OneMain Holdings, Inc. (OMF) Q1 2017 Earnings Report, Transcript and Summary

Welcome to the OneMain Financial First Quarter 2017 Earnings Conference Call and Webcast. Hosting the call today from OneMain is Craig Streem, Senior Vice President, Investor Relations. Today’s call is being recorded. 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.

Thank you, Laurie. Good morning everybody. Thanks for joining us. Let me begin as always by directing you to Pages 2 and 3 of our first quarter 2017 investor presentation, which contains important disclosures concerning forward-looking statements and the use of non-GAAP measures. The presentation can be found in the Investor Relations section of our website and we will be referencing that presentation during this morning’s call. Our discussion today will contain certain forward-looking statements reflecting management’s current beliefs about the company’s future financial performance and business prospects, and these forward-looking statements are subject to inherent risks and uncertainties, and speak only as of today. Factors that could cause actual results to differ materially from these forward-looking statements are set forth in our earnings press release. We caution you not to place undue reliance on forward-looking statements. And if you maybe listening to this via replay after today we remind you that remarks made herein are as of today, May 04, 2017, and have not been updated subsequent to this call. Our call this morning will include formal remarks from Jay Levine, our President and CEO; and Scott Parker, our Chief Financial Officer. And after the conclusion of our formal remarks of course we will conduct a Q&A period. So now, let me turn the call over to Jay.

