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Section 1: 10-Q (10-Q)

Document

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

FORM 10-Q

(Mark One)
 
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2018
 
OR
 
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from to
 
Commission file number 1-06155

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

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

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

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

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

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

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

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

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

1



TABLE OF CONTENTS

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2



GLOSSARY
Terms and abbreviations used in this report are defined below.
Term or Abbreviation
 
Definition
 
 
 
2017 Annual Report on Form
10-K
 
Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed with the SEC on February 21, 2018
2022 SFC Notes
 
$500 million of 6.125% Senior Notes due 2022 issued by SFC on May 15, 2017 and guaranteed by OMH
30-89 Delinquency ratio
 
net finance receivables 30-89 days past due as a percentage of net finance receivables
5.25% SFC Notes
 
$700 million of 5.25% Senior Notes due 2019 issued by SFC on December 3, 2014 and guaranteed by OMH
5.625% SFC Notes
 
$875 million of 5.625% Senior Notes due 2023 issued by SFC on December 8, 2017 and guaranteed by OMH
6.125% SFC Notes
 
collectively, the 2022 SFC Notes and the Additional SFC Notes
6.875% SFC Notes
 
$1.25 billion aggregate principal amount of 6.875% Senior Notes due 2025 issued by SFC on March 12, 2018 and guaranteed by OMH
7.125% SFC Notes
 
$900 million of 7.125% Senior Notes due 2026 issued by SFC on May 11, 2018 and guaranteed by OMH
8.25% SFC Notes
 
$1.0 billion of 8.25% Senior Notes due 2020 issued by SFC on April 11, 2016 and guaranteed by OMH
ABS
 
asset-backed securities
Accretable yield
 
the excess of the cash flows expected to be collected on the purchased credit impaired finance receivables over the discounted cash flows
Additional SFC Notes
 
$500 million of 6.125% Senior Notes due 2022 issued by SFC on May 30, 2017 and guaranteed by OMH
Adjusted pretax income (loss)
 
a non-GAAP financial measure used by management as a key performance measure of our segments
AHL
 
American Health and Life Insurance Company, an insurance subsidiary of OMFH
AIG
 
AIG Capital Corporation, a subsidiary of American International Group, Inc.
AOCI
 
Accumulated other comprehensive income (loss)
Apollo
 
Apollo Global Management, LLC and its consolidated subsidiaries
Apollo-Värde Group
 
an investor group led by funds managed by Apollo and Värde
Apollo-Värde Transaction
 
the purchase by the Apollo-Värde Group of 54,937,500 shares of OMH common stock from SFH pursuant to the Share Purchase Agreement for an aggregate purchase price of approximately $1.4 billion in cash on June 25, 2018
ASC
 
Accounting Standards Codification
ASU
 
Accounting Standards Update
Average debt
 
average of debt for each day in the period
Average net receivables
 
average of monthly average net finance receivables (net finance receivables at the beginning and end of each month divided by two) in the period
CDO
 
collateralized debt obligations
CFPB
 
Consumer Financial Protection Bureau
CMBS
 
commercial mortgage-backed securities
Dodd-Frank Act
 
the Dodd-Frank Wall Street Reform and Consumer Protection Act
Exchange Act
 
Securities Exchange Act of 1934, as amended
FA Loans
 
purchased credit impaired finance receivables related to the Fortress Acquisition
FASB
 
Financial Accounting Standards Board
FHLB
 
Federal Home Loan Bank
FICO score
 
a credit score created by Fair Isaac Corporation
Fixed charge ratio
 
earnings less income taxes, interest expense, extraordinary items, goodwill impairment, and any amounts related to discontinued operations, divided by the sum of interest expense and any preferred dividends
Fortress
 
Fortress Investment Group LLC
Fortress Acquisition
 
transaction by which FCFI Acquisition LLC, an affiliate of Fortress, acquired an 80% economic interest of the sole stockholder of SFC for a cash purchase price of $119 million, effective November 30, 2010

3



Term or Abbreviation
 
Definition
 
 
 
GAAP
 
generally accepted accounting principles in the United States of America
Gross charge-off ratio
 
annualized gross charge-offs as a percentage of average net receivables
Independence
 
Independence Holdings, LLC
Indiana DOI
 
Indiana Department of Insurance
IRS
 
Internal Revenue Service
Junior Subordinated Debenture
 
$350 million aggregate principal amount of 60-year junior subordinated debt issued by SFC under an indenture dated January 22, 2007, by and between SFC and Deutsche Bank Trust Company, as trustee, and guaranteed by OMH
LIBOR
 
London Interbank Offered Rate
Merit
 
Merit Life Insurance Co., an insurance subsidiary of SFC
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
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
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 Notes
 
