OneMain Holdings, Inc. (OMF) Q3 2018 Earnings Report, Transcript and Summary

Welcome to the OneMain Financial third quarter 2018 earnings conference call and webcast. Hosting the call today from OneMain is Kathryn Miller, Vice President of Investor Relations. Today’s call is being recorded. At this time, all participants have been placed on 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 Kathryn Miller. Please go ahead.

Thank you, Crystal. Good morning and thank you for joining us. Let me begin by directing you to pages two and three of the third 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. 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 may be listening to this via replay at some point after today, we remind you that the remarks made herein are as of today, November 1, and have not been updated subsequent to this call. Our call this morning will include formal remarks from Doug Shulman, our President and CEO, and Scott Parker, our Chief Financial Officer. After the conclusion of our formal remarks, we’ll conduct a Q&A session. So, now, let me turn the call over to Doug.

Thanks, Kathryn. And good morning, everyone. I’m really pleased to be with you on my first earnings call since I became CEO in September. Let me start off by just saying that we really have a great business and a terrific team. I’m going to give you a few of my early observations about the business in a minute. But, first, let me share a few highlights from this quarter. Overall, we delivered strong financial results in the third quarter as evidenced by our earnings generation, improved credit performance and our return on receivables. Consistent with the previously highlighted strategies, we continue to believe our secured lending products drive differentiated risk-adjusted returns. This continued shift in our mix to secured lending has been a key pillar in our disciplined receivables growth, which reached $15.8 billion for the third quarter, up about 10% compared to last year. Secured lending now comprises 46% of the portfolio compared to 41% last year. Both our early and late-stage delinquency rates declined versus last year as did our net charge-off rate, which, as you saw, improved to 5.8%. Our operating expense also declined 20 basis points even as we reinvested in the business. And we achieved a strong return on receivables, up 4.6% with Consumer & Insurance adjusted diluted earnings per share of $1.31. We also continued to make strides in our funding and our long-term liquidity during this quarter. We issued about $1.6 billion of long-term debt and extended our liquidity runway. As we look towards the remainder of the year, we are confident in our ability to drive third quarter’s strong momentum forward and achieve the strategic priorities for 2018 that we outlined at the beginning of the year. Just as a reminder, those include disciplined receivables growth, supported by an increased mix of secured lending, stable portfolio yield, lower credit losses, a more balanced funding mix and a lower tangible leverage ratio. By executing on these priorities, we are further enhancing what is already a highly profitable and stable business, building it for the long term. With that said, let me share a few initial observations about our company. I have spent my early weeks here getting to know the team, visiting a number of branches and spending time in our key operating sites. I’ve been struck by the overall strength of the team and also their dedication to both our customers and our company. OneMain is an incredibly strong business with tremendous earnings generation power. As you all know well, our branch network is a key component of OneMain’s competitive differentiation. It enables direct interaction with our customers and facilitates a comprehensive budgeting and underwriting process. This high-touch personal approach to lending both empowers our customers to make prudent financial decisions and enables OneMain’s strong credit performance through all economic cycles. Managing credit well is critical in our business. We are going to continue to focus on credit, and our branch model gives us a competitive advantage in this regard. Now, I’m a big believer in continuous improvement. We will always work to improve the accessibility and ease of our products and services to ensure we have a great customer experience. We will also continue to strengthen our core operations and technology. The team has already done a lot to enhance the stability of our model and the financial performance of our business through all business cycles. We’re going to continue to manage the core levers we have in the business, from credit to funding, to revenue, to operating expenses to further strengthen the resiliency and profitability of our business. I have no doubt that, as we execute on our strategic priorities and evolve to take advantage of market opportunities, we will drive great long-term value for all of our shareholders. With that, let me turn it over to Scott.

