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 September 30, 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.
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| | | | | | | |
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 November 1, 2016,October 31, 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 |
2022 SFC Notes | | $500 million of 6.125% Senior Notes due 2022 issued by SFC on May 15, 2017 and guaranteed by OMH |
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 on December 3, 2014 and guaranteed by OMH |
6.125% SFC Notes | | collectively, the 2022 SFC Notes and the Additional SFC Notes |
8.25% SFC Notes | | $1.0 billion of 8.25% Senior Notes due 2020 issued by SFC on April 11, 2016 and guaranteed by OMH |
ABS | | asset-backed securities |
Additional SFC Notes | | $500 million of 6.125% Senior Notes due 2022 issued by SFC on May 30, 2017 and guaranteed by OMH |
Adjusted pretax income (loss) | | a non-GAAP financial measure; income (loss) before income tax expense (benefit) on a Segment Accounting Basis, excluding net gain on sale of SpringCastle interests, SpringCastle transaction costs, and losses resulting from repurchases and repayments of debt |
AHL | | American Health and Life Insurance Company |
ASC | | Accounting Standards Codification |
ASU | | Accounting Standards Update |
August 2016 Real Estate Loan Sale | | SFC and certain of its subsidiaries sold a portfolio of second lien mortgage loans for aggregate cash proceeds of $246 million on August 3, 2016 |
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 two) 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 | | transaction by which FCFI Acquisition LLC, an affiliate of Fortress, acquired an 80% economic interest of the sole stockholder of SFC for a cash purchase price of $119 million, effective November 30, 2010 |
Fourth Avenue Auto Funding LSA | | Loan and Security Agreement, dated September 29, 2017, among Fourth Avenue Auto Funding, LLC, certain third party lenders and other third parties pursuant to which Fourth Avenue Auto Funding, LLC may borrow up to $250 million |
|
| | |
Term or Abbreviation | | Definition |
| | |
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 |
Indenture | | the SFC Base Indenture, together with the SFC Third Supplemental Indenture |
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 |
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. |
MetLife | | MetLife, Inc. |
Moody’s | | Moody’s Investors Service, Inc. |
Mystic River Funding LSA | | Loan and Security Agreement, dated September 28, 2017, among Mystic River Funding, LLC, certain third party lenders and other third parties pursuant to which Mystic River Funding, LLC may borrow up to $850 million |
Nationstar | | Nationstar Mortgage LLC, dba “Mr. Cooper” |
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 |
OGSC | | OneMain General Services Corporation, successor to SGSC and SFMC |
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 |
SEC | | U.S. Securities and Exchange Commission |
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 |
|
| | |
Term or Abbreviation | | Definition |
| | |
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 Third Supplemental Indenture | | supplemental indenture dated as of May 15, 2017, 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 |
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 |
Thur River Funding LSA | | Loan and Security Agreement, dated June 29, 2017, among Thur River Funding, LLC, certain third party lenders and other third parties pursuant to which Thur River Funding, LLC may borrow up to $350 million |
Triton | | Triton Insurance Company |
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 |
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) | | September 30, 2016 | | December 31, 2015 | | September 30, 2017 | | December 31, 2016 |
| | | | | | | | |
Assets | | |
| | |
| | |
| | |
|
Cash and cash equivalents | | $ | 272 |
| | $ | 321 |
| | $ | 402 |
| | $ | 240 |
|
Investment securities | | 573 |
| | 604 |
| | 577 |
| | 582 |
|
Net finance receivables: | | |
| | |
| | |
| | |
|
Personal loans (includes loans of consolidated VIEs of $2.6 billion in 2016 and $3.6 billion in 2015) | | 4,775 |
| | 4,300 |
| |
SpringCastle Portfolio (includes loans of consolidated VIEs of $1.7 billion in 2015) | | — |
| | 1,703 |
| |
Personal loans (includes loans of consolidated VIEs of $3.4 billion in 2017 and $2.9 billion in 2016) | | | 5,122 |
| | 4,804 |
|
Real estate loans | | 201 |
| | 538 |
| | 133 |
| | 144 |
|
Retail sales finance | | 13 |
| | 23 |
| | 7 |
| | 11 |
|
Net finance receivables | | 4,989 |
| | 6,564 |
| | 5,262 |
| | 4,959 |
|
Unearned insurance premium and claim reserves | | (216 | ) | | (250 | ) | | (139 | ) | | (212 | ) |
Allowance for finance receivable losses (includes allowance of consolidated VIEs of $103 million in 2016 and $128 million in 2015) | | (214 | ) | | (224 | ) | |
Allowance for finance receivable losses (includes allowance of consolidated VIEs of $117 million in 2017 and $94 million in 2016) | | | (223 | ) | | (204 | ) |
Net finance receivables, less unearned insurance premium and claim reserves and allowance for finance receivable losses | | 4,559 |
| | 6,090 |
| | 4,900 |
| | 4,543 |
|
Finance receivables held for sale (includes finance receivables held for sale of consolidated VIEs of $435 million in 2015) | | 166 |
| | 793 |
| |
Finance receivables held for sale | | | 137 |
| | 153 |
|
Notes receivable from parent and affiliates | | 3,482 |
| | 3,804 |
| | 4,305 |
| | 3,723 |
|
Restricted cash and cash equivalents (includes restricted cash and cash equivalents of consolidated VIEs of $166 million in 2016 and $282 million in 2015) | | 176 |
| | 295 |
| |
Restricted cash and restricted cash equivalents (includes restricted cash and restricted cash equivalents of consolidated VIEs of $167 million in 2017 and $211 million in 2016) | | | 178 |
| | 227 |
|
Other assets | | 279 |
| | 281 |
| | 151 |
| | 251 |
|
| | | | | | | | |
Total assets | | $ | 9,507 |
| | $ | 12,188 |
| | $ | 10,650 |
| | $ | 9,719 |
|
| | | | | | | | |
Liabilities and Shareholder’s Equity | | |
| | |
| | |
| | |
|
Long-term debt (includes debt of consolidated VIEs of $2.4 billion in 2016 and $5.5 billion in 2015) | | $ | 6,542 |
| | $ | 9,582 |
| |
Long-term debt (includes debt of consolidated VIEs of $3.1 billion in 2017 and $2.7 billion in 2016) | | | $ | 7,598 |
| | $ | 6,837 |
|
Insurance claims and policyholder liabilities | | 242 |
| | 230 |
| | 283 |
| | 248 |
|
Deferred and accrued taxes | | 134 |
| | 128 |
| | 119 |
| | 106 |
|
Other liabilities (includes other liabilities of consolidated VIEs of $4 million in 2016 and $7 million in 2015) | | 285 |
| | 216 |
| |
Other liabilities (includes other liabilities of consolidated VIEs of $5 million in 2017 and 2016) | | | 265 |
| | 185 |
|
Total liabilities | | 7,203 |
| | 10,156 |
| | 8,265 |
| | 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 September 30, 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 September 30, 2017 and December 31, 2016 | | | 5 |
| | 5 |
|
Additional paid-in capital | | 799 |
| | 789 |
| | 799 |
| | 799 |
|
Accumulated other comprehensive loss | | (13 | ) | | (24 | ) | | — |
| | (7 | ) |
Retained earnings | | 1,513 |
| | 1,341 |
| | 1,581 |
| | 1,546 |
|
Springleaf Finance Corporation shareholder’s equity | | 2,304 |
| | 2,111 |
| |
Non-controlling interests | | — |
| | (79 | ) | |
Total shareholder’s equity | | 2,304 |
| | 2,032 |
| | 2,385 |
| | 2,343 |
|
| | | | | | | | |
Total liabilities and shareholder’s equity | | $ | 9,507 |
| | $ | 12,188 |
| | $ | 10,650 |
| | $ | 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 September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2015 | | 2016 |
| 2015 | | 2017 | | 2016 | | 2017 |
| 2016 |
| | |
| | | | |
| | | | |
| | | | |
| | |
Interest income: | | | | | | | | | | | | | | | | |
Finance charges | | $ | 296 |
| | $ | 417 |
| | $ | 976 |
| | $ | 1,214 |
| | $ | 307 |
| | $ | 296 |
| | $ | 903 |
| | $ | 976 |
|
Finance receivables held for sale originated as held for investment | | 7 |
| | 5 |
| | 71 |
| | 13 |
| | 3 |
| | 7 |
| | 10 |
| | 71 |
|
Total interest income | | 303 |
| | 422 |
| | 1,047 |
| | 1,227 |
| | 310 |
| | 303 |
| | 913 |
| | 1,047 |
|
| | | | | | | | | | | | | | | | |
Interest expense | | 135 |
| | 171 |
| | 429 |
| | 500 |
| | 133 |
| | 135 |
| | 389 |
| | 429 |
|
| | | | | | | | | | | | | | | | |
Net interest income | | 168 |
| | 251 |
| | 618 |
| | 727 |
| | 177 |
| | 168 |
| | 524 |
| | 618 |
|
| | | | | | | | | | | | | | | | |
Provision for finance receivable losses | | 87 |
| | 78 |
| | 263 |
| | 230 |
| | 70 |
| | 87 |
| | 232 |
| | 263 |
|
| | | | | | | | | | | | | | | | |
Net interest income after provision for finance receivable losses | | 81 |
| | 173 |
| | 355 |
| | 497 |
| | 107 |
| | 81 |
| | 292 |
| | 355 |
|
| | | | | | | | | | | | | | | | |
Other revenues: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Insurance | | 43 |
| | 40 |
| | 122 |
| | 116 |
| | 37 |
| | 43 |
| | 114 |
| | 122 |
|
Investment | | 8 |
| | 11 |
| | 22 |
| | 43 |
| | 9 |
| | 8 |
| | 23 |
| | 22 |
|
Interest income on notes receivable from parent and affiliates | | 56 |
| | 5 |
| | 158 |
| | 11 |
| | 70 |
| | 56 |
| | 191 |
| | 158 |
|
Net loss on repurchases and repayments of debt | | — |
| | — |
| | (16 | ) | | — |
| | (1 | ) | | — |
| | (28 | ) | | (16 | ) |
Net gain on sale of SpringCastle interests | | — |
| | — |
| | 167 |
| | — |
| | — |
| | — |
| | — |
| | 167 |
|
Net gain (loss) on sales of personal and real estate loans | | (4 | ) | | — |
| | 18 |
| | — |
| | — |
| | (4 | ) | | — |
| | 18 |
|
Other | | 4 |
| | (7 | ) | | (2 | ) | | (8 | ) | | — |
| | 4 |
| | 8 |
| | (2 | ) |
Total other revenues | | 107 |
| | 49 |
| | 469 |
| | 162 |
| | 115 |
| | 107 |
| | 308 |
| | 469 |
|
| | | | | | | | | | | | | | | | |
Other expenses: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Operating expenses: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Salaries and benefits | | 81 |
| | 86 |
| | 263 |
| | 264 |
| | 73 |
| | 81 |
| | 229 |
| | 263 |
|
Other operating expenses | | 67 |
| | 79 |
| | 221 |
| | 220 |
| | 66 |
| | 67 |
| | 198 |
| | 221 |
|
Insurance policy benefits and claims | | 7 |
| | 17 |
| | 39 |
| | 53 |
| | 15 |
| | 7 |
| | 49 |
| | 39 |
|
Total other expenses | | 155 |
| | 182 |
| | 523 |
| | 537 |
| | 154 |
| | 155 |
| | 476 |
| | 523 |
|
| | | | | | | | | | | | | | | | |
Income before provision for income taxes | | 33 |
| | 40 |
| | 301 |
| | 122 |
| |
Income before income taxes | | | 68 |
| | 33 |
| | 124 |
| | 301 |
|
| | | | | | | | | | | | | | | | |
Provision for income taxes | | 10 |
| | 5 |
| | 101 |
| | 14 |
| |
Income taxes | | | 30 |
| | 10 |
| | 51 |
| | 101 |
|
| | | | | | | | | | | | | | | | |
Net income | | 23 |
| | 35 |
| | 200 |
| | 108 |
| | 38 |
| | 23 |
| | 73 |
| | 200 |
|
| | | | | | | | | | | | | | | | |
Net income attributable to non-controlling interests | | — |
| | 32 |
| | 28 |
| | 98 |
| | — |
| | — |
| | — |
| | 28 |
|
| | | | | | | | | | | | | | | | |
Net income attributable to Springleaf Finance Corporation | | $ | 23 |
| | $ | 3 |
| | $ | 172 |
| | $ | 10 |
| | $ | 38 |
| | $ | 23 |
| | $ | 73 |
| | $ | 172 |
|
See Notes to Condensed Consolidated Financial Statements.
SPRINGLEAF FINANCE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
| | (dollars in millions) | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 | | 2017 | | 2016 | | 2017 | | 2016 |
| | | | | | | | | | | | | | | | |
Net income | | $ | 23 |
|
| $ | 35 |
|
| $ | 200 |
|
| $ | 108 |
| | $ | 38 |
|
| $ | 23 |
|
| $ | 73 |
|
| $ | 200 |
|
| | | | | | | | | | | | | | | | |
Other comprehensive income (loss): | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Net change in unrealized gains (losses) on non-credit impaired available-for-sale securities | | 5 |
| | (3 | ) | | 29 |
| | (8 | ) | |
Net change in unrealized gains on non-credit impaired available-for-sale securities | | | 3 |
| | 5 |
| | 13 |
| | 29 |
|
Retirement plan liabilities adjustments | | | — |
| | — |
| | 4 |
| | — |
|
Income tax effect: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Net unrealized (gains) losses on non-credit impaired available-for-sale securities | | (1 | ) | | 1 |
| | (10 | ) | | 3 |
| |
Other comprehensive income (loss), net of tax, before reclassification adjustments | | 4 |
| | (2 | ) | | 19 |
| | (5 | ) | |
Net unrealized gains on non-credit impaired available-for-sale securities | | | (1 | ) | | (1 | ) | | (5 | ) | | (10 | ) |
Retirement plan liabilities adjustments | | | — |
| | — |
| | (1 | ) | | — |
|
Other comprehensive income, net of tax, before reclassification adjustments | | | 2 |
| | 4 |
| | 11 |
| | 19 |
|
Reclassification adjustments included in net income: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Net realized gains on available-for-sale securities | | (2 | ) | | (4 | ) | | (5 | ) | | (14 | ) | | (3 | ) | | (2 | ) | | (6 | ) | | (5 | ) |
Net realized gain on foreign currency translation adjustments | | (5 | ) | | — |
| | (5 | ) | | — |
| | — |
| | (5 | ) | | — |
| | (5 | ) |
Income tax effect: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Net realized gains on available-for-sale securities | | 1 |
| | 2 |
| | 2 |
| | 5 |
| | 1 |
| | 1 |
| | 2 |
| | 2 |
|
Reclassification adjustments included in net income, net of tax | | (6 | ) | | (2 | ) | | (8 | ) | | (9 | ) | | (2 | ) | | (6 | ) | | (4 | ) | | (8 | ) |
Other comprehensive income (loss), net of tax | | (2 | ) | | (4 | ) | | 11 |
| | (14 | ) | | — |
| | (2 | ) | | 7 |
| | 11 |
|
| | | | | | | | | | | | | | | | |
Comprehensive income | | 21 |
| | 31 |
| | 211 |
|
| 94 |
| | 38 |
| | 21 |
| | 80 |
|
| 211 |
|
| | | | | | | | | | | | | | | | |
Comprehensive income attributable to non-controlling interests | | — |
| | 32 |
| | 28 |
| | 98 |
| | — |
| | — |
| | — |
| | 28 |
|
| | | | | | | | | | | | | | | | |
Comprehensive income (loss) attributable to Springleaf Finance Corporation | | $ | 21 |
| | $ | (1 | ) | | $ | 183 |
| | $ | (4 | ) | |
Comprehensive income attributable to Springleaf Finance Corporation | | | $ | 38 |
| | $ | 21 |
| | $ | 80 |
| | $ | 183 |
|
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 | | | — |
| | — |
| | 7 |
| | — |
| | 7 |
| | — |
| | 7 |
|
Dividend of SFMC to SFI | | | — |
| | — |
| | — |
| | (38 | ) | | (38 | ) | | — |
| | (38 | ) |
Net income | | | — |
| | — |
| | — |
| | 73 |
| | 73 |
| | — |
| | 73 |
|
Balance, September 30, 2017 | | | $ | 5 |
| | $ | 799 |
| | $ | — |
| | $ | 1,581 |
| | $ | 2,385 |
| | $ | — |
| | $ | 2,385 |
|
| | | | | | | | | | | | | | | |
Balance, January 1, 2016 | | $ | 5 |
| | $ | 789 |
| | $ | (24 | ) | | $ | 1,341 |
| | $ | 2,111 |
| | $ | (79 | ) | | $ | 2,032 |
| | $ | 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 |
|
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 | | — |
| | — |
| | — |
| | — |
| | — |
| | 69 |
| | 69 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 69 |
| | 69 |
|
Other comprehensive income | | — |
| | — |
| | 11 |
| | — |
| | 11 |
| | — |
| | 11 |
| | — |
| | — |
| | 11 |
| | — |
| | 11 |
| | — |
| | 11 |
|
Net income | | — |
| | — |
| | — |
| | 172 |
| | 172 |
| | 28 |
| | 200 |
| | — |
| | — |
| | — |
| | 172 |
| | 172 |
| | 28 |
| | 200 |
|
Balance, September 30, 2016 | | $ | 5 |
| | $ | 799 |
| | $ | (13 | ) | | $ | 1,513 |
| | $ | 2,304 |
| | $ | — |
| | $ | 2,304 |
| | $ | 5 |
| | $ | 799 |
| | $ | (13 | ) | | $ | 1,513 |
| | $ | 2,304 |
| | $ | — |
| | $ | 2,304 |
|
| | | | | | | | | | | | | | | |
Balance, January 1, 2015 | | $ | 5 |
| | $ | 771 |
| | $ | 3 |
| | $ | 1,327 |
| | $ | 2,106 |
| | $ | (129 | ) | | $ | 1,977 |
| |
Non-cash incentive compensation from Initial Stockholder | | — |
| | 15 |
| | — |
| | — |
| | 15 |
| | — |
| | 15 |
| |
Share-based compensation expense, net of forfeitures | | — |
| | 1 |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
| |
Change in non-controlling interests: | | | | | | | | | | | | | |
|
| |
Distributions declared to joint venture partners | | — |
| | — |
| | — |
| | — |
| | — |
| | (58 | ) | | (58 | ) | |
Other comprehensive loss | | — |
| | — |
| | (14 | ) | | — |
| | (14 | ) | | — |
| | (14 | ) | |
Net income | | — |
| | — |
| | — |
| | 10 |
| | 10 |
| | 98 |
| | 108 |
| |
Balance, September 30, 2015 | | $ | 5 |
| | $ | 787 |
| | $ | (11 | ) | | $ | 1,337 |
| | $ | 2,118 |
| | $ | (89 | ) | | $ | 2,029 |
| |
See Notes to Condensed Consolidated Financial Statements.
SPRINGLEAF FINANCE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
| | (dollars in millions) | | Nine Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2015 |
| 2017 | | 2016 |
| | | | | | | | |
Cash flows from operating activities | | |
| | |
| | |
| | |
|
Net income | | $ | 200 |
| | $ | 108 |
| | $ | 73 |
| | $ | 200 |
|
Reconciling adjustments: | | |
| | |
| | |
| | |
|
Provision for finance receivable losses | | 263 |
| | 230 |
| | 232 |
| | 263 |
|
Depreciation and amortization | | 108 |
| | 71 |
| | 112 |
| | 108 |
|
Deferred income tax benefit | | (94 | ) | | (10 | ) | | (65 | ) | | (94 | ) |
Net gain on liquidation of United Kingdom subsidiary | | (5 | ) | | — |
| | — |
| | (5 | ) |
Net gain on sales of personal and real estate loans | | (18 | ) | | — |
| | — |
| | (18 | ) |
Net loss on repurchases and repayments of debt | | 16 |
| | — |
| | 28 |
| | 16 |
|
Non-cash incentive compensation from Initial Stockholder | | — |
| | 15 |
| |
Share-based compensation expense, net of forfeitures | | 1 |
| | 1 |
| | — |
| | 1 |
|
Net gain on sale of SpringCastle interests | | (167 | ) | | — |
| | — |
| | (167 | ) |
Other | | 6 |
| | (9 | ) | | — |
| | 6 |
|
Cash flows due to changes in: | | |
| | |
| | |
| | |
|
Other assets and other liabilities | | 17 |
| | 23 |
| | 154 |
| | 17 |
|
Insurance claims and policyholder liabilities | | (21 | ) | | 22 |
| | (38 | ) | | (21 | ) |
Taxes receivable and payable | | 95 |
| | (29 | ) | | 57 |
| | 95 |
|
Accrued interest and finance charges | | (6 | ) | | — |
| | (28 | ) | | (6 | ) |
Restricted cash and cash equivalents not reinvested | | 2 |
| | — |
| |
Other, net | | 2 |
| | (1 | ) | | (4 | ) | | 2 |
|
Net cash provided by operating activities | | 399 |
| | 421 |
| | 521 |
| | 397 |
|
| | | | | | | | |
Cash flows from investing activities | | |
| | |
| | |
| | |
|
Net principal collections (originations) of finance receivables held for investment and held for sale | | (455 | ) | | (552 | ) | |
Net principal originations of finance receivables held for investment and held for sale | | | (532 | ) | | (455 | ) |
Proceeds on sales of finance receivables held for sale originated as held for investment | | 871 |
| | 88 |
| | — |
| | 871 |
|
Proceeds from sale of SpringCastle interests | | 101 |
| | — |
| |
Cash advances on intercompany notes receivables | | (643 | ) | | (147 | ) | |
Proceeds from repayments of principal and assignment of intercompany note receivables | | 887 |
| | 77 |
| |
Proceeds from sale of SpringCastle interests, net of restricted cash released | | | — |
| | 26 |
|
Cash advances on intercompany notes receivable | | | (1,685 | ) | | (643 | ) |
Proceeds from repayments of principal and assignment of intercompany notes receivable | | | 1,126 |
| | 887 |
|
Available-for-sale securities purchased | | (218 | ) | | (382 | ) | | (226 | ) | | (218 | ) |
Trading and other securities purchased | | (10 | ) | | (1,457 | ) | | — |
| | (10 | ) |
Available-for-sale securities called, sold, and matured | | 291 |
| | 408 |
| | 240 |
| | 291 |
|
Trading and other securities called, sold, and matured | | 18 |
| | 2,563 |
| | 1 |
| | 18 |
|
Change in restricted cash and cash equivalents | | 42 |
| | (46 | ) | |
Proceeds from sale of real estate owned | | 7 |
| | 12 |
| | 3 |
| | 7 |
|
Other, net | | 6 |
| | 1 |
| | 12 |
| | 6 |
|
Net cash provided by investing activities | | 897 |
| | 565 |
| |
Net cash provided by (used for) investing activities | | | (1,061 | ) | | 780 |
|
| | | | | | | | |
Cash flows from financing activities | | |
| | |
| | |
| | |
|
Proceeds from issuance of long-term debt, net of commissions | | 2,984 |
| | 1,929 |
| | 2,342 |
| | 2,984 |
|
Proceeds from intercompany note payable | | 670 |
| | — |
| | — |
| | 670 |
|
Repayments of long-term debt | | (4,320 | ) | | (850 | ) | | (1,679 | ) | | (4,320 | ) |
Distributions to joint venture partners | | (18 | ) | | (58 | ) | | — |
| | (18 | ) |
Payments on note payable to affiliate | | (670 | ) | | — |
| | — |
| | (670 | ) |
Withholding tax on RSUs vested | | (1 | ) | | — |
| |
Withholding tax on share-based compensation | | | — |
| | (1 | ) |
Cash dividend of SFMC | | | (10 | ) | | — |
|
Capital contribution from parent | | 10 |
| | — |
| | — |
| | 10 |
|
Net cash provided by (used for) financing activities | | (1,345 | ) | | 1,021 |
| | 653 |
| | (1,345 | ) |
| | Condensed Consolidated Statements of Cash Flows (Unaudited) (Continued) | | | | | | | | |
| | | | | | | | |
(dollars in millions) | | Nine Months Ended September 30, | | At or for the Nine Months Ended September 30, |
| 2016 | | 2015 | | 2017 | | 2016 |
| | | | | | | | |
Net change in cash and cash equivalents | | (49 | ) | | 2,007 |
| |
Cash and cash equivalents at beginning of period | | 321 |
| | 749 |
| |
Cash and cash equivalents at end of period | | $ | 272 |
| | $ | 2,756 |
| |
Net change in cash and cash equivalents and restricted cash and restricted cash equivalents | | | 113 |
| | (168 | ) |
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 | | | $ | 580 |
| | $ | 448 |
|
| | | | | |
Supplemental cash flow information | | | | | |
Cash and cash equivalents | | | $ | 402 |
| | $ | 272 |
|
Restricted cash and restricted cash equivalents | | | 178 |
| | 176 |
|
Total cash and cash equivalents and restricted cash and restricted cash equivalents | | | $ | 580 |
| | $ | 448 |
|
| | | | | | | | |
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) | | $ | 1,895 |
| | $ | 608 |
| | $ | — |
| | $ | 1,895 |
|
Increase in finance receivables held for investment financed with intercompany payable | | $ | 89 |
| | $ | — |
| | 4 |
| | 89 |
|
Transfer of finance receivables to real estate owned | | $ | 7 |
| | $ | 8 |
| | 7 |
| | 7 |
|
Net unsettled investment security dispositions (purchases) | | $ | (24 | ) | | $ | 40 |
| |
Non-cash dividend of SFMC | | | (28 | ) | | — |
|
Net unsettled investment security purchases | | | — |
| | (24 | ) |
Restricted cash and restricted cash equivalents primarily represent funds required 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)
September 30, 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 September 30, 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”).Fortress.
SFC is a financial services holding company with subsidiaries engaged in the consumer finance and insurance businesses.
BASIS OF PRESENTATION
We prepared our condensed consolidated financial statements using generally accepted accounting principles in the United States of America (“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 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.statements of cash flows. 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 in 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, except for the change in accounting policy discussed below. As a result of the change in accounting policy, we have revised certain sections in our 2015 Annual Report on Form 10-K to reflect the retrospective application of this change in accounting policy, and such revised disclosures are included in exhibits to our Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on August 29, 2016 (the “retrospective Form 8-K”). Therefore, the condensed consolidated financial statements in this report should also be read in conjunction with the retrospective Form 8-K.
CHANGE IN ACCOUNTING POLICY
Effective April 1, 2016, we changed our accounting policy for the derecognition of loans within a purchased credit impaired pool. Historically, we removed loans from a purchased credit impaired pool upon charge-off of the loan, based on the Company’s charge-off accounting policy at their allocated carrying value. Under our new accounting policy, loans will be removed from a purchased credit impaired pool when the loan is written-off, at which time further collections efforts would not be pursued, or sold or repaid. While both methods are acceptable under GAAP, we believe the new method for derecognition of purchased credit impaired loans is preferable as it enhances consistency with our industry peers. As of January 1, 2015, the cumulative effect of applying the change in accounting policy increased shareholder’s equity by $37 million.
For the nine months ended September 30, 2016, the effect of this change in accounting policy was as follows:
decreased income before provision for income taxes by $56 million;
decreased net income by $34 million;pronouncements subsequently adopted and
decreased net income attributable to SFC by $37 million.
The effect of the change in accounting policy on the amounts reported in our condensed consolidated statements of operations for the three months ended September 30, 2016, was less than $1 million.
Our policy for derecognition of purchased credit impaired loans following the change described above is presented below:
Purchased Credit Impaired Finance Receivables
As part of each of our acquisitions, we identify a population of finance receivables for which it is determined that it is probable that we will be unable to collect all contractually required payments. The population of accounts identified generally consists of those finance receivables that are (i) 60 days or more past due at acquisition, (ii) which had been classified as troubled debt restructured (“TDR”) finance receivables as of the acquisition date, (iii) may have been previously modified, or (iv) had other indications of credit deterioration as of the acquisition date.
We accrete the excess of the cash flows expected to be collected on the purchased credit impaired finance receivables over the discounted cash flows (the “accretable yield”) into interest income at a level rate of return over the expected lives of the underlying pools of the purchased credit impaired finance receivables. The underlying pools are based on finance receivables with common risk characteristics. We have established policies and procedures to update on a quarterly basis the amount of cash flows we expect to collect, which incorporates assumptions regarding default rates, loss severities, the amounts and timing of prepayments and other factors that are reflective of then current market conditions. Probable decreases in expected finance receivable cash flows result in the recognition of impairment, which is recognized through the provision for finance receivable losses. Probable significant increases in expected cash flows to be collected would first reverse any previously recorded allowance for finance receivable losses; any remaining increases are recognized prospectively as adjustments to the respective pool’s yield.
Our purchased credit impaired finance receivables remain in our purchased credit impaired pools until liquidation or write-off. We do not reclassify modified purchased credit impaired finance receivables as TDR finance receivables.
We have additionally established policies and procedures related to maintaining the integrity of these pools. A finance receivable will not be removed from a pool unless we sell, foreclose, or otherwise receive assets in satisfaction of a particular finance receivable or a finance receivable is written-off. If a finance receivable is renewed and additional funds are lent and terms are adjusted to current market conditions, we consider this a new finance receivable and the previous finance receivable is removed from the pool. If the facts and circumstances indicate that a finance receivable should be removed from a pool, that finance receivable will be removed at its allocated carrying amount, and such removal will not affect the yield used to recognize accretable yield of the pool.
We have retrospectively applied this change in accounting policy. The effect of this change in accounting policy on the amounts previously reported in our condensed consolidated statements of operations for the three and nine months ended September 30, 2015 and our condensed consolidated statements of cash flows for the nine months ended September 30, 2015 are included in the following tables.
Revised Condensed Consolidated Statements of Operations
|
| | | | | | | | | | | | | | | | |
(dollars in millions) | | Three Months Ended September 30, 2015 | | Nine Months Ended September 30, 2015 |
| As Reported | | As Adjusted | | As Reported | | As Adjusted |
| | |
| | | | |
| | |
Interest income: | | | | | | | | |
Finance charges | | $ | 419 |
| | $ | 417 |
| | $ | 1,221 |
| | $ | 1,214 |
|
Finance receivables held for sale originated as held for investment | | 4 |
| | 5 |
| | 13 |
| | 13 |
|
Total interest income | | 423 |
| | 422 |
| | 1,234 |
| | 1,227 |
|
| | | | | | | | |
Interest expense | | 171 |
| | 171 |
| | 500 |
| | 500 |
|
| | | | | | | | |
Net interest income | | 252 |
| | 251 |
| | 734 |
| | 727 |
|
| | | | | | | | |
Provision for finance receivable losses | | 82 |
| | 78 |
| | 247 |
| | 230 |
|
| | | | | | | | |
Net interest income after provision for finance receivable losses | | 170 |
| | 173 |
| | 487 |
| | 497 |
|
| | | | | | | | |
Other revenues: | | |
| | |
| | |
| | |
|
Insurance | | 40 |
| | 40 |
| | 116 |
| | 116 |
|
Investment | | 11 |
| | 11 |
| | 43 |
| | 43 |
|
Interest income on notes receivable from parent and affiliates | | 5 |
| | 5 |
| | 11 |
| | 11 |
|
Other | | (1 | ) | | (7 | ) | | (3 | ) | | (8 | ) |
Total other revenues | | 55 |
| | 49 |
| | 167 |
| | 162 |
|
| | | | | | | | |
Other expenses: | | |
| | |
| | |
| | |
|
Operating expenses: | | |
| | |
| | |
| | |
|
Salaries and benefits | | 86 |
| | 86 |
| | 264 |
| | 264 |
|
Other operating expenses | | 79 |
| | 79 |
| | 220 |
| | 220 |
|
Insurance policy benefits and claims | | 17 |
| | 17 |
| | 53 |
| | 53 |
|
Total other expenses | | 182 |
| | 182 |
| | 537 |
| | 537 |
|
| | | | | | | | |
Income before provision for income taxes | | 43 |
| | 40 |
| | 117 |
| | 122 |
|
| | | | | | | | |
Provision for income taxes | | 7 |
| | 5 |
| | 14 |
| | 14 |
|
| | | | | | | | |
Net income | | 36 |
| | 35 |
| | 103 |
| | 108 |
|
| | | | | | | | |
Net income attributable to non-controlling interests | | 31 |
| | 32 |
| | 93 |
| | 98 |
|
| | | | | | | | |
Net income attributable to Springleaf Finance Corporation | | $ | 5 |
| | $ | 3 |
| | $ | 10 |
| | $ | 10 |
|
Revised Condensed Consolidated Statement of Cash Flows
|
| | | | | | | | |
(dollars in millions) | | Nine Months Ended September 30, 2015 |
| As Reported | | As Adjusted |
| | | | |
Cash flows from operating activities | | |
| | |
Net income | | $ | 103 |
| | $ | 108 |
|
Reconciling adjustments: | | |
| | |
|
Provision for finance receivable losses | | 247 |
| | 230 |
|
Depreciation and amortization | | 64 |
| | 71 |
|
Deferred income tax benefit | | (10 | ) | | (10 | ) |
Non-cash incentive compensation from Initial Stockholder | | 15 |
| | 15 |
|
Share-based compensation expense, net of forfeitures | | 1 |
| | 1 |
|
Other | | (13 | ) | | (9 | ) |
Cash flows due to changes in: | | |
| | |
Other assets and other liabilities | | 23 |
| | 23 |
|
Insurance claims and policyholder liabilities | | 22 |
| | 22 |
|
Taxes receivable and payable | | (29 | ) | | (29 | ) |
Other, net | | (1 | ) | | (1 | ) |
Net cash provided by operating activities | | 422 |
| | 421 |
|
| | | | |
Cash flows from investing activities | | |
| | |
Net principal collections (originations) of finance receivables held for investment and held for sale | | (552 | ) | | (552 | ) |
Proceeds on sales of finance receivables held for sale originated as held for investment | | 88 |
| | 88 |
|
Cash advances on intercompany notes receivables | | (147 | ) | | (147 | ) |
Principal collections on intercompany notes receivables | | 77 |
| | 77 |
|
Available-for-sale securities purchased | | (382 | ) | | (382 | ) |
Trading and other securities purchased | | (1,457 | ) | | (1,457 | ) |
Available-for-sale securities called, sold, and matured | | 408 |
| | 408 |
|
Trading and other securities called, sold, and matured | | 2,563 |
| | 2,563 |
|
Change in restricted cash and cash equivalents | | (46 | ) | | (46 | ) |
Proceeds from sale of real estate owned | | 12 |
| | 12 |
|
Other, net | | 1 |
| | 1 |
|
Net cash provided by investing activities | | 565 |
| | 565 |
|
| | | | |
Cash flows from financing activities | | |
| | |
Proceeds from issuance of long-term debt, net of commissions | | 1,929 |
| | 1,929 |
|
Repayments of long-term debt | | (850 | ) | | (850 | ) |
Distributions to joint venture partners | | (59 | ) | | (58 | ) |
Net cash provided by financing activities | | 1,020 |
| | 1,021 |
|
| | | | |
Net change in cash and cash equivalents | | 2,007 |
| | 2,007 |
|
Cash and cash equivalents at beginning of period | | 749 |
| | 749 |
|
Cash and cash equivalents at end of period | | $ | 2,756 |
| | $ | 2,756 |
|
We have also adjusted the applicable prior period amounts in the Notes to the Condensed Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part I, Item 2 herein to reflect the impact of this change in accounting policy.
2. Significant Transactions
OMH’S ACQUISITION OF ONEMAIN FINANCIAL HOLDINGS, 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 required certain of OMH’s subsidiaries (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.
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, on March 31, 2016, 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 $1.7 billion in net finance receivables.
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 paid into an escrow account on July 29, 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 $167 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 SFI is terminated, SFI will remain as servicer of the SpringCastle Portfolio under the 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 purposes of 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, the date of sale, was 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 the SpringCastle Interests Sale.
SFC’S OFFERING OF 8.25% SENIOR NOTES
On April 11, 2016, SFC issued $1.0 billion aggregate principal amount of 8.25% Senior Notes due 2020 (the “8.25% SFC Notes”) under an Indenture dated as of December 3, 2014 (the “Base Indenture”), as supplemented by a First Supplemental Indenture, dated as of December 3, 2014 (the “First Supplemental Indenture”) and a Second Supplemental Indenture, dated as of April 11, 2016 (the “Second Supplemental Indenture” and, collectively with the Base Indenture and the First Supplemental Indenture, 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, at a premium to principal amount from certain beneficial owners, and certain of those beneficial owners purchased new SFC senior notes in the offering. SFC intends to use the remaining net proceeds for general corporate purposes, which may include further debt repurchases and repayments.
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 effectively subordinated to all of SFC’s secured obligations to the extent of the value of the assets securing such obligations and structurally subordinated to any existing and future obligations of SFC’s subsidiaries with respect to claims against the assets of such subsidiaries.
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 were to occur, would permit or require the principal of and accrued interest on the notes to become, or to be declared, due and payable.
LENDMARK SALE
On November 12, 2015, OMH and the Branch Sellers entered into a purchase and sale agreement with Lendmark Financial Services, LLC (“Lendmark”) to sell 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 (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 had 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 would be 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.
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 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 (“UPB”) as of March 31, 2016 of $600 million. OMH has entered into a transition services agreement with Lendmark dated as of May 2, 2016 (the “Transition Services Agreement”), and OMH’s and our activities will remain subject to the oversight of the Monitoring Trustee appointed by the court pursuant to the Settlement Agreement until the expiration of the Transition Services
Agreement. The Transition Services Agreement is currently scheduled to expire on or before February 2, 2017, subject to an additional three-month extension with the permission of the DOJ. Although we and OMH continue to take such steps as we believe are necessary to comply with the terms of the 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 Settlement Agreement.
On May 2, 2016, 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).
REAL ESTATE LOAN SALE
On August 3, 2016, SFC and certain of its subsidiaries sold a portfolio of second lien mortgage loans for aggregate cash proceeds of $246 million (the “August 2016 Real Estate Loan Sale”). In connection with this sale, we recorded a net loss in other revenues at the time of sale of $4 million. Unless we are terminated or we resign as servicer, we will continue to service the loans included in this sale pursuant to a servicing agreement. The purchase and sale agreement and the servicing agreement include customary representations and warranties and indemnification provisions. disclosed below.
3.2. Recent Accounting Pronouncements
ACCOUNTING PRONOUNCEMENTS RECENTLY ADOPTED
Consolidation
In February of 2015, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2015-02, Consolidation - Amendments to the Consolidation Analysis, which amends the current consolidation guidance and ends the deferral granted to reporting entities with variable interests in investment companies from applying certain prior amendments to the VIE guidance. 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 tiebreakers in their consolidation analysis and disclosures. The standard became effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. We have adopted this ASU and concluded that it does not have a material effect on our consolidated financial statements.
Technical Corrections and Improvements
In June of 2015, the FASB issued ASU 2015-10, Technical Corrections and Improvements, to correct differences between original guidance and the Accounting Standards Codification, clarify the guidance, correct references and make minor improvements affecting a variety of topics. The amendments to this transition guidance became effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. We have adopted this ASU and concluded that it does not have a material effect on our consolidated financial statements.
Debt InstrumentsInvestments
In March of 2016, the FASB issued ASU 2016-06,2016-07, Contingent Puts and Call Options in Debt InstrumentsSimplifying the Transition to the Equity Method of Accounting, which clarifieseliminates the requirementsrequirement that, when an investment qualifies for assessing whether contingent call (put) optionsuse 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 retained earnings retroactively on a step-by-step basis as if the equity method of accounting had been in effect during all previous periods that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt host.investment had been held. The ASU requires assessingthat an entity that has available-for-sale securities recognize, through earnings, the embedded call (put) options solelyunrealized holding gain or loss in accordance withaccumulated other comprehensive income at the four-step decision sequence.date the investment becomes qualified for use of the equity method of accounting. The amendment ofin this ASU becomesbecame effective on a modified retrospective basisprospectively for fiscal years, and interimthe Company for annual periods within those fiscal years, beginning after December 15, 2016. January 1, 2017.We have early adopted this ASU as of January 1, 2017 and concluded that it does not have a material effectan impact on our consolidated financial statements.
Stock CompensationStatement of Cash Flows
In MarchNovember of 2016, the FASB issued ASU 2016-09,2016-18, Improvements to Employee Share-Based Payment AccountingStatement of Cash Flows, which simplifies the accounting for share-based payment transactions, income tax consequences, classificationpresentation of awards as either equity or liabilities, and classificationrestricted cash on the statement of cash flows.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 were adopted as follows:
become effective for the Company for fiscal years beginning January 1, 2018. We adopted the amendment requiring recognition of tax benefits relatedelected to exercised or vested awards through the income statement rather than additional paid-in capital on a prospective basisearly adopt this ASU as of January 1, 2016. Further, as of January 1, 2016, there was no impact to additional paid-in capital as2017 and presented this change on a result of our adoption ofretrospective basis for all periods presented. We concluded that this ASU under the modified retrospective method.
We did not adopt the amendment allowing for the use of the actual number of shares vested each period, rather than estimating the number of awards that are expected to vest. We continue to use an estimate as it relates to the number of awards that are expected to vest.
We adopted the amendment for the threshold to qualify for equity classification permits withholding up to the maximum statutory tax rates, under the modified retrospective basis as of January 1, 2016. This amendment diddoes not have a material impact on our consolidated financial statements.
Technical Corrections and Improvements
In January of 2017, the FASB issued ASU 2017-03, Accounting Changes and Error Corrections, to enhance the footnote disclosure guidelines for ASUs 2014-09, 2016-02, and 2016-13. The amendments to this transition guidance became effective for the Company for fiscal years beginning January 1, 2017. We have adopted the amendment requiring the classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes to be presented in the financing activities instead of the operating activities, under the retrospective methodthis ASU as of January 1, 2014. This amendment did2017 on a prospective basis. We concluded that this ASU does not have a material impact on our consolidated financial statements.
Business Combinations
In January of 2017, the FASB issued ASU 2017-01, Business Combinations, to clarify the definition of a business, which establishes a process to determine when an integrated set of assets and activities can be deemed a business combination. The amendments in this ASU become effective for the Company for annual periods beginning January 1, 2018. We adopted the amendment requiring the classification of excess tax benefits on the statement of cash flowselected to be presented in the operating activities instead of the financing activities, under the prospective methodearly adopt this ASU as of September 30, 2016. This amendment didApril 1, 2017 on a prospective basis. We concluded that the adoption of this ASU does not have a material impact 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 accountingrecognition 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 thosethe Company for annual periods beginning after December 15, 2017.January 1, 2018. In March of 2016, 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, Revenue from Contracts with Customers.2014-09. ASU 2016-08 does not change the core principleprinciples of 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 Licensing, 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.
The Company will adopt this ASU effective January 1, 2018. The Company’s implementation efforts included the identification of revenue streams that are within the scope of the new guidance and the review of related contracts with customers to determine their effect on certain non-interest income items presented in our consolidated statements of operations and the additional presentation disclosures required. We concluded that substantially all of the Company’s revenues are evaluating whethergenerated from activities that are outside the scope of this ASU, and the adoption of these accounting pronouncements will not have a material effectimpact on our consolidated financial statements.
Short-Duration Insurance Contracts Disclosures
In May of 2015, the FASB issued ASU 2015-09, 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 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,liabilities, 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 a 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.January 1, 2018 using a cumulative-effect adjustment to the balance sheet. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) shall be applied prospectively to equity investments that exist as of the date of adoption of this update. We are evaluating whetherconcluded the adoption of this ASU will not have a material effectimpact 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 the Company for fiscal years beginning January 1, 2019. We believe the adoption of this ASU will not have a material impact 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-of-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 in this ASU become effective for annual periods, and interim periods within thosethe Company for annual periods beginning after December 15, 2018.January 1, 2019. The Company’s cross-functional implementation team has developed a project plan to ensure we comply with all updates from this ASU at the time of adoption. We are evaluating whethercurrently in the process of importing all identified leases into a new leasing system that will allow us to better account for the leases in accordance with the new guidance. The Company’s leases primarily consist of leased office space, automobiles and information technology equipment. At December 31, 2016, the Company had approximately $55 million of minimum lease commitments from these operating leases (refer to Note 19 of our 2016 Annual Report on Form 10-K). We believe the adoption of this ASU will have a material effectimpact on our consolidated financial statements.statements, and we are in the process of quantifying the expected impact.
Investments
In March of 2016, the FASB issued ASU 2016-07, Simplifying the Transition to the Equity Method of Accounting, which eliminates the requirement that when an investment qualifies for use of the equity method 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 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. 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 amendment in this ASU becomes effective prospectively for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. We are evaluating whether the adoption of this ASU will have a material effect on our consolidated financial statements.
Revenue Recognition and Derivatives and Hedging
In May of 2016, the FASB issued ASU 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815), 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 are evaluating whether the adoption of this ASU will 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 (Topic 326):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 theThe 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 be determined 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. The Company’s cross-functional implementation team has developed a project plan to ensure we comply with all updates from this ASU at the time of adoption. We are currently in the process of developing an acceptable model to estimate the expected credit losses. We believe the adoption of this ASU will have a material effectimpact on our consolidated financial statements, and we are in the process of evaluatingquantifying the expected impacts.
Statement of Cash Flows
In August of 2016, the FASB issued ASU 2016-15, Statement of Cash FlowsFlows: Classification of Certain Cash Receipts and Cash Payments, 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 the Company for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.January 1, 2018. We are evaluating whetherconcluded the adoption of this ASU will not have a material effectimpact on our consolidated financial statements.
Income Taxes
In October of 2016, the FASB issued ASU 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory, which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments in this ASU will become effective for the Company for annual reporting periods beginning January 1, 2018. We concluded the adoption of this ASU will not have a material impact on our consolidated financial statements.
Compensation and Benefits
In March of 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, to improve the presentation of the net periodic pension cost and net periodic postretirement benefit costs. It requires that a company present the service cost component separately from other components of net benefit cost on the income statement. The amendments in this ASU become effective for the Company for annual periods beginning January 1, 2018. We concluded the adoption of this ASU will not have a material impact on our consolidated financial statements.
In May of 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation: Scope of Modification Accounting, which provides guidance on which changes to the terms or conditions of a share-based payment award requires an entity to apply modification accounting. The amendments in this ASU become effective for the Company for annual periods beginning January 1, 2018. We concluded the adoption of this ASU will not have a material impact on our consolidated financial statements.
We do not believe that any other accounting pronouncements issued during the nine months ended September 30, 2016,2017, 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 fivesix years. At September 30, 2016,2017, we had over 941,000914,000 personal loans representing $4.8$5.1 billion of net finance receivables, compared to 890,000928,000 personal loans totaling $4.3$4.8 billion 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. 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 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 SFI is terminated, SFI will continue to provide the servicing for these loans pursuant to a servicing agreement, which SFI services 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 |
| | | | | | | | | | | | | | | | | | |
September 30, 2016 | | |
| | | | |
| | |
| | |
| |
September 30, 2017 | | | |
| | |
| | |
| | |
|
Gross receivables * | | $ | 5,467 |
| | $ | — |
| | $ | 200 |
| | $ | 14 |
| | $ | 5,681 |
| | $ | 5,671 |
| | $ | 132 |
| | $ | 8 |
| | $ | 5,811 |
|
Unearned finance charges and points and fees | | (799 | ) | | — |
| | — |
| | (1 | ) | | (800 | ) | | (664 | ) | | — |
| | (1 | ) | | (665 | ) |
Accrued finance charges | | 61 |
| | — |
| | 1 |
| | — |
| | 62 |
| | 69 |
| | 1 |
| | — |
| | 70 |
|
Deferred origination costs | | 46 |
| | — |
| | — |
| | — |
| | 46 |
| | 46 |
| | — |
| | — |
| | 46 |
|
Total | | $ | 4,775 |
| | $ | — |
| | $ | 201 |
| | $ | 13 |
| | $ | 4,989 |
| | $ | 5,122 |
| | $ | 133 |
| | $ | 7 |
| | $ | 5,262 |
|
| | | | | | | | | | | | | | | | | | |
December 31, 2015 | | |
| | | | |
| | |
| | |
| |
December 31, 2016 | | | |
| | |
| | |
| | |
|
Gross receivables * | | $ | 5,028 |
| | $ | 1,672 |
| | $ | 534 |
| | $ | 25 |
| | $ | 7,259 |
| | $ | 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 |
| | $ | 1,703 |
| | $ | 538 |
| | $ | 23 |
| | $ | 6,564 |
| | $ | 4,804 |
| | $ | 144 |
| | $ | 11 |
| | $ | 4,959 |
|
| |
* | Gross receivables are defined as follows: |
Finance receivables purchased as a performing receivable — gross finance receivables equal the 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;
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; and
TDR finance receivables — gross finance receivables equal the 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 previously purchased as a performing receivable.
UnusedAt September 30, 2017 and December 31, 2016, unused lines of credit extended to customers by the Company were as follows:
|
| | | | | | | | |
(dollars in millions) | | September 30, 2016 | | December 31, 2015 |
| | | | |
Personal loans | | $ | 1 |
| | $ | 2 |
|
SpringCastle Portfolio | | — |
| | 365 |
|
Real estate loans | | 10 |
| | 30 |
|
Total | | $ | 11 |
| | $ | 397 |
|
Unused lines of credit on our personal loans can be suspended if any 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 any 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 collection 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 |
| | | | | | | | |
September 30, 2017 | | | | | | | | |
Net finance receivables: | | | | | | | | |
Performing | | | | | | | | |
Current | | $ | 4,901 |
| | $ | 103 |
| | $ | 7 |
| | $ | 5,011 |
|
30-59 days past due | | 75 |
| | 8 |
| | — |
| | 83 |
|
60-89 days past due | | 46 |
| | 2 |
| | — |
| | 48 |
|
Total performing | | 5,022 |
| | 113 |
| | 7 |
| | 5,142 |
|
Nonperforming | | | | | | | | |
90-179 days past due | | 97 |
| | 4 |
| | — |
| | 101 |
|
180 days or more past due | | 3 |
| | 16 |
| | — |
| | 19 |
|
Total nonperforming | | 100 |
| | 20 |
| | — |
| | 120 |
|
Total | | $ | 5,122 |
| | $ | 133 |
| | $ | 7 |
| | $ | 5,262 |
|
| | | | | | | | |
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 September 30, 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 and Nonperforming 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.
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.
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 | | SpringCastle Portfolio | | Real Estate Loans | | Retail Sales Finance | | Total |
| | | | | | | | | | |
September 30, 2016 | | | | | | | | | | |
Net finance receivables: | | | | | | | | | | |
Performing | | | | | | | | | | |
Current | | $ | 4,546 |
| | $ | — |
| | $ | 152 |
| | $ | 13 |
| | $ | 4,711 |
|
30-59 days past due | | 78 |
| | — |
| | 14 |
| | — |
| | 92 |
|
60-89 days past due | | 51 |
| | — |
| | 7 |
| | — |
| | 58 |
|
Total performing | | 4,675 |
| | — |
| | 173 |
| | 13 |
| | 4,861 |
|
Nonperforming | | | | | | | | | | |
90-119 days past due | | 38 |
| | — |
| | 3 |
| | — |
| | 41 |
|
120-149 days past due | | 31 |
| | — |
| | 3 |
| | — |
| | 34 |
|
150-179 days past due | | 28 |
| | — |
| | 2 |
| | — |
| | 30 |
|
180 days or more past due | | 3 |
| | — |
| | 20 |
| | — |
| | 23 |
|
Total nonperforming | | 100 |
| | — |
| | 28 |
| | — |
| | 128 |
|
Total | | $ | 4,775 |
| | $ | — |
| | $ | 201 |
| | $ | 13 |
| | $ | 4,989 |
|
| | | | | | | | | | |
Total 60+ delinquent finance receivables | | $ | 151 |
| | $ | — |
| | $ | 35 |
| | $ | — |
| | $ | 186 |
|
| | | | | | | | | | |
December 31, 2015 | | | | | | | | | | |
Net finance receivables: | | | | | | | | | | |
Performing | | | | | | | | | | |
Current | | $ | 4,077 |
| | $ | 1,588 |
| | $ | 486 |
| | $ | 22 |
| | $ | 6,173 |
|
30-59 days past due | | 65 |
| | 49 |
| | 13 |
| | — |
| | 127 |
|
60-89 days past due | | 49 |
| | 26 |
| | 19 |
| | — |
| | 94 |
|
Total performing | | 4,191 |
| | 1,663 |
| | 518 |
| | 22 |
| | 6,394 |
|
Nonperforming | | | | | | | | | | |
90-119 days past due | | 41 |
| | 16 |
| | 3 |
| | — |
| | 60 |
|
120-149 days past due | | 34 |
| | 12 |
| | 2 |
| | 1 |
| | 49 |
|
150-179 days past due | | 31 |
| | 11 |
| | 2 |
| | — |
| | 44 |
|
180 days or more past due | | 3 |
| | 1 |
| | 13 |
| | — |
| | 17 |
|
Total nonperforming | | 109 |
| | 40 |
| | 20 |
| | 1 |
| | 170 |
|
Total | | $ | 4,300 |
| | $ | 1,703 |
| | $ | 538 |
| | $ | 23 |
| | $ | 6,564 |
|
| | | | | | | | | | |
Total 60+ delinquent finance receivables | | $ | 158 |
| | $ | 66 |
| | $ | 39 |
| | $ | 1 |
| | $ | 264 |
|
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 SpringCastle Interests Sale described in Note 2.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 September 30, 20162017 and December 31, 2015,2016, finance receivables held for sale totaled $166$137 million and $793$153 million, respectively. See Note 6 for further information on our finance receivables held for sale,respectively, which 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 | | September 30, 2017 | | December 31, 2016 |
| | | | | | | | | | |
September 30, 2016 | | | | | | | |
FA Loans (a) | | | | | |
Carrying amount, net of allowance | | $ | — |
| | $ | 72 |
| | $ | 72 |
| | $ | 60 |
| | $ | 70 |
|
Outstanding balance(b) | | — |
| | 109 |
| | 109 |
| | 97 |
| | 107 |
|
Allowance for purchased credit impaired finance receivable losses | | — |
| | 8 |
| | 8 |
| | 9 |
| | 8 |
|
| | | | | | | |
December 31, 2015 | | | | | | | |
Carrying amount, net of allowance | | $ | 350 |
| | $ | 89 |
| | $ | 439 |
| |
Outstanding balance | | 482 |
| | 136 |
| | 618 |
| |
Allowance for purchased credit impaired finance receivable losses | | — |
| | 12 |
| | 12 |
| |
| |
*(a) | Purchased credit impaired FA Loans held for sale included in the table above were as follows: |
| | (dollars in millions) | | FA Loans | | September 30, 2017 | | December 31, 2016 |
| | | | | | |
September 30, 2016 | | |
| |
Carrying amount | | $ | 56 |
| | $ | 46 |
| | $ | 54 |
|
Outstanding balance | | 85 |
| | 75 |
| | 83 |
|
| | | |
December 31, 2015 | | |
| |
Carrying amount | | $ | 59 |
| |
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 September 30, 20162017 and December 31, 2015,2016, reflected the net carrying value of the purchased credit impaired FA Loansloans held for investment 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 September 30, 2017 | | | | | | | |
Balance at beginning of period | | | $ | — |
| | $ | 55 |
| | $ | 55 |
|
Accretion | | | — |
| | (1 | ) | | (1 | ) |
Balance at end of period | | | $ | — |
| | $ | 54 |
| | $ | 54 |
|
| | | | | | | |
Three Months Ended September 30, 2016 | | | | | | | | | | | | |
Balance at beginning of period | | $ | — |
| | $ | 61 |
| | $ | 61 |
| | $ | — |
| | $ | 61 |
| | $ | 61 |
|
Accretion (a) | | — |
| | (1 | ) | | (1 | ) | |
Reclassifications from nonaccretable difference (b) | | — |
| | 8 |
| | 8 |
| |
Transfer due to finance receivables sold | | — |
| | (11 | ) | | (11 | ) | |
Accretion | | | — |
| | (1 | ) | | (1 | ) |
Transfers due to finance receivables sold | | | — |
| | (11 | ) | | (11 | ) |
Reclassifications from nonaccretable difference (a) | | | — |
| | 8 |
| | 8 |
|
Balance at end of period | | $ | — |
| | $ | 57 |
| | $ | 57 |
| | $ | — |
| | $ | 57 |
| | $ | 57 |
|
| | | | | | | | | | | | |
Three Months Ended September 30, 2015 | | | | | | | |
Nine Months Ended September 30, 2017 | | | | | | | |
Balance at beginning of period | | $ | 411 |
| | $ | 53 |
| | $ | 464 |
| | $ | — |
| | $ | 60 |
| | $ | 60 |
|
Accretion (a) | | (19 | ) | | (2 | ) | | (21 | ) | |
Reclassifications from nonaccretable difference (b) | | — |
| | 1 |
| | 1 |
| |
Accretion (b) | | | — |
| | (4 | ) | | (4 | ) |
Reclassifications to nonaccretable difference (a) | | | — |
| | (2 | ) | | (2 | ) |
Balance at end of period | | $ | 392 |
| | $ | 52 |
| | $ | 444 |
| | $ | — |
| | $ | 54 |
| | $ | 54 |
|
| | | | | | | | | | | | |
Nine Months Ended September 30, 2016 | | | | | | | | | | | | |
Balance at beginning of period | | $ | 375 |
| | $ | 66 |
| | $ | 441 |
| | $ | 375 |
| | $ | 66 |
| | $ | 441 |
|
Accretion (a) | | (16 | ) | | (5 | ) | | (21 | ) | |
Reclassifications from nonaccretable difference (b) | | — |
| | 7 |
| | 7 |
| |
Accretion (b) | | | (16 | ) | | (5 | ) | | (21 | ) |
Reclassifications from nonaccretable difference (a) | | | — |
| | 7 |
| | 7 |
|
Transfer due to finance receivables sold | | (359 | ) | | (11 | ) | | (370 | ) | | (359 | ) | | (11 | ) | | (370 | ) |
Balance at end of period | | $ | — |
| | $ | 57 |
| | $ | 57 |
| | $ | — |
| | $ | 57 |
| | $ | 57 |
|
| | | | | | | |
Nine Months Ended September 30, 2015 | | | | | | | |
Balance at beginning of period | | $ | 452 |
| | $ | 54 |
| | $ | 506 |
| |
Accretion (a) | | (60 | ) | | (6 | ) | | (66 | ) | |
Reclassifications from nonaccretable difference (b) | | — |
| | 4 |
| | 4 |
| |
Balance at end of period | | $ | 392 |
| | $ | 52 |
| | $ | 444 |
| |
| |
(a) | Reclassifications from (to) nonaccretable difference represents the increases (decreases) in accretable yield resulting from higher (lower) estimated undiscounted cash flows. |
| |
(b) | Accretion on our purchased credit impaired FA Loans held for sale included inwas $3 million and $4 million for the table above were as follows: |
|
| | | | | | | | | | | | | | | | |
(dollars in millions) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
| | | | | | | | |
Accretion | | $ | 2 |
| | $ | 1 |
| | $ | 4 |
| | $ | 4 |
|
| |
(b) | Reclassifications from nonaccretable difference represents the increases in accretable yield resulting from higher estimated undiscounted cash flows.nine months ended September 30, 2017 and 2016, respectively. |
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 |
| | | | | | | | | | | | | | |
September 30, 2016 | | | | | | | | | |
September 30, 2017 | | | | | | | |
TDR gross finance receivables (b) | | $ | 36 |
| | $ | — |
| | $ | 137 |
| | $ | 173 |
| | $ | 100 |
| | $ | 141 |
| | $ | 241 |
|
TDR net finance receivables | | 36 |
| | — |
| | 138 |
| | 174 |
| | 100 |
| | 142 |
| | 242 |
|
Allowance for TDR finance receivable losses | | 13 |
| | — |
| | 11 |
| | 24 |
| | 40 |
| | 12 |
| | 52 |
|
| | | | | | | | | | | | | | |
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 | | September 30, 2017 | | December 31, 2016 |
| | | | | | | | | | |
September 30, 2016 | | | | | | | |
TDR gross finance receivables | | $ | — |
| | $ | 90 |
| | $ | 90 |
| | $ | 91 |
| | $ | 89 |
|
TDR net finance receivables | | — |
| | 90 |
| | 90 |
| | 92 |
| | 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. |
As of September 30, 2016,2017, 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 (a) | | Real Estate Loans (b) | | Total |
| | | | | | | |
Three Months Ended September 30, 2017 | | | |
| | |
| | |
|
TDR average net receivables | | | $ | 94 |
| | $ | 142 |
| | $ | 236 |
|
TDR finance charges recognized | | | 3 |
| | 3 |
| | 6 |
|
| | | | | | | | | | | | | | |
Three Months Ended September 30, 2016 | | |
| | |
| | |
| | |
| | | | | | |
TDR average net receivables | | $ | 35 |
| | $ | — |
| | $ | 159 |
| | $ | 194 |
| | $ | 35 |
| | $ | 159 |
| | $ | 194 |
|
TDR finance charges recognized | | — |
| | — |
| | 3 |
| | 3 |
| | — |
| | 3 |
| | 3 |
|
| | | | | | | | | | | | | | |
Three Months Ended September 30, 2015 | | | | | | | | | |
Nine Months Ended September 30, 2017 | | | | | | | |
TDR average net receivables | | $ | 30 |
| | $ | 12 |
| | $ | 199 |
| | $ | 241 |
| | $ | 69 |
| | $ | 139 |
| | $ | 208 |
|
TDR finance charges recognized | | — |
| | 1 |
| | 2 |
| | 3 |
| | 6 |
| | 7 |
| | 13 |
|
| | | | | | | | | | | | | | |
Nine Months Ended September 30, 2016 | | | | | | | | | | | | | | |
TDR average net receivables | | $ | 34 |
| | $ | — |
| | $ | 187 |
| | $ | 221 |
| | $ | 34 |
| | $ | 187 |
| | $ | 221 |
|
TDR finance charges recognized | | 2 |
| | — |
| | 9 |
| | 11 |
| | 2 |
| | 9 |
| | 11 |
|
| | | | | | | | | |
Nine Months Ended September 30, 2015 | | | | | | | | | |
TDR average net receivables | | $ | 28 |
| | $ | 12 |
| | $ | 197 |
| | $ | 237 |
| |
TDR finance charges recognized | | 2 |
| | 1 |
| | 8 |
| | 11 |
| |
| |
*(a) | TDR finance receivablespersonal loans held for sale included in the table above were immaterial. |
| |
(b) | TDR real estate loans held for sale included in the table above were as follows: |
| | (dollars in millions) | | Personal Loans | | Real Estate Loans | | Total | | Real Estate Loans | |
| | | | |
Three Months Ended September 30, 2017 | | | |
| |
TDR average net receivables | | | $ | 92 |
| |
TDR finance charges recognized | | | 2 |
| |
| | | | | | | | | |
Three Months Ended September 30, 2016 | | | | |
| | | | | |
TDR average net receivables | | $ | — |
| | $ | 112 |
| | $ | 112 |
| | $ | 112 |
| |
TDR finance charges recognized | | — |
| | 2 |
| | 2 |
| | 2 |
| |
| | | | | | | | | |
Three Months Ended September 30, 2015 | | | | | | | |
Nine Months Ended September 30, 2017 | | | | |
TDR average net receivables | | $ | — |
| | $ | 92 |
| | $ | 92 |
| | $ | 90 |
| |
TDR finance charges recognized | | — |
| | 2 |
| | 2 |
| | 5 |
| |
| | | | | | | | | |
Nine Months Ended September 30, 2016 | | | | | | | | | |
TDR average net receivables | | $ | 1 |
| | $ | 105 |
| | $ | 106 |
| | $ | 105 |
| |
TDR finance charges recognized | | — |
| | 5 |
| | 5 |
| | 5 |
| |
| | | | | | | |
Nine Months Ended September 30, 2015 | | | | | | | |
TDR average net receivables | | $ | — |
| | $ | 91 |
| | $ | 91 |
| |
TDR finance charges recognized | | — |
| | 4 |
| | 4 |
| |
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 September 30, 2017 | | | |
| | |
| | |
| | |
|
Pre-modification TDR net finance receivables | | | $ | 28 |
| | $ | — |
| | $ | 1 |
| | $ | 29 |
|
Post-modification TDR net finance receivables: | | | | | | | | | |
Rate reduction | | | $ | 19 |
| | $ | — |
| | $ | 2 |
| | $ | 21 |
|
Other (b) | | | 10 |
| | — |
| | — |
| | 10 |
|
Total post-modification TDR net finance receivables | | | $ | 29 |
| | $ | — |
| | $ | 2 |
| | $ | 31 |
|
Number of TDR accounts | | | 4,837 |
| | — |
| | 63 |
| | 4,900 |
|
| | | | | | | | | | | | | | | | |
Three Months Ended September 30, 2016 | | |
| | |
| | |
| | |
| | | | | | | | |
Pre-modification TDR net finance receivables | | $ | 10 |
| | $ | — |
| | $ | 3 |
| | $ | 13 |
| | $ | 10 |
| | $ | — |
| | $ | 3 |
| | $ | 13 |
|
Post-modification TDR net finance receivables: | | | | | | | | | | | | | | | | |
Rate reduction | | $ | 5 |
| | $ | — |
| | $ | 3 |
| | $ | 8 |
| | $ | 5 |
| | $ | — |
| | $ | 3 |
| | $ | 8 |
|
Other (b) | | 3 |
| | — |
| | 1 |
| | 4 |
| | 3 |
| | — |
| | 1 |
| | 4 |
|
Total post-modification TDR net finance receivables | | $ | 8 |
| | $ | — |
| | $ | 4 |
| | $ | 12 |
| | $ | 8 |
| | $ | — |
| | $ | 4 |
| | $ | 12 |
|
Number of TDR accounts | | 1,702 |
| | — |
| | 86 |
| | 1,788 |
| | 1,702 |
| | — |
| | 86 |
| | 1,788 |
|
| | | | | | | | | | | | | | | | |
Three Months Ended September 30, 2015 | | | | | | | | | |
Nine Months Ended September 30, 2017 | | | | | | | | | |
Pre-modification TDR net finance receivables | | $ | 8 |
| | $ | 1 |
| | $ | 6 |
| | $ | 15 |
| | $ | 91 |
| | $ | — |
| | $ | 14 |
| | $ | 105 |
|
Post-modification TDR net finance receivables: | | | | | | | | | | | | | | | | |
Rate reduction | | $ | 3 |
| | $ | 1 |
| | $ | 3 |
| | $ | 7 |
| | $ | 66 |
| | $ | — |
| | $ | 15 |
| | $ | 81 |
|
Other (b) | | 3 |
| | — |
| | 2 |
| | 5 |
| | 24 |
| | — |
| | — |
| | 24 |
|
Total post-modification TDR net finance receivables | | $ | 6 |
| | $ | 1 |
| | $ | 5 |
| | $ | 12 |
| | $ | 90 |
| | $ | — |
| | $ | 15 |
| | $ | 105 |
|
Number of TDR accounts | | 1,545 |
| | 142 |
| | 95 |
| | 1,782 |
| | 17,034 |
| | — |
| | 477 |
| | 17,511 |
|
| | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2016 | | | | | | | | | | | | | | | | |
Pre-modification TDR net finance receivables | | $ | 28 |
| | $ | 1 |
| | $ | 13 |
| | $ | 42 |
| | $ | 28 |
| | $ | 1 |
| | $ | 13 |
| | $ | 42 |
|
Post-modification TDR net finance receivables: | | | | | | | | | | | | | | | | |
Rate reduction | | $ | 16 |
| | $ | 1 |
| | $ | 11 |
| | $ | 28 |
| | $ | 16 |
| | $ | 1 |
| | $ | 11 |
| | $ | 28 |
|
Other (b) | | 8 |
| | — |
| | 3 |
| | 11 |
| | 8 |
| | — |
| | 3 |
| | 11 |
|
Total post-modification TDR net finance receivables | | $ | 24 |
| | $ | 1 |
| | $ | 14 |
| | $ | 39 |
| | $ | 24 |
| | $ | 1 |
| | $ | 14 |
| | $ | 39 |
|
Number of TDR accounts | | 5,251 |
| | 157 |
| | 291 |
| | 5,699 |
| | 5,251 |
| | 157 |
| | 291 |
| | 5,699 |
|
| | | | | | | | | |
Nine Months Ended September 30, 2015 | | | | | | | | | |
Pre-modification TDR net finance receivables | | $ | 24 |
| | $ | 5 |
| | $ | 16 |
| | $ | 45 |
| |
Post-modification TDR net finance receivables: | | | | | | | | | |
Rate reduction | | $ | 11 |
| | $ | 5 |
| | $ | 12 |
| | $ | 28 |
| |
Other (b) | | 9 |
| | — |
| | 4 |
| | 13 |
| |
Total post-modification TDR net finance receivables | | $ | 20 |
| | $ | 5 |
| | $ | 16 |
| | $ | 41 |
| |
Number of TDR accounts | | 4,860 |
| | 550 |
| | 272 |
| | 5,682 |
| |
| |
(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 September 30, 2016 | | |
| | |
| | |
|
Pre-modification TDR net finance receivables | | $ | — |
| | $ | 1 |
| | $ | 1 |
|
Post-modification TDR net finance receivables | | $ | — |
| | $ | 2 |
| | $ | 2 |
|
Number of TDR accounts | | — |
| | 39 |
| | 39 |
|
| | | | | | |
Three Months Ended September 30, 2015 | | | | | | |
Pre-modification TDR net finance receivables * | | $ | — |
| | $ | 1 |
| | $ | 1 |
|
Post-modification TDR net finance receivables * | | $ | — |
| | $ | 2 |
| | $ | 2 |
|
Number of TDR accounts | | 50 |
| | 33 |
| | 83 |
|
| | | | | | |
Nine Months Ended September 30, 2016 | | | | | | |
Pre-modification TDR net finance receivables * | | $ | — |
| | $ | 3 |
| | $ | 3 |
|
Post-modification TDR net finance receivables * | | $ | — |
| | $ | 4 |
| | $ | 4 |
|
Number of TDR accounts | | 174 |
| | 90 |
| | 264 |
|
| | | | | | |
Nine Months Ended September 30, 2015 | | | | | | |
Pre-modification TDR net finance receivables * | | $ | — |
| | $ | 4 |
| | $ | 4 |
|
Post-modification TDR net finance receivables * | | $ | — |
| | $ | 5 |
| | $ | 5 |
|
Number of TDR accounts | | 50 |
| | 77 |
| | 127 |
|
| |
* | Pre- and post-modification TDR personal loans held for sale for the nine months ended September 30, 2016 and the three and nine months ended September 30, 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
Personal loans held for investment and held for sale that were modified as TDR finance receivablespersonal loans within the previous 12 months and for which there was a default during the period to cause the TDR finance receivablespersonal loans 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 |
| | | | | | | | |
Three Months Ended September 30, 2016 | | |
| | |
| | |
| | |
|
TDR net finance receivables (b) | | $ | 1 |
| | $ | — |
| | $ | 1 |
| | $ | 2 |
|
Number of TDR accounts | | 355 |
| | — |
| | 13 |
| | 368 |
|
| | | | | | | | |
Three Months Ended September 30, 2015 | | | | | | | | |
TDR net finance receivables (b) (c) | | $ | 1 |
| | $ | — |
| | $ | 1 |
| | $ | 2 |
|
Number of TDR accounts | | 342 |
| | 26 |
| | 9 |
| | 377 |
|
| | | | | | | | |
Nine Months Ended September 30, 2016 | | | | | | | | |
TDR net finance receivables (b) (c) | | $ | 4 |
| | $ | — |
| | $ | 3 |
| | $ | 7 |
|
Number of TDR accounts | | 1,030 |
| | 19 |
| | 52 |
| | 1,101 |
|
| | | | | | | | |
Nine Months Ended September 30, 2015 | | | | | | | | |
TDR net finance receivables (b) | | $ | 3 |
| | $ | 1 |
| | $ | 2 |
| | $ | 6 |
|
Number of TDR accounts | | 855 |
| | 122 |
| | 35 |
| | 1,012 |
|
| |
(a) | TDR finance receivables held for sale included in the table above were as follows: |
| | (dollars in millions) | | Real Estate Loans | | Personal Loans |
| | | |
Three Months Ended September 30, 2017 | | | |
|
TDR net finance receivables * | | | $ | 10 |
|
Number of TDR accounts | | | 2,202 |
|
| | | | |
Three Months Ended September 30, 2016 | | |
| | |
TDR net finance receivables * | | $ | — |
| | $ | 1 |
|
Number of TDR accounts | | 4 |
| | 355 |
|
| | | | |
Three Months Ended September 30, 2015 | | | |
Nine Months Ended September 30, 2017 | | | |
TDR net finance receivables * | | $ | — |
| | $ | 24 |
|
Number of TDR accounts | | 1 |
| | 5,232 |
|
| | | | |
Nine Months Ended September 30, 2016 | | | | |
TDR net finance receivables | | $ | 1 |
| |
TDR net finance receivables * | | | $ | 4 |
|
Number of TDR accounts | | 25 |
| | 1,030 |
|
| | | |
Nine Months Ended September 30, 2015 | | | |
TDR net finance receivables | | $ | 1 |
| |
Number of TDR accounts | | 14 |
| |
| |
* | TDR real estate loans held for sale for the three months ended September 30, 2016 and 2015 that defaulted during the previous 12-month period were less than $1 million and, therefore, are not quantified in the combined table above. |
| |
(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 nine months ended September 30, 2016 and the three months ended September 30, 2015 that defaulted during the previous 12-month period were less than $1 million and, therefore, are not quantified in the combined table above. |
TDR real estate loans for the three and nine months ended September 30, 2017 and 2016 that defaulted during the previous 12-month period were immaterial. TDR SpringCastle Portfolio loans for the nine months ended September 30, 2016 that defaulted during the previous 12-month period were immaterial.
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 September 30, 2017 | | | |
| | | | |
| | |
| | |
|
Balance at beginning of period | | | $ | 201 |
| | $ | — |
| | $ | 19 |
| | $ | 1 |
| | $ | 221 |
|
Provision for finance receivable losses | | | 65 |
| | — |
| | 5 |
| | — |
| | 70 |
|
Charge-offs | | | (81 | ) | | — |
| | (1 | ) | | — |
| | (82 | ) |
Recoveries | | | 13 |
| | — |
| | 1 |
| | — |
| | 14 |
|
Balance at end of period | | | $ | 198 |
| | $ | — |
| | $ | 24 |
| | $ | 1 |
| | $ | 223 |
|
| | | | | | | | | | | | | | | | | | | | |
Three Months Ended September 30, 2016 | | |
| | | | |
| | |
| | |
| | |
| | | | |
| | |
| | |
|
Balance at beginning of period | | $ | 176 |
| | $ | — |
| | $ | 20 |
| | $ | 1 |
| | $ | 197 |
| | $ | 176 |
| | $ | — |
| | $ | 20 |
| | $ | 1 |
| | $ | 197 |
|
Provision for finance receivable losses | | 85 |
| | — |
| | 2 |
| | — |
| | 87 |
| | 85 |
| | — |
| | 2 |
| | — |
| | 87 |
|
Charge-offs | | (79 | ) | | — |
| | (4 | ) | | — |
| | (83 | ) | | (79 | ) | | — |
| | (4 | ) | | — |
| | (83 | ) |
Recoveries | | 12 |
| | — |
| | 1 |
| | — |
| | 13 |
| | 12 |
| | — |
| | 1 |
| | — |
| | 13 |
|
Balance at end of period | | $ | 194 |
| | $ | — |
| | $ | 19 |
| | $ | 1 |
| | $ | 214 |
| | $ | 194 |
| | $ | — |
|
| $ | 19 |
|
| $ | 1 |
|
| $ | 214 |
|
| | | | | | | | | | | | | | | | | | | | |
Three Months Ended September 30, 2015 | | |
| | | | |
| | |
| | |
| |
Nine Months Ended September 30, 2017 | | | |
| | | | |
| | |
| | |
|
Balance at beginning of period | | $ | 139 |
| | $ | 3 |
| | $ | 41 |
| | $ | 1 |
| | $ | 184 |
| | $ | 184 |
| | $ | — |
| | $ | 19 |
| | $ | 1 |
| | $ | 204 |
|
Provision for finance receivable losses | | 60 |
| | 16 |
| | 2 |
| | — |
| | 78 |
| | 225 |
| | — |
| | 7 |
| | — |
| | 232 |
|
Charge-offs | | (57 | ) | | (18 | ) | | (4 | ) | | — |
| | (79 | ) | | (260 | ) | | — |
| | (4 | ) | | — |
| | (264 | ) |
Recoveries | | 10 |
| | 3 |
| | 2 |
| | — |
| | 15 |
| | 49 |
| | — |
| | 2 |
| | — |
| | 51 |
|
Other (a) | | (1 | ) | | — |
| | — |
| | — |
| | (1 | ) | |
Balance at end of period | | $ | 151 |
| | $ | 4 |
|
| $ | 41 |
|
| $ | 1 |
|
| $ | 197 |
| | $ | 198 |
| | $ | — |
| | $ | 24 |
| | $ | 1 |
| | $ | 223 |
|
| | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2016 | | |
| | | | |
| | |
| | |
| | |
| | | | |
| | |
| | |
|
Balance at beginning of period | | $ | 173 |
| | $ | 4 |
| | $ | 46 |
| | $ | 1 |
| | $ | 224 |
| | $ | 173 |
| | $ | 4 |
| | $ | 46 |
| | $ | 1 |
| | $ | 224 |
|
Provision for finance receivable losses | | 241 |
| | 14 |
| | 8 |
| | — |
| | 263 |
| | 241 |
| | 14 |
| | 8 |
| | — |
| | 263 |
|
Charge-offs | | (253 | ) | | (17 | ) | | (10 | ) | | (1 | ) | | (281 | ) | | (253 | ) | | (17 | ) | | (10 | ) | | (1 | ) | | (281 | ) |
Recoveries | | 33 |
| | 3 |
| | 4 |
| | 1 |
| | 41 |
| | 33 |
| | 3 |
| | 4 |
| | 1 |
| | 41 |
|
Other (b) | | — |
| | (4 | ) | | (29 | ) | | — |
| | (33 | ) | |
Other * | | | — |
| | (4 | ) | | (29 | ) | | — |
| | (33 | ) |
Balance at end of period | | $ | 194 |
| | $ | — |
| | $ | 19 |
| | $ | 1 |
| | $ | 214 |
| | $ | 194 |
| | $ | — |
| | $ | 19 |
| | $ | 1 |
| | $ | 214 |
|
| | | | | | | | | | | |
Nine Months Ended September 30, 2015 | | |
| | | | |
| | |
| | |
| |
Balance at beginning of period | | $ | 130 |
| | $ | 3 |
| | $ | 46 |
| | $ | 1 |
| | $ | 180 |
| |
Provision for finance receivable losses | | 170 |
| | 53 |
| | 6 |
| | 1 |
| | 230 |
| |
Charge-offs | | (176 | ) | | (61 | ) | | (15 | ) | | (2 | ) | | (254 | ) | |
Recoveries | | 28 |
| | 9 |
| | 4 |
| | 1 |
| | 42 |
| |
Other (a) | | (1 | ) | | — |
| | — |
| | — |
| | (1 | ) | |
Balance at end of period | | $ | 151 |
| | $ | 4 |
| | $ | 41 |
| | $ | 1 |
| | $ | 197 |
| |
| |
(a) | Other consists of the elimination of allowance for finance receivable losses due to the transfer of personal loans held for investment to finance receivable held for sale on September 30, 2015. |
the elimination of allowance for finance receivable losses due to the transfer of real estate loans held for investment to finance receivables held for sale on June 30, 2016; and
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; andInterests Sale.
the elimination of allowance for finance receivable losses due to the transfer of real estate loans held for investment to finance receivable held for sale on June 30, 2016.
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 |
| | | | | | | | | | | | | | | | | | |
September 30, 2016 | | |
| | | | |
| | |
| | |
| |
September 30, 2017 | | | |
| | |
| | |
| | |
|
Allowance for finance receivable losses: | | |
| | | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Collectively evaluated for impairment | | $ | 181 |
| | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | 182 |
| | $ | 158 |
| | $ | 3 |
| | $ | 1 |
| | $ | 162 |
|
Purchased credit impaired finance receivables | | — |
| | — |
| | 8 |
| | — |
| | 8 |
| | — |
| | 9 |
| | — |
| | 9 |
|
TDR finance receivables | | 13 |
| | — |
| | 11 |
| | — |
| | 24 |
| | 40 |
| | 12 |
| | — |
| | 52 |
|
Total | | $ | 194 |
| | $ | — |
| | $ | 19 |
| | $ | 1 |
| | $ | 214 |
| | $ | 198 |
| | $ | 24 |
| | $ | 1 |
| | $ | 223 |
|
| | | | | | | | | | | | | | | | | | |
Finance receivables: | | |
| | | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Collectively evaluated for impairment | | $ | 4,739 |
| | $ | — |
| | $ | 129 |
| | $ | 13 |
| | $ | 4,881 |
| | $ | 5,022 |
| | $ | 60 |
| | $ | 7 |
| | $ | 5,089 |
|
Purchased credit impaired finance receivables | | — |
| | — |
| | 24 |
| | — |
| | 24 |
| | — |
| | 23 |
| | — |
| | 23 |
|
TDR finance receivables | | 36 |
| | — |
| | 48 |
| | — |
| | 84 |
| | 100 |
| | 50 |
| | — |
| | 150 |
|
Total | | $ | 4,775 |
| | $ | — |
| | $ | 201 |
| | $ | 13 |
| | $ | 4,989 |
| | $ | 5,122 |
| | $ | 133 |
| | $ | 7 |
| | $ | 5,262 |
|
| | | | | | | | | | | | | | | | | | |
Allowance for finance receivable losses as a percentage of finance receivables | | 4.06 | % | | — | % | | 9.96 | % | | 3.55 | % | | 4.30 | % | | 3.87 | % | | 18.19 | % | | 8.96 | % | | 4.24 | % |
| | | | | | | | | | | | | | | | | | |
December 31, 2015 | | |
| | | | |
| | |
| | |
| |
December 31, 2016 | | | |
| | |
| | |
| | |
|
Allowance for finance receivable losses: | | |
| | | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Collectively evaluated for impairment | | $ | 164 |
| | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | 165 |
| | $ | 164 |
| | $ | — |
| | $ | 1 |
| | $ | 165 |
|
Purchased credit impaired finance receivables | | — |
| | — |
| | 12 |
| | — |
| | 12 |
| | — |
| | 8 |
| | — |
| | 8 |
|
TDR finance receivables | | 9 |
| | 4 |
| | 34 |
| | — |
| | 47 |
| | 20 |
| | 11 |
| | — |
| | 31 |
|
Total | | $ | 173 |
| | $ | 4 |
| | $ | 46 |
| | $ | 1 |
| | $ | 224 |
| | $ | 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 | | — |
| | 350 |
| | 42 |
| | — |
| | 392 |
| | — |
| | 24 |
| | — |
| | 24 |
|
TDR finance receivables | | 29 |
| | 13 |
| | 109 |
| | — |
| | 151 |
| | 47 |
| | 44 |
| | — |
| | 91 |
|
Total | | $ | 4,300 |
| | $ | 1,703 |
| | $ | 538 |
| | $ | 23 |
| | $ | 6,564 |
| | $ | 4,804 |
| | $ | 144 |
| | $ | 11 |
| | $ | 4,959 |
|
| | | | | | | | | | | | | | | | | | |
Allowance for finance receivable losses as a percentage of finance receivables | | 4.01 | % | | 0.25 | % | | 8.72 | % | | 3.46 | % | | 3.42 | % | | 3.84 | % | | 13.31 | % | | 4.42 | % | | 4.12 | % |
6.5. Finance Receivables Held for Sale
We report finance receivables held for sale of $166$137 million at September 30, 20162017 and $793$153 million at December 31, 2015,2016, which are carried at the lower of cost or fair value. At September 30, 2016, finance receivables held for sale consistedvalue and consist entirely of real estate loans, compared to $617 million of personal loans and $176 million of real estate loans at December 31, 2015.loans. At September 30, 20162017 and December 31, 2015,2016, 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.
SPRINGCASTLE PORTFOLIO
During March of 2016, we transferred $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 in 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 $167 million.
PERSONAL LOANS
On May 2, 2016, we sold personal loans held for sale with a carrying value of $602 million and recorded a net gain in other revenues at the time of sale of $22 million.
REAL ESTATE LOANS
On June 30, 2016, we transferred $257 million of real estate loans (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. In connection with the August 2016 Real Estate Loan Sale, we sold a portfolio of second lien mortgage loans with a carrying value of $250 million and recorded a net loss in other revenues of $4 million.
On May 2, 2016, we sold personal loans held for sale with a carrying value of $602 million and recorded a net gain in other revenues at the time of sale of $22 million.
During March of 2016, we transferred $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 in 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 $167 million.
We did not have any other material transfer activity to or from finance receivables held for sale during each of the three and nine months ended September 30, 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 |
| | | | | | | | | | | | | | | | |
September 30, 2016 | | |
| | |
| | |
| | |
| |
September 30, 2017 | | | |
| | |
| | |
| | |
|
Fixed maturity available-for-sale securities: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Bonds | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
U.S. government and government sponsored entities | | $ | 14 |
| | $ | 1 |
| | $ | — |
| | $ | 15 |
| | $ | 19 |
| | $ | — |
| | $ | — |
| | $ | 19 |
|
Obligations of states, municipalities, and political subdivisions | | 77 |
| | 2 |
| | — |
| | 79 |
| | 71 |
| | — |
| | — |
| | 71 |
|
Non-U.S. government and government sponsored entities | | 2 |
| | — |
| | — |
| | 2 |
| | 4 |
| | — |
| | — |
| | 4 |
|
Corporate debt | | 347 |
| | 8 |
| | (1 | ) | | 354 |
| |
Mortgage-backed, asset-backed, and collateralized: | | |
| | |
| | |
| | | |
Residential mortgage-backed securities (“RMBS”) | | 37 |
| | — |
| | — |
| | 37 |
| |
Commercial mortgage-backed securities (“CMBS”) | | 37 |
| | 1 |
| | — |
| | 38 |
| |
Collateralized debt obligations (“CDO”)/Asset-backed securities (“ABS”) | | 36 |
| | — |
| | — |
| | 36 |
| |
Total bonds | | 550 |
| | 12 |
| | (1 | ) | | 561 |
| |
Preferred stock (a) | | 6 |
| | — |
| | — |
| | 6 |
| |
Other long-term investments | | 1 |
| | — |
| | — |
| | 1 |
| |
Total (b) | | $ | 557 |
| | $ | 12 |
| | $ | (1 | ) | | $ | 568 |
| |
| | | | | | | | | |
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 |
| |
Corporate debt | | 278 |
| | 2 |
| | (13 | ) | | 267 |
| | 354 |
| | 5 |
| | (2 | ) | | 357 |
|
Mortgage-backed, asset-backed, and collateralized: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
RMBS | | 74 |
| | — |
| | — |
| | 74 |
| | 38 |
| | — |
| | — |
| | 38 |
|
CMBS | | 44 |
| | — |
| | — |
| | 44 |
| | 29 |
| | — |
| | — |
| | 29 |
|
CDO/ABS | | 30 |
| | — |
| | (1 | ) | | 29 |
| | 49 |
| | — |
| | — |
| | 49 |
|
Total bonds | | 597 |
| | 3 |
| | (15 | ) | | 585 |
| | 564 |
| | 5 |
| | (2 | ) | | 567 |
|
Preferred stock (a) | | 6 |
| | — |
| | (1 | ) | | 5 |
| | 7 |
| | — |
| | (1 | ) | | 6 |
|
Other long-term investments | | 1 |
| | — |
| | — |
| | 1 |
| | 1 |
| | — |
| | — |
| | 1 |
|
Total (b) | | $ | 604 |
| | $ | 3 |
| | $ | (16 | ) | | $ | 591 |
| | $ | 572 |
| | $ | 5 |
| | $ | (3 | ) | | $ | 574 |
|
| | | | | | | | | |
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 September 30, 20162017 and December 31, 2015,2016, which is classified as a restricted investment and carried at cost. |
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 |
| | | | | | | | | | | | | | | | | | | | | | | | |
September 30, 2016 | | |
| | |
| | |
| | |
| | |
| | |
| |
Bonds: | | |
| | |
| | |
| | |
| | |
| | |
| |
U.S. government and government sponsored entities | | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | — |
| |
Obligations of states, municipalities, and political subdivisions | | 17 |
| | — |
| | 2 |
| | — |
| | 19 |
| | — |
| |
Non-U.S. government and government sponsored entities | | 2 |
| | — |
| | — |
| | — |
| | 2 |
| | — |
| |
Corporate debt | | 49 |
| | — |
| | 10 |
| | (1 | ) | | 59 |
| | (1 | ) | |
RMBS | | 14 |
| | — |
| | — |
| | — |
| | 14 |
| | — |
| |
CMBS | | 15 |
| | — |
| | — |
| | — |
| | 15 |
| | — |
| |
CDO/ABS | | 2 |
| | — |
| | — |
| | — |
| | 2 |
| | — |
| |
Total bonds | | 100 |
| | — |
| | 12 |
| | (1 | ) | | 112 |
| | (1 | ) | |
Preferred stock | | — |
| | — |
| | 6 |
| | — |
| | 6 |
| | — |
| |
Other long-term investments | | — |
| | — |
| | 1 |
| | — |
| | 1 |
| | — |
| |
Total | | $ | 100 |
| | $ | — |
| | $ | 19 |
| | $ | (1 | ) | | $ | 119 |
| | $ | (1 | ) | |
| | | | | | | | | | | | | |
December 31, 2015 | | |
| | |
| | |
| | |
| | |
| | |
| |
September 30, 2017 | | | |
| | |
| | |
| | |
| | |
| | |
|
Bonds: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
U.S. government and government sponsored entities | | $ | 76 |
| | $ | (1 | ) | | $ | — |
| | $ | — |
| | $ | 76 |
| | $ | (1 | ) | | $ | 12 |
| | $ | — |
| | $ | 4 |
| | $ | — |
| | $ | 16 |
| | $ | — |
|
Obligations of states, municipalities, and political subdivisions | | 36 |
| | — |
| | 2 |
| | — |
| | 38 |
| | — |
| | 11 |
| | — |
| | 14 |
| | — |
| | 25 |
| | — |
|
Corporate debt | | 189 |
| | (13 | ) | | 7 |
| | — |
| | 196 |
| | (13 | ) | | 63 |
| | (1 | ) | | 83 |
| | (1 | ) | | 146 |
| | (2 | ) |
RMBS | | 68 |
| | — |
| | — |
| | — |
| | 68 |
| | — |
| | 5 |
| | — |
| | 21 |
| | — |
| | 26 |
| | — |
|
CMBS | | 36 |
| | — |
| | 5 |
| | — |
| | 41 |
| | — |
| | 4 |
| | — |
| | 14 |
| | — |
| | 18 |
| | — |
|
CDO/ABS | | 29 |
| | (1 | ) | | — |
| | — |
| | 29 |
| | (1 | ) | | 16 |
| | — |
| | 11 |
| | — |
| | 27 |
| | — |
|
Total bonds | | 434 |
| | (15 | ) | | 14 |
| | — |
| | 448 |
| | (15 | ) | | 111 |
| | (1 | ) | | 147 |
| | (1 | ) | | 258 |
| | (2 | ) |
Preferred stock | | — |
| | — |
| | 6 |
| | (1 | ) | | 6 |
| | (1 | ) | | — |
| | — |
| | 6 |
| | (1 | ) | | 6 |
| | (1 | ) |
Other long-term investments | | 1 |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | 1 |
| | — |
|
Total | | $ | 435 |
| | $ | (15 | ) |
| $ | 20 |
|
| $ | (1 | ) | | $ | 455 |
| | $ | (16 | ) | | $ | 112 |
| | $ | (1 | ) | | $ | 153 |
| | $ | (2 | ) | | $ | 265 |
| | $ | (3 | ) |
| | | | | | | | | | | | | |
December 31, 2016 | | | |
| | |
| | |
| | |
| | |
| | |
|
Bonds: | | | |
| | |
| | |
| | |
| | |
| | |
|
U.S. government and government sponsored entities | | | $ | 9 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 9 |
| | $ | — |
|
Obligations of states, municipalities, and political subdivisions | | | 57 |
| | (1 | ) | | 2 |
| | — |
| | 59 |
| | (1 | ) |
Non-U.S. government and government sponsored entities | | | 3 |
| | — |
| | — |
| | — |
| | 3 |
| | — |
|
Corporate debt | | | 171 |
| | (5 | ) | | 5 |
| | — |
| | 176 |
| | (5 | ) |
RMBS | | | 33 |
| | — |
| | — |
| | — |
| | 33 |
| | — |
|
CMBS | | | 22 |
| | — |
| | — |
| | — |
| | 22 |
| | — |
|
CDO/ABS | | | 25 |
| | — |
| | — |
| | — |
| | 25 |
| | — |
|
Total bonds | | | 320 |
| | (6 | ) | | 7 |
| | — |
| | 327 |
| | (6 | ) |
Preferred stock | | | — |
| | — |
| | 6 |
| | — |
| | 6 |
| | — |
|
Total | | | $ | 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 90169 and 198217 investment securities in an unrealized loss position at September 30, 20162017 and December 31, 2015,2016, respectively. We do not consider the 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 September 30, 2016,2017, we had 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 and nine months ended September 30, 20162017 and 2015,2016, we did not recognize any other-than-temporary impairment credit losses on our available-for-sale securities in investment revenues.
ChangesDuring the three and nine months ended September 30, 2017 and 2016, there were no material additions or reductions in the cumulative amount of credit losses (recognized in earnings) on other-than-temporarily impaired available-for-sale securities were as follows:
|
| | | | | | | | | | | | | | | | |
(dollars in millions) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
| | | | | | | | |
Balance at beginning of period | | $ | — |
| | $ | 1 |
| | $ | 1 |
| | $ | 1 |
|
Reductions: | | | | | | | | |
Realized due to dispositions with no prior intention to sell | | — |
| | — |
| | 1 |
| | — |
|
Balance at end of period | | $ | — |
| | $ | 1 |
| | $ | — |
| | $ | 1 |
|
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 September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 |
| 2015 |
| 2016 | | 2015 | | 2017 |
| 2016 |
| 2017 | | 2016 |
| | | | | | | | | | | | | | | | |
Proceeds from sales and redemptions | | $ | 42 |
| | $ | 168 |
| | $ | 235 |
| | $ | 372 |
| | $ | 103 |
| | $ | 42 |
| | $ | 222 |
| | $ | 235 |
|
| | | | | | | | | | | | | | | | |
Realized gains | | $ | 1 |
| | $ | 4 |
| | $ | 5 |
| | $ | 15 |
| | $ | 3 |
| | $ | 1 |
| | $ | 7 |
| | $ | 5 |
|
Realized losses | | — |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | (1 | ) | | — |
|
Net realized gains | | $ | 1 |
| | $ | 4 |
| | $ | 5 |
| | $ | 14 |
| | $ | 3 |
| | $ | 1 |
| | $ | 6 |
| | $ | 5 |
|
Contractual maturities of fixed-maturity available-for-sale securities at September 30, 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 | | $ | 54 |
| | $ | 55 |
| | $ | 67 |
| | $ | 67 |
|
Due after 1 year through 5 years | | 215 |
| | 213 |
| | 221 |
| | 221 |
|
Due after 5 years through 10 years | | 36 |
| | 34 |
| | 40 |
| | 39 |
|
Due after 10 years | | 145 |
| | 138 |
| | 123 |
| | 121 |
|
Mortgage-backed, asset-backed, and collateralized securities | | 111 |
| | 110 |
| | 116 |
| | 116 |
|
Total | | $ | 561 |
| | $ | 550 |
| | $ | 567 |
| | $ | 564 |
|
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 certain investment strategies.
The fair value of bondssecurities on deposit with insurance regulatory authoritiesthird parties totaled $8 million and $11 million at September 30, 20162017 and December 31, 2015.2016, respectively.
TRADING AND OTHER SECURITIES
The fair value of trading and other securities by type was as follows:
| | (dollars in millions) | | September 30, 2016 | | December 31, 2015 | | September 30, 2017 | | December 31, 2016 |
| | | | | | | | |
Fixed maturity trading and other securities: | | |
| | |
| |
Fixed maturity other securities: | | | |
| | |
|
Bonds | | |
| | |
| | |
| | |
|
Corporate debt | | $ | 2 |
| | $ | 10 |
| | $ | 2 |
| | $ | 2 |
|
Mortgage-backed, asset-backed, and collateralized: | | | | |
| | | | |
|
CMBS | | 2 |
| | 2 |
| | — |
| | 1 |
|
Total * | | $ | 4 |
| | $ | 12 |
| |
Total | | | $ | 2 |
| | $ | 3 |
|
| |
* | The fair value of other securities, which we have elected the fair value option, totaled $4 million at September 30, 2016 and $2 million at December 31, 2015. |
The net unrealizedMark-to-market gains on trading and other securities held at September 30, 2017 and 2016 and realized gains (losses) on our trading and other securities which wesold or redeemed during the 2017 and 2016 periods were immaterial for the three and nine months ended September 30, 2017 and 2016. We report these gains (losses) in investment revenues,revenues. Other securities are those securities for which the fair value option was elected. Our remaining trading securities were as follows:
|
| | | | | | | | | | | | | | | | |
(dollars in millions) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2015 |
| 2016 | | 2015 |
| | | | | | | | |
Net unrealized gains (losses) on trading and other securities held at period end | | $ | (1 | ) | | $ | (1 | ) | | $ | — |
| | $ | 3 |
|
Net realized gains (losses) on trading and other securities sold or redeemed | | 1 |
| | (1 | ) | | 1 |
| | (2 | ) |
Total | | $ | — |
| | $ | (2 | ) | | $ | 1 |
| | $ | 1 |
|
sold in the first quarter of 2016.
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”).subsidiaries. Investment funds managed by affiliates of Fortress indirectly own a majority interest in Nationstar. The Owners paid Nationstar subservicing fees of less thanpaid to Nationstar were $1 million or less for the three months ended September 30, 2016 and 2015 and $1 million for the nine months ended September 30, 20162017 and 2015.2016.
INVESTMENT MANAGEMENT AGREEMENT
Logan Circle Partners, L.P. (“Logan Circle”) provides investment management services for our investments. Logan Circle iswas a wholly owned subsidiary of Fortress. On September 15, 2017, Fortress sold its interest in Logan Circle to MetLife and, as a result, Logan Circle is no longer an affiliate of Fortress. Costs and fees incurred for these investment management services were less than $1 million or less for the three months ended September 30, 2016 and 2015. Costs and fees incurred for these investment management services totaled $1 million for the nine months ended September 30, 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 $282$393 million at September 30, 20162017 and $389$285 million at December 31, 2015.2016. The interest rate for the UPB is the lender’s cost of funds rate, which was 6.16%6.06% at September 30, 2016.2017. Interest revenue on the note receivable from SFI totaled $7 million and $17 million for the three and nine months ended September 30, 2017, respectively, compared to $4 million and $14 million for the three and nine months ended September 30, 2016, respectively, compared to $5 million and $11 million for the three and nine months ended September 30, 2015, respectively, which we report in 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 is payable in full on December 31, 2019, and CSI maycan demand payment at any time prior to December 31, 2019. Independence maycan 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 6.16% at September 30, 2016.
On November 12, 2015, Independence borrowed $3.4 billion under the Independence Demand Note. At December 31, 2015,rate. Interest revenue on the note receivable from Independence totaled $3.4 billion, which included compounded interest due to CSI.$47 million and $139 million for the three and nine months ended September 30, 2016, respectively.
On July 19, 2016, CSI received $344 million from Independence, as a payment of principal and interest on the Independence Demand Note.
Additionally, on July 19, 2016, CSI, Independence, and OMFH entered into anthe Note Assignment of Intercompany Demand Note (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 (the “Original Note”) for a purchase price of $150 million (the “Assignment Purchase Price”).million. On July 20, 2016, OMFH paid the Assignment Purchase Price$150 million purchase price to CSI.
In connection with the Note Assignment discussed above, Independence exchanged the OriginalIndependence Demand Note for a new intercompany demand note(i) the Cash Services Note issued to CSI with a maximum borrowing amount not to exceed $3.4 billion (the “Cash Services Note”), and a new intercompany demand note(ii) the OMFH Note issued to OMFH with a maximum borrowing amount not to exceed $150 million (the “OMFH Note” and together with themillion. The Cash Services Note and the “New Notes”). The New NotesOMFH 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 6.06% at September 30, 2017.
At September 30, 2017 and December 31, 2016, the note receivable from Independence relating to the Cash Services Note totaled $2.8 billion and $2.9 billion, respectively, which included compounded interest due to CSI. Interest revenue on the note receivable from Independence relating to the Cash Services Note totaled $47$43 million and $139$131 million respectively, duringfor the three and nine
months ended September 30, 2016,2017, respectively, which we report in 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. At December 31, 2015, no amounts were drawn by OMFH under the note.
On July 19, 2016, SFC advanced $400 millionhas, from time to OMFH, under the note. On August 12, 2016, SFCtime, amended the note to increase the maximum amount that may be advanced to $750 million. SFC received $115 million and $35 million from OMFH
on September 13, 2016 andOMFH. At September 30, 2016, respectively, as payments of principal and interest on2017, the OneMain Demand Note.
maximum amount that may be advanced totaled $1.6 billion. At September 30, 2017 and December 31, 2016, the note receivable from OMFH totaled $255$1.1 billion and $530 million, respectively, which included compounded interest due to SFC. Interest revenue on the note receivable from OMFH totaled $21 million and $43 million for the three and nine months ended September 30, 2017, respectively, and $5 million for each of the three and nine months ended September 30, 2016, which we report in interest income on notes receivable from parent and affiliates.
Receivables from Parent and Affiliates
At September 30, 20162017 and December 31, 2015,2016, receivables from parent and affiliates totaled $6 million and $40 million, and $9 million, respectively. ReceivablesAt September 30, 2017, 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, (iii) intercompany insurance premiums collected, and (iii)(iv) the servicing fees and collections received on the legacy OneMain loans serviced by legacy Springleaf branches. At December 31, 2016, receivables from parent and affiliates also included expenses paid by a subsidiary of SFC for the benefit of parent and affiliates. Receivables from parent and affiliates at 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 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 6.16%6.06% at September 30, 2016.2017.
At September 30, 2016 and December 31, 2015, no amounts were drawn under the note. Interest expense on the note payable to OMFH was $1 million for the three months ended September 30, 2016 and $7 million for the three and nine months ended September 30, 2016, respectively, which we report in interest expense. At September 30, 2017, the maximum amount that may be advanced totaled $750 million. No amounts were drawn under the note at September 30, 2017 and December 31, 2016.
Payables to Parent and Affiliates
At September 30, 20162017 and December 31, 2015,2016, payables to parent and affiliates totaled $14$53 million and $24$13 million, respectively. At September 30, 20162017 and December 31, 2015, Springleaf Finance Management Corporation (“SFMC”), a subsidiary of2016, SFC had net payables of $13$48 million and $19$12 million, respectively, primarily to Springleaf General Services Corporation (“SGSC”), a subsidiary of SFI,OGSC, which related to the intercompany agreements further discussed below in this Note. At September 30, 20162017 and December 31, 2015, SFMC2016, SFC also had a payable of $1 million to Springleaf Consumer Loan, Inc. (“SCLI”)OCLI, a subsidiary of SFI, for internet lending referral fees charged to the branch network. See “Loan Referral Fees” below. Additionally, at September 30, 2017, SFC had a payable of $4 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.
Prior to the SpringCastle Interests Sale, SFI provided servicing of the SpringCastle Portfolio through a master servicing agreement with SpringCastle Holdings, LLC, a subsidiary of SFC. At December 31, 2015, SpringCastle Holdings LLC’s payable to SFI totaled $4 million. Subsequent to the SpringCastle Interests Sale, SFI continues to act as the servicer of the SpringCastle Portfolio for the SpringCastle Funding Trust.
RELATED PARTY LOAN SALE TRANSACTIONS
During the secondthird quarter of 2016, Springleaf Consumer Loan, Inc. (“SCLI”), a subsidiary of SFI,2017, OCLI entered into loan purchase and sale agreements with certain subsidiaries of SFC pursuant to which SCLIOCLI sold certain personal loans with an aggregate UPB at the time of sale of $4 million for an aggregate purchase price of $4 million.
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. SCLIOCLI continues to service these loans. SFC recorded service fee expenses of less than $1 million and $1 million for the three and nine months ended September 30, 2017, respectively, and $1 million and $2 million for the three and nine months ended September 30, 2016, respectively.
LOAN SERVICING FEES
In connection with the branch integration activities during the fourth quarter of 2016, SFC entered into an intercompany service agreement with OMFH relating to the servicing of loans when a legacy OneMain loan is serviced by a legacy Springleaf branch and vice versa. During the three and nine months ended September 30, 2016,2017, SFC recorded $1$4 million and $2$10 million, respectively, of service fee expenses respectively.for the legacy Springleaf loans serviced by legacy OneMain branches and $4 million and $11 million, respectively, of service fee income for the legacy OneMain loans serviced by legacy Springleaf branches. At September 30, 2017, SFC’s receivable from OMFH for the servicing fees and collections received on the legacy OneMain loans serviced by legacy Springleaf branches totaled $4 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 $4 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 fee of $35 for each underwritten approved application processed, as well as any other fees agreed to by the parties. During the three and nine months ended September 30, 2017, SFC recorded $5 million and $16 million, respectively, compared to $4 million and $11 million for the three and nine months ended September 30, 2016, respectively, of referral fee expense. SFC’s payable to OCLI for internet lending referral fees totaled $1 million at September 30, 2017 and December 31, 2016.
DEBT PURCHASES
In June of 2017, OMAS, a subsidiary of OMFH, purchased $4 million principal amount of SFC’s medium term notes in the open market for an aggregate purchase price of $4 million. At the purchase dates, these notes had a carrying value of $3 million.
In March of 2017, OMAS 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 of 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.
DIVIDEND OF SFMC TO SFI
On April 10, 2017, SFMC, a former subsidiary of SFC, was contributed to SFI in the form of a dividend. SFI then contributed SFMC and SGSC to OMH, SFMC merged into SGSC, which was renamed and is now OGSC. As a result of the dividend, the Company’s total shareholder equity and total assets were reduced by $38 million and $65 million, respectively, on the contribution date.
The contribution was the result of the continuing integration process, and part of a series of corporate consolidation transactions surrounding the OneMain Acquisition.
CAPITAL CONTRIBUTION TO SFC
During the first quarter of 2016, SFC received a capital contribution of $10 million from SFI to satisfy an interest payment required by the Junior Subordinated Debenture in respect of SFC’s junior subordinated debt.
INTERCOMPANY AGREEMENTS
On December 24, 2012,OGSC, as successor to SFMC and SGSC, is a subsidiary of SFI, entered intoparty to the following intercompany agreements with SFMC, a subsidiary of SFC, and with certain other subsidiaries of SFI (collectively, the “Recipients”). SFMC’s net payable to SGSC relating to these agreements totaled $13 million at September 30, 2016 and $19 million at December 31, 2015.agreements.
Services Agreement
SGSCOGSC provides the following services to the Recipients:various affiliates under a services agreement: management and administrative services; financial, accounting, treasury, tax, and audit services; facilities support services; capital funding services; legal services; human resources services (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 isOGSC are equal to 100% of the allocated cost of providing the services. In addition to the services to such Recipient. SGSC allocates its costnoted above, OGSC assumed the services provided by SFMC, which primarily consist of providing these services among the Recipientsoperating staff and any of the companies to which it provides similar services based on an allocation method defined in the agreement.field management for our branches. During the three and nine months ended September 30, 2016, SFMC2017, total service fee expenses recorded by SFC totaled $83 million and $221 million, respectively, which are included in operating expenses, compared to $58 million and $183 million, respectively, of service fee expenses, which are included in other operating expenses, compared to $55 million and $156 million for the three and nine months ended September 30, 2015,2016, respectively.
License Agreement
TheAs a result of the merger of SFMC and SGSC noted above, the license agreement, provides for use by SGSC of SFMC’swhereby SFMC leased its information technology systems and software and other related equipment.equipment to SGSC, was terminated. The monthly license fee payable by SGSC for its use of the information technology systems and software iswas 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 iswas 100% of the actual costs incurred by SFMC. SFC did not record any license fees during the three months ended September 30, 2017, and total license fees for the nine months ended September 30, 2017 remained at $1 million, which is included as a contra expense to other operating expenses. During the three and nine months ended September 30, 2016, and 2015, SFMCSFC recorded $1 million and $4 million, respectively, of license fees, which are included as a contra expense to other operating expenses.fees.
Building Lease Agreement
TheIn contemplation of the merger of SFMC and SGSC noted above, the building lease agreement provides thatwhereby SFMC will leaseleased six of its buildings to SGSC for an annual rental amount of $4 million, plus additional rental amounts to cover other sumscharges, was terminated effective April 5, 2017. As a result, SFC did not record any intercompany rental income during the three months ended September 30, 2017, and charges, including real estate taxes, water charges, and sewer rents.SFMC’s rent charged to SGSC for the nine months ended September 30, 2017 remained at
$1 million, which is included as a contra expense to other operating expenses. During the three and nine months ended September 30, 2016, and 2015, SFMCSFC recorded $1 million and $3 million, respectively, of rent chargedincome attributable to the building lease agreement that previously existed between SFMC and SGSC which are included as a contra expense to other operating expenses.and that was terminated effective April 5, 2017.
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 September 30, 20162017 were as follows:
| | | | Senior Debt | | | | | | Senior Debt | | | | |
(dollars in millions) | | Securitizations | | Medium Term Notes | | Junior Subordinated Debt | | Total | | Securitizations | | Medium Term Notes | | Junior Subordinated Debt | | Total |
| | | | | | | | | | | | | | | | |
Interest rates (a) | | 2.04% - 6.50% |
| | 5.25% - 8.25% |
| | 6.00 | % | | | | 2.04% - 6.50% |
| | 5.25% - 8.25% |
| | 3.05 | % | | |
| | | | | | | | | | | | | | | | |
Fourth quarter 2016 | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| |
First quarter 2017 | | — |
| | — |
| | — |
| | — |
| |
Second quarter 2017 | | — |
| | — |
| | — |
| | — |
| |
Third quarter 2017 | | — |
| | 257 |
| | — |
| | 257 |
| |
Fourth quarter 2017 | | — |
| | 1,032 |
| | — |
| | 1,032 |
| | $ | — |
| | $ | 557 |
| | $ | — |
| | $ | 557 |
|
2018 | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
2019 | | — |
| | 700 |
| | — |
| | 700 |
| | — |
| | 700 |
| | — |
| | 700 |
|
2020 | | — |
| | 1,300 |
| | — |
| | 1,300 |
| | — |
| | 1,300 |
| | — |
| | 1,300 |
|
2021-2067 | | — |
| | 950 |
| | 350 |
| | 1,300 |
| |
2021 | | | — |
| | 650 |
| | — |
| | 650 |
|
2022 | | | — |
| | 1,000 |
| | — |
| | 1,000 |
|
2023-2067 | | | — |
| | 300 |
| | 350 |
| | 650 |
|
Securitizations (b) | | 2,410 |
| | — |
| | — |
| | 2,410 |
| | 3,110 |
| | — |
| | — |
| | 3,110 |
|
Total principal maturities | | $ | 2,410 |
| | $ | 4,239 |
| | $ | 350 |
| | $ | 6,999 |
| | $ | 3,110 |
| | $ | 4,507 |
| | $ | 350 |
| | $ | 7,967 |
|
| | | | | | | | | | | | | | | | |
Total carrying amount | | $ | 2,400 |
| | $ | 3,970 |
| | $ | 172 |
| | $ | 6,542 |
| | $ | 3,097 |
| | $ | 4,329 |
| | $ | 172 |
| | $ | 7,598 |
|
Debt issuance costs (c) | | $ | (11 | ) | | $ | (15 | ) | | $ | — |
| | $ | (26 | ) | | $ | (12 | ) | | $ | (21 | ) | | $ | — |
| | $ | (33 | ) |
| |
(a) | The interest rates shown are the range of contractual rates in effect at September 30, 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 3.05% as of September 30, 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 have a stated maturity date but are not included in the above maturities by period due to their variable monthly repayments.repayments, which may result in pay-off prior to the stated maturity date. At September 30, 2016,2017, there were no amounts drawn under our revolving conduit facilities. See Note 1110 for further information on our long-term debt associated with securitizations and revolving conduit facilities. |
| |
(c) | 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$12 million at September 30, 20162017 and are reported in other assets. |
SFC’S OFFERINGS OF 6.125% SENIOR NOTES DUE 2022
On May 15, 2017, SFC issued $500 million aggregate principal amount of 6.125% Senior Notes due 2022 (the “2022 SFC Notes”) under an Indenture dated as of December 3, 2014 (the “SFC Base Indenture”), as supplemented by a Third Supplemental Indenture, dated as of May 15, 2017 (the “SFC Third Supplemental Indenture” and, collectively with the SFC Base Indenture, the “Indenture”), pursuant to which OMH provided a guarantee of the 2022 SFC Notes on an unsecured basis.
On May 30, 2017, SFC issued and sold $500 million aggregate principal amount of additional 2022 SFC Notes (the “Additional SFC Notes”) in an add-on offering. The initial 2022 SFC Notes and the Additional SFC Notes (collectively, the “6.125% SFC Notes”), are treated as a single class of debt securities and have the same terms, other than the issue date and the issue price.
SFC used a portion of the net proceeds from the sale of the Additional SFC Notes to repurchase approximately $466 million aggregate principal amount of its existing 6.90% Senior Notes due 2017 at a premium to par. SFC intends to use the remaining net proceeds from the sale of the 6.125% SFC Notes for general corporate purposes, which may include additional debt repurchases and repayments.
The 6.125% SFC 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 effectively subordinated to all of SFC’s secured obligations to the extent of the value of the assets securing such obligations and structurally subordinated to any existing and future obligations of SFC’s subsidiaries with respect to claims against the assets of such subsidiaries.
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 were to occur, would permit or require the principal of and accrued interest on the 6.125% SFC Notes to become, or to be declared, due and payable.
GUARANTY AGREEMENTS
6.125% SFC Notes
On May 15, 2017, OMH entered into the SFC Third 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 6.125% SFC Notes. As of September 30, 2017, $1.0 billion aggregate principal amount of the 6.125% SFC Notes were outstanding.
8.25% SFC Notes
On April 11, 2016, OMH entered into athe 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 $1.0 billion of the 8.25% SFC Notes. As of September 30, 2016,2017, $1.0 billion aggregate principal amount of the 8.25% SFC Notes were outstanding. See Note 2 for further discussion of this offering.
5.25% SFC Notes
On December 3, 2014, OMH entered into the 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 September 30, 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 unsecured basis, and $350 million aggregate principal amount of a junior subordinated debenture, on a junior
subordinated basis, issued bythe Other SFC (collectively, the “Other 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 September 30, 2016, approximately $2.92017, $2.2 billion aggregate principal amount of the Other SFC Notes 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 each VIE.significant. Such ability arises from SFC’s and its affiliates’ contractual right to service the securitized finance receivables. Our retained
receivables 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 interests in these securitization transactions, including residual interests in each securitization trustan interest and in some cases, subordinated securities issued by the VIEs. We retain credit risk in the securitizationsthese financing transactions 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) | | September 30, 2016 | | December 31, 2015 | | September 30, 2017 | | December 31, 2016 |
| | | | | | | | |
Assets | | |
| | |
| | |
| | |
|
Cash and cash equivalents | | $ | 2 |
| | $ | 7 |
| | $ | 2 |
| | $ | 2 |
|
Finance receivables: | | |
| | |
| | |
| | |
|
Personal loans | | 2,603 |
| | 3,621 |
| | 3,389 |
| | 2,943 |
|
SpringCastle Portfolio | | — |
| | 1,703 |
| |
Allowance for finance receivable losses | | 103 |
| | 128 |
| | 117 |
| | 94 |
|
Finance receivables held for sale | | — |
| | 435 |
| |
Restricted cash and cash equivalents | | 166 |
| | 282 |
| |
Restricted cash and restricted cash equivalents | | | 167 |
| | 211 |
|
Other assets | | 9 |
| | 48 |
| | 12 |
| | 9 |
|
| | | | | | | | |
Liabilities | | |
| | |
| | |
| | |
|
Long-term debt | | $ | 2,400 |
| | $ | 5,513 |
| | $ | 3,097 |
| | $ | 2,675 |
|
Other liabilities | | 4 |
| | 9 |
| | 6 |
| | 7 |
|
SECURITIZATION TRANSACTIONSSECURITIZED BORROWINGS
Auto Loan Securitization
ODART 2016-1 Securitization.On July 19, 2016, we completedEach of our securitizations contains a private securitization transaction inrevolving period ranging from one to five years during which OneMain Direct Auto Receivables Trust 2016-1 (“ODART 2016-1”), a wholly owned special purpose vehicle of SFC, issued $754 millionno principal amount of notes backed by direct auto loans with an aggregate UPB of $754 million as of June 30, 2016. $700 million principal amount of the notes issued by ODART 2016-1, represented by Classes A, B and C, were soldpayments are required to unaffiliated parties at a weighted average interest rate of 2.27%, and $54 million principal amount of Class D notes were retained. The maturity dates of the notes occur on January 15, 2021 for the Class A, May 17, 2021 for the Class B, September 15, 2021 for the Class C and February 15, 2023 for the Class D. The first principal and interest paymentbe made on the related asset-backed notes, was due on August 15, 2016. The indenture governingexcept for the ODART 2016-1 notes containssecuritization which has no revolving period. The indentures governing our securitizations borrowings contain early amortization events and events of default, which,that, if triggered, may result in the acceleration of the obligation to pay principal and interest on the related asset-backed notes.
Consumer Loan Securitization Transaction
Our securitized borrowings at September 30, 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 |
|
SLFT 2017-A (d) | | 619 |
| | 2.98 | % | | 3 years |
|
Total consumer securitizations | | 2,596 |
| | | | |
| | | | | | |
Auto Securitizations: | | | | | | |
ODART 2016-1 (e) | | 246 |
| | 2.70 | % | | — |
|
ODART 2017-1 (f) | | 268 |
| | 2.61 | % | | 1 year |
|
Total auto securitizations | | 514 |
| | | | |
| | | | | | |
Total secured structured financings | | $ | 3,110 |
| | | | |
| |
(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) | SLFT 2017-A Securitization. On June 28, 2017, we issued $652 million of notes backed by personal loans. The notes mature in July 2030. We initially retained $26 million of the Class A notes, $2 million of the Class B notes, $2 million of the Class C notes and $3 million of the Class D notes. |
| |
(e) | 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. |
| |
(f) | 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 included $1 million of accrued interest and 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
As of September 30, 2016,2017, our borrowings under conduit facilities consisted of the following:
|
| | | | | | | | | | |
(dollar in millions) |
| Note Maximum Balance |
| Amount Drawn |
| Revolving Period End |
|
|
|
|
|
|
|
First Avenue Funding LLC (a) |
| $ | 250 |
|
| $ | — |
|
| June 2018 |
Midbrook 2013-VFN1 Trust (b) |
| 300 |
|
| — |
|
| February 2018 |
Mill River 2015-VFN1 Trust (c) |
| 100 |
|
| — |
|
| May 2018 |
Second Avenue Funding LLC |
| 250 |
|
| — |
|
| June 2018 |
Springleaf 2013-VFN1 Trust (d) |
| 850 |
|
| — |
|
| January 2018 |
Sumner Brook 2013-VFN1 Trust |
| 350 |
|
| — |
|
| January 2018 |
Whitford Brook 2014-VFN1 Trust (e) |
| 250 |
|
| — |
|
| June 2018 |
Total |
| $ | 2,350 |
|
| $ | — |
|
|
|
|
| | | | | | | | | | |
(dollar in millions) |
| Note Maximum Balance |
| Amount Drawn |
| Revolving Period End |
|
|
|
|
|
|
|
First Avenue Funding LLC | | $ | 250 |
| | $ | — |
| | June 2018 |
Seine River Funding, LLC | | 500 |
| | — |
| | December 2019 |
Thur River Funding, LLC (a) | | 350 |
| | — |
| | June 2020 |
Mystic River Funding, LLC (b) | | 850 |
| | — |
| | September 2020 |
Fourth Avenue Auto Funding, LLC (c) | | 250 |
| | — |
| | September 2020 |
Total |
| $ | 2,200 |
|
| $ | — |
|
|
|
2017 Activity
| |
(a) | First Avenue Funding LLC. On June 30, 2016, we amendedConcurrent with the termination of the note purchase agreement with the First AvenueSumner Brook 2013-VFN1 Trust discussed below, on June 29, 2017, we entered into the Thur River Funding LLC (“First Avenue”)LSA with the same third party lenders who were parties to extend the revolving period ending in March 2018terminated note purchase agreement. We may borrow up to June 2018.a maximum principal balance of $350 million under the Thur River Funding LSA, and amounts borrowed will be backed by personal loans acquired from subsidiaries and affiliates of SFC from time to time. Following the revolving period, the principal amountbalance of the notes, if any, will be reduced as cash payments are received on the underlying direct autooutstanding loans, and will be due and payable in full 12 months following the maturity of the last direct auto loan held by First Avenue.
|
| |
(b) | 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 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. full in February 2027. |
| |
(c)(b) | Mill River 2015-VFN1 Trust. On January 21, 2016, we amended the note purchase agreementConcurrent with the Mill River 2015-VFN1 Trust to decrease the maximum principal balance from $400 million to $100 million.
|
| |
(d) | Springleaf 2013-VFN1 Trust. On January 21, 2016, we amendedtermination of the note purchase agreement with the Springleaf 2013-VFN1 Trust discussed below, on September 28, 2017, we entered into the Mystic River Funding LSA with the same third party lenders who were parties to (i) increase the terminated note purchase agreement. We may borrow up to a maximum principal balance from $350 million toof $850 million under the Mystic River Funding LSA, and (ii) extend the revolving period ending in April 2017 to January 2018, which mayamounts borrowed will be extended to January 2019, subject to the satisfactionbacked by personal loans acquired from subsidiaries and affiliates of customary conditions precedent.SFC. Following the revolving period, the principal amountbalance of the notes,outstanding loans, 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. full in October 2023. |
| |
(e)(c) | Whitford Brook 2014-VFN1 Trust. On February 24, 2016, we amendedConcurrent with the termination of the note purchase agreement with the Whitford BrookSecond Avenue Funding, Trust 2014-VFN1 (the “Whitford Brook 2014-VFN1 Trust”)LLC discussed below, on September 29, 2017, we entered into the Fourth Avenue Auto Funding LSA with the same third party lenders who were parties to extend the revolving period ending in June 2017terminated note purchase agreement. We may borrow up to June 2018.a maximum principal balance of $250 million under the Fourth Avenue Auto Funding LSA, and amounts borrowed will be backed by auto loans acquired from subsidiaries and affiliates of SFC. Following the revolving period, the principal amountbalance of the notes,outstanding loans, 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. full in October 2021. |
Midbrook 2013-VFN1 Trust. On April 13, 2017, Midbrook 2013-VFN1 Trust voluntarily terminated its note purchase agreement with its lenders.
Sumner Brook 2013-VFN1 Trust. On June 29, 2017, Sumner Brook 2013-VFN1 Trust voluntarily terminated its note purchase agreement with its lenders.
Whitford Brook 2014 - VFNI Trust. On July 14, 2017, Whitford Brook 2014-VFNI Trust voluntarily terminated its note purchase agreement with its lenders.
Springleaf 2013-VFN1 Trust. On September 28, 2017, Springleaf 2013-VFN1 Trust voluntarily terminated its note purchase agreement with its lenders.
Second Avenue Funding LLC. On September 29, 2017, Second Avenue Funding, LLC voluntarily terminated its note purchase agreement with its lenders.
VIE INTEREST EXPENSE
Other than ourthe retained subordinate and residual interests in the remainingour 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 and nine months ended September 30, 20162017 totaled $30 million and $83 million, respectively, compared to $25 million and $97 million, respectively, compared to $49 million and $136 million for the three and nine months ended September 30, 2015,2016, respectively.
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 September 30, 2016, this reserve totaled $6 million. We had no repurchase activity associated with these salesunpaid claims and loss adjustment expenses were as of September 30, 2016. See Note 14 for further information on the total reserve for sales recourse obligations relating to our real estate loan sales, including the sales of the mortgage-backed retained certificates.follows:
|
| | | | | | | | |
| | At or for the Nine Months Ended September 30, |
(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 | | 52 |
| | 49 |
|
Prior years * | | — |
| | (1 | ) |
Total | | 52 |
| | 48 |
|
Reductions for losses and loss adjustment expenses paid related to: | | | | |
Current year | | (31 | ) | | (31 | ) |
Prior years | | (20 | ) | | (20 | ) |
Total | | (51 | ) | | (51 | ) |
Net balance at end of period | | 49 |
| | 48 |
|
Plus reinsurance recoverables | | 22 |
| | 22 |
|
Balance at end of period | | $ | 71 |
| | $ | 70 |
|
| |
* | Reflects (i) a redundancy in the prior years’ net reserves of less than $1 million at September 30, 2017 primarily due to favorable development on ordinary life and credit disability during the year and (ii) a redundancy in the prior years’ net reserves of $1 million at September 30, 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 September 30, 2016 | | |
| | |
| | |
| | |
| |
Three Months Ended September 30, 2017 | | | |
| | |
| | |
| | |
|
Balance at beginning of period | | $ | 4 |
| | $ | (19 | ) | | $ | 4 |
| | $ | (11 | ) | | $ | 1 |
| | $ | (1 | ) | | $ | — |
| | $ | — |
|
Other comprehensive income (loss) before reclassifications | | 4 |
| | — |
| | — |
| | 4 |
| |
Other comprehensive income before reclassifications | | | 2 |
| | — |
| | — |
| | 2 |
|
Reclassification adjustments from accumulated other comprehensive income (loss) | | (1 | ) | | — |
| | (5 | ) | | (6 | ) | | (2 | ) | | — |
| | — |
| | (2 | ) |
Balance at end of period | | $ | 7 |
| | $ | (19 | ) | | $ | (1 | ) | | $ | (13 | ) | | $ | 1 |
| | $ | (1 | ) | | $ | — |
| | $ | — |
|
| | | | | | | | | | | | | | | | |
Three Months Ended September 30, 2015 | | |
| | |
| | |
| | |
| |
Three Months Ended September 30, 2016 | | | |
| | |
| | |
| | |
|
Balance at beginning of period | | $ | 2 |
| | $ | (13 | ) | | $ | 4 |
| | $ | (7 | ) | | $ | 4 |
| | $ | (19 | ) | | $ | 4 |
| | $ | (11 | ) |
Other comprehensive loss before reclassifications | | (2 | ) | | — |
| | — |
| | (2 | ) | |
Other comprehensive income before reclassifications | | | 4 |
| | — |
| | — |
| | 4 |
|
Reclassification adjustments from accumulated other comprehensive income (loss) | | | (1 | ) | | — |
| | (5 | ) | | (6 | ) |
Balance at end of period | | | $ | 7 |
| | $ | (19 | ) | | $ | (1 | ) | | $ | (13 | ) |
| | | | | | | | | |
Nine Months Ended September 30, 2017 | | | |
| | |
| | |
| | |
|
Balance at beginning of period | | | $ | (3 | ) | | $ | (4 | ) | | $ | — |
| | $ | (7 | ) |
Other comprehensive income before reclassifications | | | 8 |
| | 3 |
| | — |
| | 11 |
|
Reclassification adjustments from accumulated other comprehensive income (loss) | | (2 | ) | | — |
| | — |
| | (2 | ) | | (4 | ) | | — |
| | — |
| | (4 | ) |
Balance at end of period | | $ | (2 | ) | | $ | (13 | ) | | $ | 4 |
| | $ | (11 | ) | | $ | 1 |
| | $ | (1 | ) | | $ | — |
| | $ | — |
|
| | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2016 | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Balance at beginning of period | | $ | (9 | ) | | $ | (19 | ) | | $ | 4 |
| | $ | (24 | ) | | $ | (9 | ) | | $ | (19 | ) | | $ | 4 |
| | $ | (24 | ) |
Other comprehensive income (loss) before reclassifications | | 19 |
| | — |
| | — |
| | 19 |
| |
Other comprehensive income before reclassifications | | | 19 |
| | — |
| | — |
| | 19 |
|
Reclassification adjustments from accumulated other comprehensive income (loss) | | (3 | ) | | — |
| | (5 | ) | | (8 | ) | | (3 | ) | | — |
| | (5 | ) | | (8 | ) |
Balance at end of period | | $ | 7 |
| | $ | (19 | ) | | $ | (1 | ) | | $ | (13 | ) | | $ | 7 |
| | $ | (19 | ) | | $ | (1 | ) | | $ | (13 | ) |
| | | | | | | | | |
Nine Months Ended September 30, 2015 | | |
| | |
| | |
| | |
| |
Balance at beginning of period | | $ | 12 |
| | $ | (13 | ) | | $ | 4 |
| | $ | 3 |
| |
Other comprehensive loss before reclassifications | | (5 | ) | | — |
| | — |
| | (5 | ) | |
Reclassification adjustments from accumulated other comprehensive income (loss) | | (9 | ) | | — |
| | — |
| | (9 | ) | |
Balance at end of period | | $ | (2 | ) | | $ | (13 | ) | | $ | 4 |
| | $ | (11 | ) | |
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 September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2015 |
| 2016 |
| 2015 | | 2017 | | 2016 |
| 2017 |
| 2016 |
| | | | | | | | | | | | | | | | |
Unrealized gains on investment securities: | | |
| | |
| | |
| | |
| |
Unrealized gains on available-for-sale securities: | | | |
| | |
| | |
| | |
|
Reclassification from accumulated other comprehensive income (loss) to investment revenues, before taxes | | $ | 2 |
| | $ | 4 |
| | $ | 5 |
| | $ | 14 |
| | $ | 3 |
| | $ | 2 |
| | $ | 6 |
| | $ | 5 |
|
Income tax effect | | (1 | ) | | (2 | ) | | (2 | ) | | (5 | ) | | (1 | ) | | (1 | ) | | (2 | ) | | (2 | ) |
Reclassification from accumulated other comprehensive income (loss) to investment revenues, net of taxes | | 1 |
| | 2 |
| | 3 |
| | 9 |
| | 2 |
| | 1 |
| | 4 |
| | 3 |
|
| | | | | | | | | | | | | | | | |
Unrealized gains on foreign currency translation adjustments: | | | | | | | | | | | | | | | | |
Reclassification from accumulated other comprehensive income (loss) to other revenues | | 5 |
| | — |
| | 5 |
| | — |
| | — |
| | 5 |
| | — |
| | 5 |
|
Total | | $ | 6 |
| | $ | 2 |
| | $ | 8 |
| | $ | 9 |
| | $ | 2 |
| | $ | 6 |
| | $ | 4 |
| | $ | 8 |
|
13. Income Taxes
At September 30, 2016,2017, we had a net deferred tax liabilityasset of $27$7 million, compared to $113a net deferred tax liability of $42 million at December 31, 2015.2016. The decrease in net deferred tax liability of $86$49 million was primarily due to changes intax recognition of the 2014 fair value adjustment of our finance receivablesreal estate portfolio and purchase accounting for debt writedown, partially offset by the impact of the SpringCastle Interests Sale.writedown.
The effective tax rate for the nine months ended September 30, 20162017 was 33.6%40.9%, compared to 11.6%33.6% for the same period in 2015.2016. The effective tax rate for the nine months ended September 30, 2017 differed from the federal statutory rate primarily due to the effect of state income taxes and discrete expense from the 2016 tax year return-to-provision adjustment. The effective tax rate for the nine months ended September 30, 2016 differed from the federal statutory rate primarily due to the effect of the non-controlling interests in the previously owned SpringCastle Portfolio, partially offset by the effect of state income taxes. The effective tax rate for the nine months ended September 30, 2015 differed from the federal statutory rate primarily due to the effect of the non-controlling interests in the previously owned 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. We are also under examination of various states for the years 2011 to 2016. Management believes it has adequately provided for taxes for such years.
The Company’sOur gross unrecognized tax positions,benefits, including related interest and penalties, totaled $10 million and $9$12 million at September 30, 20162017 and $11 million at December 31, 2015, respectively, 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, we 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 our 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 evaluate legal actions to determine whether a loss is reasonably possible or probable and is reasonably estimable, there can be no assurance that material losses will not be incurred from pending, threatened or future litigation, investigations, examinations, or 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
Real Estate Loan Sales
At September 30, 2016,2017, our reserve for sales recourse obligations totaled $14$11 million, which primarily related to the real estate loan sales in 2014. During the three months ended September 30, 2016 and 2015 and the nine months ended September 30, 2016, we had no repurchase activity related to our real estate loan sales in 2014. For2014, 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 and nine months ended September 30, 2015,2017 and 2016, we repurchased 13 loans, totaling $1 million, associated with the real estate loanhad no material repurchase activity related to these sales in 2014. and no material activity related to our sales recourse obligations.
At September 30, 2016,2017, there were no material recourserepurchase requests with loss exposure that management believed 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. 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.
The activity in our reserve for sales recourse obligations primarily associated with the real estate loan sales during 2014 was as follows:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(dollars in millions) | | 2016 | | 2015 | | 2016 | | 2015 |
| | | | | | | | |
Balance at beginning of period | | $ | 15 |
| | $ | 18 |
| | $ | 15 |
| | $ | 24 |
|
Recourse losses | | — |
| | — |
| | — |
| | (5 | ) |
Provision for recourse obligations, net of recoveries * | | (1 | ) | | — |
| | (1 | ) | | (1 | ) |
Balance at end of period | | $ | 14 |
| | $ | 18 |
| | $ | 14 |
| | $ | 18 |
|
| |
* | Reflects the elimination of the reserve associated with other prior sales of finance receivables. |
We did not establish a reserve for sales recourse obligations associated with the August 2016 Real Estate Loan Sale.
Lendmark Sale
We did not establish a reserve for sales recourse obligations associated with the personal loans sold to Lendmark in May of 2016 due to the higher credit quality of the personal loans sold.
15. Benefit Plans
The following table presentsDuring the three and nine months ended September 30, 2017 and 2016, the components of net periodic benefit cost with respect to our defined benefit pension plans:
|
| | | | | | | | | | | | | | | | |
(dollars in millions) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2015 |
| 2016 | | 2015 |
| | | | | | | | |
Components of net periodic benefit cost - pension plans: | | |
| | |
| | |
| | |
|
Interest cost | | $ | 4 |
| | $ | 4 |
| | $ | 12 |
| | $ | 12 |
|
Expected return on assets | | (5 | ) | | (5 | ) | | (13 | ) | | (14 | ) |
Net periodic benefit cost | | $ | (1 | ) | | $ | (1 | ) | | $ | (1 | ) | | $ | (2 | ) |
plans were immaterial. We do not currently fund post retirement benefits.
16. Segment Information
Our segments coincide with how our businesses are managed. At September 30, 2016,2017, our threetwo segments included:
Consumer and Insurance — We originate and service personal loans (secured and unsecured) through two business divisions:our branch operationsnetwork and our centralized operations. We also offer credit insurance (life insurance, disability insurance, and involuntary unemployment insurance), and non-credit insurance, and ancillary products, such as warranty protection. Branch operations primarily conductinsurance. We also offer auto membership plans of an unaffiliated company. Our branch network conducts business in 28 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 previously 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 SFI services as unsecured loans because the liens are subordinated to superior ranking security interests.
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-originating legacy operations, which are isolated by geographic market and/or distribution channel from our three segments. These operations include:include (i) our legacy operations in 14 states where we 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 to its liquidation on August 16, 2016.period segment disclosures.
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 Consumer and Insurance, Acquisitions and Servicing, Real Estate, and Other using a “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 (eliminates premiums/discounts on our finance receivables and long-term debt at acquisition, as well as the amortization/accretion in future periods). These allocations and adjustments currently have a material effect on our reported segment basis income as compared to GAAP. We believe a Segment Accounting Basis (a basis other than GAAP) provides investors a consistent basis on which management evaluates segment performance.
We allocaterecord revenues and expenses (on a Segment Accounting Basis) directly incurred by a specific segment within the applicable segment. We allocate revenues and expenses that are not directly incurred by a specific segment to each segment using the following methodologies:
|
| |
Interest income | Directly correlated with a specific segment. |
Interest expense | Acquisitions 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 actualInterest expense for securitizations and secured termunsecured debt andis recorded to each of the segments using a weighted average forinterest rate applied to allocated average unsecured debt allocated to the segments. Average unsecured debt allocations for the periods presented are as follows:debt. |
Subsequent to the OneMain Acquisition |
Total averageAverage unsecured debt is allocated as follows: |
l Consumer and Insurance - receives remainder of unallocated average debt; and |
l Real Estate and Other - atAt 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 September 30, 2015, had it been in place as of the beginning of the year, would be an increase in interest expense of $59 million for Consumer and Insurance and a decrease in interest expense of $44 million and $15 million for Real Estate and Other, respectively. |
The net effect of the change in debt allocation and asset base methodologies for the nine months ended September 30, 2015, had it been in place as of the beginning of the year, would be an increase in interest expense of $179 million for Consumer and Insurance and a decrease in interest expense of $134 million and $45 million for Real Estate and Other, respectively. |
For the period third quarter 2014 to the OneMain Acquisition |
Total average unsecured debt was allocated to Consumer and Insurance, Real Estate and Other, such that the total debt allocated across each segment equaled 83%, up to 100% and 100% of each of its respective asset base. Any excess was allocated to Consumer and Insurance. |
Average unsecured debt was allocated after average securitized debt to achieve the calculated average segment debt. |
Asset base represented the following: |
l Consumer and Insurance - Receives remainder of unallocated 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.debt.
|
Provision for finance receivable losses | Directly correlated with a specific segment, except for allocationsAllocated to Other, which areeach of the segments based on the remaining delinquent accounts as a percentage of total delinquent accounts. |
Other revenues | Directly correlated with a specific segment, except for: (i) netNet gain (loss) on repurchases and repayments of debt which is allocated- Allocated to each of the segments based on the interest expense allocation of debt and (ii) gainsdebt.
Gains and losses on foreign currency exchange which are allocated- Allocated to each of 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 allocatedAllocated 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 allocatedAllocated 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 impact of premiums/discounts on non-impaired purchased finance receivables and the interest income recognition under guidance in Accounting Standards Codification (“ASC”)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 cost basis;
Interest expense - reverses the impact of premiums/discounts on acquired long-term debt and reestablishes interest expense recognition on a historical cost basis;
Provision for finance receivable losses - reverses the impact of providing an allowance for finance receivable losses upon acquisition and reestablishes the allowance on a historical cost basis and reverses 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 historical cost basis of mark-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 impact of amortization from acquired intangible assets and including amortization of other historical deferred costs.costs; and
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 | | Consumer and Insurance | | Acquisitions and Servicing | | Other (a) | | Segment to GAAP Adjustment | | Consolidated Total |
| | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended September 30, 2016 | | | | |
| | |
| | |
| | |
| | |
| |
Three Months Ended September 30, 2017 | | | | | |
| | |
| | |
| | |
|
Interest income | | $ | 291 |
| | $ | — |
| | $ | 10 |
| | $ | 1 |
| | $ | 1 |
| | $ | 303 |
| | $ | 304 |
| | $ | — |
| | $ | 6 |
| | $ | — |
| | $ | 310 |
|
Interest expense | | 105 |
| | — |
| | 8 |
| | 1 |
| | 21 |
| | 135 |
| | 115 |
| | — |
| | 5 |
| | 13 |
| | 133 |
|
Provision for finance receivable losses | | 84 |
| | — |
| | 1 |
| | — |
| | 2 |
| | 87 |
| | 64 |
| | — |
| | 6 |
| | — |
| | 70 |
|
Net interest income after provision for finance receivable losses | | 102 |
| | — |
| | 1 |
| | — |
| | (22 | ) | | 81 |
| |
Net interest income (loss) after provision for finance receivable losses | | | 125 |
| | — |
| | (5 | ) | | (13 | ) | | 107 |
|
Other revenues(b) | | 53 |
| | — |
| | (12 | ) | | 50 |
| | 16 |
| | 107 |
| | 47 |
| | — |
| | 70 |
| | (2 | ) | | 115 |
|
Other expenses | | 146 |
| | — |
| | 8 |
| | 1 |
| | — |
| | 155 |
| | 150 |
| | 1 |
| | 4 |
| | (1 | ) | | 154 |
|
Income (loss) before provision for (benefit from) income taxes | | $ | 9 |
|
| $ | — |
|
| $ | (19 | ) |
| $ | 49 |
|
| $ | (6 | ) |
| $ | 33 |
| |
Income (loss) before income tax expense (benefit) | | | $ | 22 |
| | $ | (1 | ) | | $ | 61 |
| | $ | (14 | ) | | $ | 68 |
|
| | Three Months Ended September 30, 2015 | | | | | | |
| | |
| | |
| | |
| |
Three Months Ended September 30, 2016 | | | | | | | |
| | |
| | |
|
Interest income | | $ | 289 |
| | $ | 112 |
| | $ | 17 |
| | $ | 1 |
| | $ | 3 |
| | $ | 422 |
| | $ | 291 |
| | $ | — |
| | $ | 11 |
| | $ | 1 |
| | $ | 303 |
|
Interest expense | | 43 |
| | 22 |
| | 58 |
| | 16 |
| | 32 |
| | 171 |
| | 105 |
| | — |
| | 9 |
| | 21 |
| | 135 |
|
Provision for finance receivable losses | | 62 |
| | 16 |
| | (4 | ) | | — |
| | 4 |
| | 78 |
| | 84 |
| | — |
| | 1 |
| | 2 |
| | 87 |
|
Net interest income (loss) after provision for finance receivable losses | | 184 |
| | 74 |
| | (37 | ) | | (15 | ) | | (33 | ) | | 173 |
| |
Net interest income after provision for finance receivable losses | | | 102 |
| | — |
| | 1 |
| | (22 | ) | | 81 |
|
Other revenues(b) | | 55 |
| | — |
| | (2 | ) | | 4 |
| | (8 | ) | | 49 |
| | 53 |
| | — |
| | 38 |
| | 16 |
| | 107 |
|
Other expenses | | 157 |
| | 14 |
| | 8 |
| | 2 |
| | 1 |
| | 182 |
| | 146 |
| | — |
| | 9 |
| | — |
| | 155 |
|
Income (loss) before provision for (benefit from) income taxes | | 82 |
| | 60 |
| | (47 | ) | | (13 | ) | | (42 | ) | | 40 |
| |
Income before provision for income taxes attributable to non-controlling interests | | — |
| | 32 |
| | — |
| | — |
| | — |
| | 32 |
| |
Income (loss) before provision for (benefit from) income taxes attributable to Springleaf Finance Corporation | | $ | 82 |
| | $ | 28 |
| | $ | (47 | ) | | $ | (13 | ) | | $ | (42 | ) | | $ | 8 |
| |
Income before income taxes | | | $ | 9 |
| | $ | — |
| | $ | 30 |
| | $ | (6 | ) | | $ | 33 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in millions) | | Consumer and Insurance | | Acquisitions and Servicing | | Real Estate | | Other | | Eliminations | | Segment to GAAP Adjustment | | Consolidated Total |
| | | | | | | | | | | | | | |
At or for the Nine Months Ended September 30, 2016 | | | | |
| | |
| | |
| | | | |
| | |
|
Interest income | | $ | 897 |
| | $ | 102 |
| | $ | 40 |
| | $ | 3 |
| | $ | — |
| | $ | 5 |
| | $ | 1,047 |
|
Interest expense | | 299 |
| | 20 |
| | 35 |
| | 8 |
| | — |
| | 67 |
| | 429 |
|
Provision for finance receivable losses | | 240 |
| | 14 |
| | 5 |
| | — |
| | — |
| | 4 |
| | 263 |
|
Net interest income (loss) after provision for finance receivable losses | | 358 |
| | 68 |
| | — |
| | (5 | ) | | — |
| | (66 | ) | | 355 |
|
Net gain on sale of SpringCastle interests | | — |
| | 167 |
| | — |
| | — |
| | — |
| | — |
| | 167 |
|
Other revenues (a) | | 169 |
| | — |
| | (30 | ) | | 152 |
| | — |
| | 11 |
| | 302 |
|
Other expenses | | 487 |
| | 15 |
| | 22 |
| | — |
| | — |
| | (1 | ) | | 523 |
|
Income (loss) before provision for (benefit from) income taxes | | 40 |
| | 220 |
| | (52 | ) | | 147 |
| | — |
| | (54 | ) | | 301 |
|
Income before provision for income taxes attributable to non-controlling interests | | — |
| | 28 |
| | — |
| | — |
| | — |
| | — |
| | 28 |
|
Income (loss) before provision for (benefit from) income taxes attributable to Springleaf Finance Corporation | | $ | 40 |
| | $ | 192 |
| | $ | (52 | ) | | $ | 147 |
| | $ | — |
| | $ | (54 | ) | | $ | 273 |
|
| | | | | | | | | | | | | | |
Assets | | $ | 5,529 |
| | $ | — |
| | $ | 371 |
| | $ | 3,698 |
| | $ | — |
| | $ | (91 | ) | | $ | 9,507 |
|
|
| | | | | | | | | | | | | | | | | | | | |
At or for the Nine Months Ended September 30, 2017 | | | | |
| | |
| | |
| | |
|
Interest income | | $ | 891 |
| | $ | — |
| | $ | 18 |
| | $ | 4 |
| | $ | 913 |
|
Interest expense | | 327 |
| | — |
| | 16 |
| | 46 |
| | 389 |
|
Provision for finance receivable losses | | 223 |
| | — |
| | 7 |
| | 2 |
| | 232 |
|
Net interest income (loss) after provision for finance receivable losses | | 341 |
| | — |
| | (5 | ) | | (44 | ) | | 292 |
|
Other revenues (b) | | 133 |
| | — |
| | 192 |
| | (17 | ) | | 308 |
|
Other expenses | | 466 |
| | 1 |
| | 10 |
| | (1 | ) | | 476 |
|
Income (loss) before income tax expense (benefit) | | $ | 8 |
| | $ | (1 | ) | | $ | 177 |
| | $ | (60 | ) | | $ | 124 |
|
| | | | | | | | | | |
Assets (c) | | $ | 4,939 |
| | $ | — |
| | $ | 5,765 |
| | $ | (54 | ) | | $ | 10,650 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At or for the Nine Months Ended September 30, 2015 | | | | | | |
| | |
| | | | |
| | |
|
Interest income | | $ | 810 |
| | $ | 350 |
|
| $ | 52 |
|
| $ | 6 |
| | $ | — |
|
| $ | 9 |
|
| $ | 1,227 |
|
Interest expense | | 119 |
| | 67 |
| | 177 |
| | 48 |
| | (5 | ) | | 94 |
| | 500 |
|
Provision for finance receivable losses | | 170 |
| | 53 |
| | (7 | ) | | 1 |
| | — |
| | 13 |
| | 230 |
|
Net interest income (loss) after provision for finance receivable losses | | 521 |
| | 230 |
| | (118 | ) | | (43 | ) | | 5 |
| | (98 | ) | | 497 |
|
Other revenues | | 161 |
| | 5 |
| | 4 |
| | 10 |
| | (5 | ) | | (13 | ) | | 162 |
|
Other expenses | | 448 |
| | 45 |
| | 24 |
| | 17 |
| | — |
| | 3 |
| | 537 |
|
Income (loss) before provision for (benefit from) income taxes | | 234 |
| | 190 |
| | (138 | ) | | (50 | ) | | — |
| | (114 | ) | | 122 |
|
Income before provision for income taxes attributable to non-controlling interests | | — |
| | 98 |
| | — |
| | — |
| | — |
| | — |
| | 98 |
|
Income (loss) before provision for (benefit from) income taxes attributable to Springleaf Finance Corporation | | $ | 234 |
| | $ | 92 |
| | $ | (138 | ) | | $ | (50 | ) | | $ | — |
| | $ | (114 | ) | | $ | 24 |
|
| | | | | | | | | | | | | | |
Assets (b) | | $ | 5,388 |
| | $ | 1,872 |
| | $ | 3,551 |
| | $ | 1,471 |
| | $ | — |
| | $ | (19 | ) | | $ | 12,263 |
|
|
| | | | | | | | | | | | | | | | | | | | |
At or for the Nine Months Ended September 30, 2016 | | | | | | |
| | |
| | |
|
Interest income | | $ | 897 |
| | $ | 102 |
|
| $ | 43 |
| | $ | 5 |
|
| $ | 1,047 |
|
Interest expense | | 299 |
| | 20 |
| | 43 |
| | 67 |
| | 429 |
|
Provision for finance receivable losses | | 240 |
| | 14 |
| | 5 |
| | 4 |
| | 263 |
|
Net interest income (loss) after provision for finance receivable losses | | 358 |
| | 68 |
| | (5 | ) | | (66 | ) | | 355 |
|
Net gain on sale of SpringCastle interests | | — |
| | 167 |
| | — |
| | — |
| | 167 |
|
Other revenues (b) | | 169 |
| | — |
| | 122 |
| | 11 |
| | 302 |
|
Other expenses | | 487 |
| | 15 |
| | 22 |
| | (1 | ) | | 523 |
|
Income before income taxes | | 40 |
| | 220 |
| | 95 |
| | (54 | ) | | 301 |
|
Income before income taxes attributable to non-controlling interests | | — |
| | 28 |
| | — |
| | — |
| | 28 |
|
Income before income taxes attributable to Springleaf Finance Corporation | | $ | 40 |
| | $ | 192 |
| | $ | 95 |
| | $ | (54 | ) | | $ | 273 |
|
| | | | | | | | | | |
Assets (c) | | $ | 5,529 |
| | $ | — |
| | $ | 4,069 |
| | $ | (91 | ) | | $ | 9,507 |
|
| |
(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 Cash Services Note (previously referred to as the “Independence Demand Note”) and on SFC’s note receivable from SFI. See Note 98 for further information on the notes receivable from parent and affiliates. |
| |
(b)(c) | In connection with our policy integration with OneMain, we report unearned insurance premium and claim reserves related to finance receivables (previouslyAssets reported in insurance claims“Other” primarily includes notes receivable from parent and policyholder liabilities) as a contra-asset to net finance receivables, which totaled $240 million at September 30, 2015.affiliates discussed above. See Note 8 for further information on the notes receivable from parent and affiliates. |
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 | |
| | | | | | | | | | | | | | | | | | | | |
September 30, 2016 | | |
| | |
| | |
| | |
| | |
| |
September 30, 2017 | | | |
| | |
| | |
| | |
| | |
|
Assets | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Cash and cash equivalents | | $ | 233 |
| | $ | 39 |
| | $ | — |
| | $ | 272 |
| | $ | 272 |
| | $ | 289 |
| | $ | 113 |
| | $ | — |
| | $ | 402 |
| | $ | 402 |
|
Investment securities | | — |
| | 571 |
| | 2 |
| | 573 |
| | 573 |
| | — |
| | 575 |
| | 2 |
| | 577 |
| | 577 |
|
Net finance receivables, less allowance for finance receivable losses | | — |
| | — |
| | 5,149 |
| | 5,149 |
| | 4,775 |
| | — |
| | — |
| | 5,457 |
| | 5,457 |
| | 5,039 |
|
Finance receivables held for sale | | — |
| | — |
| | 166 |
| | 166 |
| | 166 |
| | — |
| | — |
| | 141 |
| | 141 |
| | 137 |
|
Notes receivable from parent and affiliates | | — |
| | 3,482 |
| | — |
| | 3,482 |
| | 3,482 |
| | — |
| | 4,305 |
| | — |
| | 4,305 |
| | 4,305 |
|
Restricted cash and cash equivalents | | 176 |
| | — |
| | — |
| | 176 |
| | 176 |
| |
Other assets: | | |
| | |
| | |
| | |
| | |
| |
Commercial mortgage loans | | — |
| | — |
| | 45 |
| | 45 |
| | 45 |
| |
Escrow advance receivable | | — |
| | — |
| | 9 |
| | 9 |
| | 9 |
| |
Receivables from parent and affiliates | | — |
| | 40 |
| | — |
| | 40 |
| | 40 |
| |
Receivables related to sales of real estate loans and related trust assets | | — |
| | 1 |
| | — |
| | 1 |
| | 5 |
| |
Restricted cash and restricted cash equivalents | | | 178 |
| | — |
| | — |
| | 178 |
| | 178 |
|
Other assets (a) | | | — |
| | 8 |
| | 12 |
| | 20 |
| | 21 |
|
| | | | | | | | | | | | | | | | | | | | |
Liabilities | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Long-term debt | | $ | — |
| | $ | 7,038 |
| | $ | — |
| | $ | 7,038 |
| | $ | 6,542 |
| | $ | — |
| | $ | 8,201 |
| | $ | — |
| | $ | 8,201 |
| | $ | 7,598 |
|
Payables to parent and affiliates | | — |
| | 14 |
| | — |
| | 14 |
| | 14 |
| |
Other liabilities (b) | | | — |
| | 53 |
| | — |
| | 53 |
| | 53 |
|
| | | | | | | | | | | | | | | | | | | | |
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 |
| | 6,340 |
| | — |
| | — |
| | 5,122 |
| | 5,122 |
| | 4,755 |
|
Finance receivables held for sale | | — |
| | — |
| | 819 |
| | 819 |
| | 793 |
| | — |
| | — |
| | 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) | |
| | | | | | | | | | | | | | | | |
September 30, 2016 | | |
| | |
| | |
| | |
| |
September 30, 2017 | | | |
| | |
| | |
| | |
|
Assets | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Cash equivalents in mutual funds | | $ | 123 |
| | $ | — |
| | $ | — |
| | $ | 123 |
| | $ | 163 |
| | $ | — |
| | $ | — |
| | $ | 163 |
|
Cash equivalents securities | | — |
| | 39 |
| | — |
| | 39 |
| |
Cash equivalents in securities | | | — |
| | 113 |
| | — |
| | 113 |
|
Investment securities: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Available-for-sale securities | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Bonds: | | | | | | | | | | | | | | | | |
U.S. government and government sponsored entities | | — |
| | 15 |
| | — |
| | 15 |
| | — |
| | 19 |
| | — |
| | 19 |
|
Obligations of states, municipalities, and political subdivisions | | — |
| | 79 |
| | — |
| | 79 |
| | — |
| | 71 |
| | — |
| | 71 |
|
Non-U.S. government and government sponsored entities | | — |
| | 2 |
| | — |
| | 2 |
| | — |
| | 4 |
| | — |
| | 4 |
|
Corporate debt | | — |
| | 354 |
| | — |
| | 354 |
| | — |
| | 357 |
| | — |
| | 357 |
|
RMBS | | — |
| | 37 |
| | — |
| | 37 |
| | — |
| | 38 |
| | — |
| | 38 |
|
CMBS | | — |
| | 38 |
| | — |
| | 38 |
| | — |
| | 29 |
| | — |
| | 29 |
|
CDO/ABS | | — |
| | 36 |
| | — |
| | 36 |
| | — |
| | 49 |
| | — |
| | 49 |
|
Total bonds | | — |
| | 561 |
| | — |
| | 561 |
| | — |
| | 567 |
| | — |
| | 567 |
|
Preferred stock | | — |
| | 6 |
| | — |
| | 6 |
| | — |
| | 6 |
| | — |
| | 6 |
|
Other long-term investments | | — |
| | — |
| | 1 |
| | 1 |
| | — |
| | — |
| | 1 |
| | 1 |
|
Total available-for-sale securities * | | — |
| | 567 |
| | 1 |
| | 568 |
| |
Total available-for-sale securities (b) | | | — |
| | 573 |
| | 1 |
| | 574 |
|
Other securities | | | | | | | | | | | | | | | | |
Bonds: | | | | | | | | | | | | | | | | |
Corporate debt | | — |
| | 2 |
| | — |
| | 2 |
| | — |
| | 2 |
| | — |
| | 2 |
|
CMBS | | — |
| | 2 |
| | — |
| | 2 |
| |
Total other securities | | — |
| | 4 |
| | — |
| | 4 |
| | — |
| | 2 |
| | — |
| | 2 |
|
Total investment securities | | — |
| | 571 |
| | 1 |
| | 572 |
| | — |
| | 575 |
| | 1 |
| | 576 |
|
Restricted cash in mutual funds | | 163 |
| | — |
| | — |
| | 163 |
| | 168 |
| | — |
| | — |
| | 168 |
|
Total | | $ | 286 |
| | $ | 610 |
| | $ | 1 |
|
| $ | 897 |
| | $ | 331 |
| | $ | 688 |
| | $ | 1 |
|
| $ | 1,020 |
|
| |
*(a) | Due to the insignificant activity within the Level 3 assets during the three and nine months ended September 30, 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 September 30, 2016,2017, which is carried at cost. |
|
| | | | | | | | | | | | | | | | |
| | Fair Value Measurements Using | | Total Carried At Fair Value |
(dollars in millions) | | Level 1 | | Level 2 | | Level 3 | |
| | | | | | | | |
December 31, 2015 | | |
| | |
| | |
| | |
|
Assets | | |
| | |
| | |
| | |
|
Cash equivalents in mutual funds | | $ | 224 |
| | $ | — |
| | $ | — |
| | $ | 224 |
|
Investment securities: | | |
| | |
| | |
| |
|
|
Available-for-sale securities | | |
| | |
| | |
| | |
|
Bonds: | | |
| | |
| | |
| | |
|
U.S. government and government sponsored entities | | — |
| | 82 |
| | — |
| | 82 |
|
Obligations of states, municipalities, and political subdivisions | | — |
| | 89 |
| | — |
| | 89 |
|
Corporate debt | | — |
| | 267 |
| | — |
| | 267 |
|
RMBS | | — |
| | 74 |
| | — |
| | 74 |
|
CMBS | | — |
| | 44 |
| | — |
| | 44 |
|
CDO/ABS | | — |
| | 29 |
| | — |
| | 29 |
|
Total bonds | | — |
| | 585 |
| | — |
| | 585 |
|
Preferred stock | | — |
| | 5 |
| | — |
| | 5 |
|
Other long-term investments | | — |
| | — |
| | 1 |
| | 1 |
|
Total available-for-sale securities (a) | | — |
| | 590 |
| | 1 |
| | 591 |
|
Trading and other securities | | |
| | |
| | |
| | |
|
Bonds: | | |
| | |
| | |
| | |
|
Corporate debt | | — |
| | 10 |
| | — |
| | 10 |
|
CMBS | | — |
| | 2 |
| | — |
| | 2 |
|
Total trading and other securities (b) | | — |
| | 12 |
| | — |
| | 12 |
|
Total investment securities | | — |
| | 602 |
| | 1 |
| | 603 |
|
Restricted cash in mutual funds | | 276 |
| | — |
| | — |
| | 276 |
|
Total | | $ | 500 |
| | $ | 602 |
| | $ | 1 |
| | $ | 1,103 |
|
|
| | | | | | | | | | | | | | | | |
| | Fair Value Measurements Using | | Total Carried At Fair Value |
(dollars in millions) | | Level 1 | | Level 2 | | Level 3 (a) | |
| | | | | | | | |
December 31, 2016 | | |
| | |
| | |
| | |
|
Assets | | |
| | |
| | |
| | |
|
Cash equivalents in mutual funds | | $ | 119 |
| | $ | — |
| | $ | — |
| | $ | 119 |
|
Cash equivalents in securities | | — |
| | 42 |
| | — |
| | 42 |
|
Investment securities: | | |
| | |
| | |
| |
|
|
Available-for-sale securities | | |
| | |
| | |
| | |
|
Bonds: | | |
| | |
| | |
| | |
|
U.S. government and government sponsored entities | | — |
| | 13 |
| | — |
| | 13 |
|
Obligations of states, municipalities, and political subdivisions | | — |
| | 82 |
| | — |
| | 82 |
|
Non-U.S. government and government sponsored entities | | — |
| | 5 |
| | — |
| | 5 |
|
Corporate debt | | — |
| | 353 |
| | — |
| | 353 |
|
RMBS | | — |
| | 39 |
| | — |
| | 39 |
|
CMBS | | — |
| | 33 |
| | — |
| | 33 |
|
CDO/ABS | | — |
| | 46 |
| | — |
| | 46 |
|
Total bonds | | — |
| | 571 |
| | — |
| | 571 |
|
Preferred stock | | — |
| | 6 |
| | — |
| | 6 |
|
Other long-term investments | | — |
| | — |
| | 1 |
| | 1 |
|
Total available-for-sale securities (b) | | — |
| | 577 |
| | 1 |
| | 578 |
|
Other securities | | |
| | |
| | |
| | |
|
Bonds: | | |
| | |
| | |
| | |
|
Corporate debt | | — |
| | 2 |
| | — |
| | 2 |
|
CMBS | | — |
| | 1 |
| | — |
| | 1 |
|
Total other securities | | — |
| | 3 |
| | — |
| | 3 |
|
Total investment securities | | — |
| | 580 |
| | 1 |
| | 581 |
|
Restricted cash in mutual funds | | 212 |
| | — |
| | — |
| | 212 |
|
Total | | $ | 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 and nine months ended September 30, 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 (a) | | Transfers into Level 3 | | Transfers out of Level 3 (b) | | Balance at end of period |
| | Balance at beginning of period | | Other revenues | | Other comprehensive income (loss) | | | | |
(dollars in millions) | | | | | | | |
| | | | | | | | | | | | | | |
Three Months Ended September 30, 2016 | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Investment securities: | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Available-for-sale securities | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Other long-term investments | | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
|
Total | | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
|
| | | | | | | | | | | | | | |
Three Months Ended September 30, 2015 | | | | | | | | | | | | | | |
Investment securities: | | | | | | | | | | | | | | |
Available-for-sale securities | | | | | | | | | | | | | | |
Preferred stock | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 10 |
| | $ | — |
| | $ | — |
| | $ | 10 |
|
Other long-term investments | | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
|
Total | | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | 10 |
| | $ | — |
| | $ | — |
| | $ | 11 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2016 | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Investment securities: | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Available-for-sale securities | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Other long-term investments | | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
|
Total | | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
|
| | | | | | | | | | | | | | |
Nine Months Ended September 30, 2015 | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Investment securities: | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Available-for-sale securities | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Bonds: | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Corporate debt | | $ | 4 |
| | $ | — |
| | $ | — |
| | $ | (4 | ) | | $ | — |
| | $ | — |
| | $ | — |
|
CMBS | | 3 |
| | — |
| | — |
| | — |
| | — |
| | (3 | ) | | — |
|
Total bonds | | 7 |
| | — |
| | — |
| | (4 | ) | | — |
| | (3 | ) | | — |
|
Preferred stock | | — |
| | — |
| | — |
| | 10 |
| | — |
| | — |
| | 10 |
|
Other long-term investments | | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
|
Total | | $ | 8 |
| | $ | — |
| | $ | — |
| | $ | 6 |
| | $ | — |
| | $ | (3 | ) | | $ | 11 |
|
| |
(a) | The detail of purchases and settlements is presented in the table below: |
|
| | | | | | | | | | | | | | | | |
(dollars in millions) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
| | | | | | | | |
Investment securities: | | | | | | | | |
Purchases | | | | | | | | |
Available-for-sale securities | | | | | | | | |
Preferred stock | | $ | — |
| | $ | 10 |
| | $ | — |
| | $ | 10 |
|
Settlements | | | | | | | | |
Available-for-sale securities | | | | | | | | |
Bonds: | | | | | | | | |
Corporate debt | | — |
| | — |
| | — |
| | (4 | ) |
Total | | $ | — |
| | $ | 10 |
| | $ | — |
| | $ | 6 |
|
| |
(b) | During the nine months ended September 30, 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.
Quantitative information about Level 3 inputs for our assets measured at fair value on a recurring basis for which information about the unobservable inputs was reasonably available to us at September 30, 2016 and December 31, 2015 is as follows:
|
| | | | |
| | | Range (Weighted Average) |
| Valuation Technique(s) | Unobservable Input | September 30, 2016 | December 31, 2015 |
RMBS | Discounted cash flows | Spread | — | 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
| (b) | (b) |
| |
(a) | At December 31, 2015, RMBS consisted of one bond, which was less than $1 million. |
| |
(b) | 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. |
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 described in note (a) above), 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 |
| | | | | | | | |
September 30, 2016 | | |
| | |
| | |
| | |
|
Assets | | |
| | |
| | |
| | |
|
Finance receivables held for sale | | $ | — |
| | $ | — |
| | $ | 157 |
| | $ | 157 |
|
Real estate owned | | — |
| | — |
| | 6 |
| | 6 |
|
Commercial mortgage loans | | — |
| | — |
| | 3 |
| | 3 |
|
Total | | $ | — |
| | $ | — |
| | $ | 166 |
| | $ | 166 |
|
| | | | | | | | |
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 September 30, | | Nine Months Ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
| | | | | | | | |
Assets | | |
| | |
| | |
| | |
|
Finance receivables held for sale | | $ | — |
| | $ | — |
| | $ | 5 |
| | $ | — |
|
Real estate owned | | 1 |
| | 1 |
| | 2 |
| | 3 |
|
Commercial mortgage loans | | (1 | ) | | — |
| | — |
| | (2 | ) |
Total | | $ | — |
| | $ | 1 |
| | $ | 7 |
| | $ | 1 |
|
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 second 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 and nine months ended September 30, 20162017 and 2015 and recorded the writedowns in other revenues. 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 and nine months ended September 30, 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.
Quantitative information about Level 3 inputs for our assets measured at fair value on a non-recurring basis at September 30, 2016 and December 31, 2015 was as follows:
|
| | | | |
| | | Range (Weighted Average) |
| Valuation Technique(s) | Unobservable Input | September 30, 2016 | December 31, 2015 |
Finance receivables held for sale | Income approach | Market value for similar type loan transactions to obtain a price point | * | — |
Real estate owned | Market approach | Third-party valuation | * | * |
Commercial mortgage loans | Market approach
Income approach
Cost approach
| Local market conditions
Nature of investment
Comparable property sales
Operating performance
| * | * |
| |
* | We applied the third-party exception which allows us to omit certain quantitative disclosures about unobservable inputs for the assets measured at fair value on a non-recurring basis included in the table above. As a result, the weighted average ranges of the inputs for these assets are not applicable. |
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 certain cash equivalents, approximates fair value.
Mutual Funds
The fair value of mutual funds is based on quoted market prices of the underlying shares held in the mutual funds.
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.
Notes Receivable from Parent and Affiliates
The carrying amount of the notes receivable from parent and affiliates approximates the fair value because the notes are payable on a demand basis prior to their due dates and the interest rates on these notes adjust 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 September 30, 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.
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 report 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 uncertainties and risks in connection with the OneMain Acquisition, which may result in an adverse impact on us;
various risks relating to the Lendmark Sale, in connection with the previously disclosed Settlement Agreement with the DOJ;
risks relating toour continued compliance with the Settlement Agreement;
any inability to repay or default in the repayment of intercompany indebtedness owed to us by our affiliates or owed by us to our affiliates;
any inability to perform or default in the performance of any contractual obligations, including intercompany indebtedness, that currently exist or may in the future exist between us and our affiliates;
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, disruptions 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;
risks 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 portfolios, including 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;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, our use of third-party vendors and real estate loan servicing;servicing, or changes in corporate or individual income tax laws or regulations;
potential liability relating to real estate and personal loans whichthat 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;
changes in accounting principles and policies or changes in accounting estimates;
effects of the 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, 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 700600 branch offices in 28 states as of September 30, 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 (our online consumerwebsite, www.onemainfinancial.com. (The information on our website is not incorporated by reference into this report.) In connection with our personal loan origination business). We also writebusiness, we offer our customers credit and non-credit insurance policies covering our customers and the property pledged as collateral for our personal loans.insurance.
In addition, we service or sub-service loans owned by third-parties; pursue strategic acquisitions and dispositions of assets and businesses, including loan portfolios or other financial assets; and may establish joint ventures or enter into other strategic alliances or arrangements from time to time.
OUR PRODUCTS
Our 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 fivesix years and are secured by consumer goods, automobiles, or other personal property or are unsecured. At September 30, 2016,2017, we had over 941,000914,000 personal loans, representing $4.8$5.1 billion of net finance receivables, of which 81%57% were secured by titled collateral, compared to 890,000928,000 personal loans totaling $4.3$4.8 billion, of which 58% were secured by titled collateral at December 31, 2015, of which 74% were secured by collateral. Personal loans held for sale totaled $617 million at December 31, 2015.2016.
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,affiliated insurance companies, Merit, Life Insurance Co. (“Merit”)Yosemite, AHL and Yosemite Insurance Company (“Yosemite”).Triton. We also offer auto warranty membership plans of an unaffiliated company as an ancillary product.company.
Our 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 previously 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 SFI is terminated, SFI will continue to provide the servicing for these loans pursuant to a servicing agreement, which SFI services as unsecured loans due to the fact that the liens are subordinated to superior ranking security interests.
Our 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, and in connection with the Augustsale. During 2016, Real Estate Loan Sale, we sold a portfolio of second lien mortgage$308 million real estate loans with a carrying value of $250 million.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 September 30, 2016,2017, we had $201$133 million of real estate loans held for investment, of which 94%90% were secured by first mortgages, compared to $538$144 million at December 31, 2015,2016, of which 38%93% were secured by first mortgages. Real estate loans held for sale totaled $166$137 million and $176$153 million at September 30, 20162017 and December 31, 2015,2016, 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 September 30, 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 included in 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
ONEMAIN ACQUISITIONDIVIDEND OF SFMC
On November 15, 2015,April 10, 2017, SFMC, a former subsidiary of SFC, was contributed to SFI in the form of a dividend. SFI then contributed SFMC and SGSC to OMH, completed its acquisition of OMFH from Citigroup for approximately $4.5 billion in cash.and SFMC merged into SGSC, which was renamed and is now OGSC. 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 continuing integration process, and part of a series of corporate consolidation transactions surrounding 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 terms of the Independence Demand Note. See Note 9 of the Notes to Condensed Consolidated Financial Statements for further information regarding the Independence Demand Note and other related party agreements with OMFH.
SPRINGCASTLE INTERESTS SALE
On March 31, 2016, the SpringCastle Sellers, wholly owned subsidiaries of OMH, entered into a purchase agreement with 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.
As a result of this sale, SpringCastle Acquisition and SpringCastle Holdings no longer hold any ownership interests of the SpringCastle Joint Venture. However, unless SFI is terminated, SFI will remain as servicer of the SpringCastle Portfolio under the servicing agreement for the SpringCastle Funding Trust.
See Note 2 of the Notes to Condensed Consolidated Financial Statements for further information on the SpringCastle Interests Sale.
LENDMARK SALE
On November 12, 2015, the Branch Sellers entered into a purchase and sale agreement with respect to the Lendmark Sale, and on May 2, 2016, the Branch Sellers completed the sale of 127 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 of the Notes to Condensed Consolidated Financial Statements for further information on the Lendmark Sale.
REAL ESTATE LOAN SALE
In connection with the August 2016 Real Estate Loan Sale, we sold a portfolio of second lien mortgage loans for aggregate cash proceeds of $246 million and recorded a net loss in other revenues at the time of sale of $4 million. The proceeds from this sale, together with cash on hand, were used to pay off $375 million aggregate principal amount of our senior notes that matured in the third quarter of 2016. Unless we are terminated or we resign as servicer, we will continue to service the loans included in this sale pursuant to a servicing agreement. The purchase and sale agreement and the servicing agreement include customary representations and warranties and indemnification provisions.
LIQUIDATION OF UNITED KINGDOM SUBSIDIARY
On August 16, 2016, we liquidated our United Kingdom subsidiary, Ocean Finance and Mortgages Limited, which had previously ceased originating real estate loans in 2012. In connection with this liquidation, we recorded a net gain in other revenues on the date of liquidation of $5 million resulting from a net realized foreign currency translation gain.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 (i) continuing the growth in receivables through enhanced marketing strategies and product options, (ii) reducing leverage, and (iii) 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 and believe the strong credit quality of our loan portfolio will continue as the result of our disciplined underwriting practices and ongoing collection efforts. We also continuehave continued to see growth in the volume of secured loan originations, driven by our strategy to increase the proportion of our loan originations that are secured loans in order to mitigate credit risk exposure and thesome migration of customer activity away from traditional channels, such as direct mail, to online channels (primarily serviced through our branch network), where we believe we are well suited to capture volume due to our scale, technology, and deployment of advanced analytics.
In addition, with an experienced management team, long track record
Tax Reform Proposals
The presidential administration and several members of successfully accessing the capital markets,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 strongliabilities and our consolidated financial position, results of operations and cash flows, depending on the nature and extent of any changes to the U.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 positionedour products and services and the ability of our customers to execute onrepay 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 strategic prioritiescustomers or our financial position, results of strengthening our capital base through the following key initiatives:operations or cash flows.
Reducing leverage;
Maintaining a strong liquidity levelImpact of Hurricanes Harvey, Irma and diversified funding sources; and
Optimizing non-core assets.Maria
In August and September of 2017, our customers in certain areas of the United States and Puerto Rico were impacted by hurricanes Harvey, Irma and Maria. While the actual exposure to our business is not fully known at this time, we have made estimates that are reflected in our condensed consolidated financial statements as of September 30, 2017. The estimated total hurricane-related impact recorded during the three months ended September 30, 2017 was approximately $12 million, consisting primarily of increases in our loan loss reserve and borrower-related assistance programs. See additional comments in the Results of Operations and Segment Results in this report.
Completion of evaluation of certain alternatives
OMH recently completed an evaluation of certain alternatives to maximize stockholder value, including a sale of its business. The evaluation has concluded and OMH continues to implement its previously disclosed strategies.
Results of Operations
CONSOLIDATED RESULTS
See the table below for our consolidated operating results and selected financial statistics. A further discussion of our operating results for each of our operating segments is provided under “Segment Results” below.
| | (dollars in millions) | | Three Months Ended September 30, | | At or for the Nine Months Ended September 30, | | At or for the Three Months Ended September 30, | | At or for the Nine Months Ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 | | 2017 | | 2016 | | 2017 | | 2016 |
| | | | | | | | | | | | | | | | |
Interest income | | $ | 303 |
| | $ | 422 |
| | $ | 1,047 |
| | $ | 1,227 |
| | $ | 310 |
| | $ | 303 |
| | $ | 913 |
| | $ | 1,047 |
|
Interest expense | | 135 |
| | 171 |
| | 429 |
| | 500 |
| | 133 |
| | 135 |
| | 389 |
| | 429 |
|
Provision for finance receivable losses | | 87 |
| | 78 |
| | 263 |
| | 230 |
| | 70 |
| | 87 |
| | 232 |
| | 263 |
|
Net interest income after provision for finance receivable losses | | 81 |
| | 173 |
| | 355 |
| | 497 |
| | 107 |
| | 81 |
| | 292 |
| | 355 |
|
Net gain on sale of SpringCastle interests | | — |
| | — |
| | 167 |
| | — |
| | — |
| | — |
| | — |
| | 167 |
|
Other revenues | | 107 |
| | 49 |
| | 302 |
| | 162 |
| | 115 |
| | 107 |
| | 308 |
| | 302 |
|
Other expenses | | 155 |
| | 182 |
| | 523 |
| | 537 |
| | 154 |
| | 155 |
| | 476 |
| | 523 |
|
Income before provision for income taxes | | 33 |
| | 40 |
| | 301 |
| | 122 |
| |
Provision for income taxes | | 10 |
| | 5 |
| | 101 |
| | 14 |
| |
Income before income taxes | | | 68 |
| | 33 |
| | 124 |
| | 301 |
|
Income taxes | | | 30 |
| | 10 |
| | 51 |
| | 101 |
|
Net income | | 23 |
| | 35 |
| | 200 |
| | 108 |
| | 38 |
| | 23 |
| | 73 |
| | 200 |
|
Net income attributable to non-controlling interests | | — |
| | 32 |
| | 28 |
| | 98 |
| | — |
| | — |
| | — |
| | 28 |
|
Net income attributable to SFC | | $ | 23 |
| | $ | 3 |
| | $ | 172 |
| | $ | 10 |
| | $ | 38 |
| | $ | 23 |
| | $ | 73 |
| | $ | 172 |
|
| | | | | | | | | | | | | | | | |
Selected Financial Statistics(a) | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Finance receivables held for investment: | | | | | | | | | | | | | | | | |
Net finance receivables | | |
| | |
| | $ | 4,989 |
| | $ | 6,368 |
| | $ | 5,262 |
| | $ | 4,989 |
| | $ | 5,262 |
| | $ | 4,989 |
|
Number of accounts | | |
| | |
| | 949,097 |
| | 1,125,541 |
| | 919,837 |
| | 949,097 |
| | 919,837 |
| | 949,097 |
|
Finance receivables held for sale: | | | | | | | | | | | | | | | | |
Net finance receivables | | | | | | $ | 166 |
| | $ | 789 |
| | $ | 137 |
| | $ | 166 |
| | $ | 137 |
| | $ | 166 |
|
Number of accounts | | | | | | 3,191 |
| | 147,675 |
| | 2,533 |
| | 3,191 |
| | 2,533 |
| | 3,191 |
|
Finance receivables held for investment and held for sale: (a)(b) | | | | | | | | | | | | | | | | |
Average net receivables (b) | | $ | 4,942 |
| | $ | 6,873 |
| | $ | 5,789 |
| | $ | 6,677 |
| | $ | 5,195 |
| | $ | 4,942 |
| | $ | 5,020 |
| | $ | 5,789 |
|
Yield (b) | | 23.81 | % | | 24.14 | % | | 23.80 | % | | 24.28 | % | | 23.44 | % | | 23.81 | % | | 24.05 | % | | 23.80 | % |
Gross charge-off ratio (b) | | 6.56 | % | | 4.60 | % | | 6.46 | % | | 5.08 | % | | 6.21 | % | | 6.56 | % | | 7.03 | % | | 6.46 | % |
Recovery ratio (b) | | (1.03 | )% | | (0.85 | )% | | (0.93 | )% | | (0.83 | )% | | (1.09 | )% | | (1.03 | )% | | (1.36 | )% | | (0.93 | )% |
Net charge-off ratio (b) | | 5.53 | % | | 3.75 | % | | 5.53 | % | | 4.25 | % | | 5.12 | % | | 5.53 | % | | 5.67 | % | | 5.53 | % |
Delinquency ratio (b) | | | | | | 3.64 | % | | 3.53 | % | |
30-89 Delinquency ratio | | | 2.51 | % | | 3.01 | % | | 2.51 | % | | 3.01 | % |
Origination volume | | $ | 868 |
| | $ | 1,160 |
| | $ | 2,845 |
| | $ | 3,234 |
| | $ | 1,009 |
| | $ | 868 |
| | $ | 2,941 |
| | $ | 2,845 |
|
Number of accounts originated | | 148,163 |
| | 212,707 |
| | 471,460 |
| | 586,973 |
| | 144,876 |
| | 148,163 |
| | 417,399 |
| | 471,460 |
|
| |
(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 nine months ended September 30, 2016 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.” |
| |
(b) | See “Key Financial Definitions” at the end of our management's discussion and analysis for formulas and definitions of key performance ratios. |
Comparison of Consolidated Results for the Three Months Ended September 30, 20162017 and 20152016
Interest income decreasedincreased $7 million for the three months ended September 30, 20162017 when compared to the same period in 20152016 due to the net of the following:
|
| | | |
(dollars in millions) | |
| |
|
Three Months Ended September 30, 2016 compared to 2015 | |
Decrease in average net receivables | $ | (108 | ) |
Decrease in yield | (13 | ) |
Increase in interest income on finance receivables held for sale | 2 |
|
Total | $ | (119 | ) |
Average net receivablesFinance charges decreased for the three months ended September 30, 2016increased $11 million primarily due to (i) the SpringCastle Interests Sale, (ii)net of the Lendmark Sale, and (iii) our liquidating real estate loan portfolio, including the transfer of $257 million of real estate loans to finance receivables held for sale on June 30, 2016. This decrease was partially offset by the continued growth of our loan portfolio (primarily of our secured personal loans).following:
| |
◦ | Average net receivables held for investment increased primarily due to the continued growth in our personal loan portfolio. |
Yield decreased for the three months ended September 30, 2016 primarily due to (i) the continued growth of secured personal loans, which generally have lower yields relative to our unsecured personal loans, and (ii) the August 2016 Real Estate Loan Sale of second lien mortgage loans, which generally had higher yields relative to our remaining real estate loans.
| |
◦ | Yield on finance receivables held for investment decreased primarily due to the alignment of pricing and credit strategies, which have driven originations toward direct auto customers who tend to have loans with lower yields and charge-offs. In addition, the hurricane-related borrower assistance program of approximately $2 million, which unfavorably impacted our third quarter 2017 yield by approximately 20 basis points. |
Interest income on finance receivables held for sale increaseddecreased $4 million primarily due to the $58 million sale of real estate loans in November 2016.
Interest expense decreased $2 million, for the three months ended September 30, 2017 when compared to the same period in 2016 primarily due to a lower weighted average interest rate on our debt.
Provision for finance receivable losses decreased $17 million for the three months ended September 30, 2017 when compared to the same period in 2016 primarily due to the transferalignment of $257pricing and credit strategies, which have driven originations toward higher quality customers who tend to have lower delinquencies and provision. This decrease was partially offset by (i) the growth in our personal loan portfolio and (ii) the estimated impacts of hurricanes Harvey, Irma and Maria. Based on information currently available, we estimate the increase in future net charge-offs attributable to these hurricanes to be $8 million and have increased our provision for finance receivable losses accordingly.
Other revenues increased $8 million for the three months ended September 30, 2017 when compared to the same period in 2016 primarily due to a $14 million increase in interest income on the OneMain Demand Note during the 2017 period. This increase was partially offset by a decrease in insurance revenues of $6 million during the 2017 period due to canceled and runoff business and lower earned credit and non-credit premiums.
Other expenses decreased $1 million for the three months ended September 30, 2017 when compared to the same period in 2016 primarily due to the net of the following:
Salaries and benefits decreased $8 million primarily due to a decrease in average staffing as a result of our integration of the two legacy companies.
Insurance policy benefits and claims increased $8 million primarily due to unfavorable variances in claim and benefit reserves, which includes a $2 million incremental reserve attributable to hurricanes Harvey and Irma.
Income taxes totaled $30 million for the three months ended September 30, 2017 compared to $10 million for the same period in 2016. The effective tax rate for the three months ended September 30, 2017 was 44.4% compared to 29.6% for the same period in 2016. The effective tax rate for the three months ended September 30, 2017 differed from the federal statutory rate primarily due to the effect of state income taxes and discrete expense from the 2016 tax year return-to-provision adjustment. The effective tax rate for the three months ended September 30, 2016differed from the federal statutory rate primarily due to the effect of discrete tax benefits from early implementation of a new accounting standard and the income tax treatment of the net realized foreign currency translation gain arising from our United Kingdom subsidiary liquidation.
Comparison of Consolidated Results for the Nine Months Ended September 30, 2017 and 2016
Interest income decreased $134 million for the nine months ended September 30, 2017 when compared to the same period in 2016 due to the following:
Finance charges decreased $73 million primarily due to the net of the following:
| |
◦ | 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 in our personal loan portfolio.
| |
◦ | Yield on finance receivables held for investment increased primarily due to the SpringCastle Interest Sale and the continued liquidating of the real estate loan portfolio, which generally have lower yields relative to our personal loan portfolio. This increase was partially offset by the alignment of pricing and credit strategies, which have driven originations toward direct auto customers who tend to have loans with lower yields and lower charge-offs. |
Interest income on finance receivables held for sale decreased $61 million primarily due to the transfer of $608 million of our personal loans to finance receivables held for sale on September 30, 2015, which were sold in the Lendmark Sale on August 3,May 2, 2016.
Interest expense decreased $40 million for the threenine months ended September 30, 20162017 when compared to the same period in 20152016 primarily due to the net of the following:
|
| | | |
(dollars in millions) | |
| |
|
Three Months Ended September 30, 2016 compared to 2015 | |
Decrease in average debt | $ | (48 | ) |
Increase in weighted average interest rate | 11 |
|
Interest expense on note payable to affiliate | 1 |
|
Total | $ | (36 | ) |
Average debt decreased for the three months ended September 30, 2016 primarily due to (i) the elimination of the debt associated with the SpringCastle Interests Sale and (ii) net debt repurchases and repaymentrepayments during the past 12 months, including $466 million repurchased in connection with SFC’s offerings of the 6.125% SFC Notes in May of 2017 and repayments relating to our consumer securitization transactions and conduit facilities. This decrease was partially offset by net unsecured debt issuedissuances during the past 12 months.months relating to SFC’s offerings of the 6.125% SFC Notes in May of 2017 and our securitization transactions. See Notes 109 and 1110 of the Notes to Condensed Consolidated Financial Statements included in this report for further information on our long-term debt, consumer loan securitization transactions and our conduit facilities.
Weighted average interest rate on our debt increased for the three months ended September 30, 2016 primarily due to (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 had a lower interest rate relative to our other indebtedness. The 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 $7 million for the nine months ended September 30, 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 for further information onincluded in this note.
Provision for finance receivable losses increased $9 million for the three months ended September 30, 2016 when compared to the same period in 2015 primarily due to higher net charge-offs on our personal loans reflecting growth during the past 12 months. This increase was partially offset by the absence of net charge-offs on the previously owned SpringCastle Portfolio.
Other revenues increased $58 million for the three months ended September 30, 2016 when compared to the same period in 2015 primarily due to the net of (i) higher interest income on notes receivable from parent and affiliates of $51 million primarily reflecting interest income on the Cash Services Note (previously referred to as the “Independence Demand Note”) during the 2016 period, (ii) foreign currency translation adjustment gain of $5 million in the 2016 period resulting from the liquidation of our United Kingdom subsidiary, (iii) lower net charge-offs on our finance receivables held for sale and provision adjustments for liquidated held for sale accounts of $3 million during the 2016 period, and (iv) net loss on the August 2016 Real Estate Loan Sale of $4 million in the 2016 period.
Other expenses decreased $27 million for the three months ended September 30, 2016 when compared to the same period in 2015 due to the net of the following:
Salaries and benefits decreased $5 million for the three months ended September 30, 2016 primarily due to a decrease in average staffing as a result of the Lendmark Sale in May of 2016.
Other operating expenses decreased $12 million for the three months ended September 30, 2016 primarily due to three months of servicing expenses for the SpringCastle Portfolio totaling $13 million during the 2015 period.
Insurance policy benefits and claims decreased $10 million for the three months ended September 30, 2016 primarily due to favorable variances in benefit reserves during the 2016 period.
Provision for income taxes totaled $10 million for the three months ended September 30, 2016 compared to $5 million for the same period in 2015. The effective tax rate for the three months ended September 30, 2016 was 29.6% compared to 13.6% for the same period in 2015. The effective tax rate for the three months ended September 30, 2016 differed from the federal statutory rate primarily due to the effect of discrete tax benefits from our early implementation of ASU 2016-09 (see Note 3 of the Notes to Condensed Consolidated Financial Statements for further information on this ASU) and the income tax treatment of the net realized foreign currency translation gain arising from our United Kingdom subsidiary liquidation. The effective tax rate for the three months ended September 30, 2015 differed from the federal statutory rate primarily due to the effect of the non-controlling interests 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.
Comparison of Consolidated Results for the Nine Months Ended September 30, 2016 and 2015
Interest income decreased for the nine months ended September 30, 2016 when compared to the same period in 2015 due to the net of the following:
|
| | | |
(dollars in millions) | |
| |
|
Nine Months Ended September 30, 2016 compared to 2015 | |
Decrease in average net receivables | $ | (217 | ) |
Decrease in yield | (24 | ) |
Increase in number of days in 2016 | 3 |
|
Increase in interest income on finance receivables held for sale | 58 |
|
Total | $ | (180 | ) |
Average net receivables decreased for the nine months ended September 30, 2016 primarily due to (i) the SpringCastle Interests Sale, (ii) the transfer of $608 million of our personal loans to finance receivables held for sale on September 30, 2015, and (iii) our liquidating real estate loan portfolio, including the transfer of $257 million of real estate loans to finance receivables held for sale on June 30, 2016. This decrease was partially offset by the continued growth of our loan portfolio (primarily of our secured personal loans).
Yield decreased for the nine months ended September 30, 2016 primarily due to (i) the continued growth of secured personal loans, which generally have lower yields relative to our unsecured personal loans, and (ii) the August 2016
Real Estate Loan Sale of second lien mortgage loans, which generally had higher yields relative to our remaining real estate loans.
Interest income on finance receivables held for sale increased for the nine months ended September 30, 2016 primarily due to (i) the transfer of $608 million of our personal loans to held for sale on September 30, 2015, which were sold in the Lendmark Sale on May 2, 2016, and (ii) the transfer of $257 million of real estate loans to finance receivables held for sale on June 30, 2016, which were sold on August 3, 2016.
Interest expense decreased for the nine months ended September 30, 2016 when compared to the same period in 2015 due to the net of the following:
|
| | | |
(dollars in millions) | |
| |
|
Nine Months Ended September 30, 2016 compared to 2015 | |
Decrease in average debt | $ | (86 | ) |
Increase in weighted average interest rate | 8 |
|
Interest expense on note payable to affiliate | 7 |
|
Total | $ | (71 | ) |
Average debt decreased for the nine months ended September 30, 2016 primarily due to (i) the elimination of the debt associated with the SpringCastle Interests Sale and (ii) net debt repurchases and repayment during the past 12 months relating to our consumer securitization transactions and conduit facilities. This decrease was partially offset by net unsecured debt issued during the past 12 months. See Notes 10 and 11 of the Notes to Condensed Consolidated Financial Statements for further information on our long-term debt, consumer loan securitization transactions and our conduit facilities.
Weighted average interest rate on our debt increased for the nine months ended September 30, 2016 primarily due to (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 had a lower interest rate relative to our other indebtedness. The 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 resulted from a revolving demand note agreement between SFC and OMFH, entered into on December 1, 2015. See Note 9 of the Notes to Condensed Consolidated Financial Statementsreport for further information on this note.
Provision for finance receivable losses increased $33decreased $31 million for the nine months ended September 30, 20162017 when compared to the same period in 20152016 primarily due to (i) the alignment of pricing and credit strategies, which have driven originations toward higher net charge-offs on our personal loans reflecting growth duringquality customers who tend to have lower delinquencies and provision and (ii) the past 12 months. This increase was partially offset by (i) lowerabsence of net charge-offs on the previously owned SpringCastle Portfolio reflectingPortfolio. This decrease was partially offset by (i) the SpringCastle Interests Sale and the improved central servicing performance as the acquired portfolio matured undergrowth in our ownership and (ii) lower net charge-offs on our real estate loans reflecting the liquidating status of the real estatepersonal loan portfolio and (ii) the transferestimated impacts of $257hurricanes Harvey, Irma and Maria. Based on information currently available, we estimate the increase in future net charge-offs attributable to these hurricanes to be $8 million of real estate loans toand have increased our provision for finance receivables held for sale on June 30, 2016.receivable losses accordingly.
Net gain on sale of SpringCastle interests of $167 million for the nine months ended September 30, 2016 reflected the net gain associated with the sale of our equity interest in the SpringCastle Joint Venture on March 31, 2016. See
Other revenues increased $6 million for the nine months ended September 30, 2017 when compared to the same period in 2016 primarily due to a $33 million increase in interest income on the OneMain Demand Note 2during the 2017 period and $11 million of service fee income 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 for further information on the sale.
Other revenues increased $140of this report. This increase was partially offset by (i) $18 million for the nine months ended September 30, 2016 when compared to the same period in 2015 due to the net of (i) increase in interest income on notes receivable from parent and affiliates of $147 million reflecting interest income on the Cash Services 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, (ii) net gain on sales of personal and real estate loans of $18 million in the 2016 period, (iii) increase in insurance revenues of $6(ii) $12 million during the 2016 period reflecting higher earned credit premiums, (iv) foreign currency translation adjustment gain of $5 million in the 2016 period resulting from the liquidation of our United Kingdom subsidiary, (v) decrease in investment revenues of $21 million during the 2016 period primarily due to lower realized gains on the sale of investment securities and a decrease in invested assets, and (vi) net loss on repurchases and repayments of debt of $16 million in the 2016 period.2017 period, and (iii) a decrease in insurance revenues of $8 million during the 2017 period due to canceled and runoff business and lower earned credit and non-credit premiums.
Other expenses decreased $14$47 million for the nine months ended September 30, 20162017 when compared to the same period in 2015 primarily2016 due to the net of the following:
Salaries and benefits decreased $1$34 million for the nine months ended September 30, 2016 primarily due to non-cash incentive compensation expense of $15 million recorded in the second quarter of 2015 relating to the rights of certain executives to receive a portion of the cash proceeds from the sale of OMH’s common stock by the Initial Stockholder. This decrease was partially offset by an increase in average staffing duringas a result of our integration of the 2016 period prior to the Lendmark Sale.two legacy companies.
Other operating expenses increased $1decreased $23 million for the nine months ended September 30, 2016 primarily due to (i) an increaselower allocated expenses to SFC resulting from efficiencies gained from our continued integration efforts, which resulted in professional feesa greater absorption of $10 million during the 2016 period primarily reflecting debt refinance costs, (ii) an increase in information technologycorporate expenses of $7 million during the 2016 period, (iii) a decrease in deferred origination costs of $7 million, and (iv) an increase in advertising expenses of $7 million during the 2016 period. This increase was partially offset by six additional months of servicing expenses for the SpringCastle Portfolio totaling $29 million during the 2015 period.other OMH subsidiaries.
Insurance policy benefits and claims decreased $14increased $10 million primarily due to unfavorable variances in claim reserves, which includes a $2 million incremental reserve attributable to hurricanes Harvey and Irma.
Income taxes totaled $51 million for the nine months ended September 30, 2016 primarily due to favorable variances in benefit reserves during the 2016 period.
Provision for income taxes totaled $101 million for the nine months ended September 30, 20162017 compared to $14$101 million for the same period in 2015.2016. The effective tax rate for the nine months ended September 30, 20162017 was 33.6%40.9% compared to 11.6%33.6% for the same period in 2015.2016. The effective tax rate for the nine months ended September 30, 2017 differed from the federal statutory rate primarily due to the effect of state income taxes and discrete expense from the 2016 tax year return-to-provision adjustment. The effective tax rate for the nine months ended September 30, 2016 differed from the federal statutory rate primarily due to the effect of the non-controlling interests in the previously owned SpringCastle Portfolio, partially offset by the effect of state income taxes. The effective tax rate for the nine months ended September 30, 2015 differed from the federal statutory rate primarily due to the effect of the non-controlling interests in the previously owned SpringCastle Portfolio. The effective tax rate for the nine months ended September 30, 2016 differed from the same period in 2015 primarily due to the SpringCastle Interests Sale. 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 MEASURES
Segment Accounting Basis
We report the operating results of Consumer and Insurance, Acquisitions and Servicing, Real Estate, 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 (eliminates premiums/discounts on our finance receivables at acquisition, as well as the amortization/accretion in future periods). These allocations and adjustments currently 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 GAAP) provides investors a consistent basis on which management evaluates segment performance.
The reconciliations of income before provision for income taxes attributable to SFC on a GAAP basis (purchase accounting) to the same amounts under a Segment Accounting Basis were as follows:
|
| | | | | | | | | | | | | | | | |
(dollars in millions) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
| | | | | | | | |
Income before provision for income taxes attributable to SFC - GAAP basis | | $ | 33 |
| | $ | 8 |
| | $ | 273 |
| | $ | 24 |
|
GAAP to Segment Accounting Basis adjustments: (a) (b) | | | | | | | | |
Interest income | | (1 | ) | | (3 | ) | | (5 | ) | | (9 | ) |
Interest expense | | 21 |
| | 32 |
| | 67 |
| | 94 |
|
Provision for finance receivable losses | | 2 |
| | 4 |
| | 4 |
| | 13 |
|
Other revenues | | (16 | ) | | 8 |
| | (11 | ) | | 13 |
|
Other expenses | | — |
| | 1 |
| | (1 | ) | | 3 |
|
Income before provision for income taxes attributable to SFC - Segment Accounting Basis | | $ | 39 |
| | $ | 50 |
| | $ | 327 |
| | $ | 138 |
|
| |
(a) | The GAAP to Segment Accounting Basis adjustments primarily consists of: |
Interest income - reverses the impact of premiums/discounts on non-impaired purchased finance receivables and the interest income recognition under guidance in ASC 310-20, Nonrefundable Fees and Other Costs, and reestablishes interest income recognition on a historical cost basis;
Interest expense - reverses the impact of premiums/discounts on acquired long-term debt and reestablishes interest expense recognition on a historical cost basis;
Provision for finance receivable losses - reverses the impact of providing an allowance for finance receivable losses upon acquisition and reestablishes the allowance on a historical cost basis and reverses 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 historical cost basis of mark-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 impact of amortization from acquired intangible assets and including amortization of other historical deferred costs.
| |
(b) | Purchase accounting was not elected at the segment level. |
We also report selected financial statistics relating to the net finance receivables and credit quality of Consumer and Insurance, Acquisitions and Servicing, Real Estate, and Other using a Segment Accounting Basis.
Adjusted Pretax EarningsIncome (Loss)
Management uses adjusted pretax earningsincome (loss), a non-GAAP financial measure, as a key performance measure of our segments. Adjusted pretax earningsincome (loss) represents income (loss) before provision for (benefit from) income taxes on a Segment Accounting Basis and excludes net gain (loss) on sales of personal and real estate loans, net gain on sale of SpringCastle interests, SpringCastle transaction costs, losses resulting from accelerated repaymentrepurchases and repurchasesrepayments of long-term debt, debt refinance costs, and net loss on liquidation of our United Kingdom subsidiary. Management believes adjusted pretax earningsincome (loss) is useful in assessing the profitability of our segments and uses adjusted pretax earningsincome (loss) in evaluating our operating performance. Adjusted pretax earningsincome (loss) is a non-GAAP financial measure and should be considered supplemental to, but not as a substitute for or superior to, income (loss) before provision for (benefit from) income taxes, net income, or other measures of financial performance prepared in accordance with GAAP.
The reconciliations of income (loss) before provision for (benefit from) income taxes attributable to SFC on a Segment Accounting Basis to adjusted pretax earningsincome (loss) attributable to SFC (non-GAAP) by segment were as follows:
| | (dollars in millions) | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 | | 2017 | | 2016 | | 2017 | | 2016 |
| | | | | | | | | | | | | | | | |
Consumer and Insurance | | | | | | | | | | | | | | | | |
Income before provision for income taxes - Segment Accounting Basis | | $ | 9 |
| | $ | 82 |
| | $ | 40 |
| | $ | 234 |
| |
Income before income taxes - Segment Accounting Basis | | | $ | 22 |
| | $ | 9 |
| | $ | 8 |
| | $ | 40 |
|
Adjustments: | | | | | | | | | | | | | | | | |
Net gain on sale of personal loans | | — |
| | — |
| | (22 | ) | | — |
| | — |
| | — |
| | — |
| | (22 | ) |
Net loss on repurchases and repayments of debt | | — |
| | — |
| | 7 |
| | — |
| | 1 |
| | — |
| | 17 |
| | 7 |
|
Debt refinance costs | | — |
| | — |
| | 4 |
| | — |
| | — |
| | — |
| | — |
| | 4 |
|
Adjusted pretax earnings (non-GAAP) | | $ | 9 |
| | $ | 82 |
| | $ | 29 |
| | $ | 234 |
| |
Adjusted pretax income (non-GAAP) | | | $ | 23 |
| | $ | 9 |
| | $ | 25 |
| | $ | 29 |
|
| | | | | | | | | | | | | | | | |
Acquisitions and Servicing | | | | | | | | | | | | | | | | |
Income before provision for income taxes attributable to SFC - Segment Accounting Basis | | $ | — |
| | $ | 28 |
| | $ | 192 |
| | $ | 92 |
| |
Income (loss) before income tax expense (benefit) attributable to SFC - Segment Accounting Basis | | | $ | (1 | ) | | $ | — |
| | $ | (1 | ) | | $ | 192 |
|
Adjustments: | | | | | | | | | | | | | | | | |
Net gain on sale of SpringCastle interests | | — |
| | — |
| | (167 | ) | | — |
| | — |
| | — |
| | — |
| | (167 | ) |
SpringCastle transaction costs | | — |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | 1 |
|
Adjusted pretax earnings attributable to SFC (non-GAAP) | | $ | — |
| | $ | 28 |
| | $ | 26 |
| | $ | 92 |
| |
Adjusted pretax income (loss) attributable to SFC (non-GAAP) | | | $ | (1 | ) | | $ | — |
| | $ | (1 | ) | | $ | 26 |
|
| | | | | | | | | | | | | | | | |
Real Estate | | | | | | | | | |
Loss before benefit from income taxes - Segment Accounting Basis | | $ | (19 | ) | | $ | (47 | ) | | $ | (52 | ) | | $ | (138 | ) | |
Other | | | | | | | | | |
Income before income taxes - Segment Accounting Basis | | | $ | 61 |
| | $ | 30 |
| | $ | 177 |
| | $ | 95 |
|
Adjustments: | | | | | | | | | | | | | | | | |
Net loss on sale of real estate loans | | 12 |
| | — |
| | 12 |
| | — |
| | — |
| | 12 |
| | — |
| | 12 |
|
Net loss on liquidation of United Kingdom subsidiary | | | — |
| | 5 |
| | — |
| | 5 |
|
Net loss on repurchases and repayments of debt | | — |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | 1 |
|
Debt refinance costs | | — |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | 1 |
|
Adjusted pretax loss (non-GAAP) | | $ | (7 | ) | | $ | (47 | ) | | $ | (38 | ) | | $ | (138 | ) | |
| | | | | | | | | |
Other | | | | | | | | | |
Income (loss) before provision for (benefit from) income taxes - Segment Accounting Basis | | $ | 49 |
| | $ | (13 | ) | | $ | 147 |
| | $ | (50 | ) | |
Adjustments: | | | | | | | | | |
Net loss on liquidation of United Kingdom subsidiary | | 5 |
| | — |
| | 5 |
| | — |
| |
Adjusted pretax earnings (loss) (non-GAAP) | | $ | 54 |
| | $ | (13 | ) | | $ | 152 |
| | $ | (50 | ) | |
| | | | | | | | | |
Total | | | | | | | | | |
Income before provision for income taxes attributable to SFC - Segment Accounting Basis | | $ | 39 |
| | $ | 50 |
| | $ | 327 |
| | $ | 138 |
| |
Adjustments: | | | | | | | | | |
Net gain on sale of SpringCastle interests | | — |
| | — |
| | (167 | ) | | — |
| |
Net loss (gain) on sales of personal and real estate loans | | 12 |
| | — |
| | (10 | ) | | — |
| |
Net loss on repurchases and repayments of debt | | — |
| | — |
| | 8 |
| | — |
| |
Net loss on liquidation of United Kingdom subsidiary | | 5 |
| | — |
| | 5 |
| | — |
| |
Debt refinance costs | | — |
| | — |
| | 5 |
| | — |
| |
SpringCastle transaction costs | | — |
| | — |
| | 1 |
| | — |
| |
Total adjusted pretax earnings attributable to SFC (non-GAAP) | | $ | 56 |
| | $ | 50 |
| | $ | 169 |
| | $ | 138 |
| |
Adjusted pretax income (non-GAAP) | | | $ | 61 |
| | $ | 47 |
| | $ | 177 |
| | $ | 114 |
|
Segment Results
See Note 16 of the Notes to Condensed Consolidated Financial Statements included in this report for (i) a description of our segments, (ii) reconciliations of segment totals to condensed consolidated financial statement amounts, (iii) methodologies used to allocate revenues and expenses to each segment, and (iv) further discussion of the differences in our Segment Accounting Basis and GAAP.
CONSUMER AND INSURANCE
Adjusted pretax operating resultsincome and selected financial statistics for Consumer and Insurance (which are reported on an adjusted Segment Accounting Basis) were as follows:
| | (dollars in millions) | | Three Months Ended September 30, | | At or for the Nine Months Ended September 30, | | At or for the Three Months Ended September 30, | | At or for the Nine Months Ended September 30, |
| 2016 | | 2015 |
| 2016 | | 2015 |
| 2017 | | 2016 |
| 2017 | | 2016 |
| Interest income |
| $ | 291 |
| | $ | 289 |
| | $ | 897 |
| | $ | 810 |
|
| $ | 304 |
| | $ | 291 |
| | $ | 891 |
| | $ | 897 |
|
Interest expense |
| 105 |
| | 43 |
| | 299 |
| | 119 |
|
| 115 |
| | 105 |
| | 327 |
| | 299 |
|
Provision for finance receivable losses |
| 84 |
| | 62 |
| | 240 |
| | 170 |
|
| 64 |
| | 84 |
| | 223 |
| | 240 |
|
Net interest income after provision for finance receivable losses |
| 102 |
|
| 184 |
|
| 358 |
|
| 521 |
|
| 125 |
|
| 102 |
|
| 341 |
|
| 358 |
|
Other revenues |
| 53 |
|
| 55 |
|
| 154 |
|
| 161 |
|
| 48 |
|
| 53 |
|
| 150 |
|
| 154 |
|
Other expenses |
| 146 |
|
| 157 |
|
| 483 |
|
| 448 |
|
| 150 |
|
| 146 |
|
| 466 |
|
| 483 |
|
Adjusted pretax earnings (non-GAAP) |
| $ | 9 |
|
| $ | 82 |
|
| $ | 29 |
|
| $ | 234 |
| |
Adjusted pretax income (non-GAAP) | |
| $ | 23 |
|
| $ | 9 |
|
| $ | 25 |
|
| $ | 29 |
|
| | | | | | | | | | | | | | | | |
Selected Financial Statistics(a) | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Finance receivables held for investment: | | | | | | | | | | | | | | | | |
Net finance receivables | | |
| | |
| | $ | 4,765 |
| | $ | 3,973 |
| | $ | 5,122 |
| | $ | 4,765 |
| | $ | 5,122 |
| | $ | 4,765 |
|
Number of accounts | | | | |
| | 939,161 |
| | 852,457 |
| | 914,423 |
| | 939,161 |
| | 914,423 |
| | 939,161 |
|
Finance receivables held for sale: | | | | | | | | | |
Net finance receivables | | | | | | $ | — |
| | $ | 608 |
| |
Number of accounts | | | | | | — |
| | 144,392 |
| |
Finance receivables held for investment and held for sale: | | | | | | | | | |
Average net receivables * | | $ | 4,712 |
| | $ | 4,417 |
| | $ | 4,794 |
| | $ | 4,086 |
| |
Yield * | | 24.57 | % | | 26.00 | % | | 25.04 | % | | 26.46 | % | |
Gross charge-off ratio * | | 6.56 | % | | 5.18 | % | | 7.01 | % | | 5.77 | % | |
Recovery ratio * | | (0.91 | )% | | (0.90 | )% | | (0.90 | )% | | (0.89 | )% | |
Net charge-off ratio * | | 5.65 | % | | 4.28 | % | | 6.11 | % | | 4.88 | % | |
Delinquency ratio * | | | | | | 3.10 | % | | 2.90 | % | |
Finance receivables held for investment and held for sale: (b) | | | | | | | | | |
Average net receivables | | | $ | 5,051 |
| | $ | 4,712 |
| | $ | 4,870 |
| | $ | 4,794 |
|
Yield | | | 23.87 | % | | 24.57 | % | | 24.46 | % | | 25.04 | % |
Gross charge-off ratio | | | 6.28 | % | | 6.56 | % | | 7.12 | % | | 7.01 | % |
Recovery ratio | | | (1.02 | )% | | (0.91 | )% | | (1.34 | )% | | (0.90 | )% |
Net charge-off ratio | | | 5.26 | % | | 5.65 | % | | 5.78 | % | | 6.11 | % |
30-89 Delinquency ratio | | | 2.36 | % | | 2.68 | % | | 2.36 | % | | 2.68 | % |
Origination volume | | $ | 867 |
| | $ | 1,137 |
| | $ | 2,825 |
| | $ | 3,168 |
| | $ | 1,010 |
| | $ | 867 |
| | $ | 2,941 |
| | $ | 2,825 |
|
Number of accounts originated | | 148,163 |
| | 212,707 |
| | 471,460 |
| | 586,973 |
| | 144,876 |
| | 148,163 |
| | 417,399 |
| | 471,460 |
|
| |
*(a) | See “Key Financial Definitions”“Glossary” at the endbeginning of our management's discussion and analysisthis report for formulas and definitions of our key performance ratios. |
| |
(b) | Includes personal loans held for sale for the nine months ended September 30, 2016 in connection with the Lendmark Sale. |
Comparison of Adjusted Pretax Operating ResultsIncome for the Three Months Ended September 30, 20162017 and 20152016
Interest income, which consisted entirely of finance charges, increased $2$13 million for the three months ended September 30, 2017 when compared to the same period in 2016 due to the increase in finance charges primarily due to the net of the following:
Average net receivables held for investment increased for the three months ended September 30, 2016 primarily due to the continued growth in our personal loan portfolio.
Yield on finance receivables held for investment decreased primarily due to the alignment of pricing and credit strategies, which have driven originations toward direct auto customers who tend to have loans with lower yields and lower charge-offs. In addition, the hurricane-related borrower assistance program of approximately $2 million unfavorably impacted our loan portfolio (primarily of our secured personal loans). This increase was partially offsetthird quarter 2017 yield by the Lendmark Sale.approximately 20 basis points.
Yield decreased for the three months ended September 30, 2016 primarily due to the continued growth of secured personal loans, which generally have lower yields relative to our unsecured personal loans.54
Interest expense increased $62$10 million for the three months ended September 30, 2017 when compared to the same period in 2016 primarily due to a changean increase in the methodologyutilization of allocatingfinancing from unsecured notes, which generally have higher interest expense, as described in the allocation methodologies table in Note 16 of the Notesrates relative to Condensed Consolidated Financial Statements.our other indebtedness.
Provision for finance receivable losses increased $22decreased $20 million for the three months ended September 30, 2017 when compared to the same period in 2016 primarily due to the alignment of pricing and credit strategies, which have driven originations toward higher quality customers who tend to have lower delinquencies and provision. This decrease was partially offset by (i) the growth in our personal loan portfolio and (ii) the estimated impacts of hurricanes Harvey and Irma. Based on information currently available, we estimate the increase in future net charge-offs onattributable to these hurricanes to be $3 million and have increased our personal loans reflecting growth during the past 12 months.provision for finance receivable losses accordingly.
Other expenses decreased $11increased $4 million for the three months ended September 30, 2017 when compared to the same period in 2016 primarily due to the net of the following:
Insurance policy benefits and claims increased $8 million primarily due to unfavorable variances in claim and benefit reserves, which includes a $2 million incremental reserve attributable to hurricanes Harvey and Irma.
Salaries and benefits decreased $5 million primarily due to a decrease in average staffing as a result of our integration of the two legacy companies.
Comparison of Adjusted Pretax Income for the Nine Months Ended September 30, 2017 and 2016
Interest income decreased $6 million for the nine months ended September 30, 2017 when compared to the same period in 2016 due to the net of the following:
Salaries and benefitsInterest income on finance receivables held for sale decreased $4$56 million due to the transfer of $608 million of our personal loans to finance receivables held for the three months endedsale on September 30, 2016 primarily due to a decrease2015, which were sold in average staffing as a result of the Lendmark Sale inon May of2, 2016.
Other operating expensesFinance charges increased $3$50 million for the three months ended September 30, 2016 primarily due to a decrease in deferred origination costs of $4 million.
Insurance policy benefits and claims decreased $10 million for the three months ended September 30, 2016 primarily due to favorable variances in benefit reserves during the 2016 period.
Comparison of Pretax Operating Results for the Nine Months Ended September 30, 2016 and 2015
Interest income increased $87 million for the nine months ended September 30, 2016 due to the following:
Finance chargesincreased$31 million for the nine months ended September 30, 2016 primarily due to the net of the following:
| |
◦ | Average net receivables held for investment increased for the nine months ended September 30, 2016 primarily due to the continued growth of our loan portfolio (primarily of our secured personal loans). This increase was partially offset by the transfer of $608 million ofin our personal loans to finance receivables held for sale on September 30, 2015.loan portfolio. |
| |
◦ | Yield on finance receivables held for investment decreased for the nine months ended September 30, 2016 primarily due to the continued growthalignment of secured personalpricing and credit strategies, which have driven originations toward direct auto customers who tend to have loans which generally havewith lower yields relative to our unsecured personal loans.and lower charge-offs. |
Interest income on finance receivables held for saleexpense of $56increased $28 million for the nine months ended September 30, 2016 resulted from2017 when compared to the transfer of personal loans to finance receivables held for sale on September 30, 2015 and soldsame period in the Lendmark Sale on May 2, 2016.
Interest expense increased $180 million for the nine months ended September 30, 2016 primarily due to a changean increase in the methodologyutilization of allocatingfinancing from unsecured notes, which generally have higher interest expense, as described in the allocation methodologies table in Note 16 of the Notesrates relative to Condensed Consolidated Financial Statements.our other indebtedness.
Provision for finance receivable losses increased $70decreased $17 million for the nine months ended September 30, 2017 when compared to the same period in 2016 primarily due to the alignment of pricing and credit strategies, which have driven originations toward higher quality customers who tend to have lower delinquencies and provision. This decrease was partially offset by (i) the growth in our personal loan portfolio and (ii) the estimated impacts of hurricanes Harvey and Irma. Based on information currently available, we estimate the increase in future net charge-offs onattributable to these hurricanes to be $3 million and have increased our personal loans during the 2016 period reflecting growth during the past 12 months.provision for finance receivable losses accordingly.
Other revenuesexpenses decreased $7$17 million for the nine months ended September 30, 20162017 when compared to the same period in 2015 due to the net of (i) a decrease in investment revenues of $15 million during the 2016 period resulting from lower realized gains on the sale of investment securities and a decrease in invested assets, (ii) an increase in insurance revenues of $6 million during the 2016 period reflecting higher earned credit premiums, and (iii) and an increase in remaining other revenue of $2 million during the 2016 period primarily resulting from income generated from the Lendmark Sale.
Other expenses increased $35 million for the nine months ended September 30, 2016 due to the net of the following:
Salaries and benefits increased $14decreased $21 million for the nine months ended September 30, 2016 primarily due to an increasea decrease in average staffing duringas a result of our integration of the 2016 period prior to the Lendmark Sale.two legacy companies.
Other operating expenses increased $34decreased $5 million for the nine months ended September 30, 2016 primarily due to (i) an increase credit and collection related costslower allocated expenses to SFC resulting from efficiencies gained from our continued integration efforts, which resulted in a greater absorption of $10 million in the 2016 period reflecting growth in our loan portfolio, (ii) an increase in professional fees of $9 million during the 2016 period reflecting debt refinance costs and increased business efforts, (iii) an increase in information technologycorporate expenses of $8 million during the 2016 period, and (iv) an increase in advertising expenses of $7 million during the 2016 period.by other OMH subsidiaries.
Insurance policy benefits and claims decreased $13increased $9 million for the nine months ended September 30, 2016 primarily due to favorableunfavorable variances in claim and benefit reserves, during the 2016 period.which includes a $2 million incremental reserve attributable to hurricanes Harvey and Irma.
ACQUISITIONS AND SERVICING
Adjusted pretax operating resultsincome (loss) attributable to SFC and selected financial statistics for Acquisitions and Servicing (which are reported on an adjusted Segment Accounting Basis) were as follows:
|
| | | | | | | | | | | | | | | | |
(dollars in millions) | | Three Months Ended September 30, | | At or for the Nine Months Ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
| | | | | | | | |
Interest income | | $ | — |
| | $ | 112 |
| | $ | 102 |
| | $ | 350 |
|
Interest expense | | — |
| | 22 |
| | 20 |
| | 67 |
|
Provision for finance receivable losses | | — |
| | 16 |
| | 14 |
| | 53 |
|
Net interest income after provision for finance receivable losses | | — |
| | 74 |
| | 68 |
| | 230 |
|
Other revenues | | — |
| | — |
| | — |
| | 5 |
|
Other expenses | | — |
| | 14 |
| | 14 |
| | 45 |
|
Adjusted pretax earnings (non-GAAP) | | — |
| | 60 |
| | 54 |
| | 190 |
|
Pretax earnings attributable to non-controlling interests | | — |
| | 32 |
| | 28 |
| | 98 |
|
Adjusted pretax earnings attributable to SFC (non-GAAP) | | $ | — |
| | $ | 28 |
| | $ | 26 |
| | $ | 92 |
|
| | | | | | | | |
Selected Financial Statistics | | | | |
| | | | |
Finance receivables held for investment: | | | | | | | | |
Net finance receivables | | | | | | $ | — |
| | $ | 1,789 |
|
Number of accounts | | | | | | — |
| | 242,660 |
|
Average net receivables * | | $ | — |
| | $ | 1,834 |
| | 552 |
| | 1,934 |
|
Yield * | | — | % | | 24.09 | % | | 24.23 | % | | 24.16 | % |
Net charge-off ratio * | | — | % | | 3.20 | % | | 3.48 | % | | 3.54 | % |
Delinquency ratio * | | |
| | | | — | % | | 4.06 | % |
|
| | | | | | | | | | | | | | | | |
(dollars in millions) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 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 | | 1 |
| | — |
| | 1 |
| | 14 |
|
Adjusted pretax income (loss) (non-GAAP) | | (1 | ) | | — |
| | (1 | ) | | 54 |
|
Pretax income attributable to non-controlling interests | | — |
| | — |
| | — |
| | 28 |
|
Adjusted pretax income (loss) attributable to SFC (non-GAAP) | | $ | (1 | ) | | $ | — |
| | $ | (1 | ) | | $ | 26 |
|
| | | | | | | | |
Selected Financial Statistics * | | | | |
| | | | |
Finance receivables held for investment: | | | | | | | | |
Average net receivables | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 552 |
|
Yield | | — | % | | — | % | | — | % | | 24.23 | % |
Net charge-off ratio | | — | % | | — | % | | — | % | | 3.48 | % |
| |
* | See “Key Financial Definitions”“Glossary” at the endbeginning of our management's discussion and analysisthis report for formulas and definitions of our key performance ratios. |
On March 31, 2016, we sold our equity interest in the SpringCastle Joint Venture, the primary component of our Acquisitions and Servicing segment. See Note 2 of the Notes to Condensed Consolidated Financial Statements for further information on the SpringCastle Interests Sale.
REAL ESTATE
Adjusted pretax operating results and selected financial statistics for Real Estate (which are reported on an adjusted Segment Accounting Basis) were as follows:
|
| | | | | | | | | | | | | | | | |
(dollars in millions) | | Three Months Ended September 30, | | At or for the Nine Months Ended September 30, |
| 2016 | | 2015 |
| 2016 | | 2015 |
| | | | | | | | |
Interest income |
| $ | 10 |
|
| $ | 17 |
| | $ | 40 |
|
| $ | 52 |
|
Interest expense (a) |
| 8 |
|
| 58 |
| | 35 |
|
| 177 |
|
Provision for finance receivable losses |
| 1 |
|
| (4 | ) | | 5 |
|
| (7 | ) |
Net interest income (loss) after provision for finance receivable losses |
| 1 |
|
| (37 | ) | | — |
|
| (118 | ) |
Other revenues (b) |
| — |
|
| (2 | ) |
| (17 | ) |
| 4 |
|
Other expenses |
| 8 |
|
| 8 |
| | 21 |
|
| 24 |
|
Adjusted pretax loss (non-GAAP) |
| $ | (7 | ) |
| $ | (47 | ) | | $ | (38 | ) |
| $ | (138 | ) |
| | | | | | | | |
Selected Financial Statistics | | | | | | | | |
Finance receivables held for investment: | | | | | | | | |
Net finance receivables | | |
| | |
| | $ | 210 |
| | $ | 591 |
|
Number of accounts | | |
| | |
| | 3,846 |
| | 19,001 |
|
Average net receivables (c) | | $ | 215 |
| | $ | 605 |
| | $ | 433 |
| | $ | 633 |
|
Yield (c) | | 6.96 | % | | 9.15 | % | | 8.43 | % | | 9.11 | % |
Loss ratio (c) | | 7.80 | % | | 3.28 | % | | 3.61 | % | | 3.93 | % |
Delinquency ratio (c) (d) | | |
| | |
| | 17.62 | % | | 7.25 | % |
Finance receivables held for sale: | | | | | | | | |
Net finance receivables | | | | | | $ | 168 |
| | $ | 186 |
|
Number of accounts | | | | | | 3,191 |
| | 3,283 |
|
| |
(a) | Interest expense decreased $50 million and $142 million for the three and nine months ended September 30, 2016, respectively, when compared to the same periods in 2015 primarily due to a change in the methodology of allocating interest expense, as described in the allocation methodologies table in Note 16 of the Notes to Condensed Consolidated Financial Statements, and the reallocation of interest expense to the Consumer and Insurance segment as a result of the August 2016 Real Estate Loan Sale.
|
| |
(b) | Other revenues decreased $21 million for the nine months ended September 30, 2016, when compared to the same period in 2015 primarily due to (i) impairments of $10 million recognized on our real estate loans held for sale during the nine months ended September 30, 2016 and (ii) a decrease in investment revenues during the 2016 period, as the prior period reflected higher investment income generated from investing the proceeds of the 2014 real estate loan sales.
|
| |
(c) | See “Key Financial Definitions” at the end of our management's discussion and analysis for formulas and definitions of key performance ratios. |
| |
(d) | Delinquency ratio at September 30, 2016 reflected the retained real estate loan portfolio that was not eligible for sale. |
OTHER
“Other” consists of our other non-originating legacy operations, which are isolated by geographic market and/or distribution channel frominclude our three segments. These operations include: (i) our legacy operations in 14 states where we had also ceased branch-based personal lending during 2012; (ii)liquidating real estate loan portfolio as discussed below and our liquidating retail sales finance portfolio (including retail sales finance accounts from itsour legacy auto finance operation); (iii).
Beginning in 2017, management no longer views or manages our lending operationsreal estate assets as a separate operating segment. Therefore, we are now including Real Estate, which was previously presented as a distinct reporting segment, in Puerto Rico and the U.S. Virgin Islands; and (iv) the operations“Other.” To conform to this new alignment of our United Kingdom subsidiarysegments, we have revised our prior to its liquidation on August 16, 2016.period segment disclosures.
Adjusted pretax operating resultsincome of the Other components (which are reported on an adjusted Segment Accounting Basis) were as follows:
| | (dollars in millions) | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 | | 2017 | | 2016 | | 2017 | | 2016 |
| | | | | | | | | | | | | | | | |
Interest income | | $ | 1 |
| | $ | 1 |
| | $ | 3 |
| | $ | 6 |
| | $ | 6 |
| | $ | 11 |
| | $ | 18 |
| | $ | 43 |
|
Interest expense (a) | | 1 |
| | 16 |
| | 8 |
| | 48 |
| | 5 |
| | 9 |
| | 16 |
| | 43 |
|
Provision for finance receivable losses(a) | | — |
| | — |
| | — |
| | 1 |
| | 6 |
| | 1 |
| | 7 |
| | 5 |
|
Net interest loss after provision for finance receivable losses | | — |
| | (15 | ) | | (5 | ) | | (43 | ) | |
Net interest income (loss) after provision for finance receivable losses | | | (5 | ) | | 1 |
| | (5 | ) | | (5 | ) |
Other revenues (b) | | 55 |
| | 4 |
| | 157 |
| | 10 |
| | 70 |
| | 55 |
| | 192 |
| | 140 |
|
Other expenses (c) | | 1 |
| | 2 |
| | — |
| | 17 |
| | 4 |
| | 9 |
| | 10 |
| | 21 |
|
Adjusted pretax earnings (loss) (non-GAAP) | | $ | 54 |
| | $ | (13 | ) | | $ | 152 |
| | $ | (50 | ) | |
Adjusted pretax income (non-GAAP) | | | $ | 61 |
| | $ | 47 |
| | $ | 177 |
| | $ | 114 |
|
| |
(a) | Interest expense forFor the three and nine months ended September 30, 2016 when compared2017 our provision for finance receivable losses includes approximately a $5 million estimated increase in future net charge-offs attributable to the same periods in 2015 reflected a change in the methodologyimpact of allocating interest expense, as described in the allocation methodologies table in Note 16 of the Notes to Condensed Consolidated Financial Statements. hurricanes Harvey and Maria. |
| |
(b) | Other revenues for the three and nine months ended September 30, 2016 reported in “Other” primarily included (i)includes interest income on the Cash Services Note and (ii) 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 Cash Services Note (previously referred to as the “Independence Demand Note”). |
| |
(c) | In connection with the sale of our common stock by the Initial Stockholder, we recorded non-cash incentive compensation expense of $15 million in the second quarter of 2015 relating to the rights of certain executives to receive a portion and on SFC’s note receivable from SFI. See Note 8 of the cash proceeds received byNotes to Condensed Consolidated Financial Statements in this report for further information on the Initial Stockholder. notes receivable from parent and affiliates. |
Net finance receivables held for investment of the Other components (which are reported on a Segment Accounting Basis) were as follows:
|
| | | | | | | | |
(dollars in millions) | | September 30, |
| 2016 | | 2015 |
| | | | |
Net finance receivables: | | |
| | |
|
Personal loans | | $ | 13 |
| | $ | 19 |
|
Retail sales finance | | 14 |
| | 29 |
|
Total | | $ | 27 |
| | $ | 48 |
|
$148 million and $237 million at September 30, 2017 and 2016, respectively. Net finance receivables held for sale were $142 million and $168 million at September 30, 2017 and 2016, respectively.
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 |
| | | | | | | | |
September 30, 2017 | | | | | | | | |
Personal loans | | $ | 5,122 |
| | $ | — |
| | $ | — |
| | $ | 5,122 |
|
Real estate loans | | — |
| | 141 |
| | (8 | ) | | 133 |
|
Retail sales finance | | — |
| | 7 |
| | — |
| | 7 |
|
Total | | $ | 5,122 |
| | $ | 148 |
| | $ | (8 | ) | | $ | 5,262 |
|
| | | | | | | | |
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 six years and are secured by consumer goods, automobiles, or other personal property or are unsecured. At September 30, 2017, 57% 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 |
| | | | | | | | |
September 30, 2017 * | | | | | | | | |
FICO scores | | | | | | | | |
660 or higher | | $ | 1,207 |
| | $ | 41 |
| | $ | 4 |
| | $ | 1,252 |
|
620-659 | | 1,354 |
| | 26 |
| | 1 |
| | 1,381 |
|
619 or below | | 2,561 |
| | 66 |
| | 2 |
| | 2,629 |
|
Total | | $ | 5,122 |
| | $ | 133 |
| | $ | 7 |
| | $ | 5,262 |
|
| | | | | | | | |
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. Effective 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 our finance receivables as the finance receivable as our 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 |
| | | | | | | | |
September 30, 2017 | | | | | | | | |
Current | | $ | 4,901 |
| | $ | 116 |
| | $ | (6 | ) | | $ | 5,011 |
|
30-59 days past due | | 75 |
| | 9 |
| | (1 | ) | | 83 |
|
Delinquent (60-89 days past due) | | 46 |
| | 3 |
| | (1 | ) | | 48 |
|
Performing | | 5,022 |
| | 128 |
| | (8 | ) | | 5,142 |
|
| | | | | | | | |
Nonperforming (90+ days past due) | | 100 |
| | 20 |
| | — |
| | 120 |
|
Total net finance receivables | | $ | 5,122 |
| | $ | 148 |
| | $ | (8 | ) | | $ | 5,262 |
|
| | | | | | | | |
Delinquency ratio | | | | | | | | |
30-89 days past due | | 2.36 | % | | 7.84 | % | | * |
| | 2.51 | % |
30+ days past due | | 4.30 | % | | 21.65 | % | | * |
| | 4.77 | % |
60+ days past due | | 2.83 | % | | 15.60 | % | | * |
| | 3.19 | % |
90+ days past due | | 1.94 | % | | 13.80 | % | | * |
| | 2.27 | % |
| | | | | | | | |
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 | % |
* Not applicable.
ALLOWANCE FOR FINANCE RECEIVABLE LOSSES
We record an allowance for loanfinance receivable losses to cover expectedincurred losses on our finance receivables. See tableOur allowance for finance receivable losses may fluctuate based upon our continual review of netthe credit quality of the finance receivablesreceivable 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 September 30, 2017 | | | | | | | | | | |
Balance at beginning of period | | $ | 201 |
| | $ | — |
| | $ | 27 |
| | $ | (7 | ) | | $ | 221 |
|
Provision for finance receivable losses | | 64 |
| | — |
| | 6 |
| | — |
| | 70 |
|
Charge-offs | | (80 | ) | | — |
| | (1 | ) | | (1 | ) | | (82 | ) |
Recoveries | | 13 |
| | — |
| | 1 |
| | — |
| | 14 |
|
Balance at end of period | | $ | 198 |
| | $ | — |
| | $ | 33 |
| | $ | (8 | ) | | $ | 223 |
|
| | | | | | | | | | |
Three Months Ended September 30, 2016 | | | | | | | | | | |
Balance at beginning of period | | $ | 176 |
| | $ | — |
| | $ | 34 |
| | $ | (13 | ) | | $ | 197 |
|
Provision for finance receivable losses | | 84 |
| | — |
| | 1 |
| | 2 |
| | 87 |
|
Charge-offs | | (79 | ) | | — |
| | (5 | ) | | 1 |
| | (83 | ) |
Recoveries | | 12 |
| | — |
| | 2 |
| | (1 | ) | | 13 |
|
Balance at end of period | | $ | 193 |
| | $ | — |
| | $ | 32 |
| | $ | (11 | ) | | $ | 214 |
|
| | | | | | | | | | |
Nine Months Ended September 30, 2017 | | | | | | | | | | |
Balance at beginning of period | | $ | 185 |
| | $ | — |
| | $ | 31 |
| | $ | (12 | ) | | $ | 204 |
|
Provision for finance receivable losses | | 223 |
| | — |
| | 7 |
| | 2 |
| | 232 |
|
Charge-offs | | (259 | ) | | — |
| | (7 | ) | | 2 |
| | (264 | ) |
Recoveries | | 49 |
| | — |
| | 2 |
| | — |
| | 51 |
|
Balance at end of period | | $ | 198 |
| | $ | — |
| | $ | 33 |
| | $ | (8 | ) | | $ | 223 |
|
| | | | | | | | | | |
Allowance ratio | | 3.87 | % | | — | % | | 23.21 | % | | (a) |
| | 4.24 | % |
| | | | | | | | | | |
Nine Months Ended September 30, 2016 | | | | | | | | | | |
Balance at beginning of period | | $ | 173 |
| | $ | 4 |
| | $ | 70 |
| | $ | (23 | ) | | $ | 224 |
|
Provision for finance receivable losses | | 240 |
| | 14 |
| | 5 |
| | 4 |
| | 263 |
|
Charge-offs | | (253 | ) | | (17 | ) | | (14 | ) | | 3 |
| | (281 | ) |
Recoveries | | 33 |
| | 3 |
| | 6 |
| | (1 | ) | | 41 |
|
Other (b) | | — |
| | (4 | ) | | (35 | ) | | 6 |
| | (33 | ) |
Balance at end of period | | $ | 193 |
| | $ | — |
| | $ | 32 |
| | $ | (11 | ) | | $ | 214 |
|
| | | | | | | | | | |
Allowance ratio | | 4.08 | % | | — | % | | 13.51 | % | | (a) |
| | 4.30 | % |
(a) Not applicable.
the elimination of allowance for finance receivable losses due to the transfer of real estate loans held for investment to finance receivable held for sale on June 30, 2016; and
the elimination of allowance for finance receivable losses due to the sale of the SpringCastle Portfolio on March 31, 2016, in connection with the SpringCastle Interests Sale.
The current delinquency status of our finance receivable portfolio, inclusive of recent borrower performance, along with the volume of our TDR activity, are the primary drivers that can cause fluctuations in our allowance for finance receivable losses from period to period. We monitor the allowance ratio to ensure we have a sufficient level of allowance for finance receivable losses to cover estimated incurred losses in our finance receivable portfolio.
In aggregate, our Consumer and Insurance allowance for finance receivable losses decreased by type$3 million in the third quarter of 2017, inclusive of $3 million related to estimates of higher future charge-offs due to the impact of hurricanes Harvey and by number of days delinquent inIrma.
See Note 4 of the Notes to Condensed Consolidated Financial Statements.Statements included in 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 |
| | | | | | | | |
September 30, 2016 | | | | | | | | |
TDR net finance receivables | | $ | 36 |
| | $ | — |
| | $ | 138 |
| | $ | 174 |
|
Allowance for TDR finance receivable losses | | $ | 13 |
| | $ | — |
| | $ | 11 |
| | $ | 24 |
|
Number of TDR accounts | | 11,339 |
| | — |
| | 1,944 |
| | 13,283 |
|
| | | | | | | | |
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 |
| | | | | | |
September 30, 2016 | | | | | | |
TDR net finance receivables | | $ | — |
| | $ | 90 |
| | $ | 90 |
|
Number of TDR accounts | | — |
| | 1,284 |
| | 1,284 |
|
| | | | | | |
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 |
| | | | | | | | |
September 30, 2017 | | | | | | | | |
TDR net finance receivables | | $ | 100 |
| | $ | 76 |
| | $ | (26 | ) | | $ | 150 |
|
Allowance for TDR finance receivable losses | | 40 |
| | 26 |
| | (14 | ) | | 52 |
|
| | | | | | | | |
December 31, 2016 | | | | | | | | |
TDR net finance receivables | | $ | 47 |
| | $ | 71 |
| | $ | (27 | ) | | $ | 91 |
|
Allowance for TDR finance receivable losses | | 20 |
| | 23 |
| | (12 | ) | | 31 |
|
Upon the completion of our branch integration in the first quarter of 2017, we continued the alignment and enhancement of our collection processes, which in the second quarter of 2017 resulted in an increase in the loans classified as TDRs and accordingly, we have reclassified the associated allowance for finance receivable losses. The allowance for non-TDR finance receivable losses continues to reflect our historical loss coverage.
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 OfferingSFC’S Offerings of 8.25%6.125% Senior Notes Due 2022
On April 11, 2016,May 15, 2017, SFC issued $1.0 billion$500 million aggregate principal amount of the 8.25%2022 SFC Notes due 2020 under the Indenture, pursuant to which OMH provided a guarantee of the notes2022 SFC Notes on a senioran unsecured basis. On May 30, 2017, SFC issued and sold $500 million aggregate principal amount of the Additional SFC Notes in an add-on offering. SFC used a portion of the net proceeds from the offeringsale of the Additional SFC Notes to repurchase approximately $600$466 million aggregate principal amount of its existing senior notes that mature in6.90% Senior Notes due 2017 andat a premium to par. SFC intends to use the remainderremaining net proceeds from the sale of the 6.125% SFC Notes for general corporate purposes.purposes, which may include additional debt repurchases and repayments. See Note 29 of the Notes to Condensed Consolidated Financial Statements included in this report for further information on this offering.the offerings.
Securitizations and Borrowings from Revolving Conduit Facilities
During the nine months ended September 30, 2016,2017, we (i) completed one consumer loan securitization and one direct auto loan securitization and (ii) exercised our right to redeem the asset backedasset-backed notes issued by the Springleaf Funding Trust 2013-B, and (iii) 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 nine months ended September 30, 2016,2017, we (i) extended the revolving periods on four existingterminated five revolving conduit facilitiesagreements and (ii) amendedentered into three existing revolvingnew conduit facilities to change the maximum principal balances. Net repayments under the notes of our existing revolving conduit facilities totaled $1.2 billion for the nine months ended September 30, 2016.facilities.
See Notes 109 and 1110 of the Notes to Condensed Consolidated Financial Statements included in this report for further information on our long-term debt, consumer loan securitization transactions and conduit facilities.
Other Transactions
In addition to cash received from our senior notes offering and securitization transactions, our sources of funds were favorably impacted by the following transactions:
SpringCastle Interests Sale;
Lendmark Sale; and
August 2016 Real Estate Loan Sale.
See Note 2 of the Notes to Condensed Consolidated Financial Statements for further information on these transactions.
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 September 30, 2016,2017, we had $272$402 million of cash and cash equivalents, which included $173 million of cash and duringcash equivalents held at our regulated insurance subsidiaries or for other operating activities that is unavailable for general corporate purposes. During the nine months ended September 30, 2016,2017, we generated net income attributable to SFC of $172$73 million. Our net cash inflowoutflow from operating and investing activities totaled $1.3 billion$540 million for the nine months ended September 30, 2016.2017. At September 30, 2016,2017, our remaining scheduled principal and interest payments for 20162017 on our existing debt (excluding securitizations) totaled $156 million, and we had no remaining scheduled principal payments for 2016 on our existing debt.$716 million. As of September 30, 2016,2017, we had $2.2$1.7 billion UPB of unencumbered personal loans and $439$338 million UPB of unencumbered real estate loans (including $230$198 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.
See Notes 9 and 10 of the Notes to Condensed Consolidated Financial Statements included in this report for further information on our long-term debt, loan securitization transactions and conduit facilities.
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.
LIQUIDITY
Operating Activities
Net cash provided by operations of $399$521 million for the nine months ended September 30, 2017 reflected net income of $73 million, the impact of non-cash items, and a favorable change in working capital of $141 million. Net cash provided by operations of $397 million for the nine months ended September 30, 2016 reflected net income of $200 million, the impact of non-cash items, and a favorable change in working capital of $89 million. Net cash provided by operations of $421 million for the nine months ended September 30, 2015 reflected net income of $108 million, the impact of non-cash items, and a favorable change in working capital of $15$87 million.
Investing Activities
Net cash provided byused for investing activities of $897 million$1.1 billion for the nine months ended September 30, 20162017 was primarily due to the SpringCastle Interests Sale, the Lendmark Sale, the August 2016 Real Estate Loan Sale, and net principal collectionscash advances on intercompany notes receivable partially offset byand net principal collections and originations of finance receivables held for investment and held for sale. Net cash provided by investing activities of $565$780 million for the nine months ended September 30, 20152016 was primarily attributabledue to the SpringCastle Interests Sale and the Lendmark Sale, net sales, calls, and maturities of available-for-sale securities, and net collections on intercompany notes receivable, partially offset by net principal originations of finance receivables held for investment securities during 2015.and held for sale.
Financing Activities
Net cash provided by financing activities of $653 million for the nine months ended September 30, 2017 was primarily due to net issuances of long-term debt, including SFC’s offerings of the 6.125% SFC Notes in May of 2017. Net cash used for financing activities of $1.3 billion for the nine months ended September 30, 2016 was primarily due to net repayments of long-term debt. Net cash provided by financing activities of $1.0 billion for the nine months ended September 30, 2015 reflected the debt issuances associated with the 2015-A and 2015-B securitizations.
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;
any inability to repay or default in the repayment of intercompany indebtedness owed to us by our affiliates or owed by us to our affiliates;
the effect of federal, state and local laws, regulations, or regulatory policies and practices;
potential liability relating to real estate and personal loans whichthat 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 facilities to provide committed liquidity in case of prolonged market fluctuations.
However, it is possible that the actual outcome of one or more of our plans could be materially different than expected or that one or more of our significant judgments or estimates could prove to be materially incorrect.
Debt Ratings
During the second quarter of 2017, SFC’s long-term corporate debt rating was upgraded to B2 with a positive outlook by Moody’s.
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;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.” Our insurance subsidiaries did not pay any dividends during the nine months ended September 30, 2017. During the nine months ended September 30, 2016, Merit and Yosemite paid extraordinary dividends to SFC totaling $63 million.
DEBT AGREEMENTSCOVENANTS
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 September 30, 2016,2017, SFC was in compliance with all of the covenants under itsour 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 3.05% as of September 30, 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.
Based upon SFC’s financial results for the 12 months ended September 30, 2016,2017, a mandatory trigger event did not occur with respect to the interest payment due in JanuaryOctober of 2017, as SFC 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 September 30, 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 |
| | $ | 315 |
| | $ | 401 |
| | 2.67 | % | | Personal loans | | 2 years | |
SLFT 2015-A | | 1,163 |
| | 1,250 |
| | 1,163 |
| | 1,258 |
| | 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 |
| | 338 |
| | 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 |
|
SLFT 2017-A | | | 619 |
| | 685 |
| | 619 |
| | 685 |
| | 2.98 | % | | Personal loans | | 3 years |
|
Total consumer securitizations | | 2,036 |
|
| 2,229 |
|
| 1,792 |
| | 1,997 |
| | | | | 2,596 |
|
| 2,830 |
|
| 2,596 |
| | 2,830 |
| | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Auto Securitization: | | | | | | | | | | | | |
Auto Securitizations: | | | | | | | | | | | | | |
ODART 2016-1 | | 700 |
| | 754 |
| | 618 |
| | 688 |
| | 2.30 | % | | Direct auto loans | | N/A (c) | | 700 |
| | 754 |
| | 246 |
| | 305 |
| | 2.70 | % | | Direct auto loans | | — |
|
ODART 2017-1 | | | 268 |
| | 300 |
| | 268 |
| | 300 |
| | 2.61 | % | | Direct auto loans | | 1 year |
|
Total auto securitizations | | | 968 |
| | 1,054 |
| | 514 |
| | 605 |
| | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Total secured structured financings | | $ | 2,736 |
| | $ | 2,983 |
| | $ | 2,410 |
| | $ | 2,685 |
| | |
| | | | | | $ | 3,564 |
| | $ | 3,884 |
| | $ | 3,110 |
| | $ | 3,435 |
| | |
| | | | |
|
| |
(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 sevenfive conduit facilities with a total borrowing capacity of $2.4$2.2 billion as of September 30, 2016,2017, as discussed in Note 1110 of the Notes to Condensed Consolidated Financial Statements.Statements included in this report. At September 30, 2016,2017, no amounts were drawn under these facilities.
We are also party to various transaction agreements entered into on September 6, 2017, in connection with the closing of the OneMain Financial Issuance Trust 2017-1 (“OMFIT 2017-1”) revolving pool consumer loan securitization. The terms of such securitization transaction agreements permit us to sell, upon customary terms and conditions, including indemnification and repurchase provisions for breaches of representations and warranties, eligible consumer loans during the revolving period of the OMFIT 2017-1 securitization. At September 30, 2017, we have not sold any consumer loans pursuant to the OMFIT 2017-1 securitization.
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 September 30, 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 unsecured debt.
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 September 30, 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 September 30, 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
Effective April 1, 2016, we changed our accounting policy for derecognition of purchased credit impaired loans. See Note 1 of the Notes to Condensed Consolidated Financial Statements for further information.other intangible assets.
There have been no other material changes to our critical accounting policies or to our methodologies for deriving critical accounting estimates during the nine months ended September 30, 2016.2017.
Recent Accounting Pronouncements
See Note 32 of the Notes to Condensed Consolidated Financial Statements included in this report for discussion of recently issued accounting pronouncements.
Seasonality
Our personal loan volume is generally highest during the second and fourth quarters of the year, primarily due to marketing efforts, 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.
Key Financial Definitions
|
| |
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 |
Delinquency ratio | UPB 60 days or more past due (greater than three payments unpaid) as a percentage of UPB |
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 |
Gross charge-off ratio | annualized gross charge-offs as a percentage of average net receivables |
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 average real estate loans |
Net charge-off ratio | annualized net charge-offs as a percentage of average net receivables |
Net interest income | interest income less interest expense |
Recovery ratio | annualized recoveries on net charge-offs as a percentage of average net receivables |
Tangible equity | total equity less accumulated other comprehensive income or loss |
Tangible managed assets | total assets less goodwill and other intangible assets |
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 |
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 September 30, 2016,2017, 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 September 30, 20162017 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 third 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 included in Part I of this Quarterly Report on Form 10-Q.report.
Item 1A. Risk Factors.
There have been no material changes to theour risk factors included in Part I, Item 1A of our 20152016 Annual Report on Form 10-K, except for changes previously disclosed in Part II, Item 1A of our Quarterly Report on Form 10-Q for the period ended June 30, 2016,March 31, 2017, filed with the SEC on AugustMay 5, 2016, and as set forth below:
OMH’s OneMain Acquisition may not achieve its intended results and indirectly have an adverse impact on us.
On November 15, 2015, OMH, our indirect parent, completed its acquisition of OneMain, with the expectation that the OneMain Acquisition will result in various benefits including, among other things, cost savings and operating efficiencies. Achieving the anticipated benefits of the OneMain Acquisition is subject to a number of uncertainties (many of which are outside of our control and are outside of the control of OMH and OneMain), including whether the business of OneMain can be integrated into OMH’s business, including SFC, in an efficient and effective manner.
The integration process is subject to a number of risks and uncertainties, including those described under “Risk Factors” in Part I, Item 1A of OMH’s 2015 Annual Report on Form 10-K and in Part II, Item 1A of OMH’s Quarterly Report on Form 10-Q for the period ended September 30, 2016, filed with the SEC on November 8, 2016. No assurance can be given that OMH’s anticipated benefits and synergies will be realized or, if realized, the timing of their realization. Failure to achieve these anticipated benefits could indirectly result in an adverse impact on our future business, financial condition, operating results and prospects.
If our estimates of finance receivable losses are not adequate to absorb actual losses, our provision for finance receivable losses would increase, which would adversely affect our results of operations.
We maintain an allowance for finance receivable losses. To estimate the appropriate level of allowance for finance receivable losses, we consider known and relevant internal and external factors that affect finance receivable collectability, including the total amount of finance receivables outstanding, historical finance receivable charge-offs, our current collection patterns, and economic trends. Our methodology for establishing our allowance for finance receivable losses is based on the guidance in ASC 450, Contingencies and, in part, on our historic loss experience. If customer behavior changes as a result of economic conditions and if we are unable to predict how the unemployment rate, housing foreclosures, and general economic uncertainty may affect our allowance for finance receivable losses, our provision may be inadequate. Our allowance for finance receivable losses is an estimate, and if actual finance receivable losses are materially greater than our allowance for finance receivable losses, our results of operations could be adversely affected. Neither state regulators nor federal regulators regulate our allowance for finance receivable losses.
In June of 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This 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 may require earlier recognition of credit losses than the incurred loss approach. This 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. See Note 3 of the Notes to Condensed Consolidated Financial Statements for more information on this new accounting standard.2017.
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 inExhibit Number
| | Description |
| | |
| | |
| | |
| | |
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| | |
| | |
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 Shareholder’s Equity, (v) Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Condensed Consolidated Financial Statements. |
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: | November 8, 20166, 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 | | |
| | |
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. |
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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 Shareholder’s Equity, (v) Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Condensed Consolidated Financial Statements. |
68