OneMain Holdings, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data.
Business context
OneMain provides personal loans, primarily to non-prime customers, through branches and digital channels, and offers related insurance products. At June 30, 2018, it reported 2.37 million personal-loan accounts and $15.4 billion of personal-loan net receivables. Its operating segments were Consumer and Insurance, and Acquisitions and Servicing, with legacy portfolios reported as “Other.”
Financial performance and key metrics
- Q2 revenue and earnings: Interest income was $905 million, up from $772 million year over year. Net interest income after provision for loan losses was $425 million, versus $333 million. Income before taxes was $43 million, compared with $66 million; net income was $7 million, versus $42 million. Diluted EPS was $0.05, down from $0.30.
- First half: Interest income was $1.77 billion, versus $1.53 billion; net interest income after provision was $833 million, versus $645 million. Pretax income was $211 million, versus $123 million; net income was $131 million, versus $75 million. Diluted EPS was $0.96, versus $0.55.
- Credit costs and portfolio: Q2 provision for finance-receivable losses was $260 million, up from $236 million; first-half provision was $514 million, up from $481 million. The allowance was $702 million, or 4.53% of finance receivables, versus $697 million, or 4.66%, at year-end. Q2 net charge-off ratio was 6.50%, compared with 6.62%; the 30–89-day delinquency ratio was 2.18%, compared with 2.19% in Q2 2017.
- Growth and yield: Average net receivables were $15.24 billion in Q2, versus $13.68 billion. Q2 yield was 23.74%, versus 22.53%. Originations were $3.22 billion, versus $2.95 billion; first-half originations were $5.76 billion, versus $4.77 billion.
- Cash flow: First-half operating cash flow was $944 million, compared with $740 million. Investing cash outflow was $1.24 billion, versus $854 million, primarily reflecting loan originations and securities purchases. Financing cash outflow was $46 million, versus $374 million of inflow. Cash and restricted cash totaled $1.14 billion at period-end, down from $1.49 billion at year-end.
- Debt and liquidity: Long-term debt carrying value was $15.05 billion, approximately unchanged from year-end; total equity was $3.49 billion. Cash and cash equivalents were $556 million, of which $271 million was held at regulated insurance subsidiaries or for other operating activities and unavailable for general corporate purposes. The $1.7 billion investment-securities portfolio was held in insurance operations and likewise unavailable for general corporate purposes. The company had $5.35 billion of undrawn conduit capacity and reported $6.2 billion of unencumbered personal-loan UPB.
Material changes and unusual items
- Q2 earnings were significantly affected by $106 million of non-cash incentive compensation expense recorded in connection with the sale of Fortress’s shares. It was offset by an equal increase in additional paid-in capital, was equity-neutral, and was not tax-deductible. A further $4 million of similar expense was recognized in Q1.
- Q2 operating expenses also included a $14 million impairment related to the planned sale of Yosemite Insurance Company. The sale was expected to close in Q3, subject to regulatory approval and other conditions.
- OneMain issued $1.25 billion of 6.875% senior notes due 2025 and $900 million of 7.125% senior notes due 2026. Proceeds supported general corporate purposes and debt refinancing. OMFH redeemed its remaining 2021 notes; the company recorded $8 million of debt-repurchase and repayment losses in the first half.
- The Apollo-Värde Group completed its purchase of 54.94 million shares from SFH on June 25 for approximately $1.4 billion, becoming the largest shareholder with about 40.5% ownership. The company also contributed Independence through its subsidiaries to SFC.
- The Q2 effective tax rate was 83.7%, primarily reflecting non-deductible compensation and state taxes; the first-half rate was 38.0%, versus 39.0% in the prior-year period.
Outlook, commentary and risks
Management’s stated priorities include growing receivables, increasing secured lending, improving operating leverage, increasing tangible equity and reducing leverage, while maintaining diversified funding and liquidity. It said yields had stabilized and expects net credit losses to improve over time as the secured-loan share grows. Management expects continued strong credit performance assuming slow-to-moderate U.S. economic growth, and stated that liquidity should be adequate for at least the next 12 months. These are expectations, not guarantees; the filing provides no specific earnings or revenue guidance.
Key risks include credit deterioration, unemployment and economic weakness, access to capital markets and refinancing costs, substantial indebtedness, regulation and litigation, cybersecurity and operational disruption, and execution risks following the Apollo-Värde transaction. The Apollo-Värde Group’s ownership and board-designation rights may give it significant influence and may not align with other shareholders. OneMain reported compliance with SFC debt covenants and effective disclosure controls as of June 30. A securities class action concerning alleged statements about post-acquisition integration remained pending; the company said it could not estimate a reasonably possible loss.
The company expects the new expected-credit-loss accounting standard, effective for it in 2020, to materially increase its allowance and reduce retained earnings upon adoption; the impact was still being quantified. It also cited approximately $180 million of operating-lease commitments at December 31, 2017, with the effect of lease-accounting adoption still under assessment.
Important facts for investors to verify
- Whether loan growth and higher yield continue to offset funding costs, operating expenses and credit-loss provision.
- Whether delinquency, charge-off and allowance trends improve as the secured-loan mix changes, and the eventual impact of expected-credit-loss accounting.
- How much reported liquidity is freely available, given restricted cash and insurance-subsidiary investment assets, and whether conduit access and refinancing remain reliable.
- Completion and financial consequences of the Yosemite sale, and any further effects of the Apollo-Värde ownership and governance arrangements.
- Developments in the securities class action, regulatory matters and other contingencies; the filing does not provide a clear reasonably possible loss range for the class action.