ONEMAIN HOLDINGS, INC. An index to our management's discussion and analysis follows:
Topic Page
Forward-Looking Statements 42
Overview 44
Recent Developments and Outlook 45
Results of Operations 48
Segment Results 52
Credit Quality 55
Liquidity and Capital Resources 59
Off-Balance Sheet Arrangements 64
Critical Accounting Policies and Estimates 64
Recent Accounting Pronouncements 65
Seasonality 65
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Table of Contents Forward-Looking Statements This report contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact but instead represent only management's current beliefs regarding future events. By their nature, forward-looking statements are subject to risks, uncertainties, assumptions, and other important factors that may cause actual results, performance or achievements to differ materially from those expressed in or implied by such forward-looking statements. We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date they were made. We do not undertake any obligation to update or revise these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events or the non-occurrence of anticipated events, whether as a result of new information, future developments, or otherwise, except as required by law. Forward-looking statements include, without limitation, statements concerning future plans, objectives, goals, projections, strategies, events, or performance, and underlying assumptions and other statements related thereto. Statements preceded by, followed by or that otherwise include the words "anticipates," "appears," "are likely," "believes," "estimates," "expects," "foresees," "intends," "plans," "projects," and similar expressions or future or conditional verbs such as "would," "should," "could," "may," or "will" are intended to identify forward-looking statements. Important factors that could cause actual results, performance, or achievements to differ materially from those expressed in or implied by forward-looking statements include, without limitation, the following:
•adverse changes in general economic conditions, including the interest rate environment and the financial markets;
•risks associated with the COVID-19 pandemic and the mitigation efforts by governments to the pandemic and related effects on us, our customers, and employees;
•our estimates of the allowance for finance receivable losses may not be adequate to absorb actual losses, causing our provision for finance receivable losses to increase, which would adversely affect our results of operations;
•increased levels of unemployment and personal bankruptcies;
•a change in the proportion of secured loans may affect our personal loan receivables and portfolio yield;
•adverse changes in the rate at which we can collect or potentially sell our finance receivables portfolio;
•natural or accidental events such as earthquakes, hurricanes, tornadoes, fires, or floods affecting our customers, collateral, or our branches or other operating facilities;
•war, acts of terrorism, riots, civil disruption, pandemics, disruptions in the operation of our information systems, or other events disrupting business or commerce;
•risks related to the acquisition or sale of assets or businesses or the formation, termination, or operation of joint ventures or other strategic alliances, including increased loan delinquencies or net charge-offs, integration or migration issues, increased costs of servicing, incomplete records, and retention of customers;
•a failure in or breach of our operational or security systems or infrastructure or those of third parties, including as a result of cyber-attacks, or other cyber-related incidents involving the loss, theft or unauthorized disclosure of personally identifiable information, or "PII," of our present or former customers;
•our credit risk scoring models may be inadequate to properly assess the risk of customer unwillingness or lack of capacity to repay;
•adverse changes in our ability to attract and retain employees or key executives to support our businesses;
•increased competition, or changes in customer responsiveness to our
distribution channels, an inability to make technological improvements, and the
ability of our competitors to offer a more attractive range of personal loan
products than we offer;
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-------------------------------------------------------------------------------- Table of Contents •changes in federal, state, or local laws, regulations, or regulatory policies and practices that adversely affect our ability to conduct business or the manner in which we currently are permitted to conduct business, such as licensing requirements, pricing limitations or restrictions on the method of offering products, as well as changes that may result from increased regulatory scrutiny of the sub-prime lending industry, our use of third-party vendors and real estate loan servicing, or changes in corporate or individual income tax laws or regulations, including effects of the Tax Act and the CARES Act;
•risks associated with our insurance operations, including insurance claims that exceed our expectations or insurance losses that exceed our reserves;
•our inability to successfully implement our growth strategy for our consumer lending business or successfully acquire portfolios of personal loans;
•declines in collateral values or increases in actual or projected delinquencies or net charge-offs;
•potential liability relating to finance receivables which we have sold or securitized or may sell or securitize in the future if it is determined that there was a non-curable breach of a representation or warranty made in connection with such transactions;
•the costs and effects of any actual or alleged violations of any federal, state, or local laws, rules or regulations, including any associated litigation;
•the costs and effects of any fines, penalties, judgments, decrees, orders, inquiries, investigations, subpoenas, or enforcement or other proceedings of any governmental or quasi-governmental agency or authority and any associated litigation;
•our continued ability to access the capital markets and maintain adequate current sources of funds to satisfy our cash flow requirements;
•our ability to comply with our debt covenants;
•our ability to generate sufficient cash to service all of our indebtedness;
•any material impairment or write-down of the value of our assets;
•the ownership of OMH's common stock continues to be highly concentrated, which may prevent other minority stockholders from influencing significant corporate decisions and may result in conflicts of interest;
•the effects of any downgrade of our debt ratings by credit rating agencies, which could have a negative impact on our cost of and/or access to capital;
•our substantial indebtedness, which could prevent us from meeting our obligations under our debt instruments and limit our ability to react to changes in the economy or our industry or our ability to incur additional borrowings;
•our ability to maintain sufficient capital levels in our regulated and unregulated subsidiaries;
•changes in accounting standards or tax policies and practices and the application of such new standards, policies and practices;
•management estimates and assumptions, including estimates and assumptions about future events, may prove to be incorrect; and
•various risks relating to continued compliance with the Settlement Agreement
with the
We also direct readers to the other risks and uncertainties discussed in other
documents we file with the
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If one or more of these or other risks or uncertainties materialize, or if our
underlying assumptions prove to be incorrect, our actual results may vary
materially from what we may have expressed or implied by these forward-looking
statements. You should specifically consider the factors identified in this
report and in the documents we file with the SEC , including our 2019 Annual
Report on Form 10-K, that could cause actual results to differ before making an
investment decision to purchase our securities and should not place undue
reliance on any of our forward-looking statements. Furthermore, new risks and
uncertainties arise from time to time, and it is impossible for us to predict
those events or how they may affect us.