Thanks, Doug. We achieved very strong results in the third quarter. We earned $148 million of net income or $1.09 per diluted share. This compared to net income of $69 million or $0.51 per share last third quarter. As a reminder, third quarter 2017 pretax income on a GAAP basis included $27 million of hurricane-related charges or about $0.12. For the third quarter 2018, our Consumer & Insurance segment earned $179 million on an adjusted net income basis or $1.31 per diluted share compared to $123 million or $0.91 a share in the third quarter of 2017. Third quarter 2017 adjusted C&I pretax income included $22 million of hurricane-related charges or about $0.10. Importantly, our GAAP and C&I earnings continue to converge, reflecting the strength of our core operations and the declining impact of acquisition-related charges. We expect this trend to continue. Let’s assess the key drivers of our C&I financial performance for the quarter. Originations grew 10% to $2.9 billion and were 54% secured, up from 47% secured last year. Ending net receivables grew $1.4 billion versus last year. About 90% of that growth was secured, reflecting the high-quality growth of our portfolio in the third quarter. Interest income was $935 million, up 13% from last year’s levels, reflecting higher average assets and a higher yield. Yield was 23.7% in the third quarter compared with 23.4% last year. Recall that third quarter 2017 was impacted by about 20 basis points of hurricane-related borrower assistance. The remaining 10 basis points of improvement reflected the net impact of our ongoing pricing initiatives and secured lending growth. On a sequential basis, yield was down primarily reflecting the expected seasonal increase in late-stage delinquencies and the growth of our secured lending mix. We continue to expect yield to be around 23.8% for the full year. As Doug mentioned, our third quarter credit performance was strong. Both our early and late-stage delinquencies improved versus last year, as did net charge-offs, which were 5.8% for the quarter. Recall that last year’s third quarter charge-off rate was elevated from the first quarter 2017 integration impacts. Total reserves increased sequentially by $24 million, primarily reflecting asset growth and the seasonal increase in delinquency. Total reserves represented 4.8% of receivables. We continue to expect stable trends in our reserve ratio for the remainder of the year. Third quarter operating expenses were $320 million, up about 8% versus last year. The increase largely reflected the strategic initiatives we previously highlighted. Even with those investments, our OpEx ratio improved by 20 basis points versus last year, reflecting the inherent operating leverage of our secured lending products. Moving on to funding and liquidity. We’ve been proactively managing interest rate risk through our 2018 funding strategies, which includes increasing the mix of unsecured debt and extending the duration of our liabilities. In the quarter, we issued $700 million of eight-year unsecured debt at approximately 7% and also issued $900 million of two-year revolving ABS at 3.6%. At quarter-end, 50% of our debt was secured, down from about 60% at the beginning of the year. Keep in mind that our debt complex, both unsecured and ABS, is fixed rate and less than 20% of our debt matures annually. So, any increase in interest rates would take several years to materialize in our overall funding costs. In addition to our funding strategies, we manage our business to optimize our total return on receivables. We are actively managing each of our business levers to offset any potential impact from higher interest rates. We continued to strengthen our liquidity position during the third quarter. Not only does a greater mix of unsecured debt provide more funding and interest rate stability through a cycle, but it also frees up assets, giving us greater flexibility and lengthening our liquidity runway. At quarter-end, we had $6.6 billion of unencumbered receivables, more than $1.2 billion of cash and cash equivalents and undrawn conduit capacity of $5.8 billion. As a result, we currently have over two years of forward liquidity, assuming no access to the capital markets. Lastly, our tangible leverage ratio was 7.8 times at the end of the quarter, down from 8.1 times in the second quarter. We remain on track to achieve the 7 times, driven primarily by the accelerated growth of GAAP earnings and lower excess cash on hand. Overall, we are proud of our third quarter performance and the progress we’ve made across our strategic priorities. Thus far into 2018, we stabilized our portfolio yields, while growing our secured lending mix, maintained a stable cost of funds of around 5.5% of assets, even while issuing a greater proportion of unsecured debt. We reduced our net charge-offs and achieved operating leverage. Our year-to-date 2018 return on receivables increased to 4.4%, a 40-basis point improvement versus the same period of 2017, assuming a 24% tax rate in both periods. In summary, we’ve been successfully managing the core levers of our business to optimize portfolio returns and strengthening the financial and strategic positioning of our business for the long term. With that, I’ll turn it over to Doug for his closing remarks.

Thanks, Scott. I feel very fortunate to step into my role as CEO with the company in such a strong financial position. The strides we’ve already made in our secured lending mix, operating performance and funding and liquidity have set us up very well for the future. As I’ve said, this is an outstanding business model with tremendous earnings generation power. We’re in a very good position. From our strong returns on our portfolio, to our improved earnings and durable balance sheet, I’m confident we are going to build great shareholder value over the long term. Let me end by just saying I look forward to connecting with many of you in the future as I work with the management team and the board of directors to make the most of the opportunities that lie ahead for OneMain. With that, let me turn the call over to the operators for questions.

