OneMain Holdings Inc (OMF) 2014 Q2 法說會逐字稿

Welcome to the Springleaf Holdings' second quarter 2014 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. You may begin.

Thanks, Maria. Good morning, everybody. Thank you for joining us. Let me begin, as I always do, with slide 2 of the presentation, which you can find in the Investor Relations section of our website and which we will, of course, be referencing during the call. Our discussion this morning contains certain forward-looking statements about the Company's future financial performance and business prospects. Those 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 in an 8-K report and in our annual report on Form 10-K, which was filed with the SEC on April 15, 2014, as well as in the second quarter 2014 earnings presentation posted on the Investor Relations page of our website. We encourage you to refer to these documents for additional information regarding the risks associated with forward-looking statements.

In the second quarter 2014 earnings material, we've provided information that compares and reconciles our non-GAAP financial measures with the GAAP financial information. Of course, we explain why these presentations are useful to management and investors. We would urge to you review that information in conjunction with today's discussion. For those of you who will listen to the replay down the road, we remind you that the remarks made herein are as of today, August 7 and have not been updated to this initial -- subsequent, rather, to this initial earnings call.

Our call this morning will include formal remarks from Jay Levine, our President and Chief Executive Officer and Macrina Kgil, our Chief Financial Officer. As Maria said, after the conclusion of our formal remarks, we will have plenty of time for your questions. So now, it is my pleasure to turn the call over to Jay.

Thanks, Craig. Good morning. Thanks again all for joining us today. Turning first to slide 4, let's jump right in to discuss the highlights of our second quarter. First in our core business, continued strong customer demand for our responsible loan products, resulting in healthy growth in receivables, strong earnings, all demonstrating the benefits of scale across our branch network. SpringCastle also had a really strong quarter, as credit performance continues to improve. Also in the quarter, we started the rollout of our direct auto product, building on our extensive branch network and powerful customer relationships.

Earlier this year, we hired a great leader for this business, Bob Hurzeler. With 25 years of experience at Wells, he brings a long background in both branch and central operations, including the leadership of Wells' multi-billion dollar direct auto lending business. By way of background, the auto finance market is about $800 billion in outstandings with about 30% of that in non-prime customers. This presents us with a huge new opportunity. We will principally be focusing on refinance loans versus purchased loans. This is significantly different than indirect auto finance, as we will be lending directly to the customer, doing what we do best out of our branches. The auto dealer plays no role in the business.

For Springleaf, we expect this to drive larger loan amounts for newer vintage vehicles than we see in our traditional auto secured loans. We also anticipate lower losses for this product line. Still in the very early days, we will keep you posted as the business develops.

Not to be ignored, we also want to highlight the $7.2 billion of mortgage transactions we announced this morning. We will have quite a bit on that later in the call.

Turning now to slide 5. In the beginning of 2012, we re-engineered Springleaf to be better positioned to benefit from growing consumer demand for intelligent loan products and for materially less competition. We were confident that our extensive branch network, our strong local presence and our long history of personal lending would provide the foundation for our future growth.

Today, we enjoy the fruits of that plan, with strong growth in branch receivables, both on a total basis and on a per branch basis, driven increasingly by outstanding marketing performance across both digital and direct channels, solid growth in our merchant and customer referral programs, and importantly, positive trends in national consumer confidence. While we've historically talked about growing receivables per branch, our bottom line is really about pretax income per branch.

Just to illustrate the progress we've made in scaling up our branch business, in 2011, pretax income per branch for the consumer business was a little over $40,000 per branch. By 2013, we averaged a little over $200,000 per branch as we ceased originating mortgages and saw the increasing benefits of better analytics and crisper marketing. For the first half of this year, we have grown that to an annual rate of $263,000 per branch. We expect to see continued positive results.

Turning now to slide 6, we had another quarter of rising gross yields, albeit at a slower rate, along with stable net charge-offs. Our net charge-offs for the quarter were pretty comparable to the first quarter as recoveries continued to improve, up about 15 basis points from last quarter. With delinquencies being the best predictor of forward losses, we were happy to see the drop in our 60-day delinquency at quarter end, from 2.45% down to 2.28%. One last point on this slide, as our auto business becomes a more meaningful part of our originations and portfolio in future years, the more typical loan rate of about 18% will have an impact on our overall yield; however, we anticipate this will be more than made up for with incremental growth.

