OneMain Holdings, Inc. (OMF) Q4 2015 Earnings Report, Transcript and Summary

Welcome to the OneMain Financial Fourth Quarter and Full Year 2015 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. 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. You may begin.

Thank you, Paula. Good morning everyone, thank you for joining us. Let's begin with Slides 2 and 3 of the presentation, which you can find in the IR section of the Web site, which we will be referencing from time to time during the call. Our discussion contains certain forward-looking statements about the Company's future financial performance and business prospects and is a subject to risks and uncertainties and speaks 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 our Annual Report on Form 10-K which was filed with the SEC back on March 16th of ’15, as well as in the fourth quarter 2015 earnings presentation also posted on the IR page of our Web site. We encourage you to refer to these documents for additional information regarding the risks associated with forward-looking statements. In the fourth 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 urge you to review that information in conjunction with today's discussion. And if some of you listen to the replay later on, I would remind you that the remarks we make are as of today, February 25th, and has 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 Scott Parker, our CFO. Also with us this morning is Dave Hogan, our EVP of Analytics and Marketing, who will join us for Q&A. And again after the conclusion of our formal remarks we'll have plenty of time for Q&A, so now it's my pleasure to turn the call over to Jay.

Thanks Craig. Good morning, and thanks so much for joining us. This is our first earnings report since we closed on the acquisition of OneMain. So we want to focus on how the combination of our companies has positioned us to create enhanced shareholder value, in addition to reviewing our combined results for the quarter. But first I want to spend a minute on our share price. You may have heard comments from other CEOs about disappointing declines in their stock prices, but I have to say that in this case misery does not love company. The equity market has been extremely tough on financial stocks, and there is no question that our decline has been significant, and a great disappointment to me and our entire team. As a management team, our job is to execute on strategy and deliver the kind of performance you've historically seen from us. We take our responsibilities to our shareholders seriously and will continue to manage the Company as stewards of the trust and investment that our shareholders have placed in us. In fact, it is precisely markets like these that create unique opportunities for strong, well-positioned companies like us, in exactly the types of markets by which two of our great biggest milestones were achieved, the acquisition of this SpringCastle portfolio in 2013, and of course the original acquisition of Springleaf by Fortress. During today's call, we will share some very specific information to highlight why we feel confident about the embedded profitability of the business, our outlook for credit, and the adversity of our funding options. Let me say that we have no doubt about our ability to fund our business, and about the qualities of our personal loan portfolio. We firmly believe the stock price today is not reflective of our very compelling market position and the opportunities ahead of us, especially as we build on the acquisition of OneMain. We are working hard every day to drive strong returns and profitable growth, and our objective is to run the business in a manner that will generate strong ROE, and create significant shareholder value over time. We are confident that as we continue to successfully execute on our strategy, the valuation of our stock will ultimately reflect the embedded economics of that performance. Turning to Slide 4, let's take a look at the economic models of our business, and the key characteristics of how we run our business. The financial metrics shown represent actual 2015 results for Springleaf and OneMain, as if we had been combined for the full year. What it doesn't yet reflect are any synergies from the acquisition, any assumptions from stronger growth at OneMain, or any of the planned changes in the portfolio mix that drive lower losses. And without any of those potential benefits, the business today generates a very strong after-tax return on receivables of over 4%. This fundamental key to how we won the business and managed our credit risk is that we look at it as owners. We treat our customers in a highly personal and responsible manner. We actively manage credit because we are making the loans ourselves, holding them for the life of the loan to capture the full economic value and maintain long-term relationships with our customers. Unlike online lenders, with any loan we originate, we know that we need to collect and fully capture that lifetime value versus generating a brokerage share. Turning now to Slide 5, I want to highlight the size of the very significant market opportunity that we see for the combined company. The overall consumer finance market is huge, over 3 trillion in outstanding and our products enable us to compete in about two-thirds of that market. Our core product, the personal loans is a great solution for the working American, who meets an unexpected expense, such as a car repair, a medical procedures, or a big ticket purchase. In addition, it is also an important alternative for borrowers who want to consolidate revolving credit card balances, or for someone who would benefit from refinancing an auto loan. In round numbers, about 100 million people have FICO scores below 700 and with the acquisition of OneMain our combined customer base of 2.4 million people represents just over 2% market penetration. In addition, this segment of the population tends to be underserved by traditional financial institutions and historically feels more comfortable doing business with people they know in their local communities. According to recent data from BankRate, 24 million Americans are likely to take out a personal loan in 2016, so you get a great sense for the rich opportunity ahead of us. Our customers are working Americans and their borrower profiles very much represent the U.S. demographics as a whole. They earn on average about 46,000 a year, 55% own their home almost all have checking accounts and have multiple credit cards as well. Our customers tend to work in stable industries, such as healthcare, education and government, and like approximately 70% of all Americans, they generally have limited savings in the case of unexpected life events, making access to responsible credit a necessity. Turning to Slide 6, one of the principal reasons we feel so positively about the outlook of our credit performance is that our underwriting approach has withstood the test of time with strong results through numerous economic cycles. You can see that quite easily on the graph where during the financial crisis Springleaf losses peaked below 9%, while private label credit card losses were above 12%. You can see that our credit line demonstrates less volatility, especially during periods of economic stress, which also reflects our extensive use of collateral for unsecured loans. OneMain peaked somewhat higher than Springleaf, and later in our call this morning, we will discuss the significant opportunities we have begun to execute on to bring OneMain's charge-offs closer to those in Springleaf. Turning to Slide 7, I want to amplify on my comments about the economic model by looking at the business itself. Our model is truly unique, built on decades of serving the borrowing needs of working Americans. Our 1,800 branches are located in communities large and small across the country, giving us national scale, coupled with intimate knowledge of the communities we serve. The tenure of our branch and division managers further helps us build long-standing relationships with our customers and our communities as a whole. Our local presence and customer base help us control credit costs, and allow us to be aware of emerging trends at the neighbourhood level. For example, one trend we are closely monitoring is the impact of falling oil prices on local communities. Thus far, in the energy centric areas, which represent a very small portion of our portfolio, our delinquencies have raised very modestly, from just below the national average to about 12 basis points above the national average. In those areas, we have already proactively begun to tighten underwriting. Our local branch presence also gives us an advantage over competitors who depend upon a fully centralized model. Unlike online and pure call center operations, we meet every customer, and as a result experience much better credit performance for similar customer profiles. Springleaf and OneMain share the many attributes of local presence that I just described, but differ in how each has generated attractive returns historically. OneMain has generated strong overall returns through scale, with over 7 million in average receivables per branch, driven by larger loan balances to better score customers. Springleaf has generated better risk adjusted margins through careful and consistent focus on credit performance and importantly, collateral. The combination with OneMain creates opportunities for us to drive attractive returns by combining our greater scale with new products and broader underwriting capabilities. The potential impact of scale benefits can clearly be seen in the over 400 basis point difference between Springleaf's operating expense ratio of 13.3% versus OneMain at 9.2%, and you can see how much operating leverage we will derive from this. In addition to the benefits of scale, one of our critical priorities is the further collateralize the OneMain portfolio mix, to better optimize risk adjusted yields. The first element of this plan, which is already underway and off to a strong start is the roll out of our direct auto refinance program at the legacy OneMain branches. Historically, OneMain was not able to achieve the same charge-off benefits in collateralized lending that Springleaf has, because under Citi's ownership they largely focused on unsecured lending. As we grow the portfolio, we expect collateralized lending to become a larger portion of the OneMain portfolio than the current level of about 17%, which compared to Springleaf's portfolio at 54% today. Collateralized lending has driven meaningfully lower loss levels and been more resilient through cycles. The popularity of our auto refinance program fits perfectly with the customer base, and provides choices with generally lower interest rates than a personal loan. Scott will share more color on our plans a little later in the call. I also want to discuss a few of the more important characteristics of our customer base that we monitor to assess likely trends in future credit performance. First, let me say that we see no signs of degradation in either our customers, or the tens of thousands of applications that we review daily. Looking at our customer base, employment is the most critical factor in future performance, and we still see meaningful employment growth across the country. Our customer base has consistently demonstrated very good job tenure. In addition, we closely monitor other measures of our customers’ health, for example, time in residence, average annual income, revolving debt to income, and credit inquiries, and all of those metrics have remained quite stable. Let's turn now to Slide 8, and briefly comment on our performance for 2015 versus our previous guidance for legacy Springleaf. As you can see we met all of our goals for 2015, as we executed successfully on our key business objectives. The entire management team views this as our personal scorecard that we measure ourselves against. I'll now turn the call over to Scott to pick up from here.

