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Edited Transcript of OMF earnings conference call or presentation 30-Jul-19 12:00pm GMT

Q2 2019 OneMain Holdings Inc Earnings Call

Evansville Aug 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Onemain Holdings Inc earnings conference call or presentation Tuesday, July 30, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Douglas H. Shulman

OneMain Holdings, Inc. - President, CEO & Director

* Kathryn Harmon Miller

OneMain Holdings, Inc. - Head of IR

* Micah R. Conrad

OneMain Holdings, Inc. - Executive VP & CFO

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Conference Call Participants

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* Eric Edmund Wasserstrom

UBS Investment Bank, Research Division - MD & Consumer Finance Analyst

* Eric J. Hagen

Keefe, Bruyette, & Woods, Inc., Research Division - Analyst

* Giuliano Jude Anderes-Bologna

BTIG, LLC, Research Division - Director & Financials Analyst

* Henry Joseph Coffey

Wedbush Securities Inc., Research Division - MD of Equities Research

* Kyle M. Joseph

Jefferies LLC, Research Division - Equity Analyst

* Michael John Grondahl

Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst

* Michael Robert Kaye

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Moshe Ari Orenbuch

Crédit Suisse AG, Research Division - MD and Equity Research Analyst

* Pierce J. Dever

Piper Jaffray Companies, Research Division - Research Analyst

* Richard Barry Shane

JP Morgan Chase & Co, Research Division - Senior Equity Analyst

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Presentation

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Operator [1]

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Welcome to the OneMain Financial Second 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.

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Kathryn Harmon Miller, OneMain Holdings, Inc. - Head of IR [2]

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Thank you, Stephanie. Good morning, and thank you for joining us. Let me begin by directing you to Pages 2 and 3 of the second quarter 2019 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, July 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 Micah 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.

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Douglas H. Shulman, OneMain Holdings, Inc. - President, CEO & Director [3]

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Thanks, Kathryn, and good morning, everybody. I'm pleased to be with you here today, and thanks for joining us.

We had another great quarter. We continue to execute on our key strategic priorities, which include: disciplined receivables growth driven by improved customer experience; strong credit performance; expense discipline; and a conservative balance sheet with a long liquidity runway. We generated Consumer & Insurance adjusted earnings growth of 38% year-over-year and a strong return on receivables of 5.4%, up 120 basis points year-over-year.

At the end of this call, I'm going to spend some time discussing some of the key initiatives underway at the company that, together with the favorable economic environment, are driving the great performance this year.

Credit continues to be strong. Our net charge-off rates was 6.2%, about 40 basis points better than last year's second quarter. Delinquency trends were also good. Our 30 to 89 ratio was flat year-over-year and our 90-day ratio came in about 20 basis points better than last year. Our customer remains healthy and we're not seeing signs of stress in our portfolio.

Our operating expense ratio also improved, down almost 70 basis points from the second quarter of 2018, reflecting the benefit of our ongoing cost and expense discipline, coupled with the inherent operating leverage of our business.

We also continued to enhance our capital and liquidity position in the second quarter. We issued a total of $1.1 billion of unsecured debt, $300 million of which was closed in July, and we added a twelfth conduit bank. The combination of $6.7 billion of undrawn conduit capacity and $8.9 billion of unencumbered collateral provides us significant flexibility and stability. We believe that we're uniquely strong and that our conservative balance sheet gives us a differentiated position among nonbank lenders.

As we continue to execute on our core priorities, OneMain generates significant capital, with our return on tangible common equity in excess of 25%. As you know, the first phase of our capital return program began earlier this year when we announced the initiation of our regular dividend, an important milestone for the company following a period of significant deleveraging. It was a strong signal regarding our confidence in the business and our ability to execute through all economic conditions, and it also created an attractive yield for investors.

As our second quarter and year-to-date results clearly demonstrate, our business is performing very, very well. We're on track to achieve the strategic priorities we outlined for 2019, and we're generating considerable excess capital beyond what is required to grow and invest in the business.

Our capital structure is in a great position, and we are comfortable that we are well within a comfortable leverage range that we think is appropriate for the business. As a result, our Board approved a $2 per share special dividend to be payable in the third quarter.

When we think about how we use the capital generated by our business, we focus on a number of things. First, we'll make investments in the business to ensure we are serving our customers well, innovating and driving greater profitability over the longer run.

Second, we will also invest in the growth of our business, which generates significant return on tangible common equity. We'll make every loan that meets our risk-adjusted return hurdles with underwriting that uses best-in-class technology, data and analytics.

And third, we'll continue to prioritize our conservative balance sheet with prudent leverage levels and a long liquidity runway.

We believe that given the strength of our business, we will continue to generate capital in excess of those 3 priorities in the future, and this excess capital will be returned to shareholders.

