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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
The following discussion and analysis of OMH's financial condition and results of operations should be read together with the audited consolidated financial statements and related notes included in this report. This discussion and analysis contains forward-looking statements that involve risk, uncertainties, and assumptions. See “Forward-Looking Statements” included in this report for more information. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of many factors, including those discussed in “Risk Factors” included in this report.
An index to our management’s discussion and analysis follows:
We operate in the United States and market our personal loans in 44 states. We also offer two credit cards, BrightWay and BrightWay+, which are designed to reward customers for responsible credit activity such as consistent on-time payments. We continue to expand BrightWay and BrightWay+ credit cards across our branch network, through direct mail, and through our digital affiliates. In connection with our offerings, our insurance subsidiaries offer our personal loan customers optional credit and non-credit insurance, and other insurance-related products. We strive to meet our customers at their preferred channel and to deliver a seamless customer experience through our digital platforms or working with our expert team members at our approximately 1,400 locations. Our personal loans, credit cards, and other products help customers meet everyday needs and take steps to improve their financial well-being.
In addition to our loan originations, insurance, and other product sales activities, we also service the loans that we originate and retain on our balance sheet, as well as loans owned by third parties on their behalf in connection with our whole loan sale program and legacy businesses. We also pursue strategic acquisitions and dispositions of assets and businesses, including loan portfolios or other financial assets, and may establish joint ventures or enter into other strategic alliances.
OUR PRODUCTS
Our product offerings include:
•Personal Loans — We offer personal loans through our branch network, centralized operations, and our website, www.omf.com, to customers who need timely access to cash. Our personal loans are non-revolving, with a fixed rate, have fixed terms generally between three and six years, and are secured by automobiles, other titled collateral, or are unsecured. At December 31, 2022, we had approximately 2.33 million personal loans totaling $19.9 billion of net finance receivables, of which 52% were secured by titled property, compared to approximately 2.34 million personal loans totaling $19.2 billion of net finance receivables, of which 52% were secured by titled property at December 31, 2021. We also service personal loans for our whole loan sale partners.
•Credit Cards — We offer credit cards through a third-party bank partner from which we purchase the receivable balances. The credit cards are offered through our branch network, direct mail marketing, and direct-to-consumer via our affiliates. Credit cards are open-ended, revolving, with a fixed rate, and are unsecured. At December 31, 2022, we had approximately 135 thousand open credit card customer accounts, totaling $107 million of net finance receivables, compared to approximately 66 thousand open credit card customer accounts, totaling $25 million of net finance receivables at December 31, 2021.
•Insurance Products — We offer our customers optional credit insurance products (life, disability, and involuntary unemployment insurance) and optional non-credit insurance products through both our branch network and our centralized operations. Credit insurance and non-credit insurance products are provided by our affiliated insurance companies. We offer GAP coverage as a waiver product or insurance. We also offer optional membership plans from an unaffiliated company.
OUR SEGMENT
At December 31, 2022, Consumer and Insurance (“C&I”) is our only reportable segment, which includes personal loans, credit cards, and insurance products. At December 31, 2022, we managed a combined total of 2.56 million customer accounts and $20.8 billion of managed receivables, compared to 2.45 million customer accounts and $19.6 billion of managed receivables at December 31, 2021.
The remaining components (which we refer to as “Other”) consist of our liquidating SpringCastle Portfolio servicing activity and our non-originating legacy operations, which primarily include our liquidating real estate loans held for sale and reported in Other assets in our consolidated balance sheets. See Note 17 of the Notes to the Consolidated Financial Statements included in this report for more information about our segment.
HOW WE ASSESS OUR BUSINESS PERFORMANCE
We closely monitor the primary drivers of pretax operating income, which consist of the following:
Interest Income
We track interest income, including certain fees earned on our finance receivables, and continually monitor the components that impact our yield. We include any late charges on loans that we have collected from customer payments in interest income.
Interest Expense
We track the interest expense incurred on our debt, along with amortization or accretion of premiums or discounts, and issuance costs, to monitor the components of our cost of funds. We expect interest expense to fluctuate based on changes in the secured versus unsecured mix of our debt, time to maturity, the cost of funds rate, and utilization of revolving conduit facilities.
Net Credit Losses
The credit quality of our loans is driven by our underwriting philosophy, which considers the prospective customer’s household budget, his or her willingness and capacity to repay, and the underlying collateral on the loan. We closely analyze credit performance because the profitability of our loan portfolio is directly connected to net credit losses. We define net credit losses as gross charge-offs minus recoveries in the portfolio. Additionally, because delinquencies are an early indicator of future net credit losses, we analyze delinquency trends, adjusting for seasonality, to determine whether our loans are performing in line with our original estimates. We also monitor recovery rates because of their contribution to the reduction in the severity of our charge-offs.
Operating Expenses
We assess our operational efficiency using various metrics and conduct extensive analysis to determine whether fluctuations in cost and expense levels indicate operational trends that need to be addressed. Our operating expense analysis also includes a review of origination and servicing costs to assist us in managing overall profitability.
Finance Receivables Originations and Purchase Volume
Because loan volume and portfolio size determine the magnitude of the impact of each of the above factors on our earnings, we also closely monitor originations, purchase volume, and annual percentage rate.
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Recent Developments and Outlook |
RECENT DEVELOPMENTS
Stock Repurchase Program
On February 2, 2022, the Board authorized a stock repurchase program, which allows us to repurchase up to $1.0 billion of OMH’s outstanding common stock, excluding fees, commissions, and other expenses related to the repurchases. The authorization expires on December 31, 2024. As of December 31, 2022, we had $726 million of authorized share repurchase capacity, excluding fees and commissions, remaining under the program.
See “Liquidity and Capital Resources” under Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities in Part II of this report for further information on our shares repurchased.
Private Secured Term Funding
On April 25, 2022, OMFC entered into a $350 million private secured term funding collateralized by our personal loans. No principal payments are required to be made during the first three years, followed by a subsequent one-year amortization period at the expiration of which the outstanding principal amount is due and payable.
Social Securitization Transaction - OMFIT 2022-S1
As part of our continued commitment to improve the financial well-being of hardworking Americans, on April 27, 2022, OMFC completed its first social securitization under Rule 144A. We issued $600 million principal amount of notes backed by personal loans (“OMFIT 2022-S1”) made to the target population identified in the OneMain 2022 ABS Social Bond Framework. OMFIT 2022-S1 has a revolving period of three years, during which no principal payments are required. Generally, the target population is comprised of borrowers residing in rural communities (by zip code), 75% of whom are lower income borrowers in these communities. Through the OneMain 2022 ABS Social Bond Framework we aim to promote financial inclusion to the target population by providing equitable access to fair and transparent credit. The OneMain 2022 ABS Social Bond Framework, which is available on OneMain’s Investor Relations website, aligns to the Social Bond Principles 2021, as administered by the International Capital Market Association.
Securitization Transactions Completed - ODART 2022-1, OMFIT 2022-2, and OMFIT 2022-3
For information regarding the issuances of our secured debt, see “Liquidity and Capital Resources” under Management’s Discussion and Analysis of Financial Condition and Results of Operations in this report.
Redemption of 8.875% Senior Notes Due 2025
On June 1, 2022, OMFC paid a net aggregate amount of $637 million, inclusive of accrued interest and premiums, to complete the redemption of its 8.875% Senior Notes due 2025.
Unsecured Corporate Revolver
On June 15, 2022, OMFC increased the total maximum borrowing capacity of its unsecured corporate revolver to $1.25 billion. At December 31, 2022, no amounts were drawn under this facility.
For further information regarding the redemption of our unsecured debt and our corporate revolver, see Note 8 of the Notes to the Consolidated Financial Statements included in this report.
Cash Dividends to OMH's Common Stockholders
For information regarding the quarterly dividends declared by OMH, see “Liquidity and Capital Resources” under Management’s Discussion and Analysis of Financial Condition and Results of Operations in this report.
Election and Resignation of Members of the Board
On January 27, 2022, Toos N. Daruvala was elected to the Board, effective February 14, 2022.
On February 24, 2022, Peter B. Sinensky resigned from the Board.