Turning to the SpringCastle portfolio on slide 7, just a couple of quick highlights. First, our team in London, Kentucky continues to do a great job. We believe it's a major reason why the credit performance continues to improve. In addition, the portfolio today is well-seasoned, averaging over nine years of age adding to its credit stability. We've moved about 20,000 Springleaf accounts into that facility, taking advantage of the capacity and servicing expertise down there. Lastly, the center continues to provide us with significant flexibility and frees up our branch staff to bring an even greater focus to originations.

Turning now to slide 8. As you recall, during our first quarter call, we talked about our plan to accelerate the wind-down of our mortgage portfolio. Since that time, the market for mortgage assets has improved beyond our expectation, leading to today's milestone transaction. We originally envisioned a 3-year liquidation plan as our securitizations approached their respective call dates; however, dramatically improved market conditions allowed us to accelerate these plans.

To add a bit of color, on the demand side of the market, large pools of capital have been raised to pursue these types of transactions and these types of loans. At the same time, we've continued to be in a low interest rate environment with steadily increasing real estate values. On the supply side, the market has seen a drop in supply, with a significant drop in new foreclosure proceedings. Limited supply of new originations has all created for the perfect market dynamics for us to liquidate this portfolio early.

To highlight a few of the numerous benefits of the sale. First, it provides us with significant liquidity and dramatically reduces our net leverage. Given mortgages on certain lives, the sale also eliminates embedded funding risk that we would have otherwise retained. It removes significant potential earnings volatility as we experienced in recent years from this portfolio. We will be eliminating significant operating expenses related to mortgage servicing. And, as importantly, we remove a significant distraction from our core business.

Turning now to slide 9. To put the scope of these mortgage sales in context, when Fortress first acquired The Leaf about four years ago, we had a bit over $13 billion of mortgages on our balance sheet. In the almost four years since then, we've taken that down by about $5 billion, as of the end of Q1, through sales and organic runoff. By the end of Q3 of this year, you will see the portfolio drop by another $7 billion, essentially eliminating our entire mortgage exposure. It puts us in an amazingly strong liquidity position and gives us tremendous flexibility as we think about our growth strategies, both organic and inorganic.

Turning to slide 10, as we just discussed, the mortgage sale put us in an even stronger liquidity position. We ended Q2 with almost $900 million in cash and expect to generate approximately another $3 billion from these mortgage sales. Historically, we've been very effective at driving down funding costs, but with this sale, our cost of funds will migrate up in future quarters as the benefit of lower funding costs associated with mortgage securitizations is eliminated.

On this slide, we give you a snapshot of our receivables mix and balance sheet before and on a pro forma basis after the mortgage sales. Both our overall and net debt declined significantly. Our leverage ratios are significantly improved, coming down to 3 to 4 times. Again, our real estate exposure is essentially gone. Before I turn the call over to Macrina, I want to say how proud I am of our entire Springleaf team, 5,000 strong, for the team's great performance including this very significant sale. Now, over to Macrina.

Thanks, Jay. Let me begin with slide 11, the summary of our financial results for the quarter. As Jay said, another very solid quarter with our core business generating pretax earnings of $94 million, well ahead of our first quarter results. Our consumer and insurance segment earned $60 million pretax in the quarter, significantly ahead of the first quarter and also ahead of last year's quarter, adjusted for the $25 million benefit from the sale of previously charged-off receivables.

The most significant driver of our sequential quarter improvement was growth in the consumer loan portfolio. Our acquisitions and servicing segment, which is the SpringCastle portfolio, contributed nicely to our results again this quarter, driven primarily by continued improvements in credit performance. Our GAAP basis net income for the quarter was also up nicely, reflecting the solid core business earnings we've described this morning, as well as reduced losses in our non-core real estate portfolio.

We also realized a gain of $35 million pretax in the second quarter from the sale of $0.5 billion of real estate assets that closed in June. This gain is included in the overall projected gain of $575 million to $625 million pretax on the real estate asset sales that we reported in this morning's earnings release and is also included in the overall $7.2 billion of assets sold. We are reporting these amounts separately because this transaction closed in the second quarter.

