OneMain Holdings, Inc. (OMF) Q2 2015 Earnings Report, Transcript and Summary

Welcome to the Springleaf Holdings Second Quarter 2015 Earnings Conference Call and Webcast. Hosting today’s call from Springleaf is, Craig Streem, Senior Vice President Investor Relations. Today's call is being recorded. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. [Operator Instructions] It is now my pleasure to turn the floor over to Craig Streem. You may begin.

Thanks Hope. Thanks a lot. Good morning everyone and thanks for joining us. As I always do, let me begin with slides 2 and 3 of the presentation, which you can find in the IR section of our website, and which we will of course be referencing from time to time during the call. Our discussion contains certain forward-looking statements about the Company's future financial performance and business prospects and these are subject to risks and uncertainties and speak only as of today. The factors that could cause actual results to differ materially from these forward-looking statements are set forth within today's earnings press release, which was furnished to the SEC in an 8-K report and in our Annual Report on Form 10-K, which was filed with the SEC on March 16, 2015 as well as in the second quarter 2015 earnings presentation posted on the IR page of our website. We do encourage you of course to refer to these documents for additional information regarding the risks associated with forward-looking statements. In the second quarter 2015 earnings material, we've given you information that compares and reconciles our non-GAAP financial measures with the GAAP financial information. We also explain why these presentations are useful to management and investors; and we would urge you to review that information in conjunction with today's discussion. If some of you listen to the replay down the road after today, I want to remind you that the remarks we make are as of today, August 6th, and have not been updated subsequent to this initial earnings call. Also I want to take a quick second now to introduce a new member of our Investor Relations team at Springleaf Rohit Dewan, who joined us about two weeks ago. Some of you may know Rohit, he spent a number of years in equity research and as a PM, but most recently spent three years at the Consumer Financial Protection Bureau, as a Program Manager focusing on the consumer finance markets. I’m sure you’re going to enjoy working with Rohit as a team member for Macrina, Jay and me. Our call this morning will include formal remarks from Jay Levine, our President and CEO; and Macrina Kgil, our CFO. And as Hope said, after the conclusion of our formal remarks, we will have plenty of time for Q&A. So now it's my pleasure to turn the call over to Jay.

