OneMain Holdings, Inc.
Q3 2016 Earnings Call Transcript

Published: 8 Nov 2016

[Operator:]

Welcome to the OneMain Financial Third Quarter 2016 Earnings Conference Call and Webcast. Hosting the call today from OneMain is Craig Streem, Senior Vice President, Investor Relations. Today’s call is being recorded. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. [Operator Instructions] And it is now my pleasure to turn the floor over to Craig Streem. You may begin.

[Craig Streem:]

Thank you, Stephanie. Good evening, everyone. Thanks for joining us. Let me begin by directing you to Pages 2 and 3 of the slide presentation with our important disclosures concerning forward-looking statements and the use of non-GAAP financial measures. The presentation can be found in the Investor Relations section of our website and we will be referencing that presentation during this evening’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. The factors that could cause actual results to differ materially from these forward-looking statements are set forth within today’s earnings press release which was furnished to the SEC in an 8-K report and in our annual report on Form 10-K, which was filed with the SEC on February 29 of this year, as well as in the third quarter 2016 earnings presentation that has been posted on the IR page of our website. We encourage you to refer to these documents for additional information regarding the risks associated with forward-looking statements. And we caution you not to place undue reliance on forward-looking statements. In our third quarter 2016 earnings material we have provided information that compares and reconciles our non-GAAP financial measures with the GAAP financial information, and we also explained why these presentations are useful to management and investors, and we would urge you to review that information in conjunction with tonight’s discussion. And if you may be listening to this via replay at some point after today, we remind you that remarks made herein are as of today, November 7, and have not been updated subsequent to this call. Our call will include formal remarks from Jay Levine, our President and CEO; and Scott Parker, our Chief Financial Officer. And as Stephanie said, after we conclude our formal remarks we will have plenty of time for Q&A. So let me turn the call now over to Jay.

[Jay Levine:]

Thanks, Craig. With a lot going on this quarter, particularly on the integration front, we also have quite a bit to cover during our call this evening, including our review of the quarter, the state of the market, our progress on the integration of OneMain and an update to our 2016 and 2017 guidance. So let’s begin with Slide 4, we had a profitable quarter, earning $25 million or $0.19 per share on a GAAP basis, and $122 million or $0.90 per share in our Consumer and Insurance segment on an adjusted non-GAAP basis. While made good progress this quarter on our strategic priorities, we continue to grow receivables, manage credit risk and strengthen our liquidity in balance sheet. Looking at the environment, we continue to see strong underlying consumer fundamentals, with multi-decade lows in weekly jobless claims and modest wage growth from middle income consumers, giving us confidence in the overall health of the U.S. consumer. At the same time, we are seeing an increase in the supply of unsecured credit available to the sub-660 FICO borrowers. Recognizing this shift as well as our own performance, we’ve taken a harder look at the lowest credit peers in our prospect universe and requiring collateral or simply not booking these higher risk loans. I’ll discuss this later in the call. This quarter marked a meaningful acceleration of our program to integrate OneMain. As we set out a journey of maximizing the value of the OneMain acquisition, we have kept our eyes of our destination. One combined branch network with a single brand and national footprint to deliver a uniformly outstanding experience to the more than 2 million customers we serve across the country. We knew there would be a number of tasks including the implementation of a unified underwriting system, building an integrated digital strategy, rebranding our Springleaf offices and converting to a single loan management system. With the exception of the brand system conversion scheduled for the first quarter of 2017, we accomplished all these critical tasks in the past quarter. In fact, this was the single busiest quarter since closing in terms of the sheer level of change, particularly for the almost 5,000 team members at more than 1,100 former OneMain branches. In addition, we successfully converted over 100 OneMain branches in North Carolina and Kentucky, giving us the benefit of very specific and tangible experience that we are already using to help us manage the full conversion in the first quarter of 2017. I’m incredibly proud of how our entire team accomplished these large scale changes during the third quarter and on through the pilot conversions. That being said, the integration in this scale is not without its challenges, and recently we have seen a firm-wide slowdown in loan growth relative to our expectations as well as an uptick in early stage delinquency, principally at the OneMain branches. I will discuss both these trends in greater detail later in the call. I’m pleased that with all these changes in the quarter, we still grew our portfolio by almost $200 million and increased the percentage of secured originations from 30% to 45% year over year. Let’s turn now to Slide 5. First and most importantly, our business model is designed to generate an unlevered return on receivables that we believe is unequaled in the industry at over 10%. We will not stretch for growth that does not meet this hurdle rate. We’ve achieved these returns with responsible lending at meaningful interest rates and in-person underwriting build upon sophisticated analytics. We have proven that our milestone [ph] effectively managed the most critical variable, credit risk, allowing us to drive consistent profitability. Additionally, we’ve achieved strong credit performance, while growing our portfolio over the past several years. We believe that our market opportunity, combined with our extensive branch network will continue to drive strong receivables in earnings growth. Our national scale and largely fixed cost base position us to achieve increasing returns on incremental receivable growth through very meaningful operating leverage. Our focus on unlevered returns is also important as maintaining a strong level of risk adjusted profitability helps us ensure access to low cost funding in the capital markets. Most importantly, not only our spread is attractive in and of itself but with modest of leverage, we believe in generating strong ROEs in the 20%-plus range. So the principles of our business model are

[Scott Parker:]

Thanks, Jay. Now let’s turn to slide 12 to review our third quarter performance. We earned $25 million or $0.19 per share in the third quarter on GAAP basis. As a reminder, our reported results for the quarter included $157 million of pretax acquisition related and other adjustments. Our book value per share ended the quarter at $22.56. Our consumer insurance segment earned a $122 million or $0.19 per share in the third quarter on a non-GAAP adjusted basis. C&I adjusted earnings were down $0.06 versus the prior quarter and up over a 2.5 times versus the prior year. On the right side of the page, you will see the return analysis of the performance of our C&I segment on an adjusted basis for the third quarter, walking down to a 3.6% return on receivables. Return on receivables is down from 3.9% in the second quarter and down slightly from the first quarter level. Return on receivables has impacted this quarter by reserved building related to the uptick and delinquencies at the OneMain branches, as well as by higher average funding cost and a bit of a drop off in our revenue yield. Average net receivables were $13.4 billion up from $13.3 billion from the second quarter, including the impact of the May 1 branch sale. As we look into the fourth quarter, our guidance of C&I adjusted earnings per share of $0.80 to $0.90. As Jay mentioned, as we move to the integration, we are anticipating an uptick in delinquencies in the OneMain portfolio as well as a slower receivable growth on the OneMain branches. With that in mind, we expect the results to come under some pressure in the fourth quarter and the first-half of 2017 as we complete the branch integration. Additionally, given some of the near term elevation and early delinquencies, we build our non-TDR reserves in the quarter by $34 million or 19 basis points relative to prior quarter levels. If current trends continue, we would anticipate some incremental reserve building in the fourth quarter as well. I want to know that our GAAP tax rate this quarter was 24.5% as a result of our few discrete tax benefits. Going forward, we will continue to use 38% as the estimated tax rate for our C&I segment. Turning to slide 13, I’d like to highlight our progress on expenses in driving operating leverage as we continue to execute on the integration. You can see the pre-acquisition profile of a 13% operating expense to receivable ratio at Springleaf with its smaller footprint and 9% at OneMain. When we closed the deal, the combined company was running at about 10.8% in the C&I segment, and we’ve made meaningful reductions from there. During the third quarter, we reported the C&I OpEx ratio of 9.9%, so we’re down 90 basis points from the time of the acquisition, and we expect to get a run rate of 9.6% by the end of the year. This is very much in line in terms of normal dollars with our previous expectations. Given the lower asset growth as Jay outlined earlier, we’re coming in a little bit higher on the OpEx ratio than we’ve previously expected that is really driven by a lower expected denominator. In 2017, we expect to capture additional synergies as we complete the transition to a single pipeline for the combined company, consolidate overlapping branches and migrate off the TSA with Citi. Turning to Slide 14, you will see a summary of our $14.4 billion of debt on an unpaid principal value basis. We have a mix of about 60-40 secured to unsecured debt with a balance security profile of unsecured debt. And liquidity side, we’re on the strong position. We had $3.8 billion of unencumbered consumer loans and $4.6 billion of undrawn available conduits at the end of the quarter. These liquidity sources will allow us to fund all of our operating plans over the next 12 to 18 months, mitigating any capital markets risk remained experience. As we have discussed in previous calls, we see ourselves as a regular issuer in both the asset backed and unsecured bond markets. And this year, we’ve raised over $2 billion of current EPS funding, including our recent auto ABS deal in July, and $1 billion of unsecured bonds in April. We invest a significant amount of time in investor development which is paid off by attracting several large global leaders into our funding programs. Turning to slide 15, we are continuing to deleverage our balance sheet even with our expectations for lower near term asset and earnings growth. Our tangible leverage decreased to 10.7 times in the third quarter, and with our updated financial projections we are still on track to reach the high end of our target tangible leverage range towards the end of 2018. We are able to reduce our leverage ratio, as our tangible capital is expected to build more rapidly and our debt balances over the coming years. On the right side, you will see tables that goes into more detail on our path to reducing leverage and building tangible capital over the next few years. At the top of the table, you will see the underlying adjusted earnings for the C&I segment that we guided to. Below that, as we have previously provided, we have outlined the more significant elements that walk down to the tangible capital build that we expect. Based on these items, by the end of 2017 we should be around $1.6 billion of tangible capital. As we move past 2017, tangible capital growth should accelerate as we expect the drive from acquisition related cost and real estate to further less the $100 million per year and to tail off in the subsequent years. Importantly, with our current expectations for asset growth we will be able to maintain our expected path to low our leverage. At this point, I would like to turn it back to Jay for slide 16 and his closing remarks.

[Jay Levine:]

Thanks Scott. I really would emphasize our long-term goals in the opportunity to create substantial shareholder value. The acquisition of OneMain has driven a significant increase in our earnings power and just one year since closing, we have more than doubled our C&I adjusted earnings per share, and as we execute on the integration and drive growth at OneMain, we are positioned to continue to deliver double digit unlevered receivable returns. As you have seen throughout today’s presentation, we are focused on disciplined underwriting and we are now going to jeopardize long-term returns for near-term growth. We are building the right portfolio for the long-term. While, I am disappointed with our recent receivables growth and revise near-term outlook completing the integration and being able to move forward as one company is the most critical immediate step to position us for success. With our compelling business model and continued strong consumer demand and tremendous confidence in our future business prospects. For us the key to significantly enhancing earnings growth and returns is the tremendous positive operating leverage of our model. Our focus is on the near-term task at hand to allow us to return to growth opportunities and build shareholder value. Now I’d like to turn the call over to the operator to begin the Q&A portion.

[Operator:]

The floor is now open for questions. [Operator Instructions] Thank you. Our first question comes from Moshe Orenbuch from Credit Suisse.

[Moshe Orenbuch:]

Thanks I’m sort of hoping that you could give us a little more detail in terms of the integration issues and what causes them actually to kind of be removed and allow for growth in loans and maybe in a little more detail over the next couple of quarters, because I mean we spoke more than a month into this quarter. And it wasn’t apparent at that time that this level of disruption was going to go on. And so, if there’s a way you could kind of be a little more detailed as to what happened and why it’s going to be repaired over a period of time that would be helpful.

[Jay Levine:]

Sure. This was a quarter that compared to very everything that’s happened in the past was the most active quarter we’ve had. And in particular it was pretty active late in the quarter as we began to position for the rebranding. While we were operating two independent networks, one Springleaf, one OneMain, business largely continued as it is. We knew certain things were going to have to happen to ultimately operate as one brand, which we did beginning October 1, OneMain, the biggest single component of that being in aligned underwriting and pricing model. That was rolled out in September. So I’d say as we look back over the previous year that really the biggest changes occurred late in the third quarter. There were things that we have been working on for some time, but clearly they had more of an impact on business really what we would say in September and ultimately in October than possibly we anticipated. But it was - the way the two companies went about their business was slightly different in terms of underwriting processing of loans and marketing and all that came together. And on both sides there was an adjustment. So I’d say that has been dealt with basically now in the system and being worked through. As I think I also alluded to in October - on October 1, we converted two states from what had been the former operating system of OneMain Symphony to the Springleaf system to make sure the systems all work. And we are very pleased that that has all transpired. The remaining 1,000 branches will convert in January and February, and we believe those are the last critical activities that have to happen. So there’s some adjustment to the new underwriting pricing that’s occurring as we speak. There’s a new system that has to be adjusted to, that will happen in January and February. But after that, I think we are back to normal operatings.

[Moshe Orenbuch:]

And, Jay, just to follow up, and so the level of originations for the fourth quarter is going to be better or worse than the third quarter, I mean, how do you compare like kind of fourth quarter, first quarter, second quarter? How should we think about it?

[Jay Levine:]

I will say our business is a seasonal. So the first quarter is always our quietest quarter and fourth quarter is always our busiest quarter. We would expect and we plan for fourth quarter originations to be higher than they were third quarter. And I think we’ve still got a lot of in November and December to see that through. But in general, we expect the fourth quarter to be better than the third quarter. The question is what will the growth be when all set and done. We grew by a couple of hundred million in the third quarter, that was less than we had hoped to grow to meet the receivable numbers that sort of required to make the guidance. And certainly we want to see you know growth in the fourth quarter as well.

[Moshe Orenbuch:]

Okay. Thank you.

[Operator:]

Our next question is from Sanjay Sakhrani of KBW.

[Sanjay Sakhrani:]

Thanks. Jay, you talked about new players entering the market sub-660. I was just wondering if you could just talk qualitatively about those players. And maybe how much of the revision is related to that?

[Jay Levine:]

I would say nothing directly related to that. I’d say, first, I think when I’m largely talking about credit card issuers it doesn’t really matter who you look at, whether it’s the smaller balance or some of the bigger names they’ve all emphasized going down and that’s where a lot of the growth has come from, as well as some of the retail cards. So for us, what matters to our customer is both the overall economy, as well as their total debt burden. So we’re paying a fair amount of attention and trying to be responsible to what their debt burden is when they come to us as well as where it may go so. I think those are the things we’re paying attention to. So I would say that’s kind of how we see the unsecured market. I don’t think we see you know any significant number of new players making installment loans or doing anything differently there.

[Sanjay Sakhrani:]

Okay. And maybe just a follow-up on Moshe’s question and maybe just to get a little bit more there. In terms of the risks going forward of not achieving the goals you’ve outlined. Could you just maybe talk about those outside of a recessionary scenario?

[Scott Parker:]

Sure, a very thorough question. Look, to get to the numbers we put out for rest of this year and next year certainly a number of things need to happen. There needs to be some receivables growth. We need to continue to manage our credit through the integration. But I will tell you based on everything we’ve seen as rolling up to where we’ve got until now we feel good about it.

[Sanjay Sakhrani:]

Okay. And maybe a final question, just in terms of your revised views have you guys discussed those with the rating agencies and any context as far as those discussions? Thanks.

[Scott Parker:]

Well, we had conversations before the call, I think the focused that we had with rate agencies, we’ve also a lot around the deleveraging plan, and so as we kind of outlined in the deck you kind of see we’re continuous on the path to delever, as we get through 2017 even with lower expectations, we are on the right path to get down to our target leverage.

[Sanjay Sakhrani:]

Great. Thank you.

[Operator:]

Our next question is from Rick Shane of JPMorgan.

[Richard Shane:]

Thanks guys for taking my questions. So when I think about the provision to guidance today, I think it’s really three things. One is credit is a bit weaker than you had anticipated? The second is did you point to there as a shift in demand to the competitive environment there is less demand for - there is more competition for unsecured and that’s creating some pressure in your secured product? And then the third that you’re pointing, I think Moshe focused on this, I think we need to delve on this a little bit more is on the integration. And that is creating pressure in terms of loan growth through the remainder of this year, but it looks like that that actually you’d continue into next year. In fact, we are not only emerging from 2016 at a lower level that the run rate in 2017 or through 2017 is going to further be below previous expectations. I’m really curious like what’s the demand at the branch level that changed for the originators that’s caused a significant flattening of originations, and why is that a more fundamental shift?

[Jay Levine:]

[In sort of a way] [ph], I think you nailed the couple of few big ones, you’re right there is a little bit more in the way of credit that when in to the numbers. But I’d say look the biggest one is the delta on receivables, which is origination. And the originations the numbers have come down for a couple of reasons, one is the environment, and I’d say is the slightly different way, which is as we look at the environment in particular some of the weaker customers. We are now saying happy to make the loans. But we want collateral as we align the underwriting of two companies, and as I think I alluded to not every customer wants to pledge the collateral and that means we are going to be slower growth as a result of that. And again that’s being prudent around additional that they may have today with they may take on in the future. I think are thinking around post-integration is we wind up getting back to a similar level of growth in the double-digit - low- to mid- double-digit and sustainable bear over time so long as the economy base where did, but it relates to the integration, we do think that’s a near-term thing we’re going through. We think it’s one that happens within months, it has really I’d say from every standpoint gone very well other than it has slowdown origination growth. Some of that is aligning the underwriting systems and people getting use to sort of what’s passing through, but overall I’d say the biggest things that have related to the change, it may be driven by integration, but it’s largely about the receivables delta.

[Richard Shane:]

In that range can you talk about the incentives for the OneMain employees and is there a situation here where this becomes a little bit of spiral because the incentives and the expectations are now unachievable before them. So it becomes a disincentive?

[Jay Levine:]

Well, very fair question, and what I’d say is we spend a lot of time and continuing the line to make sure people are incented to do the right thing both collect and originate it’s been time to make sure we have the right balance, we have the right participation, and we’re willing to adjust those things appropriately to make sure we’re building and protecting shareholders’ value.

[Richard Shane:]

Thank you for taking my questions.

[Jay Levine:]

Sure.

[Operator:]

Our next question is from Eric Wasserstrom of Guggenheim Securities.

[Eric Wasserstrom:]

Thanks. So I just to follow-up on question I was asked earlier again related to the growth. Is the slowing in anyway related to a response from the rating agencies?

[Scott Parker:]

No. There is no correlation between the rating agencies are growth at all, what Jay has been talking about around the integration activities and really embarked in the third quarter.

[Eric Wasserstrom:]

Okay, great. And I’m just Scott, I’m just curious why recognizing that you are producing less revenue with less growth. But you’re all also consuming less capital in the process and given the high returns on the existing book, why the delivering isn’t in fact accelerating a bit here relative to the prior guidance.

[Jay Levine:]

You make a point that clearly we generate a lot of cash flow from our portfolio, and we can take you off line through the math, but if you kind of lay it out our equity is building which means we have to issues less debt, as well as the cash flow that we earn on the portfolio kind of gets us to those kind of leverage ratios in 2017 and 2018, but that has factored into that.

[Eric Wasserstrom:]

Great. Perhaps I’ll follow-up with you on that later. Thanks very much.

[Operator:]

Our next question is from John Hecht, Jefferies.

[John Hecht:]

Good afternoon and thanks guys. Just I guess a little bit more on the origination issue. If I recall the Springleaf, when you guys introduced the auto product there was a fairly high conversion rate in a lot of interest from your custom based Springleaf, and it seems like whether because the competitive products or not that the conversion rate and the interest of the product moving some unsecured - secured for the less. I’m wondering is that procedural just like you mentioned Jay, some of the sales tactics at OneMain versus Springleaf platform or is it - is there a characteristic difference of the customer base or is there something else we should think about there.

[Jay Levine:]

Yes. I think, this is a timing thing, I would say when we look at it, well, I pick up things. One is you saw well, OneMain previously in a prior life had emphasized secured lending and it’s been a while, and you’ll see the portfolio decline down. So I would say the comfort around the process of taking the tidal going through the entirety of the closing was probably a little bit different. When I look today at where we are, I would say we’re excited that OneMain has been successful, we probably the originated $500 million to $750 million of loans. But when we look at the potential and the gap between when the Springleaf branches continue to close and with the OneMain branches continue to close is actually one of the greatest points of our optimism of why we think growth is going to get back. It’s build probably running even after three quarters, it’s still probably running it half to two-thirds of what we think it could be, and we know with those bigger loans lower losses, the opportunity is there to build the receivables. So I think we need to highlight one of those things that will come in time, but with all the other things coming on in the branches it’s one of those we haven’t been able to putting resources for the training and other things for the sale process.

[John Hecht:]

Okay. And maybe just to give as a sense really when the growths are - what’s the conversion and the integration is successful that the growth trajectory will take off. What’s the average size rate now in the OneMain hard secured loan versus the - excuse me the Springleaf platform hard secure loan versus maybe an average unsecured loan at OneMain?

[Jay Levine:]

If you look at originations, recently they’re all pretty lock that was one of the keys for getting the underwriting modules putting across the company. So similar customer with similar credit would wind up with like dollar amount, like rate, like those things really by state, because you have to look at each state when we do it. In general, you’ve seen answer a couple of different things maybe. We’ve generally seen the OneMain auto has wound up I think on average about $1,000 higher. So where OneMain is in 13, 12.5 or 13, the other one is at $1,000 higher on average generally indicating potentially newer cards and better credit across the OneMain portfolio. I don’t know the specifics on the OneMain unsecured, I know on average there is 1.2 million customers about $8 billion of receivables, some of which are autos, the average is probably about 6,000 in general with the customers that are there today.

[John Hecht:]

Okay. And then last question, and I think, you guys stated this very clearly on the call. Your - the synergy guidance is unchanged, maybe the cost as a percentage by receivables moves up just because the average receivables balances are going to be quite as high. Is that they might contributing that accurately?

[Scott Parker:]

That’s correct. So we talked about getting down to 100 million annualized savings at the end of 2016, and if you kind of look at where we are John, expecting to be at 325 in the fourth quarter gets you to that run rate and then as you venture through 2017, we talked about exceeding 2017 at another 100 million reduction. So outside of the percentage impact of the denominator, the absolute cost take out is still on track.

[John Hecht:]

Okay. Thanks very much guys.

[Operator:]

Our next question is from Lee Cooperman of Omega Advisors.

[Leon Cooperman:]

Thank you. I think, when hearing on the call is the funding is good, the performance of your existing portfolio was good. We have less growth that we were hoping for, which means generating more liquidity than you need. We have $5 billion of available cash to quote you tremendous confidence in the growth prospects of the company. My question is with roughly $4 in earnings, why don’t you pay a $1 dividend to shareholders to basically we were them during this period, why is the urgency to reduce debt we have the lowest interest rates in the history of the world? That’s the question for dividend policy - just the question for dividend policy?

[Jay Levine:]

Thanks, Lee, and I appreciate it. What we talk about with by way of earnings really relates to the core business and before a number of one-time adjustments that we continue to probably take through 2018, so we finish 2017. So with larger related to the acquisition, I’d say by the time we finished the one-time charges were close to really what we generate in earnings in the core business comes a lot closer to the earnings and that’s about the time to leverage starts to hit where it should. So I’ll say do it any one obstacle is sort of getting in the way of what I think is a very - I don’t know if a $1 is the right number, but a sensible point would be to practically still have 2017 one-time charges it take relate to the acquisition. Now, Scott want to sort to jump on that.

[Leon Cooperman:]

Just before he does, do you have any covenant of prohibitions of dividend, because as I understand that, I am - my partners knows more about the numbers than me. But we’re talking about $5 billion of liquidity we have 135 million shares. A $1 dividend, it’s a $135 million. It does seem like a large number that leaves the company - divide that by four, leaves the quarterly and you underpin the stock, whereas, because you compete with other financial service companies representation the portfolio and most financial companies they are paying dividends. That’s kind was behind my question.

[Jay Levine:]

Well, it makes total sense, I think we talked about once we get our leverage targets and you’re right there are no covenants. Our responsibility is to run the company prudently we have the right amount of capital that we can survive sort of any economic sort of thing that comes our way. But I will tell you as I said before once we are in the leverage point that we think it’s possible and we continue to work with the rating agencies to get what upgrades we think we deserve, we absolutely intend to look at what the appropriate thing to do with the access earnings, and capital generating the dividends.

[Leon Cooperman:]

All right. Different view, but it’s okay.

[Operator:]

Our next question from Bob Ramsey of FBR.

[Robert Ramsey:]

Good afternoon, guys. Wondering if you could sort of quantify the diminish outlook, what percentage of that is related to OneMain execution and what percent is more the market conditions and competition, I mean is it 50-50, 60-40 how should we think about the reduction?

[Jay Levine:]

I would say what - when we think about competition we continue to see more demand for credits we’ve seen. Our apps are up year over year, and we really see no challenges on that front. So what I think we’re thinking about it. It’s really the ability of credit, making sure in being responsible about the loan we put on. So some of it is being prudent about underwriting that doesn’t mean there’s not demand - I would say the market really haven’t changed and the part about integration is really a very near term thing that we have to get trainings around systems and underwriting modules to get rolled out in the case of underwriting across 1,800 locations. And in the case of new systems around 1,000 more stores, once that’s done we think what’s important as it’s always been is to maintain the right underwriting, because those are the loan, the portfolio that we will liquid for years to come. But I will tell you there is nothing around competition that we think has hurt us. If anything, I would say it’s exactly some of our plans, the single brand have actually helped us.

[Robert Ramsey:]

Okay. If I guess prudent underwriting was a part of this model from the time the deal was announced and today the outlook it’s different. So that either means, you guys are seeing something externally that makes you more cautious or else it’s something I mean you guys have highlighted there been some of the integration issues have affected credit. So I’m just trying to get a sense of what of this is internal versus external knowing that obviously it makes sense to be prudent on underwriting, but you always have?

[Jay Levine:]

I would say, we always look at the performance I think you’ve seen it across the board whether it’s anywhere you look that we could customers are seeing lift in both delinquencies and charge-offs you’ve seen it some of the online and others, and we’re being sensitive as we go down the module it’s down the lending spectrum especially as credit more available that they don’t get in trouble and for that reason, thank goodness we’re setup with a brand system where we can get collateral. And be able to be prudent about the risk your loans, look it’s hard to figure out what’s tightening credit and what’s integration, I’d say the majority of what we’re going for now with integration, you can’t put a precise on any one of these things but from spending a lot of time in the field with our managers in the branches talking to people, and trying to root cause all these things, we see the majority of it being integration related.

[Robert Ramsey:]

Okay. On the competitive front is to sort of quantify what you’re seeing on the online versus storefront side of things. I mean are you seeing increasingly customer shift online options are you not seeing a real change that dynamic, I’m just curious how that’s working.

[Jay Levine:]

Well, it’s always hard to know what customer does away from you, because they don’t say all by the way I went here or they or so, it’s a little bit difficult. We do take surveys all private times, so get a customer that got loans from us and didn’t get loans from us and trying to get as much information. But in general we’re not seeing a kind of competition or any heightened competition for the online players. I think the brands based players are much more weekly concentrated in some cases might have more than others. I would say the place where I think the customers tend to be getting more credit tend to be coming from the credit cards that tend to be a base, but again those are smaller balances and generally are competing with what we’re trying to do, which is a $5,000 to $10,000 loan for the single purpose or a debt consolidation. So overall I’d say the market is pretty similar to what it has been previous quarters, and I’d say anything we are focused on getting through the integration and being mindful credit at lower end.

[Robert Ramsey:]

Okay. All right. Thank you.

[Jay Levine:]

Sure.

[Operator:]

Our next question is from John Rowan of Janney.

[John Rowan:]

Hi, guys. Jay, just to make sure understand, so you are cutting off all unsecured credit in the former one main branches that I heard that correctly?

[Jay Levine:]

Not - that’s not overdoing. Well I said is we are trying to create the right balance of lending that we do, I’d say it’s coupled with relay out our strategy as it relates to secured lending, just so there is no confusion. The weakest customers and it’s hard to define them, because - and I drew up FICO as a proxy. Just to be clear we don’t underwrite by FICO. But for the very weakest customers, we’re happy to make loans, we generally - or not always want collateral, that’s the very bottom and then very small percentage of our customers. As you move up, we give customer choices. We have been lending one-secured [ph]. We’re also lending secured and will show you the different prices. One of the advantages again of our auto program it can run as much as 700, 800 or 1000 basis points lower than unsecured loan might go. So in that case, we’ll tell the customer look, you can get the unsecured loan at x percent or we can give you a direct auto loan at y percent, so the customer is then making a choice, you can get 4 dollars, they can pay off and what receivables have more in pocket. So there is some loans and this is true for both portfolio. This is how Springleaf has always operated. We’re trying to make sure customers have choices of building secured and unsecured, and there is appropriate pricing differentials that are in the 100 basis points, and for some element of customers that we would consider the risk case that we wouldn’t want to lend to unsecured, we will only lend on a secured basis and that’s true across both portfolios. And with declines as I said, whether it’s 50

[John Rowan:]

Okay. And go back into your prior point, you talk about wanting to be in this range of a higher balance loan. I mean, is there - I mean, are you doing anything to nimble around the adjusted control credit from other aspects like loan to value ratio, just trying to gauge how you’re on a control credit on the unsecured portfolio without just a broader shift to secured.

[Scott Parker:]

We’re going to control credit in the unsecured portfolio.

[John Rowan:]

Correct. Like loan to value rates, because obviously you are not doing if I lowering the total loan balance you talked about wanting to keep that high. I’m curious how - what, how else you’re trying to control credit in the unsecured book?

[Jay Levine:]

Sure. I would say, we’re doing what we’ve always done. When I talked about with just the integration of the underwriting models, what I would say is with the lowest peer of going down in that requiring collateral I think, you will expect to see our overall credit was less of the unsecured being a stronger book over time, which is underpinned and that was one of our priority to going forward. But we have normal underwriting criteria, it’s less around healthy deals, because we don’t have collateral, but is really around this possible income, stability of job timing of residence to keep things as well as the credit bureau the history with their customer having to pay to other creditors et cetera, so across the board, we have risk rating and risk scoring dependent upon what these customer look like.

[John Rowan:]

Okay. Thank you.

[Operator:]

Our next question is from David Scharf of JMP Securities.

[David Scharf:]

Yes. Good afternoon. Hopefully, I’m not rehashing previous ones. But Jay trying to get a sense for it is we think about the loss rate guidance, next year this sort of mirrors the discussion about on AR growth, how much of it’s in integration related versus competitive. As we think about the loss rates, how of it is just the denominator effect impacting the calculation versus how much of it is collection efforts being impacted by integration factors?

[Scott Parker:]

Yes, this is Scott. It’s a small piece on the denominator effect. I think it’s really as we try to lay out in the slides. You kind of see as we go into 2017, we expect Springleaf to kind of stabilize and actually be down. And so, it’s the combination of the integration activities under OneMain portfolio that we talked about, and two, as you saw the chart were - the level of one secured, those vintages are producing a little bit higher delinquency, which will lead to charge-offs in 2017. But as we remix the portfolio with a higher concentration of secured lending at a much lower loss rate, we expect to in 2018, get down into the kind of the 7%, 7.5% range that we laid out.

[David Scharf:]

Okay, so it’s more - its product mix as well, obviously…

[Scott Parker:]

Correct.

[David Scharf:]

…exiting this year with a greater mix of unsecured than you had originally been forecasting.

[Scott Parker:]

Correct. So there is an impact of the lower volume, but the key piece is kind of is really the - for the range is really the integration activities and trying to box that.

[David Scharf:]

Got it, got it. And then shifting to maybe more of the nuts and bolts of integration, I’ve been taking notes here and I’ve written down - I’ve heard you know references to underwriting system to single loan system to operating system. Can you give us a little better feeling for that branch manager and collector at the - in particularly at a legacy OneMain unit? I mean, what’s going on that’s causing them to basically not be able to close as much business in focus? How are these - are these all different systems? It sounds like some of been converted, some haven’t. But what’s exactly happening on the ground?

[Jay Levine:]

Sure, let me start with systems, because they’re probably called the same thing, at least three different times it sounds like, so that probably hasn’t been overly helpful, so apologies. First, we really have one operating system and that’s what goes into the branches. And we call it class-and-score [ph]. What’s called the sort of less important than what it is, it’s really the origination and servicing system is what every branch manager uses. It’s what’s been historically in all the Springleaf branches. It’s what’s being - what was just implemented in the OneMain branches in North Carolina and Kentucky successfully and what we rolled out for the last thousand branches. And that’s what the branch manager and the other three or four people in that branch work on as their loan applications come in, doing their collections, customer relationship, keeping track of all the things is what that is. And there are two systems that are pretty comparable, but as usual there are little differences and we’re getting used to that. But I’d say some of the real benefits of it that we’ve already seen in North Carolina. Is there is paperless closing, so the whole closing process for a customer is much more efficient. It’s actually one of the reasons we wanted the system. And the whole customer experience, how long it takes to close a loan, with that you can touch screens and all that are all benefits. So that sort of in the side. So that’s what the systems are about. What is going on? Probably I’d say a number of things really transpired in the third quarter, besides for just systems. We streamlined the management of the field. And in particular, we have what we call districts managers and directors of operation that oversee all of our branches and we realigned those to get efficiencies and other things is the third quarter. So I will say a good chunk of our branch managers saw a new boss overseeing their branch in the third quarter. So in addition to some of the other things, we had to field consolidations. We changed how we routed our Internet app to try and streamline those in the quarter. So there were a number of different small things that I’d say probably all compounded to really create that level of - a little bit of stress in what the normal ecosystem of lending and collecting for that branch manager. So in hindsight, there was a lot that we brought on them. Now, we saw without that they were able to certainly grow and originate. As we saw in the first and second quarter, we’re certainly getting this behind us in what we’re trying to get back to, certainly in the second half of next year.

[David Scharf:]

Got it. Thank you.

[Jay Levine:]

So hopefully that adds a little clarity. If you want to go visit the branch and see what it’s up to, [we’d love to do that again] [ph]. But the branch managers are doing everything they can. I think they’re incented properly, which was a great question to do. What’s most important is managing the book of receivables and putting on new responsible customers, while they get used to some new underwriting and other things along the way.

[David Scharf:]

Got it, got it, thanks, Jay.

[Jay Levine:]

Sure.

[Operator:]

Our final question will come from Mark DeVries of Barclays.

[Mark DeVries:]

Yeah, thanks. Jay, I think you’re pretty clear that that you believe most of the impact on the credit outlook is due to integration. And maybe I missed this. But do you also feel that most of the moderation in the growth outlook is also due to the integration as opposed to the increase in competition that you alluded to?

[Jay Levine:]

Certainly, yes, I’d say - when I talk about the lower volumes and integration, it’s a couple of things. Certainly there’s new underwriting and other things that have to be done. But I also said to the weakest of our borrowers we are require a collateral and some of that we would have done previously without collateral. And it’s really the learning from that that has continued to bring that to enhance our models to look at underwriting over time. So some of it is probably a little bit of that, but I’d say the majority of it goes back to integration.

[Mark DeVries:]

Okay. And I think it sounds like the majority of the burden of the integration is falling on legacy OneMain as opposed to the legacy Springleaf. And is it fair to say then that you’re seeing both the impact on credit and moderate growth, most of it coming through the legacy OneMain branches?

[Jay Levine:]

Absolutely, Springleaf continues to grow with double-digits with delinquencies pretty much where we expected them to be. The elevation has really come for the OneMain branches. What we have been doing and I think will be effective at is, buddy branch is the good things, as a lot of these branches are not far in neighboring communities. And I think we probably learned already in Kentucky and North Carolina. We’re going to take some of those learning and make sure that as we get through the first quarter we do everything we can to mitigate all that.

[Mark DeVries:]

OK great. And just one last question around reserve coverage, could you just describe kind of what you’re targeting went on terms of months, coverage of charge-offs.

[Scott Parker:]

Yes, I’ll repeat it’s kind of in the 7, 7.5 range for the portfolio.

[Mark DeVries:]

Got it, okay. Thank you.

[Jay Levine:]

Look, I just want to say thank you to everybody on the call. I know Stephanie is going to wrap in one second. But there’s a little bit of integration we’ve got to get through. As you hopefully heard us all say, we feel great about our business. We’re proud of what we’ve accomplished. We want to get through the next few months to really get this company back to what we believe all its potential is. And, Stephanie, you can wrap if you want.

[Operator:]

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