Appointments of OMFC’s President and Chief Executive Officer (“CEO”), and Vice President, Chief Financial Officer (“CFO”) and a new member of OMFC’s Board of Directors
On December 12, 2022, OMFC’s Board of Directors appointed Micah R. Conrad as OMFC’s President and CEO and elected Matthew Vaughan as Vice President, CFO of OMFC and to OMFC’s Board of Directors. Mr. Conrad succeeds Richard N. Tambor and Mr. Vaughan succeeds Mr. Conrad’s former position as CFO of OMFC.
Management’s Response to the COVID-19 Pandemic
In early 2020, COVID-19 evolved into a global pandemic, resulting in widespread volatility and deterioration in economic conditions across the states and regions that we serve. Throughout the pandemic, we maintained our focus on assisting and supporting our customers, while remaining committed to the safety of our employees. We continue to serve our customers by keeping our branch locations open with appropriate protective protocols in place and through our digital platform. This hybrid capability has sustained our operating performance through the pandemic and enabled us to serve and support our customers effectively.
OUTLOOK
We are actively monitoring the current macroeconomic developments, including geopolitical actions outside of the U.S., and remain prepared for any opportunities or challenges that may impact our business. Our financial condition and results of operations could be affected by macroeconomic conditions, including changes in unemployment, inflation, interest rates, and consumer confidence. We will continue to incorporate updates to our macroeconomic assumptions, as necessary, which could lead to further adjustments in our allowance for finance receivable losses, allowance ratio, and provision for finance receivable losses.
Our experienced management team remains focused on maintaining a solid balance sheet with a strong liquidity runway and capital coverage, upholding a conservative and disciplined underwriting model, and building strong relationships with our customers to ensure that we are serving them well. We believe we are well positioned to serve our customers, invest in our business, and drive long-term growth to create value for our stockholders as we navigate an ever-evolving economic, social, political, and regulatory environment.
The results of OMFC are consolidated into the results of OMH. Due to the nominal differences between OMFC and OMH, content throughout this section relates only to OMH. See Note 1 of the Notes to the Consolidated Financial Statements included in this report for further information.
OMH'S CONSOLIDATED RESULTS
See the table below for OMH's consolidated operating results and selected financial statistics. A further discussion of OMH's operating results for our operating segment is provided under “Segment Results” below.
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(dollars in millions, except per share amounts) | | | | | | | | | | |
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At or for the Years Ended December 31, | | | | | | 2022 | | 2021 | | 2020 |
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Interest income | | | | | | $ | 4,435 | | | $ | 4,364 | | | $ | 4,368 | |
Interest expense | | | | | | 892 | | | 937 | | | 1,027 | |
Provision for finance receivable losses | | | | | | 1,402 | | | 593 | | | 1,319 | |
Net interest income after provision for finance receivable losses | | | | | | 2,141 | | | 2,834 | | | 2,022 | |
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Other revenues | | | | | | 629 | | | 531 | | | 526 | |
Other expenses | | | | | | 1,607 | | | 1,624 | | | 1,571 | |
Income before income taxes | | | | | | 1,163 | | | 1,741 | | | 977 | |
Income taxes | | | | | | 285 | | | 427 | | | 247 | |
Net income | | | | | | $ | 878 | | | $ | 1,314 | | | $ | 730 | |
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Share Data: | | | | | | | | | | |
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Earnings per share: | | | | | | | | | | |
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Diluted | | | | | | $ | 7.06 | | | $ | 9.87 | | | $ | 5.41 | |
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Selected Financial Statistics (a) | | | | | | | | | | |
Total finance receivables: | | | | | | | | | | |
Net finance receivables | | | | | | $ | 19,986 | | | $ | 19,212 | | | $ | 18,084 | |
Average net receivables | | | | | | $ | 19,440 | | | $ | 18,281 | | | $ | 17,997 | |
Yield | | | | | | 22.79 | % | | 23.84 | % | | 24.24 | % |
Gross charge-off ratio | | | | | | 7.40 | % | | 5.41 | % | | 6.46 | % |
Recovery ratio | | | | | | (1.29) | % | | (1.21) | % | | (0.92) | % |
Net charge-off ratio | | | | | | 6.10 | % | | 4.20 | % | | 5.54 | % |
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Personal loans: | | | | | | | | | | |
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Net finance receivables | | | | | | $ | 19,879 | | | $ | 19,187 | | | $ | 18,084 | |
Origination volume | | | | | | $ | 13,879 | | | $ | 13,825 | | | $ | 10,729 | |
Number of accounts | | | | | | 2,334,097 | | | 2,336,845 | | | 2,304,951 | |
Number of accounts originated | | | | | | 1,365,989 | | | 1,388,123 | | | 1,099,767 | |
30-89 Delinquency ratio | | | | | | 3.07 | % | | 2.43 | % | | 2.28 | % |
Credit cards (b): | | | | | | | | | | |
Net finance receivables | | | | | | $ | 107 | | | $ | 25 | | | $ | — | |
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Purchase volume | | | | | | $ | 172 | | | $ | 26 | | | $ | — | |
Number of open accounts | | | | | | 135,335 | | | 65,513 | | | — | |
30-89 Delinquency ratio | | | | | | 5.90 | % | | 0.08 | % | | — | % |
Debt balances: | | | | | | | | | | |
Long-term debt balance | | | | | | $ | 18,281 | | | $ | 17,750 | | | $ | 17,800 | |
Average daily debt balance | | | | | | $ | 17,854 | | | $ | 17,441 | | | $ | 18,080 | |
(a) See “Glossary” at the beginning of this report for formulas and definitions of our key performance ratios.
(b) There were no credit cards for the year ended December 31, 2020, as the product offering began in 2021.
Comparison of Consolidated Results for 2022 and 2021
Interest income increased $71 million or 2% in 2022 when compared to 2021 primarily due to growth in our loan portfolio, partially offset by lower yield.
Interest expense decreased $45 million or 5% in 2022 when compared to 2021 primarily due to a lower average cost of funds, partially offset by an increase in average debt.
See Notes 8 and 9 of the Notes to the Consolidated Financial Statements included in this report for further information on our long-term debt, securitization transactions, private secured term funding, and our revolving conduit facilities.
Provision for finance receivable losses increased $809 million or 136% in 2022 when compared to 2021 primarily driven by higher net charge-offs and an increase in the allowance for finance receivable losses due to the weakened macroeconomic environment and growth in the portfolio.
Other revenues increased $98 million or 18% in 2022 when compared to 2021 primarily due to an increase in gains on the sales of finance receivables and an increase in servicing revenue associated with the whole loan sale program as a result of more loans sold in the current period and lower net losses on the repurchases and repayments of debt in the current period compared to the prior year period.
Other expenses decreased $17 million or 1% in 2022 when compared to 2021 primarily due to a decrease in insurance policy and benefits claims expense due to favorable experiences in credit life and term life products, the prior year expense associated with the cash-settled stock-based awards not present in the current year, and a decrease in amortization expense of other intangibles primarily due to the customer relationships intangible asset being fully amortized in the prior year. The decrease was partially offset by an increase in salaries and benefits expense and an increase in software and technology expense driven by the continued investment in our business.
Income taxes totaled $285 million for 2022 compared to $427 million for 2021. The effective tax rate for 2022 was 24.5% compared to 24.6% for 2021. The effective tax rate for 2022 and 2021 differed from the federal statutory rate of 21% primarily due to the effect of state income taxes.
See Note 13 of the Notes to the Consolidated Financial Statements included in this report for further information on effective tax rates.
Comparison of Consolidated Results for 2021 and 2020
For a comparison of OMH's results of operation for the years ended 2021 and 2020, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—OMH’s Consolidated Results” in Part II - Item 7 of OMH's Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 11, 2022.
NON-GAAP FINANCIAL MEASURES
Management uses C&I adjusted pretax income (loss), a non-GAAP financial measure, as a key performance measure of our segment. C&I adjusted pretax income (loss) represents income (loss) before income taxes on a Segment Accounting Basis and excludes the expense associated with the net loss resulting from repurchases and repayments of debt, restructuring charges, direct costs associated with COVID-19, the expense associated with the cash-settled stock-based awards, and acquisition-related transaction and integration expenses. Management believes C&I adjusted pretax income (loss) is useful in assessing the profitability of our segment.
