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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 March 31, 2018
 
OR
 
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from to
 
Commission file number 1-06155

SPRINGLEAF FINANCE CORPORATION
(Exact name of registrant as specified in its charter)

Indiana
 
35-0416090
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
 
 
 
601 N.W. Second Street, Evansville, IN
 
47708
(Address of principal executive offices)
 
(Zip Code)

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

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

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

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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

At May 1, 2018, there were 10,160,021 shares of the registrant’s common stock, $0.50 par value, outstanding.
 




TABLE OF CONTENTS

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2




GLOSSARY
Terms and abbreviations used in this report are defined below.
Term or Abbreviation
 
Definition
 
 
 
2017 Annual Report on Form
10-K
 
Annual Report on Form 10-K for the fiscal year ended December 31, 2017
2022 SFC Notes
 
$500 million of 6.125% Senior Notes due 2022 issued by SFC on May 15, 2017 and guaranteed by OMH
30-89 Delinquency ratio
 
net finance receivables 30-89 days past due as a percentage of net finance receivables
5.25% SFC Notes
 
$700 million of 5.25% Senior Notes due 2019 issued by SFC on December 3, 2014 and guaranteed by OMH
5.625% SFC Notes
 
$875 million of 5.625% Senior Notes due 2023 issued by SFC on December 8, 2017 and guaranteed by OMH
6.125% SFC Notes
 
collectively, the 2022 SFC Notes and the Additional SFC Notes
6.875% SFC Notes
 
$1.25 billion aggregate principal amount of 6.875% Senior Notes due 2025 issued by SFC on March 12, 2018 and guaranteed by OMH
8.25% SFC Notes
 
$1.0 billion of 8.25% Senior Notes due 2020 issued by SFC on April 11, 2016 and guaranteed by OMH
ABS
 
asset-backed securities
Accretable yield
 
the excess of the cash flows expected to be collected on the purchased credit impaired finance receivables over the discounted cash flows
Additional SFC Notes
 
$500 million of 6.125% Senior Notes due 2022 issued by SFC on May 30, 2017 and guaranteed by OMH
Adjusted pretax income (loss)
 
a non-GAAP financial measure used by management as a key performance measure of our segments
AHL
 
American Health and Life Insurance Company, an insurance subsidiary of OMFH
Apollo
 
Apollo Global Management, LLC and its consolidated subsidiaries
Apollo-Värde Transaction
 
the proposed purchase by the Apollo-Värde Group of 54,937,500 shares of OMH common stock from the Initial Stockholder pursuant to the Share Purchase Agreement entered into among OMH, the Initial Stockholder and the Apollo-Värde Group on January 3, 2018
Apollo-Värde Group
 
an investor group led by funds managed by Apollo and Värde
ASC
 
Accounting Standards Codification
ASU
 
Accounting Standards Update
Average debt
 
average of debt for each day in the period
Average net receivables
 
average of monthly average net finance receivables (net finance receivables at the beginning and end of each month divided by two) in the period
Cash Services Note
 
new intercompany demand note issued to CSI in exchange for the Independence Demand Note in connection with the Note Assignment
CDO
 
collateralized debt obligations
CFPB
 
Consumer Financial Protection Bureau
CMBS
 
commercial mortgage-backed securities
CSI
 
Springleaf Financial Cash Services, Inc.
Dodd-Frank Act
 
the Dodd-Frank Wall Street Reform and Consumer Protection Act
Exchange Act
 
Securities Exchange Act of 1934, as amended
FA Loans
 
purchased credit impaired finance receivables related to the Fortress Acquisition
FASB
 
Financial Accounting Standards Board
FHLB
 
Federal Home Loan Bank
FICO score
 
a credit score created by Fair Isaac Corporation
Fixed charge ratio
 
earnings less income taxes, interest expense, extraordinary items, goodwill impairment, and any amounts related to discontinued operations, divided by the sum of interest expense and any preferred dividends
Fortress
 
Fortress Investment Group LLC
Fortress Acquisition
 
transaction by which FCFI Acquisition LLC, an affiliate of Fortress, acquired an 80% economic interest of the sole stockholder of SFC for a cash purchase price of $119 million, effective November 30, 2010
GAAP
 
generally accepted accounting principles in the United States of America

3




Term or Abbreviation
 
Definition
 
 
 
Gross charge-off ratio
 
annualized gross charge-offs as a percentage of average net receivables
Independence
 
Independence Holdings, LLC
Independence Demand Note
 
a revolving demand note entered into on November 12, 2015 whereby CSI agreed to make advances to Independence from time to time
Indiana DOI
 
Indiana Department of Insurance
Initial Stockholder
 
Springleaf Financial Holdings, LLC
IRS
 
Internal Revenue Service
Junior Subordinated Debenture
 
$350 million aggregate principal amount of 60-year junior subordinated debt issued by SFC under an indenture dated January 22, 2007, by and between SFC and Deutsche Bank Trust Company, as trustee, and guaranteed by OMH
LIBOR
 
London Interbank Offered Rate
Logan Circle
 
Logan Circle Partners, L.P.
Merit
 
Merit Life Insurance Co., an insurance subsidiary of SFC
MetLife
 
MetLife, Inc.
Nationstar
 
Nationstar Mortgage LLC, dba “Mr. Cooper”
Net charge-off ratio
 
annualized net charge-offs as a percentage of average net receivables
Net interest income
 
interest income less interest expense
Note Assignment
 
an assignment of an intercompany demand note entered into on July 19, 2016 whereby CSI sold and assigned to OMFH, and OMFH purchased and assumed from CSI, an interest in and to CSI’s right to receive $150 million principal amount outstanding under the Independence Demand Note
OCLI
 
OneMain Consumer Loan, Inc.
ODART
 
OneMain Direct Auto Receivables Trust
OGSC
 
OneMain General Services Corporation, successor to SGSC and SFMC
OMAS
 
OneMain Assurance Services, LLC, a subsidiary of OMFH, part of insurance operations
OMFH
 
OneMain Financial Holdings, LLC
OMFH Note
 
new intercompany demand note issued to OMFH in exchange for the Independence Demand Note (in addition to the Cash Services Note) in connection with the Note Assignment
OMH
 