Turning to slide 12, I want to walk you through our guidance update. First, we are increasing our guidance for net finance receivables to a range of $3.7 billion to $3.85 billion, reflecting the continued strong growth in our branch personal loan business and the early volume trends from our new direct auto loan product. Second, we are fine-tuning our yield expectation range down by about 15 basis points, largely due to the launch of our direct auto product.

We expect the financial impacts of this product to be a net positive for us, with strong returns, even though pricing is at lower rates than our traditional personal loans. Next, we are projecting that our risk adjusted yield will come down as well by the same 15 basis points as gross yield. Finally, we are once again raising our expectations for pretax income for the acquisitions and servicing segment, reflecting the terrific credit performance of that portfolio.

Now, before we start the Q&A period, I want to walk you through some of the impacts of our expenses from the real estate transactions we announced this morning. First, we expect to incur about $16 million of one-time costs in the third quarter related to the transaction. Second, until the cash is deployed, either by reinvesting for growth or by repaying debt, the interest expense on certain unsecured debt will continue to be captured in other non-core and will have limited impact to our core earnings.

In addition, we expect ongoing bottom line benefit in our operating expenses from the effective elimination of the non-core real estate segment. Operating expenses in that segment have been about $80 million per year. The majority of this will be eliminated as a result of this transaction. The balance will be reallocated to the other segments. We will work to minimize this impact over time. Now, let me ask the operator to begin the Q&A period.

(Operator Instructions)

Moshe Orenbuch, Credit Suisse.

Great. Excellent transaction -- really kind of took us by surprise in a good way, which doesn't happen that often. So I guess what is the first obvious question is, could you talk a little bit about what you would be doing with the money? You don't even have more than $1 billion or so of debt maturities in the next year and a half. So could you talk a little bit about where you think you're going to deploy that?

Sure. That's a great question. We certainly are in an enviable liquidity position, which gives the Company a lot more optionality than it's had in quite some time. You're right about our liquidity schedule. We look at it, as do the rating agencies, over a longer period of time than just a year or two. Our maturities are slightly bigger than that if you look out over the next couple of years. That's certainly something we want to take care of.

But I would say, it's a reserve of resources that we intend to use either to deal with debt or to fund growth. We continue to see strong organic growth. We hope that there continue to be inorganic opportunities that we'll be able to take advantage of as well.

Could you just maybe talk about the environment and what you're seeing relative to the past? I mean, is it increasing, decreasing? Could you talk a little bit about that?

Sure. On the branch side, our growth continues to be at strong levels, as we've seen over the past couple years. Fundings are up nicely. Applications are up nicely. Demand is as good as we've seen over the past couple years. We haven't seen any drop in that; as a matter of fact, we've seen a growth in demand for the responsible loan products we offer.

I'd say we continue to see incoming inquiry from retailers and others who want to partner with us to provide financial solutions to their customers that we're working on together. I think it's premature to lay out any names, but that's something that looks intriguing and something that we're look at growing. Certainly, the early results of our auto business are that this is something that could have moved the needle next year.

Organic side? Anything you can share with us?

At this point, there's nothing really appropriate to comment on. The market for portfolios, as I've said in the past, has been quieter than we would like. We haven't seen a lot of banks or others letting go of things that -- attractive yields or yields that would make sense for us and the equity holders. On the Company side, we haven't seen anything that's appropriate to report at this point.

Okay, thank you.

[John Hex], Jefferies.

Real quick, just for modelling purposes, you mentioned that your cost of funds will change or be modified because you are retiring a lot of mortgage securitizations. Do you have handy that average cost of mortgage securitizations that will route off tied to the sale of the portfolio?

All of our mortgage securitizations will be taken off our balance sheet. We expect cost of funds to increase around 60, 70 basis points.

Okay. That's very helpful. Thank you.

So two questions, one is, the portfolio growth at the branch level continues to be strong. I wonder if you could talk about iLoan? Maybe an update of the composition of loan apps that you're getting online versus store and trends you're seeing with respect to that.

Sure. We're seeing applications year over year up anywhere from 25% to 50% depending upon region, stores and channels -- so strong growth in application trends. I'd say the bulk of the growth is coming from changing consumer behavior. It's coming online. It's easier for people to start the process today than it's ever been.

