Welcome to the OneMain Financial First Quarter 2019 Earnings Conference Call and Webcast. Hosting the call today from OneMain is Kathryn Miller, Head of Investor Relations. Today's call is being recorded. [Operator Instructions]. It is now my pleasure to turn the floor over to Kathryn Miller. You may begin.

Thank you, Maria. Good morning, and thank you for joining us. Let me begin by directing you to Pages 2 and 3 of the first quarter 2019 investor presentation, which contains important disclosures concerning forward-looking statements and the use of non-GAAP measures. The presentation can be found in the Investor Relations section of our website. 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, April 30, 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 Michael Conrad, 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 very pleased to be with you today. 2019 is off to a great start. We achieved strong results across many of the key drivers of our business during the first quarter. Let me take you through a few. Consumer & Insurance earnings were $1.37 per diluted share, up 16% year-over-year. Credit continued to be strong. Our net charge-off rate was 7.1%, a 10 basis points improvement from the same period last year. And both our early- and our late-stage delinquency rates declined year-over-year. Our operating expense ratio also improved, down 30 basis points from the first quarter of 2018. We also made further strides in our funding and liquidity during the first quarter. As I said before, we are very committed to having a conservative balance sheet with a long liquidity runway. As Micah will go through in greater detail, we issued $2.3 billion of secured and unsecured debt at attractive rates this quarter, and we expanded our conduit capacity by another $250 million. Overall, we had a great first quarter. We're well on our way to achieving the strategic priorities we outlined for the year, all of which are targeted at enhancing the core strengths and earnings generation of our business. Before I turn the call over to Micah to review our quarter's results in more detail, I'd like to highlight some of the ways in which we're building on our strengths. First, our return profile. Our hybrid business model with a national branch network, robust central collections and servicing and digital capabilities is driving strong results. Our C&I segment generated a return on receivables of 4.7% in the first quarter, about 40 basis points better than last year, driven in part by our credit performance and stronger operating leverage. But we…

Thanks, Doug, and good morning. Our first quarter results were strong across-the-board. We earned a $152 million of net income or $1.11 per diluted share. This was up from $124 million or $0.91 for the same period last year. Our C&I segment earned $187 million on an adjusted net income basis or $1.37 per diluted share. This compared to $160 million or $1.18 in the first quarter of 2018. As we've highlighted in the past, our GAAP and C&I earnings will continue to converge driven by the declining impact of acquisition-related charges and purchase accounting. Non-C&I impacts in the first quarter included pretax charges of about $20 million related to the redemption of our December 2019 debt maturity. We expect non-C&I impacts to run approximately $90 million on an after-tax basis for the full year of 2019. Let's move on to the key drivers of our C&I financial performance. Originations for the quarter were $2.6 billion, of which 56% was secured, up from $2.5 billion and 44% secured last year. Ending net receivables were $16.2 billion, reflecting $1.3 billion of growth year-over-year. Our secured portfolio over the same period grew by $1.5 billion, which will continue to enhance the profitability and stability of the business over longer term. Yield in the first quarter was 23.9%, an increase of about 10 basis points compared to the first quarter of 2018. Increase generally reflected improved 90-day delinquencies, which led to fewer income reversals in the quarter. Our origination APRs remained stable despite our secured growth, so we continue to expect yields at this level for the remainder of the year. Interest income was $954 million, up 9% from last year's levels. This increase primarily reflected higher-average receivables and higher yield. Total other revenue was $151 million in the first quarter, up 14%…

Thanks, Micah. We are very pleased that the business is in such a strong position. We're going to continue to focus on the major levers of the business to build on this performance. We will manage credit prudently to ensure that we maximize risk-adjusted returns. We will continue to have a conservative balance sheet with a long liquidity runway. We will ensure that we provide a great customer experience through our differentiated business model with branch central and digital capabilities, and we will continue to drive operating efficiencies in the business. So with that, let me thank you for joining us, and I'll turn the call back over to the operator for Q&A.

[Operator Instructions]. Our first question is coming from John Hecht of Jefferies.