OneMain Holdings, Inc.
OneMain Acquisition
 
Acquisition of OneMain from CitiFinancial Credit Company, effective November 1, 2015
OneMain Demand Note
 
a revolving demand note entered into on November 15, 2015 whereby SFC agreed to make advances to OMFH from time to time
Other Securities
 
securities for which the fair value option was elected and equity securities. Other Securities recognize unrealized gains and losses in investment revenues
Other SFC Notes
 
collectively, of SFC’s 8.25% Senior Notes due 2023, 7.75% Senior Notes due 2021, and 6.00% Senior Notes due 2020, on a senior unsecured basis, and the Junior Subordinated Debenture, on a junior subordinated basis, issued by SFC and guaranteed by OMH
Recovery ratio
 
annualized recoveries on net charge-offs as a percentage of average net receivables
Retail sales finance
 
collectively, retail sales contracts and revolving retail accounts
RMBS
 
residential mortgage-backed securities
RSUs
 
restricted stock units
SEC
 
U.S. Securities and Exchange Commission
Securities Act
 
Securities Act of 1933
Segment Accounting Basis
 
a basis used to report the operating results of our segments, which reflects our allocation methodologies for certain costs and excludes the impact of applying purchase accounting
Settlement Agreement
 
a Settlement Agreement with the U.S. Department of Justice entered into by OMH and certain of its subsidiaries on November 13, 2015, in connection with the OneMain Acquisition
SFC
 
Springleaf Finance Corporation
SFC Base Indenture
 
Indenture dated as of December 3, 2014
SFC First Supplemental Indenture
 
First Supplemental Indenture dated as of December 3, 2014, to the SFC Base Indenture
SFC Fourth Supplemental Indenture
 
Fourth Supplemental Indenture dated as of December 8, 2017, to the SFC Base Indenture

4




Term or Abbreviation
 
Definition
 
 
 
SFC Fifth Supplemental Indenture
 
Fifth Supplemental Indenture dated as of March 12, 2018, to the SFC Base Indenture
SFC Guaranty Agreements
 
agreements entered into on December 30, 2013 by OMH whereby it agreed to fully and unconditionally guarantee the payments of principal, premium (if any) and interest on the Other SFC Notes
SFC Notes
 
collectively, the issued and outstanding senior unsecured notes issued pursuant to the SFC senior Notes Indenture
SFC Second Supplemental Indenture
 
Second Supplemental Indenture dated as of April 11, 2016, to the SFC Base Indenture
SFC Senior Notes Indentures

 
the SFC Base Indenture as supplemented by the SFC First Supplemental Indenture, the SFC Second Supplemental Indenture, the SFC Third Supplemental Indenture, the SFC Fourth Supplemental Indenture, and the SFC Fifth Supplemental Indenture
SFC Third Supplemental Indenture
 
Third Supplemental Indenture dated as of May 15, 2017, to the SFC Base Indenture
SFC Trust Guaranty Agreement
 
agreement entered into on December 30, 2013 by OMH whereby it agreed to fully and unconditionally guarantee the related payment obligations under the trust preferred securities in connection with the Junior Subordinated Debenture
SFI
 
Springleaf Finance, Inc.
SFMC
 
Springleaf Finance Management Corporation
SGSC
 
Springleaf General Services Corporation
Share Purchase Agreement
 
Share Purchase Agreement entered into on January 3, 2018, among the Apollo-Värde Group, the Initial Stockholder and OMH to acquire from the Initial Stockholder 54,937,500 shares of OMH’s common stock that was issued and outstanding as of such date, representing the entire holdings of OMH’s stock beneficially owned by Fortress
SLFT
 
Springleaf Funding Trust
SoftBank
 
SoftBank Group Corporation
SpringCastle Interests Sale
 
the March 31, 2016 sale by SpringCastle Holdings, LLC and Springleaf Acquisition Corporation of the equity interest in the SpringCastle Joint Venture
SpringCastle Joint Venture
 
joint venture among SpringCastle America, LLC, SpringCastle Credit, LLC, SpringCastle Finance, LLC, and SpringCastle Acquisition LLC in which SpringCastle Holdings, LLC previously owned a 47% equity interest in each of SpringCastle America, LLC, SpringCastle Credit, LLC and SpringCastle Finance, LLC and Springleaf Acquisition Corporation previously owned a 47% equity interest in SpringCastle Acquisition LLC
SpringCastle Portfolio
 
loans acquired through the SpringCastle Joint Venture
Tangible equity
 
total equity less accumulated other comprehensive income or loss
Tangible managed assets
 
total assets less goodwill and other intangible assets
Tax Act
 
Public Law 115-97 amending the Internal Revenue Code of 1986
TDR finance receivables
 
troubled debt restructured finance receivables
Triton
 
Triton Insurance Company, an insurance subsidiary of OMFH
Trust preferred securities
 
capital securities classified as debt for accounting purposes but due to their terms are afforded, at least in part, equity capital treatment in the calculation of effective leverage by rating agencies
Unearned finance charges
 
the amount of interest that is capitalized at time of origination on a precompute loan that will be earned over the remaining contractual life of the loan
UPB
 
unpaid principal balance for interest bearing accounts and the gross remaining contractual payments less the unaccreted balance of unearned finance charges for precompute accounts
Värde
 
Värde Partners, Inc.
VIEs
 
variable interest entities
Weighted average interest rate
 
annualized interest expense as a percentage of average debt
Yield
 
annualized finance charges as a percentage of average net receivables
Yosemite
 
Yosemite Insurance Company, an insurance subsidiary of SFC


5




PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.    

SPRINGLEAF FINANCE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)

(dollars in millions, except par value amount)
 
March 31,
2018
 
December 31,
2017
 
 
 
 
 
Assets
 
 

 
 

Cash and cash equivalents
 
$
1,431

 
$
244

Investment securities
 
491

 
536

Net finance receivables:
 
 

 
 

Personal loans (includes loans of consolidated VIEs of $3.5 billion in 2018 and $3.3 billion in 2017)
 
5,336

 
5,308

Other receivables
 
129

 
134

Net finance receivables
 
5,465

 
5,442

Unearned insurance premium and claim reserves
 
(83
)
 
(108
)
Allowance for finance receivable losses (includes allowance of consolidated VIEs of $137 million in 2018 and $141 million in 2017)
 
(238
)
 
(240
)
Net finance receivables, less unearned insurance premium and claim reserves and allowance for finance receivable losses
 
5,144

 
5,094

Finance receivables held for sale
 
126

 
132

Notes receivables from parent and affiliates
 
4,631

 
4,488

Restricted cash and restricted cash equivalents (includes restricted cash and restricted cash equivalents of consolidated VIEs of $238 million in 2018 and $158 million in 2017)
 
251

 
169

Other assets
 
275

 
161

 
 
 
 
 
Total assets
 
$
12,349

 
$
10,824

 
 
 
 
 
Liabilities and Shareholder's Equity
 
 

 
 

Long-term debt (includes debt of consolidated VIEs of $3.2 billion in 2018 and $3.0 billion in 2017)
 
$
9,291

 
$
7,865

Insurance claims and policyholder liabilities
 
243

 
261

Deferred and accrued taxes
 
97

 
78

Other liabilities (includes other liabilities of consolidated VIEs of $5 million in 2018 and in 2017)
 
263

 
214

Total liabilities
 
9,894

 
8,418

Commitments and contingent liabilities (Note 14)
 


 


 
 
 
 
 
Shareholder's equity:
 
 

 
 

Common stock, par value $.50 per share; 25,000,000 shares authorized, 10,160,021 shares issued and outstanding at March 31, 2018 and December 31, 2017
 
5

 
5

Additional paid-in capital
 
803

 
799

Accumulated other comprehensive income (loss)
 
(9
)
 

Retained earnings
 
1,656

 
1,602

Total shareholder's equity
 
2,455

 
2,406

 
 
 
 
 
Total liabilities and shareholder's equity
 
$
12,349

 
$
10,824


See Notes to Condensed Consolidated Financial Statements.


