Onemain Holdings, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Dollar amounts are in millions unless noted. OneMain provides consumer personal loans, primarily to non-prime customers, and related insurance products. It reported approximately 2.4 million personal loans and operated about 1,600 branches in 44 states.
Financial performance and key metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Interest income | $1,000 | $905 | $1,955 | $1,767 |
| Net interest income | $762 | $685 | $1,482 | $1,347 |
| Provision for credit losses | $268 | $260 | $554 | $514 |
| Net interest income after provision | $494 | $425 | $928 | $833 |
| Other revenues | $156 | $140 | $304 | $277 |
| Income before taxes | $256 | $43 | $458 | $211 |
| Net income | $194 | $7 | $346 | $131 |
| Diluted EPS | $1.42 | $0.05 | $2.54 | $0.96 |
- Loan yield was 24.19% in Q2 and 24.06% for the first half, compared with 23.74% and 23.50%, respectively, in 2018. The filing does not provide a clear consolidated net interest margin.
- Q2 originations were $3.879 billion, up from $3.216 billion; first-half originations were $6.462 billion, up from $5.756 billion. Net finance receivables reached $16.980 billion at June 30, versus $16.164 billion at year-end.
- Q2 net charge-off ratio was 6.23%, compared with 6.50% in Q2 2018; the 30–89-day delinquency ratio was 2.14%, versus 2.18%. The allowance was $744 million, or 4.38% of receivables, compared with $731 million and 4.52% at year-end.
- First-half operating cash flow was $1.145 billion; investing cash outflow was $1.347 billion and financing cash inflow was $230 million. Cash, cash equivalents and restricted cash totaled $1.206 billion at period-end.
- Long-term debt carrying value was $15.551 billion, compared with $15.178 billion at year-end. Debt principal maturities totaled $15.903 billion; $7.083 billion was securitized debt. No amounts were drawn on $6.7 billion of conduit capacity.
- Total assets were $21.017 billion and shareholders’ equity was $4.141 billion at June 30, 2019.
Material changes versus comparable periods
- Q2 net income rose to $194 million from $7 million; first-half net income increased to $346 million from $131 million. Management attributed higher interest income mainly to loan growth and higher yield, and higher pre-tax income also reflected lower expenses.
- Reported expenses were lower year over year: Q2 other expenses fell $128 million and first-half expenses fell $125 million. The main comparison item was $106 million of non-cash incentive compensation expense recorded in 2018 related to the Fortress transaction; Q2 2018 also included a $14 million impairment loss on the sale of Yosemite. The year-over-year earnings comparison is therefore affected by these unusual prior-year charges.
- Interest expense rose 8% in Q2 and 13% in the first half, mainly due to higher average debt and a greater proportion of unsecured funding. Credit-loss provision increased 3% and 8%, respectively, primarily with portfolio growth.
- Personal loans secured by titled collateral increased to 50% from 48% at year-end. Management said the portfolio shift and improved collections contributed to a lower allowance ratio.
Outlook, risks and unusual items
- Management said it believes liquidity is adequate to operate and meet obligations for at least the next 12 months, and cited its strategy to strengthen the capital base. No quantified earnings or origination guidance was provided.
- Management identified access to capital markets, non-investment-grade credit ratings, substantial indebtedness, debt covenant compliance, loan delinquencies and defaults, and the adequacy of credit-loss estimates as significant risks. Other disclosed risks include economic and interest-rate changes, regulatory and legal matters, cyber and operational disruption, and insurance claims.
- The company issued $1.0 billion of 6.125% notes due 2024 and $800 million of 6.625% notes due 2028 during the period, and redeemed its 5.25% notes due 2019 and 6.00% notes due 2020. Debt repurchases and repayments generated $33 million of first-half losses.
- After quarter-end, SFC issued another $300 million of 6.125% notes due 2024; OneMain issued $789 million of notes in an August securitization. On July 29, the company declared a $2.25-per-share dividend, including a $2.00 special dividend, payable September 13.
- The planned sale of Merit Life Insurance Co. was subject to regulatory approval and customary closing conditions, with closing expected in Q3 2019. A securities class-action settlement was preliminarily approved by the court and awaited final approval.
- Adoption of the expected-credit-loss standard (ASU 2016-13) was scheduled for 2020. The company expected a material increase in its allowance, a deferred tax asset increase, and a one-time reduction in retained earnings; the amount was not yet clear.
Important facts for investors to verify
- Whether loan growth and improved reported earnings continue, particularly after accounting for the unusual 2018 comparison charges.
- Credit performance and allowance adequacy, including TDR growth: personal-loan TDR balances were $549 million, versus $453 million at year-end.
- Funding costs, refinancing needs and actual availability of capital markets and conduit facilities; cash and insurance investment securities are not all available for general corporate purposes.
- The final impact and implementation of the expected-credit-loss accounting standard.
- Completion and financial effects of the Merit sale, final court approval of the class-action settlement, and payment of the declared special dividend.