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Section 1: 10-Q (10-Q)

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xbrli:shares omf:account omf:investment xbrli:pure omf:segment omf:facility

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

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

For the quarterly period ended June 30, 2019
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)
Securities registered pursuant to Section 12(b) of the Act: None

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 No

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 No

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
 
Accelerated filer
 
Non-accelerated filer
 
Smaller reporting company
 
Emerging growth 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.

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

At July 31, 2019, there were 10,160,021 shares of the registrant’s common stock, $0.50 par value, outstanding.
 



TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2




Table of Contents

GLOSSARY
Terms and abbreviations used in this report are defined below.
Term or Abbreviation
 
Definition
 
 
 
2018 Annual Report on Form
10-K
 
Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on February 15, 2019
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
6.00% SFC Notes due 2020
 
$300 million of 6.00% Senior Notes due 2020 issued by SFC on May 29, 2013 and guaranteed by OMH
6.125% SFC Notes due 2024
 
$1.0 billion of 6.125% Senior Notes due 2024 issued by SFC on February 22, 2019 and guaranteed by OMH
6.625% SFC Notes due 2028
 
$800 million of 6.625% Senior Notes due 2028 issued by SFC on May 9, 2019 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 Transaction
 
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 daily debt balance
 
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
BPS
 
basis points
CDO
 
collateralized debt obligations
CMBS
 
commercial mortgage-backed securities
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.
Exchange Act
 
Securities Exchange Act of 1934, as amended
FASB
 
Financial Accounting Standards Board
February 2019 Real Estate Loan Sale
 
SFC and certain of its subsidiaries sold a portfolio of real estate loans with a carrying value of $16 million, classified in finance receivables held for sale, for aggregate cash proceeds of $19 million on February 5, 2019.
FICO score
 
a credit score created by Fair Isaac Corporation
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
Fortress Transaction
 
the distributions by SFH to Fortress resulting from the Apollo-Värde Transaction

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
Indenture
 
the SFC Base Indenture, together with all subsequent Supplemental Indentures
Independence
 
Independence Holdings, LLC

3




Table of Contents

Term or Abbreviation
 
Definition
 
 
 
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
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 Springleaf General Services Corporation and SFMC
OMFIT
 
OneMain Financial Issuance Trust
OMH
 
OneMain Holdings, Inc.
OneMain
 
OneMain Financial Holdings, LLC, 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 and 7.75% Senior Notes due 2021, 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 finance contracts and revolving retail accounts
RMBS
 
residential mortgage-backed securities
SCLH
 
Springleaf Consumer Loan Holding Company
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 Eighth Supplemental Indenture
 
Eighth Supplemental Indenture, dated as of May 9, 2019, 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, and the 6.00% Senior Notes due 2020, which were redeemed on April 15, 2019
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, the SFC Sixth Supplemental Indenture, the SFC Seventh Supplemental Indenture and the SFC Eighth Supplemental Indenture
SFC Seventh Supplemental Indenture
 
Seventh Supplemental Indenture, dated as of February 22, 2019, to the SFC Base Indenture
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
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
SMHC
 
Springleaf Mortgage Holding Company

4




Table of Contents

Term or Abbreviation
 
Definition
 
 
 
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)
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.
Triton
 
Triton Insurance Company, an insurance subsidiary of OMFH
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
Yield
 
annualized finance charges as a percentage of average net receivables


5




Table of Contents

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,
2019
 
December 31,
2018
 
 
 
 
 
Assets
 
 

 
 

Cash and cash equivalents
 
$
785

 
$
663

Investment securities
 
1,721

 
1,694

Net finance receivables (includes loans of consolidated VIEs of $8.0 billion in 2019 and $8.5 billion in 2018)
 
16,980

 
16,122

Unearned insurance premium and claim reserves
 
(720
)
 
(662
)
Allowance for finance receivable losses (includes allowance of consolidated VIEs of $369 million in 2019 and $444 million in 2018)
 
(744
)
 
(726
)
Net finance receivables, less unearned insurance premium and claim reserves and allowance for finance receivable losses
 
15,516

 
14,734

Finance receivables held for sale
 
74

 
103

Notes receivable from parent
 
261

 
260

Restricted cash and restricted cash equivalents (include restricted cash and restricted cash equivalents of consolidated VIEs of $409 million in 2019 and $479 million in 2018)
 
420

 
499

Goodwill
 
1,422

 
1,422

Other intangible assets
 
361

 
387

Other assets
 
728

 
547

Total assets
 
$
21,288

 
$
20,309

 
 
 
 
 
Liabilities and Shareholder’s Equity
 
 

