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Section 1: 8-K/A (8-K/A)

Document


 


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

FORM 8-K/A
Amendment No. 1
CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

DATE OF REPORT (Date of earliest event reported): August 3, 2018 (June 22, 2018)

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

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


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


Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company o


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


 
 
 
 
 





Item 2.01
Completion of Acquisition or Disposition of Assets.

As previously reported, on June 22, 2018, Springleaf Finance, Inc. (“SFI”), a separate wholly owned direct subsidiary of OneMain Holdings, Inc. (“OMH”), entered into a Contribution Agreement with Springleaf Finance Corporation (“SFC” or the “Company”), a wholly owned direct subsidiary of SFI and a wholly owned indirect subsidiary of OMH, pursuant to which all of the common interests of Independence Holdings, LLC (“Independence”) were contributed to SFC on the same date (the “Contribution”). As a result of the Contribution and effective as of June 22, 2018, (i) Independence became a wholly owned direct subsidiary of SFC and (ii) Independence’s direct and indirect subsidiaries, including OneMain Financial Holdings, LLC (“OMFH”), became indirect subsidiaries of SFC. Independence, through its principal subsidiary OMFH, engages in the consumer finance and insurance businesses.

The Company’s consolidated financial statements have been retrospectively recast for all periods presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 (the “2017 Form 10-K”) to include the historical results of Independence because the Contribution was between entities under common control. This Current Report on Form 8-K/A (this “Form 8-K/A”) amends the Current Report on Form 8-K filed by the Company with the Securities and Exchange Commission (the “SEC”) on June 22, 2018 (the “Initial 8-K”) to include the recast financial statements and other affected financial information of the Company included in the 2017 Form 10-K, which have been updated to retrospectively reflect the Contribution and present SFC and Independence on a combined basis for all periods presented in the 2017 Form 10-K. In particular, Exhibit 99.1 to this Form 8-K/A includes the following items that were contained in the 2017 Form 10-K and have been updated as a result of the Contribution: Part II, Item 6: “Selected Financial Data,” Part II, Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” Part II, Item 7A: “Quantitative and Qualitative Disclosures About Market Risk,” Part II, Item 8: “Financial Statements and Supplementary Data” (which includes the recast audited consolidated financial statements of the Company at December 31, 2017 and 2016 and for each of the three years in the period ended December 31, 2017), Part II, Item 9A: "Controls and Procedures" and Part IV, Item 15: “Exhibits and Financial Statement Schedule.” Exhibit 99.2 to this Form 8-K/A includes the audited financial statements of OMFH, the predecessor of Independence, for the period from January 1, 2015 through October 31, 2015. With respect to the Company’s historical financial information for the year ended December 31, 2015, the impact of the retrospective presentation is only since November 1, 2015, the date that Independence acquired OMFH.

All updates to the historical information included in the applicable items of the 2017 Form 10-K specified above and reflected in Exhibit 99.1 hereto relate solely to the retrospective presentation of the Contribution as noted above, and this Form 8-K/A does not update or modify any other disclosures in the 2017 Form 10-K. Except as noted above, this Form 8-K/A does not provide any update or discussion of any developments, activities, trends, or risks related to the Company subsequent to the filing of the 2017 Form 10-K. The information in this Form 8-K/A, including the exhibits hereto, should be read in conjunction with the Initial 8-K, the 2017 Form 10-K and subsequent Company filings with the SEC.




























Item 9.01
Financial Statements and Exhibits.

(d)     Exhibits.
Exhibit Number
 
Description
 
 
 
 
 
 
101
 
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statements of Shareholder’s Equity, (v) Consolidated Statements of Cash Flows, (vi) Notes to Consolidated Financial Statements, and (vii) Financial Statement Schedule









Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 
 
 
SPRINGLEAF FINANCE CORPORATION
 
 
 
               (Registrant)
 
 
 
 
Date:
August 3, 2018
By:
 /s/ Micah R. Conrad
 
 
 
 Micah R. Conrad
 
 
 
Executive Vice President and Chief Financial Officer





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Section 2: EX-12.1 (EXHIBIT 12.1)

Exhibit


Exhibit 12.1    

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

(dollars in millions)
 
 
 
 
 
 
 
 
 
 
Years Ended December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
 
 
 
 
 
 
 
 
 
 
 
Earnings:
 
 
 
 
 
 
 
 
 
 
Income (loss) before income tax expense (benefit)
 
$
395

 
$
397

 
$
(196
)
 
$
678

 
$
(125
)
Interest expense
 
816

 
856

 
715

 
683

 
843

Implicit interest in rents
 
26

 
27

 
12

 
10

 
9

Total earnings
 
$
1,237

 
$
1,280

 
$
531

 
$
1,371

 
$
727

Fixed charges:
 
 
 
 
 
 
 
 
 
 
Interest expense
 
$
816

 
$
856

 
$
715

 
$
683

 
$
843

Implicit interest in rents
 
26

 
27

 
12

 
10

 
9

Total fixed charges
 
$
842

 
$
883

 
$
727

 
$
693

 
$
852

Ratio of earnings to fixed charges
 
1.47

 
1.45

 
*

 
1.98

 
*

                                      
*
Earnings did not cover total fixed charges by $196 million in 2015 and by $125 million in 2013.

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Section 3: EX-23.1 (EXHIBIT 23.1)

Exhibit


Exhibit 23.1    
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statement on Form S-3 (No. 333-221391-01) of Springleaf Finance Corporation of our report dated February 21, 2018, except with respect of the effects of the reorganization of entities under common control discussed in Note 2 to the consolidated financial statements and the financial statement schedule, as to which the date is August 3, 2018, relating to the consolidated financial statements and financial statement schedule, which appears in Springleaf Finance Corporation’s Current Report on Form 8‑K/A dated August 3, 2018.  
/s/ PricewaterhouseCoopers LLP

Dallas, Texas
August 3, 2018


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Section 4: EX-23.2 (EXHIBIT 23.2)

Exhibit


Exhibit 23.2    
Consent of Independent Registered Public Accounting Firm
The Board of Directors
OneMain Financial Holdings, LLC (formerly OneMain Financial Holdings, Inc.):

We consent to the incorporation by reference in the registration statement (No. 333-221391-01) on Form S-3 of Springleaf Finance Corporation of our report dated February 10, 2016, with respect to the consolidated statement of financial position of OneMain Financial Holdings, LLC as of October 31, 2015 and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for the 10-month period ended October 31, 2015, which report is included in the Form 8-K/A of Springleaf Finance Corporation dated August 3, 2018.
/s/ KPMG LLP

Baltimore, Maryland
August 3, 2018


136
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Section 5: EX-99.1 (EXHIBIT 99.1)

Exhibit
    

Exhibit 99.1    

EXPLANATORY NOTE

On June 22, 2018, Springleaf Finance, Inc. (“SFI”), a separate wholly owned direct subsidiary of OneMain Holdings, Inc. (“OMH”), entered into a Contribution Agreement with Springleaf Finance Corporation (“SFC,” the “Company,” “we,” “us,” or “our”), a wholly owned direct subsidiary of SFI and a wholly owned indirect subsidiary of OMH, pursuant to which all of the common interests of Independence Holdings, LLC (“Independence”) were contributed to SFC on the same date (the “Contribution”). As a result of the Contribution and effective as of June 22, 2018, (i) Independence became a wholly owned direct subsidiary of SFC and (ii) Independence’s direct and indirect subsidiaries, including OneMain Financial Holdings, LLC (“OMFH”), became indirect subsidiaries of SFC. Independence, through its principal subsidiary OMFH, engages in the consumer finance and insurance businesses.

The Company’s consolidated financial statements have been retrospectively recast for all periods presented to include the historical results of Independence because the Contribution was between entities under common control. Information in the Company’s previously filed Annual Report for the fiscal year ended December 31, 2017, as filed with the Securities and Exchange Commission (the “SEC”) on February 21, 2018 (the “2017 Form 10-K”), has been updated as a result of the Contribution. Items 6, 7, 7A, 8, 9A and 15 of the 2017 Form 10-K include periods prior to the contribution of Independence and have been updated below to retrospectively reflect the Contribution and present SFC and Independence on a combined basis for all periods presented in the 2017 Form 10-K.  

All updates to the historical information included in the applicable items of the 2017 Form 10-K set forth below relate solely to the retrospective presentation of the Contribution as noted above, and this Exhibit 99.1 to the Company’s Current Report on Form 8-K/A dated August 3, 2018 does not update or modify any other disclosures in the 2017 Form 10-K. Except as noted above, this Exhibit 99.1 does not provide any update or discussion of any developments, activities, trends, or risks related to the Company subsequent to the filing of the 2017 Form 10-K. Information within the previously filed 2017 Form 10-K not affected by this Exhibit 99.1 reflects the disclosure made at the time of the filing of the 2017 Form 10-K. For additional information related to developments since the filing of the 2017 Form 10-K, refer to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2018. Accordingly, this Exhibit 99.1 to the Company’s Current Report on Form 8-K/A dated August 3, 2018 should be read in conjunction with the previously filed 2017 Form 10-K and the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2018, as filed with the SEC on August 3, 2018.




























