OneMain Holdings, Inc. (OMF) Q1 2018 Earnings Report, Transcript and Summary

Welcome to the OneMain Financial First Quarter 2018 Earnings Conference Call and Webcast. Hosting the call today from OneMain is Catherine Miller, Vice President of 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 opened for your questions following the presentation. [Operator Instructions]. It is now my pleasure to turn the floor over to Catherine Miller. You may begin.

Thank you, Maria. Good morning and thanks for joining us. Let me begin by directing you to pages 2 and 3 of the first quarter 2018 investor presentation, which contain important disclosures concerning forward-looking statements and the use of non-GAAP measures. The presentation can be found in the Investor Relations section of our website and we will be referencing 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. If you maybe listening to this via replay at some point after today, we remind you that the remarks made herein are as of today, May 03, 2018 and have not been updated subsequent to this call. Our call this morning will include formal remarks from Jay Levine, our President and CEO and Scott Parker, our Chief Financial Officer. After the conclusion of the formal remarks, we will conduct a Q&A period. So, now let me turn the call over to Jay.

Thanks, Catherine and good morning everyone. We are thrilled to have again executed on our key objectives this quarter. We generated good receivables momentum with a greater mix of secured lending compared to last year. Credit performance improved nicely versus last year as well, and we achieved strong operating expense leverage. As a result, our consumer and insurance segment reported a $1.18 of adjusted diluted earnings per share. From the balance sheet perspective, we continued to improve our liquidity and funding diversification. So, all in, we continue to drive progress across all our key objectives in the first quarter. Let’s now take a closer look at the primary drivers supporting our 2018 strategic priorities. We continue to see a healthy consumer with debt-to-income levels that remain stable and consumer confidence remain strong. With that backdrop, we are investing in our business to ensure that we remain our customers’ first choice when they explore financing options. In fact, April marks the start of a number of strategic investments in our business. In particular, I’d like to highlight our brand campaign, Lending Done Human that was recently launched with the help of two fun television ads which are posted under the first quarter earnings presentation on our website. Our goal is to raise awareness of who we are and how we help. Research shows that many customers feel vulnerable and anxious when needing a loan, and what they want more than anything is to be treated like a human. They want to feel secure, understood and respected and of course that’s exactly what OneMain excels. OneMain’s in person and relationship based underwriting is an important differentiator from a transactional nature of most other consumer lenders. And in terms of the advertising itself, the tone is friendly and honest, just as we proud ourselves on being approachable and responsible lenders. As we continue to make investments in our brand and overall customer experience, we expect our marketing metrics to improve in support of our disciplined receivables growth. We only originate loans that we are just as happy to hold in our portfolio today, as we will be in two or three years. This means that any growth will be done with the portfolio’s overall performance in mind. Maintaining consistent credit standards and appropriate risk adjusted returns is vital. So too is our objective to increase our portfolios mix of secured lending. It should come as no surprise that this priority is a key tenant of our long term strategy. Importantly, it provides greater operating leverage and stronger credit performance thus improving the resiliency and the profitability of our portfolio. Of course, not every customer that applies is looking for a secured loan, in fact, while securing their car will qualify them for more attractive loan offers or simply a loan that they would not otherwise be approved for. There are plenty of customers are not able or would prefer not to use our quarters collateral. As we’ve said, our focus on driving the secured mix towards 50% remains a key priority. The trajectory may flow with our legacy OneMain branches approach secured mix parity and demand for both direct auto and our secured products fluctuates overtime. Overall, we are very pleased with the quality and mix of the loans we’ve adding to the book. We’ve been able to maintain all three of our key priorities consistent credit standards, appropriate risk adjusted returns, and a secured lending focus, while still growing our receivables. We are well on our way to achieve in the strategic priorities we outlined for 2018, all of which are aimed at enhancing the profitability and resiliency of our portfolio. And with that, I’ll turn the call over to Scott.