Thanks Jay. And let's turn to Slide 9. On a historical basis, which is our traditional way of reporting, we had core earnings in the fourth quarter of $105 million, or $0.77 per share. This includes the results of OneMain for the full month of November and December. As we closed on OneMain at the end of the third quarter, we would have earned about $1 per share, which we view as our baseline earnings going forward, and importantly, with no benefits of synergies from the acquisition or growth. On a GAAP basis, we recorded a loss of $217 million in the quarter, principally reflecting the reestablishment of loss reserves for legacy OneMain, detailed on Slide 20 of the presentation. On a standalone basis, legacy Springleaf would have reported core earnings of $48 million in the quarter, down sequentially and year-over-year. In both cases principally due to higher loss provisions, which we'll discuss in a minute and higher operating expenses required in advance of closing on OneMain, in order to transition off services previously provided by Citi. Let's turn to Slide 10 and discuss funding. First off, we have about $630 million of cash on hand, and over $600 million coming from the branch sale to Lendmark expected in the second quarter. We have $2.5 billion of undrawn available conduit capacity, with no scheduled amortizations of any of these facilities prior to the first quarter of 2018. In terms of funding ongoing originations, we have forward funding capacity of about $150 million per month of new originations in our existing term ABS structures given the revolving nature. In addition to these liquidity sources, in the first quarter we executed on a number of initiatives to further enhance our liquidity, including our recent APS issuance, which we raised over $400 million, we generated over $500 million in new borrowing capacity, by renegotiating and extending the legacy OneMain conduits put in place about a year ago by Citi and in addition, extended the revolving period on two Springleaf Conduits with $550 million of capacity. Since the OneMain acquisition closed, we have renewed over $3 billion in conduits, which we consider a very decent accomplishment in this market. Turning to Slide 11, you can see our unsecured debt maturity schedule, with the details for the bonds that mature prior to the end of 2017. Options available to us to refinance the payoff of the bonds, include over $1 billion of cash post the Lendmark sale, we have over $2 billion of unencumbered assets, and the undrawn conduit capacity I just mentioned. The diversity of these liquidity sources gives us confidence that we can address these maturities. Let's turn to Slide 12 and go into greater detail on credit performance, picking up on Jay's earlier comments. First off, the loss rates for our direct auto, as you can see on this slide of 50 basis points, does not reflect a fully mature portfolio, and will likely rise a bit from these levels, but we also expect the direct auto loss rates to normalize well below our hard and secured product, likely around 200 basis points. Just to remind you, our direct auto product is just a bigger version of our traditional hard secured loan, using more recent vintage cars as collateral, and does not involve any dealer interaction. We have just begun the roll out of this product through the legacy OneMain branches, and anticipate very positive impacts on growth and credit performance. We are also aiming to raise the share of the traditional hard secured loans in the legacy OneMain portfolio, and the current level of around 17%, up to the mid-30% by the end of 2017. The introduction of direct auto and increasing originations of hard secured loans have been very successful strategies for Springleaf, and we're very confident that they'll be equally effective as OneMain, with the anticipated outcome of driving lower losses. Looking at full year credit performance for legacy Springleaf in 2015 versus 2014, charge-offs grew modestly, up about 20 basis points. The percentage of unsecured loans in the portfolio declined from 54% to 47%, which overtime, will result in lower charge-offs. New customer buying increased from 33% to 36%, principally reflecting results of our marketing efforts. At legacy OneMain unsecured loans grew by 5%, which contributed to the higher charge-offs in that portfolio. Looking at the fourth quarter specifically for legacy Springleaf, the sequential quarter increase in charge-offs was driven principally by seasonality, new customer mix, which as you can see from the chart have higher loss rates and finally the servicing impact that resulted from our change in selection strategy in mid-2015, which led to higher roll rates. The bulk of this impact will be seen in the fourth quarter and then in the first quarter of this year, 2016. On a pro forma basis for 2015, the combined company net charge-off rate was about 6.5%. For 2016, we expect our combined net charge-off ratio to increase to a range of 6.8% to 7.3%, driven by the seasonality of the auto portfolio, and the anticipated increase from the new customer balances in 2016. In addition, we expect about a 15 basis point impact from the sale to Lendmark, as we will be retaining loans over 60 days past due, as well as we will lose the benefit of the 600 million of assets in the denominator of the charge-off ratio. Now turning to Slide 13, let's review or guidance for core earnings per share in 2016 and '17. As I said earlier, we are exiting 2015 at a benchmark holding run rate of approximately $1 per share, not including any upside expected from the OneMain acquisition. As we begin to realize the benefit from growth, credit performance and operating expense synergies, we are projecting a core EPS in 2016 in the range of $4.50 to $5, which takes into consideration the lost earnings from the sale of the $600 million to Lendmark, with the 2016 EPS amount anticipated to grow to the range of $6.20 to $6.70 per share in 2017. We are mindful of the current market volatility and uncertainty and the challenging capital markets. We are hopeful that the markets find firm footing but as you can tell from our comments this morning, we feel good about the prospects of our business, especially including the benefits of the OneMain acquisition. Now I would like to turn the call back to Jay.

