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Springleaf Holdings Inc. (NYSE:LEAF)

Q2 2014 Earnings Conference Call

August 7, 2014 10:00 AM ET

Executives

Craig Streem – SVP, IR

Jay Levine – President and CEO

Minchung Kgil – SVP, CFO and Treasurer

Analysts

Moshe Orenburg – Credit Suisse

John Hecht – Jefferies & Co.

Sanjay Sakhrani – KBW

David Sharp – JMP Securities

Henry Coffee – Sterne Agee

Robert Dodd – Raymond James

Operator

Welcome to the Springleaf Holdings Second Quarter 2014 Earnings Conference Call and Webcast. Hosting the call today from is 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 question following the presentation. (Operator Instructions).

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

Craig Streem

Thanks Maria. Good morning everybody. Thank you for joining us today.

Let me begin as I always do with slide two of the presentation which you can find in the Investor Relations section of our website and which we will of course be referencing during the call. Our discussion this morning contains certain forward-looking statements about the company’s future financial performance and business prospects and those are subject to risks and uncertainties and speak only as of today.

The factors that could cause actual results to differ materially from these forward-looking statements are set forth within today’s earnings press release, which was furnished to the SEC in an 8-K report and in our annual report on Form 10-K which was filed with the SEC on April 15, 2014 as well as in the second quarter 2014 earnings presentation posted on the Investor Relations page of our website. We encourage you to refer to these documents for additional information regarding the risks associated with forward-looking statements.

In the second quarter 2014 earnings material we have provided information that compares and reconciles our non-GAAP financial measures with the GAAP financial information and of course we explain why these presentations are useful for management and investors and we would urge you to review that information in conjunction with today’s discussion.

For those of you who will listen to the replay down the road we remind you that the remarks made herein are as of today August 7th and have not been updated to this initial – subsequent rather to this initial earnings call. Our call this morning will include formal remarks from Jay Levine, our President and Chief Executive Officer and Macrina Kgil, our Chief Financial Officer and as Maria said after the conclusion of our formal remarks we will have plenty of time for your questions.

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

Jay Levine

Thanks Craig, good morning and thanks again all for joining the call today.

Turning first to slide four, let’s jump right in to discuss the highlights of our second quarter. First, in our core business continued strong customer demand for our responsible loan products resulting in healthy growth in receivables strong earnings, all demonstrating the benefits of scale across our branch network. SpringCastle also had a really strong quarter as credit performance continues to improve. Also in the quarter we have started the roll-out of our direct auto product, building on our extensive branch network and powerful customer relationships.

Earlier this year we hired a great leader for this business, Robert Hurzeler with 25 years of experience at Wells, he brings a long background in both branch and central operations including the leadership of Wells multi-billion dollar direct auto lending business. By way of background the auto finance market is about $800 billion in outstandings with about 30% of that in non-prime customers. This presents us with a huge new opportunity and we will principally be focusing on refinanced loans versus purchase loans. This is significantly different than indirect auto finance as we will be lending directly to the customer doing what we do best out of our branches and the auto dealer plays no role in the business.

For Springleaf, we expect this to drive larger loan amounts for a newer vintage vehicles then we see in our traditional auto secured loans. And we also anticipate lower losses for this product line. Still in the very early days we will keep you posted as the business develops. And not to be ignored we also want to highlight the $7.2 billion of mortgage transactions we announced this morning and we will have quite a bit on that later in the call.

Turning now to slide five, in the beginning of 2012 we re-engineered Springleaf to be better positioned to benefit from growing consumer demand for intelligent loan products and for materially less competition. We were confident that our extensive branch network, our strong local presence and our long history of personal lending would provide the foundation for our future growth.

Today we enjoy the fruits of that plan with strong growth in branch receivables, both on a total basis and on a per branch basis driven increasingly by outstanding marketing performance across both digital and direct channels, solid growth in our merchant and customer referral programs and importantly positive trends in national consumer confidence.

