OneMain Holdings Inc (OMF) 2014 Q4 法說會逐字稿

Welcome to the Springleaf Holdings fourth-quarter and full-year 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, Jackie. Morning, everyone. Thanks for joining us.

Let me begin as always with slide 2 of the presentation, which you can find in the investor relations section of our website and which we will be referencing during the call this morning. Our discussion contains certain forward-looking statements about the Company's future financial performance and business prospects, and 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 fourth quarter of 2014 earnings presentation posted on the IR page of our website. We encourage you, of course, to refer to these documents for additional information regarding the risks associated with forward-looking statements.

In the fourth-quarter 2014 earnings material, we've provided information that compares and reconciles our non-GAAP financial measures with the GAAP financial information, and we also, of course, explained why these presentations are useful to management and to investors. We urge you to review that information in conjunction with today's discussion.

For those of you who may listen to the replay down the road, we remind you that the remarks made herein are as of today, March 12, and have not been updated subsequent to this initial earnings call.

With me this morning with formal remarks are Jay Levine, our President and CEO, and Macrina Kgil, our Chief Financial Officer, and, of course, we will have plenty of time for a Q&A session following our formal remarks. Now it's my pleasure to turn the call over to Jay.

Thanks, Craig, and good morning, everybody. Let me apologize in advance and welcome everybody to the sick ward in Evansville. A number of us are in recovery mode of what's been, as you guys all know, a hectic while and have been under the weather with the weather changes everywhere.

It is hard to believe it has only been six days since our last call, and while I guess you all might have a few more questions on our OneMain acquisition, today's brief call is really meant as a review of our strong fourth quarter.

Turning now to slide 3 in the deck, we're really pleased to report another quarter with very solid trends in all the fundamentals of our business. Our core earnings of $65 million were up 34% year over year, with core earnings of $0.57 per share.

The key drivers of these results were, first, continued growth in our branch receivables. This was the fifth consecutive quarter of year-over-year portfolio growth above 20%. Our gross yield remained strong in spite of the growth from our direct auto loan product, which carries lower yields than our basic installment loan. Our credit performance remains very solid, with charge-offs coming in as expected for the quarter, and, to finish up on slide 3, I want to point out that about $3.25 billion of the cash and investments on hand, which were largely generated from our sale of $8 billion of mortgages this past year, will go toward funding our OneMain acquisition.

Turning now to slide 4, we continue to emphasize driving receivables growth per branch because of the tremendous operating leverage this provides. Let me give you some key stats. At the end of 2012, 60% of our branches managed under $3 million of personal loan receivables. Today, that number has declined to fewer than 10% of our 830 branches.

Also in 2012, we had average receivables per branch of about $2.5 million, and by year-end 2014, that had grown to about $4.6 million, or nearly doubled.

Let me tell you what impact this has had. In 2012, we earned $90,000 pretax per branch. For 2014, we nearly tripled this number, earning $267,000 per branch, so while we have almost doubled receivables per store, we have nearly tripled earnings per store.

This growth in receivables results from a number of factors. First, a fundamental increase in customer demand for responsible loan products. Second, our digital operations continue to drive increased applications and volume, with nearly 45% of new customers now sourced online. Third, we exited mortgage origination and moved all mortgage servicing of our real estate out of the branches. And lastly, we have continued to centralize a number of functions that used to be done in the branches.

Finally, let me highlight the growth we have seen from our direct auto product and the potential it brings our core business. With $160 million of origination volume in the quarter, or 15% of total originations of the quarter, auto is becoming a meaningful contributor to our growth, especially when you consider this only rolled out in June of last year and on a limited basis to various divisions at a time. Most importantly, we remain extremely optimistic about our growth prospects for 2015.

Now turning to slide 5, let's take a quick look at trends in gross yield, charge-offs, and our risk-adjusted yield. Gross yield in the branch portfolio remained stable quarter to quarter at 27%. Our gross yield was up marginally year over year. Charge-offs were up a touch for the third quarter, reflecting typical seasonal trends, as well as the growth in new customer volume and are well within expected range.

