ONEMAIN HOLDINGS, INC. The following discussion and analysis of OMH's financial condition and results of operations should be read together with the audited consolidated financial statements and related notes included in this report. This discussion and analysis contains forward-looking statements that involve risk, uncertainties, and assumptions. See "Forward-Looking Statements" included in this report for more information. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of many factors, including those discussed in "Risk Factors" included in this report.
An index to our management's discussion and analysis follows:
Topic Page Overview 45 Recent Developments and Outlook 47 Results of Operations 49 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 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. AtDecember 31, 2019 , we had approximately 2.44 million personal loans, representing$18.4 billion of net finance receivables, compared to approximately 2.37 million personal loans totaling$16.2 billion atDecember 31, 2018 . •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. 45 -------------------------------------------------------------------------------- Table of Contents Our non-originating legacy products include: •Other Receivables - We ceased originating real estate loans in 2012 and purchasing retail sales finance contracts and revolving retail accounts in 2013. We continue to service or sub-service liquidating real estate loans and retail sales finance contracts. EffectiveSeptember 30, 2018 , our real estate loans previously classified as other receivables were transferred from held for investment to held for sale due to management's intent to no longer hold these finance receivables for the foreseeable future. See Notes 5, 6 and 7 of the Notes to the Consolidated Financial Statements included in this report for more information. OUR SEGMENT AtDecember 31, 2019 , C&I is our only reportable segment. Beginning in the fourth quarter of 2019, we included our A&S, which was previously presented as a distinct reporting segment, in Other. See Note 19 of the Notes to the Consolidated Financial Statements included in this report for more information on this change in our segment alignment and for more information about our segment. We have revised our prior period segment disclosures to conform to this new alignment.
HOW WE ASSESS OUR BUSINESS PERFORMANCE
We closely monitor the primary drivers of pretax operating income, which consist of the following:
Interest Income
We track interest income, including certain fees earned on our finance receivables, and continually monitor the components that impact our yield. Generally, we include any past due fees on loans that we have collected from customer payments in interest income.
Interest Expense
We track the interest expense incurred on our debt, and continually monitor the components of our cost of funds. We expect interest expense to fluctuate based on changes in the secured versus unsecured mix of our debt, time to maturity, the cost of funds rate, and access to revolving conduit facilities.
Net Credit Losses
The credit quality of our loans is driven by our underwriting philosophy, which considers the prospective customer's household budget, his or her willingness and capacity to repay, and the underlying collateral on the loan. We closely analyze credit performance because the profitability of our loan portfolio is directly connected to net credit losses. We define net credit losses as gross charge-offs minus recoveries in the portfolio. Additionally, because delinquencies are an early indicator of future net credit losses, we analyze delinquency trends, adjusting for seasonality, to determine whether our loans are performing in line with our original estimates. We also monitor recovery rates because of their contribution to the reduction in the severity of our charge-offs.
Operating Expenses
We assess our operational efficiency using various metrics and conduct extensive analysis to determine whether fluctuations in cost and expense levels indicate operational trends that need to be addressed. Our operating expense analysis also includes a review of origination and servicing costs to assist us in managing overall profitability.
Finance Receivables Originations
Because loan volume and portfolio size determine the magnitude of the impact of
each of the above factors on our earnings, we also closely monitor origination
volume and annual percentage rate.
46
--------------------------------------------------------------------------------
Table of Contents
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.
SFC's Issuances of 6.125% Senior Notes Due 2024, 6.625% Senior Notes Due 2028, 5.375% Senior Notes Due 2029 and Redemptions of 5.25% Senior Notes Due 2019 and 6.00% Senior Notes Due 2020 For further information regarding the issuances and redemptions of our unsecured debt, see Note 10 of the Notes to the Consolidated Financial Statements included in this report.
SFC's Securitization Transactions Completed: OMFIT 2019-1, OMFIT 2019-A, OMFIT 2019-2 and ODART 2019-1
For further information regarding the issuances of our secured debt, see "Liquidity and Capital Resources" of the Management's Discussion and Analysis of Financial Condition and Results of Operations in this report.