Thanks Craig, and good morning everybody. Let me begin with a brief update on our proposed acquisition of OneMain Financial. As we discussed in our earnings release and 10-Q, we’re working with the Department of Justice and certain state Attorney’s General regarding the transaction. We look forward to continuing to provide our views on the landscape for a highly fragmented and highly competitive industry and our goal remains to close as promptly as [indiscernible]. Of course, we don’t control the regulatory review process or the timing or the results, and we plan to continue to work to achieve a constructive outcome here. Turning now to Slide 4, I’d like to continue with an overview of the highlights for the quarter. First, we are really pleased to report another quarter of good growth in core earnings, up 14% year-over-year to $67 million. This translates into a very healthy pre-tax return on assets of 7.27%, up 48 basis points over last year's second quarter. Pre-tax income from branch business was up 27% over last year. The key drivers of our performance this quarter are essentially the same as what you’ve seen from us previously; first, continued growth in receivables per branch; second, maintaining effective credit risk management; and third, generating strong risk adjusted yields. Importantly, this was the seventh consecutive quarter of year-over-year portfolio growth above 20%. Average receivables per branch reached $5.2 million in the quarter, 27% above the year ago level, as our branch and marketing teams excessively collaborated on growing receivables per branch, driving significant margin benefits. The meaningful decline in charge-offs this quarter led to strong risk-adjusted margins. We are very pleased with our yield has held up given the impact of the lower rates for our direct to consumer auto loan product. Let’s turn now to Slide 5 and get into some of the details. Our emphasis on growing average receivables per branch continues to pay off. We are now at $5.2 million versus $3.4 million at the time of our IPO in October 2013. Part of our success has been driven by shifting many of our servicing and other functions out of the branches over to our centralized servicing operations. This will have the dual benefit of driving greater servicing efficiency, while giving our branches more capacity to work with new and existing customers. We have recently completed the migration of all late stage collection activities as we found that these efforts are managed more successfully in a centralized environment. This has benefitted both receivables growth and our credit performance. And of great importance, over the same period of time, we've successfully integrated advanced analytics into our marketing, underwriting, and servicing algorithms. This has led to stronger application volumes and better loan application conversion rates. In addition to these important investments in marketing and analytics, we continue to invest in customer experience, which helps drive new account acquisition and has enhanced customer retention. One of the most broadly applied measures of customer experience and loyalty is net promoter score, which essentially measures whether our customers would recommend Springleaf to a friend. Very simply, it measures the difference between a company's promoters and detractors on a scale of one to a 100. At the end of June of this year, our promoter score was 76 compared to the credit card industry average of just 31. We attribute our very favorable score to the highly personal nature of our customer experience in the branches. So as we talk about growth and the long-term potential of our business, it’s important for you to understand how seriously are about the customer experience and why we continue to invest in this critical differentiator. Returning now to the quarter, our auto originations reached $274 million versus $207 million last quarter, with very positive growth trends month over month. Looking ahead, we expect to see full year auto originations annualized around or somewhat above our second quarter run rate. As I said last quarter, even with lower yields, our direct auto loan product is more profitable than our other loan products and is often a better option for the customer. Turning back to the average receivables per branch, we benefited from strong growth in our auto loans, which now represents over $600 million of our $4.3 billion of branch consumer receivables. The successful rollout of our auto product, along with the enhanced marketing efforts I described a moment ago have contributed to significant growth. At the end of 2012, more than 500 of our branches managed less than $3 million of personal loan receivables, and today that number is down to just 35 branches. At the opposite end of the spectrum, over 320 of our branches were over $5 million of receivables at quarter-end. Let me remind you of the impact this has had; in 2012, we earned about $90,000 pre-tax per branch; for 2014, we have tripled that number earning about $274,000 per branch; in the first quarter of this year, we had $315,000 per branch on an annualized basis; and this quarter, we annualized at $372,000 per branch, almost 20% growth quarter-over-quarter and up 28% over last year, and we still see significant upside from here. Turning now to slide 6; let’s take a look at the trends in our risk-adjusted yield. Gross yield in the branch portfolio declined about 40 basis points from the first quarter to 26.5%, reflecting the impact of the strong growth of our auto loans. As I said in my earlier comments, our auto loans carry lower average APRs than our personal loans, so we are pleased that the overall yield has held up. Growth charge-offs came down nicely from the first quarter, a 59 basis point improvement, reflecting a number of factors; portfolio growth, seasonality, the growing proportion of auto loans, as well as the benefit from centralizing our late-stage collections. Net charge-offs also declined significantly from the first quarter, reflecting the improvement in underlying credit performance as well as a pick-up in recoveries this quarter. We continue to receive recoveries normalizing in a range of 75 basis points to 100 basis points. Importantly, our 60 day delinquency rate was 2.39 at the end of the second quarter, 14 basis points lower than the first quarter, adding to our confidence in our outlook for charge offs for the balance of the year. Based on the delinquency levels we are currently seeing, combined with the portfolio shift toward more auto secured loans, we remain comfortable that net charge-offs for the full year will be within the 5% to 5.5% range. Now as we turn to Slide 6, I’m going to ask Macrina to pick up from here.