Overview
We are a leading provider of responsible personal loan products, primarily to
non-prime customers. Our network of over 1,500 branch offices in 44 states is
staffed with expert personnel and is complemented by our centralized operations
and digital presence through online lending. Our digital platform provides
current and prospective customers the option of applying for a personal loan via
our website, www.omf.com. The information on our website is not incorporated by
reference into this report. In connection with our personal loan business, our
insurance subsidiaries offer our customers optional credit and non-credit
insurance, and other products.
In addition to our loan originations, and insurance and other product sales activities, we service loans owned by us and service loans owned by third parties; pursue strategic acquisitions and dispositions of assets and businesses, including loan portfolios or other financial assets; and may establish joint ventures or enter into other strategic alliances.
OUR PRODUCTS
Our product offerings include:
•Personal Loans - We offer personal loans through our branch network, centralized operations, and our website, www.omf.com, to customers who generally need timely access to cash. Our personal loans are non-revolving, with a fixed-rate, a fixed term of three to six years, and are secured by automobiles, other titled collateral, or are unsecured. AtMarch 31, 2020 , we had approximately 2.40 million personal loans, of which 52% were secured by titled property, representing$18.3 billion of net finance receivables, compared to approximately 2.44 million personal loans, of which 52% were secured by titled property, totaling$18.4 billion atDecember 31, 2019 . •Insurance Products - We offer our customers optional credit insurance products (life insurance, disability insurance, and involuntary unemployment insurance) and optional non-credit insurance products through both our branch network and our centralized operations. Credit insurance and non-credit insurance products are provided by our affiliated insurance companies. We offer GAP coverage as a waiver product or insurance. We also offer optional home and auto membership plans of an unaffiliated company.
Our non-originating legacy products include:
•Other Receivables - We ceased originating real estate loans in 2012 and we continue to service or sub-service liquidating real estate loans.
OUR SEGMENT
Beginning in the fourth quarter of 2019, C&I is our only reportable segment. The
remaining components (which we refer to as "Other") consist of (i) our
liquidating SpringCastle Portfolio servicing activity and (ii) our
non-originating legacy operations, which primarily include our liquidating real
estate loans. See Note 15 of the Notes to the Condensed Consolidated Financial
Statements included in this report for more information about our segment.
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Recent Developments and Outlook
RECENT DEVELOPMENTS
Cash Dividends to OMH's Common Stockholders
For information regarding the quarterly dividends declared by OMH, see "Liquidity and Capital Resources" of the Management's Discussion and Analysis of Financial Condition and Results of Operations in this report.
Stock Repurchase Program
During the quarter endedMarch 31, 2020 , the OMH Board of Directors approved a stock repurchase program, which allowed us to repurchase up to$200 million of OMH's outstanding common stock. See Note 11 of the Notes to the Condensed Consolidated Financial Statements and Item 2. Unregistered Sales ofEquity Securities and Use of Proceeds of Part II included in this report for further information on our shares repurchased.
Appointment of Member of the SFC Board of Directors and Executive Vice President of SFC
OnJanuary 2, 2020 ,Adam L. Rosman was appointed to the SFC Board of Directors and as Executive Vice President.Mr. Rosman replacedJohn C. Anderson , who resigned as a member of SFC's board of directors and as Executive Vice President onJanuary 2, 2020 . 45
-------------------------------------------------------------------------------- Table of Contents OUTLOOK COVID-19 has evolved into a global pandemic and has spread to many regions of the world, includingthe United States . We are closely tracking the evolving impact of COVID-19 and are focused on helping our customers and employees through these difficult times. We are generally classified as an essential business by government authorities as we play a vital role by providing over 2.4 million personal loans to hardworking Americans in hundreds of local communities where we have over 1,500 branches that are located in 44 states as ofMarch 31, 2020 . Our central operations remain operational and essentially all our branches remain open.
As it became apparent COVID-19 would have an impact to our business and our customers, we took active and decisive steps to implement an immediate COVID-19 operational response to:
•Maintain strong capital and liquidity: We have a strong balance sheet and liquidity profile as a result of numerous actions taken over the last several years to increase conduit lines, deleverage and extend our maturities. We elected to draw an aggregate$3.5 billion under our conduit facilities as ofMarch 31, 2020 as a prudent measure in order to increase liquidity and preserve financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 pandemic. It has been the long-term strategy of the Company to run a conservative balance sheet which places a premium on safety and a long liquidity runway. As a result, we had$4.2 billion of cash and cash equivalents as ofMarch 31, 2020 , which we believe is sufficient to run our operation under numerous stress scenarios through 2021. We believe our liquidity runway could be further extended with our$3.6 billion of undrawn committed capacity under our revolving conduit facilities and our$6.1 billion of unencumbered personal loans. •Tighten underwriting: We actively monitor the changing economic environment and adjust our underwriting standards accordingly. We quickly took steps to tighten underwriting standards and reduce originations to higher risk categories of lending. We are using our decades of experience and proprietary data to serve our customers while maintaining an appropriately conservative portfolio risk-management program. •Continuous stress testing: It is our practice to stress test our portfolio regularly. For the last several years, our underwriting models have incorporated the estimated impacts of a potential downturn, such that our pre-provision return suggests we maintain profitability with a 100% increase in losses. •Focus on serving our customers: Our top priority is to service and care for our current customers. We actively engaged with other lenders to put forward solutions to help our customers through this difficult time. We have taken steps to enhance our servicing capacity by shifting branch team members toward a greater focus on servicing existing loans. This is in addition to our employees who are already solely focused on servicing, which we believe is a clear differentiator for us and will lead to better outcomes for our customers and for our business. In addition, we have enhanced our borrower assistance program to ensure that we can help customers who are immediately impacted by the coronavirus, including offering reduced and deferred payment options, waiving late fees for payments dueMarch 15, 2020 throughApril 30, 2020 , and suspending credit bureau reporting for newly delinquent accounts. The enrollment in our borrower assistance program may increase in the near term, which may also adversely affect our income and other results of operations. •Deploy business continuity plans: We deployed business continuity plans to ensure operational flexibility through any environment, including the ability to work remotely. Our hybrid operating model, with fully scaled branch and central operations teams, can dynamically reroute application and servicing capabilities to service centers and branches acrossthe United States . Although a small number of branches have been temporarily closed and reopened for a variety of reasons, from deep cleaning to government mandate, all of our teams, both branch and central operations, remain operational today. We continue to serve our customers by appointment while maintaining social distancing and other safety protocols to keep our employees and customers safe. Certain preliminary borrower trends have emerged in connection with the COVID-19 pandemic. A tightening of our underwriting standards, combined with significantly lower consumer demand, has led to a significant reduction in originations volume. However, delinquencies have declined thus far inApril 2020 when compared toMarch 2020 due in part to our enhanced borrower assistance program and to increased cash payments. 46 -------------------------------------------------------------------------------- Table of Contents As a result of the COVID-19 pandemic, we expect near term impacts to affect our originations, reserves, and involuntary unemployment insurance claims. Our credit tightening measures, combined with reduced customer demand, may result in lower originations as "stay at home" orders remain in place and economic uncertainty remains high. We may experience further changes to the macroeconomic assumptions within our forecast used in our credit loss allowance model, as well as changes to our loan loss performance outlook, both of which could lead to further changes in our allowance for loan losses, reserve rate, and provision expense. The full extent to which the COVID-19 pandemic will impact our business and operating results will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19 and the mitigation efforts by government entities, as well as our own immediate COVID-19 operational response. We have and will continue to take active and decisive steps in this time of uncertainty and remain committed to the safety of our employees, while also continuing to serve our customers by remaining open with appropriate protective protocols in place. We have served working Americans for many decades at scale, through both changing economic conditions and natural disasters, and will continue to remain focused on our strategic priorities of strong liquidity, disciplined underwriting, and serving our customers. 47
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Table of Contents Results of Operations The results of SFC are consolidated into the results of OMH. Due to the nominal differences between SFC and OMH, content throughout this section relate only to OMH. See Note 2 of the Notes to the Consolidated Financial Statements included in this report for the reconciliation of results of SFC to OMH.
