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Section 1: 10-Q (10-Q)

Document

 

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

FORM 10-Q
(Mark One)
 
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 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 001-06155

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, a 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

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 October 26, 2018, there were 10,160,021 shares of the registrant’s common stock, $0.50 par value, outstanding.

 



TABLE OF CONTENTS

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2



GLOSSARY
Terms and abbreviations used in this report are defined below.
Term or Abbreviation
 
Definition
 
 
 
2017 Annual Report on Form
10-K
 
Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed with the SEC on February 21, 2018
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
 
$500 million of 6.125% Senior Notes due 2022 issued by SFC on May 15, 2017 and $500 million of 6.125% Senior Notes due 2022 issued by SFC on May 30, 2017 and, in each case, guaranteed by OMH
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 $700 million of 7.125% Senior Notes due 2026 issued by SFC on August 10, 2018 and, in each case, 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
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.
AIG Share Sale
 
sale by SFH of 4,179,678 shares of OMH common stock pursuant to an Underwriting Agreement entered into February 21, 2018 among OMH, SFH and Morgan Stanley & Co. LLC
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
BCFP
 
Bureau of Consumer Financial Protection, formerly known as Consumer Financial Protection Bureau (CFPB)
CDO
 
collateralized debt obligations
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 portfolio
 
collectively, retail sales contracts and revolving retail accounts
RMBS
 
residential mortgage-backed securities
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
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

4



Term or Abbreviation
 
Definition
 
 
 
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
 
a 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. Debt restructuring in which a concession is granted to the borrower as a result of economic or legal reasons related to the borrower’s financial difficulties.
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)
 
September 30,
2018
 
December 31,
2017
 
 
 
 
 
Assets
 
 

 
 

Cash and cash equivalents
 
$
1,217

 
$
958

Investment securities
 
1,707

 
1,697

Net finance receivables:
 
 

 
 

Personal loans (includes loans of consolidated VIEs of $9.0 billion in 2018 and $9.8 billion in 2017)
 
15,707

 
14,775

Other receivables
 

 
134

Net finance receivables
 
15,707

 
14,909

Unearned insurance premium and claim reserves
 
(631
)
 
(590
)
Allowance for finance receivable losses (includes allowance of consolidated VIEs of $451 million in 2018 and $465 million in 2017)
 
(702
)
 
(692
)
Net finance receivables, less unearned insurance premium and claim reserves and allowance for finance receivable losses
 
14,374

 
13,627

Finance receivables held for sale
 
207

 
132

Notes receivables from parent
 
212

 
391

Restricted cash and restricted cash equivalents (includes restricted cash and restricted cash equivalents of consolidated VIEs of $478 million in 2018 and $482 million in 2017)
 
495

 
498

Goodwill
 
1,422

 
1,422

Other intangible assets
 
397

 
439

Other assets
 
612

 
481

 
 
 
 
 
Total assets
 
$
20,643

 
$
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)
 
$
15,731

 
$
15,050

Insurance claims and policyholder liabilities
 
689

 
737

Deferred and accrued taxes
 
10

 
46

Other liabilities (includes other liabilities of consolidated VIEs of $15 million in 2018 and $14 million in 2017)
 
379

 
410

Total liabilities
 
16,809

 
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 September 30, 2018 and December 31, 2017
 
5

 
5

Additional paid-in capital
 
2,077

 
1,909

Accumulated other comprehensive income (loss)
 
(21
)
 
6

Retained earnings
 
1,773

 
1,482

Total shareholder's equity
 
3,834

 
3,402

 
 
 
 
 
Total liabilities and shareholder's equity
 
$
20,643

 
$
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 September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 

 
 
 

Interest income:
 
 
 
 
 
 
 
 
Finance charges
 
$
927

 
$
803

 
$
2,684

 
$
2,324

Finance receivables held for sale originated as held for investment
 
3

 
3

 
8

 
10

Total interest income
 
930

 
806

 
2,692

 
2,334

 
 