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 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
Other Securities
 
securities for which the fair value option was elected and equity securities. Other Securities recognize unrealized gains and losses in investment revenues
Other SFC Notes
 
collectively, SFC’s 8.25% Senior Notes due 2023, 7.75% Senior Notes due 2021, and 6.00% Senior Notes due 2020, on a senior unsecured basis, and the Junior Subordinated Debenture, on a junior subordinated basis, issued by SFC and guaranteed by OMH
Recovery ratio
 
annualized recoveries on net charge-offs as a percentage of average net receivables
Retail sales finance
 
collectively, retail sales contracts and revolving retail accounts
RMBS
 
residential mortgage-backed securities
RSUs
 
restricted stock units
SEC
 
U.S. Securities and Exchange Commission
Securities Act
 
Securities Act of 1933, as amended
Segment Accounting Basis
 
a basis used to report the operating results of our segments, which reflects our allocation methodologies for certain costs and excludes the impact of applying purchase accounting
Settlement Agreement
 
a Settlement Agreement with the U.S. Department of Justice entered into by OMH and certain of its subsidiaries on November 13, 2015, in connection with the OneMain Acquisition
SFC
 
Springleaf Finance Corporation
SFC Base Indenture
 
Indenture dated as of December 3, 2014
SFC First Supplemental Indenture
 
First Supplemental Indenture dated as of December 3, 2014, to the SFC Base Indenture
SFC Fourth Supplemental Indenture
 
Fourth Supplemental Indenture dated as of December 8, 2017, to the SFC Base Indenture
SFC Fifth Supplemental Indenture
 
Fifth Supplemental Indenture dated as of March 12, 2018, to the SFC Base Indenture

4



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

 
the SFC Base Indenture as supplemented by the SFC First Supplemental Indenture, the SFC Second Supplemental Indenture, the SFC Third Supplemental Indenture, the SFC Fourth Supplemental Indenture, the SFC Fifth Supplemental Indenture and the SFC Sixth Supplemental Indenture
SFC Sixth Supplemental Indenture
 
Sixth Supplemental Indenture dated as of May 11, 2018, 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
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, SFH and OMH to acquire from SFH 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
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
Springleaf
 
OMH and its subsidiaries (other than OneMain)
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, an insurance subsidiary of OMFH
Trust preferred securities
 
capital securities classified as debt for accounting purposes but due to their terms are afforded, at least in part, equity capital treatment in the calculation of effective leverage by rating agencies
Unearned finance charges
 
the amount of interest that is capitalized at time of origination on a precompute loan that will be earned over the remaining contractual life of the loan
UPB
 
unpaid principal balance for interest bearing accounts and the gross remaining contractual payments less the unaccreted balance of unearned finance charges for precompute accounts
Värde
 
Värde Partners, Inc.
VIEs
 
variable interest entities
Weighted average interest rate
 
annualized interest expense as a percentage of average debt
Yield
 
annualized finance charges as a percentage of average net receivables
Yosemite
 
Yosemite Insurance Company, an insurance subsidiary of SFC


5



PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.    

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

(dollars in millions, except par value amount)
 
June 30,
2018
 
December 31,
2017
 
 
 
 
 
Assets
 
 

 
 

Cash and cash equivalents
 
$
520

 
$
958

Investment securities
 
1,720

 
1,697

Net finance receivables:
 
 

 
 

Personal loans (includes loans of consolidated VIEs of $9.1 billion in 2018 and $9.8 billion in 2017)
 
15,341

 
14,775

Other receivables
 
124

 
134

Net finance receivables
 
15,465

 
14,909

Unearned insurance premium and claim reserves
 
(611
)
 
(590
)
Allowance for finance receivable losses (includes allowance of consolidated VIEs of $459 million in 2018 and $465 million in 2017)
 
(698
)
 
(692
)
Net finance receivables, less unearned insurance premium and claim reserves and allowance for finance receivable losses
 
14,156

 
13,627

Finance receivables held for sale
 
123

 
132

Notes receivables from parent
 
316

 
391

Restricted cash and restricted cash equivalents (includes restricted cash and restricted cash equivalents of consolidated VIEs of $569 million in 2018 and $482 million in 2017)
 
586

 
498

Goodwill
 
1,422

 
1,422

Other intangible assets
 
407

 
439

Other assets
 
528

 
481

 
 
 
 
 
Total assets
 
$
19,778

 
$
19,645

 
 
 
 
 
Liabilities and Shareholder's Equity
 
 

 
 

Long-term debt (includes debt of consolidated VIEs of $8.1 billion in 2018 and $8.7 billion in 2017)
 
$
15,054

 
$
15,050

Insurance claims and policyholder liabilities
 
690

 
737

Deferred and accrued taxes
 
3

 
46

Other liabilities (includes other liabilities of consolidated VIEs of $14 million in 2018 and 2017)
 
411

 
410

Total liabilities
 
16,158

 
16,243

Commitments and contingent liabilities (Note 15)
 


 


 
 
 
 
 
Shareholder's equity:
 
 

 
 

Common stock, par value $.50 per share; 25,000,000 shares authorized, 10,160,021 shares issued and outstanding at June 30, 2018 and December 31, 2017
 
5

 
5

Additional paid-in capital
 
2,020

 
1,909

Accumulated other comprehensive income (loss)
 
(26
)
 
6

Retained earnings
 
1,621

 
1,482

Total shareholder's equity
 
3,620

 
3,402

 
 
 
 
 
Total liabilities and shareholder's equity
 
$
19,778

 
$
19,645


See Notes to Condensed Consolidated Financial Statements (Unaudited).