6




SPRINGLEAF FINANCE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)

(dollars in millions)
 
Three Months Ended March 31,
 
2018

2017
 
 
 

 
 
Interest income:
 
 
 
 
Finance charges
 
$
325

 
$
294

Finance receivables held for sale originated as held for investment
 
3

 
3

Total interest income
 
328

 
297

 
 
 
 
 
Interest expense
 
130

 
127

 
 
 
 
 
Net interest income
 
198

 
170

 
 
 
 
 
Provision for finance receivable losses
 
81

 
71

 
 
 
 
 
Net interest income after provision for finance receivable losses
 
117

 
99

 
 
 
 
 
Other revenues:
 
 

 
 

Insurance
 
21

 
37

Investment
 
5

 
6

Interest income on notes receivable from parent and affiliates
 
68

 
59

Other
 
1

 
4

Total other revenues
 
95

 
106

 
 
 
 
 
Other expenses:
 
 

 
 

Operating expenses:
 
 

 
 

Salaries and benefits
 
82

 
79

Other operating expenses
 
52

 
67

Insurance policy benefits and claims
 
7

 
16

Total other expenses
 
141

 
162

 
 
 
 
 
Income before income taxes
 
71

 
43

 
 
 
 
 
Income taxes
 
17

 
16

 
 
 
 
 
Net income
 
$
54

 
$
27


See Notes to Condensed Consolidated Financial Statements.


7




SPRINGLEAF FINANCE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(dollars in millions)
 
Three Months Ended March 31,
 
2018
 
2017
 
 
 
 
 
Net income
 
$
54


$
27

 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
Net change in unrealized gains (losses) on non-credit impaired available-for-sale securities
 
(7
)
 
3

Income tax effect:
 
 
 
 
Net unrealized gains (losses) on non-credit impaired available-for-sale securities
 
(2
)
 
(1
)
Other comprehensive income (loss), net of tax, before reclassification adjustments
 
(9
)
 
2

Reclassification adjustments included in net income:
 
 
 
 
Net realized gains on available-for-sale securities
 

 
(2
)
Income tax effect:
 
 
 
 
Net realized gains on available -for-sale securities
 

 
1

Reclassification adjustments included in net income, net of tax
 

 
(1
)
Other comprehensive income (loss), net of tax
 
(9
)
 
1

 
 
 
 
 
Comprehensive income
 
$
45


$
28


See Notes to Condensed Consolidated Financial Statements.


8




SPRINGLEAF FINANCE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholder’s Equity (Unaudited)

 
 
Springleaf Finance Corporation Shareholder’s Equity
(dollars in millions)
 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
 
Total
Shareholder’s
Equity
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2018
 
$
5

 
$
799

 
$

 
$
1,602

 
$
2,406

Non-cash incentive compensation from Initial Stockholder
 

 
4

 

 

 
4

Other comprehensive income
 

 

 
(9
)
 

 
(9
)
Net income
 

 

 

 
54

 
54

Balance, March 31, 2018
 
$
5

 
$
803

 
$
(9
)
 
$
1,656

 
$
2,455

 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2017
 
$
5

 
$
799

 
$
(7
)
 
$
1,546

 
$
2,343

Other comprehensive income
 

 

 
1

 

 
1

Net income
 

 

 

 
27

 
27

Balance, March 31, 2017
 
$
5

 
$
799

 
$
(6
)
 
$
1,573

 
$
2,371


See Notes to Condensed Consolidated Financial Statements.


9




SPRINGLEAF FINANCE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(dollars in millions)
 
Three Months Ended March 31,

2018
 
2017
 
 
 
 
 
Cash flows from operating activities
 
 

 
 

Net income
 
$
54

 
$
27

Reconciling adjustments:
 
 

 
 

Provision for finance receivable losses
 
81

 
71

Depreciation and amortization
 
28

 
39

Deferred income tax (benefit)
 
(3
)
 
(5
)
Non-cash incentive compensation from Initial Stockholder
 
4

 

Other
 
5

 

Cash flows due to changes in other assets and other liabilities
 
(12
)
 
101

Net cash provided by operating activities
 
157

 
233

 
 
 
 
 
Cash flows from investing activities
 
 

 
 

Net principal collections (originations) of finance receivables held for investment and held for sale
 
(117
)
 
7

Cash advances on intercompany notes receivables
 
(545
)
 
(211
)
Proceeds from repayments of principal on intercompany notes receivables
 
334

 
138

Available-for-sale securities purchased
 
(24
)
 
(72
)
Available-for-sale securities called, sold, and matured
 
56

 
63

Trading and other securities called, sold, and matured
 
1

 

Other, net
 
(5
)
 
3

Net cash used for investing activities
 
(300
)
 
(72
)
 
 
 
 
 
Cash flows from financing activities
 
 

 
 

Proceeds from issuance of long-term debt, net of commissions
 
2,001

 
366

Repayment of long-term debt
 
(589
)
 
(405
)
Net cash provided by (used for) financing activities
 
1,412

 
(39
)
 
 
 
 
 
Net change in cash and cash equivalents and restricted cash and restricted cash equivalents
 
1,269

 
122

Cash and cash equivalents and restricted cash and restricted cash equivalents at beginning of period
 
413

 
467

Cash and cash equivalents and restricted cash and restricted cash equivalents at end of period
 
$
1,682

 
$
589

 
 
 
 
 
Supplemental cash flow information
 
 
 
 
Cash and cash equivalents
 
$
1,431

 
$
397

Restricted cash and restricted cash equivalents
 
251

 
192

Total cash and cash equivalents and restricted cash and restricted cash equivalents
 
$
1,682

 
$
589

 
 
 
 
 
Supplemental non-cash activities
 
 

 
 

Net unsettled investment security dispositions (purchases)
 
$
2

 
$
(19
)
 
 
 
 
 
Restricted cash and restricted cash equivalents primarily represent funds required to be used for future debt payments relating to
our securitization transactions and escrow deposits.

See Notes to Condensed Consolidated Financial Statements.

