ONEMAIN HOLDINGS, INC. An index to our management's discussion and analysis follows:
Topic Page
Forward-Looking Statements 45
Overview 47
Recent Developments and Outlook 48
Results of Operations 51
Segment Results 56
Credit Quality 58
Liquidity and Capital Resources 63
Off-Balance Sheet Arrangements 68
Critical Accounting Policies and Estimates 68
Recent Accounting Pronouncements 69
Seasonality 69
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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 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;
•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;
•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;
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•our inability to successfully implement our growth strategy for our consumer
lending business or successfully acquire portfolios of personal loans;
•a change in the proportion of secured loans may affect our personal loan
receivables and portfolio yield;
•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
and damage to our reputation;
•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 and damage to our reputation;
•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; and
•management estimates and assumptions, including estimates and assumptions about
future events, may prove to be incorrect.
We also direct readers to the other risks and uncertainties discussed in other
documents we file with the
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 theSEC , 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. 46
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Table of Contents Overview We are a leading provider of responsible personal loan products, primarily to non-prime customers. Our network of approximately 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, fixed terms generally between three and six years, and are secured by automobiles, other titled collateral, or are unsecured. AtSeptember 30, 2020 , we had approximately 2.30 million personal loans, of which 53% were secured by titled property, representing$17.8 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
Management's Response to the COVID-19 Pandemic
COVID-19 has evolved into a global pandemic and has resulted in widespread volatility and deterioration in economic conditions acrossthe United States . Governmental authorities have taken a number of steps to combat or slow the spread of COVID-19, including shutdowns of non-essential businesses, implementing stay-at-home orders, promoting social distancing measures, and other actions which have disrupted economic activity. We have been and will continue to be focused on helping our customers and employees through these difficult times. We are generally classified as an "essential business" by government authorities because we play a vital role in providing personal loans to hardworking Americans in hundreds of local communities. Our long track record of a strong balance sheet and liquidity profile, disciplined underwriting, and focus on our customers, allows us to remain well positioned to address the economic uncertainties, as well as take advantage of opportunities for growth as the economy recovers. Although we cannot predict how quickly and/or broadly the economy will recover, we will continue to: •Maintain strong capital and liquidity: We have maintained a strong balance sheet and liquidity profile as a result of numerous actions taken over the last several years, such as deleveraging, increasing the available borrowing capacity under our revolving conduit facilities, diversifying our funding mix, and extending our unsecured debt maturities. Our cash and cash equivalents, together with our potential borrowings under our revolving conduit facilities, provide a liquidity runway through 2022 under numerous stress scenarios, assuming no access to the capital markets. This liquidity runway calculation contemplates all the cash needs of the Company. •Continue to enhance our underwriting: We quickly took steps to tighten underwriting standards and reduce originations to higher risk categories of lending and continue to monitor and evaluate our underwriting standards as we further understand the evolving impacts the COVID-19 pandemic is having on local-level economies. We are using our decades of experience and proprietary data to serve our customers while maintaining an appropriately conservative portfolio risk-management program. •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 took steps to enhance our servicing capacity by shifting branch team members toward a greater focus on servicing existing loans. Beginning in late March, we increased proactive outreach to customers, offering to support them through our borrower assistance programs, which included reduced and deferred payment options, waiving of late fees, and temporary suspension in credit bureau reporting. •Deploy business continuity plans: We deployed our existing business continuity plans which are designed to ensure operational flexibility, including the ability of our employees 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 were temporarily closed, primarily for deep cleanings or due to government mandates, and subsequently reopened, all of our teams, both branch and central operations, remain operational today. We continue to serve our customers while maintaining social distancing and other safety protocols. Additionally, we have accelerated our digital origination strategy and have digitally originated more than 30% of our personal loans in the second and third quarters. For further information regarding the impact of COVID-19 on our business, results of operations, and liquidity and capital resources, see "Outlook" and "Results of Operations" under Management's Discussion and Analysis of Financial Condition and Results of Operations in this report. 48 -------------------------------------------------------------------------------- Table of Contents Cash Dividends to OMH's Common Stockholders OnOctober 26, 2020 , OMH declared a dividend of$0.45 per share payable onNovember 17, 2020 to record holders of OMH's common stock as of the close of business onNovember 9, 2020 . For information regarding the quarterly dividends declared by OMH, see "Liquidity and Capital Resources" under Management's Discussion and Analysis of Financial Condition and Results of Operations in this report.