Thanks so much, Scott. As I said in the beginning, we had a lot to cover today, and I hope what we shared will help you get a better sense for the opportunities we have to continue to drive strong returns, and manage credit and liquidity in an effective manner. We continue to be extremely excited about the incredible potential of the OneMain acquisition and as we look beyond 2016, we look forward to completing the integration of our two brand platforms and realizing the full benefits of the acquisition. Now I would like to turn it back to the operator to begin the Q&A.

The floor is now open for questions. [Operator Instructions] Your first question comes from David Scharf of JMP Securities.

Hi, good morning, thanks for taking my questions. I appreciate the color on credit and what you're experiencing, in terms of observations around consumer health. Digging into the guidance on the loss rates, though, the 6.8 to 7.3, can you provide a little more granularity on how much of the rise, when you X out the Lendmark and if the normalized rate was 6.65 as a starting point, how much of the rise is due to seasoning of auto, how much of it is due to just some conservatism, or what you're seeing in terms of cumulative loss rates?

We're going to turn it over to Dave Hogan.

So, two things about the losses, one, in terms of the seasoning of the book, that clearly have impact. That portfolio right now is coming in more the 50 basis point range and we expect it to mature into the 200 basis point range, so that will have an effect and with the losses up. I'd say secondarily while we're moving to migrate the OneMain portfolio to be more secured, we continue to see that book season and that will drive some of the increased losses as well. And the last, two things I'd cull out, one, we continue to have success at driving new customer business on the Springleaf portfolio and the Springleaf portfolio, we expect that to occur on the OneMain portfolio. Both of those will drive an increase in losses in the short-term. But over time, as customers get renewed and result in lower losses long-term. And then lastly, one of the items that Scott mentioned is, we did centralize some of the late stage collections on the Springleaf portfolio, any time you make a significant change like that, which we made to drive longer term access to better tools to collect on those last stage local accounts and better compliance, this causes a little bit of a disruption in the short-term. Long-term we end up in a better control perspective overall, but we expect that result to really impact obviously the fourth quarter of 2015, as well as the first quarter of 2016. And then we've seen that stabilize since then.

