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Section 1: 10-Q (10-Q)

Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
 
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2016
 
OR
 
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from to
 
Commission file number 001-36129

ONEMAIN HOLDINGS, INC.
(Exact name of registrant as specified in its charter)

Delaware
 
27-3379612
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
 
 
 
601 N.W. Second Street, Evansville, IN
 
47708
(Address of principal executive offices)
 
(Zip Code)

(812) 424-8031
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o
 
 
 
 
(Do not check if a smaller reporting company)
 
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

At November 1, 2016, there were 134,754,696 shares of the registrant’s common stock, $0.01 par value, outstanding.
 


Table of Contents


TABLE OF CONTENTS

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

Table of Contents


PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.    

ONEMAIN HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)

(dollars in millions, except par value amount)
 
September 30,
2016
 
December 31,
2015
 
 
 
 
 
Assets
 
 

 
 

Cash and cash equivalents
 
$
658

 
$
939

Investment securities
 
1,788

 
1,867

Net finance receivables:
 
 

 
 

Personal loans (includes loans of consolidated VIEs of $9.8 billion in 2016 and $11.4 billion in 2015)
 
13,656

 
13,295

SpringCastle Portfolio (includes loans of consolidated VIEs of $1.7 billion in 2015)
 

 
1,703

Real estate loans
 
201

 
538

Retail sales finance
 
13

 
23

Net finance receivables
 
13,870

 
15,559

Unearned insurance premium and claim reserves
 
(608
)
 
(662
)
Allowance for finance receivable losses (includes allowance of consolidated VIEs of $500 million in 2016 and $431 million in 2015)
 
(672
)
 
(592
)
Net finance receivables, less unearned insurance premium and claim reserves and allowance for finance receivable losses
 
12,590

 
14,305

Finance receivables held for sale (includes finance receivables held for sale of consolidated VIEs of $435 million in 2015)
 
166

 
793

Restricted cash and cash equivalents (includes restricted cash and cash equivalents of consolidated VIEs of $548 million in 2016 and $663 million in 2015)
 
558

 
676

Goodwill
 
1,422

 
1,440

Other intangible assets
 
507

 
559

Other assets
 
664

 
611

 
 
 
 
 
Total assets
 
$
18,353

 
$
21,190

 
 
 
 
 
Liabilities and Shareholders’ Equity
 
 

 
 

Long-term debt (includes debt of consolidated VIEs of $8.3 billion in 2016 and $11.7 billion in 2015)
 
$
13,994

 
$
17,300

Insurance claims and policyholder liabilities
 
752

 
747

Deferred and accrued taxes
 
72

 
29

Other liabilities (includes other liabilities of consolidated VIEs of $14 million in 2016 and $15 million in 2015)
 
489

 
384

Total liabilities
 
15,307

 
18,460

Commitments and contingent liabilities (Note 14)
 


 

 
 
 
 
 
Shareholders’ equity:
 
 

 
 

Common stock, par value $.01 per share; 2,000,000,000 shares authorized, 134,754,696 and 134,494,172 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively
 
1

 
1

Additional paid-in capital
 
1,545

 
1,533

Accumulated other comprehensive income (loss)
 
4

 
(33
)
Retained earnings
 
1,496

 
1,308

OneMain Holdings, Inc. shareholders’ equity
 
3,046

 
2,809

Non-controlling interests
 

 
(79
)
Total shareholders’ equity
 
3,046

 
2,730

 
 
 
 
 
Total liabilities and shareholders’ equity
 
$
18,353

 
$
21,190


See Notes to Condensed Consolidated Financial Statements.

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Table of Contents


ONEMAIN HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)

(dollars in millions, except earnings (loss) per share)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 

 
 
 

Interest income:
 
 
 
 
 
 
 
 
Finance charges
 
$
763

 
$
422

 
$
2,271

 
$
1,227

Finance receivables held for sale originated as held for investment
 
7

 
5

 
71

 
13

Total interest income
 
770

 
427

 
2,342

 
1,240

 
 
 
 
 
 
 
 
 
Interest expense
 
215

 
171

 
655

 
500

 
 
 
 
 
 
 
 
 
Net interest income
 
555

 
256

 
1,687

 
740

 
 
 
 
 
 
 
 
 
Provision for finance receivable losses
 
263

 
79

 
674

 
233

 
 
 
 
 
 
 
 
 
Net interest income after provision for finance receivable losses
 
292

 
177

 
1,013

 
507

 
 
 
 
 
 
 
 
 
Other revenues:
 
 

 
 

 
 

 
 

Insurance
 
114

 
40

 
342

 
116

Investment
 
22

 
11

 
66

 
44

Net loss on repurchases and repayments of debt
 

 

 
(16
)
 

Net gain on sale of SpringCastle interests
 

 

 
167

 

Net gain (loss) on sales of personal and real estate loans
 
(4
)
 

 
18

 

Other
 
26

 
(4
)
 
49

 
(6
)
Total other revenues
 
158

 
47

 
626

 
154

 
 
 
 
 
 
 
 
 
Other expenses:
 
 

 
 

 
 

 
 

Operating expenses:
 
 

 
 

 
 

 
 

Salaries and benefits
 
191

 
100

 
597

 
305

Acquisition-related transaction and integration expenses
 
21

 
14

 
75

 
29

Other operating expenses
 
168

 
73

 
512

 
198

Insurance policy benefits and claims
 
37

 
17

 
128

 
53

Total other expenses
 
417

 
204

 
1,312

 
585

 
 
 
 
 
 
 
 
 
Income before provision for income taxes
 
33

 
20

 
327

 
76

 
 
 
 
 
 
 
 
 
Provision for income taxes
 
8

 
1

 
111

 
1

 
 
 
 
 
 
 
 
 
Net income
 
25

 
19

 
216

 
75

 
 
 
 
 
 
 
 
 
Net income attributable to non-controlling interests
 

 
32

 
28

 
98

 
 
 
 
 
 
 
 
 
Net income (loss) attributable to OneMain Holdings, Inc.
 
$
25

 
$
(13
)
 
$
188

 
$
(23
)
 
 
 
 
 
 
 
 
 
Share Data:
 
 

 
 

 
 

 
 

Weighted average number of shares outstanding:
 
 

 
 

 
 

 
 

Basic
 
134,730,251

 
134,452,763

 
134,717,870

 
125,701,635

Diluted
 
134,987,134

 
134,452,763

 
134,949,337

 
125,701,635

Earnings (loss) per share:
 
 

 
 

 
 

 
 

Basic
 
$
0.19

 
$
(0.10
)
 
$
1.40

 
$
(0.18
)
Diluted
 
$
0.19

 
$
(0.10
)
 
$
1.39

 
$
(0.18
)

See Notes to Condensed Consolidated Financial Statements.