10




SPRINGLEAF FINANCE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2018

1. Business and Basis of Presentation    

Springleaf Finance Corporation is referred to in this report as SFC or, collectively with its subsidiaries, whether directly or indirectly owned, “Springleaf,” the “Company,” “we,” “us,” or “our” is a wholly owned subsidiary of SFI. SFI is a wholly owned subsidiary of OMH.

At March 31, 2018, the Initial Stockholder owned approximately 40.5% of OMH’s common stock. The Initial Stockholder is owned by a private equity fund managed by an affiliate of Fortress. On December 27, 2017, SoftBank acquired Fortress and Fortress now operates within SoftBank as an independent business headquartered in New York.

On January 3, 2018, the Apollo-Värde Group entered into a Share Purchase Agreement with the Initial Stockholder and the Company to acquire from the Initial Stockholder 54,937,500 shares of OMH common stock representing the entire holdings of OMH’s common stock beneficially owned by Fortress. This transaction is expected to close in the second quarter of 2018 and is subject to regulatory approvals and other customary closing conditions.

On February 21, 2018, OMH entered into an underwriting agreement among OMH, the Initial Stockholder and Morgan Stanley & Co. LLC as underwriter in connection with the sale by Springleaf Financial Holdings, LLC of 4,179,678 shares of OMH common stock. These shares were beneficially owned by AIG Capital Corporation (“AIG”), a subsidiary of American International Group, Inc., and represented the entire holdings of OMH common stock beneficially owned by AIG. As disclosed in Note 21 of the Notes to Consolidated Financial Statements in Part II - Item 8 included in our 2017 Annual Report on Form 10-K, certain executives of the Company had previously been granted incentive units that only provide benefits (in the form of distributions) if the Initial Stockholder makes distributions to one or more of its common members that exceed specified amounts. In connection with the sale of OMH common stock by the Initial Stockholder on February 21, 2018, certain of the specified thresholds were satisfied. In accordance with ASC Topic 710, Compensation-General, we recorded non-cash incentive compensation expense of $4 million in the first quarter of 2018 related to the incentive units with a capital contribution offset such that the impact to overall shareholders’ equity was neutral.

BASIS OF PRESENTATION

We prepared our condensed consolidated financial statements using GAAP. These statements are unaudited. The year-end condensed balance sheet data was derived from our audited financial statements but does not include all disclosures required by GAAP. The statements include the accounts of SFC, its subsidiaries (all of which are wholly owned), and 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 2018 presentation, we have reclassified 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 2017 Annual Report on Form 10-K. We follow the same significant accounting policies for our interim reporting, except for the new accounting pronouncements subsequently adopted and disclosed below.

2. Recent Accounting Pronouncements    

ACCOUNTING PRONOUNCEMENTS RECENTLY 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. Management has reviewed this update and other ASU’s that were subsequently issued to further clarify the implementation guidance outlined in ASU 2014-09. The Company’s implementation efforts included the

11




identification of revenue streams that are within the scope of the new guidance and the review of related contracts with customers to determine their effect on certain non-interest income items presented in our consolidated statements of operations and the additional presentation disclosures required. We concluded that substantially all of the Company’s revenues are generated from activities that are outside the scope of this ASU. We adopted the amendments of these ASU’s as of January 1, 2018 and concluded that it does not have a material impact 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 for financial liabilities measured under the fair value option, 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. In February of 2018, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments - Overall, which made technical corrections, and improvements to the codification, specifically related to ASU 2016-01. The Company has adopted these ASU’s as of January 1, 2018 using a cumulative-effect adjustment to the balance sheet. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) shall be applied prospectively to equity investments that exist as of the date of adoption of this update. We adopted all other amendments of these ASU’s as of January 1, 2018 and presented this change on a retrospective basis for all periods presented. We concluded that this ASU does not have a material impact on our consolidated financial statements.

In March of 2017, the FASB issued ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs, which amends the amortization period for certain purchased callable debt securities held at a premium. This ASU shortens the amortization period for the premium from the adjustment of yield over the contractual life of the instrument to the earliest call date. The amendments in this ASU become effective for the Company for fiscal years beginning January 1, 2019. As the Company’s existing accounting policy was in accordance with the amendments of this ASU, we elected to early adopt as of January 1, 2018 and concluded that it does not have a material impact on our consolidated financial statements.

Statement of Cash Flows

In August of 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, which clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows. We adopted the amendments of this ASU as of January 1, 2018 and concluded that it does not have a material impact on our consolidated financial statements.

Income Taxes

In October of 2016, the FASB issued ASU 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory, which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. We adopted the amendments of this ASU as of January 1, 2018 and concluded that it does not have a material impact on our consolidated financial statements.

Compensation and Benefits

In March of 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, to improve the presentation of the net periodic pension cost and net periodic postretirement benefit costs. It requires that a company present the service cost component separately from other components of net benefit cost on the income statement. We adopted the amendments of this ASU as of January 1, 2018 and concluded that it does not have a material impact on our consolidated financial statements.

In May of 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation: Scope of Modification Accounting, which provides guidance on which changes to the terms or conditions of a share-based payment award requires an entity to apply modification accounting. We adopted the amendments of this ASU as of January 1, 2018 and concluded that it does not have a material impact on our consolidated financial statements.


12




ACCOUNTING PRONOUNCEMENTS TO BE ADOPTED

Leases

In February of 2016, the FASB issued ASU 2016-02, Leases, which requires lessees to recognize a right-of-use asset and a liability for the obligation to make payments on leases with terms greater than 12 months and to disclose information related to the amount, timing and uncertainty of cash flows arising from leases, including various qualitative and quantitative requirements. Management has reviewed this update and other ASU’s that were subsequently issued to further clarify the implementation guidance outlined in ASU 2016-02.

The amendments in this ASU become effective for the Company for fiscal years beginning January 1, 2019. The Company’s cross-functional implementation team has developed a project plan to ensure we comply with all updates from this ASU at the time of adoption. We are currently in the process of implementing a new leasing system that will allow us to better account for the leases in accordance with the new guidance. We are assessing new system updates to ensure both qualitative and quantitative data requirements will be met at the time of adoption. The Company’s leases primarily consist of leased office space, automobiles and information technology equipment. At December 31, 2017, the Company had approximately $43 million of minimum lease commitments from these operating leases (refer to Note 19 of the Notes to the Consolidated Financial Statements in Part II - Item 8 included in our 2017 Annual Report on Form 10-K). The adoption of this ASU will result in an increase in our reported assets and liabilities on the consolidated balance sheets due to the recognition of the right-of-use asset and lease liability, and we are in the process of quantifying the expected impact.