 
 

Long-term debt (includes debt of consolidated VIEs of $7.1 billion in 2019 and $7.5 billion in 2018)
 
$
15,551

 
$
15,178

Insurance claims and policyholder liabilities
 
648

 
685

Deferred and accrued taxes
 
42

 
42

Other liabilities (includes other liabilities of consolidated VIEs of $13 million in 2019 and $14 million in 2018)
 
643

 
383

Total liabilities
 
16,884

 
16,288

Commitments and contingent liabilities (Note 13)
 


 

 
 
 
 
 
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, 2019 and December 31, 2018
 
5

 
5

Additional paid-in capital
 
2,146

 
2,110

Accumulated other comprehensive income (loss)
 
28

 
(34
)
Retained earnings
 
2,225

 
1,940

Total shareholder’s equity
 
4,404

 
4,021

Total liabilities and shareholder’s equity
 
$
21,288

 
$
20,309


See Notes to the Condensed Consolidated Financial Statements (Unaudited).

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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
(dollars in millions)
 
2019
 
2018
 
2019
 
2018
 
 
 
 

 
 
 

Interest income:
 
 
 
 
 
 
 
 
Finance charges
 
$
998

 
$
899

 
$
1,950

 
$
1,756

Finance receivables held for sale
 
2

 
3

 
5

 
6

Total interest income
 
1,000

 
902

 
1,955

 
1,762

 
 
 
 
 
 
 
 
 
Interest expense
 
238

 
220

 
473

 
420

 
 
 
 
 
 
 
 
 
Net interest income
 
762

 
682

 
1,482

 
1,342

 
 
 
 
 
 
 
 
 
Provision for finance receivable losses
 
268

 
259

 
554

 
512

 
 
 
 
 
 
 
 
 
Net interest income after provision for finance receivable losses
 
494

 
423

 
928

 
830

 
 
 
 
 
 
 
 
 
Other revenues:
 
 

 
 

 
 

 
 

Insurance
 
114

 
107

 
224

 
212

Investment
 
24

 
19

 
50

 
32

Interest income on notes receivable from parent
 
4

 
5

 
8

 
10

Net loss on repurchases and repayments of debt
 
(12
)
 
(7
)
 
(33
)
 
(8
)
Net gain on sale of real estate loans
 

 

 
3

 

Other
 
30

 
14

 
60

 
23

Total other revenues
 
160

 
138

 
312

 
269

 
 
 
 
 
 
 
 
 
Other expenses:
 
 

 
 

 
 

 
 

Salaries and benefits
 
204

 
293

 
404

 
477

Other operating expenses
 
140

 
162

 
276

 
300

Insurance policy benefits and claims
 
50

 
51

 
94

 
96

Total other expenses
 
394

 
506

 
774

 
873

 
 
 
 
 
 
 
 
 
Income before income taxes
 
260

 
55

 
466

 
226

 
 
 
 
 
 
 
 
 
Income taxes
 
63

 
43

 
113

 
84

 
 
 
 
 
 
 
 
 
Net income
 
$
197

 
$
12

 
$
353

 
$
142


See Notes to the Condensed Consolidated Financial Statements (Unaudited).

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

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(dollars in millions)
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
Net income
 
$
197

 
$
12

 
$
353

 
$
142

 
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 

 
 

 
 

 
 

Net change in unrealized gains (losses) on non-credit impaired available-for-sale securities
 
36

 
(13
)
 
75

 
(37
)
Foreign currency translation adjustments
 
2

 
(2
)
 
5

 
(5
)
Income tax effect:
 
 

 
 

 
 

 
 

Net unrealized gains (losses) on non-credit impaired available-for-sale securities
 
(8
)
 
6

 
(17
)
 
7

Retirement plan liability adjustments
 

 
2

 
(1
)
 
1

Foreign currency translation adjustments
 

 
(2
)
 

 
(1
)
Other comprehensive income (loss), net of tax
 
30

 
(9
)
 
62

 
(35
)
 
 
 
 
 
 
 
 
 
Comprehensive income
 
$
227

 
$
3

 
$
415

 
$
107


See Notes to the Condensed Consolidated Financial Statements (Unaudited).


