OneMain Holdings Inc (OMF) 2013 Q4 法說會逐字稿

Welcome to the Springleaf Holdings fourth-quarter 2013 earnings conference call and webcast.

Hosting the call today from Springleaf is Craig Streem, Senior Vice President, Investor Relations. Today's call is being recorded.

(Operator Instructions)

It is now my pleasure to turn the floor over to Craig Streem. Please go ahead.

Thank you, Laurie. Good morning, everyone. Thanks for joining us.

Let me begin my section of the conversation with slide 2 of our fourth-quarter earnings presentation, which you can find in the Investor Relations section of our website, and which we will be referencing during the call. Our discussion today contains certain forward-looking statements about the Company's future financial performance and business prospects, which are subject to 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 today in an 8-K report, and our final prospectus filed with the SEC on October 17, 2013, as well as in the Q4 2013 earnings presentation posted on the IR page of our website. And we encourage you to refer to these documents for additional information regarding the risks associated with forward-looking statements.

In the fourth quarter 2013 earnings material, we provided information that compares and reconciles the Company's non-GAAP financial measures with the GAAP financial information. And we explained why these presentations are useful to management and investors. And we urge you to review that information in conjunction with today's discussion.

For those who may listen to the replay of this presentation, we remind you that the remarks made herein are as of today, March 11, and have not been updated subsequent to the initial earnings call.

Our call this morning will include formal remarks from Jay Levine, President and Chief Executive Officer of Springleaf, and Macrina Kgil, our Chief Financial Officer. And, as Laurie said, after the conclusion of our formal remarks, there will be ample time for a question-and-answer session.

Now, it's my pleasure to turn the call over to Jay.

Thanks, Craig. And thanks, all, for joining the call today.

This morning we've got a few important topics we would like to cover. First, a discussion of Q4 results. I think we also want to chat briefly about our mortgage sale, which we announced this morning. And lastly, Macrina's going to spend a little bit of time talking about to 2014 guidance around a number of the key metrics we use to guide our business.

First, let's jump into the numbers on slide 4. We were really quite pleased with the results of the quarter, where we earned $76 million pretax, $48 million post tax, up dramatically year over year. We are really seeing the benefits of scale in our branches on the back of about $600 million of receivable growth in 2013, as well as growth of about 150 basis points in our risk-adjusted yield.

There was a meaningful contribution from SpringCastle, where we had the first full quarter of servicing income with our two partners. And again, in all the numbers, Macrina will go into more detail in her section.

We are really pleased with the outcome from our first sale of mortgages, where we expect to book a gain of about $55 million in the first quarter. And at this point are clearly much more comfortable around the overall liquidity of that portfolio.

And lastly, we had a number of nice improvements across the entire right side of the balance sheet, where we reduced our overall cost of funds by about 60 basis points. We extended maturities. We added backup capacity and additional counter parties. And just last week, S&P put us on positive watch yet again.

So with that, I'm going to turn to the next slide and give you a quick overview of the Springleaf business. As you can see on the map on the left, we think we've got the best footprint in the country for doing the business we do. We're in 26 states, with over 830 offices. We think we are in the states that provide the best economic and demographics for the lending that we do.

About 70% of the US population lives in the 26 states in which we have branches. And about 65% of the US population lives within 25 miles of one of our branches. And a bigger proportion of our potential customer base actually lives within those numbers. Our branches typically have three or four employees and service about 1,000 or so local customers.

We make one type of loan. We make fixed rate level-pay installment loans, freely pre-payable, all meant to help our customers. We cap our rates at 36%, even in states where no rate caps exist. On average, our rates are in the high 20%s, which is really quite comparable to credit card rates.

For the past couple of years, we've been solely focused on our consumer business, since ceasing real estate origination at the end of 2011. And we are really quite pleased with the organic growth we've seen in our branches since then.

A couple of key metrics that give you a sense. Applications are up over 50% year over year from 200,000 monthly applications to over 300,000 monthly applications. In total, we took over 4 million loan applications last year. Our closed loans are up over 20%. And we wrote $3.3 billion of business last year, compared to $2.5 billion the year before.