First question is the $2.5 billion of originations. I'm wondering, number one, is do you guys have any stats of what the composition of that is in terms of new and recurring customers. And then the second question would be Doug, you mentioned investing in the customer experience. I'm wondering, on the front end, what you guys have been investing and what it means for kind of the loan approval process.

Yes. So we don't break down the new and existing, but we have a nice mix of returning customers and new originations, really, across all of our product lines. When it comes to the customer experience, we're very focused as a team and as a company on making sure we provide great value, great products to our customers as they try to access credit and then also the experiences as easy and seamless as possible. And so we do it in a number of ways. First, our branch-based in-person relationship model has proven to be a great one. And so the first thing we do is we make sure we have great people in our 1,600 branches across the country, that they're well trained and that they know our priority is putting the customer first. So we are investing a lot in training and development. We're also investing in our customer-facing technology, both in the branches and online. In the branches, we're rolling out a new online experience for people in the branches. So they can walk through options, see what they have. And so we're making sure we have enhanced screens. We're also putting iPads in the branches so people can do things while they wait, and we can do things like upload chats and take pictures of cars when we're making loans secured by auto. I think in the online, we're continuing to make sure both our things like our landing page and the flow-through when customers come in to learn about us are best-in-class and acceptable, easy to understand. And we're also investing in making sure that our application process is as streamlined and simple as possible. And so we're really taking kind of top-to-bottom view, both how we engage with customers in person, how we engage with them on the phone, when they talk to somebody in one of our call centers centrally and also that how they invest -- or how they engage with us online. And so we're really doing work across-the-board.

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

It looks like the year-over-year change in originations continue to moderate over the last few quarters. I was just wondering what are you really seeing on the loan demand side of the equation from your customers. Also, I'm interested to know if you've been tightening your underwriting, perhaps, around edges as we're later in the credit cycle.

Yes. Look, first of all, there's tremendous demand for credit, and a lot of our customers are ones that are underserved more broadly in financial services and the financial markets. The key for us is we always get a lot more applications than actually meet our risk/return profile. And so the way we talk about it is we want to book every single loan with customers that want to do business with us, that we want to do business with them. And that's determined by our risk and return requirements and the credit profile. And so we have this combination of excellent marketing, so people know about us; a good customer experience, which I talked about. So when people come in, that they flow through our process well. And then it ends with our -- begins and ends with our credit underwriting, where we're going to make sure we're disciplined. What I would say about our underwriting is we're continually tweaking our underwriting, a, to make sure we're using artificial intelligence and best-in-class technology. So we keep learning and evolving as we go. We have certain customers that only qualify for a secured loan. And so yes, we have been -- look, we're being -- I'd like to talk about being prudent with our underwriting. Over the last 12 months, we have done some tightening around the edges, and we'll keep looking at that, recognizing that we're 10 years into an economic expansion.

Makes sense. The second question is you continued to have good momentum with your secured originations. I know you don't mix the secured as necessarily an outcome you try to solve for, but just wondering your sense on how much further penetration you're seeing in your core customer base with the secured lending product.

Yes. Look, we think our secured product, we have two of them, are really great product for customers. We give customers choice based on the loans they qualify for. And like I said, some customers -- a lot of customers qualify for both an unsecured and the secured loan and some just qualify for a secured loan. As you said, we're not solving for a particular outcome but -- because we give our customers choice. As a result, the mix of originations are going to fluctuate from a quarter to quarter. With that said, we do think there's room to grow. We anticipate the portfolio will get to 50% or over 50% later this year of secured, just based on what we've seen on customer demand over the last several quarters.

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

A couple of different questions. First, just on pricing conditions. Can you -- any changes you think about underwriting standards or some of the other topics that you just touched on? Is that being reflected all in pricing at this stage?

Eric, this is Micah. I would say it's included in our pricing today. I mean we continue to, from time-to-time, test our pricing and ensure we're competitive in the markets. But I think anything Doug talked about with respect to how we're underwriting, the mix of secured, et cetera, is reflected in our pricing. And as I mentioned, even with the higher mix of secured originations, our APRs do remain stable. That gives us confidence in the remainder of the year that we expect yields to also remain stable.