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Table of Contents

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, April 1, 2019
 
$
5

 
$
2,145

 
$
(2
)
 
$
2,062

 
$
4,210

Share-based compensation expense, net of forfeitures
 

 
1

 

 

 
1

Other comprehensive income
 

 

 
30

 

 
30

Cash dividends
 

 

 

 
(34
)
 
(34
)
Net income
 

 

 

 
197

 
197

Balance, June 30, 2019
 
$
5

 
$
2,146

 
$
28

 
$
2,225

 
$
4,404

 
 
 
 
 
 
 
 
 
 
 
Balance, April 1, 2018
 
$
5

 
$
1,914

 
$
(20
)
 
$
1,612

 
$
3,511

Non-cash incentive compensation from SFH
 

 
106

 

 

 
106

Other comprehensive loss
 

 

 
(9
)
 

 
(9
)
Impact of AOCI reclassification due to the Tax Act
 

 

 
3

 
(3
)
 

Net income
 

 

 

 
12

 
12

Balance, June 30, 2018
 
$
5

 
$
2,020

 
$
(26
)
 
$
1,621

 
$
3,620

 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2019
 
$
5

 
$
2,110

 
$
(34
)
 
$
1,940

 
$
4,021

Share-based compensation expense, net of forfeitures
 

 
7

 

 

 
7

Withholding tax on share-based compensation
 

 
(5
)
 

 

 
(5
)
Other comprehensive income
 

 

 
62

 

 
62

Contribution of OCLI to SFC from SFI
 

 
34

 

 

 
34

Cash dividends
 

 

 

 
(68
)
 
(68
)
Net income
 

 

 

 
353

 
353

Balance, June 30, 2019
 
$
5

 
$
2,146

 
$
28

 
$
2,225

 
$
4,404

 
 
 
 
 
 
 
 
 
 
 
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 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


See Notes to the Condensed Consolidated Financial Statements (Unaudited).


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SPRINGLEAF FINANCE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(dollars in millions)
 
Six Months Ended June 30,
 
2019
 
2018
 
 
 
 
 
Cash flows from operating activities
 
 

 
 

Net income
 
$
353

 
$
142

Reconciling adjustments:
 
 

 
 

Provision for finance receivable losses
 
554

 
512

Depreciation and amortization
 
138

 
125

Deferred income tax charge
 
19

 
10

Net loss on repurchases and repayments of debt
 
33

 
8

Non-cash incentive compensation from SFH
 

 
110

Share-based compensation expense, net of forfeitures
 
7

 
2

Other
 
(10
)
 
8

Cash flows due to changes in other assets and other liabilities
 
60

 
(68
)
Net cash provided by operating activities
 
1,154

 
849

Cash flows from investing activities
 
 

 
 

Net principal originations of finance receivables held for investment and held for sale
 
(1,400
)
 
(1,116
)
Proceeds on sales of finance receivables held for sale originated as held for investment
 
19

 

Cash advances on intercompany notes receivable
 
(3
)
 
(29
)
Principal collections on intercompany notes receivable
 
3

 
101

Available-for-sale securities purchased
 
(317
)
 
(394
)
Available-for-sale securities called, sold, and matured
 
336

 
280

Other securities purchased
 
(5
)
 
(6
)
Other securities called, sold, and matured
 
15

 
20

Other, net
 
5

 
(18
)
Net cash used for investing activities
 
(1,347
)
 
(1,162
)
Cash flows from financing activities
 
 

 
 

Proceeds from issuance of long-term debt, net of commissions
 
3,159

 
3,739

Repayment of long-term debt
 
(2,856
)
 
(3,776
)
Cash contribution of SCLH
 
12

 

Cash dividend to Parent
 
(68
)
 

Payments on intercompany note payable
 
(6
)
 

Withholding tax on share-based compensation
 
(5
)
 
(1
)
Net cash provided by (used for) financing activities
 
236

 
(38
)
 
 
 
 
 
Net change in cash and cash equivalents and restricted cash and restricted cash equivalents
 
43

 
(351
)
Cash and cash equivalents and restricted cash and restricted cash equivalents at beginning of period
 
1,162

 
1,457

Cash and cash equivalents and restricted cash and restricted cash equivalents at end of period
 
$
1,205

 
$
1,106

Supplemental cash flow information
 
 
 
 
Cash and cash equivalents
 
$
785

 
$
520

Restricted cash and restricted cash equivalents
 
420

 
586

Total cash and cash equivalents and restricted cash and restricted cash equivalents
 
$
1,205

 
$
1,106

 
 
 
 
 
Cash paid for amounts included in the measurement of operating lease liabilities
 
$
29

 
$

Supplemental non-cash activities
 
 
 
 
Transfer of finance receivables to real estate owned
 
$
2

 
$
3

Right-of-use assets obtained in exchange for operating lease obligations
 
177

 

Net unsettled investment security purchases
 
(20
)
 
(1
)
 
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 the Condensed Consolidated Financial Statements (Unaudited).

