OneMain Holdings, Inc. (OMF) Q1 2015 Earnings Report, Transcript and Summary

Welcome to the Springleaf Holdings First Quarter 2015 Earnings Conference Call and Web cast. Hosting the call today from Springleaf is, Craig Streem, Senior Vice President Investor Relations. Today's call is being recorded. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. [Operator Instructions]. It is now my pleasure to turn the floor over to Craig Streem. Sir, you may begin.

Christy, thank you very much. Good morning everyone. Thanks for joining us. Let me begin as I always do with slide 2 of the presentation, which you can find in the Investor Relations section of our web site, and which we will of course 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 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 first quarter 2015 earnings presentation posted on the IR page of our web site. We encourage you of course to refer to these documents for additional information, regarding the risks associated with forward-looking statements. In the first quarter 2015 earnings material, we've provided information that compares and reconciles our non-GAAP financial measures with the GAAP financial information and 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. For those of you who may listen to the replay down the road after today, we remind you that the remarks made herein are as of today, May 7th, and have not been updated subsequent to this initial earnings call. Our call this morning will include formal remarks from Jay Levine, our President and CEO; and Macrina Kgil, our Chief Financial Officer. And as Christy said, after the conclusion of our formal remarks, we will have plenty of time for Q&A. So now it's my pleasure to turn the call over to Jay.