Thank you, Jay. Turning now to Slide 7; let’s start with our financial results for the second quarter. Our core business generated pre-tax earnings of $107 million, which represents a 14% increase from the second quarter 2014. Our Consumer and Insurance segment earned $76 million pretax in the quarter, up 27% from last year’s quarter and 17% from the first quarter. The primary driver of our improvement continues to be the growth in receivables. As Jay mentioned in his remarks, we are seeing a great opportunity to enhance our growth by investing in marketing, which added an incremental $6 million to our operating expenses in the quarter. We currently envision a similar level of investment in marketing for the last two quarters of the year as well. Looking ahead to the third quarter, consistent with our experience last year, we expect to see a higher level of provision expense versus the second quarter, due to a higher level of receivables and the typical seasonal trend of delinquencies increasing in the second half of the year. Our Acquisitions and Servicing segment, also known as SpringCastle generated $31 million pretax in the quarter versus $36 million in the first quarter of 2015 and $34 million in the second quarter of last year. Of note, in March 2015, we sold our investment in a portion of the SpringCastle notes, which reduced earnings in this segment by approximately $5 million this quarter, basically accounting for the earnings decline quarter-over-quarter. Our guidance for 2015 takes this impact into account. If not for this reduction in investment income, pretax earnings for the segment would have been up from the second quarter of last year by about $2 million. Even with average receivables down $600 million from June 30, 2014 as a result of the portfolio runoff. This basically reflects the terrific credit performance in this portfolio with the annualized charge-off rate down 200 basis points year-over-year in the quarter. Our liquidity position continues to be strong with $5 billion in cash and highly liquid securities inclusive of the equity raise we completed in early May. In addition, we have increased the level of commuter undrawn facilities to over 2 billion. We also had a very successful ABS transaction in the quarter, a five year revolving asset back; the first ever transaction with a five year term in our asset class. Moving to non-core, which is laid out on Pages 16 and 17 of our slide deck, our non-core real estate segment lost $43 million in the quarter, primarily from the reduction in interest earning assets due to real estate sales completed in 2014. The sale proceeds are currently reported in the non-core portfolio, hence the earnings drag in that segment. We plan to use the proceeds towards funding the OneMain purchase, and at that time, we will reallocate the related debt to our core consumer operations mitigating the recurring loss in this segment. As a result of our reduced real estate exposure, which is now just over $800 million, we began reallocating certain corporate expenses from our non-core portfolio to our core consumer operations. This quarter's operating expense in the core consumer operations is a good indication of the run rate for the balance of this 2015, assuming Springleaf on a standalone basis with the addition of the incremental planned marketing investments that I mentioned previously. Last, we have incurred certain cost related to the OneMain purchase amounting to about $12 million this quarter, which we also included in other non-core. These expenses were contemplated in the $250 million of onetime cost that we anticipate incurring and we will continue to keep you updated. In addition our non-core other results for the quarter included a one-time non-cash charge of $15 million triggered by the gain realized by AIG on the sale of our common stock at the time of our recent equity offering. Before I close let’s turn to Slide 8 for an update on our 2015 guidance for the key drivers of our core consumer operations. First, reflecting our expectations for continued strong growth in receivables, we are increasing our target range to be $4.7 billion to $4.85 billion. And second, we are tightening the range of anticipate earnings for the Acquisitions and Servicing segment by bringing the low end of the range up to a $105 million with the top end remaining at $120 million pretax for the year. Our expectations for yield and the net charge-off ratio remain unchanged. And now, I will turn it back over to the operator to begin the Q&A.

[Operator Instructions] Thank you. Your first question comes from the line of John Hecht with Jefferies.

Morning guys, thanks very much. With respect to the credit trends, they look strong, but I’m wondering can you breakout your delinquencies and charge-offs on auto versus the traditional installment loans to give us a sense what's going on?

Sure. What I’d say is they've been very stable on each. We do break them out in the asset-backed that are online and as we’ve talked about in the past, there is a – they’re two very different portfolios, just by way of performance where the auto is in the low single digits and the non-auto tends to be the higher single-digits. The trends have been reasonably stable around both what I'd say is given the rapid growth of the larger auto product that we brought down the last year to really muted or driven down the delinquency and loss numbers on the overall auto, but if you grade that out and look at the historic hard secured, they’ve been very similar.

Okay. Thanks very much. And then with respect to the DOJ review, I know in the 10-Q you put out a date of September 10, what kind of comes and goes around that time and when do you think you’ll be able to give us more detailed outlook with respect to the timing?

Look, what I’d say is our run conversations with the DOJ are our ongoing. The September 10th date was an agreement we entered into some months ago that really related to the soon as we could close the transaction and we’re doing everything we can to move the process along as quickly as we can.