Turning to the next page, one of the gems I quickly realized on my arrival here a few years ago was the enormous value of our branches. Our branches have been in their communities for decades. And our managers are generally well known and well respected in their communities, and on average have been with us over 10 years.

We also recognize the large demand by American families for intelligent credit products post the meltdown. We saw the banks and credit card companies retreating and today show no signs of returning. And clearly, easy mortgages are no longer available.

To give you a sense of that demand and a stat probably used by me more than any, which is nearly 50% of all Americans either don't have or don't believe they could raise $2,000 in 30 days. And we all know that life brings all kinds of unexpected things that require $2,000 in more immediate times than that.

Beginning in 2012, we set on a path to increase scale in our branches, as we largely saw that expenses were largely fixed and anything we added by way of additional receivables would largely flow to the bottom line. We've accomplished that growth in a number of ways.

We're using better analytics for everything across our business, including marketing. We've transitioned and are in the process of finishing the transition to mortgages and mortgage servicing out of our branches. And we're adding technology and efficiency improvements across the board.

I want to note one other thing, that, as you'll see, there is seasonality to originations. If you look at the first quarter of 2013 compared to where we ended the quarter of 2012, you'll see that the first quarter, our actually biggest competitor is the US government, as the US government sends tax refund checks across the board to customers, and that tends to be a source of liquidity.

So first quarter for us tends to be a challenging one, but as you can see, the three quarters after that tend to be our big growth quarters. And I think we're seeing similar patterns in this year's first quarter.

We're also quite pleased with the growth in risk-adjusted yield that has accompanied the growth in receivables, clearly indicating that we have not in any way had to compromise on price to get the growth we've experienced. Let me give you a sense of why this receivable growth makes such a difference to our bottom line.

If we continue down the path that we've been on the past couple of years, one would expect our branches to grow on average of about another $1 million of receivables over the next 1.5 years. If you look at that $1 million of receivables once on, it will add about $300,000 of incremental revenue, and against that we'll take roughly 5% average losses, or $50,000, and another roughly $50,000 in incremental costs, covering money and other things.

So, on average, that $1 million receivables per branch will drop about $200,000 per branch to the bottom line. If you multiply $200,000 times 830 branches, you clearly can see the impact we expect to have that growth upon our branches and our overall economics.

I'm really pleased with what we've accomplished over the last couple of years of growth to receivables. And last year you should note that we had no net increase to our branch staff to accomplish all that.

Turning to the next slide, we're really pleased with what we've been able to do with receivables on a branch-by-branch basis. And we wanted to draw and give you a little more granularity on what our branches look like.

Since 2012, we have almost halved the number of branches managing less than $3 million of receivables per branch. While at the same time, we have more than doubled the branches that have over $5 million of receivables. And we think we've made real progress up the middle migrating those branches up, as well.

You should know, no two branches are exactly alike. Each is unique, and based upon a number of different characteristics, including the state it operates in and the lending laws, the local operating costs, the communities, the size of the communities and the local economy. Each branch that we have is measured appropriately and individually.

Over time, we will continue to have branches of all sizes. And we will focus on the potential profitability of each one and the bottom line of each.

And while we talk about a $5 million target, it clearly won't be a $5 million for each branch. But that's an average number we think about and that's just a stopping point along the way. As we see the potential, it's even bigger on average.

Turning to the next slide, consumer loan performance, we're really pleased with the steady growth in our risk-adjusted yields, up almost 1,000 basis points since 2009. I'm not sure I would call that steady, I'd call that dramatic. Over the past couple of years, we've improved and added realtime pricing and analytics into our daily business.

We've been helped by the disappearance of our historical national competitors. Names like Household, Beneficial, Wells and others are no longer the national competitors they used to be.

We've also gotten a nice assist from a number of states that have adjusted laws to allow us better rates and fees. And some of these states include North Carolina, Texas, Georgia, and Indiana.

We've also experienced record low charge-offs, driven by tightened underwriting during the crisis, and until recently, a smaller proportion of new customers who on average carry a marginally higher credit risk than seasoned customers. We feel good about our ability to continue to manage pricing and risk and, in turn, our risk-adjusted yield.

