UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 20162017
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-06155
SPRINGLEAF FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
|
| | |
| Indiana | | 35-0416090 |
| (State of Incorporation) | | (I.R.S. Employer Identification No.) |
| | | |
| 601 N.W. Second Street, Evansville, IN | | 47708 |
| (Address of principal executive offices) | | (Zip Code) |
(812) 424-8031
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
|
| | | | | | | |
Large accelerated filer o | | Accelerated filer o | | Non-accelerated filer þ | | Smaller reporting company o | Emerging growth company o |
| | | | | (Do not check if a smaller reporting company) | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
At May 2, 2016,1, 2017, there were 10,160,021 shares of the registrant’s common stock, $0.50 par value, outstanding.
TABLE OF CONTENTS
GLOSSARY
Terms and abbreviations used in this report are defined below.
|
| | |
| Term or Abbreviation | | Definition |
| | |
| 1999 Indenture | | Indenture dated as of May 1, 1999 between SFC and Wilmington |
| 2014-A Notes | | asset-backed notes issued in March 2014 by the Springleaf Funding Trust 2014-A |
2016 Annual Report on Form 10-K | | Annual Report on Form 10-K for the fiscal year ended December 31, 2016 |
| 30 - 89 Delinquency ratio | | net finance receivables 30 - 89 days past due as a percentage of net finance receivables |
| 5.25% SFC Notes | | $700 million of 5.25% Senior Notes due 2019 issued by SFC and guaranteed by OMH |
| 8.25% SFC Notes | | $1.0 billion of 8.25% Senior Notes due 2020 issued by SFC and guaranteed by OMH |
| ABS | | asset-backed securities |
| Adjusted pretax income | | a non-GAAP financial measure; income before income taxes on a Segment Accounting Basis and excludes net gain on sale of SpringCastle interests, SpringCastle transaction costs, and losses resulting from repurchases and repayments of debt |
| ASC | | Accounting Standards Codification |
| ASU | | Accounting Standards Update |
| Average debt | | average of debt for each day in the period |
| Average net receivables | | average of monthly average net finance receivables (net finance receivables at the beginning and end of each month divided by 2) in the period |
| Blackstone | | collectively, BTO Willow Holdings II, L.P. and Blackstone Family Tactical Opportunities Investment Partnership—NQ—ESC L.P. |
| Cash Services Note | | new intercompany demand note issued to CSI in exchange for the Independence Demand Note in connection with the Note Assignment |
| CDO | | collateralized debt obligations |
| CFPB | | Consumer Financial Protection Bureau |
| CMBS | | commercial mortgage-backed securities |
| CSI | | Springleaf Financial Cash Services, Inc. |
| Dodd-Frank Act | | the Dodd-Frank Wall Street Reform and Consumer Protection Act |
| Exchange Act | | Securities Exchange Act of 1934, as amended |
| FA Loans | | purchased credit impaired finance receivables related to the Fortress Acquisition |
| FASB | | Financial Accounting Standards Board |
| FHLB | | Federal Home Loan Bank |
| FICO score | | a credit score created by Fair Isaac Corporation |
| Fixed charge ratio | | earnings less income taxes, interest expense, extraordinary items, goodwill impairment, and any amounts related to discontinued operations, divided by the sum of interest expense and any preferred dividends |
| Fortress | | Fortress Investment Group LLC |
| Fortress Acquisition | | FCFI Acquisition LLC, an affiliate of Fortress, acquired an 80% economic interest for a cash purchase price of $119 million, effective November 30, 2010 |
| GAAP | | generally accepted accounting principles in the United States of America |
| Gross charge-off ratio | | annualized gross charge-offs as a percentage of average net receivables |
| Independence | | Independence Holdings, LLC |
| Independence Demand Note | | a revolving demand note entered into on November 12, 2015 whereby CSI agreed to make advances to Independence from time to time |
| Indiana DOI | | Indiana Department of Insurance |
| Initial Stockholder | | Springleaf Financial Holdings, LLC |
|
| | |
| Term or Abbreviation | | Definition |
| | |
| Junior Subordinated Debenture | | $350 million aggregate principal amount of 60-year junior subordinated debt issued by SFC under an indenture dated January 22, 2007, by and between SFC and Deutsche Bank Trust Company, as trustee, and guaranteed by OMH |
| Lendmark Sale | | the sale of 127 Springleaf branches to Lendmark Financial Service, LLC, effective April 30, 2016 |
| LIBOR | | London Interbank Offered Rate |
| Logan Circle | | Logan Circle Partners, L.P. |
| Merit | | Merit Life Insurance Co. |
| Nationstar | | Nationstar Mortgage LLC |
| Net charge-off ratio | | annualized net charge-offs as a percentage of average net receivables |
| Net interest income | | interest income less interest expense |
| Note Assignment | | an assignment of an intercompany demand note entered into on July 19, 2016 whereby CSI sold and assigned to OMFH, and OMFH purchased and assumed from CSI, an interest in and to CSI’s right to receive $150 million principal amount outstanding under the Independence Demand Note |
| NRZ | | New Residential Investment Corp. |
| OCLI | | OneMain Consumer Loan, Inc. |
| ODART | | OneMain Direct Auto Receivables Trust |
| OMAS | | OneMain Assurance Services, LLC |
| OMFH | | OneMain Financial Holdings, LLC |
| OMFH Note | | new intercompany demand note issued to OMFH in exchange for the Independence Demand Note (in addition to the Cash Services Note) in connection with the Note Assignment |
| OMH | | OneMain Holdings, Inc. |
| OneMain Acquisition | | Acquisition of OneMain from CitiFinancial Credit Company, effective November 1, 2015 |
| OneMain Demand Note | | a revolving demand note entered into on November 15, 2015 whereby SFC agreed to make advances to OMFH from time to time |
| Other SFC Notes | | collectively, approximately $5.2 billion aggregate principal amount of senior notes, on a senior unsecured basis, and the Junior Subordinated Debenture, on a junior subordinated basis, issued by SFC and guaranteed by OMH |
| Recovery ratio | | annualized recoveries on net charge-offs as a percentage of average net receivables |
| retail sales finance | | collectively, retail sales contracts and revolving retail accounts |
| RMBS | | residential mortgage-backed securities |
| SCP Loans | | purchased credit impaired loans acquired through the SpringCastle Joint Venture |
| Segment Accounting Basis | | a basis used to report the operating results of our segments, which reflects our allocation methodologies for certain costs and excludes the impact of applying purchase accounting |
| Settlement Agreement | | a Settlement Agreement with the U.S. Department of Justice entered into by OMH and certain of its subsidiaries on November 13, 2015, in connection with the OneMain Acquisition |
| SFC | | Springleaf Finance Corporation |
| SFC Base Indenture | | Indenture dated as of December 3, 2014 |
| SFC First Supplemental Indenture | | supplemental indenture dated as of December 3, 2014, to the SFC Base Indenture |
| SFC Guaranty Agreements | | agreements entered into on December 30, 2013 by OMH whereby it agreed to fully and unconditionally guarantee the payments of principal, premium (if any) and interest on the Other SFC Notes |
| SFC Second Supplemental Indenture | | supplemental indenture dated as of April 11, 2016, to the SFC Base Indenture |
| SFC Trust Guaranty Agreement | | agreement entered into on December 30, 2013 by OMH whereby it agreed to fully and unconditionally guarantee the related payment obligations under the trust preferred securities in connection with the Junior Subordinated Debenture |
|
| | |
| Term or Abbreviation | | Definition |
| | |
| SFI | | Springleaf Finance, Inc. |
| SFMC | | Springleaf Finance Management Corporation |
| SGSC | | Springleaf General Services Corporation |
| SLFT | | Springleaf Funding Trust |
| SpringCastle Interests Sale | | the March 31, 2016 sale by SpringCastle Holdings, LLC and Springleaf Acquisition Corporation of the equity interest in the SpringCastle Joint Venture |
| SpringCastle Joint Venture | | joint venture among SpringCastle America, LLC, SpringCastle Credit, LLC, SpringCastle Finance, LLC and SpringCastle Acquisition LLC in which SpringCastle Holdings, LLC previously owned a 47% equity interest in each of SpringCastle America, LLC, SpringCastle Credit, LLC and SpringCastle Finance, LLC and Springleaf Acquisition Corporation previously owned a 47% equity interest in SpringCastle Acquisition LLC |
| SpringCastle Portfolio | | loans acquired through the SpringCastle Joint Venture |
| Tangible equity | | total equity less accumulated other comprehensive income or loss |
| Tangible managed assets | | total assets less goodwill and other intangible assets |
| TDR finance receivables | | troubled debt restructured finance receivables |
| Trust preferred securities | | capital securities classified as debt for accounting purposes but due to their terms are afforded, at least in part, equity capital treatment in the calculation of effective leverage by rating agencies |
| UK | | United Kingdom |
| UPB | | unpaid principal balance |
| VFN | | variable funding notes |
| VIEs | | variable interest entities |
| Weighted average interest rate | | annualized interest expense as a percentage of average debt |
| Wilmington | | Wilmington Trust, National Association |
| Yield | | annualized finance charges as a percentage of average net receivables |
| Yosemite | | Yosemite Insurance Company |
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
SPRINGLEAF FINANCE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
| | | (dollars in millions except par value amount) | | March 31,
2016 | | December 31,
2015 | |
| (dollars in millions, except par value amount) | | | March 31,
2017 | | December 31,
2016 |
| | | | | | | | | |
| Assets | | |
| | |
| | |
| | |
|
| Cash and cash equivalents | | $ | 365 |
| | $ | 321 |
| | $ | 397 |
| | $ | 240 |
|
| Investment securities | | 621 |
| | 604 |
| | 613 |
| | 582 |
|
| Net finance receivables: | | |
| | |
| | |
| | |
|
| Personal loans (includes loans of consolidated VIEs of $3.6 billion in 2016 and 2015) | | 4,378 |
| | 4,300 |
| |
| SpringCastle Portfolio (includes loans of consolidated VIEs of $1.6 billion in 2015) | | — |
| | 1,576 |
| |
| Personal loans (includes loans of consolidated VIEs of $2.9 billion in 2017 and 2016) | | | 4,715 |
| | 4,804 |
|
| Real estate loans | | 503 |
| | 524 |
| | 139 |
| | 144 |
|
| Retail sales finance | | 19 |
| | 23 |
| | 9 |
| | 11 |
|
| Net finance receivables | | 4,900 |
| | 6,423 |
| | 4,863 |
| | 4,959 |
|
| Unearned insurance premium and claim reserves | | (245 | ) | | (250 | ) | | (198 | ) | | (212 | ) |
| Allowance for finance receivable losses (includes allowance of consolidated VIEs of $113 million in 2016 and $128 million in 2015) | | (211 | ) | | (219 | ) | |
| Allowance for finance receivable losses (includes allowance of consolidated VIEs of $85 million in 2017 and $94 million in 2016) | | | (196 | ) | | (204 | ) |
| Net finance receivables, less unearned insurance premium and claim reserves and allowance for finance receivable losses | | 4,444 |
| | 5,954 |
| | 4,469 |
| | 4,543 |
|
| Finance receivables held for sale (includes finance receivables held for sale of consolidated VIEs of $435 million in 2015) | | 776 |
| | 796 |
| |
| Finance receivables held for sale | | | 148 |
| | 153 |
|
| Notes receivable from parent and affiliates | | 3,775 |
| | 3,804 |
| | 3,803 |
| | 3,723 |
|
| Restricted cash and cash equivalents (includes restricted cash and cash equivalents of consolidated VIEs of $212 million in 2016 and $282 million in 2015) | | 225 |
| | 295 |
| |
| Restricted cash and restricted cash equivalents (includes restricted cash and restricted cash equivalents of consolidated VIEs of $173 million in 2017 and $211 million in 2016) | | | 192 |
| | 227 |
|
| Other assets | | 286 |
| | 281 |
| | 244 |
| | 251 |
|
| | | | | | | | | |
| Total assets | | $ | 10,492 |
| | $ | 12,055 |
| | $ | 9,866 |
| | $ | 9,719 |
|
| | | | | | | | | |
| Liabilities and Shareholder’s Equity | | |
| | |
| | |
| | |
|
| Long-term debt (includes debt of consolidated VIEs of $3.1 billion in 2016 and $5.5 billion in 2015) | | $ | 7,187 |
| | $ | 9,582 |
| |
| Note payable to affiliate | | 374 |
| | — |
| |
| Long-term debt (includes debt of consolidated VIEs of $2.6 billion in 2017 and $2.7 billion in 2016) | | | $ | 6,823 |
| | $ | 6,837 |
|
| Insurance claims and policyholder liabilities | | 228 |
| | 230 |
| | 270 |
| | 248 |
|
| Deferred and accrued taxes | | 178 |
| | 103 |
| | 100 |
| | 106 |
|
| Other liabilities | | 266 |
| | 217 |
| |
| Other liabilities (includes other liabilities of consolidated VIEs of $5 million in 2017 and 2016) | | | 302 |
| | 185 |
|
| Total liabilities | | 8,233 |
| | 10,132 |
| | 7,495 |
| | 7,376 |
|
| Commitments and contingent liabilities (Note 14) | |
|
| |
|
| |
|
| |
|
|
| | | | | | | | | |
| Shareholder’s equity: | | |
| | |
| | |
| | |
|
| Common stock, par value $.50 per share; 25,000,000 shares authorized, 10,160,021 and 10,160,020 shares issued and outstanding at March 31, 2016 and December 31, 2015, respectively | | 5 |
| | 5 |
| |
| Common stock, par value $.50 per share; 25,000,000 shares authorized, 10,160,021 shares issued and outstanding at March 31, 2017 and December 31, 2016 | | | 5 |
| | 5 |
|
| Additional paid-in capital | | 769 |
| | 758 |
| | 799 |
| | 799 |
|
| Accumulated other comprehensive loss | | (17 | ) | | (24 | ) | | (6 | ) | | (7 | ) |
| Retained earnings | | 1,502 |
| | 1,330 |
| | 1,573 |
| | 1,546 |
|
| Springleaf Finance Corporation shareholder’s equity | | 2,259 |
| | 2,069 |
| |
| Non-controlling interests | | — |
| | (146 | ) | |
| Total shareholder’s equity | | 2,259 |
| | 1,923 |
| | 2,371 |
| | 2,343 |
|
| | | | | | | | | |
| Total liabilities and shareholder’s equity | | $ | 10,492 |
| | $ | 12,055 |
| | $ | 9,866 |
| | $ | 9,719 |
|
See Notes to Condensed Consolidated Financial Statements.
SPRINGLEAF FINANCE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
| | | (dollars in millions) | | Three Months Ended March 31, | | Three Months Ended March 31, |
| | 2016 |
| 2015 | | 2017 |
| 2016 |
| | | |
| | | | |
| | |
| Interest income: | | | | | | | | |
| Finance charges | | $ | 384 |
| | $ | 398 |
| | $ | 294 |
| | $ | 385 |
|
| Finance receivables held for sale originated as held for investment | | 47 |
| | 4 |
| | 3 |
| | 46 |
|
| Total interest income | | 431 |
| | 402 |
| | 297 |
| | 431 |
|
| | | | | | | | | |
| Interest expense | | 156 |
| | 158 |
| | 127 |
| | 156 |
|
| | | | | | | | | |
| Net interest income | | 275 |
| | 244 |
| | 170 |
| | 275 |
|
| | | | | | | | | |
| Provision for finance receivable losses | | 94 |
| | 86 |
| | 71 |
| | 91 |
|
| | | | | | | | | |
| Net interest income after provision for finance receivable losses | | 181 |
| | 158 |
| | 99 |
| | 184 |
|
| | | | | | | | | |
| Other revenues: | | |
| | |
| | |
| | |
|
| Insurance | | 39 |
| | 36 |
| | 37 |
| | 39 |
|
| Investment | | 6 |
| | 17 |
| | 6 |
| | 6 |
|
| Interest income on notes receivable from parent and affiliates | | | 59 |
| | 51 |
|
| Net gain on sale of SpringCastle interests | | 229 |
| | — |
| | — |
| | 167 |
|
| Other | | 40 |
| | — |
| | 4 |
| | (7 | ) |
| Total other revenues | | 314 |
| | 53 |
| | 106 |
| | 256 |
|
| | | | | | | | | |
| Other expenses: | | |
| | |
| | |
| | |
|
| Operating expenses: | | |
| | |
| | |
| | |
|
| Salaries and benefits | | 97 |
| | 80 |
| | 79 |
| | 97 |
|
| Other operating expenses | | 77 |
| | 73 |
| | 67 |
| | 77 |
|
| Insurance policy benefits and claims | | 17 |
| | 16 |
| | 16 |
| | 17 |
|
| Total other expenses | | 191 |
| | 169 |
| | 162 |
| | 191 |
|
| | | | | | | | | |
| Income before provision for income taxes | | 304 |
| | 42 |
| |
| Income before income taxes | | | 43 |
| | 249 |
|
| | | | | | | | | |
| Provision for income taxes | | 106 |
| | 8 |
| |
| Income taxes | | | 16 |
| | 85 |
|
| | | | | | | | | |
| Net income | | 198 |
| | 34 |
| | 27 |
| | 164 |
|
| | | | | | | | | |
| Net income attributable to non-controlling interests | | 26 |
| | 31 |
| | — |
| | 28 |
|
| | | | | | | | | |
| Net income attributable to Springleaf Finance Corporation | | $ | 172 |
| | $ | 3 |
| | $ | 27 |
| | $ | 136 |
|
See Notes to Condensed Consolidated Financial Statements.
SPRINGLEAF FINANCE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
| | | (dollars in millions) | | Three Months Ended March 31, | | Three Months Ended March 31, |
| | 2016 | | 2015 | | 2017 | | 2016 |
| | | | | | | | | |
| Net income | | $ | 198 |
|
| $ | 34 |
|
| $ | 27 |
|
| $ | 164 |
|
| | | | | | | | | |
| Other comprehensive income: | | |
| | |
| | |
| | |
|
| Net unrealized gains on non-credit impaired available-for-sale securities | | 12 |
| | 5 |
| |
| Foreign currency translation adjustments | | — |
| | 1 |
| |
| Net change in unrealized gains on non-credit impaired available-for-sale securities | | | 3 |
| | 12 |
|
| Income tax effect: | | |
| | |
| | |
| | |
|
| Net unrealized gains on non-credit impaired available-for-sale securities | | (4 | ) | | (2 | ) | | (1 | ) | | (4 | ) |
| Other comprehensive income, net of tax, before reclassification adjustments | | 8 |
| | 4 |
| | 2 |
| | 8 |
|
| Reclassification adjustments included in net income: | | |
| | |
| | |
| | |
|
| Net realized gains on available-for-sale securities | | (1 | ) | | (6 | ) | | (2 | ) | | (1 | ) |
| Income tax effect: | | |
| | |
| | |
| | |
|
| Net realized gains on available-for-sale securities | | — |
| | 2 |
| | 1 |
| | — |
|
| Reclassification adjustments included in net income, net of tax | | (1 | ) | | (4 | ) | | (1 | ) | | (1 | ) |
| Other comprehensive income, net of tax | | 7 |
| | — |
| | 1 |
| | 7 |
|
| | | | | | | | | |
| Comprehensive income | | 205 |
|
| 34 |
| | 28 |
|
| 171 |
|
| | | | | | | | | |
| Comprehensive income attributable to non-controlling interests | | 26 |
| | 31 |
| | — |
| | 28 |
|
| | | | | | | | | |
| Comprehensive income attributable to Springleaf Finance Corporation | | $ | 179 |
| | $ | 3 |
| | $ | 28 |
| | $ | 143 |
|
See Notes to Condensed Consolidated Financial Statements.
SPRINGLEAF FINANCE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholder’s Equity (Unaudited)
| | | | | Springleaf Finance Corporation Shareholder’s Equity | | | | | | Springleaf Finance Corporation Shareholder’s Equity | | | | |
| (dollars in millions) | | Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Springleaf Finance Corporation Shareholder’s Equity | | Non-controlling Interests | | Total Shareholder’s Equity | | Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Springleaf Finance Corporation Shareholder’s Equity | | Non-controlling Interests | | Total Shareholder’s Equity |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, January 1, 2017 | | | $ | 5 |
| | $ | 799 |
| | $ | (7 | ) | | $ | 1,546 |
| | $ | 2,343 |
| | $ | — |
| | $ | 2,343 |
|
| Other comprehensive income | | | — |
| | — |
| | 1 |
| | — |
| | 1 |
| | — |
| | 1 |
|
| Net income | | | — |
| | — |
| | — |
| | 27 |
| | 27 |
| | — |
| | 27 |
|
| Balance, March 31, 2017 | | | $ | 5 |
| | $ | 799 |
| | $ | (6 | ) | | $ | 1,573 |
| | $ | 2,371 |
| | $ | — |
| | $ | 2,371 |
|
| | | | | | | | | | | | | | | | |
| Balance, January 1, 2016 | | $ | 5 |
| | $ | 758 |
| | $ | (24 | ) | | $ | 1,330 |
| | $ | 2,069 |
| | $ | (146 | ) | | $ | 1,923 |
| | $ | 5 |
| | $ | 789 |
| | $ | (24 | ) | | $ | 1,341 |
| | $ | 2,111 |
| | $ | (79 | ) | | $ | 2,032 |
|
| Capital contribution from parent | | — |
| | 10 |
| | — |
| | — |
| | 10 |
| | — |
| | 10 |
| | — |
| | 10 |
| | — |
| | — |
| | 10 |
| | — |
| | 10 |
|
| Share-based compensation expense, net of forfeitures | | — |
| | 1 |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
| | — |
| | 1 |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
|
| Excess tax benefit from share-based compensation | | — |
| | 1 |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
| | — |
| | 1 |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
|
| Withholding tax on vested RSUs | | — |
| | (1 | ) | | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) | |
| Withholding tax on share-based compensation | | | — |
| | (1 | ) | | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) |
| Change in non-controlling interests: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
|
| Distributions declared to joint venture partners | | — |
| | — |
| | — |
| | — |
| | — |
| | (18 | ) | | (18 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (18 | ) | | (18 | ) |
| Sale of equity interests in SpringCastle joint venture | | — |
| | — |
| | — |
| | — |
| | — |
| | 138 |
| | 138 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 69 |
| | 69 |
|
| Other comprehensive income | | — |
| | — |
| | 7 |
| | — |
| | 7 |
| | — |
| | 7 |
| | — |
| | — |
| | 7 |
| | — |
| | 7 |
| | — |
| | 7 |
|
| Net income | | — |
| | — |
| | — |
| | 172 |
| | 172 |
| | 26 |
| | 198 |
| | — |
| | — |
| | — |
| | 136 |
| | 136 |
| | 28 |
| | 164 |
|
| Balance, March 31, 2016 | | $ | 5 |
| | $ | 769 |
| | $ | (17 | ) | | $ | 1,502 |
| | $ | 2,259 |
| | $ | — |
| | $ | 2,259 |
| | $ | 5 |
| | $ | 800 |
| | $ | (17 | ) | | $ | 1,477 |
| | $ | 2,265 |
| | $ | — |
| | $ | 2,265 |
|
| | | | | | | | | | | | | | | | |
| Balance, January 1, 2015 | | $ | 5 |
| | $ | 740 |
| | $ | 3 |
| | $ | 1,321 |
| | $ | 2,069 |
| | $ | (188 | ) | | $ | 1,881 |
| |
| Change in non-controlling interests: | | | | | | | | | | | | | |
|
| |
| Distributions declared to joint venture partners | | — |
| | — |
| | — |
| | — |
| | — |
| | (18 | ) | | (18 | ) | |
| Net income | | — |
| | — |
| | — |
| | 3 |
| | 3 |
| | 31 |
| | 34 |
| |
| Balance, March 31, 2015 | | $ | 5 |
| | $ | 740 |
| | $ | 3 |
| | $ | 1,324 |
| | $ | 2,072 |
| | $ | (175 | ) | | $ | 1,897 |
| |
See Notes to Condensed Consolidated Financial Statements.
SPRINGLEAF FINANCE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
| | | (dollars in millions) | | Three Months Ended March 31, | | Three Months Ended March 31, |
| 2016 | | 2015 |
| 2017 | | 2016 |
| | | | | | | | | |
| Cash flows from operating activities | | |
| | |
| | |
| | |
|
| Net income | | $ | 198 |
| | $ | 34 |
| | $ | 27 |
| | $ | 164 |
|
| Reconciling adjustments: | | |
| | |
| | |
| | |
|
| Provision for finance receivable losses | | 94 |
| | 86 |
| | 71 |
| | 91 |
|
| Depreciation and amortization | | 20 |
| | 17 |
| | 39 |
| | 19 |
|
| Deferred income tax charge (benefit) | | 29 |
| | (14 | ) | | (5 | ) | | 8 |
|
| Share-based compensation expense, net of forfeitures | | 1 |
| | — |
| | — |
| | 1 |
|
| Net gain on sale of SpringCastle interests | | (229 | ) | | — |
| | — |
| | (167 | ) |
| Other | | 9 |
| | (7 | ) | | — |
| | 6 |
|
| Cash flows due to changes in: | | |
| | |
| | |
| | |
|
| Other assets and other liabilities | | 36 |
| | 72 |
| | 98 |
| | 37 |
|
| Insurance claims and policyholder liabilities | | (7 | ) | | (2 | ) | | 9 |
| | (7 | ) |
| Taxes receivable and payable | | 47 |
| | 18 |
| | (1 | ) | | 47 |
|
| Accrued interest and finance charges | | 20 |
| | 7 |
| | (5 | ) | | 20 |
|
| Restricted cash and cash equivalents not reinvested | | 1 |
| | — |
| |
| Other, net | | 1 |
| | — |
| | — |
| | 2 |
|
| Net cash provided by operating activities | | 220 |
| | 211 |
| | 233 |
| | 221 |
|
| | | | | | | | | |
| Cash flows from investing activities | | |
| | |
| | |
| | |
|
| Net principal collections (originations) of finance receivables held for investment and held for sale | | (30 | ) | | — |
| | 7 |
| | (30 | ) |
| Proceeds on sales of finance receivables held for sale originated as held for investment | | — |
| | 52 |
| |
| Proceeds from sale of SpringCastle interests | | 101 |
| | — |
| |
| Cash advances on intercompany notes receivables | | (112 | ) | | (28 | ) | |
| Principal collections on intercompany notes receivables | | 127 |
| | 16 |
| |
| Proceeds from sale of SpringCastle interests, net of restricted cash released | | | — |
| | 26 |
|
| Cash advances on intercompany notes receivable | | | (211 | ) | | (112 | ) |
| Proceeds from repayments of principal and assignment of intercompany notes receivable | | | 138 |
| | 127 |
|
| Available-for-sale securities purchased | | (92 | ) | | (95 | ) | | (72 | ) | | (92 | ) |
| Trading and other securities purchased | | (1 | ) | | (945 | ) | | — |
| | (1 | ) |
| Available-for-sale securities called, sold, and matured | | 78 |
| | 56 |
| | 63 |
| | 78 |
|
| Trading and other securities called, sold, and matured | | 10 |
| | 1,193 |
| | — |
| | 10 |
|
| Change in restricted cash and cash equivalents | | (5 | ) | | (120 | ) | |
| Proceeds from sale of real estate owned | | 2 |
| | 5 |
| |
| Other, net | | 4 |
| | 10 |
| | 3 |
| | 6 |
|
| Net cash provided by investing activities | | 82 |
| | 144 |
| |
| Net cash provided by (used for) investing activities | | | (72 | ) | | 12 |
|
| | | | | | | | | |
| Cash flows from financing activities | | |
| | |
| | |
| | |
|
| Proceeds from issuance of long-term debt, net of commissions | | 295 |
| | 1,523 |
| | 366 |
| | 295 |
|
| Proceeds from intercompany note payable | | 370 |
| | — |
| | — |
| | 370 |
|
| Repayments of long-term debt | | (916 | ) | | (315 | ) | | (405 | ) | | (916 | ) |
| Distributions to joint venture partners | | (18 | ) | | (18 | ) | | — |
| | (18 | ) |
| Excess tax benefit from share-based compensation | | 1 |
| | — |
| | — |
| | 1 |
|
| Withholding tax on share-based compensation | | | — |
| | (1 | ) |
| Capital contribution from parent | | 10 |
| | — |
| | — |
| | 10 |
|
| Net cash provided by (used for) financing activities | | (258 | ) | | 1,190 |
| |
| Net cash used for financing activities | | | (39 | ) | | (259 | ) |
| | | Condensed Consolidated Statements of Cash Flows (Unaudited) (Continued) | | | | | | | | |
| | | | | | | | | |
| (dollars in millions) | | Three Months Ended March 31, | | At or for the
Three Months Ended March 31, |
| | 2016 | | 2015 | | 2017 | | 2016 |
| | | | | | | | | |
| Net change in cash and cash equivalents | | 44 |
| | 1,545 |
| |
| Cash and cash equivalents at beginning of period | | 321 |
| | 749 |
| |
| Cash and cash equivalents at end of period | | $ | 365 |
| | $ | 2,294 |
| |
| Net change in cash and cash equivalents and restricted cash and restricted cash equivalents | | | 122 |
| | (26 | ) |
| Cash and cash equivalents and restricted cash and restricted cash equivalents at beginning of period | | | 467 |
| | 616 |
|
| Cash and cash equivalents and restricted cash and restricted cash equivalents at end of period | | | $ | 589 |
| | $ | 590 |
|
| | | | | | |
| Supplemental cash flow information | | | | | |
| Cash and cash equivalents | | | $ | 397 |
| | $ | 365 |
|
| Restricted cash and restricted cash equivalents | | | 192 |
| | 225 |
|
| Total cash and cash equivalents and restricted cash and restricted cash equivalents | | | $ | 589 |
| | $ | 590 |
|
| | | | | | | | | |
| Supplemental non-cash activities | | |
| | |
| | |
| | |
|
| Transfer of finance receivables held for investment to finance receivables held for sale (prior to deducting allowance for finance receivable losses) | | $ | 1,478 |
| | $ | — |
| | $ | — |
| | $ | 1,608 |
|
| Transfer of finance receivables to real estate owned | | $ | 2 |
| | $ | 2 |
| | 2 |
| | 2 |
|
| Net unsettled investment security dispositions | | $ | — |
| | $ | 19 |
| |
| Net unsettled investment security purchases | | | (19 | ) | | — |
|
Restricted cash and restricted cash equivalents represent funds required to be set aside by local state authorities for the payment of state specific insurance licenses, as well as funds to be used for future debt payments relating to our securitization transactions and escrow deposits.
See Notes to Condensed Consolidated Financial Statements.
SPRINGLEAF FINANCE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 20162017
1. Business and Basis of Presentation
Springleaf Finance Corporation (“SFC”is referred to in this report as “SFC” or, collectively with its subsidiaries, whether directly or indirectly owned, “Springleaf,” the “Company,” “we,” “us,” or “our”)“our.” SFC is a wholly owned subsidiary of Springleaf Finance, Inc. (“SFI”).SFI. SFI is a wholly owned subsidiary of OneMain Holdings, Inc. (“OMH”).OMH.
At March 31, 2016, Springleaf Financial Holdings, LLC (the “Initial Stockholder”)2017, the Initial Stockholder owned approximately 58%57% of OMH’s common stock. The Initial Stockholder is owned primarily by a private equity fund managed by an affiliate of Fortress Investment Group LLC (“Fortress”).
SFC is a financial services holding company with subsidiaries engaged in the consumer finance and insurance businesses.Fortress.
BASIS OF PRESENTATION
We prepared our condensed consolidated financial statements using generally accepted accounting principles in the United States of America (“U.S. GAAP”).GAAP. These statements are unaudited. The year-end condensed balance sheet data was derived from our audited financial statements, but does not include all disclosures required by U.S. GAAP. The statements include the accounts of SFC, its subsidiaries (all of which are wholly owned, except for certain subsidiaries associated with a joint venturethe SpringCastle Joint Venture, in which we owned a 47% equity interest prior to March 31, 2016), and variable interest entities (“VIEs”)VIEs in which we hold a controlling financial interest and for which we are considered to be the primary beneficiary as of the financial statement date.
We eliminated all material intercompany accounts and transactions. We made judgments, estimates, and assumptions that affect amounts reported in our condensed consolidated financial statements and disclosures of contingent assets and liabilities. In management’s opinion, the condensed consolidated financial statements include the normal, recurring adjustments necessary for a fair statement of results. Ultimate results could differ from our estimates. We evaluated the effects of and the need to disclose events that occurred subsequent to the balance sheet date. To conform to the 20162017 presentation, we have reclassified certain items in prior periods including certain items in prior periods of our condensed consolidated financial statements. Also, to conform to the new alignment of our segments, as further discussed in Note 16, we have revised our prior period segment disclosures.
The condensed consolidated financial statements of cash flows. These statementsin this report should be read in conjunction with the consolidated financial statements and related notes included in our 2016 Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (“2015 Annual Report on Form 10-K”).10-K. We follow the same significant accounting policies for our interim reporting.
2. Significant Transactions
SPRINGCASTLE INTERESTS SALE
On March 31, 2016, SFI, SpringCastle Holdings, LLC (“SpringCastle Holdings”) and Springleaf Acquisition Corporation (“Springleaf Acquisition” and, together with SpringCastle Holdings, the “SpringCastle Sellers”), wholly owned subsidiaries of OMH, entered into a purchase agreement with certain subsidiaries of New Residential Investment Corp. (“NRZ” and such subsidiaries, the “NRZ Buyers”) and BTO Willow Holdings II, L.P. and Blackstone Family Tactical Opportunities Investment Partnership—NQ—ESC L.P. (collectively, the “Blackstone Buyers” and together with the NRZ Buyers, the “SpringCastle Buyers”). Pursuant to the purchase agreement, SpringCastle Holdings sold its 47% limited liability company interest in each of SpringCastle America, LLC, SpringCastle Credit, LLC and SpringCastle Finance, LLC, and Springleaf Acquisition sold its 47% limited liability company interest in SpringCastle Acquisition LLC, to the SpringCastle Buyers for an aggregate purchase price of approximately $112 million (the “SpringCastle Interests Sale”). SpringCastle America, LLC, SpringCastle Credit, LLC, SpringCastle Finance, LLC and SpringCastle Acquisition LLC are collectively referred to herein as the “SpringCastle Joint Venture.”
The SpringCastle Joint Venture primarily holds subordinate ownership interests in a securitized loan portfolio (the “SpringCastle Portfolio”), which consists of unsecured loans and loans secured by subordinate residential real estate mortgages and includes both closed-end accounts and open-end lines of credit. These loans are in a liquidating status and vary in form and substance from the Company’s originated loans. At December 31, 2015, the SpringCastle Portfolio included over 232,000 of acquired loans, representing $1.6 billion in net finance receivables. For the three months ended March 31, 2016 and 2015, income before provision for income taxes of our Acquisitions and Servicing segment (which consists of the SpringCastle Sellers) totaled $279 million ($253 million attributable to SFC) and $64 million ($33 million attributable to SFC), respectively.
In connection with the SpringCastle Interests Sale, the SpringCastle Buyers paid $101 million of the aggregate purchase price to the SpringCastle Sellers on March 31, 2016, with the remaining $11 million to be paid into an escrow account within 120 days following March 31, 2016. Such escrowed funds are expected to be held in escrow for a period of up to five years following March 31, 2016, and, subject to the terms of the purchase agreement and assuming certain portfolio performance requirements are satisfied, paid to the SpringCastle Sellers at the end of such five year period. In connection with the SpringCastle Interests Sale, we recorded a net gain in other revenues at the time of sale of $229 million.
As a result of this sale, SpringCastle Acquisition and SpringCastle Holdings no longer hold any ownership interests of the SpringCastle Joint Venture. However, unless terminated, SFI will remain as servicer of the SpringCastle Portfolio, under the existing servicing agreement for the SpringCastle Funding Trust. In addition, we deconsolidated the underlying loans of the SpringCastle Portfolio and previously issued securitized interests, which were reported in long-term debt, as we no longer were considered the primary beneficiary.
Prior to the SpringCastle Interests Sale, affiliates of the NRZ Buyers owned a 30% limited liability company interest in the SpringCastle Joint Venture, and affiliates of the Blackstone Buyers owned a 23% limited liability company interest in the SpringCastle Joint Venture (together, the “Other Members”). The Other Members are parties to the purchase agreement for certain limited indemnification obligations and post-closing expense reimbursement obligations of the SpringCastle Joint Venture to the SpringCastle Sellers.
The NRZ Buyers are subsidiaries of NRZ, which is externally managed by an affiliate of Fortress. The Initial Stockholder, which owned approximately 58% of OMH’s common stock as of March 31, 2016, is owned primarily by a private equity fund managed by an affiliate of Fortress. Mr. Edens, Chairman of the board of directors of OMH, also serves as Chairman of the board of directors of NRZ. Mr. Edens is also a principal of Fortress and serves as Co-Chairman of the board of directors of Fortress. Mr. Jacobs, a member of the board of directors of OMH, also serves as a member of NRZ’s board of directors and Fortress’ board of directors.