Thanks Craig and good morning. Turning to slide 3, I will begin with an overview of the highlights for the quarter. First, we are really pleased to report another quarter, a very strong growth in core earnings, up 28% year-over-year to $64 million. We continue to reap the benefits of the positive operating leverage that comes from grant receivables growth. This has been a very powerful lever for us over the last few years. Once we close on OneMain in the coming months, we expect to utilize many of the growth strategies that have been so effective at Springleaf, to augment receivables growth at OneMain and drive earnings growth for the combined company. This was also the sixth consecutive quarter of year-over-year portfolio growth above 20%. Average receivables per branch reached $4.7 million in the quarter, driving significant margin benefit because of the largely fixed cost base of our branches. Net charge-offs were a bit higher this quarter than last, which I will discuss in a moment, but we expect charge-offs to come down in the second quarter, and we remain very comfortable with our full year net charge-off guidance of 5% to 5.5%. And last, we remain on-track for closing the OneMain acquisition in the third quarter of this year. Let's now turn to slide 4 and get into some of the details; as I said, we continue to emphasize receivable growth per branch, because of the tremendous operating leverage this provides. Let me give you some key steps; in 2012, we had average receivables per brand of $2.5 million, and by the end of the first quarter of this year, that had grown to $4.7 million, nearly double. Also 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. At the same time, over the last 12 months, the number of branches managing over $5 billion of receivables, has more than doubled, going from 117 last year to over 250 branches today, and I am really excited to say, that we now have three branches with over $10 million of receivables. Let me remind you of the impact that has had; in 2012, we earned about $90,000 pre-tax per branch. For 2014, we nearly tripled this number, earning $267,000 on average per branch. In the first quarter of this year, we hit $315,000 per branch on an annualized basis, more than triple where we were in 2012, and we still see significant upside from here. Our strong growth in receivables results from a number of factors. First, the U.S. economy remains stable, which has contributed to solid customer demand for our loan products, and a larger pool of qualified prospects. Second, our digital operations continue to drive increased applications and volume. Today, about 70% of new customer applications, and over 45% of new customers begin online; an interesting sidebar to this, is over 20% of our digital volume, is coming from mobile applications, more than double what it was a year ago. And lastly, we have continued to centralize a number of functions that were historically done in our branches, including the servicing of all accounts over 90 days past due, which has created greater origination capacity in our branches. Before we leave the slide, let me also highlight the growth we have seen from our direct auto product, and the potential it brings. Auto originations reached over $200 million in the first quarter, about 24% of our total originations, with very positive growth trends month-over-month. Looking ahead, we expect to see full year originations annualized well above our first quarter run rate. To illustrate the potential financial impact of our direct auto loan product, let's take a look at the table on the bottom right corner of the slide, and compare the unit economics of the unsecured loan versus our auto loan. In very simple terms, and assuming the loans are both outstanding and unamortized for a full year, on average, our net interest margin on a $4,000 unsecured loan, would be approximately $1,000 versus $1,900 on a $1,300 auto loans, in both cases, before losses. The auto loan generates almost double the net interest margin dollars, in spite of the lower yield on the auto product. In addition, based on our experience with our existing hard secure portfolio, we are very confident that we will see lower percentage losses in the auto product, and lastly, since our servicing costs are basically the same for both types of loans, the marginal contribution to earnings from auto should be far greater. Turning now to slide 5, let's take a look at the trends in gross yield and credit metrics. Gross yields in branch portfolio declined about 10 basis points from the fourth quarter, at just under 27%, even with the meaningful increase in the growth of our direct auto product, which represented about 24% of our volume this quarter. As I said in my earlier comments, our auto loans carry lower average APRs than our personal loans, so we are pleased that overall yield has held up so well. Earlier in my comments, I discussed our continued progress on centralizing certain branch functions, including late stage delinquencies. A key element of this, was to make sure our account management policies and programs are consistent across our servicing platform, including how we work with customers going through challenges, including bankruptcy. As a result, in the fourth quarter, we updated and standardized our charge-off policies for bankrupt accounts, which had the effect of reducing fourth quarter charge-offs by a few million dollars, largely in the month of November and December. On a run rate basis, excluding the bankruptcy reduction, net charge-offs in the fourth quarter would have been about 5.4% compared to the 5.6% charge-off rate we reported for the first quarter. The policy change, as recently implemented, will have a rolling impact on future quarters, with the benefit occurring only in the fourth quarter of 2014, when we implemented the change. Importantly, our 60-day delinquency rate was 2.53 at the end of the first quarter, 29 basis points lower than the fourth quarter, reflecting typical seasonal trends, as well as the small build-up that occurred in connection with the policy change. We feel strongly that our shift toward more auto secured loans should lead to lower loss rates over future quarters. One year ago, 45% of our book had titled collateral. As of 3/31, we were at 51% and we expect that level to continue to grow, with the popularity of the auto program. Based on the delinquency levels we are currently seeing, combined with the shift toward auto secured loans, we feel very comfortable that the net charge-off will drop for the full year and fall within the 5% to 5.5% range. Before I turn the call over to Macrina, I want to give you a brief update on the status of our planned acquisition of OneMain. First, we continue to anticipate closing in the third quarter of this year. This has been our expectation from the time we announced the deal in early March, and it continues to be our expectation today, for which all appropriate planning has taken place. As we described the preliminary perspectives for our recent equity offering, the antitrust division of the Department of Justice is reviewing the transaction, which is certainly not unusual for the transaction of this size, and we intend to work with the DoJ to resolve any questions they may raise. As we also said in the preliminary perspectives, when we spoke to the DoJ, they told us to expect to receive a civil investigative demand or CID, which is a request for documented information related to the acquisition, and as is customary for a business combination of this size, particularly when, as in this case, no Hart-Scott-Rodino filing was required. Again, as we disclosed, we received the anticipation VID on April 28th. Now, as we turn to slide 6, I am 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 first quarter. Our core business generated pre-tax earnings of $101 million, which represents a 27% increase from the first quarter 2014. Our consumer and insurance segment are in $65 million pre-tax in the quarter, significantly ahead of last year's quarter and a slight increase from the fourth quarter. The primary driver of our improvement continues to be the growth in receivables. Our acquisitions and servicing segment, also known as SpringCastle, continues to be a strong contributor to pre-tax earning, generating $36 million in the first quarter, versus $31 million in the same quarter 2014. In March 2015, we sold our investment in the SpringCastle notes, which will lower future earnings in this segment by approximately $5 million per quarter. Guidance provided for 2015 during the year end call, reflected this transaction. Moving to non-core, which is laid out on pages 17 and 18, our non-core real estate segments lost $48 million in the quarter, primarily from the reduction in interest earning asset, due to real estate sales completed in 2014. The sale proceeds are currently reported in the non-core portfolio, hence the earnings drag in that segment. We expect to use the proceeds towards funding the one main purchase, and at that time, we will reallocate the related debt to our core consumer operations. As a result of our reduced real estate exposure, which is now happily under $1 billion, we began reallocating certain corporate expenses from our non-core portfolio to our core consumer operations. This quarter's operating expense in the core consumer operations, is a pretty good indication of the run rate for the balance of this 2015. With the signing of the agreement to acquire OneMain, we are now starting to incur certain costs related to the field, including approximately $3 million in the first quarter, which is included in other non-core. These expenses were contemplated in the $250 million of total onetime costs that we anticipate incurring related to the acquisitions, and we will continue to keep you updated on this each quarter. Now turning to slide 7, our 2015 guidance for the key drivers of our core consumer operations remain unchanged from the targets we laid out, when we reported our year-end results. Please note, our guidance does not include the impact of our planned acquisition of OneMain. And now, I will turn it back over to the operator to begin the Q&A.