Thanks, Craig and thanks for joining us. As we will share with you this morning, the two principle drivers of our performance receivables growth and credit are both showing positive trends and we feel very good about the momentum in the business. As such, we are reaffirming our C&I adjusted EPS guidance of $3.75 to $4 per share. In the first quarter charge-offs came in as expected so we continue to feel good about the underlying credit performance of the portfolio. The net charge-off rate for the quarter was 8.5% reflecting the impact of the integration activities that took place back in the third quarter of 2016. Total delinquency at quarter end was 4.5% at the final 40 basis points from the year-end level and early-stage delinquency meaning receivables 30 to 89 days past due declined 10 basis points from year-end levels. Now, before we get into a deeper review of the quarter I want to briefly comment on our customers and how we are positioned to serve them. OneMain is the nation's leading consumer lending franchise with over $13 billion of receivables, 2.2 million customers and over 1700 branches to serve the borrowing needs of tens of millions of working Americans nationwide. Our market opportunity is significant. We believe strongly in our time tested model which provides borrowers with choices in how and where we serve them. In person underwriting helps build customer relationships and contributes to our strong credit performance. The combination of sophisticated underwriting and personal relationships allows us to originate fairly sizable loans averaging almost a$7500 of loan size that distinguishes us from other competitors. Higher loan amounts drive meaningful scale benefits with our branches now managing almost $8 million of receivables per branch with room to grow. When we look at the environment, consumer loan demand remains strong supported by the strengthening U.S. economy. We continue to see benign credit environment with the unemployment rate steady and wages rising. In addition, consumer leverage has remained stable and consumer confidence remained strong having recently reached levels not seen before the financial crisis. Together these positive developments contribute to our expectations that we will see continuing improvements in our underlying consumer credit and strong growth in our portfolio. Overall, this makes us quite optimistic about our opportunity and ability to create significant value for our shareholders. So let's turn to Slide 4 and cover our first quarter highlights. First, our overall financial performance for the quarter our Consumer and Insurance segment earned $120 million or $0.76 per share on an adjusted basis. Scott will take you through the financials in greater detail. C&I average net receivables grew 2.5% from a year ago to $15.3 billion. Secured loans made up a 48% of total originations up nicely from 35% one year ago. We added $150 million of receivables in April reflecting strong momentum that we expect to continue through the second quarter and beyond. Lastly, Capital & Liquidity, we continue to make meaningful progress on reducing our tangible leverage and we continue to track well toward our goal of approximately 7 times by the fourth quarter of 2018. At the end of the first quarter we have reduced our tangible leverage to 110 times. Let's turn to Slide 5. As we discussed our business has consistently generated an unlevered return on receivables in excess of 10% which we believe is unequaled in the lending sector. Our focus on unlevered returns is important because maintaining this consistent performance ensures ongoing assets to low cost funding in the capital markets which we continue to tap on billable [ph] terms. Most importantly, we believe we can continue to generate returns on tangible common equity in the 20% plus range. Let's turn to Slide 6. As anticipated, we saw the typical seasonal slowing in receivables growth during the first quarter, C&I ending net receivable by $13.2 billion for the first quarter down about 2% from the previous quarter. Since the completion of the integration, our branches have generated significant momentum in conversion rates of applications to closed loans which combined with the seasonal increased application volumes like the solid gains in receivables in April. These positive production trends started in mid March and carried through the month of April leading to $150 million receivable growth in April versus $95 million last April. Importantly, our former OneMain branches have increased the level of secured originations which have the dual benefit of booking larger loans while also being a significant factor in our positive outlook to credit performance. As a percentage of production secured loans were 42% of originations in the first quarter at the former lending branches up from 19% a year ago. With this progress we remain on track to reach our target of having about 35% of the former OneMmain portfolio and over 40% of the total portfolio secured by the end of 2017. Regarding future originations, we are focused on developing growth and profitability strategies by taking advantage of the improved analytics and marketing data. We are analyzing our target market and identifying opportunities to grow the portfolio within our risk profile. One of the biggest benefits of the integrated network is that we have better data that we are using market by market to drive growth and profitability with an emphasis on underpenetrated markets. Let me also share with you a couple of additional initiatives that we have recently undertaken. First, we have in our integrated branch platforms we have begun to optimize application flow across branches which both enhances customer service and improves our application to book longer version rates. Second, we continue to adapt our sales training program so that our branches have the tools and resources to put multiple loan offers in front of customers enhancing customer choice and maximizing growth opportunities. I'm thrilled with the results of the last few months' initiatives which have meaningfully improved our ability to drive loan growth and stronger returns. Turning to Slide 7, credit performance in the first quarter was consistent with our expectations. Net charge-offs were 8.5%, delinquency improved nicely quarter to quarter and our outlook for charge-offs for the year remained unchanged in the low 7s. Before we discuss our delinquency trends I want to highlight some of the credit benefits we are seeing from both the increase of secured lending and the transfer of the former OneMain portfolio on to our servicing platform. For those of you who have followed us when we acquired the SpringCastle portfolio from HSBC in 2017 [ph] I'm sure you recall the steady improvement that we were able to achieve in credit performance of that portfolio. Our recent experience with moving the former OneMain portfolio to our servicing platform is proving to be very similar and we have already seen an improvement in roll rates from 60 plus delinquency to charge-off. In prior quarters the ratio of net charge-offs to early-stage delinquency had been approximately 3.3 times. We expect that ratio to climb closer to 3 times in the near-term as we see the results of improved servicing and increased secured lending. This trend supports our loss outlook of 7.2 for the second quarter of 2017 and 6.80 for the second half of this year. As I said, we continue to expect the full-year 2017 net charge-off ration to be in the low 7s and 2018 net charge-offs to improve from there. Total delinquency for the quarter dropped 40 basis points sequentially from 4.9 to 4.5. Early stage delinquency at quarter end dropped sequentially as well to declining 10 basis points but was 30 basis points on a year-over-year basis. The latter increase resulted from two factors. First, the impact of the January and February OneMain branch conversions and second to a lesser extent was likely impacted by the delay in this year's tax reforms. Before I turn the call over to Scott, I want to comment on the impact of declining on our values which we believe is immaterial for us. First, let me remind you that we are not an indirect auto lender. Importantly we are not in the auto finance business as the industry generally defines it. Our basic loan product continues to be the traditional installment loan which in certain cases maybe secured by the borrower's title vehicle. Our loans are underwritten against the borrower's ability to repay and the presence of collateral serves to reduce the bulk frequency with law severity eating much less in the back. In any given month we repossess a relatively few vehicles, so changes in the used car prices have very little impact on our total losses. To highlight this we believe that a reduction in used care prices of 10% would result in an increase in overall portfolio lines of less than 2 basis points annually. Now, I'd like to turn the call over to Scott.

