Onemain Holdings, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports fourth-quarter results. Comparisons with 2015 are affected by the November 2015 OneMain acquisition; OneMain’s results were included from November 1, 2015.
Business context
OneMain is a consumer finance company focused primarily on non-prime personal lending, with credit and non-credit insurance and loan servicing operations. At year-end, it reported approximately 2.2 million personal-loan accounts and $13.6 billion of personal loans, served through more than 1,800 branches in 44 states and digital channels. The company had three reported segments: Consumer and Insurance, Acquisitions and Servicing, and Real Estate.
Financial performance and condition
| Metric | 2016 | 2015 |
|---|---|---|
| Interest income | $3,110 million | $1,930 million |
| Interest expense | $856 million | $715 million |
| Net interest income after provision for loan losses | $1,322 million | $499 million |
| Provision for finance receivable losses | $932 million | $716 million |
| Other revenues | $773 million | $262 million |
| Other expenses | $1,739 million | $987 million |
| Net income attributable to OneMain | $215 million | $(220) million |
| Diluted earnings per share | $1.59 | $(1.72) |
| Net finance receivables | $13,732 million | $15,559 million |
| Long-term debt | $13,959 million | $17,300 million |
Fourth-quarter 2016: interest income was $768 million, interest expense $201 million, loan-loss provision $258 million, other revenues $147 million, and other expenses $427 million. Pretax income was $29 million; net income attributable to OneMain was $27 million, or $0.20 diluted EPS.
- Full-year operating cash flow was $1,326 million; investing activities used $2 million and financing activities used $1,685 million. Cash and cash equivalents were $579 million at year-end, down from $939 million.
- Reported personal-loan yield was 21.37%, versus 23.04% in 2015. The net charge-off ratio rose to 5.54% from 3.69%, while the 30–89-day delinquency ratio improved to 2.31% from 2.57%. The allowance ratio was 5.01%, up from 3.81%.
- At year-end, 43% of personal loans were secured by collateral, compared with 27% a year earlier. Net finance receivables include $13,577 million of personal loans; $153 million of real-estate loans were held for sale.
- Scheduled 2017 principal and interest payments on existing debt, excluding securitizations, were $1.7 billion. The company reported $4.8 billion of conduit capacity with no amount drawn at year-end, and $4.0 billion UPB of unencumbered personal loans.
Material changes and unusual items
- 2016 results include a $167 million gain on the SpringCastle interests sale. The company sold its 47% joint-venture interest for approximately $112 million and deconsolidated the portfolio and related securitized debt.
- The DOJ-required sale of 127 branches to Lendmark closed in May 2016 for $624 million. The company also sold real-estate loan portfolios for $246 million and $58 million in 2016, recording losses of $4 million and less than $1 million, respectively.
- Acquisition-related transaction and integration expenses were $108 million in 2016, compared with $62 million in 2015. Cumulative expenses through year-end were approximately $170 million.
- A change in accounting policy for derecognition of purchased credit-impaired loans increased 2016 net income attributable to OneMain by $23 million and EPS by $0.17; the change was applied retrospectively.
- Finance income increased substantially with the acquired and expanded loan portfolio, but yield declined and loss provision rose. Year-end debt fell partly following the SpringCastle sale, repayments, and other financing activity.
Outlook, commentary and risks
- Management expected to realize $275–$300 million of OneMain acquisition synergies by the end of 2017, including approximately $200 million of operating-expense reductions; it also anticipated approximately $275 million of total acquisition-related expenses.
- Following the systems conversion completed in early 2017, management expected net receivables growth to resume in the second quarter of 2017 and lower credit losses to begin in late 2017. These expectations are forward-looking and not assured.
- In response to increased competition and early-stage delinquencies on 2016-originated unsecured loans, the company tightened underwriting for lower-credit-tier unsecured borrowers in the third quarter of 2016. It was increasing secured lending, which management expects to reduce losses but may also lower yields and constrain receivables growth.
- Management stated that liquidity should be adequate for at least the next 12 months, while identifying reliance on securitizations and capital markets, substantial indebtedness, non-investment-grade debt ratings, covenant compliance, and refinancing access as key risks.
- Other significant risks include non-prime borrower credit deterioration, interest-rate and funding-cost changes, regulatory oversight (including CFPB rules and the Military Lending Act), integration execution, insurance claims and reserves, cybersecurity, and legal or loan-sale repurchase exposure.
- A securities class action filed in February 2017 remained pending at the filing date; the company said it considered the allegations without merit and could not estimate a loss range. The earlier Paddock action had been voluntarily dismissed without prejudice.
- The company reported no common dividends in 2015 or 2016 and did not anticipate regular dividends. The audit opinion was unqualified, and management and the auditor reported effective internal control over financial reporting at year-end.
Important facts for investors to verify
- Whether the 2017 synergy targets and receivables-growth and credit-loss outlook were achieved, and what costs were required to deliver them.
- Subsequent trends in charge-offs, delinquencies, allowance coverage, loan yield, and the secured share of originations.
- Debt maturities, securitization-market access, covenant headroom, and available liquidity relative to scheduled obligations.
- Final outcomes of the Galestan litigation, DOJ settlement obligations, and any indemnity or repurchase claims on loans sold or securitized.
- The effects of the $0.17-per-share accounting-policy change and the $167 million SpringCastle gain when assessing recurring earnings.