Net net, our risk-adjusted yield came in at 22% for the quarter, down 35 basis points from the third quarter due to the change in charge-offs I just mentioned.

As we turn to slide 6, I'm going to ask Macrina to pick up from here.

Thank you, Jay. Turning now to slide 6, I will discuss our financial results for the fourth quarter.

Our core business generated pretax earnings of $103 million, which represents a 34% increase from the fourth-quarter 2013. Our consumer and insurance segment earned $64 million pretax in the quarter, significantly ahead of last year's quarter.

The primary driver of our sequential-quarter improvement continues to be the growth in receivables.

Our acquisitions and servicing segment, also known as SpringCastle, continues to be a strong contributor to pretax earnings, generating $39 million in the fourth quarter versus $36 million in the same quarter 2013.

Moving on to our non-core portfolio, which is laid out on pages 18 and 19, we completed our final sale of an additional $360 million of mortgages.

In total, we sold nearly $8 billion of receivables this year, generating a total pretax gain of $720 million. The proceeds from these sales, as well as the transactions announced earlier this year, are being carried in the real estate segment, which generated a negative net interest margin this quarter.

As a result of our reduced real estate exposure, which is now happily under $1 billion at year-end, we began reallocating certain corporate expenses from our non-core portfolio to our core consumer operations. The impact of this in the fourth quarter was roughly $7 million.

This quarter's operating expense in the core consumer segment would be a pretty good indication of the run rate for 2015.

Lastly, I want to touch on an important financing transaction, which was completed during the quarter. In November, we issued $700 million of new unsecured debt, which had been upsized from $500 million. The proceeds from the high-yield issue were used to repurchase and exchange a portion of our outstanding 2017 notes.

Now turning to slide 7, I would like to discuss our 2015 guidance for the key drivers of our core consumer segment. Please note our guidance does not include the impact of our recent announcement of the acquisition of OneMain Financial.

First, we are targeting net receivables at year-end 2015 of $4.50 billion to $4.75 billion, an increase of approximately 20% to 25% over the 2014 level. We expect that a key contributor to this growth will be a full year of auto originations.

We expect our portfolio yield to decrease marginally to 26% to 26.5%, in large part due to lower yields on the auto product. As we said before, while yields on the auto product are lower, we expect this to be more than offset by larger loan amounts and lower charge-offs.

We are targeting a risk-adjusted yield, which is yield less net charge-offs, of 20.5% to 21.5%. This is consistent with the slight decrease in portfolio yield, a range of 5% to 5.5% net charge-offs.

Finally, we are projecting pretax income for the acquisitions and servicing segment in the range of $100 million to $120 million.

Now I will turn it back over to the operator to begin the Q&A.

(Operator Instructions). Sanjay Sakhrani, KBW.

Good morning and good results. I guess question on leverage. I don't know if we have anything from OneMain, but I was just wondering now that we have this quarter's numbers from you guys, could you just talk about what pro forma leverage might look like and what the expectation is going forward to run it?

Good morning, Sanjay. I would say there is a couple of parts to that question. Certainly, you could say how we are looking at things over the next couple months or the next couple quarters as we move towards the acquisition, I would say you'll see very low leverage because we are carrying a fair amount of cash.

If the question is what is it going to look like post closing, I think I said about a week ago that's something we continue to work towards. We have had conversations with the rating agencies. We continue to chat with our Board, and I'd say as we get closer to closing the transaction, I think we will lay out what we expect those numbers to look, and I would say probably the most important thing that we are looking towards is the combination of things. As we look at what the pro forma will look like, you've got both tangibles and intangibles that will come. You've got both debt -- unsecured debt and secured debt, and then you've got the earnings potential, and I think all those things will be put in the mix as we look through what is the appropriate leverage.

Would we have a specific number if we were to combine the two entities as of the fourth quarter, or not really?

You have a -- if we look (multiple speakers)

Do we have -- do you guys have the number if you were to combine the two entities together as of the fourth quarter?

No, we don't because their fourth-quarter numbers are not public.

Okay. All right, great.