OMH'S CONSOLIDATED RESULTS
See the table below for OMH's consolidated operating results and selected financial statistics. A further discussion of OMH's operating results for our operating segment is provided under "Segment Results" below.
At or for the
Three Months Ended March 31,
(dollars in millions, except per share amounts) 2020 2019
Interest income $ 1,106 $ 956
Interest expense 255 236
Provision for finance receivable losses 531 286
Net interest income after provision for finance receivable
losses 320 434
Other revenues 141 148
Other expenses 418 380
Income before income taxes 43 202
Income taxes 11 50
Net income $ 32 $ 152
Share Data:
Earnings per share:
Diluted $ 0.24 $ 1.11
Selected Financial Statistics *
Finance receivables held for investment:
Net finance receivables $ 18,269 $ 16,136
Number of accounts 2,400,536 2,326,835
Average net receivables $ 18,380 $ 16,146
Yield 24.17 % 23.92 %
Gross charge-off ratio 7.35 % 7.82 %
Recovery ratio (0.90) % (0.70) %
Net charge-off ratio 6.45 % 7.12 %
30-89 Delinquency ratio 2.25 % 1.93 %
Origination volume $ 2,589 $ 2,582
Number of accounts originated 276,773 276,329
Debt balances:
Long-term debt balance $ 20,443 $ 16,117
Average daily debt balance 17,675 15,839
* See "Glossary" at the beginning of this report for formulas and definitions of our key performance ratios.
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Comparison of Consolidated Results for the Three Months Ended
Interest income increased$150 million or 16% for the three months endedMarch 31, 2020 when compared to the same period in 2019 primarily due to growth in our loan portfolio. Interest expense increased$19 million or 8% for the three months endedMarch 31, 2020 when compared to the same period in 2019 primarily due to an increase in average debt of$1.8 billion , which was issued at a lower cost than our average cost of funds and is consistent with the growth in our loan portfolio.
See Notes 8 and 9 of the Notes to the Condensed Consolidated Financial Statements included in this report for further information on our long-term debt, securitization transactions, and our revolving conduit facilities.
Provision for finance receivable losses increased$245 million or 86% for the three months endedMarch 31, 2020 when compared to the same period in 2019 primarily due to the impact of COVID-19 on our estimated allowance for loan loss requirement as we have incorporated unfavorable forecasted economic trends, including a rise in unemployment, and as a result, our allowance for finance receivable losses as a percentage of finance receivables in the current period increased from 10.6% to 11.9%. Other revenues decreased$7 million or 5% for the three months endedMarch 31, 2020 when compared to the same period in 2019 primarily due to a$17 million decrease in investment revenue primarily driven by mark-to-market losses on equity investment securities and an$11 million decrease related to the net gain on sale of a cost method investment in the prior period. The decrease was partially offset by a$21 million increase related to the net loss on repurchases and repayments of debt in the prior period and a$7 million increase in insurance products sold due to higher loan volume. Other expenses increased$38 million or 10% for the three months endedMarch 31, 2020 when compared to the same period in 2019 due to a$23 million increase in insurance policy benefits and claims primarily related to an increase in involuntary unemployment insurance claims reserves, a$10 million increase in our marketing initiatives, and our continued investment in our business operations. Income taxes decreased$39 million or 78% for the three months endedMarch 31, 2020 when compared to the same period in 2019 due to lower pre-tax income in the current period. The effective tax rate for the three months endedMarch 31, 2020 was 24.3% compared to 24.8% for the same period in 2019. The effective tax rates for the three months endedMarch 31, 2020 and 2019 differed from the federal statutory rate of 21% primarily due to the effect of state income taxes.
See Note 13 of the Notes to the Condensed Consolidated Financial Statements included in this report for further information on effective tax rates.
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NON-GAAP FINANCIAL MEASURES
Management uses adjusted pretax income (loss), a non-GAAP financial measure, as
a key performance measure of our segment. Adjusted pretax income (loss)
represents income (loss) before income taxes on a Segment Accounting Basis and
excludes direct costs incurred as result of COVID-19, net loss resulting from
repurchases and repayments of debt, acquisition-related transaction and
integration expenses, net gain on sale of cost method investment, restructuring
charges, and net loss on sale of real estate loans. Management believes adjusted
pretax income (loss) is useful in assessing the profitability of our segment.