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

Morning, guys. And welcome, Doug. Nice to catch up with you finally. First question is the – you are getting, I guess, the mix of business. It sounds like 54% of the originations were in the secured loan portfolio and 90% of the growth came from that portfolio. I’m wondering, where do we see this trend you’re persisting over the intermediate term, where does this balance out and what does it mean for yields and, I guess, losses over the intermediate term?

Hey, John. Good morning. So, this is Scott. As I mentioned on the last call, we ended June at around 50%. So, third quarter was just a continuation of the momentum that we have. I think, as you know, it will vary quarter-to-quarter. We think it really reflects the value that our customers see in the product offering that we have. But I think, overall, the most important piece is, by getting originations over that 50% threshold, allows the portfolio over time to move up from 46% to kind of our near-term target of trying to get to 50-50. From a perspective of kind of yield and pricing, clearly, I think you know that pricing on the direct auto, in particular, is lower. We’ll kind of update you as we get into 2019, but, as I mentioned, through the rest of the year, we still think we can have stable yields, while, with the pricing increases that we put in place last year, offset the lower yield on the direct auto.

John, this is Doug. Let me also just add. I got to spend time in our branches. One of the things is obvious, is that our secured auto product is a great part of our offering and it’s one of the things that differentiates us and that you can really do in the branch. If you see our team members sitting down with our customers and they can discuss the various options that customers have around the loan, it’s quite powerful to have this as part of our offering and it’s something that, I think, all of us think is a real strength.

Wonderful. Thanks very much. And second question, a totally different topic is, there had been a narrative around capital return a few quarters ago, about you’re approaching your goal in terms of tangible leverage. You’ve got, obviously, very high return business with very strong growth. I’m wondering if you can just give us an update in terms of where you see those over the intermediate term and what that does mean for any changes or potentials for capital returns.

Yeah. Hey, John. This is Doug. Let me just say this. We know that this is on investors’ minds, and I’m well aware there’s been discussions on conference calls about it. We’re in discussions about this with the team and the board, and we’ll provide an update when we have more to tell you. We really don’t have a lot to tell you on this call.

Okay. Thanks very much, guys.

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

Hi. Good morning. Goldman Sachs recently noted some caution and a possible pullback in their growth next year on their mortgage, personal lending efforts just given where we are in the credit cycle. So, wanted to get a sense of your willingness to continue to lend to your customers at this point in the cycle as we look ahead into 2019?

Look, it’s a question – we’ve read what others have said. The profile of our customers remain stable and we have robust demand. Before I got here and we’re continuing, our focus is on disciplined growth. We’ve had this mix to secure lending. The way I think about it is we’re going to book loans if we like the profile of the customer and the risk-adjusted returns. And we’ve been quite disciplined in our credit and which customers we book, and we see a lot of demand for that. And so, that’s how we’re going to approach the business.

Okay.

Michael, you know also that, with markets, it’s much more kind of targeted to the prime sector more than kind of the segments that we’re really focused on.

Right, right, right. My follow-up question, I know you don’t want to say much about capital returns just yet, but I did notice your cash balances were up a good bit quarter-on-quarter, up to about $1.2 billion from less than $600 million last quarter. I wasn’t sure if you kind of alluded to this, maybe some upcoming debt maturities that you plan to prepay, just a timing difference or is this some firepower for potential optionality around share repurchases when you’re ready to make your announcement?

No. Michael, as you’ve seen throughout the year, we kind of like to be consistent issuers in the debt markets. We can’t time our debt issuance relative to asset growth. So, in the first quarter, we had a little bit higher excess cash. We’ve kind of burned it down in the second quarter. We had favorable support from our investors, so we issued some more debt in the third quarter. And we’ll use that to kind of in the fourth quarter to fund the asset growth that we have.

Okay, thank you.

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

Thanks for taking my questions. I understand the mix towards securities is going to be maybe a little bit of a drag on yields in 2019, but do you see any sort of room to take yields up on the existing book? I know you’re limited by the rate caps, but I’m just wondering if there is more pricing power that you potentially have moving forward?