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TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



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GLOSSARY
Terms and abbreviations used in this Current Report on Form 8-K/A dated August 3, 2018 (and exhibits thereto) are defined below.
Term or Abbreviation
 
Definition
 
 
 
2013 Omnibus Incentive Plan
 
incentive plan under which equity-based awards are granted to selected management employees, non-employee directors, independent contractors, and consultants
2014-1 Notes
 
asset backed notes issued in April 2014 by OneMain Financial Issuance Trust 2014-1
2014-A Notes
 
asset-backed notes issued in March 2014 by the Springleaf Funding Trust 2014-A
2016 Annual Report on Form
10-K
 
Annual Report on Form 10-K for the fiscal year ended December 31, 2016
2019 OMFH Notes
 
$700 million aggregate principal amount of 6.75% Senior Notes due 2019
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
401(k) Plan
 
Springleaf Financial Services 401(k) Plan
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
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
ABO
 
accumulated benefit obligation
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; income (loss) before income tax expense (benefit) on a Segment Accounting Basis, excluding acquisition-related transaction and integration expenses, net gain (loss) on sales of personal and real estate loans, net gain on sale of SpringCastle interests, SpringCastle transaction costs, losses resulting from repurchases and repayments of debt, debt refinance costs, net loss on liquidation of our United Kingdom subsidiary, and income attributable to non-controlling interests
AHL
 
American Health and Life Insurance Company
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
August 2016 Real Estate Loan Sale
 
SFC and certain of its subsidiaries sold a portfolio of second lien mortgage loans for aggregate cash proceeds of $246 million on August 3, 2016
Average debt
 
average of debt for each day in the period
Average net receivables
 
average of monthly average net finance receivables (net finance receivables at the beginning and end of each month divided by two) in the period
BP
 
basis point
Blackstone
 
collectively, BTO Willow Holdings II, L.P. and Blackstone Family Tactical Opportunities Investment Partnership—NQ—ESC L.P.
CDO
 
collateralized debt obligations
CFPB
 
Consumer Financial Protection Bureau
CMBS
 
commercial mortgage-backed securities
CRA
 
Congressional Review Act


3

    

Term or Abbreviation
 
Definition
 
 
 
December 2016 Real Estate Loan Sale
 
SFC and certain of its subsidiaries sold a portfolio of first and second lien mortgage loans for aggregate cash proceeds of $58 million on December 19, 2016
Dodd-Frank Act
 
the Dodd-Frank Wall Street Reform and Consumer Protection Act
DOJ
 
U.S. Department of Justice
ERISA
 
Employee Retirement Income Security Act of 1974
Exchange Act
 
Securities Exchange Act of 1934, as amended
Excess Retirement Income Plan
 
Springleaf Financial Services Excess Retirement Income Plan
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
Fitch
 
Fitch, Inc.
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
GAP
 
guaranteed asset protection
Gross charge-off ratio
 
annualized gross charge-offs as a percentage of average net receivables
Indenture
 
the SFC Base Indenture, together with all subsequent Supplemental Indentures
Independence
 
Independence Holdings, LLC
Indiana DOI
 
Indiana Department of Insurance
Initial Stockholder
 
Springleaf Financial Holdings, LLC
Investment Company Act
 
Investment Company Act of 1940
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
Lendmark Sale
 
the sale of 127 Springleaf branches to Lendmark Financial Service, LLC, effective April 30, 2016
LIBOR
 
London Interbank Offered Rate
Logan Circle
 
Logan Circle Partners, L.P.
Loss ratio
 
annualized net charge-offs, net writedowns on real estate owned, net gain (loss) on sales of real estate owned, and operating expenses related to real estate owned as a percentage of average real estate loans
Merit
 
Merit Life Insurance Co.
MetLife
 
MetLife, Inc.
Military Lending Act
 
governs certain consumer lending to active-duty service members and covered dependents and limits, among other things, the interest rate that may be charged
Moody’s
 
Moody’s Investors Service, 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
NRZ
 
New Residential Investment Corp.
OCLI
 
OneMain Consumer Loan, Inc.
ODART
 
OneMain Direct Auto Receivables Trust
OGSC
 
OneMain General Services Corporation, successor to SGSC and SFMC
OM Loans
 
purchased credit impaired personal loans acquired in the OneMain Acquisition


4

    

Term or Abbreviation
 
Definition
 
 
 
OMAS
 
OneMain Assurance Services, LLC
OMFH
 
OneMain Financial Holdings, LLC
OMFH Indenture
 
Indenture entered into on December 11, 2014, as amended or supplemented from time to time, by OMFH and certain of its subsidiaries in connection with the issuance of the OMFH Notes
OMFH Note
 
collectively, $700 million aggregate principal amount of 6.75% Senior Notes due 2019 and $800 million in aggregate principal amount of 7.25% Senior Notes due 2021
OMFH Second Supplemental Indenture
 
Second Supplemental Indenture dated as of November 8, 2016, to the OMFH Indenture
OMFIT
 
OneMain Financial Issuance Trust
OMH
 
OneMain Holdings, Inc.
OneMain
 
OMFH, collectively with its subsidiaries
OneMain Acquisition
 
Acquisition of OneMain from CitiFinancial Credit Company, effective November 1, 2015
OneMain Financial Funding VIII LSA
 
Loan and Security Agreement, dated February 2, 2017, among OneMain Financial Funding VIII, LLC, certain third party lenders and other third parties pursuant to which OneMain Financial Funding VIII, LLC may borrow up to $450 million
Other SFC Notes
 
collectively, approximately $5.2 billion aggregate principal amount of senior notes, on a senior unsecured basis, and the Junior Subordinated Debenture, on a junior subordinated basis, issued by SFC and guaranteed by OMH
PBO
 
projected benefit obligation
PRSUs
 
performance-based RSUs
PVFP
 
present value of future profits
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
Retirement Plan
 
Springleaf Financial Services Retirement Plan
RMBS
 
residential mortgage-backed securities
RSAs
 
restricted stock awards
RSUs
 
restricted stock units
SCP Loans
 
purchased credit impaired loans acquired through the SpringCastle Joint Venture
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
S&P
 
Standard & Poor’s Ratings Services
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
SFC Guaranty Agreements
 
agreements entered into on December 30, 2013 by OMH whereby it agreed to fully and unconditionally guarantee the payments of principal, premium (if any) and interest on the Other SFC Notes
SFC Second Supplemental Indenture
 
Second Supplemental Indenture dated as of April 11, 2016, to the SFC Base 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


5

    

Term or Abbreviation
 
Definition
 
 
 
SFH
 
Springleaf Financial Holdings LLC, an entity owned primarily by a private equity fund managed by an affiliate of Fortress that sold 54,937,500 shares of OMH’s common stock to the Apollo-Värde Group in the Apollo-Värde Transaction
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
Texas DOI
 
Texas Department of Insurance
Triton
 
Triton Insurance Company
Trust preferred securities
 
capital securities classified as debt for accounting purposes but due to their terms are afforded, at least in part, equity capital treatment in the calculation of effective leverage by rating agencies
TILA
 
Truth-In-Lending-Act
UPB
 
unpaid principal balance
Värde
 
Värde Partners, Inc.
VOBA
 
value of business acquired
VFN
 
variable funding notes
VIEs
 
variable interest entities
Weighted average interest rate
 
annualized interest expense as a percentage of average debt
Wilmington
 
Wilmington Trust, National Association
Yield
 
annualized finance charges as a percentage of average net receivables
Yosemite
 
Yosemite Insurance Company


6

    

Forward-Looking Statements    

This Current Report on Form 8-K/A dated August 3, 2018 (and exhibits thereto) contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact but instead represent only management’s current beliefs regarding future events. By their nature, forward-looking statements involve inherent risks, uncertainties and other important factors that may cause actual results, performance or achievements to differ materially from those expressed in or implied by such forward-looking statements. We caution you not to place undue reliance on these forward-looking statements that speak only as of the date they were made. We do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Current Report on Form 8-K/A dated August 3, 2018 (and exhibits thereto) or to reflect the occurrence of unanticipated events or the non-occurrence of anticipated events. Forward-looking statements include, without limitation, statements concerning future plans, objectives, goals, projections, strategies, events or performance, and underlying assumptions and other statements related thereto. Statements preceded by, followed by or that otherwise include the words “anticipates,” “appears,” “are likely,” “believes,” “estimates,” “expects,” “foresees,” “intends,” “plans,” “projects” and similar expressions or future or conditional verbs such as “would,” “should,” “could,” “may,” or “will,” are intended to identify forward-looking statements. Important factors that could cause actual results, performance or achievements to differ materially from those expressed in or implied by forward-looking statements include, without limitation, the following:

the inability to obtain, or delays in obtaining, cost savings and synergies from the OneMain Acquisition and risks and other uncertainties associated with the integration of the companies;

any litigation, fines or penalties that could arise relating to the OneMain Acquisition or Apollo-Värde Transaction;

the impact of the Apollo-Värde Transaction on our relationships with employees and third parties;

various risks relating to continued compliance with the Settlement Agreement;

changes in general economic conditions, including the interest rate environment in which we conduct business and the financial markets through which we can access capital and also invest cash flows from our Consumer and Insurance segment;

levels of unemployment and personal bankruptcies;

natural or accidental events such as earthquakes, hurricanes, tornadoes, fires, or floods affecting our customers, collateral, or branches or other operating facilities;

war, acts of terrorism, riots, civil disruption, pandemics, disruptions in the operation of our information systems, cyber-attacks or other security breaches, or other events disrupting business or commerce;

changes in the rate at which we can collect or potentially sell our finance receivables portfolio;

the effectiveness of our credit risk scoring models in assessing the risk of customer unwillingness or lack of capacity to repay;

changes in our ability to attract and retain employees or key executives to support our businesses;

changes in the competitive environment in which we operate, including the demand for our products, customer responsiveness to our distribution channels, our ability to make technological improvements, and the strength and ability of our competitors to operate independently or to enter into business combinations that result in a more attractive range of customer products or provide greater financial resources;

risks related to the acquisition or sale of assets or businesses or the formation, termination or operation of joint ventures or other strategic alliances or arrangements, including loan delinquencies or net charge-offs, integration or migration issues, increased costs of servicing, incomplete records, and retention of customers;

risks associated with our insurance operations, including insurance claims that exceed our expectations or insurance losses that exceed our reserves;


