OneMain Holdings Inc (OMF) 2015 Q3 法說會逐字稿

Welcome to the Springleaf Holdings third-quarter 2015 earnings conference call and webcast. Hosting the call today from Springleaf is Craig Streem, Senior Vice President, Investor Relations.

Today's conference is being recorded.

(Operator Instructions)

It is now my pleasure to turn the floor over to Craig Streem. You may begin.

Thank you, Kristen. Good afternoon, everyone. Thank you for joining us.

Let me begin, as always, with slides 2 and 3 of the presentation. You can find the presentation in the IR section of our website and we will be referencing that from time to time during the call.

Our discussion contains forward-looking statements about the Company's future financial performance and business prospects and these 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 March 16, 2015, as well as in the third-quarter 2015 earnings presentation posted on the IR page of our website. We do encourage you, of course, to refer to these documents for additional information regarding the risks associated with forward-looking statements.

In the third-quarter 2015 earnings material, we've given you information that compares and reconciles our non-GAAP financial measures with the GAAP financial information. We also explain why these presentations are useful to Management and investors and we would urge you to review that information in conjunction with today's discussion. And if some of you listen to the replay down the road later on after today, I want to remind you that the remarks that we make are as of today, November 9, and have not updated subsequent to this initial earnings call.

I also want to take a quick moment now to introduce a new member of our Executive team at Springleaf, Scott Parker, who joined us last week as Executive Vice President and Chief Financial Officer of Springleaf Holdings. With just one week of experience, we are going to give Scott a pass for today's call. Our call this afternoon will include formal remarks from Jay Levine, our President and CEO, and Macrina Kgil. As Kristen, said after the conclusion of our formal remarks, we'll have plenty of time for Q&A.

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

Thanks, Craig, and thank you to everybody for joining us today.

Before we get into our update on the quarter, I also want to welcome Scott Parker, who joined us last week as CFO of Springleaf Holdings. Some of you may know Scott from his years at CIP but you will definitely get to know him in the days and months ahead and I am sure you will enjoy working with them. Macrina Kgil will remain CFO of Springleaf Financial, our operating company, and will continue to be a key member of our Management, working with Scott, myself and the rest of the team.

Let's start off on slide 4 and get into our update. I'm sure you read in our earnings press release that we have been in discussions with the DOJ and the state regarding antitrust clearance our acquisition of OneMain and that we have moved $608 million in receivables into our held-for-sale account. I know that you would all like to know more about the status of the review, but at this point, we are not able to share anything additional. We are optimistic that we will be able to close the transaction this quarter and when we received clearance to close, we will be back to you with the complete information about this transformational combination.

Let's get into Springleaf's third-quarter results. First, I am pleased to report a solid quarter of growth in core earnings, highlighted by the 22% growth in pretax income for our consumer and insurance segment. Core earnings this quarter reflect a combination of strong growth in our branch business, offset somewhat by the expected decline in earnings from the SpringCastle portfolio. In addition, recognizing the great opportunity we have to continue to drive receivables growth and reduce credit costs, we had added additional staff in our central servicing operations in London, Kentucky, and Tempe, Arizona, which added a bit to our operating expenses. We also built out a number of staff functions in anticipation of the closing of the OneMain acquisition.

Growth in the branch business was outstanding again this quarter, with receivables up 30% year over year. The key driver of our performance this quarter are essentially the same as what you've seen from us on a consistent basis: first, continued growth in receivables per branch, second, maintaining effective credit risk management and third, generating strong risk-adjusted yields. I am really proud of our track record on branch receivable growth.

This was the eighth consecutive quarter of year-over-year growth above 20%. We are now on an average of $5.7 million per branch, 33% above the year-ago level. This demonstrates once again the importance and value of our locally based, relationship-driven business model combined with analytics-driven marketing. The significant improvement in charge-offs this quarter contributed to our strong risk-adjusted margins. We are very pleased with how are yield has held up given the growing impact of the lower rates for our successful direct-to-consumer auto loan product.

Let's now turn to slide 5 and talk more specifically about growth. I already mentioned growth and receivables per branch, but I also want to highlight growth in origination volume, which was up 26% year over year to $1.2 billion in the quarter. We closed 220,000 loans in the third quarter, 14% above last year's level, so you can see that our volume growth reflects both new accounts, as well as specifically targeted larger loan amounts, both important aspects of our growth objectives and plans. Our continued sharp growth in originations in receivables result from strong customer demand, our highly effective marketing, as well as our ongoing success with direct auto lending.