Great. Thanks very much.

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

Hi, thanks for taking my question. This is actually Steven Kwok in for Sanjay. Just to circle back around the OneMain acquisition. Just wondering if you could touch upon in terms of around these state AGs, like exactly what are the areas that they are potentially looking at, that would be – any thoughts around that would be helpful.

Sure. I think the state AGs, I can’t comment specifically on any – what any individual one is looking at, and I think their process continues to be ongoing. So it’s difficult to know the exact, but I’d say there is similar things what DOJ is looking at.

And are there any talks around like what – are there any changes that needs to be made in order to accommodate, I just wanted to see if there is any other highlights around there?

Look we haven’t had any dialogue with anybody, and it's premature to go there, around anything other than closing the deal. What I’d say is, what we’ve said in the very beginning that this is a large highly fragmented market, there is 100 million plus target customers combined, couple a million of them are a small, very small percentage and we look forward to continuing to work with both the DOJ and the state to resolve whatever questions they have.

Got it. And my last question just deals around the auto, are you seeing any signs of like competition within the auto space just wanted to get your thoughts on that.

I'd say, there is competition everywhere, for everything we do we don’t know. We think we’ve got sort of a unique product in terms of the direct auto refinance. Around indirect, we think it’s highly competitive, which is one of the reasons we elected not to enter the marketplace, around direct and especially to our customer base, with the ability of what we do, which is fulfilling same day. There is fewer players who do it and it’s been an important product, but I'm sure as always there is banks, credit unions and others that are looking at the space and we’ll continue to growing the space.

Great. Thanks for taking my questions.

Sure. Thank you, Steve.

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

Good morning, thank you. On the credit topic, just in terms of the – some of the second half color you provided on provisioning, should we recognizing the seasonality involved there, but based on recent trend should we be looking at any material change up or down in the overall allowance rate?

David, this is Macrina. We don’t expect to see a big change in the allowance percentage, of course our receivables are growing, so the absolute dollar value will be going higher, but we expect to see allowance percentage to be consistent.

Okay, and in terms of just the mix effect of ramping up direct auto, just you know assuming credit trends remain relatively stable, should we be looking at further declines in the NCO rate, is that expected just based on the asset mix shift?

It’s certainly the auto runs at a lower charge off rate, it becomes a bigger mix, which is sort of how we got to the range we did 5 to 5.5.

Okay. So there will be some of the seasonality. Jay, turning to just the overall demand side, I think you made reference to partly as a result of more centralized marketing underwriting, the loan application conversion rates were increasing, can you provide a little more color kind of order of magnitude?

Sure. I would say, it’s really interesting and what changed so much is how many of our loans start online. Over the last, if you go back over the last few years, 70% of our new customer applications actually start the process either on a digital device or a computer or something, a mobile device. And what’s important is how could we get them to them. We may or may not be the only place they’ve applied to and we spot the times are critical. We have done study after study as we get back to them in a minute, five minutes, 10 minutes, within the hour, and certainly the branches are busy with servicing other things that makes it harder to respond because we only really be on one phone call at a time. What we've seen is by some of these other things rolling out, there is actually more capacity to get to people faster, which has made the single biggest difference in conversion. The probability of converting a loan, if you don't get to that customer after 24 hours is very low. So what I’d say is, conversion rates, we’re still more or less approving one out of five. We unfortunately turned down four to five loans we’ve seen, those have maintained, but if those that get transferred we’d probably converted 2% to 4% more or a 10% increase, which is pretty significant for us, which is one of the reasons we’ve actually seen material growth in the new customer side.

And then just lastly, listen – realizes, limited amount that you can disclose beyond what’s been in the press release on the kind of the awaiting regulatory approval on OneMain? On a no-name basis, can you share with us perhaps how many state AGs, you know become more active in this process?

Not really, if you could imagine, there is a number, it’s not, Dave I’m just going to leave it at that.

Got it. Thanks very much.

Your next question comes from the line of Vincent Caintic with Macquarie.