Management also uses adjusted pretax income (loss) excluding the change in
allowance for finance receivables losses ("pretax capital generation"), a
non-GAAP financial measure, as a key performance measure of our segment. This
measure represents adjusted pretax income as discussed above and excludes the
change in our allowance for finance receivable losses in the period while still
considering the net charge-offs incurred during the period. Management believes
that pretax capital generation is useful in assessing the capital created in the
period impacting the overall capital adequacy of the Company. Management
believes that the Company's reserves, combined with our equity represent the
loss absorption of the Company.
Management utilizes both adjusted pretax net income (loss) and pretax capital
generation in evaluating our performance. Additionally, both of these non-GAAP
measures are consistent with the performance goals established in OMH's
executive compensation program. Adjusted pretax income (loss) and pretax capital
generation are non-GAAP financial measures and should be considered supplemental
to, but not as a substitute for or superior to, income (loss) before income
taxes, net income, or other measures of financial performance prepared in
accordance with GAAP.
OMH's reconciliations of income (loss) before income tax expense (benefit) on a
Segment Accounting Basis to adjusted pretax income (loss) (non-GAAP) by segment
and Consumer and Insurance pretax capital generation (non-GAAP) were as follows:
Three Months Ended March 31,
(dollars in millions) 2020 2019
Consumer and Insurance
Income before income taxes - Segment Accounting Basis $ 51 $ 232 Adjustments:
Direct costs associated with COVID-19 3 - Acquisition-related transaction and integration expenses 6 6 Net loss on repurchase and repayment of debt - 16 Net gain on sale of cost method investment - (11) Restructuring charges - 3 Adjusted pretax income (non-GAAP) $ 60$ 246 Provision for finance receivable losses $ 530$ 276 Net charge-offs (296) (284) Pretax capital generation (non-GAAP) $ 294$ 238
Other
Loss before income taxes - Segment Accounting Basis $ (1)$ (3)
Adjustments:
Net loss on sale of real estate loans * - 1 Adjusted pretax loss (non-GAAP) $ (1)$ (2) * During the three months endedMarch 31, 2019 , the resulting impairment on finance receivables held for sale remaining after theFebruary 2019 Real Estate Loan Sale has been combined with the gain on the sale. See Note 6 of the Notes to the Condensed Consolidated Financial Statements included in this report for more information regarding the real estate loan sale. 50 -------------------------------------------------------------------------------- Table of Contents Direct costs associated with COVID-19 include (i) information technology costs to transition employees to work remotely, (ii) branch, central operations, and corporate locations sanitization services and supplies, and (iii) other costs and fees directly related to COVID-19. Acquisition-related transaction and integration expenses incurred as a result of the OneMain Acquisition includes (i) compensation and employee benefit costs, such as retention awards and severance costs, (ii) accelerated amortization of acquired software assets, (iii) rebranding to the OneMain brand, (iv) branch infrastructure and other fixed asset integration costs, (v) information technology costs, such as internal platform development, software upgrades and licenses, and technology termination costs, (vi) legal fees and project management costs, (vii) system conversions, including human capital management, marketing, risk, and finance functions, and (viii) other costs and fees directly related to the OneMain Acquisition and integration. 51
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Table of Contents Segment Results The results of SFC are consolidated into the results of OMH. Due to the nominal differences between SFC and OMH, content throughout this section relate only to OMH. See Note 2 of the Notes to the Condensed Consolidated Financial Statements included in this report for the reconciliation of results of SFC to OMH. See Note 19 of the Notes to the Consolidated Financial Statements in Part II - Item 8 included in our 2019 Annual Report on Form 10-K for a description of our segments and methodologies used to allocate revenues and expenses to each segment. See Note 15 of the Notes to the Condensed Consolidated Financial Statements included in this report for reconciliations of segment total to condensed consolidated financial statement amounts.
CONSUMER AND INSURANCE
OMH's adjusted pretax income and selected financial statistics for C&I on an adjusted Segment Accounting Basis were as follows:
At or for the
Three Months Ended March 31,
(dollars in millions) 2020 2019
Interest income $ 1,101 $ 954
Interest expense 249 229
Provision for finance receivable losses 530 276
Net interest income after provision for finance receivable
losses 322 449
Other revenues 136 151
Other expenses 398 354
Adjusted pretax income (non-GAAP) $ 60 $ 246
Selected Financial Statistics *
Finance receivables held for investment:
Net finance receivables $ 18,283 $ 16,170
Number of accounts 2,400,536 2,326,835
Average net receivables $ 18,397 $ 16,179
Yield 24.07 % 23.92 %
Gross charge-off ratio 7.36 % 7.92 %
Recovery ratio (0.90) % (0.81) %
Net charge-off ratio 6.46 % 7.11 %
30-89 Delinquency ratio 2.26 % 1.94 %
Origination volume $ 2,589 $ 2,582
Number of accounts originated 276,773 276,329
* See "Glossary" at the beginning of this report for formulas and definitions of our key performance ratios.
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Comparison of Adjusted Pretax Income for the Three Months Ended March 31, 2020
and 2019
Interest income increased $147 million or 15% for the three months ended March
31, 2020 when compared to the same period in 2019 primarily due to growth in our
loan portfolio.
Interest expense increased $20 million or 9% for the three months ended March
31, 2020 when compared to the same period in 2019 primarily due to an increase
in average debt of $1.8 billion , which was issued at a lower cost than our
average cost of funds and is consistent with the growth in our loan portfolio.
See Notes 8 and 9 of the Notes to the Condensed Consolidated Financial Statements included in this report for further information on our long-term debt, securitization transactions and our revolving conduit facilities.
Provision for finance receivable losses increased$254 million or 92% for the three months endedMarch 31, 2020 when compared to the same period in 2019 primarily due to the impact of COVID-19 on our estimated allowance for loan loss requirement as we have incorporated unfavorable forecasted economic trends, including a rise in unemployment, and as a result, our allowance for finance receivable losses as a percentage of finance receivables in the current period increased from 10.6% to 11.9%. Other revenues decreased$15 million or 10% for the three months endedMarch 31, 2020 when compared to the same period in 2019 primarily due to an$18 million decrease in investment revenue primarily driven by mark-to-market losses on equity investment securities offset by a$7 million increase in insurance products sold due to higher loan volume. Other expenses increased$44 million or 12% for the three months endedMarch 31, 2020 when compared to the same period in 2019 primarily due to a$23 million increase in insurance policy benefits and claims primarily related to an increase in involuntary unemployment insurance claims reserves, a$10 million increase in our marketing initiatives, and our continued investment in our business operations. 53 -------------------------------------------------------------------------------- Table of Contents OTHER
"Other" consists of our liquidating SpringCastle Portfolio servicing activity and our non-originating legacy operations, which includes primarily our liquidating real estate loans.