However, I think as we've talked about, almost all of our loans continue to get closed in the exact same way, where the customer will come in, once approved, even if starts online, the customer will come into the branch. We will go through the process we always have, which is getting to know that person; validating identity; and making sure that's a capable customer and the loan is appropriate for his circumstances. But what has been best about the digital channel has really been the growth in the number of loans and customers we've been able to look at and see.

Okay. Then, final question on SpringCastle. Obviously, that's been performing ahead of expectations. Number one is, what do we think in terms of run-off rates at this point in time? Are those going to be stable, or are they going to change? Then second is, what might be the stabilized charge-off rate in this portfolio that we should be expect?

A bunch of good questions.

What I'd say is, we've seen it slow down, the run-off rate of that portfolio. But I think the easiest way to look at that is to just look at sort of where it's been trailing. And we hope it continues to sort of stay in that kind of range. It has been reasonably stable. It has slowed down as defaults have slowed down. So that is a component of the run-off. That's dropped by about 20%.

The other thing, I would say, default rates going forward. We've been pleased that the overall charge-off rates dropped by probably one-third since the portfolio came on and 20% in the last couple quarters. How much lower can it go? That's a great question.

At this point, we're pleased with where it is. I think it would be early to start predicting it's going to get a lot better or a lot worse.

Okay, fair enough. Thank you very much.

Sure.

Vincent Caintic, Macquarie.

Congratulations on the legacy mortgage sale.

I have two questions. The first being on the comments on inorganic growth and I'll -- not talking about specific transactions, but if you could talk about what you'd like to achieve with that. So would that be, like, expanding branches, more capabilities in a certain area, or another product offering? And what sort of returns you would be looking for there.

Thanks, Vincent. That's a really good question.

We're looking at things in a couple of different ways. I'd say, first, we're looking at companies where there might be overlap. There'd be certainly cost synergies. But we'd want the credit portfolios and the way whoever it is that does business to be in a way that is comparable to how we go about our business. That's first and foremost.

There are lots of small consumer finance companies out there. There are very few we would say culturally fit in terms of how we think about the business, how we think about the customer. And that's very important.

So I would say, whether it fit into our footprint or it expanded our footprint, the first and foremost is, how do they go about working with the customer? How do they handle their business? That's a tough thing to ask people to change, how they've been doing their business for years. So we are pretty selective in terms of that.

I'd say other things is we are looking at how do we acquire portfolios, which we've talked about in the past, not unlike that. But we would also look at other means of business that could grow the portfolio with receivables that potentially came in a different way. So if there was something on the merchant side that made sense, that's something we'd explore.

Thus far, I'd say, we haven't seen things that make sense or a good fit. But first and foremost would be things that either overlapped or added to our branch scale. Second would be portfolios. Third would be the addition of other channels that made sense. But as we've said in the past, the things that Springleaf, we think, excels at is touching the customer and knowing the customer. And that tends to be direct lending.

Got it. Makes sense.

Second, for organic and for these auto loan refinancings, could you size the opportunity here? Understanding that you've sort of laid out $1 million in receivables growth per branch, how should we think about that going forward alongside this opportunity? Thanks.

What I'd say is, there are 250 million cars on the road. There are between 80 million and 100 million of them that have loans on them, and a good chunk of those are to non-prime customers. These are loans, unlike mortgages, that tend to amortize pretty quickly. They tend to be four- to six-year loans when they roll off the lot, if that's where they came from. And the customer, because cars have retained value, tends to hold equity.

So the automobile tends to be a place our customers have equity embedded. If it's a more intelligent solution at a more effective rate that works for the customers, it's something that we are optimistic we will be successful in over the coming years as an additional product. If customers come in and whatever the rate is on a personal loan, they want to see something more attractive, we now have a more attractive offering for newer vintage cars.

What does it mean for growth in the branches? Well, we certainly hope it accelerates our plan. We've talked about getting from $3 million to $4 million to $5 million and hopefully a bigger number in time. We certainly hope that this plan will move the needle a little faster on that.

It's hard to put more specifics on it. But I'd say it's an additional offering that is easy to push through our branches and our branch people are excited about helping their customers with.

Got it. The loss adjusted yields are -- I guess, they're roughly in line or slightly lower? Or how should we think about margins on this business?

Sure. For auto, I would say, given that there tends to be collateral and better performance, given the importance of the asset to the borrower, I think we would expect charge-off rates to be materially lower than the average charge-off rate on the portfolio. That could be a couple hundred basis points.