Hey, thanks so much guys, good morning. I understood that you can’t discuss too much of the specifics around the OneMain regulatory issue, but just if you could give us a sense, if you could reiterate your confidence in the deal closing and that the economics that you have laid out previously are still intact? Thanks.

Sure. When we look at the numbers back in March, and we look at the numbers today based on the transaction before it, especially post the equity raise, we feel good about the $800 million to $900 million number. So nothing has changed on that side. And the matter of fact I think the more we look at our growth numbers, you look at sort of lending clubs origination numbers, you look at really the growth of the installment lending, we feel outstanding about our ability to get that done. Clearly the dialogues in Washington and the States are ongoing, we feel very confident that is a pro consumer transaction, we’re going to roll out additional products. We’re going to be operating to a broader range of customers and it’s just a matter of time we hope till Washington and the States understand where we’re coming from.

Thanks. That’s really helpful. And then to the extent that it's possible what the scope of the concern and potential remedies to those concerns might be?

As you can imagine, those are conversations we’re having and I think it’s premature to discuss any of those at this point.

Got it. Understood. Thanks very much.

Your next question comes from the line of Mark DeVries with Barclays Capital.

Thanks. I know you can't really see it in the delinquency charge-off there, which is obviously very good and stable, but are you seeing any signs of concern deterioration in the oil patch states, and if so, are you doing anything to taking up underwriting in those states?

The answer is not really. We don't, while we do have Texas exposure, which has not been a tremendous state for us, and minus Oklahoma we’re not in the Dakotas, the fracing states et cetera. There has been isolated instances where there have been layoffs, but it really hasn’t been material at all. And the good news is we do have branches, they’re on the ground, they let us know what’s happening, and the way possible we’ll work with customers to get through the situations. But we haven’t had any material impact on the numbers thus far.

Okay. And any concern on OneMain’s exposure, I guess they are in the Dakota’s?

Not that we know of, but that’s between, you guys should be asking them.

Okay. And so you don’t really see any need to kind of taking up underwriting here?

We look at as you can imagine. Our underwriting processes haven’t changed. It’s all about verified income, largely the customer coming into the branch and understanding the job prospects were in the community. So we think our underwriting process actually has held up very through multiple cycles, especially to go back over time. That sort of understanding the customer, understanding the communities and understanding the job, the prospects has certainly been one of our great benefits over the years.

Got it. Thank you.

Sure.

Your next question comes from the line of JR Bizzell with Stephens.

Good morning and thanks for taking my questions. Jay, direct auto product continue to be impressed and that growth continues to strengthen quarter-over-quarter, just wondering if you could kind of walk-through with what has changed and are you marketing around it more? Is there been a change in the box that has increased that product as a percentage of sales within the box?

I think it’s about a consistent percentage as a percentage of our origination over the last couple of quarters. What I would say is there has been increased awareness in both in the communities, in our branches among our staff to make sure every time a customer with a car of a recent vintage, which is sort of on average six or seven years or less comes in that we present both options in terms of loans. We have spent some money on marketing. We have gone out and targeted where you’ve gone, you can go out, and buy a list of those that have certain vintages of automobile, where you think there happened to be a loan that could be refinanced and we’ve spent some of the additional marketing dollars this quarter going after that and that we’ve been happy with the results of that, and we’ll probably continue to see. So I’d say it’s a little bit of really coming into its own, as well as a little bit of spend on marketing.

Great. And then building, the target origination goals, just wondering if you could kind of give us an idea of where you feel comfortable getting that as a percentage of your originations kind of on a go forward basis?

We’re comfortable for it to be as much as it allows it to grow to because it’s really about giving customers choices. It’s certainly a good percentage and probably not that far off from where we thought it would get to at the 25 percentage range, 20, 25. But it got bigger because we really do think at the rates we’re charging, the terms it really is a very important and reasonable option for all these customers to have.

Great. And then last one from me, kind of switching gears. It’s been a couple of months since the CFPD kind of laid out the payday proposals and we still haven’t heard much from that, but just wondering from a competitive stance, have you seen anything changed, maybe some of the competitors out there, trying to dip down into your space and/or have you seen a consumer shift maybe getting more and more traffic through the door than you were seeing before the rule proposal?