OMH's adjusted pretax loss of the Other components on an adjusted Segment Accounting Basis was as follows:
Three Months Ended March 31,
(dollars in millions) 2020 2019
Interest income $ 2 $ 3
Interest expense 1 2
Net interest income after provision for finance
receivable losses 1 1
Other revenues 4 9
Other expenses 6 12
Adjusted pretax loss (non-GAAP) $ (1) $ (2) Net finance receivables of the Other components, reported in "Other assets," on a Segment Accounting Basis were as follows:
March 31,
(dollars in millions) 2020 2019
Net finance receivables held for sale:
Other receivables $ 63 $ 79
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Table of Contents Credit Quality The results of SFC are consolidated into the results of OMH. Due to the nominal differences between SFC and OMH, content throughout this section relate only to OMH. See Note 2 of the Notes to the Condensed Consolidated Financial Statements included in this report for the reconciliation of results of SFC to OMH.
FINANCE RECEIVABLES
Our net finance receivables, consisting of personal loans, were$18.3 billion atMarch 31, 2020 and$18.4 billion atDecember 31, 2019 . Our personal loans are non-revolving, with a fixed-rate, a fixed term of three to six years, and are secured by automobiles, other titled collateral, or are unsecured. We consider the delinquency status of our finance receivables as our key credit quality indicator. We monitor the delinquency of our finance receivable portfolio, including the migration between the delinquency buckets and changes in the delinquency trends to manage our exposure to credit risk in the portfolio.
DELINQUENCY
We monitor delinquency trends to evaluate the risk of future credit losses and
employ advanced analytical tools to manage our exposure. Our branch team members
work with customers through occasional periods of financial difficulty and offer
a variety of borrower assistance programs to help customers continue to make
payments. Team members also actively engage in collection activities throughout
the early stages of delinquency. We closely track and report the percentage of
receivables that are contractually 30-89 days past due as a benchmark of
portfolio quality, collections effectiveness, and as a strong indicator of
losses in coming quarters.
When finance receivables are contractually 60 days past due, we consider these
accounts to be at an increased risk for loss and we transfer collection of these
accounts to our centralized operations. Use of our centralized operations teams
for managing late stage delinquency allows us to apply more advanced collection
technologies and tools, and drives operating efficiencies in servicing. At 90
days contractually past due, we consider our finance receivables to be
nonperforming.
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The delinquency information for net finance receivables is as follows:
Consumer Segment to
and GAAP GAAP
(dollars in millions) Insurance Adjustment (a) Basis
March 31, 2020
Current $ 17,475 $ (12) $ 17,463
30-59 days past due 246 (1) 245
Delinquent (60-89 days past due) 167 - 167
Performing 17,888 (13)
17,875
Nonperforming (90+ days past due) 395 (1) 394 Total net finance receivables$ 18,283 $ (14)$ 18,269 Delinquency ratio 30-89 days past due 2.26 % (b) 2.25 % 30+ days past due 4.42 % (b) 4.41 % 60+ days past due 3.07 % (b) 3.07 % 90+ days past due 2.16 % (b) 2.16 % December 31, 2019 Current$ 17,578 $ (28)$ 17,550 30-59 days past due 273 (1) 272 Delinquent (60-89 days past due) 182 (1)
181
Performing 18,033 (30)
18,003
Nonperforming (90+ days past due) 388 (2) 386 Total net finance receivables$ 18,421 $ (32)$ 18,389 Delinquency ratio 30-89 days past due 2.47 % (b) 2.46 % 30+ days past due 4.58 % (b) 4.56 % 60+ days past due 3.09 % (b) 3.08 % 90+ days past due 2.11 % (b) 2.10 % (a) As a result of the adoption of ASU 2016-13, we converted all purchased credit impaired finance receivables to purchased credit deteriorated finance receivables in accordance with ASC Topic 326, which resulted in the gross-up of net finance receivables and allowance for finance receivable losses of$15 million onJanuary 1, 2020 . See Notes 3, 4, and 5 of the Notes to the Condensed Consolidated Financial Statements for additional information on the adoption of ASU 2016-13 included in this report. (b) Not applicable 56 -------------------------------------------------------------------------------- Table of Contents ALLOWANCE FOR FINANCE RECEIVABLE LOSSES We estimate and record an allowance for finance receivable losses to cover the estimated lifetime expected credit losses on our finance receivables, effective with the adoption of ASU 2016-13 onJanuary 1, 2020 . Prior to the adoption of ASU 2016-13, we estimated and recorded an allowance for finance receivable losses to cover estimated incurred losses on our finance receivables. Our allowance for finance receivable losses may fluctuate based upon our continual review of the growth and contractual delinquency of the finance receivable portfolio and changes in economic conditions. Our current methodology to estimate expected credit losses utilized macroeconomic forecasts as ofMarch 31, 2020 , which incorporated the potential impact that the COVID-19 pandemic could have on theU.S. economy. Our forecast utilized economic projections from a major rating service, and considered a spike in the second quarter unemployment rate followed by a recovery over the second half of the year, partially offset by positive impacts of the CARES Act, the involuntary unemployment insurance coverage of our portfolio, and our borrower assistance efforts. As a result, our allowance for finance receivable losses as a percentage of finance receivables increased from 10.6% to 11.9%. In the near-term, we may experience further changes to the macroeconomic assumptions within our forecast, as well as changes to our loan loss performance outlook, both of which could lead to further changes in our allowance for loan losses, reserve rate and provision expense.