Issuance of 8.875% Senior Notes Due 2025 and Redemption of 8.25% Senior Notes due 2020
On
OnJuly 29, 2020 , OMFC paid an aggregate amount of$1.0 billion , inclusive of accrued interest and premiums, to complete the redemption of its 8.25% Senior Notes due 2020. For further information regarding the issuance and redemption of our unsecured debt, see Note 8 of the Notes to the Condensed Consolidated Financial Statements included in this report.
Securitization Transactions Completed: OMFIT 2020-1 and OMFIT 2020-2
On
On
For further information regarding the issuances of our secured debt, see "Liquidity and Capital Resources-Securitized Borrowings" under Management's Discussion and Analysis of Financial Condition and Results of Operations in this report.
Stock Repurchase Program
For information regarding the stock repurchase program, see Note 11 of the Notes to the Condensed Consolidated Financial Statements included in this report.
Appointment of Member of the OMFC Board of Directors and Executive Vice President of OMFC
On
Appointment of Chairman of the OMH Board of Directors
OnAugust 28, 2020 ,Jay N. Levine resigned as Director and Chairman of the OMH Board of Directors, effectiveDecember 31, 2020 .Mr. Levine's resignation was not the result of any dispute or disagreement with the Company or the Company's board on any matter relating to the operations, policies or practices of the Company. The OMH Board of Directors electedDouglas H. Shulman as Chairman of the Board, replacingMr. Levine , effectiveDecember 31, 2020 . 49 -------------------------------------------------------------------------------- Table of Contents OUTLOOK We continue to manage the impacts of the COVID-19 pandemic and are prepared to face any additional challenges that may impact our industry. We expect near-term impacts to continue to affect our originations, loan loss reserves, and involuntary unemployment insurance claims. The ultimate impact on our financial condition and results of operations depends on the rates of unemployment, government stimulus measures, state reopenings, and the speed of economic recovery. There is also uncertainty regarding the effects of a secondary outbreak of COVID-19 and the related potential for additional shutdowns over the near-term. To the extent economies are suppressed or slow to recover, even with additional government stimulus measures, we could see higher delinquency trends during the remainder of 2020 and related losses to be realized in 2021. We may incorporate 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 continuing COVID-19 operational response. We have taken 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. While we anticipate that the economic recovery could be unstable, we believe we are well-positioned to face these challenges and are prepared for future growth opportunities. We have served hard working Americans for many decades, 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. 50
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Results of Operations
The results of OMFC are consolidated into the results of OMH. Due to the nominal
differences between OMFC and OMH, content throughout this section relates 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 OMFC to
OMH.
COVID-19 PANDEMIC IMPACTS ON RESULTS
The adverse effects caused by the COVID-19 pandemic, along with mitigation efforts from government stimulus measures, and our own operational response has impacted our business, results of operations, and liquidity and capital resources. The following is a summary of the most significant impacts:
•Net finance receivables were$17.8 billion as ofSeptember 30, 2020 compared to$18.4 billion as ofDecember 31, 2019 . Initial operational disruptions, combined with actions taken by management to tighten underwriting standards, which reduced originations to higher risk categories of lending, and a reduction in the demand for personal loans, resulted in an overall decline in net finance receivables. Originations began to be impacted in the last two weeks ofMarch 2020 , with our lowest production levels occurring in April. Originations increased in May and continued to increase through the end of September, driven by adjustments to our underwriting, enhancements to our digital origination capabilities, increased proactive outreach to our customers, and improved customer demand and unemployment trends. Originations continued to remain below 2019 levels. •The government stimulus measures, our borrower assistance programs, and our collection efforts contribute to strong customer payment trends, which contributed to a decrease in our 30-89 and 90+ day delinquency ratios to 1.9% and 1.5%, respectively, as ofSeptember 30, 2020 when compared to 2.5% and 2.1%, respectively, as ofDecember 31, 2019 and 2.3% and 1.9%, respectively, as ofSeptember 30, 2019 . •Under our borrower assistance programs, we waived late