, Jackie, could you please begin the Q&A session?

(Operator Instructions)

Moshe Orenbuch, Credit Suisse.

Thanks. Jay, I was wondering if you could talk a little bit about the competitive environment? A lot of things have happened, I know some things we were concerned about at the beginning of the year are probably less of a concern. Talk about as you look forward in terms of your customer base and others who either have been trying or might be trying to serve that and how you think about the ability to get that incremental originations from the OneMain side and what can make it better or worse as you go forward?

Sure. Thanks, Moshe. I would say the environment as we see it today is as good as it has been over in any period of time over the last few years. Certainly, I think we all have witnessed the disruption of what has gone on in the online space. For the most part they were largely going after a higher credit customer than we were, but there was no doubt I think some of their challenges came (inaudible) from migrating down.

Thus far, the things that have been evident have been a lot less [mail] has come out from them. I think the initial read has been it is slow to trickle to growth to us initially, but we think over the long term that will all be positive. In the environment in general, the customer continues to be in good shape. I'd say largely driven by confidence in employment and job stability, and we continue to see an increasing number of good applications, which to us is one of the most important drivers of how we view the business over the near term, longer term.

Great. Thanks. Just a follow-up on a different topic. You had mentioned that you were able to resell the junior tranches of early 2016 deals that you had originally retained. Scott, what was the benefit to you? And in other words, how much did you benefit by selling them later?

In regards to rate or just overall amounts? We sold the few tranches, about $125 million of additional liquidity, and we sold them below our cost of capital. So we thought it was a really good transaction. It goes back to, as we mentioned before, we wanted to wait until the market kind of stabilized in the first quarter. Clearly, the pricing was not in the area we wanted, and given some of the improvements in the market in the second quarter, we had several investors call to see if we would be interested in selling them at the time, and we did.

Thanks very much.

John Hecht, Jefferies.

Good morning, guys. Thank you for taking my questions. First one just if you can detail or characterized the local merchant referral? It seems like that is growing nicely and I'm wondering what kind of yields are on that and what that might mean to mix shift in consolidated yields at the portfolio level.

Sure. Great question. It looks very much just like a personal loan. The way it works is it's really about our branches being in the communities and developing relationships with local -- whatever kinds of trades or vendors happen to be in the communities. Much further away from the big-box kind of retailers that tend to have relationships with the national credit card companies.

These would be, as I laid out, local -- whether it's trailer, HVAC, window or other merchants where if they have a customer, and we all know, most of America, way too much of America lives pay check to pay check, and if a large ticket comes up they want to have financing options and the pricing on that looks just like direct (inaudible) personal loans.

So what this is really doing is they are introducing the relationship to us and we are funding a personal loan and trying to make that process as seamless as we can.

Okay. Thanks very much. Second question, back on slide 11, you talked about the acquisition accounting and real estate expense in 2017. Can you break that down a little bit? Give us what type of line items we might expect accounting adjustments to be in next year from the acquisition and maybe describe the wind down of the real estate activity as well?

Yes, John, this is Scott. You remember in March we put out an 8-K with a financial supplement that explained the different component pieces of what we've lumped in here as one line, the acquisition accounting, real estate and other. We also provided that in the supplement and update of where we stand on 2016. Where we thought those were going to come in.

I break it down into, we have three big buckets, one would be on the Springleaf historical, the debt is carried at a discount and that is amortizing into earnings over the time of that maturity. So some of that will expire in 2016 and 2017 as those debt maturities expire. Some of the debt that was exchanged in the April deal was at 2020, so that will amortize over the life of that extended maturity.

On the OneMain acquisition we had three real big items. One was the provision catch up, we had the premium amortization on the non-credit impaired portfolio. And then we had the receivable discount on the purchased credit impaired assets. The total of all those right now are coming in line with the outlook that we provided and that's what we provided back in March.

The one that has the least amount of certainty is the timing of the receivable premium, so if we have a OneMain customer that comes in and either takes out a new loan or leaves us, that premium will be recognized at that point in time, so that is something that is based on customer behavior. It has been a little bit faster than the contractual term that we were expecting and we, I think, mentioned that. So all those in total, I think, were right in line with what we expected. And then the last two items, as you mentioned, were acquisition and integration costs, and the real estate portfolio.

