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Section 1: 8-K (8-K)

Document


 
 
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 8-K
 
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

DATE OF REPORT (Date of earliest event reported): August 26, 2016 (August 26, 2016)
 
Springleaf Finance Corporation

(Exact name of registrant as specified in its charter)
 
Indiana
001-06155
35-0416090
(State or other jurisdiction of incorporation)
(Commission File Number)
(I.R.S. Employer Identification No.)
 
 
 
601 N.W. Second Street,
Evansville, Indiana 47708
(Address of principal executive offices)(Zip Code)
(812) 424-8031
(Registrant’s telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report)
 
 
 
 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
 
o
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
o
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
o
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
o
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))




 
 
 
 
 





Item 8.01
Other Events.

Springleaf Finance Corporation (“SFC” or, collectively with its subsidiaries, the “Company,” “we,” or “our”) is filing this Current Report on Form 8-K as a result of a change in our accounting policy for the derecognition of loans within a purchased credit impaired (“PCI”) pool, as described in more detail below. The selected financial data (Item 6), Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) (Item 7), financial statements (Item 8) and certain exhibits (Item 15) in SFC’s Annual Report on Form 10-K for the year ended December 31, 2015 (“2015 Form 10-K”) have been revised to reflect the retrospective application of this change in accounting policy, and such revised financial data, financial statements, MD&A, and exhibits are included in exhibits to this Form 8-K and incorporated by reference herein. All other information in SFC’s 2015 Form 10-K has not been updated for events or developments that occurred subsequent to the filing of SFC’s 2015 Form 10-K with the U.S. Securities and Exchange Commission (the “SEC”) on February 29, 2016.

Change in Accounting Policy

As disclosed in SFC’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2016, effective April 1, 2016, we changed our accounting policy for the derecognition of loans within a PCI pool. Historically, we removed loans from a PCI 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 PCI 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 PCI loans is preferable as it enhances consistency with our industry peers. For more information regarding our policy for the derecognition of PCI loans, see Note 3 of the Notes to Consolidated Financial Statements included in Exhibit 99.1 to this Form 8-K.

Item 9.01
Financial Statements and Exhibits.

(d)     Exhibits.

The following exhibits filed with this Current Report on Form 8-K supersede the corresponding exhibits and sections of SFC’s 2015 Form 10-K:

Exhibit Number
 
Description
12.1
 
Computation of Ratio of Earnings to Fixed Charges
23.1
 
Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm
99.1
 
Revised Selected Financial Data, MD&A, and Financial Statements from Springleaf Finance Corporation’s Annual Report on Form 10-K for the Year Ended December 31, 2015
101
 
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statements of Shareholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements

Forward-Looking Statements

This report, including the exhibits hereto, 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 presentation 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.

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 and other risks and uncertainties described in the “Risk Factors” and “Management’s Discussion and Analysis” sections of our most recent Form 10-K and Form 10-Qs filed with the SEC and in our other filings with the SEC from time to time, any of which could cause actual results, performance, or achievements to differ materially from those expressed in or implied by our forward-looking statements. Furthermore, new risks and uncertainties arise from time to time, and it is impossible for us to predict those events or how they may affect us.











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 hereunto duly authorized.

 
 
 
Springleaf Finance Corporation
 
 
 
(Registrant)
 
 
 
 
Date:
August 26, 2016
By:
/s/ Micah R. Conrad
 
 
 
Micah R. Conrad
 
 
 
Senior Vice President and Chief Financial Officer









Exhibit Index

Exhibit Number
 
Description
12.1
 
Computation of Ratio of Earnings to Fixed Charges
23.1
 
Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm
99.1
 
Revised Selected Financial Data, MD&A, and Financial Statements from Springleaf Finance Corporation’s Annual Report on Form 10-K for the Year Ended December 31, 2015
101
 
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statements of Shareholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements



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Section 2: EX-12.1 (EXHIBIT 12.1)

Exhibit


Exhibit 12.1    

SPRINGLEAF FINANCE CORPORATION AND SUBSIDIARIES
Computation of Ratio of Earnings to Fixed Charges

(dollars in millions)
 
 
 
 
 
 
 
 
 
 
Years Ended December 31,
 
2015
 
2014
 
2013
 
2012
 
2011
 
 
 
 
 
 
 
 
 
 
 
Earnings:
 
 
 
 
 
 
 
 
 
 
Income (loss) before provision for (benefit from) income taxes
 
$
159

 
$
678

 
$
(125
)
 
$
(301
)
 
$
(309
)
Interest expense
 
667

 
683

 
843

 
1,068

 
1,276

Implicit interest in rents
 
9

 
10

 
9

 
12

 
12

Total earnings
 
$
835

 
$
1,371

 
$
727

 
$
779

 
$
979

Fixed charges:
 
 
 
 
 
 
 
 
 
 
Interest expense
 
$
667

 
$
683

 
$
843

 
$
1,068

 
$
1,276

Implicit interest in rents
 
9

 
10

 
9

 
12

 
12

Total fixed charges
 
$
676

 
$
693

 
$
852

 
$
1,080

 
$
1,288

Ratio of earnings to fixed charges
 
1.24

 
1.98

 
*

 
*

 
*

                                      
*
Earnings did not cover total fixed charges by $125 million in 2013, $301 million in 2012, and $309 million in 2011.




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Section 3: EX-23.1 (EXHIBIT 23.1)

Exhibit


Exhibit 23.1    

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in Springleaf Finance Corporation’s Registration Statement on Form S-3 (No. 333-200408-01) of our report dated February 29, 2016, except with respect to the change in accounting principle for the derecognition of loans from purchase credit impaired loan pools, as to which the date is August 26, 2016, relating to the consolidated financial statements, which appears in Exhibit 99.1 to Springleaf Finance Corporation’s Current Report on Form 8-K dated August 26, 2016.

/s/ PricewaterhouseCoopers LLP
Chicago, IL
August 26, 2016



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Section 4: EX-99.1 (EXHIBIT 99.1)

Exhibit
Table of Contents

Exhibit 99.1    

Revised Selected Financial Data, MD&A, and Financial Statements from Springleaf Finance Corporation’s Annual Report on Form 10-K for the Year Ended December 31, 2015

The revised sections contained in this Exhibit 99.1 supersede the corresponding sections of Springleaf Finance Corporation’s Annual Report on Form 10-K for the year ended December 31, 2015.

TABLE OF CONTENTS

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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Table of Contents

PART II

Item 6. Selected Financial Data.    

The following table presents our selected historical consolidated financial data and other operating data. The consolidated statement of operations data for the years ended December 31, 2015, 2014, and 2013 and the consolidated balance sheet data as of December 31, 2015 and 2014 have been derived from our audited consolidated financial statements included elsewhere herein. The statement of operations data for the years ended December 31, 2012 and 2011 and the consolidated balance sheet data as of December 31, 2013, 2012 and 2011 have been derived from our consolidated financial statements not included elsewhere herein.

The following selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and our audited consolidated financial statements and related notes in Item 8.
(dollars in millions)
 
At or for the Years Ended December 31,
 
2015
 
2014
 
2013
 
2012
 
2011
 
 
 
 
 
 
 
 
 
 
 
Consolidated Statements of Operations Data:
 
 
 
 
 
 
 
 
 
 
Interest income
 
$
1,657

 
$
1,625

 
$
1,637

 
$
1,694

 
$
1,834

Interest expense
 
667

 
683

 
843

 
1,068

 
1,276

Provision for finance receivable losses
 
339

 
352

 
371

 
334

 
263

Other revenues
 
243

 
745

 
161

 
114

 
154

Other expenses
 
735

 
657

 
709

 
707

 
758

Income (loss) before provision for (benefit from) income taxes
 
159

 
678

 
(125
)
 
(301
)
 
(309
)
Net income (loss)
 
141

 
445

 
(76
)
 
(215
)
 
(210
)
Net income attributable to non-controlling interests
 
127

 
48

 

 

 

Net income (loss) attributable to Springleaf Finance Corporation
 
14

 
397

 
(76
)
 
(215
)
 
(210
)
 
 
 
 
 
 
 
 
 
 
 
Consolidated Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
Net finance receivables, less unearned insurance premium and claim reserves and allowance for finance receivable losses (a)
 
$
6,090

 
$
6,181

 
$
10,730

 
$
11,453

 
$
12,881

Total assets (a)
 
12,188

 
10,998

 
12,612

 
14,554

 
15,323

Long-term debt (a)
 
9,582

 
8,356

 
10,602

 
12,449

 
12,883

Total liabilities (a)
 
10,156

 
9,021

 
11,227

 
13,261

 
13,888

Springleaf Finance Corporation shareholder’s equity
 
2,111

 
2,106

 
1,385

 
1,293

 
1,435

Non-controlling interests
 
(79
)
 
(129
)
 

 

 

Total shareholder’s equity
 
2,032

 
1,977

 
1,385

 
1,293

 
1,435

 
 
 
 
 
 
 
 
 
 
 
Other Operating Data:
 
 
 
 
 
 
 
 
 
 
Ratio of earnings to fixed charges
 
1.24

 
1.98

 
(b)

 
(b)

 
(b)

                                      
(a)
Prior year consolidated balance sheet data reflects (i) reclassification of debt issuance costs from other assets to long-term debt as a result of our early adoption of accounting standards update 2015-03, Interest - Imputation of Interest, which totaled $29 million, $39 million, $28 million, $21 million at December 31, 2014, 2013, 2012, and 2011, respectively, and (ii) reclassification of unearned insurance premium and claim reserves related to finance receivables from insurance claims and policyholder liabilities to a contra-asset to net finance receivables in connection with our policy integration with OneMain, which totaled $217 million, $172 million, $138 million, $127 million at December 31, 2014, 2013, 2012, and 2011, respectively.

(b)
Earnings did not cover total fixed charges by $125 million in 2013, $301 million in 2012, and $309 million in 2011.


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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.    

The following discussion and analysis of our financial condition and results of operations should be read together with the audited consolidated financial statements and related notes in Item 8. This discussion and analysis contains forward-looking statements that involve risk, uncertainties, and assumptions. See “Forward-Looking Statements” beginning on page 3 of this report. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of many factors, including those discussed in “Risk Factors” in Item 1A in Part I of this report.