Going forward, we will consider all forms of capital returns, and we're very pleased to be in a position to provide this additional direct return to shareholders this quarter in the form of a special dividend.

With that, let me turn the call over to Micah.

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Micah R. Conrad, OneMain Holdings, Inc. - Executive VP & CFO [4]

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Thank you, Doug. Good morning, everyone. As Doug mentioned, we delivered strong results in the second quarter. We earned $194 million net income or $1.42 per diluted share. This was up 72% from $113 million or $0.83 in the same period last year, excluding the $106 million impact related to the Fortress transaction.

Our C&I segment earned $229 -- $221 million on an adjusted net income basis or $1.62 per diluted share. This was up 38% from $160 million or $1.18 in the second quarter of 2018.

Let's review the key drivers of our C&I financial performance. Originations for the second quarter were $3.9 billion, of which 55% was secured, up from $3.2 billion and 47% secured last year. Ending net receivables were $17 billion, reflecting $1.6 billion of growth year-over-year. Our secured portfolio over the same period grew by $1.7 billion or 25%, which will continue to enhance the profitability and stability of our business over the longer term.

Given the growth we've achieved thus far, we now expect ending receivables growth for the year to be between 8% and 10%.

Yield in the second quarter was 24.2%, up 10 basis points from last year. This increase primarily reflected an improvement in 90-day delinquency.

Interest income was $999 million, up 10% from last year, the increase reflected higher average receivables, which were also up 10% from last year. Total other revenue was $156 million in the second quarter, up about 11% versus last year, primarily due to higher insurance revenue, which tends to follow our receivables growth.

As Doug mentioned, credit performance continued to be strong. Our 30 to 89 delinquency rate was 2.1% in the second quarter. Our 90-plus delinquency rate was 1.7%, and our net charge-off ratio was 6.2%, a 40 basis point improvement from the same period last year. For the full year 2019, we expect our net charge-off ratio to be between 6.1% and 6.3%.

Our loan loss reserves increased sequentially by $7 million, largely reflecting our growth in receivables. That said, our reserve rate declined sequentially by 20 basis points to 4.5%, reflecting seasonally lower late-stage delinquency as well as the continued portfolio migration towards more secured lending.

Second quarter operating expenses were $319 million, about 1% higher than last year. With almost 10% growth in average receivables, we continue to leverage the scale of our platform and delivered about 70 basis points of year-over-year improvements in our OpEx ratio.

And lastly, interest expense was $232 million in the second quarter, up from $212 million a year ago. As expected, the increase primarily reflected both higher average debt balances as well as a greater proportion of unsecured debt. We expect interest expense to trend moderately upward for the remainder of the year, in line with the expected growth in the portfolio.

Let's move on to our balance sheet. As you know, our priority is to maintain a conservative balance sheet and long liquidity runway, both of which we continued to enhance during the quarter. Specifically, we issued $800 million of 2028 notes at 6.625% in May. We also redeemed a June 2020 maturity of $300 million. And in July, we completed a $300 million add-on to our 2024 notes at an attractive 4.5% yield.

Our 2024 maturity is now $1.3 billion, has a blended cost of about 5.7%. The average tenor of our unsecured debt has increased to 4.7 years compared to 3.6 years at the end of 2017. Our next scheduled maturity is not until the end of 2020.

Our tangible leverage ratio was 6.1x at the end of the quarter. We remain on track to achieve our leverage target at the end of the year.

In terms of liquidity, as Doug mentioned, we added a twelfth conduit bank during the second quarter and expanded our total undrawn capacity to about $6.7 billion. At quarter end, we had $8.9 billion of unencumbered assets and almost $800 million of cash. These liquidity sources, along with our longer maturities, provide significant runway without accessing the capital markets.

Overall, our second quarter performance reflected strength across the board, and we remain in a great position to take our business to the next level. And with that, I'll turn the call back to Doug.

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Douglas H. Shulman, OneMain Holdings, Inc. - President, CEO & Director [5]

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Thanks, Micah. I want to conclude with a few other comments about the business. First, we announced a few weeks ago, that Rajive Chadha has joined us as Chief Operating Officer. He's a great addition to the team with deep consumer finance experience. Before joining OneMain, Rajive led all consumer bank products, including secured and unsecured lending and fintech partnerships at Regions Bank. He also previously served as President of Diners Club International at Discover and President of CitiFinancial Auto, among other leadership roles within Citibank consumer lending business. I'm very pleased that Rajive is the most recent addition to a very, very strong executive team.

I also want to spend a few minutes discussing some of the initiatives underway at the company that underpin our strategic priority. As a reminder, the priorities are: disciplined receivables growth driven by improved customer experience; strong credit performance; expense discipline; and a conservative balance sheet with a long liquidity runway.

