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When it comes to finance companies, few have had a more interesting history than what is now called Springleaf Holdings (NYSE: LEAF). For 95 years, the company in its various forms has provided credit to the American consumer – from auto loans to household lines of credit to mortgages. The company rapidly expanded, was acquired and spun off a few times, and eventually reached 1,400 offices.
Then the financial crisis hit and it appeared Springleaf was toast. At that point it was called American General Finance, and was a subsidiary of the notorious American International Group (NYSE: AIG), with 1,400 branches – and $7.7 billion in subprime mortgage loans. Some 500 branches were closed as the company reported a $1.3 billion loss. It had about $20 billion in assets under management and some $18 billion in debt.
But then, Fortress Investment Group (NYSE: FIG) bought 80% of the company for a song – a mere $125 million. Springleaf now has a market cap of $5.73 billion, representing a 45-fold return on the investment.
The big change for Fortress came in exiting the mortgage business and placing it into runoff, and moving back into an area that had been abandoned for decades – subprime consumer finance. I’m not talking about payday lending, or even high-APR installment lending. I’m talking about the traditional personal lines of credit (and other products).
A Trillion Dollar Industry
Springleaf now deals in personal loans that are non-revolving with a fixed-rate and a fixed term of two to five years. The company has about 925,000 such loans at the end of 2014, which represented $3.8 billion of net finance receivables. Half of it was secured automobiles.
If this sounds a lot like World Acceptance Corporation (NASDAQ: WRLD), which I believe is going to zero, you’d be right. That Springleaf is able to make a tidy profit without using the machinations that World Acceptance does should tell investors something about the different models of each company. Springleaf, however, is able to make loans at 18% to 36% APR and do quite well for itself.
Yet it isn’t just the subprime consumer that Springleaf serves. According to its March investor presentation, 38% of its loans go to those with FICO scores of 750 or higher. Another 16% are above 700. The average patron is 47 years old, 56% of patrons own a home, its patrons have average household income of $47,000 and 95% have a checking account.
The result is a stable charge-off ratio, ranging from 3.6% to 5%, with 60-day-plus delinquencies stable between 2.5% and 2.82%. The consequence of this underwriting is a risk-adjusted yield on the entire portfolio ranging between 20.5% to 22.3%. That Springleaf is able to get its own funds at 5.35% on average shows it has a great spread to take advantage of.
Springleaf’s most recent earnings report, released Aug. 6, showed that through the first half of fiscal year 2015, pretax core earnings were $208 million, up from $174 million, or a 20% increase. This came on an increase in origination volume to $2.06 billion from $1.67 billion, or 26%. Risk-adjusted yield was 21.92%. Pre-tax income was up 27%. Auto loans now account for 15% of the portfolio, and originations rose 33% quarter to quarter. The company expects net chargeoffs of 5% to 5.5% for the year.
Because Springleaf’s loans are below 36% APR, which is a magic arbitrary level that the CFPB finds acceptable, it is insulated from likely regulatory obstacles.
What we see now is the stock trades at 20 times core pre-tax earnings, based on a 2015 run-rate of about $400 million. That’s right on target with the 20% growth rate. But when you consider the additional income from the mortgage run-off, it is arguably slightly undervalued.
This is making ordinary people rich
Ordinary people across America are getting insanely rich. Take Gladys Holm. She never earned more than $15,000 a year as a secretary. But by making one simple move, she was able to leave an $18 million fortune to a children’s hospital when she died. There’s many more just like her. Find out how they did it right here.