Business context and reporting period
This is Springleaf Holdings, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2015—not a filing by OneMain Holdings, Inc. Springleaf was a non-prime consumer lender and insurer, with branch and centralized personal-loan operations and a liquidating SpringCastle, real-estate, and retail-finance portfolio. It had agreed to acquire OneMain Financial for $4.25 billion, subject to closing conditions.
Key financial metrics
Amounts are in millions except per-share data and percentages.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total interest income | $428 | $484 | $1,247 | $1,569 |
| Net interest income | $257 | $304 | $747 | $992 |
| Provision for finance-receivable losses | $82 | $103 | $249 | $379 |
| Net interest income after provision | $175 | $201 | $498 | $613 |
| Total other revenues | $51 | $686 | $158 | $859 |
| Income before taxes | $22 | $697 | $71 | $943 |
| Net income (loss) attributable to Springleaf | $(11) | $427 | $(23) | $551 |
| Diluted EPS | $(0.08) | $3.70 | $(0.18) | $4.79 |
Q3 2014 and nine-month 2014 results included real-estate-loan sale gains of $641 million and $731 million, respectively; these gains were absent in 2015. Springleaf’s non-GAAP pretax core earnings were $105 million in Q3 2015 versus $101 million in Q3 2014, and $313 million for nine months versus $275 million.
At September 30, 2015, total assets were $13.284 billion, net finance receivables $6.302 billion, cash and cash equivalents $3.865 billion, investment securities $1.742 billion, and long-term debt $9.555 billion. Total shareholders’ equity was $2.829 billion. Compared with December 31, 2014, cash rose from $879 million, debt from $8.356 billion, and net finance receivables declined from $6.483 billion. The allowance for finance-receivable losses was $193 million, up from $176 million.
For the first nine months, operating cash flow was $395 million (versus $336 million), investing cash flow provided $593 million (versus $2.789 billion), and financing activities provided $1.998 billion (versus using $1.585 billion). The 2015 financing inflow included $976 million of net equity proceeds and debt issuance. The filing does not provide a single consolidated operating-margin measure.
Material changes versus comparable periods
- Lower interest income reflected the substantial reduction in the real-estate portfolio and liquidation of SpringCastle, partly offset by growth in personal loans and higher yields from a greater personal-loan mix.
- Consumer and Insurance originations increased to $1.167 billion in Q3 from $925 million; personal-loan balances grew. Auto loans reached $825 million across more than 69,000 accounts, versus $89 million and 6,800 accounts a year earlier.
- The personal-loan delinquency ratio rose to 3.31% at September 30, 2015, from 2.55% at September 30, 2014. Management cited higher personal-loan charge-offs, while SpringCastle charge-offs improved with servicing performance.
- Operating expenses increased, including $14 million of Q3 and $29 million of nine-month costs related to the proposed OneMain acquisition. Nine-month salaries and benefits also included $15 million of non-cash incentive compensation.
- The effective tax rate was 1.2% for the first nine months of 2015 versus 32.8% in 2014, primarily reflecting the effect of the joint venture’s non-controlling interest.
Outlook, risks, contingencies, and unusual items
- OneMain transaction: DOJ and certain state Attorneys General had raised potential antitrust concerns; review remained incomplete. Springleaf had transferred $608 million of personal loans to held-for-sale status as of September 30. The purchase price was $4.25 billion, and failure to obtain antitrust approval could trigger a $213 million termination fee. Management expected to fund the purchase using cash, investment-security sales, equity proceeds, debt, and securitizations, but stated that closing and timing were uncertain.
- Management outlook: Assuming slow-to-moderate U.S. economic growth, management expected continued strong credit performance and personal-loan growth, supported by underwriting, collections, branch distribution, online channels, and analytics. No quantified earnings or revenue guidance was provided.
- Liquidity and debt: Management believed liquidity was adequate for at least 12 months. Scheduled principal and interest payments on existing debt, excluding securitizations, were $892 million for the remainder of 2015 and $678 million for 2016. Seven conduit facilities had $2.2 billion total capacity, with $100 million drawn. The company reported compliance with debt covenants, but noted non-investment-grade ratings and substantial indebtedness.
- Junior subordinated debenture: A mandatory trigger event applied to the January 2016 interest payment because the trailing average fixed-charge ratio was 0.94x, below the 1.10x threshold. SFC had not yet received the required non-debt capital funding; it intended to issue SFC shares to SFI for $10.5 million in January 2016 to meet the requirement.
- Controls: Management concluded disclosure controls were ineffective at September 30, 2015 because of a previously identified material weakness in spreadsheet and report controls. Remediation was underway, with no assurance it would be successful.
- Other items: The filing reports prior-period disclosure corrections and an $8 million out-of-period second-quarter adjustment for loan charge-off and allowance errors, which reduced EPS by $0.03 for the three and six months ended June 30, 2015. Legal matters and loan-sale recourse obligations remain risks; the recourse reserve was $18 million. PPI reserves were $8 million.
Most important facts for investors to verify
- Whether the OneMain acquisition ultimately received antitrust and state approvals, closed, and was funded on the anticipated terms.
- Whether the required $10.5 million capital contribution addressed the January 2016 debenture trigger and whether the fixed-charge ratio improved.
- Trends in personal-loan delinquencies, charge-offs, allowance adequacy, and growth in lower-yield auto lending.
- Liquidity after acquisition-related funding and near-term debt maturities, including the availability and cost of securitization and other capital-market funding.
- Progress in remediating the material weakness and restoring effective disclosure controls.