OneMain Holdings, Inc. - Quarter Report: 2014 June (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended June 30, 2014

 

OR

 

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

 

For the transition period from            to           

 

Commission file number 001-36129

 

SPRINGLEAF HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

 

(812) 424-8031

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

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

 

At August 11, 2014, there were 114,832,895 shares of the registrant’s common stock, $.01 par value, outstanding.

 

 

Table of Contents

 

TABLE OF CONTENTS

 

PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets		3
	Condensed Consolidated Statements of Operations		4
	Condensed Consolidated Statements of Comprehensive Income		5
	Condensed Consolidated Statements of Shareholders’ Equity		6
	Condensed Consolidated Statements of Cash Flows		7
	Notes to Condensed Consolidated Financial Statements		9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		62
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		98
Item 4.	Controls and Procedures		98
PART II — OTHER INFORMATION
Item 1.	Legal Proceedings		99
Item 1A.	Risk Factors		99
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		99
Item 3.	Defaults Upon Senior Securities		99
Item 4.	Mine Safety Disclosures		99
Item 5.	Other Information		99
Item 6.	Exhibits		100

 

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PART I — FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

 

SPRINGLEAF HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (Unaudited)

 

		June 30,			December 31,
(dollars in thousands)		2014			2013
Assets
Cash and cash equivalents		$	891,341		$	431,409
Investment securities		657,483			582,090
Net finance receivables:
Personal loans (includes loans of consolidated VIEs of $1.9 billion in 2014 and $1.6 billion in 2013)		3,407,328			3,171,704
SpringCastle Portfolio (includes loans of consolidated VIEs of $2.2 billion in 2014 and $2.5 billion in 2013)		2,202,380			2,505,349
Real estate loans (includes loans of consolidated VIEs of $4.2 billion in 2014 and $5.7 billion in 2013)		6,341,257			7,982,349
Retail sales finance		68,426			98,911
Net finance receivables		12,019,391			13,758,313
Allowance for finance receivable losses (includes allowance of consolidated VIEs of $171.7 million in 2014 and $153.7 million in 2013)		(368,272		)	(333,325		)
Net finance receivables, less allowance for finance receivable losses		11,651,119			13,424,988
Restricted cash (includes restricted cash of consolidated VIEs of $471.3 million in 2014 and $522.8 million in 2013)		487,160			536,005
Other assets		396,255			428,194
Total assets		$	14,083,358		$	15,402,686
Liabilities and Shareholders’ Equity
Long-term debt (includes debt of consolidated VIEs of $6.5 billion in 2014 and $7.3 billion in 2013)		$	11,261,023		$	12,769,036
Insurance claims and policyholder liabilities		412,492			394,168
Deferred and accrued taxes		142,174			145,520
Other liabilities		202,041			207,334
Total liabilities		12,017,730			13,516,058
Shareholders’ equity:
Common stock		1,148			1,148
Additional paid-in capital		527,708			524,087
Accumulated other comprehensive income		37,819			28,095
Retained earnings		1,111,403			986,690
Springleaf Holdings, Inc. shareholders’ equity		1,678,078			1,540,020
Non-controlling interests		387,550			346,608
Total shareholders’ equity		2,065,628			1,886,628
Total liabilities and shareholders’ equity		$	14,083,358		$	15,402,686

 

See Notes to Condensed Consolidated Financial Statements.

 

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SPRINGLEAF HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

 