So given the sales that we had, Jay mentioned, we will see that real estate impact will start to decline in 2017 and beyond, and the integration costs really were a little bit front loaded this year as we took out the cost actions, so we're prepared for a lot of the integration activities in the second half of 2016 and early 2017. Then you'll see some more additional costs in 2017 as we complete some of the additional cost savings we have targeted.

In general, I think we're tracking well, but again these are estimates, so I think they provide a pretty good framework for you, but they're not precision.

Great. I appreciate the color. Thanks very much.

Mark DeVries, Barclays.

Yes. Thanks. Had some questions about what is embedded in some of the new targets you laid out for 2017, in particular, the return on receivables. Can you just talk us through what the levers are that you'll rely on to get that 50 to 100 basis point improvement you're looking for in the returns?

I will keep it simple. It is probably three things. One would be additional cost take-outs in 2016 and 2017, so it is just at the 4% that we are at around now. We took most of the cost out in the first half, so you will start to see that bleed through in 2016. We are also planning to take out another $100 million in 2017.

The second one is the expectation for credit costs based on the portfolio of more secured lending, as we mentioned with the OneMain being able to take unsecured losses down to more in line with the secured lending charge-offs that we've mentioned in the past is a big benefit, and also some of the acquisition integration related items that we've talked about around the policy change that we made in the second quarter.

We also made a policy change at the end of last year on charge-off policies that had some impact on the year-over-year comparable. So I think charge-offs, we expect charge-offs to be lower than 2016 which will provide benefit. And the rest of the -- most of the operating leverage then driven by that is the growth rate in assets. So I would say the asset growth is probably the more significant. Those other two are probably a third or 40% of the benefit and then the remaining is asset growth.

Got it. And then on the leverage target for mid 2018, do you get there mainly just through retained earnings and the reduced accounting drag from the acquisition or does that also contemplate some asset sales?

Well, as we've mentioned, from an asset sale perspective, we had $750 million of legacy real estate. Jay mentioned we sold about 40% of that in the second quarter, so that $250 million of liquidity. We think about it, we have an unsecured debt maturity in September, mid-September there is a $375 million debt maturity with a 5 3/4% coupon, so our expectation is we will take that $250 million and apply that to reducing net debt cost, which will help us in deleveraging, but the remaining $400 million-plus of real estate is an opportunity. Our expectations would be that would be an upside to what we laid out versus embedded in that outlook.

Okay. Great. That is helpful. And then just a last question, I do get some concerns from investors who wonder how prudent it is to grow so aggressively into the later stages of this economic cycle and I guess you guys are looking for $2 billion of receivable growth now in 2017. Jay, I'm interested to get your reaction to those kind of concerns, and could you argue that by actually shifting towards more secured you can actually grow your way into a more de-risked balance sheet?

That is exactly how we think about it. Our customers need money in all kind of times, to be very frank, and our underwriting is such that we make sure there is stability of income there to support it. And you look at the job tenure and the stability of jobs that most of our customers have had they're really quite strong so what I'd say is our real focus has always been to have a strong mix between secured and unsecured and make sure the customers that are likely to have challenges we want to have a security (inaudible) tend to perform much better through all kinds of cycles. I'd say we continue to think about responsible growth. We don't want to put on loan-term challenges either for us or for customers and I don't think we intend to grow any faster than the market allows that the right customer mix can be put on.

Okay, great. Thanks.

Sanjay Sakhrani with KBW.

Thanks. Good morning. A similar question related to direct auto. The type of growth you are seeing there, are these people that had other choices at the larger lenders or have you gotten to them first? Can you maybe just anecdotally talk about that?

Sure. It is actually one of the great programs that is really a surprise how successful it has been and continues to be. What it's really wound up being is, most auto loans are four to five years. By the time the customers are in the third or fourth year of their loans, they are usually down to principal only and down to a reasonably small balance.

When they come into a branch, we are really showing a couple of opportunities. In some cases where here is a personal loan at a higher rate, here is a secured auto loan where we'll pay off the remaining balance. When given a choice and generally a lower interest rate, substantially lower interest rate, customers, one, are happy to have choices; two, are generally happy to have rates to consolidate other debt and to wind up in a better free cash flow position.