Got it. And then just in terms of reserve adequacy. How are you approaching that topic at this point?

In terms of our current reserves?

Correct.

Yes. I mean we go through a process, as most companies do every quarter, to evaluate our reserves. As you can see from our numbers, the reserves have been very stable for the last -- as many quarters as I can remember. We're at 4.7% as a percentage of receivables this quarter. What that reflects is that continued mix towards secured lending and the lower loss rates that come along with that.

Got it. And just lastly, how should we think about operating leverage for you guys sort of on a medium-term horizon?

Yes. I mean we continue to drive operating leverage as you saw from the results. I'll note that we're running the business with long-term priorities in mind. So as Doug mentioned, we're investing for the future. We're also driving efficiencies in the business. And both of those will, of course, materialize into the expense number. But there's also the other component of operating leverage, which is the receivables. So we continue to drive receivables growth with less than equal growth in OpEx and continue to drive that leverage as a result.

Yes. I would just add, there's inherent operating leverage in our business, in that we're a scale business. We're nationwide. We've got a cost base, some of which is fixed. And so -- and the incremental revenue doesn't necessarily bring with it an incremental cost, and so that's part of the operating leverage you're seeing. Also, we're very focused on being a disciplined management team, which is we're going to drive cost out of the business for anything that we don't think adds value to our customers or our resiliency or our stability or our risk profile. So as a management team, we're being very disciplined about making investments in the business to position us for the future, but also cutting things that aren't adding value at the current time. So there's both inherent operating leverage and then also management discipline that we're layering on top of that.

Our next question comes from the line of Rick Shane of JPMorgan.

I want to look a little bit forward on the reserves as we move to a CECL environment. Historically, your reserve policy has been a little bit shorter than some of the other consumer finance companies that we look at. I'd love to get your thoughts sort of, by the three products, what the reserve -- how you'll think about the reserve levels going forward. And then the second question is, look, you guys have the advantage of not being a bank, and so you're not tied off in the bank capital requirements. I'm curious if you've had conversations with the rating agencies how they will be looking at essentially moving from capital to reserve and will they be sort of looking at that on a more holistic basis.

Yes. Rick, this is Micah. So -- well, into your first question, first, which was the reserve levels, how we think about it. When we build our reserves, as you noted, we have a 7.5 or so -- somewhere in the range of 7 to 8-month loss emergence policy. And of course, we follow GAAP for our reserves today. We do look at that by product, and we roll up the reserves. So products have different dynamics obviously with payments speeds and losses, et cetera. So we've look at that obviously on a quarterly basis. When we think about CECL, we are working through the various CECL scenarios and what that means for us. We don't have anything new to share in terms of numbers at this point. But we're in the process of, as many other companies are, running our models in parallel. We expect to have something for you later in the year. In terms of the rating agencies, we don't -- we are in a lot of conversations with the rating agencies about how they're thinking about it. We certainly don't speak for them. So I would probably want to ask them what their views are today. But we -- I would note that we did receive rating upgrades from both Moody's and S&P. Right after the first quarter earnings, we announced our dividend and also with CECL very known and on the horizon.

Micah, congratulations on the new job.

Thank you, Rick. I appreciate it.

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

Was sort of wondering if there were any kind of impacts from an economic standpoint that -- during the first quarter, given the various crosscurrents that were there and whether any of that has any impact in terms of potential increased demand in the balance of the year or things are just pretty normal. How would you characterize that?

Yes. Look, not sure exactly. There were bunch of crosscurrents. There was government shutdown, lots of noise about tax refunds and then issues about the consumer. People have asked about tax refund. That's had no impact on us, and payments were the same. The government shutdown didn't have any material impact on our business. We're quite proud that we immediately implemented a plan allowing any customer impacted to defer payments during the shutdown, but it was not a material impact. And then I think on the consumer and generally, we are not seeing any signs of stress in the customer base. And as you saw, our delinquency performance remained strong and other things that we look at, like are our consumers levering up their balance sheets, are we seeing deterioration in credit profiles, looking at things like labor markets. We're not seeing a lot, and so there wasn't -- I'd say there was no major effect one way or the other on the first quarter.