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Table of Contents


ONEMAIN HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

(dollars in millions)
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
 
Net income
 
$
25

 
$
19

 
$
216

 
$
75

 
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 

 
 

 
 

 
 

Net change in unrealized gains (losses) on non-credit impaired available-for-sale securities
 
9

 
(3
)
 
67

 
(8
)
Foreign currency translation adjustments
 
(1
)
 

 
6

 

Income tax effect:
 
 

 
 

 
 

 
 

Net unrealized (gains) losses on non-credit impaired available-for-sale securities
 
(3
)
 
1

 
(23
)
 
3

Foreign currency translation adjustments
 
1

 

 
(2
)
 

Other comprehensive income (loss), net of tax, before reclassification adjustments
 
6

 
(2
)
 
48

 
(5
)
Reclassification adjustments included in net income:
 
 

 
 

 
 

 
 

Net realized gains on available-for-sale securities
 
(3
)
 
(4
)
 
(9
)
 
(14
)
Net realized gain on foreign currency translation adjustments
 
(5
)
 

 
(5
)
 

Income tax effect:
 
 

 
 

 
 

 
 

Net realized gains on available-for-sale securities
 
1

 
2

 
3

 
5

Reclassification adjustments included in net income, net of tax
 
(7
)
 
(2
)
 
(11
)
 
(9
)
Other comprehensive income (loss), net of tax
 
(1
)
 
(4
)
 
37

 
(14
)
 
 
 
 
 
 
 
 
 
Comprehensive income
 
24

 
15

 
253

 
61

 
 
 
 
 
 
 
 
 
Comprehensive income attributable to non-controlling interests
 

 
32

 
28

 
98

 
 
 
 
 
 
 
 
 
Comprehensive income (loss) attributable to OneMain Holdings, Inc.
 
$
24

 
$
(17
)
 
$
225

 
$
(37
)

See Notes to Condensed Consolidated Financial Statements.


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Table of Contents


ONEMAIN HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)

 
 
OneMain Holdings, Inc. Shareholders’ Equity
 
 
 
 
(dollars in millions)
 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
 
OneMain
Holdings, Inc.
Shareholders’
Equity
 
Non-controlling Interests
 
Total
Shareholders’
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2016
 
$
1

 
$
1,533

 
$
(33
)
 
$
1,308

 
$
2,809

 
$
(79
)
 
$
2,730

Share-based compensation expense, net of forfeitures
 

 
16

 

 

 
16

 

 
16

Withholding tax on vested RSUs
 

 
(4
)
 

 

 
(4
)
 

 
(4
)
Change in non-controlling interests:
 
 
 
 
 
 
 
 
 
 

 
 
 
 

Distributions declared to joint venture partners
 

 

 

 

 

 
(18
)
 
(18
)
Sale of equity interests in SpringCastle joint venture
 

 

 

 

 

 
69

 
69

Other comprehensive income
 

 

 
37

 

 
37

 

 
37

Net income
 

 

 

 
188

 
188

 
28

 
216

Balance, September 30, 2016
 
$
1

 
$
1,545

 
$
4

 
$
1,496

 
$
3,046

 
$

 
$
3,046

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2015
 
$
1

 
$
529

 
$
3

 
$
1,528

 
$
2,061

 
$
(129
)
 
$
1,932

Sale of common stock, net of offering costs
 

 
976

 

 

 
976

 

 
976

Non-cash incentive compensation from Initial Stockholder
 

 
15

 

 

 
15

 

 
15

Share-based compensation expense, net of forfeitures
 

 
6

 

 

 
6

 

 
6

Excess tax benefit from share-based compensation
 

 
2

 

 

 
2

 

 
2

Withholding tax on vested RSUs
 

 
(4
)
 

 

 
(4
)
 

 
(4
)
Change in non-controlling interests:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Distributions declared to joint venture partners
 

 

 

 

 

 
(58
)
 
(58
)
Other comprehensive loss
 

 

 
(14
)
 

 
(14
)
 

 
(14
)
Net income (loss)
 

 

 

 
(23
)
 
(23
)
 
98

 
75

Balance, September 30, 2015
 
$
1

 
$
1,524

 
$
(11
)
 
$
1,505

 
$
3,019

 
$
(89
)
 
$
2,930


See Notes to Condensed Consolidated Financial Statements.


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Table of Contents


ONEMAIN HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)

(dollars in millions)
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
 
 
 
 
Cash flows from operating activities
 
 

 
 

Net income
 
$
216

 
$
75

Reconciling adjustments:
 
 

 
 

Provision for finance receivable losses
 
674

 
233

Depreciation and amortization
 
416

 
75

Deferred income tax benefit
 
(99
)
 
(10
)
Net gain on liquidation of United Kingdom subsidiary
 
(5
)
 

Net gain on sales of personal and real estate loans
 
(18
)
 

Net loss on repurchases and repayments of debt
 
16

 

Non-cash incentive compensation from Initial Stockholder
 

 
15

Share-based compensation expense, net of forfeitures
 
16

 
6

Net gain on sale of SpringCastle interests
 
(167
)
 

Other
 
(7
)
 
(10
)
Cash flows due to changes in:
 
 

 
 

Other assets and other liabilities
 
92

 
41

Insurance claims and policyholder liabilities
 
(50
)
 
22

Taxes receivable and payable
 
49

 
(49
)
Accrued interest and finance charges
 
2

 
(1
)
Restricted cash and cash equivalents not reinvested
 
2

 

Other, net
 
2

 
1

Net cash provided by operating activities
 
1,139

 
398

 
 
 
 
 
Cash flows from investing activities
 
 

 
 

Net principal collections (originations) of finance receivables held for investment and held for sale
 
(998
)
 
(593
)
Proceeds on sales of finance receivables held for sale originated as held for investment
 
870

 
88

Proceeds from sale of SpringCastle interests
 
101

 

Cash received from CitiFinancial Credit Company
 
23

 

Available-for-sale securities purchased
 
(446
)
 
(382
)
Trading and other securities purchased
 
(16
)
 
(1,465
)
Available-for-sale securities called, sold, and matured
 
597

 
411

Trading and other securities called, sold, and matured
 
52

 
2,581

Change in restricted cash and cash equivalents
 
40

 
(46
)
Proceeds from sale of real estate owned
 
7

 
12

Other, net
 
(26
)
 
(13
)
Net cash provided by investing activities
 
204

 
593

 
 
 
 
 
Cash flows from financing activities
 
 

 
 

Proceeds from issuance of long-term debt, net of commissions
 
4,552

 
1,929

Proceeds from issuance of common stock, net of offering costs
 

 
976

Repayments of long-term debt
 
(6,155
)
 
(850
)
Distributions to joint venture partners
 
(18
)
 
(58
)
Excess tax benefit from share-based compensation
 

 
2

Withholding tax on RSUs vested
 
(4
)
 
(4
)
Net cash provided by (used for) financing activities
 
(1,625
)
 
1,995

 
Condensed Consolidated Statements of Cash Flows (Unaudited) (Continued)
 
 
 
 
 
 
 
 
 
(dollars in millions)
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
 
1

 

 
 
 
 
 
Net change in cash and cash equivalents
 
(281
)
 
2,986

Cash and cash equivalents at beginning of period
 
939

 
879

Cash and cash equivalents at end of period
 
$
658

 
$
3,865

 
 
 
 
 
Supplemental non-cash activities
 
 
 
 
Transfer of finance receivables held for investment to finance receivables held for sale (prior to deducting allowance for finance receivable losses)
 
$
1,895

 
$
608

Transfer of finance receivables to real estate owned
 
$
7

 
$
8

Net unsettled investment security dispositions (purchases)
 
$
(15
)
 
$
40


See Notes to Condensed Consolidated Financial Statements.


