Business context and reporting period
OneMain Holdings, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2017. The company provides personal loans, primarily to non-prime customers, through branches and online channels, and offers insurance products. It operated in 44 states and had nearly 1,700 branches. Its principal business is personal lending; real estate and retail sales finance portfolios are in runoff.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 or prior period |
|---|---|---|
| Total interest income | $759 million | $831 million |
| Interest expense | $202 million | $226 million |
| Net interest income | $557 million | $605 million |
| Provision for finance receivable losses | $245 million | $197 million |
| Net interest income after provision | $312 million | $408 million |
| Income before income taxes | $57 million | $252 million |
| Net income attributable to OneMain | $33 million | $137 million |
| Diluted earnings per share | $0.25 | $1.01 |
| Net cash from operating activities | $444 million | $416 million |
| Net cash from investing activities | $59 million | $(45) million |
| Net cash used for financing activities | $(305) million | $(683) million |
| Cash and cash equivalents at quarter end | $787 million | $579 million at Dec. 31, 2016 |
| Long-term debt at quarter end | $13.679 billion | $13.959 billion at Dec. 31, 2016 |
| Shareholders’ equity at quarter end | $3.105 billion | $3.066 billion at Dec. 31, 2016 |
Net finance receivables were $13.388 billion at March 31, down from $13.732 billion at year-end. The allowance for finance receivable losses was $666 million, or 4.97% of receivables. Total assets were $17.973 billion. The filing does not provide a single consolidated operating-margin measure.
Material changes versus the prior comparable period
- Net income attributable to OneMain fell to $33 million from $137 million. The prior-year quarter included a $167 million gain on the sale of the SpringCastle interests; therefore, the reported earnings comparison is not like-for-like.
- Interest income fell $72 million, including lower income from loans held for sale and the smaller portfolio following the SpringCastle sale. Interest expense decreased $24 million, principally from lower average debt.
- Credit costs rose: provision increased $48 million, net charge-off ratio rose to 8.02% from 3.72%, and the 30–89-day delinquency ratio increased to 2.21% from 1.89%.
- Origination volume declined to $1.812 billion from $2.361 billion, and originated accounts fell to 243,652 from 328,057. The company attributed lower yields in part to a greater share of secured personal loans, which generally have lower yields.
- Reported other expenses declined, including lower salaries and benefits and lower professional and transition-service costs as integration continued. Acquisition-related transaction and integration expenses were $23 million, versus $33 million.
- Consumer and Insurance adjusted pretax income, a non-GAAP segment measure, was $163 million versus $203 million. Management’s segment results exclude purchase-accounting effects and should not be treated as GAAP earnings.
Outlook, risks and unusual items
- Management expected net finance receivables growth to resume in Q2 2017 following completion of the former OneMain branch systems conversion. It also expected its secured-lending and credit-risk strategies to reduce future credit losses beginning in Q2; these expectations are not assured.
- Management projected $275–$300 million of OneMain acquisition synergies by year-end 2017, including approximately $200 million of operating-expense reductions and $75–$100 million of costs it expected to avoid. It anticipated approximately $275 million of total acquisition-related consolidation expenses; $193 million had been incurred through March 31.
- The company reported $787 million of cash and $558 million of restricted cash. It had $4.1 billion of unencumbered personal-loan UPB and $357 million of unencumbered real-estate-loan UPB, including $210 million held for sale. Remaining scheduled 2017 principal and interest payments on debt, excluding securitizations, were $1.7 billion. Management said liquidity should be adequate for at least 12 months.
- Debt is substantial and SFC and OMFH had non-investment-grade credit ratings. Liquidity risks include customer delinquencies and defaults, capital-market access, refinancing costs, integration spending, and debt-covenant compliance. SFC and OMFH reported compliance with their debt covenants at quarter end.
- On April 13, 2017, the company replaced two conduit arrangements with a facility allowing up to $650 million of borrowing; nothing was drawn at closing. It subsequently reported a $60 million draw under another conduit facility on April 27.
- A securities class action filed in February 2017 remained pending; the company said it intended to defend the claims and could not estimate a reasonably possible loss. A separate January action was voluntarily dismissed without prejudice. The filing also describes ordinary-course litigation and a $15 million reserve for sales recourse obligations.
- Potential changes to U.S. tax law could affect deferred taxes, results and customers, but management could not predict whether or when proposals would be enacted. Management also identified regulatory, economic, credit-model, insurance-reserve, cyber, funding and integration risks.
- The company reported a 41.5% effective tax rate, versus 34.5% in Q1 2016, and an ongoing IRS examination of its 2011–2013 federal returns. Management said it had adequately provided for those years.
Key facts investors should verify
- Whether credit performance improves after the Q1 increase in charge-offs and delinquencies, and how much of that increase management attributes to transition activity.
- Whether Q2 receivables growth and lower future credit losses materialize, and how growth in secured lending affects portfolio yield and losses.
- Actual realization and timing of the $275–$300 million synergy target compared with remaining integration costs.
- Liquidity, refinancing needs and access to securitization, conduit and unsecured debt markets, particularly given non-investment-grade ratings and scheduled 2017 debt payments.
- Developments in the pending securities litigation, tax examination and any changes to regulatory or tax requirements.