Great. And so as you kind of look out the rest of 2019, kind of pretty much, yes, steady as it goes.

Yes. Look, we're not seeing signs of deterioration both in our book. We looked regionally and nationally, and delinquency rates are the best predictor of issues with our customers. On the macro side, labor markets are the best bellwether of the health of our customers, and we're not seeing major issues. With that said, we're quite mindful that we're 10 years into an economic expansion. And we're keeping a close eye on things, and we'll make adjustments if we see the need to.

Great. Switching to the other side of the balance sheet. You made a lot of -- you had a lot of discussion about kind of moving the maturities and making that substantially more liquid. And you did allude to the fact that you've gotten better execution on the secured side. Micah, maybe you could kind of just talk a little bit about that and how that plays into your thought process for financing and for...

Yes. I mean on the secured side, we've continued to develop our programs. They've been in place for a good 5 or 6 years now. We continue to make headway. We have a AAA rating on the top tranche of all of our secured transactions. So that has certainly helped attract investors. And I think it really just becomes a question also of relationship. We spend a lot of time with investors, and we -- our assets have performed. And with performing assets, certainly people come back for more. So we feel very, very good about our secured. We feel very good on the unsecured side as well. We've had great execution, and you see it in terms of the cash that's on our balance sheet in the first quarter. We've been opportunistic to the markets. And to be able to do the five year auto ABS and have tenor along with the great rates that come with the secured funding, we're really, really in a good place.

Our next question is from the line of Mark DeVries of Barclays.

First, I had a follow-up on CECL. I think you indicated we should expect some more disclosure later in the year. Were you referring just to what it means for the reserves? Or can we expect to get some disclosures around your parallel runs later in the year as well?

Yes. Thanks, Mark. I appreciate the question. As I said, we don't -- we're in process of doing all those parallel runs, following all the economic scenarios that come along with CECL. We are also looking at what does that mean going forward in terms of ongoing reserving. I think in terms of what will be ready to share at the end of the year, some estimates on what we think the January reserve build will be when we get to that point. I would also let you know that we are focused on looking at some potentially non-GAAP measures to help with the transition and understand how CECL impacts versus what we do today and hope that's helpful.

Yes. CECL, I -- since we met, 2 CECL questions. Let me just state the obvious, which is December 31 and January 1, are a day apart, and we'll be moving some numbers around on our balance sheet. But the strength of the business will not change at all. And as we've talked about, we're super focused on having a business that is resilient through all economic cycles. And it's why we've been so focused on liquidity runway and having a lot of liquidity in this business. And we're so focused on making sure we remain extremely disciplined in credit. And so we're going to run the business based on the fundamentals. It's not going to change how we run the business at all. Although as Micah said, we'll come back later in the year and give you more color on what CECL will do from an accounting standpoint.

Got it. It's helpful. And then loan -- the loan growth of 9%, this quarter is obviously running at the high end of the 5% to 10% guidance range you provided earlier. Should we -- if things kind of hold as they are, would you expect us to end up at the higher end of that range for the year?

We're not changing our guidance. I think of growth as an output. So we actually do not manage the growth. We manage a marketing program to make sure we're disciplined and attracting customers, converting the customers we want, booking loans and having good booking rates. We manage our credit and make sure we're incredibly disciplined on credit, and we do it on a very granular level. And what pops out the back end will be what pops out the back end. So we don't -- we're really not managing the business based on a growth target. So it's hard to say. But right now, we've got demand. We've got great marketing. We've got credit and underwriting. And 9% is what came out this quarter, and we're leaving the guidance as is.

Yes. And keep in mind, Mark, we were flat quarter-over-quarter on receivables as we were last year. So the first quarter is a typical flat quarter for us. So what you're seeing in the 9% is really what we built over the last year. And as we get into second quarter, that's when we start to see quarters of growth.

