Onemain Holdings, Inc. quarterly report, Q2 FY2015

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Business context and reporting period

This is Springleaf Holdings, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2015—not a filing by OneMain Holdings, Inc. Springleaf had agreed to acquire OneMain Financial for $4.25 billion in cash, subject to closing conditions. Springleaf provides consumer loans, primarily to non-prime borrowers, and related insurance products.

Financial performance and position

Amounts are in millions of dollars unless stated otherwise. The filing reports GAAP results alongside certain non-GAAP segment measures.

  • Second quarter: Interest income was $413, down from $533 a year earlier; net interest income was $242 versus $341. Provision for loan losses was $80 versus $115, leaving net interest income after provision of $162 versus $226. Pretax income was $11 versus $147; net income was $19 versus $103. After $31 attributable to non-controlling interests, the loss attributable to Springleaf was $12, or $0.09 per share, compared with income of $72, or $0.63 per share.
  • First half: Interest income was $819 versus $1,085; net interest income was $490 versus $688; provision for loan losses was $167 versus $276; and pretax income was $49 versus $246. Net income was $50 versus $171, while the loss attributable to Springleaf was $12 versus income of $124. Basic loss per share was $0.10 versus earnings of $1.09.
  • Core consumer operations: Management’s non-GAAP pretax core earnings were $107 in Q2 versus $94, and $208 for the first half versus $174. This measure excludes non-core and legacy operations, among other items; it is not a substitute for GAAP earnings.
  • Balance sheet at June 30: Total assets were $13.308 billion, including $6.490 billion of net finance receivables after allowance and $3.594 billion of cash and cash equivalents. Long-term debt was $9.676 billion; total liabilities were $10.477 billion and total equity was $2.831 billion. At December 31, 2014, assets were $11.029 billion, debt $8.356 billion, and equity $1.837 billion.
  • Cash flow and funding: First-half operating cash flow was $209, investing cash flow $329, and financing cash flow $2.177 billion; cash rose by $2.715 billion to $3.594 billion. Financing inflows included $976 million net proceeds from the May equity offering and debt issuance, including consumer securitizations.
  • Liquidity and debt: Management cited $0.9 billion of scheduled 2015 principal and interest payments on debt excluding securitizations, and said it expected adequate liquidity for at least the next 12 months. Debt carrying value was $9.676 billion; principal maturities shown were $10.270 billion, including $4.919 billion of securitizations with variable monthly repayments. The weighted-average debt interest rate was 5.41% for Q2 versus 5.13% a year earlier. The filing does not provide a clear consolidated net interest margin figure.
  • Credit indicators: Net finance receivables were $6.670 billion, up from $6.483 billion at year-end. Receivables 60 or more days past due totaled $197 million versus $240 million at year-end; nonperforming receivables were $128 million versus $159 million. Consumer and Insurance delinquency ratio was 2.39% at June 30, 2015, compared with 2.28% at June 30, 2014. Management cited higher personal-loan charge-offs and delinquency, alongside improving SpringCastle servicing and credit performance.

Material changes versus the prior comparable period

  • GAAP earnings attributable to Springleaf moved to a loss in both Q2 and the first half. Management attributed lower finance charges mainly to the 2014 sales of a large real estate loan portfolio and liquidation of SpringCastle balances; higher personal-loan balances and yields partly offset the reduction.
  • Lower provisions, especially for real estate and SpringCastle portfolios, partly offset lower net interest income. Personal-loan provisions increased, reflecting portfolio growth and higher delinquency.
  • Operating costs increased: Q2 salaries and benefits rose $20 million, including $15 million of non-cash incentive compensation, and other operating expenses rose $15 million, including acquisition-related professional fees and higher advertising.
  • In May, Springleaf issued 19.4 million new shares; the company received approximately $976 million net proceeds. Additional shares were sold by the Initial Stockholder. Total outstanding shares were 134.5 million at August 3, 2015.

Outlook, risks, contingencies, and unusual items

  • OneMain acquisition: Springleaf said it was pursuing the $4.25 billion purchase and evaluating cash, securities sales, equity proceeds, debt, bank borrowing, and securitizations to fund it. The DOJ and certain state attorneys general had raised potential antitrust concerns; the parties agreed not to close before September 10, 2015, to permit review. Springleaf warned of possible delay or failure to close; termination for failure to obtain antitrust approval could trigger a $213 million fee.
  • Management outlook: Assuming slow-to-moderate U.S. economic growth, management expected continued strong credit performance and personal-loan growth, supported by branch and online channels. No numerical earnings or revenue guidance was provided.
  • Unusual accounting adjustment: An out-of-period adjustment increased Q2 provision for loan losses by $8 million and reduced tax provision by $3 million after the company identified uncharged-off SpringCastle bankruptcy accounts and an error in the TDR personal-loan allowance calculation. The adjustment reduced Q2 and first-half EPS by $0.03.
  • Controls: Management concluded disclosure controls were not effective at June 30, 2015, due to a previously identified material weakness involving controls over spreadsheets and reports used in financial reporting. Remediation was underway, with no assurance it would succeed.
  • Other exposures: The filing describes ordinary-course litigation for which losses may be difficult to estimate; an $18 million reserve for loan-sale recourse obligations; and a $9 million reserve for UK payment-protection-insurance claims. Springleaf said it was in compliance with debt covenants and had no material off-balance-sheet arrangements.

Important facts for investors to verify

  1. Whether OneMain’s acquisition received antitrust and state regulatory approvals, closed, and was funded on acceptable terms; confirm any resulting purchase-price adjustments or termination exposure.
  2. Whether the material weakness was remediated and whether subsequent filings report effective controls, particularly given the allowance and charge-off errors disclosed here.
  3. Whether personal-loan delinquency, charge-offs, and allowance levels developed as the portfolio expanded; compare subsequent credit metrics with the reported 2.39% delinquency ratio.
  4. Whether liquidity remained sufficient after acquisition funding and scheduled debt payments, including the company’s reliance on securitizations and access to capital markets.
  5. How much of future earnings reflects recurring core operations versus legacy portfolio runoff, non-controlling interests, non-GAAP adjustments, and one-time acquisition or compensation costs.