7

    


the inability to successfully implement our growth strategy for our consumer lending business as well as various risks associated with successfully acquiring portfolios of consumer loans, pursuing acquisitions, and/or establishing joint ventures;

declines in collateral values or increases in actual or projected delinquencies or net charge-offs;

changes in federal, state or local laws, regulations, or regulatory policies and practices, including the Dodd-Frank Act (which, among other things, established the CFPB, which has broad authority to regulate and examine financial institutions, including us), that affect our ability to conduct business or the manner in which we conduct business, such as licensing requirements, pricing limitations or restrictions on the method of offering products, as well as changes that may result from increased regulatory scrutiny of the sub-prime lending industry, our use of third-party vendors and real estate loan servicing, or changes in corporate or individual income tax laws or regulations, including effects of the enactment of Public Law 115-97 amending the Internal Revenue Code of 1986;

potential liability relating to real estate and personal loans which we have sold or may sell in the future, or relating to securitized loans, if it is determined that there was a non-curable breach of a representation or warranty made in connection with such transactions;

the costs and effects of any actual or alleged violations of any federal, state or local laws, rules or regulations, including any litigation associated therewith, any impact to our business operations, reputation, financial position, results of operations or cash flows arising therefrom, any impact to our relationships with lenders, investors or other third parties attributable thereto, and the costs and effects of any breach of any representation, warranty or covenant under any of our contractual arrangements, including indentures or other financing arrangements or contracts, as a result of any such violation;

the costs and effects of any fines, penalties, judgments, decrees, orders, inquiries, investigations, subpoenas, or enforcement or other proceedings of any governmental or quasi-governmental agency or authority and any litigation associated therewith;

our continued ability to access the capital markets or the sufficiency of our current sources of funds to satisfy our cash flow requirements;

our ability to comply with our debt covenants;

our ability to generate sufficient cash to service all of our indebtedness;

any material impairment or write-down of the value of our assets;

the effects of any downgrade of our debt ratings by credit rating agencies, which could have a negative impact on our cost of and/or access to capital;

our substantial indebtedness, which could prevent us from meeting our obligations under our debt instruments and limit our ability to react to changes in the economy or our industry, or our ability to incur additional borrowings;

the impacts of our securitizations and borrowings;

our ability to maintain sufficient capital levels in our regulated and unregulated subsidiaries;

changes in accounting standards or tax policies and practices and the application of such new standards, policies and practices;

changes in accounting principles and policies or changes in accounting estimates;

effects of the acquisition of Fortress by an affiliate of SoftBank Group Corp.;



8

    

effects, if any, of the contemplated acquisition by an investor group of shares of our common stock beneficially owned by Fortress and its affiliates;
any failure or inability to achieve the SpringCastle Portfolio performance requirements set forth in the SpringCastle Interests Sale purchase agreement; and

the effect of future sales of our remaining portfolio of real estate loans and the transfer of servicing of these loans, including the environmental liability and costs for damage caused by hazardous waste if a real estate loan goes into default.

We also direct readers to the other risks and uncertainties discussed in “Risk Factors” in Part I - Item 1A of the 2017 Form 10-K and in other documents filed with the SEC (including the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018).

If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, our actual results may vary materially from what we may have expressed or implied by these forward-looking statements. We caution that you should not place undue reliance on any of our forward-looking statements. You should specifically consider the factors identified in the 2017 Form 10-K and subsequent Company filings with the SEC that could cause actual results to differ before making an investment decision to purchase our common stock. Furthermore, new risks and uncertainties arise from time to time, and it is impossible for us to predict those events or how they may affect us.



9

    

PART II

Item 6. Selected Financial Data.    

The following table presents our selected historical consolidated financial data and other operating data. The consolidated statement of operations data for the years ended December 31, 2017, 2016, and 2015 and the consolidated balance sheet data as of December 31, 2017 and 2016 have been derived from our audited consolidated financial statements included elsewhere herein. The statement of operations data for the years ended December 31, 2014 and 2013 and the consolidated balance sheet data as of December 31, 2015, 2014 and 2013 have been derived from our consolidated financial statements not included elsewhere herein.

The following selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this report and our audited consolidated financial statements and related notes included in this report.
(dollars in millions)
 
At or for the Years Ended December 31,
 
2017
 
2016
 
2015 (a)
 
2014
 
2013
 
 
 
 
 
 
 
 
 
 
 
Consolidated Statements of Operations Data:
 
 
 
 
 
 
 
 
 
 
Interest income
 
$
3,187

 
$
3,096

 
$
1,910

 
$
1,625

 
$
1,637

Interest expense
 
816

 
856

 
715

 
683

 
843

Provision for finance receivable losses
 
947

 
929

 
711

 
352

 
371

Other revenues
 
540

 
754

 
275

 
745

 
161

Other expenses
 
1,569

 
1,668

 
955

 
657

 
709

Income (loss) before income tax expense (benefit)
 
395

 
397

 
(196
)
 
678

 
(125
)
Net income (loss)
 
152

 
270

 
(74
)
 
445

 
(76
)
Net income attributable to non-controlling interests
 

 
28

 
127

 
48

 

Net income (loss) attributable to Springleaf Finance Corporation
 
152

 
242

 
(201
)
 
397

 
(76
)
 
 
 
 
 
 
 
 
 
 
 
Consolidated Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
Net finance receivables, less unearned insurance premium and claim reserves and allowance for finance receivable losses
 
$
13,627

 
$
12,414

 
$
14,217

 
$
6,181

 
$
10,730

Total assets
 
19,645

 
18,340

 
21,396

 
10,998

 
12,612

Long-term debt
 
15,050

 
13,959

 
17,300

 
8,356

 
10,602

Total liabilities
 
16,243

 
15,067

 
18,488

 
9,021

 
11,227

Springleaf Finance Corporation shareholder’s equity
 
3,402

 
3,273

 
2,987

 
2,106

 
1,385

Non-controlling interests
 

 

 
(79
)
 
(129
)
 

Total shareholder’s equity
 
3,402

 
3,273

 
2,908

 
1,977

 
1,385

 
 
 
 
 
 
 
 
 
 
 
Other Operating Data:
 
 
 
 
 
 
 
 
 
 
Ratio of earnings to fixed charges
 
1.47

 
1.45

 
(b)

 
1.98

 
(b)

                                      
(a) Selected financial data for 2015 includes OneMain’s results effective from November 1, 2015, pursuant to our contractual agreements with Citigroup.

(b) Earnings did not cover total fixed charges by $196 million in 2015 and by $125 million in 2013.



10

    

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

The following discussion and analysis of our financial condition and results of operations should be read together with the audited consolidated financial statements and related notes included in this report. This discussion and analysis contains forward-looking statements that involve risk, uncertainties, and assumptions. See “Forward-Looking Statements” included in this report for more information. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of many factors, including those discussed in “Risk Factors” included in the SFC Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

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

Overview    

We are a leading provider of responsible personal loan products, primarily to non-prime customers. Our network of over 1,600 branch offices in 44 states as of December 31, 2017, is staffed with highly trained personnel and is complemented by our online personal loan origination capabilities and centralized operations, which allows us to reach customers located outside our branch footprint. Our digital platform provides current and prospective customers the option of obtaining an unsecured personal loan via our website, www.onemainfinancial.com. (The information on our website is not incorporated by reference into this report.) In connection with our personal loan business, we offer our customers credit and non-credit insurance.

In addition, we service loans owned by third-parties; pursue strategic acquisitions and dispositions of assets and businesses, including loan portfolios or other financial assets; and may establish joint ventures or enter into other strategic alliances or arrangements from time to time.

OUR PRODUCTS

Our product offerings include:

Personal Loans — We offer personal loans through our branch network and over the Internet through our centralized operations to customers who generally need timely access to cash. Our personal loans are typically non-revolving with a fixed-rate and a fixed, original term of three to six years and are secured by consumer goods, automobiles, or other personal property or are unsecured. At December 31, 2017, we had nearly 2.3 million personal loans, representing $14.8 billion of net finance receivables compared to 2.2 million personal loans totaling $13.5 billion at December 31, 2016.

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



11

    

Our non-originating legacy products include:

Real Estate Loans — In 2012, we ceased originating real estate loans and the portfolio is in a liquidating status. During 2016, we sold $308 million real estate loans held for sale. At December 31, 2017, we had $128 million of real estate loans held for investment, of which 91% were secured by first mortgages, compared to $144 million at December 31, 2016, of which 93% were secured by first mortgages. Real estate loans held for sale totaled $132 million and $153 million at December 31, 2017 and 2016, respectively.

Retail Sales Finance — We ceased purchasing retail sales contracts and revolving retail accounts in January of 2013. We continue to service the liquidating retail sales contracts and will provide revolving retail sales financing services on our revolving retail accounts.

OUR SEGMENTS

At December 31, 2017, we had two operating segments:

Consumer and Insurance; and
Acquisitions and Servicing.

Beginning in 2017, we include Real Estate, which was previously presented as a distinct reporting segment, in “Other.” See Note 23 of the Notes to Consolidated Financial Statements included in this report for further information on this change in our segment alignment and for more information about our segments. To conform to the new alignment of our segments, we have revised our prior period segment disclosures.