And shifting to what type of origination and AR growth is inherent in your guidance can you give us a little more color on how we ought to be thinking about gross and net receivables?

Sure. I think we ended the year at about 13.5 between the two operating platforms, about $8.5 billion within the OneMain branch network of about $5 billion. We said it's going to drop modestly with the sale of the $600 million, and then we expect it to grow in the mid double-digit range this year, is sort of what we're talking on a combined basis.

Okay. Mid double-digit, and then just lastly, in terms of the mix of repeat borrowers that you expect, obviously we've seen a little more increase in new borrowers, but when we think about all of the factors that ultimately build up to your forecast on net charge-offs, certainly credit quality is impacted by the mix of new versus repeat, do you expect that, by the end of 2016, we have a bigger mix of repeat borrowers by that time than we saw in Q4 of this past year?

This is Dave I'll take that one again. So on the Springleaf side, I think in the short-term, we'll probably see a little continued growth on the new customer mix, but really by the end of the year, that passive growth will continue, will slow down, although we will continue to see growth. I think on the OneMain side we'll start to see some growth there driven by new customers, but we really like the overall dynamics of that new customer performance. Although the loss is a little bit higher, the profit on those customers is quite strong, and generates long-term profitability, especially as you take those new customers and renew them, and they start to perform like they're lower loss customers.

Got it, thank you very much.

I think it's worth noting, Dave, and you can sort of echo it, within the new customer, to get one new customer we probably have to look at 9 to 9.5 applications. Of the applications we see, probably approximately 5% wind up getting closed for a new customer, give or take, so one out of 20 is ultimately what we wind up closing.

Your next question comes from Moshe Orenbuch of Credit Suisse.

Great. So maybe staying on the credit and growth theme a little bit, it sounds like the effects of the collections change is something that will kind of burn through in the early part of the year, the Auto seasoning will probably take probably into 2017. The question that I had, had to do more with the interplay on the OneMain portfolio, the kind of going more secured, and kind of getting through the burnout of the older loans. Maybe just talk a little bit about how that's going to shake through? I mean, are we going to see losses kind of peaking in the early part of the year and getting a little better, or I mean, how should we think about that? And the other question is, how will this be reflected in your loan loss provisions?

This is Dave. I'll take that one. So the shift to more secured will take a little bit of time. The lending book is comprised primarily of longer term assets, so it sort of changes the direction of how much of the book is secured. It will take a bit of time. I'm not sure that will necessarily result in meaningful quarter-over-quarter changes, but it will take some time to get there. Really the effect of that will impact 2017 losses. So I think that security mix won't necessarily drive how we think about provisioning in 2016.

But perhaps the stuff that's going on in early 2016, has that been accounted for in you reserving?

It has, Jay mentioned in his comments that we've already started to go out of the auto product in the OneMain branches. And that clearly is reflected in how we think about provisioning specifically for that product. And as that grows, of course, we'll be provisioning at lower rates for those assets.

Your next question comes from Mark DeVries of Barclays.

Yes, thank you. I had a number of funding questions, but just wanted to clarify one point about the earnings guidance. Does this still contemplate roughly $275 million of expense synergies?

Yes, it does, so as we talked about, that was trying to get to the $275 million by the end of 2017, so it will have a portion of that in 2016, and then the bigger piece will be in 2017, as we kind of do a lot of the front end integration and bring the companies together.

And then on the funding side, Scott, how far does that $150 million monthly capacity from the existing revolving term ABS structures take you and how long will you have that much capacity?

I’d say based on the revolving capacity we have on there, so that's really just the balances paid down and you have charge-offs, you replenish to stay at a constant balance outstanding, so as we continue to execute new transactions, I think you look at that as we have about $7 billion of facilities out there. If it's at that level, that's where we have the $150 million, so if we're up or down a little bit, it would just change the amount that we can do on a monthly basis.

Is there a minimum amount of cash that you like to hold, and what's kind of target here?

Clearly, we like to have a stable of cash from having that for daily funding, and having liquidity outlook. We don't have a specific target based on the size of the portfolio with the current market environment. But clearly we'd like to have a normal cash balance, in excess of the liquidity we want for dealing with the debt maturities.

As I think about those debt maturities, particularly the $1.6 billion maturity at the end of next year, if you -- let's just assume that the debt markets are not available or not at economic levels. Do you have the ability in that $2.5 billion of undrawn committed conduits, to pledge some of your unencumbered assets there to generate cash to help pay that maturity?

Clearly, yes.

So there are no limitations on that, those conduits aren't specifically for new origination?

Yes, so the unencumbered assets we have is a combination of personal loans, as well as some of the legacy real estate assets, and so as we grow the portfolio, you have more unencumbered assets that you can use to leverage the conduit capacity.