Merger of SFI into SFC
As part of our efforts to streamline operations and financial reporting and improve the efficiencies in our businesses, we have taken various steps to simplify our legal entity structure. In culmination of these efforts, onSeptember 20, 2019 , SFC entered into a merger agreement with its direct parent SFI, to merge SFI with and into SFC, with SFC as the surviving entity. The merger was effective in SFC's consolidated financial statements as ofJuly 1, 2019 . As a result of SFI's merger with and into SFC, SFC became a wholly-owned direct subsidiary of OMH. In conjunction with the merger, the net deficiency of SFI, after elimination of its investment in SFC, was absorbed by SFC resulting in an equity reduction of$408 million to SFC. The net deficiency of SFI included an intercompany note payable plus accrued interest of$166 million from SFI to OMH which SFC assumed through the merger. OnSeptember 23, 2019 , SFC repaid SFI's note to OMH. Concurrently, OMH paid$22 million in other payables due to SFC and made an equity contribution of$144 million to SFC. Additionally, as a result of the merger, the intercompany notes between SFI and SFC were eliminated.
The transactions noted above resulted in a net
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 .
Appointment of Executive Vice President and Chief Operating Officer ("COO") of OMH
OnJune 24, 2019 , the OMH Board of Directors appointedRajive Chadha as Executive Vice President and COO, effective on his first day of employment,July 15, 2019 .Mr. Chadha replacedRobert A. Hurzeler , who resigned as Executive Vice President and COO onMay 1, 2019 and departed the Company onMay 31, 2019 .
Appointment of Chief Financial Officer ("CFO") of OMH
OnApril 25, 2019 , the OMH Board of Directors appointedMicah R. Conrad as CFO.Mr. Conrad replacedScott T. Parker , who resigned as Executive Vice President and CFO onMarch 26, 2019 and departed the Company onApril 4, 2019 .Mr. Parker's departure was not due to any disagreement betweenMr. Parker and the Company relating to the Company's financial reporting or condition, policies or practices.Mr. Conrad served as the Company's acting CFO fromMarch 26, 2019 until his appointment as CFO of OMH. 47 --------------------------------------------------------------------------------
Table of Contents Appointment of Member of the SFC Board of Directors, President, and Chief Executive Officer ("CEO") of SFC
OnApril 4, 2019 ,Richard N. Tambor was appointed to the SFC Board of Directors and as President and CEO of SFC.Mr. Tambor replacesScott T. Parker , who resigned as a member of SFC's board of directors and as President and CEO of SFC.
Sale of
As part of our continuing integration efforts from the OneMain Acquisition, 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 . We recorded a net gain of$9 million in the fourth quarter of 2019, which is included in other operating expenses. For further information regarding the sale, see Note 12 of the Notes to the Consolidated Financial Statements included in this report.
OUTLOOK
With our experienced management team, long track record of successfully accessing the capital markets, and strong demand for consumer credit, we believe we are well positioned to execute on our strategic priorities to strengthen our capital base through the following key initiatives: •Continuing growth in receivables through enhanced marketing strategies and customer product options; •Maintaining and enhancing credit performance; •Leveraging our scale and cost discipline across the Company to deliver improved operating leverage; •Increasing tangible equity and reducing financial leverage; and •Maintaining a strong liquidity level with diversified funding sources. Assuming theU.S. economy continues to experience moderate growth, we expect to continue our long history of strong credit performance. We believe the strong credit quality of our loan portfolio will continue as the result of our disciplined underwriting practices and ongoing collection efforts. We have continued to see some migration of customer activity away from traditional channels, such as direct mail, to online channels (primarily serviced through our branch network), where we believe we are well suited to capture volume due to our scale, technology, and deployment of advanced analytics. 48 --------------------------------------------------------------------------------
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.