Thanks Jay. Our execution on our key strategic initiatives in the first quarter led to our strong financial performance. We earned a $124 million or $0.91 per diluted share on a GAAP basis, versus 33 million or $0.25 per share in the first quarter of 2017. Our consumer insurance segment earned a $160 million this quarter on an adjusted net income basis or $1.18 per diluted share compared to a $103 million or $0.76 per share in the first quarter of 2017. I’d like to highlight our GAAP earnings growth, which has been driven by the strength of our core operations and a defining impact of acquisition related charges. We expect GAAP income to improve as these trends continue. Let’s discuss the key drivers of the C&I financial performance for the quarter. Originations were $2.5a billion up 40% from last year, because our last years’ first quarter was impacted by integration-related activities. Ending net receivables grew by more than $1.7 billion versus last year. Of that, about 1.5 billion was secured including $1 billion of Direct Auto. We feel great about this high quality growth. Interest income was $873 million in the first quarter, up almost 9% from last year’s level, reflecting higher average assets. Interest income was flat with the fourth quarter, reflecting stable portfolio yield. We continue to expect relatively flat portfolio yield for the remainder of 2018, as we prioritize our portfolios, secured lending mix and appropriate risk-based pricing. Other revenue was $133 million in the first quarter. This was down 4% compared to last year, primarily due to lower investment income. Investment income levels should remain around the first quarter levels for the remainder of the year. First quarter credit performance was in line with our expectations and showed improvement compared to last year. Our 30 to 89 days delinquencies were 2.1%, 90 plus delinquencies were 2.3% and net charge-offs were 7.2%. In terms of our second quarter credit outlook, we expect net charge-offs to continue and improve on first quarter levels. We remain on track to achieve net charge-offs below 7% for the full year of 2018, benefiting from secured lending and disciplined underwriting. Total reserves decreased by 6 million to $718 million in the first quarter, this represented 4.8% of receivables compared to 4.9% in the previous quarter. We expect our reserve ratio to remain stable for the rest of the year. First quarter operating expenses were $298 million, about 5 million lower than last year, and our OpEx ratio improved a 110 basis points versus last year. We expect expenses to increase in the second quarter, primarily reflecting the launch of our brand campaign and seasonally higher marketing expense. Moving on to our funding and liquidity, the first quarter was another active quarter for us and quite successful by all accounts. We issued $1.25 billion of seven year unsecured debt at 6 7/8, our largest and longest unsecured deal to date. A portion of that debt was used in mid-April to redeem $400 million of 7.25% notes due in 2021. In addition, we issued almost $1 billion of longer duration ABS deals at attractive pricing. At the end of the first quarter, 56% of our total debt was secured, reflecting great progress towards our goal of 55% for the year. As a result of this lower secured debt mix, we expect higher interest expense for the remainder of this year. That said, despite modestly higher interest cost our shift towards more unsecured debt is important for two reasons; first, it allows us to manage our interest rate sensitivity by having longer duration funding and reducing our reprising exposure. And second, it enhances our liquidity profile by increasing our unencumbered assets. From a liquidity standpoint, we continue to be in a very strong position. We had $4.8 billion of unencumbered receivables; we had $4.9 billion of undrawn conduit capacity and $1.8 billion of cash and cash equivalents. As know, one of our core principles is to maintain at least 12 months of liquidity to cover planned growth operating expenses and upcoming maturities in the event of a capital markets dislocation. Currently we have 19 months of coverage assuming planned receivable growth and no capital markets access, or 30 months if you assume no growth. So from a liquidity perspective, we’d never been in a better position. Lastly, our changeable leverage ratio was 9.2 times at the end of the quarter, about half a turn higher than if we hadn’t upsized our first quarter unsecured debt deal. We remain on track to achieve seven time by the end of 2018, driven primarily by the accelerated growth and GAAP earnings that I mentioned earlier. So overall, we made great progress on our strategic priorities that we laid out for the year and remain on track to achieve them by end of the year. With that I’ll turn the call over to Jay for his closing remarks.

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

[Operator Instructions] our first question is coming from Eric Wasserstrom of UBS.

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

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

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

Eric, is Scott. As you’ve seen we had the significant operating leverage that we drilled as far as the integration, and if we’re able to grow receivables in that 5% to 10%, we’ll continue to drive operating leverage because we have a largely fixed cost infrastructure. And we talk a little bit about this year that we’re making some investments in our customer experience and other technology to support that, so we had a little bit higher expense expectation for 2018 that will kind of plateau as you think about the future.

And next speaking about the financial leverage?