6



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

(dollars in millions)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018

2017
 
 
 

 
 
 
 

 
 
Interest income:
 
 
 
 
 
 
 
 
Finance charges
 
$
899

 
$
768

 
$
1,756

 
$
1,521

Finance receivables held for sale originated as held for investment
 
3

 
4

 
6

 
7

Total interest income
 
902

 
772

 
1,762

 
1,528

 
 
 
 
 
 
 
 
 
Interest expense
 
220

 
203

 
420

 
405

 
 
 
 
 
 
 
 
 
Net interest income
 
682

 
569

 
1,342

 
1,123

 
 
 
 
 
 
 
 
 
Provision for finance receivable losses
 
259

 
233

 
512

 
476

 
 
 
 
 
 
 
 
 
Net interest income after provision for finance receivable losses
 
423

 
336

 
830

 
647

 
 
 
 
 
 
 
 
 
Other revenues:
 
 

 
 

 
 

 
 

Insurance
 
107

 
104

 
212

 
207

Investment
 
19

 
20

 
32

 
39

Interest income on notes receivable from parent
 
5

 
5

 
10

 
10

Net loss on repurchases and repayments of debt
 
(7
)
 
(27
)
 
(8
)
 
(28
)
Other
 
14

 
15

 
23

 
24

Total other revenues
 
138

 
117

 
269

 
252

 
 
 
 
 
 
 
 
 
Other expenses:
 
 

 
 

 
 

 
 

Operating expenses:
 
 

 
 

 
 

 
 

Salaries and benefits
 
287

 
178

 
467

 
354

Acquisition-related transaction and integration expenses
 
28

 
14

 
39

 
37

Other operating expenses
 
140

 
148

 
271

 
305

Insurance policy benefits and claims
 
51

 
46

 
96

 
91

Total other expenses
 
506

 
386

 
873

 
787

 
 
 
 
 
 
 
 
 
Income before income taxes
 
55

 
67

 
226

 
112

 
 
 
 
 
 
 
 
 
Income taxes
 
43

 
20

 
84

 
38

 
 
 
 
 
 
 
 
 
Net income
 
$
12

 
$
47

 
$
142

 
$
74


See Notes to Condensed Consolidated Financial Statements (Unaudited).

7





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

(dollars in millions)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
Net income
 
$
12


$
47


$
142


$
74

 
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Net change in unrealized gains (losses) on non-credit impaired available-for-sale securities
 
(13
)
 
10

 
(37
)
 
20

Retirement plan liability adjustments
 

 
4

 

 
4

Foreign currency translation adjustments
 
(2
)
 
4

 
(5
)
 
4

Income tax effect:
 
 
 
 
 
 
 
 
Net unrealized gains (losses) on non-credit impaired available-for-sale securities
 
6

 
(4
)
 
7

 
(7
)
Retirement plan liability adjustments
 
2

 
(1
)
 
1

 
(1
)
Foreign currency translation adjustments
 
(2
)
 
(2
)
 
(1
)
 
(2
)
Other comprehensive income (loss), net of tax, before reclassification adjustments
 
(9
)
 
11

 
(35
)
 
18

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

 
(4
)
 

 
(8
)
Income tax effect:
 
 
 
 
 
 
 
 
Net realized gains on available -for-sale securities
 

 
1

 

 
2

Reclassification adjustments included in net income, net of tax
 

 
(3
)
 

 
(6
)
Other comprehensive income (loss), net of tax
 
(9
)
 
8

 
(35
)
 
12

 
 
 
 
 
 
 
 
 
Comprehensive income
 
$
3

 
$
55

 
$
107


$
86


See Notes to Condensed Consolidated Financial Statements (Unaudited).

8





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

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

 
1,909

 
$
6

 
$
1,482

 
$
3,402

Non-cash incentive compensation from SFH
 

 
110

 

 

 
110

Share-based compensation expense, net of forfeitures
 

 
2

 

 

 
2

Withholding tax on share-based compensation
 

 
(1
)
 

 

 
(1
)
Other comprehensive income (loss)
 

 

 
(35
)
 

 
(35
)
Impact of AOCI reclassification due to the Tax Act
 

 

 
3

 
(3
)
 

Net income
 

 

 

 
142

 
142

Balance, June 30, 2018
 
$
5

 
$
2,020

 
$
(26
)
 
$
1,621

 
$
3,620

 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2017
 
$
5

 
$
1,906

 
$
(6
)
 
$
1,368

 
$
3,273

Share-based compensation expense, net of forfeitures
 

 
3

 

 

 
3

Withholding tax on share-based compensation
 

 
(2
)
 

 

 
(2
)
Other comprehensive income
 

 

 
12

 

 
12

Dividend of SFMC to SFI
 

 

 

 
(38
)
 
(38
)
Net income
 

 

 

 
74

 
74

Balance, June 30, 2017
 
$
5

 
$
1,907

 
$
6

 
$
1,404

 
$
3,322


See Notes to Condensed Consolidated Financial Statements (Unaudited).