fees for payments dueMarch 15, 2020 throughApril 30, 2020 , suspended credit bureau reporting for newly delinquent accounts in March and April of 2020, and offered reduced and deferred payment options to our customers. Borrower assistance enrollment peaked in April at 8.0% of loans in the portfolio, and returned to a more historical normal average of 2.3% during the third quarter of 2020. As ofSeptember 30, 2020 , the customers who received borrower assistance in the second quarter were performing 50% better than our historical experience. •Our loan loss reserve methodology includes forecasted economic trends and unemployment levels, which significantly increased our provision for finance receivable losses as a result of the impacts of COVID-19 during the nine months endedSeptember 30, 2020 compared to the same period from prior year. The rise in unemployment claims around the country also resulted in an increase in involuntary unemployment insurance claims expense during the nine months endedSeptember 30, 2020 . For further information regarding the impact of COVID-19 on net income for the periods, see "Results of Operations - OMH's Consolidated Results" under Management's Discussion and Analysis of Financial Condition and Results of Operations in this report. •InMarch 2020 , out of an abundance of caution, we elected to draw on our revolving conduit facilities to preserve financial flexibility during the capital market disruption resulting from the COVID-19 pandemic. During the second quarter of 2020, we subsequently repaid all of our revolving conduit facilities. During the nine months endedSeptember 30, 2020 , we also issued debt securities in both the unsecured and ABS markets. As ofSeptember 30, 2020 , we had$1.9 billion of cash and cash equivalents,$8.3 billion of unencumbered personal loans, and$7.2 billion in potential borrowing capacity from our 14 revolving conduit facilities. •During the year, the Company incurred direct costs associated with COVID-19 relating to (i) information technology costs to transition employees to work remotely, (ii) branch, central operations, and corporate locations sanitization services and supplies, (iii) installation of protective barriers and other appropriate safety measures, and (iv) other costs and fees directly related to COVID-19. The Company also incurred restructuring costs associated with a reduction in workforce. For further information regarding direct costs associated with COVID-19 and restructuring charges, see "Results of Operations - Non-GAAP Financial Measures" under Management's Discussion and Analysis of Financial Condition and Results of Operations in this report. 51 -------------------------------------------------------------------------------- Table of Contents •We did not have any impairments with respect to goodwill, intangible assets, long-lived assets, and right of use assets during the three and nine months endedSeptember 30, 2020 . We currently do not anticipate any impairments as it relates to these assets at this time, but we will continue to monitor and test as appropriate. 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 At or for the
Three Months Ended September 30, Nine Months Ended September 30,
(dollars in millions, except per share
amounts) 2020 2019 2020 2019
Interest income $ 1,089 $ 1,065 $ 3,273 $ 3,020
Interest expense 255 244 781 717
Provision for finance receivable losses 231 282 1,186 836
Net interest income after provision for
finance receivable losses 603 539 1,306 1,467
Other revenues 101 156 390 460
Other expenses 363 398 1,194 1,172
Income before income taxes 341 297 502 755
Income taxes 91 49 131 161
Net income $ 250 $ 248 $ 371 $ 594
Share Data:
Earnings per share:
Diluted $ 1.86 $ 1.82 $ 2.75 $ 4.36
Selected Financial Statistics *
Finance receivables held for investment:
Net finance receivables $ 17,817 $ 17,791 $ 17,817 $ 17,791
Number of accounts 2,297,167 2,406,753 2,297,167 2,406,753
Average net receivables $ 17,740 $ 17,434 $ 18,010 $ 16,706
Yield 24.39 % 24.16 % 24.24 % 24.10 %
Gross charge-off ratio 6.14 % 5.92 % 6.90 % 6.89 %
Recovery ratio (0.95) % (0.73) % (0.91) % (0.74) %
Net charge-off ratio 5.19 % 5.19 % 5.99 % 6.15 %
30-89 Delinquency ratio 1.95 % 2.30 % 1.95 % 2.30 %
Origination volume $ 2,887 $ 3,657 $ 7,523 $ 10,118
Number of accounts originated 300,376 395,899 771,628 1,082,576
Debt balances:
Long-term debt balance $ 17,531 $ 17,021 $ 17,531 $ 17,021
Average daily debt balance 17,546 16,271 18,331 16,028
* 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 and Nine Months Ended September
30, 2020 and 2019
Interest income increased $24 million or 2.3% and $253 million or 8.4% for the
three and nine months ended September 30, 2020 , respectively, when compared to
the same periods in 2019 primarily due to growth in our average loan portfolio
along with higher yields driven by the impacts of lower delinquencies.