And then finally, given your guidance here, Scott, how much cash flow do you think you would have available to help pay maturities as well, between now and 2017?

Well, I think if you look at a challenging question from the perspective, the portfolio generates operating cash flow, and we invest that operating cash flow from the current portfolio to fund new growth. So the portfolio on a steady state basis would generate cash flow, but then we need cash to fund a new growth. So that's where the funding capacities that we have, it's really just a matter of balancing the growth rates with generating the cash for any debt commitments we have out there.

And if I think about the cash needed to fund that growth, is it 10% of the value of the loans that you had looked at, or something in that ballpark?

You're talking about on a net basis?

Yes, just, on like an incremental dollar of new growth, loan growth. The amount of cash you need to set aside that would basically be needed to support the financing on that?

Well, I mean, every new loan we need that, you're trying to get to what's the net of the operating cash flow versus the amount required to fund the business?

Yes.

I don't have the exact ratio for you on that one, but clearly the piece around the ability between cash and our conduits, and also the revolving facilities give us the ability to fund that on a day-to-day basis, and then it really comes down to what's the portfolio liquidation relative to the new business growth, is the net funding that we need for the portfolio on a day-to-day basis.

Your next question comes from Eric Wasserstrom, Guggenheim Securities.

Thanks very much. Just going back to the loss expectations, can you help me understand is your secular loss rate above or below the 2016 range?

I don't think we're clear on exactly what you mean about the secular rate being above or below the range?

You've given guidance for 2016 of 6.8 to 7.3, and you've underscored a number of dynamics that are going on across the two portfolios, auto growth maturing but having a lower long-term secular rate, as well as the overall movement of OneMain's portfolio from unsecured to secured. And so I guess I'm trying to understand whether the 2016 rate is indicative of some kind of peak outside of credit deterioration because those transitions have not occurred, or if we should expect continued secular degradation and credit losses?

I think if I understand that, as Dave mentioned, some of the actions that we're doing around the hard secured and auto on the OneMain portfolio, you will see the benefits of that more in 2017, as those actions and those portfolios mature, so based on the page that we put out on Slide 12, our expectation is the transformation of auto and hard secured on the OneMain will get our losses more in line with the Springleaf. How that happens is going to be a function of the percentage movement in the secured portfolio. But if all those of actions happen, that is something that would be a benefit as we start to get into 2017.

And then if I look at Slide 4 and I just take the midpoint of your charge-off range, let's call it 7, and we look at what's going on with the pricing on auto, as well as the transition that is going on within the OneMain portfolio to increasingly collateralize lending, which would suggest some compression in the revenues, if the revenue compression is occurring and the losses are going to be higher, then how do you, what is the offset in these other items that gets to the target range of return on receivables?

So when we think of, and Dave can hop in as well, when we think of the margin, whether it's on auto as we absolutely recognize comes with a lower yield, it also comes with a material is over charge-off, we think the risk adjusted margins, once you adjust for OpEx, actually winds up being we're pretty indifferent when all is said and done, to which product goes on, because the larger loan size, as well as a significantly better credit performance. So, when all is said and done, we don't think that whether it's materially a bigger composition of auto with lower losses or personal loans, whether secured or unsecured with marginally higher losses, it makes a big difference to the outcome on the bottom line.

I think the second piece, as you saw when Jay made the comments, is the leverage that we get on the operating expenses, where you look at the economics we put on the page, clearly you see that OpEx for these legacy OneMain versus Springleaf. So, by doing the combinations and executing on the synergies we've laid out, we'd get the OpEx more in line with the OneMain side.

And again this is a full run rate of OpEx which is at least a couple million higher than we talked about being at by 2017.

Your next question is comes from Michael Tarkan of Compass Point.

Thanks for taking my questions. Just another credit one, when I look at the 6.8 to 7.3 charge off guidance, and if I look at your historical performance, it looks like that's right around where we were in '08, if I take the midpoint between OneMain and legacy Springleaf, I know there are a lot of moving parts around seasoning, but is there anything you're seeing from an underlying borrower perspective, to suggest that things may be getting a little bit worse?

First to clarify, that number is again a blend of two portfolios, so when you look at '08, you need to look at a blend of '08, to get a significant number.

I'm taking the midpoint basically of looking at OneMain versus Springleaf. I was just comparing the two lines there?

This is Dave. What I'd say to that is, we're seeing very simple metrics in the customers we're underwriting and the experience we're having with those customers. The core credit performance we feel is quite stable. There are factors like the centralization of the late stage delinquent accounts that are causing a short-term migration. What we think is going to happen through the longer term is, as security gets moved into the OneMain book, we get past that centralization effect, we actually come down longer term. So we like where we are from a credit perspective.

Okay. And then just as I think about 2017 again, I guess there's a lot of moving parts around seasoning and hard secured and auto growth, and I guess are you expecting higher charge-off rates in '17 embedded in that EPS guidance number versus '16?

No, we're expecting improvement, actually, over '16 in '17.

Okay. Thanks. And then just one more on the competitive environment, just any updated thoughts as to where we are today versus where we were three or six months ago, given just what we're seeing as constant growth from the marketplace lenders? Thanks.