An index to our management’s discussion and analysis follows:

Topic
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Our Business    

Springleaf is a branch-based consumer finance company providing personal loans primarily to non-prime customers through its network of over 800 branch offices in 27 states as of December 31, 2015 and on a centralized basis as part of its centralized operations and our newly launched iLoan platform. We also write credit and non-credit insurance policies covering our customers and the property pledged as collateral for our personal loans.

OUR PRODUCTS

Our core product offerings include:

Personal Loans — We offer personal loans through our branch network and over the internet 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 two to five years. At December 31, 2015, we had over 1.0 million personal loans, representing $4.9 billion of net finance receivables (including personal loans held for sale of $617 million). At December 31, 2015, $2.4 billion, or 56%, were secured by collateral consisting of titled personal property (such as automobiles) and $1.9 billion, or 44%, were secured by consumer household goods or other items of personal property or were unsecured, compared to $1.9 billion of personal loans, or 50%, secured by collateral consisting of titled personal property and $1.9 billion, or 50%, secured by consumer household goods or other items of personal property or unsecured at December 31, 2014.

Insurance Products — We offer our customers credit insurance (life insurance, disability insurance, and involuntary unemployment insurance) and non-credit insurance through both our branch network and our centralized operations. Credit insurance and non-credit insurance products are provided by our subsidiaries, Merit and Yosemite. We also offer auto warranty membership plans of an unaffiliated company as an ancillary product.

SpringCastle Portfolio — We service the SpringCastle Portfolio that was acquired by an indirect subsidiary of OMH through a joint venture in which SFC owns a 47% equity interest. These loans include unsecured loans and loans secured by subordinate residential real estate mortgages (which we service as unsecured loans due to the fact that the liens are subordinated to superior ranking security interests). The SpringCastle Portfolio includes 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. At December 31, 2015, the SpringCastle Portfolio included over 232,000 of acquired loans,

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representing $1.7 billion in net finance receivables, compared to 277,000 of acquired loans totaling $2.1 billion at December 31, 2014.

Our non-core and non-originating legacy products include:

Real Estate Loans — We ceased real estate lending in January of 2012, and during 2014, we sold $6.4 billion real estate loans held for sale. The remaining real estate loans may be closed-end accounts or open-end home equity lines of credit, generally have a fixed rate and maximum original terms of 360 months, and are secured by first or second mortgages on residential real estate. We continue to service the liquidating real estate loans and support any advances on open-end accounts. At December 31, 2015, we had $538 million of real estate loans held for investment, of which $207 million, or 38%, were secured by first mortgages and $331 million, or 62%, were secured by second mortgages, compared to $230 million of real estate loans, or 36%, secured by first mortgages and $409 million, or 64%, secured by second mortgages at December 31, 2014. Real estate loans held for sale totaled $176 million and $202 million at December 31, 2015 and 2014, respectively, all of which were secured by first mortgages.

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 December 31, 2015, we had three operating segments:

Consumer and Insurance;
Acquisitions and Servicing; and
Real Estate.

See Note 23 of the Notes to Consolidated Financial Statements in Item 8 for more information about our segments.

2015 Segment Highlights

Net finance receivables Consumer and Insurance reached $4.9 billion at December 31, 2015, including $617 million personal loans held for sale, compared to $3.8 billion at December 31, 2014.

Origination volume Consumer and Insurance totaled $4.4 billion in 2015 compared to $3.6 billion in 2014 (including $1.0 billion of direct auto loan originations during 2015 compared to $250 million during 2014).

Pretax core earnings (a non-GAAP measure) was $377 million in 2015 compared to $305 million in 2014.

Our segments are reported on a Segment Accounting Basis (referred to as “historical accounting basis” in previous SEC filings), as defined in Note 23 of the Notes to Consolidated Financial Statements in Item 8, and includes allocations of certain costs, such as interest expense and operating expenses, to the segments based on how management evaluates the business. This is a basis of accounting other than U.S. GAAP. See “Non-GAAP Financial Measures” under “Results of Operations” for (i) a reconciliation of our pretax earnings (loss) on a GAAP basis to a Segment Accounting Basis and (ii) a reconciliation of our pretax earnings (loss) on a Segment Accounting Basis to pretax core earnings.

HOW WE ASSESS OUR BUSINESS PERFORMANCE

Our pretax operating income is the primary metric by which we assess our business performance. Accordingly, we closely monitor the primary drivers of pretax operating income, which consist of the following:

Net Interest Income

We track the spread between the interest income earned on our finance receivables and the interest expense incurred on our debt, and continually monitor the components of our yield and our cost of funds.


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Net Credit Losses

The credit quality of our loans is driven by our long-standing underwriting philosophy, which takes into account the prospective customer’s household budget, and his or her willingness and capacity to repay the proposed loan. The profitability of our loan portfolio is directly connected to net credit losses; therefore, we closely analyze credit performance. We also monitor recovery rates because of their contribution to the reduction in the severity of our charge offs. Additionally, because delinquencies are an early indicator of future net credit losses, we analyze delinquency trends, adjusting for seasonality, to determine whether or not our loans are performing in line with our original estimates.

Operating Expenses

We assess our operational efficiency using various metrics and conduct extensive analysis to determine whether fluctuations in cost and expense levels indicate operational trends that need to be addressed. Our operating expense analysis also includes a review of origination and servicing costs to assist us in managing overall profitability.

Because loan volume and portfolio size determine the magnitude of the impact of each of the above factors on our earnings, we also closely monitor origination volume and annual percentage rate.

Recent Developments and Outlook    

OMH’S ACQUISITION OF ONEMAIN FINANCIAL HOLDINGS, LLC

On November 15, 2015, OMH completed its acquisition of OMFH for $4.5 billion in cash. As a result of the OneMain Acquisition, OMFH became a wholly owned, indirect subsidiary of OMH.

On November 12, 2015, in connection with the closing of the OneMain Acquisition, SFC’s wholly owned subsidiary, Springleaf Financial Cash Services, Inc. (“CSI”), entered into a revolving demand note (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 11 of the Notes to Consolidated Financial Statements in Item 8 for further information regarding the Independence Demand Note and other related party agreements with OMFH.

Although management intends for Springleaf and OneMain to become an integrated operation, the two operations will initially be separately maintained under the Springleaf and OneMain brands, with the expectation of migrating to the OneMain brand.

LENDMARK SALE

On November 12, 2015, certain subsidiaries of the Company (the “Branch Sellers”) entered into an agreement with Lendmark Financial Services, LLC (“Lendmark”), to sell 127 branches to Lendmark (the “Lendmark Sale”). These branches represent 15% of the branches and approximately $617 million, or 13%, of the personal loans held for investment and held for sale, of the Company as of December 31, 2015. See Note 2 of the Notes to Consolidated Financial Statements in Item 8 for further information on the Lendmark Sale.

The closing of the Lendmark Sale is subject to various conditions. There can be no assurance that the Lendmark Sale will close, or if it does, when the closing will occur.

ONLINE PLATFORM

In September 2015, we launched our iLoan brand and platform to provide our current and prospective customers the option of obtaining an unsecured personal loan via a digital platform. The new online lending product offers a customized solution for our customers to consolidate debt, make home improvements or receive cash. Our iLoan product leverages our central underwriting and servicing operations in addition to our expertise in analytics, marketing, central operations and internet technology developed to support our branch operations.

As of December 31, 2015, the size of our iLoan unsecured loans ranged from $2,550 - $25,000, with a maximum term of five years.


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OUTLOOK

Assuming the U.S. economy continues to experience slow to moderate growth, we expect to continue our long history of strong credit performance. We believe the strong credit quality of our personal loan portfolio is the result of our disciplined underwriting practices and ongoing collection efforts. We also continue to see growth in the volume of personal loan originations driven by the migration of customer activity from traditional channels such as direct mail to online channels (served by our centralized operations) where we believe we are well suited to capture volume due to our scale, technology, and deployment of advanced analytics.

In addition, with an experienced management team, proven access to the capital markets, and strong demand for consumer credit, we believe we are well positioned for future personal loan growth.

Results of Operations    

CONSOLIDATED RESULTS

See table below for our consolidated operating results. A further discussion of our operating results for each of our operating segments is provided under “Segment Results.”
(dollars in millions)
 
 
 
 
 
 
Years Ended December 31,
 
2015
 
2014
 
2013
 
 
 
 
 
 
 
Interest income
 
$
1,657

 
$
1,625

 
$
1,637

Interest expense
 
667

 
683

 
843

Provision for finance receivable losses
 
339

 
352

 
371

Net interest income after provision for finance receivable losses
 
651

 
590

 
423

Other revenues
 
243

 
745

 
161

Other expenses
 
735

 
657

 
709

Income (loss) before provision for (benefit from) income taxes
 
159

 
678

 
(125
)
Provision for (benefit from) income taxes
 
18

 
233

 
(49
)
Net income (loss)
 
141

 
445

 
(76
)
Net income attributable to non-controlling interests
 
127

 
48

 

Net income (loss) attributable to Springleaf Finance Corporation
 
$
14

 
$
397

 
$
(76
)

Comparison of Consolidated Results for 2015 and 2014

Interest income increased in 2015 when compared to 2014 due to the net of the following:
(dollars in millions)
 
 
 
2015 compared to 2014
 
Decrease in average net receivables
$
(350
)
Increase in yield
383

Decrease in interest income on finance receivables held for sale
(1
)
Total
$
32


Average net receivables decreased in 2015 primarily due to (i) our liquidating real estate loan portfolio, including the transfers of real estate loans with a total carrying value of $6.6 billion to finance receivables held for sale and the subsequent sales of nearly all of these real estate loans during 2014, (ii) the transfer of $608 million of our personal loans to finance receivables held for sale on September 30, 2015 as part of OMH’s initiative to close the OneMain Acquisition, and (iii) the liquidating status of the SpringCastle Portfolio. This decrease was partially offset by (i) higher personal loan average net receivables resulting from our continued focus on personal loan originations through our branch network and centralized operations and the launch of our auto loan product in June of 2014 and (ii) higher SpringCastle average net receivables resulting from the SAC Capital Contribution on July 31, 2014.