Interest expense increased $11 million or 4.5% and $64 million or 8.9% for the
three and nine months ended September 30, 2020 , respectively, when compared to
the same periods in 2019 primarily due to an increase in average debt of
$1.3 billion and $2.3 billion , respectively, offset by a lower average cost of
funds.
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 decreased$51 million or 18.1% for the three months endedSeptember 30, 2020 when compared to the same period in 2019 primarily due to the impact of lower delinquencies in the portfolio. Provision for finance receivable losses increased$350 million or 41.9% for the nine months endedSeptember 30, 2020 when compared to the same period in 2019 primarily due to higher expected credit losses in our allowance as a result of the current year adoption of ASU 2016-13, which were primarily driven by our forecast of elevated unemployment as a result of COVID-19. Other revenues decreased$55 million or 35.3% for the three months endedSeptember 30, 2020 when compared to the same period in 2019 primarily due to a$36 million increase in net loss on the repayments of debt in the current period and a$12 million decrease in revenue due to lower insurance products and home and auto membership plans sold as a result of reduced loan origination volume. Other revenues decreased$70 million or 15.2% for the nine months endedSeptember 30, 2020 when compared to the same period in 2019 primarily due to a$20 million decrease from lower insurance products and home and auto membership plans sold as a result of reduced loan origination volume, a$15 million decrease in investment revenue primarily driven by lower interest rates on cash and invested assets and lower mark-to-market net gain on equity investment securities, and other decreases from the prior period due to lower servicing fee income, lower interest income on restricted cash, lower net gain on sale from the sale of SpringCastle interests and the gain on sale of a cost method investment in 2019. Other expenses decreased$35 million or 8.8% for the three months endedSeptember 30, 2020 when compared to the same period in 2019 primarily due to a decrease in general operating expenses, reflecting our efforts to tightly manage costs as well as variable expenses associated with lower loan origination volume. Other expenses increased$22 million or 1.9% for the nine months endedSeptember 30, 2020 when compared to the same period in 2019 primarily due to an increase in insurance policy benefits and claims expense primarily due to the impact of COVID-19 on our involuntary unemployment insurance products. The increase was partially offset by a decrease in general operating expenses, reflecting our efforts to tightly manage costs as well as variable expenses associated with lower loan origination volume. Income taxes totaled$91 million and$131 million for the three and nine months endedSeptember 30, 2020 , respectively, compared to$49 million and$161 million for the three and nine months endedSeptember 30, 2019 , respectively, due to higher pre-tax income in the third quarter of 2020 and lower pre-tax income during the nine months endedSeptember 30, 2020 . For the three and nine months endedSeptember 30, 2020 , the effective tax rates were 26.8% and 26.1%, respectively. The effective tax rates differed from the federal statutory rate of 21% primarily due to the effect of state income taxes and discrete tax expense during the third quarter of 2020. For the three and nine months endedSeptember 30, 2019 , the effective tax rates were 16.3% and 21.3%, respectively. The effective tax rates differed from the federal statutory rate of 21% primarily due to the effect of state income taxes, which was offset by the release of the valuation allowance against certain state deferred 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 associated with 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, additional net gain on sale of SpringCastle interests, lower of cost or
fair value adjustment on loans held for sale, 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 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 its equity, represent the Company's loss
absorption capacity.
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.