The purchase agreement included customary representations, warranties, covenants and indemnities. We did not record a sales recourse obligation related to this sale.
OMH’S ACQUISITION OF ONEMAIN FINANCIAL HOLDING, LLC
On November 15, 2015, OMH, through its wholly owned subsidiary, Independence Holdings, LLC (“Independence”), completed its acquisition of OneMain Financial Holdings, LLC (“OMFH”) from CitiFinancial Credit Company (“Citigroup”) for approximately $4.5 billion in cash (the “OneMain Acquisition”). As a result of the OneMain Acquisition, OMFH became a wholly owned, indirect subsidiary of OMH. OMFH is not a subsidiary of SFC and SFC is not a subsidiary of OMFH.
In connection with the closing of the OneMain Acquisition, on November 13, 2015, OMH and certain subsidiaries of SFC entered into an Asset Preservation Stipulation and Order and agreed to a Proposed Final Judgment (collectively, the “Settlement Agreement”) with the U.S. Department of Justice (the “DOJ”), as well as the state attorneys general for Colorado, Idaho, Pennsylvania, Texas, Virginia, Washington and West Virginia. The Settlement Agreement resolved the inquiries of the DOJ and such attorneys general with respect to the OneMain Acquisition and allowed OMH to proceed with the closing. Pursuant to the Settlement Agreement, OMH agreed to divest 127 branches of SFC subsidiaries across 11 states as a condition for approval of the OneMain Acquisition. The Settlement Agreement requires the Branch Sellers to operate these 127 branches as an ongoing, economically viable and competitive business until sold to the divestiture purchaser. The court overseeing the settlement appointed a third-party monitor to oversee management of the divestiture branches and ensure the Company’s compliance with the terms of the Settlement Agreement.
LENDMARK SALE
On November 12, 2015, OMH and certain subsidiaries of SFC (the “Branch Sellers”) entered into an agreement with Lendmark Financial Services, LLC (“Lendmark”) to sell 127 branches to Lendmark (the “Lendmark Sale”) for a purchase price equal to the sum of (i) the aggregate unpaid balance as of closing of the purchased loans multiplied by 103%, plus (ii) for each interest-bearing purchased loan, an amount equal to all unpaid interest that has accrued on the unpaid balance at the applicable note rate from the most recent interest payment date through the closing, plus (iii) the sum of all prepaid charges and fees and security deposits of the Branch Sellers to the extent arising under the purchased contracts as reflected on the books and records of the Branch Sellers as of closing, subject to certain limitations if the purchase price would exceed $695 million and Lendmark is unable to obtain financing on certain specified terms. In anticipation of the sale of these branches, we transferred $608 million of personal loans from held for investment to held for sale on September 30, 2015. At March 31, 2016, the personal loans held for sale totaled approximately $606 million, primarily due to originations, net of charge-offs of personal loans in these branches
during the past six months. The branches to be sold represent 15% of the branches and 12% of the personal loans held for investment and held for sale of the Company as of March 31, 2016.
Pursuant to the Settlement Agreement, we were required to dispose of the branches to be sold in connection with the Lendmark Sale within 120 days following November 13, 2015, subject to such extensions as the DOJ may approve. As we did not believe we would be able to consummate the Lendmark Sale prior to April 1, 2016, we requested two extensions of the closing deadline set forth in the Settlement Agreement. The DOJ granted our requests through May 13, 2016.
On May 2, 2016, we completed the Lendmark Sale. See Note 18 for further information on the subsequent closing.
3. Recent Accounting Pronouncements
ACCOUNTING PRONOUNCEMENTS RECENTLY ADOPTED
ConsolidationInvestments
In FebruaryMarch of 2015,2016, the Financial Accounting Standards Board (the “FASB”)FASB issued Accounting Standards Update (“ASU”) 2015-02,ASU 2016-07, Consolidation - AmendmentsSimplifying the Transition to the Consolidation AnalysisEquity Method of Accounting, which amendseliminates the current consolidation guidancerequirement that, when an investment qualifies for use of the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and endsretained earnings retroactively on a step-by-step basis as if the deferral granted to reporting entities with variable interestsequity method of accounting had been in effect during all previous periods that the investment companies from applying certain prior amendments tohad been held. The ASU requires that an entity that has available-for-sale securities recognize, through earnings, the VIE guidance. Thisunrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method of accounting. The amendment in this ASU is applicable to entities across all industries, particularly those that use limited partnerships as well as entities in any industry that outsource decision making or have historically applied related party tiebreaker in their consolidation analysis and disclosures. The standard became effective prospectively for public business entities forannual periods, and interim periods within those annual periods, beginning after December 15, 2015. 2016.We evaluated the potential impact of the adoption ofhave adopted this ASU as of January 1, 2017 and concluded that it willdoes not have a material effectan impact on our consolidated financial statements.
Statement of Cash Flows
In November of 2016, the FASB issued ASU 2016-18, Statement of Cash Flows, which simplifies the presentation of restricted cash on the statement of cash flows by requiring entities to include restricted cash and restricted cash equivalents in the reconciliation of cash and cash equivalents. The amendments in this ASU become effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. We have elected to early adopt this ASU as of January 1, 2017 and presented this change on a retrospective basis for all periods presented. We have concluded that this ASU does not have a material impact on our consolidated financial statements.
Technical Corrections and Improvements
In JuneJanuary of 2015,2017, the FASB issued ASU 2015-10,2017-03, TechnicalAccounting Changes and Error Corrections and Improvements, to correct differences between original guidanceenhance the footnote disclosure guidelines for ASUs 2014-09, 2016-02, and the Codification, clarify the guidance, correct references and make minor improvements affecting a variety of topics.2016-13. The amendments to this transition guidance became effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015.2016. We evaluated the potential impact of the adoption ofhave adopted this ASU andas of January 1, 2017 on a prospective basis. We have concluded that it willthis ASU does not have a material effectimpact on our consolidated financial statements.
ACCOUNTING PRONOUNCEMENTS TO BE ADOPTED
Revenue Recognition
In May of 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which provides a consistent revenue accounting model across industries. In August of 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers - Deferral of the Effective Date, to defer the effective date of the new revenue recognition standard by one year, which would result in the ASU becoming effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. ManyIn March of our revenue sources are2016, the FASB issued ASU 2016-08, Principal versus Agent Considerations, which clarifies the implementation of the guidance on principal versus agent considerations from ASU 2014-09. ASU 2016-08 does not withinchange the scopecore principle of this new standard,the guidance in ASU 2014-09, but rather clarifies the distinction between principal versus agent considerations when implementing ASU 2014-09. In April of 2016, the FASB issued ASU 2016-10, Identifying Performance Obligations and we are evaluating whetherLicensing, to clarify the implementation guidance of ASU 2014-09 relating to performance obligations and licensing. In May of 2016, the FASB issued ASU 2016-12, Narrow-Scope Improvements and Practical Expedients, to clarify guidance in ASU 2014-09 related to assessing collectability, presentation of sales taxes, noncash consideration, and completed contracts/contract modifications. In December of 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, which improves the guidance specific to the amendments in ASU 2014-09. We believe that the adoption of this ASU for those revenue sources that are in scope will not have a material effect on our consolidated financial statements.
Short-Duration Insurance Contracts Disclosures
In Maystatements, and we are in the process of 2015,quantifying the FASB issued ASU 2015-09, expected impact.Disclosures about Short-Duration Contracts, to address enhanced disclosure requirements for insurers relating to short-duration insurance contract claims and unpaid claims liability rollforward for long and short-duration contracts. The disclosures are intended to provide users of financial statements with more transparent information about an insurance entity’s initial claim estimates and subsequent adjustments to those estimates, the methodologies and judgments used to estimate claims, and the timing, frequency, and severity of claims. The amendments in this ASU become effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. We are currently evaluating the potential impact of the adoption of the ASU on our consolidated financial statements.
Financial Instruments
In January of 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which simplifies the impairment assessment of equity investments. The update requires equity investments to be measured at fair value with changes recognized in net income. This ASU eliminates the requirement to disclose the methods and assumptions to estimate fair value for financial instruments, requires the use of the exit price for disclosure purposes, requires the change in liability due to a change in credit risk to be presented in other comprehensive income, requires separate presentation of financial assets and liabilities by measurement category and form of asset (securities and loans), and clarifies the need for evaluationa valuation allowance on a deferred tax asset related to available-for-sale securities. The amendments in this ASU become effective prospectively for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. We are evaluating whether the adoption of this ASU will evaluatehave a material effect on our consolidated financial statements.
In March of 2017, the FASB issued ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs, which amends the amortization period for certain purchased callable debt securities held at a premium. This ASU shortens the amortization period for the premium from the adjustment of yield over the contractual life of the instrument to the earliest call date. The amendments in this ASU become effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We are evaluating whether the adoption of this ASU will have a material effect on our consolidated financial statements.
Leases
In February of 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The ASU will requirerequires lessees to recognize assetsa right-to-use asset and liabilitiesa liability for the obligation to make payments on leases with terms greater than 12 months and to disclose information related to the amount, timing and uncertainty of cash flows arising from leases, including various qualitative and quantitative requirements. The amendments ofin this ASU become effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. We believe that the adoption of this ASU will evaluatehave a material effect on our consolidated financial statements, and we are in the process of quantifying the expected impact.
Revenue Recognition and Derivatives and Hedging
In May of 2016, the FASB issued ASU 2016-11, Revenue Recognition and Derivatives and Hedging, to rescind certain SEC guidance in Topic 605 and Topic 815 as ASU 2014-09 becomes effective. Our adoption of ASU 2014-09 will bring us into alignment with this ASU. We believe that the adoption of this ASU will not have a material effect on our consolidated financial statements.
Allowance for Finance Receivables Losses
In June of 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments. The ASU significantly changes the way that entities will be required to measure credit losses. The new standard requires that the estimated credit loss be based upon an “expected credit loss” approach rather than the “incurred loss” approach currently required. The new approach will require entities to measure all expected credit losses for financial assets based on historical experience, current conditions, and reasonable forecasts of collectability. It is anticipated that the expected credit loss model will require earlier recognition of credit losses than the incurred loss approach.
The ASU requires that credit losses for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination that are measured at amortized cost basis bedetermined in a similar manner to other financial assets measured at amortized cost basis; however, the initial allowance for credit losses is added to the purchase price of the financial asset rather than being reported as a credit loss expense. Subsequent changes in the allowance for credit losses are recorded in earnings. Interest income should be recognized based on the effective rate, excluding the discount embedded in the purchase price attributable to expected credit losses at acquisition.
The ASU also requires companies to record allowances for held-to-maturity and available-for-sale debt securities rather than write-downs of such assets.
In addition, the ASU requires qualitative and quantitative disclosures that provide information about the allowance and the significant factors that influenced management’s estimate of the allowance.
The ASU will become effective for the Company for fiscal years beginning January 1, 2020. Early adoption is permitted for fiscal years beginning January 1, 2019. We believe the adoption of this ASU will have a material effect on our consolidated financial statements and we are in the process of quantifying the expected impacts.
Statement of Cash Flows
In August of 2016, the FASB issued ASU 2016-15, Statement of Cash Flows, which clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments in this ASU will become effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. We are evaluating whether the adoption of this ASU will have a material effect on our consolidated financial statements.
Debt InstrumentsIncome Taxes
In MarchOctober of 2016, the FASB issued ASU 2016-06,2016-16, Contingent Puts and Call Options in Debt InstrumentsIncome Taxes, which clarifiesrequires entities to recognize the requirements for assessing whether contingent call (put) options that can accelerateincome tax consequences of an intra-entity transfer of an asset other than inventory when the payment of principal on debt instruments are clearly and closely related to their debt host.transfer occurs. The ASU requires assessing the embedded call (put) options solelyamendments in accordance with the four-step decision sequence. The amendment of this ASU becomeswill become effective on a modified retrospective basis for annual reporting periods andbeginning after December 15, 2017, including interim periods within those annual periods, beginning after December 15, 2016.reporting periods. We will evaluateare evaluating whether the adoption of this ASU will have a material effect on our consolidated financial statements.
InvestmentsBusiness Combinations
In MarchJanuary of 2016,2017, the FASB issued ASU 2016-07,2017-01, Simplifying the Transition to the Equity Method of AccountingBusiness Combinations, to clarify the definition of a business, which eliminates the requirement thatestablishes a process to determine when an investment qualifies for useintegrated set of the equity method asassets and activities can be deemed a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held.business combination. The ASU requires that an entity that has available-for-sale securities recognize, through earnings, the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendmentamendments in this ASU becomesbecome effective prospectively for annual periods, and interim periods within those annual periods, beginning after December 15, 2016.2017. We will evaluateare evaluating whether the adoption of this ASU will have a material effect on our consolidated financial statements.
Technical Corrections
Compensation and ImprovementsBenefits
In March of 2016,2017, the FASB issued ASU 2016-08,2017-07, Principal versus Agent Considerations,Compensation-Retirement Benefits which clarifies, to improve the implementationpresentation of the guidance on principal versus agent considerations from ASU 2014-09, Revenue from Contracts with Customers. ASU 2016-08 does not changenet periodic pension cost and net periodic postretirement benefit costs. It requires that a company present separately the core principle of the guidance in ASU 2014-09, but rather clarifies the distinction between principal versus agent considerations when implementing ASU 2014-09. As these are technical corrections and improvements only, the company does not believe that this ASU will have a material effect on our consolidated financial statements.
Stock Compensation
In March of 2016, the FASB issued ASU 2016-09, Improvements to Employee Share - Based Payment Accounting, which simplifies the accounting for share-based payment transactions, income tax consequences, classification of awards as either equity or liabilities, and classificationservice cost component on the statement of cash flows.income statement. The amendmentamendments in this ASU becomesbecome effective on a modified retrospective transition for accounting in tax benefits recognized, retrospectively for accounting related to the presentation of employee taxes paid, prospective for accounting related to recognition of excess tax benefits, and either a prospective or retrospective method for accounting related to presentation of excess employee tax benefits for annual periods,
and interim periods within those annual periods, beginning after December 15, 2016.2017. We will evaluateare evaluating whether the adoption of this ASU will have a material effect on our consolidated financial statements.
We do not believe that any other accounting pronouncements issued during the first quarter of 2016,three months ended March 31, 2017, but not yet effective, would have a material impact on our consolidated financial statements or disclosures, if adopted.
4.3. Finance Receivables
Our finance receivable types include personal loans, real estate loans, and retail sales finance as defined below:
Personal loans — are secured by consumer goods, automobiles, or other personal property or are unsecured, typically non-revolving with a fixed-rate and a fixed, original term of twothree to five years. At March 31, 2016, $2.52017, we had over 893,000 personal loans representing $4.7 billion of net finance receivables, compared to 928,000 personal loans or 58%, were secured by collateral consisting of titled personal property (such as automobiles) and $1.9totaling $4.8 billion or 42%, were secured by consumer household goods or other items of personal property or were unsecured, compared to $2.4 billion of personal loans, or 56%, secured by collateral consisting of titled personal property and $1.9 billion, or 44%, secured by consumer household goods or other items of personal property or unsecured at December 31, 2015.2016.
Real estate loans — are secured by first or second mortgages on residential real estate, generally have maximum original terms of 360 months, and are considered non-conforming. At March 31, 2016, $197 million of real estate loans, or 39%, were secured by first mortgages and $306 million, or 61%, were secured by second mortgages, compared to $202 million of real estate loans, or 39%, secured by first mortgages and $322 million, or 61%, secured by second mortgages at December 31, 2015. Real estate loans may be closed-end accounts or open-end home equity lines of credit and are primarily fixed-rate products. Since we ceased originating real estate lendingloans in January of 2012, our real estate loans arehave been in a liquidating status.
Retail sales finance — include retail sales contracts and revolving retail accounts. Retail sales contracts are closed-end accounts that represent a single purchase transaction. Revolving retail accounts are open-end accounts that can be used for financing repeated purchases from the same merchant. Retail sales contracts are secured by the personal property designated in the contract and generally have maximum original terms of 60 months. Revolving retail accounts are secured by the goods purchased and generally require minimum monthly payments based on the amount financed calculated after the most recent purchase or outstanding balances. Our retail sales finance portfolio is also in a liquidating status.
Our finance receivable types also included the SpringCastle Portfolio at December 31, 2015, as defined below:
SpringCastle Portfolio — included unsecured loans and loans secured by subordinate residential real estate mortgages that were sold on March 31, 2016, in connection with the SpringCastle Interests Sale. The SpringCastle Portfolio included both closed-end accounts and open-end lines of credit. These loans were in a liquidating status and varied in substance and form from our originated loans. Unless terminated, SFI will continue to provide the servicing for these loans, which we service as unsecured loans because the liens are subordinated to superior ranking security interests.
Components of net finance receivables held for investment by type were as follows:
| | | (dollars in millions) | | Personal
Loans | | SpringCastle Portfolio | | Real Estate Loans | | Retail
Sales Finance | | Total | | Personal
Loans | | Real Estate Loans | | Retail
Sales Finance | | Total |
| | | | | | | | | | | | | | | | | | | |
| March 31, 2016 | | |
| | | | |
| | |
| | |
| |
| March 31, 2017 | | | |
| | |
| | |
| | |
|
| Gross receivables * | | $ | 5,075 |
| | $ | — |
| | $ | 499 |
| | $ | 21 |
| | $ | 5,595 |
| | $ | 5,293 |
| | $ | 137 |
| | $ | 10 |
| | $ | 5,440 |
|
| Unearned finance charges and points and fees | | (798 | ) | | — |
| | — |
| | (2 | ) | | (800 | ) | | (681 | ) | | 1 |
| | (1 | ) | | (681 | ) |
| Accrued finance charges | | 57 |
| | — |
| | 4 |
| | — |
| | 61 |
| | 60 |
| | 1 |
| | — |
| | 61 |
|
| Deferred origination costs | | 44 |
| | — |
| | — |
| | — |
| | 44 |
| | 43 |
| | — |
| | — |
| | 43 |
|
| Total | | $ | 4,378 |
| | $ | — |
| | $ | 503 |
| | $ | 19 |
| | $ | 4,900 |
| | $ | 4,715 |
| | $ | 139 |
| | $ | 9 |
| | $ | 4,863 |
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2015 | | |
| | | | |
| | |
| | |
| |
| December 31, 2016 | | | |
| | |
| | |
| | |
|
| Gross receivables * | | $ | 5,028 |
| | $ | 1,545 |
| | $ | 520 |
| | $ | 25 |
| | $ | 7,118 |
| | $ | 5,449 |
| | $ | 142 |
| | $ | 12 |
| | $ | 5,603 |
|
| Unearned finance charges and points and fees | | (833 | ) | | — |
| | — |
| | (2 | ) | | (835 | ) | | (754 | ) | | 1 |
| | (1 | ) | | (754 | ) |
| Accrued finance charges | | 60 |
| | 31 |
| | 4 |
| | — |
| | 95 |
| | 63 |
| | 1 |
| | — |
| | 64 |
|
| Deferred origination costs | | 45 |
| | — |
| | — |
| | — |
| | 45 |
| | 46 |
| | — |
| | — |
| | 46 |
|
| Total | | $ | 4,300 |
| | $ | 1,576 |
| | $ | 524 |
| | $ | 23 |
| | $ | 6,423 |
| | $ | 4,804 |
| | $ | 144 |
| | $ | 11 |
| | $ | 4,959 |
|
| |
| * | Gross receivables are defined as follows: |
Finance receivables purchased as a performing receivable — gross finance receivables equal the unpaid principal balance (“UPB”)UPB for interest bearing accounts and the gross remaining contractual payments for precompute accounts; additionally,accounts. Additionally, the remaining unearned discount,
net of premium established at the time of purchase, is included in both interest bearing and precompute accounts to reflect the finance receivable balance at its initial fair value;
Finance receivables originated subsequent to the Fortress Acquisition — gross finance receivables equal the UPB for interest bearing accounts and the gross remaining contractual payments for precompute accounts; and
Purchased credit impaired finance receivables — gross finance receivables equal the remaining estimated cash flows less the current balance of accretable yield on the purchased credit impaired accounts.accounts; and
Included in the table above areTDR finance receivables — gross finance receivables associated with securitizations that remain on our balance sheet. The carrying valueequal the UPB for interest bearing accounts and the gross remaining contractual payments for precompute accounts. Additionally, the remaining unearned discount, net of our personal loans totaled $3.6 billionpremium established at the time of purchase, is included in both interest bearing and precompute accounts previously purchased as a performing receivable.
At March 31, 20162017 and December 31, 2015 and the carrying value of the SpringCastle Portfolio totaled $1.6 billion at December 31, 2015.
Unused2016, unused lines of credit extended to customers by the Company were as follows:
|
| | | | | | | | |
| (dollars in millions) | | March 31,
2016 | | December 31,
2015 |
| | | | | |
| Personal loans | | $ | 1 |
| | $ | 2 |
|
| SpringCastle Portfolio | | — |
| | 365 |
|
| Real estate loans | | 20 |
| | 30 |
|
| Total | | $ | 21 |
| | $ | 397 |
|
Unused lines of credit on our personal loans can be suspended if one of the following occurs: (i) the value of the collateral declines significantly; (ii) we believe the borrower will be unable to fulfill the repayment obligations; or (iii) any other default by the borrower of any material obligation under the agreement occurs. Unused lines of credit on our real estate loans can be suspended if one of the following occurs: (i) the value of the real estate declines significantly below the property’s initial appraised value; (ii) we believe the borrower will be unable to fulfill the repayment obligations because of a material change in the borrower’s financial circumstances; or (iii) any other default by the borrower of any material obligation under the agreement occurs. Unused lines of credit on home equity lines of credit can be terminated for delinquency. Accordingly, no reserve has been recorded for the unused lines of credit.
immaterial.
CREDIT QUALITY INDICATORSINDICATOR
We consider the delinquency status and nonperforming status of theour finance receivablereceivables as our primary credit quality indicators.indicator. We monitor delinquency trends to manage our exposure to credit risk. When finance receivables are 60 days past due, we consider them delinquent and transfer collections management of these accounts to our centralized operations, as these accounts are considered to be at increased risk for loss. At 90 days or more past due, we consider our finance receivables to be nonperforming.
The following is a summary of net finance receivables held for investment by type and by number of days delinquent:
|
| | | | | | | | | | | | | | | | |
| (dollars in millions) | | Personal
Loans | | Real Estate Loans | | Retail
Sales Finance | | Total |
| | | | | | | | | |
| March 31, 2017 | | | | | | | | |
| Net finance receivables: | | | | | | | | |
| Performing | | | | | | | | |
| Current | | $ | 4,525 |
| | $ | 102 |
| | $ | 9 |
| | $ | 4,636 |
|
| 30-59 days past due | | 57 |
| | 8 |
| | — |
| | 65 |
|
| 60-89 days past due | | 39 |
| | 4 |
| | — |
| | 43 |
|
| Total performing | | 4,621 |
| | 114 |
| | 9 |
| | 4,744 |
|
| Nonperforming | | | | | | | | |
| 90-179 days past due | | 91 |
| | 5 |
| | — |
| | 96 |
|
| 180 days or more past due | | 3 |
| | 20 |
| | — |
| | 23 |
|
| Total nonperforming | | 94 |
| | 25 |
| | — |
| | 119 |
|
| Total | | $ | 4,715 |
| | $ | 139 |
| | $ | 9 |
| | $ | 4,863 |
|
| | | | | | | | | |
| December 31, 2016 | | | | | | | | |
| Net finance receivables: | | | | | | | | |
| Performing | | | | | | | | |
| Current | | $ | 4,579 |
| | $ | 102 |
| | $ | 11 |
| | $ | 4,692 |
|
| 30-59 days past due | | 64 |
| | 9 |
| | — |
| | 73 |
|
| 60-89 days past due | | 45 |
| | 4 |
| | — |
| | 49 |
|
| Total performing | | 4,688 |
| | 115 |
| | 11 |
| | 4,814 |
|
| Nonperforming | | | | | | | | |
| 90-179 days past due | | 112 |
| | 8 |
| | — |
| | 120 |
|
| 180 days or more past due | | 4 |
| | 21 |
| | — |
| | 25 |
|
| Total nonperforming | | 116 |
| | 29 |
| | — |
| | 145 |
|
| Total | | $ | 4,804 |
| | $ | 144 |
| | $ | 11 |
| | $ | 4,959 |
|
We accrue finance charges on revolving retail finance receivables up to the date of charge-off at 180 days past due. Our revolving retail finance receivables that were more than 90 days past due and still accruing finance charges at March 31, 20162017 and at December 31, 20152016 were immaterial. Our personal loans and real estate loans do not have finance receivables that were more than 90 days past due and still accruing finance charges.
Delinquent Finance Receivables
We consider the delinquency status of the finance receivable as our primary credit quality indicator. We monitor delinquency trends to manage our exposure to credit risk. We consider finance receivables 60 days or more past due as delinquent and consider the likelihood of collection to decrease at such time.
The following is a summary of net finance receivables held for investment by type and by days delinquent:
|
| | | | | | | | | | | | | | | | | | | | |
| (dollars in millions) | | Personal
Loans | | SpringCastle Portfolio | | Real Estate Loans | | Retail
Sales Finance | | Total |
| | | | | | | | | | | |
| March 31, 2016 | | | | | | | | | | |
| Net finance receivables: | | | | | | | | | | |
| 60-89 days past due | | $ | 39 |
| | $ | — |
| | $ | 6 |
| | $ | — |
| | $ | 45 |
|
| 90-119 days past due | | 33 |
| | — |
| | 5 |
| | — |
| | 38 |
|
| 120-149 days past due | | 33 |
| | — |
| | 3 |
| | — |
| | 36 |
|
| 150-179 days past due | | 32 |
| | — |
| | 3 |
| | — |
| | 35 |
|
| 180 days or more past due | | 3 |
| | — |
| | 22 |
| | — |
| | 25 |
|
| Total delinquent finance receivables | | 140 |
| | — |
| | 39 |
| | — |
| | 179 |
|
| Current | | 4,186 |
| | — |
| | 447 |
| | 19 |
| | 4,652 |
|
| 30-59 days past due | | 52 |
| | — |
| | 17 |
| | — |
| | 69 |
|
| Total | | $ | 4,378 |
| | $ | — |
| | $ | 503 |
| | $ | 19 |
| | $ | 4,900 |
|
| | | | | | | | | | | |
| December 31, 2015 | | | | | | | | | | |
| Net finance receivables: | | | | | | | | | | |
| 60-89 days past due | | $ | 49 |
| | $ | 22 |
| | $ | 18 |
| | $ | — |
| | $ | 89 |
|
| 90-119 days past due | | 41 |
| | 14 |
| | 3 |
| | — |
| | 58 |
|
| 120-149 days past due | | 34 |
| | 11 |
| | 2 |
| | 1 |
| | 48 |
|
| 150-179 days past due | | 31 |
| | 10 |
| | 2 |
| | — |
| | 43 |
|
| 180 days or more past due | | 3 |
| | 1 |
| | 12 |
| | — |
| | 16 |
|
| Total delinquent finance receivables | | 158 |
| | 58 |
| | 37 |
| | 1 |
| | 254 |
|
| Current | | 4,077 |
| | 1,475 |
| | 474 |
| | 22 |
| | 6,048 |
|
| 30-59 days past due | | 65 |
| | 43 |
| | 13 |
| | — |
| | 121 |
|
| Total | | $ | 4,300 |
| | $ | 1,576 |
| | $ | 524 |
| | $ | 23 |
| | $ | 6,423 |
|
Nonperforming Finance Receivables
We also monitor finance receivable performance trends to evaluate the potential risk of future credit losses. At 90 days or more past due, we consider our finance receivables to be nonperforming. Once the finance receivables are considered as nonperforming, we consider them to be at increased risk for credit loss.
Our performing and nonperforming net finance receivables held for investment by type were as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| (dollars in millions) |
| Personal
Loans | | SpringCastle Portfolio | | Real Estate
Loans | | Retail
Sales Finance | | Total |
|
|
|
| |
|
| |
|
| |
|
| |
|
|
| March 31, 2016 |
| |
| |
|
| | |
| | |
| | |
|
| Performing |
| $ | 4,277 |
|
| $ | — |
|
| $ | 470 |
|
| $ | 19 |
|
| $ | 4,766 |
|
| Nonperforming |
| 101 |
|
| — |
|
| 33 |
|
| — |
| | 134 |
|
| Total |
| $ | 4,378 |
| | $ | — |
| | $ | 503 |
| | $ | 19 |
| | $ | 4,900 |
|
|
|
|
| |
|
| |
|
| |
|
| |
|
|
| December 31, 2015 |
| |
| |
|
| | |
| | |
| | |
|
| Performing |
| $ | 4,191 |
| | $ | 1,540 |
| | $ | 505 |
| | $ | 22 |
| | $ | 6,258 |
|
| Nonperforming |
| 109 |
| | 36 |
| | 19 |
| | 1 |
| | 165 |
|
| Total |
| $ | 4,300 |
| | $ | 1,576 |
| | $ | 524 |
| | $ | 23 |
| | $ | 6,423 |
|
PURCHASED CREDIT IMPAIRED FINANCE RECEIVABLES
Our purchased credit impaired finance receivables consist of receivables purchased as part ofin connection with the following transaction:Fortress Acquisition.
Ownership interest acquired by FCFI Acquisition LLC, an affiliate of Fortress (the “Fortress Acquisition”) - we revalued our assets and liabilities based on their fair value at the date of the Fortress Acquisition, November 30, 2010, in accordance with purchase accounting and adjusted the carrying value of our finance receivables (the “FA Loans”)Prior to their fair value.
At DecemberMarch 31, 2015,2016, our purchased credit impaired finance receivables also included the SpringCastle Portfolio, which was purchased as partin connection with the joint venture acquisition of the following transaction:
SFI’s capital contribution of its wholly owned subsidiary, Springleaf Acquisition Corporation (“SAC”), to SFC - on July 31, 2014 (the “SAC Capital Contribution”), SFC acquired a 47% equity interest in the SpringCastle Portfolio (the “SCP Loans”), some of which were determined to be credit impaired when SAC acquired the SCP Loans on April 1, 2013.Portfolio. On March 31, 2016, we sold the SpringCastle Portfolio in connection with the sale of our equity interest in the SpringCastle Joint Venture.
Interests Sale.
We report the carrying amount (which initially was the fair value) of our purchased credit impaired finance receivables in net finance receivables, less allowance for finance receivable losses or in finance receivables held for sale as discussed below.
At March 31, 20162017 and December 31, 2015,2016, finance receivables held for sale totaled $776$148 million and $796$153 million, respectively. See Note 6 for further information on our finance receivables held for sale,respectively, which consist of certain of our personal loans and non-core real estate loans. Finance receivables held for sale include purchased credit impaired finance receivables, as well as TDR finance receivables. Therefore, we are presenting the financial information for our purchased credit impaired finance receivables and TDR finance receivables combined for finance receivables held for investment and finance receivables held for sale in the tables below. See Note 5 for further information on our finance receivables held for sale.
Information regarding our purchased credit impaired finance receivablesFA Loans held for investment and held for sale were as follows:
| | | (dollars in millions) | | SCP Loans | | FA Loans * | | Total | | March 31,
2017 | | December 31,
2016 |
| | | | | | | | | | | |
| March 31, 2016 | | | | | | | |
| FA Loans (a) | | | | | |
| Carrying amount, net of allowance | | $ | — |
| | $ | 71 |
| | $ | 71 |
| | $ | 68 |
| | $ | 70 |
|
Outstanding balance | | — |
| | 132 |
| | 132 |
| | 105 |
| | 107 |
|
| Allowance for purchased credit impaired finance receivable losses | | — |
| | 8 |
| | 8 |
| | 8 |
| | 8 |
|
| | | | | | | | |
| December 31, 2015 | | | | | | | |
| Carrying amount, net of allowance | | $ | 223 |
| | $ | 76 |
| | $ | 299 |
| |
| Outstanding balance | | 482 |
| | 136 |
| | 618 |
| |
| Allowance for purchased credit impaired finance receivable losses | | — |
| | 7 |
| | 7 |
| |
| |
*(a) | Purchased credit impaired FA Loans held for sale included in the table above were as follows: |
| | | (dollars in millions) | | FA Loans | | March 31, 2017 | | December 31, 2016 |
| | | | | | | |
| March 31, 2016 | | |
| |
| Carrying amount | | $ | 52 |
| | $ | 53 |
| | $ | 54 |
|
| Outstanding balance | | 87 |
| | 81 |
| | 83 |
|
| | | | |
| December 31, 2015 | | |
| |
| Carrying amount | | $ | 55 |
| |
| Outstanding balance | | 89 |
| |
| |
| (b) | Outstanding balance is defined as UPB of the loans with a net carrying amount. |
The allowance for purchased credit impaired finance receivable losses at March 31, 20162017 and December 31, 2015,2016, reflected the net carrying value of the purchased credit impaired FA Loans being higher than the present value of the expected cash flows.
Changes in accretable yield for purchased credit impaired finance receivables held for investment and held for sale were as follows:
| | | (dollars in millions) | | SCP Loans | | FA Loans | | Total | | SCP Loans | | FA Loans | | Total |
| | | | | | | | | | | | | |
| Three Months Ended March 31, 2017 | | | | | | | |
| Balance at beginning of period | | | $ | — |
| | $ | 60 |
| | $ | 60 |
|
| Accretion (a) | | | — |
| | (1 | ) | | (1 | ) |
| Balance at end of period | | | $ | — |
| | $ | 59 |
| | $ | 59 |
|
| | | | | | | | |
| Three Months Ended March 31, 2016 | | | | | | | | | | | | |
| Balance at beginning of period | | $ | 422 |
| | $ | 39 |
| | $ | 461 |
| | $ | 375 |
| | $ | 66 |
| | $ | 441 |
|
| Accretion (a) | | (16 | ) | | (2 | ) | | (18 | ) | | (16 | ) | | (2 | ) | | (18 | ) |
| Reclassifications from nonaccretable difference (b) | | | — |
| | 10 |
| | 10 |
|
| Transfer due to finance receivables sold | | (399 | ) | | — |
| | (399 | ) | | (359 | ) | | — |
| | (359 | ) |
| Disposals of finance receivables (b) | | (7 | ) | | (1 | ) | | (8 | ) | |
| Balance at end of period | | $ | — |
| | $ | 36 |
| | $ | 36 |
| | $ | — |
| | $ | 74 |
| | $ | 74 |
|
| | | | | | | | |
| Three Months Ended March 31, 2015 | | | | | | | |
| Balance at beginning of period | | $ | 541 |
| | $ | 19 |
| | $ | 560 |
| |
| Accretion (a) | | (24 | ) | | (3 | ) | | (27 | ) | |
| Disposals of finance receivables (b) | | (12 | ) | | — |
| | (12 | ) | |
| Balance at end of period | | $ | 505 |
| | $ | 16 |
| | $ | 521 |
| |
| |
| (a) | Accretion on our purchased credit impaired FA Loans held for sale included in the table above were as follows:immaterial. |
|
| | | | | | | | |
| (dollars in millions) | | Three Months Ended March 31, |
| | 2016 | | 2015 |
| | | | | |
| Accretion | | $ | 1 |
| | $ | 2 |
|
| |
| (b) | Disposals of finance receivables represent finance charges forfeited due to purchased credit impaired finance receivables charged off duringReclassifications from nonaccretable difference represents the period.increases in accretable yield resulting from higher estimated undiscounted cash flows. |
TROUBLED DEBT RESTRUCTUREDTDR FINANCE RECEIVABLES
Information regarding TDR finance receivables held for investment and held for sale were as follows:
| | | (dollars in millions) | | Personal Loans (a) | | SpringCastle Portfolio | | Real Estate
Loans (a) | | Total | | Personal Loans | | Real Estate
Loans * | | Total |
| | | | | | | | | | | | | | | |
| March 31, 2016 | | | | | | | | | |
| March 31, 2017 | | | | | | | |
TDR gross finance receivables (b) | | $ | 33 |
| | $ | — |
| | $ | 199 |
| | $ | 232 |
| | $ | 49 |
| | $ | 133 |
| | $ | 182 |
|
| TDR net finance receivables | | 33 |
| | — |
| | 201 |
| | 234 |
| | 49 |
| | 134 |
| | 183 |
|
| Allowance for TDR finance receivable losses | | 11 |
| | — |
| | 35 |
| | 46 |
| | 20 |
| | 11 |
| | 31 |
|
| | | | | | | | | | | | | | | |
| December 31, 2015 | | | | | | | | | |
| December 31, 2016 | | | | | | | |
TDR gross finance receivables (b) | | $ | 32 |
| | $ | 14 |
| | $ | 200 |
| | $ | 246 |
| | $ | 47 |
| | $ | 133 |
| | $ | 180 |
|
| TDR net finance receivables | | 31 |
| | 13 |
| | 201 |
| | 245 |
| | 47 |
| | 134 |
| | 181 |
|
| Allowance for TDR finance receivable losses | | 9 |
| | 4 |
| | 34 |
| | 47 |
| | 20 |
| | 11 |
| | 31 |
|
| |
(a)* | TDR finance receivablesreal estate loans held for sale included in the table above were as follows: |
| | | (dollars in millions) | | Personal Loans | | Real Estate Loans | | Total | | March 31, 2017 | | December 31,
2016 |
| | | | | | | | | | | |
| March 31, 2016 | | | | | | | |
| TDR gross finance receivables | | $ | 2 |
| | $ | 91 |
| | $ | 93 |
| | $ | 88 |
| | $ | 89 |
|
| TDR net finance receivables | | 2 |
| | 91 |
| | 93 |
| | 88 |
| | 90 |
|
| | | | | | | | |
| December 31, 2015 | | | | | | | |
| TDR gross finance receivables | | $ | 2 |
| | $ | 92 |
| | $ | 94 |
| |
| TDR net finance receivables | | 2 |
| | 92 |
| | 94 |
| |
| |
(b) | As defined earlier in this Note. |
We haveAs of March 31, 2017, we had no commitments to lend additional funds on our TDR finance receivables.
TDR average net receivables held for investment and held for sale and finance charges recognized on TDR finance receivables held for investment and held for sale were as follows:
| | | (dollars in millions) | | Personal Loans * | | SpringCastle Portfolio | | Real Estate Loans * | | Total | | Personal Loans * | | SpringCastle Portfolio | | Real Estate Loans * | | Total |
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2017 | | | | | | | | | |
| TDR average net receivables | | | $ | 48 |
| | $ | — |
| | $ | 134 |
| | $ | 182 |
|
| TDR finance charges recognized | | | 1 |
| | — |
| | 2 |
| | 3 |
|
| | | | | | | | | | |
| Three Months Ended March 31, 2016 | | | | | | | | | | | | | | | | |
| TDR average net receivables | | $ | 32 |
| | $ | 11 |
| | $ | 201 |
| | $ | 244 |
| | $ | 32 |
| | $ | 11 |
| | $ | 201 |
| | $ | 244 |
|
| TDR finance charges recognized | | 1 |
| | — |
| | 3 |
| | 4 |
| | 1 |
| | — |
| | 3 |
| | 4 |
|
| | | | | | | | | | |
| Three Months Ended March 31, 2015 | | | | | | | | | |
| TDR average net receivables | | $ | 25 |
| | $ | 11 |
| | $ | 195 |
| | $ | 231 |
| |
| TDR finance charges recognized | | 1 |
| | — |
| | 3 |
| | 4 |
| |
| |
| * | TDR finance receivables held for sale included in the table above were as follows: |
| | | (dollars in millions) | | Personal
Loans | | Real Estate Loans | | Total | | Personal
Loans | | Real Estate Loans | | Total |
| | | | | | | | | | | | | |
| Three Months Ended March 31, 2017 | | | | | | | |
| TDR average net receivables | | | $ | — |
| | $ | 89 |
| | $ | 89 |
|
| TDR finance charges recognized | | | — |
| | 1 |
| | 1 |
|
| | | | | | | | |
| Three Months Ended March 31, 2016 | | | | | | | | | | | | |
| TDR average net receivables | | $ | 2 |
| | $ | 92 |
| | $ | 94 |
| | $ | 2 |
| | $ | 92 |
| | $ | 94 |
|
| TDR finance charges recognized | | — |
| | 1 |
| | 1 |
| | — |
| | 1 |
| | 1 |
|
| | | | | | | | |
| Three Months Ended March 31, 2015 | | | | | | | |
| TDR average net receivables | | $ | — |
| | $ | 90 |
| | $ | 90 |
| |
| TDR finance charges recognized | | — |
| | 1 |
| | 1 |
| |
Information regarding the new volume of the TDR finance receivables held for investment and held for sale were as follows:
| | | (dollars in millions) | | Personal Loans (a) | | SpringCastle Portfolio | | Real Estate
Loans (a) | | Total | | Personal Loans (a) | | SpringCastle Portfolio | | Real Estate
Loans (a) | | Total |
| | | | | | | | | | |
| Three Months Ended March 31, 2017 | | | | | | | | | |
| Pre-modification TDR net finance receivables | | | $ | 15 |
| | $ | — |
| | $ | 3 |
| | $ | 18 |
|
| Post-modification TDR net finance receivables: | | | | | | | | | |
| Rate reduction | | | $ | 10 |
| | $ | — |
| | $ | 3 |
| | $ | 13 |
|
| Other (b) | | | 4 |
| | — |
| | — |
| | 4 |
|
| Total post-modification TDR net finance receivables | | | $ | 14 |
| | $ | — |
| | $ | 3 |
| | $ | 17 |
|
| Number of TDR accounts | | | 2,740 |
| | — |
| | 64 |
| | 2,804 |
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2016 | | | | | | | | | | | | | | | | |
| Pre-modification TDR net finance receivables | | $ | 9 |
| | $ | 1 |
| | $ | 4 |
| | $ | 14 |
| | $ | 9 |
| | $ | 1 |
| | $ | 4 |
| | $ | 14 |
|
| Post-modification TDR net finance receivables: | | | | | | | | | | | | | | | | |
| Rate reduction | | $ | 5 |
| | $ | 1 |
| | $ | 3 |
| | $ | 9 |
| | $ | 5 |
| | $ | 1 |
| | $ | 3 |
| | $ | 9 |
|
| Other (b) | | 3 |
| | — |
| | 1 |
| | 4 |
| | 3 |
| | — |
| | 1 |
| | 4 |
|
| Total post-modification TDR net finance receivables | | $ | 8 |
| | $ | 1 |
| | $ | 4 |
| | $ | 13 |
| | $ | 8 |
| | $ | 1 |
| | $ | 4 |
| | $ | 13 |
|
| Number of TDR accounts | | 1,782 |
| | 157 |
| | 89 |
| | 2,028 |
| | 1,782 |
| | 157 |
| | 89 |
| | 2,028 |
|
| | | | | | | | | | |
| Three Months Ended March 31, 2015 | | | | | | | | | |
| Pre-modification TDR net finance receivables | | $ | 9 |
| | $ | 2 |
| | $ | 4 |
| | $ | 15 |
| |
| Post-modification TDR net finance receivables: | | | | | | | | | |
| Rate reduction | | $ | 5 |
| | $ | 2 |
| | $ | 4 |
| | $ | 11 |
| |
| Other (b) | | 3 |
| | — |
| | — |
| | 3 |
| |
| Total post-modification TDR net finance receivables | | $ | 8 |
| | $ | 2 |
| | $ | 4 |
| | $ | 14 |
| |
| Number of TDR accounts | | 1,854 |
| | 195 |
| | 78 |
| | 2,127 |
| |
| |
| (a) | TDR finance receivables held for sale included in the table above were as follows: |
|
| | | | | | | | | | | | |
| (dollars in millions) | | Personal Loans | | Real Estate Loans | | Total |
| | | | | | | |
| Three Months Ended March 31, 2016 | | | | | | |
| Pre-modification TDR net finance receivables * | | $ | — |
| | $ | 1 |
| | $ | 1 |
|
| Post-modification TDR net finance receivables * | | $ | — |
| | $ | 1 |
| | $ | 1 |
|
| Number of TDR accounts | | 128 |
| | 19 |
| | 147 |
|
| | | | | | | |
| Three Months Ended March 31, 2015 | | | | | | |
| Pre-modification TDR net finance receivables ** | | $ | — |
| | $ | — |
| | $ | — |
|
| Post-modification TDR net finance receivables ** | | $ | — |
| | $ | — |
| | $ | — |
|
| Number of TDR accounts | | — |
| | 9 |
| | 9 |
|
| |
* | Pre- and post-modification TDR personal loans held for sale for the three months ended March 31, 2016 were less than $1 million and, therefore, are not quantified in the table above. |
| |
** | Pre- and post-modification TDR real estate loans held for sale for the three months ended March 31, 2015 were less than $1 million and, therefore, are not quantified in the table above.immaterial. |
| |
| (b) | “Other” modifications primarily include forgiveness of principal or interest. |
Net finance receivables held for investment and held for sale that were modified as TDR finance receivables within the previous 12 months and for which there was a default during the period to cause the TDR finance receivables to be considered nonperforming (90 days or more past due) were as follows:
| | | (dollars in millions) | | Personal Loans | | SpringCastle Portfolio | | Real Estate
Loans (a) | | Total | | Personal Loans | | SpringCastle Portfolio | | Real Estate
Loans (a) | | Total |
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2016 | | | | | | | | | |
| TDR net finance receivables (b) (c) | | $ | 1 |
| | $ | — |
| | $ | 1 |
| | $ | 2 |
| |
| Three Months Ended March 31, 2017 | | | | | | | | | |
| TDR net finance receivables (b) | | | $ | 3 |
| | $ | — |
| | $ | 1 |
| | $ | 4 |
|
| Number of TDR accounts | | 355 |
| | 19 |
| | 20 |
| | 394 |
| | 585 |
| | — |
| | 6 |
| | 591 |
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2015 | | | | | | | | | |
| Three Months Ended March 31, 2016 | | | | | | | | | |
TDR net finance receivables (b) (d)(c) | | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | 1 |
| | $ | 1 |
| | $ | — |
| | $ | 1 |
| | $ | 2 |
|
| Number of TDR accounts | | 57 |
| | 10 |
| | 18 |
| | 85 |
| | 355 |
| | 19 |
| | 20 |
| | 394 |
|
| |
| (a) | TDR finance receivablesreal estate loans held for sale included in the table above were as follows: |
|
| | | | |
| (dollars in millions) | | Real Estate Loans |
| | | |
| Three Months Ended March 31, 2016 | | |
| TDR net finance receivables | | $ | 1 |
|
| Number of TDR accounts | | 9 |
|
| | | |
| Three Months Ended March 31, 2015 | | |
| TDR net finance receivables * | | $ | — |
|
| Number of TDR accounts | | 9 |
|
| |
* | TDR real estate loans held for sale for the three months ended March 31, 2015 that defaulted during the previous 12-month period were less than $1 million for the three months ended March 31, 2017 and therefore, are not quantified in$1 million for the table above.three months ended March 31, 2016. |
| |
| (b) | Represents the corresponding balance of TDR net finance receivables at the end of the month in which they defaulted. |
| |
| (c) | TDR SpringCastle Portfolio loans for the three months ended March 31, 2016 that defaulted during the previous 12-month period were less than $1 million and, therefore, are not quantified in the combined table above. |
| |
(d) | TDR personal loans and SpringCastle Portfolio loans for the three months ended March 31, 2015 that defaulted during the previous 12-month period were less than $1 million and, therefore, are not quantified in the combined table above. |
5.4. Allowance for Finance Receivable Losses
Changes in the allowance for finance receivable losses by finance receivable type were as follows:
| | | (dollars in millions) | | Personal
Loans | | SpringCastle Portfolio | | Real Estate Loans | | Retail
Sales Finance | | Consolidated Total | | Personal
Loans | | SpringCastle Portfolio | | Real Estate Loans | | Retail
Sales Finance | | Consolidated Total |
| | | | | | | | | | | | |
| Three Months Ended March 31, 2017 | | | |
| | | | |
| | |
| | |
|
| Balance at beginning of period | | | $ | 184 |
| | $ | — |
| | $ | 19 |
| | $ | 1 |
| | $ | 204 |
|
| Provision for finance receivable losses | | | 70 |
| | — |
| | 1 |
| | — |
| | 71 |
|
| Charge-offs | | | (99 | ) | | — |
| | (1 | ) | | — |
| | (100 | ) |
| Recoveries | | | 21 |
| | — |
| | — |
| | — |
| | 21 |
|
| Balance at end of period | | | $ | 176 |
| | $ | — |
| | $ | 19 |
| | $ | 1 |
| | $ | 196 |
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2016 | | |
| | | | |
| | |
| | |
| | |
| | | | |
| | |
| | |
|
| Balance at beginning of period | | $ | 173 |
| | $ | 4 |
| | $ | 41 |
| | $ | 1 |
| | $ | 219 |
| | $ | 173 |
| | $ | 4 |
| | $ | 46 |
| | $ | 1 |
| | $ | 224 |
|
| Provision for finance receivable losses | | 73 |
| | 18 |
| | 3 |
| | — |
| | 94 |
| | 73 |
| | 14 |
| | 4 |
| | — |
| | 91 |
|
| Charge-offs | | (89 | ) | | (21 | ) | | (2 | ) | | (1 | ) | | (113 | ) | | (89 | ) | | (17 | ) | | (2 | ) | | (1 | ) | | (109 | ) |
| Recoveries | | 11 |
| | 3 |
| | 1 |
| | — |
| | 15 |
| | 11 |
| | 3 |
| | 1 |
| | — |
| | 15 |
|
| Other * | | — |
| | (4 | ) | | — |
| | — |
| | (4 | ) | | — |
| | (4 | ) | | — |
| | — |
| | (4 | ) |
| Balance at end of period | | $ | 168 |
| | $ | — |
| | $ | 43 |
| | $ | — |
| | $ | 211 |
| | $ | 168 |
| | $ | — |
| | $ | 49 |
| | $ | — |
| | $ | 217 |
|
| | | | | | | | | | | | |
| Three Months Ended March 31, 2015 | | |
| | | | |
| | |
| | |
| |
| Balance at beginning of period | | $ | 130 |
| | $ | 3 |
| | $ | 40 |
| | $ | 1 |
| | $ | 174 |
| |
| Provision for finance receivable losses | | 55 |
| | 27 |
| | 4 |
| | — |
| | 86 |
| |
| Charge-offs | | (61 | ) | | (30 | ) | | (6 | ) | | (1 | ) | | (98 | ) | |
| Recoveries | | 8 |
| | 3 |
| | 1 |
| | 1 |
| | 13 |
| |
| Balance at end of period | | $ | 132 |
| | $ | 3 |
| | $ | 39 |
| | $ | 1 |
| | $ | 175 |
| |
| |
| * | ConsistsOther consists of the elimination of allowance for finance receivable losses due to the sale of the SpringCastle Portfolio on March 31, 2016, in connection with the sale of our equity interest in the SpringCastle Joint Venture. See Note 2 for further information on this sale.Interests Sale. |
Included in the allowance for finance receivable losses are allowances associated with securitizations that totaled $113 million at March 31, 2016 and $128 million at December 31, 2015. See Note 11 for further discussion regarding our securitization transactions.
The carrying value charged-off for purchased credit impaired loans was as follows:
|
| | | | | | | | |
| (dollars in millions) | | Three Months Ended March 31, |
| | 2016 | | 2015 |
| | | | | |
| Charged-off against provision for finance receivable losses: | | |
| | |
|
| SCP Loans | | $ | 4 |
| | $ | 7 |
|
The allowance for finance receivable losses and net finance receivables by type and by impairment method were as follows:
| | | (dollars in millions) | | Personal
Loans | | SpringCastle Portfolio | | Real Estate Loans | | Retail
Sales Finance | | Total | | Personal
Loans | | Real Estate Loans | | Retail
Sales Finance | | Total |
| | | | | | | | | | | | | | | | | | | |
| March 31, 2016 | | |
| | | | |
| | |
| | |
| |
| Allowance for finance receivable losses for finance receivables: | | |
| | | | |
| | |
| | |
| |
| March 31, 2017 | | | |
| | |
| | |
| | |
|
| Allowance for finance receivable losses: | | | |
| | |
| | |
| | |
|
| Collectively evaluated for impairment | | $ | 157 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 157 |
| | $ | 156 |
| | $ | — |
| | $ | 1 |
| | $ | 157 |
|
| Purchased credit impaired finance receivables | | — |
| | — |
| | 8 |
| | — |
| | 8 |
| | — |
| | 8 |
| | — |
| | 8 |
|
| TDR finance receivables | | 11 |
| | — |
| | 35 |
| | — |
| | 46 |
| | 20 |
| | 11 |
| | — |
| | 31 |
|
| Total | | $ | 168 |
| | $ | — |
| | $ | 43 |
| | $ | — |
| | $ | 211 |
| | $ | 176 |
| | $ | 19 |
| | $ | 1 |
| | $ | 196 |
|
| | | | | | | | | | | | | | | | | | | |
| Finance receivables: | | |
| | | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Collectively evaluated for impairment | | $ | 4,347 |
| | $ | — |
| | $ | 366 |
| | $ | 19 |
| | $ | 4,732 |
| | $ | 4,666 |
| | $ | 70 |
| | $ | 9 |
| | $ | 4,745 |
|
| Purchased credit impaired finance receivables | | — |
| | — |
| | 27 |
| | — |
| | 27 |
| | — |
| | 23 |
| | — |
| | 23 |
|
| TDR finance receivables | | 31 |
| | — |
| | 110 |
| | — |
| | 141 |
| | 49 |
| | 46 |
| | — |
| | 95 |
|
| Total | | $ | 4,378 |
| | $ | — |
| | $ | 503 |
| | $ | 19 |
| | $ | 4,900 |
| | $ | 4,715 |
| | $ | 139 |
| | $ | 9 |
| | $ | 4,863 |
|
| | | | | | | | | | | | | | | | | | | |
| Allowance for finance receivable losses as a percentage of finance receivables | | 3.83 | % | | — | % | | 8.52 | % | | 2.91 | % | | 4.31 | % | | 3.74 | % | | 13.70 | % | | 4.72 | % | | 4.03 | % |
| | | | | | | | | | | | | | | | | | | |
| December 31, 2015 | | |
| | | | |
| | |
| | |
| |
| Allowance for finance receivable losses for finance receivables: | | |
| | | | |
| | |
| | |
| |
| December 31, 2016 | | | |
| | |
| | |
| | |
|
| Allowance for finance receivable losses: | | | |
| | |
| | |
| | |
|
| Collectively evaluated for impairment | | $ | 165 |
| | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | 166 |
| | $ | 164 |
| | $ | — |
| | $ | 1 |
| | $ | 165 |
|
| Purchased credit impaired finance receivables | | — |
| | — |
| | 7 |
| | — |
| | 7 |
| | — |
| | 8 |
| | — |
| | 8 |
|
| TDR finance receivables | | 8 |
| | 4 |
| | 34 |
| | — |
| | 46 |
| | 20 |
| | 11 |
| | — |
| | 31 |
|
| Total | | $ | 173 |
| | $ | 4 |
| | $ | 41 |
| | $ | 1 |
| | $ | 219 |
| | $ | 184 |
| | $ | 19 |
| | $ | 1 |
| | $ | 204 |
|
| | | | | | | | | | | | | | | | | | | |
| Finance receivables: | | |
| | | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Collectively evaluated for impairment | | $ | 4,271 |
| | $ | 1,340 |
| | $ | 387 |
| | $ | 23 |
| | $ | 6,021 |
| | $ | 4,757 |
| | $ | 76 |
| | $ | 11 |
| | $ | 4,844 |
|
| Purchased credit impaired finance receivables | | — |
| | 223 |
| | 28 |
| | — |
| | 251 |
| | — |
| | 24 |
| | — |
| | 24 |
|
| TDR finance receivables | | 29 |
| | 13 |
| | 109 |
| | — |
| | 151 |
| | 47 |
| | 44 |
| | — |
| | 91 |
|
| Total | | $ | 4,300 |
| | $ | 1,576 |
| | $ | 524 |
| | $ | 23 |
| | $ | 6,423 |
| | $ | 4,804 |
| | $ | 144 |
| | $ | 11 |
| | $ | 4,959 |
|
| | | | | | | | | | | | | | | | | | | |
| Allowance for finance receivable losses as a percentage of finance receivables | | 4.01 | % | | 0.27 | % | | 7.93 | % | | 3.45 | % | | 3.41 | % | | 3.84 | % | | 13.31 | % | | 4.42 | % | | 4.12 | % |
6.5. Finance Receivables Held for Sale
We report finance receivables held for sale of $776$148 million at March 31, 20162017 and $796$153 million at December 31, 2015,2016, which are carried at the lower of cost or fair value.value and consist entirely of real estate loans. At March 31, 20162017 and December 31, 2015, finance receivables held for sale consisted of personal loans of $606 million and $617 million, respectively, and real estate loans of $170 million and $179 million, respectively. On March 31, 2016, we marked our real estate loans held for sale to fair value and recorded impairments of $2 million in other revenues. See Note 17 for further information on the impairments of our real estate loans held for sale. At December 31, 2015, the fair value of our finance receivables held for sale exceeded the cost. We used the aggregate basis to determine the lower of cost or fair value of finance receivables held for sale. We also separately present the interest income on our finance receivables held for sale as interest income on finance receivables held for sale originated as held for investment on our condensed consolidated statements of operations, which totaled $47 million and $4 million for the three months ended March 31, 2016 and 2015, respectively.
SPRINGCASTLE PORTFOLIO
During March of 2016, we transferred $1.5$1.6 billion of loans of the SpringCastle Portfolio (after deducting allowance for finance receivable losses) from held for investment to held for sale due to management’s intent to no longer hold these finance
receivables for the foreseeable future. We simultaneously sold our interests ofin these finance receivables held for sale on March 31, 2016 in the SpringCastle Interests Sale and recorded a net gain in other revenues at the time of sale of $229$167 million.
We did not have any other material transfer activity to or from finance receivables held for sale during each of the three months ended March 31, 20162017 and 2015.2016.
7.6. Investment Securities
AVAILABLE-FOR-SALE SECURITIES
Cost/amortized cost, unrealized gains and losses, and fair value of available-for-sale securities by type were as follows:
| | | (dollars in millions) | | Cost/ Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value | | Cost/ Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
| | | | | | | | | | | | | | | | | |
| March 31, 2016 | | |
| | |
| | |
| | |
| |
| March 31, 2017 | | | |
| | |
| | |
| | |
|
| Fixed maturity available-for-sale securities: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Bonds: | | |
| | |
| | |
| | |
| |
| Bonds | | | |
| | |
| | |
| | |
|
| U.S. government and government sponsored entities | | $ | 76 |
| | $ | 1 |
| | $ | — |
| | $ | 77 |
| | $ | 19 |
| | $ | — |
| | $ | — |
| | $ | 19 |
|
| Obligations of states, municipalities, and political subdivisions | | 91 |
| | 1 |
| | — |
| | 92 |
| | 74 |
| | — |
| | (1 | ) | | 73 |
|
| Corporate debt | | 310 |
| | 4 |
| | (7 | ) | | 307 |
| |
| Mortgage-backed, asset-backed, and collateralized: | | |
| | |
| | |
| | | |
| Residential mortgage-backed securities (“RMBS”) | | 70 |
| | — |
| | — |
| | 70 |
| |
| Commercial mortgage-backed securities (“CMBS”) | | 47 |
| | — |
| | — |
| | 47 |
| |
| Collateralized debt obligations (“CDO”)/Asset-backed securities (“ABS”) | | 18 |
| | — |
| | — |
| | 18 |
| |
| Total bonds | | 612 |
| | 6 |
| | (7 | ) | | 611 |
| |
| Preferred stock | | 6 |
| | — |
| | (1 | ) | | 5 |
| |
| Other long-term investments | | 1 |
| | — |
| | — |
| | 1 |
| |
| Total * | | $ | 619 |
| | $ | 6 |
| | $ | (8 | ) | | $ | 617 |
| |
| | | | | | | | | | |
| December 31, 2015 | | |
| | |
| | |
| | |
| |
| Fixed maturity available-for-sale securities: | | |
| | |
| | |
| | |
| |
| Bonds: | | | | | | | | | |
| U.S. government and government sponsored entities | | $ | 83 |
| | $ | — |
| | $ | (1 | ) | | $ | 82 |
| |
| Obligations of states, municipalities, and political subdivisions | | 88 |
| | 1 |
| | — |
| | 89 |
| |
| Non-U.S. government and government sponsored entities | | | 3 |
| | — |
| | — |
| | 3 |
|
| Corporate debt | | 278 |
| | 2 |
| | (13 | ) | | 267 |
| | 372 |
| | 3 |
| | (4 | ) | | 371 |
|
| Mortgage-backed, asset-backed, and collateralized: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| RMBS | | 74 |
| | — |
| | — |
| | 74 |
| | 40 |
| | — |
| | — |
| | 40 |
|
| CMBS | | 44 |
| | — |
| | — |
| | 44 |
| | 32 |
| | — |
| | — |
| | 32 |
|
| CDO/ABS | | 30 |
| | — |
| | (1 | ) | | 29 |
| | 64 |
| | — |
| | — |
| | 64 |
|
| Total bonds | | 597 |
| | 3 |
| | (15 | ) | | 585 |
| | 604 |
| | 3 |
| | (5 | ) | | 602 |
|
| Preferred stock | | 6 |
| | — |
| | (1 | ) | | 5 |
| |
| Preferred stock (a) | | | 6 |
| | — |
| | — |
| | 6 |
|
| Other long-term investments | | 1 |
| | — |
| | — |
| | 1 |
| | 1 |
| | — |
| | — |
| | 1 |
|
| Total * | | $ | 604 |
| | $ | 3 |
| | $ | (16 | ) | | $ | 591 |
| |
| Total (b) | | | $ | 611 |
| | $ | 3 |
| | $ | (5 | ) | | $ | 609 |
|
| | | | | | | | | | |
| December 31, 2016 | | | |
| | |
| | |
| | |
|
| Fixed maturity available-for-sale securities: | | | |
| | |
| | |
| | |
|
| Bonds | | | | | | | | | |
| U.S. government and government sponsored entities | | | $ | 13 |
| | $ | — |
| | $ | — |
| | $ | 13 |
|
| Obligations of states, municipalities, and political subdivisions | | | 83 |
| | — |
| | (1 | ) | | 82 |
|
| Non-U.S. government and government sponsored entities | | | 5 |
| | — |
| | — |
| | 5 |
|
| Corporate debt | | | 356 |
| | 2 |
| | (5 | ) | | 353 |
|
| Mortgage-backed, asset-backed, and collateralized: | | | |
| | |
| | |
| | |
|
| RMBS | | | 39 |
| | — |
| | — |
| | 39 |
|
| CMBS | | | 33 |
| | — |
| | — |
| | 33 |
|
| CDO/ABS | | | 46 |
| | — |
| | — |
| | 46 |
|
| Total bonds | | | 575 |
| | 2 |
| | (6 | ) | | 571 |
|
| Preferred stock (a) | | | 6 |
| | — |
| | — |
| | 6 |
|
| Other long-term investments | | | 1 |
| | — |
| | — |
| | 1 |
|
| Total (b) | | | $ | 582 |
| | $ | 2 |
| | $ | (6 | ) | | $ | 578 |
|
| |
*(a) | The Company employs an income equity strategy targeting investments in stocks with strong current dividend yields. Stocks included have a history of stable or increasing dividend payments. |
| |
| (b) | Excludes an immaterial interest in a limited partnership that we account for using the equity method and Federal Home Loan BankFHLB common stock of $1 million at March 31, 20162017 and December 31, 2015,2016, which is classified as a restricted investment and carried at cost. |
As of March 31, 2016 and December 31, 2015, we did not recognize any other-than-temporary impairment non-credit losses on available-for-sale securities in accumulated other comprehensive income or loss.
Fair value and unrealized losses on available-for-sale securities by type and length of time in a continuous unrealized loss position were as follows:
| | | | | Less Than 12 Months | | 12 Months or Longer | | Total | | Less Than 12 Months | | 12 Months or Longer | | Total |
| (dollars in millions) | | Fair Value | | Unrealized Losses * | | Fair Value | | Unrealized Losses * | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses * | | Fair Value | | Unrealized Losses * | | Fair Value | | Unrealized Losses |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2016 | | |
| | |
| | |
| | |
| | |
| | |
| |
| March 31, 2017 | | | |
| | |
| | |
| | |
| | |
| | |
|
| Bonds: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| U.S. government and government sponsored entities | | $ | 30 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 30 |
| | $ | — |
| | $ | 9 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 9 |
| | $ | — |
|
| Obligations of states, municipalities, and political subdivisions | | 19 |
| | — |
| | 3 |
| | — |
| | 22 |
| | — |
| | 30 |
| | — |
| | 8 |
| | (1 | ) | | 38 |
| | (1 | ) |
| Non-U.S. government and government sponsored entities | | | — |
| | — |
| | 2 |
| | — |
| | 2 |
| | — |
|
| Corporate debt | | 85 |
| | (7 | ) | | 6 |
| | — |
| | 91 |
| | (7 | ) | | 151 |
| | (3 | ) | | 19 |
| | (1 | ) | | 170 |
| | (4 | ) |
| RMBS | | 16 |
| | — |
| | — |
| | — |
| | 16 |
| | — |
| | 20 |
| | — |
| | 12 |
| | — |
| | 32 |
| | — |
|
| CMBS | | 25 |
| | — |
| | 5 |
| | — |
| | 30 |
| | — |
| | 16 |
| | — |
| | — |
| | — |
| | 16 |
| | — |
|
| CDO/ABS | | 7 |
| | — |
| | — |
| | — |
| | 7 |
| | — |
| | 33 |
| | — |
| | — |
| | — |
| | 33 |
| | — |
|
| Total bonds | | 182 |
| | (7 | ) | | 14 |
| | — |
| | 196 |
| | (7 | ) | | 259 |
| | (3 | ) | | 41 |
| | (2 | ) | | 300 |
| | (5 | ) |
| Preferred stock | | — |
| | — |
| | 6 |
| | (1 | ) | | 6 |
| | (1 | ) | | — |
| | — |
| | 6 |
| | — |
| | 6 |
| | — |
|
| Other long-term investments | | 1 |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| |
| Total | | $ | 183 |
| | $ | (7 | ) | | $ | 20 |
| | $ | (1 | ) | | $ | 203 |
| | $ | (8 | ) | | $ | 259 |
| | $ | (3 | ) | | $ | 47 |
| | $ | (2 | ) | | $ | 306 |
| | $ | (5 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2015 | | |
| | |
| | |
| | |
| | |
| | |
| |
| December 31, 2016 | | | |
| | |
| | |
| | |
| | |
| | |
|
| Bonds: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| U.S. government and government sponsored entities | | $ | 76 |
| | $ | (1 | ) | | $ | — |
| | $ | — |
| | $ | 76 |
| | $ | (1 | ) | | $ | 9 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 9 |
| | $ | — |
|
| Obligations of states, municipalities, and political subdivisions | | 36 |
| | — |
| | 2 |
| | — |
| | 38 |
| | — |
| | 57 |
| | (1 | ) | | 2 |
| | — |
| | 59 |
| | (1 | ) |
| Non-U.S. government and government sponsored entities | | | 3 |
| | — |
| | — |
| | — |
| | 3 |
| | — |
|
| Corporate debt | | 189 |
| | (13 | ) | | 7 |
| | — |
| | 196 |
| | (13 | ) | | 171 |
| | (5 | ) | | 5 |
| | — |
| | 176 |
| | (5 | ) |
| RMBS | | 68 |
| | — |
| | — |
| | — |
| | 68 |
| | — |
| | 33 |
| | — |
| | — |
| | — |
| | 33 |
| | — |
|
| CMBS | | 36 |
| | — |
| | 5 |
| | — |
| | 41 |
| | — |
| | 22 |
| | — |
| | — |
| | — |
| | 22 |
| | — |
|
| CDO/ABS | | 29 |
| | (1 | ) | | — |
| | — |
| | 29 |
| | (1 | ) | | 25 |
| | — |
| | — |
| | — |
| | 25 |
| | — |
|
| Total bonds | | 434 |
| | (15 | ) | | 14 |
| | — |
| | 448 |
| | (15 | ) | | 320 |
| | (6 | ) | | 7 |
| | — |
| | 327 |
| | (6 | ) |
| Preferred stock | | — |
| | — |
| | 6 |
| | (1 | ) | | 6 |
| | (1 | ) | | — |
| | — |
| | 6 |
| | — |
| | 6 |
| | — |
|
| Other long-term investments | | 1 |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| |
| Total | | $ | 435 |
| | $ | (15 | ) |
| $ | 20 |
|
| $ | (1 | ) | | $ | 455 |
| | $ | (16 | ) | | $ | 320 |
| | $ | (6 | ) |
| $ | 13 |
|
| $ | — |
| | $ | 333 |
| | $ | (6 | ) |
| |
| * | Unrealized losses on certain available-for-sale securities were less than $1 million and, therefore, are not quantified in the table above. |
On a lot basis, we had 187 and 217 investment securities in an unrealized loss position at March 31, 2017 and December 31, 2016, respectively. We do not consider the above unrealized losses to be credit-related, as these unrealized losses primarily relate to changes in interest rates and market spreads subsequent to purchase. Additionally, at March 31, 2016,2017, we havehad no plans to sell any investment securities with unrealized losses, and we believe it is more likely than not that we would not be required to sell such investment securities before recovery of their amortized cost.
We continue to monitor unrealized loss positions for potential impairments. During the three months ended March 31, 20162017 and 2015,2016, we did not recognize any other-than-temporary impairment credit losses on our available-for-sale securities in investment revenues.
During the three months ended March 31, 20162017 and 2015,2016, there were no additions or reductions in the cumulative amount of credit losses (recognized in earnings) on other-than-temporarily impaired available-for-sale securities.
The proceeds of available-for-sale securities sold or redeemed and the resulting realized gains, realized losses, and net realized gains were as follows:
|
| | | | | | | | |
| (dollars in millions) | | Three Months Ended March 31, |
| | 2016 | | 2015 |
| | | | | |
| Proceeds from sales and redemptions | | $ | 70 |
| | $ | 74 |
|
| | | | | |
| Realized gains | | $ | 1 |
| | $ | 7 |
|
| Realized losses | | — |
| | (1 | ) |
| Net realized gains | | $ | 1 |
| | $ | 6 |
|
|
| | | | | | | | |
| (dollars in millions) | | Three Months Ended March 31, |
| | 2017 | | 2016 |
| | | | | |
| Proceeds from sales and redemptions | | $ | 51 |
| | $ | 70 |
|
| | | | | |
| Net realized gains * | | $ | 2 |
| | $ | 1 |
|
| |
| * | Realized losses on available-for-sale securities sold or redeemed during the three months ended March 31, 2017 and 2016 were less than $1 million and, therefore, are not quantified in the table above. |
Contractual maturities of fixed-maturity available-for-sale securities at March 31, 20162017 were as follows:
| | | (dollars in millions) | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost |
| | | | | | | | | |
| Fixed maturities, excluding mortgage-backed, asset-backed, and collateralized securities: | | |
| | |
| | |
| | |
|
| Due in 1 year or less | | $ | 83 |
| | $ | 83 |
| | $ | 51 |
| | $ | 51 |
|
| Due after 1 year through 5 years | | 214 |
| | 213 |
| | 234 |
| | 236 |
|
| Due after 5 years through 10 years | | 61 |
| | 60 |
| | 44 |
| | 43 |
|
| Due after 10 years | | 118 |
| | 121 |
| | 137 |
| | 138 |
|
| Mortgage-backed, asset-backed, and collateralized securities | | 135 |
| | 135 |
| | 136 |
| | 136 |
|
| Total | | $ | 611 |
| | $ | 612 |
| | $ | 602 |
| | $ | 604 |
|
Actual maturities may differ from contractual maturities since issuers and borrowers may have the right to call or prepay obligations. We may sell investment securities before maturity for general corporate and working capital purposes and to achieve corporate requirements andcertain investment strategies.
The fair value of bondssecurities on deposit with insurance regulatory authoritiesthird parties totaled $11 million at March 31, 20162017 and December 31, 2015.2016.
TRADING AND OTHER SECURITIES
The fair value of trading and other securities by type was as follows:
|
| | | | | | | | |
| (dollars in millions) | | March 31,
2016 | | December 31,
2015 |
| | | | | |
| Fixed maturity trading and other securities: | | |
| | |
|
| Bonds: | | |
| | |
|
| Corporate debt | | $ | 1 |
| | $ | 10 |
|
| Mortgage-backed, asset-backed, and collateralized: | | | | |
|
| CMBS | | 2 |
| | 2 |
|
| Total * | | $ | 3 |
| | $ | 12 |
|
| |
* | The fair value of other securities totaled $3 million at March 31, 2016 and $2 million at December 31, 2015. |
|
| | | | | | | | |
| (dollars in millions) | | March 31,
2017 | | December 31,
2016 |
| | | | | |
| Fixed maturity other securities: | | |
| | |
|
| Bonds | | |
| | |
|
| Corporate debt | | $ | 2 |
| | $ | 2 |
|
| Mortgage-backed, asset-backed, and collateralized: | | | | |
|
| CMBS | | 1 |
| | 1 |
|
| Total | | $ | 3 |
| | $ | 3 |
|
The net unrealizedMark-to-market gains (losses) on trading and other securities held at March 31, 2017 and 2016 and realized gains (losses) on our trading and other securities sold or redeemed during the 2017 and 2016 periods were less than $1 million for the three months ended March 31, 2017 and 2016. Other securities are those securities for which we reportthe fair value option was elected. Our remaining trading securities were sold in investment revenues, were as follows:the first quarter of 2016.
|
| | | | | | | | |
| (dollars in millions) | | Three Months Ended March 31, |
| | 2016 * | | 2015 |
| | | | | |
| Net unrealized gains (losses) on trading and other securities held at period end | | $ | — |
| | $ | 3 |
|
| Net realized gains (losses) on trading and other securities sold or redeemed | | — |
| | — |
|
| Total | | $ | — |
| | $ | 3 |
|
| |
* | Net unrealized and realized gains (losses) on trading and other securities were less than $1 million for the three months ended March 31, 2016 and, therefore, are not quantified in the table above. |
8.7. Transactions with Affiliates of Fortress
SUBSERVICING AGREEMENT
Nationstar Mortgage LLC (“Nationstar”) subservices the real estate loans of certain of our indirect subsidiaries (collectively, the “Owners”). Investment funds managed by affiliates of Fortress indirectly own a majority interest in Nationstar. The Owners paid Nationstar subservicing fees of less than $1 million for the three months ended March 31, 20162017 and 2015.2016.
INVESTMENT MANAGEMENT AGREEMENT
Logan Circle Partners, L.P. (“Logan Circle”) provides investment management services for our investments. Logan Circle is a wholly owned subsidiary of Fortress. Costs and fees incurred for these investment management services were underless than $1 million for the three months ended March 31, 20162017 and 2015.2016.
SALE OF EQUITY INTEREST IN SPRINGCASTLE JOINT VENTURE
On March 31, 2016, we sold our 47% equity interest in the SpringCastle Joint Venture, which owns the SpringCastle Portfolio, to certain subsidiaries of NRZ and Blackstone. See Note 2 for further information on this sale. NRZ is managed by an affiliate of Fortress.
9.8. Related Party Transactions
AFFILIATE LENDING
Notes Receivable from Parent and Affiliates
Note Receivable from SFI. SFC’s note receivable from SFI is payable in full on May 31, 2022, and SFC may demand payment at any time prior to May 31, 2022; however, SFC does not anticipate the need for additional liquidity during 20162017 and does not expect to demand payment from SFI in 2016.2017. The note receivable from SFI totaled $391$337 million at March 31, 20162017 and $389$285 million at December 31, 2015. Interest receivable on this note totaled $2 million at March 31, 2016 and $1 million at December 31, 2015.2016. The interest rate for the UPB is the lender’s cost of funds rate, which was 5.39%6.28% at March 31, 2016.2017. Interest revenue on the note receivable from SFI totaled $5 million and $2 million, for the three months ended March 31, 20162017 and 2015, respectively,2016, which we report in other revenues.interest income on notes receivable from parent and affiliates.
Independence Demand Note. On November 12, 2015, in connection with the closing of the OneMain Acquisition, Springleaf Financial Cash Services, Inc. (“CSI”),CSI, SFC’s wholly owned subsidiary, entered into a revolving demand note withthe Independence (the “Independence Demand Note”),Note, whereby CSI agreed to make advances to Independence from time to time, with an aggregate amount outstanding not to exceed $3.55 billion. On November 12, 2015, Independence borrowed $3.4 billion under the Independence Demand Note. Under the Independence Demand Note, Independence iswas required to use the proceeds of any advance either (i) to fund a portion of the purchase price for the OneMain Acquisition or (ii) for general corporate purposes. The note iswas payable in full on December 31, 2019, and CSI maycould demand payment at any time prior to December 31, 2019. Independence maycould repay the note in whole or in part at any time without premium or penalty. The interest rate for the UPB was the lender’s cost of funds rate. Interest revenue on the note receivable from Independence totaled $46 million for the three months ended March 31, 2016.
On July 19, 2016, CSI, Independence, and OMFH entered into the Note Assignment pursuant to which CSI sold and assigned to OMFH, and OMFH purchased and assumed from CSI, an interest in and to CSI’s right to receive $150 million principal amount outstanding under the Independence Demand Note for a purchase price of $150 million. On July 20, 2016, OMFH paid the $150 million purchase price to CSI.
In connection with the Note Assignment discussed above, Independence exchanged the Independence Demand Note for (i) the Cash Services Note issued to CSI with a maximum borrowing amount not to exceed $3.4 billion and (ii) the OMFH Note issued to OMFH with a maximum borrowing amount not to exceed $150 million. The Cash Services Note and the OMFH Note provide that no advances shall be made to Independence on or after December 31, 2019 and all principal and interest shall be payable in full on December 31, 2019, unless earlier payment is demanded by CSI or OMFH. The interest rate for the UPB is the lender’s cost of funds rate, which was 5.39%6.28% at March 31, 2016. On November 12, 2015, Independence borrowed $3.4 billion under the Independence Demand Note.
2017.
At March 31, 2017 and December 31, 2016, the note receivable from Independence relating to the Cash Services Note totaled $3.4$2.8 billion and $2.9 billion, respectively, which included $15 million ofcompounded interest due to CSI. Interest revenue on the note receivable from Independence relating to the Cash Services Note totaled $46$45 million duringfor the three months ended March 31, 2016,2017, which we report in other revenues.interest income on notes receivable from parent and affiliates.
OneMain Demand Note. On November 15, 2015, in connection with the closing of the OneMain Acquisition, SFC entered into a revolving demand note (the “OneMainthe OneMain Demand Note”)Note with OMFH, whereby SFC agreed to make advances to OMFH from time to time, with an aggregate amount outstanding not to exceed $500 million. Under the OneMain Demand Note, OMFH is required to use the proceeds of any advance either (i) exclusively to finance the purchase, origination, pooling, funding or carrying of receivables by OMFH or any of its restricted subsidiaries or (ii) for general corporate purposes. The note is payable in full on December 31, 2024, and SFC may demand payment with five days prior notice. OMFH may repay the note in whole or in part at any time without premium or penalty. The interest rate for the UPB is the lender’s cost of funds rate.
On August 12, 2016 and March 15, 2017, SFC amended the note to increase the maximum amount that may be advanced to $750 million and $1.3 billion, respectively. At March 31, 2017 and December 31, 2016, no amounts were drawn under the note.note receivable from OMFH totaled $638 million and $530 million, respectively, which included compounded interest due to SFC. Interest revenue on the note receivable from OMFH totaled $9 million for the three months ended March 31, 2017, which we report in interest income on notes receivable from parent and affiliates.
Receivables from Parent and Affiliates
At March 31, 20162017 and December 31, 2015,2016, receivables from parent and affiliates totaled $28 million and $9 million, respectively.$40 million. Receivables from parent and affiliates also included (i) interest receivable on SFC’s note receivable from SFI previously discussed in this Note, (ii) taxes paid by SFC for all entities and then settled under the tax sharing agreement, and (iii) expenses paid by a subsidiary of SFC for the benefit of parent and affiliates.affiliates, (iv) intercompany insurance premiums collected, and (v) the servicing fees and collections received on the legacy OneMain loans serviced by legacy Springleaf branches. Receivables from parent and affiliates at March 31, 2017 and December 31, 20152016 are presented net of a payable to SFI of $12$6 million. Excluding this payable, receivables from parent and affiliates totaled $21$46 million at March 31, 2017 and December 31, 2015.2016.
Note Payable to Affiliate
On December 1, 2015, in connection with the closing of the OneMain Acquisition, OMFH entered into a revolving demand note with SFC, whereby OMFH agreed to make advances to SFC from time to time, with an aggregate amount outstanding not to exceed $500 million. Under the note, SFC is required to use the proceeds of any advance for general corporate purposes. The note is payable in full on December 31, 2024, and OMFH may demand payment with five days prior notice. SFC may repay the note in whole or in part at any time without premium or penalty. The interest rate for the UPB is the lender’s cost of funds rate, which was 5.39%6.28% at March 31, 2016. On January 22, 2016, SFC drew $370 million under the note.2017.
At March 31, 2016, the note payable to OMFH totaled $374 million, which included interest of $2 million due to OMFH. Interest expense on the note payable to OMFH totaledwas $4 million for the three months ended March 31, 2016. Subsequently,2016, which we repaidreport in interest expense. On March 15, 2017, OMFH amended the note in full on May 2, 2016.to increase the maximum amount that may be advanced to $750 million. At March 31, 2017 and December 31, 2016, no amounts were drawn under the note.
Payables to Parent and Affiliates
At March 31, 20162017 and December 31, 2015,2016, payables to parent and affiliates totaled $34$45 million and $24$13 million, respectively. At March 31, 20162017 and December 31, 2015, Springleaf Finance Management Corporation (“SFMC”), a subsidiary of2016, SFC had net payables of $33$40 million and $19$12 million, respectively, to Springleaf General Services Corporation (“SGSC”),SGSC, a subsidiary of SFI, related to the intercompany agreements further discussed below in this Note. At March 31, 20162017 and December 31, 2015, SFMC2016, SFC also had a payable of $2 million and $1 million, respectively, to Springleaf Consumer Loan, Inc.OCLI, a subsidiary of SFI, for internet lending referral fees charged to the branch network. See “Loan Referral Fees” below. Additionally, at March 31, 2017, SFC had a payable of $3 million to OMFH for servicing and collection fees of legacy Springleaf loans serviced by legacy OneMain branches. See “Loan Servicing Fees” below for further information.
PriorLOAN SALE TRANSACTIONS
During the second quarter of 2016, OCLI entered into loan purchase and sale agreements with certain subsidiaries of SFC pursuant to which OCLI sold certain personal loans with an aggregate UPB at the time of sale of $89 million for an aggregate purchase price of $89 million. OCLI continues to service these loans. During the three months ended March 31, 2017, SFC recorded less than $1 million of service fee expenses.
LOAN SERVICING FEES
In connection with the combining of certain legacy OneMain branches with legacy Springleaf branches and vice versa, during the fourth quarter of 2016, SFC entered into an intercompany service agreement with OMFH relating to the SpringCastle Interests Sale, SFI provided servicing of loans when a legacy OneMain loan is serviced by a legacy Springleaf branch and vice versa. During the SpringCastle Portfolio throughthree months ended March 31, 2017, SFC recorded $3 million of service fee expenses for the legacy Springleaf loans serviced by legacy OneMain branches and $3 million of service fee income for the legacy OneMain loans serviced by legacy Springleaf branches. At March 31, 2017, SFC’s receivable from OMFH for the servicing fees and collections received on the legacy OneMain loans serviced by legacy Springleaf branches totaled $3 million, and SFC’s payable to OMFH for the servicing fees and collections received on the legacy Springleaf loans serviced by legacy OneMain branches totaled $3 million.
LOAN REFERRAL FEES
OCLI provides personal loan application processing and credit underwriting services on behalf of SFC for personal loan applications that are submitted online. SFC is charged a master servicing agreement with SpringCastle Holdings, LLC,fee of $35 for each underwritten approved application processed, as well as any other fees agreed to by the parties. During the three months ended March 31, 2017 and 2016, SFC recorded $5 million and $3 million, respectively, of referral fee expense. SFC’s payable to OCLI for internet lending referral fees totaled $2 million at March 31, 2017 and $1 million at December 31, 2016.
DEBT PURCHASES
In March of 2017, OMAS, a subsidiary of SFC.OMFH, purchased $1 million principal amount of SFC’s medium term notes in the open market for an aggregate purchase price of $1 million. At the purchase dates, these notes had a carrying value of $1 million.
In December 31, 2015, SpringCastle Holdings LLC’s payableof 2016, OMAS purchased $5 million principal amount of SFC’s medium term notes in the open market for an aggregate purchase price of $5 million. At the purchase dates, these notes had a carrying value of $5 million.
These purchase transactions did not impact our condensed consolidated financial statements.
CAPITAL CONTRIBUTIONS
During the first quarter of 2016, SFC received a capital contribution of $10 million to SFI totaled $4 million. Subsequent tosatisfy an interest payment required by the SpringCastle Interests Sale, SFI continues to act as the servicerJunior Subordinated Debenture in respect of the SpringCastle Portfolio for the SpringCastle Funding Trust.SFC’s junior subordinated debt.
INTERCOMPANY AGREEMENTS
On December 24, 2012, SGSC, a subsidiary of SFI, entered into the following intercompany agreements with SFMC, a subsidiary of SFC, and with certain other subsidiaries of SFI, (collectively,collectively, the “Recipients”). SFMC’s net payable to SGSC relating to these agreements totaled $33 million at March 31, 2016 and $19 million at December 31, 2015.“Recipients.”
Services Agreement
SGSC provides the following services to the Recipients: management and administrative services; financial, accounting, treasury, tax, and audit services; facilities support services; capital funding services; legal services; human resources services
(including (including payroll); centralized collections and lending support services; insurance, risk management, and marketing services; and information technology services. The fees payable by each Recipient to SGSC is equal to 100% of the allocated cost of providing the services to such Recipient. SGSC allocates its cost of providing these services among the Recipients and any of the companies to which it provides similar services based on an allocation method defined in the agreement. During the three months ended March 31, 2017 and 2016, and 2015, SFMCSFC recorded $67$59 million and $54$67 million, respectively, of service fee expenses, which are included in other operating expenses.
License Agreement
The license agreement provides for use by SGSC of SFMC’s information technology systems and software and other related equipment. The monthly license fee payable by SGSC for its use of the information technology systems and software is 100% of the actual costs incurred by SFMC plus a 7.00% margin. The fee payable by SGSC for its use of the related equipment is 100% of the actual costs incurred by SFMC. During the three months ended March 31, 20162017 and 2015,2016, SFMC recorded $1 million of license fees, which are included as a contra expense to other operating expenses.
Building Lease Agreement
The building lease agreement provides that SFMC will lease six of its buildings to SGSC for an annual rental amount of $4 million, plus additional rental amounts to cover other sums and charges, including real estate taxes, water charges, and sewer rents. During the three months ended March 31, 20162017 and 2015,2016, SFMC recorded $1 million of rent charged to SGSC, which are included as a contra expense to other operating expenses.
See Note 18 for information on the subsequent termination of the building lease agreement effective April 5, 2017 in contemplation of the merger of SFMC and SGSC on April 10, 2017 and the subsequent termination of the license agreement as a result of this merger.
10.9. Long-term Debt
Principal maturities of long-term debt (excluding projected repayments on securitizations and revolving conduit facilities by period) by type of debt at March 31, 20162017 were as follows:
| | | | | Senior Debt | | | | | | Senior Debt | | | | |
| (dollars in millions) | | Securitizations | | Revolving
Conduit
Facilities | | Medium Term Notes | | Junior Subordinated Debt | | Total | | Securitizations | | Revolving
Conduit
Facilities | | Medium Term Notes | | Junior Subordinated Debt | | Total |
| | | | | | | | | | | | | | | | | | | | | |
| Interest rates (a) | | 2.41% - 6.50% |
| | 1.92% - 2.77% |
| | 5.25% - 8.25% |
| | 6.00 | % | | | | 2.04% - 6.50% |
| | 2.59 | % | | 5.25% - 8.25% |
| | 2.77 | % | | |
| | | | | | | | | | | | | | | | | | | | | |
| Second quarter 2016 | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| |
| Third quarter 2016 | | — |
| | — |
| | 375 |
| | — |
| | 375 |
| |
| Fourth quarter 2016 | | — |
| | — |
| | — |
| | — |
| | — |
| |
| First quarter 2017 | | — |
| | — |
| | — |
| | — |
| | — |
| |
| Remainder of 2017 | | — |
| | — |
| | 1,889 |
| | — |
| | 1,889 |
| |
| 2018 | | — |
| | — |
| | — |
| | — |
| | — |
| |
| Second quarter 2017 | | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Third quarter 2017 | | | — |
| | — |
| | 257 |
| | — |
| | 257 |
|
| Fourth quarter 2017 | | | — |
| | — |
| | 1,030 |
| | — |
| | 1,030 |
|
| First quarter 2018 | | | — |
| | — |
| | — |
| | — |
| | — |
|
| Remainder of 2018 | | | — |
| | — |
| | — |
| | — |
| | — |
|
| 2019 | | — |
| | — |
| | 700 |
| | — |
| | 700 |
| | — |
| | — |
| | 700 |
| | — |
| | 700 |
|
| 2020 | | — |
| | — |
| | 300 |
| | — |
| | 300 |
| | — |
| | — |
| | 1,300 |
| | — |
| | 1,300 |
|
| 2021-2067 | | — |
| | — |
| | 950 |
| | 350 |
| | 1,300 |
| |
| 2021 | | | — |
| | — |
| | 650 |
| | — |
| | 650 |
|
| 2022-2067 | | | — |
| | — |
| | 300 |
| | 350 |
| | 650 |
|
| Securitizations (b) | | 2,012 |
| | — |
| | — |
| | — |
| | 2,012 |
| | 2,641 |
| | — |
| | — |
| | — |
| | 2,641 |
|
| Revolving conduit facilities (b) | | — |
| | 1,098 |
| | — |
| | — |
| | 1,098 |
| | — |
| | 10 |
| | — |
| | — |
| | 10 |
|
| Total principal maturities | | $ | 2,012 |
| | $ | 1,098 |
| | $ | 4,214 |
| | $ | 350 |
| | $ | 7,674 |
| | $ | 2,641 |
| | $ | 10 |
| | $ | 4,237 |
| | $ | 350 |
| | $ | 7,238 |
|
| | | | | | | | | | | | | | | | | | | | | |
Total carrying amount (c) | | $ | 2,003 |
| | $ | 1,098 |
| | $ | 3,914 |
| | $ | 172 |
| | $ | 7,187 |
| | $ | 2,629 |
| | $ | 10 |
| | $ | 4,012 |
| | $ | 172 |
| | $ | 6,823 |
|
Debt issuance costs (d)(c) | | $ | (9 | ) | | $ | — |
| | $ | (12 | ) | | $ | — |
| | $ | (21 | ) | | $ | (12 | ) | | $ | — |
| | $ | (13 | ) | | $ | — |
| | $ | (25 | ) |
| |
| (a) | The interest rates shown are the range of contractual rates in effect at March 31, 2016.2017. Effective January 16, 2017, the interest rate on the UPB of the Junior Subordinated Debenture became a variable floating rate (determined quarterly) equal to 3-month LIBOR plus 1.75%, or 2.77% as of March 31, 2017. Prior to January 16, 2017, the interest rate on the UPB of the Junior Subordinated Debenture was a fixed rate of 6.00%. |
| |
| (b) | Securitizations and borrowings under revolving conduit facilities are not included in the above maturities by period due to their variable monthly repayments. See Note 1110 for further information on our long-term debt associated with securitizations and revolving conduit facilities. |
| |
| (c) | The carrying amount of our long-term debt associated with certain securitizations that were either (i) issued at a premium or discount or (ii) revalued at a premium or discount based on its fair value at the time of the Fortress Acquisition or (iii) recorded at fair value on a recurring basis in circumstances when the embedded derivative within the securitization structure cannot be separately accounted for at fair value. |
| |
(d) | Debt issuance costs are reported as a direct deduction from long-term debt, with the exception of debt issuance costs associated with our revolving conduit facilities, which totaled $9 million at March 31, 2017 and are reported in other assets and are excluded from the table above.assets. |
GUARANTY AGREEMENTS
8.25% SFC Notes
On April 11, 2016, OMH entered into the SFC Second Supplemental Indenture, pursuant to which it agreed to fully and unconditionally guarantee, on a senior unsecured basis, the payments of principal, premium (if any) and interest on the 8.25% SFC Notes. As of March 31, 2017, $1.0 billion aggregate principal amount of the 8.25% SFC Notes were outstanding.
5.25% SFC Notes
On December 3, 2014, OMH entered into anthe SFC Base Indenture and the SFC First Supplemental Indenture, pursuant to which it agreed to fully and unconditionally guarantee, on a senior unsecured basis, the payments of principal, premium (if any) and interest on $700 million ofthe 5.25% Senior Notes due 2019 issued by SFC (the “5.25% SFC Notes”).Notes. As of March 31, 2016,2017, $700 million aggregate principal amount of the 5.25% SFC Notes were outstanding.
Other SFC Notes
On December 30, 2013, OMH entered into SFC Guaranty Agreements whereby it agreed to fully and unconditionally guarantee the payments of principal, premium (if any), and interest on approximately $5.2 billion aggregate principal amount of senior notes on a senior basis and $350 million aggregate principal amount of a junior subordinated debenture on a junior subordinated basis issued bythe Other SFC (collectively, the “SFC Notes”).Notes. The Other SFC Notes consisted of the following: 8.25% Senior Notes due 2023; 7.75% Senior Notes due 2021; 6.00% Senior Notes due 2020; a 60-year junior subordinated debenture;the Junior Subordinated Debenture; and all senior notes outstanding on December 30, 2013, issued pursuant to the Indenture dated as of May 1, 1999 (the “1999 Indenture”),Indenture, between SFC and Wilmington Trust, National Association (the successor trustee to Citibank N.A.). The 60-year junior subordinated debentureJunior Subordinated Debenture underlies the trust preferred securities sold by a trust sponsored by SFC. On December 30, 2013, OMH entered into athe SFC Trust Guaranty Agreement whereby it agreed to fully and unconditionally guarantee the related payment obligations under the trust preferred securities. As of March 31, 2016, approximately $4.22017, $2.9 billion aggregate principal amount of the Other SFC Notes including $2.3 billion aggregate principal amount of senior notes under the 1999 Indenture, and $350 million aggregate principal amount of a junior subordinated debenture were outstanding.
The OMH guarantees of SFC’s long-term debt discussed above are subject to customary release provisions.
11.10. Variable Interest Entities
CONSOLIDATED VIES
As part of our overall funding strategy and as part of our efforts to support our liquidity from sources other than our traditional capital market sources, we have transferred certain finance receivables to VIEs for asset-backed financing transactions, including securitization and conduit transactions. SinceWe have determined that we are the primary beneficiary of these transactions involve securitization trusts required to be consolidated,VIEs and, as a result, we include each VIE’s assets, including any finance receivables securing the securitized assetsVIE’s debt obligations, and related liabilities are included in our condensed consolidated financial statements and each VIE’s asset-backed debt obligations are accounted for as secured borrowings.
CONSOLIDATED VIES
We evaluated the securitization trusts and determined that these entities are VIEs of which we are the primary beneficiary, and, therefore, we consolidated such entities. We are deemed to be the primary beneficiariesbeneficiary of these VIEseach VIE because we have the ability to direct the activities of eachthe VIE that most significantly impact the entity’sits economic performance, including the losses it absorbs and the obligation to absorb losses and theits right to receive economic benefits that are potentially significant to the VIE.significant. Such ability stemsarises from SFC’s and/orand its affiliates’ contractual right to service the securitized finance receivables. Our retainedreceivables securing the VIEs’ debt obligations. To the extent we retain any subordinated note anddebt obligation or residual interest trust certificates expose usin an asset-backed financing facility, we are exposed to potentially significant losses and potentially significant returns.
The asset-backed securitiesdebt obligations issued by the securitization trustsVIEs are supported by the expected cash flows from the underlying securitized finance receivables.receivables securing such debt obligations. Cash inflows from these finance receivables are distributed to investorsrepay the debt obligations and related service providers in accordance with each transaction’s contractual priority of payments, (“waterfall”) and,referred to as such, most of these inflows must be directed first to service and repay each trust’s senior notes or certificates held principally by third-party investors.the “waterfall.” The holders of the asset-backed securitiesdebt obligations have no recourse to the Company if the cash flows from the underlying qualified securitized assetsfinance receivables securing such debt obligations are not sufficient to pay all principal and interest on the asset-backed securities. After these seniordebt obligations. With respect to any asset-backed financing transaction that has multiple classes of debt obligations, are extinguished, substantially all cash inflows will be directed to the subordinated notessenior debt obligations until fully repaid and, thereafter, to the residual interest that we own in each securitization trust.subordinate debt obligations on a sequential basis. We retain interestsan interest and credit risk in these securitizationfinancing transactions including residual interests in each securitization trust and, in some cases, subordinated securities issued by the VIEs. We retain credit
risk in the securitizations through our ownership of the residual interest in each securitization trust,VIE and, in some cases, ownership of the most subordinatedsubordinate class of asset-backed securities,debt obligations issued by the VIE, which are the first to absorb credit losses on the securitized assets.finance receivables securing the debt obligations. We expect that any credit losses in the pools of securitized assetsfinance receivables securing the asset-backed debt obligations will likely be limited to our subordinated and residual retained interests. We have no obligation to repurchase or replace qualified securitized assetsfinance receivables that subsequently become delinquent or are otherwise in default.
We parenthetically disclose on our consolidated balance sheets the VIE’s assets that can only be used to settle the VIE’s obligations and liabilities if its creditors have no recourse against the primary beneficiary’s general credit. The carrying amounts of consolidated VIE assets and liabilities associated with our securitization trusts were as follows:
| | | (dollars in millions) | | March 31,
2016 | | December 31,
2015 | | March 31,
2017 | | December 31,
2016 |
| | | | | | | | | |
| Assets | | |
| | |
| | |
| | |
|
| Cash and cash equivalents | | $ | 1 |
| | $ | 7 |
| | $ | 1 |
| | $ | 2 |
|
| Finance receivables: | | |
| | |
| | |
| | |
|
| Personal loans | | 3,592 |
| | 3,621 |
| | 2,863 |
| | 2,943 |
|
| SpringCastle Portfolio | | — |
| | 1,576 |
| |
| Allowance for finance receivable losses | | 113 |
| | 128 |
| | 85 |
| | 94 |
|
| Finance receivables held for sale | | — |
| | 435 |
| |
| Restricted cash and cash equivalents | | 212 |
| | 282 |
| |
| Restricted cash and restricted cash equivalents | | | 173 |
| | 211 |
|
| Other assets | | 75 |
| | 48 |
| | 9 |
| | 9 |
|
| | | | | | | | | |
| Liabilities | | |
| | |
| | |
| | |
|
| Long-term debt | | $ | 3,101 |
| | $ | 5,513 |
| | $ | 2,639 |
| | $ | 2,675 |
|
| Other liabilities | | 6 |
| | 9 |
| | 5 |
| | 7 |
|
Consumer Loan SecuritizationsSECURITIZED BORROWINGS
Each of our securitizations contains a revolving period ranging from one to five years during which no principal payments are required to be made on the related asset-backed notes, except for the ODART 2016-1 securitization which has no revolving period. The indentures governing our securitizations borrowings contain early amortization events and events of default, that, if triggered, may result in the acceleration of the obligation to pay principal and interest on the related asset-backed notes.
Our securitized borrowings at March 31, 2017 consisted of the following:
|
| | | | | | | | | | |
| (dollars in millions) | | Current
Note Amounts
Outstanding | | Current Weighted Average Interest Rate | | Original Revolving Period |
| | | | | | | |
| Consumer Securitizations: | | | | | | |
| SLFT 2015-A (a) | | $ | 1,163 |
| | 3.47 | % | | 3 years |
|
| SLFT 2015-B (b) | | 314 |
| | 3.78 | % | | 5 years |
|
| SLFT 2016-A (c) | | 500 |
| | 3.10 | % | | 2 years |
|
| Total consumer securitizations | | 1,977 |
| | | | |
| | | | | | | |
| Auto Securitization: | | | | | | |
| ODART 2016-1 (d) | | 396 |
| | 2.45 | % | | — |
|
| ODART 2017-1 (e) | | 268 |
| | 2.61 | % | | 1 year |
|
| Total auto securitizations | | 664 |
| | | | |
| | | | | | | |
| Total secured structured financings | | $ | 2,641 |
| | | | |
| |
| (a) | SLFT 2015-A Securitization. On February 26, 2015, we issued $1.2 billion of notes backed by personal loans. The notes mature in November 2024. |
| |
| (b) | SLFT 2015-B Securitization. On April 7, 2015, we issued $314 million of notes backed by personal loans. The notes mature in May 2028. |
| |
| (c) | SLFT 2016-A Securitization. On December 14, 2016, we issued $532 million of notes backed by personal loans. The notes mature in November 2029. We initially retained $32 million of the asset-backed notes. |
| |
| (d) | ODART 2016-1 Securitization. On July 19, 2016, we issued $754 million of notes backed by direct auto loans. The maturity dates of the notes occur in January 2021 for the Class A notes, May 2021 for the Class B notes, September 2021 for the Class C notes and February 2023 for the Class D notes. We initially retained $54 million of the Class D notes. |
| |
| (e) | ODART 2017-1 Securitization. On February 1, 2017, we issued $300 million of notes backed by direct auto loans. The maturity dates of the notes occur in October 2020 for the Class A notes, June 2021 for the Class B notes, August 2021 for the Class C notes, December 2021 for the Class D notes, and |
January 2025 for the Class E notes. We initially retained $11 million of the Class A notes, $1 million of each of the Class B, Class C, and Class D notes, and the entire $18 million of the Class E notes.
Call of 2013-B2014-A Notes.On February 16, 2016, Sixteenth15, 2017, we exercised our right to redeem the 2014-A Notes for a redemption price of $188 million, which excluded $33 million for the Class D Notes owned by Twenty First Street, Funding LLC (“Sixteenth Street”), a wholly owned subsidiary of SFC, exercised its right to redeem the asset backed notes issued by the Springleaf Funding Trust 2013-B on June 19, 2013 (the “2013-B Notes”). To redeem the 2013-B Notes, Sixteenth Street paid a redemption price of $371 million, which excluded $30 million for the Class C and Class D Notes owned by Sixteenth Street on February 16, 2016,15, 2017, the date of the optional redemption. The outstanding principal balance of the 2013-B Notesasset-backed notes was $400$221 million on the date of the optional redemption.
Conduit FacilitiesREVOLVING CONDUIT FACILITIES
Springleaf 2013-VFN1 Trust. On January 15, 2016, we drew $298 million under the variable funding notes issued by the Springleaf Funding Trust 2013-VFN1 (the “Springleaf 2013-VFN1 Trust”).
On January 21, 2016, we amended the note purchase agreement with the Springleaf 2013-VFN1 Trust to (i) increase the maximum principal balance from $350 million to $850 million and (ii) extend the revolving period ending in April 2017 to January 2018, which may be extended to January 2019, subject to satisfaction of customary conditions precedent. Following the revolving period, the principal amount of the notes, if any, will be reduced as cash payments are received on the underlying personal loans and will be due and payable in the 36th month following the end of the revolving period. As of March 31, 2016, $298 million was outstanding2017, our borrowings under the notes.
Mill River 2015-VFN1 Trust. On January 15, 2016, we repaid $300 million on the variable funding notes issued by the Mill River Funding Trust 2015-VFN1 (the “Mill River 2015-VFN1 Trust”).
On January 21, 2016, we amended the note purchase agreement with the Mill River 2015-VFN1 Trust to decrease the maximum principal balance from $400 million to $100 million. As of March 31, 2016, $100 million was outstanding under the notes.
Sumner Brook Trust 2013-VFN1. On February 16, 2016, Sumner Brook Funding Trust 2013-VFN1 (the “Sumner Brook 2013-VFN1 Trust”), a wholly owned special purpose vehicle of SFC, repaid the entire $100 million outstanding principal balance of its variable funding notes. As of March 31, 2016, no amounts were outstanding under the notes.
Midbrook 2013-VFN1 Trust. On February 24, 2016, we amended the note purchase agreement with the Midbrook Funding Trust 2013-VFN1 to (i) extend the revolving period ending in June 2016 to February 2018 and (ii) decrease the maximum principal balance from $300 million to $250 million on February 24, 2017. Following the revolving period, the principal amountconduit facilities consisted of the notes, if any, will be reduced as cash payments are received on the underlying personal loans and will be due and payable in the 36th month following the end of the revolving period. As of March 31, 2016, no amounts were outstanding under the notes.following:
Whitford Brook 2014-VFN1 Trust. On February 24, 2016, we amended the note purchase agreement with the Whitford Brook Funding Trust 2014-VFN1 to extend the revolving period ending in June 2017 to June 2018. Following the revolving period, the principal amount of the notes, if any, will be reduced as cash payments are received on the underlying personal loans and will be due and payable in the 12th month following the end of the revolving period. As of March 31, 2016, $200 million was outstanding under the notes. |
| | | | | | | | | | |
| (dollar in millions) |
| Note Maximum
Balance |
| Amount
Drawn |
| Revolving
Period End |
|
|
|
|
|
|
|
| Midbrook 2013-VFN1 Trust * |
| $ | 50 |
|
| $ | — |
|
| February 2018 |
| Sumner Brook 2013-VFN1 Trust | | 350 |
| | 10 |
| | January 2018 |
| Springleaf 2013-VFN1 Trust | | 850 |
| | — |
| | January 2018 |
| Whitford Brook 2014-VFN1 Trust | | 250 |
| | — |
| | June 2018 |
| First Avenue Funding LLC | | 250 |
| | — |
| | June 2018 |
| Second Avenue Funding LLC |
| 250 |
|
| — |
|
| June 2018 |
| Seine River Funding, LLC | | 500 |
| | — |
| | December 2019 |
| Total |
| $ | 2,500 |
|
| $ | 10 |
|
|
|
First Avenue Funding LLC. On March 28, 2016, we amended the note purchase agreement with the First Avenue Funding LLC (“First Avenue”) to extend the revolving period ending in December 2017 to March 2018. Following the revolving period, the principal amount of the notes, if any, will be reduced as cash payments are received on the underlying auto loans and will be due and payable in full the 12 months following the maturity of the last auto loan held by First Avenue. As of March 31, 2016, $250 million was outstanding under the notes. | |
| * | Midbrook 2013-VFN1 Trust. On February 24, 2017, the maximum principal balance decreased from $100 million to $50 million. See Note 18 for information on the subsequent termination of the note purchase agreement with Midbrook 2013-VFN1 Trust. |
VIE INTEREST EXPENSE
Other than our retained subordinate and residual interests in the remaining consolidated securitization trusts,VIEs, we are under no obligation, either contractually or implicitly, to provide financial support to these entities. Consolidated interest expense related to our VIEs for the three months ended March 31, 20162017 totaled $48$27 million, compared to $38$48 million for the three months ended March 31, 2015.2016.
DECONSOLIDATED VIES
As a result of the SpringCastle Interests Sale on March 31, 2016, we deconsolidated the securitization trust holding the underlying loans of the SpringCastle Portfolio and previously issued securitized interests, which were reported in long-term debt.
As a result of
11. Insurance
Changes in the sales of the mortgage-backed retained certificates during 2014, we (i) deconsolidated the securitization trusts holding the underlying real estate loans and previously issued securitized interests which were reported in long-term debt and (ii) established a reserve for sales recourse obligations of $6 million related to these sales. At March 31, 2016, this reserve totaled $6 million. We had no repurchase activity associated with these salesunpaid claims and loss adjustment expenses (not considering reinsurance recoverable) were as of March 31, 2016. See Note 14 for further information on the total reserve for sales recourse obligations relating to the real estate loan sales, including the sales of the mortgage-backed retained certificates.follows:
|
| | | | | | | | |
| | | At or for the
Three Months Ended March 31, |
| (dollars in millions) | | 2017 | | 2016 |
| | | | | |
| Balance at beginning of period | | $ | 70 |
| | $ | 73 |
|
| Less reinsurance recoverables | | (22 | ) | | (22 | ) |
| Net balance at beginning of period | | 48 |
| | 51 |
|
| Additions for losses and loss adjustment expenses incurred to: | | | | |
| Current year | | 17 |
| | 18 |
|
| Prior years * | | 1 |
| | (2 | ) |
| Total | | 18 |
| | 16 |
|
| Reductions for losses and loss adjustment expenses paid related to: | | | | |
| Current year | | (7 | ) | | (6 | ) |
| Prior years | | (11 | ) | | (11 | ) |
| Total | | (18 | ) | | (17 | ) |
| Net balance at end of period | | 48 |
| | 50 |
|
| Plus reinsurance recoverables | | 23 |
| | 22 |
|
| Balance at end of period | | $ | 71 |
| | $ | 72 |
|
| |
| * | Reflects (i) a shortfall in the prior years’ net reserves of $1 million at March 31, 2017 primarily resulting from increased estimates for claims incurred in prior years as claims have developed, and (ii) a redundancy in the prior years’ net reserves of $2 million at March 31, 2016 primarily due to credit disability and credit involuntary unemployment insurance claims developing more favorably than anticipated. |
12. Accumulated Other Comprehensive Income (Loss)
Changes, net of tax, in accumulated other comprehensive income (loss) were as follows:
| | | (dollars in millions) | | Unrealized Gains (Losses) Available-for-Sale Securities | | Retirement Plan Liabilities Adjustments | | Foreign Currency Translation Adjustments | | Total Accumulated Other Comprehensive Income (Loss) | | Unrealized Gains (Losses) Available-for-Sale Securities | | Retirement Plan Liabilities Adjustments | | Foreign Currency Translation Adjustments | | Total Accumulated Other Comprehensive Income (Loss) |
| | | | | | | | | | |
| Three Months Ended March 31, 2017 | | | |
| | |
| | |
| | |
|
| Balance at beginning of period | | | $ | (3 | ) | | $ | (4 | ) | | $ | — |
| | $ | (7 | ) |
| Other comprehensive income before reclassifications | | | 2 |
| | — |
| | — |
| | 2 |
|
| Reclassification adjustments from accumulated other comprehensive income (loss) | | | (1 | ) | | — |
| | — |
| | (1 | ) |
| Balance at end of period | | | $ | (2 | ) | | $ | (4 | ) | | $ | — |
| | $ | (6 | ) |
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2016 | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Balance at beginning of period | | $ | (9 | ) | | $ | (19 | ) | | $ | 4 |
| | $ | (24 | ) | | $ | (9 | ) | | $ | (19 | ) | | $ | 4 |
| | $ | (24 | ) |
| Other comprehensive income before reclassifications | | 8 |
| | — |
| | — |
| | 8 |
| | 8 |
| | — |
| | — |
| | 8 |
|
| Reclassification adjustments from accumulated other comprehensive income (loss) | | (1 | ) | | — |
| | — |
| | (1 | ) | | (1 | ) | | — |
| | — |
| | (1 | ) |
| Balance at end of period | | $ | (2 | ) | | $ | (19 | ) | | $ | 4 |
| | $ | (17 | ) | | $ | (2 | ) | | $ | (19 | ) | | $ | 4 |
| | $ | (17 | ) |
| | | | | | | | | | |
| Three Months Ended March 31, 2015 | | |
| | |
| | |
| | |
| |
| Balance at beginning of period | | $ | 12 |
| | $ | (13 | ) | | $ | 4 |
| | $ | 3 |
| |
| Other comprehensive income before reclassifications | | 3 |
| | — |
| | 1 |
| | 4 |
| |
| Reclassification adjustments from accumulated other comprehensive income (loss) | | (4 | ) | | — |
| | — |
| | (4 | ) | |
| Balance at end of period | | $ | 11 |
| | $ | (13 | ) | | $ | 5 |
| | $ | 3 |
| |
Reclassification adjustments from accumulated other comprehensive income (loss) to the applicable line item on our condensed consolidated statements of operations were as follows:
|
| | | | | | | | |
| (dollars in millions) | | Three Months Ended March 31, |
| | 2016 |
| 2015 |
| | | | | |
| Unrealized gains on investment securities: | | |
| | |
|
Reclassification from accumulated other comprehensive income (loss) to investment revenues, before taxes | | $ | 1 |
| | $ | 6 |
|
| Income tax effect | | — |
| | (2 | ) |
Reclassification from accumulated other comprehensive income (loss) to investment revenues, net of taxes | | $ | 1 |
| | $ | 4 |
|
|
| | | | | | | | |
| (dollars in millions) | | Three Months Ended March 31, |
| 2017 |
| 2016 |
| | | | | |
| Unrealized gains on available-for-sale securities: | | |
| | |
|
| Reclassification from accumulated other comprehensive income (loss) to investment revenues, before taxes | | $ | 2 |
| | $ | 1 |
|
| Income tax effect | | (1 | ) | | — |
|
| Reclassification from accumulated other comprehensive income (loss) to investment revenues, net of taxes | | $ | 1 |
| | $ | 1 |
|
13. Income Taxes
At March 31, 2016,2017, we had a net deferred tax liability of $122$37 million, compared to $89$42 million at December 31, 2015.2016. The increasedecrease in net deferred tax liability of $33$5 million was primarily due to the impact of the SpringCastle Interests Sale,tax accounting method change, partially offset by changes in the fair value of our finance receivables.
The effective tax rate for the three months ended March 31, 20162017 was 34.9%37.6%, compared to 19.3%34.1% for the same period in 2015.2016. The effective tax ratesrate for the three months ended March 31, 2017 differed from the federal statutory rate primarily due to the effect of state income taxes. The effective tax rate for the three months ended March 31, 2016 and 2015 differed from the federal statutory ratesrate primarily due to the effectseffect of the non-controlling interestinterests in the previously owned SpringCastle Portfolio. As discussed in Note 2, on March 31, 2016, the Company sold its equity interest in the SpringCastle Portfolio.
We are currently under examination of our U.S. federal tax return for the years 2011 to 2013 by the Internal Revenue Service. Management believes it has adequately provided for taxes for such years.
The Company’sOur gross unrecognized tax positionsbenefits, including related interest and penalties, totaled $9$11 million at March 31, 20162017 and December 31, 2015, all of which would affect the effective2016. We accrue interest related to uncertain tax rate if recognized.positions in income tax expense. The amount of any change in the balance of uncertain tax positionsliabilities over the next 12 months is not expected to be material to our consolidated financial statements.
14. Contingencies
LEGAL CONTINGENCIES
In the normal course of business, the Company haswe have been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions and other litigation arising in connection with itsour activities. Some of the actual or threatened legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. While we will continue to identify certainevaluate legal actions where we believeto determine whether a material loss to beis reasonably possible or probable and is reasonably estimable, there can be no assurance that material losses will not be incurred from claims that we have not yet been notified ofpending, threatened or are not yet determined to be probablefuture litigation, investigations, examinations, or reasonably possible and reasonably estimable.other claims.
We contest liability and/or the amount of damages, as appropriate, in each pending matter. Where available information indicates that it is probable that a liability had been incurred at the date of the condensed consolidated financial statements and we can reasonably estimate the amount of that loss, we accrue the estimated loss by a charge to income. In many actions, however, it is inherently difficult to determine whether any loss is probable or even reasonably possible or to estimate the amount of any loss. In addition, even where loss is reasonably possible or an exposure to loss exists in excess of the liability already accrued with respect to a previously recognized loss contingency, it is not always possible to reasonably estimate the size of the possible loss or range of loss.
For certain legal actions, we cannot reasonably estimate such losses, particularly for actions that are in their early stages of development or where plaintiffs seek substantial or indeterminate damages. Numerous issues may need to be resolved, including through potentially lengthy discovery and determination of important factual matters, and by addressing novel or unsettled legal questions relevant to the actions in question, before a loss or additional loss or range of loss or additional loss can be reasonably estimated for any given action.
For certain other legal actions, we can estimate reasonably possible losses, additional losses, ranges of loss or ranges of additional loss in excess of amounts accrued, but do not believe, based on current knowledge and after consultation with counsel, that such losses will have a material adverse effect on our condensed consolidated financial statements as a whole.
SALES RECOURSE OBLIGATIONS
At March 31, 2016,2017, our reserve for sales recourse obligations totaled $15$14 million, which primarily related to theour real estate loan sales in 2014.2014, with a minimal portion of the reserve related to net charge-off sales of our finance receivables. We did not establish any additional reserves for sales recourse obligations associated with the personal loans sold in the Lendmark Sale or our real estate loan sales in 2016 based on the credit quality of the loans sold and the terms of each transaction. During the three months ended March 31, 20162017 and 2015,2016, we had no repurchase activity related to these sales and no material activity related to our reserve for sales recourse obligations.
At March 31, 2016,2017, there were no material recourserepurchase requests with loss exposure that management believes willbelieved would not be covered by the reserve. However, we will continue to monitor any repurchase activity in the future and will adjust the reserve accordingly.
It is inherently difficult to determine whether any recourse losses are probable or even reasonably possible or to estimate the amounts of any losses. In addition, even where When recourse losses are reasonably possible or exposure to such losses exists in excess of the liability already accrued, it is not always possible to reasonably estimate the size of the possible recourse losses or range of losses.
15. Benefit Plans
The following table presentsDuring the three months ended March 31, 2017 and 2016, the components of net periodic benefit cost with respect to our defined benefit pension plans:
|
| | | | | | | | |
| (dollars in millions) | | Three Months Ended March 31, |
| | 2016 | | 2015 |
| | | | | |
| Components of net periodic benefit cost - pension plans: | | |
| | |
|
| Interest cost | | $ | 4 |
| | $ | 4 |
|
| Expected return on assets | | (4 | ) | | (5 | ) |
| Net periodic benefit cost | | $ | — |
| | $ | (1 | ) |
plans were immaterial. We do not currently fund post retirement benefits.
16. Segment Information
Our segments coincide with how our businesses are managed. At March 31, 2016,2017, our threetwo segments include:
Consumer and Insurance;
Acquisitions and Servicing; and
Real Estate.
Management considers Consumer and Insurance, and Acquisitions and Servicing as our “Core Consumer Operations” and Real Estate as our “Non-Core Portfolio.”
Our segments are managed as follows:
Core Consumer Operationsincluded:
Consumer and Insurance — We originate and service personal loans (secured and unsecured) through two business divisions:our branch operationsnetwork and our centralized operations andoperations. We also offer credit insurance (life insurance, disability insurance, and involuntary unemployment insurance), non-credit insurance, and ancillary products, such as warranty protection. Branch operations primarily conductauto membership plans provided by a third party. Our branch network conducts business in 27 states, which are our core operating28 states. Our centralized operations underwrite and process certain loan applications that we receive from our branch operationsnetwork or through an internet portal. If the applicant is “in footprint,” located near an existing branch, (“in footprint”), our centralized operations make the credit decision regarding the application and then request, but do not require, the customer to visit a nearby branch for closing, funding and servicing. If the applicant is “out of footprint,” not located near a branch, (“out of footprint”), our centralized operations originate the loan.
Acquisitions and Servicing — SFI services the SpringCastle Portfolio that was acquired by an indirect subsidiary of OMH through a joint venture in which SFC owned a 47% equity interest.the SpringCastle Joint Venture. On March 31, 2016, the SpringCastle Portfolio was sold in connection with the sale of our equity interest in the SpringCastle Joint Venture. These loans consist of unsecured loans and loans secured by subordinate residential real estate mortgages and include both closed-end accounts and open-end lines of credit. These loans are in a liquidating status and vary in substance and form from our originated loans. Unless SFI is terminated, SFI will continue to provide the servicing for these loans pursuant to a servicing agreement, which we serviceSFI services as unsecured loans because the liens are subordinated to superior ranking security interests.
Non-Core Portfolio
Real Estate — We service and hold real estate loans secured by first or second mortgages on residential real estate. Real estate loans previously originated through our branch offices or previously acquired or originated through centralized distribution channels are serviced by: (i) MorEquity and subserviced by Nationstar; (ii) Select Portfolio Servicing, Inc.; or (iii) our centralized operations. Investment funds managed by affiliates of Fortress indirectly own a majority interest in Nationstar. Prior to the OneMain Acquisition, this segment also included proceeds from the sale of our real estate loans in 2014. OMH used these proceeds to acquire OneMain.
The remaining components (which we refer to as “Other”) consist of our other non-core, non-originating legacy operations, which are isolated by geographic market and/or distribution channel from our Core Consumer Operations and our Non-Core Portfolio. These operations include:include (i) our legacy operations in 14 states where we had also ceased branch-based personal lending;liquidating real estate loan portfolio as discussed below, (ii) our liquidating retail sales finance portfolio (including retail sales finance accounts from itsour legacy auto finance operation);, and (iii) our lending operationsshort equity personal loans that we are no longer originating.
Beginning in Puerto Rico and the U.S. Virgin Islands; and (iv) the operations2017, management no longer views or manages our real estate assets as a separate operating segment. Therefore, we are now including Real Estate, which was previously presented as a distinct reporting segment, in “Other.” To conform to this new alignment of our United Kingdom subsidiary.segments, we have revised our prior period segment disclosures.
We evaluate the performance of the segments based on pretax operating earnings. The accounting policies of the segments are the same as those disclosed in Note 3 to the consolidated financial statements of our 20152016 Annual Report on Form 10-K, except as described below.
Due to the nature of the Fortress Acquisition, we applied purchase accounting. However, we report the operating results of our Core Consumer Operations, Non-Core Portfolio,and Insurance, Acquisitions and Servicing, and Other using “Segmentthe Segment Accounting Basis,” which (i) reflects our allocation methodologies for certain costs, primarily interest expense and loan loss reserves, and acquisition costs to reflect the manner in which we assess our business results and (ii) excludes the impact of applying purchase accounting. These allocations and adjustments have a material effectaccounting (eliminates premiums/discounts on our reported segment basis incomefinance receivables and long-term debt at acquisition, as compared to GAAP. We believe a Segment Accounting Basis (a basis other than U.S. GAAP) provides investorswell as the basis for which management evaluates segment performance.amortization/accretion in future periods).
We allocate revenues and expenses (on a Segment Accounting Basis) to each segment using the following methodologies:
|
| |
| Interest income | Directly correlated with a specific segment. |
| Interest expense | AcquisitionAcquisitions and Servicing - This segment includes interest expense specifically identified to the SpringCastle Portfolio.
|
Consumer and Insurance Real Estate and Other - The Company has securitization debt and unsecured debt. The Company first allocates interest expense to its segments based on actual expense for securitizations and secured term debt and using a weighted average for unsecured debt allocated to the segments. Average unsecured debt allocations for the periods presented are as follows: |
Subsequent to the OneMain Acquisition |
| Total average unsecured debt is allocated as follows: |
l Consumer and Insurance - receives remainder of unallocated average debt; and |
l Real Estate and Other - at 100% of asset base. (Asset base represents the average net finance receivables including finance receivables held for sale.) |
The net effect of the change in debt allocation and asset base methodologies for the three months ended March 31, 2015 had it been in place as of the beginning of the year would be an increase in interest expense of $54 million for Consumer and Insurance and a decrease in interest expense of $45 million and $9 million for Real Estate and Other, respectively. |
For the period third quarter 2014 to the OneMain Acquisition |
Total average unsecured debt is allocated to Consumer and Insurance, Real Estate and Other, such that the total debt allocated across each segment equals 83%, up to 100% and 100% of each of its respective asset base. Any excess is allocated to Consumer and Insurance. |
Average unsecured debt is allocated after average securitized debt to achieve the calculated average segment debt. |
Asset base represents the following: |
l Consumer and Insurance - average net finance receivables including average net finance receivables held for sale;
|
l Real Estate - average net finance receivables including average net finance receivables held for sale, cash and cash equivalents, investments including proceeds from Real Estate sales; and
|
l Other - average net finance receivables other than the periods listed below:
|
l May 2015 to the OneMain Acquisition - average net finance receivables and cash and cash equivalents less proceeds from equity issuance in 2015, operating cash reserve and cash included in other segments.
|
l February 2015 to April 2015 - average net finance receivables and cash and cash equivalents less operating cash reserve and cash included in other segments.
|
| Provision for finance receivable losses | Directly correlated with a specific segment, except for allocations to Other, which are based on the remaining delinquent accounts as a percentage of total delinquent accounts. |
| Other revenues | Directly correlated with a specific segment, except for: (i) net gain (loss) on repurchases and repayments of debt, which is allocated to the segments based on the interest expense allocation of debt and (ii) gains and losses on foreign currency exchange, which isare allocated to the segments based on the interest expense allocation of debt. |
| Other expenses | Salaries and benefits | - Directly correlated with a specific segment. Other salaries and benefits not directly correlated with a specific segment are allocated to each of the segments based on services provided. |
Other operating expenses | - Directly correlated with a specific segment. Other operating expenses not directly correlated with a specific segment are allocated to each of the segments based on services provided. |
Insurance policy benefits and claims | - Directly correlated with a specific segment. |
The “Segment to GAAP Adjustment” column in the following tables primarily consists of:
Interest income - reverses the net purchase accounting impact of the amortization (accretion) of the net premium (discount) assigned topremiums/discounts on purchased finance receivables and the impact of identifying purchased credit impaired finance receivables as compared to theinterest income recognition under guidance in ASC 310-20, Nonrefundable Fees and Other Costs, and ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, and reestablishes interest income recognition on a historical values of finance receivables;cost basis;
Interest expense - primarily includesreverses the accretionimpact of the net discount applied to our long termpremiums/discounts on acquired long-term debt as part of purchase accounting;and reestablishes interest expense recognition on a historical cost basis;
Provision for finance receivable losses - reverses the adjustment to reflectimpact of providing an allowance for finance receivable losses upon acquisition and reestablishes the difference between our allowance adjustment calculated under our Segment Accounting Basison a historical cost basis and our GAAPreverses the impact of recognition of net charge-offs on purchased credit impaired finance receivables and reestablishes the net charge-offs on a historical cost basis;
Other revenues - reestablishes the impacthistorical cost basis of carrying value differences between Segment Accounting Basis and purchase accounting basis when measuring mark to market for loansmark-to-market adjustments on finance receivables held for sale and on realized gains/losses associated with our investment portfolio; and
Other expenses - reestablishes expenses on a historical cost basis by reversing the net impact of amortization associated with identified intangibles as partfrom acquired intangible assets and including amortization of purchase accountingother historical deferred costs; and deferred costs impacted by purchase accounting.
Assets - revalues assets based on their fair values at the effective date of the Fortress Acquisition.
The following tables present information about the Company’s segments, as well as reconciliations to the condensed consolidated financial statement amounts.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| (dollars in millions) | | Consumer and Insurance | | Acquisitions and Servicing | | Real Estate | | Other | | Segment to GAAP Adjustment | | Consolidated Total |
| | | | | | | | | | | | | |
At or for the Three Months Ended
March 31, 2016 | | | | |
| | |
| | |
| | |
| | |
|
| Interest income | | $ | 311 |
| | $ | 101 |
| | $ | 15 |
| | $ | 1 |
| | $ | 3 |
| | $ | 431 |
|
| Interest expense | | 95 |
| | 20 |
| | 13 |
| | 4 |
| | 24 |
| | 156 |
|
| Provision for finance receivable losses | | 73 |
| | 17 |
| | 2 |
| | — |
| | 2 |
| | 94 |
|
| Net interest income (loss) after provision for finance receivable losses | | 143 |
| | 64 |
| | — |
| | (3 | ) | | (23 | ) | | 181 |
|
| Net gain on sale of SpringCastle interests | | — |
| | 229 |
| | — |
| | — |
| | — |
| | 229 |
|
| Other revenues * | | 45 |
| | — |
| | (11 | ) | | 50 |
| | 1 |
| | 85 |
|
| Other expenses | | 174 |
| | 14 |
| | 7 |
| | (4 | ) | | — |
| | 191 |
|
| Income (loss) before provision for (benefit from) income taxes | | 14 |
| | 279 |
| | (18 | ) | | 51 |
| | (22 | ) | | 304 |
|
| Income before provision for income taxes attributable to non-controlling interests | | — |
| | 26 |
| | — |
| | — |
| | — |
| | 26 |
|
| Income (loss) before provision for (benefit from) income taxes attributable to Springleaf Finance Corporation | | $ | 14 |
| | $ | 253 |
| | $ | (18 | ) | | $ | 51 |
| | $ | (22 | ) | | $ | 278 |
|
| | | | | | | | | | | | | |
| Assets | | $ | 5,704 |
| | $ | 101 |
| | $ | 667 |
| | $ | 4,042 |
| | $ | (22 | ) | | $ | 10,492 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| (dollars in millions) | | Consumer and Insurance | | Acquisitions and Servicing | | Other (a) | | Segment to GAAP Adjustment | | Consolidated Total |
| | | | | | | | | | | |
| At or for the Three Months Ended March 31, 2017 | | | | |
| | |
| | |
| | |
|
| Interest income | | $ | 290 |
| | $ | — |
| | $ | 6 |
| | $ | 1 |
| | $ | 297 |
|
| Interest expense | | 104 |
| | — |
| | 6 |
| | 17 |
| | 127 |
|
| Provision for finance receivable losses | | 70 |
| | — |
| | 1 |
| | — |
| | 71 |
|
| Net interest income (loss) after provision for finance receivable losses | | 116 |
| | — |
| | (1 | ) | | (16 | ) | | 99 |
|
| Other revenues (b) | | 49 |
| | — |
| | 59 |
| | (2 | ) | | 106 |
|
| Other expenses | | 158 |
| | — |
| | 4 |
| | — |
| | 162 |
|
| Income before income taxes | | $ | 7 |
| | $ | — |
| | $ | 54 |
| | $ | (18 | ) | | $ | 43 |
|
| | | | | | | | | | | |
| Assets (c) | | $ | 5,452 |
| | $ | — |
| | $ | 4,481 |
| | $ | (67 | ) | | $ | 9,866 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| At or for the Three Months Ended March 31, 2016 | | | | | | |
| | |
| | |
|
| Interest income | | $ | 311 |
| | $ | 102 |
|
| $ | 16 |
| | $ | 2 |
|
| $ | 431 |
|
| Interest expense | | 95 |
| | 20 |
| | 17 |
| | 24 |
| | 156 |
|
| Provision for finance receivable losses | | 73 |
| | 14 |
| | 2 |
| | 2 |
| | 91 |
|
| Net interest income (loss) after provision for finance receivable losses | | 143 |
| | 68 |
| | (3 | ) | | (24 | ) | | 184 |
|
| Net gain on sale of SpringCastle interests | | — |
| | 167 |
| | — |
| | — |
| | 167 |
|
| Other revenues (b) | | 45 |
| | — |
| | 39 |
| | 5 |
| | 89 |
|
| Other expenses | | 174 |
| | 14 |
| | 3 |
| | — |
| | 191 |
|
| Income before income taxes | | 14 |
| | 221 |
| | 33 |
| | (19 | ) | | 249 |
|
| Income before income taxes attributable to non-controlling interests | | — |
| | 28 |
| | — |
| | — |
| | 28 |
|
| Income before income taxes attributable to Springleaf Finance Corporation | | $ | 14 |
| | $ | 193 |
| | $ | 33 |
| | $ | (19 | ) | | $ | 221 |
|
| | | | | | | | | | | |
| Assets (c) | | $ | 5,704 |
| | $ | 101 |
| | $ | 4,709 |
| | $ | (13 | ) | | $ | 10,501 |
|
| |
*(a) | Real Estate segment has been combined with “Other” for the prior period. |
| |
| (b) | Other revenues reported in “Other” primarily includes interest income on the IndependenceCash Services Note (previously referred to as the “Independence Demand NoteNote”) and on SFC’s note receivable from SFI. See Note 98 for further information on the notes receivable from parent and affiliates. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (dollars in millions) | | Consumer and Insurance | | Acquisitions and Servicing | | Real Estate | | Other | | Eliminations | | Segment to GAAP Adjustment | | Consolidated Total |
| | | | | | | | | | | | | | | |
At or for the Three Months Ended
March 31, 2015 | | | | | | |
| | |
| | | | |
| | |
|
| Interest income | | $ | 254 |
| | $ | 125 |
|
| $ | 18 |
|
| $ | 2 |
| | $ | — |
|
| $ | 3 |
|
| $ | 402 |
|
| Interest expense | | 40 |
| | 23 |
| | 60 |
| | 10 |
| | (5 | ) | | 30 |
| | 158 |
|
| Provision for finance receivable losses | | 55 |
| | 27 |
| | 2 |
| | — |
| | — |
| | 2 |
| | 86 |
|
| Net interest income (loss) after provision for finance receivable losses | | 159 |
| | 75 |
| | (44 | ) | | (8 | ) | | 5 |
| | (29 | ) | | 158 |
|
| Other revenues | | 51 |
| | 5 |
| | 3 |
| | 2 |
| | (5 | ) | | (3 | ) | | 53 |
|
| Other expenses | | 140 |
| | 16 |
| | 7 |
| | 5 |
| | — |
| | 1 |
| | 169 |
|
| Income (loss) before provision for (benefit from) income taxes | | 70 |
| | 64 |
| | (48 | ) | | (11 | ) | | — |
| | (33 | ) | | 42 |
|
| Income before provision for income taxes attributable to non-controlling interests | | — |
| | 31 |
| | — |
| | — |
| | — |
| | — |
| | 31 |
|
| Income (loss) before provision for (benefit from) income taxes attributable to Springleaf Finance Corporation | | $ | 70 |
| | $ | 33 |
| | $ | (48 | ) | | $ | (11 | ) | | $ | — |
| | $ | (33 | ) | | $ | 11 |
|
| | | | | | | | | | | | | | | |
| Assets * | | $ | 4,821 |
| | $ | 1,958 |
| | $ | 3,613 |
| | $ | 1,832 |
| | $ | — |
| | $ | 17 |
| | $ | 12,241 |
|
| |
*(c) | Assets reflectreported in “Other” primarily includes notes receivable from parent and affiliates discussed above. See Note 8 for further information on the following:notes receivable from parent and affiliates. |
As a result of our early adoption of ASU 2015-03, we reclassified $32 million of debt issuance costs from other assets to long-term debt as of March 31, 2015.
In connection with our policy integration with OneMain, we report unearned insurance premium and claim reserves related to finance receivables (previously reported in insurance claims and policyholder liabilities) as a contra-asset to net finance receivables, which totaled $216 million at March 31, 2015.
During the second quarter of 2015, we identified incorrect allocations of our total assets disclosure within our segment footnote and have corrected the previously disclosed total assets at March 31, 2015 in the table above.
17. Fair Value Measurements
The fair value of a financial instrument is the amount that would be expected to be received if an asset were to be sold or the amount that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The degree of judgment used in measuring the fair value of financial instruments generally correlates with the level of pricing observability. Financial instruments with quoted prices in active markets generally have more pricing observability and less judgment is used in measuring fair value. Conversely, financial instruments traded in other-than-active markets or that do not have quoted prices have less observability and are measured at fair value using valuation models or other pricing techniques that require more judgment. An other-than-active market is one in which there are few transactions, the prices are not current, price quotations vary substantially either over time or among market makers, or little information is released publicly for the asset or liability being valued. Pricing observability is affected by a number of factors, including the type of financial instrument, whether the financial instrument is listed on an exchange or traded over-the-counter or is new to the market and not yet established, the characteristics specific to the transaction, and general market conditions.
The following table summarizes the fair values and carrying values of our financial instruments and indicates the fair value hierarchy based on the level of inputs we utilized to determine such fair values:
| | | | | Fair Value Measurements Using | | Total
Fair
Value | | Total
Carrying
Value | | Fair Value Measurements Using | | Total
Fair
Value | | Total
Carrying
Value |
| (dollars in millions) | | Level 1 | | Level 2 | | Level 3 | | | Level 1 | | Level 2 | | Level 3 | |
| | | | | | | | | | | | | | | | | | | | | |
| March 31, 2016 | | |
| | |
| | |
| | |
| | |
| |
| March 31, 2017 | | | |
| | |
| | |
| | |
| | |
|
| Assets | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Cash and cash equivalents | | $ | 358 |
| | $ | 7 |
| | $ | — |
| | $ | 365 |
| | $ | 365 |
| | $ | 340 |
| | $ | 57 |
| | $ | — |
| | $ | 397 |
| | $ | 397 |
|
| Investment securities | | — |
| | 619 |
| | 2 |
| | 621 |
| | 621 |
| | — |
| | 611 |
| | 2 |
| | 613 |
| | 613 |
|
| Net finance receivables, less allowance for finance receivable losses | | — |
| | — |
| | 4,912 |
| | 4,912 |
| | 4,689 |
| | — |
| | — |
| | 5,000 |
| | 5,000 |
| | 4,667 |
|
| Finance receivables held for sale | | — |
| | — |
| | 804 |
| | 804 |
| | 776 |
| | — |
| | — |
| | 151 |
| | 151 |
| | 148 |
|
| Notes receivable from parent and affiliates | | — |
| | 3,775 |
| | — |
| | 3,775 |
| | 3,775 |
| | — |
| | 3,803 |
| | — |
| | 3,803 |
| | 3,803 |
|
| Restricted cash and cash equivalents | | 225 |
| | — |
| | — |
| | 225 |
| | 225 |
| |
| Other assets: | | |
| | |
| | |
| | |
| | |
| |
| Commercial mortgage loans | | — |
| | — |
| | 53 |
| | 53 |
| | 53 |
| |
| Escrow advance receivable | | — |
| | — |
| | 11 |
| | 11 |
| | 11 |
| |
| Receivables from parent and affiliates | | — |
| | 28 |
| | — |
| | 28 |
| | 28 |
| |
| Receivables related to sales of real estate loans and related trust assets | | — |
| | 1 |
| | — |
| | 1 |
| | 5 |
| |
| Restricted cash and restricted cash equivalents | | | 192 |
| | — |
| | — |
| | 192 |
| | 192 |
|
| Other assets (a) | | | — |
| | 41 |
| | 30 |
| | 71 |
| | 73 |
|
| | | | | | | | | | | | | | | | | | | | | |
| Liabilities | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Long-term debt | | $ | — |
| | $ | 7,470 |
| | $ | — |
| | $ | 7,470 |
| | $ | 7,187 |
| | $ | — |
| | $ | 7,281 |
| | $ | — |
| | $ | 7,281 |
| | $ | 6,823 |
|
| Note payable to affiliate | | — |
| | 374 |
| | — |
| | 374 |
| | 374 |
| |
| Payables to parent and affiliates | | — |
| | 34 |
| | — |
| | 34 |
| | 34 |
| |
| Other liabilities (b) | | | — |
| | 45 |
| | — |
| | 45 |
| | 45 |
|
| | | | | | | | | | | | | | | | | | | | | |
| December 31, 2015 | | |
| | |
| | |
| | |
| | |
| |
| December 31, 2016 | | | |
| | |
| | |
| | |
| | |
|
| Assets | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Cash and cash equivalents | | $ | 321 |
| | $ | — |
| | $ | — |
| | $ | 321 |
| | $ | 321 |
| | $ | 198 |
| | $ | 42 |
| | $ | — |
| | $ | 240 |
| | $ | 240 |
|
| Investment securities | | — |
| | 602 |
| | 2 |
| | 604 |
| | 604 |
| | — |
| | 580 |
| | 2 |
| | 582 |
| | 582 |
|
| Net finance receivables, less allowance for finance receivable losses | | — |
| | — |
| | 6,897 |
| | 6,897 |
| | 6,204 |
| | — |
| | — |
| | 5,122 |
| | 5,122 |
| | 4,755 |
|
| Finance receivables held for sale | | — |
| | — |
| | 819 |
| | 819 |
| | 796 |
| | — |
| | — |
| | 159 |
| | 159 |
| | 153 |
|
| Notes receivable from parent and affiliates | | — |
| | 3,804 |
| | — |
| | 3,804 |
| | 3,804 |
| | — |
| | 3,723 |
| | — |
| | 3,723 |
| | 3,723 |
|
| Restricted cash and cash equivalents | | 295 |
| | — |
| | — |
| | 295 |
| | 295 |
| |
| Other assets: | | | | | | | | |
| | | |
| Commercial mortgage loans | | — |
| | — |
| | 62 |
| | 62 |
| | 62 |
| |
| Escrow advance receivable | | — |
| | — |
| | 11 |
| | 11 |
| | 11 |
| |
| Receivables from parent and affiliates | | — |
| | 9 |
| | — |
| | 9 |
| | 9 |
| |
| Receivables related to sales of real estate loans and related trust assets | | — |
| | 1 |
| | — |
| | 1 |
| | 5 |
| |
| Restricted cash and restricted cash equivalents | | | 227 |
| | — |
| | — |
| | 227 |
| | 227 |
|
| Other assets (a) | | | — |
| | 41 |
| | 34 |
| | 75 |
| | 77 |
|
| | | | | | | | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | |
| | | | | | | | | | |
| | |
| Long-term debt | | $ | — |
| | $ | 9,998 |
| | $ | — |
| | $ | 9,998 |
| | $ | 9,582 |
| | $ | — |
| | $ | 7,308 |
| | $ | — |
| | $ | 7,308 |
| | $ | 6,837 |
|
| Payables to parent and affiliates | | — |
| | 24 |
| | — |
| | 24 |
| | 24 |
| |
| Other liabilities (b) | | | — |
| | 13 |
| | — |
| | 13 |
| | 13 |
|
| |
| (a) | Includes commercial mortgage loans, escrow advance receivable, receivables from parent and affiliates, and receivables related to sales of real estate loans and related trust assets. |
| |
| (b) | Consists of payables to parent and affiliates. |
FAIR VALUE MEASUREMENTS — RECURRING BASIS
The following tables present information about our assets measured at fair value on a recurring basis and indicates the fair value hierarchy based on the levels of inputs we utilized to determine such fair value:
| | | | | Fair Value Measurements Using | | Total Carried At Fair Value | | Fair Value Measurements Using | | Total Carried At Fair Value |
| (dollars in millions) | | Level 1 | | Level 2 | | Level 3 | | | Level 1 | | Level 2 | | Level 3 (a) | |
| | | | | | | | | | | | | | | | | |
| March 31, 2016 | | |
| | |
| | |
| | |
| |
| March 31, 2017 | | | |
| | |
| | |
| | |
|
| Assets | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Cash equivalents in mutual funds | | $ | 129 |
| | $ | — |
| | $ | — |
| | $ | 129 |
| | $ | 232 |
| | $ | — |
| | $ | — |
| | $ | 232 |
|
| Cash equivalents in certificates of deposit and commercial paper | | — |
| | 7 |
| | — |
| | 7 |
| |
| Cash equivalents in securities | | | — |
| | 57 |
| | — |
| | 57 |
|
| Investment securities: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Available-for-sale securities: | | |
| | |
| | |
| | |
| |
| Available-for-sale securities | | | |
| | |
| | |
| | |
|
| Bonds: | | | | | | | | | | | | | | | | |
| U.S. government and government sponsored entities | | — |
| | 77 |
| | — |
| | 77 |
| | — |
| | 19 |
| | — |
| | 19 |
|
| Obligations of states, municipalities, and political subdivisions | | — |
| | 92 |
| | — |
| | 92 |
| | — |
| | 73 |
| | — |
| | 73 |
|
| Non-U.S. government and government sponsored entities | | | — |
| | 3 |
| | — |
| | 3 |
|
| Corporate debt | | — |
| | 307 |
| | — |
| | 307 |
| | — |
| | 371 |
| | — |
| | 371 |
|
| RMBS | | — |
| | 70 |
| | — |
| | 70 |
| | — |
| | 40 |
| | — |
| | 40 |
|
| CMBS | | — |
| | 47 |
| | — |
| | 47 |
| | — |
| | 32 |
| | — |
| | 32 |
|
| CDO/ABS | | — |
| | 18 |
| | — |
| | 18 |
| | — |
| | 64 |
| | — |
| | 64 |
|
| Total bonds | | — |
| | 611 |
| | — |
| | 611 |
| | — |
| | 602 |
| | — |
| | 602 |
|
| Preferred stock | | — |
| | 5 |
| | — |
| | 5 |
| | — |
| | 6 |
| | — |
| | 6 |
|
| Other long-term investments | | — |
| | — |
| | 1 |
| | 1 |
| | — |
| | — |
| | 1 |
| | 1 |
|
| Total available-for-sale securities * | | — |
| | 616 |
| | 1 |
| | 617 |
| |
| Other securities: | | | | | | | | | |
| Total available-for-sale securities (b) | | | — |
| | 608 |
| | 1 |
| | 609 |
|
| Other securities | | | | | | | | | |
| Bonds: | | | | | | | | | | | | | | | | |
| Corporate debt | | — |
| | 1 |
| | — |
| | 1 |
| | — |
| | 2 |
| | — |
| | 2 |
|
| CMBS | | — |
| | 2 |
| | — |
| | 2 |
| | — |
| | 1 |
| | — |
| | 1 |
|
| Total other securities | | — |
| | 3 |
| | — |
| | 3 |
| | — |
| | 3 |
| | — |
| | 3 |
|
| Total investment securities | | — |
| | 619 |
| | 1 |
| | 620 |
| | — |
| | 611 |
| | 1 |
| | 612 |
|
| Restricted cash in mutual funds | | 210 |
| | — |
| | — |
| | 210 |
| | 174 |
| | — |
| | — |
| | 174 |
|
| Total | | $ | 339 |
| | $ | 626 |
| | $ | 1 |
|
| $ | 966 |
| | $ | 406 |
| | $ | 668 |
| | $ | 1 |
|
| $ | 1,075 |
|
| |
*(a) | Due to the insignificant activity within the Level 3 assets during the three months ended March 31, 2017, we have omitted the additional disclosures relating to the changes in Level 3 assets measured at fair value on a recurring basis and the quantitative information about Level 3 unobservable inputs. |
| |
| (b) | Excludes an immaterial interest in a limited partnership that we account for using the equity method and Federal Home Loan BankFHLB common stock of $1 million at March 31, 2016,2017, which is carried at cost. |
| | | | | Fair Value Measurements Using | | Total Carried At Fair Value | | Fair Value Measurements Using | | Total Carried At Fair Value |
| (dollars in millions) | | Level 1 | | Level 2 | | Level 3 | | | Level 1 | | Level 2 | | Level 3 (a) | |
| | | | | | | | | | | | | | | | | |
| December 31, 2015 | | |
| | |
| | |
| | |
| |
| December 31, 2016 | | | |
| | |
| | |
| | |
|
| Assets | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Cash equivalents in mutual funds | | $ | 224 |
| | $ | — |
| | $ | — |
| | $ | 224 |
| | $ | 119 |
| | $ | — |
| | $ | — |
| | $ | 119 |
|
| Cash equivalents in securities | | | — |
| | 42 |
| | — |
| | 42 |
|
| Investment securities: | | |
| | |
| | |
| |
|
| | |
| | |
| | |
| |
|
|
| Available-for-sale securities: | | |
| | |
| | |
| | |
| |
| Available-for-sale securities | | | |
| | |
| | |
| | |
|
| Bonds: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| U.S. government and government sponsored entities | | — |
| | 82 |
| | — |
| | 82 |
| | — |
| | 13 |
| | — |
| | 13 |
|
| Obligations of states, municipalities, and political subdivisions | | — |
| | 89 |
| | — |
| | 89 |
| | — |
| | 82 |
| | — |
| | 82 |
|
| Non-U.S. government and government sponsored entities | | | — |
| | 5 |
| | — |
| | 5 |
|
| Corporate debt | | — |
| | 267 |
| | — |
| | 267 |
| | — |
| | 353 |
| | — |
| | 353 |
|
| RMBS | | — |
| | 74 |
| | — |
| | 74 |
| | — |
| | 39 |
| | — |
| | 39 |
|
| CMBS | | — |
| | 44 |
| | — |
| | 44 |
| | — |
| | 33 |
| | — |
| | 33 |
|
| CDO/ABS | | — |
| | 29 |
| | — |
| | 29 |
| | — |
| | 46 |
| | — |
| | 46 |
|
| Total bonds | | — |
| | 585 |
| | — |
| | 585 |
| | — |
| | 571 |
| | — |
| | 571 |
|
| Preferred stock | | — |
| | 5 |
| | — |
| | 5 |
| | — |
| | 6 |
| | — |
| | 6 |
|
| Other long-term investments | | — |
| | — |
| | 1 |
| | 1 |
| | — |
| | — |
| | 1 |
| | 1 |
|
| Total available-for-sale securities (a) | | — |
| | 590 |
| | 1 |
| | 591 |
| |
| Trading and other securities: | | |
| | |
| | |
| | |
| |
| Total available-for-sale securities (b) | | | — |
| | 577 |
| | 1 |
| | 578 |
|
| Other securities | | | |
| | |
| | |
| | |
|
| Bonds: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Corporate debt | | — |
| | 10 |
| | — |
| | 10 |
| | — |
| | 2 |
| | — |
| | 2 |
|
| CMBS | | — |
| | 2 |
| | — |
| | 2 |
| | — |
| | 1 |
| | — |
| | 1 |
|
| Total trading and other securities (b) | | — |
| | 12 |
| | — |
| | 12 |
| |
| Total other securities | | | — |
| | 3 |
| | — |
| | 3 |
|
| Total investment securities | | — |
| | 602 |
| | 1 |
| | 603 |
| | — |
| | 580 |
| | 1 |
| | 581 |
|
| Restricted cash in mutual funds | | 276 |
| | — |
| | — |
| | 276 |
| | 212 |
| | — |
| | — |
| | 212 |
|
| Total | | $ | 500 |
| | $ | 602 |
| | $ | 1 |
| | $ | 1,103 |
| | $ | 331 |
| | $ | 622 |
| | $ | 1 |
| | $ | 954 |
|
| |
| (a) | Due to the insignificant activity within the Level 3 assets during 2016, we have omitted the additional disclosures relating to the changes in Level 3 assets measured at fair value on a recurring basis and the quantitative information about Level 3 unobservable inputs. |
| |
| (b) | Excludes an immaterial interest in a limited partnership that we account for using the equity method and Federal Home Loan BankFHLB common stock of $1 million at December 31, 2015,2016, which is carried at cost. |
| |
(b) | The fair value of other securities totaled $2 million at December 31, 2015. |
We had no transfers between Level 1 and Level 2 during the three months ended March 31, 2016.
The following table presents changes in Level 3 assets measured at fair value on a recurring basis:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Net gains (losses) included in: | | Purchases, sales, issues, settlements | | Transfers into
Level 3 | | Transfers
out of
Level 3 * | | Balance
at end of
period |
| | | Balance at
beginning
of period | | Other
revenues | | Other
comprehensive
income (loss) | | | | |
| (dollars in millions) | | | | | | | |
| | | | | | | | | | | | | | | |
Three Months Ended
March 31, 2016 | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Investment securities: | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Available-for-sale securities: | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Other long-term investments | | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
|
| Total | | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
|
| | | | | | | | | | | | | | | |
Three Months Ended
March 31, 2015 | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Investment securities: | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Available-for-sale securities: | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Bonds: | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Corporate debt | | $ | 4 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 4 |
|
| CMBS | | 3 |
| | — |
| | — |
| | — |
| | — |
| | (3 | ) | | — |
|
| Total bonds | | 7 |
| | — |
| | — |
| | — |
| | — |
| | (3 | ) | | 4 |
|
| Other long-term investments | | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
|
| Total | | $ | 8 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (3 | ) | | $ | 5 |
|
| |
* | During the three months ended March 31, 2015, we transferred CMBS securities totaling $3 million out of Level 3 primarily related to the greater observability of pricing inputs. |
We used observable and/or unobservable inputs to determine the fair value of positions that we have classified within the Level 3 category. As a result, the unrealized gains and losses for assets and liabilities within the Level 3 category presented in the Level 3 tables above may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long-dated volatilities) inputs.
The unobservable inputs and quantitative data used in our Level 3 valuations for our investment securities were developed and used in models created by our third-party valuation service providers, which values were used by us for fair value disclosure purposes without adjustment. We applied the third-party exception which allows us to omit certain quantitative disclosures about unobservable inputs for other long-term investments. As a result, the weighted average ranges of the inputs for these investment securities are not applicable in the following table.
Quantitative information about Level 3 inputs for our assets measured at fair value on a recurring basis for which information about the unobservable inputs is reasonably available to us at March 31, 2016 and December 31, 2015 is as follows:
|
| | | | |
| | | Range (Weighted Average) |
| Valuation Technique(s) | Unobservable Input | March 31, 2016 | December 31, 2015 |
RMBS | Discounted cash flows | Spread | 693 bps (a) | 665 bps (a) |
Other long-term investments | Discounted cash flows and indicative valuations | Historical costs
Nature of investment
Local market conditions
Comparables
Operating performance
Recent financing activity
| N/A (b) | N/A (b) |
| |
(a) | At March 31, 2016 and December 31, 2015, RMBS consisted of one bond, which was less than $1 million. |
The fair values of the assets using significant unobservable inputs are sensitive and can be impacted by significant increases or decreases in any of those inputs. Level 3 broker-priced instruments, including RMBS (except for the one bond previously noted), CMBS, and CDO/ABS, are excluded from the table above because the unobservable inputs are not reasonably available to us.
Our RMBS, CMBS, and CDO/ABS securities have unobservable inputs that are reliant on and sensitive to the quality of their underlying collateral. The inputs, although not identical, have similar characteristics and interrelationships. Generally a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for prepayment speeds. An improvement in the workout criteria related to the restructured debt and/or debt covenants of the underlying collateral may lead to an improvement in the cash flows and have an inverse impact on other inputs, specifically a reduction in the amount of discount applied for marketability and liquidity, making the structured bonds more attractive to market participants.2017.
FAIR VALUE MEASUREMENTS — NON-RECURRING BASIS
We measure the fair value of certain assets on a non-recurring basis when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.
Assets measured at fair value on a non-recurring basis on which we recorded impairment charges were as follows:
|
| | | | | | | | | | | | | | | | |
| | | Fair Value Measurements Using * | | |
| (dollars in millions) | | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | | | | | | |
| March 31, 2016 | | |
| | |
| | |
| | |
|
| Assets | | |
| | |
| | |
| | |
|
| Finance receivables held for sale | | $ | — |
| | $ | — |
| | $ | 170 |
| | $ | 170 |
|
| Real estate owned | | — |
| | — |
| | 10 |
| | 10 |
|
| Commercial mortgage loans | | — |
| | — |
| | 8 |
| | 8 |
|
| Total | | $ | — |
| | $ | — |
| | $ | 188 |
| | $ | 188 |
|
| | | | | | | | | |
| December 31, 2015 | | |
| | |
| | |
| | |
|
| Assets | | |
| | |
| | |
| | |
|
| Real estate owned | | $ | — |
| | $ | — |
| | $ | 11 |
| | $ | 11 |
|
| Commercial mortgage loans | | — |
| | — |
| | 8 |
| | 8 |
|
| Total | | $ | — |
| | $ | — |
| | $ | 19 |
| | $ | 19 |
|
| |
* | The fair value information presented in the table is as of the date the fair value adjustment was recorded. |
Net impairment charges recorded on assets measured at fair value on a non-recurring basis were as follows:
|
| | | | | | | | |
| (dollars in millions) | | Three Months Ended March 31, |
| | 2016 | | 2015 |
| | | | | |
| Assets | | |
| | |
|
| Finance receivables held for sale | | $ | 2 |
| | $ | — |
|
| Real estate owned | | 1 |
| | 1 |
|
| Commercial mortgage loans * | | 1 |
| | — |
|
| Total | | $ | 4 |
| | $ | 1 |
|
| |
* | Net impairment charges recorded on commercial mortgage loans for the three months ended March 31, 2015 was less than $1 million and, therefore, is not quantified in the table above. |
In accordance with the authoritative guidance for the accounting for the impairment of finance receivables held for sale, we wrote down certain finance receivables held for sale reported in our Real Estate segment to their fair value during the first quarter of 2016 and recorded the writedowns in other revenues.
In accordance with the authoritative guidance for the accounting for the impairment of long-lived assets, we wrote down certain real estate owned reported in our Real Estate segment to their fair value less cost to sellimmaterial for the three months ended March 31, 20162017 and 2015 and recorded the writedowns in other revenues — other. The fair values of real estate owned disclosed in the table above are unadjusted for transaction costs as required by the authoritative guidance for fair value measurements. The amounts of real estate owned recorded in other assets are net of transaction costs as required by the authoritative guidance for accounting for the impairment of long-lived assets.2016.
In accordance with the authoritative guidance for the accounting for the impairment of commercial mortgage loans, we recorded allowance adjustments on certain impaired commercial mortgage loans reported in our Consumer and Insurance segment to record their fair value for the three months ended March 31, 2016 and 2015 and recorded the net impairments in investment revenues.
The inputs and quantitative data used in our Level 3 valuations for our real estate owned and commercial mortgage loans are unobservable primarily due to the unique nature of specific real estate assets. Therefore, we used independent third-party providers, familiar with local markets, to determine the values used for fair value disclosures without adjustment. We applied the third-party exception which allows us to omit certain quantitative disclosures about unobservable inputs. As a result, the weighted average ranges of the inputs are not applicable in the following table.
Quantitative information about Level 3 inputs for our assets measured at fair value on a non-recurring basis at March 31, 2016 and December 31, 2015 is as follows:
|
| | | | |
| | | Range (Weighted Average) |
| Valuation Technique(s) | Unobservable Input | March 31, 2016 | December 31, 2015 |
Finance receivables held for sale | Income approach | National market conditions Operating performance | N/A* | — |
Real estate owned | Market approach | Third-party valuation | N/A* | N/A* |
Commercial mortgage loans | Market approach
Income approach
Cost approach
| Local market conditions
Nature of investment
Comparable property sales
Operating performance
| N/A* | N/A* |
FAIR VALUE MEASUREMENTS — VALUATION METHODOLOGIES AND ASSUMPTIONS
We useSee Note 23 of the followingNotes to Consolidated Financial Statements in Part II - Item 8 included in our 2016 Annual Report on Form 10-K for information regarding our methods and assumptions used to estimate fair value.
Cash and Cash Equivalents
The carrying amount of cash and cash equivalents, including cash and cash equivalents in certificates of deposit and commercial paper, approximates fair value.
Mutual Funds
Our unit of account is the mutual fund, which is measured at net asset value.
Investment Securities
We utilize third-party valuation service providers to measure the fair value of our investment securities, which are classified as available-for-sale or as trading and other and consist primarily of bonds. Whenever available, we obtain quoted prices in active markets for identical assets at the balance sheet date to measure investment securities at fair value. We generally obtain market price data from exchange or dealer markets.
We estimate the fair value of fixed maturity investment securities not traded in active markets by referring to traded securities with similar attributes, using dealer quotations and a matrix pricing methodology, or discounted cash flow analyses. This methodology considers such factors as the issuer’s industry, the security’s rating and tenor, its coupon rate, its position in the capital structure of the issuer, yield curves, credit curves, composite ratings, bid-ask spreads, prepayment rates and other relevant factors. For fixed maturity investment securities that are not traded in active markets or that are subject to transfer
restrictions, we adjust the valuations to reflect illiquidity and/or non-transferability. Such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used.
We elect the fair value option for investment securities that are deemed to incorporate an embedded derivative and for which it is impracticable for us to isolate and/or value the derivative.
The fair value of certain investment securities is based on the amortized cost, which is assumed to approximate fair value.
Finance Receivables
The fair value of net finance receivables, less allowance for finance receivable losses, both non-impaired and purchased credit impaired, are determined using discounted cash flow methodologies. The application of these methodologies requires us to make certain judgments and estimates based on our perception of market participant views related to the economic and competitive environment, the characteristics of our finance receivables, and other similar factors. The most significant judgments and estimates made relate to prepayment speeds, default rates, loss severity, and discount rates. The degree of judgment and estimation applied is significant in light of the current capital markets and, more broadly, economic environments. Therefore, the fair value of our finance receivables could not be determined with precision and may not be realized in an actual sale. Additionally, there may be inherent limitations in the valuation methodologies we employed, and changes in the underlying assumptions used could significantly affect the results of current or future values.
Finance Receivables Held for Sale
We determined the fair value of finance receivables held for sale that were originated as held for investment based on negotiations with prospective purchasers (if any) or by using projected cash flows discounted at the weighted-average interest rates offered by us in the market for similar finance receivables. We based cash flows on contractual payment terms adjusted for estimates of prepayments and credit related losses.
Restricted Cash and Cash Equivalents
The carrying amount of restricted cash and cash equivalents approximates fair value.
Note Receivable from Parent
The carrying amount of the note receivable from parent approximates the fair value because the note is payable on a demand basis prior to its due date on May 31, 2022 and the interest rate on this note adjusts with changing market interest rates.
Commercial Mortgage Loans
Given the short remaining average life of the portfolio, the carrying amount of commercial mortgage loans approximates fair value. The carrying amount includes an estimate for credit related losses which is based on independent third-party valuations.
Real Estate Owned
We initially base our estimate of the fair value on independent third-party valuations at the time we take title to real estate owned. Subsequent changes in fair value are based upon independent third-party valuations obtained periodically to estimate a price that would be received in a then current transaction to sell the asset.
Escrow Advance Receivable
The carrying amount of escrow advance receivable approximates fair value.
Receivables from Parent and Affiliates
The carrying amount of receivables from parent and affiliates approximates fair value.
Receivables Related to Sales of Real Estate Loans and Related Trust Assets
The carrying amount of receivables related to sales of real estate loans and related trust assets less estimated forfeitures, which are reflected in other liabilities, approximates fair value.
Long-term Debt
We either receive fair value measurements of our long-term debt from market participants and pricing services or we estimate the fair values of long-term debt using projected cash flows discounted at each balance sheet date’s market-observable implicit-credit spread rates for our long-term debt.
We record at fair value long-term debt issuances that are deemed to incorporate an embedded derivative and for which it is impracticable for us to isolate and/or value the derivative. At March 31, 2016, we had no debt carried at fair value under the fair value option.
We estimate the fair values associated with variable rate revolving lines of credit to be equal to par.
Payables to Parent and Affiliates
The fair value of payable to parent and affiliates approximates the carrying value due to its short-term nature.
18. Subsequent Events
SFC’S OFFERING OF SENIOR NOTESRELATED PARTY TRANSACTIONS
Dividend of SFMC to SFI
On April 11, 2016,10, 2017, SFMC, a subsidiary of SFC, issued $1.0 billion aggregate principal amountwas contributed to SFI in the form of 8.25% Senior Notes due 2020 under an Indenture dated as of December 3, 2014 (the “Base Indenture”), as supplemented by a Second Supplemental Indenture, dated as of April 11, 2016 (the “Supplemental Indenture”dividend. SFI then contributed SFMC and together with the Base Indenture, the “Indenture”), pursuantSGSC to which OMH, providedand SFMC merged into SGSC. As a guaranteeresult of the notesdividend, the Company’s total shareholder equity and total assets were reduced by $38 million and $65 million, respectively, on an unsecured basis.
SFC used a portion of the proceeds from the offering to repurchase approximately $600 million aggregate principal amount of its existing senior notes that mature in 2017, at a premium to principal amount from certain beneficial owners, and certain of those beneficial owners purchased notes in the offering. SFC intends to use the remaining net proceeds for general corporate purposes, which may include further debt repurchases and repayments.contribution date.
The notes will mature on December 15, 2020 and bear interest at a rate of 8.25% per annum, payable semiannually in arrears on June 15 and December 15 of each year, beginning on December 15, 2016. The notes are SFC’s senior unsecured obligations and rank equally in right of payment to all of SFC’s other existing and future unsubordinated indebtedness from time to time outstanding. The notes are guaranteed by OMH and will not be guaranteed by any of SFC’s subsidiaries or any other party. The notes are effectively subordinated to all of SFC’s secured obligations tocontribution was the extentresult of the valuecontinuing integration process, and part of a series of corporate consolidation transactions surrounding the OneMain Acquisition.
Termination of Building Lease Agreement and License Agreement
In contemplation of the assets securing such obligationsmerger of SFMC and structurally subordinatedSGSC noted above, the building lease agreement, whereby SFMC leased six of its buildings to any existingSGSC, was terminated effective April 5, 2017. In addition, the license agreement, whereby SFMC leased its information technology systems and future obligationssoftware and other related equipment to SGSC, was terminated as a result of SFC’s subsidiaries with respect to claims against the assets of such subsidiaries.this merger.
The notes may be redeemed at any time and from time to time, at the option of SFC, in whole or in part at a “make-whole” redemption price specified in the Indenture. The notes will not have the benefit of any sinking fund.
The Indenture contains covenants that, among other things (i) limit SFC’s ability to create liens on assets and (ii) restrict SFC’s ability to consolidate, merge or sell its assets. The Indenture also provides for events of default which, if any of them occur, would permit or require the principal of and accrued interest on the notes to become, or to be declared, due and payable.
LENDMARK SALEOneMain Demand Note
On April 13, 2017 and May 2, 2016, pursuant2017, SFC advanced $50 million and $37 million, respectively, to OMFH, under the Purchase and Sale Agreement, dated as of November 12, 2015, by and between OneMain Holdings, Inc., certain of our subsidiaries and Lendmark and as required by our previously disclosed DOJ Settlement Agreement, we completed the sale of 127 Springleaf branches and, subject to certain exclusions, the associated personal loans issued to customers of such branches, fixed non-information technology assets and certain other tangible personal property located in such branches to Lendmark for an aggregate cash purchase price of $624 million. Such sale was effective as of April 30, 2016, and included the sale to Lendmark of personal loans with an unpaid principal balance as of March 31, 2016, of $600 million. OMH has entered into a Transition Services Agreement with Lendmark, and OMH’s and our activities will remain subject to the oversight of the Monitoring Trustee appointed by the Court pursuant to the DOJ Settlement Agreement until the expiration of the Transition Services Agreement. Although we and OMH continue to take such steps as we believe are necessary to comply with the terms of the DOJ Settlement Agreement, no assurance can be given that we will not incur fines or penalties associated with OMH’s or our activities pursuant to the Transition Services Agreement or OMH’s or our efforts to comply with the terms of the DOJ Settlement Agreement.Demand Note.
REVOLVING CONDUIT FACILITIES
On May 2, 2016, SFC used a portion of the proceeds from the Lendmark Sale to repay, in full,April 13, 2017, Midbrook 2013-VFN1 Trust voluntarily terminated its revolving demand note purchase agreement with OMFH, which totaled $376 million (including interest payable of $6 million).its lender.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
An index to our management’s discussion and analysis follows:
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 involve inherent risks, uncertainties 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 that speak only as of the date they were made. We do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this presentationreport or to reflect the occurrence of unanticipated events or the non-occurrence of anticipated events. 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:
various risks relating to the sale of branches to Lendmark Financial Services, LLC (the “Lendmark Sale”) in connection with the previously disclosed settlement with the U.S. Department of Justice (the “DOJ”);
various uncertainties and risks in connection with the OneMain Acquisition which may result in an adverse impact on us;
various risks relating to our continued compliance with the Settlement Agreement;
changes in general economic conditions, including the interest rate environment in which we conduct business and the financial markets through which we can access capital and also invest cash flows from our Consumer and Insurance segment;
levels of unemployment and personal bankruptcies;
natural or accidental events such as earthquakes, hurricanes, tornadoes, fires, or floods affecting our customers, collateral, or branches or other operating facilities;
war, acts of terrorism, riots, civil disruption, pandemics, cyberdisruptions in the operation of our information systems, cyber-attacks or other security breaches, or other events disrupting business or commerce;
changes in the rate at which we can collect or potentially sell our finance receivables portfolio;
the effectiveness of our credit risk scoring models in assessing the risk of customer unwillingness or lack of capacity to repay;
changes in our ability to attract and retain employees or key executives to support our businesses;
changes in the competitive environment in which we operate, including the demand for our products, customer responsiveness to our distribution channels, our ability to make technological improvements, and the strength and ability of our competitors to operate independently or to enter into business combinations that result in a more attractive range of customer products or provide greater financial resources;
shiftsrisks related to the acquisition or sale of assets or businesses or the formation, termination or operation of joint ventures or other strategic alliances or arrangements, including loan delinquencies or net charge-offs, integration or migration issues, increased costs of servicing, incomplete records, and retention of customers;
risks associated with our insurance operations, including insurance claims that exceed our expectations or insurance losses that exceed our reserves;
the inability to successfully implement our growth strategy for our consumer lending business as well as various risks associated with successfully acquiring portfolios of consumer loans, pursuing acquisitions, and/or establishing joint ventures;
declines in collateral values or increases in actual or projected delinquencies or credit losses;net charge-offs;
changes in federal, state or local laws, regulations, or regulatory policies and practices, including the Dodd-Frank Wall Street Reform and Consumer Protection Act (which, among other things, established the Consumer Financial Protection Bureau,CFPB, which has broad authority to regulate and examine financial institutions, including us), that affect our ability to conduct business or the manner in which we 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;industry, our use of third-party vendors and real estate loan servicing, or changes in corporate or individual income tax laws or regulations;
potential liability relating to real estate and personal loans which we have sold or may sell in the future, or relating to securitized loans, 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 litigation associated therewith, any impact to our business operations, reputation, financial position, results of operations or cash flows arising therefrom, any impact to our relationships with lenders, investors or other third parties attributable thereto, and the costs and effects of any breach of any representation, warranty or covenant under any of our contractual arrangements, including indentures or other financing arrangements or contracts, as a result of any such violation;
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 litigation associated therewith;
our continued ability to access the capital markets or the sufficiency of our 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 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;
the impacts of our securitizations and 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 topractices;
changes in accounting principles and policies or changes in accounting estimates;
effects of the manner in which we conduct business;contemplated acquisition of Fortress by an affiliate of SoftBank Group Corp.;
any failure or inability to achieve the SpringCastle Portfolio performance requirements set forth in the SpringCastle Interests Sale purchase agreement; and
the effect of future sales of our remaining portfolio of real estate loans and the transfer of servicing of these loans.loans, including the environmental liability and costs for damage caused by hazardous waste if a real estate loan goes into default.
We also direct readers to other risks and uncertainties discussed in other documents we file with the SEC.
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. We caution that you should not place undue reliance on any of our forward-looking statements. You should specifically consider the factors identified in this report that could cause actual results to differ before making an investment decision to purchase our common stock. Furthermore, new risks and uncertainties arise from time to time, and it is impossible for us to predict those events or how they may affect us.
Overview
Springleaf isWe are a branch-based consumer finance company providingleading provider of responsible personal loansloan products, primarily to non-prime customers through itscustomers. Our network of over 800600 branch offices in 2728 states as of March 31, 20162017 and on a centralized basis as part of itsexpert personnel is complemented by our online personal loan origination capabilities and centralized operations, which allow us to reach customers located outside our branch footprint. Our digital platform provides current and prospective customers the option of obtaining an unsecured personal loan via our iLoan platform. We also writewebsite, www.onemainfinancial.com. (The information on our website is not incorporated by reference into this report.) In connection with our personal loan business, we offer our customers credit and non-credit insurance policies covering our customersinsurance.
In addition, we service or sub-service loans owned by third-parties; pursue strategic acquisitions and the property pledged as collateral for our personal loans.dispositions of assets and businesses, including loan portfolios or other financial assets; and may establish joint ventures or enter into other strategic alliances or arrangements from time to time.
OUR PRODUCTS
Our core product offerings include:
Personal Loans — We offer personal loans through our branch network and over the internetInternet through our centralized operations to customers who generally need timely access to cash. Our personal loans are typically non-revolving with a fixed-rate and a fixed, original term of twothree to five years.years and are secured by consumer goods, automobiles, or other personal property or are unsecured. At March 31, 2016,2017, we had over 1.0 million893,000 personal loans, representing $5.0$4.7 billion of net finance receivables, (including personal loans held for sale of $606 million). At March 31, 2016, $2.5 billion, orwhich 58%, were secured by titled collateral, consistingcompared to 928,000 personal loans totaling $4.8 billion at December 31, 2016, of titled personal property (such as automobiles) and $1.9 billion, or 42%,which 58% were secured by consumer household goods or other items of personal property or were unsecured, compared to $2.4 billion of personal loans, or 56%, secured by collateral consisting of titled personal property and $1.9 billion, or 44%, secured by consumer household goods or other items of personal property or unsecured at December 31, 2015.collateral.
Insurance Products — We offer our customers credit insurance (life insurance, disability insurance, and involuntary unemployment insurance) and non-credit insurance through both our branch network and our centralized operations. Credit insurance and non-credit insurance products are provided by our subsidiaries, Merit Life Insurance Co. (“Merit”) and Yosemite Insurance Company (“Yosemite”).Yosemite. We also offer auto warranty membership plans of an unaffiliated company as an ancillary product.company.
Our core products also included the SpringCastle Portfolio at December 31, 2015, as described below:
SpringCastle Portfolio —SFI services the SpringCastle Portfolio that was acquired by an indirect subsidiary of OMH through a joint venture in which SFC owned a 47% equity interest. On March 31, 2016, the SpringCastle Portfolio was sold in connection with the SpringCastle Interests Sale. These loans consisted of unsecured loans and loans secured by subordinate residential real estate mortgages and include both closed-end accounts and open-end lines of credit. These loans were in a liquidating status and varied in substance and form from our originated loans. Unless terminated, SFI will continue to provide the servicing for these loans, which we service as unsecured loans due to the fact that the liens are subordinated to superior ranking security interests.
Our non-core and non-originating legacy products include:
Real Estate Loans — We ceased originating real estate lendingloans in January of 2012, and during 2014, we sold $6.3$6.4 billion real estate loans held for sale. During 2016, we sold $308 million real estate loans held for sale. The remaining real estate loans may be closed-end accounts or open-end home equity lines of credit, generally have a fixed rate and maximum original terms of 360 months, and are secured by first or second mortgages on residential real estate. OurPredominantly, our first lien mortgages are serviced by third-party servicers, and we continue to provide servicing for our second lien mortgages (home equity lines of credit). At March 31, 2016,2017, we had $503$139 million of real estate loans held for investment, of which $197 million, or 39%,94% were secured by first mortgages, and $306compared to $144 million or 61%,at December 31, 2016, of which 93% were secured by second mortgages, compared to $202 million of realfirst mortgages. Real estate loans, or 39%, secured by first mortgages and $322 million, or 61%, secured by second mortgages at December 31, 2015. Real estate
loans held for sale totaled $170$148 million and $179$153 million at March 31, 20162017 and December 31, 2015, respectively, all of which were secured by first mortgages.2016, respectively.
Retail Sales Finance — We ceased purchasing retail sales contracts and revolving retail accounts in January of 2013. We continue to service the liquidating retail sales contracts and will provide revolving retail sales financing services on our revolving retail accounts. We refer to retail sales contracts and revolving retail accounts collectively as “retail sales finance.”
OUR SEGMENTS
At March 31, 2016,2017, we had threetwo operating segments:
Consumer and Insurance; and
Acquisitions and Servicing; and
Real Estate.Servicing.
Beginning in 2017, we include Real Estate, which was previously presented as a distinct reporting segment, in “Other.” See Note 16 of the Notes to Condensed Consolidated Financial Statements in Part I - Item 1 of this report for further information on this change in our segment alignment and for more information about our segments. To conform to the new alignment of our segments, we have revised our prior period segment disclosures.
Recent Developments and Outlook
SPRINGCASTLE INTERESTS SALEDIVIDEND OF SFMC TO SFI
On March 31, 2016,April 10, 2017, SFMC, a subsidiary of SFC, was contributed to SFI in the SpringCastle Sellers, wholly owned subsidiariesform of a dividend. SFI then contributed SFMC to OMH, enteredand SFMC merged into a purchase agreement with the SpringCastle Buyers. Pursuant to the purchase agreement, SpringCastle Holdings sold its 47% limited liability company interests in each of SpringCastle America, LLC, SpringCastle Credit, LLC and SpringCastle Finance, LLC, and Springleaf Acquisition sold its 47% limited liability company interest in SpringCastle Acquisition LLC, to the SpringCastle Buyers for an aggregate purchase price of approximately $112 million.
See Note 2 of the Notes to Condensed Consolidated Financial Statements for further information on the SpringCastle Interests Sale.
ONEMAIN ACQUISITION
On November 15, 2015, OMH completed its acquisition of OMFH for approximately $4.5 billion in cash.SGSC. As a result of the OneMain Acquisition, OMFH became a wholly owned, indirect subsidiary of OMH.dividend, the Company’s total shareholder equity and total assets were reduced by $38 million and $65 million, respectively, on the contribution date.
On November 12, 2015, in connection withThe contribution was the closingresult of the OneMain Acquisition, SFC’s wholly owned subsidiary, CSI, entered into the Independence Demand Note with Independence, whereby CSI provided Independence with $3.4 billion cash pursuant to the termscontinuing integration process, and part of the Independence Demand Note. See Note 9a series of the Notes to Condensed Consolidated Financial Statements for further information regarding the Independence Demand Note and other related party agreements with OMFH.
Although management intends for Springleaf and OneMain to become an integrated operation, the two operations will initially be separately maintained under the Springleaf and OneMain brands, with the expectation of migrating tocorporate consolidation transactions surrounding the OneMain brand.
LENDMARK SALE
On November 12, 2015, the Branch Sellers entered into the Lendmark Sale. The Springleaf branches to be sold represent 15% of our branches and approximately $606 million, or 12%, of our personal loans held for investment and held for sale as of March 31, 2016.
On May 2, 2016, the Branch Sellers sold the Springleaf branches to Lendmark for an aggregate cash purchase price of $624 million. On this date, SFC used a portion of the proceeds from the Lendmark Sale to repay, in full, its revolving demand note with OMFH, which totaled $376 million (including interest payable of $6 million) on May 2, 2016. See Note 2 and Note 18 of the Notes to Condensed Consolidated Financial Statements for further information on the Lendmark Sale.Acquisition.
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 of strengthening our capital base by reducing leverage and maintaining a strong liquidity level and diversified funding sources.
Assuming the U.S. economy continues to experience slow to moderate growth, we expect to continue our long history of strong credit performance. Weperformance and believe the strong credit quality of our personal loan portfolio iswill continue as the result of our disciplined
underwriting practices and ongoing collection efforts. We also continuehave continued to see growth in the volume of personal loan originations driven by thesome migration of customer activity away from traditional channels, such as direct mail, to online channels (served by(primarily serviced through our centralized operations)branch network), where we believe we are well suited to capture volume due to our scale, technology, and deployment of advanced analytics.
In addition, with an experienced management team, proven accessTax Reform Proposals
The new presidential administration and several members of the U.S. Congress have indicated significant reform of various aspects of the U.S. tax code as a top legislative priority. A number of proposals for tax reform, including significant changes to corporate tax provisions, are currently under consideration. Such changes could have a material impact, either positive or negative, on our deferred tax assets and liabilities and our consolidated financial position, results of operations and cash flows, depending on the nature and extent of any changes to the capital markets, and strongU.S. tax code that are ultimately enacted into law. Additionally,
changes to the U.S. tax code could more broadly impact the U.S. economy, which could potentially result in a material impact, either positive or negative, on the demand for consumer credit, we believe we are well positioned for future personal loan growth.our products and services and the ability of our customers to repay their loans. We cannot predict if or when any of these proposals to reform the U.S. tax code will be enacted into law and, accordingly, no assurance can be given as to whether or to what extent any changes to the U.S. tax code will impact us or our customers or our financial position, results of operations or cash flows.
Results of Operations
CONSOLIDATED RESULTS
See the table below for our consolidated operating results.results and selected financial statistics. A further discussion of our operating results for each of our operating segments is provided under “Segment Results.”Results” below.
| | | (dollars in millions) | | Three Months Ended March 31, | | At or for the
Three Months Ended March 31, |
| | 2016 | | 2015 | | 2017 | | 2016 |
| | | | | | | | | |
| Interest income | | $ | 431 |
| | $ | 402 |
| | $ | 297 |
| | $ | 431 |
|
| Interest expense | | 156 |
| | 158 |
| | 127 |
| | 156 |
|
| Provision for finance receivable losses | | 94 |
| | 86 |
| | 71 |
| | 91 |
|
| Net interest income after provision for finance receivable losses | | 181 |
| | 158 |
| | 99 |
| | 184 |
|
| Net gain on sale of SpringCastle interests | | 229 |
| | — |
| | — |
| | 167 |
|
| Other revenues | | 85 |
| | 53 |
| | 106 |
| | 89 |
|
| Other expenses | | 191 |
| | 169 |
| | 162 |
| | 191 |
|
| Income before provision for income taxes | | 304 |
| | 42 |
| |
| Provision for income taxes | | 106 |
| | 8 |
| |
| Income before income taxes | | | 43 |
| | 249 |
|
| Income taxes | | | 16 |
| | 85 |
|
| Net income | | 198 |
| | 34 |
| | 27 |
| | 164 |
|
| Net income attributable to non-controlling interests | | 26 |
| | 31 |
| | — |
| | 28 |
|
| Net income attributable to Springleaf Finance Corporation | | $ | 172 |
| | $ | 3 |
| |
| Net income attributable to SFC | | | $ | 27 |
| | $ | 136 |
|
| | | | | | |
| Selected Financial Statistics (a) | | | |
| | |
|
| Finance receivables held for investment: | | | | | |
| Net finance receivables | | | $ | 4,863 |
| | $ | 4,914 |
|
| Number of accounts | | | 898,642 |
| | 905,809 |
|
| Finance receivables held for sale: | | | | | |
| Net finance receivables | | | $ | 148 |
| | $ | 776 |
|
| Number of accounts | | | 2,714 |
| | 146,302 |
|
| Finance receivables held for investment and held for sale: (b) | | | | | |
| Average net receivables | | | $ | 4,894 |
| | $ | 7,145 |
|
| Yield | | | 24.33 | % | | 24.00 | % |
| Gross charge-off ratio | | | 8.29 | % | | 6.11 | % |
| Recovery ratio | | | (1.73 | )% | | (0.83 | )% |
| Net charge-off ratio | | | 6.56 | % | | 5.28 | % |
| 30-89 Delinquency ratio | | | 2.22 | % | | 2.22 | % |
| Origination volume | | | $ | 773 |
| | $ | 961 |
|
| Number of accounts originated | | | 110,385 |
| | 154,759 |
|
| |
| (a) | See “Glossary” at the beginning of this report for formulas and definitions of our key performance ratios. |
| |
| (b) | Includes personal loans held for sale for the 2016 period in connection with the Lendmark Sale, but excludes real estate loans held for sale for both periods in order to be comparable with our segment statistics disclosed in “Segment Results.” |
Comparison of Consolidated Results for the Three Months Ended March 31, 20162017 and 20152016
Interest income increased decreased $134 million for the three months ended March 31, 20162017 when compared to the same period in 20152016 due to the following:
Finance charges decreased $91 million primarily due to the net of the following:
|
| | | |
| (dollars in millions) | |
| | |
|
| Three Months Ended March 31, 2016 compared to 2015 | |
| Decrease in average net receivables | $ | (1 | ) |
| Decrease in yield | (16 | ) |
| Increase in number of days in 2016 | 3 |
|
| Increase in interest income on finance receivables held for sale | 43 |
|
| Total | $ | 29 |
|
| |
| ◦ | Average net receivables held for investment decreased primarily due to (i) the SpringCastle Interests Sale and (ii) our liquidating real estate loan portfolio, including the transfers of $257 million and $50 million of real estate loans to finance receivables held for sale on June 30, 2016 and November 30, 2016, respectively. This decrease was partially offset by the continued growth of our personal loan portfolio. |
| |
| ◦ | Yield on finance receivables held for investment remained stable when compared to the same period in 2017. |
Average netInterest income on finance receivables held for sale decreased for the three months ended March 31, 2016$43 million primarily due to (i) the liquidating status of the previously owned SpringCastle Portfolio, (ii) the transfer of $608 million of our personal loans to finance receivables held for sale on September 30, 2015, as part of OMH’s initiative to closewhich were sold in the OneMain Acquisition, and (iii) our liquidating real estate loan portfolio. This decrease was partially offset by higher personal loan average net receivables resulting from (i) our continued focusLendmark Sale on personal loan originations through our branch network and centralized operations and (ii) the continued growth of our auto loan product.May 2, 2016.
YieldInterest expense decreased $29 million for the three months ended March 31, 2016 primarily due to (i) the continued growth of our auto loan product, which generally has lower yields and (ii) a decrease in yield on our liquidating real estate loan portfolio due to a higher proportion of TDR real estate loans.
Interest income on finance receivables held for sale increased for the three months ended March 31, 2016 primarily due to higher average finance receivables held for sale during the 2016 period resulting from the transfer of $608 million of our personal loans to held for sale on September 30, 2015.
Interest expense decreased for the three months ended March 31, 20162017 when compared to the same period in 20152016 primarily due to the net of the following:
|
| | | |
| (dollars in millions) | |
| | |
|
| Three Months Ended March 31, 2016 compared to 2015 | |
| Increase in average debt | $ | 9 |
|
| Decrease in weighted average interest rate | (15 | ) |
| Interest expense on note payable to affiliate | 4 |
|
| Total | $ | (2 | ) |
Average debt increased for the three months ended March 31, 2016decreased primarily due to additional borrowings under(i) the elimination of the debt associated with the SpringCastle Interests Sale and (ii) net debt repurchases and repayments during the past 12 months relating to our conduit facilities and higher averagefacilities. This decrease was partially offset by net debt pursuantissuances during the past 12 months relating to our consumer securitization transactions during the 2016 period.transactions. See Note 11Notes 9 and 10 of the Notes to Condensed Consolidated Financial Statements in Part I - Item 1 of this report for further information on our consumer loanlong-term debt, securitization transactions and borrowings under our conduit facilities.
Weighted average interest rate on our debt decreased for the three months ended March 31, 2016increased primarily due to additional borrowings under our conduit facilities,(i) SFC’s offering of the 8.25% SFC Notes in April of 2016 and (ii) the elimination of debt associated with the SpringCastle Interests Sale, which generally havehad a lower interest rates.rate relative to our other indebtedness. This increase was partially offset by the repurchase of $600 million unsecured notes, which had a higher interest rate relative to our other indebtedness, in connection with SFC’s offering of the 8.25% SFC Notes.
Interest expense on note payable to affiliate of $4 million for the three months ended March 31, 2016 resulted from a revolving demand note agreement between SFC and OMFH, entered into on December 1, 2015. See Note 98 of the Notes to Condensed Consolidated Financial Statements in Part I - Item 1 of this report for further information on this note.
Provision for finance receivable losses increased $8 decreased $20 million for the three months ended March 31, 20162017 when compared to the same period in 2015 primarily due to the net of the following:
Net charge-offs increased for the three months ended March 31, 2016 primarily due to higher net charge-offs on our personal loans reflecting (i) growth in these personal loans during the past 12 months and (ii) a higher personal loan delinquency ratio at March 31, 2016. This increase was partially offset by (i) lowerabsence of net charge-offs on the previously owned SpringCastle Portfolio reflecting the improved central servicing performance as the acquired portfolio matured under our ownership and (ii) lowera larger provision release during the 2017 period due to the reserves required in the fourth quarter of 2016 in response to the higher level of delinquency of our personal loans. This decrease was partially offset by higher net charge-offs onin the 2017 period primarily resulting from the increase in delinquency of our real estatepersonal loans reflectingin third quarter of 2016 that charged-off in the liquidating statusfirst quarter of the real estate loan portfolio.2017.
Allowance requirements on our auto loan product decreased for the three months ended March 31, 2016, as we now have a full year of historical data reflected in the allowance model, in addition to using delinquency roll rates from a proxy hard-secured portfolio.
Net gain on sale of SpringCastle interests of $229$167 million for the three months ended March 31, 2016 reflected the net gain associated with the sale of our equity interest in the SpringCastle Joint Venture. See Note 2 of the Notes to Condensed Consolidated Financial Statements for further informationVenture on the sale.March 31, 2016.
Other revenues increased $32 million for the three months ended March 31, 2016 when compared to the same period in 2015 primarily due to the net of the following: (i) increase in interest income on notes receivable from parent and affiliates of $49 million reflecting interest income on the Independence Demand Note during the 2016 period and higher interest income on SFC’s note receivable from SFI reflecting additional SFI borrowings during the 2016 period to fund the operations of its subsidiaries and (ii) decrease in investment revenues of $11 million primarily due to lower realized gains on the sale of investment securities and a decrease in invested assets.
Other expenses increased $22 million for the three months ended March 31, 2016 when compared to the same period in 2015 primarily due to the following:
Salaries and benefits increased $17 million for the three months ended March 31, 2017 when compared to the same period in 2016 primarily due to the net of (i) higher salary accruals resultinginterest income on notes receivable from an increaseparent and affiliates of $8 million primarily reflecting interest income on the OneMain Demand Note during the 2017 period, (ii) $5 million lower net charge-offs recognized on finance receivables held for sale and provision adjustments for liquidated held for sale accounts during the 2017 period, (iii) $3 million of service fee income in the number2017 period under an intercompany service agreement between SFC and OMFH, as discussed in Note 8 of employees.the Notes to Condensed Consolidated Financial Statements in Part I - Item 1 of this report, (iv) $3 million net loss on repurchases and repayments of debt in the 2016 period, and (v) a decrease in insurance revenues of $2 million during the 2017 period reflecting lower earned non-credit premiums, partially offset by higher earned credit premiums.
Other operating expenses increased $4decreased $29 million for the three months ended March 31, 2017 when compared to the same period in 2016 primarily due to (i) higher advertising expensesthe following:
Salaries and benefits decreased $18 million primarily due to increased focus on e-commerce and increased direct mailingsa decrease in average staffing as a result of our integration of the two legacy companies.
Other operating expenses decreased $10 million primarily due to pre-approved customers(i) the absence of servicing expenses for the previously owned SpringCastle Portfolio and (ii) higher information technology expenses. The increase in other operating expenseslower professional fees of $9 million during the 2017 period. This decrease was partially offset by (i) a $6 million reduction in reserves related to estimated Property Protection Insurance claims in the 2016 period related to our UK subsidiary, which we believe will have minimal loss contingencies.was liquidated on August 16, 2016 and (ii) a decrease in deferral of origination costs of $3 million during the 2017 period.
Provision for incomeIncome taxes totaled $106$16 million for the three months ended March 31, 20162017 compared to $8$85 million for the same period in 2015.2016. The effective tax rate for the three months ended March 31, 2017 was 37.6% compared to 34.1% for the same period in 2016. The effective tax rate for the three months ended March 31, 2017 differed from the federal statutory rate primarily due to the effect of state income taxes. The effective tax rate for the three months ended March 31, 2016 was 34.9% compared to 19.3% for the same period in 2015. The effective tax rates for the three months ended March 31, 2016 and 2015 differed from the federal statutory ratesrate primarily due to the effectseffect of the non-controlling interestinterests in the previously owned SpringCastle Portfolio. As discussed in Note 2 of the Notes to Condensed Consolidated Financial Statements, on March 31, 2016, the Company sold its equity interest in the SpringCastle Portfolio.
Non-GAAP Financial MeasuresNON-GAAP FINANCIAL MEASURES
We report the operating results of our Core Consumer Operations, Non-Core Portfolio, and Other using the Segment Accounting Basis, which (i) reflects our allocation methodologies for certain costs, primarily interest expense, loan loss reserves and acquisition costs to reflect the manner in which we assess our business results and (ii) excludes the impact of applying purchase accounting. These allocations and adjustments have a material effect on our reported segment basis income as compared to GAAP. See Note 16 of the Notes to Condensed Consolidated Financial Statements for a complete discussion of our segment accounting. We believe the Segment Accounting Basis (a basis other than U.S. GAAP) provides investors the basis for which management evaluates segment performance.Adjusted Pretax Income
In addition, managementManagement uses adjusted pretax core earnings,income, a non-GAAP financial measure, as a key performance measure in evaluating the performance of our Core Consumer Operations. Pretax core earningssegments. Adjusted pretax income represents our income before provision for income taxes on a Segment Accounting Basis and excludes results of operations from our Non-Core Portfolio (Real Estate segment) and other non-core, non-originating legacy operations, net gain on sale of SpringCastle interests, related to Core Consumer Operations, losses resulting from accelerated long-term repayment and repurchases of long-term debt related to Core Consumer Operations, SpringCastle transaction costs, and resultslosses resulting from repurchases and repayments of operations attributable to non-controlling interests. Pretax core earnings provides us with a key measure of our Core Consumer Operations’ performance and assists us in comparing its performance on an alternative basis.debt. Management believes adjusted pretax core earningsincome is useful in assessing the profitability of our core businesssegments and uses adjusted pretax core earningsincome in evaluating our operating performance. Pretax core earningsAdjusted pretax income is a non-GAAP measure and should be considered in additionsupplemental to, but not as a substitute for or superior to, operating income before income taxes, net income, operating cash flow, andor other measures of financial performance prepared in accordance with U.S. GAAP.
The reconciliations of (i) income before provision for income taxes on GAAP basis (purchase accounting)attributable to the same amount under a Segment Accounting Basis and (ii) income before provision for income taxesSFC on a Segment Accounting Basis to adjusted pretax core earningsincome attributable to SFC (non-GAAP) by segment were as follows:
|
| | | | | | | | |
| (dollars in millions) | | Three Months Ended March 31, |
| | 2016 | | 2015 |
| | | | | |
| Income before provision for income taxes - GAAP basis | | $ | 304 |
| | $ | 42 |
|
| Adjustments: | | | | |
| Interest income (a) | | (3 | ) | | (3 | ) |
| Interest expense (b) | | 24 |
| | 30 |
|
| Provision for finance receivable losses (c) | | 2 |
| | 2 |
|
| Repurchases and repayments of long-term debt (d) | | 1 |
| | — |
|
| Amortization of other intangible assets (e) | | — |
| | 1 |
|
| Other (f) | | (2 | ) | | 3 |
|
| Income before provision for income taxes - Segment Accounting Basis | | 326 |
| | 75 |
|
| Adjustments: | | | | |
|
| Pretax operating loss - Non-Core Portfolio Operations | | 18 |
| | 48 |
|
| Pretax operating (income) loss - Other non-core/non-originating legacy operations | | (51 | ) | | 11 |
|
| Net gain on sale of SpringCastle interests | | (229 | ) | | — |
|
| Net loss from accelerated repayment/repurchase of debt - Core Consumer Operations | | 2 |
| | — |
|
| SpringCastle transaction costs | | 1 |
| | — |
|
| Operating income attributable to non-controlling interests | | (26 | ) | | (31 | ) |
| Pretax core earnings (non-GAAP) | | $ | 41 |
| | $ | 103 |
|
|
| | | | | | | | |
| (dollars in millions) | | Three Months Ended March 31, |
| | 2017 | | 2016 |
| | | | | |
| Consumer and Insurance | | | | |
| Income before income taxes - Segment Accounting Basis | | $ | 7 |
| | $ | 14 |
|
| Adjustments: | | | | |
| Net loss on repurchases and repayments of debt | | — |
| | 2 |
|
| Adjusted pretax income (non-GAAP) | | $ | 7 |
| | $ | 16 |
|
| | | | | |
| Acquisitions and Servicing | | | | |
| Income before income taxes attributable to SFC - Segment Accounting Basis | | $ | — |
| | $ | 193 |
|
| Adjustments: | | | | |
| Net gain on sale of SpringCastle interests | | — |
| | (167 | ) |
| SpringCastle transaction costs | | — |
| | 1 |
|
| Adjusted pretax income attributable to SFC (non-GAAP) | | $ | — |
| | $ | 27 |
|
| | | | | |
| Other | | | | |
| Adjusted pretax income (non-GAAP) | | $ | 54 |
| | $ | 33 |
|
| |
(a) | Interest income adjustments consist of: (i) the net purchase accounting impact of the amortization (accretion) of the net premium (discount) assigned to finance receivables and (ii) the impact of identifying purchased credit impaired finance receivables as compared to the historical values of finance receivables. |
Components of interest income adjustments consisted of:
|
| | | | | | | | |
| (dollars in millions) | | Three Months Ended March 31, |
| | 2016 | | 2015 |
| | | | | |
| Accretion of net discount applied to non-credit impaired net finance receivables | | $ | (3 | ) | | $ | (3 | ) |
| |
(b) | Interest expense adjustments primarily include the accretion of the net discount applied to our long term debt as part of purchase accounting. |
Components of interest expense adjustments were as follows:
|
| | | | | | | | |
| (dollars in millions) | | Three Months Ended March 31, |
| | 2016 | | 2015 |
| | | | | |
| Accretion of net discount applied to long-term debt | | $ | 25 |
| | $ | 30 |
|
Elimination of accretion or amortization of historical discounts, premiums, commissions, and fees | | (1 | ) | | — |
|
| Total | | $ | 24 |
| | $ | 30 |
|
| |
(c) | Provision for finance receivable losses consists of the adjustment to reflect the difference between our allowance adjustment calculated under our Segment Accounting Basis and our GAAP basis. |
Components of provision for finance receivable losses adjustments were as follows:
|
| | | | | | | | |
| (dollars in millions) | | Three Months Ended March 31, |
| | 2016 | | 2015 |
| | | | | |
| Allowance for finance receivable losses adjustments | | $ | 3 |
| | $ | 4 |
|
| Net charge-offs | | (1 | ) | | (2 | ) |
| Total | | $ | 2 |
| | $ | 2 |
|
| |
(d) | Repurchases and repayments of long-term debt adjustments reflect the impact on acceleration of the accretion of the net discount or amortization of the net premium applied to long-term debt. |
| |
(e) | Amortization of other intangible assets reflects the net impact of amortization associated with identified intangibles as part of purchase accounting and deferred costs impacted by purchase accounting. |
| |
(f) | “Other” items reflect differences between Segment Accounting Basis and GAAP basis relating to various items, such as the elimination of deferred charges, adjustments to the basis of other real estate assets, fair value adjustments to fixed assets, adjustments to insurance claims and policyholder liabilities, and various other differences, all as of the date of the Fortress Acquisition. |
Segment Results
See Note 16 of the Notes to Condensed Consolidated Financial Statements in Part I - Item 1 of this report for (i) a description of our segments. Management considers the Consumer and Insurance segment and Acquisitions and Servicing segment as our Core Consumer Operations and the Real Estate segment as our Non-Core Portfolio. As a result of the Fortress Acquisition, we have applied purchase accounting. However, we report the operating results of our Core Consumer Operations, Non-Core Portfolio, and Other using the Segment Accounting Basis, which (i) reflects our allocation methodologies for certain costs, primarily interest expense, loan loss reserves and acquisition costs to reflect the manner in which we assess our business results andsegments, (ii) excludes the impact of applying purchase accounting. These allocations and adjustments have a material effect on our reported segment basis income as compared to GAAP. We believe a Segment Accounting Basis (a basis other than U.S. GAAP) provides investors the basis for which management evaluates segment performance. See Note 16 of the Notes to Condensed Consolidated Financial Statements for reconciliations of segment totals to condensed consolidated financial statement amounts, (iii) methodologies used to allocate revenues and forexpenses to each segment, and (iv) further discussion of the differences in our Segment Accounting Basis and GAAP.
We allocate revenues and expenses (on a Segment Accounting Basis) to each segment using the following methodologies:CONSUMER AND INSURANCE
|
| |
InterestAdjusted pretax income | Directly correlated with a specific segment. |
Interest expense | Acquisition and Servicing - This segment includes interest expense specifically identified to the SpringCastle Portfolio.
|
Consumer and Insurance, Real Estate and Other - The Company has securitization debt and unsecured debt. The Company first allocates interest expense to its segments based on actual expense for securitizations and secured term debt and using a weighted average for unsecured debt allocated to the segments. Average unsecured debt allocations for the periods presented are as follows:
|
Subsequent to the OneMain Acquisition |
Total average unsecured debt is allocated as follows: |
l Consumer and Insurance - receives remainder of unallocated average debt; and
|
l Real Estate and Other - at 100% of asset base. (Asset base represents the average net finance receivables including finance receivables held for sale.)
|
The net effect of the change in debt allocation and asset base methodologies for the three months ended March 31, 2015 had it been in place as of the beginning of the year would be an increase in interest expense of $54 million for Consumer and Insurance and a decrease in interest expense of $45 million and $9 million for Real Estate and Other, respectively. |
For the period third quarter 2014 to the OneMain Acquisition |
Total average unsecured debt is allocated to Consumer and Insurance, Real Estate and Other, such that the total debt allocated across each segment equals 83%, up to 100% and 100% of each of its respective asset base. Any excess is allocated to Consumer and Insurance. |
Average unsecured debt is allocated after average securitized debt to achieve the calculated average segment debt. |
Asset base represents the following: |
l Consumer and Insurance - average net finance receivables including average net finance receivables held for sale;
|
l Real Estate - average net finance receivables including average net finance receivables held for sale, cash and cash equivalents, investments including proceeds from Real Estate sales; and
|
l Other - average net finance receivables other than the period listed below:
|
l February 2015 to April 2015 - average net finance receivables and cash and cash equivalents less operating cash reserve and cash included in other segments.
|
Provision for finance receivable losses | Directly correlated with a specific segment, except for allocations to Other, which are based on the remaining delinquent accounts as a percentage of total delinquent accounts. |
Other revenues | Directly correlated with a specific segment, except for gains and losses on foreign currency exchange, which are allocated to the segments based on the interest expense allocation of debt. |
Salaries and benefits | Directly correlated with a specific segment. Other salaries and benefits not directly correlated with a specific segment are allocated to each of the segments based on services provided. |
Other operating expenses | Directly correlated with a specific segment. Other operating expenses not directly correlated with a specific segment are allocated to each of the segments based on services provided. |
Insurance policy benefits and claims | Directly correlated with a specific segment. |
We evaluate the performance of each of our segments based on its pretax operating earnings.
CORE CONSUMER OPERATIONS
Pretax operating results and selected financial statistics for Consumer and Insurance (which are reported on aan adjusted Segment Accounting Basis) and Acquisitions and Servicing are presented in the table below on an aggregate basis:were as follows:
| | | (dollars in millions) | | At or for the
Three Months Ended March 31, | | At or for the
Three Months Ended March 31, |
| 2016 | | 2015 |
| 2017 | | 2016 |
| | Interest income |
| $ | 412 |
|
| $ | 379 |
| | $ | 290 |
| | $ | 311 |
|
| Interest expense |
| 115 |
|
| 63 |
| | 104 |
| | 95 |
|
| Provision for finance receivable losses |
| 90 |
|
| 82 |
| | 70 |
| | 73 |
|
| Net interest income after provision for finance receivable losses |
| 207 |
|
| 234 |
|
| 116 |
|
| 143 |
|
| Net gain on sale of SpringCastle interests | | 229 |
| | — |
| |
| Other revenues |
| 45 |
|
| 56 |
|
| 49 |
|
| 47 |
|
| Other expenses |
| 188 |
|
| 156 |
|
| 158 |
|
| 174 |
|
| Pretax operating income |
| 293 |
|
| 134 |
| |
| Pretax operating income attributable to non-controlling interests |
| 26 |
|
| 31 |
| |
| Pretax operating income attributable to Springleaf Finance Corporation |
| $ | 267 |
|
| $ | 103 |
| |
| Adjusted pretax income (non-GAAP) | |
| $ | 7 |
|
| $ | 16 |
|
| | | | | | | | | |
| Consumer and Insurance | | |
| | |
| |
| Selected Financial Statistics (a) | | | |
| | |
|
| Finance receivables held for investment: | | | | | | | | |
| Net finance receivables | | $ | 4,365 |
| | $ | 3,861 |
| | $ | 4,710 |
| | $ | 4,365 |
|
| Number of accounts | | 880,116 |
| | 898,617 |
| | 892,111 |
| | 880,116 |
|
| TDR finance receivables | | $ | 31 |
| | $ | 26 |
| |
| Allowance for finance receivable losses - TDR | | $ | 10 |
| | $ | 3 |
| |
| Finance receivables held for sale: | | | | | | | | |
| Net finance receivables | | $ | 606 |
| | $ | — |
| | $ | — |
| | $ | 606 |
|
| Number of accounts | | 143,254 |
| | — |
| | — |
| | 143,254 |
|
| Finance receivables held for investment and held for sale: | | | | | |
| Finance receivables held for investment and held for sale: (b) | | | | | |
| Average net receivables | | $ | 4,926 |
| | $ | 3,799 |
| | $ | 4,736 |
| | $ | 4,926 |
|
| Yield | | 25.47 | % | | 26.90 | % | | 24.84 | % | | 25.47 | % |
| Gross charge-off ratio | | 7.20 | % | | 6.40 | % | | 8.45 | % | | 7.20 | % |
| Recovery ratio | | (0.85 | )% | | (0.78 | )% | | (1.76 | )% | | (0.85 | )% |
| Charge-off ratio | | 6.35 | % | | 5.62 | % | |
| Delinquency ratio | | 2.76 | % | | 2.51 | % | |
| Net charge-off ratio | | | 6.69 | % | | 6.35 | % |
| 30-89 Delinquency ratio | | | 2.03 | % | | 1.97 | % |
| Origination volume | | $ | 943 |
| | $ | 860 |
| | $ | 773 |
| | $ | 943 |
|
| Number of accounts originated | | 154,759 |
| | 155,523 |
| | 110,385 |
| | 154,759 |
|
| | | | | | |
| Acquisitions and Servicing | | | | | |
| Finance receivables held for investment: | | | | | |
| Net finance receivables | | $ | — |
| | $ | 1,868 |
| |
| Number of accounts | | — |
| | 264,830 |
| |
| Average net receivables | | 1,529 |
| | 1,923 |
| |
| Yield | | 26.17 | % | | 26.34 | % | |
| Net charge-off ratio | | 4.65 | % | | 5.43 | % | |
| Delinquency ratio | | — | % | | 4.22 | % | |
| |
| (a) | See “Glossary” at the beginning of this report for formulas and definitions of our key performance ratios. |
| |
| (b) | Includes personal loans held for sale for the 2016 period in connection with the Lendmark Sale. |
Comparison of Adjusted Pretax Operating ResultsIncome for the Three Months Ended March 31, 20162017 and 20152016
Interest income increased $33 decreased $21 million for the three months ended March 31, 20162017 when compared to the same period in 20152016 due to the net of the following:
Interest income — Consumer and InsuranceFinance chargesincreased$21 million increased $57 million forprimarily due to the three months ended March 31, 2016 due tonet of the following:
| |
| ◦ | Finance chargesincreased$15 millionAverage net receivables held for investment for the three months ended March 31, 2016increased primarily due to the netcontinued growth of the following:
|
| |
▪ | Average net receivables increased for the three months ended March 31, 2016 primarily due to increased originations on our personal loans resulting from our continued focus on personal loans, including our auto loan product. At March 31, 2016, we had nearly 89,000 auto loans totaling $1.0 billion compared to nearly 34,000 auto loans totaling $415 million at March 31, 2015.
|
| |
▪ | Yield decreased for the three months ended March 31, 2016 primarily due to the higher proportion of auto loan product, which generally has lower yields.portfolio.
|
| |
| ◦ | Yield on finance receivables held for investment decreased primarily due to the continued growth of secured personal loans, which generally have lower yields relative to our unsecured personal loans. |
Interest income on finance receivables held for sale of $42 million for the three months ended March 31, 2016 resulted from the transfer of personal loans to finance receivables held for sale on September 30, 2015.
Interest income — Acquisitions and Servicing decreased $24 million for the three months ended March 31, 2016 primarily dueresulted from the transfer of personal loans to lower average netfinance receivables reflectingheld for sale on September 30, 2015, which were sold in the liquidating status of the previously owned SpringCastle Portfolio.Lendmark Sale on May 2, 2016.
Interest expense increased $52$9 million for the three months ended March 31, 20162017 when compared to the same period in 2015 due to the net of the following:
Interest expense — Consumer and Insurance increased $55 million for the three months ended March 31, 2016 primarily due to a changean increase in the methodologyutilization of allocatingfinancing from unsecured notes, which generally have higher interest expense, as previously described in the allocation methodologies table.rates relative to our other indebtedness.
Interest expense — Acquisitions and ServicingProvision for finance receivable losses decreased $3 million for the three months ended March 31, 2016 primarily due to the liquidating status of the previously owned SpringCastle Portfolio.
Provision for finance receivable losses increased $8 million for the three months ended March 31, 20162017 when compared to the same period in 2015 due to the net of the following:
Provision for finance receivable losses — Consumer and Insurance increased $18 million for the three months ended March 31, 2016 primarily due to a larger provision release during the 2017 period due to the reserves required in the fourth quarter of 2016 in response to the higher net charge-offs onlevel of delinquency of our personal loans during the 2016 period reflecting (i) growth in our personal loans during the past 12 months and (ii) a higher personal loan delinquency ratio at March 31, 2016.loans. This increasedecrease was partially offset by a decrease in allowance requirements on our auto loan product, as we now have a full year of historical data reflectedhigher net charge-offs in the allowance model,2017 period primarily resulting from the increase in addition to using delinquency roll rates from a proxy hard-secured portfolio.of our personal loans in third quarter of 2016 that charged-off in the first quarter of 2017.
Provision for finance receivable losses — Acquisitions and Servicing decreased $10 million for the three months ended March 31, 2016 primarily due to lower net charge-offs on the previously owned SpringCastle Portfolio reflecting improvements in servicing of the acquired portfolio and its liquidating status.
Net gain on sale of SpringCastle interests of $229 million for the three months ended March 31, 2016 reflected the net gain associated with the sale of our equity interest in the SpringCastle Joint Venture. See Note 2 of the Notes to Condensed Consolidated Financial Statements for further information on the sale.
Other revenues decreased $11 million for the three months ended March 31, 2016 when compared to the same period in 2015 primarily due to a decrease in investment revenues of $12 million resulting from lower realized gains on the sale of investment securities and lower investment income generated from an investment in SpringCastle debt, which is eliminated in our consolidating operating results.
Other expenses increased $32 million for the three months ended March 31, 2016 when compared to the same period in 2015 due to the net of the following:
Other expenses — Consumer and Insurance increased $34 million for the three months ended March 31, 2016 primarily due to the following:
| |
◦ | Salaries and benefits increased $15 million for the three months ended March 31, 2016 primarily due to higher variable compensation reflecting increased originations of personal loans and increased staffing.
|
| |
◦ | Other operating expenses increased $18 million for the three months ended March 31, 2016 primarily due to (i) higher advertising expenses reflecting our increased focus on e-commerce, (ii) higher information technology expenses, (iv) higher occupancy costs resulting from increased rent expense on our administrative offices and servicing facilities, and (v) higher credit and collection related costs reflecting growth in personal loans, including our auto loan product.
|
Other expenses — Acquisitions and Servicing decreased $2 million for the three months ended March 31, 2017 when compared to the same period in 2016 primarily due to decreased creditthe net of (i) $3 million of service fee income in the 2017 period under an intercompany service agreement between SFC and collection related costsOMFH, as discussed in Note 8 of the Notes to Condensed Consolidated Financial Statements in Part I - Item 1 of this report and (ii) a decrease in insurance revenues of $2 million during the 2017 period reflecting lower portfolio servicing costsearned non-credit premiums, partially offset by higher earned credit premiums.
Other expenses decreased $16 million for the three months ended March 31, 2017 when compared to the same period in 2016 primarily due to the liquidating statusfollowing:
Salaries and benefits decreased $12 million primarily due to a decrease in average staffing as a result of our integration of the previously owned SpringCastle Portfolio.two legacy companies.
NON-CORE PORTFOLIOOther operating expenses decreased $3 million primarily due to the net of (i) lower professional fees of $7 million during the 2017 period, (ii) a decrease in advertising expenses of $4 million during the 2017 period, (iii) a decrease in deferral of origination costs of $4 million during the 2017 period, and (iv) $3 million of service fee expenses in the 2017 period under an intercompany service agreement between SFC and OMFH, as discussed in Note 8 of the Notes to Condensed Consolidated Financial Statements in Part I - Item 1 of this report.
Pretax operating results
ACQUISITIONS AND SERVICING
Adjusted pretax income attributable to SFC and selected financial statistics for Real EstateAcquisitions and Servicing (which are reported on aan adjusted Segment Accounting Basis) were as follows:
|
| | | | | | | | |
| (dollars in millions) | | At or for the
Three Months Ended March 31, |
| 2016 | | 2015 |
| | | | | |
| Interest income | | $ | 15 |
|
| $ | 18 |
|
| Interest expense (a) | | 13 |
|
| 60 |
|
| Provision for finance receivable losses | | 2 |
|
| 2 |
|
| Net interest loss after provision for finance receivable losses | | — |
|
| (44 | ) |
| Other revenues (b) |
| (11 | ) |
| 3 |
|
| Other expenses | | 7 |
|
| 7 |
|
| Pretax operating loss | | $ | (18 | ) |
| $ | (48 | ) |
| | | | | |
| Finance receivables held for investment: | | | | |
| Net finance receivables | | $ | 542 |
| | $ | 646 |
|
| Number of accounts | | 17,550 |
| | 21,257 |
|
| TDR finance receivables | | $ | 159 |
| | $ | 159 |
|
| Allowance for finance receivable losses - TDR | | $ | 57 |
| | $ | 55 |
|
| Average net receivables | | $ | 554 |
| | $ | 660 |
|
| Yield | | 8.73 | % | | 9.24 | % |
| Loss ratio | | 3.00 | % | | 4.66 | % |
| Delinquency ratio | | 7.82 | % | | 7.21 | % |
| Finance receivables held for sale: | | | | |
| Net finance receivables | | $ | 170 |
| | $ | 194 |
|
| Number of accounts | | 3,048 |
| | 3,472 |
|
| TDR finance receivables | | $ | 185 |
| | $ | 191 |
|
|
| | | | | | | | |
| (dollars in millions) | | At or for the
Three Months Ended March 31, |
| | 2017 | | 2016 |
| | | | | |
| Interest income | | $ | — |
| | $ | 102 |
|
| Interest expense | | — |
| | 20 |
|
| Provision for finance receivable losses | | — |
| | 14 |
|
| Net interest income after provision for finance receivable losses | | — |
| | 68 |
|
| Other expenses | | — |
| | 13 |
|
| Adjusted pretax income (non-GAAP) | | — |
| | 55 |
|
| Pretax income attributable to non-controlling interests | | — |
| | 28 |
|
| Adjusted pretax income attributable to SFC (non-GAAP) | | $ | — |
| | $ | 27 |
|
| | | | | |
| Selected Financial Statistics * | | | | |
| Finance receivables held for investment: | | | | |
| Average net receivables | | $ | — |
| | $ | 1,656 |
|
| Yield | | — | % | | 24.32 | % |
| Net charge-off ratio | | — | % | | 3.44 | % |
| |
(a)* | Interest expense decreased $47 millionSee “Glossary” at the beginning of this report for the three months ended March 31, 2016 when compared to the same period in 2015 primarily due to a change in the methodologyformulas and definitions of allocating interest expense, as previously described in the allocation methodologies table. |
| |
(b) | Other revenues decreased $14 million for the three months ended March 31, 2016 when compared to the same period in 2015 primarily due to the following: (i) impairments of $7 million recognized on our real estate loans held for sale during the 2016 period and (ii)key performance ratios. |
decreaseOn March 31, 2016, we sold our equity interest in investment revenuesthe SpringCastle Joint Venture, the primary component of $5 million, as the prior period reflected higher investment income generated from investing the proceeds of the 2014 real estate loan sales.our Acquisitions and Servicing segment.
OTHER
“Other” consists of our other non-core, non-originating legacy operations, which are isolated by geographic market and/or distribution channel from our prospective Core Consumer Operations and our Non-Core Portfolio. These operations include:include (i) our legacy operations in 14 states where we had also ceased branch-based personal lending;liquidating real estate loan portfolio as discussed below, (ii) our liquidating retail sales finance portfolio (including retail sales finance accounts from itsour legacy auto finance operation);, and (iii) our lending operationsshort equity personal loans that we are no longer originating.
Beginning in Puerto Rico and the U.S. Virgin Islands; and (iv) the operations2017, management no longer views or manages our real estate assets as a separate operating segment. Therefore, we are now including Real Estate, which was previously presented as a distinct reporting segment, in “Other.” To conform to this new alignment of our United Kingdom subsidiary.segments, we have revised our prior period segment disclosures.
Pretax operating resultsAdjusted pretax income of the Other components (which are reported on aan adjusted Segment Accounting Basis) were as follows:
| | | (dollars in millions) | | Three Months Ended March 31, | | Three Months Ended March 31, |
| | 2016 | | 2015 | | 2017 | | 2016 |
| | | | | | | | | |
| Interest income | | $ | 1 |
| | $ | 2 |
| | $ | 6 |
| | $ | 16 |
|
Interest expense (a) | | 4 |
| | 10 |
| | 6 |
| | 17 |
|
| Provision for finance receivable losses | | | 1 |
| | 2 |
|
| Net interest loss after provision for finance receivable losses | | (3 | ) | | (8 | ) | | (1 | ) | | (3 | ) |
| Other revenues (b) | | 50 |
| | 2 |
| |
| Other revenues | | | 59 |
| | 39 |
|
| Other expenses | | (4 | ) | | 5 |
| | 4 |
| | 3 |
|
| Pretax operating income (loss) | | $ | 51 |
| | $ | (11 | ) | |
| Adjusted pretax income (non-GAAP) | | | $ | 54 |
| | $ | 33 |
|
| |
(a) | Interest expense for the three months ended March 31, 2016 when compared to the same period in 2015 reflected a change in the methodology of allocating interest expense, as previously described in the allocation methodologies table. |
| |
(b) | Other revenues for the three months ended March 31, 2016 included (i) interest income on the Independence Demand Note and (ii) higher interest income on SFC’s note receivable from SFI reflecting additional SFI borrowings during the 2016 period to fund the operations of its subsidiaries. See Note 9 of the Notes to Condensed Consolidated Financial Statements for further information on the Independence Demand Note. |
Net finance receivables of the Other components (which are reported on a Segment Accounting Basis) were as follows:
| | | (dollars in millions) | | March 31, | | March 31, |
| | 2016 | | 2015 | | 2017 | | 2016 |
| | | | | | | | | |
| Net finance receivables: | | |
| | |
| |
| Net finance receivables held for investment: | | | |
| | |
|
| Personal loans | | $ | 15 |
| | $ | 25 |
| | $ | 6 |
| | $ | 15 |
|
| Real estate loans | | | 148 |
| | 542 |
|
| Retail sales finance | | 20 |
| | 41 |
| | 10 |
| | 20 |
|
| Total | | $ | 35 |
| | $ | 66 |
| | $ | 164 |
| | $ | 577 |
|
| | | | | | |
| Net finance receivables held for sale: | | | | | |
| Real estate loans | | | $ | 151 |
| | $ | 170 |
|
Credit Quality
FINANCE RECEIVABLE COMPOSITION
The following table presents the composition of our finance receivables for each of the Company’s segments on a Segment Accounting Basis, as well as reconciliations to our total net finance receivables on a GAAP basis:
|
| | | | | | | | | | | | | | | | |
| (dollars in millions) | | Consumer and Insurance | | Other | | Segment to GAAP Adjustment | | Consolidated Total |
| | | | | | | | | |
| March 31, 2017 | | | | | | | | |
| Personal loans | | $ | 4,710 |
| | $ | 6 |
| | $ | (1 | ) | | $ | 4,715 |
|
| Real estate loans | | — |
| | 148 |
| | (9 | ) | | 139 |
|
| Retail sales finance | | — |
| | 10 |
| | (1 | ) | | 9 |
|
| Total | | $ | 4,710 |
| | $ | 164 |
| | $ | (11 | ) | | $ | 4,863 |
|
| | | | | | | | | |
| December 31, 2016 | | | | | | | | |
| Personal loans | | $ | 4,794 |
| | $ | 11 |
| | $ | (1 | ) | | $ | 4,804 |
|
| Real estate loans | | — |
| | 153 |
| | (9 | ) | | 144 |
|
| Retail sales finance | | — |
| | 12 |
| | (1 | ) | | 11 |
|
| Total | | $ | 4,794 |
| | $ | 176 |
| | $ | (11 | ) | | $ | 4,959 |
|
The largest component of our finance receivables and primary source of our interest income is our personal loan portfolio. Our customers encompasspersonal loans are typically non-revolving with a wide rangefixed-rate and a fixed, original term of borrowers. Inthree to five years and are secured by consumer goods, automobiles, or other personal property or are unsecured. At March 31, 2017, 58% of our personal loans were secured by titled collateral, compared to 58% at December 31, 2016.
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, non-prime, and sub-prime. We track and analyze the performance of our finance industry, theyreceivable portfolio using many different parameters, including FICO scores, which is widely recognized in the consumer lending industry.
We group FICO scores into the following credit strength categories:
Prime: FICO score of 660 or higher
Non-prime: FICO score of 620-659
Sub-prime: FICO score of 619 or below
Our customers are described as prime or near-prime at one extremeend of the credit spectrum and non-prime or sub-prime (less creditworthy) at the other. Our customers’ incomesdemographics are generallyin many respects near the national median, but our customers may vary from national norms as to their debt-to-income ratios, employmentin terms of credit and residency stability, and/or credit repayment histories. In general,Many of our customers have lowerexperienced some level of prior financial difficulty or have limited credit qualityexperience and require significanthigher levels of servicing.servicing and support from our branch network.
We may offer borrowersOur net finance receivables grouped into the opportunity to defer their personal loan by extendingfollowing categories based solely on borrower FICO credit scores at the purchase, origination, renewal, or most recently refreshed date on which any payment is due. We may require a partial payment prior to granting such a deferral. Deferments must bring the account contractually current or due for the current month’s payment. Borrowers are generally limited to two deferments in a rolling 12-month period unless it is determined that an exception is warranted.were as follows:
|
| | | | | | | | | | | | | | | | |
| (dollars in millions) | | Personal Loans | | Real Estate Loans | | Retail Sales Finance | | Total |
| | | | | | | | | |
| March 31, 2017 * | | | | | | | | |
| FICO scores | | | | | | | | |
| 660 or higher | | $ | 1,111 |
| | $ | 40 |
| | $ | 5 |
| | $ | 1,156 |
|
| 620-659 | | 1,189 |
| | 25 |
| | 1 |
| | 1,215 |
|
| 619 or below | | 2,412 |
| | 72 |
| | 3 |
| | 2,487 |
|
| Unavailable | | 3 |
| | 2 |
| | — |
| | 5 |
|
| Total | | $ | 4,715 |
| | $ | 139 |
| | $ | 9 |
| | $ | 4,863 |
|
| | | | | | | | | |
| December 31, 2016 | | | | | | | | |
| FICO scores | | | | | | | | |
| 660 or higher | | $ | 888 |
| | $ | 41 |
| | $ | 5 |
| | $ | 934 |
|
| 620-659 | | 1,079 |
| | 23 |
| | 2 |
| | 1,104 |
|
| 619 or below | | 2,814 |
| | 77 |
| | 4 |
| | 2,895 |
|
| Unavailable | | 23 |
| | 3 |
| | — |
| | 26 |
|
| Total | | $ | 4,804 |
| | $ | 144 |
| | $ | 11 |
| | $ | 4,959 |
|
| |
| * | The shift in FICO distribution reflects the alignment in FICO versions across OMH. As of March 31, 2017, the legacy Springleaf FICO scores were refreshed to FICO 08 version, which is comparable with the legacy OneMain FICO version. |
In addition to deferrals, we may also offer borrowers the opportunity to cure delinquent accounts when a customer demonstrates that he or she has rehabilitated from a temporary event that caused the delinquency. An account may be brought to current status after the cause for delinquency has been identified and remediated and the customer has made two consecutive
qualified payments; however, no principal or interest amounts are forgiven or credited. Independent risk management approval is required for all cures.
When a loan is 60 days past due, we transfer the loan to one of our centralized service centers for account servicing and collection processing. This process includes assessing previous collection efforts, contacting the customer to determine whether the customer’s financial problems are temporary, reviewing the collateral securing the loan and developing a plan to maintain contact with the customer to increase the likelihood of future payments. Certain non-routine collection activities may include litigation, repossession of collateral, or filing involuntary bankruptcy petitions.
We may renew a delinquent personal loan if the related borrower meets current underwriting criteria and we determine that it does not appear that the cause of past delinquency will affect the customer’s ability to repay the new personal loan. We employ the same credit risk underwriting process that we would use for an application from a new customer to determine whether to grant a renewal of a personal loan, regardless of whether the borrower’s account is current or delinquent.DELINQUENCY
We consider the delinquency status of theour finance receivable as ourthe primary indicator of credit quality indicator.quality. We monitor delinquency trends to evaluate the risk of future credit losses and employ advanced analytical tools to manage our exposure and appetite. Our branch team members work with customers through occasional periods of financial difficulty and offer a variety of borrower assistance programs to credit risk. Although wehelp customers continue to make payments. Team members also actively engage in collection activities well before an account isthroughout the early stages of delinquency. We closely track and report the percentage of receivables that are 30-89 days past due as a benchmark of portfolio quality, collections effectiveness, and as a strong indicator of losses in coming quarters.
When finance receivables are 60 days past due, we consider them delinquent and transfer collections management of these accounts to our centralized operations, as these accounts are considered to be at increased risk for loss. Use of our centralized operations teams for managing late stage delinquency allows us to apply more advanced collections technologies/tools and drives operating efficiencies in servicing. At 90 days past due, we consider our finance receivables 60to be nonperforming.
The following table presents (i) delinquency information of the Company’s segments on a Segment Accounting Basis, (ii) reconciliations to our total net finance receivables on a GAAP basis, by number of days or more past due as delinquent, and consider the likelihood(iii) delinquency ratios as a percentage of collection to decrease at such time. net finance receivables:
|
| | | | | | | | | | | | | | | | |
| (dollars in millions) | | Consumer and Insurance | | Other | | Segment to GAAP Adjustment | | Consolidated Total |
| | | | | | | | | |
| March 31, 2017 | | | | | | | | |
| Current | | $ | 4,520 |
| | $ | 125 |
| | $ | (9 | ) | | $ | 4,636 |
|
| 30-59 days past due | | 57 |
| | 9 |
| | (1 | ) | | 65 |
|
| Delinquent (60-89 days past due) | | 39 |
| | 4 |
| | — |
| | 43 |
|
| Performing | | 4,616 |
| | 138 |
| | (10 | ) | | 4,744 |
|
| | | | | | | | | |
| Nonperforming (90+ days past due) | | 94 |
| | 26 |
| | (1 | ) | | 119 |
|
| Total net finance receivables | | $ | 4,710 |
| | $ | 164 |
| | $ | (11 | ) | | $ | 4,863 |
|
| | | | | | | | | |
| Delinquency ratio | | | | | | | | |
| 30-89 days past due | | 2.03 | % | | 7.83 | % | | * |
| | 2.22 | % |
| 30+ days past due | | 4.03 | % | | 23.99 | % | | * |
| | 4.67 | % |
| 60+ days past due | | 2.81 | % | | 18.65 | % | | * |
| | 3.33 | % |
| 90+ days past due | | 1.99 | % | | 16.16 | % | | * |
| | 2.45 | % |
| | | | | | | | | |
| December 31, 2016 | | | | | | | | |
| Current | | $ | 4,570 |
| | $ | 131 |
| | $ | (9 | ) | | $ | 4,692 |
|
| 30-59 days past due | | 64 |
| | 10 |
| | (1 | ) | | 73 |
|
| Delinquent (60-89 days past due) | | 45 |
| | 4 |
| | — |
| | 49 |
|
| Performing | | 4,679 |
| | 145 |
| | (10 | ) | | 4,814 |
|
| | | | | | | | | |
| Nonperforming (90+ days past due) | | 115 |
| | 31 |
| | (1 | ) | | 145 |
|
| Total net finance receivables | | $ | 4,794 |
| | $ | 176 |
| | $ | (11 | ) | | $ | 4,959 |
|
| | | | | | | | | |
| Delinquency ratio | | | | | | | | |
| 30-89 days past due | | 2.26 | % | | 8.32 | % | | * |
| | 2.47 | % |
| 30+ days past due | | 4.67 | % | | 25.88 | % | | * |
| | 5.38 | % |
| 60+ days past due | | 3.33 | % | | 20.16 | % | | * |
| | 3.90 | % |
| 90+ days past due | | 2.40 | % | | 17.56 | % | | * |
| | 2.91 | % |
��
ALLOWANCE FOR FINANCE RECEIVABLE LOSSES
We record an allowance for loanfinance receivable losses to cover expected losses on our finance receivables. Our allowance for finance receivable losses may fluctuate based upon our continual review of the credit quality of the finance receivable portfolios and changes in economic conditions.
Changes in the allowance for finance receivable losses for each of the Company’s segments on a Segment Accounting Basis, as well as reconciliations to our total allowance for finance receivable losses on a GAAP basis, were as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| (dollars in millions) | | Consumer and Insurance | | Acquisitions and Servicing | | Other | | Segment to GAAP Adjustment | | Consolidated Total |
| | | | | | | | | | | |
| Three Months Ended March 31, 2017 | | | | | | | | | | |
| Balance at beginning of period | | $ | 185 |
| | $ | — |
| | $ | 31 |
| | $ | (12 | ) | | $ | 204 |
|
| Provision for finance receivable losses | | 70 |
| | — |
| | 1 |
| | — |
| | 71 |
|
| Charge-offs | | (99 | ) | | — |
| | (2 | ) | | 1 |
| | (100 | ) |
| Recoveries | | 21 |
| | — |
| | — |
| | — |
| | 21 |
|
| Balance at end of period | | $ | 177 |
| | $ | — |
| | $ | 30 |
| | $ | (11 | ) | | $ | 196 |
|
| | | | | | | | | | | |
| Allowance ratio | | 3.76 | % | | — | % | | 18.24 | % | | (a) |
| | 4.03 | % |
| | | | | | | | | | | |
| Three Months Ended March 31, 2016 | | | | | | | | | | |
| Balance at beginning of period | | $ | 174 |
| | $ | 4 |
| | $ | 70 |
| | $ | (24 | ) | | $ | 224 |
|
| Provision for finance receivable losses | | 73 |
| | 14 |
| | 2 |
| | 2 |
| | 91 |
|
| Charge-offs | | (89 | ) | | (17 | ) | | (5 | ) | | 2 |
| | (109 | ) |
| Recoveries | | 11 |
| | 3 |
| | 1 |
| | — |
| | 15 |
|
| Other (b) | | — |
| | (4 | ) | | — |
| | — |
| | (4 | ) |
| Balance at end of period | | $ | 169 |
| | $ | — |
| | $ | 68 |
| | $ | (20 | ) | | $ | 217 |
|
| | | | | | | | | | | |
| Allowance ratio | | 3.86 | % | | — | % | | 11.82 | % | | (a) |
| | 4.42 | % |
| |
| (b) | Consists of the elimination of allowance for finance receivable losses due to the sale of the SpringCastle Portfolio on March 31, 2016, in connection with the sale of our equity interest in the SpringCastle Joint Venture. |
The following is a summarydelinquency status of netour finance receivable portfolio, along with the level of our TDR finance receivables, by type and by days delinquent:
|
| | | | | | | | | | | | | | | | | | | | |
| (dollars in millions) | | Personal Loans | | SpringCastle Portfolio | | Real Estate Loans | | Retail Sales Finance | | Total |
| | | | | | | | | | | |
| March 31, 2016 | | |
| | | | |
| | |
| | |
|
| Net finance receivables: | | |
| | | | |
| | |
| | |
|
| 60-89 days past due | | $ | 39 |
| | $ | — |
| | $ | 6 |
| | $ | — |
| | $ | 45 |
|
| 90-119 days past due | | 33 |
| | — |
| | 5 |
| | — |
| | 38 |
|
| 120-149 days past due | | 33 |
| | — |
| | 3 |
| | — |
| | 36 |
|
| 150-179 days past due | | 32 |
| | — |
| | 3 |
| | — |
| | 35 |
|
| 180 days or more past due | | 3 |
| | — |
| | 22 |
| | — |
| | 25 |
|
| Total delinquent finance receivables | | 140 |
| | — |
| | 39 |
| | — |
| | 179 |
|
| Current | | 4,186 |
| | — |
| | 447 |
| | 19 |
| | 4,652 |
|
| 30-59 days past due | | 52 |
| | — |
| | 17 |
| | — |
| | 69 |
|
| Total | | $ | 4,378 |
| | $ | — |
| | $ | 503 |
| | $ | 19 |
| | $ | 4,900 |
|
| | | | | | | | | | | |
| December 31, 2015 | | |
| | | | |
| | |
| | |
|
| Net finance receivables: | | |
| | | | |
| | |
| | |
|
| 60-89 days past due | | $ | 49 |
| | $ | 22 |
| | $ | 18 |
| | $ | — |
| | $ | 89 |
|
| 90-119 days past due | | 41 |
| | 14 |
| | 3 |
| | — |
| | 58 |
|
| 120-149 days past due | | 34 |
| | 11 |
| | 2 |
| | 1 |
| | 48 |
|
| 150-179 days past due | | 31 |
| | 10 |
| | 2 |
| | — |
| | 43 |
|
| 180 days or more past due | | 3 |
| | 1 |
| | 12 |
| | — |
| | 16 |
|
| Total delinquent finance receivables | | 158 |
| | 58 |
| | 37 |
| | 1 |
| | 254 |
|
| Current | | 4,077 |
| | 1,475 |
| | 474 |
| | 22 |
| | 6,048 |
|
| 30-59 days past due | | 65 |
| | 43 |
| | 13 |
| | — |
| | 121 |
|
| Total | | $ | 4,300 |
| | $ | 1,576 |
| | $ | 524 |
| | $ | 23 |
| | $ | 6,423 |
|
See Note 4 of the Notes to Condensed Consolidated Financial Statements in Part I - Item 1 of this report for more information about the changes in the allowance for finance receivable losses.
TROUBLED DEBT RESTRUCTURINGTDR FINANCE RECEIVABLES
We make modifications to our finance receivables to assist borrowers during times of 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 finance receivables held for investment andfor each of the Company’s segments on a Segment Accounting Basis, as well as reconciliations to information regarding our total TDR finance receivables held for saleinvestment on a GAAP basis, were as follows:
|
| | | | | | | | | | | | | | | | |
| (dollars in millions) | | Personal Loans * | | SpringCastle Portfolio | | Real Estate Loans * | | Total |
| | | | | | | | | |
| March 31, 2016 | | | | | | | | |
| TDR net finance receivables | | $ | 33 |
| | $ | — |
| | $ | 201 |
| | $ | 234 |
|
| Allowance for TDR finance receivable losses | | $ | 11 |
| | $ | — |
| | $ | 35 |
| | $ | 46 |
|
| Number of TDR accounts | | 10,949 |
| | — |
| | 3,490 |
| | 14,439 |
|
| | | | | | | | | |
| December 31, 2015 | | | | | | | | |
| TDR net finance receivables | | $ | 31 |
| | $ | 13 |
| | $ | 201 |
| | $ | 245 |
|
| Allowance for TDR finance receivable losses | | $ | 9 |
| | $ | 4 |
| | $ | 34 |
| | $ | 47 |
|
| Number of TDR accounts | | 10,542 |
| | 1,656 |
| | 3,506 |
| | 15,704 |
|
| |
* | TDR finance receivables held for sale included in the table above were as follows: |
|
| | | | | | | | | | | | |
| (dollars in millions) | | Personal Loans | | Real Estate Loans | | Total |
| | | | | | | |
| March 31, 2016 | | | | | | |
| TDR net finance receivables | | $ | 2 |
| | $ | 91 |
| | $ | 93 |
|
| Number of TDR accounts | | 746 |
| | 1,294 |
| | 2,040 |
|
| | | | | | | |
| December 31, 2015 | | | | | | |
| TDR net finance receivables | | $ | 2 |
| | $ | 92 |
| | $ | 94 |
|
| Number of TDR accounts | | 738 |
| | 1,322 |
| | 2,060 |
|
|
| | | | | | | | | | | | | | | | |
| (dollars in millions) | | Consumer and Insurance | | Other | | Segment to GAAP Adjustment | | Consolidated Total |
| | | | | | | | | |
| March 31, 2017 | | | | | | | | |
| TDR net finance receivables | | $ | 49 |
| | $ | 72 |
| | $ | (26 | ) | | $ | 95 |
|
| Allowance for TDR finance receivable losses | | 20 |
| | 23 |
| | (12 | ) | | 31 |
|
| | | | | | | | | |
| December 31, 2016 | | | | | | | | |
| TDR net finance receivables | | $ | 47 |
| | $ | 71 |
| | $ | (27 | ) | | $ | 91 |
|
| Allowance for TDR finance receivable losses | | 20 |
| | 23 |
| | (12 | ) | | 31 |
|
Liquidity and Capital Resources
SOURCES OF FUNDS
We finance the majority of our operating liquidity and capital needs through a combination of cash flows from operations, securitization debt, borrowings from conduit facilities, unsecured debt and equity, and may also utilize other corporate debt facilities in the future. As a holding company, all of the funds generated from our operations are earned by our operating subsidiaries.
SFC’s Offering of Senior Notes
On April 11, 2016, SFC issued $1.0 billion aggregate principal amount of 8.25% Senior Notes due 2020 under the Indenture, pursuant to which OMH provided a guarantee of the notes on an unsecured basis. SFC used a portion of the proceeds from the offering to repurchase approximately $600 million aggregate principal amount of its existing senior notes that mature in 2017. See Note 18 of the Notes to Condensed Consolidated Financial Statements for further information on this offering.
Securitizations and Borrowings from Revolving Conduit Facilities
During the three months ended March 31, 2016,2017, we (i) completed one auto securitization and (ii) exercised our right to redeem the asset backedasset-backed notes issued by the Springleaf Funding Trust 2013-B and (ii) deconsolidated the previously issued securitized interests of the SpringCastle Funding Asset-backed NotesSLFT 2014-A. See “Structured Financings” later in this section for further information on each of our securitization transactions.
During the three months ended March 31, 2016, we (i) extended the revolving periods on four existing conduits and (ii) amended three existing conduits to change the maximum principal balances. Net repaymentsborrowings under the notes of our existing conduitsrevolving conduit facilities totaled $103$10 million for the three months ended March 31, 2016.2017.
See Note 11Notes 9 and 10 of the Notes to Condensed Consolidated Financial Statements in Part I - Item 1 of this report for further information on our personallong-term debt, consumer loan securitizationssecuritization transactions and conduit facilities.
Subsequent to March 31, 2016,2017, we completed the following transactions:
On April 1, 2016, we drew $100 million under the variable funding notes issued by the Springleaf13, 2017, Midbrook 2013-VFN1 Trust.Trust voluntarily terminated its note purchase agreement with its lender.
On April 12, 2016,27, 2017, we repaid the entire $100drew $60 million outstanding principal balance of the variable funding notes issued by the Mill River 2015-VFN1 Trust.
On April 14, 2016, we repaid $248 million of the outstanding principal balance of the variable funding notes issued by the Springleaf 2013-VFN1 Trust.
On May 3, 2016, we repaid the entire $150 million outstanding principal balance of the variable funding notes issued by the SpringleafSumner Brook 2013-VFN1 Trust.
USES OF FUNDS
Our operating subsidiaries’ primary cash needs relate to funding our lending activities, our debt service obligations, our operating expenses, payment of insurance claims and, to a lesser extent, expenditures relating to upgrading and monitoring our technology platform, risk systems, and branch locations.
At March 31, 2016,2017, we had $365$397 million of cash and cash equivalents, and during the three months ended March 31, 2016, SFC2017, we generated net income of $172$27 million. Our net cash inflow from operating and investing activities totaled $302$161 million for the three months ended March 31, 2016.2017. At March 31, 2016,2017, our remaining scheduled principal and interest payments for 20162017 on our existing debt (excluding securitizations and borrowings under revolving conduit facilities)securitizations) totaled $647 million.$1.6 billion. As of March 31, 2016,2017, we had $1.4$1.8 billion UPB of unencumbered personal loans (including $604 million held for sale) and $775$357 million UPB of unencumbered real estate loans (including $232$210 million 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.
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.
Subsequent Transactions
On April 13, 2017 and May 2, 2017, SFC advanced $50 million and $37 million, respectively, to OMFH, under the OneMain Demand Note.
LIQUIDITY
Operating Activities
Net cash provided by operations of $220$233 million for the three months ended March 31, 20162017 reflected net income of $198$27 million, the impact of non-cash items, and a favorable change in working capital of $98$101 million. Net cash provided by operations of $211$221 million for the three months ended March 31, 20152016 reflected net income of $34$164 million, the impact of non-cash items, and a favorable change in working capital of $95$99 million.
Investing Activities
Net cash used for investing activities of $72 million for the three months ended March 31, 2017 was primarily due to net cash advances on intercompany notes receivable. Net cash provided by investing activities of $82$12 million for the three months ended March 31, 2016 was primarily due to the SpringCastle Interests Sale. Net cash providedSale and net collections on intercompany notes receivable, partially offset by investing activitiesnet principal originations of $144 millionfinance receivables held for the three months ended March 31, 2015 reflected net sales of investment securities during 2015.investment.
Financing Activities
Net cash used for financing activities of $258$39 million and $259 million for the three months ended March 31, 2017 and 2016, wasrespectively, were primarily due to net repayments of long-term debt. Net cash provided by financing activities of $1.2 billion for the three months ended March 31, 2015 reflected the debt issuance associated with the 2015-A securitization.
Liquidity Risks and Strategies
SFC’s credit ratings are non-investment grade, which have a significant impact on our cost of, 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;
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 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 standby fundingrevolving 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 credit facilities to allow us to use excess cash to pay down higher cost debt.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. State law restricts the amounts our insurance subsidiaries,that Merit and Yosemite may pay as dividends without prior notice to the Indiana Department of Insurance (the “Indiana DOI”).DOI. The maximum amount of dividends, (referredreferred to as “ordinary dividends”)dividends,” for an Indiana domiciled life insurance company that can be paid without prior approval in a 12-month12 month period (measured retrospectively from the date of payment) is the greater of: (i) 10% of policyholders’ surplus as of the prior year-end; or (ii) the statutory net gain from operations as of the prior year-end. Any amount greater must be approved by the Indiana DOI prior to its payment. The maximum ordinary dividends for an Indiana domiciled property and casualty insurance company that can be paid without prior approval in a 12-month12 month period (measured retrospectively from the date of payment) is the greater of: (i) 10% of policyholders’ surplus as of the prior year-end; or (ii) the statutory net income. Any amount greater must be approved by the Indiana DOI prior to its payment. These approved dividends are called “extraordinary dividends.” Merit and YosemiteOur insurance subsidiaries did not pay any dividends during the first quarter ofthree months ended March 31, 2017 and 2016.
OUR DEBT AGREEMENTS
8.25% SFC Notes. On April 11, 2016, OMH entered into an Indenture and Second Supplemental Indenture, pursuant to which it agreed to fully and unconditionally guarantee the payments of principal, premium (if any) and interest on $1.0 billion of 8.25% Senior Notes due 2020 issued by SFC. See Note 18 of the Notes to Condensed Consolidated Financial Statements for further information.
5.25% SFC Notes. On December 3, 2014, OMH entered into an Indenture and First Supplemental Indenture, pursuant to which it agreed to fully and unconditionally guarantee the payments of principal, premium (if any) and interest on $700 million of 5.25% Senior Notes due 2019 issued by SFC (the “5.25% SFC Notes”). As of March 31, 2016, $700 million aggregate principal amount of the 5.25% SFC Notes were outstanding.
SFC Notes. On December 30, 2013, OMH entered into Guaranty Agreements whereby it agreed to fully and unconditionally guarantee the payments of principal, premium (if any), and interest on approximately $5.2 billion aggregate principal amount of senior notes on a senior basis and $350 million aggregate principal amount of a junior subordinated debenture on a junior subordinated basis issued by SFC (collectively, the “SFC Notes”). The SFC Notes consisted of the following: 8.25% Senior
Notes due 2023; 7.75% Senior Notes due 2021; 6.00% Senior Notes due 2020; a 60-year junior subordinated debenture; and all senior notes outstanding on December 30, 2013, issued pursuant to the Indenture dated as of May 1, 1999 (the “1999 Indenture”), between SFC and Wilmington Trust, National Association (the successor trustee to Citibank N.A.). The 60-year junior subordinated debenture underlies the trust preferred securities sold by a trust sponsored by SFC. On December 30, 2013, OMH entered into a Trust Guaranty Agreement whereby it agreed to fully and unconditionally guarantee the related payment obligations under the trust preferred securities. As of March 31, 2016, approximately $4.2 billion aggregate principal amount of the SFC Notes, including $2.3 billion aggregate principal amount of senior notes under the 1999 Indenture, and $350 million aggregate principal amount of a junior subordinated debenture were outstanding.COVENANTS
The debt agreements to which SFC and its subsidiaries are a party include customary terms and conditions, including covenants and representations and warranties. Some or all of these agreements also contain certain restrictions, including (i) restrictions on the ability to create senior liens on property and assets in connection with any new debt financings and (ii) SFC’s ability to sell or convey all or substantially all of its assets, unless the transferee assumes SFC’s obligations under the applicable debt agreement. In addition, the OMH guarantees of SFC’s long-term debt discussed above are subject to customary release provisions.
With the exception of SFC’s junior subordinated debenture,the Junior Subordinated Debenture, none of ourSFC’s debt agreements require SFC or any of its subsidiaries to meet or maintain any specific financial targets or ratios. However, certain events, including non-payment of principal or interest, bankruptcy or insolvency, or a breach of a covenant or a representation or warranty, may constitute an event of default and trigger an acceleration of payments. In some cases, an event of default or acceleration of payments under one debt agreement may constitute a cross-default under other debt agreements resulting in an acceleration of payments under the other agreements.
As of March 31, 2016, we were2017, SFC was in compliance with all of the covenants under our debt agreements.
Junior Subordinated Debenture.Debenture
In January of 2007, SFC issued the Junior Subordinated Debenture, consisting of $350 million aggregate principal amount of 60-year junior subordinated debenture (the “debenture”) under an indenture dated January 22, 2007 (the “Juniordebt. The Junior Subordinated Indenture”), by and between SFC and Deutsche Bank Trust Company, as trustee. The debentureDebenture underlies the trust preferred securities sold by a trust sponsored by SFC. SFC can redeem the debentureJunior Subordinated Debenture at par beginning in January of 2017. Effective January 16, 2017, the interest rate on the UPB of the Junior Subordinated Debenture became a variable floating rate (determined quarterly) equal to 3-month LIBOR plus 1.75%, or 2.77% as of March 31, 2017. Prior to January 16, 2017, the interest rate on the UPB of the Junior Subordinated Debenture was a fixed rate of 6.00%.
Pursuant to the terms of the debenture,Junior Subordinated Debenture, SFC, upon the occurrence of a mandatory trigger event, is required to defer interest payments to the holders of the debentureJunior Subordinated Debenture (and not make dividend payments to SFI) unless SFC obtains non-debt capital funding in an amount equal to all accrued and unpaid interest on the debentureJunior Subordinated Debenture otherwise payable on the next interest payment date and pays such amount to the holders of the debenture.Junior Subordinated Debenture. A mandatory trigger event occurs if SFC’s (i) tangible equity to tangible managed assets is less than 5.5% or (ii) average fixed charge ratio is not more than 1.10x for the trailing four quarters (where the fixed charge ratio equals earnings excluding income taxes, interest expense, extraordinary items, goodwill impairment, and any amounts related to discontinued operations, divided by the sum of interest expense and any preferred dividends).quarters.
Based upon SFC’s financial results for the 12 months ended March 31, 2016,2017, a mandatory trigger event did not occur with respect to the interest payment due in JulyApril of 2016,2017, as we wereSFC was in compliance with both required ratios discussed above.
Structured Financings
We execute private securitizations under Rule 144A of the Securities Act of 1933. As of March 31, 2016,2017, our structured financings consisted of the following:
| | | (dollars in millions) | | Initial Note Amounts Issued (a) | | Initial Collateral Balance (b) | | Current Note Amounts Outstanding | | Current Collateral Balance (b) | | Current Weighted Average Interest Rate | | Collateral Type | | Revolving Period | | Initial Note Amounts Issued (a) | | Initial Collateral Balance (b) | | Current Note Amounts Outstanding | | Current Collateral Balance (b) | | Current Weighted Average Interest Rate (a) | | Collateral Type | | Original Revolving Period |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Consumer Securitizations: | | |
| | |
| | |
| | |
| | |
| | | | | | |
| | |
| | |
| | |
| | |
| | | | |
|
| SLFT 2014-A | | $ | 559 |
| | $ | 644 |
| | $ | 535 |
| | $ | 620 |
| | 2.56 | % | | Personal loans | | 2 years | |
| SLFT 2015-A | | 1,163 |
| | 1,250 |
| | 1,163 |
| | 1,250 |
| | 3.47 | % | | Personal loans | | 3 years | | $ | 1,163 |
| | $ | 1,250 |
| | $ | 1,163 |
| | $ | 1,250 |
| | 3.47 | % | | Personal loans | | 3 years |
|
| SLFT 2015-B | | 314 |
| | 335 |
| | 314 |
| | 336 |
| | 3.78 | % | | Personal loans | | 5 years | | 314 |
| | 335 |
| | 314 |
| | 336 |
| | 3.78 | % | | Personal loans | | 5 years |
|
| SLFT 2016-A | | | 500 |
| | 560 |
| | 500 |
| | 559 |
| | 3.10 | % | | Personal loans | | 2 years |
|
| Total consumer securitizations | | | 1,977 |
|
| 2,145 |
|
| 1,977 |
| | 2,145 |
| | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Total consumer securitizations | | $ | 2,036 |
|
| $ | 2,229 |
|
| $ | 2,012 |
| | $ | 2,206 |
| | | | |
| Auto Securitizations: | | | | | | | | | | | | | |
| ODART 2016-1 | | | 700 |
| | 754 |
| | 396 |
| | 456 |
| | 2.45 | % | | Direct auto loans | | — |
|
| ODART 2017-1 | | | 268 |
| | 300 |
| | 268 |
| | 300 |
| | 2.61 | % | | Direct auto loans | | 1 year |
|
| Total auto securitizations | | | 968 |
| | 1,054 |
| | 664 |
| | 756 |
| | | | |
| | | | | | | | | | | | | | |
| Total secured structured financings | | | $ | 2,945 |
| | $ | 3,199 |
| | $ | 2,641 |
| | $ | 2,901 |
| | |
| | | | |
|
| |
| (a) | Represents securities sold at time of issuance or at a later date and does not include retained notes. |
| |
| (b) | Represents UPB of the collateral supporting the issued and retained notes. |
In addition to the structured financings included in the table above, we had access to seven conduit facilities with a total borrowing capacity of $2.4$2.5 billion as of March 31, 2016,2017, as discussed in Note 1110 of the Notes to Condensed Consolidated Financial Statements.Statements in Part I - Item 1 of this report. At March 31, 2016, $1.1 billion2017, $10 million was drawn under these facilities.
See “Liquidity and Capital Resources - Sources of Funds - Securitizations and Borrowings from Revolving Conduit Facilities” above for information on the securitization and conduit transactions completed subsequent to March 31, 2016.2017.
Our securitizations have served to partially replace secured and unsecured debt in our capital structure with more favorable non-recourse funding. Our overall funding costs are positively impacted by our increased usage of securitizations, as we typically execute these transactions at interest rates significantly below those of our maturing secured and unsecured debt.
The weighted average interest rates on our debt on a Segment Accounting Basis were as follows:
|
| | | | | | |
| | | Three Months Ended March 31, |
| | 2016 | | 2015 |
| | | | | |
| Weighted average interest rate | | 5.26 | % | | 5.47 | % |
Off-Balance Sheet Arrangements
We have no material off-balance sheet arrangements as defined by SEC rules. We had no off-balance sheet exposure to losses associated with unconsolidated VIEs at March 31, 20162017 or December 31, 2015,2016, other than certain representations and warranties associated with the sales of the mortgage-backed retained certificates during 2014. As of March 31, 2016,2017, we had no repurchase activity related to these sales.
Critical Accounting Policies and Estimates
We describe our significant accounting policies used in the preparation of our consolidated financial statements in Note 3 of the Notes to Consolidated Financial Statements in Part II, Item 8 of our 20152016 Annual Report on Form 10-K. 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;
purchased credit impaired finance receivables;
TDR finance receivables; and
fair value measurements.measurements; and
other intangible assets.
There have been no material changes to our critical accounting policies or to our methodologies for deriving critical accounting estimates during the three months ended March 31, 2016.2017.
Recent Accounting Pronouncements
See Note 32 of the Notes to Condensed Consolidated Financial Statements in Part I - Item 1 of 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, seasonality of demand, and increased traffic in branches after the winter months. Demand for our personal loans is usually lower in January and February after the holiday season and as a result of tax refunds.season. Delinquencies on our personal loans are generally lowest in the first quarter 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.
Glossary of Terms
|
| |
Average debt | average of debt for each day in the period |
Average net receivables | average of monthly average net finance receivables (net finance receivables at the beginning and end of each month divided by 2) in the period |
Charge-off ratio | annualized net charge-offs as a percentage of the average of net finance receivables at the beginning of each month in the period |
Delinquency ratio | UPB 60 days or more past due (greater than three payments unpaid) as a percentage of UPB |
Gross charge-off ratio | annualized gross charge-offs as a percentage of the average of net finance receivables at the beginning of each month in the period |
Trust Preferred Securities | capital securities classified as debt for accounting purposes but due to their terms are afforded, at least in part, equity capital treatment in the calculation of effective leverage by rating agencies |
Loss ratio | annualized net charge-offs, net writedowns on real estate owned, net gain (loss) on sales of real estate owned, and operating expenses related to real estate owned as a percentage of the average of real estate loans at the beginning of each month in the period |
Net interest income | interest income less interest expense |
Recovery ratio | annualized recoveries on net charge-offs as a percentage of the average of net finance receivables at the beginning of each month in the period |
Tangible equity | total equity less accumulated other comprehensive income or loss |
Weighted average interest rate | annualized interest expense as a percentage of average debt |
Yield | annualized finance charges as a percentage of average net receivables |
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes to our market risk previously disclosed in Part II, Item 7A of our 20152016 Annual Report on Form 10-K.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Securities Exchange Act, of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As of DecemberMarch 31, 2015,2017, we carried out an evaluation of the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. This evaluation was conducted under the supervision of, and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer. Based on our evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of DecemberMarch 31, 20152017 to provide the reasonable assurance described above.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the first quarter of 20162017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 14 of the Notes to Condensed Consolidated Financial Statements in Part I - Item 1 of this Quarterly Report on Form 10-Q.report.
Item 1A. Risk Factors.
Since our transition services agreement with Lendmark expired on May 1, 2017, the risk factor entitled “The DOJ may impose additional conditions or penalties relating to the Lendmark Sale that could adversely affect us.” previously disclosed in Part I, Item 1A of our 2016 Annual Report on Form 10-K is no longer applicable and is hereby deleted.
There have been no other material changes to our risk factors previously disclosed in Part I, Item 1A of our 20152016 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On January 11, 2016, in order to satisfy a non-debt capital funding requirement with respect to SFC’s debenture, SFC issued one share of SFC common stock to SFI for $10 million. The share of SFC common stock was issued in reliance on the exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended. See “Liquidity and Capital Resources - Our Debt Agreements” in Part I, Item 2 of this Quarterly Report on Form 10-Q for further information on SFC’s debentures.None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
|
|
Exhibits are listed in the Exhibit Index beginning on page 7061 and incorporated by reference herein. |
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | | | |
| | | | SPRINGLEAF FINANCE CORPORATION |
| | | | (Registrant) |
| | | | |
| Date: | May 6, 20165, 2017 | | ByBy: | /s/ Micah R. Conrad |
| | | | | Micah R. Conrad |
| | | | | SeniorExecutive Vice President and Chief Financial Officer |
| | | | | (Duly Authorized Officer and Principal Financial Officer) |
Exhibit Index
|
| | |
| Exhibit | | |
| | |
2.1* | | Purchase Agreement, dated as of March 31, 3016, by and among SpringCastle Holdings, LLC, Springleaf
Acquisition Corporation, Springleaf Finance, Inc., NRZ Consumer LLC, NRZ SC America LLC, NRZ SC
Credit Limited, NRZ SC Finance I LLC, NRZ SC Finance II LLC, NRZ SC Finance III LLC, NRZ SC Finance
IV LLC, NRZ SC Finance V LLC, BTO Willow Holdings II, L.P. and Blackstone Family Tactical Opportunities
Investment Partnership - NQ - ESC L.P., and solely with respect to Section 11(a) and Section 11(g), NRZ SC
America Trust 2015-1, NRZ SC Credit Trust 2015-1, NRZ SC Finance Trust 2015-1, and BTO Willow
Holdings, L.P. Incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on April 1, 2016.
|
| | |
4.1 | | Second Supplemental Indenture relating to Springleaf Finance Corporation’s 8.250% Senior Notes due 2020, dated as of April 11, 2016, by and among Springleaf Finance Corporation, OneMain Holdings, Inc. and Wilmington Trust, National Association, as trustee. Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on April 11, 2016. |
| | |
10.1 | | Form of Restricted Stock Award Agreement under the Springleaf Holdings, Inc. 2013 Omnibus Incentive Plan (Employees), filed herewith as Exhibit 10.1. |
| | |
10.2 | | OneMain Holdings, Inc. Amended and Restated Annual Leadership Incentive Plan, effective January 1, 2016.
Incorporated by reference to Exhibit 10.16 to the Company’s Annual Report on Form 10-K for the year ended
December 31, 2015.
|
| | | |
| 31.1 | | Rule 13a-14(a)/15d-14(a) Certifications of the President and Chief Executive Officer of Springleaf Finance Corporation. |
| | | |
| 31.2 | | Rule 13a-14(a)/15d-14(a) Certifications of the Executive Vice President and Chief Financial Officer of Springleaf Finance Corporation. |
| | | |
| 32.1 | | Section 1350 Certifications. |
| | | |
| 101 | | Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Comprehensive Income (Loss), (iv) Condensed Consolidated Statements of Shareholders’Shareholder’s Equity, (v) Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Condensed Consolidated Financial Statements. |
| |
* | Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. |