OneMain Holdings, Inc. (OMF) Q2 2017 Earnings Report, Transcript and Summary

Welcome to the OneMain Financial Second 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. [Operator Instructions] It is now my pleasure to turn the floor over to Craig Streem. Sir, you may begin.

Thank you very much, Maria. Good morning, everyone. Thanks for joining us today. Let me begin, as always, by directing you to Pages two and three of the second quarter 2017 investor presentation, which contains important disclosures concerning forward-looking statements and our use of non-GAAP measures. The presentation can be found in the Investor Relations section of our website. 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. And we caution you not to place undue reliance on forward-looking statements. If you may be listening to this via replay at some point after today, we remind you that the remarks made herein are as of today, August 3, 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 of course, after the conclusion of our formal remarks, we will conduct a Q&A period. So now let me turn the call over to Jay.

Thanks, Craig and thanks for joining us this morning. We had a great quarter and our results reflect the terrific execution on the two key drivers of our business, receivables growth and credit performance. For the quarter, our C & I segment earned adjusted EPS of $0.81, reflecting our very strong direct auto originations which have lower near-term yields but higher long-term profitability. This was the first full quarter where we could enjoy the benefit of having a fully integrated company and I believe we are just starting to see the product of all the hard work of bringing together Springleaf and OneMain to become the leading nationwide personal lender. We entered the quarter with strong growth momentum, which we continue to drive, with the result being a record for both originations and growth. In addition, we generated very positive credit performance, positioning us well for the third quarter and the rest of the year. We are maintaining our full year 2017 C & I adjusted EPS guidance of $3.75 to $4.00 per share, and given the underlying trends in the business, we feel great about how we are setting up for 2018. Net-net, we had a great quarter and I believe we have terrific prospects ahead. So let's turn to slide four and cover the highlights. For the quarter, our Consumer & Insurance segment earned $110 million or $0.81 per share on an adjusted basis. Consumer & Insurance receivables reached $13.9 billion at quarter end, ahead of our expectations. We originated a record $3 billion of loans in the quarter, 16% ahead of last year with secured loans making up 47% of our originations. Credit performance was outstanding in the second quarter with net charge-offs of $6.9, down nearly 160 basis points from the prior quarter and down 40 basis points from the prior year. Early-stage delinquency, meaning receivables 30 to 89 days past due, decreased to 2.1% from 2.2% in the prior quarter, countered the normal seasonal uptick that we otherwise would have expected. Tangible leverage remained nearly flat from last quarter. We issued over $1.6 billion of debt at very attractive pricing, putting us in great shape to fund our ongoing growth, as well as the debt maturity scheduled for later this year. Let's turn to Slide 5. As we have discussed, our business has consistently generated an unlevered return on receivables in excess of 10%, demonstrating the strength of our business model across cycles. As we have said, we believe it is unequaled in the lending sector by any competitor of scale. Our focus on unlevered returns is important because maintaining consistent performance