Got it. Thanks very much.

Don Fandetti, Citigroup.

Yes, Jay, I was wondering if you could provide an update on the regulatory landscape. Clearly the CFPB and others have been looking at some areas, such as autos and servicing. Could you just sort of talk a little bit about whether or not you've been contacted by any regulators or what we should expect?

Sure. It's hard to predict the entire regulatory landscape and what anybody should expect because I think that's what makes it interesting. It's a little bit of an unknown.

What I'd say is at this point, the CFPB has not yet written guidance for installment lending. We have had dialogue with them. We've had a very good dialogue with them. At the point that they do write that regulation, we certainly will expect to fall under those guidelines. We continue to have great relationships with the states that we do business in and where we continue to be regulated by.

I'd say, when we set up our auto business -- we're aware there's scrutiny around it -- we were very sensitive that a lot of that involved around indirect auto, the role the dealer plays. And like our branch business, our auto lending will be done direct to the customer with no intermediary.

So I would say at this point, it's been reasonably quiet, if not very quiet, on the regulatory front. We continue to prepare for ourselves living in a more regulated world. I'd say, steady as she goes.

Okay. Then one other follow-up. We've seen some of the credit card issuers -- they seem to be a little more willing to reach down and loosen up on credit.

You've talked about this in the past. But do you think there'll be any negative impact to your personal lending business if the card issuers do start loosening up over time?

The answer is, absolutely. It would be hard to say. I think any alternative means of credit offered to customers is something customers will think about. Given the Card Act, we have seen credit card pricing to our customers be as or more expensive than what we're offering. It's something that doesn't necessarily solve their problems. A minimum payment keeps you in debt for quite a period of time.

I think from everything we've seen, the Card Act and inability to adjust pricing has made issuing credit to this counter-party with anything more than minimal lines of $500 to $1,000, which are just utility lines more than credit, a difficult place. I would say, when we continue to monitor the profiles of applications, loans we've closed, we really haven't seen any difference when we look at bureaus and what's available to our customer base.

Okay. Thank you.

Sanjay Sakhrani, KBW.

Congratulations again on the real estate portfolio sale.

I guess I have two questions. One was, when we think about potential uses of the cash towards paying down debt, could you just talk about how you might go about doing that. I was just looking at that debt maturity schedule. I was wondering where you might consider prepaying, if you would, and what those rates would be across the spectrum as well as the pricing, if you were to repurchase them.

Then secondly, Jay, I think I heard you say that the sale of these loans frees up from a distraction standpoint. I guess I was wondering if auto is an area that you're getting into because of the freed-up distraction? Or are there other opportunities as well? Thank you.

Sanjay, both great questions.

I'd say on the debt side, we've laid out here our upcoming maturities. This is just our unsecured debt. This does not include our other securitization debt, our SpringCastle debt. There are options around those things and we can do to retire some of those things.

I would say, in the past, if you looked at how we've acted in the liability markets, we've both bought debt in the market; we've exchanged debt; we've done a number of different things. It would be premature and probably inappropriate to comment exactly what our strategy is around the liabilities. But I'd say, all those things have been in our tool chest over previous years. We've used them effectively.

Our liabilities, from 2017 and inward, do trade at a pretty decent premium to par. They are non-callable bonds. So we would either have to retire them, tender for them, exchange them. But those are all things that we've thought about and would be potentially be in the wheelhouse.

Some of our asset-backed securitizations, our SpringCastle, all have earlier call dates and things we can do around them. Those are things we've explored. So that's how I think about the liability side.

I'd say auto -- when you say, now that we're freed up -- we haven't yet envisioned all the freedom we probably have before us. But it's something we actually look forward to thinking more about. But auto is something we've been thinking about actually for the last year or two when it was more a matter of finding the right team, the right leadership, to set this up.

I'd say we had a search that probably went on for the better part of a year before we actually identified Bob. And his natural fit of having come through the Norwest Finance organization and risen up to run a big part of Wells' auto business was just a natural fit of putting together the best of our branch network, as well as the things you need to do to centrally underwrite and approve the larger loans in the branches we're used to.

So we're thrilled that we've gotten it launched. It's off to a nice but small start. And Bob has put together a phenomenal team of people around him already.