We believe we're in the best overall lending land landscape this Company has seen in decades. There's limited national competition. The customer base has been stable, as well as the economy. And there is huge and growing demand with limited intelligent alternatives for the customer.

Turning to the next slide, our loan performance has been solid and really driven by our time-tested underwriting and servicing. You should know that, each loan that flows in the branches is done with a face-to-face meeting with the customer, where we go through a thorough cash flow underwriting to really determine the affordability of that loan based on the disposable income of that borrower.

85% of our loans have some form of collateral, with almost half of them being a hard title automobile. And almost all the loans are serviced by the same person who originated that loan in the branch.

I'm frequently asked about our outstanding performance. And people ask -- is it the origination or is it the servicing? And my answer is always the same, yes. Again, we measure our business on a risk-adjusted yield basis, as no two customers are exactly the same.

Our Q4 charge-offs, both net and gross, ticked up a bit. On gross, we attribute it largely to seasonality, as you can see the historical trends of past years, and a bit to the growing number of new customers within the portfolio.

On a net basis, it's almost exclusively due to the receivable sale we undertook at the end of Q2 2012, as that reduced our net recoveries. We expect in 2014, assuming we don't complete anymore sales, that our recovery numbers will return to their normal range of about 100 basis points.

Turning to the next slide on the SpringCastle portfolio, we are really pleased with the way the investment has turned out here. This was a $3.9 billion portfolio of seasoned loans we acquired from HSBC that had largely been originated by Household. We invested with two other partners and in total own about 47% of the economics.

We originally invested $370 million, along with our two partners. A few months after the acquisition, we sold off our share of the retained B note of $160 million and brought our net investment down to about $210 million.

This transaction was critical for us in a number of ways, on top of the pure earning numbers, which have been outstanding thus far. First, we bought a world-class centralized servicing operation in London, Kentucky, with over 200 seasoned employees that had experience collecting all types of assets. We acquired over 300,000 new customer relationships that will be with us for years. And we're already transitioning other Springleaf business to that facility, providing additional efficiency across the entire Springleaf system.

Just to recap the numbers, since our $210 million investment in April, we have booked income of over $100 million on the portfolio. And the numbers in the portfolio continue to exceed our projections.

Turning to the mortgage slide, as I mentioned already, we're really quite pleased with the initial sale for a number of reasons. You should know there was strong demand from a number of parties. Ultimately, there were three acquirers.

We expect to book a gain of over $55 million. We expect to settle in the first quarter of this year. And we expect to generate about $800 million in net liquidity into the Company.

A few things to note on the overall portfolio. Our mortgage book was a well underwritten portfolio. Credit is a big part of our DNA. All these loans were written with the intent of holding them for life. They had performed well through the cycle.

As you can see, they are largely first lien, fixed rate, owner-occupied loans, fully verified. As they like to say, no-liar loans.

We also benefited from the revaluation of our mortgage book at the time of acquisition from Fortress in late 2010, as well as the TDR reserves we have taken since then. Overall, our book is marked at $0.83 on the dollar to UPB, where we carry about $1.6 billion discount to our UPB.

The pool we sold, the one in the middle, was 100% serviced by a third party. And as you can see, it had a lower coupon than our average book and it had a higher delinquency than our average book.

On average, we got a price of about 86, when you put the different pieces together, boding well against our mark of 80 and translating into the gain I talked about of about $55 million. The proceeds will be used to reinvest in the business in our higher yielding consumer business, as well as paying down the debt appropriately.

This sale and other potential sales, as well as the early retirement of debt, will likely introduce some element of volatility into the mortgage earning segment. So we note that here, as that winds down. We see the environment today as quite favorable and plan to continue to explore the optimal outcome for our legacy mortgage portfolio.

Turning to the next slide, and before I turn it over to Macrina, I want to comment briefly on liquidity and funding. We made enormous progress in 2013 on so many fronts. We added consumer securitizations as a core funding tool to our repertoire. And we closed financings backed by over $5 billion of consumer loans last year.

