OneMain Holdings, Inc. (OMF) Q2 2016 Earnings Report, Transcript and Summary

Welcome to the OneMain Financial Second Quarter 2016 Earnings Conference Call and Webcast. Hosting the call today from OneMain Holdings is Craig Streem, Senior Vice President, Investor Relations. [Operator Instructions]. It is my pleasure over to Craig Streem. You may begin.

Thanks, Jackie. Good morning, everybody. Thank you for joining us. Let me begin, as always, by directing you, this time to the back of the deck, Pages 29 and 30 with our important Safe Harbor disclosures. The presentation itself can be found in the investor relations section of our website and we will be referencing that presentation during this morning's call. Our discussion today contains certain forward-looking statements about the Company's future financial performance and business prospects and these are subject to risks and uncertainties and speak only as of today. The factors that could cause actual results to differ materially from these forward-looking statements are set forth within today's earnings press release which was furnished to the SEC in an 8-K report and in our annual report on Form 10-K which was filed with the SEC back on February 29, as well as in the second quarter 2016 earnings presentation that has been posted on our IR website. We encourage you, of course, to refer to these documents for additional information regarding the risks associated with forward-looking statements. In the second quarter 2016 earnings material we have provided information that compares and reconciles our non-GAAP financial measures with the GAAP financial information and we also explained why these presentations are useful to management and investors and we would urge you to review that information in conjunction with today's discussion. And if you may be listening to the replay down the road at some point after today, we want to remind you that the remarks made today are as of today, August 4 and have not been updated subsequent to this call. Our call this morning will include formal remarks from Jay Levine, our President and CEO; and Scott Parker, our Chief Financial Officer and as Jackie said, after we conclude our formal remarks we will have plenty of time for Q&A, so now it is my pleasure to turn the call over to Jay.