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Yield increased in 2015 primarily due to a higher proportion of personal loans, which have higher yields, as a result of the real estate loan sales during 2014. The increase in yield was partially offset by the launch of our auto loan product in June of 2014, which generally has lower yields.

Interest income on finance receivables held for sale decreased in 2015 primarily due to lower average finance receivables held for sale during 2015.

Interest expense decreased in 2015 when compared to 2014 due to the following:
(dollars in millions)
 
 
 
2015 compared to 2014
 
Decrease in average debt
$
(3
)
Decrease in weighted average interest rate
(13
)
Total
$
(16
)

Average debt decreased in 2015 primarily due to debt repurchases and repayments of $2.0 billion during 2015 and the elimination of $3.4 billion of debt associated with our mortgage securitizations as a result of the sales of the Company’s beneficial interests in the mortgage-backed certificates during 2014 and the resulting deconsolidation of the securitization trusts and their outstanding certificates reflected as long-term debt. These decreases were partially offset by net debt issuances pursuant to our consumer securitization transactions completed during 2015 and additional borrowings under our conduit facilities. See Note 13 of the Notes to Consolidated Financial Statements in Item 8 for further information on our consumer loan securitization transactions and borrowings under our conduit facilities.

Weighted average interest rate on our debt decreased in 2015 primarily due to the debt repurchases and repayments discussed above, which resulted in lower accretion of net discount, established at the date Fortress acquired a significant ownership interest in OMH (the “Fortress Acquisition”), applied to long-term debt. This decrease was partially offset by the elimination of debt associated with our mortgage securitizations discussed above, which generally have lower interest rates.

Provision for finance receivable losses decreased $13 million in 2015 when compared to 2014 primarily due to the net of the following:

Allowance requirements on our real estate loans decreased in 2015 as a result of the transfers of real estate loans with a total carrying value of $6.6 billion to finance receivables held for sale and the subsequent sales of nearly all of these real estate loans during 2014.

Net charge-offs increased in 2015 primarily due to (i) an additional seven months net charge-offs on the SpringCastle Portfolio during 2015 as a result of the SAC Capital Contribution on July 31, 2014 and (ii) higher net charge-offs on our personal loans primarily due to growth in personal loans during 2015 and a higher personal loan delinquency ratio in 2015. This increase was partially offset by lower net charge-offs on our real estate loans reflecting the 2014 transfer of real estate loans previously discussed.

Other revenues decreased $502 million in 2015 when compared to 2014 primarily due to the net of the following: (i) transactions that occurred in 2014 including net gain on sales of real estate loans and related trust assets of $626 million and net loss on repurchases and repayments of debt of $66 million, (ii) net increase in revenues associated with the 2014 real estate loans sales of $2 million (higher investment revenue generated from investing the proceeds of the sales, partially offset by lower insurance revenue reflecting the cancellations of dwelling policies as a result of the sales) and (iii) increase in other revenues — other of $57 million primarily due to 2015 interest income on the Independence Demand Note, higher interest income on SFC’s note receivable from SFI reflecting additional SFI borrowings during 2015 to fund the operations of its subsidiaries, and lower net charge-offs recognized on our finance receivables held for sale and provision adjustments for liquidated held for sale accounts during 2015. See Note 11 of the Notes to Consolidated Financial Statements in Item 8 for further information on the Independence Demand Note.


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Other expenses increased $78 million in 2015 when compared to 2014 due to the net of the following:

Salaries and benefits increased $43 million in 2015 primarily due to (i) higher salary accruals due to an increase in the number of employees, (ii) non-cash incentive compensation expense of $15 million recorded in the second quarter of 2015 related to the rights of certain executives to a portion of the cash proceeds from the sale of OMH’s common stock by the Initial Stockholder and (iii) compensation costs of $7 million in connection with the OneMain Acquisition and the Lendmark Sale. See Note 2 of the Notes to Consolidated Financial Statements in Item 8 for further information on OMH’s equity offering.

Other operating expenses increased $38 million in 2015 primarily due to (i) an additional seven months of servicing expenses for the SpringCastle Portfolio during 2015 as a result of the SAC Capital Contribution on July 31, 2014, (ii) higher advertising expenses due to increased direct mailings to pre-approved customers, our increased focus on e-commerce and social media marketing, and our marketing efforts on our auto loan product during 2015, (iii) increased application processing expenses reflecting a higher number of applications for auto loan products, and (iv) higher information technology expenses. The increase in other operating expenses was partially offset by (i) costs of $7 million recorded in 2014 related to the real estate loan sales, (ii) a $6 million reduction in reserves related to estimated Property Protection Insurance (“PPI”) claims, and (iii) lower subservicing fees on our real estate loans as a result of the real estate loan sales during 2014. See Note 20 of the Notes to Consolidated Financial Statements in Item 8 for further information on the loss contingencies related to PPI claims.

Insurance policy benefits and claims decreased $3 million in 2015 primarily due to favorable variances in benefit reserves.

Provision for income taxes totaled $18 million for 2015 compared to $233 million for 2014. The effective tax rate for 2015 was 11.1% compared to 34.4% for 2014. The effective tax rate for 2015 and 2014 differed from the federal statutory rate primarily due to the effect of the non-controlling interest in the SpringCastle Portfolio and state income taxes. See Note 19 of the Notes to Consolidated Financial Statements in Item 8 for further information on the effective rates.

Comparison of Consolidated Results for 2014 and 2013

Interest income decreased in 2014 when compared to 2013 due to the net of the following:
(dollars in millions)
 
 
 
2014 compared to 2013
 
Decrease in average net receivables
$
(384
)
Increase in yield
100

SpringCastle finance charges in 2014
211

Interest income on finance receivables held for sale
61

Total
$
(12
)

Average net receivables decreased in 2014 primarily due to our liquidating real estate loan portfolio, including the transfers of real estate loans with a total carrying value of $6.6 billion to finance receivables held for sale and the subsequent sales of nearly all of these real estate loans during 2014. This decrease was partially offset by higher personal loan average net receivables resulting from our continued focus on personal loan originations through our branch network and centralized operations.

Yield increased in 2014 primarily from our personal loans, which have higher yields. This increase also reflected a higher proportion of personal loans as a result of the transfers of real estate loans to finance receivables held for sale during 2014.

SpringCastle finance charges for 2014 included five months of finance charges on the SpringCastle Portfolio as a result of the SAC Capital Contribution on July 31, 2014.

Interest income on finance receivables held for sale in 2014 resulted from the transfers of real estate loans to finance receivables held for sale during 2014.

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Interest expense decreased in 2014 when compared to 2013 due to the net of the following:
(dollars in millions)
 
 
 
2014 compared to 2013
 
Decrease in average debt
$
(219
)
Increase in weighted average interest rate
29

SpringCastle net interest expense in 2014
30

Total
$
(160
)

Average debt decreased in 2014 primarily due to debt repurchases and repayments of $4.2 billion during 2014 and the elimination of $3.4 billion of debt associated with our mortgage securitizations as a result of the sales of the Company’s beneficial interests in the mortgage-backed certificates during 2014. These decreases were partially offset by net debt issuances pursuant to our consumer securitization transactions completed during 2014.

Weighted average interest rate on our debt increased in 2014 primarily due to the elimination of debt associated with our mortgage securitizations discussed above, which generally have lower interest rates. This increase was partially offset by the debt repurchases and repayments discussed above, which resulted in lower accretion of net discount applied to long-term debt.

SpringCastle interest expense for 2014 included five months of interest expense on long-term debt associated with the securitization of the SpringCastle Portfolio.

Provision for finance receivable losses decreased $19 million in 2014 when compared to 2013 primarily due to the net of the following:

Allowance requirements decreased in 2014 primarily due to a reduction in the allowance requirements on our real estate loans deemed to be purchased credit impaired finance receivables and troubled debt restructured (“TDR”) finance receivables subsequent to the Fortress Acquisition as a result of the transfers of real estate loans with a total carrying value of $6.6 billion to finance receivables held for sale and the subsequent sales of nearly all of these real estate loans during 2014. This decrease was partially offset by additional allowance requirements on our personal loans primarily due to growth in our personal loans during 2014 and a higher personal loan delinquency ratio at December 31, 2014.

Net charge-offs increased in 2014 primarily due to (i) higher net charge-offs on our personal loans primarily due to growth in our personal loans during 2014 and a higher personal loan delinquency ratio at December 31, 2014 and (ii) $37 million of recoveries recorded in June 2013 resulting from a sale of previously charged-off finance receivables in June 2013 (net of a $4 million adjustment for the subsequent buyback of certain finance receivables).

SpringCastle provision for finance receivable losses for 2014 included five months of provision for finance receivable losses associated with the SpringCastle Portfolio totaling $36 million.

Other revenues increased $584 million in 2014 when compared to 2013 primarily due to the net of the following: (i) net gain on sales of real estate loans and related trust assets of $626 million in 2014 which reflected the reversal of the remaining unaccreted GAAP basis for the real estate loans, less allowance for finance receivable losses that we established at the date of the Fortress Acquisition, (ii) increase in insurance revenues of $18 million primarily due to increases in credit and non-credit earned premiums reflecting higher originations of personal loans with longer terms during 2014, (iii) net loss on repurchases and repayments of debt of $66 million and $42 million in 2014 and 2013, respectively, which reflected repurchases of debt at net amounts greater than carrying value, and (iv) decrease in other revenues — other of $42 million primarily due to impairments recognized on our finance receivables held for sale and provision adjustments for liquidated held for sale accounts during 2014 and lower interest revenue on notes receivables from SFI, partially offset by servicing fee revenues for the servicing of the real estate loans included in the agreement, dated and effective August 1, 2014, to sell the servicing rights of the mortgage loans primarily underlying the mortgage securitizations completed during 2011 through 2013 to Nationstar, which we continued to service until the servicing transfer on September 30, 2014, under an interim servicing agreement.


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Other expenses decreased $52 million in 2014 when compared to 2013 due to the net of the following:

Salaries and benefits decreased $126 million in 2014 primarily due to $145 million of share-based compensation expense due to the grant of restricted stock units (“RSUs”) to certain of our executives and employees in the second half of 2013. This decrease was partially offset by (i) higher salary accruals reflecting an increase in number of employees and increased commissions related to originations of personal loans and (ii) employee retention and severance accruals of $3 million recorded in the second half of 2014 due to the workforce reduction of approximately 170 employees in 2014.