We certainly are looking at other, and will always look at other, areas where we think we can provide solutions at rates that are good for customers and good for shareholders. I'd just say we continue to look at other products where there's a direct to capital. And we'll keep you posted.

All right, great. Thank you very much.

David Scharf, JMP Securities.

Most questions have been answered; but I did want to follow-up on the auto expansion, Jay. You partially answered my question. It sounds like it's something that's been in the works for awhile. I'm just curious. Any thoughts on the direct market right now, given how frothy the indirect lending market has been lately and the fact that capital still seems to be flowing in so prominently into auto ABS?

Should we be thinking -- should we read anything into the timing of this announcement? That you think there might be a little bit of a slowdown in the indirect side and that capital flows might ease and direct lending might have a little bit of an uptake?

We think of them as actually very different. It's an interesting thing. We look at the direct lending market, and there aren't that many people. When you think about how we provide our solutions, we're one of the few places you can walk in and get a loan the same day.

And there are, again, 80 million to 100 million auto loans outstanding. Once a customer says, I want to refi my loan, well, maybe a bank will do it. Once you fall out of there, maybe it's some credit unions. After that, there are just very few places can you turn to get a direct auto loan.

It's very easy when you buy a car from a dealer. There are ten people the dealer will call and say we're helping you. But when you want to go and refinance your own loan, you don't go back to the dealer. You've got to go find a solution. And we're one of the solutions. You can you drive in, same day, either lower the rate; lower your terms; lower your payment; or take out money.

We have found, as we did through the last cycle, the automobile has been the most stable asset class. So I would say there's really very little correlation. The only correlation you'd say to indirect auto is, there are a lot more loans out there against a lot more cars, which makes the universe of what we can refinance even larger.

But I think in time, what we really care about is the fact that the loans are already on the cars. They've paid down. The customer has equity. And it's just sort of sitting there waiting to either be marketed or refinanced at the appropriate time.

Got it. And I realize I'm kind of pushing the envelope here asking about 2015. But I'm just trying to get a sense for the magnitude of how much you think that auto loan book might build up over the next year. And more importantly, how we should think about maybe consolidated yields next year when we have a full 12 months of it up and running.

I appreciate you saying it's early for 2015. It's early for us, too. What I'd say is, as the next quarter goes on and we see additional insights as to where the portfolio is heading -- how big it can be, what yields look like -- we'll share that with you on the next call.

Got it, fair enough.

A more general question about demand. As we look at the improvement in branch level metrics from Q1 to Q2, how much of that should we think of as just the normal seasonality of the business, the typical buildup, rebuildup after tax refund season? How much of it would you characterize as increased demand and organic application growth?

You're absolutely appropriate to recognize it is a seasonal business. And the first quarter is always our toughest quarter, swimming upstream. But if you look at our second quarter, we're up 20% year over year on originations and outstandings.

Got it. Is there anything -- based on that kind of growth, any changes to your thoughts about branch level staffing? Or do you feel like the amount of bodies in place right now can currently handle this kind of growth going forward for the next year or so?

We think about that a lot. I think we've published our, what we call APEs, or accounts per employee, something we pay a lot of attention to. We're thinking about it; as opposed to adding staff at 850 stores, we've said -- What are the things the staff does that we could eliminate and centralize and get efficiencies out of so we continue to have additional capacity in our stores?

So I'd say with Bob and having a strong background in central operations, examples for argument's sake, would be things like once we take an auto title, historically, each branch has handled its own titling with the local DMVs, etc. It may be more effective to get a handful of people, as opposed to individual persons in every branch doing it. And we're looking at functions like that to give the branches more capacity by centralizing certain of the administrative functions that are in the branches.

Got it. And lastly, any metrics around the percentage of originations that are coming through the iLoan channel now and whether it's moving the needle much?

The answer is, we continue to see increasing applications coming online. It tends to be predominantly around new customers. Most of our present customers wind up having a relationship with the branch. So that's how that channel tends to get, originated or reoriginated. Former customers are coming in somewhat online.

But what I would say is, as the applications grow, it does become a more meaningful part of our new customer origination. I don't think it's yet half of the new customer business, but it does continue to grow every quarter.

Got it. Thanks so much.

That's being closed in the branch.

Yes, when we talk about iLoan --

Just to be clear, sourcing.