		Three Months			Three Months			Six Months			Six Months
		Ended			Ended			Ended			Ended
(dollars in thousands except		June 30,			June 30,			June 30,			June 30,
earnings per share)		2014			2013			2014			2013
											Revised
Interest income		$	532,750		$	580,597		$	1,085,387		$	993,635
Interest expense		191,301			240,418			396,721			471,711
Net interest income		341,449			340,179			688,666			521,924
Provision for finance receivable losses		115,347			82,311			276,225			176,797
Net interest income after provision for finance receivable losses		226,102			257,868			412,441			345,127
Other revenues:
Insurance		42,687			35,967			81,106			68,867
Investment		10,622			10,598			20,083			20,722
Net loss on repurchases and repayments of debt		—			(237		)	(6,615		)	(237		)
Net gain (loss) on fair value adjustments on debt		482			752			(16,385		)	511
Net gain on sales of real estate loans and related trust assets		34,800			—			89,986			—
Other		2,752			4,510			4,572			5,383
Total other revenues		91,343			51,590			172,747			95,246
Other expenses:
Operating expenses:
Salaries and benefits		91,283			78,862			183,802			157,290
Other operating expenses		60,063			70,369			117,772			121,979
Insurance losses and loss adjustment expenses		18,667			16,346			37,032			31,100
Total other expenses		170,013			165,577			338,606			310,369
Income before provision for income taxes		147,432			143,881			246,582			130,004
Provision for income taxes		44,754			32,963			75,272			28,700
Net income		102,678			110,918			171,310			101,304
Net income attributable to non-controlling interests		30,289			54,740			46,597			54,740
Net income attributable to Springleaf Holdings, Inc.		$	72,389		$	56,178		$	124,713		$	46,564
Share Data:
Weighted average number of shares outstanding:
Basic		114,788,439			100,000,000			114,788,439			100,000,000
Diluted		115,176,021			100,000,000			115,160,440			100,000,000
Earnings per share:
Basic		$	0.63		$	0.56		$	1.09		$	0.47
Diluted		$	0.63		$	0.56		$	1.08		$	0.47

 

See Notes to Condensed Consolidated Financial Statements.

 

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SPRINGLEAF HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

 

		Three Months			Three Months			Six Months			Six Months
		Ended			Ended			Ended			Ended
		June 30,			June 30,			June 30,			June 30,
(dollars in thousands)		2014			2013			2014			2013
											Revised
Net income		$	102,678		$	110,918		$	171,310		$	101,304
Other comprehensive income (loss):
Net unrealized gains (losses) on:
Investment securities on which other-than- temporary impairments were taken		(42		)	(95		)	(349		)	(118		)
All other investment securities		9,203			(9,301		)	19,342			(10,560		)
Foreign currency translation adjustments		(367		)	(20		)	(494		)	2,094
Income tax effect:
Net unrealized (gains) losses on:
Investment securities on which other-than- temporary impairments were taken		15			33			122			41
All other investment securities		(3,223		)	3,245			(6,772		)	3,695
Other comprehensive income (loss), net of tax, before reclassification adjustments		5,586			(6,138		)	11,849			(4,848		)
Reclassification adjustments included in net income:
Net realized gains on investment securities		(1,432		)	(2,033		)	(3,269		)	(2,608		)
Cash flow hedges		—			—			—			(160		)
Income tax effect:
Net realized gains on investment securities		501			712			1,144			913
Cash flow hedges		—			—			—			56
Reclassification adjustments included in net income, net of tax		(931		)	(1,321		)	(2,125		)	(1,799		)
Other comprehensive income (loss), net of tax		4,655			(7,459		)	9,724			(6,647		)
Comprehensive income		107,333			103,459			181,034			94,657
Comprehensive income attributable to non-controlling interests		30,289			54,740			46,597			54,740
Comprehensive income attributable to Springleaf Holdings, Inc.		$	77,044		$	48,719		$	134,437		$	39,917

 

See Notes to Condensed Consolidated Financial Statements.

 

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SPRINGLEAF HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)

 