While we’ve historically talked about growing receivables per branch our bottom line is really about pretax income per branch. Just to illustrate the progress we’ve made in scaling of our branch business, in 2011 pretax income per branch for the consumer business with a little over $40,000 per branch. By 2013 we averaged a little over $200,000 per branch as we ceased originating mortgages and saw the increasing benefits of better analytics in crisper marketing. And for the first half of this year we’ve grown that to an annual rate of $263,000 per branch and we expect to see continued positive results.

Turning now to slide six, we had another quarter of rising gross yields albeit at a slower rate along with stable net-charge offs. Our net charge-offs for the quarter were pretty comfortable for the first quarter as recoveries continued to improve up about 15 basis points from last quarter. With delinquencies being the best predictor of forward losses we were happy to see the drop in our 60 day delinquency at quarter end from 2.45 down to 2.28. One last point on this slide as our auto business becomes a more meaningful part of our originations and portfolio in future years the more typical loan rate of about 18% will have an impact on our overall yield. However we anticipate this will be more than made up for with incremental growth.

Turning to the SpringCastle portfolio on slide seven, just a couple of quick highlights. First our team in London, Kentucky has continued to do a great job, we believe is a major reason why the credit performance continues to improve. In addition the portfolio today is well seasoned averaging over nine years of age adding to its credit stability. We’ve moved by 20,000 Springleaf accounts into that facility taking advantage of the capacity and servicing expertise down there and then lastly center continues to provide us with significant flexibility and frees up our branch staff to bring in the even greater focus to originations.

Turning now to slide eight, as you’ll recall during our first quarter call we talked about our plan to accelerate the wind down of our mortgage portfolio. Since that time the market for mortgage assets has improved beyond our expectations, leading to today’s milestone transaction. We originally envisioned a three year liquidation plan as our securizations approach their respective call dates. However dramatically improved market conditions allowed us to accelerate these plans. To add a bit of color on the demand side of the market large pools of capital have been raised to pursue these types of transactions and these types of loans and at the same time we’ve continued to be in the low interest rate environment with steadily increasing real estate values.

On the supply side the market has seen a drop in supply with a significant drop in new foreclosure proceedings, limited supply of new originations has all created for the perfect market dynamics for us to liquidate this portfolio early. To highlight a few of numerous benefits of the sale; first it provides us the significant liquidity and dramatically reduces our net leverage. Given mortgages’ uncertain lives the sale also eliminates embedded funding risk that we would otherwise retained. It removes significant potential earnings volatility as we experienced in these recent years from this portfolio, we’ll be eliminating significant operating expenses related to mortgage servicing and as importantly we remove a significant distraction from our core business.

Turning now to slide nine, to put the scope of these mortgage sales in context when Fortress first acquired the Leaf about four years ago we had a bit over $13 billion of mortgages on our balance sheet. In the almost four years since then we’ve taken that down by about $5 billion as of the end of Q1 through sales and organic run-off. By the end of Q3 of this year you’ll see the portfolio drop by another $7 billion essentially eliminating our entire mortgage exposure. It puts us in an amazingly strong liquidity position and gives us tremendous flexibility as we think about our growth strategies both organic and inorganic.

Turning to slide 10, as we just discussed the mortgage sales puts us in an even stronger liquidity position. We ended Q2 with almost $900 million in cash and expect to generate approximately another $3 billion from these mortgage sales. Historically we’ve been very effective at driving down funding cost but with this sale our cost of funds will migrate up in future quarters as the benefit of lower funding cost associated with mortgage securitization is eliminated.

On this slide we give you a snapshot of our receivables mix and balance sheet before and on a pro forma basis after the mortgage sales. Both our overall and net debt declined significantly and our leverage ratios are significantly improved coming down to three to four times. Again our real estate exposure is essentially gone.

Before I turn the call over to Macrina, I want to say how proud I am of our entire Springleaf team, 5,000 strong, for the team’s great performance including this very significant sale. And now over to Macrina.

Minchung Kgil

Thanks, Jay. Let me begin with slide 11 the summary of our financial results for the quarter. As Jay said, another very solid quarter with our core business generating pretax earnings of $94 million, well ahead of our first quarter results. Our consumer and insurance segment earned $60 million pretax in the quarter, significantly ahead of the first quarter and also ahead of last year’s quarter adjusted for the $25 million benefit from the sale of previously charged-off receivables. The most significant driver of our sequential quarter improvement was growth in the consumer loan portfolio.