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Table of Contents

SPRINGLEAF FINANCE CORPORATION AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
June 30, 2019
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,” and is a wholly owned subsidiary of SFI. SFI is a wholly owned subsidiary of OneMain Holding, Inc. (“OMH”).

SFC is a financial services holding company whose principal subsidiaries are Independence Holdings, LLC (“Independence”), which was contributed to SFC by SFI on June 22, 2018, and other direct subsidiaries engaged in the consumer finance and insurance businesses.

At June 30, 2019, the Apollo-Värde Group owned approximately 40.4% of OMH’s common stock.

2018 Share Sale Transactions

As disclosed in Note 21 of the Notes to the Consolidated Financial Statements in Part II - Item 8 included in our 2018 Annual Report on Form 10-K, certain executives of the Company had previously been granted incentive units that only provided benefits (in the form of distributions) if SFH made distributions to one or more of its common members that exceeded specified threshold amounts. In connection with the distributions by SFH to Fortress (the “Fortress Transaction”) resulting from  the Apollo-Värde Transaction described in Note 2 of the Notes to the Consolidated Financial Statements in Part II - Item 8 included in our 2018 Annual Report on Form 10-K, certain executive officers who were holders of SFH incentive units received a distribution of approximately $106 million in the aggregate from 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.

In addition, in connection with the distributions by SFH to AIG resulting from the AIG Transaction described in Note 2 of the Notes to the Consolidated Financial Statements in Part II - Item 8 included in our 2018 Annual Report on Form 10-K, these same executive officers holding the incentive units described above, received a distribution of approximately $4 million in the aggregate from SFH in respect of their incentive interests in SFH. Consistent with the Fortress Transaction, we recorded 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.

BASIS OF PRESENTATION

We prepared our condensed consolidated financial statements using generally accepted accounting principles in the United States of America (“GAAP”). These statements are unaudited. The year-end condensed balance sheet data was derived from our audited financial statements but does not include all disclosures required by GAAP. The statements include the accounts of OMH, its subsidiaries (all of which are wholly owned), 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. Actual 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 2019 presentation, we have reclassified certain items in prior periods of our condensed consolidated financial statements.

The condensed consolidated financial statements in this report should be read in conjunction with the consolidated financial statements and related notes included in our 2018 Annual Report on Form 10-K. We follow the same significant accounting policies for our interim reporting, except for the new accounting pronouncements subsequently adopted and disclosed in Note 2 below.

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Table of Contents

2. Recent Accounting Pronouncements


ACCOUNTING PRONOUNCEMENTS RECENTLY 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. We adopted the amendments of these ASUs as of January 1, 2019. See Note 13 for additional information on the adoption of ASU 2016-02.

ACCOUNTING PRONOUNCEMENTS TO BE ADOPTED

Financial Instruments - Credit 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. 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 also modifies the other-than-temporary impairment model for available-for-sale debt securities by requiring companies to record an allowance for credit impairment 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. The Company has performed limited parallel testing and expects to perform more comprehensive testing in the third quarter of 2019. We continue to refine our model to estimate the expected credit losses as well as develop the necessary changes to our processes and internal controls in order to comply with this ASU. As we finalize the impact on our consolidated financial statements and related disclosures, we will provide further disclosure regarding the estimated impact on our allowance for finance receivable losses. The Company’s implementation team has also been working with our investment advisor to develop a new process to comply with this ASU as it relates to available-for-sale debt securities and the related disclosure requirements.

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, an increase to deferred tax assets, and a corresponding one-time cumulative reduction to retained earnings, net of tax, in the consolidated balance sheet as of the beginning of the year of adoption. The actual impact will depend on the characteristics of our finance receivables, current economic conditions, as well as our economic and loss forecasts at the time of adoption.

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Table of Contents

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. In July of 2019, the FASB announced the proposal of a one-year deferral of this ASU to become effective for fiscal years beginning January 1, 2022. We have a cross-functional implementation team and a project plan to ensure we comply with all the amendments in this ASU at the time of adoption. We continue to make progress in 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 six months ended June 30, 2019, but not yet effective, would have a material impact on our consolidated financial statements or disclosures, if adopted.

3. Finance Receivables

Our finance receivables consist of personal loans, which are non-revolving, with a fixed-rate, a fixed term of three to six years, and are secured by automobiles, other titled collateral, or are unsecured. Prior to September 30, 2018, our finance receivables also included other receivables, which consist of our liquidating loan portfolios: real estate loans, retail sales finance contracts, and revolving retail accounts. We continue to service or sub-service liquidating real estate loans and retail sales finance contracts. Effective September 30, 2018, our real estate loans were transferred from held for investment to held for sale. See Notes 5, 6 and 7 of the Notes to the Consolidated Financial Statements in Part II - Item 8 included in our 2018 Annual Report on Form 10-K for more information about Other Receivables.