Here are just a few of the initiatives. We're investing in customer experience, including redesigning our loan application to make it more simple and streamlined and developing omnichannel tools to enhance operating efficiency and improve our service. We've invested in our central sales and servicing teams to support our customers after hours when branches are closed, contributing to our ability to book loans with more customers that meet our risk/return hurdles.

And we also are upping our game in analytics across the company. We're using advanced analytics in multiple facets of the business, from marketing optimization to enhanced underwriting to improved management of the mix of products across geographies.

We're also investing in technology in a number of ways. We're creating microservices and APIs in our core systems to increase our agility and ability to innovate and move at speed, to use new data sources for our underwriting and to integrate third-party applications.

There's a lot happening at the company and I hope these examples give you a sense of that. We're driving a number of initiatives and I believe there's more opportunity to optimize performance and even better serve our customers and, over the long run, grow earnings.

As you can see, from our performance this quarter, these and other initiatives are starting to impact the financial performance of our business in a very positive way.

Let me end by letting you know that we plan to hold our first-ever Investor Day later this year. We look forward to talking to you about the future of our business, our strategic initiatives, our credit and funding and our capital allocation strategy at that time.

So with that, thanks, again, for joining us, and let me turn it over to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Eric Wasserstrom with UBS.

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Eric Edmund Wasserstrom, UBS Investment Bank, Research Division - MD & Consumer Finance Analyst [2]

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Just a couple of questions, please. The first is the -- obviously, you've articulated this capital return expectation, which is very exciting. But can you give us a sense of how you're thinking about capital adequacy through the CECL implementation period and on a go-forward basis just given what CECL will require with respect to go-forward growth?

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Micah R. Conrad, OneMain Holdings, Inc. - Executive VP & CFO [3]

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Yes. So this is Micah, Eric. Thanks for the question. I mean with respect to CECL, we view reserves as another form of capital and really, CECL just moves capital around the balance sheet. We don't expect CECL to change at all the way we think about financial leverage whether it helps in performance of our business.

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Eric Edmund Wasserstrom, UBS Investment Bank, Research Division - MD & Consumer Finance Analyst [4]

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Okay. And if I may just follow up on that point. And is that a position that you've vetted with the rating agencies and funding constituencies? And is that a broadly shared view?

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Micah R. Conrad, OneMain Holdings, Inc. - Executive VP & CFO [5]

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Yes. I mean we talk with the rating agencies a lot as you can expect. We don't speak for them, but we do believe that the rating agencies understand CECL is not a credit event.

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Douglas H. Shulman, OneMain Holdings, Inc. - President, CEO & Director [6]

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Yes. And Eric, what I would say is, this is Doug, the company has come an incredibly long way and has deleveraged a ton. We feel really comfortable that we're in a very responsible, prudent range of leverage now. We're carrying a lot of excess liquidity on our balance sheet to make sure we're strong now, but we're strong through any economic cycle, and obviously, we wouldn't be doing capital returns now if we didn't feel we had plenty of capital now and will have plenty of capital in the future to run a prudent business with a conservative balance sheet.

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Operator [7]

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Your next question is from the line of Michael Kaye with Wells Fargo.

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Michael Robert Kaye, Wells Fargo Securities, LLC, Research Division - Senior Analyst [8]

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One of the things that struck me with the results was the very large pickup and year-over-year growth of originations this quarter. It went to over 20%, up -- way up from under 2% last quarter. So I just want to understand some of the factors that led to some of that growth. Was it some of those initiatives that you were talking about at the end of the call that started to finally hit? Because it seems like a dramatic swing.

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Douglas H. Shulman, OneMain Holdings, Inc. - President, CEO & Director [9]

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Yes. I mean a couple of things: One, we'll remind you, there's definitely seasonal pickup. So I wouldn't compare it quarter-over-quarter as much because first quarter, there's usually a lot less lending. So some of it -- some of the quarter-over-quarter is seasonal pickup.

I think the growth is a combination of factors. One is if you look at the year-over-year growth, actually, over 100% of the growth, so there's $1.7 billion of growth -- or I'm sorry, $1.6 billion of growth, $1.7 billion of secured growth. So the portfolio we're growing is a secured portfolio, which generally has larger loan sizes. So that is -- that's one factor. It's also credit that we're very comfortable with and has lower losses.

A second is our customers, the near prime customer, does remain healthy. I mentioned debt to income ratios look very good, unemployment low, our delinquencies are looking good. So there is healthy demand, but we are making sure we're incredibly disciplined around our underwriting and are only booking loans that meet our risk/return criteria.

And then the third, as you mentioned, is we are doing a lot to optimize the business. So we're actively managing what we call the funnel, which is -- the top of the funnel, which is attracting all the customers that we think meet our risk/return demand, whether that's through digital or mail or partners, making sure that there's a good experience when they come in and that both our web experience, our phone experience and our in-person experience is great.