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

Just to follow up on some of the comments that Micah made earlier. Could you talk about the $90 million of other non -- I mean $90 million non-C&I impact that you're expecting this year and the cadence of that $90 million difference between C&I?

Sure. Thanks, Kevin. On first quarter, it was $35 million. So there's that piece. I would say with respect to the $90 million, for the remainder of the year, we do expect continued convergence in the non-C&I impacts. And first quarter, as I mentioned, was $35 million. It had about $20 million pretax associated with that redemption that I mentioned of our 2019 maturities. So we do expect continued convergence over time. The path will definitely not always be linear. And so we do expect a little bit of an impact in the second quarter with respect to the maturity that we just did. But other than that, we would expect roughly something that sort of a run rate going forward after that.

Okay. And then given the debt issuance you made and to be proactive with the balance sheet, and I appreciate the interest expense guidance that you gave, would you expect a little bit of spread widening as we move through the year, given some of the pricing initiatives you've done on the asset side?

We've done actually pretty good with our spreads. I would say that the increase in interest expense is really -- some of it's a function of obviously our secured strategy -- I mean our unsecured strategy to increase that mix of debt, but also just the continued growth in the balance sheet. So our average debt balances are up year-over-year, about 6% and in line with our receivables growth. So we would expect going forward, as I mentioned, we'll be about $230 million to $240 million. And I would say that that's largely reflecting now just the growth in the balance sheet to support the business as our transition, if you will, or mix change to unsecured has largely reached its targets. And it'll fluctuate from quarter-to-quarter, of course.

Yes. And then on the -- this pricing initiatives you made, do you think you'll see a little bit of incremental increases in spread or I guess net interest margin, given that debt cost have -- should be close to stable, right, given some of the issuance you've done and the proactive -- how proactive you were in the first quarter?

Yes. As we said earlier, we expect our yields to remain fairly stable. On the pricing initiatives, again we run pricing tests from time-to-time, again looking at competitive forces and making sure that we're competitive in those markets and there's obviously volume impacts with that as well. But we look at APRs coming in the door. It's one of bigger signals in terms of where we think yields are going to be, and we think that's going to be stable for the remainder of the year. And I think I answered the interest expense question.

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

Just a couple of quick follow-ups. So on -- following up on the auto secured mix question, I'm kind of wondering, first, if you could talk about -- if you could break out the yields between the auto secured portfolio versus unsecured, how we should think about that mix. And then secondly, so understanding, and thank you for the guidance, that your portfolio probably get to 50% to secured by the end of this year, is there anything that, say, keeps it from going to 60% or 70% or maybe even higher? Is it really more of a -- what the customer wants? Or is there, at some point, a limit to the mix that you see?

So I'll take the first one. We don't break out our yields by product. But I can -- we have talked about and disclosed our APRs on those products. So the unsecured tends to be about somewhere around 29% on an APR basis and the hard secured a little lower at 28% and then direct auto will range from 20% to 21%.

Yes. And on the mix, Vincent, as I said, we give our customers choice, and they choose which product is right for them, except for in the case where they don't qualify for an unsecured loan, then they can choose to do business with us or go elsewhere. So it really will fluctuate. I wouldn't predict where it's going to go. As I said, it will likely go above 50% this year just based on the trends and what we see in the choices people are making. With that said, I would also just remind you that the unsecured market is a bigger market generally. And so there is -- I'm not sure there is a cap per se or a place it can't go to. But we think all of our products are great and provide value to the customers. The customers will make their choice. And so theoretically, there's no limit. But I think the unsecured is a bigger market.

Okay. Great. That's helpful. And then last question. So I appreciate the commentary around the leverage and that -- I guess without the -- absent the excess cash you're holding right now, you'd be at around 6.3x debt-to-equity leverage. So understanding your guidance is from 5 to 7x for your leverage, now that you're kind of approaching the midpoint of the range and maybe even next quarter we could see you being at 6x, how do you think about capital return going forward? Is it an emphasis on -- would you increase the dividend? Is it maybe buyback is starting to be part of the question? Or anything else there?