HOW WE ASSESS OUR BUSINESS PERFORMANCE

We closely monitor the primary drivers of pretax operating income, which consist of the following:

Net Interest Income

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

Net Credit Losses

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

Operating Expenses

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

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


12

    

Recent Developments and Outlook    

APOLLO-VÄRDE TRANSACTION

On January 3, 2018, the Apollo-Värde Group entered into a Share Purchase Agreement with SFH and OMH to acquire from SFH 54,937,500 shares of OMH’s common stock representing the entire holdings of OMH’s stock beneficially owned by Fortress. The Apollo-Värde Transaction closed on June 25, 2018 for an aggregate purchase price of approximately $1.4 billion in cash.

As disclosed in Note 22 of the Notes to Consolidated Financial Statements, certain executives of the Company had previously been granted incentive units that only provide benefits (in the form of distributions) if SFH makes distributions to one or more of its common members that exceed specified amounts. In connection with the Apollo-Värde Transaction, certain executive officers who are holders of SFH incentive units received a distribution of approximately $106 million in the aggregate from SFH as a result of their ownership interests in SFH. Although the distribution was not made by the Company or its subsidiaries, in accordance with ASC Topic 710, Compensation-General, we recorded non-cash incentive compensation expense of approximately $106 million in the second quarter of 2018, with an equal and offsetting increase to additional paid-in-capital. The impact to the Company was non-cash, equity neutral and not tax deductible.

DIVIDEND OF SFMC

On April 10, 2017, SFMC, a former subsidiary of SFC, was contributed to SFI in the form of a dividend. SFI then contributed SFMC and SGSC to OMH, and SFMC merged into SGSC, which was renamed and is now OGSC. As a result of the dividend, the Company’s total shareholder equity and total assets were reduced by $38 million and $65 million, respectively, on the contribution date.

The contribution was the result of the continuing integration process, and part of a series of corporate consolidation transactions surrounding the OneMain Acquisition.

SFC’s MEDIUM-TERM NOTE ISSUANCES

6.125% SFC Notes

On May 15, 2017, SFC issued $500 million aggregate principal amount of 6.125% Senior Notes due 2022 (the “2022 SFC Notes”) under an Indenture dated as of December 3, 2014 (the “SFC Base Indenture”), as supplemented by a Third Supplemental Indenture, dated as of May 15, 2017 (the “SFC Third Supplemental Indenture” ), pursuant to which OMH provided a guarantee of the 2022 SFC Notes on an unsecured basis.

On May 30, 2017, SFC issued and sold $500 million aggregate principal amount of additional 2022 SFC Notes (the “Additional SFC Notes”) in an add-on offering. The initial 2022 SFC Notes and the Additional SFC Notes (collectively, the “6.125% SFC Notes”), are treated as a single class of debt securities and have the same terms, other than the issue date and the issue price.

SFC used a portion of these net proceeds to repurchase approximately $466 million aggregate principal amount of its existing 6.90% Senior Notes due 2017 at a premium to par. SFC used the remaining net proceeds for general corporate purposes.

5.625% SFC Notes

On December 8, 2017, SFC issued $875 million aggregate principal amount of 5.625% Senior Notes due 2023 (the ‘‘5.625% SFC Notes’’) under the SFC Base Indenture, as supplemented by a Fourth Supplemental Indenture dated as of December 8, 2017 (the “SFC Fourth Supplemental Indenture”), pursuant to which OMH provided a guarantee of the 5.625% SFC Notes on an unsecured basis. SFC used a portion of these net proceeds to repay at maturity approximately $557 million aggregate principal amount of its existing 6.90% Medium-Term Notes. SFC intends to use the remaining net proceeds for general corporate purposes, which may include additional debt repurchases and repayments.

See Note 2 and 13 of the Notes to Consolidated Financial Statements included in this report for further information on the SFC Offerings.



13

    

OMFH SECURITIZATION OFFERING

On December 11, 2017, OMFH, as sponsor, completed an offering of approximately $605 million of asset-backed notes in a private offering (the ‘‘December OMFH Securitization’’). The December OMFH Securitization included one class of senior asset-backed notes and four classes of subordinate asset-backed notes. The assets that were pledged consist of a pool of non-revolving, fixed-rate loans secured by automobiles, light-duty trucks and other vehicles. At least 5% of the initial note principal balance of each class of notes and the residual interest in the issuing entity were retained in satisfaction of the risk retention requirements of Section 941 of the Dodd-Frank Act.

See Note 13 of the Notes to Consolidated Financial Statements included in this report for further information on the December OMFH Securitization.

MATURITY OF SFC’S 6.90% MEDIUM-TERM NOTES

On December 15, 2017, the $557 million outstanding principal amount of SFC’s 6.90% Medium-Term Notes, Series J became due and payable.

See Note 13 of the Notes to Consolidated Financial Statements included in this report for further information on the maturity of SFC’s 6.90% medium-term notes.

REDEMPTION OF THE OMFH 2019 NOTES

On December 8, 2017, OMFH issued a notice of redemption to redeem all $700 million outstanding principal amount of its 6.75% Senior Notes due 2019 at a redemption price equal to 103.375%, plus accrued and unpaid interest to the redemption date. The notes were redeemed on January 8, 2018.

See Notes 12 and 24 of the Notes to Consolidated Financial Statements included in this report for further information on the Redemption of the OMFH Notes.

THE TAX ACT

On December 22, 2017, the President signed into law the Tax Act, which contains substantial changes to the Internal Revenue Code effective January 1, 2018, including a reduction in the federal corporate tax rate from 35% to 21%. In the long-term, we anticipate that we will have an overall benefit from the reduction in the tax rate slightly offset by potential deductions disallowed under the current law. However, we recognized an $81 million tax charge in 2017. This charge is primarily the result of the lower corporate tax rate, which required us to remeasure our net deferred tax asset to reflect the lower corporate tax rate. For further information see Note 18 of the Notes to Consolidated Financial Statements included in this report.

IMPACT OF HURRICANES HARVEY, IRMA AND MARIA

In August and September of 2017, our customers in certain areas of the United States and Puerto Rico were impacted by hurricanes Harvey, Irma and Maria. The estimated total hurricane-related impact recorded during 2017 was approximately $25 million, consisting primarily of increases in our loan loss reserve and borrower-related assistance programs. See additional discussion under “Results of Operations” and “Segment Results” below.

COST SYNERGIES

As of December 31, 2017, we had incurred approximately $239 million of acquisition-related transaction and integration expenses ($69 million incurred during 2017) from the OneMain Acquisition.

We achieved our estimated cost synergies from the OneMain Acquisition, including approximately $200 million in lower operating expenses, which were fully realized by the end of the fourth quarter of 2017. Furthermore, our transition services agreement with Citigroup terminated on May 1, 2017 in accordance with its terms, and we are no longer required to make any further payments under the agreement.



14

    

OUTLOOK                

With our experienced management team, long track record of successfully accessing the capital markets, and strong demand for consumer credit, we believe we are well positioned to execute on our strategic priorities to strengthen our capital base through the following key initiatives:

Continuing the growth in receivables through enhanced marketing strategies and customer product options;
Growing secured lending originations with a goal of enhancing credit performance;
Leveraging our scale and cost discipline across the Company to deliver improved operating leverage;
Increasing tangible equity and reducing leverage; and
Maintaining a strong liquidity level with diversified funding sources.

We continue to execute our strategy to increase the proportion of our loan originations secured by titled collateral (which typically have lower yields and credit losses relative to unsecured personal loans), particularly within the former OneMain branches where secured loan originations have historically represented a smaller proportion of total originations than those of the former Springleaf branches. As we continue to increase secured loans as a proportion of our total loan portfolio, our yields may be lower in future periods relative to our historical yields; however, we also expect a proportional improvement in net credit losses over time as our portfolio matures and as secured loans become a greater proportion of our total loan portfolio.

Assuming the U.S. economy continues to experience slow to moderate growth, we expect to continue our long history of strong credit performance and believe the strong credit quality of our loan portfolio will continue as the result of our disciplined underwriting practices and ongoing collection efforts. We have continued to see some migration of customer activity away from traditional channels, such as direct mail, to online channels (primarily serviced through our branch network), where we believe we are well suited to capture volume due to our scale, technology, and deployment of advanced analytics.