Management also uses C&I pretax capital generation, a non-GAAP financial measure, as a key performance measure of our segment. This measure represents C&I adjusted pretax income as discussed above and excludes the change in our C&I allowance for finance receivable losses in the period while still considering the C&I net charge-offs incurred during the period. Management believes that C&I pretax capital generation is useful in assessing the capital created in the period impacting the overall capital adequacy of the Company. Management believes that the Company’s reserves, combined with its equity, represent the Company’s loss absorption capacity.
Management utilizes both C&I adjusted pretax income (loss) and C&I pretax capital generation in evaluating our performance. Additionally, both of these non-GAAP measures are consistent with the performance goals established in OMH’s executive compensation program. C&I adjusted pretax income (loss) and C&I pretax capital generation are non-GAAP financial measures and should be considered supplemental to, but not as a substitute for or superior to, income (loss) before income taxes, net income, or other measures of financial performance prepared in accordance with GAAP.
OMH's reconciliations of income before income tax expense on a Segment Accounting Basis to C&I adjusted pretax income (non-GAAP) and C&I pretax capital generation (non-GAAP) were as follows:
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(dollars in millions) | | | | | | | | | | |
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Years Ended December 31, | | | | | | 2022 | | 2021 | | 2020 |
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Consumer and Insurance | | | | | | | | | | |
Income before income taxes - Segment Accounting Basis | | | | | | $ | 1,177 | | | $ | 1,788 | | | $ | 1,021 | |
Adjustments: | | | | | | | | | | |
Net loss on repurchases and repayments of debt | | | | | | 26 | | | 70 | | | 36 | |
Restructuring charges | | | | | | 7 | | | — | | | 7 | |
Direct costs associated with COVID-19 | | | | | | 4 | | | 6 | | | 17 | |
Cash-settled stock-based awards | | | | | | — | | | 54 | | | — | |
Acquisition-related transaction and integration expenses | | | | | | — | | | — | | | 11 | |
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Adjusted pretax income (non-GAAP) | | | | | | 1,214 | | | 1,918 | | | 1,092 | |
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Provision for finance receivable losses | | | | | | 1,399 | | | 587 | | | 1,313 | |
Net charge-offs | | | | | | (1,186) | | | (768) | | | (998) | |
Pretax capital generation (non-GAAP) | | | | | | $ | 1,427 | | | $ | 1,737 | | | $ | 1,407 | |
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The results of OMFC are consolidated into the results of OMH. Due to the nominal differences between OMFC and OMH, content throughout this section relate only to OMH. See Note 1 of the Notes to the Consolidated Financial Statements included in this report for further information.
See Note 17 of the Notes to the Consolidated Financial Statements in this report for a description of our segment, methodologies used to allocate revenues and expenses to our C&I segment, and reconciliations of segment total to consolidated financial statement amounts.
CONSUMER AND INSURANCE
OMH's adjusted pretax income and selected financial statistics for C&I on an adjusted Segment Accounting Basis were as follows:
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(dollars in millions) | | | | | | | | | | |
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At or for the Years Ended December 31, | | | | | | 2022 | | 2021 | | 2020 |
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Interest income | | | | | | $ | 4,429 | | | $ | 4,355 | | | $ | 4,353 | |
Interest expense | | | | | | 886 | | | 930 | | | 1,007 | |
Provision for finance receivable losses | | | | | | 1,399 | | | 587 | | | 1,313 | |
Net interest income after provision for finance receivable losses | | | | | | 2,144 | | | 2,838 | | | 2,033 | |
Other revenues | | | | | | 644 | | | 597 | | | 551 | |
Other expenses | | | | | | 1,574 | | | 1,517 | | | 1,492 | |
Adjusted pretax income (non-GAAP) | | | | | | $ | 1,214 | | | $ | 1,918 | | | $ | 1,092 | |
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Selected Financial Statistics (a) | | | | | | | | | | |
Total finance receivables: | | | | | | | | | | |
Net finance receivables | | | | | | $ | 19,987 | | | $ | 19,215 | | | $ | 18,091 | |
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Average net receivables | | | | | | $ | 19,442 | | | $ | 18,286 | | | $ | 18,009 | |
Yield | | | | | | 22.78 | % | | 23.82 | % | | 24.17 | % |
Gross charge-off ratio | | | | | | 7.40 | % | | 5.42 | % | | 6.46 | % |
Recovery ratio | | | | | | (1.29) | % | | (1.21) | % | | (0.92) | % |
Net charge-off ratio | | | | | | 6.10 | % | | 4.20 | % | | 5.54 | % |
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Personal loans: | | | | | | | | | | |
Net finance receivables | | | | | | $ | 19,880 | | | $ | 19,190 | | | $ | 18,091 | |
Origination volume | | | | | | $ | 13,879 | | | $ | 13,825 | | | $ | 10,729 | |
Number of accounts | | | | | | 2,334,097 | | | 2,336,845 | | | 2,304,951 | |
Number of accounts originated | | | | | | 1,365,989 | | | 1,388,123 | | | 1,099,767 | |
30-89 Delinquency ratio | | | | | | 3.07 | % | | 2.43 | % | | 2.28 | % |
Credit cards (b): | | | | | | | | | | |
Net finance receivables | | | | | | $ | 107 | | | $ | 25 | | | $ | — | |
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Purchase volume | | | | | | $ | 172 | | | $ | 26 | | | $ | — | |
Number of open accounts | | | | | | 135,335 | | | 65,513 | | | — | |
30-89 Delinquency ratio | | | | | | 5.90 | % | | 0.08 | % | | — | % |
(a) See “Glossary” at the beginning of this report for formulas and definitions of our key performance ratios.
(b) There were no credit cards for the year ended December 31, 2020, as the product offering began in 2021.
Comparison of Adjusted Pretax Income for 2022 and 2021
Interest income increased $74 million or 2% in 2022 when compared to 2021 primarily due to growth in our loan portfolio, partially offset by lower yield.
Interest expense decreased $44 million or 5% in 2022 when compared to 2021 primarily due to a lower average cost of funds, partially offset by an increase in average debt.
See Notes 8 and 9 of the Notes to the Consolidated Financial Statements included in this report for further information on our long-term debt, securitization transactions, private secured term funding, and our revolving conduit facilities.
Provision for finance receivable losses increased $812 million or 138% in 2022 when compared to 2021 primarily driven by higher net charge-offs and an increase in the allowance for finance receivable losses due to the weakened macroeconomic environment and growth in the portfolio.
Other revenues increased $47 million or 8% in 2022 when compared to 2021 primarily due to an increase in gains on the sales of finance receivables and an increase in servicing revenue associated with the whole loan sale program as a result of more loans sold in the current period.
Other expenses increased $57 million or 4% in 2022 when compared to 2021 primarily due to an increase in salaries and benefits expense and an increase in software and technology expense driven by the continued investment in our business. The increase was partially offset by a decrease in insurance policy and benefits claims expense primarily due to favorable experiences in credit life and term life products.
Comparison of Adjusted Pretax Income for 2021 and 2020
For a comparison of OMH's adjusted pretax income for C&I for the years ended 2021 and 2020, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—OMH’s Consolidated Results” in Part II -Item 7 of OMH's Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 11, 2022.
FINANCE RECEIVABLES
Our net finance receivables, consisting of personal loans and credit cards, were $20.0 billion at December 31, 2022 and $19.2 billion at December 31, 2021. We consider the delinquency status of our finance receivables as our key credit quality indicator. We monitor the delinquency of our finance receivable portfolio, including the migration between the delinquency buckets and changes in the delinquency trends to manage our exposure to credit risk in the portfolio. Our branch and central operation team members work with customers as necessary and offer a variety of borrower assistance programs to help customers continue to make payments.
DELINQUENCY
We monitor delinquency trends to evaluate the risk of future credit losses and employ advanced analytical tools to manage our exposure. Team members are actively engaged in collection activities throughout the early stages of delinquency. We closely track and report the percentage of receivables that are contractually 30-89 days past due as a benchmark of portfolio quality, collections effectiveness, and as a strong indicator of losses in coming quarters.