One follow-up question, just on auto. Obviously, you guys are having lots of success there. Could you just talk about what's driving that success and how you anticipate it to grow going forward? I know the growth is expected to be strong, where it's going to come from? Thank you.

Sure. The growth is really coming from straight organic originations out of the branches. I would say we have only really started to use this as giving customers choice.

So customers come in and they generally come in looking for an installment loan, which is in general how they have thought about us for the last 100 years, and when we do come up with various options of how to look at their overall balance sheet, which is really what we are trying to do -- we're not trying to help with one problem; we're trying to help them how do you get your balance sheet to a better place. How do you get out of debt? How do you take the responsible known product, the installment loan, and use that against your total liabilities?

We are now coming and saying instead of just an installment loan of a few thousand dollars, here is other choices. Take your auto, pay off your existing auto loan, consolidate additional amounts of debt.

So it's really by giving the customer additional choices, and it is certainly one that we are highly optimistic that will be really in play with the OneMain customer base as well.

What I would say -- the other thing I would add is we really haven't begun specific marketing of it, so at this point, it is really happening by accident. When customers come into a branch, we're saying here is a couple of different ways of thinking about it, and we do intend this year to be more aggressive about marketing it as a product.

I guess what would that do to the run rate of growth on a quarterly basis? Obviously, it should accelerate, then.

Correct and that's built into the numbers.

Got it, great. Thank you.

Henry Coffey, Sterne, Agee.

Good morning, everyone, and thanks for taking my quarter -- my questions. It is very apparent to everyone that you must have terrific tailwinds going on in the installment business. When you break your book down, where are the improvements in charge-offs coming and what does the new customer look like going forward in terms of [expected] losses?

As you would expect, there is all kinds of segments within the portfolio in terms of where the charge-offs come from and we spend a lot of time looking at them.

I think I have highlighted in the past the existing customer, where we have known them and he has performed for a while, we're not going to renew a customer and keep him on the books if he is not one paying well. So by definition, over time that becomes a better credit.

The newer customer we haven't had the experience with, and while we do our best to underwrite it in general is a customer that we do see higher losses on. The differentials have remained about the same, and I don't think we continue to expect anything dramatically different.

I will say the auto will be a better credit. We expect it to be a better credit. In general what we have seen within our book, we have had -- more or less, 40% or 50% has been hard secured. It has tended to be older automobiles that probably average 10 years old that have what I would say less collateral value, but even there if you compare our unsecured and soft secured to our hard secured, there is a couple hundred basis-point differential, and we have talked about that with asset-backed investors for some time, and we expect the new auto to mirror or even be better than what we have seen in our own auto with the older vehicles.

Then I have two other (multiple speakers)

I hope that answers your question.

Two other questions, so I will go to the one that's not so much fun. In terms of analyzing the combined OneMain/Springleaf business, we obviously only have the September OneMain data to begin with. There was that $1.5 billion dividend that they took out in November. Is there any chance that they would reverse that? Then I had one other question.

Not to my knowledge. To my understanding, the balance sheet we bought with $1.9 billion of capital is more or less the one that is supposed to be delivered.

Then in terms of allocating intangibles, I know it's probably pretty early, but either in a very generic general way or very specific, how much of the premium gets allocated to intangibles and goodwill and how much should get allocated on to the loan balances, and then how are we going to separate out core from not core and tangible equity?

It's the whole equation that everyone is asking about, so even if it's just the general number, can you give us a feeling for how much of that premium is going to get allocated to intangibles and goodwill and how much to loan balances and other items?

Well, Henry, we're still working through the allocation of what the numbers would look like, but for the loan premium, I would point you to OneMain's S-1. They have a footnote that talks about the fair value of the receivables, which I believe is about $1 billion over their carrying value after allowance, so I would think of it as looking at the loans there.

There is also going to be other receivables and debt as well that we have to look at for fair value, and then we will see the fallout coming through intangibles and goodwill.

Probably in simple terms, better than most of us initially thought.

Based on that $1 billion at this point?

Yes, yes, exactly. It is not as rough as just putting the two balance sheets together and putting all the premium against equity.

Great, thank you.

