OneMain Holdings Inc (OMF) 2017 Q1 法說會逐字稿

Welcome to the OneMain Financial First Quarter 2017 Earnings Conference Call and Webcast. Hosting the call today from OneMain 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.

Thank you, Laurie. Good morning, everybody. Thanks for joining us. Let me begin, as always, by directing you to Pages 2 and 3 of our first quarter 2017 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, and we will be referencing that presentation during this morning's call.

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. And if you may be listening to this via replay after today, we remind you that the remarks made herein are as of today, May 4, 2017, 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 after the conclusion of our formal remarks, of course, we will conduct a Q&A period. So now let me turn the call over to Jay.

Thanks, Craig, and thanks for joining us. As we will share with you this morning, the 2 principal drivers of our performance, receivables growth and credit, are both showing positive trends, and we feel very good about the momentum in the business. As such, we are reaffirming our C&I adjusted EPS guidance of $3.75 to $4 per share. In the first quarter, charge-offs came in as expected, and we continue to feel good about the underlying credit performance of the portfolio. The net charge-off rate for the quarter was 8.5%, reflecting the impact of the integration activities that took place back in the third quarter of 2016.

Total delinquency at quarter end was 4.5%, a decline of 40 basis points from the year-end level an early-stage delinquency, meaning receivables 30 to 89 days past due, declined 10 basis points from year-end levels.

Now before we get into a deeper review of the quarter, I want to briefly comment on our customers and how we are positioned to serve them.

OneMain is the nation's leading consumer lending franchise with over $13 billion of receivables 2.2 million customers and over 1,700 branches to serve the borrowing needs of tens of millions of working Americans nationwide. Our market opportunity is significant. We believe strongly our time-tested model, which provides borrowers with choices in how and where we serve them. In-person underwriting helps build customer relationships and contribute to our strong credit performance. The combination of sophisticated underwriting and personal relationships allows us to originate fairly sizable loans averaging almost $7,500, a loan size that distinguishes us from other competitors. Higher loan amounts drive meaningful scale benefits with our branches now managing almost $8 million of receivables per branch with room to grow. When we look at the environment, consumer loan demand remains strong, supported by the strengthening U.S. economy. We continue to see a benign credit environment with unemployment rates steady and wages rising. In addition, consumer leverage has remained stable and consumer confidence remained strong, having recently reached levels not seen since before the financial crisis.

Together, these positive developments contribute to our expectation, that we will see continuing improvements in our underlying consumer credit and strong growth in our portfolio. Overall, this makes us quite optimistic about our opportunity and ability to create significant value for our shareholders. So let's turn to Slide 4 and cover our first quarter highlights.

First, our overall financial performance. For the quarter, our Consumer & Insurance segment earned $103 million or $0.76 per share on an adjusted basis. Scott will take you through the financials in greater detail. C&I average net receivables grew 2.5% from a year ago to $13.3 billion. Secured loans made up 48% of total originations, up nicely from 35% 1 year ago. We added $150 million of receivables in April, reflecting strong momentum that we expect to continue through the second quarter and beyond.

Lastly, capital liquidity. We continue to make meaningful progress on reducing our tangible leverage, and we continue to track well towards our goal of approximately 7x by the fourth quarter of 2018. At the end of the first quarter, we had reduced our tangible leverage to under 10x.

Let's turn to Slide 5. As we discussed, our business has consistently generated an unlevered return on receivables in excess of 10%, which we believe is unequaled in the lending sector. Our focus on unlevered returns is important because maintaining this consistent performance ensures ongoing access to low-cost funding in the capital markets, which we continue to tap on favorable terms. Most importantly, we believe we can continue to generate returns on tangible common equity in the 20%-plus range.

Let's turn to Slide 6. As anticipated, we saw the typical seasonal slowing in receivables growth during the first quarter. C&I ending net receivables were $13.2 billion for the first quarter, down about 2% from the previous quarter. Since the completion of the integration, our branches have generated significant momentum in conversion rates of applications to close loans, which combined with a seasonal increase applications volume led to solid gains in receivables in April. These positive production trends started in mid-March and carried through the month of April, leading to $150 million receivables growth in April versus $95 million last April. Importantly, our former OneMain branches had increased the level of secured originations, which has the dual benefit of booking larger loans, while also being a significant factor in our positive outlook for credit performance. As a percentage of production, secured loans were 42% of originations in the first quarter at the former OneMain branches, up from 19% a year ago. With this progress, we remain on track to reach our target of having about 35% of the former OneMain portfolio and over 40% of the total portfolio secured by the end of '17.

Regarding future originations, we are focused on developing growth and profitability strategies by taking advantage of improved analytics and marketing data. We are analyzing our target market and identifying opportunities to grow the portfolio within our risk profile. One of the biggest benefit of the integrated network is that we have better data that we are using market-by-market to drive growth and profitability with an emphasis on underpenetrated markets.

Let me also share with you a couple of additional initiatives that we have recently undertaken.

