Welcome to the Springleaf Holdings First 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. 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, 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, 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 first quarter '14 earnings presentation posted on the Investor Relations page of our website.

And we encourage you to refer to these documents for additional information regarding the risks associated with forward-looking statements..

In the first quarter 2014 earnings material, we've provided information that compares and reconciles our non-GAAP financial measures with the GAAP financial information and, of course, we 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.

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, May 14, and have not been updated subsequent to this initial earnings call. .

Call this morning will include formal remarks from Jay Levine, our President and Chief Executive Officer; and Macrina Kgil, our Chief Financial Officer. And as Maria said, after the conclusion of our formal remarks, we'll have plenty of time for a Q&A session. .

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

Thanks, Craig, and thanks, all, for joining today. Let's get started by turning to Page 4. We're really quite pleased with the results of our quarter. Our core business produced about $80 million of pretax earnings and generated $50 million of after-tax earnings. Importantly, earnings from our branch business were up 20% quarter-over-quarter.

This was driven by portfolio growth and a 60-basis-point growth in risk-adjusted yield on the back of similar expansion in our gross yield. .

Couple of quick highlights to note from the quarter. We closed on a previously announced sale of approximately $1 billion of real estate loans, generating a pretax gain of $55 million, and significantly, with the sale, we further reduced our mortgage exposure.

And to put that in context, over the last 3 years, our mortgage book is down about $5 billion of exposure.

Again this quarter, we improved on the right side of our balance sheet, which we've been focused upon, where we paid off our secured term loan of $750 million that was due in 2019, and we priced our highly successful third consumer securitization with the strongest demand yet in our lowest cost of funds.

Basically, the business was as we hoped and expected for the quarter. In sum, this was a no-surprise quarter. .

total originations were up almost 10% year-over-year; our applications were up 50% year-over-year, largely from our online channel; our accounts per employee in the branches were up to 264 per, still with room to grow.

We continue to adapt to changing consumer behaviors, making it easy for our customers to start the loan process online, and still today, we continue to close over 99% of our loans in our branches..

With growth comes changing portfolio dynamics. In recent quarters, almost all our portfolio growth has come from new customers. As we focused exclusively on growing our personal loan portfolio over the past couple of years, our new customer outstandings have grown as a percentage of total outstandings.

By way of example, at end of the year 2012, roughly 1/3 or 33% of our portfolio was comprised of customers whose first experience with us was in that calendar year. By end of year 2013, as we grew the portfolio, that percentage grew from 33% of the portfolio to 39% of the portfolio, or new customers who began with us in 2013.

By end of the year '14, we project that number to be in the mid-40s as a percentage. Of our 3 customer types, new customers, present customers and former customers, new customers tend to be riskier. We just haven't had that lending experience with them.

Recently, new customer charge-offs have been running a couple hundred basis points higher than the remainder of the portfolio comprised of our former customers and present customers.

To add a bit more color on that, our former customer and present customer portfolio has seen charge-offs in the low 4s, while our new customer portfolio has experienced charge-offs in the mid 6s..

In order to achieve the growth and returns the company is poised for, we will continue to grow our new customer account. With that growth will come marginally higher net charge-offs but significantly higher earnings from the incremental portfolio growth.

With the yields available and the largely fixed cost structure of our branches, all new business should be highly accretive. .

Now turning to Page 6. Our strong loan performance is evidenced in a number of ways. First, our net charge-offs for the quarter were steady at 5%. Also importantly, our risk-adjusted yield for the quarter was up 60 basis points.

Finally, we continue to benefit from favorable state law changes and enhancements to our pricing as well as the runoff of older receivables with lower yields in the portfolio..

Now turning to Page 7. And before I turn the call over to Macrina, I want to briefly cover our Acquisitions & Servicing segment, which we call SpringCastle. We've had solid credit performance, post the Servicing transfer to Springleaf in September of 2013.

Since the acquisition, we have posted pretax earnings of $140 million since acquisition on our investment of just over $200 million. Net-net, pretty outstanding. The $1.7 billion financing currently in place against that portfolio has delevered since acquisition.

And as a result, we are exploring new funding aimed at reducing our cost of funds for that portfolio. Lastly, our facility in London, Kentucky has provided significant leverage to the organization as we've recently moved about 20,000 noncore customer accounts into that facility for servicing.

We continue to look for additional ways to leverage that operation, providing for both operational cost savings and possible further efficiencies for our branches. .