15

    

Results of Operations    

CONSOLIDATED RESULTS            

On November 15, 2015, we completed the OneMain Acquisition. The results of OneMain are included in our consolidated operating results and selected financial statistics from November 1, 2015 in the table below. A further discussion of our operating results for each of our operating segments is provided under “Segment Results” below.
(dollars in millions)
 
 
 
 
 
 
Years Ended December 31,
 
2017
 
2016
 
2015
 
 
 
 
 
 
 
Interest income
 
$
3,187

 
$
3,096

 
$
1,910

Interest expense
 
816

 
856

 
715

Provision for finance receivable losses
 
947

 
929

 
711

Net interest income after provision for finance receivable losses
 
1,424

 
1,311

 
484

Net gain on sale of SpringCastle interests
 

 
167

 

Other revenues
 
540

 
587

 
275

Acquisition-related transaction and integration expenses
 
69

 
108

 
62

Other expenses
 
1,500

 
1,560

 
893

Income (loss) before income tax expense (benefit)
 
395

 
397

 
(196
)
Income tax expense (benefit)
 
243

 
127

 
(122
)
Net income (loss)
 
152

 
270

 
(74
)
Net income attributable to non-controlling interests
 

 
28

 
127

Net income attributable to SFC
 
$
152

 
$
242

 
$
(201
)
 
 
 
 
 
 
 
Selected Financial Statistics (a)
 
 
 
 
 
 
Finance receivables held for investment:
 
 
 
 
 
 
Net finance receivables
 
$
14,909

 
$
13,686

 
$
15,469

Number of accounts
 
2,351,211

 
2,202,166

 
2,443,250

Finance receivables held for sale:
 
 
 
 
 
 
Net finance receivables
 
$
132

 
$
153

 
$
793

Number of accounts
 
2,460

 
2,800

 
148,932

Finance receivables held for investment and held for sale: (b)
 
 
 
 
 
 
Average net receivables
 
$
14,009

 
$
14,412

 
$
8,252

Yield
 
22.66
 %
 
21.35
 %
 
22.94
 %
Gross charge-off ratio
 
7.47
 %
 
6.04
 %
 
4.34
 %
Recovery ratio
 
(0.76
)%
 
(0.50
)%
 
(0.67
)%
Net charge-off ratio
 
6.71
 %
 
5.54
 %
 
3.67
 %
30-89 Delinquency ratio
 
2.48
 %
 
2.30
 %
 
2.59
 %
Origination volume
 
$
10,502

 
$
9,408

 
$
5,715

Number of accounts originated
 
1,436,871

 
1,313,388

 
971,662

                                      
(a)
See “Glossary” at the beginning of this report for formulas and definitions of our key performance ratios.

(b)
Includes personal loans held for sale, but excludes real estate loans held for sale in order to be comparable with our segment statistics disclosed in “Segment Results.”



16

    

Comparison of Consolidated Results for 2017 and 2016

Interest income increased $91 million in 2017 when compared to 2016 due to the net of the following:

Finance charges increased $152 million primarily due to the net of the following:

Yield on finance receivables held for investment increased primarily due to lower amortization of purchase premium on non-credit impaired finance receivables. This increase was partially offset by the continued shift of the portfolio towards secured personal loans and direct auto customers who tend to have loans with lower yields and lower charge-offs relative to our unsecured personal loans.

Average net receivables held for investment decreased primarily due to (i) the SpringCastle Interests Sale and (ii) our liquidating real estate loan portfolio, including transfers of $307 million of real estate loans to finance receivables held for sale during 2016. This decrease was partially offset by the continued growth in our personal loan portfolio.

Interest income on finance receivables held for sale decreased $61 million primarily due to (i) personal loans sold in the Lendmark Sale in May 2016, and (ii) the real estate loans in finance receivables held for sale during 2016 period, which were sold in the fourth quarter of 2016.

Interest expense decreased $40 million in 2017 when compared to 2016 due to the net of the following:

Average debt decreased primarily due to debt elimination associated with the SpringCastle Interests Sale and net debt issuance and repayment activity in 2017. This decrease was partially offset by net debt issuances during the past 12 months relating to SFC’s offerings of the 6.125% SFC Notes in May of 2017 and our securitization transactions. See Notes 13 and 14 of the Notes to Consolidated Financial Statements included in this report for further information on our long-term debt, securitization transactions and our conduit facilities.

Weighted average interest rate on our debt increased primarily due to (i) SFC’s offering of the 8.25% SFC Notes in April of 2016, (ii) the debt elimination associated with the SpringCastle Interests Sale, and (iii) the pay down of securitizations, which had a lower interest rate relative to our other indebtedness. This increase was partially offset by the repurchase of $600 million of unsecured notes, which had a higher interest rate relative to our other indebtedness.

Provision for finance receivable losses increased $18 million in 2017 when compared to 2016 primarily due to (i) the growth in our personal loan portfolio during the past 12 months, (ii) continued alignment and enhancement of our collection practices which resulted in higher provision from an increase in the loans now classified as TDR, (iii) a greater proportion of charge-offs from our purchased credit impaired finance receivables in 2016, which were not recorded as charge-offs through the allowance for finance receivable losses and (iv) the estimated impacts of hurricanes Harvey, Irma and Maria. Based on information currently available, we estimate the impact to net charge-offs attributable to these hurricanes to be $17 million and have increased our provision for finance receivable losses accordingly. This increase was partially offset by $22 million reduction in the impairment in the purchased credit impaired loans due to the increase in expected cash flows in that portfolio.

Net gain on sale of SpringCastle interests of $167 million in 2016 reflected the net gain associated with the sale of our equity interests in the SpringCastle Joint Venture on March 31, 2016.

Other revenues decreased $47 million in 2017 when compared to 2016 primarily due to (i) a decrease in insurance revenues of $29 million during 2017 primarily due to lower volume of loans with insurance products sold and a decrease in revenues from runoff business, (ii) a decrease of $18 million in 2017 due to net gain on sales of personal and real estate loans in 2016, (iii) a decrease in investment revenue of $13 million primarily due to lower realized gains on securities sold in the 2017 period, and (iv) a decrease of $12 million driven by higher net loss on repurchases and repayments of debt in 2017. This decrease was partially offset by (i) a $13 million increase in fee revenues from home and auto membership plans sold in the 2017 period, (ii) a $9 million lower market adjustment on finance receivables held for sale in 2017 compared to 2016 and (iii) a $4 million increase in interest income on notes receivable from parent and affiliates in the 2017 period, as discussed in Note 12 of the Notes to Consolidated Financial Statements of this report.

Acquisition-related transaction and integration costs decreased $39 million in 2017 when compared to 2016 primarily due to (i) $32 million of lower compensation costs associated with severance and stock compensation costs in 2017, (ii) a $13 million claim reserve adjustment for pre-acquisition non-credit insurance policies, and (iii) $9 million of lower system conversions and


17

    

project management servicing fees. These decreases were partially offset by $17 million in expenses associated with branch and administrative office consolidations. See “Non-GAAP Financial Measures” below for further information regarding these costs.

Other expenses decreased $60 million in 2017 when compared to 2016 due to the following:

Other operating expenses decreased $83 million primarily due to (i) a decrease in Citigroup transition expenses of $55 million, (ii) lower professional and audit expenses of $33 million during the 2017 period, (iii) an increase in the deferral of origination costs of $22 million due to the increase in the number of loans originated in the 2017 period compared to prior year, and (iv) a decrease in amortization of other intangible assets of $18 million during the 2017 period. This decrease was partially offset by an increase in OCLI loan referral fees of $39 million due to increased levels of loan volume through online sources. See Note 12 of the Notes to Consolidated Financial Statements included in this report for further information on loan referral fees.

Insurance policy benefits and claims increased $17 million primarily due to the prior year favorable variances of $12 million in credit claim and benefit reserves and a $5 million increase in reserve for non-credit insurance products due to higher growth in sales.

Salaries and benefits increased by $6 million.

Income taxes totaled $243 million for 2017 compared to $127 million for 2016. The increase is primarily due to recognition of the impact of the Tax Act. The effective tax rate for 2017 was 61.5% compared to 31.9% for 2016. The effective tax rate for 2017 differed from the federal statutory rate primarily due to the recognition of the impact of the Tax Act and the effects of state income taxes. As a result of the Tax Act we recognized an $81 million tax charge in 2017. This charge is primarily the result of the lower corporate tax rate, which required us to remeasure our net deferred tax asset to reflect the lower corporate tax rate. The effective tax rate for 2016 differed from the federal statutory rate primarily due to the effects of the non-controlling interest in the previously owned SpringCastle Portfolio and the effects of state income taxes. See Note 19 of the Notes to Consolidated Financial Statements included in this report for further information on the effective tax rates.

Comparison of Consolidated Results for 2016 and 2015

Interest income increased $1.2 billion in 2016 when compared to 2015 due to the net of the following:

Finance charges increased $1.2 billion primarily due to the net of the following:

Average net receivables held for investment increased primarily due to (i) loans acquired in the OneMain Acquisition and (ii) the continued growth of our loan portfolio (primarily of our secured personal loans). This increase was partially offset by (i) the SpringCastle Interests Sale, (ii) the transfer of $608 million of our personal loans to finance receivables held for sale on September 30, 2015, and (iii) our liquidating real estate loan portfolio, including the transfers of $257 million and $50 million of real estate loans to finance receivables held for sale on June 30, 2016 and November 30, 2016, respectively.

Yield on finance receivables held for investment decreased primarily due to (i) the continued growth of secured personal loans, which generally have lower yields relative to our unsecured personal loans, and (ii) the effects of purchase accounting adjustments relating to the OneMain Acquisition.

Interest income on finance receivables held for sale increased $14 million primarily due to (i) the transfer of $608 million of our personal loans to held for sale on September 30, 2015, which were sold in the Lendmark Sale on May 2, 2016, and (ii) the transfers of $307 million of real estate loans to finance receivables held for sale during 2016, which were sold in the August 2016 Real Estate Loan Sale and December 2016 Real Estate Loan Sale.

Interest expense increased $141 million in 2016 when compared to 2015 due to the net of the following:

Average debt increased primarily due to (i) debt acquired in the OneMain Acquisition and (ii) net unsecured debt issued during the 2016 period. This increase was partially offset by (i) the elimination of the debt associated with the SpringCastle Interests Sale and (ii) net repayments under our conduit facilities. See Notes 13 and 14 of the Notes to Consolidated Financial Statements included in this report for further information on our long-term debt, consumer loan securitization transactions, and our conduit facilities.