ensures ongoing access to low cost funding in the capital markets. Most importantly, we believe, we can continue to generate returns on tangible common equity in the 20%-plus range. The foundation for our strong performance is our cutting-edge use of data and analytics for marketing and underwriting, and our nationwide branch network, which allows us to deliver highly personalized service tailored to each customer's financial capacity and needs. We are the nation's leading consumer lending franchise, now with nearly $14 billion of receivables, 2.2 million customer accounts, and nearly 1,700 branches in 44 states. Our market opportunity is massive, with solid customer demand and a sound economic environment as a backdrop. We believe in providing the right loan choices to our borrowers, ranging from traditional unsecured installment loans to our direct auto loan product where the borrower can receive a meaningful rate benefit by using a late model vehicle as collateral for their loan. Let me remind you that our direct auto loans are originated through our branches, directly with the customer and not indirectly through auto dealers. In every case, our in-person underwriting and servicing help build customer relationships, enhance credit performance and contribute to our market leading position. Let's turn to Slide 6 to discuss receivables growth. As I said, the second quarter was a record for originations. We closed about 400,000 loans, which was almost 50,000 more than in the second quarter of last year, and importantly, with 27% higher on a loans per branch basis. Looking specifically at the former OneMain branches, it was great to see loans per branch increased by over 40% as they really began hitting their stride. These branches are benefiting from new systems, products, training and enhanced marketing strategies. Total secured loans were 47% of originations in the second quarter, up from 43% in the second quarter of last year. Secured loans, including almost $2.5 billion of direct auto loans, now represent 40% of our total portfolio. Putting us well along the way to achieving our year-end target. Originations in the quarter exceeded our expectations, driven by the strength in our direct auto product and increased conversions on applications from better credit quality customers. Importantly, these loans generate higher unlevered return due to the stronger credit performance and attractive operating leverage they provide. To illustrate, direct auto loans have annual unlevered returns around 30% higher than our other loans even with the lower coupon. These origination trends are expected to contribute to our improved credit performance for the remainder of 2017, as well as lower losses in 2018. Now let's turn to Slide 7 to review our second quarter credit trends. Credit performance in the second quarter was quite strong, with early stage delinquency declining to 2.1% from 2.2% in the prior quarter and prior year. Our 90 plus delinquency also declined in the second quarter but was slightly higher than last year's level as the remainder of the conversion related delinquency from the first quarter rolled through the later-stage bucket. Net charge-offs were 6.9% in the second quarter, down from 8.5% in the first quarter and 7.3% in the prior year. Our credit performance was driven by our continued portfolio shift towards secured loans, improvement in the back-end roll rate and having put all the conversion activities and noise behind us. As a result, we expect net charge-offs in the second half of the year to be in the mid-6's and approximately 7% for full year 2017. Now, let me turn the call over to Scott to go through his comments on our financial results.