Changes in the allowance for finance receivable losses were as follows:
Consumer Segment to
and GAAP Consolidated
(dollars in millions) Insurance Adjustment Total
Three Months Ended March 31, 2020
Balance at beginning of period $ 849 $ (20) $ 829
Impact of adoption of ASU 2016-13 (a) 1,119 (1) 1,118
Provision for finance receivable losses 530 1 531 Charge-offs (337) - (337) Recoveries 41 - 41 Balance at end of period$ 2,202 $ (20) $ 2,182 Allowance ratio 12.05 % (b) 11.95 % Three Months EndedMarch 31, 2019 Balance at beginning of period$ 773 $ (42) $ 731 Provision for finance receivable losses 276 10 286 Charge-offs (316) 5 (311) Recoveries 32 (5) 27 Balance at end of period$ 765 $ (32) $ 733 Allowance ratio 4.73 % (b) 4.54 % (a) As a result of the adoption of ASU 2016-13, we recorded a one-time adjustment to the allowance for finance receivable losses. Additionally, we converted all purchased credit impaired finance receivables to purchased credit deteriorated finance receivables in accordance with ASC Topic 326, which resulted in the gross-up of net finance receivables and allowance for finance receivable losses of$15 million onJanuary 1, 2020 . See Notes 3, 4, and 5 of the Notes to the Condensed Consolidated Financial Statements for additional information on the adoption of ASU 2016-13 included in this report. (b) Not applicable. The current delinquency status of our finance receivable portfolio, inclusive of recent borrower performance, volume of our TDR activity, level and recoverability of collateral securing our finance receivable portfolio, and the reasonable and supportable forecast of economic conditions (after adoption of ASU 2016-13) are the primary drivers that can cause fluctuations in our allowance for finance receivable losses from period to period. We monitor the allowance ratio to ensure we have a sufficient level of allowance for finance receivable losses based on the estimated lifetime expected credit losses in our finance receivable portfolio. The allowance for finance receivable losses as a percentage of net finance receivables increased from prior periods due to the adoption of ASU 2016-13. 57
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See Note 5 of the Notes to the Condensed Consolidated Financial Statements included in this report for more information about the changes in the allowance for finance receivable losses.
TDR FINANCE RECEIVABLES
We make modifications to our finance receivables to assist borrowers experiencing financial difficulties. When we modify a loan's contractual terms for economic or other reasons related to the borrower's financial difficulties and grant a concession that we would not otherwise consider, we classify that loan as a TDR finance receivable.
Information regarding TDR net finance receivables is as follows:
Consumer Segment to
and GAAP GAAP
(dollars in millions) Insurance Adjustment Basis
March 31, 2020
TDR net finance receivables $ 744 $ (56) $ 688
Allowance for TDR finance receivable losses 326 (24) 302
December 31, 2019
TDR net finance receivables $ 721 $ (63) $ 658
Allowance for TDR finance receivable losses 292 (20) 272
DISTRIBUTION OF FINANCE RECEIVABLES BY FICO SCORE
There are many different categorizations used in the consumer lending industry to describe the creditworthiness of a borrower, including prime, near prime, and sub-prime. While management does not utilize FICO scores to manage credit quality, we have presented the following on how we group FICO scores into said categories for comparability purposes across our industry: •Prime: FICO score of 660 or higher •Near prime: FICO score of 620-659 •Sub-prime: FICO score of 619 or below Our customers' demographics are in many respects near the national median but may vary from national norms in terms of credit and repayment histories. Many of our customers have experienced some level of prior financial difficulty or have limited credit experience and require higher levels of servicing and support from our branch network and central servicing operations. The following table reflects our personal loans grouped into the categories described above based on borrower FICO credit scores as of the most recently refreshed date or as of the loan origination or purchase date: (dollars in millions) March 31, 2020 December 31, 2019 FICO scores 660 or higher$ 3,820 $ 3,951 620-659 4,568 4,683 619 or below 9,881 9,755 Total$ 18,269 $ 18,389 58
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Liquidity and Capital Resources
SOURCES AND USES OF FUNDS
We finance the majority of our operating liquidity and capital needs through a combination of cash flows from operations, secured debt, unsecured debt, borrowings from revolving conduit facilities, and equity. We may also utilize other sources in the future. As a holding company, all of the funds generated from our operations are earned by our operating subsidiaries. Our operating subsidiaries' primary cash needs relate to funding our lending activities, our debt service obligations, our operating expenses, payment of insurance claims, and expenditures relating to upgrading and monitoring our technology platform, risk systems, and branch locations. We have previously purchased portions of our unsecured indebtedness, and we may elect to purchase additional portions of our unsecured indebtedness or securitized borrowings in the future. Future purchases may be made through the open market, privately negotiated transactions with third parties, or pursuant to one or more tender or exchange offers, all of which are subject to terms, prices, and consideration we may determine at our discretion. During the three months endedMarch 31, 2020 , OMH generated net income of$32 million . OMH net cash inflow from operating and investing activities totaled$369 million for the three months endedMarch 31, 2020 . AtMarch 31, 2020 , our scheduled principal and interest payments for 2020 on our existing debt (excluding securitizations and borrowings under our revolving conduit facilities) totaled$1.5 billion . As ofMarch 31, 2020 , we had$6.1 billion UPB of unencumbered personal loans and$116 million UPB of unencumbered real estate loans. These real estate loans are classified as held for sale and reported in "Other assets." Based on our estimates and taking into account the risks and uncertainties of our plans, we believe that we will have adequate liquidity to finance and operate our businesses and repay our obligations as they become due for at least the next 12 months.
Securitizations and Borrowings from Revolving Conduit Facilities
During the three months endedMarch 31, 2020 , we did not terminate, cancel or enter into any new securitizations or conduit facilities. AtMarch 31, 2020 , we had$12.0 billion in UPB of finance receivables pledged as collateral for our securitization transactions and conduit draws.
At
See Notes 8 and 9 of the Notes to the Condensed Consolidated Financial Statements included in this report for further information on our long-term debt and conduit facilities.
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Shares Repurchased and Retired
During the three months ended March 31, 2020 , OMH repurchased and retired
2,031,698 shares of its common stock at an average price per share of $22.30 ,
for an aggregate total of approximately $45 million , including commissions and
fees. To provide funding for the OMH stock repurchase and retirement program,
the SFC Board of Directors authorized multiple dividend payments in the
aggregate amount of $45 million . For additional information regarding the shares
repurchased see Note 11 of the Notes to the Condensed Consolidated Financial
Statements and Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds of Part II included in this report.