As Craig said, yes, iLoan is what we think of as the digital funnel of how the applications come into Springleaf and then get routed out to the local branches.

There's really no change at this point in our orientation towards full origination and closing online. No change in that at this point.

Got it. Thanks very much, Jay.

(Operator instructions)

Henry Coffey, Sterne Agee.

Let me add my congratulations.

When you look at this $3 billion worth of cash that you have now and you're thinking about putting it to work, absent something really big dropping in your lap, what are your priorities? What is the best use of capital?

The best use of capital is continuing to grow our organic receivables. It's what our strategy has been. It's what it'll continue to be. We'll originate a substantial amount of receivables. If something inorganic does not happen, what this will do is it'll mitigate the issuance of new debt going forward.

Then on that side of acquisitions, is your box still defined around the idea that you want a 36% highly-compliant product? Or would you be willing to sort of stretch into the South and look at some of these small loan companies or some of these much short-term lenders?

The answer is, we are very comfortable in the space we're in. We believe the 36% and under market is a very good market. I think everybody knows there are a lot of reasons where that rate comes from.

Our average rate is in the 20%s, not at 36%. But we do set a 36% max on what we will charge any customer. We're very comfortable with that space. I don't think we're culturally set or otherwise to be writing smaller loans in the way those are handled.

Then the last question was, a very successful lender facility, your strategy on a centralized basis down in Texas for a long time. Do you think this product migrates into more of a call center, like you suggested -- centralized processing and then the branch just becomes a closing place? Or how do you see it going long term?

How do we see the interaction between central operations and branch operations?

Yes, particularly the auto product.

At this point for the auto product, the only thing that has been centralized to point is underwriting, where we have set up an operation in Minneapolis where at this point we've hired 30, 40 experienced loan underwriters, auto underwriters. They are reviewing all the loans and coming up with the proposals. As you can imagine, there's infinite imaginations for any single borrower, based on how much equity they have; how much they want to borrow; what's the age of the car. We have set up those programs.

At this point, we see it as the customer comes into the branch, has the relationship with the branch. Minneapolis helps them figure out what's the best loan by way of rate and terms and those things. The branch then works with the customer to sell that program. That receivable will stay in the branch, be serviced by the branch.

Ultimately, if that doesn't work out, do we centralize the backend collections and those things? That's down the road. But at this point, the only thing that's been centralized is the underwriting.

Great. Thank you very much. Congratulations.

Thank you very much, Henry.

Robert Dodd, Raymond James.

Again, congratulations on the mortgage portfolio.

Following up on the iLoan issue with it being now an increase -- as it's been for a while -- of new customer sourcing. Are you seeing any material difference in demographics of a customer that comes in through that channel -- obviously versus a new customer coming to the store and obviously your kind of portfolio average customer? Any delta of really in age or incomes or any other metrics?

I'd say for closed loans, substantially similar. For those that we pull through, if anything -- I think, if I'm not mistaken -- they have marginally higher income. Those that started online.

If you look at the total application pile, we have what we call the credit seekers. So there are lots of people online looking for credit. Most of those we, unfortunately, have to turn away. Again, we'll take probably five million applications this year and write one million loans, give or take rough numbers. And the vast majority of those are of an inferior quality that just don't fit what we're trying to do.

Perfect. Thank you.

Moshe Orenbuch, Credit Suisse.

Have you noted who actually bought the assets?

We have not, and we've been asked by the buyers not to. But what I can say, it's both a combination of hedge funds and financial institutions.

Got it. Just the other thing and maybe coming at question in a different way. Obviously, a wide range between your debt to equity ratio now and what it will be or what it is pro forma for the deal. Any sense as to where you want that?

A very good question.

We have had extensive conversations with rating agencies. We've said one of our priorities is to be rated higher than we have been in the past. We've talked to them about appropriate targets. I'd say we've gotten to a much better place than we had been.

Targets, I think targets depend on -- we'd like to be a BB or BBB Company. Probably getting to BBB in the near term is not something that is going to happen in the very near term. But I think the levels we're at today are appropriate for where we'd like to get to.

Okay. Thank you.

Thank you.

That does conclude the Q&A session for today. I will now turn the floor back over to Craig Streem for any additional or closing remarks.

Thanks, Maria.

Thanks to all of you for your attention this morning, your interest. We're always available for any follow-up. So have a good day. Thanks.

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