9





SPRINGLEAF FINANCE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(dollars in millions)
 
Six Months Ended June 30,

2018
 
2017
 
 
 
 
 
Cash flows from operating activities
 
 

 
 

Net income
 
$
142

 
$
74

Reconciling adjustments:
 
 

 
 

Provision for finance receivable losses
 
512

 
476

Depreciation and amortization
 
125

 
172

Deferred income tax charge (benefit)
 
10

 
(19
)
Net loss on repurchases and repayments of debt
 
8

 
28

Non-cash incentive compensation from SFH
 
110

 

Share-based compensation expense, net of forfeitures
 
2

 
3

Other
 
8

 

Cash flows due to changes in other assets and other liabilities
 
(68
)
 
87

Net cash provided by operating activities
 
849

 
821

 
 
 
 
 
Cash flows from investing activities
 
 

 
 

Net principal originations of finance receivables held for investment and held for sale
 
(1,116
)
 
(875
)
Cash advances on intercompany notes receivables
 
(29
)
 
(206
)
Proceeds from repayments of principal on intercompany notes receivables
 
101

 
110

Available-for-sale securities purchased
 
(394
)
 
(351
)
Available-for-sale securities called, sold, and matured
 
280

 
382

Trading and other securities called, sold, and matured
 
20

 
6

Other, net
 
(24
)
 
4

Net cash used for investing activities
 
(1,162
)
 
(930
)
 
 
 
 
 
Cash flows from financing activities
 
 

 
 

Proceeds from issuance of long-term debt, net of commissions
 
3,739

 
2,633

Repayment of long-term debt
 
(3,776
)
 
(2,254
)
Cash dividend of SFMC
 

 
(10
)
Withholding tax on share-based compensation
 
(1
)
 
(2
)
Net cash provided by (used for) financing activities
 
(38
)
 
367

 
 
 
 
 
Net change in cash and cash equivalents and restricted cash and restricted cash equivalents
 
(351
)
 
258

Cash and cash equivalents and restricted cash and restricted cash equivalents at beginning of period
 
1,457

 
1,121

Cash and cash equivalents and restricted cash and restricted cash equivalents at end of period
 
$
1,106

 
$
1,379

 
 
 
 
 
Supplemental cash flow information
 
 
 
 
Cash and cash equivalents
 
$
520

 
$
834

Restricted cash and restricted cash equivalents
 
586

 
545

Total cash and cash equivalents and restricted cash and restricted cash equivalents
 
$
1,106

 
$
1,379

 
 
 
 
 
Supplemental non-cash activities
 
 

 
 

Transfer of finance receivables to real estate owned
 
$
3

 
$
5

Non-cash dividend of SFMC
 

 
(28
)
Net unsettled investment security purchases
 
(1
)
 
(3
)
 
 
 
 
 
Restricted cash and restricted cash equivalents primarily represent funds required to be used for future debt payments relating to our securitization transactions and escrow deposits.

See Notes to Condensed Consolidated Financial Statements (Unaudited).

10





SPRINGLEAF FINANCE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2018

1. Business and Basis of Presentation    

Springleaf Finance Corporation is referred to in this report as SFC or, collectively with its subsidiaries, whether directly or indirectly owned, “Springleaf,” the “Company,” “we,” “us,” or “our” is a wholly owned subsidiary of SFI. SFI is a wholly owned subsidiary of OMH. On June 22, 2018, SFI entered into a contribution agreement with OMH, whereby OMH contributed all of the common interests of Independence to SFI. Immediately thereafter, SFI entered into a separate contribution agreement with SFC, pursuant to which SFI contributed all of the common interests of Independence to SFC. As a result of the contribution from SFI to SFC, Independence became a wholly owned direct subsidiary of SFC on June 22, 2018.

Independence, through its wholly owned subsidiary OMFH and OMFH’s subsidiaries, and SFC engage in the consumer finance and insurance businesses.

At December 31, 2017, prior to the transactions described below, Springleaf Financial Holdings LLC (“SFH”), owned approximately 44% of OMH’s common stock. SFH was owned primarily by a private equity fund managed by an affiliate of Fortress.

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, par value $0.01 per share, at a purchase price per share of $26.00, representing the entire holdings of OMH’s common stock beneficially owned by Fortress. This transaction closed on June 25, 2018 for an aggregate purchase price of approximately $1.4 billion in cash.

The Share Purchase Agreement was filed as Exhibit 10.1 to OMH’s Current Report on Form 8-K filed with the SEC on January 4, 2018. Upon closing of the Apollo-Värde Transaction, OMH entered into an Amended and Restated Stockholders’ Agreement, the terms of which are described in OMH’s Current Report on Form 8-K, filed with the SEC on June 25, 2018. As disclosed in Note 22 of the Notes to Consolidated Financial Statements in Part II - Item 8 included in our Current Report Form 8-K/A Exhibit 99.1 filed on August 3, 2018, 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, 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.

