OneMain Holdings Inc (OMF) 2018 Q1 法說會逐字稿

Welcome to the OneMain Financial First Quarter 2018 Earnings Conference Call and Webcast. Hosting the call today from OneMain is Kathryn Miller, Vice President of Investor Relations. Today's call is being recorded. (Operator Instructions)

It is now my pleasure to turn the floor over to Kathryn Miller. You may begin.

Thank you, Maria. Good morning, and thanks for joining us. Let me begin by directing you to Pages 2 and 3 of the first quarter 2018 investor presentation, which contain 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 the 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. If you may be listening to this via replay at some point after today, we remind you that the remarks made herein are as of today, May 3, 2018, 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. After the conclusion of our formal remarks, we will conduct a Q&A period.

So now let me turn the call over to Jay.

Thanks, Kathryn, and good morning, everyone. We are thrilled to have again executed on our key objectives this quarter. We generated good receivables momentum with a greater mix of secured lending compared to last year. Credit performance improved nicely versus last year as well. And we achieved strong operating expense leverage. As a result, our Consumer & Insurance segment reported a $1.18 of adjusted diluted earnings per share.

From a balance sheet perspective, we continued to improve our liquidity and funding diversification. So, all in, we continued to drive progress across all our key objectives in the first quarter.

Let's now take a closer look at the primary drivers supporting our 2018 strategic priorities. We continue to see a healthy consumer with debt to income level that remained stable, and consumer confidence remain strong. With that backdrop, we are investing in our business to ensure that we remain our customers' first choice when they explore financing options.

In fact, April marked the start of a number of strategic investments in our business. In particular, I'd like to highlight our brand campaign, Lending Done Human, that was recently launched with the help of 2 fun television ads, which are posted under the first quarter earnings presentation on our website. Our goal is to raise awareness of who we are and how we help.

Research shows that many customers feel vulnerable and anxious when needing a loan, and what they want more than anything is to be treated like a human. They want to feel secure, understood and respected. And of course, that's exactly where OneMain excels. OneMain's in-person and relationship-based underwriting is an important differentiator from a transactional nature of most other consumer lenders. And in terms of the advertising itself, the tone is friendly and honest, just as we pride ourselves on being approachable and responsible lenders.

As we continue to make investments in our brand and overall customer experience, we expect our marketing metrics to improve in support of our disciplined receivables growth. We only originate loans that we are just as happy to hold in our portfolio today as we will be in 2 or 3 years. This means that any growth will be done with the portfolio's overall performance in mind. Maintaining consistent credit standards and appropriate risk-adjusted returns is vital. So, too, is our objective to increase our portfolio's mix of secured lending. It should come as no surprise that this priority is a key tenet of our long-term strategy. Importantly, it provides greater operating leverage and stronger credit performance. That's improving the resiliency and the profitability of our portfolio. Of course, not every customer that applies is looking for a secured loan. In fact, while securing their car will qualify them for more attractive loan offers or simply a loan that they would not otherwise be approved for, there are plenty of customers that are not able -- would prefer not to use their car as collateral.

As we've said, our focus on driving the secured mix towards 50% remains a key priority. The trajectory may slow with our legacy OneMain branch's approach secured mix parity, and demand for both direct auto and our secured products fluctuates over time.

Overall, we are very pleased with the quality and the mix of the loans we've been adding to the book. We've been able to maintain all 3 of our key priorities: consistent credit standards; appropriate risk-adjusted returns; and a secured lending focus, while still growing our receivables.

We are well on our way to achieving the strategic priorities we outlined for 2018, all of which are aimed at enhancing the profitability and resiliency of our portfolio. And with that, I'll turn the call over to Scott.

Thanks, Jay. Our execution on our key strategic initiatives in the first quarter led to our strong financial performance. We earned $124 million, or $0.91 per diluted share, on a GAAP basis versus $33 million, or $0.25 per share, in the first quarter of 2017.

Our Consumer & Insurance segment earned $160 million this quarter on an adjusted net income basis, or $1.18 per diluted share, compared to $103 million, or $0.76 per share, in the first quarter of 2017.

I'd like to highlight our GAAP earnings growth, which has been driven by the strength of our core operations and the defining impact of acquisition-related charges. We expect GAAP income to improve as these trends continue.