As Jay just walked through we have sound momentum on growth in credit. I will take you through the significant progress we've made on our operating expenses and deleveraging. Before we get there let's turn to Slide 8 to review our first quarter performance. We earned $33 million or $0.25 per share in the first quarter on a GAAP basis versus $137 million or $1.01 per share in the first quarter of 2016. Last year’s quarter includes a pretax gain of $167 million related to the sale of our interest in our SpringCastle joint venture. Our Consumer and Insurance segment earned a $103 million this quarter or $0.76 per share on an adjusted basis compared to $126 million or $0.94 per share in the first quarter of 2016. Let me take you through the key factors in this quarter’s performance. First, interest income declined in the fourth quarter consistent with the reduction and receivables that we had signaled during the fourth quarter earnings call. Over the past few quarters, yields have been declining as we have executed on our secured lending strategy, which we expect to lead to lower losses in future periods. As yields will stabilize incremental growth in the portfolio will accelerate interest income. Other net revenue which includes net insurance, investment and other income were down sequentially and year-over-year with the declines attributable to lower insurance premiums in the current quarter. Looking ahead to the balance of this year, the first quarter level will be more indicative of the run rate. We expect total provision expense to remain stable quarter-to-quarter for the remainder of the year. As Jay mentioned, we anticipate second quarter charge-offs to decline to 7.2% and the second half loss ratio around 6.8% as we see the benefits of improved roll rates and the impact of our secured lending strategy. Our loan loss reserve for the remainder of 2017 should be relatively stable as the reserve benefits from the improving loss outlook are expected to be offset by growth related increases. This stability will result in defining our non-TDR reserve ratio as receivable denominator growth throughout the year. As a reminder our non-TDR reserve reflected loss of emergent period of seven to eight months in accordance with the characteristics of our portfolio. Turning to slide nine, I want to highlight our progress on expense reductions and operating leverage we continue to realize cost savings from the acquisition. In the first quarter C&I expenses were $303 million or 9.1% of receivables, down from $325 million or 9.6% of receivables in the fourth quarter. The sequential reduction in operating expenses reflects seasonally lower expenses typical of the first quarter such as marketing which we will return to normal levels over the rest of the year as we invest in growth. In addition, we transitioned all legacy OneMain branches of the Citi operating system allowing us to reduce TSA costs. First quarter operating expenses included a modest benefit from eliminating TSA costs and we will see additional benefits in the second quarter as the full run rate of the savings is reflected in our results. Further, we have completed the consolidation of about a 100 overlapping branches positioning us to realize additional expense synergies. Looking ahead operating expenses may vary a bit over the next few quarters as we see opportunities for incremental investment in growth initiatives including investing in our brands. We remain on track to achieve a fourth quarter exit run rate of $300 million which is equivalent to an annualized $100 million savings compared to the fourth quarter of 2016. Turning to slide 10, you will see a summary of our $14 billion in debt. Similar to last quarter we have maintained in excess about 60% secured debt and 40% unsecured debt with a nicely balanced unsecured maturity profile. On the liquidity side, we continue to be in a strong position. We have over $4 billion of unencumbered consumer loans and $4.6 billion of undrawn conduit capacity at the end of the quarter. These liquidity sources allow us to maintain our policy of having greater than 12 months of forward liquidity coverage without any new capital markets transactions, mitigating any significant potential market volatility. Turning to slide 11, we have continued on our path to de-lever our balance sheet. Our tangible leverage decreased to 9.8 times at the end of the first quarter of 2017, down from 10.4 times at the end of 2016. We continue to be on page to reach our leverage target of 7 times by the end of 2018. On the right side, you will see a table that goes into more detail on our expected tangible capital bill in 2017 and beyond. At the top of the table you will see the underlying adjusted earnings for the C&I segment that we have guided to. Below that as we have previously provided we have outlined the more significant elements that walk down to the $300 million of tangible capital build that we expect in 2017. As we move past 2017 tangible capital growth is expected to accelerate as the impact of acquisition related costs, the legacy [indiscernible] fall to less than $100 million in 2018. And in 2019 we expect that impact to reduce further to about $50 million. Now, let's turn to slide 12, our business generates a significant amount of capital and free cash flow. I want to share some of our early thoughts on capital generation and deployment as we now have increased visibility towards reaching our tangible leverage target of 7 times by the end of 2018, which is equivalent to a 12% tangible common equity ratio. For illustrative purposes we’ve assumed any receivable growth ranging from 5% to 10% and return on receivables of a little over 3.5%, both basically around our current levels. Using these growth rates we would expect to generate excess capital of about $300 million to $400 million per year after we retain the appropriate level of capital to support our receivables growth. With that amount of excess capital generation we would have a variety of options available to us to deploy capital in a shareholder family manner including dividends and/or share buybacks. Of course, we continue to focus on achieving our target leverage ratio, but we thought it would be helpful for you to understand just how much excess capital the business can generate. At this point I would like to turn the call back over to Jay for his closing remarks.