Our acquisitions and servicing segments which is the SpringCastle portfolio contributed nicely to our results again this quarter, driven primarily by continued improvements in credit performance. Our GAAP basis net income for the quarter was also up nicely reflecting the solid core business earnings we described this morning as well as reduced losses in our non-core real estate portfolio. We also realized the gain of $35 million pretax in the second quarter from the sale of half a billion of real estate assets that closed in June. This gain is included in the overall projected gain of $575 to $625 million pretax on the real estate asset sales that we recorded in this morning’s earnings release. And is also included in the overall $7.2 billion assets sold. We are reporting these amounts separately because this transaction closed in the second quarter.

Turning to slide 12, I want to walk you through our guidance update. First, we are increasing our guidance for net finance receivables to a range of $3.7 to $3.85 billion, reflecting the continued strong growth in our branch personal loan business and the early volume trends from our new direct auto loan product. Second, we are fine-tuning our yield expectation range down by about 15 basis points largely due to the launch of our direct auto product. We expect the financial impact of this product to be a net positive for us with strong returns even though pricing is at lower rates than our traditional personal loans.

Next, we are projecting that our risk-adjusted yield will come down as well by the same 15 basis points as gross yield. Finally, we are once again raising our expectations for pretax income for the Acquisitions and Servicing segment reflecting the terrific credit performance of that portfolio.

Now before we start the Q&A period I want to walk you through some of the impacts of our expenses from the real estate transactions we announced this morning. First, we expect to incur about $16 million of one-time costs in the third quarter related to the transaction. Second, until the cash is deployed either by reinvesting for growth or by repaying debt the interest expense on certain unsecured debt will continue to be captured in other non-core and will have limited impact to our core earnings. In addition, we expect ongoing bottom line benefit in our operating expenses from the effective elimination of the non-core real estate segments.

Operating expenses in that segment have been about $80 million per year and the majority of this will be eliminated as a result of this transaction. The balance will be reallocated to the other segments and we will work to minimize this impact over time. And now let me ask the operator to begin the Q&A period.

Question-and-Answer Session

Operator

Thank you, the floor is now open for questions. (Operator’s Instructions). Our first question comes from the line of Moshe Orenburg of Credit Suisse.

Moshe Orenburg – Credit Suisse

Great, so I mean excellent transactions, really kind of took us by surprise and in a good way which doesn’t happen that often. So I guess what is the first obvious question is could you talk a little bit about what you would be doing with the money. You don’t even have more than a $1 billion or so of that maturities in the next year and a half. So could you talk a little bit about where you think you’re going to deploy that?

Jay Levine

Sure, it’s a great question. We certainly are in an evitable liquidity position which gives the company a lot more optionality than it’s had in quite some time. You’re right about the liquidity schedule. We look at it I think as it executes over a longer period of time than just a year or two and our maturities are slightly bigger than that if you look out over the next couple of years and that’s certainly something we want to take care of. But I would say it’s a resources of or reserve of resources that we intend to use either to deal with debt or to fund growth and we continue to see strong organic growth and we hope that there continued to be inorganic opportunities that we’ll be able to take advantage of as well.

Moshe Orenburg – Credit Suisse

So could you just maybe kind of talk about the environment and what you’re seeing relative to the past? I mean is it increasing, decreasing could you talk a little bit about that?

Jay Levine

Sure on the branch side, our growth continues to be at strong levels as we’ve seen over the past couple of years. Fundings are up nicely, applications are up nicely. Demand is as good as we’ve seen over the past couple of years. We haven’t seen any drop in them as a matter of fact we’ve seen a growth in demand for the responsible loan products that we offer. I’d say we continue to see incoming inquiry from retailers and others who want to partner with us to provide financial solutions to their customers that we’re working on together. I think it’s pre-mature to lay out any names without something that looks intriguing and something that we’re looking at growing and certainly the early result of our auto business are that this is something that could have moved the needle next year.