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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 Nine Months Ended
September 30, September 30,
(dollars in millions) 2020 2019 2020 2019
Consumer and Insurance
Income before income taxes - Segment Accounting
Basis $ 351 $ 312 $ 530 $ 814 Adjustments:
Direct costs associated with COVID-19 4 - 13 - Acquisition-related transaction and integration expenses 2 2 10 16 Net loss on repurchase and repayment of debt 35 2 35 30 Net gain on sale of cost method investment - - - (11) Restructuring charges 1 1 7 5 Adjusted pretax income (non-GAAP)$ 393 $ 317 $ 595 $ 854 Provision for finance receivable losses$ 232 $ 277 $ 1,184 $ 816 Net charge-offs (232) (227) (810) (767) Pretax capital generation (non-GAAP)$ 393 $ 367 $ 969 $ 903
Other
Loss before income taxes - Segment Accounting Basis
$ (2) $ (5) $ (2)
Adjustments:
Additional net gain on sale of SpringCastle interests (4) - (4) (7) Lower of cost or fair value adjustment (a) 4 - 4 - Net loss on sale of real estate loans (b) - - - 1 Adjusted pretax loss (non-GAAP)$ (2) $ (2) $ (5) $ (8) (a) The carrying value of our remaining real estate loans classified in finance receivables held for sale exceeded their fair value, and accordingly, we have marked the loans to fair value and recorded an impairment in other revenue during the three and nine months endedSeptember 30, 2020 . (b) During the nine months endedSeptember 30, 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. 55
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Segment Results
The results of OMFC are consolidated into the results of OMH. Due to the nominal
differences between OMFC 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 OMFC 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 At or for the
Three Months Ended September 30, Nine Months Ended September 30,
(dollars in millions) 2020 2019 2020 2019
Interest income $ 1,086 $ 1,060 $ 3,260 $ 3,013
Interest expense 250 238 765 700
Provision for finance receivable losses 232 277 1,184 816
Net interest income after provision for
finance receivable losses 604 545 1,311 1,497
Other revenues 134 154 415 461
Other expenses 345 382 1,131 1,104
Adjusted pretax income (non-GAAP) $ 393 $ 317 $ 595 $ 854
Selected Financial Statistics *
Finance receivables held for investment:
Net finance receivables $ 17,826 $ 17,825 $ 17,826 $ 17,825
Number of accounts 2,297,167 2,406,753 2,297,167 2,406,753
Average net receivables $ 17,750 $ 17,469 $ 18,023 $ 16,740
Yield 24.34 % 24.07 % 24.16 % 24.06 %
Gross charge-off ratio 6.15 % 5.98 % 6.91 % 6.97 %
Recovery ratio (0.95) % (0.81) % (0.91) % (0.84) %
Net charge-off ratio 5.20 % 5.17 % 6.00 % 6.13 %
30-89 Delinquency ratio 1.95 % 2.30 % 1.95 % 2.30 %
Origination volume $ 2,887 $ 3,657 $ 7,523 $ 10,118
Number of accounts originated 300,376 395,899 771,628 1,082,576
* 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 and Nine Months Ended
Interest income increased$26 million or 2.5% and$247 million or 8.2% for the three and nine months endedSeptember 30, 2020 , respectively, when compared to the same periods in 2019 primarily due to growth in our average loan portfolio along with higher yields driven by the impacts of lower delinquencies. Interest expense increased$12 million or 5.0% and$65 million or 9.3% for the three and nine months endedSeptember 30, 2020 , respectively, when compared to the same periods in 2019 primarily due to an increase in average debt of$1.3 billion and$2.3 billion , respectively, offset by a lower average cost of funds.