[Operator Instructions]. Thank you. Your first question is coming from Mark DeVries of Barclays.

Yeah thanks. Appreciate the comments around the regulatory approvals around the deal. Just wanted to clarify a few points; I assume when you guided us the 3Q close, this contemplated request for additional information, correct?

That is correct. We originally planned on closing the deal in the third quarter when we announced it in March, and we continue to believe that will be the case, even with the additional questions we have gotten from the DoJ.

Okay. And our data shows average time for second request run three to four months, which seems in line with your 3Q close. Does that make sense to you?

Well I wouldn’t call this a second request. It’s a different process, because it's not part of HSR, and these are sort of the normal things that I think would have been asked.

Okay. And then, finally, judging by the antitrust termination fee and high revenue threshold for investors, you guys seem pretty committed to getting this deal done. Is that a fair statement?

That's a very fair statement. We are very committed getting this done, as I think Citi is as well.

Okay. And that involves the requirement to make all necessary divestitures, to comply with any regulatory enforcement, correct?

We will do what it takes to close this deal, and we are certainly confident that this is a market that's highly fragmented, intensely competitive, and we certainly are confident that we will succeed in closing on the transaction that's laid out.

Great. And then just finally, I appreciate the comments around the auto book. Can you give us a sense at higher level, kind of longer term, how you expect the proportion of the hard-secured in auto loans could grow relative to the unsecured?

You know, what you saw in the quarter was about 25% of our volume came specifically from this new product, which are focused on recent vintage models, I think sort of last seven or eight years and under, what historically I think, we have also taken a good chunk of our collateral, which have been older. I would say, based on what we saw in the last quarter, I would expect our percentage of title to continue to drift up over time, but I think we will see a healthy mix between secured and unsecured.

Okay. Thanks.

Sure. Thanks for the questions.

Thank you. Your next question comes from Sanjay Sakhrani of KBW.

Hi thanks. This is actually Steven Kwok filling in for Sanjay. My first question is around the recent capital raise and if you feel like that has appropriately right-sized your balance sheet? And in terms of how should we think about the long-term capital structure, meaning, do you look at it from a debt-to-equity perspective or tangible debt-to-equity perspective?

Both great questions. I'd say the $1 billion of capital that we raised were closed on -- earlier this week and raised last week, its certainly what we thought was appropriate to finance the transaction on to sort of add to the depth of the capital base. So what I'd say is, from that standpoint, we are done and have no additional plans to raise any further equity to support at least what's been announced and contemplated to-date by way of transactions. As we think about leverage, what I said last week and I really said, is we look at the long term leverage of this company, as debt-to-tangible equity. We look at it as both debt tangible and debt-to-equity. In the case of debt-to-tangible, I think we are looking at long term, wanting to be in the five to seven type range. I think when we look at where we think we get to by 2017, it gets us to just under the seven times range, and I think based on the growth we projected, the earnings profile, we are in a good place by then. Ultimately, once we get to that place, I think we have a lot of options. I'd further say that, there is more that goes into the mix than just what's the leverage ratio. I think also you are aware, we fund it with both secured debt, unsecured debt, the quantum of unsecured debt, the term, just because of the nature and the covenants that are embedded really and our unsecured debt gives us significant additional flexibility and I think there's additional thing that factor into, beyond just tangible debt to -- or tangible equity-to-debt.

Got it. That's helpful. And then just around the guidance that was initially given during the time of the acquisition, the $800 million to $900 million of core net income, did that contemplate already the equity raise? Meaning, could you potentially take the capital and pay down some of the debt?

At the time, we gave out that, back in March. The $800 million to $900 million did not contemplate additional equity, that was as things stood. We put out pro forma, certainly with additional equity, that will mean less debt, won't have any impact on the $800 million to $900 million, I will say, that number really hasn't changed. At this point, there is really no plan to update that $800 million to $900 million on a regular basis, but I will say, as we sit here today, with the additional equity and other thing that have been done, we feel good about the $800 million to $900 million n umber.

Got it. And so the $300 million of pre-tax savings, that's also unchanged?

Correct.

Got it. Great, thanks for taking my questions.

Absolutely.

Thank you, Steve.

Thank you. Your next question comes from David Scharf of JMP Securities.