Thanks, Craig and thanks for joining of this morning. Before we get into the slides, I want to say that the second quarter was a very good quarter for us with consumer insurance EPS of $0.96 versus $0.36 in last year's quarter, with solid performance on credit, growth, operating expenses, funding and importantly, integration. We feel very good about our business, our operating model and our competitive position. Let me begin on Slide 2 with some comments about our second quarter performance and a discussion of the key drivers of our business. First, average net receivables were up 12% year-over-year. Total receivables growth was a tad slower this quarter as the blocking and tackling of the integration of OneMain became more tangible. The timing of our integration activities is meeting all of our expectations and some cases, even ahead of plan. Given the near term introduction of new programs and the associated training requirements, it's not surprising that loan growth has slowed down this quarter, but our focus remains on capturing the fall long term benefits of the acquisition, principally around responsible profitable growth. Credit performance this quarter was consistent with our expectations of lower credit charges with net charge-offs improving to 6.95% from 7.5% in the first quarter and with delinquencies stable as well. Keep in mind that the 6.95% charge-off ratio includes a 35 basis point net benefit from the alignment of our credit policies. Both our own customers set performance as well as the overall economic environment which is a key driver of our customers performance, continue to look healthy. We're seeing continued positive trends in job growth, including the addition of almost 180,000 private sector jobs in July and no signs of deterioration in the economy. Given our market opportunity, we have no plans to relax our underwriting standards to gain volume and we continue to manage credit risk with the same conservative orientation we have always had. As a result, we remain confident in our outlook for the full year 2016 net charge-offs in a range of 6.8% to 7.3%. With respect to the balance sheet, we have brought our leverage down to just over 11 times and we remain highly focused on working towards our long term leverage target of 5 to 7 times debt-to-tangible equity. We expect to be within that range by mid-2018. In terms of funding, in spite of market volatility, we're pleased to have completed four ABS transaction so far this year, including our first and highly successful Auto ABS issuance. In addition, after the end of the quarter, we completed the sale of portfolio and mortgage loans from our legacy real estate portfolio, with proceeds of approximately $250 million which will also help further reduce leverage and minimize future borrowings. Our mortgage portfolio is now under $450 million from almost $10 billion at the time of our IPO in October of 2013 and we will continue to look for opportunities to reduce it further. Turning to Slide 3, I want to begin with a couple comments on our business model in the context of today's environment. As we've said in the past, our model is built on a footprint of 1,800-plus branches in 44 states with a presence in communities all across the country. Our market opportunity is enormous, representing between 75 million and 100 million people with approximately $250 billion of refinanceable debt and borrowing needs. Importantly, about 88% of Americans live within driving distance of one of our branches. This presence is highly valuable in today's environment as it gives us a tangible understanding of what is going on in every market we serve which helps us manage credit risk in real time. Our local branch presence creates a unique and very personal engagement with our customers and a real understanding of their individual financial circumstances. Importantly, it also allows us to verify the borrower's income which is an important element of our underwriting process and focuses on each borrower's ability to pay. The powerful combination of our branch presence and sophisticated analytical capabilities represent a significant competitive edge that is virtually unmatched today. Importantly, even with our extensive footprint, we're benefiting from changes in technology which allows us to see far more applications than ever before as increasing numbers of prospective customers choose to begin the loan process by applying online. Our branch network has a much broader reach today as a result of the most significant initiative this Company has undertaken, the acquisition of OneMain last November. The integration of Springleaf and OneMain remains on track and I would like to share a couple of highlights of our progress. First, later this year we plan a full rebranding of the Springleaf branch into OneMain which will allow us to present one unified branch to our customers and further enhance the recognition of the OneMain brand. Second, we have made meaningful progress on implementing the technology integration required of the two networks. By bringing the two branch networks together under one technology platform, we will be well positioned to generate incremental growth and meaningful cost savings. Turning to Slide 4, I want to emphasize how significant the OneMain acquisition has been to realize in the long term earnings power of our Company and how positive we remain about the acquisition. Our principal focus continues to be on reinvigorating profitable growth and risk adjusted returns at OneMain, with our first initiative being the rollout of direct auto lending. We introduced direct auto lending to the former OneMain branches in December of last year and shortly after closing and by the end of April this year we were originating direct auto loans in all 1,800 of our branches. Our early success with the rollout contributed to a meaningful improvement in origination growth at the former OneMain branches. It's worth noting, that well the rollout of direct auto at OneMain has been very successful, it does come with a trade-off of giving up some growth on the unsecured side. Historically at OneMain, certain higher risk customers would have been offered unsecured loans, but with our push to credit risk we would require the additional security in order to make the loan and not every potential customer is willing to provide that collateral. While this does impact our growth it reflects our conservative orientation toward credit risk management. Looking at earnings per share as a simple measure, in the second quarter of 2015, our consumer insurance segment of Springleaf earned $0.38 per share and in the second quarter of this year we earned $0.96 with the benefits of the acquisition just starting to kick in. Looking ahead, by capturing the benefits of the acquisition and continuing to execute, we expect to reach a run rate in consumer insurance segment earnings exceeding $1.50 per share by the third quarter of 2017 and we see continued upside from there as we grow receivables against our largely fixed-cost branch network. Let's turn now to Slide 5. As I've already highlighted this morning, our plans call for an acceleration of growth at OneMain and on this slide I will walk you through some of our larger scale initiatives, all of which were key parts of the Springleaf playbook as we reinvigorating growth over the past few years. Bringing OneMain to the level of Springleaf on these key initiatives will dramatically increase average net receivable growth and we believe should add at least $1.5 billion of incremental annual originations over time. As you all know, we have had tremendous success with our direct auto program, generating over $1.7 billion of loans since rollout and we see a similar opportunity at OneMain. We have already originated about $250 million of new auto receivables at OneMain and we see this initiative adding over $1 billion of new originations over the next 12 months. Our local merchant referral program has been another important [indiscernible] channel at Springleaf. We launched this program in 2013 and in the first half of 2016 generated about $360 million of receivables on an annual run rate basis. We're in the process of rolling out the program to the 1,100 OneMain branches, so it's too early to post numbers, but we expect this program to be well received. This program is all about leveraging our local community relationships to assist local merchants whose customers need financing for big-ticket purchases such as ATVs or HVAC equipment. Outside of new products and channels, we also see a large opportunity to enhance origination growth at OneMain through more effective management of digital leads and conversions. Conversion rates for Springleaf on applications that start online are about double those of OneMain where historically there was less emphasis and resources committed to this channel. As we bring the OneMain branches to the same level of efficiency as Springleaf, with similar symptoms and additional applications, we expect to see significant origination growth. Turning to Slide 6, I want to discuss the significant progress we've made on a couple of integration initiatives. Since closing on the acquisition, we have highlighted the opportunity to reinvigorate growth while increasing the level of secured lending at the former OneMain. We showed good progress on these goals in the second quarter. Average net receivables, excluding the receivables in the main branch sale, reached $13.1 billion on the quarter, up 2% sequentially from the first quarter. As you can see on the chart, Springleaf continues to grow at a healthy pace, 16% annualized, while the former OneMain growth is coming in slower. Also, auto secured loans as a percentage of production have grown meaningfully to 33% of originations at OneMain in the second quarter, terrific early progress. Turning to Slide 7, we remain confident in our full-year charge-up guidance of 6.8% to 7.3% and from where we're today, believe we're likely to come in near the midpoint of the range. In the second quarter we experienced a typical seasonal decline in credit losses, as well as a benefit from aligning our credit policies, as well as a negative impact from the branch sale. The net effect of these was 35 basis points with the principal impact coming from the bankruptcy policy change. On a full-year basis, the net effect of these is reflected in our guidance. Excluding the 35 basis point benefit, our net charge-off ratio was 7.3% for the second quarter, well within our expectations. The quarter rate also included the impact of the drag from the sale of $600 million in current receivables to Lendmark. In the second half of this year, the denominator effect of the branch sale will continue to impact the charge-off rate, in addition to the flow through of losses on the delinquent accounts retained in the branch sale transaction. As we discussed last quarter, our Q1 charge-offs are supported by the stable trends we're seeing in early stage delinquency, demonstrated in the chart on the right hand side of the slide. We have laid out the actual net charge-off rate for each quarter beginning with the first quarter of 2015 with an overlay of our 30 day to 89 day delinquency rate on a two quarter lag basis. As you can see, delinquency is seasonally lower than the first quarter which is the primary driver of seasonally lower charge-off rate in the third quarter. Our second quarter early stage delinquencies will largely determine our fourth quarter charge-offs. The sequential increase of 28 basis points from 1Q to 2Q is largely in line with last year's increase of about 22 basis points. Let me add that we're also seeing improvement in late stage roles. Now I would like to turn the call over to Scott to continue with our financial review.