I don’t think it yet have the impact on customers. I will say we’re certainly seeing the growth of online continue to, there is no doubt lending club had a big quarter. I’m sure, Prosper will probably do the same, there is real demand for credit, which we think is an important driver of our business as well as a number of others. But the spillover yet from what the impact will be to the payday title, I think is yet to be seen. As I said, I think on the previous call, it’s sort of a mixed blessing for certainly a lot of potential customers whether or not that option is out there or not, but we also see some of our customers who need small dollars after they’ve taken out some of our loans who wind up not in a great position because they’ve taken out some of these loans, and we think that’s the potential that actually enhances our credit performance in future years to the extent some of the things go the way they do. So time will tell what ultimately the impact of those regs are, but as we sit here today I think we’re watching as our number of big other participants.

Great. Thanks for taking my questions.

Sure, as always. Thanks for asking.

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

Thanks. Just a follow up on – a little bit on some of that last question. Can you give us a sense of how much of the growth outside of auto is secular versus some of the company specific initiatives? I’m just trying to guess what the underlying market growth maybe?

Look I think, when you’re saying secular. I think there is no doubt credit is expanding nationally. So if you look at the credit card company, as you look at other sort of credit, overall you look at auto, you look at every single sector, I think they’re growing nicely and I think part of it is the state that we’re in the economy, we’re in a steady state, there is more confidence around jobs, unemployment is low. So I think across the board and in general the Americans delevered. So, you’ve got peoples with better place, more comfortable borrowings, so it’s more about overall expansion of credit. And I’d say at the same time, I’d say what the marketplace lenders have done, you know all of them in general have made the installment loan a much more invoke product because of responsible loan product, it’s one that you get into debt, you get out of debt, and as a result most of our customers watch their credit score migrate up significantly. So we think it's becoming a more popular product than a revolving credit card. So I’d say it’s a combination of all the above. I think we’re gaining market share, we’re spending more on marketing. There is better awareness and our branches have more time, but at the same time I’d say overall credit is expanding as well.

Alright. But so for example looking at your 10% growth rate, like can you give us some sense of how much of that might be actual share gain, and just to kind of understand the efficacy of the incremental marketing spend?

Look, it’s hard to know what share because we don't know exactly what every other – you know, you don’t know what’s going back and forth between us, credit cards other debt. I would say we are happy and pleased to have a 10% growth plus in customer account, which is largely even bigger if you put it in this percentage of new customers. And marketing spend, we’re finding on average that our marginal cost of acquisition is remaining about the same. So we haven't had to go up and spend dramatically for that marginal customer, so we continue to see efficiencies around our marketing efforts.

Great. And then if I can just sneak in one more on OneMain, frequently when these things progress, they move from sort of general issues to more specific issues, has the conversation advanced to that stage that it's becoming more narrow or is it still very broad?

Look, we’re not really in a position where we’re – to talk about the ongoing dialogue with the DOJ. I’d say what I said at the beginning, which is we remain optimistic and confident that we will continue to have constructive conversations and get to a place with respect to the transaction.

Okay. Thanks very much.

Your next question comes from the line of Robert Dodd with Raymond James.

Hi everybody and thanks for taking the question. Just a kind of, on the auto obviously a year ago, you’re doing about $6 million in volume in the second quarter, and now to $70 million, massive success, massive growth. Now that you've got a lot more data, is there any kind of recalibration of that product going on? If I look at the data sequentially, so there is seasonality in play, the loan size came down just a tiny bit from Q1, the APR moved up just a little bit to within the data I’ve at least some, is that just seasonality or is there any modest readjustment to that given the amount of data you have now versus where you were even six months ago?

