OneMain Holdings, Inc. — 2017 Form 10-K
Business context and period. Annual report for the fiscal year ended December 31, 2017, with fourth-quarter results also provided. OneMain originates and services fixed-rate personal loans, primarily to non-prime borrowers, and offers related insurance products. At year-end it had about $14.8 billion of personal loans, over 2.3 million customer accounts, and more than 1,600 branches in 44 states.
Financial and operating performance
| Metric | 2017 | 2016 |
|---|---|---|
| Interest income | $3.196 billion | $3.110 billion |
| Interest expense | $816 million | $856 million |
| Provision for finance receivable losses | $955 million | $932 million |
| Net interest income after provision | $1.425 billion | $1.322 billion |
| Other revenues | $560 million | $773 million |
| Income before taxes | $431 million | $356 million |
| Net income attributable to OneMain | $183 million | $215 million |
| Diluted earnings per share | $1.35 | $1.59 |
| Operating cash flow | $1.555 billion | $1.322 billion |
- Fourth quarter: Interest income was $857 million, pretax income $187 million, net income $39 million and diluted EPS $0.29. Fourth-quarter 2016 net income was $27 million and diluted EPS was $0.20.
- Portfolio growth and credit: Year-end net finance receivables increased to $14.957 billion from $13.732 billion. Originations rose to $10.537 billion from $9.475 billion. The annual yield increased to 22.64% from 21.37%, while the net charge-off ratio rose to 6.74% from 5.54%; the 30–89-day delinquency ratio increased to 2.49% from 2.31%.
- Margins and expenses: Net interest income after loan-loss provision increased, but segment Consumer and Insurance adjusted pretax income, a non-GAAP measure, declined to $760 million from $784 million. The filing does not provide a clear consolidated operating-margin percentage.
- Cash flows: Investing activities used $2.192 billion, largely reflecting net loan originations; financing activities provided $975 million. Cash and restricted cash combined increased $338 million during the year.
- Balance sheet and funding: Total assets were $19.433 billion and shareholders’ equity $3.278 billion. Long-term debt was $15.050 billion, up from $13.959 billion; 2017 interest expense was $816 million. Cash and cash equivalents were $987 million, of which $242 million was held by regulated insurance subsidiaries or otherwise unavailable for general corporate purposes. The company also reported $5.1 billion of conduit capacity with no amounts drawn at year-end.
Material changes versus the prior comparable period
- Annual pretax income rose to $431 million from $356 million, but net income attributable to OneMain fell to $183 million from $215 million. The 2016 comparison included a $167 million gain on the SpringCastle interests sale; 2017 did not.
- 2017 income tax expense increased to $248 million from $113 million. The Tax Act prompted an $81 million charge to remeasure deferred tax assets, contributing to a 57.5% effective tax rate versus 31.8% in 2016.
- The company reported lower interest expense and lower operating expenses, including reduced Citigroup transition costs. It stated that approximately $200 million of OneMain acquisition cost synergies had been fully realized by the end of fourth-quarter 2017; the transition-services agreement with Citigroup ended in May 2017.
- The share of personal loans secured by titled collateral increased to 43% from 36%. Management said secured loans generally have lower yields and credit losses than unsecured loans.
Outlook, risks and unusual items
- Management’s priorities are to grow receivables, increase secured lending, improve operating leverage, build tangible equity, reduce leverage and maintain liquidity. It expects lower portfolio yields as secured lending expands, with a potential offset from improved credit performance over time. No specific earnings or revenue guidance was provided.
- Management expects adequate liquidity for at least the next 12 months, while noting reliance on loan collections, securitizations and debt-market access. Scheduled 2018 principal and interest payments on existing debt, excluding securitizations, were $1.1 billion. The company redeemed $700 million of OMFH notes on January 8, 2018.
- Hurricanes Harvey, Irma and Maria generated an estimated $25 million of 2017 impact, primarily through higher loan-loss reserves and borrower assistance. The Tax Act and the hurricane impacts are notable non-routine items.
- On January 3, 2018, Apollo- and Värde-affiliated investors agreed to acquire 54.9 million shares, about 40.6% of outstanding shares, from the Initial Stockholder. The transaction was expected to close in second-quarter 2018, subject to regulatory approvals and other conditions. If completed, OneMain expected approximately $108 million of non-cash incentive compensation expense, offset by a capital contribution so total shareholders’ equity would be neutral.
- Key risks include elevated consumer credit losses and delinquencies, non-prime borrower sensitivity to economic conditions, high leverage and refinancing needs, securitization-market access, rising funding costs, regulatory and legal exposure, and operational and cybersecurity risks. A federal securities class action concerning statements about integration and financial projections was pending; the company said it could not estimate a reasonably possible loss.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective at year-end.
Investor verification points
- Track subsequent delinquency, charge-off, allowance and TDR trends, particularly against the higher 2017 credit-loss ratios and the growth in modified loans.
- Assess available liquidity after restricted and otherwise unavailable cash, 2018 debt payments, the post-year-end $475 million net conduit draw, and the completed $700 million note redemption.
- Verify that portfolio growth and secured-loan mix deliver the expected credit improvement without materially weakening yield or profitability.
- Review the Tax Act’s ongoing tax and cash-flow effects and the effect of the $81 million deferred-tax remeasurement charge.
- Confirm the Apollo-Värde transaction’s closing status, required regulatory approvals, governance effects and expected compensation accounting.
- Review the pending securities litigation, regulatory developments, debt covenants and continued access to securitization and unsecured funding markets.