As I said, we have a credit box to make sure once they come in, that they meet our underwriting criteria, including ability to pay. And then we are doing a better job in the branches with the loans that we say we want that are sent to them pulling those through. And that's through a variety of factors, both giving them information about the loans, that they feel comfortable that they're getting more transparency even though the underwriting decisions are made by the underwriting department. And then just really focusing on performance. So it's a number of things from the mixed shift to secured, demand remaining healthy and then us running the business at a very granular level to make sure that we're performing well.

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Michael Robert Kaye, Wells Fargo Securities, LLC, Research Division - Senior Analyst [10]

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Okay. That's great. I wanted to also talk about the updated charge-off guidance. It's implying better charge-offs, about 20 to 40 basis points better than last year. I know you don't give 2020 charge-off guidance yet, but I was just hoping for some high-level thoughts on how we should think about charge-offs next year with secured loan growth like with the slower debt and some of those loans begin to season?

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Micah R. Conrad, OneMain Holdings, Inc. - Executive VP & CFO [11]

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Yes, Mike, this is Micah. I -- largely what we're seeing this year is a continued mix towards secured. We've seen pretty stable product loss rates, our unsecured remains around 9% on an annualized basis, which is pretty consistent with what it's been over the last couple of years. As you're starting to see, the slowing down, if you will, or leveling off of our secured mix just coming off of very, very, very much lows from when we integrated OneMain into the platform, and I think what we expect is as that portfolio shift moderates, the moderation in terms of loss performance will also take place. So we're not ready to give out 2020 guidance next year, we feel really good about where the portfolio stands and where our loss rate is in terms of our range for this year, but we'll continue to move forward with that.

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Operator [12]

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Your next question comes from Moshe Orenbuch with Crédit Suisse.

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Moshe Ari Orenbuch, Crédit Suisse AG, Research Division - MD and Equity Research Analyst [13]

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Congratulations, Doug and Micah. Could you talk a little bit about the thinking behind the special dividend this quarter versus other forms of capital return and how to kind of think about -- obviously you've got a lot of options with the capital generation, but how we should think about which directions it gets deployed?

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Douglas H. Shulman, OneMain Holdings, Inc. - President, CEO & Director [14]

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Yes, Moshe. Look, first of all, business is performing great, we've got excess capital. It's evidenced by the strong returns second quarter and this year. Second quarter we had over 30% return on tangible common equity. So we -- I feel very fortunate and we feel very fortunate that the business has come such a long way that we're having these discussions and we're distributing capital to shareholders.

As I mentioned before, priority one is invest in the business, whether that's technology, analytics, customer experience. We want to make sure we have a profitable business for the long-term and this year and next year and 5 years from now we're able to keep serving customers well, driving profitability. So that's always going to be first.

We also have a very attractive asset that we put on our books and so as long as the loan meets our risk/return hurdle, we'll put it on, and we think that's a good investment of capital. I want to be clear, we're not looking for growth for growth's sake. It's an output of all the factors I talked about on the last question. But we're seeing attractive opportunities, and we'll keep making loans.

Third is our balance sheet. Having a lot of liquidity is paramount in this business. We're never going to take our eye off of it, and we're going to use capital for that purposes -- for those purposes. We're going to make sure we always are running within prudent leverage levels, and we've got liquidity.

What I didn't mention is over the long-run, we will look at our organic opportunities in the business. The market is quite frothy right now. There's nothing on the horizon, but over time and especially if the economy moderates, there might be some attractive opportunities that would be accretive to the business that we'll consider.

And then capital generated in excess of what we need to run the business prudently, we plan to return to shareholders. We started this year with a regular dividend that created an attractive yield for shareholders. Because the business is performing well and we have a good line of sight to achieving our 2019 goals for the year, we feel really good about adding a special dividend.

As you said, there's a number of things you can do with the capital. I outlined most of them. Going forward, we're going to consider all forms of capital return, and we're going to talk to you more about it when we hold an Investor Day later in the year.

What I would say is we feel really good about the state of the business and very confident that over the long-run that the holders of our stocks are going to get excellent total shareholder returns and you're starting to see that now.

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Moshe Ari Orenbuch, Crédit Suisse AG, Research Division - MD and Equity Research Analyst [15]

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Great. Doug, you'd also outlined a number of different initiatives that you're kind of working on. Are those things that you think will -- I mean, are the primary objectives of that to add to growth, to reduce losses, to reduce expenses? And what's the impact on expenses kind of for the balance of this year?

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Douglas H. Shulman, OneMain Holdings, Inc. - President, CEO & Director [16]

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Yes. So the answer to growth, losses, expenses is yes. A combination of things. I think they're all -- everything we do, we want to make sure has a good ROI for the business and strengthen it for the long term.

