Onemain Holdings, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise noted. OneMain provides mostly non-prime personal loans and related insurance through branches and digital channels.
Financial results and key metrics
- Revenue and earnings: Interest income was $956 million, up 11%; net interest income was $720 million, up 9%. After a $286 million provision for finance receivable losses, net interest income was $434 million, up 6%. Other revenues were $148 million, up 8%. Income before tax was $202 million, up 20%; net income was $152 million, up 23%. Diluted EPS increased to $1.11 from $0.91.
- Expenses and returns: Interest expense rose 18% to $236 million, primarily reflecting higher average debt and a greater share of unsecured funding. Other expenses were $380 million, up less than 1%. Portfolio yield was 23.92%, versus 23.25%; net charge-off ratio was 7.12%, versus 7.10%.
- Credit and portfolio: Personal-loan net receivables were $16.1 billion at quarter-end, compared with $15.0 billion a year earlier and $16.2 billion at December 31, 2018. The allowance was $733 million, or 4.54% of receivables. The 30–89-day delinquency ratio was 1.93%, down from 2.11% in Q1 2018 and 2.42% at year-end. Nonperforming loans 90 or more days past due were $335 million, versus $363 million at year-end. Charge-offs were $311 million and recoveries $27 million. TDR net personal loans were $502 million, with a $196 million allowance.
- Cash flow: Operating activities provided $548 million, compared with $555 million. Investing activities used $305 million, versus $381 million, and financing activities provided $863 million, versus $827 million. Net cash from operating and investing activities was $243 million. Cash and cash equivalents were $1.709 billion at quarter-end; restricted cash was another $575 million.
- Debt and liquidity: Long-term debt carrying value was $16.117 billion, up from $15.178 billion at year-end; total principal was $16.474 billion. Securitized debt was $8.155 billion. The company had $6.2 billion of conduit capacity, with no amounts drawn. Management said it expected adequate liquidity for at least 12 months. Of $1.7 billion in cash and cash equivalents, $312 million was unavailable for general corporate purposes; the $1.7 billion of investment securities was held in insurance operations and unavailable for general corporate purposes.
- Equity and dividend: Shareholders’ equity was $3.950 billion, up from $3.799 billion at year-end. The company paid its initial quarterly dividend of $0.25 per share, totaling $34 million, and announced another $0.25 dividend for June 2019.
Material changes and unusual items
- Growth in the loan portfolio and higher yield drove higher interest income. Provision expense rose 13%, mainly with portfolio growth, partly offset by a shift toward more secured loans and collection improvements. The share of personal loans secured by titled collateral was 49%, versus 48% at year-end.
- In February, SFC issued $1.0 billion of 6.125% senior notes due 2024 and used the proceeds in part to redeem its 5.25% notes due 2019. The redemption generated a $21 million debt-repurchase and repayment loss. The company also redeemed $317 million of 6.00% notes due 2020 on April 15, 2019, expecting an additional $11 million loss in Q2.
- A February sale of real estate loans generated $19 million in proceeds on loans with a $16 million carrying value. The company recorded a $3 million gain and a separate $3 million impairment on remaining held-for-sale loans.
- Management reported a $13 million increase in investment revenue, including unrealized gains on equity securities and higher interest income on cash; it also cited an $11 million gain on sale of a cost-method investment. Net losses on debt repurchases partly offset revenue growth.
- OneMain adopted lease accounting on January 1, 2019, recording a $160 million operating lease right-of-use asset and $175 million lease liability at quarter-end. Adoption of the expected-credit-loss standard is planned for 2020; management expects a material increase in the allowance, a deferred-tax-asset increase, and a one-time reduction to retained earnings, but did not provide a quantified estimate.
Outlook, commentary, and risks
- Management cited strong consumer-credit demand and its capital-markets access as support for executing strategic priorities, including strengthening the capital base. No quantitative earnings or portfolio guidance was provided.
- The company expects personal-loan volume to be seasonally higher in Q2 and Q4; delinquencies are generally lowest in Q1 and tend to rise later in the year.
- Key risks include economic deterioration, unemployment and borrower defaults, allowance-estimation uncertainty, credit and collateral performance, funding access and cost, substantial indebtedness and covenant compliance, regulatory changes, litigation, cybersecurity and operational disruptions, and the non-investment-grade credit ratings of SFC.
- A securities class action concerning alleged statements about post-acquisition integration and projections was settled in April 2019, subject to court approval. The company said the amount incurred was immaterial and accrued, including related insurance proceeds; the settlement contains no admission of liability.
- The sale of Merit Life Insurance Co. was expected to close in Q2, subject to regulatory approval and customary conditions. The CFO was appointed on April 25 after the prior CFO’s March resignation; the company said the departure was not related to a disagreement over financial reporting or practices. The COO indicated on May 1 that he intended to resign effective May 31.
Important facts for investors to verify
- Whether loan growth, portfolio yield, delinquency trends, charge-offs, and allowance adequacy remain consistent with management’s explanation, particularly as seasonal delinquencies typically rise after Q1.
- The impact of the 2020 expected-credit-loss accounting adoption on the allowance, deferred taxes, and retained earnings; no estimate was yet quantified.
- Funding costs, refinancing needs, debt covenants, and liquidity available for general corporate purposes, given the debt balance and restrictions on some cash and investments.
- Completion and financial effects of the Merit sale, and the Q2 debt-redemption loss.
- Approval and final terms of the securities litigation settlement, as well as any material developments in other legal or regulatory matters.