Thank you, Jay. Now let's turn to Slide 8 and review the highlights of our second quarter performance. We earned $26 million or $0.19 per share in the second quarter. As a reminder, our reported results for the quarter included $165 million of pretax acquisition related and other adjustments. With the sale of our SpringCastle investment last quarter, we're now focusing our commentary on the consumer and insurance segment. We will continue to report results for the acquisition and servicing segment, but we expect that contribution to be minimal going forward. Our consumer insurance segment earned $130 million or $0.96 per share in the second quarter. C&I earnings were up $0.02 versus the previous quarter and 2.5 times the prior year. Before we get to the book value per share numbers, I want to discuss the impact of our change in accounting policy regarding the application of ASC 310-30 and the treatment of our purchase credit impaired loans. This change is consistent with the preferred method used by the industry and you will be able to see the details in our 10-Q filing. This change increased our shareholders equity, at the end of the second quarter, by $59 million. It is important to note that this is a change only in the timing of when the PCI discount is accreted. The net performance over the life of the portfolio is not impacted. With that said, the numbers in the earnings summary are reflective of the policy change in all periods. On the right side of Slide 8, you will see the analysis of the performance of our C&I segment for the second quarter, walking down to a 3.9% after-tax return on receivables. Return on receivables is up from 3.7% in the first quarter, showing the benefit of cost saves and normal seasonality and credit. Average net receivables was $13.1 billion in the quarter, up about $200 million from the first quarter excluding the receivables associated with the May 1 branch sale in both periods. Looking forward to the second half of the year, we expect to see higher returns as we get the full period benefit of the cost saves and the continued asset growth. I would also note that in line with our seasonal trends in prior years, we expect to build our loan loss allowance in the third quarter in order to maintain our allowance at a forward coverage rate of about nine months. In the second quarter, we released about $18 million of reserves with the build in our non-TDR reserves offset by our release related to our TDR portfolio. As part of our ongoing policy alignment, the number of former OneMain loans being classified as TDRs has declined, resulting in a corresponding decrease in reserves for $34 million in the second quarter. Our non-TDR reserves have grown by approximately $16 million from the first quarter, largely due to the receivable growth. Included in today's earnings presentation, you will see that we have provided a financial supplements for the first time. We've presented adjusted results for our C&I segment going back to the beginning of 2015, as if the two companies had been combined. This is intended to give our investors and analysts a better view of the prior period comparisons. Included in this supplement is a historical view of our loan loss reserves split between TDR and non-TDR. Turning to Slide 9, I would like to highlight our progress on capturing the expense benefits from the merger and driving operating leverage. First, let's go back to where we started and where we're planning to go. Premerger Springleaf, with a smaller footprint, was running at about 13% operating expense ratio. OneMain, with greater scale in terms of branches and recievables per branch, was running at about 9%. The blend of the two companies in the fourth quarter of 2015, at the time of close, was around 10.8%. Through the first six months since the acquisition, we have already dropped down that ratio to about 10% through the combination of expense reductions and asset growth. We're now on a quarterly run rate of about $325 million, reflecting $100 million of annualized saves for the first quarter 2016 levels, mainly from headquarter consolidation and the branch sale. We expect continued momentum going into 2017 as we complete the systems and branch integration. Now turning to Slide 10, you will see a brief summary of our unsecured and asset-backed maturities. Our debt mix is well balanced, not quite 50-50, with a very level maturity profile. We have had a lot of success with our funding this year, as Jay mentioned. Even at a time when overall market conditions have become more challenging for other lenders, we have raised $2.3 billion from four asset-backed transactions this year, including our well received initial $700 million securitization of direct auto collateral in July which we see as an important step to further diversify our ABS funding. In addition, we sold the previously retained class-C tranches from our first quarter ABS transactions. In addition to the ABS transactions, we raised $1 billion in the unsecured bond market in April. Included in this was a $600 million exchange of 2017 maturities for longer duration notes, helping us to achieve, in all years, our target of $1 billion to $1.5 million of unsecured maturities and a smoother maturity profile. In terms of liquidity, we feel great about our position. We received $600 million of proceeds from the branch sale this quarter which we used to pay down our conduit lines. We primarily use our conduit facilities as continued liquidity in case of prolonged market dislocation and through the first six months we reduced our utilization from $2.6 billion at the start of the year, to just $300 million at the end of second quarter, increasing our undrawn capacity to about $4.4 billion. We continue to operate within our policy of 12 to 18 months forward liquidity runway for all funding needs, including growth, debt maturities and expenses, assuming no capital markets access. We invest a significant amount of time in investor development which has paid off handsomely in bringing large global leaders into our 2016 funding programs. Turning to Slide 11, I want to focus on the progress we have made on leverage. We started the year with an adjusted debt at 18.5 times adjusted intangible equity and a multi-year plan to reduce that to our target level 5 to 7 times by the second half of 2018. We have taken many steps since the acquisition closed to improve our leverage to about 11 times, a 40% improvement and we will continue to make progress towards our objective. On the right side you will see a table that goes into more depth on how we're going to reduce leverage and build tangible capital over the next few years. At the top of the table you will see the strong underlying segment earnings from consumer insurance that we have guided to. Below that, as we have previously provided, we have outlined the more significant elements that walk down to the tangible capital build that we expect. Based on these items, by the end of 2017 we should have around $1.9 billion of tangible capital, about a 90% increase from where we ended 2015 when we closed the acquisition. As we move past 2017, we would expect a drag from the acquisition related costs in real estate to fall to less than $100 million per year, in turn accelerating our capital generation over the long term in a very positive way. Now I would like to turn the call back to Jay for closing remarks.