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Table of Contents


ONEMAIN HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2016

1. Business and Basis of Presentation    

OneMain Holdings, Inc. is referred to in this report as “OMH” or, collectively with its subsidiaries, whether directly or indirectly owned, the “Company,” “we,” “us,” or “our.” OMH is a Delaware corporation. At September 30, 2016, Springleaf Financial Holdings, LLC (the “Initial Stockholder”) owned approximately 58% of OMH’s common stock. The Initial Stockholder is owned primarily by a private equity fund managed by an affiliate of Fortress Investment Group LLC (“Fortress”).

On November 15, 2015, OMH completed its acquisition of OneMain Financial Holdings, LLC (“OMFH”) from CitiFinancial Credit Company (“Citigroup”) for $4.5 billion in cash (the “OneMain Acquisition”). As a result of the OneMain Acquisition, OMFH became a wholly owned, indirect subsidiary of OMH. See Note 2 for further information on the OneMain Acquisition.

OMH is a financial services holding company whose principal subsidiaries are Springleaf Finance, Inc. (“SFI”) and Independence Holdings, LLC (“Independence”). SFI’s principal subsidiary is Springleaf Finance Corporation (“SFC”), and Independence’s principal subsidiary is OMFH. SFC and OMFH are financial services holding companies with subsidiaries engaged in the consumer finance and insurance businesses. OMFH, collectively with its subsidiaries, is referred to in this report as “OneMain.” OMH and its subsidiaries (other than OneMain) is referred to in this report as “Springleaf.”

BASIS OF PRESENTATION

We prepared our condensed consolidated financial statements using generally accepted accounting principles in the United States of America (“GAAP”). These statements are unaudited. The year-end condensed balance sheet data was derived from our audited financial statements, but does not include all disclosures required by GAAP. The statements include the accounts of OMH, its subsidiaries (all of which are wholly owned, except for certain indirect subsidiaries associated with a joint venture in which we owned a 47% equity interest prior to March 31, 2016), and variable interest entities (“VIEs”) in which we hold a controlling financial interest and for which we are considered to be the primary beneficiary as of the financial statement date.

We eliminated all material intercompany accounts and transactions. We made judgments, estimates, and assumptions that affect amounts reported in our condensed consolidated financial statements and disclosures of contingent assets and liabilities. In management’s opinion, the condensed consolidated financial statements include the normal, recurring adjustments necessary for a fair statement of results. Ultimate results could differ from our estimates. We evaluated the effects of and the need to disclose events that occurred subsequent to the balance sheet date. To conform to the 2016 presentation, we have reclassified certain items in prior periods, including certain items in prior periods of our condensed consolidated financial statements.

The condensed consolidated financial statements in this report should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (“2015 Annual Report on Form 10-K”). We follow the same significant accounting policies for our interim reporting, except for the change in accounting policy discussed below. As a result of the change in accounting policy, we have revised certain sections in our 2015 Annual Report on Form 10-K to reflect the retrospective application of this change in accounting policy, and such revised disclosures are included in exhibits to our Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on August 29, 2016 (the “retrospective Form 8-K”). Therefore, the condensed consolidated financial statements in this report should also be read in conjunction with the retrospective Form 8-K.

CHANGE IN ACCOUNTING POLICY

Effective April 1, 2016, we changed our accounting policy for the derecognition of loans within a purchased credit impaired pool. Historically, we removed loans from a purchased credit impaired pool upon charge-off of the loan, based on the Company’s charge-off accounting policy at their allocated carrying value. Under our new accounting policy, loans will be removed from a purchased credit impaired pool when the loan is written-off, at which time further collections efforts would not be pursued, or sold or repaid. While both methods are acceptable under GAAP, we believe the new method for derecognition of purchased credit impaired loans is preferable as it enhances consistency with our industry peers. As of January 1, 2015, the cumulative effect of applying the change in accounting policy increased shareholders’ equity by $36 million.


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Table of Contents


For the three and nine months ended September 30, 2016, respectively, the effect of this change in accounting policy was as follows:

increased income before provision for income taxes by $24 million and $27 million;
increased net income by $15 million and $17 million;
increased net income attributable to OMH by $15 million and $15 million;
increased basic earnings per share by $0.11 and $0.11; and
increased diluted earnings per share by $0.11 and $0.11.

Our policy for derecognition of purchased credit impaired loans following the change described above is presented below:

Purchased Credit Impaired Finance Receivables

As part of each of our acquisitions, we identify a population of finance receivables for which it is determined that it is probable that we will be unable to collect all contractually required payments. The population of accounts identified generally consists of those finance receivables that are (i) 60 days or more past due at acquisition, (ii) which had been classified as troubled debt restructured (“TDR”) finance receivables as of the acquisition date, (iii) may have been previously modified, or (iv) had other indications of credit deterioration as of the acquisition date.

We accrete the excess of the cash flows expected to be collected on the purchased credit impaired finance receivables over the discounted cash flows (the “accretable yield”) into interest income at a level rate of return over the expected lives of the underlying pools of the purchased credit impaired finance receivables. The underlying pools are based on finance receivables with common risk characteristics. We have established policies and procedures to update on a quarterly basis the amount of cash flows we expect to collect, which incorporates assumptions regarding default rates, loss severities, the amounts and timing of prepayments and other factors that are reflective of then current market conditions. Probable decreases in expected finance receivable cash flows result in the recognition of impairment, which is recognized through the provision for finance receivable losses. Probable significant increases in expected cash flows to be collected would first reverse any previously recorded allowance for finance receivable losses; any remaining increases are recognized prospectively as adjustments to the respective pool’s yield.

Our purchased credit impaired finance receivables remain in our purchased credit impaired pools until liquidation or write-off. We do not reclassify modified purchased credit impaired finance receivables as TDR finance receivables.

We have additionally established policies and procedures related to maintaining the integrity of these pools. A finance receivable will not be removed from a pool unless we sell, foreclose, or otherwise receive assets in satisfaction of a particular finance receivable or a finance receivable is written-off. If a finance receivable is renewed and additional funds are lent and terms are adjusted to current market conditions, we consider this a new finance receivable and the previous finance receivable is removed from the pool. If the facts and circumstances indicate that a finance receivable should be removed from a pool, that finance receivable will be removed at its allocated carrying amount, and such removal will not affect the yield used to recognize accretable yield of the pool.

We have retrospectively applied this change in accounting policy. The effect of this change in accounting policy on the amounts previously reported in our condensed consolidated statements of operations for the three and nine months ended September 30, 2015 and our condensed consolidated statements of cash flows for the nine months ended September 30, 2015 are included in the following tables.
 