On the marketing side, we've introduced a new generation of scoring models and an improved algorithm for targeting pre-qualified offers, and the initial returns look very encouraging, as you can see in our growth numbers. Additionally, we took advantage of opportunities to ramp up our investment in internet marketing, which is paying off nicely. Auto originations reached a new high of $280 million in what is typically a flat to down quarter due to seasonality. We continue to expect direct auto origination to run at about 25% of total originations. As I've noted in the past, even with the lower yields our direct auto loan product is more profitable than our other loan products, has better credit performance and, for many customers, is a better loan alternative.

Turning now to slide 6, let's take a look at her trends in our risk-adjusted yields. Gross yield in the brand portfolio declined 53 basis points in the second quarter to 25.97%, primarily reflecting the impact of the strong growth of our direct auto product. In addition to the increasing share of direct auto in the portfolio, we are also finding more opportunity to originate larger loans to better credit borrowers, which also has the effect of reducing gross yields, while benefiting risk-adjusted yield through lower charge-offs.

Gross charge-offs were down 65 basis points from the second quarter, driven by strong performance in direct auto, as well as continued benefit of centralizing late stage collections. Net charge-offs also improved, down to 4.3% in the quarter as we typically see a seasonal reduction in charge-offs in the third quarter. In terms of recoveries, we continue to expect in the 75 to 100 basis point range. Our 60-day delinquency rate picked up modestly to 2.9% at the end of the quarter, up from 2.39% in the second quarter, again largely due to seasonality.

Now, as we turn to slide 7, I'm going to ask Macrina to pick up from here.

Thanks, Jay.

Turning now to slide 7, let's start with our financial results for the third quarter. Our core business generated pretax earnings of $105 million this quarter. Our consumer and insurance segment earned $77 million pretax in the quarter, up 22% from last year. The primary driver of our year-over-year improvement continues to be the growth in receivables.

On a sequential quarter basis, pretax income for the segment was up nominally, primarily due to an increased interest expense allocation of our unsecured debt, which carries a higher cost to funds from non-core to core, which funded our rapid portfolio growth. We chose not to do any additional borrowings in the quarter to fund our growth. In addition, as Jay mentioned, operating expenses in the core segment were somewhat higher as we added key staff in anticipation of the OneMain acquisition.

Our acquisitions and servicing segment, also known as SpringCastle, generated $28 million pretax in the quarter. Our liquidity position continues to be strong as we are maintaining in excess of $5 billion in cash and highly liquid securities to fund our planned acquisition of OneMain. In addition, we have substantial backup liquidity with $2.1 billion in undrawn committed multi-year secured facilities and we issued no new debt in the quarter.

Moving to non-core, which is laid out on pages 16 and 17 of our slide deck, our non-core real estate segment lost $47 million in the quarter, primarily from the reduction in interest earning assets due to real estate sales completed in 2014. Last, with the signing of the agreement to require OneMain, we have been incurring certain one-time costs related to the deal amounting to about $14 million this quarter, which we also included in other non-core. These expenses were contemplated in the total onetime cost that we anticipate incurring on this and we will continue to keep you updated.

Before I close, let's turn to slide 8 for an update on our 2015 guidance for the key drivers of our core consumer operations. First, reflecting our expectations for continued strong growth in receivables, we are increasing our target range to $4.85 billion to $4.95 billion. For growth yield, we are tightening the range to 26% to 26.25%. For charge offs, we expect to finish the full year in a range of 5% to 5.25%. We're targeting net yield for the consumer segment to come in from 20.75% to 21.25%. Finally, we're tightening the range of anticipated earnings for the acquisitions and servicing segment to $115 million to $125 million pretax for the year.

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

Thank you. The floor is now open for questions.

(Operator Instructions)

Sanjay Sakhrani, KBW.

Thank you. Good evening. I know you guys can't really talk a whole lot about the DOJ, but just some color around the loan sales. Is it safe to assume that you're working in concert with the DOJ is asking of you and these loan sales were encouraged as a part of the process? Secondly, when we think about this loan pool, how does it differ from the average loan pool within the portfolio? Thanks.

Thanks, Sanjay. Couple of clearly great questions. Look, what I'd say is as you well highlighted, it's an ongoing process between us, the DOJ and the states. I said we are optimistic that we will have something to finalize here in the fourth quarter and I'll just leave it at that.

Just as far as the economic returns of these loans that you might be selling, do they have an impact to some of the guidance metrics that you guys have targeted for the remainder of the year?

We don't expect it to have any impact on guidance for this year.

Okay. And then I guess another question on credit quality. It seems like you guys are expecting a pretty significant ramp in the charge off rate in the fourth quarter. Now we didn't see that last year, but we have seen it in years past. Is that just normal seasonality or is there anything else going on in the credit numbers?