Thanks, Scott. Turning to Slide 12, I want to take a step back from the discussion of the quarter and focus on the tremendous opportunity we have to drive significant earnings per share over the long term. With the acquisition of OneMain, we have fundamentally transformed the earnings power of our Company. In fact, virtually tripling it from where we were on a standalone basis. In addition we have made significant strides in reducing the leverage that we took on to fund the deal. With our largely fixed-cost base, additional asset growth is highly accretive to earnings and we're on track to generate a lower OpEx ratio than either company had as a standalone operator. The integration and the related cost savings give us built-in earnings growth and improved operating leverage. We remain comfortable with our previously stated EPS guidance for 2017 of $5.60 to $6.10 per share, with average receivables of $16 billion. Importantly, as we look out over the longer term, both market demand as well as the compelling nature of our business model are such that future asset growth drives progressively higher returns as you can see in the chart on the side. As you can imagine, this would produce very strong ROEs. To wrap up, as we complete the integration of these two companies, we have a tremendous opportunity to deliver value to all stakeholders as we continue to responsibly grow our business and serve additional customers and their communities. We're very proud of how far we've come since we acquired OneMain last November, but even more excited about the opportunities ahead of us. With that, Jackie, could you please begin the Q&A session?

[Operator Instructions]. Our next question comes from the line of Moshe Orenbuch with Credit Suisse.