 
 
 
 
 
 
 
 
 
 
 
 
 

9

Table of Contents


Revised Condensed Consolidated Statements of Operations
(dollars in millions, except loss per share)
 
Three Months Ended September 30, 2015
 
Nine Months Ended September 30, 2015
 
As Reported
 
As Adjusted
 
As Reported
 
As Adjusted
 
 
 
 
 
 
 
 
 
Interest income:
 
 
 
 
 
 
 
 
Finance charges
 
$
424

 
$
422

 
$
1,234

 
$
1,227

Finance receivables held for sale originated as held for investment
 
4

 
5

 
13

 
13

Total interest income
 
428

 
427

 
1,247

 
1,240

 
 
 
 
 
 
 
 
 
Interest expense
 
171

 
171

 
500

 
500

 
 
 
 
 
 
 
 
 
Net interest income
 
257

 
256

 
747

 
740

 
 
 
 
 
 
 
 
 
Provision for finance receivable losses
 
82

 
79

 
249

 
233

 
 
 
 
 
 
 
 
 
Net interest income after provision for finance receivable losses
 
175

 
177

 
498

 
507

 
 
 
 
 
 
 
 
 
Other revenues:
 
 

 
 

 
 

 
 

Insurance
 
40

 
40

 
116

 
116

Investment
 
11

 
11

 
44

 
44

Other
 

 
(4
)
 
(2
)
 
(6
)
Total other revenues
 
51

 
47

 
158

 
154

 
 
 
 
 
 
 
 
 
Other expenses:
 
 

 
 

 
 

 
 

Operating expenses:
 
 

 
 

 
 

 
 

Salaries and benefits
 
100

 
100

 
305

 
305

Acquisition-related transaction and integration expenses
 
14

 
14

 
29

 
29

Other operating expenses
 
73

 
73

 
198

 
198

Insurance policy benefits and claims
 
17

 
17

 
53

 
53

Total other expenses
 
204

 
204

 
585

 
585

 
 
 
 
 
 
 
 
 
Income before provision for income taxes
 
22

 
20

 
71

 
76

 
 
 
 
 
 
 
 
 
Provision for income taxes
 
2

 
1

 
1

 
1

 
 
 
 
 
 
 
 
 
Net income
 
20

 
19

 
70

 
75

 
 
 
 
 
 
 
 
 
Net income attributable to non-controlling interests
 
31

 
32

 
93

 
98

 
 
 
 
 
 
 
 
 
Net loss attributable to OneMain Holdings, Inc.
 
$
(11
)
 
$
(13
)
 
$
(23
)
 
$
(23
)
 
 
 
 
 
 
 
 
 
Share Data:
 
 

 
 

 
 

 
 

Weighted average number of shares outstanding:
 
 

 
 

 
 

 
 

Basic
 
134,452,763

 
134,452,763

 
125,701,635

 
125,701,635

Diluted
 
134,452,763

 
134,452,763

 
125,701,635

 
125,701,635

Loss per share:
 
 

 
 

 
 

 
 

Basic
 
$
(0.08
)
 
$
(0.10
)
 
$
(0.18
)
 
$
(0.18
)
Diluted
 
$
(0.08
)
 
$
(0.10
)
 
$
(0.18
)
 
$
(0.18
)


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Revised Condensed Consolidated Statement of Cash Flows
(dollars in millions)
 
Nine Months Ended September 30, 2015
 
As Reported *
 
As Adjusted
 
 
 
 
 
Cash flows from operating activities
 
 

 
 
Net income
 
$
70

 
$
75

Reconciling adjustments:
 
 

 
 
Provision for finance receivable losses
 
249

 
233

Depreciation and amortization
 
68

 
75

Deferred income tax benefit
 
(10
)
 
(10
)
Non-cash incentive compensation from Initial Stockholder
 
15

 
15

Share-based compensation expense, net of forfeitures
 
6

 
6

Other
 
(13
)
 
(10
)
Cash flows due to changes in:
 
 

 
 
Other assets and other liabilities
 
37

 
41

Insurance claims and policyholder liabilities
 
22

 
22

Taxes receivable and payable
 
(49
)
 
(49
)
Accrued interest and finance charges
 
(1
)
 
(1
)
Other, net
 
1

 
1

Net cash provided by operating activities
 
395

 
398

 
 
 
 
 
Cash flows from investing activities
 
 

 
 
Net principal collections (originations) of finance receivables held for investment and held for sale
 
(593
)
 
(593
)
Proceeds on sales of finance receivables held for sale originated as held for investment
 
88

 
88

Available-for-sale securities purchased
 
(382
)
 
(382
)
Trading and other securities purchased
 
(1,465
)
 
(1,465
)
Available-for-sale securities called, sold, and matured
 
411

 
411

Trading and other securities called, sold, and matured
 
2,581

 
2,581

Change in restricted cash and cash equivalents
 
(46
)
 
(46
)
Proceeds from sale of real estate owned
 
12

 
12

Other, net
 
(13
)
 
(13
)
Net cash provided by investing activities
 
593

 
593

 
 
 
 
 
Cash flows from financing activities
 
 

 
 
Proceeds from issuance of long-term debt, net of commissions
 
1,929

 
1,929

Proceeds from issuance of common stock, net of offering costs
 
976

 
976

Repayments of long-term debt
 
(850
)
 
(850
)
Distributions to joint venture partners
 
(59
)
 
(58
)
Excess tax benefit from share-based compensation
 
2

 
2

Withholding tax on RSUs vested
 
(4
)
 
(4
)
Net cash provided by financing activities
 
1,994

 
1,995

 
 
 
 
 
Net change in cash and cash equivalents
 
2,982

 
2,986

Cash and cash equivalents at beginning of period
 
879

 
879

Cash and cash equivalents at end of period
 
$
3,861

 
$
3,865

                                      
*
The condensed consolidated statement of cash flows for the nine months ended September 30, 2015 includes a reclassification resulting from our adoption of Accounting Standards Update (“ASU”) 2016-09, Improvements to Employee Share-Based Payment Accounting. See Note 3 for further information regarding this ASU.


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We have also adjusted the applicable prior period amounts in the Notes to the Condensed Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part I, Item 2 herein to reflect the impact of this change in accounting policy.

2. Significant Transactions    

ONEMAIN ACQUISITION

On November 15, 2015, OMH completed its acquisition of OneMain from Citigroup for approximately $4.5 billion in cash after accounting for certain estimated adjustments at closing. OneMain is a leading consumer finance company in the United States, providing personal loans to primarily middle income households through a national, community based network.

We allocated the purchase price to the net tangible and intangible assets acquired and liabilities assumed, based on their respective estimated fair values as of October 31, 2015. Given the timing of this transaction and complexity of the purchase accounting, our estimate of the fair value adjustment specific to the acquired loans and intangible assets was preliminary, and our determination of the final tax positions with Citigroup was also preliminary. We intend to finalize the accounting for these matters as soon as reasonably possible and within the measurement period, which may be up to one year from the acquisition date.

The excess of the purchase price over the fair values, which we recorded as goodwill, was determined as follows:
(dollars in millions)
 
As
Reported
 
 
 
As
Adjusted
 
 
Adjustments *
 
 
 
 
 
 
 
 
Cash consideration
 
$
4,478

 
$
(23
)
(a)
$
4,455

Fair value of assets acquired:
 
 
 
 
 
 
Cash and cash equivalents
 
958

 

 
958

Investment securities
 
1,294

 

 
1,294

Personal loans
 
8,801

 
(6
)
(b)
8,795

Intangibles
 
555

 
3

(c)
558

Other assets
 
247

 
(3
)
(d)
244

Fair value of liabilities assumed:
 
 
 
 
 
 
Long-term debt
 
(7,725
)
 

 
(7,725
)
Unearned premium, insurance policy and claims reserves
 
(936
)
 

 
(936
)
Other liabilities
 
(156
)
 
1

(e)
(155
)
Goodwill
 
$
1,440

 
 
 
$
1,422

                                      
*
During the first half of 2016, we recorded the following adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill as new information, which existed as of the acquisition date, became available:

(a)
Represents a subsequent cash payment from Citigroup as a result of reaching final agreement on certain purchase accounting adjustments.