So I talked about customer experience should both add to growth because more customers will want to do business with us, won't drop off in the funnel because they don't have a good experience. And the more we streamline our application and make it simpler, it'll also be less expensive for us to acquire customers.

Similar with central sales, our analytics will both help us see where we have opportunities to drive more efficiency, but also see the mix that we have in marketing, for instance, between digital and mail, and how people come in and interact with us and where there's fall-off. So again, it will help with both cost and growth.

And the analytics will also help us with underwriting as we get more refined, as we see how investors perform -- or I'm sorry, how our customers perform over time.

The tech initiatives clearly are a number of things from stability of platform, customer experience, ease of doing business. All of these will make sure that we -- once we attract the customers we want who meet our risk/return profile and we think we can help them with their financial need, make sure we book them, which will help across the board and it'll be a better customer with less losses with more growth and more of those customers either joining us or staying with us.

So we'll give you a flavor of it when we do Investor Day, but we have initiatives driving on all cylinders of the business.

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Micah R. Conrad, OneMain Holdings, Inc. - Executive VP & CFO [17]

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And Moshe, Micah. I'll just kind of pile on that in terms of your second part of your question, what does it mean for expenses for the year. Doug mentioned we're already doing a bunch of investments for the near future, we're continuing to drive efficiencies and just focused on general cost controls. Our expenses do tend to fluctuate also with -- seasonally with our originations and customer acquisitions. So the quarterly timing will vary. I think the first quarter, we were up somewhere around 3.5%. This quarter year-over-year, 1%. We're up 2% year-to-date, and we still feel comfortable that at the end of the year, we'll be up about 3% incorporating all of those factors.

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Operator [18]

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Your next question comes from the line of Kyle Joseph with Jefferies.

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Kyle M. Joseph, Jefferies LLC, Research Division - Equity Analyst [19]

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Let me echo others' congratulations on a strong quarter. Just 2 questions from me. Given what you guys did with the balance sheet in the quarter, how should we think about your debt mix between secured and unsecured going forward?

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Micah R. Conrad, OneMain Holdings, Inc. - Executive VP & CFO [20]

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Yes. Thanks for the question. We -- as Doug mentioned it, we've talked about it a lot. We run a conservative and resilient balance sheet, really, with a focus on health of the business and a long liquidity runway. Our strategic mix towards unsecured over time has increased our duration not just from the mix impacts, but also lengthening the average tenor of our unsecured debt. It's also increased our unencumbered receivables. And those become available to pledge in our conduits or just in general use as liquidity if and when we need them. So we -- these strategies have definitely led to increased liquidity. We've extended our runway significantly and our increasing duration also reduces our interest rate risk. Obviously, these things are critical to the long-term health of the company. The increase in interest expense year-over-year is really an output of that strategy. Our average debt was up $400 million year-over-year to support growth. But then the impact of having that additional unsecured has contributed also to that year-over-year increase.

We feel that's important to the business. I think from a long-term point of view, in terms of our mix of funding and debt, we will -- we've had a stated strategy to be approximately 50-50. That will move around from quarter-to-quarter depending on our issuance calendar and the timing. But I think when we migrate up, you'll see us migrate back down towards secured and run really a balanced program over time.

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Kyle M. Joseph, Jefferies LLC, Research Division - Equity Analyst [21]

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Got it. And then one follow-up from me. Obviously, there's been some regulatory developments in California. Can you just give us a high level sort of how you're thinking about that as an opportunity for your business?

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Douglas H. Shulman, OneMain Holdings, Inc. - President, CEO & Director [22]

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Yes. Look, we support the proposed California legislation that would cap lending rates at 36%. It's been through the assembly. It's been through some committees and the Senate and from what we hear, it's going to be picked up when the Senate comes back in session.

We operate as a responsible lender. We already voluntarily limit our rates to 36% even in uncapped states like California and others that don't have a cap. So we like this legislation. We think it's really good for consumers. We think it's good public policy and we support it.

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Operator [23]

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Your next question is from Rick Shane with JP Morgan.

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [24]

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So when we look at the dividend distributions for this year, it probably represents somewhere between a 35% and 40% payout ratio, which is a good trajectory in first year of return to capital. I'm curious where you think that could go longer term.

The other question I'd like to explore is just when you consider either repurchase versus dividend decision, can you talk a little bit about what metrics you're looking at in terms of tangible book versus GAAP book value? And also given the concentrated position from the sponsor and the relatively low flow, how you think about that in terms of returning capital?

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Douglas H. Shulman, OneMain Holdings, Inc. - President, CEO & Director [25]

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Yes, sure. So regarding going forward, as you said, we're really pleased that we have a nice payout ratio this year. And as you know, this is new to the company to be doing capital returns and so we legged in with a regular dividend, then a special dividend. You named a whole bunch of factors that can go into the decision. Obviously, when we think about capital, we look at GAAP and GAAP earnings and what capital is generated. And that's how we'll be looking at it going forward.