18

    

Weighted average interest rate on our debt decreased primarily due to (i) debt acquired from the OneMain Acquisition, which generally has a lower weighted average interest rate relative to SFC's weighted average interest rate, and (ii) the repurchase of $600 million unsecured notes, which had a higher interest rate relative to our other indebtedness, in connection with SFC’s offering of the 8.25% SFC Notes, as defined in “Liquidity and Capital Resources” included in this report. The decrease was partially offset by (i) SFC’s offering of the 8.25% SFC Notes in April of 2016 and (ii) the elimination of debt associated with the SpringCastle Interests Sale, which generally had a lower interest rate relative to our other indebtedness.

Provision for finance receivable losses increased $218 million in 2016 when compared to 2015 primarily due to (i) provision for finance receivable losses of $229 million resulting from the OneMain Acquisition, which reflected net charge-offs of $477 million, partially offset by the re-establishment of the allowance for finance receivable losses of $248 million in 2015 and (ii) higher net charge-offs on Springleaf personal loans reflecting growth during the past 12 months. This increase was partially offset by (i) lower net charge-offs on the previously owned SpringCastle Portfolio reflecting the SpringCastle Interests Sale and the improved central servicing performance as the acquired portfolio matured under our ownership and (ii) the continued refinement of our estimates of allowance for finance receivable losses and their related assumptions based on ongoing integration and alignment of collection and charge-off practices.

Net gain on sale of SpringCastle interests of $167 million in 2016 reflected the net gain associated with the sale of our equity interest in the SpringCastle Joint Venture on March 31, 2016. See Note 2 of the Notes to Consolidated Financial Statements included in this report for further information on this sale.

Other revenues increased $312 million in 2016 when compared to 2015 primarily due to (i) other revenues of $319 million resulting from the OneMain Acquisition, which consisted of insurance revenues of $236 million, investment revenues of $54 million, and remaining other revenues of $29 million, including $25 million of revenues from our ancillary products, (ii) net gain on sales of personal and real estate loans of $18 million in 2016, (iii) servicing charge income for the receivables related to the Lendmark Sale of $6 million in 2016, (iv) foreign currency translation adjustment gain of $4 million in 2016 resulting from the liquidation of our United Kingdom subsidiary, and (v) a $3 million increase in interest income on notes receivable from parent and affiliates in the 2016 period, as discussed in Note 12 of the Notes to Consolidated Financial Statements of this report. This increase was partially offset by (i) a decrease in Springleaf investment revenues of $20 million during 2016 primarily due to a decrease in invested assets and lower realized gains on the sale of investment securities and (ii) net loss on repurchases and repayments of debt of $17 million in 2016.

Acquisition-related transaction and integration costs of $108 million and $62 million in 2016 and 2015, respectively, reflected increased costs relating to the OneMain Acquisition and the Lendmark Sale, including branch and system conversions, information technology costs, certain compensation and benefit related costs, and other costs and fees that would not have been incurred in the ordinary course of business. See “Non-GAAP Financial Measures” below for further information regarding these costs.

Other expenses increased $667 million in 2016 when compared to 2015 due to the following:

Other operating expenses increased $299 million primarily due to (i) an increase in other operating expense of $306 million resulting from the OneMain Acquisition, which consisted primarily of advertising expenses of $74 million, occupancy costs of $66 million, amortization on other intangible assets of $57 million, and information technology expenses of $53 million, (ii) a decrease in Springleaf deferred origination costs of $12 million during 2016, (iii) an increase in Springleaf information technology expenses of $9 million during 2016, (iv) an increase in professional fees of $8 million during 2016 primarily reflecting debt refinance costs, and (v) an increase of $5 million in OCLI loan referral fees due to increased levels of loan volume through online sources. See Note 12 of the Notes to Consolidated Financial Statements included in this report for further information on loan referral fees. These increases were offset by lower expense in 2016 due to nine additional months of servicing expenses for the SpringCastle Portfolio totaling $38 million during 2015.

Salaries and benefits increased $297 million primarily due to salaries and benefits of $317 million resulting from the OneMain Acquisition. This increase was partially offset by (i) non-cash incentive compensation expense of $15 million recorded in 2015 relating to the rights of certain executives to receive a portion of the cash proceeds from the sale of OMH’s common stock by the Initial Stockholder and (ii) a decrease in Springleaf average staffing during 2016.

Insurance policy benefits and claims increased $71 million due to insurance policy benefits and claims of $88 million resulting from the OneMain Acquisition. This increase was partially offset by a $17 million decrease in Springleaf


19

    

insurance policy benefits and claims during 2016 primarily due to favorable variances in benefit reserves, which partially resulted from a $9 million write-down of benefit reserves recorded during 2016.

Income taxes totaled $127 million for 2016 compared to benefit from income taxes of $122 million for 2015. The effective tax rate for 2016 was 31.9% compared to 62.5% for 2015. The effective tax rate for 2016 and 2015 differed from the federal statutory rate primarily due to the effect of the non-controlling interest in the previously owned SpringCastle Portfolio, partially offset by the effect of state income taxes. On March 31, 2016, the Company sold its equity interest in the SpringCastle Portfolio. See Note 19 of the Notes to Consolidated Financial Statements included in this report for further information on the effective rates.



20

    

NON-GAAP FINANCIAL MEASURES

Adjusted Pretax Income (Loss)

Management uses adjusted pretax income (loss), a non-GAAP financial measure, as a key performance measure of our segments. Adjusted pretax income (loss) represents income (loss) before income taxes on a Segment Accounting Basis and excludes acquisition-related transaction and integration expenses, net gain (loss) on sales of personal and real estate loans, net gain on sale of SpringCastle interests, SpringCastle transaction costs, losses resulting from repurchases and repayments of debt, debt refinance costs, net loss on liquidation of our United Kingdom subsidiary, and income attributable to non-controlling interests. Management believes adjusted pretax income (loss) is useful in assessing the profitability of our segments and uses adjusted pretax income (loss) in evaluating our operating performance and as a performance goal under the company’s executive compensation programs. Adjusted pretax income (loss) is a non-GAAP financial measure and should be considered supplemental to, but not as a substitute for or superior to, income (loss) before income taxes, net income, or other measures of financial performance prepared in accordance with GAAP.

The reconciliations of income (loss) before income taxes attributable to SFC on a Segment Accounting Basis to adjusted pretax income (loss) attributable to SFC (non-GAAP) by segment were as follows:
(dollars in millions)
 
 
 
 
 
 
Years Ended December 31,
 
2017
 
2016
 
2015
 
 
 
 
 
 
 
Consumer and Insurance
 
 
 
 
 
 
Income before income taxes - Segment Accounting Basis
 
$
601

 
$
716

 
$
372

Adjustments:
 
 
 
 
 
 
Acquisition-related transaction and integration expenses
 
66

 
100

 
16

Net gain on sale of personal loans
 

 
(22
)
 

Net loss on repurchases and repayments of debt
 
18

 
14

 

Debt refinance costs
 

 
4

 
$

Adjusted pretax income (non-GAAP)
 
$
685

 
$
812

 
$
388

 
 
 
 
 
 
 
Acquisitions and Servicing
 
 
 
 
 
 
Income (loss) before income taxes - Segment Accounting Basis
 
$
(2
)
 
$
218

 
$
243

Adjustments:
 
 
 
 
 
 
Net gain on sale of SpringCastle interests
 

 
(167
)
 

Acquisition-related transaction and integration expenses
 

 
1

 
1

SpringCastle transaction costs
 

 
1

 

Income attributable to non-controlling interests
 

 
(28
)
 
(127
)
Adjusted pretax income (loss) (non-GAAP)
 
$
(2
)
 
$
25

 
$
117

 
 
 
 
 
 
 
Other
 
 
 
 
 
 
Income (loss) before income taxes - Segment Accounting Basis
 
$
1

 
$
(70
)
 
$
(270
)
Adjustments:
 
 
 
 
 
 
Acquisition-related transaction and integration expenses
 
6

 
27

 
48

Net loss on sale of real estate loans
 

 
12

 

Net loss on liquidation of United Kingdom subsidiary
 

 
6

 

Net loss on repurchases and repayments of debt
 

 
1

 

Debt refinance costs
 

 
1

 

Adjusted pretax income (loss) (non-GAAP)
 
$
7

 
$
(23
)
 
$
(222
)

Acquisition-related transaction and integration expenses incurred as a result of the OneMain Acquisition and the Lendmark Sale include (i) compensation and employee benefit costs, such as retention awards and severance costs, (ii) accelerated amortization of acquired software assets, (iii) rebranding to the OneMain brand, (iv) branch infrastructure and other fixed asset integration costs, (v) information technology costs, such as internal platform development, software upgrades and licenses, and technology termination costs, (vi) legal fees and project management costs, (vii) system conversions, including human capital management, marketing, risk, and finance functions, and (viii) other costs and fees directly related to the OneMain Acquisition and integration.


21

    

Segment Results     

See Note 23 of the Notes to Consolidated Financial Statements included in this report for (i) a description of our segments, (ii) reconciliations of segment totals to consolidated financial statement amounts, (iii) methodologies used to allocate revenues and expenses to each segment, and (iv) further discussion of the differences in our Segment Accounting Basis and GAAP.