(b)
Represents the net impact of an increase to the discount of purchased credit impaired finance receivables of $64 million and an increase to the premium on finance receivables purchased as performing receivables of $58 million as a result of revisions to the receivables valuation during the measurement period.

(c)
Represents an increase in acquired intangibles related to customer loan applications in process at the acquisition date.

(d)
Represents a decrease in valuation of acquired software asset.

(e)
Represents the settlement of a payable to Citigroup during the measurement period.

Of the adjusted $8.8 billion of acquired personal loans included in the table above, $8.1 billion relates to finance receivables determined not to be credit impaired at acquisition. Contractually required principal and interest of these non-credit impaired personal loans was $11.6 billion at the date of acquisition, of which $2.2 billion is not expected to be collected.


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Changes in the carrying amount of goodwill, all of which are reported in our Consumer and Insurance segment, were as follows:
(dollars in millions)
 
Consumer
and
Insurance
 
 
 
Nine Months Ended September 30, 2016
 
 
Balance at beginning of period
 
$
1,440

Adjustments to purchase price allocation *
 
(18
)
Balance at end of period
 
$
1,422

                                      
*
Goodwill adjustments were recorded at OMFH subsidiary level.

We did not record any impairments to goodwill during the nine months ended September 30, 2016.

The following unaudited pro forma information presents the combined results of operations of Springleaf and OneMain as if the OneMain Acquisition had occurred on January 1, 2014. The unaudited pro forma information is not necessarily indicative of the operating results that would have been achieved had the OneMain Acquisition occurred on January 1, 2014. In addition, the unaudited pro forma financial information does not purport to project the future operating results of the combined company following the OneMain Acquisition.

The unaudited pro forma information also reflects adjustments for the Lendmark Sale (as defined below), as if the Lendmark Sale had been consummated on January 1, 2015. In addition, the pro forma interest income assumes the adjustment of historical finance charges for estimated impacts of accounting for credit impaired loans. The unaudited pro forma financial information does not give effect to the SpringCastle Interests Sale or the August 2016 Real Estate Loan Sale (both of which are defined below).

As of September 30, 2016, we had incurred approximately $137 million of acquisition-related transaction and integration expenses ($75 million incurred during the nine months ended September 30, 2016) in connection with the OneMain Acquisition and the Lendmark Sale (as defined below), which we report as a component of operating expenses. These expenses include transaction costs, technology termination and certain compensation and benefit related costs.

The following table presents the unaudited pro forma financial information:
(dollars in millions)
 
Three Months Ended 
 September 30, 2015
 
Nine Months Ended 
 September 30, 2015
 
 
 
 
 
Interest income
 
$
838

 
$
2,442

Net income attributable to OneMain Holdings, Inc.
 
27

 
92


In connection with the closing of the OneMain Acquisition, on November 13, 2015, OMH and certain of its subsidiaries entered into an Asset Preservation Stipulation and Order and agreed to a Proposed Final Judgment (collectively, the “Settlement Agreement”) with the U.S. Department of Justice (the “DOJ”), as well as the state attorneys general for Colorado, Idaho, Pennsylvania, Texas, Virginia, Washington and West Virginia. The Settlement Agreement resolved the inquiries of the DOJ and such attorneys general with respect to the OneMain Acquisition and allowed OMH to proceed with the closing. Pursuant to the Settlement Agreement, OMH agreed to divest 127 branches of SFC subsidiaries across 11 states as a condition for approval of the OneMain Acquisition. The Settlement Agreement required certain of OMH’s subsidiaries (the “Branch Sellers”) to operate these 127 branches as an ongoing, economically viable and competitive business until sold to the divestiture purchaser. The court overseeing the settlement appointed a third-party monitor to oversee management of the divestiture branches and ensure the Company’s compliance with the terms of the Settlement Agreement.

SPRINGCASTLE INTERESTS SALE

On March 31, 2016, SFI, SpringCastle Holdings, LLC (“SpringCastle Holdings”) and Springleaf Acquisition Corporation (“Springleaf Acquisition” and, together with SpringCastle Holdings, the “SpringCastle Sellers”), wholly owned subsidiaries of OMH, entered into a purchase agreement with certain subsidiaries of New Residential Investment Corp. (“NRZ” and such subsidiaries, the “NRZ Buyers”) and BTO Willow Holdings II, L.P. and Blackstone Family Tactical Opportunities Investment

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Partnership—NQ—ESC L.P. (collectively, the “Blackstone Buyers” and together with the NRZ Buyers, the “SpringCastle Buyers”). Pursuant to the purchase agreement, on March 31, 2016, SpringCastle Holdings sold its 47% limited liability company interest in each of SpringCastle America, LLC, SpringCastle Credit, LLC and SpringCastle Finance, LLC, and Springleaf Acquisition sold its 47% limited liability company interest in SpringCastle Acquisition LLC, to the SpringCastle Buyers for an aggregate purchase price of approximately $112 million (the “SpringCastle Interests Sale”). SpringCastle America, LLC, SpringCastle Credit, LLC, SpringCastle Finance, LLC and SpringCastle Acquisition LLC are collectively referred to herein as the “SpringCastle Joint Venture.”

The SpringCastle Joint Venture primarily holds subordinate ownership interests in a securitized loan portfolio (the “SpringCastle Portfolio”), which consists of unsecured loans and loans secured by subordinate residential real estate mortgages and includes both closed-end accounts and open-end lines of credit. These loans are in a liquidating status and vary in form and substance from the Company’s originated loans. At December 31, 2015, the SpringCastle Portfolio included over 232,000 of acquired loans, representing $1.7 billion in net finance receivables.

In connection with the SpringCastle Interests Sale, the SpringCastle Buyers paid $101 million of the aggregate purchase price to the SpringCastle Sellers on March 31, 2016, with the remaining $11 million paid into an escrow account on July 29, 2016. Such escrowed funds are expected to be held in escrow for a period of up to five years following March 31, 2016, and, subject to the terms of the purchase agreement and assuming certain portfolio performance requirements are satisfied, paid to the SpringCastle Sellers at the end of such five-year period. In connection with the SpringCastle Interests Sale, we recorded a net gain in other revenues at the time of sale of $167 million.

As a result of this sale, SpringCastle Acquisition and SpringCastle Holdings no longer hold any ownership interests of the SpringCastle Joint Venture. However, unless we are terminated, we will remain as servicer of the SpringCastle Portfolio under the servicing agreement for the SpringCastle Funding Trust. In addition, we deconsolidated the underlying loans of the SpringCastle Portfolio and previously issued securitized interests, which were reported in long-term debt, as we no longer were considered the primary beneficiary.