Good morning, everyone, as you just heard from Jay, we feel traffic about our progress towards achieving our long-term strategic goals for the portfolio in the company. We completed a successful integration in the first quarter, and subsequently saw our portfolio return to growth in the second quarter, with record originations of $3 billion. In the quarter, we saw a significant direct auto growth in our former OneMain branches, supporting our objective of building a more secured portfolio. In fact, total receivable growth in direct auto was almost $400 million in the quarter. Our delinquency and credit results have continued to improve, and we are building a more resilient and profitable company. We also have continued to make significant progress on our operating expenses, funding and capital, which I will share with you in the coming pages. First, let's turn to slide 8, to review our second quarter performance. As Jay mentioned, we earned $41 million or $0.30 per share in the second quarter on a GAAP basis versus $26 million or $0.19 per share in the second quarter of 2016. This year's quarter included a pretax charge of $27 million related to the repurchase of approximately $480 million dollars of debt coming due in the second half of 2017. Our Consumer & Insurance segment earned $110 million this quarter or $0.81 per share on an adjusted basis compared to $130 million or $0.96 per share in the second quarter of 2016. Let me take you through the key factors in this quarter's performance. First, interest income increased marginally from the first quarter of 2017, as the impact of higher average net receivables was partially offset by lower yields. As Jay mentioned, the growth in our direct auto originations, as well as an increase in the loans to better credit quality customers, has improved our loss outlook but contributed to a 50 basis points reduction in the yield from the first quarter. Over the next few quarters, we expect recent pricing actions to partially offset further declines from portfolio mix. Over the long term, the characteristics of our direct auto product, specifically the higher loan size and lower loss attributes, will contribute to superior returns relative to comparable personal loans. The provision for loan losses improved by $5 million from the prior quarter. Total reserves increased by $3 [Technical Difficulty] million to $697 million, which represented 5% of receivables compared to $694 million or 5.3% in the prior quarter. The decline in the ratio was largely driven by growth in our portfolio and the continued improvement in our delinquency and loss outlook. Upon the completion of our system integrations in the first quarter, we have continued the alignment of our collection practices and processes, which has resulted in a small movement of loans into our TDR population, the associated reserves have also moved. As a reminder, the loan loss reserve for our non-TDR loans continues to reflect our historical loss coverage of approximately 7 to 8 months. Turning to Slide 9. I want to highlight our progress on expense reductions and operating leverage. In the second quarter, C & I expenses were $301 million or 8.9% of receivables, down from the $303 million or 9.1% in the first quarter of 2017. At the current operating expense level, we fully realized the cost-savings target we laid out at the time of the acquisition. And since the first quarter of 2016, we have reduced our OpEx ratio from over 10% to an expected 8% by the end of the year. The reduction reflects our disciplined focus on cost and the operating leverage created by receivable growth. Turning to Slide 10. You'll see a summary of the $14.7 billion in debt, which increased from $14 billion in the first quarter of 2017 in support of our receivables growth. Our debt mix shift is marginally due to our issuance mix in the quarter. We ended the quarter with 55% of our debt secured and 45% unsecured. We completed the issuance of a $1 billion 5-year unsecured bond as well as a $600 million ABS issuance with a three-year revolving period. The average cost of funds on the unsecured bond was just under 6% and approximately 3% on the ABS deal. We also retired approximately $480 million of unsecured debt due in the second half of 2017. This reduced our remaining 2017 maturities to approximately $800 million. I'm also very pleased with the results of our latest ABS issuance. After achieving a Class A spread of 150 basis points on our December securitization, we brought that down to 100 basis points on the most recent deal. We also received a ratings upgrade from Moody's in the quarter, in which they increased our corporate family rating to B2 while maintaining the previous positive outlook. On the liquidity side, we continued to be on a very strong position. We have $4.5 billion of unencumbered consumer loans and $4.8 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 potential market volatility. Turning to Slide 11. Our adjusted tangible leverage remained relatively flat from the prior quarter and was impacted by the timing of debt issuance as well as the expense we incurred in connection with debt retirements. Exuding these impacts, our leverage would have been improved to 9.6 times in the quarter, but we remain on-target for the nine times by the end of 2017. On the right side, you'll see a table that goes into more detail on our expected tangible capital in 2017 and beyond. At the top of the table, you'll see the underlining adjusted earnings for the C&I segment that we have guided to. Below that, as we've previously provided, we have outlined the more significant elements that walk down to the approximate $300 million of incremental tangible capital that we expect to build in 2017. As we move past 2017, tangible capital growth is expected to accelerate as the impact of acquisition-related costs fall to less than $100 million in 2018. And then in 2019, we expect the impact to reduce even further to about $50 million. With that, I'll turn it back to Jay.