(dollars in millions, except per share amounts) Years Ended December 31, 2019 2018 2017 Interest income$ 4,127 $ 3,658 $ 3,196 Interest expense 970 875 816 Provision for finance receivable losses 1,129 1,048 955 Net interest income after provision for finance receivable losses 2,028 1,735 1,425 Other revenues 622 574 560 Other expenses 1,552 1,685 1,554 Income before income taxes 1,098 624 431 Income taxes 243 177 248 Net income$ 855 $ 447 $ 183 Share Data: Earnings per share: Diluted$ 6.27 $ 3.29 $ 1.35 Selected Financial Statistics * Finance receivables held for investment: Net finance receivables$ 18,389 $ 16,164 $ 14,957 Number of accounts 2,435,172 2,373,330 2,360,604 Finance receivables held for sale: Net finance receivables$ 64 $ 103 $ 132 Number of accounts 2,019 2,827 2,460 Finance receivables held for investment and held for sale: Average net receivables$ 17,055 $ 15,471 $ 14,057 Yield 24.13 % 23.56 % 22.64 % Gross charge-off ratio 6.79 % 7.13 % 7.50 % Recovery ratio (0.74) % (0.73) % (0.76) % Net charge-off ratio 6.05 % 6.40 % 6.74 % 30-89 Delinquency ratio 2.46 % 2.42 % 2.49 % Origination volume$ 13,803 $ 11,923 $ 10,537 Number of accounts originated 1,481,166 1,436,029 1,442,895 Debt balances: Long-term debt balance$ 17,212 $ 15,178 $ 15,050 Average daily debt balance 16,336 15,444 14,224
* See "Glossary" at the beginning of this report for formulas and definitions of our key performance ratios.
49
--------------------------------------------------------------------------------
Table of Contents
Comparison of Consolidated Results for 2019 and 2018
Interest income increased
Interest expense increased$95 million or 11% in 2019 when compared to 2018 primarily due to an increase in average debt, consistent with the growth in our loan portfolio, and our strategic actions to increase unsecured debt, which tends to have higher interest rates than secured debt, in order to achieve a more proportional mix of secured and unsecured funding.
See Notes 10 and 11 of the Notes to the 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$81 million or 8% in 2019 when compared to 2018 primarily driven by the growth in our loan portfolio. The allowance for finance receivable losses as a percentage of net finance receivables was flat from prior period reflecting lower allowance requirements due to the continued shift in portfolio mix to more secured personal loans and improvements in the effectiveness of our collections, offset by the impacts of continued liquidation of purchased credit impaired finance receivables resulting from the OneMain Acquisition. Other revenues increased$48 million or 8% in 2019 when compared to 2018 primarily due to (i) a$31 million increase in insurance products sold due to higher loan volume and larger average loan size, (ii) a$29 million increase in investment revenue primarily driven by an increase in unrealized gains on equity investment securities due to improved market conditions and an increase in interest income due to higher yield and higher average cash and investment balances, (iii) a$13 million decrease in impairment loss recorded on the loans in finance receivables held for sale compared to the prior year, and (iv) an$11 million net gain on sale of a cost method investment. The increase was partially offset by$26 million of higher net losses on repurchases and repayments of debt and$15 million decrease in gain on sale of real estate loans sold in the prior year as compared to the current year. Other expenses decreased$133 million or 8% in 2019 when compared to 2018 primarily due to$110 million of non-cash incentive compensation expense in 2018 related to the 2018 Apollo-Värde and AIG Share Sale Transactions,$14 million of impairment loss on the transfer of Yosemite to held for sale in 2018, and a$9 million net gain on the sale of Merit in 2019. Income taxes totaled$243 million for 2019 compared to$177 million for 2018. The effective tax rate for 2019 was 22.2% compared to 28.4% for 2018. The effective tax rate for 2019 differed from the federal statutory rate of 21% primarily due to the effect of state income taxes, offset by the release of the valuation allowance against certain state deferred taxes. The effective tax rate for 2018 differed from the federal statutory rate of 21% primarily due to the effect of discrete tax expense for non-deductible compensation expense and state income taxes.
See Note 15 of the Notes to the Consolidated Financial Statements included in this report for further information on effective tax rates.