On February 21, 2018, OMH entered into an underwriting agreement among OMH, SFH and Morgan Stanley & Co. LLC as underwriter in connection with the sale by SFH of 4,179,678 shares of its common stock. These shares were beneficially owned by AIG Capital Corporation (“AIG”), a subsidiary of American International Group, Inc., and represented the entire holdings of OMH’s stock beneficially owned by AIG. In connection with this sale of OMH’s common stock by SFH, certain executive officers who are holders of SFH incentive units, as described above, received a distribution of approximately $4 million in the first quarter of 2018. Consistent with the accounting for distribution from the Apollo-Värde Transaction described above, the Company recognized non-cash incentive compensation expense of approximately $4 million, with an equal and offsetting increase to additional paid-in-capital. Again, the impact to the Company was non-cash, equity neutral and not tax deductible.

At June 30, 2018, the Apollo-Värde Group owned approximately 40.5% of OMH’s common stock.

BASIS OF PRESENTATION

We prepared our condensed consolidated financial statements using GAAP. These statements are unaudited. The year-end condensed balance sheet data was derived from our audited financial statements as revised to reflect the retrospective application of the contribution of Independence but does not include all disclosures required by GAAP. The statements include the accounts of SFC, its subsidiaries (all of which are wholly owned), and VIEs in which we hold a controlling financial interest and for which we are considered to be the primary beneficiary as of the financial statement date.


11





We eliminated all material intercompany accounts and transactions. We made judgments, estimates, and assumptions that affect amounts reported in our condensed consolidated financial statements and disclosures of contingent assets and liabilities. In management’s opinion, the condensed consolidated financial statements include the normal, recurring adjustments necessary for a fair statement of results. Ultimate results could differ from our estimates. We evaluated the effects of and the need to disclose events that occurred subsequent to the balance sheet date. To conform to the 2018 presentation, we have reclassified certain items in prior periods of our condensed consolidated financial statements.

The condensed consolidated financial statements in this report should be read in conjunction with SFC's Annual Report on Form 10-K for the year ended December 31, 2017 and our revised financial statement schedules included in our Current Report Form 8-K/A Exhibit 99.1 filed on August 3, 2018. We follow the same significant accounting policies for our interim reporting, except for the new accounting pronouncements subsequently adopted and disclosed in Note 3 below.

2. Significant Transaction    

INDEPENDENCE CONTRIBUTION

On June 22, 2018, SFC entered into a Contribution Agreement with SFI, a wholly-owned subsidiary of OMH. Pursuant to the Contribution Agreement, Independence was contributed by SFI to SFC.

The Company has retrospectively recast the financial results for all periods to include Independence as required for transactions between entities under common control.

12





The following table presents the Company’s previously reported Consolidated Balance Sheet as of December 31, 2017 retrospectively recast for the contribution of Independence:
(dollars in millions)
December 31, 2017
 
As Reported SFC
 
Independence
 
Adjustments
 
Consolidated SFC
Assets
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
244

 
$
714

 
$

 
$
958

Investment securities
 
536

 
1,172

 
(11
)
 
1,697

Net finance receivables:
 
 
 
 
 
 
 
 
Personal loans
 
5,308

 
9,467

 

 
14,775

Real estate loans *
 
128

 

 

 
128

Retail sales finance *
 
6

 

 

 
6

Net finance receivables
 
5,442

 
9,467

 

 
14,909

Unearned insurance premium and claim reserves
 
(108
)
 
(482
)
 

 
(590
)
Allowance for finance receivable losses
 
(240
)
 
(452
)
 

 
(692
)
Net finance receivables, less unearned insurance premium and claim reserves and allowance for finance receivable losses
 
5,094

 
8,533

 

 
13,627

Finance receivables held for sale
 
132

 

 

 
132

Notes receivable from parent and affiliates
 
4,488

 

 
(4,097
)
 
391

Restricted cash and restricted cash equivalents
 
169

 
329

 

 
498

Goodwill
 

 
1,422

 

 
1,422

Other intangible assets
 
15

 
424

 

 
439

Other assets
 
146

 
402

 
(67
)
 
481

Total assets
 
$
10,824

 
$
12,996

 
$
(4,175
)
 
$
19,645

 
 
 
 
 
 
 
 
 
Liabilities and Shareholder’s Equity
 
 
 
 
 
 
 
 
Long-term debt
 
$
7,865

 
$
7,195

 
$
(10
)
 
$
15,050

Note payable to parent and affiliates
 

 
4,097

 
(4,097
)
 

Insurance claims and policyholder liabilities
 
261

 
476

 

 
737

Deferred and accrued taxes
 
78

 
3

 
(35
)
 
46

Other liabilities
 
214

 
229

 
(33
)
 
410

Total liabilities
 
8,418

 
12,000

 
(4,175
)
 
16,243

Commitments and contingent liabilities (Note 15)
 

 

 

 

 
 
 
 
 
 
 
 
 
Shareholder’s equity:
 
 
 
 
 
 
 
 
Common stock
 
5

 

 

 
5

Additional paid-in capital
 
799

 
1,110

 

 
1,909

Accumulated other comprehensive income
 

 
6

 

 
6

Retained earnings
 
1,602

 
(120
)
 

 
1,482

Total shareholder’s equity
 
2,406

 
996

 

 
3,402

Total liabilities and shareholder’s equity
 
$
10,824

 
$
12,996

 
$
(4,175
)
 
$
19,645

                                      
*
Amounts are combined into “Other Receivables” on the Condensed Consolidated Balance Sheet

13





The following tables present the Company’s previously reported Consolidated Statements of Operations for the three months and six months ended June 30, 2017 retrospectively recast for the contribution of Independence:

Three Months Ended June 30, 2017
 
 
As Reported SFC
 
Independence
 
Adjustments
 
Consolidated SFC
(dollars in millions)
 
 
 
 
 
 
 
 
 
Interest income:
 
 
 
 
 
 
 
 
Finance charges
 
$
302

 
$
466

 
$

 
$
768

Finance receivables held for sale originated as held for investment
 
4

 

 

 
4

Total interest income
 
306

 
466




772

 
 
 
 
 
 
 
 
 
Interest expense
 
129

 
131

 
(57
)
 
203

 
 
 
 
 
 
 
 
 
Net interest income
 
177


335


57


569

 
 
 
 
 
 
 
 


Provision for finance receivable losses
 
91

 
142

 

 
233

 
 
 
 
 
 
 
 


Net interest income after provision for finance receivable losses
 
86


193


57

 
336

 
 
 
 
 
 
 
 


Other revenues:
 
 
 
 
 
 
 


Insurance
 
40

 
64

 

 
104

Investment
 
8

 
12

 

 
20

Interest income on notes receivable from parent and affiliates
 
62

 

 
(57
)
 
5

Net loss on repurchases and repayments of debt
 
(27
)
 

 

 
(27
)
Other
 
4

 
18

 
(7
)
 
15

Total other revenues
 
87


94


(64
)
 
117

 
 
 
 
 
 
 
 


Other expenses:
 
 
 
 
 
 
 


Operating expenses:
 
 
 
 
 
 
 


Salaries and benefits
 
77

 
107

 
(6
)
 
178

Acquisition-related transaction and integration expenses
 

 

 
14

 
14

Other operating expenses
 
65

 
98

 
(15
)
 
148

Insurance policy benefits and claims
 
18

 
28

 

 
46

Total other expenses
 
160


233


(7
)
 
386

 
 
 
 
 
 
 
 


Income before income tax expense
 
13


54



 
67

 
 
 
 
 
 
 
 


Income tax expense
 
5

 
15

 

 
20

 
 
 
 
 
 
 
 


Net income
 
$
8


$
39


$

 
$
47


14





 
(dollars in millions)
Six Months Ended June 30, 2017
 
 
As Reported SFC
 
Independence
 
Adjustments
 
Consolidated SFC
 
 
 
 
 
 
 
 
 
 
 
 
Interest income:
 
 
 
 
 
 
 
 
 
Finance charges
 
$
596

 
$
925

 
$

 
$
1,521

 
Finance receivables held for sale originated as held for investment
 
7

 

 

 
7

 
Total interest income
 
603


925



 
1,528

 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
256

 
260

 
(111
)
 
405

 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
347

 
665

 
111

 
1,123

 
 
 
 
 
 
 
 
 
 
 
Provision for finance receivable losses
 
162

 
314

 

 
476

 
 
 
 
 
 
 
 
 
 
 
Net interest income after provision for finance receivable losses
 
185


351


111

 
647

 
 
 
 
 
 
 
 
 
 
 
Other revenues:
 
 
 
 
 
 
 
 
 
Insurance
 
77

 
130

 

 
207

 
Investment
 
14

 
25

 

 
39

 
Interest income on notes receivable from parent and affiliates
 
121

 

 
(111
)
 
10

 
Net loss on repurchases and repayments of debt
 
(27
)
 
(1
)
 

 
(28
)
 
Other
 
8

 
30

 
(14
)
 
24

 
Total other revenues
 
193

 
184

 
(125
)
 
252

 
 
 
 
 
 
 
 
 
 
 
Other expenses:
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
Salaries and benefits
 
156

 
211

 
(13
)
 
354

 
Acquisition-related transaction and integration expenses
 

 

 
37

 
37

 
Other operating expenses
 
132

 
211

 
(38
)
 
305

 
Insurance policy benefits and claims
 
34

 
57

 

 
91

 
Total other expenses
 
322

 
479

 
(14
)
 
787

 
 
 
 
 
 
 
 
 
 
 
Income before income tax expense
 
56


56



 
112

 
 
 
 
 
 
 
 
 
 
 
Income tax expense
 
21

 
17

 

 
38

 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
35


$
39


$

 
$
74




15





The following table presents the Company’s previously reported Consolidated Statement of Cash Flows for the six months ended June 30, 2017 retrospectively recast for the contribution of Independence:
 
Six Months Ended June 30, 2017
(dollars in millions)
 
As Reported
SFC
 
Independence
 
Adjustments
 
Consolidated
SFC
 
 
 
 
 
 
 
 
 
Cash flows from operating activities
 
 
 
 
 
 
 
 
Net income
 
$
35

 
$
39

 
$

 
$
74

Reconciling adjustments:
 
 
 
 
 
 
 
 
Provision for finance receivable losses
 
162

 
314

 

 
476

Depreciation and amortization
 
75

 
97

 

 
172

Deferred income tax benefit
 
(58
)
 
39

 

 
(19
)
Net loss on repurchases and repayments of debt
 
27

 
1

 

 
28

Share-based compensation expense, net of forfeitures
 

 
3

 

 
3

Other
 
2

 
(2
)
 

 

Cash flows due to changes in:
 
 
 
 
 
 
 
 
Other assets and other liabilities *
 
111

 
47

 

 
158

Insurance claims and policyholder liabilities *
 
5

 
(36
)
 

 
(31
)
Taxes receivable and payable *
 
25

 
(56
)
 

 
(31
)
Accrued interest and finance charges *
 
(29
)
 
22

 

 
(7
)
Other, net *
 
(3
)
 
1

 

 
(2
)
Net cash provided by operating activities
 
352


469



 
821

 
 
 
 
 
 
 
 
 
Cash flows from investing activities
 
 
 
 
 
 
 
 
Net principal originations of finance receivables held for investment and held for sale
 
(307
)
 
(568
)
 

 
(875
)
Cash advances on intercompany notes receivable
 
(1,335
)
 

 
1,129

 
(206
)
Proceeds from repayments of principal on intercompany notes receivable
 
491

 

 
(381
)
 
110

Available-for-sale securities purchased
 
(182
)
 
(169
)
 

 
(351
)
Available-for-sale securities called, sold, and matured
 
136

 
246

 

 
382

Trading and other securities called, sold, and matured
 
1

 
5

 

 
6

Other, net
 
6

 
(2
)
 

 
4

Net cash provided by (used for) investing activities
 
(1,190
)

(488
)

748


(930
)
 
 
 
 
 
 
 
 
 
Cash flows from financing activities
 
 
 
 
 
 
 
 
Proceeds from issuance of long-term debt, net of commissions
 
2,124

 
509

 

 
2,633

Repayments of long-term debt
 
(1,138
)
 
(1,116
)
 

 
(2,254
)
Cash dividend of SFMC
 
(10
)
 

 

 
(10
)
Withholding tax on share-based compensation
 

 
(2
)
 

 
(2
)
Proceeds from intercompany note payable
 

 
1,129

 
(1,129
)
 

Payments on intercompany note payable
 

 
(381
)
 
381

 

Net cash provided by (used for) financing activities
 
976


139


(748
)
 
367

 
 
 
 
 
 
 
 
 
Net change in cash and cash equivalents and restricted cash and restricted cash equivalents
 
138

 
120

 

 
258

Cash and cash equivalents and restricted cash and restricted cash equivalents at beginning of period
 
467

 
654

 

 
1,121

Cash and cash equivalents and restricted cash and restricted cash equivalents at end of period
 
$
605


$
774


$

 
$
1,379

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

16





Consolidated Statement of Cash Flows (Continued)
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2017
(dollars in millions)
 
As Reported
SFC
 
Independence
 
Adjustments
 
Consolidated
SFC
 
 
 
 
 
 
 
 
 
Supplemental cash flow information
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
413

 
$
421

 
$

 
$
834

Restricted cash and restricted cash equivalents
 
192

 
353

 

 
545

Total cash and cash equivalents and restricted cash and restricted cash equivalents
 
$
605


$
774


$

 
$
1,379

 
 
 
 
 
 
 
 
 
Supplemental non-cash activities
 
 
 
 
 
 
 
 
Transfer of finance receivables to real estate owned
 
$
5

 
$

 
$

 
$
5

Net unsettled investment security purchases
 
(2
)
 
(1
)
 

 
(3
)
Non-cash dividend of SFMC
 
(28
)
 

 

 
(28
)
                                      
*
Amounts are included in “Cash flows due to changes in other assets and other liabilities” on the Condensed Consolidated Statement of Cash Flows.

3. Recent Accounting Pronouncements    

ACCOUNTING PRONOUNCEMENTS RECENTLY ADOPTED

Revenue Recognition

In May of 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which provides a consistent revenue accounting model across industries. Management has reviewed this update and other ASUs that were subsequently issued to further clarify the implementation guidance outlined in ASU 2014-09. The Company’s implementation efforts included the identification of revenue streams that are within the scope of the new guidance and the review of related contracts with customers to determine their effect on certain non-interest income items presented in our consolidated statements of operations and the additional presentation disclosures required. We concluded that substantially all of the Company’s revenues are generated from activities that are outside the scope of this ASU. We adopted the amendments of this ASU as of January 1, 2018 and concluded they do not have a material impact on our consolidated financial statements.

Financial Instruments

In January of 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which simplifies the impairment assessment of equity investments. The update requires equity investments to be measured at fair value with changes recognized in net income. This ASU eliminates the requirement to disclose the methods and assumptions to estimate fair value for financial instruments, requires the use of the exit price for disclosure purposes, requires the change in liability due to a change in credit risk to be presented in other comprehensive income for financial liabilities measured under the fair value option, requires separate presentation of financial assets and liabilities by measurement category and form of asset (securities and loans), and clarifies the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. In February of 2018, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments - Overall, which made technical corrections and improvements to the codification, specifically related to ASU 2016-01. The Company has adopted these ASUs as of January 1, 2018 using a cumulative-effect adjustment to the balance sheet. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) shall be applied prospectively to equity investments that exist as of the date of adoption of this update. We adopted all other amendments of these ASUs as of January 1, 2018 and presented this change on a retrospective basis for all periods presented. We concluded that these ASUs do not have a material impact on our consolidated financial statements.


17





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

Statement of Cash Flows

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

Income Taxes

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

In February of 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income: Reclassifications of Certain Tax Effects from Accumulated Other Comprehensive Income, which permits the reclassification of stranded tax effects within accumulated other comprehensive income to retained earnings from the passage of the Tax Act. This update requires additional disclosures describing the nature of the stranded tax effects. The amendments within this ASU become effective for the Company for fiscal years beginning after January 1, 2019, with early adoption permitted. We elected to early adopt as of April 1, 2018 and reclassified $3 million of stranded tax effects resulting in a decrease to retained earnings and an increase to accumulated other comprehensive income.

Compensation and Benefits

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

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

Goodwill Impairment

In January of 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment, which simplifies the test for goodwill impairment by eliminating Step 2 of the impairment testing process. The amendments in this ASU will become effective for the Company for fiscal years beginning January 1, 2020. We elected to early adopt as of January 1, 2018 and concluded that it does not have a material impact on our consolidated financial statements.

ACCOUNTING PRONOUNCEMENTS TO BE ADOPTED

Leases

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


18





The amendments in this ASU become effective for the Company for fiscal years beginning January 1, 2019. The Company’s cross-functional implementation team continues to make progress in line with the established project plan to ensure we comply with all updates from this ASU at the time of adoption. We are currently in the process of implementing a new leasing system that will allow us to better account for the leases in accordance with the new guidance. We are assessing new system updates to ensure both qualitative and quantitative data requirements will be met at the time of adoption. The Company’s leases primarily consist of leased office space, automobiles and information technology equipment. At December 31, 2017, the Company had approximately $167 million of minimum lease commitments from these operating leases (refer to Note 20 of the Notes to the Consolidated Financial Statements in Part II - Item 8 included in our Current Report Form 8-K/A Exhibit 99.1). The adoption of this ASU will result in an increase in our reported assets and liabilities on the consolidated balance sheets due to the recognition of the right-of-use asset and lease liability, and we are in the process of quantifying the expected impact.

Allowance for Finance Receivables Losses

In June of 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments, which significantly changes the way that entities will be required to measure credit losses. The new standard requires that the estimated credit loss be based upon an “expected credit loss” approach rather than the “incurred loss” approach currently required. The new approach will require entities to measure all expected credit losses for financial assets based on historical experience, current conditions, and reasonable forecasts of collectability. It is anticipated that the expected credit loss model will require earlier recognition of credit losses than the incurred loss approach. Therefore, we would expect changes in the allowance for finance receivable losses will be driven primarily by the nature and growth of the Company’s loan portfolio and the economic environment at that time.

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

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

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

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

We do not believe that any other accounting pronouncements issued during the six months ended June 30, 2018, but not yet effective, would have a material impact on our consolidated financial statements or disclosures, if adopted.

4. Finance Receivables    

Our finance receivable types include personal loans and other receivables as defined below:

Personal loans — are secured by consumer goods, automobiles, or other personal property or are unsecured, typically non-revolving with a fixed-rate and a fixed, original term of three to six years.

Other receivables — consist of our loan portfolios in a liquidating status. We ceased originating real estate loans in 2012 and purchasing retail sales contracts and revolving retail accounts in 2013. We continue to service or sub-

19





service the liquidating real estate loans and retail sales contracts and will provide revolving retail sales financing services on our revolving retail accounts.

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

Components of net finance receivables held for investment by type were as follows:
(dollars in millions)
 
Personal
Loans
 
Other Receivables
 
Total
 
 
 
 
 
 
 
June 30, 2018
 
 

 
 

 
 

Gross receivables (a)(b)
 
$
15,173

 
$
123

 
$
15,296

Unearned points and fees
 
(175
)
 

 
(175
)
Accrued finance charges
 
219

 
1

 
220

Deferred origination costs
 
124

 

 
124

Total
 
$
15,341

 
$
124

 
$
15,465

 
 
 
 
 
 
 
December 31, 2017
 
 

 
 

 
 

Gross receivables (a)(b)