You mean EPS growth?

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

We’ve mentioned in the past that we’ve been targeted probably in the 5% to 7%. We’re focused on getting the seven times. As we get in to the future, I think we’ll find a place between those two benchmarks around where the optimal capital structure is as we think about the outlook. But with that even within that target of generally it’s a lot of excess capital we’ve talked about in the past.

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

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

What I would say is, where it awfully winds up, I think as long as the loans meet our risk criteria we’re not sort of fixated on 5, 7, 9, 10, 11. Our initial thinking have been, given that the economy is being chucking along for quite a while and we recognize that it is a good time, but good times don’t last forever, and I think we all know that. So we just want to make sure that the loan we put on are loans that we’re going to be comfortable with not matter what the economic cycles deliver us.

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

Yeah, we did and that’s kind of multi-quarter process in regards to making that transition. But as we mentioned, we were bringing some activities more back in-house but we will continue to have use third parties as part of our diversification in regards to post-charge-off activities.

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

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

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

Could I also add, if time continues to go on – it’s a selling process, customers come in largely looking for unsecured money. At the end of the day, what we’re doing is walking them through loan options and showing the customer the various things that would be available to them and a lot of it still continues to be comfort on the part of our people and I think they’ve come a very long way as evidenced by just how far we’ve come, but as time goes on we continue to see progress on that front. So, I’d expect time continues to help especially as it relates to a lot of the former, as you would call, a big chunk of the legacy OneMain booked three years ago came over unsecured and that can take time to turn. And I’d say as Scott just laid out, that turn is happening and we’ll see those two almost approaching priority probably over the next couple of years.

And then you still have the guidance for stable yields for the year. Yields kind of dipped down the first quarter, their seasonal aspects to that, is there anything that would help boost the yield later in the year.

As we’ve talked about we try to give you context, it really comes down to two things. It’s a trajectory of how much Direct Auto growth it is and then we’ve kind of taken pricing actions, we continue to monitor those. But our expectation is that that those two will offset themselves during 2018.

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

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

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

Second question, I know it’s very early on in changing environment here. But any kind of early indications of changes in payment of borrowing behavior on the yields of tax reform?

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

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

I had a little bit of a similar question, but I wanted to see if you’re seeing any pickup, an intensity from some of your competitors in the lending market? Has this impacted certain segments of where you lend and some of your tax reforms?

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

And also to sort of add a little bit, we’ve thought a lot about tax reforms, how it impacts our customer sort of given the averaging $50,000. It’s one of those things that sort of trickles out overtime. There were clearly year-end notices that were related to tax reform and other things which did help some number of millions of people. But for the most part our average customer we think is good (inaudible) lined up with $750 or $1000 may be net ahead. That’s $60 to $80 a month net more of free cash flow. That will give them some more flexibility but it’s not going mid terminally change sort of their financial landscape.

I know you’re still working on the financial on (inaudible), but I wanted to get your early thoughts on how this could impact you competitively, like for example could potentially change your habit to lend on the low end of your target market. On the other hand, does it provide some opportunities, for example, could some other banks curtail some of their lending on your brand of the near prime market.

I think CSIL as you know is an accounting change. So the economics of the portfolio and the economics of the cash flow the customer doesn’t change. So when we think about that, we’re focused really on the charge-offs and the actual economic impact as we think about the portfolio and the different segments that we kind of focus on. But clearly in CSIL we are – our current approach though preserving is on a loss emergence period and when you go to life of loan that will impact us from a perspective of the accounting applications of that. It doesn’t change kind of how we think about the market place, and again we’ll see what impacts that that has from a competitive point of view as that kind of comes to fruition in the late ’19 -‘20 timeframe.

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

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

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

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

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

Our next question comes from the line of Rick Shane of JP Morgan.

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

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

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

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

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

As far as growth goes, not to beat a dead horse here, but your guidance of 5% to 10% there was 13% growth in the first quarter. Was there anything atypical in seasonal pattern that you saw in the first quarter that wouldn’t necessarily trend in to better earning or better loan growth later on in the year or is this more of an economic tailwind that we can look to, to say, maybe growth was better than anticipated.

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

And then the Apollo transactions that’s still on schedule to close in 2Q?

That’s the plan.

