OneMain Holdings, Inc. — Q2 2020 Form 10-Q
Business context and period. OneMain provides fixed-rate personal loans, primarily to non-prime borrowers, through branches and digital channels, and sells related insurance products. This unaudited filing covers the quarter and six months ended June 30, 2020. Unless noted, amounts are in U.S. dollars.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Interest income | $1.077 billion | $1.000 billion | $2.184 billion | $1.955 billion |
| Net interest income | $806 million | $762 million | $1.657 billion | $1.482 billion |
| Provision for finance receivable losses | $423 million | $268 million | $954 million | $554 million |
| Net interest income after provision | $383 million | $494 million | $703 million | $928 million |
| Net income | $89 million | $194 million | $121 million | $346 million |
| Diluted EPS | $0.66 | $1.42 | $0.90 | $2.54 |
| Operating cash flow | Not separately stated | Not separately stated | $1.204 billion | $1.145 billion |
At June 30, 2020, cash and cash equivalents were $2.740 billion; total cash including restricted cash was $3.227 billion. Long-term debt was $18.010 billion, up from $17.212 billion at year-end 2019. Net finance receivables were $17.721 billion, versus $18.389 billion at December 31, 2019. Shareholders’ equity was $3.171 billion, down from $4.330 billion.
Material changes and operating trends
- Q2 interest income increased 7.7%, primarily reflecting prior portfolio growth, but higher credit-loss provision more than offset that increase: net income fell 54% year over year. Six-month net income declined to $121 million from $346 million.
- Origination volume was $2.047 billion in Q2, compared with $3.879 billion a year earlier; first-half volume was $4.636 billion versus $6.462 billion. Management attributed the contraction to COVID-19 disruptions, tighter underwriting, and weaker loan demand. Production improved in May and June but remained below 2019 levels.
- The 30–89-day delinquency ratio was 1.63% at June 30, down from 2.14% a year earlier and 2.47% at year-end 2019. Management linked the improvement to government stimulus, customer assistance, and collections. The net charge-off ratio was 6.32% for Q2, versus 6.23% in Q2 2019.
- The allowance for finance receivable losses was $2.324 billion, or 13.12% of finance receivables, compared with $829 million, or 4.51%, at year-end. The comparison is affected by adoption of the expected-credit-loss standard: adoption added $1.118 billion to the allowance and reduced opening retained earnings by $828 million after tax. COVID-related economic forecasts also drove higher provisions.
Liquidity, capital, and unusual items
- Six-month operating cash flow was $1.204 billion; investing activities provided $106 million and financing activities provided $285 million. Cash dividends paid were $431 million and share repurchases were $45 million.
- At quarter-end, the company reported $8.7 billion of unencumbered personal loans and $7.1 billion of available borrowing capacity under 14 revolving conduit facilities, with no amounts drawn. It stated that cash and potential conduit borrowings supported a liquidity runway through 2022 under numerous stress scenarios, assuming no capital-market access. $240 million of cash was held at regulated insurance subsidiaries or for other operating activities and unavailable for general corporate purposes; $1.9 billion of investment securities was also unavailable for general corporate purposes.
- OMFC issued $600 million of 8.875% senior notes due 2025 and completed an $821 million personal-loan securitization during the quarter. It redeemed its $1.0 billion 8.25% notes on July 29, 2020, after the reporting date; management expected an approximately $35 million debt-repayment loss in Q3.
- The company suspended its stock repurchase program on March 20. A $2.33-per-share dividend was declared July 27, payable August 18; future dividends remain subject to board discretion and financial, contractual, and regulatory considerations.
Outlook, risks, and contingencies
Management expected COVID-19 effects to continue affecting originations, credit reserves, and involuntary unemployment insurance claims. If economic recovery is slow or government support diminishes, management warned of higher delinquencies during the remainder of 2020 and losses realized in 2021; further changes to credit-loss assumptions and provisions may follow. The company tightened underwriting, offered reduced or deferred payments and other borrower assistance, and planned expense reductions in response to lower receivables and higher expected losses. The filing provides no specific earnings or origination guidance.
Key risks include pandemic-related unemployment and borrower repayment capacity, the adequacy of credit-loss estimates, access to capital markets and debt refinancing, substantial indebtedness, regulatory and legal developments, and potential disruption to operations. The company disclosed ongoing legal matters but stated that losses for certain actions could not be reasonably estimated; it did not indicate that those matters were expected to have a material adverse effect based on current knowledge. No goodwill, intangible, long-lived-asset, or right-of-use-asset impairment was recorded at June 30.
Important facts for investors to verify
- How subsequent delinquency, charge-offs, and borrower performance compare with the unusually low Q2 delinquency ratio, and whether government support or borrower assistance materially influenced it.
- Whether the $2.324 billion allowance adequately reflects expected lifetime losses and how changes in unemployment and recovery forecasts affect future provisions.
- Liquidity availability and funding costs, including the terms and continued access to conduit facilities, securitization markets, and unsecured debt markets.
- The effect of the July 2020 redemption, including the expected approximately $35 million Q3 debt-repayment loss, and the sustainability of dividends after substantial first-half distributions.