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

Thanks, Jay. Let's turn to Page 8. Before turning to our quarterly results, I'll touch on our liquidity and funding. First, we completed our third consumer securitization in March, which we upsized due to strong investor demand. This transaction raised over $500 million with cost of funds at 2.62%.

Second, we closed on the previously announced sale of $1 billion of real estate receivables in March, accelerating the runoff of the legacy real estate portfolio and generating net proceeds of over $800 million after paydown of related debt.

Overall, our total debt decreased approximately $1 billion since the end of 2013, and our cash position remains at over $700 million after repayment of the secured term loan. .

Let's move to Page 9 for a summary of our financial results. Another solid quarter, with our operations generating $79 million of pretax core earnings.

Our Consumer & Insurance segment earned $49 million pretax in the quarter, nicely ahead of the first and fourth quarter of 2013, primarily from growth in our consumer loan portfolio and expansion of yield. We also benefited from another strong quarter of earnings in our Acquisitions & Servicing segment, with $31 million pretax earnings.

Our GAAP income includes results from our core consumer operation and from the legacy real estate portfolio, which has improved since fourth quarter of 2013. Also included are certain nonrecurring items, such as the gain recognized from the sale of real estate receivables and loss from repurchase and retirement of debt. .

Turning to Slide 10. Here's an update of our 2014 guidance for the key drivers of our core Consumer operation. We reaffirm our Consumer net finance receivables target of $3.6 billion to $3.75 billion at year end. We expect our consumer yield to be between 27% to 27.5% for the year as we continue to pursue pricing strategies.

With the quarter behind us, we've tightened our risk-adjusted yield expectation to be between 22% to 22.5%. Finally, we've raised the guidance for pretax income of our Acquisitions & Servicing segment to a range of $95 million to $115 million, which reflects the strong performance of the portfolio. .

To wrap up, we had a solid quarter, and as Jay noted, we feel pretty good about the continued growth in our personal loan portfolio and look forward to continuing this positive trend. .

Now I'd like to turn the call back to the operator for questions. .

[Operator Instructions] Our first question comes from the line of Sanjay Sakhrani of KBW. .

This is actually Steven filling in for Sanjay. I just wanted to go back on the charge-off trend. When we look at it from a historical perspective, it seems typically what you'd see is the decline in the net charge-off number.

Just a little curious if you could break out what the impact of the new -- newer customers or -- and if you were to kind of exclude that, will we have seen a similar decline on the net charge-off front? Additionally, the follow-up is around recoveries.

It seems to have increased a little bit and just was wondering about timeline of that to normalize at around, I believe it's like the 1% level. .

Sure. Those are 2 great questions. Let me take the second one first, and I'll come back to the first one. I think as you properly saw on the slides, in the rear, the recoveries did pick up marginally in the most recent quarter, and we expect them to continue to do that through the remainder of the year.

I would say if we had to pick a timeline, it would be towards the back end of the year when we'd start seeing them in the 100-basis-point range. So a little slower than we would've liked, but I think net-net, on track to get back to where they have been on a historical basis.

As it relates to charge-offs in the quarter, breaking it out, I gave more of a trend of where they are on a longer-term basis than a particular quarter. I'm happy to go and look at the quarter and see was there a differential between the 2, but I think pretty much for the quarter, they both stayed within the range of where they had been. .

Got it.

Any -- can you give us some color around how we should expect the charge-offs to trend for the remainder of the year? Given the dynamics, should we expect it to be flat, kind of, at these levels?.

I think you've got a couple of dynamics going on. First is, you noted there's recoveries that will be coming back, and that will be reducing the charge-off number as the year goes on. I think there's also, like we'll hopefully see, will be the growth of the portfolio and that growing percentage of new customers.

And as I alluded to, they do have a more than marginally higher charge-off that goes with them. But the way we think about charge-offs is it's a part of doing the business. And when you think about the yields we charge in conjunction with the charge-off rate, we think the risk-adjusted yield is exactly sort of in the target of what we're looking for. .

Got it. And then just to follow up around your comments, I believe the outstanding loans per branch employee was 264 for the quarter, and you said there's still room to grow.

What -- is there a targeted optimal level that you're looking at?.

Look, it varies by branch. We have branches that have 3 people, we have branches that have 4, we have branches by 5, and we run each one slightly differently. But I think we've definitely got, at least, a year or so before I think -- we think we'll have to start adding staff to handle.

So if you had to pick a number, I think we think of 300 as a place that's manageable, but that's a very broad number, just like all 833 branches aren't the same. .

Our next question comes from the line of Moshe Orenbuch of Crédit Suisse. .