I don't think we see anything outside the normal trends, that the end of the year can be a tough time for our customer base and we've generally seen it over the years. I think we would say the third quarter was a lower quarter, but I don't think were projecting anything different than we would have thought about earlier in the year.

Okay. Great. Thank you.

Bob Ramsey, FBR.

Good afternoon, guys. Thank you for taking the question. I was wondering if you can talk a little bit about the internet customer piece of business. You have mentioned that you have done incremental spending (technical difficulty).

Bob, you're breaking up on us. I don't know if it's your line. Hopefully it's not ours. Can you give it another shot, please? Kristen, are you hearing the same things as we are?

Yes, I am hearing the same noise.

Sanjay came through clearly. I'm not sure what to say, Bob, but we really can't hear you at all.

David Scharf, JMP.

Hi, good afternoon. Maybe first just to clarify, during the quarter, was the provision expense lowered to account for moving the receivables to held for sale?

The receivables were actually moved at the end of the quarter, so the provision expense is consistent.

Okay. Got it. And then I guess it's somewhat repeating Sanjay's question about the asset quality of those that are held for sale. Should we generally be looking at the same allowance for loan losses going forward even after we've moved these for held to sale?

No. The held-for-sale receivables, as you're familiar with how the accounting guidance works, we won't be putting in additional allowance as part of the provision that we show. So yes, we expect to see some changes in the provision value.

Or amount.

Right, amount. I was referring more to the sort of the allowance rate that we would be applying to the --

There's no reason why the way we book our allowance or the methodology that we use would change.

Okay. Got it. It sounds like the tick up in DQs isn't necessarily influencing that. That's more seasonal phenomena.

Yes.

Okay. And lastly, I'm probably a little lazy here, maybe I can try to back into it myself, but can you give us a sense for what the year-over-year or per-branch growth rate was in balances, excluding auto for sort of a core installment product?

I don't think we've broken it out. We can certainly get back to. We can basically look at what the auto growth has been as a percentage of the portfolio and look at the total. But you're right, we will get back to you with the numbers.

Got it. Thank you.

Don Rowan, Janney.

Good afternoon. Sorry about all the questions on provision, expense but I have one more. It was higher than I thought it was going on be in the quarter and if you look at the allowance ratio sequentially, it's up. Is that a function of growth? Was there some type of asymmetrical growth in the loan book in the quarter that made that provision expense in the allowance ratio look higher on a sequential basis?

Actually, the allowance ratio is pretty constant if you add in the loans held for sale value into the receivable denominator. (Multiple speakers)

Yes, it looked like it was up about 10 basis points even with that adjustment.

Yes I think were coming in within 10 basis points, yes.

Okay so is that actually 10 basis points, is that a function of the provision leading growth on the balance sheet or is it just -- is that the delinquency numbers being up? I'm trying to understand why that number went up on a sequential basis.

It's up very nominally, very slightly but --

It also reflects the lost emergence, right? If you look through seasonality and those things, you're going to see some variability around on that as well. (Multiple speakers) Yes.

Are you guys seeing more competition from some other online and lenders? Anova came out and they have a product that is supposed to compete more with you guys that had good growth in that. Are you worried at all or kind of tracking growth of newer products from other internet lenders?

The answer is, absolutely. We try to keep best track we can of what everybody is doing in the lending space. It's a little bit hard to see directly on any individual customer, whether or not they are getting other loan offers or not because the vast majority of our customers, if not all of them, walk into the branches and transact right there. Whether or not they've checked or not other offers is generally hard to know because they've generally walked out with a loan proceeds check.

We paid a lot of attention. I think we've been very pleased with our loan growth and the loan business we've been doing, but it's certainly something we pay a lot of attention to and we're doing everything we can our side to make sure we've put the right tools in place to allow customers as much flexibility while still being able to maintain the best of the branch network and the things that it provides the customer service.

Okay. I pretty much know the answer to this, just trying to make sure, the loans held for sale are included in your NFR, guidance, correct?

That's correct.

Okay. Thank you very much.

Henry Coffey, Stern, Agee.

Good afternoon everyone and thanks for taking my call. I want to go back to some of the loan quality questions, but first it might be more interesting. Springleaf Digital is sort of, where are you in the evolution of that?