When personal loans are contractually 60 days past due, we consider these accounts to be at an increased risk for loss and collection of these accounts is managed by our centralized operations. Use of our centralized operations teams for managing late-stage delinquency allows us to apply more advanced collection technologies and tools and drives operating efficiencies in servicing. We consider our personal loans to be nonperforming at 90 days contractually past due, at which point we stop accruing finance charges and reverse finance charges previously accrued.
We accrue finance charges and fees on credit cards until charge-off at approximately 180 days past due, at which point we reverse finance charges and fees previously accrued.
The delinquency information for net finance receivables on a Segment Accounting Basis was as follows: | | | | | | | | | | | | | | | | | | | | |
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(dollars in millions) | | Personal Loans | | Credit Cards | | | | |
December 31, 2022 | | | | | | | | | | |
Current | | $ | 18,726 | | | $ | 93 | | | | | | | |
30-59 days past due | | 357 | | | 3 | | | | | | | |
60-89 days past due | | 253 | | | 3 | | | | | | | |
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90+ days past due | | 544 | | | 8 | | | | | | | |
Total net finance receivables | | $ | 19,880 | | | $ | 107 | | | | | | | |
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Delinquency ratio | | | | | | | | | | |
30-89 days past due | | 3.07 | % | | 5.90 | % | | | | | | |
30+ days past due | | 5.80 | % | | 13.08 | % | | | | | | |
60+ days past due | | 4.01 | % | | 9.69 | % | | | | | | |
90+ days past due | | 2.74 | % | | 7.18 | % | | | | | | |
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December 31, 2021 | | | | | | | | | | |
Current | | $ | 18,340 | | | $ | 25 | | | | | | | |
30-59 days past due | | 282 | | | — | | | | | | | |
60-89 days past due | | 185 | | | — | | | | | | | |
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90+ days past due | | 383 | | | — | | | | | | | |
Total net finance receivables | | $ | 19,190 | | | $ | 25 | | | | | | | |
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Delinquency ratio | | | | | | | | | | |
30-89 days past due | | 2.43 | % | | 0.08 | % | | | | | | |
30+ days past due | | 4.43 | % | | 0.08 | % | | | | | | |
60+ days past due | | 2.96 | % | | — | % | | | | | | |
90+ days past due | | 2.00 | % | | — | % | | | | | | |
ALLOWANCE FOR FINANCE RECEIVABLE LOSSES
We estimate and record an allowance for finance receivable losses to cover the estimated lifetime expected credit losses on our finance receivables. Our allowance for finance receivable losses may fluctuate based upon changes in portfolio growth, credit quality, and economic conditions.
Our current methodology to estimate expected credit losses used the most recent macroeconomic forecasts, which incorporated the overall unemployment rate. Our unemployment outlook leveraged projections from various industry leading forecast providers. We also considered inflationary pressures, consumer confidence levels, and continued interest rate increases negatively impacting the economic outlook. At December 31, 2022, our economic forecast used a reasonable and supportable period of 12 months. We may experience further changes to the macroeconomic assumptions within our forecast, as well as changes to our loan loss performance outlook, both of which could lead to further changes in our allowance for finance receivable losses, allowance ratio, and provision for finance receivable losses.
Changes in our allowance for finance receivable losses were as follows:
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(dollars in millions) | | Consumer and Insurance | | | | Segment to GAAP Adjustment | | Consolidated Total |
| Personal Loans | | Credit Cards | | | | |
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Year Ended December 31, 2022 | | | | | | | | | | |
Balance at beginning of period | | $ | 2,097 | | | $ | 5 | | | | | $ | (7) | | | $ | 2,095 | |
Provision for finance receivable losses | | 1,376 | | | 23 | | | | | 3 | | | 1,402 | |
Charge-offs | | (1,431) | | | (7) | | | | | — | | | (1,438) | |
Recoveries | | 252 | | | — | | | | | — | | | 252 | |
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Balance at end of period | | $ | 2,294 | | | $ | 21 | | | | | $ | (4) | | | $ | 2,311 | |
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Allowance ratio | | 11.54 | % | | 19.12 | % | | | | (a) | | 11.56 | % |
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Year Ended December 31, 2021 | | | | | | | | | | |
Balance at beginning of period | | $ | 2,283 | | | $ | — | | | | | $ | (14) | | | $ | 2,269 | |
Provision for finance receivable losses | | 582 | | | 5 | | | | | 6 | | | $ | 593 | |
Charge-offs | | (990) | | | — | | | | | 1 | | | $ | (989) | |
Recoveries | | 222 | | | — | | | | | — | | | $ | 222 | |
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Balance at end of period | | $ | 2,097 | | | $ | 5 | | | | | $ | (7) | | | $ | 2,095 | |
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Allowance ratio | | 10.93 | % | | 19.91 | % | | | | (a) | | 10.90 | % |
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Year Ended December 31, 2020 (b) | | | | | | | | | | |
Balance at beginning of period | | $ | 849 | | | $ | — | | | | | $ | (20) | | | $ | 829 | |
Impact of adoption of ASU 2016-13 (c) | | 1,119 | | | — | | | | | (1) | | | 1,118 | |
Provision for finance receivable losses | | 1,313 | | | — | | | | | 6 | | | 1,319 | |
Charge-offs | | (1,163) | | | — | | | | | 1 | | | (1,162) | |
Recoveries | | 165 | | | — | | | | | — | | | 165 | |
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Balance at end of period | | $ | 2,283 | | | $ | — | | | | | $ | (14) | | | $ | 2,269 | |
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Allowance ratio | | 12.62 | % | | — | % | | | | (a) | | 12.55 | % |
(a) Not applicable.
(b) There were no credit cards for the year ended December 31, 2020 as the product offering began in 2021.
(c) As a result of the adoption of ASU 2016-13, we recorded a one-time adjustment to the allowance for finance receivable losses.
The current delinquency status of our finance receivable portfolio, inclusive of recent borrower performance, volume of our TDR activity, level and recoverability of collateral securing our finance receivable portfolio, and the reasonable and supportable forecast of economic conditions are the primary drivers that can cause fluctuations in our allowance ratio from period to period. We monitor the allowance ratio to ensure we have a sufficient level of allowance for finance receivable losses based on the estimated lifetime expected credit losses in our finance receivable portfolio. The allowance for finance receivable losses as a percentage of net finance receivables for personal loans increased from the prior year period primarily due to the weakened macroeconomic environment. See Note 5 of the Notes to the Consolidated Financial Statements included in this report for more information about the changes in the allowance for finance receivable losses.
TDR FINANCE RECEIVABLES
We may modify the terms of our finance receivables to assist borrowers experiencing financial difficulties. When we modify a loan’s contractual terms for economic or other reasons related to the borrower’s financial difficulties and grant a concession that we would not otherwise consider, we classify that loan as a TDR finance receivable.
Information regarding TDR net finance receivables for personal loans are as follows: | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in millions) | | Personal Loans | | | | | | Segment to GAAP Adjustment | | GAAP Basis |
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December 31, 2022 | | | | | | | | | | |
TDR net finance receivables | | $ | 915 | | | | | | | $ | (11) | | | $ | 904 | |
Allowance for TDR finance receivable losses | | 373 | | | | | | | (4) | | | 369 | |
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December 31, 2021 | | | | | | | | | | |
TDR net finance receivables | | $ | 671 | | | | | | | $ | (21) | | | $ | 650 | |
Allowance for TDR finance receivable losses | | 279 | | | | | | | (9) | | | 270 | |
There were no credit cards classified as TDR finance receivables at December 31, 2022 or December 31, 2021.
DISTRIBUTION OF FINANCE RECEIVABLES BY FICO SCORE
There are many different categorizations used in the consumer lending industry to describe the creditworthiness of a borrower, including prime, near-prime, and sub-prime. While management does not utilize FICO scores to manage credit quality, we group FICO scores into the following categories for comparability purposes across our industry:
•Prime: FICO score of 660 or higher
•Near-prime: FICO score of 620-659
•Sub-prime: FICO score of 619 or below
Our customers’ demographics are, in many respects, near the national median but may vary from national norms in terms of credit and repayment histories. Many of our customers have experienced some level of prior financial difficulty or have limited credit experience and require higher levels of servicing and support from our branch network and central servicing operations.