Let's discuss the key drivers of the C&I financial performance for the quarter. Originations were $2.5 billion, up 40% from last year. Recall that last year's first quarter was impacted by integration-related activities. Ending net receivables grew by more than $1.7 billion versus last year. Of that, about $1.5 million was secured, including $1 billion of direct auto. We feel great about this high-quality growth. Interest income was $873 million in the first quarter, up almost 9% from last year's level, reflecting higher average assets.

Interest income was flat with the fourth quarter, reflecting stable portfolio yield. We continue to expect relatively flat portfolio yield for the remainder of 2018 as we prioritize our portfolio's secured lending mix and appropriate risk-based pricing.

Other revenue was $133 million in the first quarter. This was down 4% compared to last year, primarily due to lower investment income. Investment income levels should remain around the first quarter levels for the remainder of the year.

First quarter credit performance was in line with our expectations and showed improvement compared to last year. Our 30- to 89-day delinquencies were 2.1%, 90-plus delinquencies were 2.3% and net charge-offs were 7.2%.

In terms of our second quarter credit outlook, we expect net charge-offs to continue to improve on first quarter levels. We remain on track to achieve net charge-offs below 7% for the full year of 2018, benefiting from secured lending and disciplined underwriting.

Total reserves decreased by $6 million to $718 million in the first quarter. This represented 4.8% of receivables compared to 4.9% in the previous quarter. We expect our reserve ratio to remain stable for the rest of the year.

First quarter operating expenses were $298 million, about $5 million lower than last year, and our OpEx ratio improved 110 basis points versus last year. We expect expenses to increase in the second quarter, primarily reflecting the launch of our brand campaign and seasonally higher marketing expense.

Moving on to our funding and liquidity. The first quarter was another active quarter for us and quite successful by all accounts. We issued $1.25 billion of 7-year unsecured debt at 6.875%, our largest and longest unsecured deal to date. A portion of that debt was used in mid-April to redeem $400 million of 7.25% notes due in 2021.

In addition, we issued almost $1 billion of longer-duration ABS deals at attractive pricing. At the end of the first quarter, 56% of our total debt was secured, reflecting great progress towards our goal of 55% for the year. As a result of this lower secured debt mix, we expect higher interest expense for the remainder of this year. That said, despite modestly higher interest cost, our shift towards more unsecured debt is important for 2 reasons: first, it allows us to manage our interest rate sensitivity by having longer duration funding and reducing our repricing exposure; and second, it enhances our liquidity profile by increasing our unencumbered assets.

From a liquidity standpoint, we continue to be in a very strong position. We had $4.8 billion of unencumbered receivables; we had $4.9 billion of undrawn conduit capacity; and $1.8 billion of cash and cash equivalents.

As you know, one of our core principles is to maintain at least 12 months of liquidity to cover planned growth, operating expenses and upcoming maturities in the event of a capital markets dislocation. Currently, we have 19 months of coverage, assuming planned receivable growth and no capital markets access, or 30 months, if you assume no growth. So from a liquidity perspective, we've never been in a better position.

Lastly, our tangible leverage ratio was 9.2x at the end of the quarter, about half a turn higher than if we hadn't upsized our first quarter unsecured debt deal. We remain on track to achieve 7x by the end of 2018, driven primarily by the accelerated growth in GAAP earnings that I mentioned earlier.

So overall, we made great progress on our strategic priorities that we laid out for the year and remain on track to achieve them by the end of the year. With that, I'll turn the call over to Jay for his closing remarks.

Thanks, Scott. In sum, we are building a brand that will leave a lasting impression and withstand the test of time. We continue to put our customers first by investing in their experience and matching them with the right products that address their individual financial needs. We are growing in a disciplined manner by prioritizing our credit standards, appropriate risk-adjusted returns and secured lending. And we are strengthening our capital structure to enhance the resiliency of our business. In short, we've been around for more than 100 years, and we're positioning OneMain to be here for the next century and beyond. With that, I'll turn the call over to the operator to begin the Q&A.

(Operator Instructions) Our first question is coming from Eric Wasserstrom of UBS.

Jay, could we just talk maybe a little bit about the longer-term growth trajectory? You're a very large part of your market space. Of course, you're more than double the size of your next competitor in terms of footprint and in terms of receivables. So how should we view the secular growth opportunity, not so much for this year, but maybe over the medium term?