Thanks, Scott. In closing, I'd like to turn the Slide 12 and review our outlook for the remainder of 2017. First, we are maintaining our full year 2017, C & I adjusted EPS guidance of $3.75 to $4.00. We expect receivables to end the year in the range of $14.8 billion to $15.2 billion. With today's solid economic environment, we expect underlying credit performance in the portfolio to remain strong and expect charge-offs from second half of the year to improve to the mid-6's, resulting in a full year charge-off of approximately 7%. Finally, we expect to continue building tangible capital over the second half of this year, bringing us closer to reaching our leverage target by the end of next year. And as I said at the beginning of my remarks, I couldn't be more pleased with our performance and outlook for the company. Today, we are a significantly larger company, capturing all the benefits we envisioned when we first combined the two companies, most importantly, profitable growth. Now, I'd like to turn the call back to Maria to start the Q&A period.

Thank you [Operator Instructions]. Our first question comes from the line of Rick Shane of J. P. Morgan.

Thanks for taking my questions this morning. Jay, you made the comment about how the OneMain branches experienced a 40% increase in volume and then that was really one of the big contributors to the origination growth. I'm curious how they compare now on a per-unit basis to the Springleaf branches, so we can get a sense of how this is going to track going forward as they sort of reach equilibrium?

Great. Thanks, Rick. I'd say, as I alluded to, we were really pleased with how the branches, especially the former OneMain branches, came along during the second quarter. We knew we had to get those systems integration and all the other integration activities which we were thrilled to have completed as successfully as we did in the first quarter. What I'd say is as -- when we look at the second quarter, we're pretty close to parity in terms of where the two branches are closing, where we'd like them to be. A number of activities have happened across the firm that have allowed us to better allocate both applications and other things that have really helped normalize and get all the branches up to sort of similar levels of productivity. So I'm thrilled with where we are and I'm not sure you'll keep seeing 40% plus growth. But between new applications a better focus on new customers and lots of other things, we're thrilled with where all the branches are producing today.

No, was just very strong quarter on origination and appreciate you taking our question. Thank you.

Thanks so much Rick.

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

Good morning and thanks for taking mine. Wondering, Jay, if you can comment a little bit. I believe you had referenced the pricing actions going forward. Obviously, the yield trend reflects the shift in product mix towards direct auto and secured. But can you give us a sense of where the pricing actions, product-wise, have taken place, how much pricing leverage you feel you have and whether by those comments you're indicating that the Q2 blended yield represents a near-term through?

Yes, this is Scott. So I think -- I won't go into all the specifics around that. But we did -- we tested some pricing increases in different segments based on kind of competitive dynamics. And as I mentioned in my remarks, that we think those pricing actions took place kind of in the late June timeframe. But I would say that in the near term, those take some time because that's only on new originations versus the portfolio, so there'll be some continued kind of pressure but that will kind of turn as we do the second half originations at the new rates.

Got it. And just as a follow-up, as we think about trying to forecast ultimately the blended yield on the portfolio, based on current origination trends and where the branch managers are focused on product wise, where does the mix of secured ultimately top out at? It went from 35% to 40% of the portfolio from Q1 to Q2 and just trying to get a sense for how we should think about the portfolio at year end and perhaps, 12 months from now?

I think it's -- what I'd say is if you look at originations in the quarter, sort of they've been running 45% to 50%. I think ultimately, if we keep originating at that pace, the portfolio turns over every couple of years, that's sort of probably where it will migrate. And that's certainly where we feel comfortable and where we'd like to see it.

And I'll just make a point on -- in regard to the first quarter, second quarter and some of the yield. As Jay mentioned, as we were going through some of the integration and the selling of our direct auto product, that integration effort, it really kind of took off in the second quarter as we got, as Jay mentioned, a lot of the integration behind us, the team really kind of came through on that. As we saw with the Springleaf that, that does kind of level out over a few quarters as you'll see the potential borrowers that can actually qualify for a direct auto. So I think they'll still continue to see that in the next couple of quarters, but as you get into near the end of the year, you'll probably kind of get a little bit more stable mix between the different products we have. But again, that's all subject to applications and the customer profiles that we see come to the door.

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

Kind of following up on Rick's question. Is the -- I know you said you don't expect 40% growth in originations, but was there kind of catch-up in this quarter? Or is that level kind of a good level of originations as we go forward?

What I'd say is there's a little bit of seasonality that goes along with our business. So the first quarter is always the quietest when we have tax refunds and other things and there's certainly less borrowing. I think, it's hard to say it's a catch-up because when people need to borrow, they generally kind of need to do it now. So to that we sit around and say, Well, I think you're all set for the second quarter. Let me hang out. So generally, when people are borrowing, they tend to take care of it in pretty real time, but I'd say, we're -- we got to in the second quarter in terms of application trends, in terms of our close rates, in terms of the overall business, we feel pretty good about.

Got it. And how -- is there any -- are there any kind of, as you think about the intermediate term outlook, does it kind of change your view about, I don't know, the number of branches or staffing in terms of that -- the level of success that you're seeing now?

We pay a lot of attention to individual staffing, per branch. And -- but I think we feel good about -- with a lot of the systems, the integration, there's a lot more productivity that's been available across the system that's been very helpful to everybody. Certainly, the levering we have between our centralized operations and our branch operations has helped a lot sort of balance load and allow us to do more within our branches.

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

Just one on credit. With charge offs moving lower in the back half of the year, I'm just kind of curious how you're thinking about provisions sort of even this quarter, I'm just kind of wondering, if that's moving lower, how you're thinking about that for the back half?