We added $1 billion in backup lines from major financial institutions. We paid off our $3.75 billion term loan due in 2017, and replaced it with a new $750 million term loan at a lower rate due in 2019. We placed three new unsecured issuances, with maturities reaching out to 2023.

We reduced our cost of funds by almost 60 basis points. We were upgraded by all three major rating agencies. What I would say, not a bad year, but still more work to be done in 2014.

And with that, I would turn it over to Macrina.

Thanks, Jay.

Let's move to slide 13 for a summary of our financial results. For the quarter, our core operations, consisting of the consumer and insurance and acquisitions and servicing businesses, generated $76 million of pretax earnings, significantly greater than last year's fourth quarter, and 4% ahead of the third quarter.

Our consumer and insurance segment earned $40 million pretax in the quarter, down slightly quarter over quarter, largely due to the impact of seasonality and credit losses, and higher provision for the larger portfolio. The decline was more than offset by higher earnings in our acquisitions and servicing segment, which we refer to as the SpringCastle portfolio, where we booked our first full quarter of servicing income from our co-investors.

Growth in our consumer loan portfolio and expansion of yield, the two key metrics that drive revenue, were both significant positives this quarter compared to a year ago. This, together with lower funding costs, and a modest increase to our operating expenses, resulted in stronger performance year over year.

Jay has already discussed our success in driving growth in average receivables per brand, so I'll expand a bit on the embedded leverage in our core branch business. Our operating expenses are largely fixed in nature. The key components being the investment required to operate a fully staffed branch and the level of support from headquarters for what we consider to be best-in-class risk, technology, legal compliance, and marketing.

We're able to take advantage of the operating leverage that comes with our scale, as there are minimal incremental costs, as consumer receivables per branch grow. Most of the net interest margin earned from loan portfolio growth goes straight to our bottom line.

Working down to our net income from core earnings, the key components are from loss on our legacy real estate and other non-core, in addition to nonrecurring losses relating to repurchase of debt, the sale of personal loan portfolio in Puerto Rico, and noncash compensation expenses.

Turning now to slide 14, I want to talk about our 2014 guidance for the key drivers of our core operations. First, we are targeting net receivables at year end 2014 of $3.6 billion to $3.75 billion, an increase of approximately 15% to 19% over the 2013 level. As Jay said earlier, we don't anticipate any sort of material increase in the number of branches, so we should experience pretty significant operating leverage from the continued solid growth in average receivables per branch.

We expect our consumer portfolio yield to continue to increase in 2014, moving up into the 26.75 to 27.25 range as we continue to pursue the pricing strategies and runoff of older assets at lower rates. We're targeting a yield-adjusted yield, which is yield less expected net charge-off ratio, of 22% to 23%. This reflects our net charge-offs ratios to trend slightly up in 2014 as the credit profile of the portfolio continues to season off of the extremely low levels of the post-financial crisis period, and with the impact of greater volume from new customers.

This range is consistent with our approach to underwriting standards and loss characteristics for our non-prime personal loan business. And we will continue to balance underwriting standards in conjunction with pricing strategies.

We expect pretax earnings from our SpringCastle portfolio to be in the range of $85 million to $105 million. As Jay talked about earlier, this is a run-off portfolio and the range does not consider additional acquisitions.

Now I would like to turn the call back to Jay.

Thanks, Macrina.

Just to wrap up before we turn over to questions, hopefully you hear how excited we all are about the growth potential in our core branches. We were really pleased with the market reception and demand we saw as we went out to sell our first $1 billion in mortgages.

And, lastly, I just want to note, I recently completed a tour of visiting with our 1,000 managers and district managers across the country. And I can tell you, I have not seen a set of people more excited about the business and the business potential before them than we experienced on that 11-city road show, where we sat and really reviewed what's going on in the market, as well as the real opportunity for Springleaf.

And with that, I'll turn it back to Craig.

Thanks. Laurie, if you would like to go ahead and prompt for questions, give the instructions, we'll be happy to take whatever is out there.

(Operator Instructions)

Mark DeVires of Barclays.

Thanks. When we spoke to you around the IPO, we got the sense that you weren't really inclined to sell any of the real estate assets. And now understandably, given how well this one sale appears to have priced, you really seem to be open to doing more of that.