Thanks, Henry, it's a fabulous question I'm thrilled you asked. We've been talking about iLoans for some time and actually it was in this quarter that we actually began the pilot of iLoan. It started as a California-only offering to begin with. You can go up, you can Google it and take a look. It's rather cool, very sleek. The feedback from both customers and those that have used that has actually been quite strong and very responsive to what's been laid out there. As I think I said, we've targeted a higher grade, higher FICO customer than we've generally closed in the branches but thus far, I'd say all signs are very good, and as time goes on, we'll roll it out incrementally to additional states.

And the thought process is to make it a state-by-state license model or are you going to use the bank agent process? Are you targeting prime, near prime, sub prime? What exactly is the thought process around the product?

I'd say first, at this point were operating on a state by state with our state licenses. As I think you probably know, we are licensed, I want to say, in all 50 states one way or the other between origination and servicing, given the vast portfolio we have. We already those in have those in place. We continue to pay attention to what's going on with sort of the cases that are pending around the bank model. As it relates to who were targeting, we're generally targeting a near-prime or prime customer. The loans are similar in terms of level pay installment loans, premium pre-payable, no pre-payment penalties, those things they have in common but as it relates to the target FICO is roughly 50 points higher than the typical Springleaf at this point.

Just two more questions, obviously back to the loan quality issue. There is that sort of seasonal factor that goes on with sub-prime customers. September is bad, in December they -- it's kind of a shock that Christmas showed up all over again. How much is the increase that you sawn delinquencies would you attribute there? How much of it is to sort of new customers and new products? Where does the delinquency number sort of sort out in your mind?

I don't think it's coming from any particular product. I think it's really across the entirety of the portfolio. I'd say we sort of are responsible for little bit of it in that as I've been saying over the last couple quarters, we have been centralizing a number of our late stage collection activities over the last couple of quarters. I'd say some of the actions that were formally taken in the branches are now taken in our central servicing facilities, so we are getting on them a little bit later than we previously had in the branches. So that is sort of our making. We think that's a little bit of it and the rest of it I'd generally call seasonal.

Great. Thank you.

John Hecht, Jefferies.

Afternoon, guys. Almost got my name right. I guess this is sort of just another question that's consistent with a few of the prior ones. If you look at your page 5, you get a lot of characteristics of the different loan categories, and I think we know some of the loss rates. Is a lot of the noise with yield and loss rates and those, so forth, would you just attributed more a mix shift pad to kind of origination shift or would you highlight anything, whether it's yield or loss rates at the product level that's either going better or worse than expected that we should think about?

Look, what I'd say is really there is no distinction. Yield's holding up. I think the question was, did we see any difference in credit performance around those things. Is that what you asked?

Yes. At the product level, has there been any variance of performance.

Look, what I'd say, which has sort of been a theme of the past is, when new business is growing and new customers, new customers do tend to run a little bit higher delinquencies and higher losses than our existing customers, which is one reason we do everything we can to maintain our present and former customers, but when you're growing a portfolio, by definition, you're going to see a higher loss rate and by definition, as the portfolio growth there's going to be more exposure to the new customer block. So I'd say if there's any one place that were seeing a rise or one of the reasons were looking to a rise in delinquencies would be linked to the growth in new customers.

Okay. And then you did talk about iLoan. I'm just wondering sort of on the front end if you could talk a little bit originations by product or by channel, conversion rates, where you're seeing things -- where you're seeing better success, better penetration and then maybe we're seeing areas you want to focus on?

I'd say the single best success we have is that relationship in the branch. The greatest conversion we have is when there's a relationship -- if we're getting the customers we already have but if a new customer calls into a branch, is referred to a branch, the closing rates on those our dramatically different been an internet loan. They also tend to perform better than the rest of the stack. That -- we want to do everything we can to mirror that but on the other hand, we recognize we're in a very digital world so the key is getting a hold of that customers as quick you can when he's applied online and being able to get him off the market.

A lot of people come to Springleaf only in a lot of people may be applying to multiple other lenders and the key is, we certainly have name brand community recognition and the ability to close loans the same day. I think those things separate us from a lot of the peers, as well as the personal service you're going to get in the branch. Again, the biggest challenge and opportunity we have is that the internet does change things and we're gearing up to make sure we can handle it.

Okay. Thanks very much for that. The last question is, Jay, you mentioned you front loaded a couple expenses in term of key hires in anticipation of closing OneMain. Are there any -- is there any noise in expenses and maybe kind of non-recurring our one-time expenses that you've got in there as well just to deal with the review and so forth?

I think we've broken those out. I think Macrina highlighted and I think they're in the deck.

(Multiple speakers) $14 million.

We put in one-time stuff in the non-core. The other stuff really relates to the fact that part of the synergies we talked about earlier on really result from -- Citi provided a lot of the services to OneMain via TSAs and we will be taking over a lot of those services, which is one of the reasons we've always thought from the very beginning how complementary these two companies are.