I think around, like, all of the metrics and factors that go into it, we're going to give you more color at our Investor Day later in the year. For us, the key was what if -- how are we doing this year, what do we need to fund the -- both investments in the business and the growth of the business. What do we need from a prudent leverage level and if there's excess capital this year, we're sticking with dividend. With that said, I mentioned that we will consider all forms of capital return going forward, and we'll talk to you more about it later in the year.

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Operator [26]

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Your next question is from Kevin Barker with Piper Jaffray.

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Pierce J. Dever, Piper Jaffray Companies, Research Division - Research Analyst [27]

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This is actually Pierce Dever on for Kevin. Most of my questions have been answered, but maybe just looking at the average size of your loans kind of continued to trend higher here in recent quarters. Is that any particular strategy attributable to the change or just maybe a result of a sharper focus on lending on the auto side?

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Micah R. Conrad, OneMain Holdings, Inc. - Executive VP & CFO [28]

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Yes. That's a good question. I mean really, it's just a function of the mix of securing our customers. We get our customers largely choice. Some customers come in, we will only offer them a secured loan depending on the credit. But a good portion of our customers do have a choice and when they -- where that mix of originations of secured will change from quarter-to-quarter as a result, then certainly, the higher loan size on the secured will have an impact on that year-over-year.

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Operator [29]

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Your next question is from Sanjay Sakhrani with KBW.

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Eric J. Hagen, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [30]

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It's Eric on for Sanjay. Maybe you could take me into the portfolio a little bit and hopefully, shine some light on the credit profile of the borrower between secured and unsecured. Specifically, how does the debt-to-income ratio differ between the 2 buckets?

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Micah R. Conrad, OneMain Holdings, Inc. - Executive VP & CFO [31]

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Well, I guess I'll say for our secured products and our unsecured, largely, the differences in credit and in terms of expressing it through FICO are not materially different. In terms of our ability to pay and income ratio, that's really a function of each loan and the tenor and cost of that loan on a monthly basis. So Doug alluded to this a little bit in his comments, that we bring a customer in, they have a certain risk profile, they're available for one or more products and then when we walk them through the process and talk to them about their specific financial situation, we make sure that their residual income is sufficient enough to cover their monthly obligations and also the obligation on the OneMain loan. So depending on the size of that loan and the tenor, that can change, but we don't see significant impacts other than that.

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Eric J. Hagen, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [32]

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Understood. And then last question, just how does the Fed rate cut factor into your outlook for the consumer, I guess if at all? And how should we think about the impact of lower interest rates on the financing side of OneMain's business and just the impact that, again, if any, on credit spreads?

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Micah R. Conrad, OneMain Holdings, Inc. - Executive VP & CFO [33]

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Yes. So on the funding side, I'll remind everyone, we're -- our debt is nearly 100% fixed rate. So immediately, not an impact. We do issue $3.5 billion to $4 billion a year to fund the business. That is exposed to benchmark rate. That said, we think it will have a relatively minimal impact. So if you run about a 50 basis points parallel shift across the curve, keep in mind that we issue across all tenors with our ABS and unsecured issuance. But if you were to see a 50 basis point change in your example, a reduction, we expect to see approximately a [$15 million] increase in net income, so relatively small.

On the customer side, our customers are relatively, from a pricing point of view, insensitive to benchmark rates. We operate within each state's unique pricing rates and rate structures. And we're continuously pricing, as we talked before, continuously testing pricing to make sure we're competitive in our markets. And that's really what drives the APRs and pricing that we have on the front end.

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Operator [34]

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Your next question is from the line of Mike Grondahl with Northland Securities.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [35]

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Congratulations on the quarter. Just a question on leveraging capital return. Your leverage got down to 6.1x and you announced a special dividend. Do you need to get it back to 6.1 or 6 flat before you do another kind of capital initiative? Or are you saying, "Hey, you're close enough to that ZIP Code to kind of keep going?"

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Micah R. Conrad, OneMain Holdings, Inc. - Executive VP & CFO [36]

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Yes. Mike, I mean, as Doug mentioned and as you're seeing from this special, the business does produce a lot of excess capital. We felt comfortable with where the business was in order to initiate this original special dividend. Yes, we did achieve 6.1x leverage for the quarter. We remain committed to our year-end leverage target, and we'll kind of go from there.