Yes, we think, as Scott alluded to, certainly the capital markets have been a little shakier this year. We think that's an opportunity. We certainly have seen demand for the marketplace lender loans have been contracted, we have seen them have to raise rates to meet demand. We think that is all an opportunity in the long-term, because of a couple of portfolio sellers, so those are all things that we think will endure our way. Right now it's hard to see as we probably said, the online competitors are a little bit of the invisible competitor, because you don't see them on the corner. We don't necessarily see our customers going in every day. But I will say, in general, we think these things all help overall, in terms of sourcing better loans, and lower cost of acquisition over time.

Thank you.

So in general, I think we see this as much more of an opportunity than additional competition, which we've faced in the past.

Your next question comes from Sanjay Sakhrani of KBW.

Thank you. I guess my question is a combination of some of the questions already asked. When we look at the core EPS walk, 2016, 2017 estimates, can you just go through some of the assumptions embedded in there? You mentioned some of the origination growth targets. What is the loan growth expectation, as far as like expense saving? I think Scott mentioned there's a little bit of these savings in 2016, but most of it's in 2017. Maybe you can just walk through some of the key drivers of the growth here, if you don't mind?

Sure. I think, we -- as you think about it, there's clearly a lot of moving parts, as you can appreciate Sanjay, but I think we've alluded to most of them. We've said, the big drivers for us are really three things, it's the revenue line at the top, and then you've got operating expenses, credit losses and interest charges, and sort of said at a high level we expect 2017 interest charges to come down as we go sort of the credit and collateral additions to the OneMain portfolio, in addition to the continued growth of the auto product, which we think will have great results over time. I would say expenses we talked about it. We think we're going to drive those lower by a couple hundred million dollars from the operating rate we're at today, and we've said you look at both companies, it was $1.5 billion ending run rate for OpEx, we said that's going to come down. Interest expense, we expect to maintain a balance between secured and unsecured borrowings, which certainly has had a little tone in this quarter, but the good news, is most of our debt in place and will remain in place through 2017. So growth is really a matter of what makes the most sense, in terms of good loans are available that we can fund with the right return on equity. As we talked about mid double-digits for 2016, assuming the market holds. I would say we are in a similar place in 2017.

And by mid double-digits, does that mean like 20s, 20%-ish? Could you just explain mid double-digits?

Sure. I would say teens.

Okay. As far as the stock is concerned, it seems like people have been focused on credit quality and obviously access to the capital markets. I think you guys have kind of touched on credit quality, but maybe just access to the capital markets. I mean, is there anything you guys can do with the debt maturities out in 2017? I mean, it seems like the actual debt today is trading inside of your coupons. I mean, is there anything that could be done to just calm people, investors expectations?

Sure. Well, we recognize that it's out there. I should note that we started about the time we went public, just before we went public three years ago, we had $7 billion in maturities in the 2017. We've taken that down to under $2 billion today. That was done through a combination of retirement, exchanges, repurchases, et cetera. I expect all of those tools to continue to remain available to us between now and then, as well as purely being, we plan on having the flexibility to pay off those bonds. So we want to make sure all of those tools we have had in the past, and continue to have, and will execute on those things as they are appropriate.

Okay. I mean, you guys don't plan to address it any time soon, you probably want to address it closer to when you need to?

No, I'd say we'll address it as it makes sense for ourselves as a Company and our shareholders.

Your next question comes from John Rowan of Janney.

So there's two questions for me. First the ABS deal that you guys recently completed, can you talk about the reason why you didn't sell the bottom tranche, and whether or not you are going to continue to look to sell that piece, and how you see future deals going, whether or not there's a lower advance rate or a higher cost to borrow?

So the first question, clearly we made the decision not to retain the sub note pieces of those mainly because we didn't like the pricing, and it was something that has been, we've done in the past, and we will look at options to sell those when pricing is more attractive. From a perspective of accessing the market, we continue to build out our investor base, and we've been a routine issuer in the secured market, or the ABS market, both on the OneMain side and the legacy Springleaf side, so we have a good track record of performance in delivering for that investment over the years, and we continue to develop that as we go through 2016. Clearly, given the current market price, market conditions, pricing is higher than it was in 2015, but as Jay laid out from an overall funding mix, we have to balance the rates as our overall mix, and at that level it's not going to have a dramatic increase on our overall debt cost.

Do you think that with the presence of other rated issuers for unsecured consumer ABS deals in the market right now that improves the audience for which you're trying to sell these securities and potentially improve liquidity?

Well, I think it's been positive to have, additional parties in the marketplace. One, just from a perspective of an investor kind of understanding, and asset allocation, and number two, as I think we've mentioned on the call, also to show and demonstrate our performance relative to others, I think is also very helpful.

Okay. And then last question for me, going back to your online program, I'm just curious if you could kind of outline what types of variances we'll see in that product over time versus your peers? Do you have an embedded advantage given your store base, and whether or not you can piggyback state licenses without having to use a bank partner, and what if any impact that has on the product offering to the consumer over time versus what you're seeing in the market now?