I noticed that in the core consumer business, actually, your costs were a little lower than we were expecting, and it sounds like you feel like there's still room to kind of continue to lever that as you grow.

Is that a fair statement?.

It's a very fair statement. .

Okay. And then in terms of your comments about the servicing platform and kind of SpringCastle, I mean, you talked a little bit about being able to get a better cost of funds on your existing business.

But what -- can you talk a little bit about the opportunities for portfolios? I mean, what do you see out there now?.

Sure. I think we've been surprised that we haven't actually found a significantly meaningful portfolio to add, and a little disappointed, to be frank. But as I think we all know, these are good times, and in good times is not exactly when people are selling.

Or at least, if they do sell, they're looking for prices, and we're pretty disciplined about wanting to make sure that if we put something on, we're able to return and achieve the returns to equity that we're looking for.

What we have done, and we think has provided significant efficiencies to our organization, is begun to migrate a number of accounts that had been in other centers across the organization, not in the branches. One, because there is a large, talented staff that we're going to be able to take advantage of.

And two, because they have done a great job, as evidenced by the SpringCastle portfolio on performance. So while there hasn't been a new portfolio that we've put in there, we have added, as I mentioned, about 20,000 new accounts.

Those -- and we'll continue to look for other efficiencies and ways to use that center to take advantage of all its capabilities. .

And when you think about the real estate portfolio, things are generally improving from both a funding standpoint and a credit standpoint.

Are you thinking about kind of running that down faster? Or do you kind of still, despite the sale, think about kind of going in the same pattern as you had kind of thought about before?.

I think -- and it's a great question. The way we think about it is we're trying to manage a balance of both our liabilities and our assets. We have liabilities that come due over the next couple of years, and I think we're thinking about how do we lag those liabilities, as well as potentially accelerating sales to go with it.

We also look at it in terms of most -- a good chunk of the mortgages have mortgage-backed securities to which they're related, and what we found with the last sale was the ideal timing was when those loans -- or that securitization could be collapsed and the ultimate buyer could get at the loans.

If you look at our schedule of mortgage-backed securities, they really all have some element of call features that, over the next couple of years, you'll be able to get to the underlying mortgages. And we're actually planning on working around the collapse or the sale of the mortgages around the liability structures that go with those.

So I'd say stay tuned, look at the liability structures and you'll probably be -- I'd expect to be more active than we probably had been in the most recent quarter. .

Our next question comes from the line of John Hecht of Stephens. .

First of all, and this is consistent with the last few quarters, you've been able to reprice your products upward, and you've referred to some changes in state laws that have been able to allow you this, as well as just some repricing.

I'm wondering, should we expect this trend to persist for a few quarters? And what's sort of the threshold where you might top out there?.

At this point, I'd say, look to the guidance we've given. I think we have seen yields go up a little bit. I think we expect to see them continue to drift up marginally. Some of it's older stuff running off and new stuff coming on. I think that will continue to be -- once the entire portfolio is repriced, that will go away.

And we continue to look at places where, at times, we'll lower the rate if we think we can do more business and it makes sense. And in other places, we have -- the way our pricing works is it's a reasonably dynamic set of pricing. It's not one size fits all.

It's risk-base priced, and it clearly has to fit within the state guidelines of every state that we do business in. .

Okay. And then based -- in looking at the guidance, it looks like you're expecting a combination of better average yields over the course of the year potentially, and maybe slightly higher losses.

And I'm wondering, are the higher losses a function of a different balance of new versus recurring customer that you referred to earlier and the differences in charge-offs between those 2 types of customers? Or are you seeing changing behaviors also with the recurring customer side?.

I think it's exactly as you alluded to. I'd say it's really one more factor as well. It's a, first, a slower recovery of the net charge-off because, again, the number is -- so the slower recovery line is holding back the charge-off number a bit.

But as well, it's the growth of the portfolio, which we think is the single most important thing in terms of moving earning to this company, is continuing to grow the portfolio. We're really not seeing any changes to customer behavior to any particular segments performing any differently than they have in the past.

And as I said, we've gone from, over the last few years, a portfolio that had roughly 33% new customers to one that we expect to close this year with something in the mid-40s. And with that comes slightly different dynamics, but more importantly, comes the real growth of earnings that comes with a growing portfolio. .

Great. Appreciate that.

And final question, SpringCastle, or the Servicing and Acquisitions segment guidance coming up, is that just better than forecasted losses from the outset? Or is there anything else going on there?.

It's predominantly that performance of the loans as a result of the servicing center we have in Kentucky, who have done just a great job, leads us to believe that we'll wind up in a better place on that portfolio in the earnings as a result of that. .