Comparison of Consolidated Results for 2018 and 2017
For a comparison of OMH's results of operation for the years ended 2018 and 2017, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Consolidated Results" in Part II Item 7 of OMH's Annual Report on Form 10-K for the year endedDecember 31, 2018 filed with theSEC onFebruary 15, 2019 . 50 --------------------------------------------------------------------------------
Table of Contents NON-GAAP FINANCIAL MEASURES Adjusted Pretax Income (Loss) 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 net losses resulting from repurchases and repayments of debt, acquisition-related transaction and integration expenses, net gain on sale of cost method investment, restructuring charges, additional net gain on Sale of SpringCastle interests, net loss on sale of real estate loans, and non-cash incentive compensation expense related to the Fortress Transaction. Management believes adjusted pretax income (loss) is useful in assessing the profitability of our segment and uses adjusted pretax income (loss) in evaluating our operating performance and as a performance goal under OMH's executive compensation programs. Adjusted pretax income (loss) is a non-GAAP financial measure 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 were as follows: (dollars in millions) Years Ended December 31, 2019 2018 2017 Consumer and Insurance Income before income taxes - Segment Accounting Basis$ 1,168 $ 787 $ 676
Adjustments:
Net loss on repurchases and repayments of debt 30 63 18 Acquisition-related transaction and integration expenses 14 47 66 Net gain on sale of cost method investment (11) - - Restructuring charges 5 8 - Adjusted pretax income (non-GAAP)$ 1,206 $ 905 $ 760
Other
Loss before income taxes - Segment Accounting Basis$ (3) $ (131) $ (40)
Adjustments:
Additional net gain on Sale of SpringCastle interests (7) - - Net loss on sale of real estate loans * 1 6 - Non-cash incentive compensation expense - 106 - Acquisition-related transaction and integration expenses - - 6 Adjusted pretax loss (non-GAAP)$ (9) $ (19) $ (34) * In 2019 and 2018, the resulting impairments on finance receivables held for sale that remained after theFebruary 2019 and theDecember 2018 Real Estate Loan Sales were combined with the respective gains on sales. See Note 7 of the Notes to the Consolidated Financial Statements included in this report for more information regarding the real estate loan sales. 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 --------------------------------------------------------------------------------
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 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 included in this report for a description of our segment and methodologies used to allocate revenues and expenses to our C&I segment and Other.
CONSUMER AND INSURANCE
OMH's adjusted pretax income and selected financial statistics for C&I on an adjusted Segment Accounting Basis were as follows:
(dollars in millions) At or for the Years Ended December 31, 2019 2018 2017 Interest income$ 4,114 $ 3,677 $ 3,305 Interest expense 947 844 765 Provision for finance receivable losses 1,105 1,047 963 Net interest income after provision for finance receivable losses 2,062 1,786 1,577 Other revenues 619 558 565 Other expenses 1,475 1,439 1,382 Adjusted pretax income (non-GAAP)$ 1,206 $ 905 $ 760 Selected Financial Statistics * Finance receivables held for investment: Net finance receivables$ 18,421 $ 16,195 $ 14,820 Number of accounts 2,435,172 2,373,330 2,355,682
Finance receivables held for investment and held for sale: Average net receivables
$ 17,089 $ 15,401 $ 13,860 Yield 24.07 % 23.88 % 23.84 % Gross charge-off ratio 6.86 % 7.32 % 7.94 % Recovery ratio (0.84) % (0.84) % (0.93) % Net charge-off ratio 6.02 % 6.48 % 7.01 % 30-89 Delinquency ratio 2.47 % 2.43 % 2.44 % Origination volume$ 13,803 $ 11,923 $ 10,537 Number of accounts originated 1,481,166 1,436,029 1,442,895
* See "Glossary" at the beginning of this report for formulas and definitions of our key performance ratios.
52
--------------------------------------------------------------------------------
Table of Contents
Comparison of Adjusted Pretax Income for 2019 and 2018
Interest income increased
Interest expense increased$103 million or 12% in 2019 when compared to 2018 primarily due to an increase in average debt, consistent with the growth in our loan portfolio, and our strategic actions to increase unsecured debt, which tends to have higher interest rates than secured debt, in order to achieve a more proportional mix of secured and unsecured funding.
See Notes 10 and 11 of the Notes to the 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$58 million or 6% in 2019 when compared to 2018 primarily driven by the growth in our loan portfolio. The allowance for finance receivable losses as a percentage of net finance receivables decreased from prior periods due to the shift in portfolio mix to more secured personal loans and improvements in the effectiveness of collections. Other revenues increased$61 million or 11% in 2019 when compared to 2018 primarily due to a$31 million increase in insurance products sold due to higher loan volume and larger average loan size, and a$25 million increase in investment revenue primarily driven by an increase in unrealized gains on equity investment securities due to improved market conditions and an increase in interest income due to higher yield and higher average cash and investment balances.
Other expenses increased
Comparison of Adjusted Pretax Income for 2018 and 2017
For a comparison of OMH's adjusted pretax income for C&I for the years ended 2018 and 2017, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Segment Results" in Part II Item 7 of OMH's Annual Report on Form 10-K for the year endedDecember 31, 2018 filed with theSEC onFebruary 15, 2019 . 53 -------------------------------------------------------------------------------- Table of Contents OTHER "Other" consists of our liquidating SpringCastle Portfolio servicing activity and our non-originating legacy operations, which include our liquidating real estate loans and liquidating retail sales finance receivables. Beginning in the fourth quarter 2019, we included A&S, which was previously presented as a distinct reporting segment, in Other. See Note 19 of the Notes to the Consolidated Financial Statements included in this report for further information on this change in our segment alignment. We have revised our prior period segment disclosures to conform to this new alignment.