Sure, a great question. We've all done iLoan three, six months ago. It has been a successful rollout but a very small one. It really continued to be in the test phase in a few states. At this point we are 100% using our state licenses, to originate the loans that are not dependant in any way on bank charters or rent-a-charter, whatever you want to call it. I think some of the benefits we have, is we have a phenomenal centralized servicing operation, I think Dave alluded to it, in that we can do some of our back end collections there. It's also if you look at the results of our Spring Capital portfolio, where we've cut losses from a 12% portfolio to a portfolio with a 4, that's the exact same group of people that is servicing that portfolio. And I think one of the big differences between us and the online lenders is, the online lenders, when you get a loan, you generally sign up for ACH, if you have a problem in any given month, good luck finding someone to talk to, if you can't have your payment sort of automatically withdrawn from your account, and we have seasoned veterans, collectors and people that know how to work with borrowers that we think makes a long-term difference in performance, as well as potential renewals and other things over time in terms of lifetime value of a customer. So we really think the combination of what we've built centrally plus what we've built online is the right model for doing that kind of business, but also at this point it's very small, and we expect it to probably remain small, until we've done further testing of both our underlying models, and all of the validations that you need to go through.

Your next question comes from Bob Ramsey of FBR.

Could you just clarify, the $4 run rate of earnings, does that have the full reallocation of debt from non-core into that core $4 number?

Yes, it does.

And then could you talk about sort of, I know you said there's not much debt, or you had reallocated most of the debt, but what is still outside of the core segments, in terms of what we can expect from a drag on a go-forward basis?

It's mainly at this point the legacy real estate portfolio that we have in the presentation in the back Appendix you can see that. And that's about $800 million. So that's kind of liquidating down, that segment will kind of continue to become less and less impactful on the overall kind of reported numbers.

And then that other segment, that virtually is wrapped up, and there shouldn't be a material impact from the other piece?

Correct. That continues to kind of wind down, also.

And then could you give the break out, I know you’ve said that the cost savings number, more of that is 2017 versus 2016, but could you break out what the expectation is between the two years is, please?

I think the number was kind of on getting to an annualized rate in 2017. Right now, for ‘16, we have kind of have line of sight, and have identified about $100 million of annual savings that will be executed over the course of the year. We've taken some actions already in the first couple months of the year, but we'll continue to do that throughout the year on different initiatives. And then the second piece is really in 2017, as we talked about the build-out in the fourth quarter, prior to the fourth quarter, once we are able to get off the TSA with Citi, and get the systems fully integrated, that is when we start to see, in 2017, a big benefit.

Okay. So sorry, do you get the full $275 million in 2017, or you're just at that run rate by the end of the year?

At that run rate by the end of the year.

But you said you do expect about $100 million of benefit in 2016, or is that an end of year run rate as well?

End of year run rate.

And then last question, can you just talk about, I know you mentioned that you started to roll out the auto product in the OneMain branches, just maybe talk about what that ramp looks like? I mean, is it fully rolled out across the footprint, or have you started in certain markets first and how quickly does that ramp?

It's exactly as you laid out. It's sort of the way we rolled it out. Springleaf, we had 10 divisions, we rolled out probably one division every couple of weeks, so you can figure out it would have been 80 branches covered, given that we have about 800, and ultimately it was within three or four months that we were sort of up to pace. It probably took us six months from when we launched, summer of 2014, it wasn't really until the beginning of 2015 that we were sort of hitting stride, across all 800 I'd say we started really at the beginning of the year, pretty impressed with the clip we're running at. As a matter of fact, I think we're going to push north of $20 million of originations before we close out this month, after having really just started a couple weeks ago. So early take-up is really quite good, but it will probably take until midyear until it's fully rolled out, and I would expect similar production in the way of dollars, probably is what we're doing across the branches.

Your next question comes from John Hecht of Jefferies.

A couple questions ongoing questions on creditors for incremental information. First your recovery rates have been 70 to 100 basis points over the past several quarters. Is that going to be consistent going forward with the integration, or is there a different type of recovery rate in a mix shift basis when we think about the OneMain legacy rates?

This is Dave. So on the Springleaf side, recovery rates have been stable. On the OneMain book, it passes with a lot of sale which tends to be more volatile. I think in the short-term we'll likely see the recovery rate fall a little bit on that as we build out more capacity to do recoveries internally. With longer term, it is the best strategy, it gives you the option of either collecting internally, or selling or placing at agencies externally. So I think in the short-term, a little bit lower, but over time, back to a healthy balance.

Okay. And then I know you touched on this a little bit in an earlier question, and I know there are a lot of moving parts in the credit book, including the seasoning and the migration of the OneMain toward a more secured profile, and the auto mix and new customer mix, but just thinking about all of those, is it fair to think kind of the '17, directionality of '17 expected charge-offs or losses would be consistent with the range you've given for '16, or is there anything else we should think about there?

We expect them in '17 to actually be better than '16.

Okay. And then you guys talked about cross selling the auto product through the OneMain, the OneMain platform, and obviously that will add more security to that portfolio, but is this just a replacement product as you kind of resell there, or is there some revenue synergies you'd expect to get from that cross selling as well?

So, on the auto products, let me address that first, I think that there are two opportunities there. One is of course the introduction of the auto product itself. Similar to what we introduced at Springleaf in 2014. But there's also significant opportunity to migrate the unsecured book to secured by a titled vehicle. So there's really two pieces there. Generally that will result in a little bit lower yield on those particular loans, but there is definitely a revenue opportunity between both companies to drive additional revenue off of the loan book as it stands today.