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

So you had good loan and forecast and good loan growth for 2018, and we see credits improving while yields are staying flat and you’re closer to secured and unsecured mix, [burning] mix that you’ve already guided to. So I’m kind of wondering, you’re seeing nice margin expansion, risk adjust margin expansion. Is there anything industry wide or if you could just discuss specifically what’s driving that nice risk adjusted margin expansion?

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

This is kind of the beauty of the model. It took a little bit of time to sort of get to the kind of numbers we’ve been putting, but modest growth goes a long way, given that you can manage credit and manage expenses, it is – the numbers speak for themselves.

It’s impressive to see yield staying flat and credit improving. And I know you’re already at the mix of secured and unsecured. So we’ve been getting a lot of questions about how yield is going to stay flat while credit is improving and margin is expanding. So its great to see what the (inaudible) been working. The second point, another investor, several investor questions I usually get. I’m not sure how much you can answer this, but so Apollo and we see in the document that there’s stencil provision up to 50% through June and then think just a remaining (inaudible) up until 2020. Just kind of wondering what are your thoughts for that standstill provision, what they can do from there?

I’d say, first we want to get the deal closed which we perfectly is on track for the second quarter. I’d say what exactly Apollo intended to do is a better public question for Apollo and all, post-closing, but thus far there has been great collaboration and we like (inaudible) for the deal to close.

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

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

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

Will there be a digital component to the strategy or --?

Absolutely, look this is not just a – but we know we’ve also said, the vast majority of customers are very computer literate. 80% of new customer app start online. So even though we mail a lot of people that come in to our website they want to go through the pre-screening, not everybody wants to drive to a branch, spend a time and it creates a lot more efficiency for us. So what really is for us kind of the best of Omni. Customer can do a lot of sending in information before hand, get increased (inaudible) accepted and when they come to the branch it’s really about to film it and building that relationship. So the goal is to hit every possible venue we can that will allow people to become aware of it, so that will be social medial, that will be as I said billboards, radio, TV, but you really need them all to play of each other, and we hope to hit as many of that 100 million as we can and certainly the test that we’re doing across some of the cities in Ohio, Pacific Northwest Michigan are going to give us a lot more insights in to how should we be going about that. But you’re right, it’s not a specific target, we think anyone that has high cost debt that has an ability to pay should be consolidating and we can put them in a better place.

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

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

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

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

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

And then when you think about the changes that you’re making on some of those pricing do you feel that that is broad based across most of your markets or do you feel like its localized where you have better pricing in certain markets?

Well as you know we’re state license, so we have different rates we can charge in the different state. But I’d say it was broad based around our products. And then there is fine tuning that you do within the states relative to that. So in the three products we have been able to increase rates at different levels for each one of those products.

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

The repeat borrower percentage is that still close to that 50% level?

Yes, very stable.

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

There continues to be an ongoing dialog with our Board. We’ve made it very clear to everyone that getting closer to our 7% or seven times the leverage target is a critical milestone for us, and as we move that in that direction I think it’s one that will certainly fast forward those conversations.

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

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

Sure, really good question, but we’ve spent a lot of time looking at application flows, what the underlying data and remember all of our customers are on the financial highlights. They have the credit, a vast majority of bank accounts, they have credit cards, they have other things. They are mainstream America that generally needs to consolidate mean a bigger picture loan. And I’d say the trends and most importantly the ones we look at loans being closed, and I say very stable. If you look at any of the metrics, the amount of leverage they have, the payments to income, what they can handle, we’re seeing trends that look just like America. We’re seeing income growth that looks a lot like America sort of 2%-3% numbers, we’re seeing debt that’s grown, similarly, but all very responsible in terms of what the customer can handle. We’re not going to make a loan if we know the customer is going to be in problem maybe late. It’s not good for anybody, so maintaining those sort of steady set of metrics has been very important to us and one we pay attention to quite regularly. But the loans were closing and will probably close give or take million plus loan this year against 1 million or quarter million half loans, very stable numbers in terms of overall consumer, what they can handle. There is a wide range within there, but our underwriting criteria will make sure that that is a core competency of ours at keeping our eye on a customer that can afford the payment that we’re putting them in to.

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

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

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

All my questions have been answer. Thank you so much.

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