Other operating expenses increased $64 million in 2014 primarily due to (i) servicing expenses of $25 million for the SpringCastle Portfolio as a result of the SAC Capital Contribution on July 31, 2014, (ii) higher professional fees primarily due to costs relating to the real estate sales transactions, and (iii) higher advertising and information technology expenses during 2014.

Insurance policy benefits and claims increased $10 million in 2014 primarily due to unfavorable variances in benefit reserves and claim reserves.

Provision for income taxes totaled $233 million for 2014 compared to benefit from income taxes of $49 million for 2013. The effective tax rate for 2014 was 34.4% compared to 39.4% for 2013. The effective tax rate for 2014 differed from the federal statutory rate primarily due to the effect of the non-controlling interest in our joint venture, partially offset by the effect of our state income taxes. The effective tax rate for 2013 differed from the federal statutory rate primarily due to the effects of state income taxes and a change in tax status, partially offset by the effect of interest and penalties on prior year tax returns.

Non-GAAP Financial Measures

As a result of the Fortress Acquisition, we have applied purchase accounting rules in accordance with U.S. GAAP that have caused us to fair value our assets and liabilities (primarily our finance receivables, long-term debt, and allowance for finance receivable losses). The fair valuing of these components of our balance sheet has affected and continues to affect our finance charges and related yields, our interest expense and our provision and charge offs. However, we report the operating results of our Core Consumer Operations, Non-Core Portfolio, and Other using the Segment Accounting Basis, which (i) reflects our allocation methodologies for certain costs, primarily interest expense, loan loss reserves and acquisition costs to reflect the manner in which we assess our business results and (ii) excludes the impact of applying purchase accounting. These allocations and adjustments have a material effect on our reported segment basis income as compared to GAAP. See Note 23 of the Notes to Consolidated Financial Statements in Item 8 for a complete discussion of our segment accounting. We believe a Segment Accounting Basis (a basis other than U.S. GAAP) provides investors the basis for which management evaluates segment performance.

In addition, management uses pretax core earnings, a non-GAAP financial measure, as a key performance measure in evaluating the performance of our Core Consumer Operations. Pretax core earnings represents our income (loss) before provision for (benefit from) income taxes on a Segment Accounting Basis and excludes results of operations from our Non-Core Portfolio (Real Estate segment) and other non-core, non-originating legacy operations, gains (losses) resulting from accelerated long-term debt repayment and repurchases of long-term debt related to Core Consumer Operations (attributable to SFC), gains (losses) on fair value adjustments on debt related to Core Consumer Operations (attributable to SFC), costs associated with debt refinance related to Consumer and Insurance, and results of operations attributable to non-controlling interests. Pretax core earnings provides us with a key measure of our Core Consumer Operations’ performance and assists us in comparing its performance on an alternative basis. Management believes pretax core earnings is useful in assessing the profitability of our core business and uses pretax core earnings in evaluating our operating performance. Pretax core earnings is a non-GAAP measure and should be considered in addition to, but not as a substitute for or superior to, operating income, net income, operating cash flow, and other measures of financial performance prepared in accordance with U.S. GAAP.


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The reconciliations of (i) income (loss) before provision for (benefit from) income taxes on GAAP basis (purchase accounting) to the same amount under a Segment Accounting Basis and (ii) income (loss) before provision for (benefit from) income taxes on a Segment Accounting Basis to pretax core earnings were as follows:
(dollars in millions)
 
 
 
 
 
 
Years Ended December 31,
 
2015
 
2014
 
2013
 
 
 
 
 
 
 
Income (loss) before provision for (benefit from) income taxes - GAAP basis
 
$
159

 
$
678

 
$
(125
)
Adjustments:
 
 
 
 
 
 
Interest income (a)
 
(11
)
 
(85
)
 
(181
)
Interest expense (b)
 
127

 
133

 
140

Provision for finance receivable losses (c)
 
17

 
(19
)
 
(1
)
Repurchases and repayments of long-term debt (d)
 

 
16

 
(10
)
Fair value adjustments on debt (e)
 

 
8

 
57

Sales of finance receivables held for sale originated as held for investment (f)
 

 
(434
)
 

Amortization of other intangible assets (g)
 
4

 
5

 
5

Other (h)
 
13

 
26

 
7

Income (loss) before provision for (benefit from) income taxes - Segment Accounting Basis
 
309

 
328

 
(108
)
Adjustments:
 
 
 
 
 
 
Pretax operating loss - Non-Core Portfolio Operations
 
172

 
5

 
181

Pretax operating loss - Other non-core/non-originating legacy operations
 
23

 
2

 
131

Net loss from accelerated repayment/repurchase of debt - Core Consumer Operations (attributable to SFC)
 

 
17

 
5

Costs associated with debt refinance - Consumer and Insurance
 

 
1

 

Operating income attributable to non-controlling interests
 
(127
)
 
(48
)
 

Pretax core earnings (non-GAAP)
 
$
377

 
$
305

 
$
209

                                      
(a)
Interest income adjustments consist of: (i) the net purchase accounting impact of the amortization (accretion) of the net premium (discount) assigned to finance receivables and (ii) the impact of identifying purchased credit impaired finance receivables as compared to the historical values of finance receivables.

Components of interest income adjustments consisted of:
(dollars in millions)
 
 
 
 
 
 
Years Ended December 31,
 
2015
 
2014
 
2013
 
 
 
 
 
 
 
Accretion of net discount applied to non-credit impaired net finance receivables
 
$
(12
)
 
$
(66
)
 
$
(151
)
Purchased credit impaired finance receivables finance charges
 
(1
)
 
(26
)
 
(46
)
Elimination of accretion or amortization of historical unearned points and fees, deferred origination costs, premiums, and discounts
 
2

 
7

 
16

Total
 
$
(11
)
 
$
(85
)
 
$
(181
)

(b)
Interest expense adjustments primarily includes the accretion of the net discount applied to our long term debt as part of purchase accounting.

Components of interest expense adjustments were as follows:
(dollars in millions)
 
 
 
 
 
 
Years Ended December 31,
 
2015
 
2014
 
2013
 
 
 
 
 
 
 
Accretion of net discount applied to long-term debt
 
$
131

 
$
145

 
$
180

Elimination of accretion or amortization of historical discounts, premiums, commissions, and fees
 
(4
)
 
(12
)
 
(40
)
Total
 
$
127

 
$
133

 
$
140


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(c)
Provision for finance receivable losses consists of the adjustment to reflect the difference between our allowance adjustment calculated under our Segment Accounting Basis and our GAAP basis.

Components of provision for finance receivable losses adjustments were as follows:
(dollars in millions)
 
 
 
 
 
 
Years Ended December 31,
 
2015
 
2014
 
2013
 
 
 
 
 
 
 
Allowance for finance receivable losses adjustments
 
$
22

 
$
24

 
$
101

Net charge-offs
 
(5
)
 
(43
)
 
(102
)
Total
 
$
17

 
$
(19
)
 
$
(1
)

(d)
Repurchases and repayments of long-term debt adjustments reflect the impact on acceleration of the accretion of the net discount or amortization of the net premium applied to long-term debt.

(e)
Fair value adjustments on debt reflect differences between Segment Accounting Basis and GAAP basis. On a Segment Accounting Basis, certain long-term debt components are marked-to-market on a recurring basis and are no longer marked-to-market on a recurring basis after the application of purchase accounting at the time of the Fortress Acquisition.

(f)
Fair value adjustments on sales of finance receivables held for sale originated as held for investment reflect the impact of carrying value differences between Segment Accounting Basis and purchase accounting basis when measuring mark to market for loans held for sale.

(g)
Amortization of other intangible assets reflects the net impact of amortization associated with identified intangibles as part of purchase accounting and deferred costs impacted by purchase accounting.

(h)
“Other” items reflect differences between Segment Accounting Basis and GAAP basis relating to various items such as the elimination of deferred charges, adjustments to the basis of other real estate assets, fair value adjustments to fixed assets, adjustments to insurance claims and policyholder liabilities, and various other differences all as of the date of the Fortress Acquisition.

Segment Results    

See Note 23 of the Notes to Consolidated Financial Statements in Item 8 for a description of our segments. Management considers the Consumer and Insurance segment and Acquisitions and Servicing segment as our Core Consumer Operations and the Real Estate segment as our Non-Core Portfolio. As a result of the Fortress Acquisition, we have applied purchase accounting. However, we report the operating results of our Core Consumer Operations, Non-Core Portfolio, and Other using the Segment Accounting Basis, which (i) reflects our allocation methodologies for certain costs, primarily interest expense, loan loss reserves and acquisition costs to reflect the manner in which we assess our business results and (ii) excludes the impact of applying purchase accounting. These allocations and adjustments have a material effect on our reported segment basis income as compared to GAAP. We believe a Segment Accounting Basis (a basis other than U.S. GAAP) provides investors the basis for which management evaluates segment performance. See Note 23 of the Notes to Consolidated Financial Statements in Item 8 for reconciliations of segment totals to consolidated financial statement amounts and for further discussion of the differences in our Segment Accounting Basis and GAAP.