Thanks Scott. In closing, I would like to turn to page 13, and highlight our outlook for the remainder of 2017. We continue to be comfortable with our full year 2017 Consumer and Insurance adjusted EPS guidance of $3.75 to $4.00 with receivables expected to end the year in the range of $14.3 billion to $15 billion. Looking ahead to the remainder of the year we will continue to provide our branches with the analytics, product and sales tools to maintain the momentum in growth and credit trends. As we continue to take these steps we are confident that we will generate meaningful excess capital that can be deployed to drive even stronger shareholder return. This adds to our view that our shares are clearly undervalued. Now I’d like to turn the call back to Laurie to begin the Q&A period.

The floor is now open for questions. [Operator Instructions] Your first question comes from the line of Mark DeVries of Barclays.

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

Sure, well great question, thanks Mark. I'd say a couple of things. First let me start with the second half and then work my way back. You know we pay a lot of attention to leverage our consumers have and the expanding debts that they bring on when we close loans with them. And as we look back over the last couple of quarters, they have been very stable. So, we've really haven’t seen significant increase in our customers having additional credit investments over the increased table over time and something we're obviously quite cognizant of. As we lead to the competition, you know I said this small balance credit card that was probably little bit you said when I made the comment a few quarters ago it was just something we were aware off and much less of a competitive saying when I was referring to a much smaller balances I was referring to probably the cards in 100s of dollars is equal to our loans in the thousands, so just something that was out there. I said a competitive environment as we see today is quite good and similar to what it has been really for a period of time.

Okay, got it. And then my second question, I think you may have answered this in some of your prepared remarks, but if we think about your second half charge-off guidance of 6 to 8, if we kind of look at where roll rates have been to us that implies given where delinquencies are roughly 6, 8 for the seasonally favorable 3Q and then higher in 4Q making it tougher to get to the guidance, is that is your expectation that, I think you mentioned that you are seeing some improvement in roll rates recently, that those continue and that’s what kind of keeps you to your guidance?

Yes, Mark, this is Scott. So, two things, one is the roll rate improvement as well as the continued percentage of secured lending. So, as we get to the back half of the year and going into 2018 we have focus those tailwinds helping us.

Okay, got it. Thank you.

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

Hey, good morning. You know, I know you all talked about the acceleration in growth in April, I am just curious that you could sort of separate how much of that you think is seasonal and what may be you are seeing outside of the seasonal trends?

You know, look as we have sort of highlighted, it’s a meaningful year-over-year and you know to us that’s a significant marker. But you know I would say a big chunk of it is the bad debt. We have really finished all the activities we need to do in Jan and Feb and people are very comfortable with the systems. I think people are seeing the experience of how they are able to work with the system. There are people that's closing from the branches that make loan closing significantly more customer friendly across our thousand new branches and really the pick up across the additional thousand branches has really added to the growth. The conversion rates as we indicated has gotten stronger, so I would say some of its clearly seasonal, but when we look at the growth year-over-year that’s really a factor of having everybody on the same system as well as seeing strong demand across the board.

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

I think that, look when we have basically 4000 people coming to our system change in January and February, we were very confident and we didn’t want to create significant issues and really made sure marketing and other things were pared back to be able to get through as seamlessly as we could the January and February so we could maintain credit and do the things we needed to do, so we could come out strong in March, April and beyond.

Okay. And then just sort of thinking about the borrower aspect rather than you all saw employee impact, you know sort of what have you seen on the part of the borrower in terms of demand?

You know, I would say, the biggest indicator that we look at is the demand of applications and we are seeing strong applications year-over-year and month-over-month, so you know that gives us pretty good confidence that demand is there.

All right, thank you.

Thank you.

Your next question comes from David Ho of Deutsche Bank.

Good morning. Just wanted to reconcile your continued assumption that the secured versus unsecured would obviously go towards secured over time, but obviously you said that the yields looked fairly stable, even though the secured loans are probably coming on a much lower gross yield. So, what gives you confidence that you can maintain kind of the yield out right from here? Thanks.

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

Okay, and then your confidence on loss rates in 2018 declining, can you go over in terms of some of the drivers what does gives you that confidence, I know obviously the mix shift continued growth and in direct auto, but anything macro wise or anything else that would give you additional confidence?

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

Okay, great, and are you seeing any benefit from higher rates of obviously 40% of your business is debt consolidation and higher rates obviously makes that more expensive and many people want to re-file or consolidate over time?

Not really. You know our customers are clearly both interest sensitive and payment sensitive and we want to make sure we are providing loans that fit into their budgets. So, I would say we expect more or less the rates we charge would be pretty consistent to where we have been.

I’ll add one more thing really to your earlier question is what Scott said is really getting high level that I think everybody knows, is when we think about loss rates obviously the portfolio is making more-and-more secured the loss rates on the overall secured book is 50% lower than the unsecured book, so it doesn’t take much of a mix to drive the losses down.

Great, great, thank you.

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

Hi guys, good morning. It’s actually Chas Tyson on for Sanjay. I just wanted to ask about loan growth again, and kind of get your thoughts on longer term that you’re obviously seeing some acceleration in the early months of 2Q and you outlined some kind of scenarios on loan growth on slide 12. You know how should we think about where this model can grow long-term and takes - you can kind of get these improvements going on and see results.

Look, we want to make sure we can stay responsible when the credit [indiscernible] and that’s our primary goal. You know we are certainly comfortable with the numbers that we are on Scott's page sort of comfortably given the 5% to 10% range we certainly over the longer term would like to see our ability to help more customers then get into double-digits, but in the near term I think we are very comfortable with the target rates that are out there.

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

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

Got it, thank you.

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

Hi, good morning, thanks for taking my questions. Jay, couple of things, one is just on the consumer front, just a point of clarification, I wanted to make sure I understood your commentary or assessment about household leverage of your applicants. I think it was a couple of quarters ago you had commented, you are starting to see some of your applicants carry a little more unsecured debt. I thought the comments today suggested the outlook was more stable, can you elaborate on how you want to interpret the overall balance sheets of your applicants?

Sure, I'd split that really into two things. There is the applicant and there is the loans we close. So, we pay a lot more attention to the loans we close because that’s the risk we're towing going forward. Certainly, we don’t approve every loan. We have the - approving every loan. I would say in general the applicants do have more credit and we are being careful about those that we do approve. But of those that we do approve and put on the book it’s been pretty stable.

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

Sure, I sort of just to clarify, you know as I said it’s about 48% of book from the [indiscernible] in the first quarter it was secured. Of that we view about half of that is direct auto and half as what we would call card secured which are cards older than eight years. So, again the bigger loans after the newer cards at average I want to say four and half years old those loans have been about $15,000, $16,000 as we look at the older cards they have been in the $6,000, $7,000 range. So, that’s the - profile looks like it is been roughly 50:50 mix between the newer vintages and the older vintages and clearly the older vintages performed a bit better, but they don’t perform quite well compared to the unsecured market.

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

Now you're right, so we've been averaging about 80 basis points on recoveries. I would say the majority of our recoveries were actually in-house collections and not sales, but as we kind of put the two servicing platforms together as we planned last year in the fourth quarter, we did have a bulk sale of some bankruptcy charge-offs that we didn’t have in the first quarter that we don’t expect to repeat in the subsequent quarters.

Got it, very helpful. Thank you.

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

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

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

Okay and then, thanks for that Scott and then for, more longer term, at the time of that you guys announced the OneMain acquisition you had articulated a certain level of earnings power and then obviously that changed a little bit through the integration, but now that you're on the other side of that, how do we think about the longer terms earnings power at this stage given what you're articulating in terms of credit expectation, growth and it sounds like the potential for Capital Management? A - Jay Levine I'd briefly say, I think we feel quite good about the long term earnings power of this company. I think certainly when we look back a couple years we're probably off by a year so in terms of where we thought we'd get to, but longer term, I think we feel good about the platform, the customer base and the ability to generate long term meaningful profits.

