Onemain Holdings, Inc. quarterly report, Q2 FY2016

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Onemain Holdings, Inc. — Q2 2016 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2016. Amounts are in millions of dollars unless noted. OneMain was acquired in November 2015, so 2016 results include its operations while comparable 2015 results generally do not; reported year-over-year changes are not directly comparable.

Business context

OneMain provides primarily non-prime consumer personal loans through branches and centralized/online channels, and sells insurance and ancillary products. At quarter-end it operated across 44 states with more than 1,800 branches. The company completed the OneMain acquisition integration and portfolio transactions remained significant during the period.

Financial performance and position

  • Q2 revenue and earnings: Interest income was $741, up from $410; interest expense was $214, up from $171; and net interest income after loan-loss provision was $313, versus $165. Other revenues were $165, including a $22 gain on personal-loan sales and a $13 debt-repurchase/repayment loss. Pretax income was $42 versus $13; net income attributable to OneMain was $26 versus a $12 loss. Diluted EPS was $0.19 versus a $0.09 loss.
  • First-half results: Interest income was $1,572 versus $813; net interest income after provision was $721 versus $330. Pretax income was $294 versus $56, and net income attributable to OneMain was $163 versus a $10 loss. First-half 2016 includes a $167 gain on the SpringCastle interests sale and a $22 gain on personal-loan sales.
  • Credit and portfolio: Q2 average net receivables were $14,138 versus $6,670, while yield declined to 20.99% from 24.39%, primarily reflecting growth in lower-yielding auto-secured loans. The Q2 net charge-off ratio rose to 6.05% from 4.25%; the reported delinquency ratio was 3.07% versus 3.10%. Consumer and Insurance segment delinquency was 2.84% versus 2.39%. First-half provision for finance-receivable losses increased to $411 from $154.
  • Balance sheet at June 30: Total assets were $18,544 versus $21,190 at year-end 2015; long-term debt was $14,362 versus $17,300; total shareholders’ equity was $3,020 versus $2,730. Net finance receivables after unearned insurance premiums and loss allowance were $12,531. The allowance for finance-receivable losses was $608, or 4.42% of finance receivables, compared with $592, or 3.81%, at year-end.
  • Cash flow and liquidity: First-half operating cash flow was $658, investing cash flow was $370, and financing cash flow was negative $1,226; cash declined by $197 to $742. Management cited $1.0 billion of net cash inflow from operating and investing activities, $3.4 billion UPB of unencumbered personal loans, and $745 million UPB of unencumbered real-estate loans, including $526 million held for sale. It stated liquidity was adequate for at least 12 months.
  • Funding: SFC issued $1.0 billion of 8.25% senior notes due 2020 and used part of the proceeds to repurchase about $600 million of notes due 2017. At quarter-end, $7.99 billion of securitization debt and $325 million of conduit borrowings were outstanding; total conduit capacity was $4.75 billion. SFC and OMFH were in compliance with debt covenants.

Material changes and unusual items

  • The $4.5 billion OneMain acquisition, completed in November 2015, substantially expanded the loan book and operating footprint. Management reported $116 million of cumulative acquisition-related transaction and integration expense through June 30, 2016, including $54 million in the first half.
  • On March 31, the company sold its 47% SpringCastle joint-venture interest for approximately $112 million and recorded a $167 million gain. It deconsolidated the associated loan portfolio and securitized debt, while retaining a servicing role.
  • On May 2, the company completed the DOJ-required sale of 127 branches and associated loans to Lendmark for $624 million; the loans had $600 million UPB at March 31. The company recorded a $22 million gain on personal-loan sales.
  • Effective April 1, the company changed its accounting policy for derecognition of purchased credit-impaired loans and retrospectively applied the change. The cumulative effect increased shareholders’ equity by $42 million; prior-period results and EPS were adjusted.
  • At June 30, the company transferred $257 million of real-estate loans to held for sale and recorded a $5 million impairment. In August, it sold a second-lien mortgage portfolio for $246 million, approximately carrying value.
  • Subsequent to quarter-end, the company completed a $754 million auto-loan securitization, sold $83 million of previously retained securitization notes, and reduced the maximum balance of a warehouse facility from $750 million to $600 million.

Outlook, risks and contingencies

  • Management expects $275–$300 million of OneMain acquisition synergies, fully reflected by the end of 2017, and anticipates approximately $275 million of acquisition-related costs, primarily during 2016 and the first half of 2017. Both estimates are subject to uncertainty; no assurance is given they will be achieved on schedule or in full.
  • Management expects continued personal-loan growth, including auto-secured lending, and identified priorities including realizing integration synergies, reducing leverage, maintaining liquidity and diversified funding, and optimizing non-core assets. The filing provides no formal earnings or revenue guidance.
  • Key risks include non-investment-grade credit ratings and dependence on capital markets, substantial indebtedness, borrower delinquencies/defaults, credit-model performance, integration costs and execution, regulation and litigation, and disruptions in funding markets. The company warned the DOJ could impose fines or other actions for violations of the settlement or transition-services obligations.
  • Various legal claims are pending; the company stated that losses for certain matters cannot be reasonably estimated. Its sales-recourse reserve was $15 million, primarily related to 2014 real-estate loan sales. The IRS was examining federal tax returns for 2011–2013; management believed tax provisions were adequate.
  • The company expects the new expected-credit-loss accounting standard to have a material effect but was still assessing the impact. Disclosure controls were concluded effective as of June 30, 2016.

Important facts for investors to verify

  • How much of reported earnings and segment performance reflects the acquisition, SpringCastle disposal gain, loan-sale gain, and purchase-accounting adjustments—and how the company’s non-GAAP segment measures reconcile to GAAP.
  • Whether credit performance stabilizes: track delinquency, net charge-offs, provisions, allowance coverage, and performance of the acquired and auto-secured loan portfolios.
  • Whether management realizes the projected synergies while controlling integration costs, and whether leverage and refinancing needs decline as planned.
  • Liquidity and funding access, including securitization capacity, debt maturities, borrowing costs, and compliance with financing covenants.
  • Any material developments in DOJ settlement compliance, litigation, sales-recourse claims, tax examinations, or the quantified impact of the expected-credit-loss standard.