From what we see, other than local credit unions, there aren't a lot of people really competing in this space on a national basis, where they are really targeting the refinance of the existing debt on auto. So we have not seen a lot of large-scale completion which I think has helped the program as well.

Okay, great. When we think about the 2017 debt maturities, could you maybe talk about how you plan to tackle them?

Sure. This is Scott. I think as you've seen we've taken the stack down to a reasonable amount or level of maturity. We've talked about, we continue to have good demand for asset-backed transactions, and I think also we want to be a routine issuer in the unsecured market. So we think between those two, we have plenty of capacity to pay off those debt maturities. And I also mentioned that we have paid down all our conduits that we use as contingent liquidity but we have, as we mention in the deck, about $4 billion of unencumbered assets. So we have many levers to pull in regards to how to do 2017. Our preferred method would be to do a combination of unsecured as well as EPS transactions in late 2016 early 2017 to deal with those securities.

And are there specific costs you've embedded in your 2017 EPS guidance related to those refinancing activities?

As we mentioned in the first quarter, clearly we have in the estimate kind of use, back at the time, kind of the rates that we were seeing in the first half of the year.

Okay, and where are we right now maybe in relation? I'm sorry.

Today on the EPS side clearly things are a little bit better than they were in the beginning of the year. As I mentioned, we were able to sell an additional sub-tranche. I would say on the unsecured, we issued in April that's performed better than what we issued, so it's a little bit better but I would say it's not materially different than what we were thinking about back in the first quarter.

Okay. Perfect. Thank you.

Bob Ramsey, FBR.

Hey. Good morning guys. I know you sort of reiterated losses in the charge-off guidance. Just curious if you are seeing any pockets or areas of concern either in terms of the credit quality of the borrower, geography, or the type of loan or anything else.

I would say that earlier in the year we didn't have a lot of focus on the regions that were impacted by some of the energy prices. As we talked about in the past, we didn't see any significant difference in the performance of the loans in those regions relative to the overall business. Jay mentioned that I think when we look at the health of our consumer and customer base, that things are still very positive with regards to where they sit from an overall -- the year-over-year basis. We don't really see any kind of pockets that concern us, so it is really just managing the overall portfolio and driving more secured lending as Jay just mentioned because that will help us with respect to managing through the loss cycle and we think that's a good risk return trade-off.

Okay. Thank you.

Mike Grondahl, Northland Securities.

Thanks guys for taking my questions. I think in the prepared remarks you said that you were starting to see some improvement in some of the later stage roles. Could you just go into a little bit more detail there what you are seeing?

Sure. Those later stage roles are once again just a [quarter] charge-off, are they going to go to charge-offs, or are we going to figure out a way to avoid that? One of the key things we have done has been is we've migrated off the city resources and onto extremely centralized resources. We have seen great effectiveness around collections and some of the things that have done there, so we marginally moved some of those rates down.

Got it, and then with your local merchant referral program starting to rollout at OneMain, do you have any goals or maybe a range of originations the rest of this year or for next year with that effort?

We would like to be as effective as we can. The high level has took us a few years across Springleaf to get to the levels we are at today and I expect over time that this will be an important and meaningful one but I don't have any specific target.

Got you, okay, and maybe just lastly, direct auto you've done very well rolling that out there. What's sort of the next milestone or two that you are looking at that with that initiative?

I don't think that there is any in particular when I say continuing the growth across OneMain, customer awareness so that when loan choices are presented, that the customers see a couple of choices and they can make intelligent decisions around what is best for them, but clearly a book of the same size and just follow it up with financing we did at (inaudible) receivable, you can see how important it is for us all around. It's good the customer, it's good for us as a lender, and certainly not even talking about cycles in the future, we know it's a form better.

Got it. Thank you and congratulations on the progress.

Take you so much.

Eric Wasserstrom, Guggenheim Securities.

Thanks very much. Scott, I know this will come out in the queue, the detail but can you just sort of briefly indicate why the change in the accounting policy benefited equity to the extent that it did?