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

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

Thanks very much.

Our next question comes from Henry Coffey of Wedbush.

Yes, good morning everyone and thanks for delivering a real solid quarter. Two questions, first just in terms of overhead at what point do we get to where you're operating costs are going to grow pretty much in line with the receivables, is that 2018 or is there more efficiency squeeze going on past 2017?

Yes, thanks Henry. I'd say as we kind of get through kind of our run rate target we talked about in 2018 and I think as we are in 2017 I think as we go into 2018 I would kind of think about go forward kind of a 4% to 5% type inflation which would be a little bit would be comp related and little bit would be investment in growth and from those perspectives, we can still drive down the ratio because you will get the operating leverage from slower expense growth relative to receivables growth, so we can continue to drive the ratio down.

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

Good, great question. Look what I'd say is our customers - we have recognized them in a very [indiscernible] then our customers directly of prices indicated, whether it is tools like credit card, LendingTree and others that give customers quite a bit of access the information and competitive rates. But when we work and sit down with our customers we're largely looking at their credit bureaus and seeing the credit card debts they have and in general our rates are pretty comparable with credit cards. And that is a large degree of the conversation as well as what's important is can they handle the debt loan? So what's the payment, how has it been in the total obligations and do they have disposable income left over? So we’re – they are very aware of rates, it is part of the conversation, but it's also important that they have that meaningful budget left over to live their lives and be able to deal with the things that come along. So I would say increasingly they're quite sophisticated and rate is part of the conversation, but not the only part.

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

I would say that, as you know we're well aware, a part of the conversation, but it’s one that is the decision the customer makes though to agree their underinsured and these are tools that give them options to better protect themselves.

Great, thank you very much.

Your next question comes from John Hecht of Jefferies.

Thanks guys very much. Most of my questions have been asked, but Jay you did - you stated that the DGs ph are still higher on an absolute basis in the OneMain branches relative to the Legacy SpringLeaf branches. And if you disaggregate the credit then it looks like SpringLeaf is actually pretty flat year-over-year in terms of credit quality. So I guess number one is what have you learned thus far in the integration process if you can apply to the OneMain branches where you can continue to mitigate the DQ levels and given that what timeframe do you think will you get those down to the SpringLeaf type levels?

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

Okay. Thanks that's is at middle of the year basically sort of okay and then the second question is just clarification, Scott I think you mentioned the insurance would be flat or this would represent a good base rate, is it is it flat on a dollar basis or against as a percentage of receivables, how should we think about that?

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

Okay, great. Thank you very much for the clarification. Thanks Guys.

Thanks John.

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

Hey guys, this is Andrew [indiscernible] on for Mike. First question, can you just talk about sort of developments on the regulatory front, specifically we're seeing a number of states get more aggressive with rate cuts, I know that there's bills in California and one in Maryland any thoughts or color on these?

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

Okay, thanks and then just one more, so I know you gave us a breakdown between legacy OneMain and Springleaf from the DQ side, can you talk about sort of what you're seeing in the loss rates at those two different books of business?

Yes, I think, as we’ve talked about before we provided last quarter, some expectations for losses relative to the two portfolios. So I'd tell you that the Springleaf portfolio really has been you see on this the vintage improvement, delinquency improvement on a year-over-year from 2016 to 2015 and then the conversation with OneMain was because of the large percentage of unsecured lending that we kind of were expecting a little bit of a pickup in 2017 related to having a higher proportion of unsecured and then the impact of some of the integration delinquency aspects also impacted the OneMain portfolio. And so as we kind of look at 2018, we see OneMain kind of stabilizing back to kind of 2015 levels and with SpringLeaf kind of below those levels to get into our overall kind of outlook that 2018 will be lower than 2017.

Okay, thanks and then just one housekeeping question, can you give us the ending branch count?

1701.

Thank you very much.

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

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

Sure, a couple quick observations. One, time has helped a lot so a couple of quarters that make a big difference in terms of people getting comfortable with the product given choices, two being on the same system makes an enormous difference as well, so OneMain system, what was called [indiscernible] really never set up to offer secured loans and once they were put on a similar system the fact that those offerings are provided nationally, how loans get routed and the ability to do that in real time has made an enormous difference as well as the fact that the new leadership of the field has a lot more comfort. Understanding the products and appointing the branch manager who knows in the branches to help sell the products, so I'd like say really time, leadership and systems that all combined together to help sales tremendously.