The following table reflects our net finance receivables grouped into the categories described above based on borrower FICO credit scores as of the most recently refreshed date or as of the loan origination or purchase date:
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(dollars in millions) | | Personal Loans | | Credit Cards | | Total |
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December 31, 2022 | | | | | | |
FICO scores | | | | | | |
660 or higher | | $ | 4,255 | | | $ | 15 | | | $ | 4,270 | |
620-659 | | 4,986 | | | 37 | | | 5,023 | |
619 or below | | 10,638 | | | 55 | | | 10,693 | |
Total | | $ | 19,879 | | | $ | 107 | | | $ | 19,986 | |
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December 31, 2021 | | | | | | |
FICO scores * | | | | | | |
660 or higher | | $ | 4,897 | | | $ | 14 | | | $ | 4,911 | |
620-659 | | 5,321 | | | 7 | | | 5,328 | |
619 or below | | 8,969 | | | 4 | | | 8,973 | |
Total | | $ | 19,187 | | | $ | 25 | | | $ | 19,212 | |
* Due to the impact of COVID-19, FICO scores as of December 31, 2021 may have been positively impacted by government stimulus measures, borrower assistance programs, and potentially inconsistent reporting to credit bureaus.
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Liquidity and Capital Resources |
SOURCES AND USES OF FUNDS
We finance the majority of our operating liquidity and capital needs through a combination of cash flows from operations, secured debt, unsecured debt, borrowings from revolving conduit facilities, whole loan sales, and equity. We may also utilize other sources in the future. As a holding company, all of the funds generated from our operations are earned by our operating subsidiaries. Our operating subsidiaries’ primary cash needs relate to funding our lending activities, our debt service obligations, our operating expenses, payment of insurance claims, and expenditures relating to upgrading and monitoring our technology platform, risk systems, and branch locations.
We have previously purchased portions of our unsecured indebtedness, and we may elect to purchase additional portions of our unsecured indebtedness or securitized borrowings in the future. Future purchases may be made through the open market, privately negotiated transactions with third parties, or pursuant to one or more tender or exchange offers, all of which are subject to terms, prices, and consideration we may determine at our discretion.
During the year ended December 31, 2022, OMH generated net income of $878 million. OMH’s net cash inflow from operating and investing activities totaled $268 million for the year ended December 31, 2022. At December 31, 2022, our scheduled principal and interest payments for 2023 on our existing debt (excluding securitizations) totaled $1.5 billion. As of December 31, 2022, we had $9.3 billion of unencumbered loans.
Based on our estimates and considering the risks and uncertainties of our plans, we believe that we will have adequate liquidity to finance and operate our businesses and repay our obligations as they become due for at least the next 24 months.
OMFC’s Unsecured Corporate Revolver
At December 31, 2022, the borrowing capacity of our corporate revolver was $1.25 billion, and no amounts were drawn.
OMFC’s Redemption and Repurchases of Unsecured Debt
For information regarding the redemption and open market repurchases of OMFC’s unsecured debt, see Note 8 of the Notes to the Consolidated Financial Statements included in this report.
Securitizations and Borrowings from Revolving Conduit Facilities
During the year ended December 31, 2022, we completed four personal loan securitizations (OMFIT 2022-S1, ODART 2022-1, OMFIT 2022-2, and OMFIT 2022-3, see “Securitized Borrowings” below) and redeemed five personal loan securitizations (ODART 2018-1, OMFIT 2019-1, OMFIT 2015-3, OMFIT 2018-1, and OMFIT 2016-3). During the year ended December 31, 2022, we entered into one new revolving conduit facility. At December 31, 2022, $50 million was drawn under our revolving conduit facilities, and the remaining borrowing capacity was $6.1 billion. At December 31, 2022, we had $10.3 billion of gross finance receivables pledged as collateral for our securitizations, revolving conduit facilities, and private secured term funding.
Private Secured Term Funding
On April 25, 2022, OMFC entered into a $350 million private secured term funding collateralized by our personal loans. No principal payments are required to be made during the first three years, followed by a subsequent one-year amortization period at the expiration of which the outstanding principal amount is due and payable.
See Notes 8 and 9 of the Notes to the Consolidated Financial Statements included in this report for further information on our long-term debt, securitization transactions, private secured term funding, and revolving conduit facilities.
Credit Ratings
Our credit ratings impact our ability to access capital markets and our borrowing costs. Rating agencies base their ratings on numerous factors, including liquidity, capital adequacy, asset quality, quality of earnings, and the probability of systemic support. Significant changes in these factors could result in different ratings.
The table below outlines OMFC’s long-term corporate debt ratings and outlook by rating agencies:
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As of December 31, 2022 | | Rating | | Outlook |
| | | | |
S&P | | BB | | Stable |
Moody’s | | Ba2 | | Stable |
KBRA | | BB+ | | Positive |
Currently, no other entity has a corporate debt rating, though they may be rated in the future.
Stock Repurchased
During the year ended December 31, 2022, OMH repurchased 7,181,023 shares of its common stock through its stock repurchase program for an aggregate total of $303 million, including commissions and fees. As of December 31, 2022, OMH held a total of 13,813,476 shares of treasury stock. To provide funding for the OMH stock repurchases, the OMFC Board of Directors authorized dividend payments in the amount of $280 million.
For additional information regarding the shares repurchased, see Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities of Part II included in this report.
Cash Dividend to OMH's Common Stockholders
As of December 31, 2022, the dividend declarations for the current year by the Board were as follows:
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Declaration Date | | Record Date | | Payment Date | | Dividend Per Share | | Amount Paid |
| | | | | | | | | (in millions) |
February 2, 2022 | | February 14, 2022 | | February 18, 2022 | | $ | 0.95 | | | | $ | 121 | |
April 28, 2022 | | May 9, 2022 | | May 13, 2022 | | 0.95 | | | 118 | |
July 27, 2022 | | August 8, 2022 | | August 12, 2022 | | 0.95 | | | | 117 | |
October 26, 2022 | | November 7, 2022 | | November 14, 2022 | | 0.95 | | | | 116 | |
Total | | | | | | $ | 3.80 | | | | $ | 472 | |
To provide funding for the dividend, OMFC paid dividends of $471 million to OMH during the year ended December 31, 2022.
On February 7, 2023, OMH declared a dividend of $1.00 per share payable on February 24, 2023 to record holders of OMH's common stock as of the close of business on February 17, 2023. To provide funding for the OMH dividend, the OMFC Board of Directors authorized a dividend in the amount of up to $121 million payable on or after February 17, 2023.
While OMH intends to pay its minimum quarterly dividend, currently $1.00 per share, for the foreseeable future, all subsequent dividends will be reviewed and declared at the discretion of the Board and will depend on many factors, including our financial condition, earnings, cash flows, capital requirements, level of indebtedness, statutory and contractual restrictions applicable to the payment of dividends, and other considerations that the Board deems relevant. OMH’s dividend payments may change from time to time, and the Board may choose not to continue to declare dividends in the future. See our “Dividend Policy” in Part II - Item 5 of this report for further information.
Whole Loan Sale Transactions
As of December 31, 2022, we have whole loan sale flow agreements with third parties, with remaining terms of up to one year, in which we agreed to sell a combined total of $180 million gross receivables per quarter of newly originated unsecured personal loans along with any associated accrued interest. During the year ended December 31, 2022, we sold $720 million of gross finance receivables, compared to $505 million during the year ended December 31, 2021. See Note 4 of the Notes to the Consolidated Financial Statements included in this report for further information on the whole loan sale transactions.
LIQUIDITY
OMH's Operating Activities
Net cash provided by operations of $2.4 billion for the year ended December 31, 2022 reflected net income of $878 million, the impact of non-cash items, and an unfavorable change in working capital of $90 million. Net cash provided by operations of $2.2 billion for the year ended December 31, 2021 reflected net income of $1.3 billion, the impact of non-cash items, and an unfavorable change in working capital of $48 million. Net cash provided by operations of $2.2 billion for the year ended December 31, 2020 reflected net income of $730 million, the impact of non-cash items, and an unfavorable change in working capital of $118 million.