Our next question comes from the line of Don Fandetti of Citi. .

I was wondering if you could talk a little bit about your view on regulatory risk? Obviously, in the sector, if you get caught off guard from the CFPB if -- I just wondered if they've been in there, if their inquiries have increased or what your expectation is there on the reg front [ph]?.

I'll say it's -- it remains, still, a big question. I think everybody here already knows they have not yet written rules as it relates to the installment business. I think they continue to look at that. From soundings we've heard, that's still down the road in terms of what rulemaking will look like for the installment sector.

We spent a lot of time thinking about our business, the rates we charge, how we go about our business, and certainly, I've said 100 times, we cap our rates at 36%. We live within the state lending laws in every single state we're in. We are subject to the CFPB complaint board. Our complaints are very low that we see on that.

So hard to handicap, but from everything we've seen and heard, it's a ways down the road. .

Okay. And just to kind of follow up on credit, I know you've have gotten a couple of questions, but as you look back at the IPO, clearly, charge-offs are just coming in higher.

And I mean, is that -- do you think that, that's a function of more new business than you had thought at the time? And just to clarify, is there any -- are you seeing any weakening, let's say, in the consumer today versus IPO time?.

The answer -- it's a good question. I'd say when we did the IPO, and we looked at the previous couple of years, we were running at all-time lows. The company had never seen charge-offs as low as it had. It was on the back of a very limited loan growth.

It was on the back of Treasury and AIG really having constrained growth and really almost focused exclusively on just maintaining the current customer, who you had the most experience with.

I think we're -- if you look at trends over time, and we're happy to provide those later, we're sort of in a good spot of where this company has been over a longer period of time. So where we are is sort of, I think, where we'd expect to be.

And a matter of fact, for the industry we're in and the customer we lend to, we're actually quite pleased with the results we're seeing on the charge-off side. Is there really any weakening on the part of the customer? We don't see it. We're -- if you look at our -- who we're lending to, we take a lot of applications. We don't close that many loans.

We turn away, unfortunately, or have to turn away, 4 out of 5 customers of loans we see because they just don't meet the criteria.

With the really growth of the Internet, everybody's looking for money, and what we've had to do very effectively and efficiently is be able to turn those potential customers that show up via applications into real customers by being able to get the data, get the increased amounts of data and being able to sort through who are those that have the highest likelihood to pay us back.

So we've become actually pickier, but we've also gotten a much broader swath of applications that have come in because of the online channel. So net-net, our credit we think is the same. There just happen to be more people looking for more loans. .

Our next question comes from the line of Robert Dodd of Raymond James. .

Just following on somewhat from that question there on the online.

I mean, have you got enough data right now where you can kind of look at the delta, and you mentioned credit here, but I mean, the expected loss rates for a new customer that originates online versus a new customer that walks into the store? I mean, obviously, [indiscernible], they're all close to the store.

But is there a material differential between the sourcing channel for those new customers, whether somebody is flagging that they saw a billboard or just word of mouth or online or anything like that?.

One thing I mentioned that's been very important to us is we continue to close 99% of our loans in our branches. A real challenge for anyone doing business online is fraud.

And do you know who you're really dealing with? And as much you get IP addresses and other things, and you can double check against databases, we don't think there's anything better than the customer coming into the branch, sitting across from our financial representative in that branch, going through the process, understanding the loan they're getting into, full disclosure, both ways, and we understand the situation both upfront, as well as for collection.

As I've said, in spite of the growth of online applications, we continue to close 99% of our loans in the branches. And that small 1% we don't close in the branches, is generally places we don't have physical bricks and mortar.

So wherever possible, we want that customer to come into the branch because that eliminates the vast majority of the challenges that come with online lending. .

Appreciate that.

Just 1 additional piece, I mean, it is not your intent, correct, to ever -- or ever might be an overstatement, but certainly, anytime in the material near future to launch any kind of live check product or anything like that, correct?.

Let me clarify that. We use live checks in a very small way against former customers. So where we have customer experience, where the borrower has worked with us and where they've paid us back well and we've had success, we have a small program where we do a small amount of marketing to former customers via live checks.

We have experimented in the past to small amounts of potential new customers, but I would call it an experiment and not something that will really ever be material. .

Our next question comes from the line of Jordan Hymowitz of Philadelphia Financial. .

I'm just trying to -- there's no balance sheet here.

What was the loss allowance at the end of the quarter?.

Are you asking for our personal loan exactly? Or which amount are you looking for?.