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 decreased$45 million or 16.2% for the three months endedSeptember 30, 2020 when compared to the same period in 2019 primarily due to the impact of lower delinquencies in the portfolio. Provision for finance receivable losses increased$368 million or 45.1% for the nine months endedSeptember 30, 2020 when compared to the same period in 2019 primarily due to higher expected credit losses in our allowance as a result of the current year adoption of ASU 2016-13, which were primarily driven by our forecast of elevated unemployment as a result of COVID-19. Other revenues decreased$20 million or 13.0% and$46 million or 10.0% for the three and nine months endedSeptember 30, 2020 , respectively, when compared to the same periods in 2019 primarily due to lower insurance products and home and auto membership plans sold as a result of reduced loan origination volume and a decrease in investment revenue primarily driven by lower interest rates on cash and invested assets and lower mark-to-market net gain on equity investment securities in the current periods. Other expenses decreased$37 million or 9.7% for the three months endedSeptember 30, 2020 when compared to the same period in 2019 primarily due to a decrease in general operating expenses, reflecting our efforts to tightly manage costs as well as variable expenses associated with lower loan origination volume. Other expenses increased$27 million or 2.4% for the nine months endedSeptember 30, 2020 when compared to the same periods in 2019 primarily due to an increase in insurance policy benefits and claims expense primarily due to the impact of COVID-19 on our involuntary unemployment insurance products. The increase was partially offset by a decrease in general operating expenses, reflecting our efforts to tightly manage costs as well as variable expenses associated with lower loan origination volume. 57 -------------------------------------------------------------------------------- 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 Nine Months Ended
September 30, September 30,
(dollars in millions) 2020 2019 2020 2019
Interest income $ 1 $ 2 $ 4 $ 7
Interest expense 1 1 3 4
Net interest income after provision for
finance receivable losses - 1 1 3
Other revenues 4 5 12 20
Other expenses 6 8 18 31
Adjusted pretax loss (non-GAAP) $ (2) $
(2)
Net finance receivables of the Other components, reported in "Other assets," on a Segment Accounting Basis were as follows:
September 30,
(dollars in millions) 2020 2019
Net finance receivables held for sale:
Other receivables $ 54 $ 70
Credit Quality
The results of OMFC are consolidated into the results of OMH. Due to the nominal
differences between OMFC 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 OMFC to OMH.
FINANCE RECEIVABLES
Our net finance receivables, consisting of personal loans, were$17.8 billion atSeptember 30, 2020 and$18.4 billion atDecember 31, 2019 . Our personal loans are non-revolving, with a fixed-rate, fixed terms generally between three and 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. Our branch team members work with customers as necessary and offer a variety of borrower assistance programs to help customers continue to make payments. See "Results of Operations" under Management's Discussion and Analysis of Financial Condition and Results of Operations in this report for further details on our borrower assistance programs.
DELINQUENCY
We monitor delinquency trends to evaluate the risk of future credit losses and
employ advanced analytical tools to manage our exposure. Team members are
actively engaged 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. See "Results of Operations" under Management's Discussion and Analysis
of Financial Condition and Results of Operations in this report for further
details on the COVID-19 impact on delinquency.
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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 (a) Basis
September 30, 2020 Current$ 17,212 $ (7)$ 17,205 30-59 days past due 216 (1) 215 Delinquent (60-89 days past due) 132 (1) 131 Performing 17,560 (9) 17,551 Nonperforming (90+ days past due) 266 - 266 Total net finance receivables$ 17,826 $ (9)$ 17,817 Delinquency ratio 30-89 days past due 1.95 % (b) 1.95 % 30+ days past due 3.44 % (b) 3.44 % 60+ days past due 2.23 % (b) 2.23 % 90+ days past due 1.49 % (b) 1.49 %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 59
-------------------------------------------------------------------------------- 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 used the most recent macroeconomic forecasts, which incorporated the projected impacts of COVID-19 on theU.S. economy. We also incorporated estimated impacts from known government stimulus measures, the involuntary unemployment insurance coverage of our portfolio, and our borrower assistance efforts. Our forecast leveraged economic projections from an industry leading forecast provider. AtSeptember 30, 2020 , our economic forecast used a reasonable and supportable period of 12 months. The increase in our allowance for finance receivable losses for the nine months endedSeptember 30, 2020 was largely due to these economic considerations relating to COVID-19 along with the adoption of ASU 2016-13. 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. For further information regarding the impact of COVID-19 on our allowance for finance receivable losses see "Recent Development and Outlook" and "Results of Operations" under Management's Discussion and Analysis of Financial Condition and Results of Operations in this report.