OMH's Investing Activities
Net cash used for investing activities of $2.1 billion for both the years ended December 31, 2022 and 2021 was primarily due to net principal originations and purchases of finance receivables and purchases of available-for-sale and other securities, partially offset by the proceeds from sales of finance receivables and calls, sales, and maturities of available-for-sale and other securities. Net cash used for investing activities of $751 million for the year ended December 31, 2020 was primarily due to net principal originations of finance receivables and purchases of available-for-sale and other securities, partially offset by calls, sales and maturities of available-for-sale and other securities.
OMH's Financing Activities
Net cash used for financing activities of $326 million for the year ended December 31, 2022 was primarily due to repayments and repurchases of long-term debt, cash dividends paid, and the cash paid to repurchase common stock, partially offset by the issuance and borrowings of long-term debt. Net cash used for financing activities of $1.8 billion and $370 million for the years ended December 31, 2021 and 2020, respectively, were primarily due to debt repayments, cash dividends paid, and the cash paid to repurchase common stock, partially offset by the issuance and borrowings of long-term debt.
OMH's Cash and Investments
At December 31, 2022, we had $498 million of cash and cash equivalents, which included $147 million of cash and cash equivalents held at our regulated insurance subsidiaries or for other operating activities that is unavailable for general corporate purposes.
At December 31, 2022, we had $1.8 billion of investment securities, which are all held as part of our insurance operations and are unavailable for general corporate purposes.
Liquidity Risks and Strategies
OMFC’s credit ratings are non-investment grade, which has a significant impact on our cost and access to capital. This, in turn, can negatively affect our ability to manage our liquidity and our ability or cost to refinance our indebtedness.
There are numerous risks to our financial results, liquidity, capital raising, and debt refinancing plans, some of which may not be quantified in our current liquidity forecasts. These risks include, but are not limited to, the following:
•our inability to grow or maintain our personal loan portfolio with adequate profitability;
•the effect of federal, state and local laws, regulations, or regulatory policies and practices;
•effects of ratings downgrades on our secured or unsecured debt;
•potential liability relating to real estate and personal loans which we have sold or may sell in the future, or relating to securitized loans; and
•the potential for disruptions in the debt and equity markets.
The principal factors that could decrease our liquidity are customer delinquencies and defaults, a decline in customer prepayments, rising interest rates, and a prolonged inability to adequately access capital market funding. We intend to support our liquidity position by utilizing some or all of the following strategies:
•maintaining disciplined underwriting standards and pricing for loans we originate or purchase and managing purchases of finance receivables;
•pursuing additional debt financings (including new secured and unsecured debt issuances, debt refinancing transactions, unsecured corporate revolvers, and revolving conduit facilities), or a combination of the foregoing;
•purchasing portions of our outstanding indebtedness through open market or privately negotiated transactions with third parties or pursuant to one or more tender or exchange offers or otherwise, upon such terms and at such prices, as well as with such consideration, as we may determine; and
•obtaining new and extending existing secured revolving facilities to provide committed liquidity in case of prolonged market fluctuations.
However, it is possible that the actual outcome of one or more of our plans could be materially different than expected or that one or more of our significant judgments or estimates could prove to be materially incorrect.
OUR INSURANCE SUBSIDIARIES
Our insurance subsidiaries are subject to state regulations that limit their ability to pay dividends. See Note 10 of the Notes to the Consolidated Financial Statements in Part II - Item 8 included in this report for further information on these state restrictions and the dividends paid by our insurance subsidiaries from 2020 through 2022.
OUR DEBT AGREEMENTS
The debt agreements which OMFC and its subsidiaries are a party to include customary terms and conditions, including covenants and representations and warranties. See Note 8 of the Notes to the Consolidated Financial Statements in Part II - Item 8 included in this report for more information on the restrictive covenants under OMFC’s debt agreements, as well as the guarantees of OMFC’s long-term debt.
Securitized Borrowings
We execute private securitizations under Rule 144A of the Securities Act of 1933, as amended. As of December 31, 2022, our structured financings consisted of the following: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in millions) | | Issue Amount (a) | | Initial Collateral Balance | | Current Note Amounts Outstanding (a) | | Current Collateral Balance (b) | | Current Weighted Average Interest Rate | | Original Revolving Period | | | | |
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OMFIT 2018-2 | | 368 | | | 381 | | | 350 | | | 400 | | | 3.87 | % | | 5 years | | | | |
OMFIT 2019-2 | | 900 | | | 947 | | | 900 | | | 995 | | | 3.30 | % | | 7 years | | | | |
OMFIT 2019-A | | 789 | | | 892 | | | 750 | | | 892 | | | 3.78 | % | | 7 years | | | | |
OMFIT 2020-1 | | 821 | | | 958 | | | 457 | | | 556 | | | 4.34 | % | | 2 years | | | | |
OMFIT 2020-2 | | 1,000 | | | 1,053 | | | 1,000 | | | 1,053 | | | 2.03 | % | | 5 years | | | | |
OMFIT 2021-1 | | 850 | | | 904 | | | 850 | | | 904 | | | 2.46 | % | | 5 years | | | | |
OMFIT 2022-S1 | | 600 | | | 652 | | | 600 | | | 652 | | | 4.31 | % | | 3 years | | | | |
OMFIT 2022-2 | | 1,000 | | | 1,099 | | | 1,000 | | | 1,099 | | | 5.17 | % | | 2 years | | | | |
OMFIT 2022-3 (c) | | 979 | | | 1,090 | | | 796 | | | 1,090 | | | 6.00 | % | | 2 years | | | | |
ODART 2019-1 | | 737 | | | 750 | | | 700 | | | 750 | | | 3.79 | % | | 5 years | | | | |
ODART 2021-1 | | 1,000 | | | 1,053 | | | 1,000 | | | 1,053 | | | 0.98 | % | | 2 years | | | | |
ODART 2022-1 | | 600 | | | 632 | | | 600 | | | 632 | | | 4.92 | % | | 2 years | | | | |
Total securitizations | | $ | 9,644 | | | $ | 10,411 | | | $ | 9,003 | | | $ | 10,076 | | | | | | | | | |
(a) Issue Amount includes the retained interest amounts as applicable and the Current Note Amounts Outstanding balances reflect pay-downs subsequent to note issuance and exclude retained interest amounts.
(b) Inclusive of in-process replenishments of collateral for securitized borrowings in a revolving status as of December 31, 2022.
(c) On December 14, 2022, we issued $979 million of notes backed by personal loans and retained the Class C and Class D notes in the amount of $183 million. The notes mature in May of 2034.