 
 
 
 
 
 
 
Interest expense
 
228

 
207

 
648

 
612

 
 
 
 
 
 
 
 
 
Net interest income
 
702

 
599

 
2,044

 
1,722

 
 
 
 
 
 
 
 
 
Provision for finance receivable losses
 
254

 
242

 
766

 
718

 
 
 
 
 
 
 
 
 
Net interest income after provision for finance receivable losses
 
448

 
357

 
1,278

 
1,004

 
 
 
 
 
 
 
 
 
Other revenues:
 
 

 
 

 
 

 
 

Insurance
 
106

 
107

 
318

 
314

Investment
 
18

 
19

 
50

 
58

Interest income on notes receivable from parent
 
4

 
7

 
14

 
17

Net loss on repurchases and repayments of debt
 

 
(1
)
 
(9
)
 
(29
)
Other
 
12

 
17

 
35

 
40

Total other revenues
 
140

 
149

 
408

 
400

 
 
 
 
 
 
 
 
 
Other expenses:
 
 

 
 

 
 

 
 

Operating expenses:
 
 

 
 

 
 

 
 

Salaries and benefits
 
194

 
181

 
661

 
536

Acquisition-related transaction and integration expenses
 
9

 
22

 
47

 
59

Other operating expenses
 
138

 
150

 
409

 
453

Insurance policy benefits and claims
 
48

 
48

 
144

 
139

Total other expenses
 
389

 
401

 
1,261

 
1,187

 
 
 
 
 
 
 
 
 
Income before income taxes
 
199

 
105

 
425

 
217

 
 
 
 
 
 
 
 
 
Income taxes
 
47

 
44

 
131

 
82

 
 
 
 
 
 
 
 
 
Net income
 
$
152

 
$
61

 
$
294

 
$
135

 
 
 
 
 
 
 
 
 

See Notes to Condensed Consolidated Financial Statements (Unaudited).

7



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

(dollars in millions)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
Net income
 
$
152

 
$
61

 
$
294

 
$
135

 
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 

 
 

 
 

 
 

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

 
(40
)
 
23

Retirement plan liability adjustments
 

 

 

 
4

Foreign currency translation adjustments
 
2

 
3

 
(4
)
 
7

Income tax effect:
 
 

 
 

 
 

 
 

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

 
(1
)
 
7

 
(8
)
Retirement plan liability adjustments
 

 

 
1

 
(1
)
Foreign currency translation adjustments
 

 
(1
)
 

 
(3
)
Other comprehensive income (loss), net of tax, before reclassification adjustments
 

 
4

 
(36
)
 
22

Reclassification adjustments included in net income:
 
 

 
 

 
 

 
 

Net realized losses (gains) on available-for-sale securities
 

 
(4
)
 
1

 
(12
)
Income tax effect:
 
 

 
 

 
 

 
 

Net realized gains on available-for-sale securities
 

 
2

 

 
4

Reclassification adjustments included in net income, net of tax
 

 
(2
)
 
1

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

 
2

 
(35
)
 
14

 
 
 
 
 
 
 
 
 
Comprehensive income
 
$
152

 
$
63

 
$
259

 
$
149


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

Contribution of OGSC to SFC from SFI
 

 
53

 
5

 

 
58

Share-based compensation expense, net of forfeitures
 

 
6

 

 

 
6

Withholding tax on share-based compensation
 

 
(1
)
 

 

 
(1
)
Other comprehensive loss
 

 

 
(35
)
 

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

 

 
3

 
(3
)
 

Net income
 

 

 

 
294

 
294

Balance, September 30, 2018
 
$
5

 
$
2,077

 
$
(21
)
 
$
1,773

 
$
3,834

 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2017
 
$
5

 
$
1,906

 
$
(6
)
 
$
1,368

 
$
3,273

Share-based compensation expense, net of forfeitures
 

 
4

 

 

 
4

Withholding tax on share-based compensation
 

 
(2
)
 

 

 
(2
)
Other comprehensive income
 

 

 
14

 

 
14

Dividend of SFMC to SFI
 

 

 

 
(38
)
 
(38
)
Net income
 

 

 

 
135

 
135

Balance, September 30, 2017
 
$
5

 
$
1,908

 
$
8

 
$
1,465

 
$
3,386


See Notes to Condensed Consolidated Financial Statements (Unaudited).