Yes, I think as we've talked about kind of in the first quarter, we'd kind of see the provision line kind of being relatively stable with what we've seen in the last few quarters. As you know, in the third quarter, it's our -- historically, our lowest loss quarter. So that's kind of the area that -- that there'd be expectations for bill based on prior experiences, and then fourth quarter kind of a little bit back to kind of levels you probably see in the second quarter. So that -- we said before, we thought the provision would kind of stay in the range of what we've seen in the first half.

Okay. And then just competitively, it sounds like you're taking pricing up in certain areas. Just what are you seeing out there that is allowing you to take pricing up in certain areas and then, just broadly speaking, how is that environment sort of evolving over the past -- are you seeing any kind of tightening or anything like that?

I'll answer it in two ways. One, as we were going through -- until we were on one common platform and system, it was very difficult to kind of do broad-based pricing testing, which we would normally do, because you have to do it for both platforms. So we've really, I would say, just gotten going on that side, looking at the different opportunities and I'd say that it's across most of the products, in regard to where we're seeing that and that's really subsectors within different risk grades and distributions. So we'll continue to do that and potentially, as we get through the year, it's really based on kind of uptake, right? So the competitive environment will tell us how much price we can push through and how much -- which is a detriment to our originations.

And then I'll follow-up on Scott in terms of the competitive environment, which is we're seeing a pretty stable -- steady competitive environment in terms of looking at sort of who we compete with. It's sort of hard to know exactly what's out there. A lot of its local regional guys, some of it's other players, but in general, we're seeing a very stable competitive environment in terms of players coming in or out or making any real dent to what we go after.

Just one last quick one. Are you guys still -- with the pricing actions, are you still staying below that 36% all-in APR number?

Correct.

Our next question comes the line of Arren Cyganovich of D.A. Davidson.

Just looking at the yields by product, can you give us any indication on how they moved on a quarter-over-quarter basis in -- it would just help -- be helpful to have that broken out so that we can help -- see how that mix shift affect things over time?

Yes, we -- there was a page in -- we published kind of an ABS package. And when we go twice a year to those conferences, we'll kind of include that going forward. But there's a page in there, and if you kind of look at the auto product, the kind of the portfolio pricing is kind of in the 17% or 18%. On the hard secured, it's kind of in the mid-20s. Same thing with the unsecured. Unsecured is a little bit higher than that, but it's kind of in those kind of ballparks. And so really, there hasn't been -- there's been a little bit of change in the yield because we do risk-based pricing. So depending on the quality of the borrower, there is a little bit of differentiation based on that. That would be a little bit but most of it's just a shift. As we talked about with the direct auto, kind of at that lower rate, but even with the lower rate, it has much lower losses, and you get the operating leverage where you kind of have a fairly fixed cost of origination cost as well as the cost of acquisition spread over a larger dollar amount, so you get the -- a much better unlevered return.

And then in terms of the net charge-offs, also kind of wondering if you could talk about that from a product perspective in where you would see the normalized net charge-offs when they're fully seasoned by product? Just trying to think of how that evolves over time?

Yes. So I'd say on the direct auto, it's still seasoning. So if you look at that same deck that we have out there, we -- that's in the asset-backed deck. Losses are a little bit lower on the direct auto cause it's still seasoning. We expect that to kind of get into the 2%, 2.5% range. It's a little bit below that today. And the hard secured, if you look historically, that's kind of been in the kind of the 4% to 5% range. And then if you look at the unsecured, it's -- historically, it's probably been in the 9% to 10% range.

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

And it seems like a lot of progress is being made. Obviously, a lot of moving pieces, but I -- and a lot of commentary around this. But I was just hoping maybe Scott, you could talk about what all of the comments mean for the NIM going forward as we look into the back part of this year into next?

Well, I think from that perspective you're right, we do have many different pieces and part of it's based on the mix of originations that we have, so I can't give you kind of specifics. But directionally, what we've talked about is that we continue to grow the secured portfolio and at that the proportion of direct auto is higher than -- or a higher percentage of that secured origination, there'll be some near-term pressure from that based on the -- what we just went through on the pricing aspect of that. But we did put in, as I mentioned, some price increases that we think will partially offset that mix shift that we're expecting, so that will kind of come in third quarter but more likely in the fourth quarter you'll start to see that piece kind of build up and as we go into 2018, as long as the competitive forces are such that we can maintain those type of changes, that will bode well as we go into 2018 relative to where we are today. But I'd say third quarter, you're not going to give a lot of boost because of the originations as a percentage of our overall book, but as you get third and fourth quarter combined, it starts to give you some of that offset as you go into 2018. Hopefully, that's helpful.

Yes. No, I guess just embedded in your guidance, your EPS guidance, is there an assumption that you -- it goes lower before it goes higher in the second half?

I'd say third quarter, probably, there is a -- it's probably going to be kind of the most impacted because of where we are -- when we put the price increases versus the portfolio originations.

And Jay, I guess maybe an update on sort of the integration and other initiatives that you're working on as it relates to the integration, and maybe where we might be with synergies and what might be on the come?

I wish I had a long answer to that, but I'll happily say integration is fully behind us and other than this call, I don't think we plan on talking about it a lot more. I think the branches are humming at where they are, the activities, the learnings, the training, everything, is sort of exactly where we'd hoped it would be. So from that standpoint, certainly, we're always thinking about new products, additional things that we can help our customers with, but I'd say, they’re in the future. So where we are today is planning to continue originating and managing the credit the way we did in the second quarter.

And maybe it goes back to sort of Moshe's question on sort of people and personnel. I mean are there any additional synergies that you might be able to recognize now that we're at this point?

Well, this is Scott, I'd say that if you kind of look at the trajectory of the cost we've taken out since the integration, it's been pretty significant, but we're always looking at it and so our viewpoint is that we kind of separate it between the front end -- if we have the opportunity, one we're getting productivity and better in conversion rates, which means you can grow without adding incremental heads. But if there's opportunity, as we mentioned in the first quarter, we will invest in growth, if that means new markets or new areas we think there's opportunities, we will make the investments on that. We also are continuing to enhance our marketing efforts and that -- those would be where, on the growth side, we'll make those investments where we see the opportunity. In regards to the infrastructure side, we are starting to see some benefits from all the kind of improved technology that we have across the platform. I'd say there are some areas there, but most likely, those synergies in the -- what I'd say the infrastructure or the back office, will be really kind of reinvested in the growth. So if we don't see the growth, then there could be reduction in OpEx. But otherwise, our philosophy would be to reinvest those or offset the growth cost with those from kind of the squeezing out a little bit more in the back. We won't under-invest in both growth or collections.

Thank you very much.

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

Good morning, guys. Thanks for taking my questions. Most of my questions have been asked. I guess, one of the questions, you would be talk about the kind of online or Internet strategy. I know you guys have been investing in this and you've been very carefully over time to kind of implement this. But at this point, how many customers are you identifying online? How many customers are you closing online? And what that -- sort of the intermediate to long term, kind of how might that develop?

Sure. Great question. I know it's a little bit early out there. So thanks for getting it up. I'd say our business continues to migrate very much online. In terms of how customers apply, the interaction we have, but today, well north of 99% of our customers come into a branch and that experience is an important one both for us and for them, building that relationship. So the stats I've used, which I think continued to grow are about 80% of new customers start the process online where they'll apply online, the application will get to us, we'll sort through them, we'll figure out what documentation we need. They'll then come into the branch we'll build the relationship, figure out the best product that makes the most sense. And that certainly has important impacts upon the products we're able to sell, the collection abilities and long term, certainly putting customers into new loans once they've proven to be good customers. So all those are important things. But we understand we've got to provide Omni-channel solutions to our customers. And that's what we continue to do with -- as Chris spoke, we can of every part of the process, and we certainly look it over time. We think the way we're set up and the way the business is done today is certainly proving that it's working.

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

Good morning, everyone. The credit improvement in the quarter was relative -- when you look at what we're seeing everywhere else was dramatic. Much better than you were guiding, much better than we were looking for, better year over year. When you take a -- if we had this kind of data that you give us in your asset-backed slide deck, and we were trying to compare product to product to product, is the improvement mix based, is it because of certain products performing better, is it because the OneMain products, which you've given us some insight on, are performing better? If we'd laid out the whole grid and we're trying to get really precise about where the improvements came from and where they are coming from, is it mix or is it product specific?

Henry, this is Scott. So I'll try to break it down to a couple of things. As you kind of know, the metrics are kind of a combination of vintages. So as we provided in the deck, you kind of see the improvement of the recent kind of vintages and we only have 2016 because we use 60 days at 6 months. We talked about kind of the mix of direct auto and better credits, which will also have better credit performance going forward. So I think part of it is vintage is the main build up of kind of what you see in the results. Number two, as we've mentioned, as we put the centralized servicing parts of the business together and had the strategic alignment there, we've seen that -- and you see that coming through, better back end roll rates, which also has contributed to that. And of course, the continued mix to secured will improve the delinquency as we kind of continue through the year and into 2018. So it's a combination of multiple things, but it starts with vintages, and the underlying vintage performance of the product mix also impacts that, as well as better collection effectiveness.

Let me just add one more thing, which is we had 4,000, 5,000 of our people focused on many other things through the last few quarters. So we had to put new systems in, new products, et cetera. And that was just resources that we know we're capable of in terms of quality of collections, and we got there in the second quarter with having put all that stuff behind us.

Are you seeing a better customer today than you were a year ago, do think you think? Or just doing a better job of managing that customer?

I'd say it's a little of all the above. So certainly, a great question. I think I'd say, what we're closing, it's a marginally stronger customer when I look at year-over-year in terms of our credit scores, as I've said, whether it's -- be our customers' scores, FICOs, etcetera. And I think with the new systems, the way the system is set up, the leadership, et cetera, we're also doing a better job staying on top of those customers.

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

Just Scott, to go back to the expense conversation. Obviously, you made a point that you're kind of fully loaded as far as the synergies from the OneMain-Springleaf combination. I just want to understand how that relates to your operating leverage. Obviously, you put out the slide that shows your OpEx ratio at 8.9% for the quarter. Do you continue to build operating leverage as the -- as there's growth in receivables per branch? Or is there a little bit more of a proportional build in operating expenses relative to receivables growth going forward? Now that you have all those synergies built into the systems?

Yes. So a good question. I think where we looked at is we were targeting to get the $300 million run rate by the end of 2017, when we originally laid out the targets. We were able to achieve those synergies faster as we kind of made the adjustments. So our expectation was that given the -- as Jay mentioned, some of the embedded capacity we have post integration that we thought for the rest of 2017 that we can keep our expenses in this range, as well as grow the book. I think as you start to think about, I think Henry asked me a question last quarter about kind of 2018 and beyond, clearly, we'll have to add some costs in regard to just normal kind of inflation for our kind of our employees around that. So we're going to have growth in expenses going forward, but it's going to be at a much slower pace than we're going to have in regard to receivable growth, which will continue to drive the operating leverage we're talking about.

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

My first question relates to the origination side. Obviously, things are performing quite well there, certainly from a growth perspective, and you've had a lot of success with the direct auto product. I'm interested to know if you see, from a competitive standpoint, that product is being rolled out by any others. Is it -- are you seeing any look-alikes? Or you really just have a greenfield in terms of using that as a debt-consolidation product to accelerate growth?

I'd say, certainly, there's banks, credit unions and others on a local basis that have the ability to provide refinanced car loans. When we look at our spot and who we're trying to serves, certainly on a nationwide basis, we don't see others sort of offering the product at the scale, but Lord knows, time will tell, we certainly think it's a product that's a win-win, it's a very good for the customer, it's certainly gives them more dollars and allows them to consolidate a fair amount of debt, puts them in a better place with a fair payment. And for us, certainly given the credit performance Scott talked to as well as the operating leverage it provides in the branches, we think it's a great product. But I think that a good question, we haven't seen a lot of others going after it and given the spot of who we're serving, we probably won't see a lot of the banks going and serving, this FICO [indiscernible] or this customer base. So we're going to continue to do what we can to make it available to customers.