Allowance for Finance Receivables Losses

In June of 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments, which 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. Therefore, we would expect changes in the allowance for finance receivable losses will be driven primarily by the nature and growth of the Company’s loan portfolio and the economic environment at that time.

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

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

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

The ASU will become effective for the Company for fiscal years beginning January 1, 2020. Early adoption is permitted for fiscal years beginning January 1, 2019. The Company’s cross-functional implementation team has developed a project plan to ensure we comply with all updates from this ASU at the time of adoption. We continue to make progress in developing an acceptable model to estimate the expected credit losses. After the model has been reviewed and validated in accordance with our governance policies, the Company will provide further disclosure regarding the estimated impact on our allowance for finance receivables losses. In addition to the development of the model, we are assessing the additional disclosure requirements from this update. We believe the adoption of this ASU will have a material effect on our consolidated financial statements through an increase to the allowance for finance receivable losses and a corresponding one-time cumulative effect reduction to retained earnings in the consolidated balance sheet as of the beginning of the year of adoption. We are in the process of quantifying the expected impacts.


13




Income Taxes

In February of 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income, which permits the reclassification of stranded tax effects within accumulated other comprehensive income to retained earnings from the passage of the Tax Act. This update requires additional disclosures describing the nature of the stranded tax effects. The amendments within this ASU become effective for the Company for fiscal years beginning after January 1, 2019, with early adoption permitted. We believe that the adoption of this ASU will not have a material impact on our consolidated financial statements.
We do not believe that any other accounting pronouncements issued during the three months ended March 31, 2018, but not yet effective, would have a material impact on our consolidated financial statements or disclosures, if adopted.

3. Finance Receivables    

Our finance receivable types include personal loans and other receivables 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.

Other receivables — consist of our loan portfolios in a liquidating status. We ceased originating real estate loans and purchasing retail sales contracts and revolving retail accounts. We continue to service or sub-service the liquidating real estate loans and retail sales contracts and will provide revolving retail sales financing services on our revolving retail accounts.

Beginning in 2018, we combined real estate and retail sales finance loans into “Other Receivables.” Previously, we presented real estate and retail sales finance loans as distinct receivable types. In order to conform to this new alignment, we have revised our prior period finance receivable disclosures.

Components of net finance receivables held for investment by type were as follows:
(dollars in millions)
 
Personal
Loans
 
Other Receivables
 
Total
 
 
 
 
 
 
 
March 31, 2018
 
 

 
 

 
 

Gross receivables (a)(b)
 
$
5,280

 
$
128

 
$
5,408

Unearned points and fees
 
(65
)
 

 
(65
)
Accrued finance charges
 
74

 
1

 
75

Deferred origination costs
 
47

 

 
47

Total
 
$
5,336

 
$
129

 
$
5,465

 
 
 
 
 
 
 
December 31, 2017
 
 

 
 

 
 

Gross receivables (a)(b)
 
$
5,248

 
$
133

 
$
5,381

Unearned points and fees
 
(66
)
 

 
(66
)
Accrued finance charges
 
78

 
1

 
79

Deferred origination costs
 
48

 

 
48

Total
 
$
5,308

 
$
134

 
$
5,442

                                      
(a)
Gross receivables are defined as follows:

Finance receivables purchased as a performing receivable — gross finance receivables equal the UPB and the remaining unearned discount, net of premium established at the time of purchase to reflect the finance receivable balance at its initial fair value;

Finance receivables originated subsequent to the Fortress Acquisition — gross finance receivables equal the UPB;

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 and, if applicable, the remaining unearned discount, net of premium established at the time of purchase if previously purchased as a performing receivable.

14




(b)
As of January 1, 2018, we have reclassified unearned finance charges to gross receivables. To conform to this presentation, we have reclassified the prior period.

At March 31, 2018 and December 31, 2017, unused lines of credit extended to customers by the Company were immaterial.

CREDIT QUALITY INDICATOR

We consider the value and recoverability of collateral, if any, securing a loan at loan origination and the delinquency status of our finance receivables as our primary credit quality indicators. At March 31, 2018, 56% of our personal loans were secured by titled collateral, compared to 57% at December 31, 2017. We monitor delinquency trends to manage our exposure to credit risk. When finance receivables are 60 days contractually past due, we consider these accounts to be at an increased risk for loss and we transfer collection of these accounts to our centralized operations. At 90 days or more contractually past due, we consider our finance receivables to be nonperforming.

The following is a summary of net finance receivables held for investment by type and by number of days delinquent:
(dollars in millions)
 
Personal
Loans
 
Other Receivables
 
Total
 
 
 
 
 
 
 
March 31, 2018
 
 
 
 
 
 
Performing
 
 
 
 
 
 
Current
 
$
5,112

 
$
103

 
$
5,215

30-59 days past due
 
63

 
7

 
70

60-89 days past due
 
47

 
2

 
49

Total performing
 
5,222

 
112

 
5,334

Nonperforming
 
 
 
 
 
 
90-179 days past due
 
110

 
3

 
113

180 days or more past due
 
4

 
14

 
18

Total nonperforming
 
114

 
17

 
131

Total
 
$
5,336

 
$
129

 
$
5,465

 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
Performing
 
 
 
 
 
 
Current
 
$
5,063

 
$
104

 
$
5,167

30-59 days past due
 
75

 
8

 
83

60-89 days past due
 
55

 
3

 
58

Total performing
 
5,193

 
115

 
5,308

Nonperforming
 
 
 
 
 
 
90-179 days past due
 
112

 
4

 
116

180 days or more past due
 
3

 
15

 
18

Total nonperforming
 
115

 
19

 
134

Total
 
$
5,308

 
$
134

 
$
5,442


PURCHASED CREDIT IMPAIRED FINANCE RECEIVABLES

Our purchased credit impaired finance receivables consist of receivables purchased in connection with the Fortress Acquisition.

We report the carrying amount (which initially was the fair value) of our purchased credit impaired finance receivables in net finance receivables, less allowance for finance receivable losses or in finance receivables held for sale as discussed below.

At March 31, 2018 and December 31, 2017, finance receivables held for sale totaled $126 million and $132 million, respectively, which include purchased credit impaired finance receivables, as well as TDR finance receivables. Therefore, we are presenting the financial information for our purchased credit impaired finance receivables and TDR finance receivables combined for finance receivables held for investment and finance receivables held for sale in the tables below. See Note 5 for further information on our finance receivables held for sale.