Could you talk a little bit about what's changed between then and now? And also just comment on your thoughts around use of proceeds from the sale of those assets.

Sure. That's a great question, and thanks. I would say it's really a few questions.

First, I would say we've always paid attention to where the market is and what we think the outcome could be. As it relates to recently, I think we've seen a dramatic improvement in the market for mortgages across the board. I think if you pay attention to really the limited supply that's been out there, as well as demand from a number of different counter parties, I think there's been really a dramatic change in the last few months in terms of demand for the product. And that's really why we paid attention to that and took advantage of that.

Use of proceeds, I think we are still deciphering exactly what it will be, but largely it will be reinvestment in the business. We continue to have the ability to grow our core consumer, and where appropriate, that's where it will be used. We do have a little bit of near-term debt coming due this year and we'll optimize and make sure that the mix of both cash and earnings and earning assets that we can put on will be appropriate as we look through the year.

Okay, great. And just to follow up on that, on your comment about reinvesting in the business, without specifically addressing any targets that are out there, what are your thoughts on potentially doing some inorganic acquisitions that wouldn't materially expand your branch reach?

I think what I would say is we feel very good about the ability to expand our branches. We've done it nicely over the last couple of years. That remains our core focus. We wouldn't shy away from looking at anything that was available and out there and made sense.

Okay, great. And then finally, any updates you can provide on your iloan platform, just any productivity metrics around that?

Sure. I think there was a brief one on one of the pages. And just for everyone's benefit, we define iloan, really, as the sourcing of Internet leads for us that we, in turn, transfer to the branches and really become Springleaf loans.

On the Springleaf overview, slide 5, online volume is almost doubled year over year from $188 million to $346 million, what started digitally. And we continue to see that trend growing. Actually, the biggest lift we got in applications last year was largely due to the Internet applications.

I will tell you, we have a lower pull-through on our Internet applications. We have to vet it more. You've got more people that aren't afraid to continue to look until someone says yes. And you've got to do more work on those applications.

But that's why it's so important to have the right framework. And we're very excited about the team we've got and how we're going about that.

Okay, great. Thank you.

Sanjay Sakhrani of KBW.

Thank you. Going back to the mortgage portfolio discussion, when we look at what's left within the portfolio, it seems like if you look at the key metrics and they look a lot better than what you sold. Could you just talk about how you're thinking about the pricing you could get on what's left? I know it's an inefficient market, to some extent, but just conceptually how we should think about what kind of mark you think you could get if you sold the remaining piece versus what you sold?

That's a really good question. We think of the pool in a few different ways. There's clearly loans really fall into a couple different categories. Really, the performing ones, and then you've got the coupon on the performing ones, and what the pay history has been.

And then you've got lows that have been less than perfect pay histories. And they can either fall into what we call reperformers or nonperformers, depending upon the delinquency status. Clearly, we do everything we can to keep loans from going all the way through.

But to answer your question, I would hope, and we would expect, that we would see similar or better pricing on the remainder of the portfolio, just given the fact that the coupons are higher. They tend to be more seasoned and tends to be what borrowers are looking for.

Our portfolio does have a couple different portfolios within a little bit. We had a centralized portfolio and a branch portfolio.

The sale we undertook was from the centralized portfolio, which had the lower coupon. And we haven't yet tapped into the branch portfolio, but we expect over time pricing to be comparable or better, based on the fact that it has higher coupons.

Okay. And then I had another question just on the existing mortgage book. When I look at the loss rates, they rose a little bit in the quarter. I was just wondering what the outlook was there as far as loss rates.

I think when you break it out, we again had a quarter which was a large TDR quarter. And again, for those that -- we've gone on this quite a few times -- but any time we make a loan modification to keep a borrower in-house, of any sort, almost any sort, if you lower the rate for any few months, if you cut principle, which we rarely do, you're forced to take an accounting reserve.

And, depending upon whether it's historical or otherwise, it can be anywhere from 10 to 20 points of reserves. And it's largely that reserving that's getting built back into our basis that's covering the bulk of those losses.