Cash Dividends to OMH's Common Stockholders
As of
Declaration Date Record Date Payment Date Dividend Per Share Amount Paid
(in millions)
February 10, 2020 February 26, 2020 March 13, 2020 $ 2.83 * $ 386
* On
To provide funding for the dividends, SFC paid dividends to OMH of
OnApril 27, 2020 , OMH declared a regular quarterly dividend of$0.33 per share payable onJune 12, 2020 to record holders of OMH's common stock as of the close of business onMay 29, 2020 . To provide funding for the OMH dividend, the SFC Board of Directors authorized a dividend in the amount of up to$45 million payable on or afterJune 9, 2020 . While OMH intends to pay regular quarterly dividends for the foreseeable future, and has announced its intention to pay semi-annual special dividends, all subsequent dividends will be reviewed quarterly and declared at the discretion of the board of directors and will depend on many factors, including our financial condition, earnings, cash flows, capital requirements, level of indebtedness, statutory and contractual restrictions applicable to the payment of dividends, and other considerations that the board of directors deems relevant. OMH's dividend payments may change from time to time, and the board of directors may not continue to declare dividends in the future.
LIQUIDITY
OMH's Operating Activities
Net cash provided by operations of$565 million for the three months endedMarch 31, 2020 reflected net income of$32 million , the impact of non-cash items, and an unfavorable change in working capital of$45 million . Net cash provided by operations of$548 million for the three months endedMarch 31, 2019 reflected net income of$152 million , the impact of non-cash items, and a favorable change in working capital of$17 million .
OMH's Investing Activities
Net cash used for investing activities of$196 million for the three months endedMarch 31, 2020 and$305 million for the three months endedMarch 31, 2019 were primarily due to net principal originations of finance receivables held for investment and held for sale and purchases of available-for-sale securities, partially offset by calls, sales, and maturities of available-for-sale securities.
OMH's Financing Activities
Net cash provided by financing activities of$2.8 billion for the three months endedMarch 31, 2020 was primarily due to net issuances of long-term debt offset by the quarterly and special cash dividends paid, and the cash paid on the common stock repurchased in the quarter. Net cash provided by financing activities of$863 million for the three months endedMarch 31, 2019 were primarily due to net issuances of long-term debt offset by the quarterly cash dividends paid. 60
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At
At
Liquidity Risks and Strategies
SFC's credit ratings are non-investment grade, which may have a significant impact on our cost and access to capital. This, in turn, can negatively affect our ability to manage our liquidity and our ability or cost to refinance our indebtedness. There are numerous risks to our financial results, liquidity, capital raising, and debt refinancing plans, some of which may not be quantified in our current liquidity forecasts. These risks are further described in our "Liquidity and Capital Resources" of Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II - Item 7 included in our 2019 Annual Report on Form 10-K. Principal factors that could decrease our liquidity are customer delinquencies and defaults, a decline in customer prepayments, and a prolonged inability to adequately access capital market funding. We intend to support our liquidity position by utilizing strategies that are further described in our "Liquidity and Capital Resources" of Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II - Item 7 included in our 2019 Annual Report on Form 10-K.
However, it is possible that the actual outcome of one or more of our plans could be materially different than expected or that one or more of our significant judgments or estimates could prove to be materially incorrect.
OUR INSURANCE SUBSIDIARIES
Our insurance subsidiaries are subject to state regulations that limit their ability to pay dividends. AHL and Triton did not pay any dividends during the three months endedMarch 31, 2020 and 2019. OnMarch 7, 2019 , we entered into a share purchase agreement to sell all of the issued and outstanding shares of our former insurance subsidiary, Merit. The transaction closed onDecember 31, 2019 . Merit also did not pay any dividends during the three months endedMarch 31, 2019 . See Note 12 of the Notes to the Consolidated Financial Statements in Part II - Item 8 included in our 2019 Annual Report on Form 10-K for more information on state regulation restrictions and the Merit sale.
OUR DEBT AGREEMENTS
The debt agreements to which SFC and its subsidiaries are a party include
customary terms and conditions, including covenants and representations and
warranties. See Note 10 of the Notes to the Consolidated Financial Statements in
Part II - Item 8 included in our 2019 Annual Report on Form 10-K for more
information on the restrictive covenants under SFC's debt agreements, as well as
the guarantees of SFC's long-term debt.
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Securitized Borrowings
We execute private securitizations under Rule 144A of the Securities Act of
1933. As of March 31, 2020 , our structured financings consisted of the
following:
Current Current Collateral Current Original
Issue Amount Initial Collateral Note Amounts Balance Weighted Average Revolving
(dollars in millions) (a) Balance Outstanding (a) (b) Interest Rate Period
SLFT 2015-B $ 314 $ 336 $ 314 $ 320 3.78 % 5 years
SLFT 2016-A 532 559 120 167 3.72 % 2 years
SLFT 2017-A 652 685 619 685 2.98 % 3 years
OMFIT 2015-3 293 329 293 325 4.21 % 5 years
OMFIT 2016-1 500 570 110 192 5.13 % 3 years
OMFIT 2016-3 350 397 317 391 4.33 % 5 years
OMFIT 2017-1 947 988 630 663 2.70 % 2 years
OMFIT 2018-1 632 650 600 651 3.60 % 3 years
OMFIT 2018-2 368 381 350 381 3.87 % 5 years
OMFIT 2019-1 632 654 600 654 3.79 % 2 years
OMFIT 2019-2 900 947 900 947 3.30 % 7 years
OMFIT 2019-A 789 892 750 892 3.78 % 7 years
ODART 2017-2 605 624 193 227 3.22 % 1 year
ODART 2018-1 947 964 900 964 3.56 % 2 years
ODART 2019-1 737 750 700 750 3.79 % 5 years
Total securitizations $ 9,198 $ 9,726 $ 7,396 $ 8,209
(a) Issue Amount includes the retained interest amounts as applicable and the
Current Note Amounts Outstanding balances reflect pay-downs subsequent to note
issuance and exclude retained interest amounts.
(b) Inclusive of in-process replenishments of collateral for securitized
borrowings in a revolving status as of March 31, 2020 .