15




Information regarding our purchased credit impaired FA Loans held for investment and held for sale were as follows:
(dollars in millions)
 
March 31,
2018
 
December 31,
2017
 
 
 
 
 
FA Loans (a)
 
 
 
 
Carrying amount, net of allowance
 
$
54

 
$
57

Outstanding balance (b)
 
91

 
94

Allowance for purchased credit impaired finance receivable losses
 
9

 
9

                                      
(a)
Purchased credit impaired FA Loans held for sale included in the table above were as follows:
(dollars in millions)
 
March 31,
2018
 
December 31,
2017
 
 
 
 
 
Carrying amount
 
$
42

 
$
44

Outstanding balance
 
69

 
72


(b)
Outstanding balance is defined as UPB of the loans with a net carrying amount.

The allowance for purchased credit impaired finance receivable losses at March 31, 2018 and December 31, 2017, reflected the carrying value of the purchased credit impaired loans held for investment being higher than the present value of the expected cash flows.

Changes in accretable yield for purchased credit impaired FA Loans held for investment and held for sale were as follows:
 
 
Three Months Ended March 31,
(dollars in millions)
 
2018
 
2017
 
 
 
 
 
Balance at beginning of period
 
$
53

 
$
60

Accretion (a)
 
(1
)
 
(1
)
Balance at end of period
 
$
52

 
$
59

 
 
 
 
 
 
 
                                      
(a)
Accretion on our purchased credit impaired FA Loans held for sale included in the table above were immaterial for the three months ended March 31, 2018 and 2017.

TDR FINANCE RECEIVABLES

Information regarding TDR finance receivables held for investment and held for sale were as follows:
(dollars in millions)
 
Personal
Loans
 
Other Receivables (a)
 
Total
 
 
 
 
 
 
 
March 31, 2018
 
 
 
 
 
 
TDR gross finance receivables (b)
 
$
124

 
$
138

 
$
262

TDR net finance receivables
 
123

 
139

 
262

Allowance for TDR finance receivable losses
 
48

 
12

 
60

 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
TDR gross finance receivables (b)
 
$
112

 
$
139

 
$
251

TDR net finance receivables
 
111

 
140

 
251

Allowance for TDR finance receivable losses
 
44

 
12

 
56


16




                                      
(a)
Other Receivables held for sale included in the table above were as follows:
(dollars in millions)
 
March 31,
2018
 
December 31, 2017
 
 
 
 
 
TDR gross finance receivables
 
$
88

 
$
90

TDR net finance receivables
 
89

 
91


(b)
As defined earlier in this Note.

As of March 31, 2018, we had no commitments to lend additional funds on our TDR finance receivables.

TDR average net receivables held for investment and held for sale and finance charges recognized on TDR finance receivables held for investment and held for sale were as follows:
(dollars in millions)
 
Personal
Loans
 
Other Receivables *
 
Total
 
 
 
 
 
 
 
Three Months Ended March 31, 2018
 
 
 
 
 
 
TDR average net receivables
 
$
117

 
$
139

 
$
256

TDR finance charges recognized
 
3

 
2

 
5

 
 
 
 
 
 
 
Three Months Ended March 31, 2017
 
 
 
 
 
 
TDR average net receivables
 
$
48

 
$
134

 
$
182

TDR finance charges recognized
 
1

 
2

 
3

                                      
*
Other Receivables held for sale included in the table above were as follows:
 
 
Three Months Ended March 31,
(dollars in millions)
 
2018
 
2017
 
 
 
 
 
TDR average net receivables
 
$
90

 
$
89

TDR finance charges recognized
 
1

 
1



17




Information regarding the new volume of the TDR finance receivables held for investment and held for sale were as follows:
(dollars in millions)
 
Personal
Loans
 
Other Receivables (a)
 
Total
 
 
 
 
 
 
 
Three Months Ended March 31, 2018
 
 
 
 
 
 
Pre-modification TDR net finance receivables
 
$
33

 
$
2

 
$
35

Post-modification TDR net finance receivables:
 
 
 
 
 
 
Rate reduction
 
$
26

 
$
2

 
$
28

Other (b)
 
7

 

 
7

Total post-modification TDR net finance receivables
 
$
33

 
$
2

 
$
35

Number of TDR accounts
 
5,894

 
29

 
5,923

 
 
 
 
 
 
 
Three Months Ended March 31, 2017
 
 
 
 
 
 
Pre-modification TDR net finance receivables
 
$
15

 
$
3

 
$
18

Post-modification TDR net finance receivables:
 
 
 
 
 
 
Rate reduction
 
$
10

 
$
3

 
$
13

Other (b)
 
4

 

 
4

Total post-modification TDR net finance receivables
 
$
14

 
$
3

 
$
17

Number of TDR accounts
 
2,740

 
64

 
2,804

                                      
(a)
Other Receivables held for sale included in the table above were immaterial.

(b)
“Other” modifications primarily include potential principal and interest forgiveness contingent on future payment performance by the borrower under the modified terms.

Personal loans held for investment that were modified as TDR personal loans within the previous 12 months and for which there was a default during the period to cause the TDR personal loans to be considered nonperforming (90 days or more past due) were as follows:
 
 
Three Months Ended March 31,
(dollars in millions)
 
2018
 
2017
 
 
 
 
 
TDR net finance receivables *
 
$
6

 
$
3

Number of TDR accounts
 
1,190

 
585

                                      
*
Represents the corresponding balance of TDR net finance receivables at the end of the month in which they defaulted.

TDR other receivables for the three months ended March 31, 2018 and 2017 that defaulted during the previous 12-month period were immaterial.


18




4. Allowance for Finance Receivable Losses    

Changes in the allowance for finance receivable losses by finance receivable type were as follows:
(dollars in millions)
 
Personal
Loans
 
Other Receivables
 
Consolidated Total
 
 
 
 
 
 
 
Three Months Ended March 31, 2018
 
 

 
 

 
 

Balance at beginning of period
 
$
216

 
$
24

 
$
240

Provision for finance receivable losses
 
81

 

 
81

Charge-offs
 
(98
)
 
(1
)
 
(99
)
Recoveries
 
15

 
1

 
16

Balance at end of period
 
$
214

 
$
24

 
$
238

 
 
 
 
 
 
 
Three Months Ended March 31, 2017
 
 

 
 

 
 

Balance at beginning of period
 
$
184

 
$
20

 
$
204

Provision for finance receivable losses
 
70

 
1

 
71

Charge-offs
 
(99
)
 
(1
)
 
(100
)
Recoveries
 
21

 

 
21

Balance at end of period
 
$
176

 
$
20

 
$
196



19




The allowance for finance receivable losses and net finance receivables by type and by impairment method were as follows:
(dollars in millions)
 
Personal
Loans
 
Other Receivables
 
Total
 
 
 
 
 
 
 
March 31, 2018
 
 

 
 

 
 

Allowance for finance receivable losses:
 
 

 
 

 
 

Collectively evaluated for impairment
 
$
166

 
$
3

 
$
169

Purchased credit impaired finance receivables
 

 
9

 
9

TDR finance receivables
 
48

 
12

 
60

Total
 
$
214

 
$
24

 
$
238

 
 
 
 
 
 
 
Finance receivables:
 
 

 
 

 
 

Collectively evaluated for impairment
 
$
5,213

 
58

 
$
5,271

Purchased credit impaired finance receivables
 

 
21

 
21

TDR finance receivables
 
123

 
50

 
173

Total
 
$
5,336

 
$
129

 
$
5,465

 
 
 
 
 
 
 
Allowance for finance receivable losses as a percentage of finance receivables
 
4.02
%
 
18.72
%
 
4.36
%
 
 
 
 
 
 
 
December 31, 2017
 
 

 
 

 
 

Allowance for finance receivable losses:
 
 

 
 

 
 

Collectively evaluated for impairment
 
$
172

 
$
3

 
$
175

Purchased credit impaired finance receivables
 

 
9

 
9

TDR finance receivables
 
44

 
12

 
56

Total
 
$
216

 
$
24

 
$
240

 
 
 
 
 
 
 
Finance receivables:
 
 

 
 

 
 

Collectively evaluated for impairment
 
$
5,197

 
$
63

 
$
5,260

Purchased credit impaired finance receivables
 

 
22

 
22

TDR finance receivables
 
111

 
49

 
160

Total
 
$
5,308

 
$
134

 
$
5,442

 
 
 
 
 
 
 
Allowance for finance receivable losses as a percentage of finance receivables
 
4.06
%
 
18.27
%
 
4.41
%

5. Finance Receivables Held for Sale    

We report finance receivables held for sale of $126 million at March 31, 2018 and $132 million at December 31, 2017, which are carried at the lower of cost or fair value and consist entirely of real estate loans. At March 31, 2018 and December 31, 2017, the fair value of our finance receivables held for sale exceeded the cost. We used the aggregate basis to determine the lower of cost or fair value of finance receivables held for sale.

We did not have any material transfers to or from finance receivables held for sale during the three months ended March 31, 2018 and 2017.


20




6. Investment Securities    

AVAILABLE-FOR-SALE SECURITIES

Cost/amortized cost, unrealized gains and losses, and fair value of fixed maturity available-for-sale securities by type were as follows:
(dollars in millions)
 
Cost/
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
 
 
 
 
 
 
 
 
March 31, 2018
 
 

 
 

 
 

 
 

Fixed maturity available-for-sale securities:
 
 

 
 

 
 

 
 

U.S. government and government sponsored entities
 
$
17

 
$

 
$

 
$
17

Obligations of states, municipalities, and political subdivisions
 
66

 

 
(1
)
 
65

Non-U.S. government and government sponsored entities
 
4

 

 

 
4

Corporate debt
 
296

 
3

 
(6
)
 
293

Mortgage-backed, asset-backed, and collateralized:
 
 

 
 

 
 

 
 
RMBS
 
39

 

 
(1
)
 
38

CMBS
 
23

 

 

 
23

CDO/ABS
 
43

 

 

 
43

Total
 
$
488

 
$
3

 
$
(8
)
 
$
483

 
 
 
 
 
 
 
 
 
December 31, 2017
 
 

 
 

 
 

 
 

Fixed maturity available-for-sale securities:
 
 

 
 

 
 

 
 

U.S. government and government sponsored entities
 
$
17

 
$

 
$

 
$
17

Obligations of states, municipalities, and political subdivisions
 
70

 

 

 
70

Non-U.S. government and government sponsored entities
 
4

 

 

 
4

Corporate debt
 
322

 
4

 
(2
)
 
324

Mortgage-backed, asset-backed, and collateralized:
 
 

 
 

 
 

 
 

RMBS
 
35

 

 

 
35

CMBS
 
23

 

 

 
23

CDO/ABS
 
53

 

 

 
53

Total
 
$
524

 
$
4

 
$
(2
)
 
$
526




21




Fair value and unrealized losses on available-for-sale securities by type and length of time in a continuous unrealized loss position were as follows:
 
 
Less Than 12 Months
 
12 Months or Longer
 
Total
(dollars in millions)
 
Fair
Value
 
Unrealized
Losses *
 
Fair
Value
 
Unrealized
Losses *
 
Fair
Value
 
Unrealized
Losses
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2018
 
 

 
 

 
 

 
 

 
 

 
 

U.S. government and government sponsored entities
 
$
8

 
$

 
$
8

 
$

 
$
16

 
$

Obligations of states, municipalities, and political subdivisions
 
39

 

 
12

 
(1
)
 
51

 
(1
)
Non-U.S. government and government sponsored entities
 
3

 

 

 

 
3

 

Corporate debt
 
159

 
(4
)
 
64

 
(2
)
 
223

 
(6
)
RMBS
 
17

 
(1
)
 
12

 

 
29

 
(1
)
CMBS
 
6

 

 
15

 

 
21

 

CDO/ABS
 
27

 

 
10

 

 
37

 

Total
 
$
259

 
$
(5
)
 
$
121

 
$
(3
)
 
$
380

 
$
(8
)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 

 
 

 
 

 
 

 
 

 
 

U.S. government and government sponsored entities
 
$
13

 
$

 
$
1

 
$

 
$
14

 
$

Obligations of states, municipalities, and political subdivisions
 
35

 

 
12

 

 
47

 

Corporate debt
 
120

 
(1
)
 
69

 
(1
)
 
189

 
(2
)
RMBS
 
14

 

 
12

 

 
26

 

CMBS
 
6

 

 
15

 

 
21

 

CDO/ABS
 
30

 

 
10

 

 
40

 

Total
 
$
218

 
$
(1
)
 
$
119

 
$
(1
)
 
$
337

 
$
(2
)
                                     
*
Unrealized losses on certain available-for-sale securities were less than $1 million and, therefore, are not quantified in the table above.

On a lot basis, we had 251 and 212 investment securities in an unrealized loss position at March 31, 2018 and December 31, 2017, respectively. We do not consider the unrealized losses to be credit-related, as these unrealized losses primarily relate to changes in interest rates and market spreads subsequent to purchase. Additionally, at March 31, 2018, we had no plans to sell any investment securities with unrealized losses, and we believe it is more likely than not that we would not be required to sell such investment securities before recovery of their amortized cost.

We continue to monitor unrealized loss positions for potential impairments. During the three months ended March 31, 2018 and 2017, we did not recognize any other-than-temporary impairment credit losses on our available-for-sale securities in investment revenues.

During the three months ended March 31, 2018 and 2017, there were no material additions or reductions in the cumulative amount of credit losses (recognized in earnings) on other-than-temporarily impaired available-for-sale securities.