Look, it's a really good question and, certainly, one we think about. I think the most important thing we think about is making sure every loan we put on meets our risk standards, and that's the filter through which all growth is thought about. I'd also say the other important thing to think about is, remember, a lot of our debt is actually consolidating a lot of other debt on the part of the customer. So if you look at our raw numbers and the dollars that we're putting out, a lot of it is actually consolidating and paying down other debt on the part of the customer. So it's not necessarily just pure growth and additive to outstanding credit. It actually -- about 50% of all the dollars we put out are actually directed to other lenders in terms of the customer consolidating other debt. So look, I think, we think of growth as the most important thing being, does it mean our hurdles? I don't think we've got a particular growth number that we focus on. But the most important thing is, does it meet our hurdles? Is it good for the customer? And if so, I think the levels we've laid out is sort of 5% to 10% over both this year and beyond is sort of what feels right.

Great. And maybe just a follow-up. In an environment where, let's say, growth is averaging mid- to high single-digit figure. What is the -- how should we think about the longer-term optimal leverage for you under those circumstances?

Eric, it's Scott. So I think we -- as you've seen, we had the significant operating leverage that we drove as part of the integration. And if we're able to grow receivables in that 5% to 10%, we'll continue to drive operating leverage because we have a largely fixed cost infrastructure, and we talked a little bit about this year that we're making some investments in our customer experience and other technology to support that. So we've had a little bit higher expense expectation for 2018 that will kind of plateau as you think about the future.

Great. And actually, Scott, I was thinking about the financial leverage?

You mean EPS growth?

Just in terms of like your capital ratio, like your appropriate capital ratio under sort of a moderate growth circumstance generating positive operating leverage, what that means in terms of your optimal capital structure.

Yes, we've mentioned in the past we've been in -- targeted probably in the 5 to 7. We are focused on getting the 7x. I think as we get into kind of the future, I think we'll find a place between those 2 benchmarks around where the optimal capital structure is as we think about the outlook. But with that, even within that target, it generates a lot of excess capital as we've talked about in the past.

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

Mine is maybe a follow-up on the previous question on growth, but focusing more immediate in the near term. I'm wondering, Jay, obviously, discipline is the guiding principle. But given the strength you're seeing in the consumer, and it certainly echoes what we've heard from other subprime lenders during this reporting season, is there ever a consideration of, for lack of a better term, a "strike while the iron is hot" approach to asset growth this year? I'm wondering whether sort of the low employment environment, stable credit, combined with a launch of a new marketing campaign, if there is anything that would lead asset growth to go north of 10%.

Look, what I would say is where it ultimately winds up, I think, as long as the loans meet our risk criteria, we're not sort of fixated on 5%, 7%, 9%, 10%, 11%. Our initial thinking has been, given that the economy is -- been chugging along for quite a while, and we recognize that it is a good time, but good times don't last forever. I think we all know that. So we just want to make sure that the loans we put on are loans that we're going to be comfortable with, no matter what the economic cycles deliver us.

Got it. Fair enough. And just one follow-up on the credit side. I believe last quarter you may have mentioned on the recovery side, some more investing in in-house collections. Can you just provide an update on that front?

Yes, we did. And so that's kind of a multi-quarter process in regards to making that transition. But as we mentioned, we are bringing some activities more back in-house, but we will continue to have -- use third parties as part of our diversification in regards to post charge-off activity.

Our next question comes from the line of Arren Cyganovich of Citi.

So the goal is to still get to 50% secured in the book, and you've been running kind of around 44%. You mentioned some kind of gating factors of just choice of consumers. What can you do to kind of increase that secured portion as you think about it moving forward?

Well, I think, if you remember, if you look at the last year's growth, I know you can look at the percentages. But of the $1.7 billion of growth year-over-year, a $1.5 billion of that was secured. As you understand that the secured loans are a little larger than the unsecured loans and have a larger -- a little longer duration, so even on an origination point of view, as you put that on, they hang around a little bit longer. So we'll continue to see the portfolio migrate up from kind of current levels of security up to that 50% that Jay mentioned.