Good morning. Thanks for taking my questions. Few things; one, Jay, can you comment, maybe little more broadly about what you are seeing in the macro and competitive environment as it influences originations? Maybe specifically just impact on things like gas prices, more subprime card mailings and the like?

Look, I'd say at the high level, we have seen good demand for our products. In fact, we have kind of continued to experience 20% growth, has certainly given us a fair amount of confidence that the demand is there and the competition has -- I'd say, we are aware of it, we see it, but while there has -- take a few different pieces of it. The additional auto -- gasoline has certainly been beneficial to our customer. We have seen our customer more optimistic, we have seen delinquency rates remain in line, if not improve, as I talked about, as it relates to the end of the first quarter. So I think all of that has been a positive, as well as I'd say, trends we've seen really over the last year or so, which is more borrowing around optimistic events and positive events, as opposed to sort of defensive and debt consolidation and other emergency things. So more people going on vacations. More people doing home repairs and the things that we consider positive life events. I will also say, while its harder to see the online competitors and the fact that we continue to see the growth, we are well aware that they are presenting new options to borrowers, and one of the reasons we continue to expand and give customers increased options around digital capabilities with us.

Got it. That's helpful. Along the same vein at the branch level, we have kind of been thinking about that $5 million AR per branch as sort of an artificial ceiling, just in terms of capacity for the people in the stores to manage that. It sounds like you are shifting even more of the servicing to centralized areas. What should we think about, I guess, as an average ceiling, if you will, per branch right now? I was surprised to learn that a few of them have actually over $10 million in receivables.

You know, look, I don't think we think of having a ceiling on any of our branches. We really think of it as what can be properly managed, and what can the market sustain. Again, we have all kinds of branches, every size, shape, every type of community, where in some communities that have populations of 20,000, wherein some communities who have populations in the millions. You're going to have very different kinds of branches, and I recognize, it's an average number. But what I'd say is, in general, we are managing about 1,100 receivables per store. Clearly, we have got many stores that are pushing a couple of thousand of receivables per store. So, I'd say, $5 million is a stocking point. I don't think -- and I think we talked about. OneMain is managing their stores at over 7 million, with not that many different receivables. Part of it has to do with the size of the loan, and certainly, our auto loans will drive the loan significantly higher, and we continue to look for the things we can do, so we can continue. So hopefully, as we talk about it, we keep seeing more branches over $10 million, because clearly, the profitability there is demonstrably different than those at $5 million.

Got it. Got it. And just lastly, can you remind me the average yield on your unsecured books, I guess it's noted about 30% APR. What percentage of those receivables are in states where you are above 36%, if any?

Well let me remind everybody, we do not charge over 36% APR in any state. I think there is a number of states, I want to say, either 10 of our -- 26, 27 we are in today -- we are actually in 27 states, where we had been in 26, we opened in Delaware again. Where there is no cap on rate, but in spite of that, we have stayed under the 36%. So one thing that's important to us, one thing that we think is important to regulators, is that 36% cap, and we have that hard wired absolutely everywhere.

Got it. Thank you.

Sure. Thanks Dave.

Thank you. Your next question comes from John Hecht of Jefferies.

Good morning. Thanks for taking my questions. Just a couple questions kind of related to modeling and then one more about trends. With respect to other items, I guess the next few quarters, which would be -- the other items I'm focused on are the insurance income and then the non-controlling interest. As SpringCastle continues to wind down, what should we -- how should we think about the trends in the non-controlling interest? And then, anything with that wind down and other kind of items in the business that would influence the trends with the insurance income and expenses?

Okay. I will take the one on the non-controlling interest. You're absolutely right, we do have the SpringCastle portfolio decreasing in terms of the revenue and the gain that we are getting, as you can see in our guidance. And as that continues, the non-controlling interest piece of that would also go down in the numbers.

It's proportional, we own about 47% of the economics, and two other partners on 53%, and it will just continue to operate that way.

Okay. And then what about the trends with the insurance income and expenses?

In terms of the insurance income and expenses, you have seen the growing trend on the insurance. That really relates to the unit origination that we do, and so, you will see the insurance income and expense fluctuate depending on the units that we originate.

Okay. So it's just going to be directionally consistent with volumes?

Yes.

Okay. And moving on to trends, Jay, you talked about kind of mix shift in auto versus the personal loans and what that might do to yields. How are overall yields in the personal loans and how should we think about that trend over the year?

I'd say it has been very consistent. Couple of years ago, we talked about North Carolina and other states that had modified legislation, that had allowed for a long overdue adjustment to rates. I'd say, it has been much more stable in the legislative front, and in general, the markets have remained competitive, and our pricing has largely been unchanged.