Prior to the SpringCastle Interests Sale, affiliates of the NRZ Buyers owned a 30% limited liability company interest in the SpringCastle Joint Venture, and affiliates of the Blackstone Buyers owned a 23% limited liability company interest in the SpringCastle Joint Venture (together, the “Other Members”). The Other Members are parties to the purchase agreement for purposes of certain limited indemnification obligations and post-closing expense reimbursement obligations of the SpringCastle Joint Venture to the SpringCastle Sellers.

The NRZ Buyers are subsidiaries of NRZ, which is externally managed by an affiliate of Fortress. The Initial Stockholder, which owned approximately 58% of OMH’s common stock as of March 31, 2016, the date of sale, was owned primarily by a private equity fund managed by an affiliate of Fortress. Mr. Edens, Chairman of the Board of Directors of OMH, also serves as Chairman of the Board of Directors of NRZ. Mr. Edens is also a principal of Fortress and serves as Co-Chairman of the Board of Directors of Fortress. Mr. Jacobs, a member of the Board of Directors of OMH, also serves as a member of NRZ’s Board of Directors and Fortress’ Board of Directors.

The purchase agreement included customary representations, warranties, covenants and indemnities. We did not record a sales recourse obligation related to the SpringCastle Interests Sale.

SFC’S OFFERING OF 8.25% SENIOR NOTES

On April 11, 2016, SFC issued $1.0 billion aggregate principal amount of 8.25% Senior Notes due 2020 (the “8.25% SFC Notes”) under an Indenture dated as of December 3, 2014 (the “Base Indenture”), as supplemented by a First Supplemental Indenture, dated as of December 3, 2014 (the “First Supplemental Indenture”) and a Second Supplemental Indenture, dated as of April 11, 2016 (the “Second Supplemental Indenture” and, collectively with the Base Indenture and the First Supplemental Indenture, the “Indenture”), pursuant to which OMH provided a guarantee of the notes on an unsecured basis.

SFC used a portion of the proceeds from the offering to repurchase approximately $600 million aggregate principal amount of its existing senior notes that mature in 2017, at a premium to principal amount from certain beneficial owners, and certain of those beneficial owners purchased new SFC senior notes in the offering. SFC intends to use the remaining net proceeds for general corporate purposes, which may include further debt repurchases and repayments.

The notes are SFC’s senior unsecured obligations and rank equally in right of payment to all of SFC’s other existing and future unsubordinated indebtedness from time to time outstanding. The notes are effectively subordinated to all of SFC’s secured

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obligations to the extent of the value of the assets securing such obligations and structurally subordinated to any existing and future obligations of SFC’s subsidiaries with respect to claims against the assets of such subsidiaries.

The notes may be redeemed at any time and from time to time, at the option of SFC, in whole or in part at a “make-whole” redemption price specified in the Indenture. The notes will not have the benefit of any sinking fund.

The Indenture contains covenants that, among other things, (i) limit SFC’s ability to create liens on assets and (ii) restrict SFC’s ability to consolidate, merge or sell its assets. The Indenture also provides for events of default which, if any of them were to occur, would permit or require the principal of and accrued interest on the notes to become, or to be declared, due and payable.

LENDMARK SALE

On November 12, 2015, OMH and the Branch Sellers entered into a purchase and sale agreement with Lendmark Financial Services, LLC (“Lendmark”) to sell 127 Springleaf branches and, subject to certain exclusions, the associated personal loans issued to customers of such branches, fixed non-information technology assets and certain other tangible personal property located in such branches to Lendmark (the “Lendmark Sale”) for a purchase price equal to the sum of (i) the aggregate unpaid balance as of closing of the purchased loans multiplied by 103%, plus (ii) for each interest-bearing purchased loan, an amount equal to all unpaid interest that had accrued on the unpaid balance at the applicable note rate from the most recent interest payment date through the closing, plus (iii) the sum of all prepaid charges and fees and security deposits of the Branch Sellers to the extent arising under the purchased contracts as reflected on the books and records of the Branch Sellers as of closing, subject to certain limitations if the purchase price would exceed $695 million and Lendmark would be unable to obtain financing on certain specified terms. In anticipation of the sale of these branches, SFC transferred $608 million of personal loans from held for investment to held for sale on September 30, 2015.

Pursuant to the Settlement Agreement, we were required to dispose of the branches to be sold in connection with the Lendmark Sale within 120 days following November 13, 2015, subject to such extensions as the DOJ may approve. As we did not believe we would be able to consummate the Lendmark Sale prior to April 1, 2016, we requested two extensions of the closing deadline set forth in the Settlement Agreement. The DOJ granted our requests through May 13, 2016.

On May 2, 2016, we completed the Lendmark Sale for an aggregate cash purchase price of $624 million. Such sale was effective as of April 30, 2016, and included the sale to Lendmark of personal loans with an unpaid principal balance (“UPB”) as of March 31, 2016 of $600 million. We have entered into a transition services agreement with Lendmark dated as of May 2, 2016 (the “Transition Services Agreement”), and our activities will remain subject to the oversight of the Monitoring Trustee appointed by the court pursuant to the Settlement Agreement until the expiration of the Transition Services Agreement. The Transition Services Agreement is currently scheduled to expire on or before February 2, 2017, subject to an additional three-month extension with the permission of the DOJ. Although we continue to take such steps as we believe are necessary to comply with the terms of the Settlement Agreement, no assurance can be given that we will not incur fines or penalties associated with our activities pursuant to the Transition Services Agreement or our efforts to comply with the terms of the Settlement Agreement.

REAL ESTATE LOAN SALE

On August 3, 2016, SFC and certain of its subsidiaries sold a portfolio of second lien mortgage loans for aggregate cash proceeds of $246 million (the “August 2016 Real Estate Loan Sale”). In connection with this sale, we recorded a net loss in other revenues at the time of sale of $4 million. Unless we are terminated or we resign as servicer, we will continue to service the loans included in this sale pursuant to a servicing agreement. The purchase and sale agreement and the servicing agreement include customary representations and warranties and indemnification provisions.


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3. Recent Accounting Pronouncements    

ACCOUNTING PRONOUNCEMENTS RECENTLY ADOPTED

Consolidation

In February of 2015, the Financial Accounting Standards Board (the “FASB”) issued ASU 2015-02, Consolidation - Amendments to the Consolidation Analysis, which amends the current consolidation guidance and ends the deferral granted to reporting entities with variable interests in investment companies from applying certain prior amendments to the VIE guidance. This ASU is applicable to entities across all industries, particularly those that use limited partnerships as well as entities in any industry that outsource decision making or have historically applied related party tiebreakers in their consolidation analysis and disclosures. The standard became effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. We have adopted this ASU and concluded that it does not have a material effect on our consolidated financial statements.

Technical Corrections and Improvements

In June of 2015, the FASB issued ASU 2015-10, Technical Corrections and Improvements, to correct differences between original guidance and the Accounting Standards Codification, clarify the guidance, correct references and make minor improvements affecting a variety of topics. The amendments to this transition guidance became effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. We have adopted this ASU and concluded that it does not have a material effect on our consolidated financial statements.

