Onemain Holdings, Inc. quarterly report, Q2 FY2021

OneMain Holdings, Inc. — Q2 2021 Form 10-Q

Reporting period: Three and six months ended June 30, 2021. OneMain provides fixed-rate personal loans, primarily to non-prime customers, through branches, centralized operations and digital channels, with affiliated insurance products. The figures below are consolidated and in U.S. dollars; financial amounts are in millions unless stated otherwise.

Financial performance and position

Metric	Q2 2021	Q2 2020	Six months 2021	Six months 2020
Interest income	$1,071	$1,077	$2,130	$2,184
Net interest income	$840	$806	$1,665	$1,657
Provision for loan losses	$132	$423	$130	$954
Income before taxes	$463	$118	$1,010	$161
Net income	$350	$89	$763	$121
Diluted EPS	$2.60	$0.66	$5.67	$0.90

• Q2 total other revenues were $150 million, versus $148 million; other expenses were $395 million, versus $413 million. Six-month other revenues were $241 million, versus $289 million, and other expenses were $766 million, versus $831 million.
• Loan yield was 24.21% in Q2 (24.16% in Q2 2020). The net charge-off ratio was 4.40% (6.32%); the 30–89-day delinquency ratio was 1.76% (1.63%). Six-month net charge-off ratio was 4.54%, compared with 6.39%.
• Loan originations were $3.835 billion in Q2, up from $2.047 billion; six-month originations were $6.119 billion, versus $4.636 billion. At quarter-end, net finance receivables were $18.163 billion and the portfolio comprised approximately 2.27 million loans.
• Allowance for finance receivable losses was $2.0 billion, or 11.01% of finance receivables, at June 30, versus $2.269 billion, or 12.55%, at year-end 2020. The company cited improved unemployment and economic assumptions, lower charge-offs and higher recoveries.

Balance sheet, debt and cash flow

• Total assets were $22.377 billion and shareholders’ equity was $3.537 billion at June 30. Long-term debt was $17.605 billion, down from $17.800 billion at December 31, 2020.
• Cash and cash equivalents were $1.787 billion; restricted cash was $507 million. The company reported $9.7 billion of unencumbered gross finance receivables and $7.3 billion of available revolving conduit capacity, with none drawn. It stated that $158 million of cash was unavailable for general corporate purposes and that investment securities were held in insurance operations and unavailable for general corporate purposes.
• For the first six months, operating cash flow was $1.130 billion, investing cash flow was negative $630 million, and financing cash flow was negative $929 million. Cash and restricted cash together declined $429 million to $2.294 billion.
• OMFC issued $750 million of 3.50% senior notes due 2027 in June as its inaugural Social Bond. In May, it completed an $850 million personal-loan securitization with a 1.56% current weighted-average interest rate. The company redeemed $681 million of 7.75% notes in January and recorded a $47 million related debt-repayment loss in Q1.

Material changes versus the prior comparable period

• Net income rose to $350 million from $89 million in Q2 and to $763 million from $121 million for the first half. The principal driver was a substantially lower loan-loss provision: management attributed the prior-year provision build to uncertainty at the onset of COVID-19, and the current-period decrease to improved economic expectations, lower charge-offs and increased recoveries.
• Q2 interest income was slightly lower, while interest expense declined 14.8% to $231 million, reflecting lower average debt and a lower average cost of funds. Six-month interest expense declined 11.8% to $465 million.
• Year-over-year Q2 originations increased materially, while the 30–89-day delinquency ratio was higher than in Q2 2020 but lower than at year-end 2020. Management cautioned that credit scores may have been affected by stimulus, borrower assistance and potentially inconsistent credit-bureau reporting.
• Other expenses decreased, largely due to lower-than-expected involuntary unemployment insurance claims; management said strategic investment and receivables growth partly offset that reduction.

Outlook, commentary and risks

• Management described current origination and credit-performance trends as favorable, but provided no specific earnings or revenue guidance. It said results remain dependent on the economic recovery, unemployment, further COVID-19 developments and related government actions.
• The company expects to update macroeconomic assumptions as needed; changes could affect the allowance, allowance ratio and future provision. Its allowance uses a 12-month reasonable-and-supportable economic forecast.
• Management stated it expects adequate liquidity to operate and meet obligations for at least 24 months, based on its estimates and subject to risks and uncertainties. It identified customer delinquencies or defaults, lower prepayments and reduced capital-market access as potential liquidity pressures. OMFC’s credit ratings are non-investment grade.
• OMH declared $4.65 per share in dividends during the first half, including a $3.95-per-share February payment. It declared a further $4.20-per-share dividend on July 21, payable in August. Future dividends remain at the board’s discretion; the stated minimum quarterly dividend was $0.70 per share.
• The company began repurchasing shares in Q2: 612,355 shares for $35 million, with approximately $120 million of program capacity remaining at June 30. It also acquired financial-wellness fintech Trim in May and has loan-sale agreements covering $120 million of gross receivables per quarter, with terms remaining one to two years.
• Legal proceedings arise in the ordinary course. The company said some potential losses cannot be reasonably estimated, and it cannot assure that pending or future matters will not result in material losses. It reported no material off-balance-sheet arrangements.

Important facts for investors to verify

1. Whether loan-loss assumptions and the lower allowance remain adequate as stimulus effects fade and delinquency, charge-off and recovery trends develop.
2. Whether elevated originations can be sustained without weakening underwriting or future portfolio credit quality.
3. Liquidity and refinancing capacity given non-investment-grade ratings, substantial debt, capital-market dependence and the availability of unencumbered collateral.
4. The sustainability of dividends and repurchases relative to earnings, cash generation, debt obligations and restrictions on subsidiary distributions.
5. Developments in legal matters, COVID-19 and unemployment exposure, and the company’s allocation of Social Bond proceeds under its stated framework.