Okay. Thanks very much. Then final question, similar to what Dave Scharf was asking, we have all seen the CFPD, like initial rule proposal, and as it is laid out now, do you guys see any opportunities or challenges, if the rules were passed in the current framework in the coming months?

Clearly, I think there is a number of months -- a lot of things got to get sorted out, as I think you guys are all well aware. There is a couple of things that we would like to see some clarity on, that's related to it. First and foremost, I'd say, there is a lot of things that have to be worked, as I think we all know. Secondly, I'd say, to the extent it does go through as it is, we think its going to be significantly beneficial to Springleaf or the combined Springleaf and OneMain organization. What we feel bad about is, way too many customers lined up thinking they only needed a small loan, will wind up at, unfortunately a pay-day, or an expensive alternative, without thinking about a holistic solution, and wind-up in a place like that, with a much more expensive, thinking as a short term, that becomes a longer term problems. So to the extent those options are reduced, we think the Springleaf solution, for those that qualify, is a much better choice, and actually a fair amount of business could wind up our way. I'd secondly say, which is even after our customers take out a loan, it's not unusual for them, and they also need a short term bridge, and they wind up at a payday or other high cost lender, which in turn can certainly influence credit performance and what happens. So if those choices are fewer, we think our own credit performance could be better, as well as the fact that, we think we will see greater customer demand coming that way. With all that said, there still needs to be some clarification around how the ACH works. We have a number of customers that come to us and want to go on voluntary ACH. There is, I think some confusion around how that works. I think there is also notes around, auto titles, and I will also say, the definition of APRs, still yet to be defined. But other than those three, we think this is overall net beneficial and positive for Springleaf.

That's great context. Thanks very much.

Thank you. Your next question comes from J.R. Bizzell of Stephens.

Good morning. Thanks for taking my questions. Jay, when I think about this shift to late stage, the delinquencies being shift in centralized areas, and then kind of looking at your addition in Tempe of 60 collectors, just wondering, is this a function of -- you're just seeing a nice improvement in that late-stage collection process and you are going to continue to add more to the centralized platform?

Look, three questions J.R., I'd say a couple of things. It has helped us -- in the vast majority of customers, once they go three down, we have tried everything we can, to get them back on plan. I'd say, in general the relationship is broken, and a fresh start has frequently helped, in terms of a new person working that relationship and trying to come up with solutions. Because that branch, through the customers, they had three months to work with, a fresh voice is frequently helpful, to try and rehabilitate. So that was the main thinking, we have also got significant rates and other things around collections, doing it on a standardized basis, what's much more important for us, as well as the fact that, that fresh voice. So we have seen improved performance around our delinquencies. Clearly we, as I mentioned, we wanted to standardize our policies across the company, which resulted in the no-dimension around the fourth quarter. But I'd say, the better collection, the standardization of policies around the compliance world we live in, and the third benefit, which has been most important, has really been to give the branches additional capacity to go out and bring a new business. So I'd say, across the board it has been a win-win for both the branches and the company overall.

Excellent. Thank you. And switching gears, I know we have hit on auto quite a bit, but just wondering about that -- I think in the last call, you stressed that marketing around auto wasn't going to really flow into the system until the back half of the year. Is that still the case, was there any marketing around that item this quarter, or is it still kind of word of mouth, as they walk into the branch?

Still very limited. We are still working on the auto targeting, which is specifically going out, figuring out types of cars people own, the debt they have on it, bringing that altogether to very specific marketing to those types of customers and eligible customers. But at this point, its really a customer looking at their options. They are seeing where a personal loan could be, they are seeing where the auto loan could be. They are seeing what the auto loan could be, they are looking at rate, they are looking at payment, they are looking at what it would take to pay it off, and they look at their holistic financial solution, and they are frequently walking out with more free cash flow, in spite of the bigger loan. I think that's largely driving.

Great. Then last one for me, continue to see nice online strength. I think you said 70% of new accounts being driven in by online. What are your thoughts on that, early innings still? You still think there's a lot of room to grow there? And obviously, you are updating that, so that you can leverage that online and make loans through the online process. Just kind of give us an update around that.