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Douglas H. Shulman, OneMain Holdings, Inc. - President, CEO & Director [37]

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Yes. I mean all I would say is, similar to our balance sheet, we're going to be raising debt every quarter, we're going to have different growth rates. And so end of quarter numbers, while are interesting and we'll always come and talk to you about them, they're going to fluctuate. And when we think about the business and when we think about leverage, we think we need to be in a prudent range where we have a conservative balance sheet, lots of liquidity. We feel really good now and we feel really good should the economy moderate. And so you'll see fluctuations at quarter end, but we're going to manage it in a responsible range.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [38]

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Got it. Got it. And then are you seeing anything new on the competitive environment to kind of supplement your growth a little bit? What are you seeing there?

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Douglas H. Shulman, OneMain Holdings, Inc. - President, CEO & Director [39]

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Look, we have -- what's unique is we're the only nonbank installment lender at scale nationwide. And so we actually compete with all sorts of different institutions. So we have some community banks and credit unions that are very local that serve some of our customers. We've got the niche regional players who've got similar business models to us.

For our unsecured debt, we do a fair amount of credit card and other debt consolidation, and so there's movement there. And then some of the fintech competitors, most of them are more in the prime space, but some of them go down into the near prime, the high 600s. We're very attuned to our competitors, as Micah said. We want to make sure our customers have a great customer experience. And so the personalized service we give, the ability to pay underwriting, the relationships we build, especially in smaller towns where lending is a very personal thing, is very important and we think we outperform there. We've been investing in technology and in our digital interfaces and in our applications to make sure if there's more tech competitors that we remain at parity. We've been investing in our mobile app and making sure we're at parity.

We're developing chats, so people from a younger demographic who don't want to get on the phone or walk into our branch can get serviced through other means. And we're always testing pricing and making sure we stay competitive with pricing.

So what I said -- what I would say is we feel really comfortable with our competitive position, and the results are showing that. But it's also our job as management to never get comfortable with your competitive position and always be looking at ways to better serve customers, do underwriting, manage your balance sheet, drive expenses down, but we have a very intense focus on customer experience and part of that is making sure we know what's happening in the competitive landscape.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [40]

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Got it. Then maybe lastly quick, just your credit performance is obviously running better. And if the improvement was 100 points, what would you allocate to the economy and what would you kind of allocate to your underwriting for that 100-point improvement?

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Micah R. Conrad, OneMain Holdings, Inc. - Executive VP & CFO [41]

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Yes. That's a hypothetical, that's tough to answer. I'd say the improvement we're seeing is largely driven, as I mentioned before, by our secured mix. Our product performance is performing well and has been relatively stable, within a few points, over the last few years. But it's a function of our underwriting and the investments in technology that Doug talked about, investments in analytics and strengthening our underwriting models. But the secured mix is a huge part of what we've been able to accomplish over the last few years, taking credit down from 7% annual charge-offs down to our 6.1% to 6.3% range for this year.

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Operator [42]

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Your next question is from Henry Coffey with our Wedbush.

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Henry Joseph Coffey, Wedbush Securities Inc., Research Division - MD of Equities Research [43]

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Two questions really. One on the capacity front. It is a branch-based system. What do -- how do you think your current origination and loan servicing volume would sort of match up to your ultimate capacity for the system?

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Douglas H. Shulman, OneMain Holdings, Inc. - President, CEO & Director [44]

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It's -- we have the ability to do distribution and servicing at scale. A lot of our loans actually originate online. So it's not like they're walking in and just having a conversation and giving all the information. We have a very good web interface and mobile interface where you can still add your application.

We've got -- there's quite a bit of elasticity in our system, both because we have so many branches and we can do branch overflow. We know how to open and close branches. So if we see more demand and we're doing that all the time, we're opening branches in some areas where we're under-penetrated and we're closing branches where they're not as profitable or we feel over-penetrated.

And as I mentioned, we've been adding to our sales and servicing capability centrally. And so, for instance, right now, our branches both work with customers on products and close loans, they also do the early-stage delinquencies. If there's an issue in a branch where they can't get to all the early stage delinquency or they're flooded by applications, we, that day, can do overflow to our central collections, who can then pick up some of the collection load. So I don't think capacity is a constraint for us.

Our constraint is there's certain a universe of people, we will make loans to who we think it's a good financial product for them, meets their financial needs and meets our risk/return hurdles and our credit criteria, we market to those people. We bring them in and onto our platform. But I don't think kind of the closing, servicing, branch network is the capacity constraint.

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Henry Joseph Coffey, Wedbush Securities Inc., Research Division - MD of Equities Research [45]

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And then a second somewhat related question. In terms of attractive customers, the fintechs are offering a rate that's comparable with the kinds of rates you offer to customers that, at least based on a FICO score basis, they claim are better, much more in the high 600s than not. Is there ability to do sort of the instant close? Is that a restraint for you all? Are you losing customers because you can't decision something as quickly as they can? Or is that really not turning out to be much of an issue?

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Douglas H. Shulman, OneMain Holdings, Inc. - President, CEO & Director [46]

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Look, I -- my view is that the fintech competition that's come in has done a couple of things: one is it's grown the market so they spend a ton of money on advertising; and two, not anyone specifically, but folks in Silicon Valley usually start with a customer experience-first mentality. Folks like us actually start with a credit, liquidity, financial services view. I think what they've done is kind of made everybody just be on their toes around customer experience. Throughout my career, I've always thought it's a losing proposition to say you're great at financing, but you're not great at customer experience. And so, we've got a really good focus on our customers. People in the branches perform great service to the customers, have great deep relationships. A lot of people taking a loan like a personalized approach.

With that said, we also have digital capabilities, phone capabilities and we're investing in that. So that as the market evolves, we make sure that we don't have any cracks and that we stay strong and competitive.

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Henry Joseph Coffey, Wedbush Securities Inc., Research Division - MD of Equities Research [47]

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It looks like -- and this is just by looking at the estimated payment rates -- that you're -- the sort of average life of your loan is about 18 months. I don't know if that's the exact number. But is that likely to change as you originate more and more secured loans? Or do you think that's always going to be kind of the profile of what you do?

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Micah R. Conrad, OneMain Holdings, Inc. - Executive VP & CFO [48]

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Yes, Henry, this is Micah. We've talked about before the average term on our loans is somewhere between 48 and 60. The average life ends up being a function of payment behavior and also renewals. The -- on the secured side, certainly, the life of that loan is a little bit lengthened from a credit perspective because you just have fewer charge-offs and a larger loan tends to stay around a little bit longer, but it's moderate. And really, as we focus on continuing to build customer value and making sure that we're there for when our customers need us, we do tend to have a lot of -- a good amount of renewal activity, customers coming back and those are, as you know, some of our best performing loans. So that's going to impact the average life of the ultimate loan, not necessarily the customer.

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Henry Joseph Coffey, Wedbush Securities Inc., Research Division - MD of Equities Research [49]

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Great. And congratulations on a great quarter.

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Micah R. Conrad, OneMain Holdings, Inc. - Executive VP & CFO [50]

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Thanks, Henry.

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Douglas H. Shulman, OneMain Holdings, Inc. - President, CEO & Director [51]

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Thank you.

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Operator [52]

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Your next question comes from Giuliano Bologna.

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Giuliano Jude Anderes-Bologna, BTIG, LLC, Research Division - Director & Financials Analyst [53]

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I had a quick question. Looking at the portfolio, it seems that the paydown rate of the portfolio kind of accelerated in the quarter by roughly 350 basis points on an annualized basis. Was there a little bit more refinanced volume internally? Or did something drive that, that would probably explain the higher originations volumes?

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Micah R. Conrad, OneMain Holdings, Inc. - Executive VP & CFO [54]

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Yes, Giuliano, it's Micah. The relationship between our originations and our receivables growth will tend to change from time to time. It does fluctuate. It's really a function of the secured mix that we do and the size of the loans. It's also a function of the customer mix. When we do a renewal, the customer has an existing balance and we refinance that balance. So even though you might have an origination that looks like an $8,000 loan, on a renewal, the actual change in the receivables will be lower than that because the customer has an existing loan. So you will not see a perfect relationship between originations and receivables if you look at it every quarter. From a payment rate point of view, we've seen payments and also we track early payoffs, so customers who'll end up paying off their loan and leaving the book, we've seen a lot of stability over that and really, over a long period of time. So it's probably more something with the mix that's impacting what you're looking at.

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Giuliano Jude Anderes-Bologna, BTIG, LLC, Research Division - Director & Financials Analyst [55]

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That makes sense. And then thinking about the guide on charge-offs. Is that -- what's really driving that? Is that lower gross charge-offs or is it really more -- or should be driven by higher recoveries going forward?

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Micah R. Conrad, OneMain Holdings, Inc. - Executive VP & CFO [56]

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No, no. It's really more on the growth side. We run a pretty diversified recovery strategy over a long period of time that'll tend to run anywhere between 80 and 100 basis points as a percentage of receivables, every -- each quarter.

If you look at where we are from an early stage delinquency point of view, if you look over the last 3 years in the second quarter, we've seen 30 to 89 relatively flat but yet, over that period of time, we've delivered 3 years of declining charge-offs. And really, that is an indication of the benefits secured mix has on our late-stage delinquency, and ultimately, on our charge-offs. As our customers who -- a nonprime customer will miss a payment from time to time, secured lending really helps to prevent those customers from rolling into the late stages of delinquency and has a significant impact on our charge-offs. So that's why I was mentioning before also that as our portfolio mix of secured begins to stabilize and level off, we expect the rate of improvement to follow.

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Operator [57]

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There are no further questions at this time. Thank you. This does conclude today's OneMain Financial Second Quarter 2019 Earnings Conference Call. Please disconnect your lines at this time, and have a wonderful day.