No, no, you've been very successful with it. I guess looking at the credit side, I think kind of behind some of the questions you've had already is a little bit of difference in terms of what we're hearing from other credit, creditors in the market as it relates to the performance of their own portfolios. If you look at credit cards in particular, there has been some discussion around higher delinquencies and loss rates, and you see some of that in the periodic results for those companies. You're seeing something that seems much better, so to speak, not only in terms of the math around how you get to the loss rate you're using for your own guidance, but just in terms of the actual performance of the consumers. Is there anything that you can -- that you noticed within this particular customer set that gives you confidence that their credit will hold up?

Well, let me say one thing and I'll turn it over to Scott, which is, we've put a lot of faith in our underwriting, and the fact that every customer comes into the branch, we go through a personal disposable income making sure they have the ability to pay. We verify income, and we've done that for long periods of time. We've certainly instituted that across the almost 1,700 branches we have. But each borrower's circumstances are unique, we want to understand what debt they have, we want to understand their payment ability to fulfill all the obligations and most importantly, we want to make sure they have capacity and free income, net disposable income after all the payments, that they can get buy and we think that makes an enormous difference in terms of performance.

Yes. I can just add on that -- to Jay's point, I mean, the -- that ability to repay underwriting and in-person touch, I think having a balanced product mix, so I think if you kind of look at the some of the peers, it's really mainly an unsecured product, so that's why a hard secured or direct auto could be the right opportunity for our customer both from their perspective and our perspective of managing risk. And I think the other piece that we've provided you the details as we've been -- as we have gone through the integration, clearly, we've seen a little bit of stress in regard to the legacy OneMain portfolio. But if you look at the Springleaf portfolio because of that mix and kind of continued focus on new customers or customers coming into the portfolio, have seen improved vintages in 2016, and we have seen that continuation, as we talked about. In this quarter, with the direct auto and some of the better risk grade customers that are coming through the portfolio, surely we have to trade off a little bit of yield on that, but the loss performance on that gives us confidence that that's a really good trade-off to make to keep that momentum going in our portfolio.

[Operator Instructions] We have a question from the line of [Mark Hammond] from Bank of America.

So I have two. So first on funding. With the increased expectations for a larger portfolio size by the end of the year, how do foresee funding that incremental growth? Is it just the same mix of secured and unsecured debt as it stands today?

Yes, as I mentioned, we clearly did a little bit more unsecured in the second quarter because of the attractive market opportunity we had. So as you get to the back half of the year, when we look at the maturity we have, now about $800 million in the second half, we'll look at a combination of unsecured and secured as well as you're well aware that we still have a healthy amount of capacity in our conduit in kind of unencumbered assets. So those are the three levers that we look at in regard to our funding, and we think we have plenty of capacity to fund the growth going forward.

And then my second and last question is on auto insurance. So the press is picking up on large bank's -- a large bank's use of lender-placed collateral protection insurance if the borrower doesn't have its own policy. Since secured lending is an increasingly larger part of your portfolio, I was wondering if you could just go over OneMain's policy and procedure for when a customer doesn't ensure an auto that's securing a OneMain loan?

Look, we have very specific policies, and what I would say is we do have a lender-placed policy in place. It relates to larger automobiles only. And what I'd say is, in total, it's immaterial to our overall business.

And following up on that, is it more since it's a larger balance to the direct auto product rather than the hard secured?

Yes. Look, I'd say, we've got it called out where it's only relating to the larger loans. So predominantly those.

And ladies and gentlemen, that was our final question. I would now like to turn the floor back over to Craig Streem for any additional or closing remarks.

Thanks, Maria. And thank you all for your questions this morning, your interest. And of course, our team is available for any follow-ups. 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.