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We allocate revenues and expenses (on a Segment Accounting Basis) to each segment using the following methodologies:

Interest income
Directly correlated with a specific segment.
Interest expense
Acquisition and Servicing - includes interest expense specifically identified to our SpringCastle portfolio
Consumer and Insurance, Real Estate and Other - The Company has securitization debt, secured term loan and unsecured debt. The Company first allocates interest expense to its segments based on actual expense for securitizations and secured term debt and using a weighted average for unsecured debt allocated to the segments. Average unsecured debt allocations for the periods presented are as follows:
Subsequent to the OneMain Acquisition
Total average unsecured debt is allocated as follows:
l  Consumer and Insurance - receives remainder of unallocated average debt; and
l  Real Estate and Other - at 100% of asset base. (Asset base represents the average net finance receivables including finance receivables held for sale.)
The net effect of the change in debt allocation and asset base methodologies for 2015 had it been in place as of the beginning of the year would be an increase in interest expense of $208 million for Consumer and Insurance and a decrease in interest expense of $157 million and $51 million for Real Estate and Other, respectively.
For the period third quarter 2014 to the OneMain Acquisition
Total average unsecured debt is allocated to Consumer and Insurance, Real Estate and Other, such that the total debt allocated across each segment equals 83%, up to 100% and 100% of each of its respective asset base. Any excess is allocated to Consumer and Insurance.
Average unsecured debt is allocated after average securitized debt to achieve the calculated average segment debt.
Asset base represents the following:
l  Consumer and Insurance - average net finance receivables including average net finance receivables held for sale;
l  Real Estate - average net finance receivables including average net finance receivables held for sale, cash and cash equivalents, investments including proceeds from Real Estate sales; and
l  Other - average net finance receivables other than the periods listed below:
l  May 2015 to the OneMain Acquisition - average net finance receivables and cash and cash equivalents less proceeds from equity issuance in 2015, operating cash reserve and cash included in other segments.
l  February 2015 to April 2015 - average net finance receivables and cash and cash equivalents less operating cash reserve and cash included in other segments.
Prior to third quarter 2014
The ratio of each segment average net finance receivables to total average net finance receivables is calculated. This ratio is applied to average total debt to calculate the average segment debt. Average unsecured debt is allocated after average securitized debt and secured term loan to achieve the calculated average segment debt.
Provision for finance receivable losses
Directly correlated with a specific segment, except for allocations to Other, which are based on the remaining delinquent accounts as a percentage of total delinquent accounts.
Other revenues
Directly correlated with a specific segment, except for: (i) net gain (loss) on repurchases and repayments of debt, which is allocated to the segments based on the interest expense allocation of debt and (ii) gains and losses on foreign currency exchange, which is allocated to the segments based on the interest expense allocation of debt.
Salaries and benefits
Directly correlated with a specific segment. Other salaries and benefits not directly correlated with a specific segment are allocated to each of the segments based on services provided.
Other operating expenses
Directly correlated with a specific segment. Other operating expenses not directly correlated with a specific segment are allocated to each of the segments based on services provided.
Insurance policy benefits and claims
Directly correlated with a specific segment.

We evaluate the performance of each of our segments based on its pretax operating earnings.


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CORE CONSUMER OPERATIONS

Pretax operating results and selected financial statistics for Consumer and Insurance (which are reported on a Segment Accounting Basis), and Acquisitions and Servicing are presented in the table below on an aggregate basis:
(dollars in millions)
 
 
 
 
 
 
At or for the Years Ended December 31,
 
2015
 
2014
 
2013
 
 
 
 
 
 
 
Interest income
 
$
1,570

 
$
1,123

 
$
721

Interest expense
 
277

 
199

 
149

Provision for finance receivable losses
 
323

 
236

 
117

Net interest income after provision for finance receivable losses
 
970

 
688

 
455

Other revenues
 
217

 
200

 
197

Other expenses
 
683

 
553

 
448

Pretax operating income
 
504

 
335

 
204

Pretax operating income attributable to non-controlling interests
 
127

 
48

 

Pretax operating income attributable to Springleaf Finance Corporation
 
$
377

 
$
287

 
$
204

 
 
 
 
 
 
 
Consumer and Insurance
 
 
 
 
 
 
Finance receivables held for investment:
 
 
 
 
 
 
Net finance receivables
 
$
4,286

 
$
3,775

 
$
3,129

Number of accounts
 
887,523

 
908,808

 
826,659

TDR finance receivables
 
$
29

 
$
22

 
$
15

Allowance for finance receivable losses - TDR
 
$
8

 
$
2

 
$
1

 
 
 
 
 
 
 
Finance receivables held for sale:
 
 
 
 
 
 
Net finance receivables
 
$
617

 
$

 
$

Number of accounts
 
145,736

 

 

 
 
 
 
 
 
 
Finance receivables held for investment and held for sale:
 
 
 
 
 
 
Average net receivables
 
$
4,250

 
$
3,374

 
$
2,789

Yield
 
26.23
 %
 
27.01
 %
 
25.85
 %
Gross charge-off ratio (a)
 
5.92
 %
 
5.64
 %
 
5.19
 %
Recovery ratio (b)
 
(0.86
)%
 
(0.71
)%
 
(1.67
)%
Charge-off ratio (a) (b)
 
5.06
 %
 
4.93
 %
 
3.52
 %
Delinquency ratio
 
3.16
 %
 
2.80
 %
 
2.59
 %
Origination volume
 
$
4,434

 
$
3,612

 
$
3,240

Number of accounts originated
 
818,758

 
775,581

 
786,805

 
 
 
 
 
 
 
Acquisitions and Servicing
 
 
 
 
 
 
Net finance receivables
 
$
1,703

 
$
2,091

 
$

Number of accounts
 
232,383

 
277,533

 

Average net receivables (c)
 
$
1,887

 
$
2,174

 
$

Yield
 
24.14
 %
 
23.21
 %
 
 %
Net charge-off ratio
 
3.49
 %
 
3.70
 %
 
 %
Delinquency ratio
 
4.07
 %
 
4.69
 %
 
 %
                                      
(a)
The gross charge-off ratio and charge-off ratio in 2013 reflect $15 million of additional charge-offs recorded in March of 2013 (on a Segment Accounting Basis) related to our change in charge-off policy for personal loans effective March 31, 2013. Excluding these additional charge-offs, the gross charge-off ratio would have been 4.66% in 2013.

(b)
The recovery ratio and charge-off ratio in 2013 reflects $23 million of recoveries on charged-off personal loans resulting from a sale of our charged-off finance receivables in June of 2013, net of a $3 million adjustment for the subsequent buyback of certain personal loans.

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Excluding the impacts of the $15 million of additional charge-offs and the $23 million of recoveries on charged-off personal loans, the charge-off ratio would have been 3.82% in 2013.

(c)
Acquisitions and Servicing average net receivables for 2014 reflect a five-month average since the SAC Capital Contribution occurred on July 31, 2014.

Comparison of Pretax Operating Results for 2015 and 2014

Interest income increased $447 million in 2015 when compared to 2014 due to the following:

Interest income — Consumer and Insurance increased $204 million in 2015 primarily due to the net of the following:

Average net receivables increased in 2015 primarily due to increased originations on personal loans resulting from our continued focus on personal loans, including the launch of our auto loan product in June of 2014. At December 31, 2015, we had over 85,000 auto loans totaling nearly $1.0 billion compared to 19,000 auto loans totaling $238 million at December 31, 2014.

Yield decreased in 2015 primarily due to the higher proportion of our auto loan product, which generally has lower yields.

Interest income on finance receivables held for sale of $43 million in 2015 resulted from the transfer of personal loans to finance receivables held for sale on September 30, 2015.

Interest income — Acquisitions and Servicing increased $243 million in 2015 primarily due to an additional seven months of finance charges on the SpringCastle Portfolio during the 2015 period as a result of the SAC Capital Contribution on July 31, 2014. The increase was partially offset by the liquidating status of the acquired SpringCastle Portfolio.

Interest expense increased $78 million in 2015 when compared to 2014 due to the following:

Interest expense — Consumer and Insurance increased $27 million in 2015 primarily due to additional funding required to support increased originations of personal loans. This increase was partially offset by a reduction in the utilization of financing from unsecured notes that was replaced by consumer loan securitizations and additional borrowings under our conduit facilities, which generally have lower interest rates.

Interest expense — Acquisitions and Servicing increased $51 million in 2015 primarily due to (i) an additional seven months of interest expense on the long-term debt associated with the securitization of the SpringCastle Portfolio during the 2015 period as a result of the SAC Capital Contribution on July 31, 2014 and (ii) the refinance of the SpringCastle 2013-A Notes in October of 2014, which resulted in an increase in average debt.

Provision for finance receivable losses increased $87 million in 2015 when compared to 2014 due to the following:

Provision for finance receivable losses — Consumer and Insurance increased $55 million in 2015 primarily due to higher net charge-offs on our personal loans during 2015 reflecting (i) growth in our personal loans in 2015 and (ii) a higher personal loan delinquency ratio at December 31, 2015.

Provision for finance receivable losses — Acquisitions and Servicing increased $32 million in 2015 primarily due to an additional seven months of provision for finance receivable losses associated with the SpringCastle Portfolio during the 2015 period as a result of the SAC Capital Contribution on July 31, 2014. This increase was partially offset by the improved credit quality of the SpringCastle Portfolio reflecting improvements in servicing of the acquired portfolio and its liquidating status.

Other revenues increased $17 million in 2015 when compared to 2014 primarily due to the net of the following: (i) net loss on repurchases and repayments of debt of $28 million in 2014 and (ii) decrease in insurance revenues of $8 million primarily due to decreases in credit and non-credit earned premiums reflecting the cancellations of dwelling policies as a result of the real estate loan sales during 2014 and fewer non-credit policies written, respectively.


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Other expenses increased $130 million in 2015 when compared to 2014 due to the following:

Other expenses — Consumer and Insurance increased $99 million in 2015 due to the net of the following:

Salaries and benefits increased $57 million in 2015 primarily due to (i) higher variable compensation reflecting increased originations of personal loans, (ii) increased staffing in our centralized operations, (iii) compensation costs of $6 million in connection with the OneMain Acquisition and the Lendmark Sale, and (iv) the redistribution of the allocation of salaries and benefit expenses as a result of the real estate loan sales in 2014.

Other operating expenses increased $45 million in 2015 primarily due to (i) higher advertising expenses reflecting our increased focus on e-commerce and social media marketing and our marketing efforts on our auto loan product during 2015, (ii) higher information technology expenses reflecting increased depreciation and software maintenance as a result of software purchases and the capitalization of internally developed software, (iii) higher occupancy costs resulting from increased general maintenance costs of our branches and higher leasehold improvement amortization expense from the servicing facilities added in 2014, (iv) higher professional fees relating to legal and audit services, (v) higher credit and collection related costs reflecting growth in personal loans, including our auto loan product, and (vi) the redistribution of the allocation of other operating expenses as a result of the real estate loan sales in 2014.