OMH's adjusted pretax loss of the Other components on an adjusted Segment Accounting Basis was as follows:
(dollars in millions) Years Ended December 31, 2019 2018 2017 Interest income$ 9 $ 17 $ 23 Interest expense 5 17 21 Provision for finance receivable losses (a) - (5) 7 Net interest income after provision for finance receivable losses 4 5 (5) Other revenues 26 33 45 Other expenses (b) 39 57 74 Adjusted pretax loss (non-GAAP) $
(9)
(a) Provision for finance receivable losses for 2017 includes a$5 million increase due to estimated net charge-offs attributable to the impact of hurricanes Harvey and Maria. (b) Other expenses for 2018 includes$4 million of non-cash incentive compensation expense related to the rights of certain executives to a portion of the cash proceeds from the sale of OMH's common stock by SFH. Net finance receivables of the Other components on a Segment Accounting Basis were as follows: (dollars in millions) December 31, 2019 2018* 2017
Net finance receivables held for investment:
Other receivables $ - $ - $
142
Net finance receivables held for sale: Other receivables$ 66 $ 103 $
138
* OnSeptember 30, 2018 , we transferred our real estate loans previously classified as other receivables from held for investment to held for sale. See Notes 5 and 7 of the Notes to the Consolidated Financial Statements included in this report for further information. 54 --------------------------------------------------------------------------------
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 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$18.4 billion atDecember 31, 2019 and$16.2 billion atDecember 31, 2018 . Our personal loans are non-revolving, with a fixed-rate, a fixed term of three to six years, and are secured by automobiles, other titled collateral, or are unsecured. We consider the concentration of secured loans, the underlying value of the collateral of the secured loans, and the delinquency status of our finance receivables as the primary indicators of credit quality. AtDecember 31, 2019 andDecember 31, 2018 , 52% and 48%, respectively, of our personal loans, on a consolidated basis, were secured by titled collateral.
Distribution of Finance Receivables by FICO Score
There are many different categorizations used in the consumer lending industry to describe the creditworthiness of a borrower, including prime, near prime, and sub-prime.
We group FICO scores into the following credit strength categories:
•Prime: FICO score of 660 or higher •Near prime: FICO score of 620-659 •Sub-prime: FICO score of 619 or below Our customers' demographics are in many respects near the national median but may vary from national norms in terms of credit and repayment histories. Many of our customers have experienced some level of prior financial difficulty or have limited credit experience and require higher levels of servicing and support from our branch network and central servicing operations.
The following table reflects our personal loans grouped into the categories described above based on borrower FICO credit scores as of the most recently refreshed date or as of the loan origination or purchase date:
(dollars in millions) December 31, 2019 2018 FICO scores 660 or higher$ 3,951 $ 3,906 620-659 4,683 4,251 619 or below 9,755 8,007 Total$ 18,389 $ 16,164
The increase in the sub-prime category from prior year reflects the growth in secured loans, which accommodates customers with lower FICO scores.
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.
55
--------------------------------------------------------------------------------
Table of Contents
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.
The delinquency information for net finance receivables is as follows:
Consumer Segment to
and GAAP GAAP
(dollars in millions) Insurance Adjustment Basis
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 % * 2.46 % 30+ days past due 4.58 % * 4.56 % 60+ days past due 3.09 % * 3.08 % 90+ days past due 2.11 % * 2.10 % December 31, 2018 Current$ 15,437 $ (26) $ 15,411 30-59 days past due 231 (2) 229 Delinquent (60-89 days past due) 162 (1)
161
Performing 15,830 (29)
15,801
Nonperforming (90+ days past due) 365 (2) 363 Total net finance receivables$ 16,195 $ (31) $ 16,164 Delinquency ratio 30-89 days past due 2.43 % * 2.42 % 30+ days past due 4.68 % * 4.66 % 60+ days past due 3.26 % * 3.25 % 90+ days past due 2.25 % * 2.25 % * Not applicable. 56
-------------------------------------------------------------------------------- Table of Contents ALLOWANCE FOR FINANCE RECEIVABLE LOSSES We record 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 credit quality of the finance receivable portfolio and changes in economic conditions.