Vincent Caintic, Macquarie.

I am going to ask another one on the capital structure, but it will be more philosophical. When you think about the kind of leverage you can run, are there any kinds of limitations on that? I know you had a guidance for 3.5 to 4 times debt to equity before, but is there anything that actually prohibits you from running a higher leverage?

As a corollary to that, how important are the rating agency ratings? And then, what do they look at? Is it a total equity number or tangible equity? Thanks.

Those are a couple great questions. I would say on the Springleaf side, there are no restrictions in terms of the leverage. The restrictions are really what is prudent, and that is something we spend a lot of time talking about with the Board, and I think you guys know who our Board is and they are a bunch of people who have significant experience both around financial services, balance sheet, and those things, and these are all conversations we spend a fair amount of time around.

The rating agencies, look, we think our ratings are important, but much more important than our ratings are access to capital and access to the markets. We have borrowed over the last several years through all kinds of markets, through all kinds of ratings, and we do pay attention to them, but most importantly is do we manage the adequate -- the Company with adequate liquidity and runway to be able to do the things we need to do.

Got it, thanks. Then one other operational question on the auto loans, it sounds like there is a lot of opportunity here. Just actually trying to get a sense of how the sale typically works, and I think you touched on it. Somebody walks into the branch and then asks for a product.

Is it -- I guess taking a step back, do you have a preference for one loan or the other? Is it typically that the person tries to get an unsecured loan, and if that doesn't work, you work on the secured side. Just trying to get a sense of how the sale execution actually goes through? Thanks.

Sure, look, our greatest desire is to make our customers happy, so it's giving them choices. Really, whatever makes and fits the customer best is the one that's best for us, and that's really what we do believe.

We have always believed in choices. We have offered both secured and unsecured in the past. This is a little bit different because the underwriting on these loans, given their size, is done by experts with auto underwriting experience, a set of people up in Minneapolis where we have about 100 experts in auto underwriting. So when a customer does walk in, unlike a normal loan that a branch will approve, assuming it's within its limits, these are loans that will be shipped up to Minneapolis, looked at very quickly, turned back, and the customer will be given options.

But I would say what's really important is that the customer has choices and the customer makes the choice of what's best for them.

Great. Thanks very much, guys. Appreciate it.

Don Fandetti, Citigroup.

Macrina, it looks like the SpringCastle equity went negative. Is that just reflecting a fair value mark on the new ABS deal? Is that the dynamic that drove that?

The dynamic is really coming from the initial mark that we had on the assets and the debt, and then as part of the refinancing, we had a good distribution to the equity investors related to the transaction, so that's what you are seeing within the financial statements.

Okay. I guess, Jay, on the credit front, I was wondering if you could talk a little bit about what you're seeing, and also where we are in the cycle of credit extension in personal lending. It just seems like every time I turn around there is another company that is providing some type of credit. Have we swung to the other level of the spectrum here where there was very little credit being provided and now you might have a risk of pushing the envelope?

Look, we see what you see. There are -- it's not hard to start an online shop. You don't even need a lease; all you need is a name and a domain name and you are in business.

What I would say is this is a customer set that we think takes really a personal touch, does take underwriting, and we have generally seen the bigger of the online players cut off in the mid-600s, which is more or less where we go up to in terms of the bulk of our customer base.

So I don't think you have seen a ton of people coming down to the -- in general where we are lending. But I agree with you. Credit has gotten easier. The customer base is definitely in better shape. You are seeing disposable income. You are seeing greater flexibility in budgets, and all those things have helped.

Where do you see it going? You continue to hope and remain optimistic that the economy remains good, that employment remains good, but we underwrite as if we're going to have to continue to go through cycles as we have in the past.

Thanks.

Terry Ma, Barclays.

Can you maybe just give us a sense of how much of the auto loan product is embedded in your guidance for this year, and also how you expect that to evolve post the OneMain acquisition, and whether or not you're going to roll that out at OneMain as well?

I will take a shot at it and Macrina can add as well. The goal is we can't wait for OneMain to settle, still got some work to do, so it's a little early to talk about which products we will be able to roll out.