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

No, well that’s basically yes, so I think couple things. One, the way that process is handled is once a loan goes really delinquent again a decision needs to be made to repossess or not, that's all done manually. The branches are not involved in that and it's all handled out of our central facilities where there's a fair amount of experience. And as you could imagine the decisions also being made is there in that value in the car to go through the whole process. We don't want to be taking cars and losing money on, especially older vehicles. So, I'd say there is very good analytics that go in terms of the decision making around whose is going to get repo, who is not, et cetera, to make sure we're optimizing on behalf of ourselves and investors. And that's basically how the process works. Clearly there is a lot I'd say, but it's those central facilities and those central positioning that are making the repo and then ultimately if we have to repo getting it to auction and making sure we're maximizing proceeds. So again we've got a really experienced team led by, we wouldn't have gotten into the business if we didn't have the full DNA to manage it soup to nuts and I'd say I feel good about the process as well as, as I mentioned very few others are actually coming through its percentage of the total book. And most importantly, it's the question is exactly as you said, we stress auto prices if we drop recovery another 5% would be a basis point.

Okay, thanks very much.

Your next question comes from Rick Shane of J.P. Morgan.

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

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

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

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

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

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

Okay, I'll have to wind up, one of the things is that some of the disclosure bucket on delinquencies have changed, so I missed the 60, I’ll have to go back and find that.

It’s in the, there is page on 21 of the appendix that kind of has all the delinquency metrics.

I see the 90 there.

Sorry, from the press release.

Okay, thank you guys.

Thanks Rick.

Your next question comes from Robert Dodd of Raymond James.

Hi guys and thanks for taking the question. I’ll always follow with Ricks question, if I go back and it sounds like ancient history, but to the fourth that when you gave the presentation in the fourth quarter of 2015 so a little bit more than a year ago you gave us a breakdown on mix and how charge-offs trend over time. Springleaf the first two years legacy Springleaf the first two years on the auto side charge-offs were essentially zero, right? Young program going up doesn't have a lot of NCOs, we are kind of in that situation now with OneMain. So the question becomes I guess, how much of this improvement is really like for like consumer versus the mix, obviously the mix moving to hard secured and auto I would expect the whole back charge-off number down, but some of that is a function of that program through the OneMain branches just being so young and so essentially charge-offs being near zero in the near term, but then obviously they will trend up pretty rapidly well, relatively rapidly at some point. So can you give us some color on that how much of this is the timing and the age of those type of receivable that you’re on boarding versus how much of this is actually like for like consumer improvement?

Well, I guess, if you kind of look at the charts that we put up - put in the back in regards to two different portfolios, the strategy was always to kind of take the OneMain portfolio from being predominantly unsecured to a mix of unsecured and secured in order to over time clearly kind of reduce the invented loss on that portfolio. So, that was what we were doing strategically. So, I think if that's answering your question, so the expectation would be that portfolio would have a lower loss we did have to as others have mentioned on the call, the pricing for the hard security is lower than that of unsecured, but the overall risk adjusted return on the secured book is very strong. And so that the mix aspects of that would be something that we've talked about on the OneMain, you will start to see that come through more in 2018 and you will in the current years because most of the losses in 2017 or 2016 are derived from the previous, kind of two years. So on an apples-to-apples basis, clearly OneMain as we get to the 17 vintage it will start to improve because of the mix and as you get in the 2018, our 18 vintage you can go back and try to compare that towards 2015 vintage because of the mix shift. But the overall credit on the - from the product side continues to be stable. That answers part of your question also.

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

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

Understood, I appreciate it. Thank you.

Robert the only other thing that I'd quickly add is, you're right, the auto is a factor, but if you look at performance of our stable auto when we securitize a couple of schools at this point charge-offs [indiscernible] it was fairly different than everything else and all that factored into our long term expectation.

Got it. Thank you.

Your next question comes from Lee Cooperman of Omega Advisors.

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

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

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

Yes correct.

Okay. Thank you.

Thanks Lee.

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

Thanks Laurie. I appreciate your interest and your question this morning and of course we'll be available for any follow up, thanks. Have a good day.

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