Revolving Conduit Facilities
In addition to the structured financings, we had access to 15 revolving conduit facilities with a total borrowing capacity of $6.2 billion as of December 31, 2022: | | | | | | | | | | | | | | | | | | |
(dollars in millions) | | Advance Maximum Balance | | Amount Drawn | | | | |
| | | | | | | | |
OneMain Financial Funding VII, LLC | | $ | 600 | | | $ | — | | | | | |
OneMain Financial Funding IX, LLC | | 600 | | | — | | | | | |
OneMain Financial Auto Funding I, LLC | | 550 | | | — | | | | | |
Seine River Funding, LLC | | 550 | | | — | | | | | |
Hudson River Funding, LLC | | 500 | | | — | | | | | |
OneMain Financial Funding VIII, LLC | | 400 | | | — | | | | | |
River Thames Funding, LLC | | 400 | | | — | | | | | |
OneMain Financial Funding X, LLC | | 400 | | | 50 | | | | | |
Chicago River Funding, LLC | | 375 | | | — | | | | | |
Mystic River Funding, LLC | | 350 | | | — | | | | | |
Thayer Brook Funding, LLC | | 350 | | | — | | | | | |
Columbia River Funding, LLC | | 350 | | | — | | | | | |
Hubbard River Funding, LLC | | 250 | | | — | | | | | |
New River Funding Trust | | 250 | | | — | | | | | |
St. Lawrence River Funding, LLC | | 250 | | | — | | | | | |
Total | | $ | 6,175 | | | $ | 50 | | | | | |
Contractual Obligations
At December 31, 2022, our material contractual obligations were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in millions) | | 2023 | | 2024-2025 | | 2026-2027 | | 2028+ | | Securitizations | | Private Secured Term Funding | | Revolving Conduit Facilities | | Total |
| | | | | | | | | | | | | | | | |
Principal maturities on long-term debt: | | | | | | | | | | | | | | | | |
Securitization debt (a) | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 9,003 | | | $ | — | | | $ | — | | | $ | 9,003 | |
Medium-term notes | | 1,004 | | | 2,519 | | | 2,350 | | | 2,933 | | | — | | | — | | | — | | | 8,806 | |
Junior subordinated debt | | — | | | — | | | — | | | 350 | | | — | | | — | | | — | | | 350 | |
Private secured term funding (a) | | — | | | — | | | — | | | — | | | — | | | 350 | | | — | | | 350 | |
Revolving conduit facilities (a) | | — | | | — | | | — | | | — | | | — | | | — | | | 50 | | | 50 | |
Total principal maturities | | 1,004 | | | 2,519 | | | 2,350 | | | 3,283 | | | 9,003 | | | 350 | | | 50 | | | 18,559 | |
Interest payments on debt (b) | | 513 | | | 787 | | | 435 | | | 1,124 | | | 899 | | | 64 | | | 9 | | | 3,831 | |
Total | | $ | 1,517 | | | $ | 3,306 | | | $ | 2,785 | | | $ | 4,407 | | | $ | 9,902 | | | $ | 414 | | | $ | 59 | | | $ | 22,390 | |
(a) On-balance sheet securitizations, private secured term funding, and borrowings under revolving conduit facilities are not included in maturities by period due to their variable monthly payments.
(b) Future interest payments on floating-rate debt are estimated based upon rates in effect at December 31, 2022.
OFF-BALANCE SHEET ARRANGEMENTS
We have no material off-balance sheet arrangements as defined by SEC rules, and we had no material off-balance sheet exposure to losses associated with unconsolidated VIEs at December 31, 2022 or December 31, 2021.
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Critical Accounting Policies and Estimates |
We consider the following policies to be our most critical accounting policies because they involve critical accounting estimates and a significant degree of management judgment:
ALLOWANCE FOR FINANCE RECEIVABLE LOSSES
We estimate the expected credit losses on our finance receivables over their expected lives based on historical experience, current conditions, and reasonable and supportable forecasts of collectability. No new volume is assumed. Personal loan renewals are a significant piece of our new volume and are considered a terminal event of the previous loan. For our personal loans, we have elected not to measure an allowance on accrued finance charges as it is our policy to reverse finance charges previously accrued after four contractual payments become past due.
Our estimate of the allowance for finance receivable losses is primarily based on historical loss experience using a cumulative loss model applied to our personal loan portfolios. Our gross credit loss expectation is offset by the estimate of future recoveries using historical recovery curves. Our personal loans are primarily segmented in the loss model by contractual delinquency status. Other attributes in the model include collateral mix and recent credit score. To estimate the gross credit losses, the model utilizes a roll rate matrix to project the first 12 months of losses and historical cohort performance to project the expected losses over the remaining term. Our methodology relies on historical loss experience to forecast the corresponding future outcomes. These patterns are then applied to the current portfolio to obtain an estimate of future losses.
Management exercises its judgment when determining the amount of allowance for finance receivable losses. Our judgment is based on quantitative analyses, qualitative factors, such as recent portfolio, industry, and other economic trends, and experience in the consumer finance industry. We may adjust the amounts determined by our model for management’s estimate of the effects of model imprecision which include but are not limited to, any changes to underwriting criteria and portfolio seasoning.
Forecasting macroeconomic conditions requires significant judgment and estimation uncertainty. We consider key economic factors, most notably unemployment rates, to incorporate into our estimate of the allowance for finance receivable losses. Our macroeconomic forecast considers various scenarios of economic projections from industry leading forecast providers, and extends over our reasonable and supportable forecast period, after which we revert to a historical average.
Due to the judgment and uncertainty in estimating the expected credit losses, we may experience changes to the macroeconomic assumptions within our forecast, as well as changes to our loan loss performance outlook, both of which could lead to further changes in our allowance for finance receivable losses, allowance ratio, and provision for finance receivable losses.
Macroeconomic Sensitivity
To demonstrate the sensitivity of forecasting macroeconomic conditions, we compared the output of our model using a baseline scenario to that of a downside scenario. As of December 31, 2022, the impact of a ten percentage point increase in weighting towards a downside scenario increased the estimate by approximately $25 million.
The macroeconomic scenarios are highly influenced by the timing, severity, and duration of changes in the underlying economic factors. This makes it difficult to estimate how potential changes in economic factors affect the estimated credit losses. Therefore, this hypothetical analysis is not intended to represent our expectation of changes in our estimate of expected credit losses due to a change in the macroeconomic environment, nor does it consider management’s judgment of other quantitative and qualitative information which could increase or decrease the estimate.
TDR FINANCE RECEIVABLES
When we modify a personal loan’s contractual terms for economic or other reasons related to the borrower’s financial difficulties and grant a concession that we would not otherwise consider, we classify that loan as a TDR finance receivable. Loan modifications primarily involve a combination of the following to reduce the borrower’s monthly payment: reduce interest rate, extend the term, defer or forgive past due interest or forgive principal. Account modifications that are deemed to be a TDR finance receivable are measured for impairment in accordance with the authoritative guidance for the accounting for impaired loans.
The allowance for finance receivable losses related to our personal loan TDR finance receivables represent loan-specific reserves based on an analysis of the present value of expected future cash flows. We establish our allowance for finance receivable losses related to our TDR finance receivables by calculating the present value (discounted at the loan’s effective interest rate prior to modification) of all expected cash flows less the recorded investment in the aggregated pool. We use historical cash flow performance by TDR segments to estimate expected cash flows from our current portfolio of TDR finance receivables.
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Recent Accounting Pronouncements |
See Note 3 of the Notes to the Consolidated Financial Statements included in this report for discussion of recently issued accounting pronouncements.
Our personal loan volume is generally highest during the second and fourth quarters of the year, primarily due to marketing efforts and seasonality of demand. Demand for our personal loans is usually lower in January and February after the holiday season and as a result of tax refunds. Delinquencies on our personal loans are generally lower in the first and second quarters and tend to rise throughout the remainder of the year. These seasonal trends contribute to fluctuations in our operating results and cash needs throughout the year.
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Item 8. Financial Statements and Supplementary Data. |
An index to our financial statements and supplementary data follows:
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Financial Statements of OneMain Finance Corporation and Subsidiaries: | | |
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of OneMain Holdings, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of OneMain Holdings, Inc. and its subsidiaries (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of operations, of comprehensive income, of shareholders’ equity and of cash flows for each of the three years in the period ended December 31, 2022, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 5 to the consolidated financial statements, the Company changed the manner in which it accounts for credit losses in 2020.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Finance Receivable Losses for Personal Loans Collectively Evaluated for Impairment – Forecasted Macroeconomic Conditions
As described in Notes 2 and 5 to the consolidated financial statements, the Company’s allowance for finance receivable losses for personal loans collectively evaluated for impairment was $1,921 million as of December 31, 2022. Management estimates the allowance for finance receivable losses for personal loans collectively evaluated for impairment primarily on historical loss experience using a cumulative loss model applied to the Company’s finance receivable portfolios. Management also considers forecasted macroeconomic conditions within the Company’s reasonable and supportable forecast period, which incorporated the overall unemployment rate.
The principal considerations for our determination that performing procedures relating to the allowance for finance receivable losses for personal loans collectively evaluated for impairment – forecasted macroeconomic conditions is a critical audit matter are (i) the significant judgment by management in determining adjustments to the results of the cumulative loss model to reflect forecasted macroeconomic conditions, which led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence relating to management’s determination of the impact of forecasted macroeconomic conditions, and (ii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the allowance for finance receivable losses, including controls over management’s determination of the impact of forecasted macroeconomic conditions. These procedures also included, among others, the involvement of professionals with specialized skill and knowledge to assist in testing management's process for determining forecasted macroeconomic conditions and applying those forecasts to the results of the cumulative loss model, which included (i) evaluating the appropriateness of the methodology, (ii) testing the data used in the estimate and (iii) evaluating the reasonableness of management’s determination of the impact of forecasted macroeconomic conditions on the allowance for finance receivable losses.