But the goal will be -- and I think I laid this out originally, we will be running them as two separate brands, at least for the first year, so there is definitely some technology and other work to be done. Whether or not we can get products in there as soon as we would like, we will figure out in the coming months.

As it relates to what percentage of our overall volume, I think you saw the fourth-quarter number was 15%, and I am not sure that it is probably as good an indication as one might see for the year.

I got it. That's helpful. Just want to get some color on your outlook for credit. It looks like you guys increased the high end of your implied NCO range this quarter in guidance. Can you just talk about that?

Sure. As I have said over the last year or so, the new customers do pose additional credit risk that the existing customers haven't in the past, and as we look to grow the new book, that is in general where the challenges will come from. So I would say we have added that. As we think about growth, that is where I would say the change in the number we expect this to be.

Okay, got it. Thank you.

John Hecht, Jefferies.

Thanks for taking my questions. Real quick, one on the quarter, in the core earnings, there is an other income item of negative $8 million. I'm wondering, is that a one-time or is there an offset to that number?

John, are you looking at the appendix section?

Yes.

It is a one-time. I am assuming you're looking at page 16 for the consumer and insurance?

It is actually page 15, the core earnings non-GAAP, the other income of negative $7.983 million.

That's correct. We have some of the one-times related to the SpringCastle refinancing and some of the debt repurchase as well.

Okay, and there is not another -- there is not an offset to that, to be -- I guess to be clear about my question?

Can you repeat the question (multiple speakers)

What do you mean by an offset?

I guess the high-level question is if you are including a one-time item in your core earnings, are your core earnings actually higher than the bottom line you reported this morning?

Okay, if that's a one-timer, you can recover it any way you want. But we don't expect to refinance SpringCastle every quarter.

Okay, fair enough. Okay, second question, gross yields, they have been very stable and you are forecasting your guidance as more stability, although there is some fluctuation. Is the fluctuation related to mix shift or is there other market conditions we should consider there?

I would say it's strictly mix with auto. We haven't -- our pricing has been generally pretty consistent over the last year or so.

In states, there hasn't been a lot of change, as much as there was a year ago where North Carolina and a few other states made a number of changes to their rate caps, so this is largely coming from really the mix of auto, and I think if you look at the numbers, you'll see auto is in general several hundred basis points lower on rate. Clearly something that, between scale and lower charge-offs, that we think actually ultimately is a higher net present value [in loan] to the Company.

Okay, great. Then one question on OneMain. I know it's early on, but as you look deeper into the organization, are you guys finding either human resources or technological or operational capabilities that you may be able to port over that you think may be additive to the combined organization?

Look, I would say what we have seen was what we saw during diligence. At this point, we are both doing what we need to do to run our respective businesses while the transaction migrates through the normal course.

But we are thrilled and excited by everything we saw in diligence. We wouldn't still be here today if we weren't excited about the people, the talent, the potential for adding on growth and products, as well as the technology they had invested in, as well as the compliance infrastructure and other things, having been inside Citi for as long as they were.

Okay, great. Thanks very much.

J.R. Bizzell, Stephens Inc.

Thanks, guys, for taking my questions and congrats on another great quarter. Jay, more specifically digging in on this auto loan discussion, could you give us an idea of what your customer demographic looks like right now? What kind of customer you're dealing with now?

Then as we roll out this marketing -- pointed marketing for auto in 2015, do you expect that customer demographic, and I guess, more specifically, that rate and customer in general, to stay the same? Are you going to go up FICO or down FICO? Just give us an idea of how you are thinking about that marketing program.

Sure. The customer today, and I think we laid out a little bit of it on the slide, but in general it's a marginally higher credit customer with marginally more income, and why do I say that?

One, we know the numbers, but, two, they have newer cars. So if you think about who has got the newer cars -- here is an amazing stat that I'm always blown away by. Couple hundred million cars on the road -- it's actually 250 million cars on the road -- the average car is 11 years old on the road today. 11 years old is the average car. So you only -- 250 million cars, you only produce 16 million, 17 million new ones, so those that tend to have the newer cars tend to be those with bigger incomes that can afford the bigger payment, so by definition it's probably a customer with marginally more disposable income.