Insurance policy benefits and claims decreased $3 million in 2015 primarily due to favorable variances in benefit reserves.

Other expenses — Acquisitions and Servicing increased $31 million in 2015 reflecting higher other operating expenses in 2015 primarily due to an additional seven months of other operating expenses during 2015 period as a result of the SAC Capital Contribution on July 31, 2014.

Comparison of Pretax Operating Results for 2014 and 2013

Interest income increased $402 million in 2014 when compared to 2013 due to the following:

Interest income — Consumer and Insurance increased $190 million in 2014 primarily due to the following:

Average net receivables increased in 2014 primarily due to increased originations of personal loans resulting from our continued focus on personal loans.

Yield increased in 2014 primarily due to pricing of new personal loans at higher state specific rates with concentrations in states with more favorable returns.

Interest income — Acquisitions and Servicing of $212 million in 2014 reflected five months of finance charges on the SpringCastle Portfolio.

Interest expense increased $50 million in 2014 when compared to 2013 due to the following:

Interest expense — Consumer and Insurance increased $14 million in 2014 primarily due to additional funding required to support increased originations of personal loans. This increase was partially offset by less utilization of financing from unsecured notes that was replaced by consumer loan securitizations, which generally have lower interest rates.

Interest expense — Acquisitions and Servicing of $36 million in 2014 reflected five months of interest expense on long-term debt associated with the securitization of the SpringCastle Portfolio and the refinance of the SpringCastle 2013-A Notes in October of 2014, which resulted in an increase in average debt.

Provision for finance receivable losses increased $119 million in 2014 when compared to 2013 due to the following:

Provision for finance receivable losses — Consumer and Insurance increased $83 million in 2014 primarily due to (i) higher net charge-offs and additional allowance requirements on our personal loans resulting from increased originations of personal loans in 2014 and a higher personal loan delinquency ratio at December 31, 2014 and (ii) $23

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million of recoveries recorded in June 2013 on previously charged-off personal loans resulting from a sale of these loans in June 2013 (net of a $3 million adjustment for the subsequent buyback of certain personal loans).

Provision for finance receivable losses — Acquisitions and Servicing of $36 million in 2014 reflected five months of provision for finance receivable losses on the SpringCastle Portfolio.

Other revenues increased $3 million in 2014 when compared to 2013 primarily due to the net of the following: (i) increase in insurance revenues of $18 million primarily due to increases in credit and non-credit earned premiums reflecting higher originations of personal loans with longer terms in 2014, (ii) increase in investment income of $8 million primarily due to investment income generated from an investment in SpringCastle debt, which is eliminated in our consolidated results, and (iii) net loss on repurchases and repayments of debt of $28 million and $5 million in 2014 and 2013, respectively, which reflected repurchases of debt at net amounts greater than carrying value.

Other expenses increased $105 million in 2014 when compared to 2013 due to the following:

Other expenses — Consumer and Insurance increased $75 million in 2014 due to the following:

Other operating expenses increased $45 million in 2014 primarily due to higher professional fees, advertising, and information technology expenses and the redistribution of the allocation of other operating expenses as a result of the real estate loan sales in 2014.

Salaries and benefits increased $20 million in 2014 primarily due to increased originations of personal loans and the redistribution of the allocation of salaries and benefit expenses as a result of the real estate loan sales in 2014.

Insurance policy benefits and claims increased $10 million in 2014 primarily due to unfavorable variances in benefit reserves and claim reserves.

Other expenses — Acquisitions and Servicing of $30 million in 2014 reflected five months of operating expenses allocated to Acquisitions and Servicing.


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NON-CORE PORTFOLIO

Pretax operating results and selected financial statistics for Real Estate (which are reported on a Segment Accounting Basis) were as follows:
(dollars in millions)
 
 
 
 
 
 
At or for the Years Ended December 31,
 
2015
 
2014
 
2013
 
 
 
 
 
 
 
Interest income
 
$
68

 
$
401

 
$
690

Interest expense
 
213

 
349

 
539

Provision for finance receivable losses
 
(2
)
 
128

 
255

Net interest loss after provision for finance receivable losses
 
(143
)
 
(76
)
 
(104
)
Other revenues (a)
 
4

 
162

 
7

Other expenses
 
33

 
91

 
84

Pretax operating income (loss)
 
$
(172
)
 
$
(5
)
 
$
(181
)
 
 
 
 
 
 
 
Finance receivables held for investment:
 
 
 
 
 
 
Net finance receivables
 
$
565

 
$
670

 
$
9,199

Number of accounts
 
21,631

 
22,852

 
118,618

TDR finance receivables
 
$
160

 
$
160

 
$
3,241

Allowance for finance receivable losses - TDR
 
$
57

 
$
56

 
$
751

Average net receivables
 
$
619

 
$
5,055

 
$
9,783

Yield
 
8.99
%
 
6.93
%
 
7.06
%
Loss ratio (b) (c)
 
3.71
%
 
2.11
%
 
2.22
%
Delinquency ratio
 
7.71
%
 
8.07
%
 
8.08
%
 
 
 
 
 
 
 
Finance receivables held for sale:
 
 
 
 
 
 
Net finance receivables
 
$
182

 
$
200

 
$

Number of accounts
 
3,196

 
3,578

 

TDR finance receivables
 
$
187

 
$
194

 
$

                                      
(a)
For purposes of our segment reporting presentation in Note 23 of the Notes to Consolidated Financial Statements in Item 8, we have combined the lower of cost or fair value adjustments recorded on the date the real estate loans were transferred to finance receivables held for sale with the final gain (loss) on the sales of these loans.

(b)
The loss ratio in 2014 reflects $2 million of recoveries on charged-off real estate loans resulting from a sale of previously charged-off real estate loans in March of 2014. Excluding these recoveries, our Real Estate loss ratio would have been 2.16% in 2014.

(c)
The loss ratio in 2013 reflects $9 million of recoveries on charged-off real estate loans resulting from a sale of our charged-off finance receivables in June of 2013, net of a $1 million adjustment for the subsequent buyback of certain real estate loans. Excluding these recoveries, our Real Estate loss ratio would have been 2.31% in 2013.

Comparison of Pretax Operating Results for 2015 and 2014

Interest income decreased $333 million in 2015 when compared to 2014 due to the following:

Finance charges decreased $295 million in 2015 primarily due to the net of the following:

Average net receivables decreased in 2015 primarily due to the continued liquidation of the real estate portfolio, including the transfers of real estate loans with a total carrying value of $7.1 billion to finance receivables held for sale and the subsequent sales of nearly all of these real estate loans during 2014.

Yield increased in 2015 primarily due to a higher proportion of our remaining real estate loans that are secured by second mortgages, which generally have higher yields.


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Interest income on real estate loans held for sale decreased $38 million in 2015 primarily due to lower average real estate loans held for sale during 2015.

Interest expense decreased $136 million in 2015 when compared to 2014 primarily due to the sales of the Company’s beneficial interests in the mortgage-backed retained certificates during 2014 and the resulting deconsolidation of the securitization trusts and their outstanding certificates reflected as long-term debt.

Provision for finance receivable losses decreased $130 million in 2015 when compared to 2014 due to reductions in net charge-offs and the allowance requirements on our real estate loans recorded during 2015 as a result of (i) the transfers of real estate loans with a total carrying value of $7.1 billion to finance receivables held for sale and the subsequent sales of nearly all of these real estate loans during 2014 and (ii) a lower real estate loan delinquency ratio at December 31, 2015.

Other revenues decreased $158 million in 2015 when compared to 2014 primarily due to the net of the following: (i) transactions that occurred in 2014 including net gain on sales of real estate loans and related trust assets of $192 million, net gain on fair value adjustments on debt of $8 million, and net loss on repurchases and repayments of debt of $22 million, (ii) increase in other revenues — other of $10 million primarily due to lower net charge-offs recognized on real estate finance receivables held for sale and provision adjustments for liquidated real estate held for sale accounts during 2015, and (iii) investment revenues of $9 million in 2015 which reflected investment income generated from investing the proceeds of the real estate loan sales during 2014.

Other expenses decreased $58 million in 2015 when compared to 2014 due to the following:

Other operating expenses decreased $34 million in 2015 primarily due to lower professional services expenses and credit and collection related costs resulting from the sales of real estate loans during 2014. This decrease also reflected the redistribution of the allocation of other operating expenses as a result of the real estate loan sales in 2014.

Salaries and benefits decreased $24 million in 2015 primarily due to the redistribution of the allocation of salaries and benefit expenses as a result of the real estate loan sales in 2014.

Comparison of Pretax Operating Results for 2014 and 2013

Interest income decreased $289 million in 2014 when compared to 2013 due to the net of the following:

Finance charges decreased $340 million in 2014 primarily due to the following:

Average net receivables decreased in 2014 primarily due to the continued liquidation of the real estate portfolio, including the transfers of real estate loans with a total carrying value of $7.1 billion to finance receivables held for sale and the subsequent sales of nearly all of these real estate loans during 2014.

Yield decreased in 2014 reflecting a higher proportion of TDR finance receivables during the first half of 2014, which generally have lower rates than non-modified real estate loans. The decrease in yield was partially offset by a higher proportion of our remaining real estate loans that are secured by second mortgages, which generally have higher yields.

Interest income on real estate loans held for sale in 2014 resulted from the transfers of real estate loans to held for sale during 2014.

Interest expense decreased $190 million in 2014 when compared to 2013 primarily due to lower secured term loan interest expense allocated to Real Estate and lower securitization interest expense as a result of the sales of the Company’s beneficial interests in the mortgage-backed retained certificates related to its previous mortgage securitization transactions.

Provision for finance receivable losses decreased $127 million in 2014 when compared to 2013 primarily due to a reduction in the allowance requirements recorded during 2014 as a result of the transfers of real estate loans with a total carrying value of $7.1 billion to finance receivables held for sale and the subsequent sales of nearly all of these real estate loans during 2014. This decrease was partially offset by $9 million of recoveries on previously charged-off real estate loans resulting from a sale of these loans in June 2013 (net of a $1 million adjustment for the subsequent buyback of certain real estate loans).