Net-net, the run rate losses on mortgages are in the low to mid 2%s. That's where they were last year. We continue to hope and expect them to come down from there.

And it is down from the 3%s, where they were post crisis, 2008, 2009, and 2010. That's pure losses without reserves. They get driven up by once you put, in fact, the TDR reserves in.

Great. Thank you very much.

Kyle Joseph of Stephens.

I wanted to dig in a little bit on the lower level of recoveries. How quickly do you expect the recovery levels to recover?

Do we need to completely lap the sale of charge-off accounts? I know you mentioned that it would recover in 2014, but just looking for a little bit more specifics on the timing there.

We think it will be a gradual tick-up as the year goes on. There were a couple things that probably made the fourth-quarter number marginally lower than what it otherwise would have been, which was we had to resettle up with the person that we sold them to, and that dragged it down a little bit lower than it otherwise would have been by a few million dollars.

But this is something that will pick up quarter over quarter and the recoveries come from a number of different areas. All charge-offs aren't exactly the same. Some are customer bankruptcies. Some are customer pure skips that we ultimately find.

There's a number of different ways and it will take some time as we get through the year. But I would expect to really see the full impact closer to the second half of the year.

All right, thanks. And then in terms of the first quarter, it sounds like tax refunds were delayed a bit. The weather was pretty bad. Can you talk about your first-quarter performance overall and what you expect there?

I would say it's a little bit early. You're right about the weather. You don't have to look forward on the weather.

We, like every other person in the branches in the states we do business, we had branch closings, and looked out for our employees first and foremost. And closed on a few different days, a couple hundred of our branches. And we thought that was the prudent thing to do. And clearly that had an effect on business those days.

Overall, I will say volumes are tracking ahead of last year in terms of new business we've done year over year. And we're pleased with that.

All right. And then, lastly, on the yield guidance, do you expect the portfolio to gradually build up to those levels over 2014? And then a second question there is, do you expect yields to plateau from there, or is there upside beyond that?

First of all, we do expect the yield to gradually increase over time. As I mentioned earlier, we're going to see older loans come down and the newer loans going up.

And then in terms of over time, as the yield increase there's many factors that impact yield. We do look at the pricing analytics and get to the right price for the customer. And then we also have certain legislation impacts, as well, which you're seeing within the yield.

Great. Thanks so much for answering my questions.

Moshe Orenbuch of Credit Suisse.

Great, thanks. Going back to the real estate portfolio, Jay, you had mentioned the possibility of more volatile earnings. And obviously you'll have the gain in the first quarter followed by the absence of that. But as was referred to, it seems like the quality of what you're keeping is better than what you're selling.

Is there something else going on? It seems like, all other things equal, whatever one would have thought, the losses should be more moderate as you go forward. Is that fair or is there something else going on?

I would hope so. I think you nailed it. The overall coupon has gone up, or will go up, as a result of when the sale closes, which will help spread there. It was a higher delinquent pool.

We isolated the pool for a couple reasons. One, it was solely serviced by a third party, and made it an easy transaction to undertake. That was the main reason for focusing here, as opposed to trying to move different servicers and getting something accomplished that way.

But it was also a pool that we were continuing to experience reasonable losses on. We looked at where would the portfolio get a lift and where would we see less losses? So, I am hoping, as you said, Moshe, that the portfolio will perform better with this piece carved out over time.

But just addressing the volatility question, Moshe, each transaction, should we do additional transactions, is a one-off situation and difficult to predict whether gain or loss or the magnitude of it at this point, obviously, going forward. But to the extent there is, it's a nonrecurring kind of item. And I think that's what Jay was really addressing when he talked about potential volatility and periodic earnings.

Got it. Of course. Just as a follow-up, as you think about the rest of the portfolio, the priority in terms of either holding or disposing, just how do you think about it? And what are the factors? Are there other chunks that make sense? How should we think about that?

I think we think about it in a couple of ways. We think about, one, what's the marketplace, what's demand in the marketplace, which we will continue to explore from here.

I think two is, to the extent we were to sell it and generate proceeds, how would those proceeds be used. I think those are the main two factors that would go into play.