Changes in the allowance for finance receivable losses were as follows:
Consumer Segment to
and GAAP Consolidated
(dollars in millions) Insurance Other Adjustment Total
Year EndedDecember 31, 2019 Balance at beginning of period$ 773 $ -$ (42) $ 731 Provision for finance receivable losses 1,105 - 24 1,129 Charge-offs (1,172) - 15 (1,157) Recoveries 143 - (17) 126 Balance at end of period$ 849 $ -$ (20) $ 829 Allowance ratio 4.61 % (a) (a) 4.51 % Year EndedDecember 31, 2018 Balance at beginning of period$ 724 $ 35 $ (62) $ 697 Provision for finance receivable losses 1,047 (5) 6 1,048 Charge-offs (1,127) (3) 26 (1,104) Recoveries 129 3 (19) 113 Other (b) - (30) 7 (23) Balance at end of period$ 773 $ -$ (42) $ 731 Allowance ratio 4.77 % (a) (a) 4.52 % Year EndedDecember 31, 2017 Balance at beginning of period$ 732 $ 31 $ (74) $ 689 Provision for finance receivable losses 963 7 (15) 955 Charge-offs (1,100) (7) 53 (1,054) Recoveries 129 4 (26) 107 Balance at end of period$ 724 $ 35 $ (62) $ 697 Allowance ratio 4.88 % 24.28 % (a) 4.66 % (a) Not applicable. (b) Other consists primarily of the reclassification of allowance for finance receivable losses due to the transfer of the real estate loans in other receivables from held for investment to finance receivables held for sale onSeptember 30, 2018 . See Note 5 and 7 of the Notes to the Consolidated Financial Statements included in this report for further information. The current delinquency status of our finance receivable portfolio, inclusive of recent borrower performance, volume of our TDR activity, and the level and recoverability of collateral securing our finance receivable portfolio 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 to cover estimated incurred losses in our finance receivable portfolio. The allowance for finance receivable losses as a percentage of net finance receivables has decreased from prior periods reflecting lower allowance requirements due to the shift in portfolio mix to more secured personal loans and improvements in the effectiveness of our collections, offset by the impacts of continued liquidation of purchased credit impaired finance receivables resulting from the OneMain Acquisition. 57 -------------------------------------------------------------------------------- Table of Contents See Note 6 of the Notes to the 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. The increase to the TDR portfolio in 2019 was primarily driven by the increase in modifications on late stage delinquent accounts and the growth in our loan portfolio.
Information regarding TDR net finance receivables is as follows:
Consumer Segment to
and GAAP GAAP
(dollars in millions) Insurance Adjustment Basis
December 31, 2019
TDR net finance receivables $ 721 $ (63) $ 658
Allowance for TDR finance receivable losses 292 (20) 272
December 31, 2018
TDR net finance receivables $ 555 $ (102) $ 453
Allowance for TDR finance receivable losses 210 (40) 170
58-------------------------------------------------------------------------------- Table of Contents 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 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 2019, OMH generated net income of$855 million . OMH net cash outflow from operating and investing activities totaled$1.1 billion for the year endedDecember 31, 2019 . AtDecember 31, 2019 , our scheduled principal and interest payments for 2020 on our existing debt (excluding securitizations) totaled$1.7 billion . As ofDecember 31, 2019 , we had$9.9 billion UPB of unencumbered personal loans and$120 million UPB of unencumbered real estate loans. These real estate loans are included in held for sale. 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.
SFC's Issuances and Redemptions
For information regarding the issuances and redemptions of SFC's unsecured debt, see Note 10 of the Notes to the Consolidated Financial Statements included in this report.
Securitizations and Borrowings from Revolving Conduit Facilities
During the year endedDecember 31, 2019 , we completed four personal loan securitizations (OMFIT 2019-1, ODART 2019-1, OMFIT 2019-A, and OMFIT 2019-2, see "Securitized Borrowings" below), and redeemed five securitizations (SLFT 2015-A, OMFIT 2015-1, OMFIT 2015-2, OMFIT 2016-2, and ODART 2017-1). AtDecember 31, 2019 , we had$8.3 billion in UPB of finance receivables pledged as collateral for our securitization transactions.
During the year ended
Subsequent to
See Notes 10 and 11 of the Notes to the Consolidated Financial Statements included in this report for further information on our long-term debt, loan securitization transactions and conduit facilities.
59
--------------------------------------------------------------------------------
Table of Contents
Cash Dividends to OMH's Common Stockholders
During 2019, dividend declarations by OMH's board of directors were as follows:
Declaration Date Record Date Payment Date Dividend Per Share Amount Paid
(in millions)
February 11, 2019 February 26, 2019 March 15, 2019 $ 0.25 $ 34
April 29, 2019 May 29, 2019 June 14, 2019 0.25 34
July 29, 2019 August 27, 2019 September 13, 2019 2.25 * 306
October 28, 2019 November 26, 2019 December 13, 2019 0.25 34
Total $ 3.00 $ 408
* On
To provide funding for the dividends, SFC paid dividends to OMH of$34 million onMarch 13, 2019 and onJune 13, 2019 ,$306 million onSeptember 12, 2019 , and$34 million onDecember 12, 2019 . OnFebruary 10, 2020 , OMH declared a regular quarterly dividend of$0.33 per share and a special dividend of$2.50 per share payable onMarch 13, 2020 to record holders of OMH's common stock as of the close of business onFebruary 26, 2020 . To provide funding for the OMH dividend, the SFC Board of Directors authorized a dividend in the amount of up to$388 million payable on or afterMarch 10, 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$2.4 billion for 2019 reflected net income of$855 million , the impact of non-cash items, and a favorable change in working capital of$67 million . Net cash provided by operations of$2.0 billion for 2018 reflected net income of$447 million , the impact of non-cash items, and a favorable change in working capital of$86 million . Net cash provided by operations of$1.6 billion for 2017 reflected a net income of$183 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$3.4 billion ,$2.4 billion , and$2.2 billion for 2019, 2018, and 2017, respectively, 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 net sales, calls, and maturities of available-for-sale securities.
OMH's Financing Activities
Net cash provided by financing activities of$1.5 billion for 2019 was primarily due to net issuances of long-term debt offset primarily by the cash dividends paid in 2019. Net cash provided by financing activities of$44 million for 2018 was primarily due to net issuances of long-term debt. Net cash provided by financing activities of$975 million for 2017 was primarily due to net issuances of long-term debt, offset primarily by the repayment at maturity of existing 6.90% Medium-Term Notes and the repurchase of existing 6.90% Medium-Term Notes. 60 -------------------------------------------------------------------------------- Table of Contents OMH's Cash and Investments AtDecember 31, 2019 , we had$1.2 billion of cash and cash equivalents, which included$182 million of cash and cash equivalents held at our regulated insurance subsidiaries or for other operating activities that is unavailable for general corporate purposes. AtDecember 31, 2019 , we had$1.9 billion of investment securities, which are all held as part of our insurance operations and are unavailable for general corporate purposes.
Liquidity Risks and Strategies
SFC's credit ratings are non-investment grade, which has 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 include, but are not limited to, the following: •our inability to grow or maintain our personal loan portfolio with adequate profitability; •the effect of federal, state and local laws, regulations, or regulatory policies and practices; •effects of ratings downgrades on our secured or unsecured debt •potential liability relating to real estate and personal loans which we have sold or may sell in the future, or relating to securitized loans; and •the potential for disruptions in the debt and equity markets. The 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 some or all of the following strategies: •maintaining disciplined underwriting standards and pricing for loans we originate or purchase and managing purchases of finance receivables; •pursuing additional debt financings (including new securitizations and new unsecured debt issuances, debt refinancing transactions and revolving conduit facilities), or a combination of the foregoing; •purchasing portions of our outstanding indebtedness through open market or privately negotiated transactions with third parties or pursuant to one or more tender or exchange offers or otherwise, upon such terms and at such prices, as well as with such consideration, as we may determine; and •obtaining new and extending existing secured revolving facilities to provide committed liquidity in case of prolonged market fluctuations.
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. See Note 12 of the Notes to the Consolidated Financial
Statements included in this report for further information on these restrictions
and the dividends paid by our insurance subsidiaries from 2017 through 2019.
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
included in this report for further information on the restrictive covenants
under SFC's debt agreements, as well as the guarantees of SFC's long-term debt.
61
--------------------------------------------------------------------------------
Table of Contents
Securitized Borrowings
We execute private securitizations under Rule 144A of the Securities Act of
1933. As of December 31, 2019 , 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 $ 336 3.78 % 5 years
SLFT 2016-A 532 559 166 208 3.49 % 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 2016-1 500 570 160 238 4.67 % 3 years
OMFIT 2016-3 350 397 317 391 4.33 % 5 years
OMFIT 2017-1 947 988 769 796 2.74 % 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 2017-2 605 624 240 276 3.07 % 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 $ 7,678 $ 8,494
(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 December 31, 2019 .
62
--------------------------------------------------------------------------------
Table of Contents
Revolving Conduit Facilities
In addition to the structured financings, we have access to 14 revolving conduit
facilities with a total borrowing capacity of $7.1 billion as of December 31,
2019 :
Advance
Maximum Amount Revolving
(dollars in millions) Balance Drawn Period End Due and Payable
Rocky River Funding, LLC $ 400 $ - April 2022 May 2023
OneMain Financial Funding IX, LLC 650 - June 2022 July 2023
Mystic River Funding, LLC 850 - September 2022 October 2025
Fourth Avenue Auto Funding, LLC 200 - June 2022 July 2023
OneMain Financial Funding VIII, LLC 650 - August 2021 September 2023
OneMain Financial Auto Funding I, LLC 850 - June 2021 July 2028
OneMain Financial Funding VII, LLC 850 - June 2021 July 2023
Thayer Brook Funding, LLC 250 - July 2021 August 2022
Hubbard River Funding, LLC 250 - September 2021 October 2023
Seine River Funding, LLC 650 - October 2021 November 2024
New River Funding, LLC 250 - March 2022 April 2027
Hudson River Funding, LLC 500 - June 2022 July 2025
Columbia River Funding, LLC 500 - September 2022 October 2025
St. Lawrence River Funding, LLC 250 - October 2022 November 2024
Total $ 7,100 $ -
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
Contractual Obligations
At
(dollars in millions) 2020 2021-2022 2023-2024 2025+ Securitizations Total Principal maturities on long-term debt: Securitization debt (a) $ - $ - $ - $ -$ 7,678 $ 7,678 Medium-term notes 1,000 1,646 2,475 4,399 - 9,520 Junior subordinated debt - - - 350 - 350 Total principal maturities 1,000 1,646 2,475 4,749 7,678 17,548 Interest payments on debt (b) 664 1,062 781 1,139 899 4,545 Total$ 1,664 $ 2,708 $ 3,256 $ 5,888 $ 8,577 $ 22,093
(a) On-balance sheet securitizations and borrowings under revolving conduit
facilities are not included in maturities by period due to their variable
monthly payments. At
(b) Future interest payments on floating-rate debt are estimated based upon
floating rates in effect at
63
--------------------------------------------------------------------------------
Table of Contents
Off-Balance Sheet Arrangements
We have no material off-balance sheet arrangements as defined by SEC rules and
we had no off-balance sheet exposure to losses associated with unconsolidated
VIEs at December 31, 2019 or December 31, 2018 .
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 roll rate-based model applied to our finance receivable portfolio. In our roll rate-based model, our finance receivable types are stratified by collateral mix and contractual delinquency stages, and are projected forward in one-month increments using historical roll rates. In each month of the simulation, losses on our finance receivable types are captured, and the ending delinquency stratification serves as the beginning point of the next iteration. No new volume is assumed. This process is repeated until the number of iterations equals the loss emergence period (the interval of time between the event which causes a borrower to default on a finance receivable and our recording of the charge-off) for our finance receivable types. As delinquency is a primary input into our roll rate-based model, we inherently consider nonaccrual loans in our estimate of the allowance for finance receivable losses. Management exercises its judgment, based on quantitative analyses, qualitative factors, such as recent delinquency and other credit trends, and experience in the consumer finance industry, when determining the amount of the allowance for finance receivable losses. We adjust the amounts determined by the roll rate-based model for management's estimate of the effects of model imprecision which include but are not limited to, any changes to underwriting criteria, portfolio seasoning, and current economic conditions, including levels of unemployment and personal bankruptcies.
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 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.
64
--------------------------------------------------------------------------------
Table of Contents
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 4 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.
65
--------------------------------------------------------------------------------Table of Contents
© Edgar Online, source