9



SPRINGLEAF FINANCE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(dollars in millions)
 
Nine Months Ended September 30,
 
2018
 
2017
 
 
 
 
 
Cash flows from operating activities
 
 

 
 

Net income
 
$
294

 
$
135

Reconciling adjustments:
 
 

 
 

Provision for finance receivable losses
 
766

 
718

Depreciation and amortization
 
181

 
254

Deferred income tax charge (benefit)
 
7

 
(40
)
Net loss on repurchases and repayments of debt
 
9

 
29

Non-cash incentive compensation from SFH
 
110

 

Share-based compensation expense, net of forfeitures
 
6

 
4

Other
 
9

 
(5
)
Cash flows due to changes in other assets and other liabilities
 
(26
)
 
222

Net cash provided by operating activities
 
1,356

 
1,317

 
 
 
 
 
Cash flows from investing activities
 
 

 
 

Net principal originations of finance receivables held for investment and held for sale
 
(1,702
)
 
(1,572
)
Cash advances on intercompany notes receivables
 
(32
)
 
(326
)
Proceeds from repayments of principal on intercompany notes receivables
 
207

 
217

Available-for-sale securities purchased
 
(548
)
 
(508
)
Available-for-sale securities called, sold, and matured
 
438

 
619

Trading and other securities purchased
 
(9
)
 

Trading and other securities called, sold, and matured
 
30

 
9

Other, net
 
(18
)
 
11

Net cash used for investing activities
 
(1,634
)
 
(1,550
)
 
 
 
 
 
Cash flows from financing activities
 
 

 
 

Proceeds from issuance of long-term debt, net of commissions
 
5,474

 
3,743

Repayment of long-term debt
 
(4,852
)
 
(3,176
)
Cash contribution of OGSC
 
11

 

Cash dividend of SFMC
 

 
(10
)
Payments on intercompany note payable
 
(98
)
 

Withholding tax on share-based compensation
 
(1
)
 
(2
)
Net cash provided by financing activities
 
534

 
555

 
 
 
 
 
Net change in cash and cash equivalents and restricted cash and restricted cash equivalents
 
256

 
322

Cash and cash equivalents and restricted cash and restricted cash equivalents at beginning of period
 
1,456

 
1,121

Cash and cash equivalents and restricted cash and restricted cash equivalents at end of period
 
$
1,712

 
$
1,443

 
 
 
 
 
Supplemental cash flow information
 
 
 
 
Cash and cash equivalents
 
$
1,217

 
$
872

Restricted cash and restricted cash equivalents
 
495

 
571

Total cash and cash equivalents and restricted cash and restricted cash equivalents
 
$
1,712

 
$
1,443

 


Consolidated Statement of Cash Flows (Continued)
 
 
 
 
(dollars in millions)
 
Nine Months Ended September 30,
 
2018
 
2017
 
 
 
 
 
Supplemental non-cash activities
 
 
 
 
Transfer of finance receivables held for investment to finance receivables held for sale (prior to deducting allowance for finance receivable losses)
 
$
111

 
$

Non-cash contribution of OGSC
 
47

 

Increase in finance receivables held for investment financed with intercompany payable
 

 
4

Transfer of finance receivables to real estate owned
 
5

 
7

Non-cash dividend of SFMC
 

 
(28
)

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 the Condensed Consolidated Financial Statements (Unaudited)
September 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 Springleaf Finance, Inc.(“SFI”). SFI is a wholly owned subsidiary of OneMain Holdings, Inc. (“OMH”). At December 31, 2017, prior to the Apollo-Värde and AIG Share Sale 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 Investment Group LLC (“Fortress”). At September 30, 2018, an investor group led by funds managed by Apollo and Värde (the “Apollo-Värde Group”) owned approximately 40.5% of OMH’s common stock.