Right. This was perhaps somewhat different than much of the rest of the portfolio in that there wasn't as much debt specifically allocated to these assets. Is that fair?

That is very fair. It had a remaining securitization related to it that was largely paid down.

Great. Thanks so much.

David Scharf of JMP Securities.

Good morning. Jay, just wanted to dig in a little more on the core portfolio and credit. In general, would you characterize recent credit trends, notwithstanding the nuance around the charge-off sale earlier in the year, is it generally tracking in line with your expectations? Are you seeing anything on the margins that's incrementally better or worse?

No. I think if you look at it -- it's a good question -- if you look at the trends they are very comparable to where they have been the last few years. And we certainly don't see anything extraordinary other than the one charge-off.

As I mentioned, as the portfolio grows, we put more new customers on and we don't get heavy experience that we had in a legacy portfolio, as those customers tend to be marginally riskier. And as you grow a portfolio, you're going to wind up with more new customers. But away from that, I don't think there's anything going on in the portfolio that has surprised us or has us concerned at all.

Got it. And following along those lines, just as we think about the loss rate guidance in 2014, can you give us a sense for what percentage of your current borrowers are new to Springleaf over the last 12 months as opposed to repeat customers?

I'll give you some overall numbers as it relates to the total business. And it moves a few points here or there, and we can get back to you on the specifics.

But in general, our portfolio is comprised of roughly -- 50% is comprised of what we call present customers, customers that have been with us and have renewed at least once and their loans are paid down, we have reunderwritten them, they remain strong credits. We've given them additional proceeds. And that loan remains with us.

About 35% to 40% at any given time, are new customers. And about 10% or 15% are former customers, customers that have fully paid off their relationship and have come back to borrow again from us.

The customers that have the lowest losses tend to be the present customers and the former customers, because we've had experience with them. They have been with us in time. We've seen payment patterns. And if they weren't good customers, we wouldn't have renewed them.

Then you have the new customers, which is if you're not one of those other two. Clearly, when you're a growing portfolio, you're getting more of those new customers.

I think last year it ticked up by probably 3%, if I looked at it over the last couple years. But we'll get back to you with the exact percentages.

Okay. It's that 35% to 40% bucket I was just trying to get a sense for, given the growth lately where that could head to. Got it.

Lastly, as it relates to recoveries on the regulatory side, I'm not sure this would impact you, but I know in the core collection agency debt buying market there's quite a bit of anticipation of upcoming CFBP rule making on the collections front. Is there anything that you're waiting on or that might potentially change in terms of any of your collection patterns and processes?

I can't think of anything specifically. We clearly pay attention to all the state regs, federal regs, et cetera, from almost every agency that's out there as it relates to collections of our customers -- FTC, CFBP, state laws, et cetera.

Clearly, we've been in compliance with those for -- I won't say forever, for at least the [10] years the Company's been around. And we pay a lot of attention to them. So we don't see any major impact coming from that.

Okay, got it. Thank you very much.

Don Fandetti of Citigroup.

Yes, good morning. Jay, just to clarify, let's say in a perfect world you had a great bid for your mortgage book. You had a use of proceeds.

Are there any restrictions that you have, whether due to some of the portfolio being securitized, or could you sell the entire portfolio? Can you clarify that?

Specifically, as it relates to the securitizations on there, I don't think anything stops the portfolio from transferring, subject to the securitizations that are still in place. The buyer would have to assume our interest in the pool, subject to the securitizations.

I think anything beyond that, I would have to check on. But as it relates to the debt that's in place and everything else I don't think we see anything material that would stop us from exploring as it relates to the securitizations.

And then briefly on a competitive environment, we've seen some companies, like Santander talking about doing a little bit more personal lending. Have you seen anything on the margin, on the competitive front? And then maybe if you could talk about some of your largest competitors, if you've seen any change in behavior on their aggressiveness lately.

I think, as I've said, there's one large national competitor that tends to be out there. A little bit bigger than we are. And we clearly keep an eye on them.

Beyond that, we tend to have lots of local regional competitors. I think it's estimated there's 10,000-plus consumer finance branches across the country and we've got almost 1,000 of those. So there's clearly competitors, but I don't think we've seen any dramatic change in the competitive landscape, in pricing, or anything else as relates to that.

