Onemain Holdings, Inc. — Q3 2019 Form 10-Q
Business context and period: OneMain provides primarily non-prime personal loans through branches and digital channels, and sells optional insurance products. This unaudited filing covers the quarter and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods unless noted. Amounts are in millions except per-share data and ratios.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Interest income | $1,065 | $933 | $3,020 | $2,700 |
| Interest expense | $244 | $227 | $717 | $647 |
| Net interest income | $821 | $706 | $2,303 | $2,053 |
| Provision for credit losses | $282 | $256 | $836 | $770 |
| Net interest income after provision | $539 | $450 | $1,467 | $1,283 |
| Income before taxes | $297 | $199 | $755 | $410 |
| Net income | $248 | $148 | $594 | $279 |
| Diluted EPS | $1.82 | $1.09 | $4.36 | $2.05 |
- Q3 net income increased about 68%; nine-month net income more than doubled. Management attributed higher interest income primarily to portfolio growth and higher yield. Nine-month expenses also benefited from the absence of 2018 transaction-related noncash incentive compensation and Yosemite impairment costs.
- Q3 portfolio yield was 24.16% versus 23.51%; net charge-off ratio was 5.19% versus 5.76%; 30–89-day delinquency was 2.30% versus 2.33%. For the nine months, net charge-off ratio was 6.15% versus 6.43%.
- Personal-loan receivables were $17.8 billion at September 30, up from $16.2 billion at year-end 2018. The allowance was $798 million, or 4.49% of receivables. Secured loans were 51% of the portfolio, compared with 48% at year-end.
- At September 30, cash and cash equivalents were $1.393 billion, restricted cash was $434 million, and investment securities were $1.779 billion. The company said $230 million of cash was unavailable for general corporate purposes and insurance investment securities were unavailable for that purpose.
- Long-term debt was $17.021 billion, versus $15.178 billion at December 31, 2018; shareholders’ equity was $4.094 billion. Operating cash flow was $1.729 billion for the nine months, investing cash outflow was $2.456 billion, and financing cash inflow was $1.376 billion.
Material changes and notable items
- Loan originations were $3.657 billion in Q3 versus $2.899 billion; nine-month originations were $10.118 billion versus $8.655 billion.
- Debt activity included issuing $1.3 billion of 6.125% notes due 2024 and $800 million of 6.625% notes due 2028, while redeeming the 5.25% notes due 2019 and 6.00% notes due 2020. Nine-month debt repurchases and repayments generated a $35 million loss.
- The company declared a Q3 dividend of $2.25 per share, including a $2.00 special dividend. It declared a subsequent regular dividend of $0.25 per share, payable December 13, 2019; future dividends remain at the board’s discretion.
- On September 20, 2019, SFC merged with its parent SFI, effective for financial reporting as of July 1, 2019. The Apollo-Värde Group held approximately 40.4% of OMH common stock at quarter-end.
- A federal securities class action was dismissed with prejudice following court approval of a settlement on August 9, 2019; the settlement included no admission of liability.
Outlook, risks and contingencies
- Management stated it believed liquidity would be adequate to operate and meet obligations for at least the next 12 months. No quantitative earnings or loan-growth guidance was provided.
- The company expects to adopt the expected-credit-loss standard on January 1, 2020. Based on the September portfolio and current economic expectations, it estimated the allowance as a percentage of receivables would rise to 10%–11%, with a corresponding one-time, after-tax reduction to retained earnings. Actual impact will depend on portfolio characteristics and economic and loss forecasts at adoption.
- Key stated risks include worsening economic conditions, unemployment and borrower defaults; adequacy of credit-loss reserves; access to capital markets and debt refinancing; substantial indebtedness and covenant compliance; regulatory or legal actions; cyber and operational disruptions; and changes in collateral values. SFC’s credit ratings were non-investment grade.
- The filing describes ordinary-course litigation and says some potential losses cannot be reasonably estimated. It reports no material off-balance-sheet arrangements and no material changes to previously disclosed risk factors or market risk.
Important facts for investors to verify
- Whether loan growth and higher yield persist without deterioration in delinquencies, charge-offs, or borrower credit quality.
- The realized allowance and retained-earnings impact when the expected-credit-loss standard is adopted; the 10%–11% estimate is not a finalized adoption amount.
- Debt refinancing needs, funding costs, access to securitization and conduit markets, and the availability of cash held in insurance or restricted accounts.
- Whether the special dividend affects future capital flexibility and the board’s decisions on regular dividends.
- Developments in litigation, regulatory matters, and the pending sale of Merit Life Insurance Co.; the filing gives no clear final outcome for the Merit sale.