No, it's -- Jordan, the Q will be out tomorrow with the balance sheet information. .

Okay.

So you can't provide it?.

We'll call you afterwards. The question is, which number do you want? There's a big number for the whole company. There's the portfolio... .

Portfolio [ph], yes, for the Consumer business. .

The Consumer business. .

For the Consumer business, we're at about $100 million. .

Okay. That's my main question.

And was there any change in the reserve coverage from last quarter?.

Well, in terms of the provisions, we have seen a little bit of a change. Just to give background, how we look at our provision is we take into account the -- look back on the transfer charge-off, roll rates, recovery and delinquency. And as you are aware, our recovery rates have been lower in the recent 6 to 9 months.

And so our provision really reflects a lower recovery rate, and so you're seeing an upward trend in the provision. .

So, hence, the recovery ratio would be higher than last quarter? Or the reserve ratio would be higher than last quarter?.

That's correct. .

That's right, yes. You're right, Jordan. .

Perfect. If the Q is out tomorrow, just -- I'll get it then and follow up. .

Yes. .

Yes, you'll see all that detail in there tomorrow. .

[Operator Instructions] Our next question comes from the line of Ken Bruce of Bank of America Merrill Lynch. .

My question also relates to credit, and happy to take this off-line. I realize you've already discussed it ad nauseam. As you look at -- you described -- obviously, credit's a little -- maybe losses are a little higher than you might have expected. Some of that's based on recoveries.

Obviously, the yields have been kind of moving higher as well, which is positive and I think offsets it from a general earnings standpoint.

But I guess I'm trying to understand is when you're looking at the new customers that you have identified as having higher losses, is there any marginal change in the quality of that borrower that would essentially argue for that higher yield and maybe higher loss rate? Or is it purely just newer customers have higher loss rates, they season into, in a sense, where you would expect as an existing customer and there's really no change?.

I think it's largely the latter. It's sort of it's been what it's been, or as I like to say, it is what it is. But if you think about it, we take a former customer, which tend to be 10% to 15% of our business.

If they borrowed from us, they paid us perfectly on time, they maybe even paid off their loan early and they come back, you know how that customer is going to perform. Best indicator of performance is past performance. Period. So once you -- and again, a present customer is one who has been with us, we've reunderwritten, we know the experience.

So that is going to be the lowest loss segment. As we grow the portfolio, will come new customers you just haven't had that experience with. .

So the -- if I may, let me reiterate what Jay said earlier, that really, we're not seeing any change in the underlying credit characteristics or performance characteristics of the portfolio.

It's -- I don't want to say merely, but the fact is, it's merely a function of the change in mix of the new customer who's coming in unseasoned, as you said, Ken. I think you actually characterized it quite well, so a change in the mix of what's in the portfolio. .

Okay.

And then just as you're looking at that Internet channel, is it that we're going to have to see a whole cycle of those new customers through that channel having essentially turned over before you have a better baseline as to exactly what that expected loss within that channel would look like just as -- I think your earlier question, you said you don't have a significant enough history yet, but is it just you just need to turn over the book before you have a good sense as to where that channel is relative to your baseline in branch origination?.

I think that's a fair way of characterizing it. But again, for us, most of what's important is -- again, the Internet is a means of providing efficiency and seeing more applications. What has been the cornerstone of our business for almost 100 years, and we expect to continue to be is that personal level of service.

That customer coming into the branch, establishing that relationship, it helps in a number of ways.

Not only does it vet out the fraud that goes with a fair amount -- or it could go with the Internet business, but it provides a relationship, come renewals, having the history with that customer, once the loan pays down, if he needs more money, making sure he comes back to us, et cetera.

If there's a collection issue in the future, again, having that relationship. So we consider, again, the bricks and mortar and the personal and the people in the branch, the key cornerstone of how we do our business, and a matter of fact, how we're able to keep our losses with this customer base to as low a level as we do. .

Right. Yes, no, I appreciate the difference in the model and what it provides. And I guess I'm just wondering how long it'll take for you to feel like you've got sufficient data to support either a more aggressive strategy or a less. Just, obviously, these things are still evolving in the Internet side of the equation.

And I think as you pointed out at your IPO, you don't want to lend money to people that are necessarily looking for it, so you have to be careful in certain channels over others. .

At this time, I'm showing no further questions. I would now like to turn the floor back over to Craig Streem for any additional or closing remarks. .

Thanks, Maria. Thank you, all, for your attention. We're going to wrap up here. And any follow-up, feel free to get back to us, and we'll do whatever we can for you. So thanks, and have a good day. .

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