First, given our integrated branch platform, we have begun to optimize application flow across branches, which both enhances customer service and improves our application to book long conversion rates. Second, we continue to adapt our sales training programs so that our branches have the tools and resources to put multiple loan offers in front of customers, enhancing customer choice and maximizing growth opportunities.

I'm thrilled with the results of the last few months' initiatives, which have meaningfully improved our ability to drive loan growth and stronger returns.

Turning to Slide 7. Credit performance in the first quarter was consistent with our expectations. Net charge-offs were 8.5%. Delinquency improved nicely quarter-to-quarter and our outlook for charge-offs for the year remains unchanged in the low 7s.

Before we discuss our delinquency trends, I want to highlight some of the credit benefits we are seeing from both the increase in secured lending and the transfer of the former OneMain portfolio onto our servicing platform.

For those of you who followed us when we acquired the SpringCastle portfolio from HSBC and took on the servicing, I'm sure you recall the steady improvement that we were able to achieve in credit performance of that portfolio. Our recent experience with moving the former OneMain portfolio to our servicing platform is proving to be very similar, and we've already seen an improvement in roll rates from 60-plus delinquency to charge-offs. In prior quarters, the ratio of net charge-offs to early-stage delinquency had been approximately 3.3x. We expect that ratio to trend closer to 3x in the near term as we see the results of improved servicing and increased secured lending. This trend supports our loss outlook of 7.2% for the second quarter of '17 and 6.8% for the second half of this year. As I said, we continue to expect the full year 2017 net charge-off ratio to be in the low 7s and 2018 net charge-offs to improve from there. Total delinquency for the quarter dropped 40 basis points sequentially from 4.9% to 4.5%. Early-stage delinquency at quarter end fell sequentially as well, declining 10 basis points, but was up 30 basis points on a year-over-year basis. The latter increase resulted from 2 factors. First, the impact of the January and February OneMain branch conversions; and second, to a lesser extent, was likely impacted by delay in this year's tax refunds.

Before I turn the call over to Scott, I want to comment on the impact of declining auto values, which we believe is immaterial for us. First, let me remind you that we are not an indirect auto lender. Importantly, we are not in the auto finance business as the industry generally defines it. Our basic loan product continues to be the traditional installment loan, which in certain cases, may be secured by the borrower's titled vehicle. Our loans are underwritten against the borrower's ability to repay and the presence of collateral serves to reduce the bulk frequency with loss severity being much less the factor. In any given month, we repossess a relatively few vehicles. So changes in used car prices have very little impact on our total losses. To highlight this, we believe that a reduction in used car prices of 10% would result in an increase in overall portfolio losses of less than 2 basis points annually. Now I'd like to turn the call over to Scott.

As Jay just walked through, we have solid momentum on growth and credit. I will take you through the significant progress we'd made on our operating expenses and deleveraging.

Before we get there, let's turn to Slide 8 to review our first quarter performance. We earned $33 million or $0.25 per share in the first quarter on a GAAP basis versus $137 million or $1.01 per share in the first quarter of 2016. Last year's quarter includes a pretax gain of $167 million related to the sale of our interest in our SpringCastle joint venture.

Our Consumer & Insurance segment earned $103 million this quarter or $0.76 per share on an adjusted basis compared to $126 million or $0.94 per share in the first quarter of 2016.

Let me take you through the key factors in this quarter's performance. First, interest income declined in the fourth quarter consistent with the reduction in receivables that we signaled during the fourth quarter earnings call. Over the past few quarters, yields have been declining as we have executed on our secured lending strategy, which we expected to lead to lower losses in future periods.

As yields have stabilized incremental growth in the portfolio will accelerate interest income. Other net revenue, which includes net insurance, investment and other income was down sequentially and year-over-year, with the declines attributable to lower insurance premiums in the current quarter. Looking ahead to the balance of this year, the first quarter level will be more indicative of the run rate. We expect total provision expense to remain stable quarter-to-quarter for the remainder of the year. As Jay mentioned, we anticipate second quarter charge-offs to decline to 7.2% and the second half loss ratio around 6.8% as we see the benefits of improved roll rates and the impact of our secured lending strategy.

Our loan loss reserve for the remainder of 2017 should be relatively stable, as the reserve benefit from the improving loss outlook are expected to be offset by growth-related increases.

This stability will result in a decline in our non-TDR reserve ratio as the receivable denominator grows throughout the year. As a reminder, our non-TDR reserve reflect a loss of emergence period 7 to 8 months in accordance with the characteristics of our portfolio.

Turning to Slide 9. I want to highlight our progress on expense reductions and operating leverage, we continue to realize cost savings from the acquisition.

In the first quarter, C&I expenses were $303 million or 9.1% of receivables, down from $325 million or 9.6% of receivables in the fourth quarter. The sequential reduction in operating expenses reflects seasonally lower expenses, typical of the first quarter such as marketing, which we will return to normal levels over the rest of the year as we invest in growth.

In addition, we transitioned all legacy OneMain branches off the Citi operating system, allowing us to reduce TSA costs. First quarter operating expenses included a modest benefit from eliminating TSA costs, and we will see additional benefits in the second quarter as the full run rate of the savings is reflected in our results.