		Springleaf Holdings, Inc. Shareholders’ Equity
								Accumulated						Springleaf
					Additional			Other						Holdings, Inc.						Total
		Common			Paid-in			Comprehensive			Retained			Shareholders’			Non-controlling			Shareholders’
(dollars in thousands)		Stock			Capital			Income (Loss)			Earnings			Equity			Interests			Equity
Balance, January 1, 2014		$	1,148		$	524,087		$	28,095		$	986,690		$	1,540,020		$	346,608		$	1,886,628
Share-based compensation expense, net of forfeitures		—			3,621			—			—			3,621			—			3,621
Change in non-controlling interests:
Distributions declared to joint venture partners		—			—			—			—			—			(5,655		)	(5,655		)
Change in net unrealized gains:
Investment securities		—			—			10,218			—			10,218			—			10,218
Foreign currency translation adjustments		—			—			(494		)	—			(494		)	—			(494		)
Net income		—			—			—			124,713			124,713			46,597			171,310
Balance, June 30, 2014		$	1,148		$	527,708		$	37,819		$	1,111,403		$	1,678,078		$	387,550		$	2,065,628
Balance, January 1, 2013 - Revised		$	1,000		$	147,459		$	26,472		$	1,005,991		$	1,180,922		$	—		$	1,180,922
Change in non-controlling interests:
Contributions from joint venture partners		—			—			—			—			—			438,081			438,081
Distributions declared to joint venture partners		—			—			—			—			—			(6,519		)	(6,519		)
Change in net unrealized losses:
Investment securities		—			—			(8,637		)	—			(8,637		)	—			(8,637		)
Cash flow hedges		—			—			(104		)	—			(104		)	—			(104		)
Foreign currency translation adjustments		—			—			2,094			—			2,094						2,094
Net income		—			—			—			46,564			46,564			54,740			101,304
Balance, June 30, 2013 - Revised		$	1,000		$	147,459		$	19,825		$	1,052,555		$	1,220,839		$	486,302		$	1,707,141

 

See Notes to Condensed Consolidated Financial Statements.

 

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SPRINGLEAF HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

(dollars in thousands)
Six Months Ended June 30,		2014			2013
					Revised
Cash flows from operating activities
Net income		$	171,310		$	101,304
Reconciling adjustments:
Provision for finance receivable losses		276,225			176,797
Depreciation and amortization		(14,182		)	(1,303		)
Deferred income tax benefit		(154,525		)	(62,951		)
Net loss (gain) on fair value adjustments on debt		16,385			(511		)
Net gain on sales of real estate loans and related trust assets		(89,986		)	—
Net loss on repurchases and repayments of debt		6,615			237
Share-based compensation expense, net of forfeitures		3,621			—
Other		(1,529		)	(3,174		)
Cash flows due to changes in:
Other assets and other liabilities		4,305			(64,981		)
Insurance claims and policyholder liabilities		18,324			12,309
Taxes receivable and payable		131,040			34,076
Accrued interest and finance charges		(6,938		)	(20,890		)
Restricted cash		(5,840		)	(3,172		)
Other, net		(467		)	(1,772		)
Net cash provided by operating activities		354,358			165,969
Cash flows from investing activities
Finance receivables originated or purchased, net of deferred origination costs		(1,226,894		)	(1,107,024		)
Principal collections on finance receivables		1,550,234			1,564,803
Purchase of SpringCastle Portfolio		—			(2,978,992		)
Sales and principal collections on finance receivables held for sale originated as held for investment		1,079,904			—
Available-for-sale investment securities purchased		(148,197		)	(340,349		)
Trading investment securities purchased		(37,760		)	(982		)
Available-for-sale investment securities called, sold, and matured		116,609			652,984
Trading investment securities called, sold, and matured		12,463			6,501
Change in restricted cash		10,745			(213,037		)
Proceeds from sale of real estate owned		40,813			68,614
Other, net		(1,300		)	(839		)
Net cash provided by (used for) investing activities		1,396,617			(2,348,321		)
Cash flows from financing activities
Proceeds from issuance of long-term debt, net of commissions		673,136			4,081,198
Repayment of long-term debt		(1,959,290		)	(3,237,503		)
Contributions from joint venture partners		—			438,081
Distributions to joint venture partners		(5,655		)	(5,862		)
Net cash provided by (used for) financing activities		(1,291,809		)	1,275,914

 

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Condensed Consolidated Statements of Cash Flows (Unaudited) (Continued)

 

(dollars in thousands)
Six Months Ended June 30,		2014			2013
					Revised
Effect of exchange rate changes		766			(1,538		)
Net change in cash and cash equivalents		459,932			(907,976		)
Cash and cash equivalents at beginning of period		431,409			1,554,348
Cash and cash equivalents at end of period		$	891,341		$	646,372
Supplemental non-cash activities
Transfer of finance receivables to real estate owned		$	33,335		$	45,207
Transfer of finance receivables held for investment to finance receivables held for sale (prior to deducting allowance for finance receivable losses)		1,291,078			—

 

See Notes to Condensed Consolidated Financial Statements.

 

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SPRINGLEAF HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2014

 

1.  Business and Summary of Significant Accounting Policies

 

Springleaf Holdings, Inc. (“SHI” or, collectively with its subsidiaries, whether directly or indirectly owned, “Springleaf,” the “Company,” “we,” “us,” or “our”) is a Delaware corporation, primarily owned by Springleaf Financial Holdings, LLC (the “Initial Stockholder”).

 

Following a series of restructuring transactions completed on October 9, 2013, in connection with the initial public offering of common stock of SHI, all of the common stock of Springleaf Finance, Inc. (“SFI”) is owned by SHI. On October 21, 2013, SHI completed the initial public offering of its common stock. At June 30, 2014, the Initial Stockholder owned approximately 75% of SHI’s common stock. The Initial Stockholder is owned primarily by a private equity fund managed by an affiliate of Fortress Investment Group LLC (“Fortress”) and AIG Capital Corporation, a subsidiary of American International Group, Inc. (“AIG”).

 

SHI is a financial services holding company whose principal subsidiary is SFI. SFI’s principal subsidiary is Springleaf Finance Corporation (“SFC”), a financial services holding company with subsidiaries engaged in the consumer finance and credit insurance businesses.

 

BASIS OF PRESENTATION

 

We prepared our condensed consolidated financial statements using generally accepted accounting principles in the United States of America (“U.S. GAAP”). These statements are unaudited. The year-end condensed balance sheet data was derived from our audited financial statements, but does not include all disclosures required by U.S. GAAP. The statements include the accounts of SHI, its subsidiaries (all of which are wholly owned, except for certain subsidiaries associated with a joint venture in which we own a 47% equity interest), and variable interest entities (“VIEs”) in which we hold a controlling financial interest as of the financial statement date.

 

We eliminated all material intercompany accounts and transactions. We made judgments, estimates, and assumptions that affect amounts reported in our condensed consolidated financial statements and disclosures of contingent assets and liabilities. In management’s opinion, the condensed consolidated financial statements include the normal, recurring adjustments necessary for a fair statement of results. Ultimate results could differ from our estimates. We evaluated the effects of and the need to disclose events that occurred subsequent to the balance sheet date. These statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 (“2013 Annual Report on Form 10-K”). We follow the same significant accounting policies for our interim reporting.

 

In connection with SHI’s initial public offering of its common stock previously discussed, SFI became a wholly owned subsidiary of SHI. As a result, the financial statements of SFI have been adjusted on a retrospective basis, as appropriate, as financial statements of SHI.

 

Prior Period Revisions

 

As disclosed in our 2013 Annual Report on Form 10-K, we identified certain out-of-period errors in preparing our annual consolidated financial statements for the year ended December 31, 2013. In addition to these errors, we had previously recorded and disclosed out-of-period adjustments in prior reporting periods when the errors were discovered. As a result, we revised all previously reported periods included in our 2013 Annual Report on Form 10-K. Similarly, we have revised all previously reported periods included in this report. We corrected the errors identified in the fourth quarter of 2013 and included these

 

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corrections in the appropriate prior periods. In addition, we reversed all out-of period adjustments previously recorded and disclosed, and included the adjustments in the appropriate periods. After evaluating the quantitative and qualitative aspects of these corrections, we have determined that our previous applicable quarterly condensed financial statements and our annual consolidated financial statements were not materially misstated.

 

See Note 17 for further information on the prior period revisions. The financial data for the six months ended June 30, 2013 was previously presented in our final prospectus filed with the Securities and Exchange Commission (the “SEC”) on October 16, 2013 related to our initial public offering of our common stock (the “Prospectus”). The financial data for the three months ended June 30, 2013 has not been previously reported.

 

In addition, during the first quarter of 2014, we identified that the disclosure of the allowance for finance receivable losses related to our securitized finance receivables at December 31, 2013, was previously incorrectly overstated by $26.8 million. The parenthetical disclosure of the allowance of consolidated VIEs as of December 31, 2013 on our condensed consolidated balance sheet and the related VIE disclosures in Notes 3 and 8 have been revised in this report to $153.7 million.

 

During the first quarter of 2014, we also discovered that our long-term debt associated with securitizations that were issued at a discount and which had embedded derivatives, was incorrectly excluded from the fair value disclosure of our financial instruments measured on a recurring basis. The affected fair value amount has been corrected in Note 18 in this report to include the fair value of our long-term debt measured on a recurring basis of $363.7 million at December 31, 2013.

 

During the second quarter of 2014, we discovered that we incorrectly disclosed the carrying values at the date of sale of the real estate loans associated with the 2009-1 securitization and certain additional real estate loans sold on March 31, 2014. The affected carrying values have been corrected in Notes 1, 3, and 4 in this report as follows: (i) the carrying value of real estate loans associated with the 2009-1 securitization that were sold on March 31, 2014, was previously reported as $742.0 million but has been corrected to be $724.9 million and (ii) the carrying value of additional real estate loans sold on March 31, 2014, was previously reported as $93.3 million but has been corrected to be $89.9 million.

 

After evaluating the quantitative and qualitative aspects of these corrections (individually and in the aggregate), management has determined that our previously issued interim and annual consolidated financial statements were not materially misstated.

 

Fortress Acquisition

 

Due to the significance of the ownership interest acquired by FCFI Acquisition LLC, an affiliate of Fortress, (the “Fortress Acquisition”), the nature of the transaction, and at the direction of our acquirer, we applied push-down accounting to SFI as an acquired business. We revalued our assets and liabilities based on their fair values at the date of the Fortress Acquisition, November 30, 2010, in accordance with business combination accounting standards (“push-down accounting”).

 

SIGNIFICANT 2014 TRANSACTIONS

 

Sale of 2010-1 Retained Certificates

 

On March 30, 2010, we completed a private securitization transaction in which a wholly owned special purpose vehicle of SFC sold $716.9 million of certificates backed by real estate loans of the American General Mortgage Loan Trust 2010-1 (the “2010-1 Trust”). We initially retained $285.8 million of the 2010-1 Trust’s subordinate mortgage-backed certificates (the “2010-1 Retained Certificates”).

 

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On June 1, 2014, the real estate loans included in the transaction were transferred from held for investment to held for sale, due to management’s intent to no longer hold these finance receivables for the foreseeable future.

 

We completed the sale of the 2010-1 Retained Certificates on June 30, 2014, at which time, the real estate loans included in the transaction had a carrying value of $444.4 million (after the basis adjustment for the related allowance for finance receivable losses). As a result of the sale, we deconsolidated the underlying real estate loans and previously issued securitized interests which were reported in long-term debt, as we no longer were considered the primary beneficiary.

 

Sale of 2009-1 Retained Certificates

 

On July 30, 2009, we completed a private securitization transaction in which a wholly owned special purpose vehicle of SFC sold $1.2 billion of certificates backed by real estate loans of the American General Mortgage Loan Trust 2009-1 (the “2009-1 Trust”). We initially retained $786.3 million of the 2009-1 Trust’s subordinate mortgage-backed certificates (the “2009-1 Retained Certificates”).

 

On March 1, 2014, the real estate loans included in the transaction were transferred from held for investment to held for sale, due to management’s intent to no longer hold these finance receivables for the foreseeable future.

 

We completed the sale of the 2009-1 Retained Certificates on March 31, 2014, at which time, the real estate loans included in the transaction had a carrying value of $724.9 million (after the basis adjustment for the related allowance for finance receivable losses). As a result of the sale, we deconsolidated the underlying real estate loans and previously issued securitized interests which were reported in long-term debt, as we no longer were considered the primary beneficiary.

 

Sale of Real Estate Loans

 

On March 7, 2014, we entered into an agreement to sell, subject to certain closing conditions, certain performing and non-performing real estate loans. We completed this sale on March 31, 2014, at which time, the real estate loans included in the transaction had a carrying value of $89.9 million (after the basis adjustment for the related allowance for finance receivable losses). On March 1, 2014, these loans were transferred from held for investment to held for sale, due to management’s intent to no longer hold these finance receivables for the foreseeable future.

 

ACCOUNTING PRONOUNCEMENTS ADOPTED

 

Income Taxes

 

In July 2013, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update (“ASU”), ASU 2013-11, Income Taxes (Topic 740), which clarifies the presentation requirements of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. The amendments in this ASU became effective prospectively for the Company for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of this ASU did not have a material effect on our consolidated statements of financial condition, results of operations, or cash flows.

 

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ACCOUNTING PRONOUNCEMENTS TO BE ADOPTED

 

Troubled Debt Restructurings

 

In January 2014, the FASB issued ASU 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure, which clarifies when an in substance repossession or foreclosure occurs — that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The ASU requires a creditor to reclassify a collateralized consumer mortgage loan to real estate property upon obtaining legal title to the real estate collateral, or the borrower voluntarily conveying all interest in the real estate property to the lender to satisfy the loan through a deed in lieu of foreclosure or similar legal agreement. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. We are currently evaluating whether the adoption of this ASU will have a material effect on our consolidated statements of financial condition, results of operations, or cash flows.

 

Discontinued Operations

 

In April 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which redefines when the disposal of a component of entity or a group of assets is required to be reported in discontinued operations. The ASU requires a reporting entity to report disposals of components of an entity or a group of assets in discontinued operations when the disposal represents a strategic shift that has or will have a major effect on an entity’s operations and financial results. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014, but can be early adopted.

 

Revenue from Contracts

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which provides a consistent revenue accounting model across industries. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. Many of our revenue sources are not within the scope of this new standard and we are currently evaluating whether the adoption of this ASU for those revenue sources that are in scope will have a material effect on our consolidated statements of financial condition, results of operations, or cash flows.

 

Share-based Payments

 

In June 2014, the FASB issued ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period, which clarifies that performance targets within share-based payment awards that can be met after the requisite service period should be considered performance conditions that affect vesting. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. We are currently evaluating whether the adoption of this ASU will have a material effect on our consolidated statements of financial condition, results of operations, or cash flows.

 

ACCOUNTING POLICY ELECTIONS

 

We made certain policy elections with regard to the issuance of long-term debt related to the 2014-A securitization and have updated our long-term debt policy previously disclosed in our 2013 Annual Report on Form 10-K to reflect these elections. The updated long-term debt policy is presented below:

 

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Long-term Debt

 

We generally report our long-term debt issuances at the face value of the debt instrument, which we adjust for any unaccreted discount or unamortized premium associated with the debt. We make policy elections on a security by security basis with regard to the methodology used to accrete discounts and premiums. Other than securitized products, we generally accrete discounts and premiums over the contractual life of the security using contractual payment terms. With respect to securitized products, we have historically elected to use estimated prepayment patterns adjusted for changes in estimate over the estimated life of the debt. However, in certain circumstances, including our policy election for the 2014-A securitization, we elect to amortize deferred items over the contractual life of the security. Under either treatment, such accretion is recorded to interest expense. Additionally, we generally accrete other deferred amounts (e.g. issuance costs) following the same method elected on the associated unaccreted discount or premium.

 

2.  Finance Receivables

 

Our finance receivable types include personal loans, SpringCastle Portfolio, real estate loans, and retail sales finance as defined below:

 

·                  Personal loans — are secured by consumer goods, automobiles, or other personal property or are unsecured, generally have maximum original terms of four years, and are usually fixed-rate, fixed-term loans. At June 30, 2014, $1.5 billion of personal loans, or 45%, were secured by collateral consisting of titled personal property (such as automobiles), $1.3 billion, or 39%, were secured by consumer household goods or other items of personal property, and the remainder was unsecured.

 

·                  SpringCastle Portfolio — are loans jointly acquired from HSBC Finance Corporation and certain of its affiliates (collectively, “HSBC”) on April 1, 2013 through a joint venture in which we own a 47% equity interest. These loans include unsecured loans and loans secured by subordinate residential real estate mortgages (which we service as unsecured loans due to the fact that the liens are subordinated to superior ranking security interests). The SpringCastle Portfolio includes both closed-end accounts and open-end lines of credit. These loans are in a liquidating status and vary in substance and form from our originated loans.

 

·                  Real estate loans — are secured by first or second mortgages on residential real estate, generally have maximum original terms of 360 months, and are usually considered non-conforming. Real estate loans may be closed-end accounts or open-end home equity lines of credit and are primarily fixed-rate products.

 

·                  Retail sales finance — includes retail sales contracts and revolving retail accounts. Retail sales contracts are closed-end accounts that represent a single purchase transaction. Revolving retail accounts are open-end accounts that can be used for financing repeated purchases from the same merchant. Retail sales contracts are secured by the personal property designated in the contract and generally have maximum original terms of 60 months. Revolving retail accounts are secured by the goods purchased and generally require minimum monthly payments based on the amount financed calculated after the most recent purchase or outstanding balances. In January 2013, we ceased purchasing retail sales contracts and revolving retail accounts.

 

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Components of net finance receivables by type were as follows:

 

		Personal			SpringCastle			Real			Retail
(dollars in thousands)		Loans			Portfolio			Estate Loans			Sales Finance			Total
June 30, 2014
Gross receivables*		$	3,948,649		$	2,186,158		$	6,308,033		$	74,989		$	12,517,829
Unearned finance charges and points and fees		(632,108		)	—			(362		)	(7,148		)	(639,618		)
Accrued finance charges		50,177			16,222			33,342			585			100,326
Deferred origination costs		40,610			—			244			—			40,854
Total		$	3,407,328		$	2,202,380		$	6,341,257		$	68,426		$	12,019,391
December 31, 2013
Gross receivables*		$	3,644,030		$	2,484,719		$	7,940,500		$	108,457		$	14,177,706
Unearned finance charges and points and fees		(560,104		)	—			(1,115		)	(10,444		)	(571,663		)
Accrued finance charges		48,179			20,630			42,690			898			112,397
Deferred origination costs		39,599			—			274			—			39,873
Total		$	3,171,704		$	2,505,349		$	7,982,349		$	98,911		$	13,758,313

 

*                 Gross receivables are defined below:

 

·                  finance receivables purchased as a performing receivable — gross finance receivables equal the unpaid principal balance (“UPB”) for interest bearing accounts and the gross remaining contractual payments for precompute accounts; additionally, the remaining unearned discount, net of premium established at the time of purchase is included in both interest bearing and precompute accounts to reflect the finance receivable balance at its fair value;

·                  finance receivables originated subsequent to the Fortress Acquisition — gross finance receivables equal the UPB for interest bearing accounts and the gross remaining contractual payments for precompute accounts; and

·                  purchased credit impaired finance receivables — gross finance receivables equal the remaining estimated cash flows less the current balance of accretable yield on the purchased credit impaired accounts.

 

Included in the table above are personal loans totaling $1.9 billion at June 30, 2014 and $1.6 billion at December 31, 2013, SpringCastle Portfolio loans totaling $2.2 billion at June 30, 2014 and $2.5 billion at December 31, 2013, and real estate loans totaling $4.2 billion at June 30, 2014 and $5.7 billion at December 31, 2013 associated with securitizations that remain on our balance sheet. The carrying amount of consolidated long-term debt associated with securitizations totaled $6.5 billion at June 30, 2014 and $7.3 billion at December 31, 2013. See Note 8 for further discussion regarding our securitization transactions. Also included in the table above are finance receivables totaling $1.0 billion at December 31, 2013, which were pledged as collateral for our secured term loan that we fully repaid in March 2014. See Note 7 for further discussion of the repayment of our secured term loan.

 

Unused lines of credit extended to customers by the Company were as follows:

 

		June 30,			December 31,
(dollars in thousands)		2014			2013
Personal loans		$	1,445		$	4,996
SpringCastle Portfolio		369,016			366,060
Real estate loans		29,759			32,338
Total		$	400,220		$	403,394

 

Unused lines of credit on our personal loans can be suspended if one of the following occurs: the value of the collateral declines significantly; we believe the borrower will be unable to fulfill the repayment obligations; or any other default by the borrower of any material obligation under the agreement. Unused lines of credit on our real estate loans and the SpringCastle Portfolio secured by subordinate residential real estate mortgages can be suspended if one of the following occurs: (1) the value of the real estate declines significantly below the property’s initial appraised value; (2) we believe the borrower will be

 

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