The FICO is about 10 points higher, from what I recall, compared to the rest of the book, which is why, and I think we've talked about this, the OneMain customer has about a 30-point higher FICO on average compared to our customer, so we expect there to be a newer vintage of vehicles and we expect this product to fit a lot better.

There is a fair amount of targeting that goes into auto marketing. I would say the really interesting thing about the product is there aren't a lot of people, banks and otherwise, who on a same-day basis can close a $10,000 to $20,000 auto loan out of the branch. I think that's one of the things that really differentiates us.

Just asking about that marketing, is that -- has that already begun in 2015 or is that something that will start in the second quarter and moving out?

I think we are still in the learning phases on our marketing. It is just beginning and it's something that we will be rolling out really in the second half of the year.

Got you. Then switching gears, given your commentary around the online strength that you saw -- I think you said 45%-plus of customers sourced online, then I know on the M&A call we had six days ago, you spoke to another product that you are excited about, could you just give us an update on your online product and how you view it this year, and then maybe over the next three years where you see that headed?

Sure, trust me. We have spent a lot of time talking and thinking about all the things going on online, as some of the earlier questions were about.

Today, we use springleaf.com. We continue to upgrade our websites. We continue to do everything we can to make it as user-friendly an experience for everyone that starts their loan today.

99% of our loans, when a customer does start online, will ultimately wind up getting closed in the branch and wind up being a receivable service to out of our branches and managed by our outstanding branch staff. The other 1% is actually where we don't today have brick and mortar, so we are in 26 states. There is a number of states where there are qualified customers, and many were even former customers where we had branches, and we try and service those, but it's a very small portfolio.

As we look forward, and I think brand is yet to be identified and a couple other things, we are looking at taking all the experience and learning and analytics and data that we have gathered over the years, which is honestly the hardest part about lending is knowing, when you look at patterns, who are the right customers to market to, to close to, and actually building an independent online channel, probably initially starting for a higher credit grade customer then we are lending of the branches, but ultimately, hopefully, being able to provide credit to a broader swath of customers.

We have world-class servicing in London, Kentucky, and other facilities and I think you have seen the results there in the SpringCastle.

So between putting together, I think, our great servicing facility, our phenomenal analytics, we think we're in a great place to launch an independent online channel that will ultimately start small, but could become an important and meaningful part of our business.

Great, and just to clarify, that would be something that you would use that e-signature product and that customer wouldn't necessarily come in the store. Am I thinking about that correctly?

Correct. It would be -- look, at this point, what's important? Giving customers choices. We are giving them choices on products and we want to give them choices about how they close, assuming they meet the appropriate criteria.

Excellent. Thanks for taking my questions.

Sure, thanks for asking.

[Paolo Vibero], BMO.

Macrina, I just wanted to get a little more color on the impact to noncontrolling interest that was asked earlier. Where should we see it going from here, and if I understand correctly, you said it was mostly due to distribution to the partners and not so much from the impact of the securitization that caused this drop. Is that correct? Again, what should we see it going, and if it was from distribution, where do we see it in your numbers, your portion of it? Thank you.

Sure. Lot of questions in one. I will start with the noncontrolling interest and the trend that we are expecting. As the earnings grow in SpringCastle, which that's what you have been seeing in the last couple of quarters, the noncontrolling interest negative number would be growing closer to zero, so you'll see that trend as the quarters progress.

In terms of the distribution, since SpringCastle is a consolidation within Springleaf, I don't think you would see that anywhere, unless you look at the statement of equity in the financial statements, which you will see that in the fourth quarter and you'll see it when we file our 10-K.

Okay, perfect. Another question is you mentioned that about $7 million of expenses that were in the non-core real estate were reallocated to the core portion. Is that operating expenses, right?

That's correct. That's corporate overhead expenses.

Then you have still left, if I am not mistaken, about $15 million, and that we should see being redistributed soon? I guess in the merger call, you guys mentioned also that interest expense will be reallocated, and is the same happening with the overhead in the coming quarters?