Clearly, there's been the growth of the peer-to-peer, but that's largely focused on a much higher credit sector than we're going after. So I think the overall landscape continues to largely be the same.

Thank you.

(Operator Instructions)

Henry Coffey of Sterne Agee.

I know you've probably kicked this around a little bit, but when we're looking forward and thinking in terms of reserve dynamics and provision, what are some of the guiding principles we should be using? I know you have a lot of moving parts here.

It relates to a couple of different portfolios, so it's not exactly the same. So I'm not exactly sure.

Clearly, the consumer portfolio has one way that it's reserved against. The mortgage one has a slightly different one because of its initial adjustments from an accounting standpoint.

On the mortgage one, I would say it's largely driven by additional TDR reserves we're taking. I'll let Macrina talk about the consumer one.

Yes. So Jay, for mortgage -- and I'm talking about our GAAP, which is our purchase GAAP that we look at -- for mortgage, it is largely based on the TDR portfolio and the credit-impaired portfolio that we have. On the consumer side, we look forward to the delinquency in charge-offs to come up with a reasonable provision that we've tested over time. And how I think of it is usually it's around 8 months to 10 months of risk charge-offs getting reserves.

The other part, SpringCastle, we really don't have a reserve on the SpringCastle portfolio. It was largely discounted on the purchase. And so what you are seeing in the provision line is the charge-off coming through.

Thank you. And then just a second question. The world is changing, you may have noticed.

And we have a lot of action going on with the CFPB. We have consumers getting, I think, in aggregate, if you look at the pawn and payday lenders, which are way down the food chain from you all, they are seeing fairly anemic growth, whereas you're seeing fairly robust growth.

With your analytics, do you have a feeling for customers walking in the door or joining the Internet? Are they former payday customers looking for a more durable loan product?

Are they former credit card customers looking for something with a longer maturity? Can you give us a sense in terms of your new customers walking in the door, what were they doing before they came to Springleaf for their credit needs?

That's a really good question. I would say it's a host of things. To try and generalize any one trend is a difficult thing to do.

We regularly watch what are the uses of proceeds. Most of them clearly didn't have debt. If were paying off debt when they come in, they -- I'll say it a couple ways.

One, if we're winding up with hard title, we'll usually pay off another lender. It tended to be an auto lender. So that's the one time we do see proceeds going out.

Ultimately the customer, if they are going to consolidate debt, it's usually them that winds up paying off others. Increasingly, we're looking for that kind of information that you just referred to of, were they pawn customers, were they payday customers, and can we get that data.

Most won't walk in and say -- oh, help me get out of my payday loan. Most of our customers, we find, usually don't even want to disclose whether or not they have got a payday loan or not.

We're doing what we can to track it. But what I would say is, it tends to be the same vanilla, bread and butter, life event, debt consolidation that drives our customers. And our biggest challenge is awareness.

We think when we look at the product that we offer, the installment loan, that with a number of level payments, gets you out of debt, it is for those that have the capacity and the disposable income, the smartest single alternative to all the other debt products that are out there. We need to be able to make sure it's a customer who can borrow enough dollars.

It's not someone who needs $200 for a utility bill as opposed to a couple thousand dollars, because it just doesn't make sense for us for a couple hundred dollars. One of the things we really want to continue to be proactive about is making sure the customer is aware of what smart alternatives are out there to help them get out of debt in a responsible way.

And you're still committed to that 36% total cost of funds, total APR ceiling, which puts you into a very nice set of compliant box, right?

Yes, we do. Full disclosure, we're at 36% on rate and 39.9% on APR, because we will on occasion, we're allowed to charge small fees. But we cap our rates at 36% and if the states allow, small fees will cap our APR marginally higher.

Thank you.

At this time, there are no further questions. I'll now return the call to Craig Streem for any additional or closing remarks.

Thanks, Laurie. Thank you all for your interest. Good conversation this morning. And anything else you need, you know how to find us. And we look forward to talking to you again. Thank you.

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time. And have a wonderful day.