Okay. And then final question, to this year, and I know this is not core, but just in terms of modeling balance sheet stuff, we know you're going to have the premium amortization over the next couple of years. What other material accounting adjustments or I guess maybe one-time items or ongoing items should we think about just from a GAAP perspective for the next few quarters?

Yes, so for the next few quarters, you saw in the fourth quarter that the majority of the GAAP loss was driven by the reestablishment of the legacy OneMain reserve. You'll see that continue in the first half of the year, as we build that back to the normalized rate for the portfolio. The other big item on the legacy OneMain will be the amortization of the premium, as you mentioned, and that will, it was a smaller piece in the fourth quarter but that will be the bigger piece as you go through 2016, and then they trail off as you get into 2017 and beyond. And the only one big item remaining for the legacy Springleaf side is really the discount on some of the legacy debt that is amortizing, declining in 2016 from '15.

Your next question is comes from Henry Coffey of Sterne Agee CRT.

Obviously we're all focused on credit funding, credit, and then funding. Looking at the credit metrics first, if we go back into the ancient days of 1998, we've had three recessions, right? One almost, the last one almost killed us, and you managed fairly well through that on the consumer side. The '98 to '01 period was fairly mild. Do you have any sense of actually how the book performed then?

This is Dave. In terms of losses on the Springleaf portfolio, I don't have it in front of me, it was significantly below what we saw in the 2008, 2009 time period, but I don't have that number right in front of me.

So in a mild recession, we don't see the stuff that you've shown, is I guess the simple answer then?

Correct. It was better than what you see in the document in the 2009 time period.

And then in the context is of the guidance, you obviously have a lot of liquidity. What capital build do you think we'll see during the course of 2016? And obviously that would be tied to GAAP results?

Yes, so Henry, I think it's, we start to see building of GAAP earnings as the previous question around the amortization of the different items that I mentioned. The one that is, we can't forecast exactly the reserve build is somewhat problematic. It's really the amortization of the premium and that really is tied to the maturation of that portfolio as they run off. So that would be the variable on that one. But the expectation, as we announced the transaction, would be as minimal build on GAAP earnings in 2016, growing in 2017, as those items kind of diminish, and then really 2018 is when you start to see the alignment of the core earnings and the GAAP earnings.

And then kind of going back to the funding capital, liquidity issue, are the real estate assets, what sort of excess cash would you release, if you were able to sell your non-core real estate assets, or if you were able to sort of totally liquidate your position in SpringCastle?

Look, we haven't done a mark to market on either, I'd say for the most part our real estate book is performing quite well. There's about $400 million of, I call them Junior liens, that have very low loss rates that we held back from the previous sale, and then there's sort of a high price of another $400 million of a combination of performing and non-performing. We haven't gone out to get exact values. Clearly it's a portfolio that both generates cash, and there'll be a repayment interest on a regular basis that is creating a fair amount of cash flow, then things look like into 2017, we'll absolutely go check the market, which we know is there. SpringCastle is clearly generating a lot of earnings, we made $120 million pretax last year on our 47%, so clearly have a lot of value there as well. I think we're reflecting a lower number this year, with it running off, but it is running off at a much lower rate. We think there's a long-term annuity in there. So clearly a lot of value built into Springleaf, or SpringCastle, and it should be noted, looking on the capital things, ironically, one of the most profitable assets generates a negative NCI, but then kept within the balance sheet. So it's probably got a huge mark to market value, but on the balance sheet carries a negative NCI.

Your next question comes from Peter [Trophy] of Barclays.

Just a question on the 5 to 7 times target leverage range on Page 4 of the presentation, is there a specific timeline for achieving that?

When we announced transaction, as Henry just asked the question, it's kind of in the 2018 time frame to kind of get to those levels, as we have the impact on the GAAP earnings from the amortization of the two items I mentioned, and that trails off towards the end of 2017, early 2018, and that's where you see the building of equity for that leverage ratio.

Your next question comes from Vincent Caintic of Macquarie.

I just have more of a philosophical question. So I appreciate that the 2016 net charge-off ratio, it's increasing year-over-year because of new customer mix, but I guess given that the stock is trading at $22 a share, and investors are concerned about credit and funding, is it an option for you to instead of putting capital towards these new customer originations, to instead retain that capital and just deleverage the business? Thanks.

Sure, the balance sheet provides us a lot of flexibility in terms of what we can do, what makes the most sense, I think what we're most confident about or excited about is the run rate. We're already making $4 a share annualized, without any benefits of synergy or cost savings, or any of the things we can do. We absolutely will look at the position we're in. We recognize that having closed on the deal, we need to rebuild some earnings, and that's really the goal over the next couple of years, but we certainly will be cognizant of where the share trades, what our growth opportunities are, and what makes the most sense for shareholders.

This concludes the question-and-answer session of today's conference. I would now like to turn the floor over to Craig Streem for any additional or closing remarks.

Thank you. We're all set. Thank you all for your interest, your attention, and please feel free to reach out to us if you need anything else. Thank you.

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