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 September 30, 2020
Balance at beginning of period $ 2,342 $ (18) $ 2,324
Provision for finance receivable losses 232 (1) 231
Charge-offs (274) - (274)
Recoveries 42 1 43
Balance at end of period $ 2,342 $ (18) $ 2,324
Three Months Ended September 30, 2019
Balance at beginning of period $ 772 $ (28) $ 744
Provision for finance receivable losses 277 5 282
Charge-offs (263) 3 (260)
Recoveries 36 (4) 32
Balance at end of period $ 822 $ (24) $ 798
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Consumer Segment to
and GAAP Consolidated
(dollars in millions) Insurance Adjustment Total
Nine Months Ended September 30, 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 1,184 2 1,186 Charge-offs (932) 1 (931) Recoveries 122 - 122 Balance at end of period$ 2,342 $ (18) $ 2,324 Allowance ratio 13.14 % (b) 13.05 % Nine Months EndedSeptember 30, 2019 Balance at beginning of period$ 773 $ (42) $ 731 Provision for finance receivable losses 816 20 836 Charge-offs (873) 11 (862) Recoveries 106 (13) 93 Balance at end of period$ 822 $ (24) $ 798 Allowance ratio 4.61 % (c) 4.49 % (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 the 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 and the impacts of the current economic environment.
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.
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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
September 30, 2020
TDR net finance receivables $ 743 $ (42) $ 701
Allowance for TDR finance receivable losses 344 (23) 321
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) September 30, 2020 * December 31, 2019
FICO scores
660 or higher $ 4,612 $ 3,951
620-659 4,835 4,683
619 or below 8,370 9,755
Total $ 17,817 $ 18,389
* Due to the impact of COVID-19, FICO scores as of September 30, 2020 may have
been impacted due to government stimulus measures, borrower assistance programs,
and potentially inconsistent reporting to credit bureaus.
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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 nine months endedSeptember 30, 2020 , OMH generated net income of$371 million . OMH net cash inflow from operating and investing activities totaled$1.4 billion for the nine months endedSeptember 30, 2020 . AtSeptember 30, 2020 , our scheduled principal and interest payments for the remainder of 2020 on our existing debt (excluding securitizations) totaled$119 million . As ofSeptember 30, 2020 , we had$8.3 billion of unencumbered personal loans and$110 million 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 through 2022.
OMFC's Issuance and Redemption of Unsecured Debt
For information regarding the issuance and redemption of OMFC's unsecured debt, see Note 8 of the Notes to the Condensed Consolidated Financial Statements included in this report.
Securitizations and Borrowings from Revolving Conduit Facilities
During the nine months endedSeptember 30, 2020 , we completed two personal loan securitizations (OMFIT 2020-1 and OMFIT 2020-2, see "Securitized Borrowings" below), and redeemed two personal loan securitizations (SLFT 2016-A and OMFIT 2016-1). AtSeptember 30, 2020 , we had$9.3 billion in UPB of finance receivables pledged as collateral for our securitization transactions.
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 revolving conduit facilities.
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Shares Repurchased and Retired
During the first quarter of 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 OMFC Board of
Directors authorized multiple dividend payments in the aggregate amount of
$45 million . On March 20, 2020 , OMH temporarily suspended its stock repurchase
program. OMH retains the right to reinstate the stock repurchase program as
circumstances change. For additional information regarding the shares
repurchased see Note 11 of the Notes to the Condensed Consolidated Financial
Statements 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
April 27, 2020 May 29, 2020 June 12, 2020 0.33 44
July 27, 2020 August 10, 2020 August 18, 2020 2.33 * 313
Total $ 5.49 $ 743
* Our
To provide the primary funding for the dividends, OMFC paid dividends of
OnOctober 26, 2020 , OMH declared a dividend of$0.45 per share payable onNovember 17, 2020 to record holders of OMH's common stock as of the close of business onNovember 9, 2020 . To provide funding for the OMH dividend, the OMFC Board of Directors authorized a dividend in the amount of up to$61 million payable on or afterNovember 13, 2020 . While OMH intends to pay its minimum quarterly dividend, currently$0.45 per share, for the foreseeable future, and announced its intention to evaluate dividends above the minimum every first and third quarters, all subsequent dividends will be reviewed 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 choose not to continue to declare dividends in the future.
LIQUIDITY
OMH's Operating Activities
Net cash provided by operations of$1.6 billion for the nine months endedSeptember 30, 2020 reflected net income of$371 million , the impact of non-cash items, and an unfavorable change in working capital of$108 million . Net cash provided by operations of$1.7 billion for the nine months endedSeptember 30, 2019 reflected net income of$594 million , the impact of non-cash items, and a favorable change in working capital of$51 million .
OMH's Investing Activities
Net cash used for investing activities of$257 million and$2.5 billion for the nine months endedSeptember 30, 2020 and 2019, respectively, was 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 used for financing activities of$563 million for the nine months endedSeptember 30, 2020 was primarily due to debt repayments, cash dividends paid, and the cash paid on the common stock repurchased, offset by the issuances of the 8.875% Senior Notes due 2025, OMFIT 2020-1, and OMFIT 2020-2 securitizations during the period. Net cash provided by financing activities of$1.4 billion for the nine months endedSeptember 30, 2019 was primarily due to net issuances of long-term debt. 64
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OMH's Cash and Investments
AtSeptember 30, 2020 , we had$1.9 billion of cash and cash equivalents, which included$233 million of cash and cash equivalents held at our regulated insurance subsidiaries or for other operating activities that is unavailable for general corporate purposes. AtSeptember 30, 2020 , 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
OMFC'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 nine months endedSeptember 30, 2020 and 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, the Merit sale, and dividends paid by Merit in 2019.
OUR DEBT AGREEMENTS
The debt agreements to which OMFC 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 OMFC's debt agreements, as well
as the guarantees of OMFC'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 September 30, 2020 , our structured financings consisted of the
following:
Current
Initial Current Collateral Current Original
Issue Amount Collateral Note Amounts Balance Weighted Average Revolving
(dollars in millions) (a) Balance Outstanding (a) (b) Interest Rate Period
SLFT 2015-B $ 314 $ 336 $ 213 $ 235 3.92 % 5 years
SLFT 2017-A 652 685 532 590 3.04 % 3 years
OMFIT 2015-3 293 329 282 295 4.24 % 5 years
OMFIT 2016-3 350 397 317 415 4.33 % 5 years
OMFIT 2017-1 947 988 423 486 2.88 % 2 years
OMFIT 2018-1 632 650 600 683 3.60 % 3 years
OMFIT 2018-2 368 381 350 400 3.87 % 5 years
OMFIT 2019-1 632 654 600 687 3.79 % 2 years
OMFIT 2019-2 900 947 900 995 3.30 % 7 years
OMFIT 2019-A 789 892 750 892 3.78 % 7 years
OMFIT 2020-1 (c) 821 958 821 958 4.12 % 2 years
OMFIT 2020-2 (d) 1,000 1,053 1,000 1,053 2.03 % 5 years
ODART 2017-2 605 624 122 149 3.58 % 1 year
ODART 2018-1 947 964 791 819 3.58 % 2 years
ODART 2019-1 737 750 700 750 3.79 % 5 years
Total securitizations $ 9,987 $ 10,608 $ 8,401 $ 9,407
(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 September 30, 2020 .
(c) On May 1, 2020, we issued $821 million of notes backed by personal loans.
The notes mature in May of 2032. We initially retained $71 million of the Class
C notes and subsequently sold the Class C notes on May 29, 2020 .
(d) On August 21, 2020 , we issued $1.0 billion of notes backed by personal
loans. The notes mature in September of 2035.
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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 $7.2 billion as of September 30,
2020 :
Amount
(dollars in millions) Advance Maximum Balance Drawn
Rocky River Funding, LLC $ 400 $ -
OneMain Financial Funding IX, LLC 650
-
Mystic River Funding, LLC 850
-
Fourth Avenue Auto Funding, LLC 200
-
OneMain Financial Funding VIII, LLC 500
-
Thayer Brook Funding, LLC 500
-
Hubbard River Funding, LLC 250
-
Seine River Funding, LLC 650
-
New River Funding Trust * 250
-
Hudson River Funding, LLC 500
-
Columbia River Funding, LLC 500
-
St. Lawrence River Funding, LLC 250
-
OneMain Financial Funding VII, LLC 850
-
OneMain Financial Auto Funding I, LLC 850
-
Total $ 7,200 $ -
* On
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 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.
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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 Condensed 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 continue to be affected by the COVID-19 pandemic and
mitigating efforts from government stimulus measures.
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