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

Look I would say the environment as we see it today is as good as it has been over any period of time over the last two years, certainly I think we all have witnessed the disruption of what has gone on in the online space. For the most part that was largely going after a higher credit customer than we were but there was no doubt, I think some of their challenges came a bit from migrating down, thus far the things that have the evidence [ph] have been a lot less has come out from them. I think the initial read has been in -- it is slow to triple to growth to initially but we think over the long term that will all be positive. In the environment in general customer continues to be in good shape I would say largely driven by confidence and employment and job stability and we continue to see an increasing number of good applications which to us is one of the most important drivers of how we see the business over the near term and longer term.

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

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

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

First one if you can just detail or characterized the local merchant referral. It seems like that’s growing nicely and I wonder what kind of yields are on that and what that might mean to kind of mix shifts in consolidated yields at the portfolio level.

It looks very much like a personal loan. The way it works is it's really about our branches really being in the communities and developing relationships with local, whatever kinds of trades or vendors have to be in local communities, let's [indiscernible] big-box retailers that tend to have relationships with financial credit card companies. It would be sort of laid out local whether it's trailer, [indiscernible] window or other markets where they have a customer and we all know most of America, way too much of America lives paycheck to paycheck and is a large thing comes up they want to have financing options and the pricing on that looks just like the rest of our personal loans. So what they are really doing is they are introducing relationships to us and we're funding a personal loan and finally make that process as seamless as we can.

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

Yes, John, this is Scott. So as you remember in March we put out an 8K financial supplement that explain the different component pieces of what we want them here as one line of acquisition accounting real estate and other. So we also provided that in the supplement an update of where we stand on 2016 kind of where we thought those are going to come in. I break it down into kind of three big bucket, one would be on the spring [indiscernible] historical the debt carried on the discount and that amortizing into earnings over the time of that maturities but some of that will expire in '16 and '17 as those debts maturities expire. Some of the debt exchanged in the April deal one is 2020 so that will amortize over the life of that extended maturity. On the OneMain acquisition we had three real big items, one was the provision catch up, we had the premium amortization on the noncredit and impaired portfolio and then we had receivable discount on the purchase credit impaired assets. The total of all those right now are kind of coming in line with the outlook that we provided and that's what we brought back in March. So one that has the least amount of certainty is the timing of the receivable premium so if we have a OneMain customer that comes in and either takes out a new loan or lease us that premium will be recognized at that point in time. So that is something that is based on customer behavior. It has been a little bit faster than the contractual term that we were expecting and we mentioned that. So all those in total I think we’re right in line what we expected and then the last two items that you mentioned were acquisition and integration costs and the real estate portfolio. So given the sales that we had Jay mentioned we will see that real estate impacts will start to decline in 2017 and beyond and the integration across really well kind of a little bit frontloaded this year as we took out the cost action so we're prepared for a lot of the amortization activities in the second half of 2016 and early 2017 then you'll see some more additional costs in 2017 as we complete some of the additional cost savings we have targeted. So in general I think we’re tracking well, but again these are estimates so I think they provide a pretty good framework for you but they're not precision.

Our next question comes from now line of Mark DeVries with Barclays.

Have some questions about what's embedded in some of the new targets you laid out for 2017, in particular the return on receivables. Can you just talk us through what the levers are that you relying to get that 50 to 100 basis point improvement you're looking for in the terms?

Yes Mark, I will keep it simple. Is probably three things. One would be additional cost take out in 2016 and 2017 so it is at the 4% that we’re at around now. We took most of the cost out in the first half and you will start to see that go through in '16. We're also planning to take out another $100 million in 2017. The second one is expectation for credit costs based on the portfolio of more secured lending as we mentioned with OneMain being able to take unsecured losses down to more in line with the secured lending charge-offs that we mentioned in the past is a big benefit and also some of the acquisition integration related items that we’ve talked about around the policy change that we made in the second quarter. We also made a policy change at the end of last year on charge-off policies that had some impact on year-over-year comparable so I think charge-offs we expect charge-offs to be lower than 2016 will which will provide benefits. And then the rest of the operating leverage then driven by that is the growth rate in asset so I would say the asset growth is probably the more significant, those are the two are probably a he third or 40% of the benefit and then the remaining of that is the growth.

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

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

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

That is exactly how we think about it. Our customers need money from time to time to be very frank, our underwriting is such that we make sure there is ability of income there to support it and if you look at the job tenure it's sort of the stability of jobs that most of our customers have had, they are really quite strong. So when I say is our will moments has always been to have strong mix between secured and unsecured and make sure the customers that are likely to have challenges we want to have them [indiscernible] tend to perform much better to walk on that kinds of cycles. So I say we continue to think about responsible growth. We don’t want to put out loans that are challenging either for us or for customers and I don't think we intend to grow money faster than the market allows as the right customer mix can be put on.