CONSUMER AND INSURANCE            

Adjusted pretax income and selected financial statistics for Consumer and Insurance (which are reported on an adjusted Segment Accounting Basis) were as follows:
(dollars in millions)
 
 
 
 
 
 
At or for the Years Ended December 31,
 
2017
 
2016
 
2015
 
 
 
 
 
 
 
Interest income
 
$
3,296

 
$
3,314

 
$
1,470

Interest expense
 
765

 
738

 
242

Provision for finance receivable losses
 
955

 
908

 
346

Net interest income after provision for finance receivable losses
 
1,576

 
1,668

 
882

Other revenues
 
567

 
601

 
274

Other expenses
 
1,458

 
1,457

 
768

Adjusted pretax income (non-GAAP)
 
$
685

 
$
812

 
$
388

 
 
 
 
 
 
 
Selected Financial Statistics (a)
 
 
 
 
 
 
Finance receivables held for investment:
 
 
 
 
 
 
Net finance receivables
 
$
14,772

 
$
13,409

 
$
12,864

Number of accounts
 
2,346,289

 
2,191,348

 
2,179,484

Finance receivables held for sale:
 
 
 
 
 
 
Net finance receivables
 
$

 
$

 
$
617

Number of accounts
 

 

 
145,736

Finance receivables held for investment and held for sale: (b)
 
 
 
 
 
 
Average net receivables
 
$
13,811

 
$
13,393

 
$
5,681

Yield
 
23.86
 %
 
24.75
 %
 
25.87
 %
Gross charge-off ratio (c)
 
7.92
 %
 
7.82
 %
 
7.46
 %
Recovery ratio
 
(0.93
)%
 
(0.76
)%
 
(0.80
)%
Net charge-off ratio (c)
 
6.99
 %
 
7.06
 %
 
6.66
 %
30-89 Delinquency ratio
 
2.43
 %
 
2.25
 %
 
2.29
 %
Origination volume
 
$
10,502

 
$
9,388

 
$
5,627

Number of accounts originated
 
1,436,871

 
1,313,388

 
971,662

                                      
(a)
See “Glossary” at the beginning of this report for formulas and definitions of our key performance ratios.

(b)
Includes personal loans held for sale for the 2016 and 2015 periods in connection with the Lendmark Sale.

(c)
The gross charge-off ratio and net charge-off ratio in 2015 reflect $62 million of additional charge-offs recorded in December of 2015 (on a Segment Accounting Basis) related to alignment in charge-off policy for personal loans in connection with the OneMain integration. Excluding these additional charge-offs, our gross charge-off ratio and net charge-off ratio would have been 6.37% and 5.57%, respectively.


22

    

Comparison of Adjusted Pretax Income for 2017 and 2016
 
Interest income decreased $18 million in 2017 when compared to 2016 due to the net of the following:

Interest income on finance receivables held for sale decreased $56 million in 2017 due to the transfer of our personal loans to finance receivables held for sale in the 2015 period that were sold in the Lendmark Sale in May of 2016.

Finance charges increased $38 million primarily due to the net of the following:

Average net receivables held for investment increased primarily due to the continued growth in our personal loan portfolio.

Yield on finance receivables held for investment decreased primarily due to the continued shift of the portfolio towards secured personal loans and direct auto customers who tend to have loans with lower yields and lower charge offs relative to our unsecured personal loans.

Interest expense increased $27 million in 2017 when compared to 2016 primarily due to an increase in the utilization of financing from unsecured notes which generally have higher interest rates relative to our other indebtedness.

Provision for finance receivable losses increased $47 million in 2017 when compared to 2016 primarily due to (i) the growth in our personal loan portfolio during the past 12 months, (ii) continued alignment and enhancement of our collection practices which resulted in an increase in the loans now classified as TDR and (iii) the estimated impacts of hurricanes Harvey and Irma. Based on information currently available, we estimate the impact to net charge-offs attributable to these hurricanes to be $12 million and have increased our provision for finance receivable losses accordingly.

Other revenues decreased $34 million in 2017 when compared to 2016 primarily due to (i) a decrease in insurance revenues of $28 million during 2017 primarily due to lower volume of loans with insurance products sold and a decrease in revenue from runoff business and (ii) a decrease in investment revenue of $21 million primarily due to lower realized gains on securities sold and reinvestments into lower yielding assets. This decrease was offset by an increase in fee revenues of $10 million from home and auto membership plans sold in 2017.

Comparison of Adjusted Pretax Income for 2016 and 2015

Interest income increased $1.8 billion in 2016 when compared to 2015 due to the following:

Finance charges increased $1.8 billion primarily due to the net of the following:

Average net receivables increased primarily due to (i) loans acquired in the OneMain Acquisition and (ii) the continued growth of our loan portfolio (primarily of our secured personal loans). This increase was partially offset by the transfer of $608 million of our personal loans to finance receivables held for sale on September 30, 2015.

Yield decreased primarily due to the continued growth of secured personal loans, which generally have lower yields relative to our unsecured personal loans.

Interest income on finance receivables held for sale increased $13 million primarily due to the transfer of personal loans to finance receivables held for sale on September 30, 2015 and sold in the Lendmark Sale on May 2, 2016.

Interest expense increased $496 million in 2016 when compared to 2015 primarily due to (i) interest expense of $284 million resulting from the OneMain Acquisition and (ii) a change in the methodology of allocating interest expense. See Note 23 of the Notes to Consolidated Financial Statements included in this report for the allocation methodologies.

Provision for finance receivable losses increased $562 million in 2016 when compared to 2015 primarily due to (i) provision for finance receivable losses of $512 million resulting from the OneMain Acquisition and (ii) higher net charge-offs on Springleaf personal loans reflecting growth during 2016. This increase was partially offset by the continued refinement of our estimates of allowance for finance receivable losses and their related assumptions based on ongoing integration and alignment of collection and charge-off practices.



23

    

Other revenues increased $327 million in 2016 when compared to 2015 primarily due to other revenues of $336 million resulting from the OneMain Acquisition, which consisted of insurance revenues of $236 million, investment revenues of $71 million, and remaining other revenues of $29 million, partially offset by a decrease in Springleaf investment revenues of $12 million during 2016 resulting from a decrease in invested assets and lower realized gains on the sale of investment securities.

Other expenses increased $689 million in 2016 when compared to 2015 due to the following:

Salaries and benefits increased $314 million primarily due to (i) salaries and benefits of $316 million resulting from the OneMain Acquisition and (ii) an increase in Springleaf average staffing during 2016 prior to the Lendmark Sale.

Other operating expenses increased $305 million primarily due to (i) other operating expenses of $266 million resulting from the OneMain Acquisition, which consisted primarily of advertising expenses of $74 million, occupancy costs of $66 million, and information technology expenses of $49 million, (ii) an increase in Springleaf credit and collection related costs of $13 million during 2016 reflecting growth in our loan portfolio, (iii) a decrease in Springleaf deferred origination costs of $12 million during 2016, (iv) an increase in Springleaf information technology expenses of $10 million during 2016, (v) an increase in Springleaf advertising expenses of $6 million during 2016, and (vi) an increase of $5 million in OCLI loan referral fees due to increased levels of loan volume through online sources. See Note 12 of the Notes to Consolidated Financial Statements included in this report for further information on loan referral fees.

Insurance policy benefits and claims increased $70 million primarily due to insurance policy benefits and claims of $87 million resulting from the OneMain Acquisition. This increase was partially offset by a $17 million decrease in Springleaf insurance policy benefits and claims during 2016 primarily due to favorable variances in benefit reserves, which partially resulted from a $9 million write-down of benefit reserves recorded during 2016.

ACQUISITIONS AND SERVICING

Adjusted pretax income (loss) attributable to SFC and selected financial statistics for Acquisitions and Servicing (which are reported on an adjusted Segment Accounting Basis) were as follows:
(dollars in millions)
 
 
 
 
 
 
At or for the Years Ended December 31,
 
2017
 
2016
 
2015
 
 
 
 
 
 
 
Interest income
 
$

 
$
102

 
$
455

Interest expense
 

 
20

 
87

Provision for finance receivable losses
 

 
14

 
68

Net interest income after provision for finance receivable losses
 

 
68

 
300

Other revenues
 

 

 
5

Other expenses
 
2


15


61

Adjusted pretax income (loss) (non-GAAP)
 
(2
)
 
53

 
244

Pretax income attributable to non-controlling interests
 

 
28

 
127

Adjusted pretax income (loss) attributable to SFC (non-GAAP)
 
$
(2
)
 
$
25

 
$
117

 
 
 
 
 
 
 
Selected Financial Statistics *
 
 
 
 
 
 
Finance receivables held for investment:
 
 
 
 
 
 
Net finance receivables
 
$

 
$

 
$
1,703

Number of accounts
 

 

 
232,383

Average net receivables
 
$

 
$
414

 
$
1,887

Yield
 
%
 
24.19
%
 
24.14
%
Net charge-off ratio
 
%
 
3.48
%
 
3.49
%
30-89 Delinquency ratio
 
%
 
%
 
4.40
%
                                      
*
See “Glossary” at the beginning of this report for formulas and definitions of our key performance ratios.




24

    

On March 31, 2016, we sold our equity interest in the SpringCastle Joint Venture, the primary component of our Acquisitions
and Servicing segment.

OTHER

“Other” consist of our non-originating legacy operations, which include (i) our liquidating real estate loan portfolio as discussed below and (ii) our liquidating retail sales finance portfolio (including retail sales finance accounts from our legacy auto finance operation).

Beginning in 2017, management no longer views or manages our real estate assets as a separate operating segment. Therefore, we are now including Real Estate, which was previously presented as a distinct reporting segment, in “Other.” To conform to this new alignment of our segments, we have revised our prior period segment disclosures.

