Onemain Holdings, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context
OneMain provides personal loans, primarily to non-prime customers, through more than 1,600 branches in 44 states and online channels. It also offers insurance and services certain third-party and legacy loan portfolios. Personal loans were the principal business, with net receivables of $15.75 billion at quarter-end, up from $14.82 billion at December 31, 2017. The company reported Consumer and Insurance and Acquisitions and Servicing segments, plus legacy activities reported as “Other.”
Financial performance and key metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Interest income | $933 | $808 | $2,700 | $2,339 |
| Interest expense | $227 | $207 | $647 | $612 |
| Net interest income | $706 | $601 | $2,053 | $1,727 |
| Provision for finance receivable losses | $256 | $243 | $770 | $724 |
| Net interest income after provision | $450 | $358 | $1,283 | $1,003 |
| Income before taxes | $199 | $121 | $410 | $244 |
| Net income | $148 | $69 | $279 | $144 |
| Diluted earnings per share | $1.09 | $0.51 | $2.05 | $1.07 |
- Q3 personal-loan yield was 23.51%; the net charge-off ratio was 5.76%, versus 6.16% a year earlier. The 30–89 day delinquency ratio was 2.33%, versus 2.43%.
- At September 30, the allowance for finance receivable losses was $706 million, or 4.48% of finance receivables. Forty-six percent of personal loans were secured by titled collateral, up from 43% at year-end 2017.
- Total assets were $20.47 billion; long-term debt was $15.73 billion; total liabilities were $16.83 billion; and shareholders’ equity was $3.64 billion.
- Cash and cash equivalents were $1.24 billion, including $264 million held at regulated insurance subsidiaries or otherwise unavailable for general corporate purposes. Restricted cash was $495 million. The $1.71 billion of investment securities was held in insurance operations and unavailable for general corporate purposes.
- For the first nine months, operating cash flow was $1.46 billion, investing cash outflow was $1.82 billion, and financing cash inflow was $613 million. Cash, cash equivalents, and restricted cash increased by $253 million to $1.74 billion.
Changes versus prior comparable periods
- Q3 net income more than doubled year over year, while nine-month net income rose to $279 million from $144 million. Higher portfolio balances and yield increased interest income; management also cited lower purchase-premium amortization. The 2017 comparison was affected by hurricane-related impacts on yield and credit provisions.
- Receivables growth drove higher provisions and interest expense. Management said the allowance ratio declined year over year with a shift toward secured loans, improved collections, and completion of OneMain Acquisition integration.
- Nine-month other expenses increased by $133 million, principally reflecting $106 million of non-cash incentive compensation related to the sale of Fortress’s shares. The charge was offset by an increase in additional paid-in capital, was equity-neutral, and was not tax-deductible.
- The company issued $1.25 billion of 6.875% notes due 2025 and $1.6 billion of 7.125% notes due 2026, while redeeming the remaining OMFH notes due 2019 and 2021. Long-term debt increased from $15.05 billion at year-end to $15.73 billion.
- On June 25, Apollo-Värde completed its purchase from SFH of 54.9 million OMH shares for approximately $1.4 billion. This was a shareholder transaction, not proceeds to the company. Apollo-Värde held approximately 40.5% of OMH at September 30 and could designate six of nine directors.
Outlook, risks, and unusual items
- Management gave no numerical earnings or receivables guidance. It prioritized receivables growth, more secured originations, operating leverage, increased tangible equity, lower leverage, and diversified liquidity. It expects credit performance to benefit over time from a larger secured-loan share, assuming moderate U.S. economic growth.
- Management stated it expected adequate liquidity to operate and meet obligations for at least the next 12 months. The company had $6.6 billion of unencumbered personal-loan UPB, $294 million of unencumbered real-estate-loan UPB, and $5.8 billion of undrawn conduit capacity at quarter-end. It reported $140 million of scheduled 2018 principal and interest payments on debt excluding securitizations.
- Risks include non-investment-grade ratings and dependence on capital-market access; substantial debt and refinancing needs; consumer delinquencies, defaults, and prepayments; economic, interest-rate, regulatory, and competitive changes; credit-model performance; cybersecurity; and litigation. SFC was in compliance with its debt covenants, and no amounts were drawn under conduit facilities at September 30.
- The company disclosed a federal securities class action alleging misleading statements about post-acquisition integration and projections. It said it would defend the claims and could not estimate a reasonably possible loss. The sales-recourse reserve was $7 million; management reported no material uncovered recourse requests.
- Management expects adoption of the current expected credit loss standard in 2020 to materially increase the allowance for finance receivable losses and reduce retained earnings through a one-time cumulative adjustment; the amount was not yet quantified. Lease accounting adoption in 2019 is expected to increase reported assets and liabilities, with the impact still being assessed.
- The company sold its Yosemite insurance subsidiary in Q3; a $14 million impairment was recorded in Q2, with no additional sale loss recorded in Q3. A new CEO began in September 2018.
Important facts for investors to verify
- Whether portfolio growth and secured-loan mix continue to improve credit performance, and whether the allowance remains adequate as delinquencies and charge-offs evolve.
- How the company’s debt costs, maturities, ratings, securitization capacity, and refinancing access affect liquidity and leverage.
- The eventual quantified impact of expected-credit-loss and lease-accounting standards, and the sustainability of earnings excluding unusual non-cash compensation.
- Developments in the securities class action, regulatory matters, and any other contingencies for which the filing says losses may be difficult to estimate.
- Whether management’s stated priorities translate into lower leverage, improved operating efficiency, and any future capital distributions; the filing gives no assurance of dividends.