Moshe Orenburg – Credit Suisse

Inorganic side, anything you can kind of share with us?

Jay Levine

At this point there’s nothing really appropriate to comment on. The market for portfolio as I’ve said in the past has been quieter than we would like. We haven’t seen a lot of other banks or others letting go of thing at attractive yields or yields that would make sense for us and the equity holders. On the company side we haven’t seen anything that’s appropriate to report at this point.

Moshe Orenburg – Credit Suisse

Okay thank you.

Operator

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

John Hecht – Jefferies & Co.

Good morning thanks very much guys. Real quick, just for modeling purposes you mentioned that your cost of funds will change or be modified because you’re retiring a lot of mortgage securitizations. Do you having handy that average cost of mortgage securitizations that will be run-off type of the sale of that portfolio?

Minchung Kgil

All of our mortgage securitizations will be taken off our balance sheet. We expect cost of funds to increase around 60, 70 basis points.

John Hecht – Jefferies & Co.

Okay that’s very helpful, thank you. So two questions one is, the portfolio growth at the branch level continues to be strong. I wonder if you could talk about i-loan and maybe an update of the composition of loan apps that you’re getting online versus stores and trends you’re seeing with respect to that.

Jay Levine

Sure, we’re seeing applications year-over-year up anywhere from 25% to 50% depending up on region, stores and channels, so strong growth in application trends. I’d say the bulk of the growth is coming from change in consumer behavior, it’s coming online. It’s easier for people to start the process today than it’s ever been. However I think as we talked about, almost all of our loans continue to get closed in the exact same way where the customer will come in once approved even if it starts online, the customer will come in to the branch and we’ll go through the process we always have which is getting to know that person, validating identity and making sure that’s a capable customer that actually and the loan is appropriate for his circumstances. But what has been best about the digital channel has really been the growth in the number of loans and customers we’ve been able to look at and see.

John Hecht – Jefferies & Co.

Okay and then final question is Spring caps obviously that’s has been performing ahead of expectations. Number one is, what do we think in terms of run off rates at this point in time, are those going to be stable or going to be – or are they going to change and then second is what might be the stabilized charge-off rate in this portfolio we should expect?

Jay Levine

A bunch of good questions, what I’d say is we’ve seen a slowdown in the run off rate of that portfolio but I think the easiest way to look at that is just look at sort of where it’s been trailing and we hope it continues to sort of stay in that kind of range. And it has been reasonably stable, it has slowed down as defaults have slowed down. So that is a component of the run off and that’s dropped by about 20%.

The other thing, I would say default rates going forward, we’ve been pleased that the overall charge off rates dropped by probably a third since the portfolio came on and 20% in the last couple of quarters. How much lower can it go, that’s a great question? At this point we’re pleased with where it is and I think it would be early to start predicting it’s going to get a lot better or a lot worse.

John Hecht – Jefferies & Co.

Okay, fair enough. Thanks very much guys.

Jay Levine

Sure.

Operator

Our next question comes from the line of Vincent [Hanset] of Macquarie.

Unidentified Analyst

Hi. Good morning and congratulations guys on the legacy mortgage sale. Have two questions, the first being on the comments on inorganic growth and kind of not talking about specific transactions but if you could talk about what you’d like to achieve with that. So would that be like expanding branches, more capabilities in a certain area, another product offering and what sort of returns you would be looking for there?

Jay Levine

Thanks, Vincent. That’s really a good question. We’re looking at things in a couple of different way. I’d say first we’re looking companies where there might be overlap and there would be certainly cost synergies but we want the credit portfolios and the way whoever it is that does business to be in a way that is comparable to how we go about our business, that’s first and foremost. There is lots of small consumer finances companies out there. There is very few we would say culturally fit in terms of how we think about the business, how we think about the customers and that’s very important.

So I would say whether it fits in to our footprint or expanded our footprint, the first and foremost is how do they go about working with the customer, how do they handle their business and that’s a tough thing to ask people to change how they’ve been doing their business for years. So we are pretty selective in terms of that. I’d say other things is we are looking at how we acquire portfolios, which we talked about in the part not unlike that but we would also look at other means of business that could grow the portfolio with receivables that potentially came in a different way. So if there was something on the merchant side that made sense that’s something we’d explore. Thus far I’d say we have been seen things that make sense or a good fit. But first and foremost would be things that either overlapped or added to our branch scale. Second would be portfolios and third would be the addition of other channels that made sense.

But as we’ve said in the past, the things that Springleaf’s we think excel at is touching the customer, knowing the customer and that intends to be direct lending.

Unidentified Analyst

Got it. Makes sense. And then a second for organic and for these auto loan refinancings, could you size the opportunity here and understanding that you sort of laid out $1 million in receivables growth per branch, how should we think about that going forward alongside with this opportunity? Thanks.

Jay Levine

What I’d say is there is 250 million cars on the road, between 80 million and 100 million of them that have loans on them and a good chunk of those are to non-prime customers. These are loans unlike mortgages that tend to amortize pretty quickly. They tend to be four to six year loans, when they roll off the lot if that’s where they came from. And the customer because cars have retained value tend to hold equities. So the automobile tends to be a place our customers have equity embedded and if it’s a more intelligent solution and a more effective rate that works with the customers it’s something that we are optimistic. We will be successful in over the coming years as an additional product if customers come in and whatever the rate is, these are on a personal loan they want to see something more attractive we now have a more attractive offering for newer vintage cars.

What does it mean for growth in the branches? Well we certainly hope it accelerates our plan, we’ve talked about getting from three, to four to five and hopeful a bigger number in time and we certainly hope that his plan will move the needle a little faster on that. It’s hard to put more specifics on it but I’d say it’s an additional offering that is easy to push through our branches and our branch people are excited about helping the customer’s with.

Unidentified Analyst

Got it and the loss adjusted yields are, I guess they are roughly in line or slightly lower, how should we think about I guess margins going in this business.

Jay Levine

For Auto I would say given that there tends to be collateral and better performance given the importance of the asset to the borrower, I think we would expect charge off rate to be materially lower than the average charge-off rate on the portfolio and that could be a couple of 100 basis points.

Unidentified Analyst

Got it. Thanks very much.

Operator

Our next question comes from the line of [Thomson Vendetti] of Citigroup.

Unidentified Analyst

Just curious, I was wondering if you could provide an update on the regulatory landscape, clearly the CFTB and others have been looking at some areas such as autos and servicing and could you just sort of talk a little bit about whether or not you have been contacted by any regulators or what we should expect?

Jay Levine

Sure. It’s hard to predict the entire regulatory landscape and what anybody should expect, as I think what makes it interesting is it’s a little bit of an unknown. What I’d say is we at this point the CFTB has not yet written guidance for installment lending. We’ve had dialogue with them, we’ve had a very good dialogue with them and at the point that they do write that regulation we certainly will expect to fall under those guidelines. We continue to have great relationships with the states that we do business in and where we continue to be regulated by.

I’d say when we set up our auto business and we were aware there is scrutiny around it, we were very sensitive and a lot of that involved around indirect auto, the role the dealer plays. And like our branch business our auto lending will be done direct to the customer with no intermediary. So I would say at this point it’s been reasonably quite if not very quiet on the regulatory front. We continue to prepare for ourselves living in a more regulated world and I’d say steady as she goes.

Unidentified Analyst

Okay, and then one other follow-up. We have seen some of the credit card issuers they seem to be a little more willing to reach down and loosen up on credit. Do you think you have talked about this in the past but do you think there will be any negative impact to your personal lending business if the card issuers do start loosening up over time?

Jay Levine

Yeah the interest absolutely, would be hard to say. I think any alternatives means of credit offered to customers is something customers will think about. Given the Card Act we’ve seen credit card pricing to our customers be as and or more expensive than what we’re offering and it’s something that doesn’t necessarily solve their problems. The minimum payment keeps you in debt for quite a period of time and I think from everything we’ve seen the Card Act and inability to adjust pricing has made, issuing credit to this counter party with anything more than sort of minimal lines or sort of 500 to a 1,000 of these utility lines more than credit a difficult place and I would say when we continue to monitor the profiles of applications, loans we closed, we really haven’t seen any difference when we look at bureaus and what’s available to our customer base.

Unidentified Analyst

Okay. Thank you.

Operator

Our next question comes from the line of Sanjay Sakhrani of KBW.

Sanjay Sakhrani – KBW

Congratulations again on the real estate portfolio sale. I guess I had two questions. One, was when we think about potential uses of the cash, towards paying down debt, could you just talk about how you might go about doing that. I was just looking at that debt maturity schedule and I was wondering where you might consider prepaying if you would and what those rates would be across the spectrum as-well-as the pricing if you were to repurchase them.

And then secondly, Jay I think I heard you say that the sale of these loans frees up from a distraction standpoint. And I guess I was wondering if auto is an area that you are getting into because of the freed up distraction or are there other opportunities as well? Thank you.

Jay Levine

Sanjay, both great questions. I’d say on the debt side we’ve laid out here our upcoming maturities, this is just our unsecured debt. This does not include our other securitization debt, our SpringCastle debt and there is options around those things what we can do to retire some of those things. So I’d say, in the past if you looked at how we’ve acted in the liability market we’ve both bought debt in the market and we’ve exchanged debt. We’ve done a number of different things. It would be premature and probably inappropriate to comment exactly what our strategy is around the liabilities. But I’d say all those things have been in our tool chest over previous years. We’ve used them effectively.

Our debt, our liabilities from ‘17 and inward do trade at a pretty decent premium to par. They are non-callable bonds. So we would either have to retire them, tender for them, exchange them but those are all things that we’ve thought about and would potentially be in the wheel house. Some of our asset-backed securitization or SpringCastle all have earlier call dates and things we can do around them and those are things we’ve explored. So that’s how I’d think about the liability side.

I’d say auto when you say now that we’re freed up, we haven’t yet envisioned all the freedom we probably have before us, so it is something we actually look forward to, we’re thinking more about. But auto is something we have been thinking about actually for the last year or two, and it was more a matter of finding the right team, the right leadership to set this up.

I did say we had a search that probably went on for the better part of a year before we actually identified Bob and his natural fit of having come to the Norwest Financial Organization and risen up to run a big part of part of Well’s Auto business, with a natural fit of putting together the best of our branch network as well as the things you need to do to centrally underwrite and approve the larger loans in the branches we are used to. So we are thrilled that we have got the launch, it’s off to a nice but small start and Bob has put together a phenomenal team of people around him already. We certainly are looking at other and we’ll always look at other areas where liquidity, we think we can provide solutions and effective rates that are good for customers and good for shareholders.

I mean I’d just say we continue to look at other products where there is a dearth of capital and we will keep you posted.

Sanjay Sakhrani – KBW

All right, great, thank you very much.

Operator

Our next question comes from the line of David Sharp of JMP Securities.

David Sharp – JMP Securities

Hi, good morning, thanks for taking the call. Most questions have been answered. But I did want to follow up on the auto expansion. So you partially answered my question it sounds like it is something that has been in the works for a while. I am just curious, any, you know, any thoughts on the direct market right now given how frothy the indirect lending market has been lately and the fact that capital still seems to be flowing in so prominently into auto ABO. I mean should we be thinking, should we read anything into the timing of this announcement that you think that might be little bit of a slowdown in the indirect side and capital flows might ease and direct lending might have a little bit of an uptake.

Jay Levine

You know, we think of it as very different. It is an interesting thing. We look at the direct lending market and there aren’t that many people and when you think about how we provide our solutions, we are one of the few places you can walk in and get a loan the same day. So who else is and there are again $80 million to $100 million auto loans outstanding. Once a customer says I want to my repay loan maybe a bank will do it. Once you fall out of there maybe it is Credit Unions, after that there are very few places you can turn to get a direct auto loan.

You know, it is very easy when you to buy a car from a dealer there’s 10 people the dealer will call and say we are helping you. Okay, but when you want to go and re-finance your own loan you don’t go back to the dealer. You’ve got to go and find a solution and we’re one of the solutions you can drive in same day either lower the rate, lower your terms, lower your payment or take out money. And we have found as we dealt with the life cycle the automobile has been the most stable asset class and so I would say there is really, really little correlation. The only correlation you would say to indirect auto is there lot more loans out there against a lot more cars which makes the universe of what we can re-finance even larger. But I think in time what we really care about is the fact that the loans are already on the cars. They pay down the customer’s equity and it is just sort of sitting there waiting to either be marketed or refinanced at the appropriate time.

David Sharp – JMP Securities

Got it, got it, and I realize I’m kind of pushing the envelope here asking about 2015 but just to give, trying to get a sense for the magnitude of how much you think that auto loan book might build up over the next year and more importantly how we should think about maybe consolidated yields next year when we have a full 12 months of it up and running.

Jay Levine

I appreciate you saying it is early for 2015 and it is early for us too. But I would say as the next quarter goes on and we see additional insights as to where the portfolio is heading how big it can be, what the yield will look like we will share that with you on the next call.

David Sharp – JMP Securities

Got, got it, fair enough. Hey, a more general question about demand, as we look at the improvement in branch level metrics from Q1 to Q2, how much of that should we think of it as the normal seasonality to business, a typical build up, re-build up after tax refund season and how much of it would you characterize as increased demand and organic application growth.

Jay Levine

Well, you are absolutely appropriate to recognize it is a seasonal business and the first quarter is always the tough quarter, swimming upstream. But if you look at our second quarter we are up 20% year over year on originations and outstandings.

David Sharp – JMP Securities

Got it, and is there anything, based on that kind of growth, any changes to your thoughts about branch level staffing or do you feel like the amount of bodies in place right now can currently handle this kind of growth going forward for the next year or so?

Jay Levine

We think about that a lot. I think we’ve published our, what we call APEs or accounts per employees and we pay a lot of attention to and we think about as opposed to adding staff at 850 stores, we said what are the things that staff does that we could eliminate and centralize and get efficiencies out of. So we continue to have additional capacity in our stores. So I’d say with Bob and having a strong background in central operations examples for argument sake would be things like once we taken auto title each historically each branch has handled its own titling with the local BMBs et cetera. It may be more effective to get a handful of people as opposed to individual persons at every branch doing it and we look at functions like that to give the branches more capacity by centralizing certain administrative functions that were in the branches.

David Sharp – JMP Securities

Got it and lastly any metrics around the percentage of originations that are coming through the i-loan channel now and whether it’s moving the needle much?

Jay Levine

The answer is we continue to see increasing applications coming online. It tends to be predominantly around new customers. Most of our present customers wind up having relationship with the branch. So that’s how that channel tends to get originated or re-originated. Former customers are coming in somewhat online but what I would say is as the applications grow it does become a more meaningful part of our new customer origination. I don’t think it’s yet half of the new customer business but it does continue to grow every quarter.

David Sharp – JMP Securities

Got it thanks very much.

Craig Streem

That’s being closed in the branch.

Jay Levine

And when we talked about i-loan….

Craig Streem

Just to be clear, again sourcing.

Jay Levine

As Craig said, yeah i-loan is what we think of as the digital funnel of how the applications come into Springleaf and then get routed out to the local purchase.

Craig Streem

There’s really no change at this point in our orientation towards full origination and closing online, no change in that at this point.

David Sharp – JMP Securities

Got it thanks very much Jay.

Operator

(Operator Instructions). Our next question comes from the line of Henry Coffee of Sterne Agee.

Henry Coffee – Sterne Agee

Hi good morning everyone and let me add my congratulations. When you look at the sort of $3 billion worth of cash that you have now and you’re thinking about bring it to work absent it’s something really big dropping in your lap, what are your priorities what is the best use of capital?

Jay Levine

Best use of capital is continue to grow our organic receivables and it’s what our strategy has been, it’s what we’ll continue to be. We will originate a substantial amount of receivables and if something inorganic does not happen what this will do is it’ll mitigate the issuance of new debt going forward.

Henry Coffee – Sterne Agee

And then on that side of acquisitions is your box yields tied around the idea that you want a 36% pilot compliant product or would you be willing to sort of stretch into the south and look at some of these small loan companies or some of these much shorter term lenders?

Jay Levine

The answer is we are very comfortable in the space we’re in, we believe that 36 and under market is a very good market. I think everybody knows there’s a lot of reasons where that rate comes from. Our average rate is in the 20s and high 36 but we do set a 36% max on what we will charge any customer and we’re very comfortable with that space. I don’t think we’re culturally set or otherwise to be writing smaller loans and the way those ran.

Henry Coffee – Sterne Agee

Okay and the last question as a very successful lender facilitate your strategy on centralized basis transactions for one time, as this product migrates into more of a cost center like you suggest internal – centralized processing and then the branch has become a closing place or how do you see going long-term?

Jay Levine

How do we see sort of the interaction between central operations and branch operations?

Henry Coffee – Sterne Agee

Yeah particularly in the auto product.

Jay Levine

Well at this point for the auto product the only thing that has been centralized to point is underwriting, where we have set up an operation at Minneapolis where at this point we’ve hired 30, 40 experienced loan underwriters, auto underwriters and they are reviewing all the loans and coming up with the proposals as you can imagine there is infinite originals for any single borrower based on how much equity they have, how much they want to borrow, what the age of the car and we have set up those programs.

At this point we see this as the customer comes into the branch, has a relationship with the branch, Minneapolis helps them figure out what’s the best loan by way of rate and terms of those things. The brand then works with the customer to sell that program and that receivable will stay in the branch, be service by the branch. Ultimately if that doesn’t work out to be centralized back end collection and those things, that’s down the road but at this point the only thing that’s been centralized is the underwriting.

Henry Coffee – Sterne Agee

Hey thank you very much, congratulations.

Jay Levine

Thank you very much Henry.

Operator

Our next question comes from Robert Dodd of Raymond James.

Robert Dodd – Raymond James

Hi guys and again congratulations on the mortgage portfolio. Following up on the i-loan issuance, with it being now an increasing path has been for a while of new customers sourcing. Are you seeing any material difference in demographics of a customer who comes in through that channel versus a new customer coming into the store and obviously your kind of portfolio average customer. I mean any delta in really age or incomes or any other metrics?

Jay Levine

I’d say for closed loans substantially similar. For those that we’ve pulled through if anything I think if I’m not mistaken they have marginally higher income, those that started online. If you look at the total application pile we have what we call the credit seekers. So there’s a lots of people online looking for credit and most of those we unfortunately have to turn away. Again we’ll take probably 5 million applications to share and write a million loans give or take rough numbers and the vast majority of those are of an inferior quality that just don’t fit what we’re trying to do.

Robert Dodd – Raymond James Okay perfect. Thank you.

Operator

Our final question comes from the line of Moshe Orenburg of Credit Suisse.

Moshe Orenburg – Credit Suisse

Have you noted who actually bought the assets?

Jay Levine

We have not and we’ve been asked by the buyer not to. But I would – what I can say it’s both a combination of hedge funds and financial institutions.

Moshe Orenburg – Credit Suisse

Got it and just the other thing and maybe coming at the question in a different way, I mean obviously a wide range between your debt-to-equity ratio now and what it will be pro forma or whether it is pro forma for the deal any sense as to where you want that?

Jay Levine

A very good question, look we’ve had extensive conversations with rating agencies. We’ve said one of our priorities is to be rated higher than we have been in the past. We’ve talked to them about appropriate targets until we’ve got to a much better place than we have been. Targets, I think targets depend on, we’d like to be a double B or triple B company. Probably getting a triple B in the near term is not something that is going to happen in the very near term, but I think the levels we’re at today are appropriate for where we would like to get to.

Moshe Orenburg – Credit Suisse

Thank you.

Operator

Thank you and that does conclude the Q&A session for today. I will now turn the floor back over to Craig Streem for any additional or closing remarks.

Craig Streem

Yeah thanks Maria and thanks to all of you for your attention this morning, your interest and we’re always available for any follow-up. So have a good day and thanks.

Operator

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

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Source: Springleaf Holdings' (LEAF) CEO Jay Levine on Q2 2014 Results - Earnings Call Transcript
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