In this quarter for the non-core portfolio, you'll also see some debt losses and debt repurchase losses and some transaction costs coming through the operating expense, so it's higher than expected for real estate, as well. With the coming quarters, we expect that trend to go down and to continue to see reallocation of corporate overhead.

Okay, perfect. Just sneaking one quick one. You talked so much about auto and OneMain. I just wanted some color on the different trends that we have at OneMain. If I'm not mistaken, the auto portfolio declining and you growing, what is happening there? It is not a focus for them or they had some problems, to the extent you can talk about it? I would imagine you would reverse that trend, given your strategy.

At this point, while Jay shared our optimism about the opportunity to roll out products through the OneMain network, we really can't speak at all to what's going on in their business today.

Okay, fair enough. Thank you. You all get better and, say, get some rest.

Robert Dodd, Raymond James.

Sticking to auto for right now, can you give us any color on what proportion -- and obviously, it's very early days, but what proportion of these customers are new to Springleaf versus existing customers, who, I guess, come in and renew with a larger loan? Is there a dynamic -- obviously on the website, if you click on loans, you can see auto is available. Is there a difference between auto versus installment in terms of the digital success in that 45%?

I guess a couple of parts to it. I would say our mix of new auto origination, which are the bigger loans, on the newer vintage, is coming from a combination of new customers and former customers.

It's also coming from some of our existing customers, but what's interesting, even within our existing customers, many of them were previously unsecured customers. So we are actually winding up in a better place with a bigger loan with collateral, et cetera. So, as a matter of fact, that's the vast majority of it.

We spend a lot of time looking at of the money we lent, how much is actually new money, and it's the vast majority of all the dollars we are putting out.

The second half of the question, now you got to remind me what it was. I think it was two parts.

In terms of the online, I think (multiple speakers)

Oh, the online, right. Look, I think the online is really getting the customer into the branch with the personal loan. Then we are having some upside in terms of giving them choices. I think, just like we spoke about, we're going to be more aggressive in marketing auto as a specific product. We're going to do the exact same digitally.

Got it, okay. On the credit side, obviously, you predict a pretty stable blended credit in terms of roughly 500 basis points delta between gross and risk-adjusted yield. Obviously, you have already talked about the dynamics that new customers tend to be higher, auto is lower, et cetera. How much of that stability is a function of mix versus -- and maybe the new auto versus do you -- I guess, like for like, do you see credit being stable or deteriorating slightly into 2015?

I would say like for like, in general, it is stable.

Perfect, thank you.

Ken Bruce, Bank of America Merrill Lynch.

Just to belabor the auto discussion, I just want to make sure that we are thinking about this properly. It sounds like just the way that you have described it, really it tends to be a debt consolidation product. Somebody comes in looking for an unsecured loan. You are able to wrap a bunch of things into effectively an auto loan, and you take a little bit lower yield, you get a little bit better credit at the end of the day, but the real benefit is you get a much bigger balance out of that transaction. Is that right?

You nailed it.

Okay, perfect. Then I guess the discussion around the capital structure, I understand that you guys have to be careful about what you say because there's still decisions to be made and the like. But the way that we have looked at it, you have got the potential to write up the assets $1 billion per city. Looking at the way that you should be able to accrete earnings over the next couple of quarters and continue to accrete capital, that maybe there is $1 billion or so that needed to be right-sized the equity base to get you back to your targeted capital levels. You got a strong market backdrop.

What would prevent you from wanting to do an equity deal at this point? And then, separately, is there anything from just a technical process standpoint that has to occur before you would do that?

Talking about not letting go today. Look, I would say it is certainly -- the most important thing is the Board and management coming to a position of what we think makes the most sense. There is clearly a number of other things that go into it, and filings and other things that -- financials have to be put together.

Nothing prevents us, but I would say the most important thing is trying to figure out what does make the most sense for the long-term balance sheet and stability of the Company.

Great, thank you.

(Operator Instructions). Henry Coffey, Sterne, Agee.