Further, we have completed the consolidation of about 100 overlapping branches, positioning us to realize additional expense synergies.

Looking ahead, operating expenses made various fit over the next few quarters as we see opportunities for incremental investment and growth initiatives, including investing in our brand.

We remain on track to achieve a fourth quarter excess run rate of $300 million, which is equivalent to an annualized $100 million savings compared to fourth quarter of 2016.

Turning to Slide 10. You'll see a summary of our $14 billion in debt. Similar to last quarter, we have maintained a mix of about 60% secured debt and 40% unsecured debt, with a nicely balanced unsecured maturity profile. On the liquidity side, we continue to be in a strong position. We have over $4 billion of unencumbered consumer loans and $4.6 billion of undrawn conduit capacity at the end of the quarter. These liquidity sources allow us to maintain our policy of having greater than 12 months of forward liquidity coverage without any new capital markets transactions, mitigating any significant potential market volatility.

Turning to Slide 11. We continued on our path to delever our balance sheet. Our tangible leverage decreased to 9.8x at the end of the first quarter of 2017, down from 10.4x at the end of 2016. We continue to be on pace to reach our leverage target of 7x by the end of 2018. On the right side, you will see a table that goes into more detail on our expected tangible capital build in 2017 and beyond. At the top of the table, you'll see the underlying adjusted earnings for the C&I segment that we have guided to. Below that, as we previously provided, we have outlined the more significant elements that walk down to the $300 million of tangible capital build that we expect in 2017.

As we move past 2017, tangible capital growth is expected to accelerate as the impact of acquisition-related costs in legacy real estate falls to less than $100 million in 2018. And in 2019, we expect that impact to reduce further to about $50 million.

Now let's turn to Slide 12. Our business generated a significant amount of capital and free cash flow. I want to share some of our early thoughts on capital generation and deployment as we now have increased visibility towards reaching our tangible leverage target of 7x by the end of 2018, which is equivalent to a 12% tangible common equity ratio. For illustrative purposes, we've assumed annual receivable growth ranging from 5% to 10% and return on receivables of a little over 3.5%, both basically around our current levels. Using these growth rates, we would expect to generate excess capital of about $300 million to $400 million per year after retaining the appropriate level of capital to support our receivables growth. With that amount of excess capital generation, we would have a variety of options available to us to deploy capital in a shareholder-friendly manner, including dividends and our share buybacks. Of course, we continue to focus on achieving our target leverage ratio, but we thought it would be helpful for you to understand just how much excess capital the business can generate.

At this point, I'd like to turn the call back over to Jay for his closing remarks.

Thanks, Scott. In closing, I'd like to turn to Page 13 and highlight our outlook for the remainder of 2017.

We continue to be comfortable with our full year 2017 Consumer & Insurance adjusted EPS guidance of $3.75 to $4 with receivables expected to end the year in a range of $14.3 billion to $15 billion. Looking ahead to the remainder of the year, we will continue to provide our branches with the analytics, products and sales tools to maintain the momentum in growth and credit trends. As we continue to take these steps, we are confident that we will generate meaningful excess capital that can be deployed to drive even stronger shareholder returns. This adds to our view that our shares are clearly undervalued. Now, I'd like to turn the call back to Laurie to begin the Q&A period.

(Operator Instructions) Your first question comes from the line of Mark DeVries of Barclays.

Jay, I think 2 quarters back you commented how your ability to grow is being impacted by a number of things including just increasing competition from credit card lenders. I'm interested in getting your thoughts on where that dynamic is today. And also, I think one of the CEOs and one of those issuers recently on an earnings call commented on how while they still see an attractive growth window, they are seeing risk increase as consumers unsecured debts are growing faster than their incomes, making them a little more cautious. So interested in your thoughts around that dynamic as well.

Sure. Well, great questions. Thanks, Mark. I'd say a couple of things. First, let me start with the second half. I'll then work my way back. We pay a lot of attention to the leverage our consumers have and the outstanding debts that they bring on when we close loans with them. And as we look back over the last couple of quarters, they have been very stable. So we really haven't seen significant increase in our customers having additional credit. That's been something that's been pretty stable over time and something we're obviously quite cognizant of. And to at least to the competition, I'd say, the small balance credit card that was probably a little bit misunderstood when I made the comment a few quarters ago. It was just something we were aware of and much less of a competitor. But when I was actually referring to them, they're much smaller balances, I was referring to probably the cards and hundreds of dollars as opposed to our loans in the thousands. So just something that was out there. I said the competitive environment as we see today is quite good and similar to what it's been really for a period of time.

Okay. Got it. And then my second question, I think you may have answered this in some of your prepared remarks, but if we think about your second half charge-off guidance of 6.8%, if we kind of look at where roll rates have been, to us that implies given where delinquencies are, roughly 6.8% for the seasonally favorable 3Q and then higher in 4Q, making it tougher to get to the guidance. Is that -- is your expectation that -- I think you mentioned that you're seeing some improvement in roll rates recently, that those continue and that's what keeps you to your guidance?