Debt Instruments

In March of 2016, the FASB issued ASU 2016-06, Contingent Puts and Call Options in Debt Instruments, which clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt host. The ASU requires assessing the embedded call (put) options solely in accordance with the four-step decision sequence. The amendment of this ASU becomes effective on a modified retrospective basis for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. We have early adopted this ASU and concluded that it does not have a material effect on our consolidated financial statements.

Stock Compensation

In March of 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies the accounting for share-based payment transactions, income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in this ASU were adopted as follows:

We adopted the amendment requiring recognition of tax benefits related to exercised or vested awards through the income statement rather than additional paid-in capital on a prospective basis as of January 1, 2016. Further, as of January 1, 2016, there was no impact to additional paid-in capital as a result of our adoption of this ASU under the modified retrospective method.

We did not adopt the amendment allowing for the use of the actual number of shares vested each period, rather than estimating the number of awards that are expected to vest. We continue to use an estimate as it relates to the number of awards that are expected to vest.

We adopted the amendment for the threshold to qualify for equity classification permits withholding up to the maximum statutory tax rates, under the modified retrospective basis as of January 1, 2016. This amendment did not have a material impact on our consolidated financial statements.

We adopted the amendment requiring the classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes to be presented in the financing activities instead of the operating activities, under the retrospective method as of January 1, 2014. This amendment did not have a material impact on our consolidated financial statements.

We adopted the amendment requiring the classification of excess tax benefits on the statement of cash flows to be presented in the operating activities instead of the financing activities, under the prospective method as of September 30, 2016. This amendment did not have a material impact on our consolidated financial statements.

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ACCOUNTING PRONOUNCEMENTS TO BE ADOPTED

Revenue Recognition

In May of 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which provides a consistent revenue accounting model across industries. In August of 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers - Deferral of the Effective Date, to defer the effective date of the new revenue recognition standard by one year, which would result in the ASU becoming effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. In March of 2016, the FASB issued ASU 2016-08, Principal versus Agent Considerations, which clarifies the implementation of the guidance on principal versus agent considerations from ASU 2014-09, Revenue from Contracts with Customers. ASU 2016-08 does not change the core principle of the guidance in ASU 2014-09, but rather clarifies the distinction between principal versus agent considerations when implementing ASU 2014-09. In April of 2016, the FASB issued ASU 2016-10, Identifying Performance Obligations and Licensing, to clarify the implementation guidance of ASU 2014-09 relating to performance obligations and licensing. In May of 2016, the FASB issued ASU 2016-12, Narrow-Scope Improvements and Practical Expedients, to clarify guidance in ASU 2014-09 related to assessing collectability, presentation of sales taxes, noncash consideration, and completed contracts/contract modifications. We are evaluating whether the adoption of these accounting pronouncements will have a material effect on our consolidated financial statements.

Short-Duration Insurance Contracts Disclosures

In May of 2015, the FASB issued ASU 2015-09, Disclosures about Short-Duration Contracts, to address enhanced disclosure requirements for insurers relating to short-duration insurance contract claims and unpaid claims liability rollforward for long and short-duration contracts. The disclosures are intended to provide users of financial statements with more transparent information about an insurance entity’s initial claim estimates and subsequent adjustments to those estimates, the methodologies and judgments used to estimate claims, and the timing, frequency, and severity of claims. The amendments in this ASU become effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. We are evaluating the potential impact of the adoption of the ASU on our consolidated financial statements.

Financial Instruments

In January of 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which simplifies the impairment assessment of equity investments. The update requires equity investments to be measured at fair value with changes recognized in net income. This ASU eliminates the requirement to disclose the methods and assumptions to estimate fair value for financial instruments, requires the use of the exit price for disclosure purposes, requires the change in liability due to a change in credit risk to be presented in other comprehensive income, requires separate presentation of financial assets and liabilities by measurement category and form of asset (securities and loans), and clarifies the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. The amendments in this ASU become effective prospectively for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. We are evaluating whether the adoption of this ASU will have a material effect on our consolidated financial statements.

Leases

In February of 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The ASU will require lessees to recognize assets and liabilities on leases with terms greater than 12 months and to disclose information related to the amount, timing and uncertainty of cash flows arising from leases, including various qualitative and quantitative requirements. The amendments in this ASU become effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. We are evaluating whether the adoption of this ASU will have a material effect on our consolidated financial statements.

Investments

In March of 2016, the FASB issued ASU 2016-07, Simplifying the Transition to the Equity Method of Accounting, which eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The ASU requires that an entity that has available-for-sale securities recognize, through earnings, the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendment in this ASU becomes effective prospectively for annual periods, and interim periods within

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those annual periods, beginning after December 15, 2016. We are evaluating whether the adoption of this ASU will have a material effect on our consolidated financial statements.

Revenue Recognition and Derivatives and Hedging

In May of 2016, the FASB issued ASU 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815), to rescind certain SEC guidance in Topic 605 and Topic 815 as ASU 2014-09 becomes effective. Our adoption of ASU 2014-09 will bring us into alignment with this ASU. We are evaluating whether the adoption of this ASU will have a material effect on our consolidated financial statements.

Allowance for Finance Receivables Losses

In June of 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU significantly changes the way that entities will be required to measure credit losses. The new standard requires that the estimated credit loss be based upon an “expected credit loss” approach rather than the “incurred loss” approach currently required. The new approach will require entities to measure all expected credit losses for financial assets based on historical experience, current conditions, and reasonable forecasts of collectability. It is anticipated that the expected credit loss model will require earlier recognition of credit losses than the incurred loss approach.

The ASU requires that credit losses for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination that are measured at amortized cost basis be determined in a similar manner to other financial assets measured at amortized cost basis; however, the initial allowance for credit losses is added to the purchase price of the financial asset rather than being reported as a credit loss expense. Subsequent changes in the allowance for credit losses are recorded in earnings. Interest income should be recognized based on the effective rate, excluding the discount embedded in the purchase price attributable to expected credit losses at acquisition.

The ASU also requires companies to record allowances for held-to-maturity and available-for-sale debt securities rather than write-downs of such assets.

In addition, the ASU requires qualitative and quantitative disclosures that provide information about the allowance and the significant factors that influenced management’s estimate of the allowance.

The ASU will become effective for the Company for fiscal years beginning January 1, 2020. Early adoption is permitted for fiscal years beginning January 1, 2019. We believe the adoption of this ASU will have a material effect on our consolidated financial statements and we are in the process of evaluating the expected impacts.

Statement of Cash Flows

In August of 2016, the FASB issued ASU 2016-15, Statement of Cash Flows, which clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments in this ASU will become effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. We are evaluating whether the adoption of this ASU will have a material effect on our consolidated financial statements.

We do not believe that any other accounting pronouncements issued during the nine months ended September 30, 2016, but not yet effective, would have a material impact on our consolidated financial statements or disclosures, if adopted.

4. Finance Receivables    

Our finance receivable types include personal loans, real estate loans, and retail sales finance as defined below:

Personal loans — are secured by consumer goods, automobiles, or other personal property or are unsecured, typically non-revolving with a fixed-rate and a fixed, original term of three to six years. At September 30, 2016, we had over 2.2 million personal loans representing $13.7 billion of net finance receivables, compared to 2.2 million personal loans totaling $13.3 billion at December 31, 2015.