Hey, Michael. Yeah. I’d say we talk about it every quarter that we are routinely testing out different pricing strategies across our portfolio. And I think a lot of that comes down to supply/demand competitive forces. We feel good kind of where we are in regards to the value proposition, but there’s always potential. But I would say, right now, kind of where we are we feel pretty good about that. And as we’ve talked about, we’re looking at other levers in addition just to kind of the yield line in regards to running the business.

Okay, thanks. And then, just from a credit perspective, and I know you’re going to take the volume that drives the risk-adjusted returns that you are comfortable with, are you seeing anything internally with your customer base that will cause any areas for concern, largely speaking? Is the macro environment still supportive of your customer base? Just any changes there.

We haven’t really seen any changes. As Doug mentioned, look, there’s plenty of demand. We have to be disciplined in what assets we do put on the books. The trends of the portfolio, as you’ve seen over the last four or five quarters, we’ve had good consistency around that. We’re always looking within the portfolio to make sure that we can proactively spot anything, but the consumer health background has been stable for the last year for us.

Okay. And then, just a follow-up on that. With a bigger mix towards secured, assuming the macro stays static into 2019, should we expect charge-offs to continue to drift a little bit lower?

Well, we talked about it. The losses on the secured products are lower than the unsecured. I think as you just – the caution is, we would normally do is that it takes some time for the secured. As you’ve seen over the last two years, it takes some time for that secured percentage. We take the upfront hit on yield, and then you get the benefit on losses kind of 12 to 18 months later. So, I think it’s a continued migration of the portfolio, is what I would expect kind of going forward.

Thank you.

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

Yes. Thanks very much. Scott, how do we think about sort of the secular level of asset growth? Obviously, it’s being a bit influenced by mix, but also you’re just a very big competitor in your space. So, how do we think about that from a secular perspective?

Well, I think the way I think about it, Eric, is we have a fairly defined marketplace. There are plenty of competition in our market, in different parts of the market that kind of drift up and down. I think, in general, as Doug mentioned, and we’ve mentioned before is, given the economic backdrop, it is something where consumers are looking for products and looking for funding for their lifestyle. So, I think the strong demand there, I think, the piece for us is to ensure that given where we are in kind of the economic environment, is to make sure that we like the asset not only today, but also one or two or three years from now. So, that’s the balancing act that we do. But, overall, I’d say that the macro is still a healthy customer, a healthy economy, low unemployment, strong consumer confidence are things that continue to – things that we watch closely. And any change in those would have an impact on the consumer. But I think given our disciplined underwriting, we’re kind of already factoring some of that in.

I think if we were just attempting to quantify that, if you look at Federal Reserve statistics, the secular growth of the product itself has tended to be around 5% to 6% over the past several years. So, how do you sort of view your growth opportunity relative to, let’s say, that benchmark?

Are you talking about just the personal loans sector?

Correct.

Yeah. So, as you remember, the personal loan sector is really kind of focused on unsecured lending, which is a portion of our business. I think our secured products are kind of refinanced. So, when you think about our loans that we provide, we are paying off other auto loans and credit cards as part of some of the debt consolidation we do for our customers. So, I think we have been able to achieve above the kind of the industry rate of growth, given the fact that we do have a broader product offering than some of the other players that just play in the personal loan space.

Right. And if I can just transition quickly to CECL, I know it’s still early days. But have you begun any dialogue with the rating agencies around that topic and kind of what’s your sense of their level of awareness and understanding of its components?

Yeah. So, you’re right, it’s early stage. There’s a lot of activity and things going on, both in the company – other companies providing feedback around CECL and the accounting pronouncement. Look, we have a dedicated team like others. We’re very focused on putting the infrastructure in place. How that all ends up playing out over the next 12 months is something that you’ll watch, we’ll watch. I think from a rating agencies point of view, we have a very healthy dialogue with all of our rating agencies. You kind of see that they have been very supportive of our transition and what we’ve been able to do with the business in regards to the actions they’ve taken this year. Clearly, this is a topic that we do have conversations with. And I think they’re kind of all taking that into consideration in regards to how they look at kind of the credit of not us, but also others. So, we’ll continue to have that dialogue and I think it’s been a very productive discussion so far.

Thanks very much.

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

Good morning, guys.

Hey, John.

Good morning.

So, I wanted to ask you a different variation of the question about how you view your asset growth because there are a lot of installment lenders. Obviously, people will focus on different corners of the market who are providing significantly higher growth than what you do. They’re using advanced analytics to get better risk-adjusted returns. I just want to kind of get a baseline here. Do you feel like this kind of 8% to 10% growth is really the best risk-adjusted return for you guys? How do you view the opportunity set to move that number up? And you’re still kind of getting enough volume in that 8% to 10% growth where you are still rejecting 80% of the applicants. I just want to make sure there’s enough volume to kind of get that growth, still create operating leverage and still meet your risk-adjusted return profiles. And whether or not you view those higher growth rates as an area that you just don’t really want to go to?

Yeah. Hey, John. This is Doug. I’ve said it before, we have very good demand. As Scott said, the profile of our customers remains stable. I think I’ve been quite impressed with our underwriting discipline. We’ve got plenty of demand to book loans with – my simple way of thinking about it is, we want to give a loan to somebody who needs it and can provide value in their life and they can afford to repay it. And that’s kind of where we’re focused. And so, we’re really focused on what’s coming in the pipe, making sure we’re disciplined around credit. The growth we have will be disciplined around our customer and our returns. And as of now, it’s been very good and robust and we don’t see any reason for that to change.

Yeah. And, John, I’ll just make a comment around kind of the analytical side. I think given our business model, both the legacy businesses have been through many different cycles, so we have a lot of data. We have a lot of historical data. Our analytics are continuing to be enhanced around kind of getting even better and better at predicting kind of the customer behaviors. So I think, to Doug’s point, we have the demand there. We kind of like where we’re at right now and we’ll continue to monitor that as, one, you’ve got the macro economy, you have, two, competitive forces. But I think the other piece that gets lost is we’re a $16 billion portfolio. So, some of the other players that you may be talking about have higher growth rates, but you kind of look at the size and complexity of the market. The question is, long-term, what’s a reasonable growth rate to maximize returns as well as kind of be -- kind of prudent when it comes to overall loss profile. So, that’s what we focus on.

Okay, great. Thank you.

Our next question comes from Kevin Barker with Piper.

Hi. This is Pierce Dever on for Kevin. Good morning.

Good morning.

A lot of my questions have been answered, but maybe just a quick one on expenses. The other expense line was $141 million this quarter. It fell slightly on a sequential basis. Just wanted to get your thoughts on the expected run rate in that line item moving forward. Is this sort of $140 million level expected to stay pretty stable or should we expect to see continued increases?

Yeah, I think we – you can follow up with Kathryn on specific stuff around that. But I think, in general, we kind of manage our expenses. And as we talked about, we’ve made investments into the business. We’re very focused on continuing to drive operating leverage and those investments are to kind of continue to improve our customer engagement, customer experience, those things that were very important to the previous question from John around how do we kind of look at the market and continue to stay top-of-mind for our customers. So, I think we look at overall expenses and how we’re kind of running the business.

Okay, great. And then, any updates on the ad campaign? I know, last quarter, you mentioned it was probably still too early to say anything definitive on progress there, but I was just looking for any update on that side.

Again, it is still too early. We did a few pilots to kind of evaluate the impact on kind of customer engagement. There’s really not much. As you know, it takes some time. It’s only been a couple of months, two quarters. So, we’ll kind of keep you posted. It really comes down to, is if we see positive, then that will be something that we’ll kind of take into consideration. But anything we can do to kind of keep our customers mindful of the products and the services that we provide is very important for us.

Okay, great. Thanks, guys.

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

Thanks. Maybe following up on some of the questions previously. On credit quality, can you just talk about how much of the outperformance is being driven by less integration impact versus macro versus mix? And then, you guys maintained your charge-off guidance for the year, but credit is, obviously, doing better. Can you just talk about what you expect in the fourth quarter as it relates to that? Thanks.

Yeah. I only called out the integration item. We don’t really – that was kind of like early 2017, but, as you know, because of our kind of 180-day charge-off policies, I don’t want to go back in history, but first quarter of 2017 is when we put the platform together. We had some elevated delinquency that kind of flowed through in the third quarter. So, I mentioned that more just for year-over-year comparison in regards to that. And so, it also says that, seasonally, fourth quarter, charge-offs are higher than third quarter, which you would not see if you looked at last year. From our perspective of the portfolio, clearly, the increased mix of secured over the last two years that we’ve been driving is the major driver of losses over that time period. In regards to the fourth quarter, we call them strategic priorities and we updated them just mid-year just to kind of give that context, but we’re not going to provide quarter-to-quarter kind of guidance. So, we still think the loss trends that we’ve seen have been very good and we expect that to continue as we go into the fourth quarter.

Okay. Follow-up question. Doug, congrats on your first call and your new role.

Thank you.

Maybe just a question on the direction – yeah, no problem – and just question in terms of the direction you expect to take OneMain. I know you kind of laid out fairly consistent priorities, but maybe just even if nuanced you could talk about some of the observations you’ve had since you’ve taken over the role and maybe some changes you might make even if it’s nuanced.

Yeah. Look, first of all, I’ve been here seven weeks. I really think we have a great business model. I really think the priorities that our team has laid out from focus on discipline, credit and underwriting, our liquidity runway, our growth being focused on secured lending, all make a ton of sense. Right now, I’m getting to know the people in the business, spending time with customers, key partners, et cetera. And we’re really quite focused on the fundamentals of running a business, which is making sure we’re executing, making sure we have a great team who’s driving in the same direction, making sure we’re taking care of our customers and looking for ways we can always improve the customer experience, making sure we’re efficient and we have world-class technology and operations, allocating our resources where we can get the most return. And then, obviously, we talked a lot about, in this business, being super-focused on credit and making sure we have a bulletproof capital structure. So, right now, we’re focused on execution. I really do like the 2018 priorities. Obviously, any management team’s job is to continually look for ways to drive better performance, to be more efficient, to get higher returns, and we’re going to do that. But I’ll lay out more in the future, but, right now, we really are focused on current priorities.

Thank you.

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

Yeah, thanks. Scott, how do you weigh the added flexibility and longer-term funding in the unsecured markets against the significantly lower cost of funding that’s available to you in the secured markets? And how should we think about the mix of the two funding – unsecured and secured – going forward?

Yeah. Mark, good morning. Look, we think always having balanced funding is very important. And so, you have to trade-off the cost differential between those two. But I think I laid out kind of the benefits of – both products are very important to us. I think we have very good investor demand for both of our products. The thing about the unsecured market, clearly, gives us longer duration and it does not encumber our assets. And so, that helps us both on kind of the amount of maturities that come due in any given year, as well as kind of gives us that liquidity runway due to that. On the secured side, the piece of the improvement there really has been all of our programs are being able to get to AAA, which provides us the access to the markets. ABS market is more robust during kind of the tougher economic cycles than the unsecured. So, we’re going to continue to stay balanced around where we are. I think we’re at a really good point. Quarter to quarter, we may be a little bit off that, Mark, just because of – we have the go to the markets when the markets are there. But I think, in general, that’s a pretty good place for us right now, balancing the cost versus the liquidity and duration that we get from the different products.

Okay. So, longer-term, you think kind of the 50-50 mix makes sense?

Yeah. It could go up a little bit, up or down from there, over the course of the near term, depending on where the markets are.

Okay, got it. Thank you.

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

Great, thanks. Maybe flipping around one of the earlier questions about the competitive environment, we did note some – in addition to Goldman, other companies talking about slowing down their efforts. Anything that you are seeing in terms of any kind of slowdown in the competitive environment from some of the others that are out there?

This is Doug. And Scott can add to it. We’re really focused on our customers and we’ve got a very good kind of marketing machine that targets the customers that we want to do business with. We’re getting a lot of demand for them. We’re turning down a lot. And so, a lot of these other folks, as I’ve kind of tracked, so-called competitors in the market, they’re not necessarily targeting the same customers. If they are, they don’t always have the branch model. We feel really good about our underwriting. And so, right now, our demand is stable. Our customers and their ability to repay as far as our underwriting is concerned, and it has proven out, looks stable. And so, we’re feeling good about our customers and our business.

Yeah, Moshe. This is Scott. It will take some time. As we look at the business, we’re kind of monitoring and looking at things on a month-to-month basis. But depending on the magnitude of “some of the pullbacks,” it may or may not be something that we can actually kind of see through the data we look at. To Doug’s point, we’re kind of focused on kind of what we are trying to do in regards to customers that we’re trying to solicit and bring to the company and making sure we book the ones that make the most sense for their perspective as well as our perspective.

Got it. And, Doug, I think, you highlighted the kind of accelerating growth in GAAP earnings at the start of the call. It’s almost $150 million in the quarter. I think, if my math is right, that’s almost a 30% return on tangible equity. So, I know you don’t want to talk yet about capital return, but you’re growing in the neighborhood of 10%. So, there’s kind of between 15 and 20 points. Any thoughts about what those – what that extra capital generation could be used for because you should be – if that strong GAAP earnings growth continues, as you pointed out, should be pretty close to your target before very long. So…

Yeah. Look, I appreciate the question. And I really do believe we can continue to drive earnings growth. And as I mentioned, the company and this business has a number of levers to do that. And we’re going to be focused on all of them. It’s just really too early to say. And we really don’t have anything to say about the capital returns on this call, but we know it’s on your mind. And when we’re ready to talk about it, we’ll definitely talk with you about it.

Got it. Thanks.

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

Thanks. Doug, it looks like you have kind of a technology background. I was wondering if you could just talk about how you feel in your early tenure there about the technology platforms of OneMain and whether or not you need to make any significant investment within the platform.

Sure. Look, my belief – and it’s kind of common sense – is any financial service firm needs to be highly technology enabled. At the end of the day, we serve customers and have technology to do that. Our employees are using technology all day long. We’re storing and managing data. And every company I’ve ever been at, you’re always on a journey because technology is changing so quickly. We’ve got very good proprietary systems to run a nationwide network of lending. It’s real IP that we have for our branch network, and it’s very stable and strong. And we’ve been investing in customer experience over time. And so, any place is always going to need to stay up-to-date, continue to invest in technology. I think my observations being here is we have a very strong foundation and then we’ll just need to keep making sure we have the best talent, the focus and we keep meeting the customers where they want to be met, giving our team members across the country great technology. And so, it will be a focus early on. I think we’ve got a solid foundation.

Great, thanks. And, Scott, answering the question on the yield, you had mentioned that there you're looking at other levers that you can use for keeping the yields from falling too much or what are those other levers that you’re referencing?

I think, on the yield side, it’s really kind of our pricing initiatives relative to the growth of secured lending. What I was saying, is outside of just focusing on yield, we also can kind of manage the business around our operating expenses, charge-offs, which also could benefit us as we kind of continue to transition to the secured percentage. So, it’s more around levers to keep our return on receivables kind of stable to growing versus just the yield buying.

Got it. Okay. And then, lastly, the convergence of GAAP and core definitely improving. I’m not sure if you’ve updated the prior kind of guidance around this for a while. I think, in 2019, you were previously saying about $50 million of difference there. Is that still around the right ballpark or has that changed over time?

It’s changed a little bit, Arren, just because we bought back some of the legacy OneMain bonds that had some purchase accounting, so we just kind of accelerated that. When we get to 2019, I will give you a little bit more clarity about that once we kind of sort through that. But my viewpoint is that, in 2019, it will continue to be declining, and it’s pretty much going to be gone by the time we get into 2020. So, 2019 is kind of the last year we’ll have some impact, but it’s not going to be as significant as it has been in the past.

Great. Thank you. Our next question comes from the line of Rick Shane with J.P. Morgan.

Hi, Rick.

Rick, your line is open. Our next question comes from the line of Henry Coffey with Wedbush.

Good morning, everyone. And thank you for taking my question. There’s been some discussion around competition. The installment loan business, the branch-based businesses is a really unique animal. And, historically, the only thing that’s ever upset it has been product intrusion. And so, as some of these high-growth lenders like Marcus and we’re also seeing it with Lending Club and some of the Chicago companies have all started to pull back, has that changed that factor for you? Do you have a way to really figure out – how are your customers being impacted by products that, frankly, probably aren’t really appropriate for them?

Let me just say that the branch – I mentioned it earlier – it really is quite special. And I’ve spent a bunch of time in the branches, and I’ve spent time while I was kind of “diligencing” coming here, looking at all the other products. And the relationship that our team members form with the customer is one of the reasons that you see such good credit performance with us. It also allows us to offer and give options to customers. And so, our secured auto product is really enabled through the branch. We’ve been reading the same thing you have about pullbacks and what folks are doing. But I will say – and we’re monitoring demand, but we’re feeling pretty good about our marketing and our targeting of customers, pulling in the customers we want to do business with. And these things take time to play out, but we anticipate, because of our model, being able to continue to drive the right business and the business we want.

But maybe it’s too early for you to have a ceiling for it in terms of where that cycle is. It sounds like it’s getting better and better and you’re – but it is the hardest thing to monitor. And then, Scott, how important do you think the switch between GAAP and core is going to be for investors? Have you gotten a feeling about what they think about the issue?

You’re talking about in regards to the C&I versus GAAP earnings?

Yes, exactly.

Yeah. Look, we did a large acquisition. I think it’s been a journey that we’ve been on for the last couple of years as a lot of acquisition accounting kind of burns out. Clearly, tangible leverage and GAAP earnings go hand-in-hand. So, it gives us the ability to continue to build our balance sheet and capital structure. Technically, I guess, Henry, no, I have not had specific questions around that. I think both are – we used the C&I for the last couple of years to say what was the kind of the core earnings power of the company. But, now, when you have kind of GAAP earnings that are similar to those, I think it will be in that transition year in 2018 – or 2019 and beyond where it’s better to talk about GAAP earnings than it is in adjusted numbers. So, it makes it easier for people to understand our business model.

I know you mentioned that you took some steps recently to buy back some of the old bonds. Are there other assets or liabilities that you could alter that would further accelerate the process or is everything just wrapped up in the purchase accounting adjustments?

Yeah. Most of the stuff – we have a few different items. We still have a little bit of a premium on the receivables. So, as those kind of either payoff or refinance that that would kind of go away. There is some associated with some of the legacy Springleaf debt. So, we have a maturity in December of 2019 and December of 2020 that some of that stuff would kind of be accelerated. Those are kind of, Henry, by the two items. So, they’re small items. We wouldn’t do it just to get rid of the – first thing, if it made sense economically on the debt side, that would be one thing. And then, the customer behavior will drive the other one. But it’s getting so small; that’s why we really don’t kind of talk much about it anymore.

Our next question comes from the line of Rick Shane with J.P. Morgan.

Hey, guys. Can you hear me this time?

We can, Rick.

Okay. Sorry about that. Currently, [indiscernible] or something. So, historically, what we have seen is that there is a high correlation on credit for unsecured products to the labor markets and that, for secured products, there tends to be more collation to collateral, and in your case that would be used car prices. I’m curious if you think that that sensitivity will change for OneMain given the product shift mix over the last couple of years.

Hey, Rick. It’s Scott. So, we agree with you. I think in our product, in general, we’ve seen through the cycle and we’ve done secured lending for a very long period of time. I know it comes up and we’ve addressed it a couple of times around our auto product. Remember, we’re doing a personal loan secured by autos. We’re not doing purchase and kind of new car kind of financing. So, we think that both of our products are really driven by frequency, not by severity. So, we focus a lot on employment/unemployment claims as the kind of the correlation between the portfolio. I’m not saying that used car prices don’t have some impact on our secured, but it’s not the primary driver of the loss profile for both the secured products that we offer.

Got it. So, you think the credit data will continue to be [indiscernible] as opposed to used car prices.

Correct.

And with that in mind, [indiscernible] question based on that, but how carefully do you – how risk-free [ph] do you look at collateral risk? So, for example, you're concentrated in full-size [indiscernible] and that made sense given the customer base. That’s a product that typically is more sensitive to things like gas prices and some decision related to that. Are you managing your collateral pool in any way to reflect that? Or given the focus on sort of sensitivity of the labor, is that not a big consideration?

Yeah. We look at – just in that case, we do look at different variables around sensitivity like gas prices, those type of things. But from a perspective of our business model, we are – we do and aware of the collateral that we have and looking at that from a diversification point of view. But, Rick, if you kind of look at our customer value prop is, we’re providing a loan to a customer and we’re taking the collateral that they happen to have. And the driver of the losses over time for that customer is really going to be driven based on frequency or the fact of stability of having a job. So, that is a secondary kind of attribute that we would look at, but it’s not the driving force behind our kind of underwriting.

Got it. Okay, very helpful. Congratulations [indiscernible]. And thank you for taking my questions.

Thanks, Rick.

Thanks a lot.

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