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Revolving Conduit Facilities
In addition to the structured financings, we have access to 14 revolving conduit
facilities with a total borrowing capacity of approximately $7.1 billion as of
March 31, 2020 :
Advance
Maximum Amount Revolving
(dollars in millions) Balance Drawn Period End Due and Payable
Rocky River Funding, LLC $ 400 $ 400 April 2022 May 2023
OneMain Financial Funding IX, LLC 650 - June 2022 July 2023
Mystic River Funding, LLC 850 500 September 2022 October 2025
Fourth Avenue Auto Funding, LLC 200 200 June 2022 July 2023
OneMain Financial Funding VIII, LLC 650 200 August 2021 September 2023
Thayer Brook Funding, LLC 250 200 July 2021 August 2022
Hubbard River Funding, LLC 250 250 September 2021 October 2023
Seine River Funding, LLC 650 250 October 2021 November 2024
New River Funding, LLC 250 - March 2022 April 2027
Hudson River Funding, LLC 500 250 June 2022 July 2025
Columbia River Funding, LLC 500 250 September 2022 October 2025
St. Lawrence River Funding, LLC 250 250 October 2022 November 2024
OneMain Financial Funding VII, LLC 850 500 January 2023 February 2025
OneMain Financial Auto Funding I, LLC 850 250 February 2023 March 2030
Total $ 7,100 $ 3,500 See "Liquidity and Capital Resources - Sources and Uses of Funds -
Securitizations and Borrowings from Revolving Conduit Facilities" above for
information on the transaction completed subsequent to
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Off-Balance Sheet Arrangements
We have no other material off-balance sheet arrangements as defined by
Critical Accounting Policies and Estimates
We consider the following policies to be our most critical accounting policies because they involve critical accounting estimates and a significant degree of management judgment:
ALLOWANCE FOR FINANCE RECEIVABLE LOSSES
We estimate the allowance for finance receivable losses primarily on historical loss experience using a cumulative loss model applied to our finance receivable portfolios. Our gross credit loss expectation is offset by the estimate of future recoveries using historical recovery curves. Our finance receivables are primarily segmented in the loss model by contractual delinquency status. Other attributes in the model include collateral mix and recent credit score. To estimate the gross credit losses, the model utilizes a roll rate matrix to project the first 12 months of losses and historical cohort performance to project the expected losses over the remaining term. Our methodology relies solely on historical loss experience to forecast the corresponding future outcomes. These patterns are then applied to the current portfolio to obtain an estimate of future losses. We also consider key economic trends including unemployment rates and bankruptcy filings. Forecasted macroeconomic conditions extend to our reasonable and supportable forecast period and revert to a historical average. No new volume is assumed. Renewals are a significant piece of our new volume and are considered a terminal event of the previous loan. We have elected not to measure an allowance on accrued finance charges as it is our policy to reverse finance charge amounts previously accrued after four contractual payments become past due. Management exercises its judgment when determining the amount of the allowance for finance receivable losses. Our judgment is based on quantitative analyses, qualitative factors, such as recent portfolio, industry, and other economic trends, and experience in the consumer finance industry. We adjust the amounts determined by our model for management's estimate of the effects of model imprecision which include but are not limited to, any changes to underwriting criteria and portfolio seasoning.
TDR FINANCE RECEIVABLES
When we modify a loan's contractual terms for economic or other reasons related to the borrower's financial difficulties and grant a concession that we would not otherwise consider, we classify that loan as a TDR finance receivable. Loan modifications primarily involve a combination of the following to reduce the borrower's monthly payment: reduce interest rate, extend the term, defer or forgive past due interest or forgive principal. Account modifications that are deemed to be a TDR finance receivable are measured for impairment in accordance with the authoritative guidance for the accounting for impaired loans. The allowance for finance receivable losses related to our TDR finance receivables represents loan-specific reserves based on an analysis of the present value of expected future cash flows. We establish our allowance for finance receivable losses related to our TDR finance receivables by calculating the present value (discounted at the loan's effective interest rate prior to modification) of all expected cash flows less the recorded investment in the aggregated pool. We use certain assumptions to estimate the expected cash flows from our TDR finance receivables. The primary assumptions for our model are prepayment speeds, default rates, and loss severity rates.
FAIR VALUE MEASUREMENTS
Management is responsible for the determination of the fair value of our
financial assets and financial liabilities and the supporting methodologies and
assumptions. We employ widely used financial techniques or utilize third-party
valuation service providers to gather, analyze, and interpret market information
and derive fair values based upon relevant methodologies and assumptions for
individual instruments or pools of finance receivables. When our valuation
service providers are unable to obtain sufficient market observable information
upon which to estimate the fair value for a particular security, we determine
fair value either by requesting brokers who are knowledgeable about these
securities to provide a quote, which is generally non-binding, or by employing
widely used financial techniques.
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GOODWILL AND OTHER INTANGIBLE ASSETS
We test goodwill for potential impairment annually as of October 1 of each year
and whenever events occur or circumstances change that would more likely than
not reduce the fair value of our reporting unit below its carrying amount. If
the qualitative assessment indicates that it is more likely than not that the
reporting unit's fair value is less than its carrying amount, we proceed with
the quantitative impairment test. When necessary, the fair value of the
reporting unit is calculated utilizing the income approach, which uses
prospective financial information of the reporting unit discounted at a rate
that we estimate a market participant would use.
For indefinite-lived intangible assets, we review for impairment at least
annually and whenever events occur or circumstances change that would indicate
the assets are more likely than not to be impaired. We first complete an annual
qualitative assessment to determine whether it is necessary to perform a
quantitative impairment test. If the qualitative assessment indicates that the
assets are more likely than not to have been impaired, we proceed with the fair
value calculation of the assets. The fair value is determined in accordance with
our fair value measurement policy.
For those net intangible assets with a finite useful life, we review such intangibles for impairment at least annually and whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable.
Recent Accounting Pronouncements
See Note 3 of the Notes to the Consolidated Financial Statements included in this report for discussion of recently issued accounting pronouncements.
Seasonality Our personal loan volume is generally highest during the second and fourth quarters of the year, primarily due to marketing efforts and seasonality of demand. Demand for our personal loans is usually lower in January and February after the holiday season and as a result of tax refunds. Delinquencies on our personal loans are generally lower in the first and second quarters and tend to rise throughout the remainder of the year. These seasonal trends contribute to fluctuations in our operating results and cash needs throughout the year. Our normal seasonality trends may be affected by COVID-19.
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