SFC and its subsidiaries engage in the consumer finance and insurance businesses.

On June 22, 2018, SFI entered into a contribution agreement with OMH, whereby OMH contributed all of the common interests of Independence Holdings, LLC (“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.

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, 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 (the “Share Purchase Agreement”). This transaction (the “Apollo-Värde 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. As provided for in the Share Purchase Agreement, in accordance with the Amended and Restated Stockholders’ Agreement, the Apollo-Värde Group has the ability to designate six (6) of the nine (9) directors.

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 on 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.

AIG Share Sale Transaction

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.


11



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.

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 on 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 nine months ended September 30, 2017 retrospectively recast for the contribution of Independence:
 
Three Months Ended September 30, 2017
 
 
As Reported SFC
 
Independence
 
Adjustments
 
Consolidated SFC
(dollars in millions)
 
 
 
 
 
 
 
 
 
Interest income:
 
 
 
 
 
 
 
 
Finance charges
 
$
307

 
$
496

 
$

 
$
803

Finance receivables held for sale originated as held for investment
 
3

 

 

 
3

Total interest income
 
310


496




806

 
 
 
 
 
 
 
 
 
Interest expense
 
133

 
137

 
(63
)
 
207

 
 
 
 
 
 
 
 
 
Net interest income
 
177


359


63


599

 
 
 
 
 
 
 
 
 
Provision for finance receivable losses
 
70

 
172

 

 
242

 
 
 
 
 
 
 
 
 
Net interest income after provision for finance receivable losses
 
107


187


63


357

 
 
 
 
 
 
 
 
 
Other revenues:
 
 
 
 
 
 
 
 
Insurance
 
37

 
70

 

 
107

Investment
 
9

 
10

 

 
19

Interest income on notes receivable from parent and affiliates
 
70

 

 
(63
)
 
7

Net loss on repurchases and repayments of debt
 
(1
)
 

 

 
(1
)
Other
 

 
24

 
(7
)
 
17

Total other revenues
 
115

 
104

 
(70
)
 
149

 
 
 
 
 
 
 
 
 
Other expenses:
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
Salaries and benefits
 
73

 
111

 
(3
)
 
181

Acquisition-related transaction and integration expenses
 

 

 
22

 
22

Other operating expenses
 
66

 
110

 
(26
)
 
150

Insurance policy benefits and claims
 
15

 
33

 

 
48

Total other expenses
 
154

 
254

 
(7
)
 
401

 
 
 
 
 
 
 
 
 
Income before income tax expense
 
68


37



 
105

 
 
 
 
 
 
 
 


Income tax expense
 
30

 
14

 

 
44

 
 
 
 
 
 
 
 
 
Net income
 
$
38


$
23


$

 
$
61


14



 
(dollars in millions)
Nine Months Ended September 30, 2017
 
 
As Reported SFC
 
Independence
 
Adjustments
 
Consolidated SFC
 
 
 
 
 
 
 
 
 
 
 
 
Interest income:
 
 
 
 
 
 
 
 
 
Finance charges
 
$
903

 
$
1,421

 
$

 
$
2,324

 
Finance receivables held for sale originated as held for investment
 
10

 

 

 
10

 
Total interest income
 
913


1,421



 
2,334

 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
389

 
397

 
(174
)
 
612

 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
524


1,024


174

 
1,722

 
 
 
 
 
 
 
 
 
 
 
Provision for finance receivable losses
 
232

 
486

 

 
718

 
 
 
 
 
 