We are always continuing to learn. We’re trying to figure out what appropriate pricing for each sort of vintage and credit risk customer drives the most business. So there's always ongoing testing going on there and this is probably the place we test the most because this is the place there is probably the greatest awareness when a customer says they already have an auto loan, if it’s x rate, so in some way, I’m going to refinance it in the Y rate, so we spend a lot of time here probably thinking about rate the most. But on the other hand, I’d say couple of things have happened over the last year that probably have had some impact on those numbers. One, we’ve rolled out later vintage, I think we started with seven year in younger cars, we’ve rolled out, I want to say 8, 9-year-old cars, which will create smaller balances because they’re worthless. What’s interesting and you guys probably will know this, the average car on the road is 11.5 years old, so that creates – car just last a lot longer, you can finance them longer and most of the financing that’s done and generally done for cars, five, six, seven years endeavor. So I think we've got a niche product where a lot of others aren’t now, while these cars aren’t necessarily of huge value, they do last longer, they maintain their value longer, but it's hard to believe that actually half the cars on the road today are actually 11.5 years and older, the average is 11.5. So that’s one of the reasons and certainly on some of the older cars with less value probably is one of the reasons rates may have gone up a little bit and grabbed the overall sort of originations in the quarter up a little bit.

Got it. Thank you.

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

Thanks. Good morning. First of all good quarter all round. I guess you pointed out some of the higher expenses in terms of marketing and some of the deal cost. Is there a way to be thinking about expenses up, particular within the consumer loan space either as an efficiency ratio or percentage of loans, what’s the best way to think about how your expense ratios are going to look as we kind of project it forward?

We look at our expenses in many different ways. I would first point you to looking at the Consumer and Insurance segment as ROA, return on average receivables, which Jay mentioned in his comments are better than where we were a year ago, approximately 7.3% is where we are currently. And in terms of ratio over spend, we’ve been looking at our marketing spends and what the ratio of that to our volume is and we’ve been pretty much consistent in terms of how much we’re spending versus where we’re getting in volume. So we’re pretty confident with where we are on the operating expenses, and I as mentioned earlier, the second half will be pretty similar to where we’re at for the second quarter.

I guess I would have expected that to fall just given the nature of the loans per branch and the profitability per branch, is there any way that – or am I thinking about that incorrectly? I would expect that the operating leverage would in fact show up in those lines?

I should restate and just clarify, I was talking more in dollars rather than percentages. So in terms of dollars, the second half dollars, I expect it to be pretty similar to where we were in the second quarter.

Okay. So that efficiency ratio would in fact drop in that case.

That’s where you get the leverage Ken.

Okay, great. And then, Jay you talked about the expansion of credit and maybe some of the drivers of that, I'm interested if you have any sense as to how much of that is push versus pull, I mean obviously there is clear better access to credit today and there has been a lot of marketing too if you will begin to not only make installment lending more kind of more in vogues as you put it, but also drive a lot of brand recognition within some of the lender. So I’m kind of challenges to how much of this is actually true demand on the part of the consumer versus just getting pushed in the overall access improving. I’ve don’t know if you’ve gotten these surveys that you’ve done or any stance just based on the clientele that are coming to your branches to which is which?

Look, I’d say, our customers use our loans for a variety of purposes and some of them involve debt consolidation, which is usually at least a chunk of some of the loans as well as general purposes. Many good events as I’d like to say is, I think makes me happier when I see a family put on a wedding, go to Disney, improve a home et cetera, so we’ve increasingly seen the positive events, I think when people are borrowing for, but it's hard to know what’s push and what’s pull. There are certainly some, you know I won’t call it churn, but definitely when you look at the debt consolidation in credit cards what the lending club loans are used for, what some of our portions are, you’ve definitely got some reallocation within the overall credit stack. But as I said increasingly, we’re seeing more demand for positive events than we have over the last few years.

Okay, great. Thank you. And then to somewhat deal related, but not specific in nature, you had mentioned I believe something along the lines of the 100 million potential customers, I’m wondering how do you see the overall market share that Springleaf has within the broader market and how should we be thinking about some of them kind of the variables that one might want to look at if they’re trying to assess overall market share?