And also, Arren, as time continues to go on, look, it's a selling process. Customers come in largely looking for unsecured money. At the end of the day, what we're doing is walking them through loan options and showing the customer the various things that would be available to them and a lot of it still continues to be comfort on the part of our people. And I think they've come a very long way as evidenced by just how far we've come. But as time goes on, we continue to see progress on that front. So I'd expect time continues to help especially as it relates to a lot of the former. As you recall, a big chunk of the legacy OneMain book 3 years ago came over unsecured, and that just takes time to turn. And I'd say, as Scott just laid out, that turn is happening, and you'll see those 2 almost approaching parity probably over the next couple of years.

Okay. And then you still have a guidance for stable yield for the year. Yield kind of dipped down in the first quarter. Are there seasonal aspects to that? Or is there anything that would help boost the yield later in the year?

I mean, as we've talked about, we've tried to give you context. It really comes down to 2 things. It's a trajectory of how much direct auto growth is, and then we've kind of taken pricing actions. We continue to monitor those. But our expectation is that those 2 kind of will offset themselves during 2018.

Our next question comes from the line of John Hecht of Jefferies.

(technical difficulty) intermediate longer-term growth focus. Yes, I guess, maybe another question I have on that front is, how do you think about investing in new branches versus, call it, e-commerce techniques? And how should we think about that over the next 3 to 5 years in the front -- I guess, in the front-end of the funnel finding new customers?

John, I think we -- it was a little bit hard to hear the first part, but I think, in general, we are managing our branch network. We've kind of stabilized a little bit around that as we've gotten through the last couple of years. We are investing in certain marketplaces where we think there is opportunity, where we're underpenetrated relative to our potential prospects. There are other ones -- other locations that we may have some overlapping kind of branch network that we consolidate. We retain most of the people on that front, so it's just more of an efficiency from that perspective. When you think about going forward, a lot of the things that Jay mentioned was really as we think about '18 and some of the expenses, one is the branding, which is a multiyear process to get our brand awareness out there. Number two is when we talk about customer experience, it's a multitude of what you just mentioned. Part of that is how do we interact with our customers more digitally, give them more capabilities to do things online, whether it be customer self-service or through the application and approval process. So it's something that we are investing in as you think about the next 3 to 5 years, so that we can provide our customers choices, and it's all going to be predicated on the fact of making sure that when we go to those capabilities that the performance of the portfolio stays consistent with our operating principles.

Okay. And second question, I know it's very early on in the changing environment here. But any kind of early indications of changes in payment or borrowing behavior on the yields with tax reform?

I'll tell you what, it looks pretty stable. When we look at our first quarter versus previous years, I'd say all performance looks very similar.

Our next question comes from the line of Michael Kaye of Wells Fargo.

I had a little bit of a similar question, but I wanted to see if you've seen any pickup in intensity from some of your competitors in the lending market? I mean, has this impacted certain segments of where you lend post the December tax reform?

We haven't seen anything. I mean, it's still -- I know it happened, but I think probably it takes some time for that to feed through the consumer. But we have not seen that. As we mentioned, we kind of look at different segments and different parts of the business, and we -- to Jay's point, we really haven't seen any change in regards to either on the origination side or on the kind of payment side, any significant change in regards to trends we've seen for the last 12 months.

I'd also just sort of add a little bit. When -- we've thought a lot about tax reform, how it impacts our customer base sort of given the, call it, average income of $50,000. It's one of those things that sort of trickles out over time. It's not -- there were, clearly, year-end bonuses that were related to tax reform and other things, which did help some number of millions of people. But for the most part, our average customer, we think, is going to sort of get wind up with $750 to $1,000 maybe net ahead. That's $60 to $80 a month net more free cash flow. That will give them some more flexibility, but it's not going to materially change sort of their financial landscape.

That's helpful. I know you're still working on the financial impact of CECL, but I wanted to get your early thoughts on how this can impact you competitively? Like, for example, could it potentially change your appetite to lend on the lower end of your target market? On the other hand, does it provide some opportunities? For example, could some of the banks curtail some of their lending on the upper end of the near prime market?

Yes, I think CECL, as you know, is an accounting change. So the economics of the portfolio and the economics of the cash flow, the customer doesn't change. So what we think about that is that we're focused really on the charge-offs and the actual economic impact as we think about the portfolio in the different segments that we kind of focus on. But clearly, CECL, we are -- our current approach to reserving is on a loss emergence period, and when you go to life of loan, that will impact us from a perspective of the accounting implications of that. But it doesn't change kind of how we think about the marketplace. And again, we'll see what impacts that, that has from a competitive point of view as that kind of comes to fruition kind of in the late '19, '20 time frame.

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

Jay, I was hoping you could talk a little bit about because I think people have talked about the fact that there's been a little more growth in subprime. But I mean, when you look at the supply kind of broadly of kind of unsecured and the kind of partially secured credit that goes into this market, it would seem that between one large credit card player and a number of marketplace lenders that kind of each had stubbed their toe individually in that market, that there's been a pretty significant reduction in supply. And maybe just get your thoughts on that and whether that's something that you've seen over the last 6 to 12 months and whether the environment going forward in the '18 is reflective of somewhat more moderate competitive environment compared to, say, the prime market for credit.

Look, very fair observation. I think we've seen some of the same things you see in some of the securitization data and other things that come out from those that make their originations pretty transparent via the capital markets. And I'd say, what we've seen in really good back probably last few quarters is a pretty steady flow of applications. It's hard to exactly know where competition sits. Not every customer comes in and lays out 3 or 4 offers and says what do you want to do. But I'd say, we feel good about our application funnel, we feel good about our close rates. Is there less competition? Yes, there definitely is just based on if you sort of take securitization data and some of the other things you see. But I think all that fed into our thinking in terms of what growth would be this year, and it sort of sets us up well really to be putting on the loans we want to be putting on.

Great. And maybe just could you talk a little bit about the timing of this brand campaign? I mean, obviously -- I mean, from that set of observations, it sounds like it's a good time to be doing it? And maybe talk a little bit about what the kinds of benefits that you would expect to see. Is it more people coming in, higher conversion rates? How should we think about it?

Great. Look, the exact same things we think about. It's a really good question. We're starting our brand campaign we've made, and I really do encourage everyone to take a look at the ads. They're short, they're fun, and they really speak to who we are. They're up on the website. What I'd say is, we're testing them regionally. We're in a handful of markets. I think it's a half dozen or so on different parts of the country. And we're testing exactly the things you talked about, are we getting more traffic? Are we converting more loans? Is it raising awareness? We're testing the market before and after, and I think that will inform us as to what do we do from here. Do we go nationally? Certainly, national is a much bigger investment than what we're doing regionally. But certainly, we made all these investments with the goal of actually taking this out nationally, but we want to see the results of it, and that will probably take a couple of quarters. So If you are in the Pacific Northwest, if you are in, I want to say, Michigan, we can let you know the markets, but Grand Rapids, Portland, Ohio, it's a (inaudible) market like that. So if anybody there in tunes in, you might see a quick 30-second spot, but that's what we're doing, we're backing it up with some billboards, some radio, and we're really testing the effectiveness of it. You won't see us on the Super Bowl any time soon, but it's sort of advertisement that we think will make a difference and help with all the metrics you talk about from awareness to closings to funnel, and all the things that make a difference. And really, I'll tell you, the initial response we've gotten, and not that this is the most important one. But the feedback from our 10,000 people who have seen these things has really been great. It's added to pride in the communities, it's added to pride across the company, and I think everybody feels great about what we're doing.

Our next question comes from the line of Rick Shane of JPMorgan.

When we look at the delinquency trends, we're basically, from a 60- and 90-day DQ perspective, entering the second quarter at the levels we were last year. Is it fair to say that the sort of expectations for losses based on that should be roughly comparable for the next 3 quarters to where you guys were last year? That would certainly put you on that better than 7% NCO target? But just want to see how to think about the sort of year-over-year changes in NCOs.

Yes, Rick, I think I provided you a little bit of expectation for the second quarter. But the portfolio has -- the credit metrics have stabilized and so we are still kind of comfortable with net charge-offs for the full year below 7%. And as we get through, as you know, with our portfolio, when we get to the second quarter, based on kind of our loss emergence period, it will kind of give kind of a full year update at that point in time.

Perfect. Yes, I think you characterized it in the words I was trying to get to, which is stabilized on a year-over-year basis. That makes sense. Second question, in a place where you guys have certainly done better than our expectations is on the expense side. I would be curious to know how much you think we should be layering in related to the TV campaign. If you can just put some context around that. You've given good context on some of the base rate, but so we can think about how that develops over the next couple of quarters.

Yes, I think, as Jay mentioned, the branding campaign started in the second quarter. So as we put out the 5%, we were not trying to give specific quarter-over-quarter expectations. And as you know, the first quarter is seasonally kind of a slower month -- slower quarter for us. So I think the combination, as I mentioned in my remarks, between the branding campaign and kind of marketing efforts, you should expect that operating expenses kind of increase in the second quarter and beyond. And roughly, we're sticking right now based on what we see to that kind of the same operating expense increase that we've laid out last quarter. So I think that -- you should be able to kind of layer it in based on that.

Our next question comes from the line of John Rowan of Janney.

As far as growth goes, not to beat a dead horse here, but you're guiding for 5% to 10%. There was 13% growth in the first quarter. Was there anything atypical in the seasonal pattern that you saw in the first quarter that wouldn't necessarily transcend into better earning -- or better loan growth later on in the year? Or is this more of an economic tailwind that we can look to, to, say, maybe growth's a little bit better than anticipated?

Well, remember, again, last year, I know there's -- we're not going to try to parse every piece of it, but remember, last year, we shrunk as we went through integration in the first quarter by almost $300 million. So if you're just looking for a year-over-year comparison, that is a little bit of the impact. And I think, as Jay mentioned several times, we are focused on kind of where we are and if that ends up getting receivables to more at the higher end, as long as it fits our return expectations and our credit expectations, that would be good for us.

And then the Apollo transaction, is that still on schedule to close in 2Q?

That's the plan.

Our next question comes from the line of Vincent Caintic of Stephens.

Just -- so you had good loan growth and forecasting good loan growth for 2018, and we see credits improving while yields are staying flat. And you're close to the secured and unsecured mix, lending mix that you've really guided to. So I'm kind of wondering, you're seeing nice margin expansion -- risk-adjusted margin expansion in this or anything industry-wide or if you could just discuss specifically what's driving that nice risk-adjusted margin expansion.

Well, I think a combination of a couple of things. Clearly, on the yield side, as we initiated some of the pricing initiatives last year that was able to help us offset the growth of the direct auto business, which, as you know, is lower price, but also has lower losses and greater operating leverage. So I think the combination of yields and charge-offs are kind of getting to the hard work from the organization over the last couple of years as we've grown the book, as Jay mentioned, from, when we came together as a combined company, it was about 70% unsecured, and we've been able to get that down to kind of below around 57% as of the end of the quarter. So as that trend continues and stabilizing yields will give you a better risk-adjusted margin. At the same time, we've been able to drive down the operating expenses. So you've been able to kind of continue to do that. And given the growth rates that we put out there, even with operating expenses, as I mentioned, the steady state is not going to be the 5%, that's a little bit of the investment we have, we will continue to drive both financial leverage as well as operating leverage in the business.

This is kind of the beauty of the model. Look, it took a little bit of time to sort of get to the kind of numbers we've been putting out. But modest growth goes a long way, given -- if you can manage credit and manage expenses, it is -- the numbers speak for themselves.

Great. Perfect. Yes, it's impressive to see yields staying flat and credit improving. And I know you're already at the mix of secured and unsecured. So a lot of -- we've been getting a lot of questions about how yields can stay flat while credit is improving and margin expanding. So it's great to see that what you've been executing on has been working. The second point in another investor -- a set of investor questions I usually get. I'm not sure how much you can answer this. But -- so Apollo, we see in the documents that there's standstill provisions up to 50% through June and then, I think, there's some remaining lock up until 2020. I'm just kind of wondering what your thoughts are for that standstill provision and what they can do from there.

I'd say, first, we want to get the deal closed, which we firmly believe is on track for the second quarter. I'd say, what exactly Apollo intended to do, it's a better, probably, question for Apollo and all post-closing, but thus far, there has been great collaboration, and we, like they, can't wait for the deal to close.

Our next question comes from the line of Henry Coffey of Wedbush.

Obviously, credit is headed in a real nice direction, and there are some sort of big growth opportunities. When you think about attracting new customers, whether it's through this ad campaign or some other ad campaign, who is it that you are really focusing on? Is it the online borrower that deserves a better value proposition? They're getting a $5,000 installment loan with about an 80% rate on it. Is it the small loan customer that's going to regional or world? Who is it that you're -- it's a very special value prop that you offer. But it has to be done in the branch to work. You can't just do it on a few clicks. So who is it that you're really hoping to bring in with this ad campaign?

I'd say, this ad campaign our direct mail, which I think people know we're pretty active in. It's really meant to go after a broad swath of working America. The most important thing for us is are we making the loan to a customer that we can put in a better place. Can they afford it? Does it make sense? Can we verify it? And yes, those things are important to be done at the branch, but it's hard to stereotype who we're going after. Certainly, when we sit down with somebody, we want to see what other expensive debt they have, can we consolidate it, can we get them more free cash flow. But to say, it's sort of this population or that population, our goal is to make sure every customer that we're able to interact with, that we're able to sort of help and put them in a better place. They have a need. It certainly is some amount of liquidity. The loan we write might be what they ask for. It might be more than they ask for if we consolidate other debt. But if you sort of look at the targeting in the potential population, we think there's 100 million potential customers that have debt, have a need to borrow, could potentially consolidate debt, and the goal is to appeal to all of them and be top of mind there. So our biggest challenge is I don't think enough people know about us. So that's exactly what this is meant to do.

Will there be a digital component to this strategy? Or...

Absolutely. Look, this is not just a -- we've also said, the vast majority of our customers are very computer illiterate. 80% of new customer apps start online. So even though we mail a lot of people, they're coming to our website, they want to go through that prescreening. Not everybody wants to drive to a branch, spend the time, and it creates a lot more efficiency for us. So it really is, for us, kind of the best of omni. Customer can do a lot of sending in information beforehand, getting prescreened, et cetera, and then when they come to the branch, it's really about fulfillment and building that relationship. So the goal is to hit every possible venue we can that will allow people to become aware of us, so that will be social media, that will be, as I said, billboards, radio, TV. But you really need them all to play off each other. And we hope to hit as many of that 100 million as we can and, certainly, the test that we're doing across some of the cities in Ohio, Pacific Northwest, Michigan, are going to give us a lot more insight into how should we be going about that. But you're right, it's not a specific target. We think anyone who has high-cost debt that has an ability to pay should be consolidating, and we can put them in a better place.

And then for Scott, how quickly do you think we're going to close the gap between what we call, well, the GAAP earnings and adjusted earnings? I mean, it's coming down rapidly. We're probably almost at the point where we can focus on the GAAP number and really capture the company. But how quickly does that process complete itself?

Yes. I think, Henry, as we've talked about it, '18 was kind of a much smaller impact in the last 2 years, and as we get into '19 and beyond, it's pretty small. So I think this year, what we're working through as we do -- as we kind of bought back some of the legacy OneMain bonds, there has been kind of redemption charges for that, which also had some purchase accounting on those. So you'll see those 2 items have accelerated based on our original kind of timeline based on the success we've had in the market. So I think as you get into 2019, these numbers will be pretty close to each other.

Our next question comes from the line of Kevin Barker of Piper Jaffray.

I was hoping you could give us a little bit more detail on what your asset data has been given the rates have moved higher? I know there are some constraints on some of the pricing you can do in certain markets. I was hoping maybe you could detail it across the company and by auto versus secured and unsecured consumer lending?

Yes, we're not going to give specific pricing kind of details, but we're continuing to test, and we look at opportunities within the marketplace. I think there's been several questions around what the competitive environment is. And the way we think about things is when you kind of adjust price up or down, you want to see what the impact is on the corresponding volume, and that kind of gives you some kind of indications around the competitive nature. But we do have opportunities to continue to optimize the overall pricing on our assets, but not to the extent depending on what assumptions you want to make in regards to kind of the liability side and what rates are doing. But as we've mentioned in the past, at least for the last kind of 12 to 18 months as the kind of short-term rates have gone up, our ABS spreads have come down to offset that. And one of the pushes for us to continue to drive more unsecured is to kind of lock in that funding for longer duration, which then also buffers our kind of interest rate sensitivity.

Okay. And then when you think about the changes that you're making on some of those pricing, do you feel that, that is broad-based across most of your markets or do you feel like it's localized where you have better pricing in certain markets?

We're state licensed, so we have different rates we can charge in the different states. But I'd say, it was broad-based around our products. And then there's fine-tuning that you do within the states relative to that. So in the 3 products, we have been able to increase rates at different levels for each one of those products.

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

Most have been asked. But repeat borrower percentage, is that still close to that 50% level?

Yes, very stable.

Okay. And then, Jay, in the past, you've talked about potentially looking at capital returns, and I know CECL is on the horizon. But I'm just kind of curious if you have an update there in terms of how you're thinking about potentially returning some capital to shareholders.

I'd say, it continues to be an ongoing dialogue with our board. We've made it very clear to everyone that getting closer towards 7% or 7x the leverage target is a critical milestone for us, and as we move that in that direction, I think it's one that will certainly fast-forward those conversations.

Our next question comes from the line of Ken Bruce of Bank of America.

I'll try to keep this short. Firstly, it's good to see another quarter of great execution, I really do think you're setting yourself up well for 2018 and look forward to seeing how the brand campaign works. I guess, really, the question I'd like to get at is a little bit more big picture. I mean, the performance from a growth and credit perspective for OneMain has a lot to do with your own choices, and I'm trying to maybe get a little bit beyond that and understand from the general health of the consumer how that may be changing. We've seen in other asset markets where credit frankly is deteriorating, and it's clearly kind of going the other way for yourself and, again, that has more to do with your own choices. But as you look at the consumer coming in the front door, are you seeing any changes in terms of the health of that consumer? Are your conversion rates within product groups changing at all that kind of give you some indication of how that base consumer looks financially coming as they come into the front pipeline?

Sure. Really good question. We spend a lot of time looking at application flows, what's the underlying data. Remember, all of our customers are on the financial highway. They all have credit. The vast majority have bank accounts. They have credit cards. They have other things. They are mainstream America that generally needs to consolidate debt, needs a bigger picture loan. And I'd say, the trends and, most importantly, the ones we look at are the loans we close and I'd see very stable. If you look at any of the metrics, the amount of leverage they have, the payments, the income, what they can handle, we're seeing trends that look just like America. We're seeing income growth that looks a lot like America at sort of 2%, 3% numbers. We're seeing debt that's grown similarly, but all very responsible in terms of what the customer can handle. We're not going to make a loan if we know the customer is going to be in trouble immediately, it's not good for anybody. So maintaining those sort of steady set of metrics has been very important to us and one we pay attention to quite regularly. But the loans we're closing, we'll probably close, give or take, 1 million-plus loans this year against 1.25 million, 1.5 million loans, very stable numbers in terms of overall consumer, what they can handle, their income. Now there is a wide range within there. But our underwriting criteria will make sure that, that is a core competency of ours at keeping our eye on a customer that can afford the payment that we're putting him into.

Yes. Maybe just as a quick follow-up. I mean, do you look at that stability as more a reflection of just this customer segment that you're going after being, I don't know, for lack of a better way to phrase it, kind of a constant state of recession, so there's not much changing from where we are in the economic cycle because it just seems to be a little different than what we're hearing from other consumer lenders?

Look, I'd call it a state of what they're accustomed to. There is certainly things that are becoming more expensive for everybody across America. There is health care, there is housing costs, there is college education and those things, and then there is, hopefully, savings that are coming from other places. But what we're generally seeing is modestly rising income, and you've got a customer that's on average making $50,000, 2%, 3%, 4% a year goes a long way. We're paying a lot of attention to the leverage they have and, I think, most people have been responsible about other lenders, especially in the last couple of years about additional debt they're lending into the customers' pocket. I think we're seeing the benefits of those trends. The customer happens to be in pretty decent shape, at least the ones we're lending to. I'd also say, don't forget, we'll take 9, 10 million applications, a big chunk of those don't even come close to meeting our filter. So we turn down a lot because they're already financially strapped, and that's not who we're trying to help. The financially strapped have another challenge. They need to get out of debt, and putting more debt on does not help them. So if those are some of the parties you're talking about, yes, you're right, they could see a more financially strapped customer. But thank goodness for automated underwriting, our ability to filter and figure out those that really we can help in a loan that actually puts everybody in a better place.

Our next question is a follow-up from the line of Kevin Barker of Piper Jaffray.

All my questions have been answered.

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