 
 
 
 
 
Net interest income after provision for finance receivable losses
 
292


538


174

 
1,004

 
 
 
 
 
 
 
 
 
 
 
Other revenues:
 
 
 
 
 
 
 
 
 
Insurance
 
114

 
200

 

 
314

 
Investment
 
23

 
35

 

 
58

 
Interest income on notes receivable from parent and affiliates
 
191

 

 
(174
)
 
17

 
Net loss on repurchases and repayments of debt
 
(28
)
 
(1
)
 

 
(29
)
 
Other
 
8

 
53

 
(21
)
 
40

 
Total other revenues
 
308

 
287

 
(195
)
 
400

 
 
 
 
 
 
 
 
 
 
 
Other expenses:
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
Salaries and benefits
 
229

 
323

 
(16
)
 
536

 
Acquisition-related transaction and integration expenses
 

 

 
59

 
59

 
Other operating expenses
 
198

 
319

 
(64
)
 
453

 
Insurance policy benefits and claims
 
49

 
90

 

 
139

 
Total other expenses
 
476

 
732

 
(21
)
 
1,187

 
 
 
 
 
 
 
 
 
 
 
Income before income tax expense
 
124


93



 
217

 
 
 
 
 
 
 
 
 
 
 
Income tax expense
 
51

 
31

 

 
82

 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
73


$
62


$

 
$
135




15



The following table presents the Company’s previously reported Consolidated Statement of Cash Flows for the nine months ended September 30, 2017 retrospectively recast for the contribution of Independence:
 
Nine Months Ended September 30, 2017
(dollars in millions)
 
As Reported
SFC
 
Independence
 
Adjustments
 
Consolidated
SFC
 
 
 
 
 
 
 
 
 
Cash flows from operating activities
 
 
 
 
 
 
 
 
Net income
 
$
73

 
$
62

 
$

 
$
135

Reconciling adjustments:
 
 
 
 
 
 
 
 
Provision for finance receivable losses
 
232

 
486

 

 
718

Depreciation and amortization
 
112

 
142

 

 
254

Deferred income tax benefit
 
(65
)
 
25

 

 
(40
)
Net loss on repurchases and repayments of debt
 
28

 
1

 

 
29

Share-based compensation expense, net of forfeitures
 

 
4

 

 
4

Other
 

 
(5
)
 

 
(5
)
Cash flows due to changes in:
 
 
 
 
 
 
 


Other assets and other liabilities (a)
 
154

 
106

 

 
260

Insurance claims and policyholder liabilities (a)
 
(38
)
 
6

 

 
(32
)
Taxes receivable and payable (a)
 
57

 
(45
)
 

 
12

Accrued interest and finance charges (a)
 
(28
)
 
13

 

 
(15
)
Other, net (a)
 
(4
)
 
1

 

 
(3
)
Net cash provided by operating activities
 
521


796



 
1,317

 
 
 
 
 
 
 
 
 
Cash flows from investing activities
 
 
 
 
 
 
 
 
Net principal originations of finance receivables held for investment and held for sale
 
(532
)
 
(1,040
)
 

 
(1,572
)
Cash advances on intercompany notes receivable
 
(1,685
)
 

 
1,359

 
(326
)
Proceeds from repayments of principal on intercompany notes receivable
 
1,126

 

 
(909
)
 
217

Available-for-sale securities purchased
 
(226
)
 
(287
)
 
5

 
(508
)
Available-for-sale securities called, sold, and matured
 
240

 
379

 

 
619

Trading and other securities called, sold, and matured
 
1

 
8

 

 
9

Proceeds from sale of real estate owned (b)
 
3

 

 

 
3

Other, net (b)
 
12

 
(4
)
 

 
8

Net cash provided by (used for) investing activities
 
(1,061
)
 
(944
)
 
455

 
(1,550
)
 
 
 
 
 
 
 
 
 
