Onemain Holdings, Inc. — Q1 2018 Form 10-Q
Business context and period. Unaudited quarter ended March 31, 2018; comparisons are with Q1 2017 unless otherwise noted. OneMain provides personal loans primarily to non-prime customers through more than 1,600 branches in 44 states, online channels, and affiliated insurance businesses. Its principal operating segments are Consumer and Insurance, and Acquisitions and Servicing.
Financial performance and position
- Earnings: Interest income was $862 million, up from $759 million. Net interest income after provision for finance receivable losses rose to $408 million from $312 million. Other revenues were $137 million, versus $141 million. Income before taxes was $168 million, versus $57 million; net income was $124 million, versus $33 million. Diluted EPS was $0.91, versus $0.25.
- Credit costs and portfolio: Provision for finance receivable losses was $254 million, versus $245 million. Net charge-off ratio improved to 7.10% from 8.02%; the 30–89-day delinquency ratio improved to 2.11% from 2.21%. Net finance receivables were $14.99 billion at quarter-end, compared with $14.96 billion at December 31, 2017; average receivables were $14.99 billion. Originations increased to $2.54 billion from $1.81 billion.
- Cash flow: Operating activities provided $555 million, versus $444 million. Investing activities used $381 million, compared with $59 million provided in Q1 2017; financing activities provided $827 million, compared with $305 million used. Cash and cash equivalents were $1.81 billion at quarter-end; restricted cash was $679 million.
- Debt and liquidity: Long-term debt was $15.90 billion, up from $15.05 billion at December 31, 2017. Cash includes $201 million unavailable for general corporate purposes; the $1.7 billion investment portfolio is held in insurance operations and also unavailable for general corporate purposes. The company reported $4.9 billion of undrawn conduit capacity and $4.8 billion UPB of unencumbered personal loans. Management said it expects adequate liquidity for at least the next 12 months.
- Capital and margins: Total assets were $20.47 billion and shareholders’ equity was $3.38 billion. The filing does not provide a clear consolidated operating-margin measure. The effective tax rate was 26.2%, down from 41.5%.
Material changes and notable items
- Higher interest income reflected loan portfolio growth and reduced amortization of purchase premium; management also cited higher portfolio yields in its consolidated comparison. In the Consumer and Insurance segment, increased secured lending reduced yield relative to the prior-year segment result.
- Management attributed improved credit performance to lower delinquencies, a larger share of secured loans, and collection effectiveness. Secured loans were 43% of personal loans; management noted these loans typically have lower yields and credit losses.
- On March 12, SFC issued $1.25 billion of 6.875% senior notes due 2025. OMFH redeemed $700 million of 6.75% notes due 2019 in January; $400 million of OMFH notes due 2021 were redeemed on April 18, after quarter-end, with an expected approximately $4 million loss in Q2.
- Apollo-Värde agreed to buy 54,937,500 shares from the Initial Stockholder, subject to regulatory approvals and other conditions, with closing expected in Q2 2018. On closing, the company expected approximately $108 million of non-cash incentive compensation expense, offset by a capital contribution so the overall shareholders’ equity impact would be neutral. A separate $4 million non-cash incentive expense was recorded in Q1 following an AIG-related share sale.
- Acquisition-related transaction and integration expenses were $10 million, down from $23 million. Cumulative expenses from the OneMain Acquisition were approximately $249 million through March 31, 2018.
Outlook, risks, and contingencies
- Management’s priorities include growing receivables, expanding secured lending, improving operating leverage, increasing tangible equity, reducing leverage, and maintaining diversified funding and liquidity. It gave no specific numerical earnings or growth guidance.
- Management expects secured lending to lower yields over time but to improve net credit losses as the portfolio matures. It expects continued strong credit performance assuming slow-to-moderate U.S. economic growth; results remain exposed to unemployment, defaults, delinquencies, and economic conditions.
- Key stated risks include non-investment-grade credit ratings and dependence on capital-market access; substantial indebtedness and refinancing costs; regulatory and legal exposure; credit-model and collateral risks; and integration, technology, cyber, and operational risks. SFC and OMFH reported compliance with debt covenants at quarter-end.
- The company is involved in a securities class action concerning alleged statements about post-acquisition integration and financial projections; it disputes the allegations and cannot estimate a reasonably possible loss. It reported a $9 million reserve for sales-recourse obligations and no material uncovered recourse requests.
- Adoption of the expected-credit-loss standard (ASU 2016-13) is expected in 2020. Management anticipates a material increase in the allowance and a one-time reduction to retained earnings but had not quantified the impact. Lease accounting adoption in 2019 is expected to increase reported assets and liabilities; the impact was still being assessed.
- The company had not paid dividends since its 2013 IPO; it planned to evaluate possible 2018 capital distributions, with no assurance any would be made. Personal-loan volume is seasonal, typically highest in Q2 and Q4; delinquencies generally rise after Q1.
Investor verification priorities
- Confirm the Apollo-Värde transaction’s closing status, approvals, and the timing and accounting for the expected $108 million incentive expense.
- Track credit quality as the portfolio grows: delinquencies, charge-offs, allowance adequacy, and the effects of a larger secured-loan mix.
- Assess refinancing needs and funding costs, including the 2025 notes, post-quarter $400 million redemption, securitization performance, and continued access to conduit and capital markets.
- Monitor liquidity available to the parent and operating businesses, distinguishing unrestricted cash from restricted cash and insurance-subsidiary assets.
- Follow the expected-credit-loss standard implementation, the securities litigation, and any developments in regulatory or sales-recourse contingencies.