Yes. Mark, this is Scott. I've got 2 things. One is the roll rate improvement as well as the continued percentage of secured lending. So as we get to the back half of the year and going into 2018, we have both of those tailwinds helping us.

Your next question comes from the line of Bob Ramsey of FBR.

I think you all talked about the acceleration growth in April. I'm just curious if you could sort of separate how much of that you think is seasonal and what maybe you're seeing outside of the seasonal trends?

Look, as we sort of highlighted, it's up meaningfully year-over-year and to us that's a significant marker. But I would say a big chunk of it is the fact that we have really finished all the activities we need to do in Jan, Feb and people are very comfortable at the systems. I think people are seeing the experience of how they were able to work with the system, there are paperless closings in the branches that make loan closings significantly more customer friendly across 1,000 new branches and really the take-up across the additional 1,000 branches has really added to the growth. The conversion rates, as we indicated has gotten stronger. So I'd say some of it's clearly seasonal, but when we look at the growth year-over-year, that's really a factor of having everybody on the same system as well as seeing strong demand across the board.

Okay. And I guess, the originations did look a little bit softer this quarter. Was that just around the, sort of, system conversion and distraction? Or is there anything else sort of in the first quarter that impacted originations?

I think that's it. Look, when we had basically 4,000 people coming from a systems change in January and February, we were very cognitive that we didn't want to create significant issues and really made sure marketing and other things were paired back to be able to get through as seamlessly as we could for January and February, so we could maintain credit and do the things we needed to do so we could come out strong in March, April and beyond.

Okay. And then just sort of thinking about the borrower aspects, whether then you all saw a employee impact. Sort of what are you seeing on the part of the borrower in terms of demand?

I would say the biggest indicator we look at in demand is applications, and we're seeing strong applications year-over-year and month-over-month and so that gives us pretty good confidence that demand is there.

Your next question comes from David Ho of Deutsche Bank.

Just want to reconcile your continued assumption that the secured versus unsecured would obviously go towards secured over time. But obviously, you said that the yields look fairly stable even though the secured loans are probably coming on a much lower gross yields. So what gives you confidence that you can maintain the yield outlook from here?

Yes, David, we mentioned a little bit in the fourth quarter coming into the first quarters. We've had a big ramp up in early part of 2016 particularly, on the OneMain side. And so as you kind of look at the kind of -- the increase is not as steep, so as part of that the overall portfolio mix, you won't see the same impact on the yields going forward. That's kind of the transition period.

Okay. And then your confidence on loss rates in 2018 declining. Can you go over some of the drivers of what gives you that confidence? I know obviously, the mix shift continued growth and direct auto. But anything macro wise? Or anything else that would give you additional confidence?

Well, I think, as Jay mentioned, if you look at the backdrop the macro was unemployment and unemployment claims are still very positive. There is growth in the economy. I think if you look at OneMain, specifically, I feel like in the appendix page, which we have been providing for several quarters. If you look at the 2016 vintage coupled with the increased percentage of secured lending, those pieces kind of the leading indicators as we get into our expectations for 2017. So a lot of it is based on the portfolio mix shift and also the underlying credit improvement in the vintages.

Okay, great. And are you seeing a benefit from higher rates as obviously, 40 percentage of your business is debt consolidation and higher rates obviously makes debt more expensive and many people want to refi or consolidate over time?

Not really. Our customers are clearly, both interest sensitive and payment sensitive, and we want to make sure we're providing loans that fit into their budgets. So I'd say we expect more or less the rates we're charging to be pretty consistent to what we've been. I'll add one more thing really to your earlier question, what Scott said. It's really a high level but I think what everybody knows, is when we think about loss rates, obviously, the portfolio is mixing more and more to secured. The loss rates on the overall secured book is 50% lower than the unsecured book. So it doesn't take much of a mix to drive the losses down.

Your next question comes from the line of Sanjay Sakhrani of KBW.

This is actually Chas Tyson on for Sanjay. Just want to ask about loan growth again and get your thoughts on longer term. I know you're obviously seeing some acceleration in the early months of 2Q and you outlined some kind of scenarios on loan growth on Slide 12. How should we think about where this model can grow long term to the extent that you can kind of get these improvements going and see results?

Well, we want to make sure we stay responsible in the credit box for capital lift, and that's our primary goal. We're certainly comfortable in the numbers that were on Scott's page, sort of comfortably doing the 5% to 10% range. We've certainly over the longer term like to see our ability to help more customers in -- get in the double digits. But in the near term, I think we're very comfortable with the target rates that are out there.

Got it. And then on OpEx, again, the ratio came down. Again, obviously, how much of a benefit was there from the roll off of the TSA in the quarter? And is there any way to size the additional expense synergies from branch consolidation that you talked about?

Yes, I think, it's all part of what we kind of originally laid out there. So it's a little bit -- it's kind of 1 month in the first quarter as we talked about getting all the systems not until the end of February. So most of that will kind of come through in the second quarter. And then the consolidations to me that really the -- if we kept all the people its just kind of putting 2 nearby branches together. So we have little bit of savings on rental expense in regards to those operating leases. But other than that, most of the savings as you see have been based on the kind of the actions we've been taking over the last couple of quarters manifesting themselves in the first quarter numbers.