Yes. I will try to make it simple and you can have a few follow-ups with Craig here. But really I would think about it very simply as we set up about [$1 billion] with the OneMain portfolio is credit impaired. With that there was a discount taken on that of around 35%. So really the change in accounting method was to be more consistent with a lot of other financial institutions using a concept of level yields for the amortization of that discount. And given the difference between that level yield amortization and the policy that Springleaf had on a historical basis, you have a more standard amortization of that discount where the policy that was used in the past was a little bit back-end loaded where that amortization was in later years versus the year over year. So that is really the simple method that built the equity.

Got it, and that was about $59 million? Was that correct?

Yes. About $42 million when we adopted it at the end of effective April 1 and there's about another $17 million that benefited the second quarter so for a total of $59 million. That will also, if we go back to the supplement, there's a line in the supplement around the receivable discount, and you will see in there why we were higher than what we had estimated in 2016 was because of this discount amortization, and so that will actually benefit us over the next several quarters too.

Got it, great, and if I could just follow up on Sanjay's question, are you thinking, Scott about, is there some kind of mix optimization in terms of funding that you are thinking about relative to the current?

I think right now we are about 55-45. That mix feels pretty good for us right now, and I think it is really going to be a matter of we had a great reception on the auto deals. So as we originate additional auto deals, I think that is another opportunity as we go into 2017, our personal loan programs. I had a [previous] question. Spreads have kind of tightened in on the AMP tranches similar to probably where we would have expected them maybe in the fourth quarter of last year. And then on the unsecured market, things have come in but clearly the rates in the unsecured market are still significantly higher than they were end of last year. So I think the timing of an unsecured deal really is really going to be what the rate environment is at the time that we need to enter that market.

Great. Thanks very much.

Jordan Hymowitz, Philadelphia Financial.

Thanks, guys. If you go to page 11 for a second, you've got an adjusted tangible equity that goes to 2017 while most of the other stuff go to 2018. If I think about another $525 million change in equity and I take the real estate of less than $100 million would it be fair to think that this number should be like 25 of tangible equity or about $20 per share in 2018? Is that a reasonable thought?

That is a reasonable thought.

Okay. And there's no reason why this one didn't go to 2018 and everything else went to 2018 is there?

Now, Jordan, we were just trying to -- as provided previous details around 2016 and 2017 on the supplement. So in order to not have to try to breakdown a lot of more details I think your math, you can roll forward the equity role as you mentioned.

Okay. Do you think it's important, because there's tremendous upside to earnings and people concerned on the downside to book. And the downside to book really picks up in the next two years. That's why I think it is so important. My second question is, you mentioned the discount teams. Is my understanding that the accountants made you become more back-end loaded or aggressive if you want to use that term on the discount accretion so you are accreting the discount later as opposed to earlier?

No. Is the other way around. We're just going to the industry standard, Jordan. There's systems out there that actually do the accounting for that and we purchased that tool as part of the OneMain acquisition when we started evaluating this. So what we are going to is the industry standard, you get to the same endpoint, it is just the preferred method is to do a level yield of that discount and that is what we have adopted.

As opposed to before when you were --

Before it would be that the discount would be more back-end loaded so you would get it in later years versus the early years.

Got it. Thank you.

Okay.

Thanks, Jordan.

Michael Cohen, Opportunistic Research.

Thank you. My questions have been answered.

Thank you.

Our final question comes from the line of Michael Tarkan with Compass Point.

Thanks. Just a couple here. Do you expect any impact from the CFPPD debt collection proposal? And then the second one, how are you thinking about the new accounting rules for late 2019 or early 2020 around reserving for life of loan losses up front? Thanks.

Two great questions. As it relates to the debt collection, we are not a third-party debt collector, and all of the loans we collect our primarily for ourselves. So I don't think it has any impact. We are aware they are thinking about it, but at this point there is no impact to us on that. The other one I will turn over to Scott.

The thinking, I think since is it is being applied across the industry, I think given the duration of our loans that are a little bit shorter than some others, clearly that would change how we provide and build reserves. But that is clearly kind of 2019-2020, we will see how that actually ends up getting rolled out and if there's any modifications to that over time. But since it's an industry, everyone in the industry will be impacted at least in our sector on a similar basis.

Understood. Thank you.

That was our final question. I would like to turn the floor back over to Craig Streem for any additional or closing remarks.

Thanks, Jackie. Let me just wrap up by thanking everybody for their interest. Good questions this morning, and of course we are always available for any follow-up. Thanks, have a good day.

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.