Sure. What I'd say is -- what I mentioned, 70% of our new customer application start online -- of the new customer loans we closed, about 45% of those, were started online. What's interesting is, in spite of direct mail, which we still use a lot of, many-many of the customers that we will send a mail piece to, will log on and come online. And what's ironic is, you could say the exact same for the marketplace lenders. What we hear, and many of you may have received, one of the biggest users of mail happens to be lending club, ironically, so the number one supposed digital player is continuing to use mail to engage and they are hoping the process to start digitally. So what I will say is, we see it as a portal and a mean that's highly leverageable, we can process a lot more online before many of these customers come into a branch. We can give them auto decisions, for those that we think qualify, subject to the exact same process around the verification of income, identity, and other things, we can get the loan ready, and let them know they are approved much quicker and take them off the market and all those things are huge benefits, to being able to it digitally, as opposed to calling in, coming in. People are using, as we all know, computers, to make their lives simpler, quicker and easier, and we want to make sure we are doing all those things.

Excellent. Thanks for the detail, and thanks for taking my questions.

Sure. Thanks so much J.R.

And your next question comes from Don Fandetti of Citigroup.

Yes Jay. I was wondering if you are seeing any change in the mix of new originations that come from existing customers that are essentially rolling forward into a new loan? And then, can you talk a little bit about, what you think the relative quality is of some of your new accounts? Is it the same, are you reaching down, and why don't we start there?

Sure. What I'd say is, it relates to our originations and we think really in a few categories. We think of new customers, which we just talked about with J.R. We think of former customers, those that have borrowed from us formerly, fully paid us off and then have another borrowing need, and come back, and then what we call present customers, who have a loan, have performed well, have paid us down, we have re-underwritten and written them a new loan and probably have given them additional proceeds. I'd say, the mix has remained very consistent. That really hasn't changed at all, in terms of the quantum of customers going through each one of those. What I will say is interesting, is we have seen a number of smaller unsecured existing customers, present customers, see the auto option are turning into much bigger loans. We have had a lot of $1,000 and $2,000 loans that probably would have run off in the near term, that have turned into $10,000 to $15,000 loans, and that has been, clearly, hugely beneficial to the branches, to us, especially where we'd have that preexisting relationship. As it relates -- the second part of the question is, credit trends, what are we seeing. What I'd say is, we are as discerning as we have been in the past. We continue to turn down, unfortunately, four out of five of the applications we see. We are only approving in total, about 20% of the loans that come in, and that has been very consistent over the last few years.

And when you do underwrite an auto loan, how do you think of the residual value, in terms of an environment where used car pricing will likely soften a bit? Then, can you talk about the term of your auto loans? I know in the subprime industry there has been some extension of term, but it looks like you guys have been pretty steady.

Absolutely. What I'd say is, our average term is 50 months on the auto, and I think the average term -- its hard to compare, the new used mix, the age, you got to put a lot of things in the context. Ours is very short. We have not gone out, I think past 60 at all, the average has stayed, as I said, just over 40 years on the newer collateral. A little bit shorter on the older cars, and we keep a very tight control over loan-to-values, against NADA. We repoed very-very few cars out of the newer auto program, I think you can count them on one hand, or maybe a couple hands and a few toes. But it isn't much more than that, and I'd say, the guidance and origination is really set around customer's income, value of the car, age of the car and real consideration of taking into the fact that -- and we've factored in the fact that, auto prices are volatile, and we will see some element of volatility over the life of these ones.

Got it. Thank you.

Your next question comes from Vincent Caintic of Macquarie.

Hi, good morning guys. I have two questions; first, operationally, you have posted some very strong loan grown on a standalone basis with Springleaf; and OneMain, in the past, has not really been growing that much, if at all. Was wondering if the trends that you are seeing in Springleaf are -- if that can continue onward with the combined entity? And also, what sort of loan growth is implied in your 2017 guidance of $800 million to $900 million?

Sure. Couple of great questions. Look, one of the reasons -- I'd tell you, there are really two things -- a lot of things have appealed to us about OneMain, when we announced this back in March. First, it was highly profitable, it was a company that had a long history of doing business the right way, in a way very similar to us, which was a very customer first approach. So I'd say, two primary appeals were, how they went about their business, the fact that they also capped their rate to 36%, the fact that they still emphasized that customer experience, made it a very good cultural fit, the fact that they were already making sort of in the $500 million range, was also appealing. But then, when we layered in the fact that, they had been in Citi Holdings for some number of years. We thought there had been underinvestment in the franchise and in the growth optionality of what the company was capable of, was really what got us most excited. So, I'd say, a lot of what we have accomplished over the last few years around analytics, around branch incentives, around how marketing is done, etcetera, I can go down a long laundry list, around the auto products, are all things that we hope in the near term, post close. We will be able to effectuate and roll out in OneMain and ultimately bring a greater sense of growth to their branches. Again they are at $7 million, but there is no reason those can't be $8 million, $9 million, and $10 million branches. They don't service that many customers out of the branches than we do. As it relates to the growth number for the guidance, what I'd say is, we are at $14.5 million of receivables today, of which about $2 billion are SpringCastle, about $12.5 billion are branch receivables, either us or OneMain's combined like we are at $4 billion, they are like $8 billion unchanged and I think we were talking about getting to a number of -- in the neighborhood of like $14.5 billion to $15 billion, something in that range. Let's call it the $14 billion to $15 billion range for the -- against $12.5 billion.