Your next question comes from the line of David Scharf of JMP Securities.

Jay, a couple of things. One is just on the consumer front, just a point of clarification. I wanted to make sure I understood your commentary or assessment about household leverage of your applicants. I think it was a couple of quarters ago, you had commented you were starting to see some of your applicants carry a little more unsecured debt. I thought the comments today, suggested the outlook was more stable. Can you elaborate on how we ought to interpret the overall balance sheets of your applicants?

Sure. Well, I'd split that really into 2 things. There is the applicants and there's the loans we closed. So we pay a lot more attention to the loans we close because that's the risk we're going to own going forward. Certainly, we don't approve every loan. We come close to approving every loan. I'd say, in general, the applicants do have more credit and we're being careful about those that we do approve. But those that we do approve and put on the book has been pretty stable.

Got it. Got it. And shifting to the secured versus unsecured profile, if we assume that a significant portion of the incremental secured loans are on the direct auto side, can you give us a sense for what the average loan size is likely to look like at the end of this year and how that compares to a year ago?

Sure. And sort of just to clarify, as I said it's about 48% of book from the passive book in the first quarter was secured. That we view, about half of that is direct auto and half as what we would call hard secured, which are cars older than 8 years. So again, the bigger loans are for the newer cars that average, I want say, 4.5 years old. Those loans have been about $15,000, $16,000. As we look at the older cars, they bid in the $6,000, $7,000 range. So that's about the profile looks like and it's been roughly a 50-50 mix between the newer vintages and the older vintages. And clearly, the newer vintages perform a bit better, but they both perform quite well compared to the unsecured book.

Got it. And then lastly, on the losses in the quarter, the recovery rate was unusually large, which I assume was a function of larger than usual debt sales in the quarter. I guess, number one, is just to confirm that. But secondly, if increasing sale of charge-offs is contemplated or inherent in your full year forecast for net losses?

No. No, you're right. So we've been averaging about 80 basis points on recoveries. I would say the majority of our recoveries are actually in-house collections and not sales. But as we kind of put the 2 servicing platforms together, as we planned last -- in the fourth quarter, we did have a bulk sale of some bankruptcy charge-offs that we didn't have in the first quarter that we don't expect to repeat in the subsequent quarters.

Your next question comes from the line of Eric Wasserstrom of Guggenheim.

Just a couple of small questions and then a more strategic one. I just want to understand on margin, I know, it's been brought up a couple of times, but presumably as rates move higher, solely your cost of funding. But are you anticipating passing that full cost on to -- in the form of pricing?

As we've talked about before is on the funding side depending on kind of what expectations as we go forward around rates. If you look at our unsecured debt kind of where they're trading out now would imply that we could actually replace our existing unsecured probably for similar prices to what we could issue new debt at. And as we've talked about in the last call, the rates on the base rates for our secured lending have gone up with rate increases, but we've seen compression on spreads based on the performance of those securitizations. So accordingly, there's some potential kind of rate pressure, but as we have a staggered maturity, the impact won't be as significant as you may think. In regards to passing on to the customer, again, it's a competitive environment. We look at kind of how we price our loans routinely, but again, it's really a matter of -- a function of managing that with kind of the market forces. So there is some opportunity there, but, Eric, I'd say for the most part we kind of see some stability at least over the next couple of quarters.

Okay. And then for more longer term, at the time of the -- that you guys announced the OneMain acquisition, you'd articulated a certain level of earnings power and then obviously that changed a little bit through the integration. But now that you're on the other side of that, how do we think about the longer-terms earnings power at this stage, given what you're articulating in terms of credit expectation growth and it sounds like the potential for capital management?

No, I briefly say, I think, we feel quite good about the long-term earnings power of this company. I think, certainly, when we look back couple of years, we're probably off by a year or so in terms of where we thought we'd get to. But longer term, I just think we feel good about the platform, the customer base and the ability to generate long-term meaningful profits.

So and just to be clear, Jay, your view is that those levels aren't necessarily inaccurate, just the timing to achieve them had changed?

I think that's a fair observation. Yes, we're certainly a year behind with integration and some few other things, but as you look at certainly, what we've said for what we expect growth and other things over the longer term, we think it's a matter of time.

Your next question comes from Henry Coffey of Wedbush.

Two questions. First, just in terms of overhead. At what point do we get to where you're operating costs are going to grow pretty much in line with the receivables? Is that 2018? Or is there more efficiency squeeze going on past '17?

Yes, thanks, Henry. As soon as we kind of get to kind of our run target we talked about in 2018 I think as we -- or in 2017. I think as we go into 2018, I would kind of think about go forward kind of a 4% to 5% type inflation, which would be a little bit -- would be comp related and a little bit would be investment and growth. And from those perspectives, we can still drive down the ratio because you'll get the operating leverage from slower expense growth relative to receivable growth. So we can continue to drive the ratio down.

