OneMain (NYSE:OMF) is a US non-bank consumer finance company. It has over 1,800 branches and around 2.2 million borrowers who collectively owe around $13.5 billion. Policies and procedures are managed centrally, although the local branch managers do have some discretionary authority.

The loans managed by OneMain are high interest loans. The interest rate (annual percentage rate, or APR) averages 27% for personal loans and 20% for auto loans. OneMain also makes money selling insurance (including credit life, credit disability, and auto insurance) to its customers.

OneMain Financial's logo.

Image source: OneMain Financial.

It's worth noting that these loans are installment loans. The borrower gets a check, and signs an agreement to make 36 to 60 monthly payments to pay off the loan. Sometimes the loan is made at a third-party business, like a used car dealership or a furniture store, although generally OneMain staff meets the borrower face-to-face at least once, which helps prevent fraud.

These loans behave a lot like sub-prime revolving credit card debt. After the initial loan, the balance goes down slowly for a few months, then goes up again, and that process can repeat many times. A loan can be profitable from the interest and fees, even if is eventually written off. 

1. Amazing profits from assets 

The types of loans made by OneMain are more profitable than almost any other type of loans that financial institutions make. On a typical dollar of loans, the company receives 28 cents per year for interest, fees, and insurance premiums. Deduct 7 cents for charge offs, and 10 cents for operating costs, and you're left with an operating profit (which OneMain calls unlevered return on receivables) of around 11% of assets. About half of that goes to bond holders as interest, and the other half is pre-tax profit. In the banking industry, the average return on assets is about 1% and was as high as 1.4% during the height of the boom in 2002-2004.  A pre-tax profit of 5% of assets is almost unheard of for a bank. This means that OneMain earns almost 5 times as much profit per dollar of loans as does an average bank.

2. Integration pains from the merger are over

The management team from Springleaf decided to buy OneMain in early 2015 because they saw a huge opportunity to increase profits by introducing some of Springleaf's business practices into the roughly 1,100 OneMain branches. Citigroup had been trying to sell legacy OneMain as a non-core asset off-and-on since 2010. The merger closed in November 2015 but only in February of 2017 did the Springleaf management team finish getting all the legacy OneMain branches integrated into their systems. Management is planning to increase profits, above and beyond what the two firms have been doing separately by:

  • Increasing the proportion of loans which are secured by collateral. This could mean a loan someone takes out to buy a car, but it often means a personal loan, where the borrower gives the company the title to a car as collateral. It is often not worth their while to repossess the car (they would usually prefer that the borrower use the car to get to work, and maybe someday send in some money), but the borrowers are significantly less likely to miss a payment knowing that the bill collector who will call to ask about it will have the title to their car on their desk during the call. During the year since the merger, the proportion of the loans being issued from legacy OneMain branches with collateral has increased from 13% to 36%. 
  • Increasing loans made through merchant referrals and car dealer direct loans.
  • Reducing costs by closing some redundant branches and spreading the costs of the centralized functions over a much larger business.

Management's strategy has unfortunately been expensive in the short term. The merger has caused big swings in accounting results. The company first integrated 100 of the legacy OneMain branches as a pilot project in October 2016. Those branches had more delinquencies, and less originations of new loans, because the branch employees were spending a lot of time on the integration.

These are short term issues, however. Management recognized them and decided to send more support and training to the branches as they integrated the remaining thousand branches (half in January 2017 and half at the beginning of February.)


3. The company is performing very well

 OneMain will have much more stable earnings going forward. The big loss in the quarter ending 12/31/2015 was the result of costs associated with the completion and closure of the merger. Management also lowered the value of the loans, simultaneously with the merger because the accounting rules for merging the two companies together are different from the rules for accounting for the loans on an ongoing basis. The management said that they do not expect any further changes to the valuations of the loans. .


Quarter ending date

GAAP Earnings Per Share


12/31/2015  $(1.63) loss: mostly related to accounting adjustments at merger
3/31/2016  $1.02 mostly related to sale of branches to satisfy antitrust concerns
6/30/2016  $0.19  
9/30/2016  $0.19  
12/31/2016 $0.20  

Source: Company earnings announcements

That accounting adjustment at the time of the merger accounts for the company's reported loss for the quarter ending 12/31/2015. The following quarter (the first quarter of 2016) OMF had a large gain -- 127 branches with around $600 million of loans were sold (which the US government required to avoid antitrust issues). Since then, the company has turned in 3 solid quarters of about 19 or 20 cents per quarter of earnings per share.The last quarter of 2015 and the first quarter of 2016 had losses that were large one-time events, so investors should ignore them and and model the income to continue along the trend of the last three quarters. 

Overall, I expect the quarterly earnings should be rising in the future as the management has been successfully integrating the best aspects of the two legacy organization. The legacy Springleaf management team now has over twice as many branches making loans. They have already started growing the revenue from those branches by introducing more distribution channels (car dealers and retailers). They have decreased the risk of the business (by increasing the proportion of loans which are secured) and they have reduced the operational overhead of the combined business (by eliminating some redundancies). Those factors should produce a larger loan portfolio, and higher profits which can justify a higher stock price over the next year or so.

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