Not to let go, when we analyze your balance sheet, the core installment loan business is obviously growing. Of course, then the next question is the SpringCastle portfolio is shrinking. It's a high-return, quote, low-value business from that point of view. Is there anything that would prevent you from selling that interest off, thereby shrinking your assets and potentially boosting equity?

No, nothing would. We haven't thought about it. I would say the servicing and all the things that have come with it, we have been able to renew a number of the customers in there. There is 275,000 relationships. Those relationships are important to us over time.

So not something we have thought about because of how well it has worked out financially and I think what a good job we have done on these customers, but there is nothing that prevents us.

But you could keep the servicing, keep the customers, shed the assets, not a crazy thought. Thank you.

No, interesting.

Daniel DeYoung, Columbia Management.

Thanks for taking the question. Most of them have been answered. Just -- I think I asked this question a few quarters ago, Jay, but are you seeing any competition or increased promotional activity from any of the peer-to-peer lending sites, which have seemed to grow pretty rapidly, and are they targeting any of your core customers, in your opinion?

It's a hard one to answer. The answer is absolutely. They are out there and they are growing. You look at the volumes for any of the peer to peer that have made public for the fourth quarter and they are growing, so you can't look the other way on that.

But in some ways, they are like the invisible competitor. You don't really see them on the corner, so it's a little bit harder, as we like to say, but we're not really seeing any faster payoffs in our existing loans. We are not seeing drops in pullthroughs on customers that come in.

But we know they are out there. It's something we are paying attention to and it's exactly why we are going to start up our own channel.

Okay, and then just back to the digital, I guess, move. Previously, you guys have been pretty straightforward about bringing in most of the customers to the branch as part of the balance-sheet structuring process for the customer. I guess when you switch to an online channels, whereby originating and issuing loans to people that have not come into the branch, I guess what kind of things do you think about in terms of additional risks that might bring to the Company? And are you also trying to sell these specific customers any insurance products that the CFPB might look at differently than those customers that are coming to the bank -- or the branch, sorry?

I would say we're still in the early stages of sorting out exactly how it is all going to work in terms of the products we're going to offer, how the whole channel is going to work. I think the online players today are largely working through other financial intermediaries, some of the other banks, the web banks, and the others, and generally aren't offering the other products. I think we're still, as I said, sorting through exactly what the customer experience will be.

The things we think a lot about are the whole fraud channel. Again, the branches have been great at eliminating fraud. That is one thing. When you come in, you have to bring identity and income. When we know who you are and you live in the communities, huge differential.

I will also say if you look at similar stratas of some of the peer-to-peer companies who publish their loss results by FICO and other channels, I think we would say our numbers are significantly better because we do go through that experience with the branch, but that's one of the things we're going to be spending a fair amount of time on. The fact that we have the years of data and analytics and experience we think will go a long way.

But I would say early days in terms of the exact product offering. Fraud is the thing we think about the most, and the other benefit of the branches that we are going to try and figure out how to get the best of both is maintaining that customer relationship. It's the renewal, the fact that customer stays with us a lot longer and we maintain that relationship, and it's not just an anonymous third-party lender. That's something that we're going to work to try and get the best of, and we think our London, Kentucky, facility will be very good at that.

Just one more, if I could squeeze it in. As you look to close the acquisition of OneMain, obviously you got a lot of things on your plate. But just looking at your capital structure, you still do have a lot of legacy high-cost debt. Just wondering your thoughts about capital allocation there and if you think you can get any improvements to earnings through liability management.

I would say we are always looking at our liabilities. We have continued to be successful. I think we were a few weeks ago with a new asset-backed securitization, where I think we got north of $1 billion raised in the low 3s, but we are going to be very cognizant of our mix of secured and unsecured. Most of our debt has noncall features, but a good chunk of it will be rolling off over the next couple years, and in general, assuming rates stay where they are, I think we expect to replace it with lower-cost debt.

Thanks.

We have no further questions at this time. I would like to turn the floor back over to Craig Streem for any additional or closing remarks.

Sure, Jackie, thank you. Thank you all for your attention, lots of good questions, and we will endeavor to stay available to you day by day. Thanks and have a good day.

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