Got it. That makes sense. Thank you. And then, the other one is, and I know you can't talk too much about the antitrust review, but if there's any details that would be appreciated. And specifically, just taking a step back, having something with antitrust kind of implies that you have cornered the market here. But could you give us a perspective actually on what the Department of Justice is comping your set against? Is it the entire $3.2 trillion U.S. consumer loan market? Or any kind of color there would be appreciated.

Sure. Look, I can't specifically speak to what the DoJ is looking at. But I think, you guys all know, as we do. We face a lot of competition every day. There are 6,500 credit unions, many of them small and in the community. There is hundreds, if not thousands of local community banks. There is hundreds, if not thousands of other consumer finance companies. In many of these communities, we are seeing the growth of the online player. So I think, we'd all be comfortable saying this market is highly fragmented, intensely competitive, and I think they are just reviewing that as -- this is a high profile transaction of a couple of large players coming together, and we are not in any way surprised, that this is something that they would look at.

Great. Thanks for the color. Appreciate it.

Sure. Thanks for the questions.

Thank you. Your next question comes from Paulo Ribeiro of BMO Capital Markets.

Good morning. I have a couple of questions related to the OneMain acquisition. First, on the goodwill, in the last earnings call we talked about $1 billion, and I know it was just an indication based on OneMain's S-1 that was the carrying value that the loans had. The pro forma numbers seem to indicate about $1.8 billion, almost $1.9 billion. So I want to talk about that difference there, walk us through a little bit, and most of it seems to come with the value of the related parties debt. And also, there's a footnote here that says that, that amount, $1.84 billion, is expected to decrease significantly once the identifiable intangibles have been assigned fair values. Can we get some color on that, and I'm just trying to get a handle of what to expect the goodwill actually to be here, because there's a lot of numbers floating around. The second question is about attrition rates from the book that you're going to buy from OneMain, in both -- maybe in terms of percentage of loan books or earnings, what do you think the attrition rate could be once you have closed the transaction? Thank you.

Before I turn it over to Macrina, let me just clarify a couple of quick things. Macrina will talk about the tangibles, intangibles, how they came from the various areas they are in, as opposed to the fair value mark that Citibank put or OneMain included in their S-1, which is really calculated on a different basis. So what I'd say is, I think it breaks down the question, on the related party debt. There won't be any related party. There is not expected to be any related party debt closing, all that will be fully dealt with, by funding either the securitizations or a warehouse that has been put in place. So all the debt related matters really have -- will have zero impact on the intangibles. I will let Macrina talk about the intangibles. There will be a premium on the asset after acquisition, and then, there will be some intangibles.

Sure. Thanks Jay. In terms of the purchase price allocation, as we had stated in the pro forma as well, this is still a preliminary estimate that we are going through the process of, and this will be finalized at closing. But in terms of the information that's currently in the pro forma, the $1 billion I believe, that you're referring to, is really related to the receivable fair value delta, that one main had shown in their footnote disclosure. OneMain had approximately $1 billion of fair value increase, compared to their carrying value of the receivables, which is the par value of the loans, less the allowance. If you look at our pro forma information, we are coming in -- roughly about the same maybe, $50 million or so lower than the $1 billion, but we are coming in around the same number, where around 103% of par value OneMain had a little bit above the 103. So roughly about the same number. In terms of goodwill and intangible assets, at this point, we are still looking, what will be the identified intangible assets. And so we think the combined number should be around the $1.8 billion that you see, and we expect that to be in line at closing as well, which would be a negative to the tangible equity value you look at, but I think, this is in line with what you expectation was, initially.

Perfect, very helpful. The second question, in terms of attrition, if you can comment a little bit on what to expect once you close the deal, if there's a lot of overlap in the loan book? Or, because of the DoJ -- I mean, I know it's too soon, but just a general sense to look internally, how are you thinking about attrition in terms of earnings or loan book?