Sure. When we generally think of who we’re targeting, we’re generally thinking of, and while we don't underwrite on FICO, we’re generally thinking of the 700 FICO and down. It’s sort of how we look at our target market, and today if you look at our branches we’re about the top a million customers serviced in our branches, we've got another few hundred thousand customers across our SpringCastle portfolio. So that would be our market share. Again, we just look at the number of potential borrowers that are sub-700 FICO that have debt and borrow and that – the number has been 120 million households, about 100 million of them have material enough – would be a borrower, so that sort of how we think about it and we know the OneMain count at least as of the announcement was about another 1 million in the quarter. So when you put the two together, you've got about 2% market share of penetration across those that borrow.

Great, thank you. And then lastly understanding that, you can’t really share anything about the discussions, but what would be kind of the go-ahead milestone that we would be able to observe, would it be the actual, an actual deal closing or some kind an announcement around the date, DOJ is not prone to putting out press releases that they’re giving a deal go-ahead, but what would we be looking for?

Certainly any material information that we think is relevant, we absolutely plan to disclose, and have an obligation disclose then we’ll be doing it.

Great. Thank you for all your comments, appreciate it.

Sure. Thanks for the questions.

Your next question comes from the line of Jordan Hymowitz with Philadelphia Financial.

All my questions basically have been answered. I just had a quick comment that you mentioned a preferred lender or some work side effect. I mean since all your loans are under 36%, I think you’re increasingly portraying yourselves especially regarding the crackdowns two other installment lending companies and payday companies as the consumer housekeeping [indiscernible] negotiates.

Jordan, we lost the question.

Let me just follow up with you later, I apologize.

No worries. Thanks Jordan.

But I think it’s a relevant point, when we’ve talked about before that, across the country we have set our max APR to 36 everywhere which we happen to think is the right place to be given the regulatory framework and the conversations that are going on across Washington.

[Operator Instructions] Your next question comes from the line of Guillermo Roditi with New River Investments.

Hi good morning guys. I have quick question about wages, one, are you seeing kind of any material difference in [indiscernible] amongst borrowers, and are you guys feeling any kind of competitions for talent?

So I guess two questions right. Competition for talent; look we’re always competing for the best people in the branches. We have across the company about 5,500 staff today with a couple of big centers in Evansville; Tempe where we’ve opened, one in Kentucky and Minneapolis, as well as our 830 stores and we have turnover like a lot of companies, and we’re always looking for great new young talent and we’re competing with in a marketplace that’s increasingly competitive. What I’d say is, one of the things I’m thrilled about a little anecdotal, we just finished up our summer intern program where we had 180 interns across our company, and I want to say north of half of those are going to stay on with us even as they continued their final year at school. So I think we found actually a great tool for continuing to grow young talent across company, so I’m thrilled. As it relates to I think the first half of the question, we’re really seeing any difference, we’re seeing more new customers, but the profile I would say looks very similar to what it has in the past by way of income demographics et cetera. So from there, I’d say that sort of what it looks like.

Thank you. And just a quick follow-up, you guys mentioned the increasing online share. Do you guys see any material difference in, let’s say how many worker minutes going to something that came into the pipeline online versus off.

Well what we keep finding in part of it is just the growth of competition. What the Internet allows you to do is not just apply at Springleaf, but potentially apply at more than one play. So as opposed to the time that we take exactly to walk into a branch you may not want to walk into every branch in the community, so you get online and you go to a few places. So we do know that almost all the marketplace lenders have gone deep-rhythming historically where we know Avant [ph] is a company we’ve spent a lot of time looking at, who was really focused a fair amount on the target set that we're going after. So response times are something that we have had to pay a lot more attention to off late and we do see a big material difference. I couldn’t say, you got to get back in 90 seconds now compared to 150 a year ago, but I will say we continue to see the importance of response times, and we largely think that’s due to competition out there.

Thank you very much.

Thank you. Hope, let’s just check and make sure there are no more questions on the line before we move ahead.

[Operator Instructions] And there are no further questions. I will now turn the floor back over to Craig Streem, for any additional or closing remarks.

Thank you. Thanks everybody for your attention. Good questions this morning. Appreciate your interest and as always you know how to find me for follow-up. Thanks. Have a good day.

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