Great. Thanks very much.

Sure.

Vincent Caintic, Macquarie.

Hey, great, thanks very much, guys. Just taking a broader question. Given everything that you've seen so far with OneMain and with the $608 million loans booked for sale, could you update us on how comfortable you are with the guidance you gave for 2017 on the combined entity of $800 million to $900 million net income. Have the economics changed at all?

It's a great question. What I'd say is, when we're in a position to fully update you on the entirety of the transaction, we certainly will come back and give you what we think are numbers that make sense for 2017.

Okay. Got it. And then just secondly focusing on organic. The 30% year-over-year growth rate, it's pretty, a very strong number. How sustainable do you think that is in the near term and then individually, how do you see growth potential in the existing personal loans versus this your growth in the auto loan portfolio? Thanks.

Yes, look, what I'd say is we are really a recipient of customer demand. I think if you look at our numbers, if you look at others, both online and otherwise, lending in the personal loan space or in the installment space, demand has been very strong. We hope and we're positioned to do everything we can to capture that demand. I think if you look at one particular public online lender that reported really strong growth year-over-year numbers that really speak to the demand and how responsible the installment loan as compared to other revolvers and other expensive loan products. We're certainly are hoping we're positioned to continue to take advantage of that kind of demand that's out there where people realize it's actually a smart, responsible loan that puts them in a better place overtime.

Okay. Got it. Thank you.

Robert Dodd, Raymond James.

Hello, everybody. On the auto side, obviously it's very, very strong growth again and it's been a very successful product launch for you. It's now roughly at, in Q3, at least, roughly at your target of 25% of originations in the long run. Are you doing anything to deliberately put the brakes on that product to slow it down to digest it? I would expect with these kind of growth rates that it may end up exceeding your target, so are you deliberately slowing it or can you give any color there?

No I don't think were deliberately slowing anything. We're trying to make sure we put on as much responsible business that makes sense for customers and makes sense for us. I'd say you've heard me talk about one of the hallmarks of our product is responsible underwriting and the ability of the customer to pay and we want to make sure in every case we get customers that are interested in the product the opportunity to look at a personal loan, an auto loan, but I think the incentives across the Company and in the field and in the branches are to make sure customers have as many choices they can to be able to pick whatever product is best for them.

Okay. Great. Thank you.

JR Bizzell, Stephens.

Good afternoon and thanks for taking my questions. You know, Jay, kind of building on a comment, I think most of my questions have been asked, but you spoke a little bit about the marketing strategy and just wondering if you could go into a little more detail there around what is that new strategy. I know you kind of spoke to internet marketing increase and it's paying off for you. If you would just kind of give us an update around kind of your strategy on that moving forward.

Sure. We have a multi-pronged approach, as you can imagine, to marketing. Increasingly, it is becoming very digitally oriented. A few years ago I never would've said Springleaf would be active on Facebook, but that's one of the many places where Springleaf has a presence. I'd say, look, we try to do everything we can via email, via multiple sites, but I'll also say we're looking at, and we are a user of a number of things out there, Aggregators to Credit Karmas and the Lending Trees of the world provide leads to multiple lenders and we want to do everything we can to be in their best graces to be able to fill the customers that come to them. It's across the board but those are basically relationships that wind up on a per-closed loan basis where you wind up paying for referrals and if it's a loan that makes sense for us on a fully cost of basis, those are actually things we will pursue in addition to our own direct marketing. It's really a pretty broad- base, so we're users of mail, certainly we're active in email and across the internet as well as search words.

Great. Kind of digging in on that, I know last quarter, and you can correct me if I'm wrong, but last quarter was the first aggressive auto marketing. I was just wondering if that's increased, decreased or still in the early innings and plan on continuing to accelerate that on a go-forward basis?

I'd say you're right. Were still in the early phases. I think we've only begun really to target auto directly or specifically as opposed to lending and where it's really been having -- giving a customer options, and I think one of the things we do plan to do is be a more active target for just people are looking specifically for an auto loan as opposed to a personal loan. I'd say you haven't yet see us fully rollout what could be, or will be, our marketing efforts for auto lending.

Excellent. Thanks for taking my questions.

Sure thanks for asking.

(Operator Instructions)

Kristen, it sounds like we're ready to wrap.

At this time, I will turn it over to Craig Streem for any closing comments.

Thanks. Just in closing, I appreciate your interest, your questions. Those that need to be addressed, let us know, get in touch with us if you have anything more. And thanks, we'll talk to you again soon.

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