Real estate loans — are secured by first or second mortgages on residential real estate, generally have maximum original terms of 360 months, and are considered non-conforming. Real estate loans may be closed-end accounts or open-end home equity lines of credit and are primarily fixed-rate products. Since we ceased real estate lending in January of 2012, our real estate loans are in a liquidating status.

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Retail sales finance — include retail sales contracts and revolving retail accounts. Retail sales contracts are closed-end accounts that represent a single purchase transaction. Revolving retail accounts are open-end accounts that can be used for financing repeated purchases from the same merchant. Retail sales contracts are secured by the personal property designated in the contract and generally have maximum original terms of 60 months. Revolving retail accounts are secured by the goods purchased and generally require minimum monthly payments based on the amount financed calculated after the most recent purchase or outstanding balances. Our retail sales finance portfolio is in a liquidating status.

Our finance receivable types also included the SpringCastle Portfolio at December 31, 2015, as defined below:

SpringCastle Portfolio — included unsecured loans and loans secured by subordinate residential real estate mortgages that were sold on March 31, 2016, in connection with the SpringCastle Interests Sale. The SpringCastle Portfolio included both closed-end accounts and open-end lines of credit. These loans were in a liquidating status and varied in substance and form from our originated loans. Unless we are terminated, we will continue to provide the servicing for these loans pursuant to a servicing agreement, which we service as unsecured loans because the liens are subordinated to superior ranking security interests.

Components of net finance receivables held for investment by type were as follows:
(dollars in millions)
 
Personal
Loans
 
SpringCastle
Portfolio
 
Real Estate
Loans
 
Retail
Sales Finance
 
Total
 
 
 
 
 
 
 
 
 
 
 
September 30, 2016
 
 

 
 

 
 

 
 

 
 

Gross receivables *
 
$
15,607

 
$

 
$
200

 
$
14

 
$
15,821

Unearned finance charges and points and fees
 
(2,175
)
 

 

 
(1
)
 
(2,176
)
Accrued finance charges
 
145

 

 
1

 

 
146

Deferred origination costs
 
79

 

 

 

 
79

Total
 
$
13,656

 
$

 
$
201

 
$
13

 
$
13,870

 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 

 
 

 
 

 
 

 
 

Gross receivables *
 
$
15,353

 
$
1,672

 
$
534

 
$
25

 
$
17,584

Unearned finance charges and points and fees
 
(2,261
)
 

 

 
(2
)
 
(2,263
)
Accrued finance charges
 
147

 
31

 
4

 

 
182

Deferred origination costs
 
56

 

 

 

 
56

Total
 
$
13,295

 
$
1,703

 
$
538

 
$
23

 
$
15,559

                                      
*
Gross receivables are defined as follows:

Finance receivables purchased as a performing receivable — gross finance receivables equal the UPB for interest bearing accounts and the gross remaining contractual payments for precompute accounts; additionally, the remaining unearned discount, net of premium established at the time of purchase, is included in both interest bearing and precompute accounts to reflect the finance receivable balance at its initial fair value;

Finance receivables originated subsequent to the respective OneMain and Fortress acquisitions — gross finance receivables equal the UPB for interest bearing accounts and the gross remaining contractual payments for precompute accounts;

Purchased credit impaired finance receivables — gross finance receivables equal the remaining estimated cash flows less the current balance of accretable yield on the purchased credit impaired accounts; and

TDR finance receivables — gross finance receivables equal the UPB for interest bearing accounts and the gross remaining contractual payments for precompute accounts; additionally, the remaining unearned discount, net of premium established at the time of purchase, is included in both interest bearing and precompute accounts previously purchased as a performing receivable.


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Unused lines of credit extended to customers by the Company were as follows:
(dollars in millions)
 
September 30,
2016
 
December 31,
2015
 
 
 
 
 
Personal loans
 
$
1

 
$
2

SpringCastle Portfolio
 

 
365

Real estate loans
 
10

 
30

Total
 
$
11

 
$
397


Unused lines of credit on our personal loans can be suspended if any of the following occurs: (i) the value of the collateral declines significantly; (ii) we believe the borrower will be unable to fulfill the repayment obligations; or (iii) any other default by the borrower of any material obligation under the agreement occurs. Unused lines of credit on our real estate loans can be suspended if any of the following occurs: (i) the value of the real estate declines significantly below the property’s initial appraised value; (ii) we believe the borrower will be unable to fulfill the repayment obligations because of a material change in the borrower’s financial circumstances; or (iii) any other default by the borrower of any material obligation under the agreement occurs. Unused lines of credit on home equity lines of credit can be terminated for delinquency. Accordingly, no reserve has been recorded for the unused lines of credit.

CREDIT QUALITY INDICATORS

We consider the delinquency status and nonperforming status of the finance receivable as our primary credit quality indicators.

We accrue finance charges on revolving retail finance receivables up to the date of charge-off at 180 days past due. Our revolving retail finance receivables that were more than 90 days past due and still accruing finance charges at September 30, 2016 and at December 31, 2015 were immaterial. Our personal loans and real estate loans do not have finance receivables that were more than 90 days past due and still accruing finance charges.

Delinquent and Nonperforming Finance Receivables

We consider the delinquency status of the finance receivable as our primary credit quality indicator. We monitor delinquency trends to manage our exposure to credit risk. We consider finance receivables 60 days or more past due as delinquent and consider the likelihood of collection to decrease at such time.

We also monitor finance receivable performance trends to evaluate the potential risk of future credit losses. At 90 days or more past due, we consider our finance receivables to be nonperforming. Once the finance receivables are considered as nonperforming, we consider them to be at increased risk for credit loss.


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Table of Contents


The following is a summary of net finance receivables held for investment by type and by number of days delinquent:
(dollars in millions)
 
Personal
Loans
 
SpringCastle
Portfolio
 
Real Estate
Loans
 
Retail
Sales Finance
 
Total
 
 
 
 
 
 
 
 
 
 
 
September 30, 2016
 
 

 
 

 
 

 
 

 
 

Net finance receivables:
 
 

 
 

 
 

 
 

 
 

Performing
 
 
 
 
 
 
 
 
 
 
Current
 
$
12,992

 
$

 
$
152

 
$
13

 
$
13,157

30-59 days past due
 
211

 

 
14

 

 
225

60-89 days past due
 
145

 

 
7

 

 
152

Total performing
 
13,348

 

 
173

 
13

 
13,534

Nonperforming
 
 
 
 
 
 
 
 
 
 
90-119 days past due
 
115

 

 
3

 

 
118

120-149 days past due
 
99

 

 
3

 

 
102

150-179 days past due
 
91

 

 
2

 

 
93

180 days or more past due
 
3

 

 
20

 

 
23

Total nonperforming
 
308

 

 
28

 

 
336

Total
 
$
13,656

 
$

 
$
201

 
$
13

 
$
13,870

 
 
 
 
 
 
 
 
 
 
 
Total 60+ delinquent finance receivables
 
$
453

 
$

 
$
35

 
$

 
$
488

 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 

 
 

 
 

 
 

 
 

Net finance receivables: