UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
Amendment No. 1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (Date of earliest event reported): November 17, 2015 (November 15, 2015)
OneMain Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware |
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1-36129 |
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27-3379612 |
(State or other jurisdiction of
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(Commission File Number) |
|
(I.R.S. Employer Identification No.) |
601 N.W. Second Street,
Evansville, Indiana 47708
(Address of principal executive offices) (Zip Code)
(812) 424-8031
(Registrants telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Item 2.01 Completion of Acquisition or Disposition of Assets.
As previously reported, on November 15, 2015, pursuant to the Stock Purchase Agreement, dated as of March 2, 2015 (the Stock Purchase Agreement), by and between OneMain Holdings, Inc. (formerly, Springleaf Holdings, Inc.) (the Company) and CitiFinancial Credit Company (the Seller), the Company, through a wholly owned subsidiary, Independence Holdings, LLC, completed its previously announced acquisition of OneMain Financial Holdings, LLC (the successor to OneMain Financial Holdings, Inc.) (OneMain) from the Seller (the OneMain Acquisition). This Current Report on Form 8-K/A amends the Current Report on Form 8-K filed by the Company with the Securities and Exchange Commission on November 17, 2015 (the Initial 8-K) to include the financial statements relating to OneMain and the pro forma financial information required by Items 9.01(a) and 9.01(b), respectively, and to include the exhibits under Item 9.01(d) of this Form 8-K/A. All other information in the Initial 8-K remains unchanged.
Item 9.01. Financial Statements and Exhibits.
(a) Financial Statements of Businesses Acquired
The unaudited consolidated and combined financial statements of OneMain as of and for the nine months ended September 30, 2015 are attached as Exhibit 99.2 to this Form 8-K/A and are incorporated in this Item 9.01(a) by reference.
The audited consolidated and combined financial statements of OneMain as of December 31, 2014 and 2013 and for each of the years in the three-year period ended December 31, 2014 were filed on the Companys Current Report on Form 8-K on April 27, 2015 as Exhibit 99.2 and are incorporated in this Item 9.01(a) by reference.
(b) Pro Forma Financial Information
The unaudited pro forma condensed combined financial statements of the Company as of and for the nine months ended September 30, 2015 and for the year ended December 31, 2014, giving effect to the OneMain Acquisition, are attached as Exhibit 99.1 to this Form 8-K/A and are incorporated in this Item 9.01(b) by reference.
(d) Exhibits
Exhibit
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Description |
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99.1 |
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OneMain Holdings, Inc. Unaudited Pro Forma Condensed Combined Financial Statements as of and for the nine months ended September 30, 2015 and for the year ended December 31, 2014. |
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99.2 |
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OneMain Financial Holdings, LLC Unaudited Consolidated and Combined Financial Statements as of and for the nine months ended September 30, 2015. |
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
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ONEMAIN HOLDINGS, INC. |
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By: |
/s/ Scott T. Parker |
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Name: |
Scott T. Parker |
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Title: |
Executive Vice President and Chief Financial Officer |
Date: January 29, 2016
Exhibit Index
Exhibit
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Description |
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99.1 |
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OneMain Holdings, Inc. Unaudited Pro Forma Condensed Combined Financial Statements as of and for the nine months ended September 30, 2015 and for the year ended December 31, 2014. |
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99.2 |
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OneMain Financial Holdings, LLC Unaudited Consolidated and Combined Financial Statements as of and for the nine months ended September 30, 2015. |
Exhibit 99.1
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
In this Exhibit 99.1, except as otherwise indicated or the context otherwise requires, each reference to (i) SFC refers to Springleaf Finance Corporation, (ii) OMH refers to OneMain Holdings, Inc. (formerly Springleaf Holdings, Inc.), (iii) OMFH refers to OneMain Financial Holdings, LLC (formerly OneMain Financial Holdings, Inc.) (iv) OneMain refers to OMFH and its subsidiaries and (v) Springleaf, the Company, we, us and our refers to OMH and its subsidiaries (other than OneMain), whether directly or indirectly owned.
The following unaudited pro forma condensed combined financial information presents the combination of the historical consolidated and combined balance sheet and statements of income of Springleaf and OneMain adjusted to give effect to the OneMain Acquisition (as defined below) and certain other adjustments described below. The unaudited pro forma condensed combined statement of income for the year ended December 31, 2014, has been prepared to give effect to the 2014 real estate assets sale transactions reported in OMHs Current Report on Form 8-K filed November 13, 2014, and certain additional real estate sales completed subsequent to that filing (collectively, the Real Estate Asset Sales). There are no adjustments for the Real Estate Asset Sales in the unaudited pro forma condensed combined balance sheet as of September 30, 2015, since the Real Estate Asset Sales were completed prior to December 31, 2014, and are reflected in the balance sheet amounts as of September 30, 2015. Similarly, there are no adjustments for the Real Estate Asset Sales in the unaudited pro forma condensed combined income statement for the nine month period ended September 30, 2015, since the Real Estate Asset Sales were completed in 2014.
The unaudited pro forma condensed combined statements of income for the year ended December 31, 2014, (i) combine the historical consolidated statements of income of Springleaf and the historical consolidated and combined statements of income of OneMain, giving effect to the OneMain Acquisition as if it had been consummated on January 1, 2014, and (ii) reflect the Real Estate Assets Sales transactions completed by Springleaf in 2014, as well as the expected disposition of certain personal loans classified as finance receivables held for sale in connection with the Branch Sales (as defined below), in each case as if such transactions had been consummated on January 1, 2014. The unaudited pro forma condensed combined statements of income for the nine months ended September 30, 2015, (i) combine the historical consolidated statements of income of Springleaf and the historical consolidated and combined statements of income of OneMain, giving effect to the OneMain Acquisition as if it had been consummated on January 1, 2014, and (ii) reflect the expected disposition of certain personal loans classified as finance receivables held for sale in connection with the Branch Sales (as defined below) as if such transaction had been consummated on January 1, 2014.
The unaudited pro forma condensed combined balance sheet as of September 30, 2015, combines the historical condensed consolidated balance sheet of Springleaf and the historical condensed consolidated balance sheet of OneMain as of September 30, 2015, giving effect to the OneMain Acquisition and the expected disposition of certain personal loans classified as finance receivables held for sale in connection with the Branch Sales (as defined below) as if such transactions had been consummated on September 30, 2015. The historical consolidated and combined financial information of OneMain has been adjusted to reflect certain reclassifications (included in the reclassifications column) in order to conform to Springleafs financial statement presentation.
The unaudited pro forma condensed combined financial information was prepared using the acquisition method of accounting with Springleaf considered the acquirer of OneMain. Under the acquisition method of accounting, OneMains specific identifiable tangible and intangible assets acquired and liabilities assumed are reflected at their respective fair values with any excess of the purchase price over the fair value of OneMains identifiable net assets allocated to goodwill.
On November 15, 2015 (the Acquisition Date), OMH acquired all of the outstanding equity interests of OMFH. As of the Acquisition Date, Springleaf has not finalized the detailed valuation analysis necessary to arrive at the required estimates of the fair value of OneMains assets acquired and the liabilities assumed and the related allocations of purchase price. The pro forma adjustments have been made solely for the purpose of providing the unaudited pro forma condensed combined financial information presented herein. Any increases or decreases in the fair value of relevant balance sheet amounts upon completion of the final valuations will result in differences from this pro forma condensed combined balance sheet and/or statements of income. Differences between these estimates and the final acquisition accounting may occur and these differences could have a material impact on the accompanying pro forma financial statements and the combined companys future results of operation and financial position.
Assumptions and estimates underlying the unaudited adjustments to the pro forma condensed combined financial information (the pro forma adjustments) are described in the accompanying notes. The historical consolidated and combined financial statements have been adjusted in the unaudited pro forma condensed combined financial information to give effect to pro forma events that are: (1) directly attributable to the OneMain Acquisition; (2) factually supportable; and (3) with respect to the pro forma statements of income, expected to have a continuing impact on the combined results of Springleaf and OneMain following the OneMain Acquisition. The unaudited pro forma
condensed combined financial information has been presented for illustrative purposes only and is not necessarily indicative of the operating results and financial position that would have been achieved had the OneMain Acquisition occurred on the dates indicated above. Further, the unaudited pro forma condensed combined financial information does not purport to project the future operating results or financial position of the combined company following the OneMain Acquisition.
The unaudited pro forma condensed combined financial information, although helpful in illustrating the financial characteristics of the combined company under one set of assumptions, does not reflect the benefits of expected cost savings (or associated costs to achieve such savings), opportunities to earn additional revenue, or other factors that may result as a consequence of the OneMain Acquisition and, accordingly, does not attempt to predict or suggest future results. Specifically, the unaudited pro forma condensed combined statements of income exclude projected operating efficiencies and synergies expected to be achieved as a result of the OneMain Acquisition. The unaudited pro forma condensed combined financial information includes an adjustment to reflect the anticipated Branch Sales in connection with the closing of the OneMain Acquisition; such assets consist of personal loans that are classified in the historical balance sheet as finance receivables held for sale. In addition, the unaudited pro forma condensed combined financial information excludes the effects of costs associated with any restructuring or integration activities resulting from the OneMain Acquisition, as they are currently not known, and to the extent they occur, are expected to be non-recurring and will not have been incurred at the closing date of the OneMain Acquisition. However, such costs could affect the combined company following the OneMain Acquisition in the period the costs are incurred or recorded.
The unaudited pro forma condensed combined financial information has been developed from and should be read in conjunction with:
· the historical unaudited condensed consolidated financial statements of Springleaf as of and for the three and nine months ended September 30, 2015 included in OMHs Quarterly Report on Form 10-Q filed November 9, 2015;
· the historical audited consolidated financial statements of Springleaf as of and for the year ended December 31, 2014 included in OMHs Annual Report on Form 10-K filed March 16, 2015;
· the historical unaudited condensed consolidated financial statements of OneMain as of and for the three and nine months ended September 30, 2015 included as Exhibit 99.2 in OMHs Current Report on Form 8-K/A to which this Exhibit 99.1 is attached; and
· the historical audited consolidated and combined financial statements of OneMain as of December 31, 2014 and 2013, and for each of the years in the three-year period ended December 31, 2014, which were filed as Exhibit 99.2 to OMHs Current Report on Form 8-K filed on April 27, 2015, and which are incorporated by reference in OMHs Current Report on Form 8-K/A to which this Exhibit 99.1 is attached.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
As of September 30, 2015
The following unaudited pro forma condensed combined balance sheet as of September 30, 2015, combines the September 30, 2015 historical balance sheets of Springleaf and OneMain assuming the companies had been combined on September 30, 2015 using the acquisition method of accounting.
September 30, 2015
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Springleaf |
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OneMain |
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Reclassifications |
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Adjustments for
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Adjustments for
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Pro Forma
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Assets |
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Cash and cash equivalents |
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$ |
3,865 |
|
$ |
1,011 |
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$ |
(390 |
) |
4a |
|
$ |
(3,303 |
) |
6a |
|
$ |
630 |
|
$ |
1,813 |
|
Investment securities |
|
1,742 |
|
1,403 |
|
|
|
|
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(1,175 |
) |
5 |
|
|
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1,970 |
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Net finance receivables: |
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|
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|
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Personal loans |
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4,061 |
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9,949 |
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(1,464 |
) |
4b |
|
273 |
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6c |
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|
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12,819 |
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SpringCastle Portfolio |
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1,667 |
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1,667 |
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Real estate loans |
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547 |
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|
|
|
|
|
|
|
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|
|
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547 |
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Retail sales finance |
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27 |
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27 |
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Unearned revenue and deferred costs |
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|
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(1,464 |
) |
1,464 |
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4b |
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|
|
|
|
|
|
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Net finance receivables |
|
6,302 |
|
8,485 |
|
|
|
|
|
273 |
|
|
|
|
|
15,060 |
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Unearned premium and claim reserves |
|
|
|
(406 |
) |
(240 |
) |
4e |
|
|
|
|
|
|
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(646 |
) |
||||||
Allowance for finance receivable losses |
|
(193 |
) |
(666 |
) |
|
|
|
|
666 |
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6d |
|
|
|
(193 |
) |
||||||
Net finance receivables, less unearned insurance premium and claim reserves and allowance for finance receivable losses |
|
6,109 |
|
7,413 |
|
(240 |
) |
|
|
939 |
|
|
|
|
|
14,221 |
|
||||||
Finance receivables held for sale |
|
797 |
|
|
|
|
|
|
|
|
|
|
|
(608 |
) |
189 |
|
||||||
Restricted cash and cash equivalents |
|
270 |
|
|
|
390 |
|
4a |
|
|
|
|
|
|
|
660 |
|
||||||
Goodwill |
|
|
|
|
|
|
|
|
|
1,372 |
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6e |
|
|
|
1,372 |
|
||||||
Intangibles, net |
|
|
|
62 |
|
18 |
|
4c |
|
488 |
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6l |
|
|
|
568 |
|
||||||
Deferred tax assets, net |
|
|
|
338 |
|
|
|
|
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(295 |
) |
6f |
|
|
|
43 |
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||||||
Premises and equipment, net |
|
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|
90 |
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(90 |
) |
4d |
|
|
|
|
|
|
|
|
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||||||
Other assets |
|
501 |
|
248 |
|
72 |
|
4c, 4d |
|
(130 |
) |
6g, 6h |
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(3 |
) |
688 |
|
||||||
Total assets |
|
$ |
13,284 |
|
$ |
10,565 |
|
$ |
(240 |
) |
|
|
$ |
(2,104 |
) |
|
|
$ |
19 |
|
$ |
21,524 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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||||||
Liabilities and Shareholders Equity |
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|
|
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|
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Long-term debt |
|
$ |
9,555 |
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$ |
6,178 |
|
$ |
(100 |
) |
4f |
|
$ |
119 |
|
6j, 6k |
|
$ |
|
|
$ |
15,752 |
|
Related party debt |
|
|
|
290 |
|
|
|
|
|
(290 |
) |
6j |
|
|
|
|
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||||||
Borrowings under revolving facilities |
|
|
|
1,136 |
|
100 |
|
4f |
|
349 |
|
6j |
|
|
|
1,585 |
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||||||
Insurance claims and policyholder liabilities |
|
467 |
|
532 |
|
(240 |
) |
4e |
|
|
|
|
|
|
|
759 |
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||||||
Deferred and accrued taxes |
|
139 |
|
59 |
|
|
|
|
|
(59 |
) |
6j |
|
|
|
139 |
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||||||
Other liabilities |
|
294 |
|
147 |
|
|
|
|
|
|
|
|
|
(1 |
) |
440 |
|
||||||
Total liabilities |
|
10,455 |
|
8,342 |
|
(240 |
) |
|
|
119 |
|
|
|
(1 |
) |
18,675 |
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|
|
|
|
|
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Shareholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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||||||
Common stock |
|
1 |
|
|
|
|
|
|
|
|
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6i |
|
|
|
1 |
|
||||||
Additional paid-in capital |
|
1,524 |
|
1,841 |
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|
|
|
|
(1,841 |
) |
6i |
|
|
|
1,524 |
|
||||||
Accumulated other comprehensive income |
|
(11 |
) |
18 |
|
|
|
|
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(18 |
) |
6i |
|
|
|
(11 |
) |
||||||
Retained earnings |
|
1,469 |
|
364 |
|
|
|
|
|
(364 |
) |
6i |
|
20 |
|
1,489 |
|
||||||
|
|
2,983 |
|
2,223 |
|
|
|
|
|
(2,223 |
) |
|
|
20 |
|
3,003 |
|
||||||
Non-controlling interests |
|
(154 |
) |
|
|
|
|
|
|
|
|
|
|
|
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(154 |
) |
||||||
Total shareholders equity |
|
2,829 |
|
2,223 |
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|
|
|
|
(2,223 |
) |
|
|
20 |
|
2,849 |
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||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total liabilities and shareholders equity |
|
$ |
13,284 |
|
$ |
10,565 |
|
$ |
(240 |
) |
|
|
$ |
(2,104 |
) |
|
|
$ |
19 |
|
$ |
21,524 |
|
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
For the Nine months Ended September 30, 2015
The following unaudited pro forma condensed combined statement of income for the nine months ended September 30, 2015, combines the historical income statements, for the nine months ended September 30, 2015, of Springleaf and OneMain assuming the companies had been combined on January 1, 2014 using the acquisition method of accounting.
For the nine months ended September 30,
|
|
Springleaf |
|
OneMain |
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Reclassifications |
|
|
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Adjustments for
|
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|
|
Adjustments
|
|
Pro Forma
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||||||
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|
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|
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|
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|
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Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Finance charges |
|
$ |
1,234 |
|
$ |
1,542 |
|
$ |
|
|
|
|
$ |
(205 |
) |
7a |
|
$ |
(125 |
) |
$ |
2,446 |
|
Investment revenue |
|
|
|
42 |
|
(42 |
) |
4h |
|
|
|
|
|
|
|
|
|
||||||
Finance receivables held for sale originated as held for investment |
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
13 |
|
||||||
Total interest income |
|
1,247 |
|
1,584 |
|
(42 |
) |
|
|
(205 |
) |
|
|
(125 |
) |
2,459 |
|
||||||
Interest expense |
|
500 |
|
232 |
|
10 |
|
4i |
|
(38 |
) |
7b |
|
|
|
704 |
|
||||||
Net interest income |
|
747 |
|
1,352 |
|
(52 |
) |
|
|
(167 |
) |
|
|
(125 |
) |
1,755 |
|
||||||
Provisions for finance receivable losses |
|
249 |
|
|
|
421 |
|
4g |
|
(135 |
) |
7c |
|
(15 |
) |
520 |
|
||||||
Net interest income after provisions for finance receivable losses |
|
498 |
|
1,352 |
|
(473 |
) |
|
|
(32 |
) |
|
|
(110 |
) |
1,235 |
|
||||||
Other revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Insurance |
|
116 |
|
238 |
|
|
|
|
|
|
|
|
|
|
|
354 |
|
||||||
Investment |
|
44 |
|
2 |
|
42 |
|
4h |
|
|
|
|
|
|
|
88 |
|
||||||
Other |
|
(2 |
) |
31 |
|
|
|
|
|
|
|
|
|
|
|
29 |
|
||||||
Total other revenues |
|
158 |
|
271 |
|
42 |
|
|
|
|
|
|
|
|
|
471 |
|
||||||
Provisions for credit losses and for benefits and claims: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Provision for credit losses |
|
|
|
421 |
|
(421 |
) |
4g |
|
|
|
|
|
|
|
|
|
||||||
Policyholder benefits and claims |
|
|
|
107 |
|
(107 |
) |
4g |
|
|
|
|
|
|
|
|
|
||||||
Total provisions for credit losses and for benefits and claims |
|
|
|
528 |
|
(528 |
) |
|
|
|
|
|
|
|
|
|
|
||||||
Other expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Salaries and benefits |
|
305 |
|
231 |
|
|
|
|
|
44 |
|
7g |
|
(22 |
) |
558 |
|
||||||
Other operating expenses |
|
227 |
|
351 |
|
(10 |
) |
4i |
|
(20 |
) |
7d, 7e |
|
(23 |
) |
525 |
|
||||||
Insurance losses and loss adjustment expenses |
|
53 |
|
|
|
107 |
|
4g |
|
|
|
|
|
|
|
160 |
|
||||||
Total other expenses |
|
585 |
|
582 |
|
97 |
|
|
|
24 |
|
|
|
(45 |
) |
1,243 |
|
||||||
Income (loss) before benefit from income taxes |
|
71 |
|
513 |
|
|
|
|
|
(56 |
) |
|
|
(65 |
) |
463 |
|
||||||
Provision for (benefit from) income taxes |
|
1 |
|
192 |
|
|
|
|
|
(21 |
) |
7f |
|
(24 |
) |
148 |
|
||||||
Net income (loss) |
|
70 |
|
321 |
|
|
|
|
|
(35 |
) |
|
|
(41 |
) |
315 |
|
||||||
Net income attributable to non-controlling interests |
|
93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
93 |
|
||||||
Net income (loss) |
|
$ |
(23 |
) |
$ |
321 |
|
$ |
|
|
|
|
$ |
(35 |
) |
|
|
$ |
(41 |
) |
$ |
222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Net income (loss) per common share attributable to Springleaf: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Basic |
|
$ |
(0.18 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.65 |
7h |
||||
Diluted |
|
$ |
(0.18 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.64 |
7h |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Weighted average number of shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Basic |
|
125,701,635 |
|
|
|
|
|
|
|
8,748,533 |
|
7h |
|
|
|
134,450,168 |
7h |
||||||
Diluted |
|
125,701,635 |
|
|
|
|
|
|
|
9,813,860 |
|
7h |
|
|
|
135,515,495 |
7h |
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
For the Year Ended December 31, 2014
The following unaudited pro forma condensed combined statement of income for the year ended December 31, 2014, combines the December 31, 2014 historical income statements of Springleaf and OneMain assuming the companies had been combined on January 1, 2014 using the acquisition method of accounting, and reflects the Real Estate Asset Sales that occurred in 2014 as if those assets had been sold on January 1, 2014.
For the year ended December 31, 2014
|
|
Springleaf |
|
OneMain |
|
Reclassifications |
|
|
|
Adjustments for
|
|
|
|
Adjustments for
|
|
Adjustments
|
|
Pro Forma
|
|
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Finance charges |
|
$ |
1,921 |
|
$ |
2,011 |
|
$ |
|
|
|
|
$ |
(313 |
) |
7a |
|
$ |
(369 |
) |
$ |
(154 |
) |
$ |
3,096 |
|
|
Investment revenue |
|
|
|
62 |
|
(62 |
) |
4h |
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Finance receivables held for sale originated as held for investment |
|
61 |
|
|
|
|
|
|
|
|
|
|
|
(53 |
) |
|
|
8 |
|
|
|||||||
Total interest income |
|
1,982 |
|
2,073 |
|
(62 |
) |
|
|
(313 |
) |
|
|
(422 |
) |
(154 |
) |
3,104 |
|
|
|||||||
Interest expense |
|
734 |
|
217 |
|
|
|
|
|
41 |
|
7b |
|
(80 |
) |
|
|
912 |
|
|
|||||||
Net interest income |
|
1,248 |
|
1,856 |
|
(62 |
) |
|
|
(354 |
) |
|
|
(342 |
) |
(154 |
) |
2,192 |
|
|
|||||||
Provisions for finance receivable losses |
|
474 |
|
|
|
575 |
|
4g |
|
130 |
|
7c |
|
(87 |
) |
(32 |
) |
1,060 |
|
|
|||||||
Net interest income after provisions for finance receivable losses |
|
774 |
|
1,856 |
|
(637 |
) |
|
|
(484 |
) |
|
|
(255 |
) |
(122 |
) |
1,132 |
|
|
|||||||
Other revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Insurance |
|
166 |
|
338 |
|
|
|
|
|
|
|
|
|
(11 |
) |
|
|
493 |
|
|
|||||||
Investment |
|
39 |
|
3 |
|
62 |
|
4h |
|
|
|
|
|
|
|
|
|
104 |
|
|
|||||||
Net gain (loss) on repurchases and repayments of debt |
|
(66 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(66 |
) |
|
|||||||
Net gain (loss) on fair value adjustments on debt |
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15 |
) |
|
|||||||
Net gain (loss) on sales of real estate loans and related trust assets |
|
726 |
|
|
|
|
|
|
|
|
|
|
|
(726 |
) |
|
|
|
|
|
|||||||
Other |
|
(18 |
) |
43 |
|
|
|
|
|
|
|
|
|
24 |
|
|
|
49 |
|
|
|||||||
Total other revenues |
|
832 |
|
384 |
|
62 |
|
|
|
|
|
|
|
(713 |
) |
|
|
565 |
|
|
|||||||
Provisions for credit losses and for benefits and claims: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Provision for credit losses |
|
|
|
575 |
|
(575 |
) |
4g |
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Policyholder benefits and claims |
|
|
|
134 |
|
(134 |
) |
4g |
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Total provisions for credit losses and for benefits and claims |
|
|
|
709 |
|
(709 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Other expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Salaries and benefits |
|
360 |
|
288 |
|
|
|
|
|
57 |
|
7g |
|
(10 |
) |
(29 |
) |
666 |
|
|
|||||||
Other operating expenses |
|
266 |
|
426 |
|
|
|
|
|
(15 |
) |
7d, 7e |
(19 |
) |
(26 |
) |
632 |
|
|
||||||||
Insurance losses and loss adjustment expenses |
|
75 |
|
|
|
134 |
|
4g |
|
|
|
|
|
(10 |
) |
|
|
199 |
|
|
|||||||
Total other expenses |
|
701 |
|
714 |
|
134 |
|
|
|
42 |
|
|
|
(39 |
) |
(55 |
) |
1,497 |
|
|
|||||||
Income (loss) before benefit from income taxes |
|
905 |
|
817 |
|
|
|
|
|
(526 |
) |
|
|
(929 |
) |
(67 |
) |
200 |
|
|
|||||||
Provision for (benefit from) income taxes |
|
297 |
|
304 |
|
|
|
|
|
(196 |
) |
7f |
|
(340 |
) |
(25 |
) |
40 |
|
|
|||||||
Net income (loss) |
|
608 |
|
513 |
|
|
|
|
|
(330 |
) |
|
|
(589 |
) |
(42 |
) |
160 |
|
|
|||||||
Net income attributable to non-controlling interests |
|
103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103 |
|
|
|||||||
Net income (loss) |
|
$ |
505 |
|
$ |
513 |
|
$ |
|
|
|
|
$ |
(330 |
) |
|
|
$ |
(589 |
) |
$ |
(42 |
) |
$ |
57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Net income (loss) per common share attributable to Springleaf: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Basic |
|
$ |
4.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.42 |
|
7h |
|||||
Diluted |
|
$ |
4.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.42 |
|
7h |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Weighted average number of shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Basic |
|
114,791,225 |
|
|
|
|
|
|
|
19,417,476 |
|
7h |
|
|
|
|
|
134,208,701 |
|
7h |
|||||||
Diluted |
|
115,265,123 |
|
|
|
|
|
|
|
19,417,476 |
|
7h |
|
|
|
|
|
134,682,599 |
|
7h |
Note 1Description of OneMain Acquisition
On November 15, 2015 (the Acquisition Date), pursuant to the Stock Purchase Agreement, dated as of March 2, 2015, by and between OMH and CitiFinancial Credit Company (the Seller), OMH completed its previously announced acquisition of OneMain from the Seller (the OneMain Acquisition) for $4.49 billion in cash after accounting for certain contract termination payments and certain estimated adjustments at closing. OneMain is a leading consumer finance company in the United States, providing personal loans to primarily middle income households through a national, community based network of 1,139 branches as of September 30, 2015, serving approximately 1.3 million customer accounts across 43 states.
In connection with the closing of the OneMain Acquisition, OMH and certain of its subsidiaries (collectively, the Branch Sellers) entered into an Asset Preservation Stipulation and Order and agreed to a Proposed Final Judgment (collectively, the Settlement Agreement) on November 13, 2015, with the United States Department of Justice (DoJ), as well as the state attorneys general for Colorado, Idaho, Pennsylvania, Texas, Virginia, Washington and West Virginia. The Settlement Agreement resolved the inquiries of the DoJ and such attorneys general with respect to the OneMain Acquisition and allowed OMH to proceed with the closing. Pursuant to the Settlement Agreement, OMH agreed to divest 127 branches across eleven states as a condition for approval of the OneMain Acquisition. The Settlement Agreement requires the Branch Sellers to operate these 127 branches as an ongoing, economically viable and competitive business until sold to the divestiture purchaser. OMH must also appoint a third-party monitor to oversee management of the divestiture branches and ensure the Companys compliance with the terms of the Settlement Agreement.
On November 12, 2015, the Branch Sellers agreed to sell (the Lendmark Sale) these branches to Lendmark Financial Services, LLC (Lendmark). These branches represent 6% of the branches and approximately $600 million, or 4%, of the finance receivables, on a pro forma basis, for the combined company as of December 31, 2014. In anticipation of the sale of these branches, Springleaf transferred $608 million of personal loans from held for investment to held for sale at September 30 2015. See Note 9 for a further discussion of the Lendmark Sale.
The closing of the Lendmark Sale is subject to various conditions. There can be no assurance that the Lendmark Sale will close, or if it does, when the closing will occur. In the event that the Branch Sellers have not completed the Branch Sales within 120 days after November 13, 2015, as such time period may be extended pursuant to the Settlement Agreement, the court may appoint a divestiture trustee to conduct the sale of such assets. In this case, the divestiture trustee would have the power to accomplish the divestiture of such assets to an acquirer or acquirers acceptable to the DoJ, and the Branch Sellers would have no right to object to a sale by the divestiture trustee on any ground other than the divestiture trustees malfeasance. Accordingly, the asset divesture could occur on terms less favorable to the Branch Sellers than the Lendmark Sale.
Note 2Basis of Pro Forma Presentation
The unaudited pro forma condensed combined balance sheet related to the OneMain Acquisition is included as of September 30, 2015 and the unaudited pro forma condensed combined statements of income are included for the nine months ended September 30, 2015 and for the year ended December 31, 2014. The historical consolidated and combined financial statements of OneMain have been adjusted to reflect reporting reclassifications necessary to conform to the presentation of the historical consolidated financial statements of Springleaf. The adoption of new or changes to existing accounting principles generally accepted in the United States of America subsequent to the unaudited pro forma condensed combined financial statement dates may result in changes to the presentation of the preliminary unaudited pro forma condensed combined financial information. In the fourth quarter of 2015, the Company changed its current policy for the classification of unearned premium, policy and claim reserves on its balance sheet for credit insurance products. Unearned premium, policy and claim reserves related to the Companys customers will be netted and classified as contra-assets in the Companys consolidated balance sheet. This change in policy is not reflected in the historical consolidated balance sheet of the Company but a reclassification adjustment was made to conform to the Companys planned presentation at December 31, 2015, see Note 4e for more information.
The unaudited pro forma condensed combined financial information shows the impact of the OneMain Acquisition on the condensed combined balance sheet and the condensed combined statements of income under the acquisition method of accounting with OMH treated as the acquirer. The acquisition method of accounting, provided by Accounting Standards Codification (ASC) 805 Business Combinations , uses the fair value concepts defined in ASC 820 Fair Value Measurement . Under this method of accounting, the assets and liabilities of OneMain are recorded by Springleaf at the date of acquisition at their estimated fair values, where fair value is defined in ASC 820 as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of OneMains identifiable tangible and intangible assets acquired and liabilities assumed are based on fair value estimates as of September 30, 2015. Any excess of the purchase price over the fair value of identified assets acquired and liabilities assumed will be recognized as goodwill. Fair value measurements may require extensive use of significant estimates and managements judgment, and it is possible the application of reasonable judgment could produce varying results based on a range of alternative estimates using the same facts and circumstances.
The unaudited pro forma financial information was prepared using a preliminary allocation of the estimated purchase price based on assumptions and estimates, which are subject to material changes. Certain market based assumptions were used when data was not available; however, management believes the fair values recognized for the assets acquired and liabilities assumed are based on reasonable estimates and assumptions. There may be further refinements of the business combination adjustments as additional information becomes available. Increases or decreases in fair value of certain balance sheet amounts and other items of OneMain as compared to the information presented in this document may change the amount of the business combination adjustments to goodwill and other assets and liabilities and may impact the income statement due to adjustments in yield and/or amortization of adjusted assets and liabilities.
Note 3Conforming Accounting Policies
Springleaf is currently reviewing OneMains accounting policies to harmonize any differences in accounting policies between those of Springleaf and OneMain. At this time, Springleaf is not aware of any differences that would have a material impact on the unaudited pro forma condensed combined financial information. However, as a result of its review, Springleaf may identify differences between the accounting policies of the two companies that, when conformed, could have a material impact on the unaudited pro forma condensed combined financial information.
Note 4Reclassifications
Certain balances from the consolidated and combined financial statements of OneMain were reclassified to conform their presentation to the consolidated financial statements of Springleaf, with the exception of Note 4c, Note 4e, and Note 4f below.
The following reclassifications were made to OneMains historical consolidated balance sheet for the purpose of Springleafs unaudited pro forma condensed combined balance sheet as of September 30, 2015, with the exception of Note 4c, Note 4e, and Note 4f below:
4a. Reclassification of OneMains restricted cash amounts from parenthetical disclosure under Cash and cash equivalents to the Restricted cash and cash equivalents financial statement line item to conform to Springleafs financial statement presentation.
4b. Reclassification of OneMains Unearned revenue and deferred costs balance as a separate financial statement line item to Personal loans to conform to Springleafs financial statement presentation.
4c. Reclassification of Springleafs Intangible assets balance from the Other assets financial statement line item to Intangible assets for presentation consistency.
4d. Reclassification of OneMains Premises and equipment, net balance as a separate financial statement line item to Other assets to conform to Springleafs financial statement presentation.
4e. Reclassification of Springleafs Insurance claims and policyholder liabilities balance from a liability financial statement line item to Unearned premium and claim reserves to conform to Springleafs planned presentation at December 31, 2015.
4f. Reclassification of borrowings, under a conduit, from Long-term debt to Borrowings under revolving facilities to conform to Springleafs planned presentation at December 31, 2015.
The following reclassifications were made to OneMains historical consolidated and combined statements of income for the purpose of Springleafs unaudited pro forma condensed combined statements of income for the nine months ended September 30, 2015 and for the year ended December 31, 2014:
4g. Reclassification of OneMains financial statement line items grouped under Provisions for credit losses and for benefits and claims to Provisions for finance receivable losses and insurance related expenses to Insurance losses and loss adjustment expenses to conform to Springleafs financial statement presentation.
4h. Reclassification of OneMains investment earning from the Investment revenue financial statement line item to Other revenues: Investment to conform to Springleafs financial statement presentation.
4i. Reclassification of OneMains non-usage fee on the warehouse funding facility from the Other operating expenses financial statement line item to Interest expense to conform to Springleafs financial statement presentation.
Note 5 Financing Transactions
The consideration paid for the OneMain Acquisition consists of a cash payment of approximately $4.48 billion (excluding certain contract termination payments paid in connection with the closing of the OneMain Acquisition). Springleaf funded the consideration using a combination of available cash and proceeds from the sale of investment securities. The following is a summary of the financing transactions related to the OneMain Acquisition (in millions):
Description |
|
Amount |
|
|
Cash and cash equivalents |
|
$ |
3,303 |
|
Proceeds from sale of investment securities |
|
1,175 |
|
|
Total Proceeds |
|
4,478 |
|
|
In connection with the consummation of the OneMain Acquisition, OMH funded the acquisition with $1 billion in cash and a $3.4 billion loan under an intercompany demand note agreement with Springleaf Financial Cash Services, Inc., a wholly-owned subsidiary of SFC. The note is payable in full on December 31, 2019, and is prepayable in whole or in part at any time without premium or penalty.
Note 6Unaudited Pro Forma Condensed Combined Balance Sheet Adjustments
This footnote should be read in conjunction with Note 1Description of OneMain Acquisition, Note 2Basis of Pro Forma Presentation, Note 3Conforming Accounting Policies, Note 4Reclassifications, and Note 5Financing Transactions. Adjustments included in the column Adjustments for OneMain Acquisition to the accompanying unaudited pro forma condensed combined balance sheet at September 30, 2015 are represented, in part, by the following considerations arising out of applying the acquisition method of accounting to OneMains assets and liabilities (in millions):
Description |
|
Note |
|
Amounts |
|
|
Fair value of cash consideration |
|
(6a) |
|
$ |
4,478 |
|
Less: Book value of OneMains net assets |
|
(6b) |
|
2,223 |
|
|
Less: Fair value adjustments of assets and liabilities acquired |
|
|
|
|
|
|
Loans receivables |
|
(6c) |
|
273 |
|
|
Allowance for loan losses |
|
(6d) |
|
666 |
|
|
Intangibles, net |
|
(6l) |
|
488 |
|
|
Deferred tax assets, net |
|
(6f) |
|
(295 |
) |
|
Premises and equipment, net |
|
(6g) |
|
(23 |
) |
|
Other assets |
|
(6h) |
|
(107 |
) |
|
Long-term debt |
|
(6j), (6k) |
|
(119 |
) |
|
Related-party debt |
|
(6j) |
|
290 |
|
|
Borrowings under a revolving facility |
|
(6j) |
|
(349 |
) |
|
Deferred and accrued taxes |
|
(6j) |
|
59 |
|
|
Goodwill |
|
(6e) |
|
$ |
1,372 |
|
6a) Represents purchase price of approximately $4.48 billion (excluding certain contract termination payments paid in connection with the closing of the OneMain Acquisition) paid at closing, adjusted based on OneMains equity at closing.
6b) Reflects the historical book value of net assets acquired as of September 30, 2015.
6c) Personal loans
Reflects fair value adjustment for OneMains loan portfolio, which includes both a purchased credit impaired portfolio and a non-purchased credit impaired portfolio. See Note 7a for further discussion on the income statement adjustment resulting from this bifurcation.
6d) Allowance for finance receivable losses
Reflects the elimination of OneMains historical allowance for finance receivable losses.
6e) Goodwill
Represents the difference between the fair value of the consideration transferred and the preliminary values assigned to the identifiable tangible and intangible assets acquired and liabilities assumed. The amount of goodwill presented in the above table reflects the estimated goodwill as a result of the OneMain Acquisition of $1.3 billion.
6f) Deferred tax assets
Represents the elimination of deferred tax assets reflected on OneMains historical consolidated balance sheet and preliminary adjustment of $44 million in deferred tax assets resulting from adjusting the fair value of OneMains long-term debt, see Note 6k.
6g) Premises and equipment, net
Represents fair value adjustment primarily related to OneMains premises and equipment.
6h) Other assets
Represents the elimination of historical debt issuance costs related to OneMains revolving warehouse facility and deferred acquisition costs related to OneMains insurance business.
Description |
|
Amount |
|
|
Debt issuance fees |
|
$ |
15 |
|
Deferred acquisition costs |
|
92 |
|
|
Total |
|
$ |
107 |
|
6i) Equity
Represents adjustment to eliminate OneMains historical stockholders equity.
6j) Borrowing adjustments for Acquisition Accounting
Represents adjustment to eliminate OneMains related party debt and intercompany income tax payable due to Seller and replacement with availability on OneMains revolving warehouse facility. The borrowings are included as pro forma adjustments to properly reflect the liabilities of the acquired company as of the closing date. The adjustment decreases related party debt and deferred and accrued taxes by $290 million and $59 million, respectively, and replaces that debt with $349 million from OneMains revolving warehouse facility.
Description |
|
Amount |
|
|
Related party debt |
|
$ |
290 |
|
Intercompany income tax payable |
|
59 |
|
|
Related party debt to be repaid at closing of acquisition |
|
$ |
349 |
|
|
|
|
|
|
Borrowings under a revolving facility |
|
$ |
349 |
|
Third party borrowing to repay related party debt |
|
$ |
349 |
|
6k) Long-term debt
Represents fair value adjustment of $119 million and elimination of historical debt issuance costs related to OneMains senior unsecured notes and securitizations.
6l) Intangibles
Represents fair value adjustment of $488 million related to OneMains preliminary identified intangible assets.
Note 7Unaudited Pro Forma Condensed Combined Income Statement Adjustments
This footnote should be read in conjunction with Note 1Description of OneMain Acquisition, Note 2Basis of Pro Forma Presentation, Note 3Conforming Accounting Policies, Note 4Reclassifications, Note 5Financing Transactions and Note 6Unaudited Pro Forma Condensed Combined Balance Sheet Adjustments. Adjustments included in the column Adjustments for OneMain Acquisition to the accompanying unaudited pro forma condensed combined income statement for the nine months ended September 30, 2015 and year ended December 31, 2014, are represented by the following:
7a) Interest Income: Finance Charges
Finance receivables acquired are separated into purchased credit impaired and purchased non-credit impaired portfolios. The purchased credit impaired finance receivables portfolio is comprised of approximately $1.2 billion of unpaid principal balance as of September 30, 2015 and is valued based on the expected cash flows to be collected. For this portfolio, the difference between the fair value and the outstanding loan balance at acquisition is separated into the accretable yield component and the non-accretable component. The accretable yield will be recognized over the estimated remaining life of the loan portfolio at an effective yield under the interest method. The non-accretable difference is recorded to cover lifetime expected net credit losses and will absorb losses on loans accounted for under ASC 310-30 Loans and debt securities acquired with deteriorated credit quality until it is exhausted. The excess of the cash flows expected to be collected on the purchased credit impaired finance receivables over the discounted cash flows is accreted into interest income at a level rate of return over the expected lives of the underlying pools of the purchased credit impaired finance receivables. As of September 30, 2015, the discount to unpaid principal balance on the purchased credit impaired finance receivables is $348 million and the effective yield is 11.59%. The accretion calculated on the purchased credit impaired finance receivables is $25 million and $92 million for nine months ended September 30, 2015 and year ended December 31, 2014, respectively.
The purchased non-credit impaired finance receivable portfolio includes approximately $7.3 billion of unpaid principal balance, and is accounted for under ASC 310-20 Nonrefundable fees and other costs . For this portfolio a premium is recorded equal to the difference between the fair value and the outstanding loan balance at closing and will be recognized over the remaining life of the loan portfolio at an effective yield using the interest method. As of September 30, 2015, the premium to unpaid principal balance for the purchased non-credit impaired finance receivables is estimated at approximately $601 million and the related effective yield is 22.37%. The finance charges on the purchased non-credit impaired finance receivables are $922 million and $1.5 billion for the nine months ended September 30, 2015 and year ended December 31, 2014, respectively.
The net impact of finance charges adjustments to the unaudited pro forma condensed combined statements of income is a decrease of $205 million and $313 million for the nine months ended September 30, 2015 and the year ended December 31, 2014, respectively.
7b) Interest expense adjustments for acquisition accounting
Represents the incremental interest expense, including the amortization of fair value adjustments, for the nine months ended September 30, 2015 and the year ended December 31, 2014 as if the OneMain Acquisition occurred on January 1, 2014. The OneMain Acquisition assumes a new debt structure, as described in Note 6j above, and adjustments to market rates are estimated for interest expense. The related party interest expense is replaced with interest expense adjustment for new and existing borrowings as if those borrowings had provided financing throughout the year. The table below illustrates adjustments to interest expense (in millions):
Description |
|
For the Nine months
|
|
For the Year Ended
|
|
||
Related party debt |
|
$ |
(46 |
) |
$ |
(178 |
) |
2015-1, 2015-2, 2015-3 Securitization |
|
25 |
|
96 |
|
||
Borrowings under a revolving facility |
|
15 |
|
27 |
|
||
2014-1 and 2014-2 securitizations |
|
(6 |
) |
21 |
|
||
Senior unsecured notes |
|
(26 |
) |
75 |
|
||
Total incremental interest expense |
|
$ |
(38 |
) |
$ |
41 |
|
7c) Provisions for finance receivable losses
This adjustment represents the elimination of the provisions for finance receivable losses recorded on OneMains historical consolidated and combined statements of income for the nine months ended September 30, 2015 and year ended December 31, 2014 and includes provisions of $286 million, and $705 million, respectively, to conform to Springleafs allowance methodology. To calculate the provision, Springleaf uses a roll rate model that derives the roll rate percentage to estimate incurred losses. This methodology was applied to OneMains portfolio derived from historical data to determine OneMains roll rates.
To determine the provision, the balances of purchased non-credit impaired accounts, which are less than 60 days past due at the time of acquisition, are evaluated through this roll rate model, and the results are expressed as a percentage of the receivables balance which ranges from 2.7% to 5.1%.
7d) Other operating expenses (amortization)
This adjustment represents the impact to amortization for the preliminary intangible assets identified in Note 6l for the nine months ended September 30, 2015 and year ended December 31, 2014, respectively.
7e) Other operating expenses (depreciation)
This adjustment represents the impact to depreciation for the nine months ended September 30, 2015 and depreciation for the year ended December 31, 2014 for premises and equipment.
7f) Provision for income taxes
Represents adjustment to record the net tax effect of the pro forma adjustments based on the statutory tax rate of 36.5% for adjustments related to Springleaf for the nine months ended September 30, 2015 and the year ended December 31, 2014; and 37.2% for adjustments related to OneMain for the nine months ended September 30, 2015 and the year ended December 31, 2014.
7g) Salaries and benefits
OneMains historical consolidated and combined income statement includes allocated costs which represent general corporate level services provided to OneMain and other affiliates by Citigroup. Corporate level services include finance, human resources, legal, compliance, risk, technology and administration. These costs are classified as Other operating expenses in OneMains historical consolidated and combined income statement. An adjustment was made to reclassify such costs from Other operating expenses to Salaries and benefits to reflect the costs associated with these services as if they were performed by OneMain employees.
7h) Net income (loss) per common share attributable to Springleaf
Net income (loss) per common share attributable to Springleaf has been calculated based on the number of shares assumed to be outstanding, assuming such shares were outstanding for the full period presented.
The computation of pro forma earnings per share assumes that 19,417,476 of incremental shares, that were issued as part of the equity offering completed on May 4, 2015, were outstanding for the full period beginning on January 1, 2014 . The following table sets forth the computation of unaudited pro forma basic and diluted income per share attributable to common stockholders (in millions, except share data and per share):
|
|
Nine months ended September 30, 2015 |
|
Year ended December 31, 2014 |
|
||||||||||||
|
|
Net Income |
|
Shares |
|
Per share
|
|
Net Income |
|
Shares |
|
Per share
|
|
||||
Earnings per share, basic |
|
$ |
222 |
|
134,450,168 |
|
$ |
1.65 |
|
$ |
57 |
|
134,208,701 |
|
$ |
0.42 |
|
Earnings per share, diluted |
|
222 |
|
135,515,495 |
|
1.64 |
|
57 |
|
134,682,599 |
|
0.42 |
|
||||
Shares utilized in the calculation of pro forma basic and diluted income (loss) per share attributable to Springleaf are as follows:
|
|
Nine months ended September 30, 2015 |
|
Year ended December 31, 2014 |
|
||||||||
|
|
Historical |
|
Shares issued in
|
|
Pro Forma
|
|
Historical |
|
Shares issued in
|
|
Pro Forma
|
|
Weighted-average shares outstanding, basic |
|
125,701,635 |
|
8,748,533 |
|
134,450,168 |
|
114,791,225 |
|
19,417,476 |
|
134,208,701 |
|
Weighted-average shares outstanding, diluted |
|
125,701,635 |
|
9,813,860 |
|
135,515,495 |
|
115,265,123 |
|
19,417,476 |
|
134,682,599 |
|
*Adjustment reflects the impact of reflecting the shares issued in the equity raise as if it occurred at the earliest period presented. Additionally, positive pro forma combined net income for the nine months ended September 30, 2015, an adjustment of 1,065,327 was made to increase Springleafs weighted-average shares to include the effect of dilutive securities .
Note 8Unaudited Pro Forma Condensed Combined Income Statement Adjustments for Real Estate Asset Sales
During 2014, Springleaf entered into a series of transactions relating to the sales of its principal interests in its real estate loans, the related servicing of these loans and the sales of certain performing and non-performing real estate loans, which substantially completed its plan to liquidate its non-core real estate loans. At September 30, 2015, the remaining real estate loans held for investment and held for sale totaled $573 million and $193 million, respectively. The following Real Estate Asset Sales were completed during 2014 and reflected in the pro forma condensed combined income statement as if they were completed on January 1, 2014:
· The Securitization Assets Sale (as defined in Note 1 of the Notes to Unaudited Pro Forma Condensed Consolidated Financial Information contained within Exhibit 99.1 to OMHs Current Report on Form 8-K filed November 13, 2014) by OMHs indirect wholly owned subsidiary Springleaf Finance Corporation (SFC) and the Depositors (as defined in Note 1 of the Notes to Unaudited Pro Forma Condensed Consolidated Financial Information contained within Exhibit 99.1 to OMHs Current Report on Form 8-K filed November 13, 2014), to Credit Suisse Securities (USA) LLC and certain of its affiliates (Credit Suisse) and the MSR Sale (as defined in Note 1 of the Notes to Unaudited Pro Forma Condensed Consolidated Financial Information contained
within Exhibit 99.1 to OMHs Current Report on Form 8-K filed November 13, 2014) by SFC and MorEquity, Inc. (MorEquity), a wholly owned subsidiary of SFC, to Nationstar Mortgage LLC, both of which were completed on August 29, 2014. The total purchase price for these transactions was approximately $1.67 billion, of which $1.63 billion relates to the Securitization Assets Sale, and $39 million relates to the MSR Sale.
· The 2006-1 Securitization Assets Sale (as defined in Note 1 of the Notes to Unaudited Pro Forma Condensed Consolidated Financial Information contained within Exhibit 99.1 to OMHs Current Report on Form 8-K filed November 13, 2014) by Springleaf to an unaffiliated third party, for a purchase price of $9.5 million.
· The sale of certain performing and non-performing mortgage loans by certain indirect subsidiaries of OMH to Credit Suisse, completed on September 30, 2014. The purchase price for the September Whole Loan Sales (as defined in Exhibit 99.1 to OMHs Current Report on Form 8-K filed November 13, 2014) was $795 million. This amount includes a holdback provision of $120 million. Of the $120 million holdback, $116 million has been collected to date from Credit Suisse.
· The sale of a portion of the remaining performing and non-performing mortgage loans by certain indirect subsidiaries of OMH to Credit Suisse, completed on November 7, 2014. The purchase price for the November Whole Loan Sales (as defined in Exhibit 99.1 to OMHs Current Report on Form 8-K filed November 13, 2014) was approximately $270 million. This amount includes a holdback provision of $34 million, as described in Note 1 of the Notes to Unaudited Pro Forma Condensed Consolidated Financial Information contained within Exhibit 99.1 to OMHs Current Report on Form 8-K filed November 13, 2014. Of the $34 million holdback, $30 million has been collected to date from Credit Suisse.
· Prior Dispositions (as defined in Note 1 of the Notes to Unaudited Pro Forma Condensed Consolidated Financial Information contained within Exhibit 99.1 to OMHs Current Report on Form 8-K filed November 13, 2014), including (i) the sale by Third Street Funding LLC, SFCs wholly owned subsidiary, of its beneficial interests in the mortgage-backed retained certificates related to a securitization transaction in 2009 for approximately $737.2 million which closed on March 31, 2014, (ii) the sale of certain performing and non-performing real estate loans by MorEquity for approximately $79 million, which closed on March 31, 2014, and (iii) the sale by Sixth Street Funding LLC, a wholly owned subsidiary of SFC, of its beneficial interests in the mortgage-backed retained certificates related to a securitization transaction in 2010 for approximately $263.7 million, which closed on June 30, 2014.
· Subsequent to the November 13, 2014 filing of OMHs Current Report on Form 8-K, the sale of a portion of the remaining performing and non-performing mortgage loans by certain indirect subsidiaries of OMH was completed on December 19, 2014. The purchase price for the sale was approximately $25.8 million. This amount includes a holdback provision of $4.5 million. Of the $4.5 million holdback, $3.6 million has been collected to date.
Note 9Unaudited Pro Forma Condensed Combined Adjustments Related to the Anticipated Disposition of Assets Held for Sale
On November 12, 2015, the Branch Sellers entered into a Purchase and Sale Agreement (the Purchase Agreement) with OMH and Lendmark in connection with and subject to the closing of the OneMain Acquisition. Under the terms and conditions of the Purchase Agreement, Lendmark has agreed to (i) purchase 127 branches (the Branches) from the Branch Sellers, together with certain loans issued to Branch customers, the fixed non-information technology assets located at any such Branch and certain other Branch assets, and (ii) assume certain Branch liabilities (including the Branch Sellers obligations under certain Branch store leases) ((i) and (ii) collectively, the Branch Sales). The Branches are located in the states of Arizona, California, Colorado, Idaho, North Carolina, Ohio, Pennsylvania, Texas, Virginia, Washington and West Virginia. Under the Purchase Agreement, Lendmark has agreed to, at or prior to the closing, offer employment, effective as of closing, to each of the employees of every purchased Branch.
The purchase price for the Branch Sales is equal to the sum of (i) the aggregate unpaid balance as of closing of the purchased loans multiplied by 103%, plus (ii) for each interest-bearing purchased loan, an amount equal to all unpaid interest that has accrued on the unpaid balance at the applicable note rate from the most recent interest payment date through the closing, plus (iii) the sum of all prepaid charges and fees and security deposits of the Branch Sellers to the extent arising under the purchased contracts as reflected on the books and records of the Branch Sellers as of closing. As of September 30, 2015, the unpaid balance of the loans that would qualify as purchased loans under the Purchase Agreement was approximately $605,110,720. If the aggregate purchase price at closing would exceed $695,000,000, and Lendmark is not able to obtain additional financing on specified terms to purchase loans above such price, then the parties will mutually agree to exclude loans from the sale in the amount necessary to reduce the purchase price to $695,000,000. The initial closing under the Purchase Agreement is expected to occur on or about April 1, 2016.
The Purchase Agreement contemplates a series of successive closings, with each closing (including the initial closing) being conditioned on the satisfaction or waiver of specified closing conditions, including (i) Lendmarks receipt of approvals from certain state regulatory authorities governing consumer lending required for Lendmarks purchase of the Branches (the State Approvals), (ii) OMHs
completion of certain loan servicing and administration information technology systems needed for the transition services to be provided by OMH to Lendmark for operation of the Branches (the IT System Preparation), (iii) to the extent required under the terms of any assumed Branch store lease, the receipt of landlord consent to the assignment of such lease, and (iv) other customary closing conditions, including (a) the accuracy of each partys representations and warranties (subject to customary materiality qualifiers), (b) each partys performance in all material respects of its obligations under the Purchase Agreement, (c) no court order, injunction or other judgment preventing the transactions contemplated by the Purchase Agreement, and (d) the absence of any material adverse effect with respect to the purchased Branch assets and assumed Branch liabilities to be conveyed at such closing, taken as a whole. The consummation of the Branch Sales is not subject to Lendmarks receipt of financing or approval by the shareholders of any party to the Purchase Agreement.
Each party has the right to terminate the Purchase Agreement if the Branch Sales are not consummated by August 3, 2016, which shall be extended to October 3, 2016 if the IT System Preparation or Lendmarks receipt of the State Approvals is not completed (provided that no party may terminate the Purchase Agreement if such party is then in material breach of the Purchase Agreement). If the Branch Sellers terminate the Purchase Agreement because Lendmark (then being required to consummate the transactions contemplated by the Purchase Agreement) fails to so consummate such transactions solely due to the fact that the debt financing is not available, then the Branch Sellers would be entitled to a reverse termination fee from Lendmark of $49,000,000 (or $63,000,000 if the Purchase Agreement is terminated as a result of willful and material breach by Lendmark), such termination fee to be proportionately reduced following the initial closing, based on the unpaid balance of loans at the Branches that have been acquired by Lendmark, in the event the Purchase Agreement is terminated after the initial closing.
The Purchase Agreement includes customary representations, warranties, covenants and agreements, including, among other things, covenants of each Branch Seller regarding the conduct of its business prior to the closing, mutual covenants regarding the use of each partys reasonable best efforts to cause the conditions to closing of the Branch Sales to be consummated and mutual covenants regarding the use of reasonable best efforts by the parties to obtain regulatory approvals. The parties have also agreed to indemnify each other (subject to customary limitations) for certain losses relating to the Branch Sales.
The Branch Sales is expected to decrease the Companys total assets by 4.58% as of September 30, 2015. The proceeds from this sale will be used to fund operations and enhance our liquidity. The following pro forma adjustments were made to the historical consolidated statements of income of Springleaf and the historical condensed consolidated balance sheet of Springleaf to reflect the Branch Sales as if it had been consummated on January 1, 2014:
· Estimated proceeds of $630 million for the sale of (i) $608 million of personal loans classified as held for sale, (ii) certain other assets of $3 million and (iii) certain liabilities of $1 million.
· Adjustment to Finance charges of $125 million for the nine months ended September 30, 2015 and $154 million for the year ended December 31, 2014 to reflect the impact of selling the personal loans.
· Adjustment to Provisions for finance receivable losses of $15 million for the nine months ended September 30, 2015 and $32 million for the year ended December 31, 2014 to reflect charge-offs recorded at the branches.
· Adjustment to Salaries and benefits of $22 million for the nine months ended September 30, 2015 and $29 million for the year ended December 31, 2014 to reflect direct costs associated with employees located at the Branches.
· Adjustment to Other operating expenses of $23 million for the nine months ended September 30, 2015 and $26 million for the year ended December 31, 2014 to reflect certain direct costs at the Branches (primarily occupancy costs, advertising costs and credits, collections, and losses costs).
Exhibit 99.2
ONEMAIN FINANCIAL HOLDINGS, LLC AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Position
(In millions of dollars, except share data)
|
|
September 30,
|
|
December 31,
|
|
||
|
|
(Unaudited) |
|
|
|
||
Assets |
|
|
|
|
|
||
Cash and cash equivalents (including restricted cash of $390 and $147) |
|
$ |
1,011 |
|
$ |
319 |
|
Investments (at fair value) |
|
1,403 |
|
1,391 |
|
||
Consumer finance receivables: |
|
|
|
|
|
||
Loans and accrued interest receivable |
|
9,949 |
|
9,946 |
|
||
Unearned revenue and deferred costs |
|
(1,464 |
) |
(1,510 |
) |
||
Unearned premium and claim reserves |
|
(406 |
) |
(415 |
) |
||
Allowance for loan losses |
|
(666 |
) |
(695 |
) |
||
Net consumer finance receivables |
|
7,413 |
|
7,326 |
|
||
Deferred tax assets, net |
|
338 |
|
313 |
|
||
Intangible assets |
|
62 |
|
71 |
|
||
Premises and equipment, net |
|
90 |
|
94 |
|
||
Other assets |
|
248 |
|
232 |
|
||
Total assets |
|
$ |
10,565 |
|
$ |
9,746 |
|
The following table summarizes the assets of the variable interest entities (VIEs) that are included in the Condensed Consolidated Statements of Financial Position above. The assets in the table below include those assets that can only be used to settle obligations of consolidated VIEs on the following page, and are in excess of those obligations. Additionally, the assets in the table below include third-party assets of consolidated VIEs only and exclude intercompany balances that eliminate in consolidation.
|
|
September 30,
|
|
December 31,
|
|
||
|
|
(Unaudited) |
|
|
|
||
Assets |
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
390 |
|
$ |
147 |
|
Net consumer finance receivables |
|
7,065 |
|
2,179 |
|
||
Other assets |
|
15 |
|
|
|
||
Total assets |
|
$ |
7,470 |
|
$ |
2,326 |
|
Refer to the Notes to Condensed Consolidated and Combined Financial Statements.
ONEMAIN FINANCIAL HOLDINGS, LLC AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Position (continued)
(In millions of dollars, except share data)
|
|
September 30,
|
|
December 31,
|
|
||
|
|
(Unaudited) |
|
|
|
||
Liabilities and equity |
|
|
|
|
|
||
Related party debt |
|
$ |
6 |
|
$ |
3,249 |
|
Revolving line of credit - related party |
|
284 |
|
|
|
||
Revolving line of credit - third party |
|
1,136 |
|
|
|
||
Long-term debt |
|
6,178 |
|
3,408 |
|
||
Insurance policy and claim reserves |
|
532 |
|
549 |
|
||
Income taxes payable |
|
59 |
|
506 |
|
||
Accounts payable, accrued expenses and other liabilities |
|
147 |
|
101 |
|
||
Total liabilities |
|
8,342 |
|
7,813 |
|
||
Commitments and contingencies (Note 19) |
|
|
|
|
|
||
Equity: |
|
|
|
|
|
||
Common stock ($1.00 par value, 1,000 shares issued and authorized at September 30, 2015 and December 31, 2014) |
|
|
|
|
|
||
Additional paid-in capital |
|
1,841 |
|
1,846 |
|
||
Retained earnings |
|
364 |
|
43 |
|
||
Accumulated other comprehensive income |
|
18 |
|
44 |
|
||
Total equity |
|
2,223 |
|
1,933 |
|
||
Total liabilities and equity |
|
$ |
10,565 |
|
$ |
9,746 |
|
The following table summarizes the liabilities of VIEs that are included in the Condensed Consolidated Statements of Financial Position above. The liabilities in the table below include third-party liabilities of consolidated VIEs only, and exclude intercompany balances that eliminate in consolidation. The liabilities also exclude amounts where creditors or beneficial interest holders have recourse to the general credit of OneMain Financial Holdings, LLC and subsidiaries.
|
|
September 30,
|
|
December 31,
|
|
||
|
|
(Unaudited) |
|
|
|
||
Liabilities |
|
|
|
|
|
||
Revolving line of credit - related party |
|
$ |
284 |
|
$ |
|
|
Revolving line of credit - third party |
|
1,136 |
|
|
|
||
Long-term debt |
|
4,695 |
|
1,933 |
|
||
Accounts payable, accrued expenses and other liabilities |
|
8 |
|
24 |
|
||
Total liabilities |
|
$ |
6,123 |
|
$ |
1,957 |
|
Refer to the Notes to Condensed Consolidated and Combined Financial Statements.
ONEMAIN FINANCIAL HOLDINGS, LLC AND SUBSIDIARIES
Condensed Consolidated and Combined Statements of Income
(Unaudited)
(In millions of dollars, except share data)
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
||||||||
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
||||
Revenue |
|
|
|
|
|
|
|
|
|
||||
Finance interest and other charges |
|
$ |
525 |
|
$ |
511 |
|
$ |
1,542 |
|
$ |
1,496 |
|
Investment revenue |
|
14 |
|
16 |
|
42 |
|
46 |
|
||||
Total interest revenue |
|
539 |
|
527 |
|
1,584 |
|
1,542 |
|
||||
Interest expense |
|
80 |
|
48 |
|
232 |
|
162 |
|
||||
Net interest revenue |
|
459 |
|
479 |
|
1,352 |
|
1,380 |
|
||||
Other non-interest revenue: |
|
|
|
|
|
|
|
|
|
||||
Insurance premiums |
|
76 |
|
84 |
|
238 |
|
255 |
|
||||
Realized gain on sales and impairments of investments, net |
|
|
|
|
|
2 |
|
1 |
|
||||
Other revenue |
|
10 |
|
10 |
|
31 |
|
33 |
|
||||
Total non-interest revenue |
|
86 |
|
94 |
|
271 |
|
289 |
|
||||
Total revenue, net of interest expense |
|
545 |
|
573 |
|
1,623 |
|
1,669 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Provisions for credit losses and for benefits and claims |
|
|
|
|
|
|
|
|
|
||||
Provision for credit losses |
|
113 |
|
156 |
|
421 |
|
386 |
|
||||
Policyholder benefits and claims |
|
38 |
|
38 |
|
107 |
|
102 |
|
||||
Total provisions for credit losses and for benefits and claims |
|
151 |
|
194 |
|
528 |
|
488 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Operating expenses |
|
|
|
|
|
|
|
|
|
||||
Compensation and benefits |
|
77 |
|
70 |
|
231 |
|
216 |
|
||||
Technology and communications |
|
25 |
|
22 |
|
68 |
|
62 |
|
||||
Occupancy |
|
19 |
|
18 |
|
56 |
|
55 |
|
||||
Advertising and marketing |
|
28 |
|
21 |
|
69 |
|
55 |
|
||||
Other operating |
|
50 |
|
46 |
|
158 |
|
144 |
|
||||
Total operating expenses |
|
199 |
|
177 |
|
582 |
|
532 |
|
||||
Income before income taxes |
|
195 |
|
202 |
|
513 |
|
649 |
|
||||
Provision for income taxes |
|
69 |
|
74 |
|
192 |
|
234 |
|
||||
Net income |
|
$ |
126 |
|
$ |
128 |
|
$ |
321 |
|
$ |
415 |
|
|
|
|
|
|
|
|
|
|
|
||||
Share data: |
|
|
|
|
|
|
|
|
|
||||
Weighted average shares outstanding |
|
1,000 |
|
1,000 |
|
1,000 |
|
1,000 |
|
||||
Earnings per share basic and diluted |
|
$ |
125,916 |
|
$ |
127,268 |
|
$ |
321,359 |
|
$ |
414,638 |
|
Refer to the Notes to Condensed Consolidated and Combined Financial Statements.
ONEMAIN FINANCIAL HOLDINGS, LLC AND SUBSIDIARIES
Condensed Consolidated and Combined Statements of Comprehensive Income
(Unaudited)
(In millions of dollars)
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
||||||||
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
||||
Net income |
|
$ |
126 |
|
$ |
128 |
|
$ |
321 |
|
$ |
415 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
||||
Net change in unrealized gains (losses) on investment securities, net of taxes |
|
(9 |
) |
(8 |
) |
(17 |
) |
8 |
|
||||
Net change in foreign currency translation adjustment, net of taxes |
|
(4 |
) |
(3 |
) |
(9 |
) |
(2 |
) |
||||
Total other comprehensive income (loss) |
|
(13 |
) |
(11 |
) |
(26 |
) |
6 |
|
||||
Comprehensive income |
|
$ |
113 |
|
$ |
117 |
|
$ |
295 |
|
$ |
421 |
|
Refer to the Notes to Condensed Consolidated and Combined Financial Statements.
ONEMAIN FINANCIAL HOLDINGS, LLC AND SUBSIDIARIES
Condensed Consolidated and Combined Statements of Changes in Equity and Net Parent Investment
(Unaudited)
(In millions of dollars, except share data)
|
|
Common stock |
|
Additional
|
|
Retained |
|
Net Parent |
|
Accumulated
|
|
Total |
|
||||||||
|
|
Shares |
|
Amount |
|
capital |
|
earnings |
|
investment |
|
income (loss) |
|
equity |
|
||||||
Balance, January 1, 2015 |
|
1,000 |
|
$ |
|
|
$ |
1,846 |
|
$ |
43 |
|
$ |
|
|
$ |
44 |
|
$ |
1,933 |
|
Net income |
|
|
|
|
|
|
|
321 |
|
|
|
|
|
321 |
|
||||||
Transfers to Parent |
|
|
|
|
|
(5 |
) |
|
|
|
|
|
|
(5 |
) |
||||||
Other comprehensive loss, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
(26 |
) |
(26 |
) |
||||||
Balance, September 30, 2015 |
|
1,000 |
|
$ |
|
|
$ |
1,841 |
|
$ |
364 |
|
$ |
|
|
$ |
18 |
|
$ |
2,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Balance, January 1, 2014 |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
2,803 |
|
$ |
44 |
|
$ |
2,847 |
|
Net income |
|
|
|
|
|
|
|
128 |
|
287 |
|
|
|
415 |
|
||||||
Transfers from Parent, net 1 |
|
|
|
|
|
|
|
|
|
69 |
|
|
|
69 |
|
||||||
Conversion of Parents net investment into common stock |
|
1,000 |
|
|
|
3,159 |
|
|
|
(3,159 |
) |
|
|
|
|
||||||
Other comprehensive income, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
6 |
|
6 |
|
||||||
Balance, September 30, 2014 |
|
1,000 |
|
$ |
|
|
$ |
3,159 |
|
$ |
128 |
|
$ |
|
|
$ |
50 |
|
$ |
3,337 |
|
1 Consists of transfers from Parent of $490 million partially offset by a transfer to Parent of real estate loans of $421 million.
Refer to the Notes to Condensed Consolidated and Combined Financial Statements.
ONEMAIN FINANCIAL HOLDINGS, LLC AND SUBSIDIARIES
Condensed Consolidated and Combined Statements of Cash Flows
(Unaudited)
(In millions of dollars)
|
|
Nine Months Ended
|
|
||||
|
|
2015 |
|
2014 2 |
|
||
Cash flows from operating activities |
|
|
|
|
|
||
Net income |
|
$ |
321 |
|
$ |
415 |
|
Adjustments to reconcile income to net cash from operating activities: |
|
|
|
|
|
||
Net realized gain on sales of investments |
|
(5 |
) |
(1 |
) |
||
Impairments of investments |
|
3 |
|
|
|
||
Provision for credit losses |
|
421 |
|
386 |
|
||
Depreciation and amortization |
|
55 |
|
26 |
|
||
Deferred tax benefit |
|
|
|
(6 |
) |
||
Net changes in other assets and liabilities |
|
(405 |
) |
(57 |
) |
||
Net cash provided by operating activities |
|
390 |
|
763 |
|
||
Cash flows from investing activities |
|
|
|
|
|
||
Net increase in short-term investments |
|
(42 |
) |
(98 |
) |
||
Purchases of investments |
|
(278 |
) |
(161 |
) |
||
Proceeds from sales of investments |
|
69 |
|
69 |
|
||
Proceeds from maturities of investments |
|
192 |
|
124 |
|
||
Originations of consumer finance receivables 1 |
|
(2,455 |
) |
(2,463 |
) |
||
Repayments of consumer finance receivables |
|
1,912 |
|
1,881 |
|
||
Purchases of premises and equipment |
|
(22 |
) |
(3 |
) |
||
Proceeds from sale of premises and equipment |
|
13 |
|
|
|
||
(Increase) decrease in restricted cash |
|
(243 |
) |
65 |
|
||
Net cash used in investing activities |
|
(854 |
) |
(586 |
) |
||
Cash flows from financing activities |
|
|
|
|
|
||
Debt issuance costs |
|
(35 |
) |
(16 |
) |
||
Repayments of revolving line of credit - related party |
|
(56 |
) |
|
|
||
Draws on revolving line of credit - related party |
|
340 |
|
|
|
||
Repayments of revolving line of credit - third party |
|
(224 |
) |
|
|
||
Draws on revolving line of credit - third party |
|
1,360 |
|
|
|
||
Issuance of long-term debt, net |
|
2,772 |
|
1,944 |
|
||
Net decrease in related party debt |
|
(3,244 |
) |
(2,527 |
) |
||
Transfers from Parent |
|
|
|
475 |
|
||
Net cash provided by (used in) financing activities |
|
913 |
|
(124 |
) |
||
Increase in cash and cash equivalents |
|
449 |
|
53 |
|
||
Cash and cash equivalents, beginning of year (excluding restricted cash of $147 and $188) |
|
172 |
|
131 |
|
||
Cash and cash equivalents, end of period (excluding restricted cash of $390 and $123) |
|
$ |
621 |
|
$ |
184 |
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
||
Cash paid during the period for: |
|
|
|
|
|
||
Interest |
|
$ |
185 |
|
$ |
160 |
|
Income taxes |
|
666 |
|
348 |
|
||
Supplemental schedule of non-cash investing and financing activities: |
|
|
|
|
|
||
Purchase of technology assets |
|
|
|
(80 |
) |
||
Transfers (to) from Parent |
|
(5 |
) |
15 |
|
||
Transfer to Parent of real estate loans |
|
|
|
(421 |
) |
1 Originations of consumer finance receivables are presented net of payoffs on loans that were refinanced into a new loan.
2 Certain reclassifications have been made to the prior period to conform to the current period presentation. See Note 2 for additional information.
Refer to the Notes to Condensed Consolidated and Combined Financial Statements.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(1) Organization and Business
The accompanying Condensed Consolidated and Combined Financial Statements primarily include OneMain Financial Holdings, LLC (OMFH)(formerly OneMain Financial Holdings, Inc.), a holding company, and its wholly owned subsidiaries OneMain Financial, Inc. (DE)(OMFI), American Health and Life Insurance Company (AHL) and Triton Insurance Company (Triton), (collectively OneMain Financial Holdings, LLC and subsidiaries or the Company). The Company is a wholly owned subsidiary of CitiFinancial Credit Company (CCC or Parent), which is a wholly owned subsidiary of Associates First Capital Corporation, an indirect subsidiary of Citigroup, Inc. (Citigroup).
On May 26, 2015, OneMain Financial Holdings, Inc. was converted to a limited liability company, or LLC, and renamed OneMain Financial Holdings, LLC. Ownership interests in the LLC are presented as Common stock.
On July 1, 2014, CCC contributed all of the capital of OMFI, AHL and Triton to OMFH resulting in OMFH becoming the legal parent of the contributed entities. The contribution did not result in a change to the historical carrying value of the assets and liabilities of the Company.
The Company conducts its operations through two business segments - Lending and Insurance. In accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 280, Segment Reporting , operating segments represent components of an entity where discrete financial information is available and for which the operating results are regularly reviewed by the chief operating decision maker to determine resources to be allocated to a segment and to assess its performance.
The Companys Lending segment originates and services personal loans to consumers through a community branch-based network throughout the United States. The Company ceased originating real estate loans as of June 1, 2012. Prior to January 6, 2014, the Company serviced a portfolio of owned real estate loans and a portfolio of real estate loans owned by an affiliate. Refer to Note 16 for further information on the transfer of real estate loans and related servicing in 2014.
The Companys Insurance segment, known as OneMain Solutions, underwrites policies to its customers and underwrites and reinsures policies covering customers of Citigroup affiliates. In addition, the Company is a full service administrator of debt protection products for customers of Citigroup affiliates. Refer to Note 16 for further information on the services provided to Citigroup affiliates.
Refer to Note 4 for additional information regarding the Companys business segments.
On March 3, 2015, Citigroup announced that it reached a definitive agreement to sell the Company to Springleaf Holdings (NYSE: LEAF). The transaction is subject to regulatory approvals, and other customary closing conditions.
(2) Basis of Presentation
Prior to the July 1, 2014 contribution of capital discussed in Note 1, there was not a legal parent-subsidiary relationship between OMFH and OMFI, AHL and Triton. Accordingly, for all periods prior to July 1, 2014, the Companys financial statements were prepared on a combined basis and the Parents equity investment in the Company for the period ended June 30, 2014 was presented as Net Parent investment in lieu of common stock, paid-in capital, and retained earnings. The combined financial statements combine all of the Companys subsidiaries. Effective July 1, 2014, the Companys financial statements have been prepared on a consolidated basis. Under this basis of presentation, the financial statements consolidate all of the Companys subsidiaries and present the Parents legal equity investment as common stock, paid-in capital and retained earnings. All subsequent periods will also be presented on a consolidated basis. The Condensed Consolidated and Combined Financial Statements included herein may not be indicative of the Companys financial position, results of operations, and cash
flows in the future, and also may not be indicative of the financial position, results of operations and cash flows had the Company been a separate, stand-alone entity during the periods presented.
The Condensed Consolidated and Combined Financial Statements as of September 30, 2015 and December 31, 2014 and for the three and nine-month periods ended September 30, 2015 and 2014 have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP). Certain financial information that is normally included in annual financial statements but is not required for interim reporting purposes, has been condensed or omitted. All significant intercompany balances and transactions between the legal entities that comprise the Company have been eliminated.
Management must make estimates and assumptions that affect the Condensed Consolidated and Combined Financial Statements and the related footnote disclosures. While management uses its best judgment in making estimates, actual amounts or results could differ from those estimates. Market conditions may increase the risk and complexity of the judgments in these estimates.
The Condensed Consolidated and Combined Financial Statements include expense allocations to and from affiliates for certain costs of support functions provided on a centralized basis within Citigroup. Such allocations primarily relate to employee benefits, technology, operations and global functions such as finance, human resources, legal and compliance. Management believes the basis on which the expenses have been allocated to be a reasonable reflection of the utilization of services provided to or the benefits received by the Company during the periods presented. The allocations may not, however, reflect the expenses the Company would have incurred as a stand-alone company for the periods presented. Actual costs that may have been incurred if the Company had been a stand-alone company would depend on multiple factors, including organizational structure, which functions were outsourced or performed by employees and strategic decisions in various areas such as information technology and infrastructure. Refer to Note 16 for further discussion of these expense allocations.
Earnings per share is calculated as net income divided by the weighted average shares outstanding during the period. No securities or instruments have been issued that could convert to common stock and have a dilutive effect on earnings per share.
While the Company is included in the consolidated U.S. federal and certain state income tax returns of Citigroup, the income tax provision in the Condensed Consolidated and Combined Statements of Income has been calculated as if the Company filed separate U.S. federal and state tax returns.
The Company consolidates entities deemed to be VIEs when the Company is determined to be the primary beneficiary.
Certain immaterial errors have been identified in the prior periods financial statements and notes which require reclassification of the amounts to conform to the current period presentation. Immaterial error corrections consist of the reclassification of $16 million of debt issuance costs from Net changes in other assets and liabilities in cash flows from operating activities to Debt issuance costs in cash flows from financing activities and the reclassification of $15 million of Transfers from Parent in cash flows from financing activities from cash to non-cash on the Condensed Consolidated and Combined Statements of Cash Flows for the nine months ended September 30, 2014, as well as the reclassification of $88 million of ceded insurance policy and claim reserves from Insurance policy and claim reserves to be presented on a gross basis within Other assets on the Condensed Consolidated Statement of Financial Position at December 31, 2014.
These statements should be read in conjunction with the Consolidated and Combined Financial Statements and related notes included in our Annual Report as of and for the fiscal year ended December 31, 2014. We follow the same accounting policies for our interim reporting.
Accounting Policy Changes
Debt Issuance Costs
In April 2015, the FASB issued Accounting Standards Update (ASU) No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30) , Simplifying the Presentation of Debt Issuance Costs , to conform the presentation of debt issuance costs to that of debt discounts and premiums. Thus, the ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted for financial statements that have not been previously issued. After retrospectively applying this new ASU as of September 30, 2015, the Company reclassified $38 million and $36 million of debt issuance costs as of September 30, 2015 and December 31, 2014, respectively, from Other assets to Long-term debt in our Condensed Consolidated Statement of Financial Position. The Company will continue to report fees paid to access its warehouse facility in other assets. The adoption of this ASU did not have a material effect on the Companys Condensed Consolidated Financial Statements.
Push Down Accounting
In November 2014, the FASB issued ASU No. 2014-17 Business Combinations (Topic 805): Pushdown Accounting.
The amendments in the ASU provide an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. An acquired entity may elect the option to apply pushdown accounting in the reporting period in which the change-in-control event occurs. An acquired entity should determine whether to elect to apply pushdown accounting for each individual change-in-control event in which an acquirer obtains control of the acquired entity. If pushdown accounting is not applied in the reporting period in which the change-in-control event occurs, an acquired entity will have the option to elect to apply pushdown accounting in a subsequent reporting period to the acquired entitys most recent change-in-control event. If pushdown accounting is applied to an individual change-in-control event, that election is irrevocable. The amendments in this ASU are effective November 18, 2014.
In May 2015, the FASB issued ASU No. 2015-08, Business Combinations (Topic 805): Pushdown Accounting - Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115, to remove Securities and Exchange Commission (the SEC) staff guidance on pushdown accounting from the Accounting Standards Codification. The SEC staff had previously rescinded its guidance with the issuance of Staff Accounting Bulletin No. 115 when the FASB issued its own pushdown accounting guidance in November 2014. The ASU is effective immediately. The adoption of this ASU did not have an impact on our condensed consolidated and combined financial statements.
Future Application of Accounting Standards
Short-Duration Contracts
In May 2015, the FASB issued Accounting Standards Update (ASU) No. 2015-09 Financial Services-Insurance (Topic 944)- Disclosures about Short-Duration Contracts, which requires insurance entities to disclose for annual reporting periods information about the liability for unpaid claims and claim adjustment expenses. The ASU also requires insurance entities to disclose information about significant changes in methodologies and assumptions used to calculate the liability for unpaid claims and claim adjustment expenses, including reasons for the change and the effects on the financial statements.
In addition, the ASU requires insurance entities to disclose for annual and interim reporting periods a roll-forward of the liability for unpaid claims and claim adjustment expenses. For health insurance claims, the amendments require the disclosure of the total of incurred-but-not-reported liabilities and expected development on reported claims included in the liability for unpaid claims and claim adjustment expenses. The ASU is effective for the Company for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. Early adoption is permitted.
The Company is currently evaluating the impact of the ASU on its disclosures and does not expect to elect early adoption.
Consolidation
In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis , which is intended to improve certain areas of consolidation guidance for legal entities such as limited partnerships, limited liability companies, and securitization structures. The ASU will reduce the number of consolidation models. The ASU will be effective on January 1, 2016. Early adoption is permitted, including adoption in an interim period. The Company is evaluating the effect of ASU No. 2015-02 on its financial statements upon its adoption on January 1, 2016 and does not expect to elect early adoption.
Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers , which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. The original effective date of the ASU was January 1, 2017. However, in July 2015, the FASB agreed to extend the effective date to January 1, 2018. Early application is permitted but not before the original effective date. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU No. 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its financial statements.
Accounting for Financial InstrumentsCredit Losses
In December 2012, the FASB issued a proposed ASU, Financial Instruments-Credit Losses . This proposed ASU, or exposure draft, was issued for public comment in order to allow stakeholders the opportunity to review the proposal and provide comments to the FASB and does not constitute accounting guidance until a final ASU is issued.
The exposure draft contains proposed guidance developed by the FASB with the goal of improving financial reporting about expected credit losses on loans, securities and other financial assets held by banks, financial institutions and other organizations. The exposure draft proposes a new accounting model intended to require earlier recognition of credit losses, while also providing additional transparency about credit risk.
The FASBs proposed model would utilize an expected credit loss measurement objective for the recognition of credit losses for loans, held-to-maturity securities and other receivables at the time the financial asset is originated or acquired and adjusted each period for changes in expected credit losses. For available for sale (AFS) securities where fair value is less than cost, impairment would be recognized in the allowance for credit losses and adjusted each period for changes in credit. This would replace the multiple existing impairment models in GAAP, which generally require that a loss be incurred before it is recognized.
The FASBs proposed model represents a significant departure from existing GAAP, and may result in material changes to the Companys accounting for financial instruments. The impact of the FASBs final ASU on the Companys financial statements will be assessed when it is issued. The exposure draft does not contain a proposed effective date; this would be included in the final ASU, when issued.
(3) Summary of Significant Accounting Policies
The Companys accounting policies are fundamental to understanding managements discussion and analysis of the results of operations and financial condition. The Company has identified six policies as being significant because they require management to make subjective and/or complex judgments about matters that are inherently uncertain. These policies relate to valuations of financial instruments, allowance for loan losses, securitizations, insurance policy and claim reserves, income taxes and litigation accruals. These significant accounting policies are further described under Note 2 Summary of Significant
Accounting Policies to the annual audited Consolidated and Combined Financial Statements and related notes as of and for the year ended December 31, 2014.
(4) Business Segments
The Company evaluates the results of its operations through two reportable segments: Lending and Insurance.
The Lending segment primarily originates, services and, from time to time, securitizes unsecured personal loans and personal loans secured by autos through its community-based branch network. Prior to January 6, 2014, the Lending segment included real estate loans to nonprime consumers serviced by the Company. The Company ceased originating real estate loans as of June 1, 2012 and transferred its remaining real estate loans to affiliates on January 1, 2014.
The Insurance segment writes and reinsures credit life, credit disability, credit involuntary unemployment insurance (IUI), collateral protection, term life, accidental death, and hospital indemnity policies.
The chief operating decision maker evaluates the operating results and performance of the Lending and Insurance segments through Income before income taxes on the Condensed Consolidated and Combined Statements of Income .
The following tables summarize certain information by segment:
|
|
Three Months Ended September 30, |
|
||||||||||||||||
|
|
Net interest revenue |
|
Operating expenses |
|
Income before
|
|
||||||||||||
(In millions of dollars) |
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
||||||
Lending |
|
$ |
445 |
|
$ |
463 |
|
$ |
180 |
|
$ |
159 |
|
$ |
169 |
|
$ |
166 |
|
Insurance |
|
14 |
|
16 |
|
29 |
|
29 |
|
26 |
|
36 |
|
||||||
Intersegment eliminations and reclassifications |
|
|
|
|
|
(10 |
) 1 |
(11 |
) 1 |
|
|
|
|
||||||
Total |
|
$ |
459 |
|
$ |
479 |
|
$ |
199 |
|
$ |
177 |
|
$ |
195 |
|
$ |
202 |
|
|
|
Nine Months Ended September 30, |
|
||||||||||||||||
|
|
Net interest revenue |
|
Operating expenses |
|
Income before
|
|
||||||||||||
(In millions of dollars) |
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
||||||
Lending |
|
$ |
1,310 |
|
$ |
1,334 |
|
$ |
524 |
|
$ |
474 |
|
$ |
416 |
|
$ |
529 |
|
Insurance |
|
42 |
|
46 |
|
88 |
|
89 |
|
97 |
|
120 |
|
||||||
Intersegment eliminations and reclassifications |
|
|
|
|
|
(30 |
) 1 |
(31 |
) 1 |
|
|
|
|
||||||
Total |
|
$ |
1,352 |
|
$ |
1,380 |
|
$ |
582 |
|
$ |
532 |
|
$ |
513 |
|
$ |
649 |
|
1 Represents commissions charged to the Insurance segment by the Lending segment for insurance products sold through the Lending branch network, which are eliminated in consolidation and combination.
The following table summarizes total assets by segment:
|
|
Total assets |
|
||||
(In millions of dollars) |
|
September 30,
|
|
December 31,
|
|
||
Lending |
|
$ |
9,371 |
|
$ |
8,537 |
|
Insurance |
|
1,600 |
|
1,624 |
|
||
Intersegment eliminations and reclassifications 1 |
|
(406 |
) |
(415 |
) |
||
Total |
|
$ |
10,565 |
|
$ |
9,746 |
|
1 Represents unearned premium and claim reserves related to the Companys customers that is managed as a liability for segment reporting purposes.
Most of the revenue generated by the Companys business segments is derived from U.S. clients. Neither business segment earned revenue from a single external customer that was 10% or more of total consolidated or combined revenue.
(5) Interest Revenue and Expense
The following table summarizes interest revenue, interest expense and provision for credit losses:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
||||||||
(In millions of dollars) |
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
||||
Interest revenue: |
|
|
|
|
|
|
|
|
|
||||
Finance interest and other charges |
|
$ |
525 |
|
$ |
511 |
|
$ |
1,542 |
|
$ |
1,496 |
|
Investment revenue |
|
14 |
|
16 |
|
42 |
|
46 |
|
||||
Total interest revenue |
|
539 |
|
527 |
|
1,584 |
|
1,542 |
|
||||
Interest expense: |
|
|
|
|
|
|
|
|
|
||||
Related party debt |
|
6 |
|
36 |
|
45 |
|
145 |
|
||||
Third-party debt |
|
74 |
|
12 |
|
187 |
|
17 |
|
||||
Total interest expense |
|
80 |
|
48 |
|
232 |
|
162 |
|
||||
Net interest revenue |
|
459 |
|
479 |
|
1,352 |
|
1,380 |
|
||||
Provision for credit losses |
|
113 |
|
156 |
|
421 |
|
386 |
|
||||
Net interest revenue after provision for credit losses |
|
$ |
346 |
|
$ |
323 |
|
$ |
931 |
|
$ |
994 |
|
(6) Investments
The following tables summarize amortized cost, gross unrealized gains and losses and estimated fair value of investments, which the Company classifies as AFS:
|
|
September 30, 2015 |
|
||||||||||
|
|
Amortized |
|
Gross unrealized |
|
Fair |
|
||||||
(In millions of dollars) |
|
cost |
|
Gains |
|
Losses |
|
value |
|
||||
Fixed maturity securities: |
|
|
|
|
|
|
|
|
|
||||
Mortgage-backed: |
|
|
|
|
|
|
|
|
|
||||
U.S. government agency guaranteed |
|
$ |
55 |
|
$ |
4 |
|
$ |
|
|
$ |
59 |
|
Prime |
|
4 |
|
|
|
|
|
4 |
|
||||
Commercial |
|
60 |
|
3 |
|
|
|
63 |
|
||||
Total mortgage-backed |
|
119 |
|
7 |
|
|
|
126 |
|
||||
U.S. Treasury and federal agency |
|
26 |
|
|
|
|
|
26 |
|
||||
State and municipal |
|
49 |
|
1 |
|
|
|
50 |
|
||||
Foreign government |
|
129 |
|
7 |
|
1 |
|
135 |
|
||||
Corporate |
|
863 |
|
41 |
|
14 |
|
890 |
|
||||
Other debt |
|
63 |
|
|
|
|
|
63 |
|
||||
Total fixed maturity securities |
|
1,249 |
|
56 |
|
15 |
|
1,290 |
|
||||
Equity securities |
|
34 |
|
7 |
|
1 |
|
40 |
|
||||
Short-term and other securities |
|
73 |
|
|
|
|
|
73 |
|
||||
Total investments |
|
$ |
1,356 |
|
$ |
63 |
|
$ |
16 |
|
$ |
1,403 |
|
|
|
December 31, 2014 |
|
||||||||||
|
|
Amortized |
|
Gross unrealized |
|
Fair |
|
||||||
(In millions of dollars) |
|
cost |
|
Gains |
|
Losses |
|
value |
|
||||
Fixed maturity securities: |
|
|
|
|
|
|
|
|
|
||||
Mortgage-backed: |
|
|
|
|
|
|
|
|
|
||||
U.S. government agency guaranteed |
|
$ |
63 |
|
$ |
4 |
|
$ |
|
|
$ |
67 |
|
Prime |
|
5 |
|
|
|
|
|
5 |
|
||||
Commercial |
|
53 |
|
2 |
|
|
|
55 |
|
||||
Total mortgage-backed |
|
121 |
|
6 |
|
|
|
127 |
|
||||
U.S. Treasury and federal agency |
|
27 |
|
|
|
|
|
27 |
|
||||
State and municipal |
|
47 |
|
1 |
|
|
|
48 |
|
||||
Foreign government |
|
140 |
|
8 |
|
|
|
148 |
|
||||
Corporate |
|
849 |
|
55 |
|
6 |
|
898 |
|
||||
Other debt |
|
63 |
|
|
|
|
|
63 |
|
||||
Total fixed maturity securities |
|
1,247 |
|
70 |
|
6 |
|
1,311 |
|
||||
Equity securities |
|
40 |
|
10 |
|
1 |
|
49 |
|
||||
Short-term and other securities |
|
31 |
|
|
|
|
|
31 |
|
||||
Total investments |
|
$ |
1,318 |
|
$ |
80 |
|
$ |
7 |
|
$ |
1,391 |
|
Management reviews the investment portfolio on a periodic basis to determine the cause of declines in the fair value of each security in an unrealized loss position. Evaluations of the causes of the unrealized losses are performed to determine whether the impairment is temporary or other-than-temporary in nature. Any credit-related impairment related to debt securities that the Company does not plan to sell and is not likely to be required to sell is recognized in the Condensed Consolidated and Combined Statements of Income, with the non-credit-related impairment recognized in accumulated other comprehensive income (AOCI). For other debt securities with other-than-temporary-impairment (OTTI), the entire impairment is recognized in the Condensed Consolidated and Combined Statements of Income. Equity securities deemed other-than-temporarily impaired are written down to fair value, with the full difference between fair value and cost recognized in earnings.
As a result of this analysis, the Company recorded pre-tax losses for OTTI, primarily related to equity securities, of $1 million and $3 million for the three and nine months ended September 30, 2015. The Company recorded no pre-tax losses for OTTI for the three and nine months ended September 30, 2014. Pre-tax losses for OTTI are classified in Realized gain on sales and impairments of investments, net on the Condensed Consolidated and Combined Statements of Income.
The following tables summarize a three and nine-month roll-forward of the credit-related impairments recognized in earnings for AFS debt securities held at September 30, 2015 and 2014 that the Company does not intend to sell nor likely will be required to sell:
|
|
Cumulative OTTI credit losses recognized in earnings |
|
|||||||||||||
(In millions of dollars) |
|
Balance,
|
|
Credit impairments
|
|
Credit impairments
|
|
Reductions due to
|
|
Balance,
|
|
|||||
AFS debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Mortgage-backed |
|
$ |
1 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
1 |
|
Foreign government |
|
|
|
|
|
|
|
|
|
|
|
|||||
Corporate |
|
2 |
|
|
|
|
|
|
|
2 |
|
|||||
All other debt |
|
|
|
|
|
|
|
|
|
|
|
|||||
Total OTTI credit losses recognized for AFS debt securities |
|
$ |
3 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
3 |
|
|
|
Cumulative OTTI credit losses recognized in earnings |
|
|||||||||||||
(In millions of dollars) |
|
Balance,
|
|
Credit impairments
|
|
Credit impairments
|
|
Reductions due to
|
|
Balance,
|
|
|||||
AFS debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Mortgage-backed |
|
$ |
1 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
1 |
|
Foreign government |
|
|
|
|
|
|
|
|
|
|
|
|||||
Corporate |
|
3 |
|
|
|
|
|
|
|
3 |
|
|||||
All other debt |
|
1 |
|
|
|
|
|
|
|
1 |
|
|||||
Total OTTI credit losses recognized for AFS debt securities |
|
$ |
5 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
5 |
|
|
|
Cumulative OTTI credit losses recognized in earnings |
|
|||||||||||||
(In millions of dollars) |
|
Balance,
|
|
Credit impairments
|
|
Credit impairments
|
|
Reductions due to
|
|
Balance,
|
|
|||||
AFS debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Mortgage-backed |
|
$ |
1 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
1 |
|
Foreign government |
|
|
|
|
|
|
|
|
|
|
|
|||||
Corporate |
|
3 |
|
|
|
|
|
(1 |
) |
2 |
|
|||||
All other debt |
|
1 |
|
|
|
|
|
(1 |
) |
|
|
|||||
Total OTTI credit losses recognized for AFS debt securities |
|
$ |
5 |
|
$ |
|
|
$ |
|
|
$ |
(2 |
) |
$ |
3 |
|
|
|
Cumulative OTTI credit losses recognized in earnings |
|
|||||||||||||
(In millions of dollars) |
|
Balance,
|
|
Credit impairments
|
|
Credit impairments
|
|
Reductions due to
|
|
Balance,
|
|
|||||
AFS debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Mortgage-backed |
|
$ |
1 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
1 |
|
Foreign government |
|
|
|
|
|
|
|
|
|
|
|
|||||
Corporate |
|
3 |
|
|
|
|
|
|
|
3 |
|
|||||
All other debt |
|
1 |
|
|
|
|
|
|
|
1 |
|
|||||
Total OTTI credit losses recognized for AFS debt securities |
|
$ |
5 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
5 |
|
The following table summarizes amortized cost and fair value by contractual maturity:
|
|
September 30, 2015 |
|
December 31, 2014 |
|
||||||||
(In millions of dollars) |
|
Amortized
|
|
Fair
|
|
Amortized
|
|
Fair
|
|
||||
Mortgage-backed: |
|
|
|
|
|
|
|
|
|
||||
Due within 1 year |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
After 1 but within 5 years |
|
1 |
|
1 |
|
2 |
|
2 |
|
||||
After 5 but within 10 years |
|
5 |
|
5 |
|
6 |
|
6 |
|
||||
After 10 years |
|
113 |
|
120 |
|
113 |
|
119 |
|
||||
Total |
|
119 |
|
126 |
|
121 |
|
127 |
|
||||
U.S. Treasury and federal agency: |
|
|
|
|
|
|
|
|
|
||||
Due within 1 year |
|
3 |
|
3 |
|
1 |
|
1 |
|
||||
After 1 but within 5 years |
|
12 |
|
12 |
|
14 |
|
14 |
|
||||
After 5 but within 10 years |
|
11 |
|
11 |
|
12 |
|
12 |
|
||||
After 10 years |
|
|
|
|
|
|
|
|
|
||||
Total |
|
26 |
|
26 |
|
27 |
|
27 |
|
||||
State and municipal: |
|
|
|
|
|
|
|
|
|
||||
Due within 1 year |
|
3 |
|
3 |
|
|
|
|
|
||||
After 1 but within 5 years |
|
19 |
|
19 |
|
13 |
|
13 |
|
||||
After 5 but within 10 years |
|
23 |
|
24 |
|
29 |
|
30 |
|
||||
After 10 years |
|
4 |
|
4 |
|
5 |
|
5 |
|
||||
Total |
|
49 |
|
50 |
|
47 |
|
48 |
|
||||
Foreign government: |
|
|
|
|
|
|
|
|
|
||||
Due within 1 year |
|
19 |
|
19 |
|
15 |
|
15 |
|
||||
After 1 but within 5 years |
|
55 |
|
59 |
|
68 |
|
73 |
|
||||
After 5 but within 10 years |
|
52 |
|
54 |
|
57 |
|
60 |
|
||||
After 10 years |
|
3 |
|
3 |
|
|
|
|
|
||||
Total |
|
129 |
|
135 |
|
140 |
|
148 |
|
||||
Corporate and other: |
|
|
|
|
|
|
|
|
|
||||
Due within 1 year |
|
85 |
|
86 |
|
91 |
|
92 |
|
||||
After 1 but within 5 years |
|
432 |
|
459 |
|
404 |
|
437 |
|
||||
After 5 but within 10 years |
|
313 |
|
314 |
|
331 |
|
344 |
|
||||
After 10 years |
|
96 |
|
94 |
|
86 |
|
88 |
|
||||
Total |
|
926 |
|
953 |
|
912 |
|
961 |
|
||||
Total fixed maturity securities |
|
$ |
1,249 |
|
$ |
1,290 |
|
$ |
1,247 |
|
$ |
1,311 |
|
Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
The following tables summarize the fair value of investment securities for which an OTTI has not been recognized that have been in an unrealized loss position for less than 12 months or for 12 months or longer:
|
|
September 30, 2015 |
|
||||||||||||||||
|
|
Less than twelve
|
|
Twelve months
|
|
Total |
|
||||||||||||
(In millions of dollars) |
|
Fair
|
|
Gross
|
|
Fair
|
|
Gross
|
|
Fair
|
|
Gross
|
|
||||||
Mortgage-backed |
|
$ |
8 |
|
$ |
|
|
$ |
6 |
|
$ |
|
|
$ |
14 |
|
$ |
|
|
U.S. Treasury and federal agency |
|
9 |
|
|
|
|
|
|
|
9 |
|
|
|
||||||
State and municipal |
|
2 |
|
|
|
2 |
|
|
|
4 |
|
|
|
||||||
Foreign government |
|
11 |
|
|
|
2 |
|
1 |
|
13 |
|
1 |
|
||||||
Corporate |
|
181 |
|
8 |
|
45 |
|
6 |
|
226 |
|
14 |
|
||||||
Other debt |
|
10 |
|
|
|
7 |
|
|
|
17 |
|
|
|
||||||
Equity |
|
7 |
|
1 |
|
|
|
|
|
7 |
|
1 |
|
||||||
Total |
|
$ |
228 |
|
$ |
9 |
|
$ |
62 |
|
$ |
7 |
|
$ |
290 |
|
$ |
16 |
|
|
|
December 31, 2014 |
|
||||||||||||||||
|
|
Less than twelve
|
|
Twelve months or
|
|
Total |
|
||||||||||||
(In millions of dollars) |
|
Fair
|
|
Gross
|
|
Fair
|
|
Gross
|
|
Fair
|
|
Gross
|
|
||||||
Mortgage-backed |
|
$ |
14 |
|
$ |
|
|
$ |
9 |
|
$ |
|
|
$ |
23 |
|
$ |
|
|
U.S. Treasury and federal agency |
|
5 |
|
|
|
9 |
|
|
|
14 |
|
|
|
||||||
State and municipal |
|
5 |
|
|
|
5 |
|
|
|
10 |
|
|
|
||||||
Foreign government |
|
2 |
|
|
|
2 |
|
|
|
4 |
|
|
|
||||||
Corporate |
|
90 |
|
2 |
|
76 |
|
4 |
|
166 |
|
6 |
|
||||||
Other debt |
|
26 |
|
|
|
10 |
|
|
|
36 |
|
|
|
||||||
Equity |
|
5 |
|
1 |
|
|
|
|
|
5 |
|
1 |
|
||||||
Total |
|
$ |
147 |
|
$ |
3 |
|
$ |
111 |
|
$ |
4 |
|
$ |
258 |
|
$ |
7 |
|
At September 30, 2015, the Company had 857 investment securities in a gross unrealized loss position. The unrealized losses are primarily due to increases in interest rates primarily as a result of widening of interest rate spreads. The evidence considered by management in reaching the conclusion that the unrealized losses are not other-than-temporary includes analyst views, financial performance of the issuers and underlying collateral, cash flow projections, ratings and rating downgrades and available credit enhancements. Based on the analysis of the evidence, management has determined it is probable that the Company will collect all amounts due according to the contractual terms of the investment securities. The Company has no intent to sell the investment securities and believes it likely will not be required to sell the investment securities before recovery of the amortized cost basis.
The following tables summarize sales proceeds and Realized gain on sales and impairments of investments , net on the Condensed Consolidated and Combined Statements of Income:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
||||||||
(In millions of dollars) |
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
||||
Sales proceeds: |
|
|
|
|
|
|
|
|
|
||||
Fixed income and equity investments |
|
$ |
21 |
|
$ |
52 |
|
$ |
70 |
|
$ |
69 |
|
Short-term investments, net of purchases |
|
(7 |
) |
|
|
|
|
|
|
||||
Total proceeds on sales of investments |
|
$ |
14 |
|
$ |
52 |
|
$ |
70 |
|
$ |
69 |
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
||||||||
(In millions of dollars) |
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
||||
Gross pre-tax gains (losses) on investment securities: |
|
|
|
|
|
|
|
|
|
||||
Gains |
|
$ |
1 |
|
$ |
1 |
|
$ |
7 |
|
$ |
3 |
|
Losses |
|
|
|
(1 |
) |
(2 |
) |
(2 |
) |
||||
Net pre-tax gains on investment securities |
|
1 |
|
|
|
5 |
|
1 |
|
||||
OTTI |
|
(1 |
) |
|
|
(3 |
) |
|
|
||||
Realized gain on sales and impairments of investments, net |
|
$ |
|
|
$ |
|
|
$ |
2 |
|
$ |
1 |
|
At September 30, 2015 and December 31, 2014, investment securities with an approximate carrying value of $149 million and $167 million were on deposit with regulatory authorities as required by insurance regulations.
(7) Consumer Finance Receivables
The following table summarizes net consumer finance receivables:
(In millions of dollars) |
|
September 30,
|
|
December 31,
|
|
||
Total loans |
|
$ |
8,397 |
|
$ |
8,347 |
|
Unearned premium and claim reserves |
|
(406 |
) |
(415 |
) |
||
Accrued interest receivable |
|
88 |
|
89 |
|
||
Consumer finance receivables 1 |
|
8,079 |
|
8,021 |
|
||
Allowance for loan losses |
|
(666 |
) |
(695 |
) |
||
Net consumer finance receivables |
|
$ |
7,413 |
|
$ |
7,326 |
|
1 Presented net of unearned revenue and deferred costs of $1.5 billion at September 30, 2015 and December 31, 2014.
Geographic diversification of consumer finance receivables reduces the concentration of credit risk associated with economic stress in any one state. The Companys entire personal loan portfolio is serviced within the United States. At September 30, 2015 and December 31, 2014, no state or customer comprised a significant portion of the Companys total consumer finance receivables balance.
Refer to Note 15 for further discussion on the fair value of consumer finance receivables. Refer to Note 16 for discussion on the transfer of real estate loans.
Credit Quality Indicators
Credit quality indicators that are actively monitored include delinquency status and Fair Isaac Corporation (FICO) credit scores.
Delinquency Status
Delinquency status is carefully monitored and considered a key indicator of credit quality. The Company considers a loan delinquent if a monthly payment has not been received by the close of business on the loans next due date. All loans are classified as non-accrual when loan payments are 90 days contractually past due.
The following table summarizes consumer finance receivables delinquencies and non-accrual loans:
(In millions of dollars) |
|
September 30,
|
|
December 31,
|
|
||
Current 1 |
|
$ |
8,023 |
|
$ |
7,946 |
|
30 - 89 days past due |
|
158 |
|
160 |
|
||
90 days or more past due (non-accrual) |
|
216 |
|
241 |
|
||
Total loans |
|
$ |
8,397 |
|
$ |
8,347 |
|
1 Loans less than 30 days past due are presented as current.
Credit Scores
Independent credit agencies rate an individuals risk for assuming debt based on the individuals credit history and assign every consumer a FICO credit score. These scores are continually updated by the agencies based upon an individuals credit actions (e.g., taking out a loan, missed or late payments, etc.). FICO scores are updated monthly for substantially the entire portfolio or, otherwise, on a quarterly basis.
The following table summarizes details on FICO scores:
(In millions of dollars) |
|
September 30,
|
|
December 31,
|
|
||
Less than 620 |
|
$ |
3,688 |
|
$ |
3,653 |
|
Equal to or greater than 620 but less than 660 |
|
2,260 |
|
2,244 |
|
||
Equal to or greater than 660 |
|
2,449 |
|
2,450 |
|
||
Total loans |
|
$ |
8,397 |
|
$ |
8,347 |
|
Allowance for Loan Losses
The following table summarizes the change in the allowance for loan losses on consumer finance receivables:
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
||||||||
(In millions of dollars) |
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
||||
Balance at beginning of period |
|
$ |
684 |
|
$ |
604 |
|
$ |
695 |
|
$ |
676 |
|
Provision for credit losses |
|
113 |
|
156 |
|
421 |
|
386 |
|
||||
Amounts charged off |
|
(147 |
) |
(131 |
) |
(493 |
) |
(417 |
) |
||||
Recovery of amounts previously charged off |
|
16 |
|
14 |
|
43 |
|
43 |
|
||||
Other |
|
|
|
|
|
|
|
(45 |
) 1 |
||||
Balance at end of period |
|
$ |
666 |
|
$ |
643 |
|
$ |
666 |
|
$ |
643 |
|
Total loans |
|
$ |
8,397 |
|
$ |
8,278 |
|
$ |
8,397 |
|
$ |
8,278 |
|
Ratio of allowance for loan losses to total loans at end of period |
|
7.93 |
% |
7.77 |
% |
7.93 |
% |
7.77 |
% |
1 Related to a non-provision transfer of reserves associated with loan sale transactions.
The following table summarizes the allowance for loan losses and investment in loans:
(In millions of dollars) |
|
September 30,
|
|
December 31,
|
|
||
Allowance for loan losses: |
|
|
|
|
|
||
Determined in accordance with ASC 450-20 |
|
$ |
443 |
|
$ |
482 |
|
Determined in accordance with ASC 310-10-35 |
|
223 |
|
213 |
|
||
Total allowance for loan losses |
|
$ |
666 |
|
$ |
695 |
|
Loans, net of unearned income: |
|
|
|
|
|
||
Non-TDR loans evaluated for impairment in accordance with ASC 450-20 |
|
$ |
7,890 |
|
$ |
7,851 |
|
TDR loans evaluated for impairment in accordance with ASC 310-10-35 |
|
507 |
|
496 |
|
||
Total loans |
|
$ |
8,397 |
|
$ |
8,347 |
|
Impaired Loans
Impaired loans are those for which the Company believes it is not probable that it will collect all amounts due according to the original contractual terms of the loan. Impaired loans include loans whose terms have been modified due to the borrowers financial difficulties and for which the Company has granted a concession to the borrower. These modifications may include interest rate reductions and/or principal forgiveness. Impaired loans exclude loans that have not been modified and are carried on a non-accrual basis. In addition, impaired loans exclude substantially all loans modified pursuant to the Companys short-term modification programs (i.e., for periods of 12 months or less) that were modified after December 31, 2008 and prior to January 1, 2011. Outstanding loans included in these short-term programs amounted to $8 million and $14 million at September 30, 2015 and December 31, 2014.
The following tables summarize impaired loans:
(In millions of dollars) |
|
September 30,
|
|
December 31,
|
|
||
|
|
|
|
|
|
||
Recorded investment 1 |
|
$ |
507 |
|
$ |
496 |
|
Unpaid principal balance |
|
507 |
|
495 |
|
||
Related specific allowance 2 |
|
223 |
|
213 |
|
||
Average carrying value 3 |
|
497 |
|
489 |
|
||
1 Recorded investment in consumer finance receivables includes net deferred loan fees and costs, unamortized premium or discount and direct write-downs.
2 Classified in Allowance for loan losses on the Condensed Consolidated Statements of Financial Position.
3 Average carrying value represents the average recorded investment ending balance for the last four quarters ended September 30, 2015 and December 31, 2014, and does not include related specific allowance.
The following table summarizes interest income recognized on impaired loans:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
||||||||
(In millions of dollars) |
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Interest income recognized |
|
$ |
21 |
|
$ |
22 |
|
$ |
64 |
|
$ |
67 |
|
Troubled Debt Restructurings
The Company may make modifications to its loans for various reasons. Such modifications may result in long-term or short-term rate reductions and payment deferrals. When a modification is made to a loan for a borrower experiencing financial difficulty and the terms are considered below market terms for that borrower, the Company reports such modified loans as TDRs.
The following table summarizes TDR activity and default information:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
||||||||
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
||||
Number of loans modified |
|
12,581 |
|
10,399 |
|
33,572 |
|
31,439 |
|
||||
Post-modification recorded investment (in millions of dollars) |
|
$ |
94 |
|
$ |
77 |
|
$ |
250 |
|
$ |
231 |
|
Average interest rate reduction |
|
5.56 |
% |
5.74 |
% |
6.51 |
% |
5.95 |
% |
||||
TDRs for which a payment default (defined as 60 days past due) occurred within one year of the modification (in millions of dollars) |
|
$ |
20 |
|
$ |
21 |
|
$ |
54 |
|
$ |
52 |
|
(8) Intangible Assets
Intangible assets are comprised of the present value of future profits (PVFP) of purchased insurance contracts. The following table summarizes intangible assets:
|
|
September 30, 2015 |
|
December 31, 2014 |
|
||||||||||||||
(In millions of dollars) |
|
Gross
|
|
Accumulated
|
|
Net
|
|
Gross
|
|
Accumulated
|
|
Net
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total intangible assets |
|
$ |
226 |
|
$ |
(164 |
) |
$ |
62 |
|
$ |
226 |
|
$ |
(155 |
) |
$ |
71 |
|
Amortization expense was $3 million and $9 million for the three and nine months ended September 30, 2015 and $2 million and $8 million for the three and nine months ended September 30, 2014 and is classified in Other operating expense on the Condensed Consolidated and Combined Statements of Income.
(9) Premises and Equipment, net
The following table summarizes the cost of premises and equipment and related accumulated depreciation and amortization:
(In millions of dollars) |
|
September 30,
|
|
December 31,
|
|
||
|
|
|
|
|
|
||
Leasehold improvements |
|
$ |
95 |
|
$ |
83 |
|
Equipment |
|
34 |
|
31 |
|
||
Software |
|
75 |
|
82 |
|
||
Premises and equipment |
|
204 |
|
196 |
|
||
Less accumulated depreciation and amortization |
|
(114 |
) |
(102 |
) |
||
Premises and equipment, net |
|
$ |
90 |
|
$ |
94 |
|
Depreciation and amortization expense was $6 million and $16 million for the three and nine months ended September 30, 2015 and $2 million and $6 million for the three and nine months ended September 30, 2014. Rental expense (principally for offices and computer equipment) was $12 million and $35 million for the three and nine months ended September 30, 2015 and $11 million and $34 million for the three and nine months ended September 30, 2014. Non-base rent expenses, included in rental expense, (principally real estate taxes and utilities) were $0 million and $2 million for the three and nine months ended September 30, 2015 and $0 million and $2 million for the three and nine months ended September 30, 2014. These amounts are classified in Occupancy expense and Technology and communications expense on the Condensed Consolidated and Combined Statements of Income, based on the nature of the related asset.
In addition to the above, allocated rental expenses due to affiliates of $1 million and $4 million for the three and nine months ended September 30, 2015 and $3 million and $5 million for the three and nine months ended September 30, 2014 were incurred. Refer to Note 16 for further discussion of expense allocations.
Premises and equipment are tested for impairment annually and when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Impairment is recognized if the carrying amount is not recoverable and exceeds the fair value of the assets. At September 30, 2015 and December 31, 2014, no premises and equipment were impaired.
Refer to Note 16 for transfers of premises and equipment to and from affiliates.
(10) Long-term Debt and Revolving Credit Facility
Long-term Debt
Long-term debt is accounted for at cost. Debt issuance costs related to long-term debt are capitalized and classified in Long-term debt on the Condensed Consolidated Statements of Financial Position. Amortization of debt issuance costs related to long-term debt is classified in Interest expense on the Condensed Consolidated and Combined Statements of Income over the earlier of the contractual term of the debt or the earliest call date that management would consider exercising. The following table summarizes certain information relating to long-term debt:
|
|
Weighted
|
|
Maturity |
|
September 30,
|
|
December 31,
|
|
||
|
|
interest rate |
|
date |
|
(In millions of dollars) |
|
||||
2019 Notes |
|
6.75 |
% |
2019 |
|
$ |
700 |
|
$ |
700 |
|
2021 Notes |
|
7.25 |
% |
2021 |
|
800 |
|
800 |
|
||
Senior unsecured notes |
|
|
|
|
|
1,500 |
|
1,500 |
|
||
OneMain Financial Issuance Trust 2014-1 |
|
2.54 |
% |
2024 |
|
760 |
|
760 |
|
||
OneMain Financial Issuance Trust 2014-2 |
|
2.93 |
% |
2024 |
|
1,184 |
|
1,184 |
|
||
OneMain Financial Issuance Trust 2015-1 |
|
3.74 |
% |
2026 |
|
1,229 |
|
|
|
||
OneMain Financial Issuance Trust 2015-2 |
|
3.07 |
% |
2025 |
|
1,250 |
|
|
|
||
OneMain Financial Issuance Trust 2015-3 |
|
4.21 |
% |
2028 |
|
293 |
|
|
|
||
Securitizations |
|
|
|
|
|
4,716 |
|
1,944 |
|
||
Less: Debt issuance costs |
|
|
|
|
|
38 |
|
36 |
|
||
Total long-term debt |
|
|
|
|
|
$ |
6,178 |
|
$ |
3,408 |
|
Senior Unsecured Notes
On December 11, 2014, OMFH completed an issuance of $1.5 billion of unsecured debt, of which $700 million aggregate principal amount of 6.75% fixed-rate senior notes will mature in 2019 (the 2019 Notes) and $800 million aggregate principal amount of 7.25% fixed-rate senior notes will mature in 2021 (the 2021 Notes and, together with the 2019 Notes, the Notes).
Each series of Notes are:
· general unsecured senior obligations of the Company;
· equal in right of payment with any existing and future senior indebtedness of the Company;
· subordinated to any existing and future secured indebtedness of the Company to the extent of the value of the assets securing such indebtedness;
· senior in right of payment to any future subordinated indebtedness of the Company;
· subordinated to any existing and future indebtedness and other liabilities, including preferred stock, of non-guarantors; and
· unconditionally guaranteed on a senior unsecured basis by each of the Companys wholly owned domestic subsidiaries other than certain subsidiaries, including the Companys insurance subsidiaries and securitization subsidiaries.
The Notes
The 2019 Notes mature on December 15, 2019 and the 2021 Notes mature on December 15, 2021. Interest on the Notes is payable semi-annually in arrears on June 15 and December 15 of each year, beginning on June 15, 2015. The Company may redeem the Notes, in whole or in part, at its option, at different prices throughout the term of the debt.
Certain Covenants
The indenture under which the Notes were issued does not contain financial covenants but does contain a number of restrictive non-financial covenants that impose significant operating and financial restrictions on the Company and may limit its ability to engage in acts that may be in the Companys best interest, including, but not limited to:
· limitations on restricted payments;
· limitations on certain types of indebtedness subject to financial ratios;
· limitations on restrictions on distributions from certain subsidiaries;
· limitations on affiliate transactions;
· limitations on sales of assets and subsidiary stock;
· limitations on the type of business conducted;
· limitations on additional guarantees; and
· certain limitations on mergers and consolidations.
As of September 30, 2015, the Company is in compliance with all of its covenants.
Suspension of Covenants on Achievement of Investment Grade Status
If and when the Notes achieve investment grade status and no default or event of default has occurred and is continuing under the indenture, the Company will not be subject to the provisions of the covenants referred to above. At September 30, 2015, the Notes had a non-investment grade rating and no default or event of default had occurred.
Guarantees
The obligations of the Company pursuant to the Notes are unconditionally guaranteed, jointly and severally, by each of the Companys subsidiaries (Guarantors) except for certain subsidiaries that are specifically excluded from providing this guarantee, including the VIEs and insurance companies (Non-Guarantors). As of September 30, 2015, the Non-Guarantors accounted for approximately 70% of the Companys total revenue, 82% of total assets and 79%, or $6.6 billion, of total liabilities including trade payables.
Securitizations
On September 29, 2015, the Company completed the securitization of personal loans using the OneMain Financial Issuance Trust 2015-3 (the 2015-3 Trust) formed in April 2015, resulting in the issuance of $293 million of 3.63% Class A, 4.16% Class B, 5.82% Class C and 6.94% Class D fixed rate notes collateralized by $329 million of loans. The notes are due November 18, 2028 and may be called at the option of the 2015-3 Trust on or after the payment date occurring in September 2019 at a redemption price equal to 100% of the aggregate note principal balance at the time of the call. The 2015-3 Trust will make payments of interest on the notes during the revolving period, which ends August 31, 2020, and make principal and interest payments thereafter. During the revolving period, additional loans may be transferred to the 2015-3 Trust. The loans are restricted from being sold or pledged as collateral and can only be used to pay the liabilities of the 2015-3 Trust while the notes are outstanding. The parent of the 2015-3 Trust is OneMain Financial Funding III LLC, which is a subsidiary of OMFH.
On May 21, 2015, the Company completed the securitization of personal loans using the OneMain Financial Issuance Trust 2015-2 (the 2015-2 Trust) formed in December 2014, resulting in the issuance of $1.3 billion of 2.57% Class A, 3.10% Class B, 4.32% Class C and 5.64% Class D fixed rate notes collateralized by $1.3 billion of loans. The notes are due July 18, 2025 and may be called at the option of the 2015-2 Trust on or after the payment date occurring in May 2017 at a redemption price equal to 100% of the aggregate note principal balance at the time of the call. The 2015-2 Trust will make payments of interest on the notes during the revolving period, which ends April 30, 2017, and make principal and interest payments thereafter. During the revolving period, additional loans may be transferred to the 2015-2 Trust. The loans are restricted from being sold or pledged as collateral and can only be used to pay the liabilities of the 2015-2 Trust while the notes are outstanding. The parent of the 2015-2 Trust is OneMain Financial Funding III LLC, which is a subsidiary of OMFH.
On February 5, 2015, the Company completed the securitization of personal loans using the OneMain Financial Issuance Trust 2015-1 (the 2015-1 Trust) formed in October 2014, resulting in the issuance of $1.2 billion of 3.19% Class A, 3.85% Class B, 5.12% Class C and 6.63% Class D fixed rate notes collateralized by $1.4 billion of loans. The notes are due March 18, 2026 and may be called at the option of the 2015-1 Trust on or after the payment date occurring in January 2018 at a redemption price equal to 101% of the aggregate note principal balance at the time of the call. The 2015-1 Trust will make payments of interest on the notes during the revolving period, which ends December 31, 2017, and make principal and interest payments thereafter. During the revolving period, additional loans may be transferred to the 2015-1 Trust. The loans are restricted from being sold or pledged as collateral and can only be used to pay the liabilities of the 2015-1 Trust while the notes are outstanding. The parent of the 2015-1 Trust is OneMain Financial Funding III LLC, which is a subsidiary of OMFH.
On July 30, 2014, the Company completed the securitization of personal loans and formed OneMain Financial Issuance Trust 2014-2 (the 2014-2 Trust) resulting in the issuance of $1.2 billion of 2.47% Class A, 3.02% Class B, 4.33% Class C and 5.31% Class D fixed rate notes collateralized by $1.3 billion of loans. The notes are due September 18, 2024 and may be called at the option of the 2014-2 Trust on or after April 18, 2016 at a redemption price equal to 101% of the aggregate note principal balance at the time of the call. The 2014-2 Trust will make payments of interest on the notes during the revolving period, which ends June 30, 2016, and make principal and interest payments thereafter. During the revolving period, additional loans may be transferred to the 2014-2 Trust. The loans are restricted from being sold or pledged as collateral and can only be used to pay the liabilities of the 2014-2 Trust while the notes are outstanding. The parent of the 2014-2 Trust is OneMain Financial Funding II, LLC, which is a subsidiary of OMFH.
On April 17, 2014, the Company completed the securitization of personal loans and formed OneMain Financial Issuance Trust 2014-1 (the 2014-1 Trust) resulting in the issuance of $760 million of 2.43% Class A and 3.24% Class B fixed rate notes collateralized by $1.0 billion of loans. The notes are due June 18, 2024 and may be called at the option of the 2014-1 Trust on or after July 18, 2016 at a redemption price equal to 101% of the aggregate note principal balance at the time of the call. The 2014-1 Trust will make payments of interest on the notes during the revolving period, which ends March 31, 2016, and make principal and interest payments thereafter. During the revolving period, additional loans may be transferred to the 2014-1 Trust. The loans are restricted from being sold or pledged as collateral and can only be used to pay the liabilities of the 2014-1 Trust while the notes are outstanding. The parent of the 2014-1 Trust is OneMain Financial Funding, LLC, which is a subsidiary of OMFH.
At September 30, 2015, no default or event of default had occurred related to the securitizations discussed above.
Maturities of Long-term Debt
The following table summarizes future maturities of long-term debt (excluding securitizations) at September 30, 2015:
(In millions of dollars) |
|
2015 |
|
2016 |
|
2017 |
|
2018 |
|
2019 |
|
Thereafter |
|
Securitizations 1 |
|
Total 2 |
|
||||||||
2019 Notes |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
700 |
|
$ |
|
|
$ |
|
|
$ |
700 |
|
2021 Notes |
|
|
|
|
|
|
|
|
|
|
|
800 |
|
|
|
800 |
|
||||||||
Senior unsecured notes |
|
|
|
|
|
|
|
|
|
700 |
|
800 |
|
|
|
1,500 |
|
||||||||
OneMain Financial Issuance Trust 2014-1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
760 |
|
760 |
|
||||||||
OneMain Financial Issuance Trust 2014-2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
1,184 |
|
1,184 |
|
||||||||
OneMain Financial Issuance Trust 2015-1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
1,229 |
|
1,229 |
|
||||||||
OneMain Financial Issuance Trust 2015-2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
1,250 |
|
1,250 |
|
||||||||
OneMain Financial Issuance Trust 2015-3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
293 |
|
293 |
|
||||||||
Securitizations |
|
|
|
|
|
|
|
|
|
|
|
|
|
4,716 |
|
4,716 |
|
||||||||
Total maturities of long-term debt |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
700 |
|
$ |
800 |
|
$ |
4,716 |
|
$ |
6,216 |
|
1 On-balance sheet securitizations are not included in maturities by period due to their variable monthly payments.
2 Excludes $38 million of debt issuance costs.
Refer to Note 15 for information regarding the fair value of long-term debt.
Revolving Line of Credit
On February 3, 2015, the Company entered into a $3.0 billion revolving warehouse facility. The facility has a securitization structure, whereby OneMain Financial Warehouse Trust, a wholly owned statutory trust (Warehouse Trust), has issued Series 2015-A Variable Funding Notes (the notes) that are backed by personal loans originated by the Company from time to time, to a number of financial institutions, which may from time to time include asset-backed commercial paper conduits administered by certain of these financial institutions. During the revolving period of the facility, the Company may sell personal loans into the Warehouse Trust and draw advances against the value of such personal loans, subject to meeting required overcollateralization levels. The lenders will make advances against the notes on a revolving basis through December 31, 2017. The initial maximum principal balance of $3.0 billion will be reduced by $500 million on January 30, 2016 and by an additional $1.0 billion on January 30, 2017. The notes mature on January 18, 2025. During the revolving period, the outstanding note balance may be redeemed, in whole or in part, at the Companys option. The Company incurs a fee during the revolving period for the unused portion of the credit facility. This fee is recorded in Other operating expense on the Condensed Consolidated and Combined Statements of Income. The debt incurred under the warehouse facility is non-recourse to OMFH. The parent of the Warehouse Trust is OneMain Financial Warehouse LLC, which is a subsidiary of OMFH.
Debt issuance costs associated with the revolving credit facility are capitalized and classified in Other assets on the Condensed Consolidated Statements of Financial Position. Amortization of debt issuance costs related to the unused portion is classified in Other operating expense on the Condensed Consolidated and Combined Statements of Income and amortization of debt issuance costs related to the drawn portion is classified in Interest expense on the Condensed Consolidated and Combined Statements of Income.
At September 30, 2015, $1.4 billion of the warehouse facility was drawn and no default or event of default had occurred. Of the $1.4 billion drawn, $1.1 billion is due to third-parties and $284 million is due to an affiliate and is included in Revolving line of credit - related party on the Condensed Consolidated Statements of Financial Position (see Note 16 for additional discussion).
The securitization trusts and Warehouse Trust described above are VIEs consolidated by the Company as their primary beneficiary. Refer to Note 14 for further discussion regarding VIEs.
(11) Insurance
Reinsurance
The Companys use of ceded reinsurance arrangements is limited. The Company has generally used assumed reinsurance agreements to acquire blocks of business in force. Ceded reinsurance arrangements do not discharge the insurance entities or the Company as the primary insurer.
The following tables summarize reinsurance amounts included on the Condensed Consolidated and Combined Statements of Income:
|
|
Three Months Ended September 30, 2015 |
|
Three Months Ended September 30, 2014 |
|
||||||||||||||||||||
(In millions of dollars) |
|
Direct
|
|
Assumed
|
|
Ceded to
|
|
Net
|
|
Direct
|
|
Assumed
|
|
Ceded to
|
|
Net
|
|
||||||||
Premiums: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Accident and health insurance |
|
$ |
26 |
|
$ |
6 |
|
$ |
|
|
$ |
32 |
|
$ |
28 |
|
$ |
7 |
|
$ |
|
|
$ |
35 |
|
Life insurance |
|
20 |
|
10 |
|
(2 |
) |
28 |
|
22 |
|
12 |
|
(2 |
) |
32 |
|
||||||||
Property and other |
|
15 |
|
1 |
|
|
|
16 |
|
16 |
|
1 |
|
|
|
17 |
|
||||||||
Total premiums |
|
$ |
61 |
|
$ |
17 |
|
$ |
(2 |
) |
$ |
76 |
|
$ |
66 |
|
$ |
20 |
|
$ |
(2 |
) |
$ |
84 |
|
Policyholder benefits and claims |
|
$ |
31 |
|
$ |
8 |
|
$ |
(1 |
) |
$ |
38 |
|
$ |
32 |
|
$ |
8 |
|
$ |
(2 |
) |
$ |
38 |
|
|
|
Nine Months Ended September 30, 2015 |
|
Nine Months Ended September 30, 2014 |
|
||||||||||||||||||||
(In millions of dollars) |
|
Direct
|
|
Assumed
|
|
Ceded to
|
|
Net
|
|
Direct
|
|
Assumed
|
|
Ceded to
|
|
Net
|
|
||||||||
Premiums: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Accident and health insurance |
|
$ |
80 |
|
$ |
19 |
|
$ |
|
|
$ |
99 |
|
$ |
85 |
|
$ |
22 |
|
$ |
|
|
$ |
107 |
|
Life insurance |
|
60 |
|
32 |
|
(4 |
) |
88 |
|
65 |
|
37 |
|
(4 |
) |
98 |
|
||||||||
Property and other |
|
48 |
|
3 |
|
|
|
51 |
|
47 |
|
3 |
|
|
|
50 |
|
||||||||
Total premiums |
|
$ |
188 |
|
$ |
54 |
|
$ |
(4 |
) |
$ |
238 |
|
$ |
197 |
|
$ |
62 |
|
$ |
(4 |
) |
$ |
255 |
|
Policyholder benefits and claims |
|
$ |
90 |
|
$ |
24 |
|
$ |
(7 |
) |
$ |
107 |
|
$ |
84 |
|
$ |
24 |
|
$ |
(6 |
) |
$ |
102 |
|
Insurance policy and claim reserves |
|
$ |
650 |
|
$ |
288 |
|
$ |
(87 |
) |
$ |
851 |
|
$ |
676 |
|
$ |
293 |
|
$ |
(89 |
) |
$ |
880 |
|
Deferred Policy Acquisition Costs
Unamortized deferred policy acquisition costs were $95 million and $101 million at September 30, 2015 and December 31, 2014, and are classified in Other assets on the Condensed Consolidated Statements of Financial Position. Amortization of deferred policy acquisition costs was $3 million and $11 million for the three and nine months ended September 30, 2015 and $4 million and $12 million for the three and nine months ended September 30, 2014, and is classified in Other operating expense on the Condensed Consolidated and Combined Statements of Income.
Statutory Stockholders Equity
The insurance entities statutory stockholders equity was $434 million and $379 million at September 30, 2015 and December 31, 2014. State law restricts the amounts the Companys insurance entities may pay as dividends without prior notice
to, or in some cases prior approval from, the Texas Department of Insurance. The Companys insurance entities paid no dividends in the three and nine months ended September 30, 2015 and 2014. In 2015, the insurance entities may pay dividends up to $125 million without prior regulatory approval. For each period presented, the Company met the regulatory capital requirements. The Condensed Consolidated and Combined insurance entities net income determined in accordance with statutory accounting practices was $18 million and $68 million for the three and nine months ended September 30, 2015 and $26 million and $100 million for the three and nine months ended September 30, 2014.
Liability for Accident and Health Unpaid Claims and Reserve for Losses and Loss Expenses
The following table summarizes activity in the accident and health policy and contract claims and certain accident and health aggregate reserves (present value of amounts not yet due on claims) and activity in the liability for credit IUI unpaid claims and claim adjustment expenses:
|
|
Nine Months Ended September 30, |
|
||||
(In millions of dollars) |
|
2015 |
|
2014 |
|
||
Balance, January 1 |
|
$ |
95 |
|
$ |
109 |
|
Incurred related to: |
|
|
|
|
|
||
Current year |
|
69 |
|
60 |
|
||
Prior years |
|
(4 |
) |
(7 |
) |
||
Total incurred |
|
65 |
|
53 |
|
||
Paid related to: |
|
|
|
|
|
||
Current year |
|
(22 |
) |
(18 |
) |
||
Prior years |
|
(42 |
) |
(44 |
) |
||
Total paid |
|
(64 |
) |
(62 |
) |
||
Foreign currency translation adjustment |
|
(1 |
) |
|
|
||
Balance, September 30 |
|
$ |
95 |
|
$ |
100 |
|
The decrease in incurred claims related to prior years in each of the nine months ended September 30, 2015 and 2014 resulted from subsequent revisions to estimated claim reserves based on actual experience.
(12) Income Taxes
At September 30, 2015, the Company recorded deferred tax assets, net of deferred tax liabilities, of $338 million, an increase of $25 million from December 31, 2014. The increase in net deferred tax assets was driven primarily by deferred federal impact on state and local taxes and deferred taxes on other comprehensive income. The Company had no valuation allowance on deferred tax assets at September 30, 2015 and December 31, 2014. Although realization is not assured, the Company believes that the realization of the recognized deferred tax asset is more-likely-than-not based on expectations as to future taxable income in the jurisdictions in which it operates.
The Company recorded an income tax provision of $69 million (35.4% effective income tax rate) and $192 million (37.4% effective income tax rate) for the three and nine months ended September 30, 2015, compared with an income tax provision of $74 million (36.6% effective income tax rate) and $234 million (36.1% effective income tax rate) for the three and nine months ended September 30, 2014. The effective tax rate differs from the U.S. federal statutory tax rate of 35.0% primarily due to state and local income taxes.
The Company recorded uncertain income tax positions relevant to the jurisdictions where it is required to file income tax returns. Total unrecognized tax benefits that, if recognized, would affect the effective tax rate were $4 million each at September 30, 2015 and December 31, 2014. The Companys policy is to record interest and penalties related to uncertain tax positions in the tax provision.
Interest and penalties (not included in unrecognized tax benefits above) are a component of the Provision for income taxes on the Condensed Consolidated and Combined Statements of Income and are immaterial for all periods presented.
The Company is currently under audit by the Internal Revenue Service and other major taxing jurisdictions, and it may conclude certain state and local tax audits within the next 12 months. It is thus reasonably possible that significant changes in the gross balance of unrecognized tax benefits may occur within the next 12 months, although the Company does not expect such audits to result in amounts that would cause a significant change to the effective tax rate.
Refer to Note 16 for income taxes payable to affiliates.
(13) Changes in AOCI
The following table summarizes the components of AOCI:
(In millions of dollars) |
|
Net unrealized
|
|
Foreign
|
|
Accumulated
|
|
|||
Three Months Ended September 30, 2015 |
|
|
|
|
|
|
|
|||
Balance at beginning of period |
|
$ |
39 |
|
$ |
(8 |
) |
$ |
31 |
|
Other comprehensive loss before reclassifications |
|
(9 |
) |
(4 |
) |
(13 |
) |
|||
Decrease due to amounts reclassified from AOCI |
|
|
|
|
|
|
|
|||
Change, net of tax |
|
(9 |
) |
(4 |
) |
(13 |
) |
|||
Balance at end of period |
|
$ |
30 |
|
$ |
(12 |
) |
$ |
18 |
|
|
|
|
|
|
|
|
|
|||
Three Months Ended September 30, 2014 |
|
|
|
|
|
|
|
|||
Balance at beginning of period |
|
$ |
59 |
|
$ |
2 |
|
$ |
61 |
|
Other comprehensive loss before reclassifications |
|
(8 |
) |
(3 |
) |
(11 |
) |
|||
Decrease due to amounts reclassified from AOCI |
|
|
|
|
|
|
|
|||
Change, net of tax |
|
(8 |
) |
(3 |
) |
(11 |
) |
|||
Balance at end of period |
|
$ |
51 |
|
$ |
(1 |
) |
$ |
50 |
|
|
|
|
|
|
|
|
|
|||
Nine Months Ended September 30, 2015 |
|
|
|
|
|
|
|
|||
Balance at beginning of period |
|
$ |
47 |
|
$ |
(3 |
) |
$ |
44 |
|
Other comprehensive loss before reclassifications |
|
(16 |
) |
(9 |
) |
(25 |
) |
|||
Decrease due to amounts reclassified from AOCI |
|
(1 |
) |
|
|
(1 |
) |
|||
Change, net of tax |
|
(17 |
) |
(9 |
) |
(26 |
) |
|||
Balance at end of period |
|
$ |
30 |
|
$ |
(12 |
) |
$ |
18 |
|
|
|
|
|
|
|
|
|
|||
Nine Months Ended September 30, 2014 |
|
|
|
|
|
|
|
|||
Balance at beginning of period |
|
$ |
43 |
|
$ |
1 |
|
$ |
44 |
|
Other comprehensive income (loss) before reclassifications |
|
8 |
|
(2 |
) |
6 |
|
|||
Decrease due to amounts reclassified from AOCI |
|
|
|
|
|
|
|
|||
Change, net of tax |
|
8 |
|
(2 |
) |
6 |
|
|||
Balance at end of period |
|
$ |
51 |
|
$ |
(1 |
) |
$ |
50 |
|
1 Reflects the movements in the Canadian Dollar against the U.S. Dollar.
The following table summarizes the pre-tax and after-tax changes in each component of AOCI:
(In millions of dollars) |
|
Pre-tax |
|
Tax effect |
|
After-tax |
|
|||
Three Months Ended September 30, 2015 |
|
|
|
|
|
|
|
|||
Balance at beginning of period |
|
$ |
48 |
|
$ |
(17 |
) |
$ |
31 |
|
Change in net unrealized gains (losses) on investment securities |
|
(13 |
) |
4 |
|
(9 |
) |
|||
Foreign currency translation adjustment |
|
(7 |
) |
3 |
|
(4 |
) |
|||
Change |
|
(20 |
) |
7 |
|
(13 |
) |
|||
Balance at end of period |
|
$ |
28 |
|
$ |
(10 |
) |
$ |
18 |
|
|
|
|
|
|
|
|
|
|||
Three Months Ended September 30, 2014 |
|
|
|
|
|
|
|
|||
Balance at beginning of period |
|
$ |
95 |
|
$ |
(34 |
) |
$ |
61 |
|
Change in net unrealized gains (losses) on investment securities |
|
(13 |
) |
5 |
|
(8 |
) |
|||
Foreign currency translation adjustment |
|
(4 |
) |
1 |
|
(3 |
) |
|||
Change |
|
(17 |
) |
6 |
|
(11 |
) |
|||
Balance at end of period |
|
$ |
78 |
|
$ |
(28 |
) |
$ |
50 |
|
|
|
|
|
|
|
|
|
|||
Nine Months Ended September 30, 2015 |
|
|
|
|
|
|
|
|||
Balance at beginning of period |
|
$ |
68 |
|
$ |
(24 |
) |
$ |
44 |
|
Change in net unrealized gains (losses) on investment securities |
|
(26 |
) |
9 |
|
(17 |
) |
|||
Foreign currency translation adjustment |
|
(14 |
) |
5 |
|
(9 |
) |
|||
Change |
|
(40 |
) |
14 |
|
(26 |
) |
|||
Balance at end of period |
|
$ |
28 |
|
$ |
(10 |
) |
$ |
18 |
|
|
|
|
|
|
|
|
|
|||
Nine Months Ended September 30, 2014 |
|
|
|
|
|
|
|
|||
Balance at beginning of period |
|
$ |
69 |
|
$ |
(25 |
) |
$ |
44 |
|
Change in net unrealized gains (losses) on investment securities |
|
12 |
|
(4 |
) |
8 |
|
|||
Foreign currency translation adjustment |
|
(3 |
) |
1 |
|
(2 |
) |
|||
Change |
|
9 |
|
(3 |
) |
6 |
|
|||
Balance at end of period |
|
$ |
78 |
|
$ |
(28 |
) |
$ |
50 |
|
The following table summarizes the decrease in AOCI for amounts reclassified to the Condensed Consolidated and Combined Statements of Income:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
||||||||
(In millions of dollars) |
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
||||
Net realized gains on sales of investments 1 |
|
$ |
(1 |
) |
$ |
|
|
$ |
(5 |
) |
$ |
(1 |
) |
Gross OTTI impairment losses 1 |
|
1 |
|
|
|
3 |
|
|
|
||||
Net realized gains on investment securities reclassified out of AOCIpretax |
|
|
|
|
|
(2 |
) |
(1 |
) |
||||
Tax expense |
|
|
|
|
|
1 |
|
1 |
|
||||
Net realized gains on investment securities reclassified out of AOCIafter-tax |
|
$ |
|
|
$ |
|
|
$ |
(1 |
) |
$ |
|
|
1 Refer to Note 6 for additional information on realized gains and losses on investment securities and OTTI impairment losses.
(14) Variable Interest Entities
An entity is referred to as a VIE if it meets the criteria outlined in ASC 810, Consolidation , which are: (1) the entitys equity is insufficient to permit the entity to finance its activities without additional subordinated financial support from other parties; or (2) the entitys equity investors cannot make significant decisions about the entitys operations or do not absorb their proportionate share of the expected losses or receive the expected returns of the entity. The Company is involved with VIEs through its loan securitization and revolving warehouse activities.
In accordance with ASC 810, the Company consolidates a VIE when it has both the power to direct the activities that most significantly impact the VIEs economic performance and an obligation to absorb losses, or a right to receive benefits from the entity that could be potentially significant to the VIE (that is, the Company is the primary beneficiary).
VIEs are continually monitored to determine if any events have occurred that could cause the VIEs primary beneficiary status to change. These events include:
· Additional purchases or sales of variable interests by the Company or an unrelated third party, which cause the Companys overall variable interest ownership to change;
· Changes in contractual arrangements in a manner that reallocates expected losses and residual returns among the variable interest holders;
· Changes in the party with power to direct activities of a VIE that most significantly affect the entitys economic performance; and
· Providing support to an entity that results in an implicit variable interest.
The securitization trusts and warehouse facility described in Note 10 are VIEs consolidated by the Company at September 30, 2015.
The following table summarizes the carrying amounts and classifications of the VIEs assets and liabilities in the Condensed Consolidated Statements of Financial Position that are consolidated in accordance with ASC 810:
(In millions of dollars) |
|
September 30,
|
|
December 31,
|
|
||
Assets |
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
394 |
|
$ |
162 |
|
Net consumer finance receivables |
|
7,065 |
|
2,179 |
|
||
Deferred tax assets |
|
39 |
|
|
|
||
Other assets |
|
15 |
|
|
|
||
Total assets |
|
$ |
7,513 |
|
$ |
2,341 |
|
Liabilities |
|
|
|
|
|
||
Revolving line of credit - related party |
|
$ |
284 |
|
$ |
|
|
Revolving line of credit - third party |
|
1,136 |
|
|
|
||
Long-term debt |
|
4,695 |
|
1,933 |
|
||
Accounts payable, accrued expenses and other liabilities |
|
8 |
|
24 |
|
||
Total liabilities |
|
$ |
6,123 |
|
$ |
1,957 |
|
(15) Fair Value Measurements
ASC 820-10, Fair Value Measurement , defines fair value, establishes a consistent framework for measuring fair value and requires disclosures about fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Among other things, the standard requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
Fair Value Hierarchy
ASC 820-10 specifies a hierarchy of inputs based on whether the inputs are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Companys market assumptions.
These two types of inputs have created the following fair value hierarchy:
Level 1Quoted prices for identical instruments in active markets.
Level 2Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
The Companys policy with respect to transfers between levels of the fair value hierarchy is to recognize transfers into and out of each level as of the end of the reporting period.
Determination of Fair Value
For assets and liabilities carried at fair value, the Company primarily utilizes third-party valuation service providers to derive fair values based on various methodologies, including market quotes where available, external non-binding broker quotes, and proprietary valuation models. The Company assesses the reasonableness of security values received from valuation service providers through various analytical techniques including comparing the information obtained from the valuation service providers to other third-party valuation sources for selected securities.
Fair Value of Financial Instruments
The following tables summarize the fair value and carrying amount of financial instruments:
|
|
September 30, 2015 |
|
|||||||||||||
|
|
Carrying |
|
Estimated |
|
Estimated fair value |
|
|||||||||
(In millions of dollars) |
|
value |
|
fair value |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
|||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|||||
Cash and cash equivalents |
|
$ |
1,011 |
|
$ |
1,011 |
|
$ |
|
|
$ |
1,011 |
|
$ |
|
|
Investments (Note 6) |
|
1,403 |
|
1,403 |
|
160 |
|
1,187 |
|
56 |
|
|||||
Consumer finance receivables (Note 7) |
|
7,819 |
1 |
8,789 |
|
|
|
|
|
8,789 |
|
|||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|||||
Related party debt (Note 16) |
|
6 |
|
6 |
|
|
|
|
|
6 |
|
|||||
Revolving line of credit - related party (Note 16) |
|
284 |
|
284 |
|
|
|
|
|
284 |
|
|||||
Revolving line of credit - third party (Note 10) |
|
1,136 |
|
1,136 |
|
|
|
|
|
1,136 |
|
|||||
Long-term debt (Note 10) |
|
6,178 |
|
6,283 |
|
|
|
|
|
6,283 |
|
|||||
1 The carrying value of consumer finance receivables is calculated as net consumer finance receivables excluding unearned premium and claim reserves of $406 million.
|
|
December 31, 2014 |
|
|||||||||||||
|
|
Carrying |
|
Estimated |
|
Estimated fair value |
|
|||||||||
(In millions of dollars) |
|
value |
|
fair value |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
|||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|||||
Cash and cash equivalents |
|
$ |
319 |
|
$ |
319 |
|
$ |
|
|
$ |
319 |
|
$ |
|
|
Investments (Note 6) |
|
1,391 |
|
1,391 |
|
57 |
|
1,276 |
|
58 |
|
|||||
Consumer finance receivables (Note 7) |
|
7,741 |
1 |
8,758 |
|
|
|
|
|
8,758 |
|
|||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|||||
Related party debt (Note 16) |
|
3,249 |
|
3,249 |
|
|
|
|
|
3,249 |
|
|||||
Long-term debt (Note 10) |
|
3,408 |
|
3,480 |
|
|
|
|
|
3,480 |
|
|||||
1 The carrying value of consumer finance receivables is calculated as net consumer finance receivables excluding unearned premium and claim reserves of $415 million.
Fair value assumptions of the financial instruments listed below are based upon subjective estimates of market conditions and perceived risks of the financial instruments at a certain point in time, as disclosed further in various notes to the Condensed Consolidated and Combined Financial Statements.
Fixed maturities and equity securities fair value is based primarily on quoted market prices for similar instruments or if quoted market prices are not available, discounted expected cash flows using market rates for similar instruments which are commensurate with the credit quality and maturity of the investments. If market rates for similar instruments are not available, other valuation techniques would be used and the asset would be classified as Level 3.
Short-term and other investments carrying value approximates fair value due to the relatively short period of time between the origination of the investment and its expected maturity or realization.
Consumer finance receivables fair value is estimated using a discounted cash flow methodology using assumptions management believes a market participant would make in valuing these assets.
Related party debt carrying value approximates fair value due to the short-term nature of these instruments.
Revolving line of credit carrying value approximates fair value due to the short-term nature of these instruments.
Long-term debt fair value measurements of long-term debt are based upon input from market participants or indicative prices obtained from a third party.
The disclosed fair values for financial instruments do not reflect any premium or discount that could result from offering for sale, at one time, the Companys entire holdings of a particular financial instrument. In addition, any potential taxes and other expenses that would be incurred in an actual sale or settlement are not reflected in amounts disclosed.
Items Measured at Fair Value on a Recurring Basis
The Company has certain financial assets that are required to be reported on the Condensed Consolidated Statements of Financial Position at fair value, on a recurring basis. The Company does not have any items that are required to be reported on the Condensed Consolidated Statements of Financial Position at fair value, on a nonrecurring basis.
The following tables summarize investments measured at fair value on a recurring basis:
|
|
September 30, 2015 |
|
||||||||||
(In millions of dollars) |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
||||
Fixed maturity securities: |
|
|
|
|
|
|
|
|
|
||||
Mortgage-backed: |
|
|
|
|
|
|
|
|
|
||||
U.S. government agency guaranteed |
|
$ |
|
|
$ |
57 |
|
$ |
2 |
|
$ |
59 |
|
Prime |
|
|
|
4 |
|
|
|
4 |
|
||||
Commercial |
|
|
|
63 |
|
|
|
63 |
|
||||
Total mortgage-backed |
|
|
|
124 |
|
2 |
|
126 |
|
||||
U.S. Treasury and federal agency |
|
10 |
|
16 |
|
|
|
26 |
|
||||
State and municipal |
|
|
|
50 |
|
|
|
50 |
|
||||
Foreign government |
|
37 |
|
98 |
|
|
|
135 |
|
||||
Corporate |
|
4 |
|
846 |
|
40 |
|
890 |
|
||||
Other debt |
|
|
|
53 |
|
10 |
|
63 |
|
||||
Total fixed maturity securities |
|
51 |
|
1,187 |
|
52 |
|
1,290 |
|
||||
Equity securities |
|
36 |
|
|
|
4 |
|
40 |
|
||||
Short-term and other securities |
|
73 |
|
|
|
|
|
73 |
|
||||
Total investments |
|
$ |
160 |
|
$ |
1,187 |
|
$ |
56 |
|
$ |
1,403 |
|
|
|
December 31, 2014 |
|
||||||||||
(In millions of dollars) |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
||||
Fixed maturity securities: |
|
|
|
|
|
|
|
|
|
||||
Mortgage-backed: |
|
|
|
|
|
|
|
|
|
||||
U.S. government agency guaranteed |
|
$ |
|
|
$ |
66 |
|
$ |
1 |
|
$ |
67 |
|
Prime |
|
|
|
5 |
|
|
|
5 |
|
||||
Commercial |
|
|
|
54 |
|
1 |
|
55 |
|
||||
Total mortgage-backed |
|
|
|
125 |
|
2 |
|
127 |
|
||||
U.S. Treasury and federal agency |
|
12 |
|
15 |
|
|
|
27 |
|
||||
State and municipal |
|
|
|
48 |
|
|
|
48 |
|
||||
Foreign government |
|
|
|
147 |
|
1 |
|
148 |
|
||||
Corporate |
|
1 |
|
857 |
|
40 |
|
898 |
|
||||
Other debt |
|
|
|
53 |
|
10 |
|
63 |
|
||||
Total fixed maturity securities |
|
13 |
|
1,245 |
|
53 |
|
1,311 |
|
||||
Equity securities |
|
44 |
|
|
|
5 |
|
49 |
|
||||
Short-term and other securities |
|
|
|
31 |
|
|
|
31 |
|
||||
Total investments |
|
$ |
57 |
|
$ |
1,276 |
|
$ |
58 |
|
$ |
1,391 |
|
Transfers between Level 1 and Level 2 of the Fair Value Hierarchy
For the nine months ended September 30, 2015, the Company transferred no investments from Level 1 to Level 2 and $54 million of investments from Level 2 to Level 1. Transfers from Level 2 to Level 1 related to short-term and other securities and foreign government securities, which were traded with sufficient frequency to constitute an active market.
For the nine months ended September 30, 2014, the Company did not transfer any investments between Level 1 and Level 2.
The following tables summarize the changes in the Level 3 fair value category:
(In millions of dollars) |
|
Balance,
|
|
Transfers
|
|
Transfers
|
|
Purchases |
|
Sales |
|
Net
|
|
Net unrealized
|
|
Balance,
|
|
||||||||
Fixed maturity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Mortgage-backed: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
U.S. government agency guaranteed |
|
$ |
5 |
|
$ |
|
|
$ |
(3 |
) |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
2 |
|
Prime |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Total mortgage-backed |
|
5 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
2 |
|
||||||||
Foreign Government |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Corporate |
|
37 |
|
5 |
|
|
|
2 |
|
(3 |
) |
|
|
(1 |
) |
40 |
|
||||||||
Other debt |
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
|
||||||||
Total fixed maturity securities |
|
52 |
|
5 |
|
(3 |
) |
2 |
|
(3 |
) |
|
|
(1 |
) |
52 |
|
||||||||
Equity securities |
|
3 |
|
1 |
|
|
|
|
|
|
|
|
|
|
|
4 |
|
||||||||
Total fixed maturity and equity securities |
|
$ |
55 |
|
$ |
6 |
|
$ |
(3 |
) |
$ |
2 |
|
$ |
(3 |
) |
$ |
|
|
$ |
(1 |
) |
$ |
56 |
|
(In millions of dollars) |
|
Balance,
|
|
Transfers
|
|
Transfers
|
|
Purchases |
|
Sales |
|
Net
|
|
Net unrealized
|
|
Balance,
|
|
||||||||
Fixed maturity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Mortgage-backed: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
U.S. government agency guaranteed |
|
$ |
1 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
1 |
|
Prime |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
||||||||
Commercial |
|
2 |
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
1 |
|
||||||||
Total mortgage-backed |
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
||||||||
Corporate |
|
40 |
|
1 |
|
|
|
|
|
(1 |
) |
|
|
|
|
40 |
|
||||||||
Other debt |
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
|
||||||||
Total fixed maturity securities |
|
53 |
|
1 |
|
|
|
|
|
(1 |
) |
|
|
|
|
53 |
|
||||||||
Equity securities |
|
7 |
|
4 |
|
(5 |
) |
1 |
|
|
|
|
|
|
|
7 |
|
||||||||
Total fixed maturity and equity securities |
|
$ |
60 |
|
$ |
5 |
|
$ |
(5 |
) |
$ |
1 |
|
$ |
(1 |
) |
$ |
|
|
$ |
|
|
$ |
60 |
|
(In millions of dollars) |
|
Balance,
|
|
Transfers
|
|
Transfers
|
|
Purchases |
|
Sales |
|
Net
|
|
Net unrealized
|
|
Balance,
|
|
||||||||
Fixed maturity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Mortgage-backed: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
U.S. government agency guaranteed |
|
$ |
1 |
|
$ |
4 |
|
$ |
(3 |
) |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
2 |
|
Prime |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Commercial |
|
1 |
|
1 |
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
||||||||
Total mortgage-backed |
|
2 |
|
5 |
|
(5 |
) |
|
|
|
|
|
|
|
|
2 |
|
||||||||
Foreign Government |
|
1 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
||||||||
Corporate |
|
40 |
|
5 |
|
|
|
2 |
|
(6 |
) |
|
|
(1 |
) |
40 |
|
||||||||
Other debt |
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
|
||||||||
Total fixed maturity securities |
|
53 |
|
10 |
|
(6 |
) |
2 |
|
(6 |
) |
|
|
(1 |
) |
52 |
|
||||||||
Equity securities |
|
5 |
|
4 |
|
(4 |
) |
|
|
(1 |
) |
|
|
|
|
4 |
|
||||||||
Total fixed maturity and equity securities |
|
$ |
58 |
|
$ |
14 |
|
$ |
(10 |
) |
$ |
2 |
|
$ |
(7 |
) |
$ |
|
|
$ |
(1 |
) |
$ |
56 |
|
(In millions of dollars) |
|
Balance,
|
|
Transfers
|
|
Transfers
|
|
Purchases |
|
Sales |
|
Net
|
|
Net unrealized
|
|
Balance,
|
|
||||||||
Fixed maturity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Mortgage-backed: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
U.S. government agency guaranteed |
|
$ |
5 |
|
$ |
1 |
|
$ |
(4 |
) |
$ |
|
|
$ |
(1 |
) |
$ |
|
|
$ |
|
|
$ |
1 |
|
Prime |
|
|
|
2 |
|
(1 |
) |
|
|
|
|
|
|
|
|
1 |
|
||||||||
Commercial |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
||||||||
Total mortgage-backed |
|
5 |
|
4 |
|
(5 |
) |
|
|
(1 |
) |
|
|
|
|
3 |
|
||||||||
Corporate |
|
37 |
|
2 |
|
|
|
3 |
|
(2 |
) |
|
|
|
|
40 |
|
||||||||
Other debt |
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
|
||||||||
Total fixed maturity securities |
|
52 |
|
6 |
|
(5 |
) |
3 |
|
(3 |
) |
|
|
|
|
53 |
|
||||||||
Equity securities |
|
6 |
|
11 |
|
(12 |
) |
2 |
|
|
|
|
|
|
|
7 |
|
||||||||
Total fixed maturity and equity securities |
|
$ |
58 |
|
$ |
17 |
|
$ |
(17 |
) |
$ |
5 |
|
$ |
(3 |
) |
$ |
|
|
$ |
|
|
$ |
60 |
|
Transfers in and out of Level 3 of the Fair Value Hierarchy
For the three months ended September 30, 2015, securities, primarily related to mortgage-backed, corporate, and equity, were transferred into and out of Level 3 due to changes in the level of price observability for the specific securities. Of the $6 million of securities transferred into Level 3, $1 million was transferred from Level 1 and $5 million was transferred from Level 2. Of the $3 million of securities transferred out of Level 3, $0 million was transferred into Level 1 and $3 million was transferred into Level 2.
For the nine months ended September 30, 2015, securities, primarily related to mortgage-backed, corporate, and equity were transferred into and out of Level 3 due to changes in the level of price observability for the specific securities. Of the $14
million of securities transferred into Level 3, $4 million was transferred from Level 1 and $10 million was transferred from Level 2. Of the $10 million of securities transferred out of Level 3, $4 million was transferred into Level 1 and $6 million was transferred into Level 2.
For the three months ended September 30, 2014, securities, primarily related to equity and mortgage-backed securities were transferred into and out of Level 3 due to changes in the level of price observability for the specific securities. Of the $5 million transferred into Level 3, $3 million was transferred from Level 1 and $2 million was transferred from Level 2. Of the $5 million transferred out of Level 3, $4 million was transferred into Level 1 and $1 million was transferred into Level 2.
For the nine months ended September 30, 2014, securities, primarily related to equity and mortgage-backed securities, were transferred into and out of Level 3 due to changes in the level of price observability for the specific securities. Of the $17 million transferred into Level 3, $7 million was transferred from Level 1 and $10 million was transferred from Level 2. Of the $17 million transferred out of Level 3, $10 million was transferred into Level 1 and $7 million was transferred into Level 2.
Valuation Techniques and Inputs for Level 2 Fair Value Measurements
At September 30, 2015 and December 31, 2014, the financial instruments in Level 2 consisted of cash and investments. Investments in Level 2 were composed primarily of corporate securities, mortgage-backed securities and foreign government securities. The fair value for these investments is based upon: (1) quoted prices for similar assets in active markets; (2) quoted prices for identical or similar assets in inactive markets; or (3) valuations based on models where the significant inputs are observable; including, but not limited to, interest rates, yield curves, prepayment speeds, default rates and loss severities; or where the significant inputs can be corroborated by observable market data.
Valuation Techniques and Inputs for Level 3 Fair Value Measurements
At September 30, 2015 and December 31, 2014, the majority of the investments in Level 3 were corporate securities for which the fair value is measured by the Companys third-party valuation service provider using a price based methodology with the significant unobservable input as the price, which ranges from 3.24 to 115.79 of par at September 30, 2015 and from 3.27 to 116.38 of par at December 31, 2014.
The effect on the fair value measurement of a given security is wholly dependent on the amount and direction of any changes in the unobservable price input.
(16) Related Party Transactions
Expense Allocations
The Condensed Consolidated and Combined Financial Statements include direct and indirect expense allocations of certain costs for employee benefits and support functions provided on a centralized basis by various providers across Citigroup and CCC. These expenses are allocated to the Company based on various cost- and/or activity-related drivers.
The following table summarizes the Companys allocated share of the related costs from Citigroup and CCC providers:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
||||||||
(In millions of dollars) |
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Direct costs |
|
$ |
51 |
|
$ |
53 |
|
$ |
154 |
|
$ |
157 |
|
Indirect costs |
|
13 |
|
11 |
|
39 |
|
33 |
|
||||
Total allocated expenses |
|
$ |
64 |
|
$ |
64 |
|
$ |
193 |
|
$ |
190 |
|
Direct Allocated Costs
Direct allocated costs represent specific services or functions that are attributable to the Company based on actual and/or estimated usage or consumption. These services include employee benefits, technology, occupancy, and other direct costs. Citigroup and CCC allocate the costs associated with these services using established allocation methodologies.
Indirect Allocated Costs
Indirect allocated costs represent general corporate level services provided to the Company and other affiliates by Citigroup. Corporate level services include finance, human resources, compliance, risk, legal, communications, treasury, audit, administration and security. The costs are attributed to the Company in two steps; first, using a consumption based survey; and second, based on metrics that are reflective of service usage.
Revenue Allocations
The Insurance segment provides administrative support related to debt protection products on behalf of other Citigroup affiliates. The Company recorded income related to these services of $3 million and $10 million for the three and nine months ended September 30, 2015 and $3 million and $9 million for the three and nine months ended September 30, 2014. These amounts are classified in Other revenue on the Condensed Consolidated and Combined Statements of Income.
The Company provides other shared support to an affiliate and recorded income related to these services of $1 million and $3 million for the three and nine months ended September 30, 2015 and $1 million and $5 million for the three and nine months ended September 30, 2014. These amounts are classified in Other revenue on the Condensed Consolidated and Combined Statements of Income.
Related Party Debt
The Companys related party debt was $6 million and $3.2 billion, net of related party receivables of $646 million and $1.7 billion at September 30, 2015 and December 31, 2014. These balances are short-term in nature with no stated maturity and include charges for operational support and the borrowing and lending of funds. Interest is charged monthly and is based on CCCs cost of funds.
In addition, $284 million of the $1.4 billion drawn on the revolving credit facility is due to an affiliate (as discussed in Note 10). Interest is charged monthly and is primarily based on a LIBOR-indexed floating rate.
The following table summarizes information with respect to related party debt:
|
|
Nine Months
|
|
Year
|
|
||
(In millions of dollars, except weighted average interest rate) |
|
September 30,
|
|
December 31,
|
|
||
|
|
|
|
|
|
||
Weighted average interest rate |
|
3.87 |
% |
3.93 |
% |
||
Maximum outstanding balance |
|
$ |
3,550 |
|
$ |
5,625 |
|
Interest paid |
|
$ |
45 |
|
$ |
178 |
|
Other Related Party Transactions
Cash on deposit with related parties was $483 million and $32 million as of September 30, 2015 and December 31, 2014. These balances are classified in Cash and cash equivalents on the Condensed Consolidated Statements of Financial Position.
Income taxes payable of $59 million at September 30, 2015 is comprised of income taxes payable to affiliates of $57 million and income taxes payable to taxing authorities of $2 million. Income taxes payable of $506 million at December 31, 2014 is comprised of income taxes payable to affiliates of $497 million and income taxes payable to taxing authorities of $9 million.
During the nine months ended September 30, 2015, the Company transferred software totaling $13 million to an affiliate and acquired $7 million of software and other premises and equipment from an affiliate. Both transfers occurred at carrying value.
On January 6, 2014, the Company transferred real estate loan servicing responsibilities to an affiliate. Due to a licensing restriction, the servicing relating to $57 million of loans could not be released until April 6, 2014. The Company received servicing fees of $2 million for the three and nine months ended September 30, 2014 related to the servicing of real estate loans that were transferred to an affiliate in 2014. These servicing fees are classified in Other revenue on the Condensed Consolidated and Combined Statements of Income. The Company did not receive or pay any consideration relating to the servicing transfer.
On January 1, 2014, the Company transferred its residential first mortgage and home equity loans totaling approximately $463 million to affiliates in the form of a distribution. The distribution occurred at carrying value and accordingly, no gain or loss was recognized.
(17) Incentive Compensation
The Companys executives and employees participate in the Citigroup programs described under Note 2 Summary of Significant Accounting Policies to the annual audited Consolidated and Combined Financial Statements and related notes as of December 31, 2014. The Company makes cash payments to reimburse Citigroup for the cost of the awards when shares are delivered to participants (the payments are based on market value of the vested stock awards at such time or the spread realized by the employee on an option exercise). The Company recognizes compensation expense for the awards as described below.
The compensation expense related to discretionary annual incentive cash awards was $2 million and $6 million for the three and nine months ended September 30, 2015 and $2 million and $6 million for the three and nine months ended September 30, 2014. These amounts are classified in Compensation and benefits expense on the Condensed Consolidated and Combined Statements of Income.
The compensation expense related to variable incentive compensation awards was $9 million and $22 million for the three and nine months ended September 30, 2015 and $5 million and $17 million for the three and nine months ended September 30, 2014 and is classified in Compensation and benefits expense on the Condensed Consolidated and Combined Statements of Income.
The compensation expense related to stock awards was immaterial for the three and nine months ended September 30, 2015 and 2014.
(18) Retirement and Postemployment Benefits
The Company participates in several noncontributory defined benefit pension plans sponsored by Citigroup covering certain U.S. employees. Citigroups U.S. qualified defined benefit plan was frozen effective January 1, 2008 for most employees. Accordingly, no additional compensation-based contributions were credited to the cash balance portion of the plan for existing plan participants after 2007. However, certain employees covered under the prior final pay plan formula continue to accrue benefits. The Company also participates in a number of noncontributory, nonqualified pension plans. These plans, which are unfunded, provide supplemental defined pension benefits to certain U.S. employees. With the exception of a few employees covered under the prior final average pay formulas, the benefits under these plans were frozen in prior years. The allocated share of the related net benefit for these pension plans was $3 million and $7 million for the three and nine months ended
September 30, 2015 and $2 million and $7 million for the three and nine months ended September 30, 2014. These amounts are classified in Compensation and benefits expense on the Condensed Consolidated and Combined Statements of Income.
The Company also participates in postretirement health care and life insurance benefits offered by Citigroup to certain eligible U.S. retired employees. The allocated share of the related expense is classified in Compensation and benefits expense on the Condensed Consolidated and Combined Statements of Income and was not material to the results of operations for the three and nine months ended September 30, 2015 and 2014.
The Company also participates in postemployment plans sponsored by Citigroup that provide income continuation and health and welfare benefits to certain eligible U.S. employees on long-term disability. The allocated share of the related expense is classified in Compensation and benefits expense on the Condensed Consolidated and Combined Statements of Income and was not material to the results of operations for the three and nine months ended September 30, 2015 and 2014.
Citigroup sponsors defined contribution plans in the United States and in certain non-U.S. locations, all of which are administered in accordance with local laws. The most significant defined contribution plan is the Citigroup 401(k) Plan in the U.S. Under the Citigroup 401(k) plan, eligible U.S. employees received matching contributions of up to 6% of their eligible compensation for 2015 and 2014 subject to statutory limits. Additionally, for eligible employees whose eligible compensation is $100,000 or less, a fixed contribution of up to 2% of eligible compensation is provided. All Company contributions are invested according to participants individual elections. The expense allocated to the Company for the Citigroup 401(k) Plan amounted to approximately $4 million and $12 million for the three and nine months ended September 30, 2015 and $4 million and $12 million for the three and nine months ended September 30, 2014. These amounts are classified in Compensation and benefits expense on the Condensed Consolidated and Combined Statements of Income and included in direct allocated costs. Refer to Note 16 for further discussion on direct allocated costs.
(19) Commitments and Contingencies
In the ordinary course of business, the Company including its affiliates and subsidiaries, as well as its respective current and former officers, directors and employees, routinely are named as defendants in, or as parties to, various actual or threatened legal actions and proceedings. Certain of these actions and proceedings assert claims or seek relief in connection with alleged violations of consumer protection, lending, insurance, anti-fraud, anti-money laundering, employment and other statutory and common laws. Certain of these legal actions and proceedings may include claims for substantial or indeterminate compensatory or punitive damages, or for injunctive relief, and in some instances, seek recovery on a class-wide basis.
In the ordinary course of business, the Company is also subject to governmental and regulatory examinations, information-gathering requests, investigations and proceedings (both formal and informal), certain of which may result in adverse judgments, settlements, fines, penalties, restitutions, disgorgements, injunctions or other relief. In addition, the Company and certain of its affiliates and subsidiaries are regulated entities and, in those capacities, subject to regulation by various U.S. and state regulators. In connection with formal and informal inquiries by these regulators, the Company receives requests, subpoenas and orders seeking documents, testimony and other information in connection with various aspects of their regulated activities. The Company from time to time receives grand jury subpoenas and other requests for information or assistance, formal or informal, relating to the Company and its customers, from federal or state law enforcement agencies. The Company seeks to resolve all litigation and regulatory matters in the manner management believes is in the best interests of the Company and its shareholders, and contests liability, allegations of wrongdoing and, where applicable, the amount of damages or scope of any penalties or other relief sought as appropriate in each pending matter.
In accordance with ASC 450, Contingencies accruals are established for contingencies, including litigation and regulatory matters, when management believes it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. When the reasonable estimate of the loss is within a range of amounts, the minimum amount of the range is accrued, unless some higher amount within the range is a better estimate than any other amount within the range. Once established, accruals are adjusted from time to time, as appropriate, in light of additional information. In view of the inherent unpredictability of litigation and regulatory matters, particularly where the damages sought are substantial or indeterminate, the
investigations or proceedings are in the early stages, or the matters involve novel legal theories or a large number of parties, the Company cannot predict the timing or ultimate resolution of litigation and regulatory matters, and the actual costs of resolving litigation and regulatory matters may be substantially higher or lower than the amounts accrued for those matters.
Subject to the foregoing, it is the opinion of the Companys management, based on current knowledge and after taking into account its current legal accruals, that the eventual outcome of the matters described in this Note would not be likely to have a material adverse effect on the Companys financial condition. Nonetheless, given the substantial or indeterminate amounts sought in certain of these matters, and the inherent unpredictability of such matters, an adverse outcome in certain of these matters could, from time to time, have a material adverse effect on its results of operations or cash flows in particular periods.
Litigation and Regulatory Contingencies
Securitizations
In December 2014, the Company received a subpoena from the Department of Justice requesting information related to the Companys origination, servicing and securitization of personal loans secured by autos. The Company is fully cooperating with the inquiry.
West Virginia Consumer Finance Litigation
In 2006, Paul Lightner filed a counter-claim class action complaint seeking recovery under West Virginias Consumer Credit and Protection Act against CitiFinancial, Inc. (WV) for selling insurance with allegedly inflated premiums and for allegedly taking impermissible security interests in household goods. In 2008, the trial court certified a class under both claims and denied CitiFinancial, Inc.s motion for summary judgment on both claims. CitiFinancial, Inc. appealed the denial of summary judgment on the insurance claim, and in 2009 the West Virginia Supreme Court reversed the trial court, and held that appropriateness of insurance rates was a matter to be decided by the West Virginia Insurance Commissioner. In 2010, the West Virginia Insurance Commissioner ruled in CitiFinancial, Inc. (WV)s favor, and plaintiffs appealed this decision. In June 2014, the West Virginia Supreme Court ruled in CitiFinancial, Inc. (WV)s favor, and affirmed the decision of the Insurance Commissioner. The matter has been remanded back to the trial court, where a new judge has been assigned to the matter. CitiFinancial, Inc. (WV) is subject to the prior judges 2008 certification order, and is seeking to have the remaining claim for taking impermissible security interests in household goods decertified. Additional information concerning this matter is publicly available in court filings under Lightner v. CitiFinancial, Inc., Case No. 02-C0723 (Cir. Ct. Marshall Co. WV).
Other Commitments and Contingencies
On July 25, 2014, CCC executed a Host Services Agreement on behalf of the Company and other affiliates. In conjunction with this agreement, the Company executed a work order directly with the third party for maintenance services, which is expected to commence once the new account management system is operational. The work order has an initial five year term and provides for payments based on a fixed fee per loan processed. If, once effective, the work order is terminated by the Company without cause, the Company would be obligated to pay a termination fee of $26 million less any fees already paid under the agreement.
On August 13, 2014, CCC entered into an agreement to obtain a new back-office account management system on behalf of the Company and other affiliates. The related expense allocated to the Company is not material for the nine months ended September 30, 2015. This contract can be terminated prior to completion in exchange for an early termination fee of approximately $9 million less any amounts already paid under the contract. If incurred, a significant portion of the termination fee would be allocated to the Company.
(20) Subsequent Events
On October 20, 2015, the Company paid a dividend of $90 million to CCC.
The Company has evaluated all events subsequent to the balance sheet date as of September 30, 2015 through November 12, 2015, which is the date these consolidated and combined financial statements were available to be issued, and have determined that there are no other subsequent events that required disclosure under ASC 855, Subsequent Events .