Net finance receivables consist of our total portfolio of personal loans. Components of our personal loans were as follows:
(dollars in millions)
 
June 30,
2019
 
December 31,
2018
 
 
 
 
 
Gross receivables *
 
$
16,808

 
$
15,936

Unearned points and fees
 
(218
)
 
(200
)
Accrued finance charges
 
254

 
253

Deferred origination costs
 
136

 
133

Total
 
$
16,980

 
$
16,122

                                      
*
Gross receivables equal the UPB except for the following:
Finance receivables purchased as a performing receivable — gross receivables are equal to UPB and, if applicable, any remaining unearned premium or discount established at the time of purchase to reflect the finance receivable balance at its initial fair value; and
Purchased credit impaired finance receivables — gross receivables equal the remaining estimated cash flows less the current balance of accretable yield on the purchased credit impaired accounts.

At June 30, 2019 and December 31, 2018, unused lines of credit extended to customers by the Company were immaterial.

CREDIT QUALITY INDICATOR

We consider the value of the collateral, the concentration of secured loans, and the delinquency status of our finance receivables as our primary credit quality indicators. At June 30, 2019 and December 31, 2018, 50% and 48% of our personal loans were secured by titled collateral, respectively. We monitor delinquency trends to manage our exposure to credit risk. When finance receivables are 60 days contractually past due, we consider these accounts to be at an increased risk for loss and we transfer collection of these accounts to our centralized operations. At 90 days or more contractually past due, we consider our finance receivables to be nonperforming.

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Table of Contents

The following is a summary of our personal loans held for investment by number of days delinquent:
(dollars in millions)
 
June 30,
2019
 
December 31,
2018
 
 
 
 
 
Performing
 
 
 
 
Current
 
$
16,325

 
$
15,373

30-59 days past due
 
220

 
228

60-89 days past due
 
144

 
160

Total performing
 
16,689

 
15,761

Nonperforming
 
 
 
 
90-179 days past due
 
284

 
353

180 days or more past due
 
7

 
8

Total nonperforming
 
291

 
361

Total
 
$
16,980

 
$
16,122



PURCHASED CREDIT IMPAIRED FINANCE RECEIVABLES

Our purchased credit impaired finance receivables consist of personal loans held for investment and real estate loans held for sale purchased in connection with the OneMain Acquisition and the Fortress Acquisition, respectively.

We report the carrying amount of our purchased credit impaired personal loans in net finance receivables, less allowance for finance receivable losses, and our purchased credit impaired real estate loans in finance receivables held for sale as discussed below.

At June 30, 2019 and December 31, 2018, finance receivables held for sale totaled $74 million and $103 million, respectively, which include purchased credit impaired real estate loans, as well as TDR real estate loans. See Note 5 for further information on our finance receivables held for sale.

Information regarding our purchased credit impaired finance receivables were as follows:
(dollars in millions)
 
June 30,
2019
 
December 31, 2018
 
 
 
 
 
Personal Loans
 
 
 
 
Carrying amount, net of allowance
 
$
58

 
$
89

Outstanding balance (a)
 
100

 
135

Allowance for purchased credit impaired finance receivable losses (b)
 

 

 
 
 
 
 
Real Estate Loans - Held for Sale
 
 
 
 
Carrying amount
 
$
21

 
$
28

Outstanding balance (a)
 
38

 
48

                                      
(a)
Outstanding balance is defined as UPB of the loans with a net carrying amount.
(b)
The allowance for purchased credit impaired finance receivable losses reflects the carrying value of the purchased credit impaired loans held for investment exceeding the present value of the expected cash flows. As indicated above, no allowance was required as of June 30, 2019 or December 31, 2018.


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Table of Contents

Changes in accretable yield for purchased credit impaired finance receivables were as follows:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(dollars in millions)
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
Personal Loans
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
34

 
$
49

 
$
39

 
$
47

Accretion
 
(4
)
 
(8
)
 
(9
)
 
(14
)
Reclassifications from nonaccretable difference *
 
16

 
11

 
16

 
19

Balance at end of period
 
$
46

 
$
52

 
$
46

 
$
52

 
 
 
 
 
 
 
 
 
Real Estate Loans - Held for Sale
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
23

 
$
52

 
$
27

 
$
53

Accretion
 

 
(1
)
 
(1
)
 
(2
)
Transfer due to finance receivables sold