Onemain Holdings, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Dollar amounts are in millions unless otherwise noted. OneMain provides consumer lending, principally personal loans to non-prime customers, and related insurance; it operated nearly 1,700 branches in 44 states.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Interest income | $772 | $741 | $1,531 | $1,572 |
| Interest expense | $203 | $214 | $405 | $440 |
| Net interest income | $569 | $527 | $1,126 | $1,132 |
| Provision for receivable losses | $236 | $214 | $481 | $411 |
| Net interest income after provision | $333 | $313 | $645 | $721 |
| Income before taxes | $66 | $42 | $123 | $294 |
| Net income attributable to OneMain | $42 | $26 | $75 | $163 |
| Diluted earnings per share | $0.30 | $0.19 | $0.55 | $1.21 |
- Balance sheet at June 30: Assets were $18.698 billion, cash and cash equivalents $862 million, restricted cash $545 million, and shareholders’ equity $3.154 billion. Net finance receivables, after unearned insurance premium and claim reserves and the loss allowance, were $12.802 billion.
- Credit performance: Consolidated net charge-off ratio was 6.62% for Q2 versus 6.05% a year earlier; for the first half it was 7.31% versus 4.82%. The 30–89-day delinquency ratio was 2.19% versus 2.26% for Q2. The allowance for finance receivable losses was $676 million, or 4.81% of receivables.
- Portfolio and production: Personal loans were $13.9 billion, across more than 2.2 million accounts. Forty percent of personal loans were secured by titled collateral, up from 36% at year-end 2016. Q2 originations were $2.953 billion, compared with $2.557 billion.
- Cash flows, first half: Operating activities provided $740 million; investing activities used $854 million; financing activities provided $374 million. Cash and restricted cash together increased $260 million to $1.407 billion.
- Debt and liquidity: Long-term debt carrying value was $14.409 billion, up from $13.959 billion at December 31, 2016. The company had $4.8 billion of conduit capacity with no amounts drawn at quarter-end, in addition to securitization funding. Management said liquidity was adequate for at least 12 months; scheduled remaining 2017 principal and interest payments on debt, excluding securitizations, were $1.0 billion.
Material changes versus comparable periods
- Q2 net income and diluted EPS improved year over year, reflecting higher net interest income after provision and lower expenses. Other revenues fell to $121 million from $165 million, including the absence of the prior-year $22 million personal-loan sale gain and a higher debt-repurchase loss.
- First-half net income attributable to OneMain declined to $75 million from $163 million. The 2016 period included a $167 million gain on the SpringCastle interests sale and $22 million gain on personal-loan sales; 2017 also had a $70 million higher provision for finance receivable losses.
- Credit costs and charge-offs rose, which management linked in part to delinquencies associated with 2016 branch-transition activity, portfolio growth, and a higher volume of loans classified as troubled debt restructurings (TDRs). Management reported that credit losses began to decline in Q2.
- OneMain issued $1.0 billion of 6.125% senior notes due 2022 and used part of the proceeds to repurchase approximately $466 million of 6.90% notes due 2017. SFC and OMFH long-term debt ratings were upgraded by Moody’s to B2 and B1, respectively, both with positive outlooks.
Outlook, management commentary, and risks
- Management expected receivables growth to continue through the remainder of 2017 following completion of the former OneMain branch system conversion in Q1. It expected credit-loss improvement to continue, but cautioned that its strategies might not achieve the expected results. The filing provides no specific earnings or revenue guidance.
- Management targeted $275–$300 million of aggregate OneMain acquisition synergies by year-end 2017, including about $200 million of operating-expense reductions and $75–$100 million of costs avoided. It expected approximately $275 million of total acquisition-related expenses; approximately $207 million had been incurred by June 30.
- Management’s strategy included increasing secured lending, expanding direct auto lending, reducing leverage, and preserving diversified funding and liquidity. It noted that a greater secured-loan mix may lower yields while potentially improving credit losses over time.
- Key risks include non-investment-grade funding ratings and capital-market access, substantial debt, borrower delinquencies/defaults and credit-model performance, integration execution, regulatory and legal exposure, and changes in economic conditions, interest rates, unemployment, and customer repayment capacity. Insurance subsidiaries face limits on dividends to the parent.
- A putative federal securities class action filed in 2017 alleges misleading statements about financial projections and post-acquisition integration. OneMain said it considers the allegations without merit and intends to defend the case; it could not estimate a reasonably possible loss. The company also reported an IRS examination of its 2011–2013 federal tax returns and said it had adequately provided for taxes.
- Management stated that adoption of the expected-credit-loss standard (ASU 2016-13) is expected to have a material financial-statement impact, which was still being quantified; the new lease standard is also expected to have a material impact.
Important facts for investors to verify
- Whether the Q2 improvement in earnings and management’s stated decline in credit losses persist, given higher first-half net charge-offs and provisions.
- Actual progress on the $275–$300 million synergy target, total integration costs, and the effect of secured-loan growth on yield and credit performance.
- Debt maturities, refinancing costs, covenant compliance, availability of capital-market funding, and liquidity relative to scheduled obligations.
- Developments in the securities litigation, regulatory matters, tax examination, and any associated financial exposure.
- The eventual quantified effects and implementation timing of the expected-credit-loss and lease accounting standards.