Cash flows from financing activities
 
 
 
 
 
 
 
 
Proceeds from issuance of long-term debt, net of commissions
 
2,342

 
1,401

 

 
3,743

Repayments of long-term debt
 
(1,679
)
 
(1,492
)
 
(5
)
 
(3,176
)
Cash dividend of SFMC
 
(10
)
 

 

 
(10
)
Withholding tax on share-based compensation
 

 
(2
)
 

 
(2
)
Proceeds from intercompany note payable
 

 
1,359

 
(1,359
)
 

Payments on intercompany note payable
 

 
(909
)
 
909

 

Net cash provided by (used for) financing activities
 
653

 
357

 
(455
)
 
555

 
 
 
 
 
 
 
 
 
Net change in cash and cash equivalents and restricted cash and restricted cash equivalents
 
113


209



 
322

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
 
$
580

 
$
863

 
$

 
$
1,443

 
 
 
 
 
 
 
 
 

16



Consolidated Statement of Cash Flows (Continued)
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2017
(dollars in millions)
 
As Reported
SFC
 
Independence
 
Adjustments
 
Consolidated
SFC
 
 
 
 
 
 
 
 
 
Supplemental cash flow information
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
402

 
$
470

 
$

 
$
872

Restricted cash and restricted cash equivalents
 
178

 
393

 

 
571

Total cash and cash equivalents and restricted cash and restricted cash equivalents
 
$
580

 
$
863

 
$

 
$
1,443

 
 
 
 
 
 
 
 
 
Supplemental non-cash activities
 
 
 
 
 
 
 
 
Increase in finance receivables held for investment financed with intercompany payable
 
$
4

 
$

 
$

 
$
4

Transfer of finance receivables to real estate owned
 
7

 

 

 
7

Non-cash dividend of SFMC
 
(28
)
 

 

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

(b)
Amounts are included in “Other, net” on the Condensed Consolidated Statement of Cash Flows.


17



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.

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.


18



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.

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 in the final phase of 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 on Form 8-K/A Exhibit 99.1 filed on August 3, 2018). 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.


19



In July of 2018, the FASB issued ASU 2018-11, Leases: Targeted Improvements, which allows for a transition option to adopt the standard on the date of initial application as opposed to the modified retrospective approach. We plan to make the election to adopt the standard using this transition relief.

Allowance for Finance Receivable 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 over their expected lives 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 ongoing 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 in accordance with our model governance policies. After the model has been subject to a parallel testing phase in 2019, the Company will provide further disclosure regarding the estimated impact on our allowance for finance receivable 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.

Insurance

In August of 2018, the FASB issued ASU 2018-12, Financial Services - Insurance: Targeted Improvements to the Accounting for Long-Duration Contracts, which provides targeted improvements to Topic 944 for the assumptions used to measure the liability for future policy benefits for nonparticipating traditional and limited-payment contracts; measurement of market risk benefits; amortization of deferred acquisition costs; and enhanced disclosures. The amendments in this ASU become effective for fiscal years beginning January 1, 2021. We are currently evaluating the potential impact of the adoption of the ASU on our consolidated financial statements.

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


20



4. Finance Receivables    

Our finance receivables consist of personal loans and, prior to September 30, 2018, also included 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 (“retail sales finance portfolio”) in 2013. We continue to service or sub-service the liquidating real estate loans and retail sales contracts and will provide revolving retail sales financing services on our revolving retail accounts. Beginning in 2018, we combined real estate loans and retail sales finance portfolio into “Other Receivables.” Previously, we presented real estate loans and retail sales finance portfolio as distinct receivable types. In order to conform to this new alignment, we have revised our prior period finance receivable disclosures.

On September 30, 2018, we transferred our real estate loans previously classified as Other Receivables from held for investment to held for sale due to management’s intent to no longer hold these finance receivables for the foreseeable future. See Notes 5 and 6 included in this report for additional information related to this transfer.

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