The proceeds of available-for-sale securities sold or redeemed and the resulting net realized gains were as follows:
(dollars in millions)
 
Three Months Ended March 31,

2018
 
2017
 
 
 
 
 
Proceeds from sales and redemptions
 
$
39

 
$
51

 
 
 
 
 
Net realized gains *
 
$

 
$
2

                                     
*
Realized losses on available-for-sale securities sold or redeemed during the three months ended March 31, 2018 and 2017 were less than $1 million.

22




Contractual maturities of fixed-maturity available-for-sale securities at March 31, 2018 were as follows:
(dollars in millions)
 
Fair
Value
 
Amortized
Cost
 
 
 
 
 
Fixed maturities, excluding mortgage-backed, asset-backed, and collateralized securities:
 
 

 
 

Due in 1 year or less
 
$
56

 
$
56

Due after 1 year through 5 years
 
173

 
177

Due after 5 years through 10 years
 
29

 
29

Due after 10 years
 
121

 
121

Mortgage-backed, asset-backed, and collateralized securities
 
104

 
105

Total
 
$
483

 
$
488


Actual maturities may differ from contractual maturities since issuers and borrowers may have the right to call or prepay obligations. We may sell investment securities before maturity for general corporate and working capital purposes and to achieve certain investment strategies.

The fair value of securities on deposit with third parties totaled $4 million and $8 million at March 31, 2018 and December 31, 2017, respectively.

OTHER SECURITIES

The fair value of other securities by type was as follows:
(dollars in millions)
 
March 31,
2018
 
December 31,
2017
 
 
 
 
 
Fixed maturity other securities:
 
 

 
 

Corporate debt
 
$
1

 
$
3

Preferred stock *
 
6

 
5

Other long-term investments
 
1

 
1

Total
 
$
8

 
$
9

                                    
*
The Company employs an income equity strategy targeting investments in stocks with strong current dividend yields. Stocks included have a history of stable or increasing dividend payments.

Unrealized gains (losses) on other securities held at March 31, 2018 and 2017 and net realized gains (losses) on other securities sold or redeemed during the 2018 and 2017 periods were immaterial for the three months ended March 31, 2018 and 2017. We report these gains and losses in investment revenues.

7. Transactions with Affiliates    

SUBSERVICING AGREEMENT

Nationstar subservices the real estate loans of certain of our indirect subsidiaries. Investment funds managed by affiliates of Fortress indirectly own a majority interest in Nationstar. On February 12, 2018, Nationstar’s parent, Nationstar Mortgage Holdings Inc. (“NSM”), entered into an Agreement and Plan of Merger (the “Merger Agreement”). In connection with the closing of the transactions contemplated by the Merger Agreement, investment funds managed by affiliates of Fortress have agreed to elect to receive cash merger consideration with respect to no less than 50% of the shares in NSM held by such funds and, following such closing, will no longer indirectly own a majority interest in Nationstar. The subservicing fees paid to Nationstar were immaterial for the three months ended March 31, 2018 and 2017.


23




8. Related Party Transactions    

Notes Receivable from Parent and Affiliates: The table below sets forth the note receivables from our parent and affiliates. We describe our affiliate lending in Note 11 of the Notes to Consolidated Financial Statements in Part II - Item 8 included in our 2017 Annual Report on Form 10-K.
(dollars in millions)
 
Note Balance
 
Interest Income (a)
Three Months Ended March 31,
 
 
March 31,
2018
 
December 31, 2017
 
2018
 
2017
SFI Note
 
$
380

 
$
390

 
$
6

 
$
5

IH Cash Services Note
 
2,835

 
2,883

 
41

 
45

OMFH Demand Note (b)
 
1,416

 
1,215

 
21

 
9

Total
 
$
4,631

 
$
4,488

 
$
68

 
$
59

                                      
(a) Reported in interest income on notes receivable from parent and affiliates. The interest rate on notes receivable from parent and affiliates is SFC’s cost of funds rate, which was 5.81% at March 31, 2018 and 6.28% at March 31, 2017.

(b) The maximum amount available increased from $1.6 billion to $2.7 billion effective March 28, 2018.

Note Payable to Affiliate: On December 1, 2015, in connection with the closing of the OneMain Acquisition, OMFH entered into a revolving demand note with SFC whereby OMFH agreed to make advances to SFC from time to time. SFC is required to use any advances for general corporate purposes. At March 31, 2018, the maximum amount that OMFH may advance to SFC is $750 million. At March 31, 2018 and December 31, 2017, no amounts were drawn by SFC under the note. We did not incur interest expense on the note payable to OMFH for the three months ended March 31, 2018 and 2017.

OGSC Services Agreement: OGSC provides variety of services to various affiliates under a services agreement. SFC is currently a party to this services agreement and formerly, through its subsidiaries had license and building lease agreements with OGSC as well. See Note 11 of the Notes to Consolidated Financial Statements in Part II - Item 8 included in our 2017 Annual Report on Form 10-K for more information about these agreements.

During the three months ended March 31, 2018 and 2017, SFC recorded $71 million and $59 million, respectively, of service fee expenses which are included in operating expenses. SFC did not record any expenses related to the terminated license or building lease agreements for the three months ending March 31, 2018. For the three months ending March 31, 2017, license and building lease expenses were immaterial.

Loan Servicing Fees: SFC’s intercompany agreement with OMFH relates to the servicing of its loans by legacy OneMain branches (expense to SFC) and OMFH loans serviced by legacy SFC branches (income to SFC). The servicing fee is based on a percentage of the outstanding principal balance of the serviced loans. During the three months ended March 31, 2018, SFC recorded $3 million of service fee expenses and $4 million of service fee income. During the three months ended March 31, 2017, SFC recorded $3 million of service fee expenses and $3 million of service fee income.

Loan Referral Fees: OCLI provides personal loan application and credit underwriting services on behalf of SFC and charges a fee of $35 for each underwritten approved application referred to SFC, as well as any other fees agreed to by the parties. During the three months ended March 31, 2018 and March 31, 2017, SFC recorded $5 million of referral fee expense, respectively.

Insurance Subsidiaries: SFC incurs a payable whenever it finances or collects insurance premiums on policies issued by OMFH insurance subsidiaries or when SFC insurance subsidiaries incur insurance claims on insurance policies issued on OMFH loans. Conversely, SFC records a receivable when insurance claims are incurred on policies issued by insurance subsidiaries of OMFH on SFC loans. As a result of these transactions, at March 31, 2018, SFC had a $16 million payable to and a $1 million receivable from OMFH subsidiaries. At December 31, 2017, SFC insurance subsidiaries had a $22 million payable to and a $4 million receivable from OMFH subsidiaries.

Home and Auto Membership Plans: SFC collects optional home and auto membership plan fees that are payable to subsidiaries of OMFH. SFC’s payable to OMFH subsidiaries for these fees was $3 million at