Other revenue increased $155 million in 2014 when compared to 2013 primarily due to the net of the following: (i) net gain on sales of real estate loans and related trust assets of $192 million in 2014 which primarily reflected consideration of amounts

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greater than the equity basis of the real estate loans at the date of sale, including proceeds of $39 million from the related MSR Sale, partially offset by the lower of cost or fair value adjustments recorded on the dates the real estate loans were transferred to finance receivables held for sale (consistent with our segment reporting presentation, we have combined the lower of cost or fair value adjustments with the final gain (loss) on the sales of these loans), (ii) net loss on repurchases and repayments of debt of $22 million and $46 million in 2014 and 2013, respectively, which reflected acceleration of amortization of deferred costs and repurchases of debt at net amounts greater than carrying value, and (iii) net gain on fair value adjustments on debt of $8 million and $57 million in 2014 and 2013, respectively, which reflected differences between Segment Accounting Basis and GAAP basis. On a Segment Accounting Basis, certain long-term debt components were marked-to-market on a recurring basis and were no longer marked-to-market on a recurring basis after the application of purchase accounting at the time of the Fortress Acquisition.

OTHER

“Other” consists of our other non-core, non-originating legacy operations, which are isolated by geographic market and/or distribution channel from our prospective Core Consumer Operations and our Non-Core Portfolio. These operations include: (i) our legacy operations in 14 states where we had also ceased branch-based personal lending; (ii) our liquidating retail sales finance portfolio (including retail sales finance accounts from its legacy auto finance operation); (iii) our lending operations in Puerto Rico and the U.S. Virgin Islands; and (iv) the operations of our United Kingdom subsidiary.

Pretax operating results of the Other components (which are reported on a Segment Accounting Basis) were as follows:
(dollars in millions)
 
 
 
 
 
 
Years Ended December 31,
 
2015
 
2014
 
2013
 
 
 
 
 
 
 
Interest income
 
$
8

 
$
16

 
$
45

Interest expense (a)
 
55

 
7

 
15

Provision for finance receivable losses
 
1

 
7

 

Net interest income (loss) after provision for finance receivable losses
 
(48
)
 
2

 
30

Other revenues (b)
 
42

 
6

 
13

Other expenses (c) (d)
 
17

 
10

 
174

Pretax operating loss
 
$
(23
)
 
$
(2
)
 
$
(131
)
                                      
(a)
Interest expense for 2015 when compared to 2014 reflected higher interest expense on unsecured debt, which was allocated based on a higher cash balance resulting from the proceeds from the real estate sales in 2014.

(b)
Other revenues for 2015 included (i) 2015 interest income on the Independence Demand Note and (ii) higher interest income on SFC’s note receivable from SFI reflecting additional SFI borrowings during 2015 to fund the operations of its subsidiaries. See Note 11 of the Notes to Consolidated Financial Statements in Item 8 for further information on the Independence Demand Note.

(c)
Other expenses for 2015 included non-cash incentive compensation expense of $15 million recorded in the second quarter of 2015 related to the rights of certain executives to a portion of the cash proceeds from the sale of OMH’s common stock by the Initial Stockholder.

(d)
Other expenses for 2013 included $145 million of share-based compensation expense due to the grant of RSUs to certain of our executives and employees in the second half of 2013.

Net finance receivables of the Other components (which are reported on a Segment Accounting Basis) were as follows:
(dollars in millions)
 
 
 
 
 
 
December 31,
 
2015
 
2014
 
2013
 
 
 
 
 
 
 
Net finance receivables:
 
 
 
 
 
 
Personal loans
 
$
17

 
$
29

 
$
38

Real estate loans
 

 
6

 
8

Retail sales finance
 
24

 
50

 
103

Total
 
$
41

 
$
85

 
$
149



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Credit Quality    

Our customers encompass a wide range of borrowers. In the consumer finance industry, they are described as prime or near-prime at one extreme and non-prime or sub-prime (less creditworthy) at the other. Our customers’ incomes are generally near the national median but our customers may vary from national norms as to their debt-to-income ratios, employment and residency stability, and/or credit repayment histories. In general, our customers have lower credit quality and require significant levels of servicing.

We may offer borrowers the opportunity to defer their personal loan by extending the 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 twelve month period unless it is determined that an exception is warranted.

In addition to deferrals, we may also offer borrowers the opportunity to cure. Delinquent accounts are offered the opportunity to cure 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. Cures are reviewed by a central and independent loan review team.

A full file review is completed when a loan is 60 days past due. This review 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. Litigation and repossession are used as a last resort after all other collection efforts to resolve the delinquency and protect our interest in the personal loan have been exhausted. Litigation and repossession require approval.

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 as it would 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.

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 record an allowance for loan losses to cover expected losses on our finance receivables.


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The following is a summary of net finance receivables by type and by days delinquent:
(dollars in millions)
 
Personal
Loans
 
SpringCastle
Portfolio
 
Real Estate
Loans
 
Retail
Sales Finance
 
Total
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
 
 
 
Net finance receivables: *
 
 
 
 
 
 
 
 
 
 
60-89 days past due
 
$
49

 
$
26

 
$
19

 
$

 
$
94

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 delinquent finance receivables
 
158

 
66

 
39

 
1

 
264

Current
 
4,077

 
1,588

 
486

 
22

 
6,173

30-59 days past due
 
65

 
49

 
13

 

 
127

Total
 
$
4,300

 
$
1,703

 
$
538

 
$
23

 
$
6,564

 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
 
 
 
Net finance receivables: *
 
 
 
 
 
 
 
 
 
 
60-89 days past due
 
$
36

 
$
34

 
$
13

 
$
1

 
$
84

90-119 days past due
 
30

 
21

 
9

 

 
60

120-149 days past due
 
24

 
17

 
5

 
1

 
47

150-179 days past due
 
21

 
16

 
4

 

 
41

180 days or more past due
 
2

 
2

 
13

 

 
17

Total delinquent finance receivables
 
113

 
90

 
44

 
2

 
249

Current
 
3,632

 
1,937

 
577

 
45

 
6,191

30-59 days past due
 
55

 
64

 
18

 
1

 
138

Total
 
$
3,800

 
$
2,091

 
$
639

 
$
48

 
$
6,578

                                      
*
Purchased credit impaired finance receivables are accounted for on a pool basis. For purposes of allocating the pool carrying amount to individual finance receivables, the Company applied the ratio of the carrying value to the gross receivable balance of each pool in developing the above table. Finance receivables greater than 180 days delinquent within a PCI pool are not ascribed any carrying value and are not used in deriving the aforementioned ratio.

TROUBLED DEBT RESTRUCTURING

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 and held for sale were as follows:
(dollars in millions)
 
Personal
Loans *
 
SpringCastle
Portfolio
 
Real Estate
Loans *
 
Total
 
 
 
 
 
 
 
 
 
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

 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
 
TDR net finance receivables
 
$
22

 
$
10

 
$
196

 
$
228

Allowance for TDR finance receivable losses
 
$
1

 
$
3

 
$
32

 
$
36

Number of TDR accounts
 
8,069

 
1,159

 
3,463

 
12,691


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*
TDR finance receivables held for sale included in the table above were as follows:
(dollars in millions)
 
Personal
Loans
 
Real Estate
Loans
 
Total
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
TDR net finance receivables
 
$
2

 
$
92

 
$
94

Number of TDR accounts
 
738

 
1,322

 
2,060

 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
TDR net finance receivables
 
$

 
$
91

 
$
91

Number of TDR accounts
 

 
1,284

 
1,284


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.

Securitizations and Borrowings from Revolving Conduit Facilities

During 2015, we completed two consumer loan securitizations. We also sold certain SpringCastle 2014-A Notes that were previously retained and repaid the entire outstanding principal balance of the 2013-A Trust’s subordinate asset-backed notes, plus accrued and unpaid interest. See “Structured Financings” for further information each of our securitization transactions.

During 2015, we completed two auto loan conduit securitizations and one personal loan conduit securitization. We also extended the revolving periods on two existing conduits, amended an existing conduit to remove the minimum balance requirement and reduce the maximum principal balance, and drew $1.2 billion under the notes of our existing conduits.

See Note 13 of the Notes to Consolidated Financial Statements in Item 8 for further information on our personal loan securitizations and conduit facilities.

Subsequent to December 31, 2015, we completed the following transactions:

On January 15, 2016, we drew $298 million under the variable funding notes issued by the Springleaf Funding Trust 2013-VFN1 (the “Springleaf 2013-VFN1 Trust”) and repaid $300 million on the variable funding notes issued by the Mill River Funding Trust 2015-VFN1 (the “Mill River 2015-VFN1 Trust”).

On January 21, 2016, we amended the note purchase agreement with the Springleaf 2013-VFN1 Trust to (i) increase the maximum principal balance from $350 million to $850 million and (ii) extend the revolving period ending in April 2017 to January 2018, which may be extended to January 2019, subject to satisfaction of customary conditions precedent. Following the revolving period, the principal amount of the notes, if any, will be reduced as cash payments are received on the underlying personal loans and will be due and payable in the 36th month following the end of the revolving period. As of February 24, 2016, $298 million was outstanding under the notes.

On January 21, 2016, we amended the note purchase agreement with the Mill River 2015-VFN1 Trust to decrease the maximum principal balance from $400 million to $100 million. As of February 24, 2016, $100 million was outstanding under the notes.

On February 16, 2016, Sixteenth Street Funding LLC (“Sixteenth Street”), a wholly owned subsidiary of SFC, exercised its right to redeem the asset backed notes issued by the Springleaf Funding Trust 2013-B on June 19, 2013 (the “2013-B Notes”). To redeem the 2013-B Notes, Sixteenth Street paid a redemption price of $371 million, which excluded $30 million for the Class C and Class D Notes owned by Sixteenth Street on the date of the optional redemption. The outstanding principal balance of the 2013-B Notes was $400 million on the date of the optional redemption.


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On February 16, 2016, Sumner Brook Funding Trust 2013-VFN1, a wholly owned special purpose vehicle of SFC, repaid the entire $100 million outstanding principal balance of its variable funding notes.

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. As of February 24, 2016, no amounts were outstanding under the notes.

On February 24, 2016, we amended the note purchase agreement with the Whitford Brook Funding Trust 2014-VFN1 to extend the revolving period ending in June 2017 to June 2018. Following the revolving period, the principal amount of the notes, if any, will be reduced as cash payments are received on the underlying personal loans and will be due and payable in the 12th month following the end of the revolving period. As of February 24, 2016, $200 million was outstanding under the notes.

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 December 31, 2015, we had $321 million of cash and cash equivalents, and during 2015, SFC generated net income of $14 million. Our net cash outflow from operating and investing activities totaled $1.4 billion in 2015. At December 31, 2015, our scheduled principal and interest payments for 2016 on our existing debt (excluding securitizations) totaled $678 million. As of December 31, 2015, we had $854 million unpaid principal balance (“UPB”) of unencumbered personal loans (including $182 million held for sale) and $806 million UPB of unencumbered real estate loans (including $240 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 twelve months.

We have previously purchased portions of our unsecured indebtedness, and we may elect to purchase additional portions of our unsecured indebtedness in the future. Future purchases may be made through the open market, privately negotiated transactions with third parties, or pursuant to one or more tender or exchange offers, all of which are subject to terms, prices, and consideration we may determine.

LIQUIDITY

Operating Activities

Net cash provided by operations of $603 million for 2015 reflected net income of $141 million, the impact of non-cash items, and a favorable change in working capital of $67 million. Net cash provided by operations of $236 million for 2014 reflected net income of $445 million, the impact of non-cash items, and an unfavorable change in working capital of $118 million primarily due to costs relating to the real estate sales transactions. Net cash provided by operations of $406 million for 2013 reflected a net loss of $76 million, the impact of non-cash items, and an unfavorable change in working capital of $65 million.

Investing Activities

Net cash used for investing activities of $2.0 billion for 2015 was primarily due to the OneMain Acquisition. Net cash provided by investing activities of $1.4 billion for 2014 was primarily due to the sales of real estate loans held for sale originated as held for investment during 2014, partially offset by the purchase of investment securities. Net cash provided by investing activities of $726 million for 2013 was primarily due to net principal collections (originations) of finance receivables held for sale and held for investment and change in notes receivable from parent.

Financing Activities

Net cash provided by financing activities of $992 million for 2015 reflected the debt issuances associated with the 2015-A and 2015-B securitizations. Net cash used for financing activities of $1.3 billion for 2014 was primarily due to the repayments of

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the secured term loan and the 2013-BAC trust notes in late March of 2014. Net cash used for financing activities of $2.1 billion for 2013 was primarily due to the repayment of the initial secured term loan.

Liquidity Risks and Strategies

SFC’s credit ratings are non-investment grade, which have a significant impact on our cost of, and access to, capital. This, in turn, can negatively affect our ability to manage our liquidity and our ability or cost to refinance our indebtedness.

There are numerous risks to our financial results, liquidity, capital raising, and debt refinancing plans, some of which may not be quantified in our current liquidity forecasts. These risks include, but are not limited, to the following:

our inability to grow or maintain our personal loan portfolio with adequate profitability;
the effect of federal, state and local laws, regulations, or regulatory policies and practices;
potential liability relating to real estate and personal loans which we have sold or may sell in the future, or relating to securitized loans; and
the potential for disruptions in the debt and equity markets.

The principal factors that could decrease our liquidity are customer delinquencies and defaults, a decline in customer prepayments, and a prolonged inability to adequately access capital market funding. We intend to support our liquidity position by utilizing 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 funding 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 secured revolving credit facilities to allow us to use excess cash to pay down higher cost debt.

However, it is possible that the actual outcome of one or more of our plans could be materially different than expected or that one or more of our significant judgments or estimates could prove to be materially incorrect.

OUR INSURANCE SUBSIDIARIES

State law restricts the amounts our insurance subsidiaries, Merit and Yosemite, may pay as dividends without prior notice to the Indiana Department of Insurance (the “Indiana DOI”). The maximum amount of dividends (referred to as “ordinary dividends”) for an Indiana domiciled life insurance company that can be paid without prior approval in a 12 month period (measured retrospectively from the date of payment) is the greater of: (i) 10% of policyholders’ surplus as of the prior year-end; or (ii) the statutory net gain from operations as of the prior year-end. Any amount greater must be approved by the Indiana DOI prior to its payment. The maximum ordinary dividends for an Indiana domiciled property and casualty insurance company that can be paid without prior approval in a 12 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 paid extraordinary dividends to SFC totaling $100 million, $57 million, and $150 million during 2015, 2014, and 2013, respectively, and ordinary dividends of $18 million to SFC during 2014. In addition, Yosemite paid, as an extraordinary dividend to SFC, 100% of the common stock of its wholly owned subsidiary, CommoLoCo, Inc., in the amount of $58 million in July of 2013.

OUR DEBT AGREEMENTS

5.25% SFC Notes. On December 3, 2014, OMH entered into an Indenture and First Supplemental Indenture pursuant to which it agreed to fully and unconditionally guarantee the payments of principal, premium (if any) and interest on $700 million of 5.25% Senior Notes due 2019 issued by SFC (the “5.25% SFC Notes”). As of December 31, 2015, $700 million aggregate principal amount of the 5.25% SFC Notes were outstanding.

SFC Notes. On December 30, 2013, OMH entered into Guaranty Agreements whereby it agreed to fully and unconditionally guarantee the payments of principal, premium (if any), and interest on approximately $5.2 billion aggregate principal amount of senior notes on a senior basis and $350 million aggregate principal amount of a junior subordinated debenture on a junior

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subordinated basis issued by SFC (collectively, the “SFC Notes”). The SFC Notes consisted of the following: 8.25% Senior Notes due 2023; 7.75% Senior Notes due 2021; 6.00% Senior Notes due 2020; a 60-year junior subordinated debenture; and all senior notes outstanding on December 30, 2013, issued pursuant to the Indenture dated as of May 1, 1999 (the “1999 Indenture”), between SFC and Wilmington Trust, National Association (the successor trustee to Citibank N.A.). The 60-year junior subordinated debenture underlies the trust preferred securities sold by a trust sponsored by SFC. On December 30, 2013, OMH entered into a Trust Guaranty Agreement whereby it agreed to fully and unconditionally guarantee the related payment obligations under the trust preferred securities. As of December 31, 2015, approximately $4.2 billion aggregate principal amount of the SFC Notes, including $2.3 billion aggregate principal amount of senior notes under the 1999 Indenture, and $350 million aggregate principal amount of a junior subordinated debenture were outstanding.

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, none of our 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 December 31, 2015, we were in compliance with all of the covenants under our debt agreements.

Junior Subordinated Debenture. In January of 2007, SFC issued $350 million aggregate principal amount of 60-year junior subordinated debenture (the “debenture”) under an indenture dated January 22, 2007 (the “Junior Subordinated Indenture”), by and between SFC and Deutsche Bank Trust Company, as trustee. The debenture underlies the trust preferred securities sold by a trust sponsored by SFC. SFC can redeem the debenture at par beginning in January of 2017.

Pursuant to the terms of the debenture, SFC, upon the occurrence of a mandatory trigger event, is required to defer interest payments to the holders of the 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 debenture otherwise payable on the next interest payment date and pays such amount to the holders of the debenture. A mandatory trigger event occurs if SFC’s (i) tangible equity to tangible managed assets is less than 5.5% or (ii) average fixed charge ratio is not more than 1.10x for the trailing four quarters (where the fixed charge ratio equals earnings excluding income taxes, interest expense, extraordinary items, goodwill impairment, and any amounts related to discontinued operations, divided by the sum of interest expense and any preferred dividends).

Based upon SFC’s financial results for the twelve months ended September 30, 2015, a mandatory trigger event occurred with respect to the interest payment due in January of 2016 as the average fixed charge ratio was 0.94x. On January 11, 2016, SFC issued one share of SFC common stock to SFI for $11 million to satisfy the January 2016 interest payments required by SFC’s debenture.


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Structured Financings

We execute private securitizations under Rule 144A of the Securities Act of 1933. As of December 31, 2015, 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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer Securitizations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SLFT 2013-B
 
$
370

 
$
442

 
$
370

 
$
442

 
3.99
%
 
Personal loans
 
3 years
SLFT 2014-A
 
559

 
644

 
559

 
644

 
2.55
%
 
Personal loans
 
2 years
SLFT 2015-A
 
1,163

 
1,250

 
1,163

 
1,250

 
3.47
%
 
Personal loans
 
3 years
SLFT 2015-B
 
314

 
335

 
314

 
336

 
3.78
%
 
Personal loans
 
5 years
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total consumer securitizations
 
2,406

 
2,671

 
2,406

 
2,672

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SpringCastle Securitization:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SCFT 2014-A
 
2,559

 
2,737

 
1,917

 
2,095

 
4.08
%
 
Personal and junior mortgage loans
 
N/A (c)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total secured structured financings
 
$
4,965

 
$
5,408

 
$
4,323

 
$
4,767

 
 
 
 
 
 
                                      
(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.

(c)
Not applicable.

In addition to the structured financings included in the table above, we had access to seven conduit facilities with a total borrowing capacity of $2.2 billion as of December 31, 2015, as discussed in Note 13 of the Notes to Consolidated Financial Statements in Item 8. At December 31, 2015, $1.2 billion was drawn under these facilities.

See “Liquidity and Capital Resources - Sources of Funds - Securitizations and Borrowings from Revolving Conduit Facilities” for securitization and conduit transactions completed subsequent to December 31, 2015.

Our securitizations have served to partially replace secured and unsecured debt in our capital structure with more favorable non-recourse funding. Our overall funding costs are positively impacted by our increased usage of securitizations as we typically execute these transactions at interest rates significantly below those of our maturing secured and unsecured debt.

The weighted average interest rates on our debt on a Segment Accounting Basis were as follows:
Years Ended December 31,
 
2015
 
2014
 
2013
 
 
 
 
 
 
 
Weighted average interest rate
 
5.42
%
 
5.42
%
 
5.59
%


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Contractual Obligations

At December 31, 2015, our material contractual obligations were as follows:
(dollars in millions)
 
2016
 
2017-2018
 
2019-2020
 
2021+
 
Securitizations
 
Revolving
Conduit
Facilities
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Principal maturities on long-term debt: