OneMain Holdings, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports unaudited fourth-quarter results. OneMain is a consumer finance company focused primarily on non-prime personal lending, with insurance and loan-servicing operations. At year-end, it had approximately 2.4 million personal-loan accounts, $16.2 billion of personal loans, and more than 1,600 branches in 44 states.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Interest income | $3.658 billion | $3.196 billion |
| Interest expense | $875 million | $816 million |
| Net interest income | $2.783 billion | $2.380 billion |
| Provision for finance receivable losses | $1.048 billion | $955 million |
| Net interest income after provision | $1.735 billion | $1.425 billion |
| Other revenues | $574 million | $560 million |
| Other expenses | $1.685 billion | $1.554 billion |
| Income before taxes | $624 million | $431 million |
| Net income attributable to OneMain | $447 million | $183 million |
| Diluted earnings per share | $3.29 | $1.35 |
| Operating cash flow | $2.046 billion | $1.555 billion |
- Full-year portfolio yield was 23.56%, versus 22.64%; the net charge-off ratio improved to 6.40% from 6.74%, while the 30–89-day delinquency ratio edged down to 2.42% from 2.49%.
- Personal-loan originations were $11.923 billion, up from $10.537 billion. Year-end net finance receivables were $16.164 billion, compared with $14.957 billion.
- At December 31, total assets were $20.090 billion, long-term debt was $15.178 billion, and shareholders’ equity was $3.799 billion. The allowance for finance receivable losses was $731 million, or 4.52% of net finance receivables.
- Cash and cash equivalents were $679 million, including $226 million unavailable for general corporate purposes; restricted cash was a further $499 million. Investment securities of $1.694 billion were held for insurance operations and unavailable for general corporate purposes.
- Investing cash outflow of $2.397 billion exceeded operating cash inflow, resulting in a $351 million net outflow from operating and investing activities. Financing activities provided $44 million; cash and restricted cash combined declined $307 million.
Fourth-quarter results
For Q4 2018, interest income was $958 million, provision for finance receivable losses was $278 million, pretax income was $214 million, net income was $168 million, and diluted EPS was $1.24. In Q4 2017, the corresponding figures were $857 million, $231 million, $187 million, $39 million, and $0.29. Q4 2018 net income included substantially lower income tax expense than Q4 2017 ($46 million versus $148 million).
Material changes and unusual items
- Net income rose to $447 million from $183 million. Higher portfolio balances and yield contributed to increased interest income; lower 2018 tax expense also supported the comparison. The 2017 result included an $81 million tax charge related primarily to remeasurement of deferred tax assets following the Tax Act.
- Credit-loss provision increased $93 million, primarily reflecting portfolio growth and increased loans classified as troubled debt restructurings (TDRs); the 2017 comparison included hurricane-related provision expense. Management said the allowance ratio declined as the portfolio shifted toward secured loans and collections improved.
- Other expenses included $106 million of non-cash incentive compensation associated with the Apollo-Värde share transaction. The expense was offset by an equal capital contribution, was equity-neutral, and was not tax deductible. A further $4 million non-cash expense related to an AIG share sale.
- OneMain issued $1.25 billion of 6.875% senior notes due 2025 and $1.6 billion of 7.125% senior notes due 2026, while redeeming all $700 million of OMFH notes due 2019 and all $800 million due 2021. Debt repurchases and repayments generated an $8 million net loss. Total debt was $15.178 billion at year-end.
- The Apollo-Värde Group acquired 54.94 million shares from SFH for approximately $1.4 billion and held about 40.5% of OneMain at year-end; it designated six of nine directors. Douglas H. Shulman became CEO in September 2018.
- OneMain sold its Yosemite insurance subsidiary in the third quarter and transferred legacy real estate loans to held-for-sale classification. A December 2018 loan sale generated $100 million in proceeds and an $18 million gain; a $16 million impairment was recorded on remaining held-for-sale loans. The company also recorded an $8 million impairment of indefinite-lived licenses related to the Yosemite sale.
Outlook, risks, and contingencies
- Management’s priorities include receivables growth, increasing secured originations, improving operating leverage, building tangible equity, reducing leverage, and maintaining liquidity with diversified funding. It expects secured lending to improve credit performance over time, while acknowledging that secured loans generally have lower yields.
- Management expects continued strong credit performance assuming moderate U.S. economic growth, citing underwriting and collection practices. The filing provides no quantified earnings or revenue guidance.
- Management estimated adequate liquidity for at least the next 12 months. It cited $7.6 billion of unencumbered personal-loan UPB, $169 million of unencumbered real-estate-loan UPB, and approximately $5.95 billion of undrawn conduit capacity. Scheduled 2019 principal and interest payments, excluding securitizations, were $1.2 billion.
- SFC debt ratings were below investment grade: S&P B+ (positive outlook), Moody’s B1 (positive), and KBRA BB+ (stable). Funding-market access, refinancing costs, debt-service capacity, and covenant compliance remain significant risks; the company reported covenant compliance at year-end.
- Key exposures include non-prime borrower defaults and economic deterioration; higher funding costs or reduced capital-market access; regulatory changes and enforcement; cybersecurity and vendor failures; and possible repurchase or indemnification claims on sold or securitized loans. OneMain said a 100-basis-point interest-rate move would not materially affect aggregate fair values in its sensitivity analysis, but warned that this is not a forecast of earnings effects.
- A federal securities class action alleging misleading statements about integration and performance projections remained pending. The court denied the company’s motion to dismiss in December 2018; OneMain stated it could not estimate a reasonably possible loss range. The sales-recourse reserve was $6 million, with no material recourse requests believed uncovered by the reserve.
- The company expects the credit-loss accounting standard effective in 2020 to materially increase its allowance, deferred tax assets, and produce a one-time reduction to retained earnings; the amount was not yet estimated. It expected a $183 million right-of-use asset and matching lease liability upon adoption of the lease standard in 2019.
- The board declared an initial $0.25-per-share quarterly dividend in February 2019, payable in March. Future dividends remain discretionary and subject to financial, legal, and contractual constraints.
Investor verification points
- Review whether portfolio growth and improving charge-off and delinquency trends persist, and how TDR growth affects provisioning and collections.
- Assess earnings quality, including the non-cash executive incentive charge, tax-rate changes, and gains and impairments from legacy loan and insurance dispositions.
- Evaluate liquidity available to the parent versus cash and investments held in regulated subsidiaries, near-term debt service, refinancing requirements, and continued access to securitization and unsecured-debt markets.
- Track the expected CECL allowance and retained-earnings impact, and the actual effect of secured-loan mix on portfolio yield and losses.
- Monitor the securities class action, regulatory developments, sales-recourse exposure, and the governance and capital-allocation implications of Apollo-Värde’s ownership and board rights.