Adjusted pretax income (loss) of the Other components (which are reported on an adjusted Segment Accounting Basis) were as follows:
(dollars in millions)
 
 
 
 
 
 
Years Ended December 31,
 
2017
 
2016
 
2015
 
 
 
 
 
 
 
Interest income
 
$
23

 
$
51

 
$
76

Interest expense (a)
 
21

 
43

 
268

Provision for finance receivable losses (b)
 
7

 
6

 
(1
)
Net interest income (loss) after provision for finance receivable losses
 
(5
)
 
2

 
(191
)
Other revenues (c)
 
23

 
3

 
19

Other expenses (d)
 
11

 
28

 
50

Adjusted pretax income (loss) (non-GAAP)
 
$
7

 
$
(23
)
 
$
(222
)
                                      
(a)
Interest expense for 2016 when compared to 2015 reflected a change in the methodology of allocating interest expense. See Note 23 of the Notes to Consolidated Financial Statements included in this report for the allocation methodologies table.

(b)
Provision for finance receivable losses for 2017 includes a $5 million increase due to estimated net charge-offs attributable to the impact of hurricanes Harvey and Maria.

(c)
Other revenues reported in “Other” primarily includes interest income on SFC’s note receivable from SFI. See Note 12 of the Notes to Consolidated Financial Statements included in this report for further information on the notes receivable from parent and affiliates.

(d)
Other expenses for 2015 reflected non-cash incentive compensation relating to the rights of certain executives to receive a portion of the cash proceeds received by the Initial Stockholder.

Net finance receivables held for investment of the Other components (which are reported on a Segment Accounting Basis) were as follows:
(dollars in millions)
 
 
 
 
 
 
December 31,
 
2017
 
2016
 
2015
 
 
 
 
 
 
 
Net finance receivables:
 
 
 
 
 
 
Personal loans
 
$

 
$
11

 
$
17

Real estate loans
 
136

 
153

 
565

Retail sales finance
 
6

 
12

 
24

Total
 
$
142

 
$
176

 
$
606




25

    

Credit Quality    

FINANCE RECEIVABLE COMPOSITION

The following table presents the composition of our finance receivables held for investment for each of the Company’s segments on a Segment Accounting Basis, as well as reconciliations to our total net finance receivables on a GAAP basis:
(dollars in millions)
 
Consumer
and
Insurance
 
Other
 
Segment to
GAAP
Adjustment
 
Consolidated
Total
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
Personal loans
 
$
14,772

 
$

 
$
3

 
$
14,775

Real estate loans
 

 
136

 
(8
)
 
128

Retail sales finance
 

 
6

 

 
6

Total
 
$
14,772

 
$
142

 
$
(5
)
 
$
14,909

 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
Personal loans
 
$
13,409

 
$
11

 
$
111

 
$
13,531

Real estate loans
 

 
153

 
(9
)
 
144

Retail sales finance
 

 
12

 
(1
)
 
11

Total
 
$
13,409

 
$
176

 
$
101

 
$
13,686


The largest component of our finance receivables and primary source of our interest income is our personal loan portfolio. Our personal loans are typically non-revolving with a fixed-rate and a fixed, original term of three to six years and are secured by consumer goods, automobiles, or other personal property or are unsecured. At December 31, 2017, 43% of our personal loans were secured by titled collateral, compared to 36% at December 31, 2016.

Distribution of Finance Receivables by FICO Score

There are many different categorizations used in the consumer lending industry to describe the creditworthiness of a borrower, including prime, non-prime, and sub-prime. We track and analyze the performance of our finance receivable portfolio using many different parameters, including FICO scores, which is widely recognized in the consumer lending industry.

We group FICO scores into the following credit strength categories:

•     Prime: FICO score of 660 or higher
•     Non-prime: FICO score of 620-659
•      Sub-prime: FICO score of 619 or below

Our customers are described as prime at one end of the credit spectrum and sub-prime at the other. Our customers’ demographics are in many respects near the national median, but may vary from national norms in terms of credit and repayment histories. Many of our customers have experienced some level of prior financial difficulty or have limited credit experience and require higher levels of servicing and support from our branch network.



26

    

Our net finance receivables grouped into the following categories based solely on borrower FICO credit scores at the purchase, origination, renewal, or most recently refreshed date were as follows:
(dollars in millions)
 
Personal
Loans
 
Real Estate
Loans
 
Retail Sales Finance
 
Total
 
 
 
 
 
 
 
 
 
December 31, 2017 *
 
 
 
 
 
 
 
 
FICO scores
 
 
 
 
 
 
 
 
660 or higher
 
$
3,937

 
$
42

 
$
3

 
$
3,982

620-659
 
3,903

 
21

 
1

 
3,925

619 or below
 
6,935

 
65

 
2

 
7,002

Total
 
$
14,775

 
$
128

 
$
6

 
$
14,909

 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
FICO scores
 
 
 
 
 
 
 
 
660 or higher
 
$
3,413

 
$
41

 
$
5

 
$
3,459

620-659
 
3,369

 
23

 
2

 
3,394

619 or below
 
6,726

 
77

 
4

 
6,807

Unavailable
 
23

 
3

 

 
26

Total
 
$
13,531

 
$
144

 
$
11

 
$
13,686

                                    
*
The shift in FICO distribution includes the alignment in FICO versions across OMH. Effective March 31, 2017, the legacy Springleaf FICO scores were refreshed to FICO 08 version, which is comparable with the legacy OneMain FICO version.

DELINQUENCY

We consider the delinquency status of our finance receivables as the primary indicator of credit quality. We monitor delinquency trends to evaluate the risk of future credit losses and employ advanced analytical tools to manage our exposure and appetite. Our branch team members work with customers through occasional periods of financial difficulty and offer a variety of borrower assistance programs to help customers continue to make payments. Team members also actively engage in collection activities throughout the early stages of delinquency. We closely track and report the percentage of receivables that are contractually 30-89 days past due as a benchmark of portfolio quality, collections effectiveness, and as a strong indicator of losses in coming quarters.

When finance receivables are contractually 60 days past due, we consider them delinquent and transfer collections management of these accounts to our centralized operations, as these accounts are considered to be at increased risk for loss. Use of our centralized operations teams for managing late stage delinquency allows us to apply more advanced collections technologies/tools and drives operating efficiencies in servicing. At 90 days past due, we consider our finance receivables to be nonperforming.



27

    

The following table presents (i) delinquency information of the Company’s segments on a Segment Accounting Basis, (ii) reconciliations to our total net finance receivables on a GAAP basis, by number of days delinquent, and (iii) delinquency ratios as a percentage of net finance receivables:
(dollars in millions)
 
Consumer
and
Insurance
 
Other
 
Segment to GAAP Adjustment
 
Consolidated
Total
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
Current
 
$
14,076

 
$
109

 
$

 
$
14,185

30-59 days past due
 
203

 
9

 
(2
)
 
210

Delinquent (60-89 days past due)
 
156

 
4

 
(1
)
 
159

Performing
 
14,435

 
122

 
(3
)
 
14,554

 
 
 
 
 
 
 
 
 
Nonperforming (90+ days past due)
 
337

 
20

 
(2
)
 
355

Total net finance receivables
 
$
14,772

 
$
142

 
$
(5
)
 
$
14,909

 
 
 
 
 
 
 
 
 
Delinquency ratio
 
 
 
 
 
 
 
 
30-89 days past due
 
2.43
%
 
8.60
%
 
*

 
2.48
%
30+ days past due
 
4.71
%
 
22.75
%
 
*

 
4.86
%
60+ days past due
 
3.34
%
 
16.66
%
 
*

 
3.45
%
90+ days past due
 
2.28
%
 
14.15
%
 
*

 
2.38
%
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
Current
 
$
12,757

 
$
131

 
$
103

 
$
12,991

30-59 days past due
 
173

 
10

 
(1
)
 
182

Delinquent (60-89 days past due)
 
129

 
4

 

 
133

Performing
 
13,059

 
145

 
102

 
13,306

 
 
 
 
 
 
 
 
 
Nonperforming (90+ days past due)
 
350

 
31

 
(1
)
 
380

Total net finance receivables
 
$
13,409

 
$
176

 
$
101

 
$
13,686

 
 
 
 
 
 
 
 
 
Delinquency ratio
 
 
 
 
 
 
 
 
30-89 days past due
 
2.25
%
 
8.32
%
 
*

 
2.30
%
30+ days past due
 
4.87
%
 
25.88
%
 
*

 
5.08
%
60+ days past due
 
3.58
%
 
20.16
%
 
*

 
3.76
%
90+ days past due
 
2.61
%
 
17.56
%
 
*

 
2.78
%
                                     
*
Not applicable.



28

    

ALLOWANCE FOR FINANCE RECEIVABLE LOSSES

We record an allowance for finance receivable losses to cover estimated incurred losses on our finance receivables. Our allowance for finance receivable losses may fluctuate based upon our continual review of the credit quality of the finance receivable portfolios and changes in economic conditions.

Changes in the allowance for finance receivable losses for each of the Company’s segments on a Segment Accounting Basis, as well as reconciliations to our total allowance for finance receivable losses on a GAAP basis, were as follows:
(dollars in millions)
 
Consumer
and
Insurance
 
Acquisitions and Servicing
 
Other
 
Segment to GAAP Adjustment
 
Consolidated
Total
 
 
 
 
 
 
 
 
 
 
 
Year Ended December 31, 2017
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
729

 
$

 
$
31

 
$
(74
)
 
$
686

Provision for finance receivable losses
 
955

 

 
7

 
(15
)
 
947

Charge-offs
 
(1,093
)
 

 
(7
)
 
53

 
(1,047
)
Recoveries
 
128

 

 
4

 
(26
)
 
106

Balance at end of period
 
$
719

 
$

 
$
35

 
$
(62
)
 
$
692

 
 
 
 
 
 
 
 
 
 
 
Allowance ratio
 
4.86
%
 
%