Yes. Look, Vincent, as we've talked about and we mentioned on the call, we're really happy as a company to be in a position to return capital to shareholders for the first time. And so we announced on the last call that our policy this year was going to be, first, use excess capital to keep investing in the business and lending to our customers because that's an attractive return profile for our shareholders. Second, we're using it to delever and the kind of stated deleveraging was to turn from 7 down to 6x. And then we initiated a dividend. We will update you going forward when we have anything to add to that. And so -- but again, we're very pleased that we initiated a robust dividend. We've been talking with lots of investors who in the past, we didn't talk to because initiating a dividend in the kind of 3% range opens up a whole set of investors, which accrue to the benefit of all investors, and we'll keep having the dialogue with you.

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

You mentioned earlier in the call that you're tightening or you have been tightening around the edges on credit for the past 12 months or so. Do you see any need to do further tightening there? Or do you feel like the credits coming in roughly where you would expect?

We're really pleased with our -- the portfolio performances across multiple vintages. We track it clearly. You see our delinquency performance remain strong. As I mentioned before, we're really not seeing indications that our customer base is stressed. So household balance sheets are not levering up for our customers. Credit profiles remain strong, and leading economic indicators are not showing any major warning signs. Just for clarification, the question was -- is around the edges, do we happen to have been tightening up credits, and what I said is we're continually kind of making sure we're updating our credit box and credit profile using techniques. We do tighten around the edges, but we also sometimes open up around the edges where we see that -- there's customers that meet our risk/return profile. So what I would say is we're being very prudent. There's certainly way more loans that we could put on our books that we choose not to because of our relatively conservative and prudent credit profile. We, as a management team, think that given we're in a long economic expansion, that's a good place to be. And we're going to stay disciplined. And if we see any indications that suggests we need to adjust the credit, our credit standards will make them. We didn't see indications in the first quarter.

Okay. And I guess to clarify, your guidance is for less than 6.5% net charge-offs for the year. First quarter tends to be the high point. Do you expect the normal seasonal pattern to emerge for the rest of the year?

Yes. That's right. And third quarter being the lowest as -- and first quarter being the highest. But we feel good about credit. I also note that delinquency, which has been very strong, has historically also been a pretty reliable predictor of future charge-offs, so the next couple of quarters.

Yes. And as you saw, I mean we feel really good about where our credit is, where our portfolio is and whether it's charge-offs or delinquency are really looking great.

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

Sort of back to CECL. What is the average duration, either by product or just by overall portfolio of your loans right now?

Yes. Henry, this is Micah. We don't disclose that today.

It used to be about 1 year to 1.5 years. Is that the right number?

Again, we're not going to disclose that on this call.

What about the contractual maturity?

Well, our terms run anywhere from 36 to 48 months generally on a loan [indiscernible] some payments.

And then with CECL, where is the focus likely to be, on the contractual or on the duration of the actual loans?

That's a good question and a little bit technical. But the CECL guidance is that we -- that you should focus on contractual -- the contractual terms, but you take consideration to payments. And we would treat renewals as payments in a CECL model. Those once again are on your books today.

So in terms of thinking about lifetime losses, is there a number within the reported results that will give us a good sense of what that should be?

Later in the year, we'll have an update for you. I think -- but to answer your question, just -- I think I see where you're going. You're -- CECL probably is a better reflection of the actual life of our product, not the contractual.

Well, I mean the real issue is CECL solving a problem that doesn't exist.

That's fair.

And we don't have time on the call to go into it. But -- and then are -- I know some of the companies we've talked to have started to focus on something that we used to call primary capital, where you include reserve amounts into the capital equation. I don't know what your thoughts are on that sort of thing.

No. I don't have anything to add on that, Henry. We're focused on building the models and running our models in parallel, and we'll have more to talk about later in the year.

And thank you. This does conclude today's OneMain Financial's First Quarter 2019 Earnings Conference Call. Please disconnect your lines at this time, and have a wonderful day.