Sure. We don't fully know, because we have been able to [indiscernible] to exactly identify overlapping customers, but its not a big number. In general, the customers have picked one relationship over the other, or hundreds of other places that could have gone, and gotten loans. So we think, in general, this is very -- certainly pro-consumer. We think in general, between the products we offer, and some of the-- I'd say, upscaler products that OneMain has offered. We expect to actually to be able to broaden the base, that each of one us offers to the consumer. So one of the reasons we are highly optimistic around and the conversations around DoJ is, the fact that we will be providing a broader base or a suite of products, to the customer base out of either branch. I think one of the things OneMain has been known for is, offering larger personal loans to, -- I'd say higher credit quality customers, hence their higher FICO on their book, that's something we are excited to learn from and sell out of our branches, hence, their higher average loan receivables and certainly the auto products and some of the other things that we have undertaken, and we hope to be able to offer out of their branches. So that's why we are optimistic on the growth side, I'd say on the attrition, I don't think we expect to see a lot.

Perfect. Thank you.

Thank you. Our final question is coming from the line of Ken Bruce of Bank of America.

Thanks. Good morning. Jay, you touched on this in a couple of different questions and part of your prepared remarks. But there has been a pretty considerable growth in these marketplace models, a lot of money raised at kind of crazy valuations, but they are starting to use some of their more traditional marketing techniques, as you mentioned with direct mail, and clearly are starting to make more of a presence in the market. How are you looking at that group? Obviously, you probably need them today, just so that it kind of provides plenty of cover on the antitrust front, but how are you thinking about that group of lenders? Do you think that they are acting responsibly, in terms of the way they are pushing the product into the market, price levels and the like? Just give us some high-level thoughts, that would be very helpful.

Sure. Look I continue to be impressed by the growth of all of them. I think, as importantly, the product they offer is the exact same product that we offer. The level pay, installment loan with fixed rates that other -- are either a three or five year term, and gets the customer into debt, out of debt, puts them in a better place. So there is different reasons on average, I think the lending customer is gone, and refinance debt, versus the Springleaf customer. But all in all, I think it has been a big positive for the awareness of the installment product, and has been a net overall benefit, I think to the whole market. What I'd say is, it does seem like, I wasn't [indiscernible] [0:48:07], but a number of our -- or my partners and colleagues were. The fact that 2,000 people showed up and wanted to hear everything going on in the online space, tells you, there is nothing very hot here. We pay a lot of attention to the large numbers, that any of them make public, and what I will tell you is, when we look at various cohorts that map closer to some of the cohorts we lend to, for those that go a little bit deeper, we have been -- we look at the potential loss numbers and say, this is the customer that actually needs higher touch servicing. We are seeing much higher loss rates there, than we experience on our own, and I would say to anyone trying to embark and service, this customer says, what I would say the wisdom might do is, be careful. With the customer base its high touch. You need to understand what they go through. You look at the -- any of the press -- 70% of America is paycheck to paycheck. They are pretty frail financial and anything that happens will pose a challenge. There is very little, in most of the marketplace models today, with the ability to collect or work on a loan. They are on auto ACH, and I'd say there is real differences in model, clearly brand servicing is more expensive, but I think it has paid off well by way of performance. But we certainly are paying attention, we recognize youngers and millenials who want to borrow in a different way, and we are doing everything we can to give him the tools, but we certainly do not want to lose our own credit discipline, nor do we intend to compete with any of them, that way.

All right. And as a corollary, do you think that they have funding advantages? I mean, when you look at some of the securitizations that are going off, I mean, do you see there to be any pickup in terms of the way that they are funding these assets?

I think there has been one or two rated securitizations done. I wouldn't say it’s a lot or it’s a dramatic scale. And it has largely been for the higher grade customers. So I think it has been very different thus far. What I'd say about a lot of these models, which is -- we'd start with peer-to-peer, then it was peer-to-hedge fund, now its marketplace is -- while these things are going great, the funding is there. We have been in business doing it as OneMain for a 100 years, that have been there for our customers, and to the extent, markets turn, credit turns, its not funding that's permanent.

Right. Great. Well thank you for your comments. Appreciate them.

Thank you, Ken.

Thank you. I will now turn the floor back over to Craig Streem, for any additional or closing remarks.

Thanks Christy. Thank you all for your attention, for the questions. Hopefully, we were able to deal with them effectively, and you know where I am, if you need anything else. Thank you. have a good day.

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