And then just looking at this big, we'll call it the competitive pricing matrix, what -- really, it's 2 parts to that, product intrusion. There's been a lot of noise with all the marketplace lenders and a recent IPO with an online lender. When your customers walk in the branch, are they seeing pricing competition from other branch-based lenders? And are they sort of sitting with other offers in hand? Or how does it actually -- how does the pricing discussion actually work when a customer sits down with you all? And how much of that is impacted by either the presence or the absence of all these other providers?

Good. Great question. Look, what I'd say is our customers, we recognize them in a very transparent world and our customers are actually all quite sophisticated, whether it's tools like Credit Karma, LendingTree and others, that give customers quite a bit of access to information and competitive rates. But when we look and sit down with our customers, we're largely looking at their credit bureaus and seeing the credit card debts they have and, in general, our rates are pretty comparable to credit cards. And that's a large degree of the conversation. As well as what's important is can they handle the debt load. So what's the payment, how does it fit in their total obligations. And do they disposal income leftover? So we're very -- they're very aware of rates. Its part of the conversation, but it's also important that they have that meaningful budget leftover to live their lives and be able to deal with the things that come along. So I'd say increasingly, they're quite sophisticated and rates is part of the conversation but not the only part.

Is this all impacting insurance sales? Or is that still very much a part of the finance equation?

No, I'd say that as we're well aware, a part of the conversation, but it's one that is the decision a customer makes to agree they're underinsured and these are tools that give them options to better protect themselves and their credit.

Your next question comes from John Hecht of Jefferies.

Most of my questions have been asked. But, Jay, you did -- you cited that the DQs are still higher on an absolute basis in the OneMain branches relative to the legacy Springleaf branches. And if you disaggregate the credit, then it looks like Springleaf is actually pretty flat year-over-year in terms of credit quality, so I guess, number 1 is what have you learned thus far in the integration process that you can apply to the OneMain branches, where you can continue to mitigate the DQ levels? And given that, what time frame do you think where you'll get those down to the Springleaf-type levels?

Yes, John, this is Scott. I think just to put it in perspective, I think the delinquency impact really, we went through a 1,000 branch conversions in January and February. So you're really only seeing 1 month post that process. As we kind of look into April, we saw kind of a pickup on that side in regards to the OneMain branches as we got further from that. And so I think as we get through the next quarter plus, you'll start to see normalization in the OneMain branches.

Okay. That's helpful. So it's the middle of the year basically is what I'm hearing. And then the second question and it's just a clarification. Scott, I think you mentioned the insurance again, would be flat, or this would represent a good base rate? Is it flat in a dollar basis or against the basic percentage of receivables, how should we think about that?

I think what I talked about John, was on a dollar basis.

Your next question comes from the line of Michael Tarkan of Compass Point.

This is Andrew Eskelsen on for Mike. First question can you just talk about sort of developments on the regulatory front? Specifically, we're seeing a number of states get more aggressive with rate caps. I know that there are bills in California and one in Maryland. Any thoughts or color on these?

Sure. We're certainly paying a fair amount of attention to what goes on at every single state. California is sort of transpiring pretty quickly, and we're paying a fair amount of attention. The good news for us is relatively few of our loans would wind up under the guidelines where they're talking about moving the rate caps. So for us on that one, next to no impact. We're certainly watching every other state. I can't give you specific color on Maryland. I can get back to you. But we clearly pay a lot of attention to every state. There have actually been a couple of others going the other way. So you've got a fair number of things going on as we always do, but at this point, we don't think there's likely to be much material impact on our business.

Okay. And then just one more. So I know you gave us a breakdown between legacy OneMain and Springleaf from the DQ side. Can you talk about sort of what you're seeing in the loss rates at those 2 different books of business?

Yes. I think as we've talked about before, we provided last quarter, some expectations for losses relative to the 2 portfolios. So I'll tell you that the Springleaf portfolio really has been, you see on the vintage improvement, delinquency improvement, on a year-over-year from '16 to '15. And then, on top of those the conversation with OneMain was because of the large percentage of unsecured lending that we kind were expecting a little bit of a tick up in 2017 related to having a higher proportion of unsecured. And then the impact of some of the integration delinquency aspects also impacted the OneMain portfolio. And so as we kind of look at 2018, we see OneMain kind of stabilizing back to kind of '15 levels and with Springleaf kind of below those levels to get to our overall kind of outlook that 2018 will be lower than 2017.

Okay. And then, just one housekeeping question. Can you give us the ending branch count?

1,701.

Your next question comes from the line of Moshe Orenbuch of Crédit Suisse.

I guess, a couple of quarters ago you had talked about some concern that the personnel in the branches on the legacy OneMain were not really able to sell the secured product. You sound a lot more confident now. Can you talk about what that process was? Was it -- is it different training? Was it replacement? Is it done? Like as -- and can you just talk about that a little bit?

Sure. Couple of quick confirmations. One, time has helped a lot. So a couple of quarters have made a big difference in terms of people getting comfortable with the product, giving customer choices; two, being on the same system makes it (inaudible) even on the difference as well. The OneMain system, what was called Synchrony, was really never set up to offer secured loans and once they were put on a similar system, the fact that those offerings are provided naturally, how those get routed and the ability to do that in real time has made an enormous difference as well as the fact that the new leadership that the CEO has a lot more comfort understanding the products and training the branch managers and those in the branches to help sell the products. So I'd say, really, time, leadership and systems have all combined together to help sales tremendously.

Great. And given -- really wanted to thank you for that guidance on the auto given the fear and loathing there is on used car prices. Just a couple of questions related to that. I guess, first is, you mentioned that you actually repossess very few cars. Maybe talk a little bit about how you do manage that customer then? And kind of a corollary is I mean, kind of is it linear, another 5% would be a basis point or 2? Or is there something else going on there?

No, well, that's basically it. So I'd say a couple of things. One, the way the process is handled is once a loan goes really delinquent, and the decision needs to be made to repossess or not. That's all done centrally. The branches are not involved in that. And it's all handled at our central facilities, where there's a fair amount of experience. And as you can imagine, the decisions also being made is there enough value in the car to go through the whole process. We don't want to be taking cars and then losing money on them respectively the older vehicles. So I'd say there is very good analytics that go in terms of the decisioning around who's going to repoed, who's not, et cetera to make sure we're optimizing on behalf of ourselves and investors. And that's basically how the process works. Clearly, there's laws by state, but it's those central facilities and those central decisioning that are making the repo and then ultimately, if we have to repo, getting it to auction, and making sure we're maximizing proceeds. So again, we've got a real experienced team led by -- we wouldn't have got into the auto business if we didn't have the full DNA to manage it soup to nuts and as I say, it feels good about the process as well as, as I mentioned, very few autos have actually coming through as a percentage of the total book. And most importantly, the question is definitely as you said. We stressed auto prices, then we dropped recovery, another 5% would be a basis point.

Your next question comes from Rick Shane of JP Morgan.

It's a little bit hard. You guys have done a nice job improving your slides over time. But it makes for some continuity challenges just in terms of how we look at things. But I think my takeaway is that last year, sequentially in the first quarter delinquencies improved about 40 basis points. This year, they improved about 20 -- or excuse me, they improved about 10 basis points. The portfolio and the reserve have grown roughly 2% to 2.5%. Delinquencies on a dollar basis, again, since there's not been a lot of growth, this is a good apples-to-apples comparison, it's grown about 17%. Help us understand keeping the reserve levels flat, given that you didn't see the normal -- or the historical, sequential improvement in delinquencies and that the dollar delinquencies are higher. I understand that it sounds like it's related to roll rates, but let's really delve into what's going on with roll rates. How long have you seen a roll rate improvement? And more importantly, what do you think is driving that?

Well, Rick, I'll try to kind of take some of the different pieces of your conversation. So again, from the perspective of our overall reserves as we have on Page 7, the LEP process and expectations for the next 7 to 8 months of losses is clearly something that is the driver of the reserve rate. And so as we kind of look at a year ago, first quarter versus the current quarter, our losses last year on a full year basis as well as this year are kind of in the same ballpark. And so from a perspective of that question, the reserve rate is kind of driven by that expectation of losses. And number two, in regards to kind of why the reserve kind of came down in the first quarter is related to the fact that we had a large kind of charge-off in the first quarter that we provided for back in the third quarter when we saw the delinquency. So you kind of look at that chart, you see where it kind of went up, which was kind of taking into consideration the first quarter charge-offs. The third question I think you had, if you could repeat them, I apologize.

It's really what's going on with roll rates because I think that that's really the key thing here, and it's interesting because look, this is a trust-but-verify job. And what we're looking at is charge-offs that actually, and I understand -- and I'm not worried about the sequential decline in the reserve. I think that that's a normal seasonal factor. What I'm looking at is delinquencies that are up year-over-year. Fine, I understand there's a onetime charge-off in the first quarter but charge-offs that were up pretty significantly year-over-year and a reserve that's flat year-over-year. And, fine, maybe that's a function of roll rates, but if that's the case, let's really understand what's going on with those roll rates, because it's a little bit inconsistent with what we're seeing in almost every other asset?

Okay. So I think to answer that question you heard Jay, talk a little bit about kind of the centralized servicing moves. So we did start to see some improvement overall, on the OneMain portfolio, legacy or former OneMain portfolio. Late in 2016, but it was kind of incremental, given that we're still on 2 different platforms. As we came into the first quarter and kind of put all that on to the same system and used similar strategies to the Springleaf historical strategies. We've seen the roll rate improvement accelerate over the last few months and that's what gives us confidence as we look forward in the next couple of quarters of why the reserve as well as the loss expectations are kind of commensurate with what we put out for guidance.

Okay. And with the idea that delinquencies are up 17% year-over-year, are you actually seeing a 17 and reserves are flat. Are you actually seeing a 17% or close to 17% improvement in roll rates?

Well, it's a combination of a couple of things, Rick. So we are seeing very good improvements on the roll rates. But also, if you kind of look at some of the other metrics outside of just the 30 to 89 days if you look at 60 plus, went down from 3.6% to 3.2% and as we talked about the roll rate improvement is really 60 to charge-off, so I think that also is something that is a proper trend that you can take a look to help with your thinking.

Okay. I'll have to wind up. One of things is that some of the disclosure buckets on delinquencies have changed. So I missed the 60. I'll have to go back and find out.

It's in the -- there's a page on 21 of the appendix. It kind of has all the delinquency metrics.

I see the 90 there.

Sorry, it's in the press release.

Your next question comes from Robert Dodd of Raymond James.

All those follow-up with Rick's question. If I go back and it sounds like ancient history, but to the fourth of the -- when you gave the presentation of fourth quarter '15. So a little bit more than a year ago you give us a breakdown on mix and how charge-offs trend over time. Springleaf, the first 2 years, like I see Springleaf the first 2 years on the order side charge-offs were essentially 0, right. Young program going up, it doesn't have a lot of NCOs. We're kind of in that situation now with OneMain. So to the question becomes I guess, how much of this improvement is vertical like-for-like consumer versus the mix. Obviously, the mix moving to hard secured and auto. I would expect the whole that charge-off number down, but some of that is a function of that program through the OneMain branches just being so young and so essentially, charge-offs being near 0 in the near term, but then obviously, they won't trend up pretty rapidly -- well, relatively rapidly at some point. So can you give us some color on that? How much of this is the timing and the age of those type of receivables that you're onboarding versus how much of this is actually like-for-like consumer improvements?

Well, I guess, if you kind of look at the charts that we put in the back in regard to the 2 different portfolios. The strategy was always to kind of take the OneMain portfolio from being predominantly unsecured to a mix of unsecured and secured, in order to over time, clearly, kind of reduce the embedded loss on that portfolio. So that was what we were doing strategically. So I think, if that's answering your question, so the expectation would be that portfolio would have a lower loss. We did have to, as others have mentioned on the call, the pricing for the hard secured is lower than that of unsecured, but the overall risk-adjusted return on the secured book is very strong. And so the mix aspect of that would be something that we've talked about on the OneMain. You'll start to see that come through more in 2018 than you will in the current years because most of the losses in 2017 or '16 are derived from the previous kind of 2 years. So on an apples-to-apples basis, clearly, OneMain as we get to the '17 vintage will start to improve because of the mix and as you get into '18, or '18 vintage, you can't go back and try to compare that to a 2015 vintage because of the mix shift. But the overall credit on the product side continues to be stable. If that answered part of your question also.

It does. I guess, the question really boils down to and I appreciate, obviously, the mix is the plan to rotate that. That has been the plan the whole time and that's one of the factors that, that goes into the guidance and the expected return on capital improvement. I guess, the question also, goes into the fact that if -- the target is to grow receivables pretty substantially this year. If that's in the auto and the hard secured, it's a real effect on net charge-offs, but it's not a -- I'm trying to separate the 2 issues between what consumers are doing and we're seeing like-for-like, so to speak, in the delinquency numbers versus the mix. Both of them together are what drives your earnings, right? But from a -- I worry about the future perspective, which I do, obviously, I'm on the credit side. I'm trying to separate the 2 issues to see what effect the consumer status is having on you versus what effect your decisions are having on you in terms of mix, but I'll do what I can...

Yes. Well, I'll try to answer that in a different way to maybe help you is, when Jay made the point there's kind of 2 things. We provide multiple products to our customers. So we have a unsecured product, we have a hard secured product, and we have direct auto product. Not each of one of those products the customer will qualify. But also, giving choices to consumers when -- it's from our perspective versus the consumer perspective that we feel that a secured loan is the best loan from a perspective of the profile of the credit. That is a decision that is -- that we offer that hard secured because we know that, that would perform better than an unsecured loan. So part of this is strategic, but also, it's a way for us to manage kind of the different credit profile of our customer base with respect to getting that collateral which implies and performs much better than an unsecured loan.

Robert, the only other thing I quickly add is you're right. The auto is a factor, but if you look at the performance of our stable auto, when we've (inaudible) securitized a couple of pools at this point, charge-offs are in the 2s. It was clearly different than everything else and all that's factored into our long-term expectation.

Your next question comes from Lee Cooperman of Omega Advisors.

You come across the feeling that your stock is very mispriced and that you'll ultimately resort to some kind of dividend repurchase. But relative to the $3 billion market cap and your own budgets, what order of magnitude are we talking about in terms of free cash flow relative to the market cap? And when would the timing likely be for you to either implement a dividend or a meaningful repurchase program?

I think as we mentioned that we're very focused on getting down to our target leverage of 7x in 2018. So we put the illustrative example in there to kind of talk more once we get down to that target leverage. If we get to that a little bit faster that gives us opportunities to think about that before then. But the capital generation of the business and the free cash flow is kind of fairly in line with our earnings generation. So that gives us -- those are that kind of the factors that we'll look at, but it's really kind of once we get down to the 7x.

So that's really a year-end 2018, early 2019 development?

Yes. Correct.

At this time, there are no further questions. I will now return the call to Craig Streem for any additional or closing remarks.

Thanks, Laurie. Appreciate your interest and your questions this morning. And of course, we'll be available for any follow-up. Thanks. Have a good day.

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