Our next question comes from the line of [indiscernible] with KBW.

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

Sure. It is actually one of the great programs that you may be surprised how successful it has been and continues to be. What it has really wound up being is most auto loans are four to five years by the time customers comes in third and fourth year of their loan, they are usually down to principal only [indiscernible]. When they come into a branch we're really showing a couple of opportunities in some cases where here it's a personal loan at a higher rate, here is a secured auto loan where we will pay off the remaining balance and when given the choice and generally a lower interest rate, substantially lower interest rate customers one, are happy to have choices, two are generally happy to have ways to consolidate other debt and to wind up in a better free cash flow position. From what we see other than local credit unions there aren't a lot of people really competing in this space on a national basis where they are really targeting the refinance of existing debt on auto, so we have not seen a lot of large-scale complications which I think has helped this program as well.

And then when we think about the 2017 debt maturities, could you maybe talk about how you guys plan to tackle them?

I think as you’ve seen we kind of taken the stack down to a reasonable amount or level of maturities. As we talk about -- we continue to have good demand for asset backed transactions and I think also we want to be a routine issuer in the unsecured market so we think between those two we have plenty of capacity to pay off those debt maturities and I also mentioned that we have paid down all of our [indiscernible] that we have use as contingent liquidity but we have, as we mentioned in the deck, about $4 billion of unencumbered assets. So we have many levers to pull in regards to how to do 2017. Our preferred method would be to do a combination of unsecured as well as ABS [ph] transaction in late 2016 early 2017 to deal with those securities.

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

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

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

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

Our next question comes from the line of Bob Ramsey with FBR.

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

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

Our next question comes from allies line of Mike Grondahl with Northland Securities.

One, I think in the prepared remarks you said that you were starting to see some improvement in some of the later roles, could you just go into a little more detail there what you are seeing?

Sure. Those [indiscernible] roles are once you get to just before charge-off are they going to go to charge-off, obviously going figure out a way to avoid that. I think one of the key things we have done as we've migrated off the city resources on to [indiscernible] resources, we have seen greater effectiveness around collection of some of the things that have done there. So we’ve marginally moved some of the breakdown.

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

The answer, we would like to be as effective as we can. The high level took us a few years across Springleaf to get to the levels we're at today and I expect over time that it will be an important and meaningful one but I have any steady targets.

Okay and then maybe just lastly, direct auto you've done very well rolling that out what sort of the next milestone or two that you are looking at with that initiative?

I don't think that there is anything when I say continuing the growth across OneMain, customer awareness so that when loan choices are presented that the customers see a couple of choices and they can make intelligent decisions around what's best for them but clearly growth of the same size and just follow it up with financing we did at 2% against the [indiscernible] you can see how important it is for us all around. It's good for the customer, it's good for us as lender and certainly not even talking about cycles of the future we know it better.

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

Scott, could you just -- I know this will come out in the queue in detail but can you briefly indicate why the change in the accounting policy benefited equity to the extent that it did?

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

And that was about 59 million? Was that correct?

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

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

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

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

If you go to page 11 for a second you got an adjusted tangible equity that goes to 17 or most of them go to 18, if I think about another $525 million change in equity and I take the real estate less than a $100 million would it be fair to think that this number should be like 25 tangible equity or about $20 per share in '18? Is that a reasonable thoughts?

That is a reasonable thought.

Okay. And there's a reason why this one didn’t go to '18 and everything else were to '18 is there?

No, Jordan, we’re just trying to -- we provided previous details around '16 and '17 on a supplement so in order to not have to try to breakdown a lot more details I think your math you can roll forward the equity role as you mentioned.

Okay. Do you think it's important, because there's tremendous upside to earnings and people concern on the downside to book and the downside to book really picks up in the next two years. That’s why I think it's important. My second question is you mentioned the discount change, is my understanding that the account has made you become more backend loaded or aggressive do you want to use that term on the discount accretion so you are accreting the discount later as opposed to earlier?

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

I suppose to before when you were--?

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

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

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

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

Yes, I mean not what the thinking is I think since this has being applied across the industry I think given the duration of our loans that are a little bit shorter than some others clearly that would change how we provide and built reserves but that is clearly kind of 1920 we will see how that actually ends up getting rolled out and if there's any modification to that over time. But it's an interesting -- everyone in the industry will be impacted at least in our sector on a similar basis.

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

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

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