Onemain Holdings, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Amounts are in millions of dollars unless otherwise stated. Results include OneMain Financial, acquired November 15, 2015, so comparisons with 2015 are not on a like-for-like basis.
Business context and reporting period
Onemain provides consumer personal loans, primarily to non-prime customers, through branches and online channels, and offers related insurance products. At September 30, 2016, it reported over 1,800 branches in 44 states and approximately 2.2 million personal loan accounts. Its main operating segment is Consumer and Insurance; it also reports Acquisitions and Servicing, Real Estate, and legacy operations.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Interest income | $770 | $427 | $2,342 | $1,240 |
| Interest expense | $215 | $171 | $655 | $500 |
| Net interest income | $555 | $256 | $1,687 | $740 |
| Provision for receivable losses | $263 | $79 | $674 | $233 |
| Net interest income after provision | $292 | $177 | $1,013 | $507 |
| Other revenues | $158 | $47 | $626 | $154 |
| Income before taxes | $33 | $20 | $327 | $76 |
| Net income attributable to OneMain | $25 | $(13) | $188 | $(23) |
| Diluted earnings per share | $0.19 | $(0.10) | $1.39 | $(0.18) |
Nine-month 2016 results included a $167 gain on the SpringCastle interests sale. A change in accounting for purchased credit-impaired loans increased OneMain-attributable net income by $15 in both Q3 and the nine-month period, and increased EPS by $0.11 in each period.
- Credit and portfolio: Q3 consolidated yield was 21.92%, down from 24.25%; net charge-off ratio was 5.71%, up from 3.77%. Delinquency ratio was 3.54%, versus 3.53%. Personal loan net receivables were $13.7 billion, versus $13.3 billion at year-end 2015.
- Allowance: $672 at September 30, compared with $592 at December 31, 2015; allowance equaled 4.85% of finance receivables, versus 3.81%.
- Cash flow: Nine-month operating cash flow was $1.139 billion, investing cash flow $204, and financing cash flow $(1.625) billion. Cash declined to $658 from $939 at year-end 2015.
- Debt and liquidity: Long-term debt was $13.994 billion, down from $17.300 billion at year-end 2015. The company reported $4.6 billion of undrawn conduit capacity and $3.8 billion UPB of unencumbered personal loans. Management said liquidity was adequate for at least the next 12 months.
- Balance sheet: Total assets were $18.353 billion and shareholders’ equity $3.046 billion at September 30, 2016.
Material changes versus prior comparable periods
- Reported interest income rose substantially, primarily because the OneMain acquisition and portfolio growth increased average receivables. Lower yields, partly reflecting a larger secured-loan mix and purchase accounting, offset some of that growth.
- Credit-loss provision increased sharply, reflecting acquired OneMain charge-offs and higher charge-offs on Springleaf personal loans. The allowance ratio also increased.
- Operating expenses increased with the acquired business and integration activity. Acquisition-related transaction and integration expenses were $21 in Q3 and $75 for the nine months.
- SpringCastle was sold in March for approximately $112, generating a $167 gain and removing its loans and associated securitized debt from consolidation. The company retained servicing responsibilities; $11 of sale proceeds was placed in escrow, subject to portfolio-performance terms.
- The May Lendmark divestiture generated $624 in cash proceeds and completed the sale of 127 branches and associated loans required under the acquisition settlement. The August sale of second-lien real estate loans generated $246 in proceeds and a $4 loss.
Outlook, management commentary, and risks
- Management estimated $275–$300 of OneMain acquisition synergies, expected to be fully reflected by the end of 2017, and approximately $275 of integration expenses, primarily during 2016 and the first half of 2017. It had incurred approximately $137 by September 30.
- Integration activity reduced Q3 origination growth, especially at former OneMain branches, and management attributed a slight increase in early-stage delinquencies on 2016 originations to reduced branch capacity for monitoring and collections. Branch consolidation and systems conversion were targeted for completion in the first half of 2017.
- The company lowered expectations for personal-loan receivable growth for the balance of 2016 and 2017. It warned of potential higher delinquencies, net charge-offs, and loss provisions through that period; management anticipated possible renewed growth after integration and lower credit losses beginning in 2018, subject to execution and economic conditions.
- Management tightened underwriting for lower-credit-tier unsecured loans and is pursuing more secured originations, which generally have lower yields and credit losses. Increased online-lender competition and the possibility that customers may not qualify for or choose secured loans could constrain growth and yields.
- Other significant risks include substantial indebtedness and reliance on capital markets, non-investment-grade credit ratings, consumer defaults and economic weakness, regulatory and litigation exposure, and execution risks in integration. The filing says pending legal matters may result in losses, but certain exposures cannot be reasonably estimated.
- The filing gives no formal earnings or revenue guidance. SFC and OMFH reported compliance with debt covenants at September 30. The company disclosed no material off-balance-sheet arrangements.
Important facts for investors to verify
- How credit performance develops: delinquency, charge-offs, loss provisions, and allowance coverage, especially as integration continues.
- Whether the lower receivable-growth outlook and reduced unsecured lending affect portfolio yields, originations, and profitability.
- Progress toward the stated synergy target, integration-cost estimate, branch consolidation, and systems-conversion timetable.
- Liquidity and refinancing capacity, including the terms and availability of securitizations, conduit facilities, and unsecured debt markets.
- Potential contingencies from the DOJ settlement, Lendmark transition services, litigation, loan-sale recourse, and SpringCastle escrow conditions.
- The impact of the purchased credit-impaired accounting change on reported earnings and the expected material effect of the future expected-credit-loss accounting standard.