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
February 10, 2023
We have served as the Company’s auditor since 2002.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholder of OneMain Finance Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of OneMain Finance Corporation and its subsidiaries (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of operations, of comprehensive income, of shareholder’s equity and of cash flows for each of the three years in the period ended December 31, 2022, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 5 to the consolidated financial statements, the Company changed the manner in which it accounts for credit losses in 2020.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Finance Receivable Losses for Personal Loans Collectively Evaluated for Impairment – Forecasted Macroeconomic Conditions
As described in Notes 2 and 5 to the consolidated financial statements, the Company’s allowance for finance receivable losses for personal loans collectively evaluated for impairment was $1,921 million as of December 31, 2022. Management estimates the allowance for finance receivable losses for personal loans collectively evaluated for impairment primarily on historical loss experience using a cumulative loss model applied to the Company’s finance receivable portfolios. Management also considers forecasted macroeconomic conditions within the Company’s reasonable and supportable forecast period, which incorporated the overall unemployment rate.
The principal considerations for our determination that performing procedures relating to the allowance for finance receivable losses for personal loans collectively evaluated for impairment – forecasted macroeconomic conditions is a critical audit matter are (i) the significant judgment by management in determining adjustments to the results of the cumulative loss model to reflect forecasted macroeconomic conditions, which led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence relating to management’s determination of the impact of forecasted macroeconomic conditions, and (ii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the allowance for finance receivable losses, including controls over management’s determination of the impact of forecasted macroeconomic conditions. These procedures also included, among others, the involvement of professionals with specialized skill and knowledge to assist in testing management's process for determining forecasted macroeconomic conditions and applying those forecasts to the results of the cumulative loss model, which included (i) evaluating the appropriateness of the methodology, (ii) testing the data used in the estimate and (iii) evaluating the reasonableness of management’s determination of the impact of forecasted macroeconomic conditions on the allowance for finance receivable losses.
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
February 10, 2023
We have served as the Company's auditor since 2002.
ONEMAIN HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
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December 31, | | 2022 | | 2021 |
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Assets | | | | |
Cash and cash equivalents | | $ | 498 | | | $ | 541 | |
Investment securities (includes available-for-sale securities with a fair value and an amortized cost basis of $1.7 billion and $1.9 billion in 2022, respectively, and $1.9 billion and $1.8 billion in 2021, respectively) | | 1,800 | | | 1,992 | |
Net finance receivables (includes loans of consolidated VIEs of $10.4 billion in 2022 and $8.8 billion in 2021) | | 19,986 | | | 19,212 | |
Unearned insurance premium and claim reserves | | (749) | | | (761) | |
Allowance for finance receivable losses (includes allowance of consolidated VIEs of $1.1 billion in 2022 and $910 million in 2021) | | (2,311) | | | (2,095) | |
Net finance receivables, less unearned insurance premium and claim reserves and allowance for finance receivable losses | | 16,926 | | | 16,356 | |
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Restricted cash and restricted cash equivalents (includes restricted cash and restricted cash equivalents of consolidated VIEs of $442 million in 2022 and $466 million in 2021) | | 461 | | | 476 | |
Goodwill | | 1,437 | | | 1,437 | |
Other intangible assets | | 261 | | | 274 | |
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Other assets | | 1,150 | | | 1,003 | |
Total assets | | $ | 22,533 | | | $ | 22,079 | |
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Liabilities and Shareholders’ Equity | | | | |
Long-term debt (includes debt of consolidated VIEs of $9.4 billion in 2022 and $8.0 billion in 2021) | | $ | 18,281 | | | $ | 17,750 | |
Insurance claims and policyholder liabilities | | 602 | | | 621 | |
Deferred and accrued taxes | | 5 | | | 1 | |
Other liabilities (includes other liabilities of consolidated VIEs of $20 million in 2022 and $13 million in 2021) | | 616 | | | 614 | |
Total liabilities | | 19,504 | | | 18,986 | |
Contingencies (Note 14) | | | | |
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Shareholders’ equity: | | | | |
Common stock, par value $0.01 per share; 2,000,000,000 shares authorized, 121,042,125 and 127,809,640 shares issued and outstanding at December 31, 2022 and December 31, 2021, respectively | | 1 | | | 1 | |
Additional paid-in capital | | 1,689 | | | 1,672 | |
Accumulated other comprehensive income (loss) | | (119) | | | 61 | |
Retained earnings | | 2,125 | | | 1,727 | |
Treasury stock, at cost; 13,813,476 and 6,712,923 shares at December 31, 2022 and December 31, 2021, respectively | | (667) | | | (368) | |
Total shareholders’ equity | | 3,029 | | | 3,093 | |
Total liabilities and shareholders’ equity | | $ | 22,533 | | | $ | 22,079 | |
See Notes to the Consolidated Financial Statements.
ONEMAIN HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
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Years Ended December 31, | | | | | | 2022 | | 2021 | | 2020 |
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Interest income | | | | | | $ | 4,435 | | | $ | 4,364 | | | $ | 4,368 | |
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Interest expense | | | | | | 892 | | | 937 | | | 1,027 | |
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Net interest income | | | | | | 3,543 | | | 3,427 | | | 3,341 | |
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Provision for finance receivable losses | | | | | | 1,402 | | | 593 | | | 1,319 | |
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Net interest income after provision for finance receivable losses | | | | | | 2,141 | | | 2,834 | | | 2,022 | |
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Other revenues: | | | | | | | | | | |
Insurance | | | | | | 445 | | | 434 | | | 443 | |
Investment | | | | | | 61 | | | 65 | | | 75 | |
Gain on sales of finance receivables | | | | | | 63 | | | 47 | | | — | |
Net loss on repurchases and repayments of debt | | | | | | (27) | | | (78) | | | (39) | |
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Other | | | | | | 87 | | | 63 | | | 47 | |
Total other revenues | | | | | | 629 | | | 531 | | | 526 | |
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Other expenses: | | | | | | | | | | |
Salaries and benefits | | | | | | 836 | | | 839 | | | 756 | |
Other operating expenses | | | | | | 621 | | | 609 | | | 573 | |
Insurance policy benefits and claims | | | | | | 150 | | | 176 | | | 242 | |
Total other expenses | | | | | | 1,607 | | | 1,624 | | | 1,571 | |
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Income before income taxes | | | | | | 1,163 | | | 1,741 | | | 977 | |
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Income taxes | | | | | | 285 | | | 427 | | | 247 | |
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Net income | | | | | | $ | 878 | | | $ | 1,314 | | | $ | 730 | |
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Share Data: | | | | | | | | | | |
Weighted average number of shares outstanding: | | | | | | | | | | |
Basic | | | | | | 124,178,643 | | | 132,653,889 | | | 134,716,012 | |
Diluted | | | | | | 124,417,274 | | | 133,054,494 | | | 134,919,258 | |
Earnings per share: | | | | | | | | | | |
Basic | | | | | | $ | 7.07 | | | $ | 9.90 | | | $ | 5.42 | |
Diluted | | | | | | $ | 7.06 | | | $ | 9.87 | | | $ | 5.41 | |
See Notes to the Consolidated Financial Statements.
ONEMAIN HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
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(dollars in millions) | | | | | | | | | | |
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Years Ended December 31, | | | | | | 2022 | | 2021 | | 2020 |
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Net income | | | | | | $ | 878 | | | $ | 1,314 | | | $ | 730 | |
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Other comprehensive income (loss): | | | | | | | | | | |
Net change in unrealized gains (losses) on non-credit impaired available-for-sale securities | | | | | | (229) | | | (53) | | | 66 | |
Retirement plan liability adjustments | | | | | | (12) | | | (1) | | | (2) | |
Foreign currency translation adjustments | | | | | | (10) | | | 1 | | | 2 | |
Other | | | | | | 22 | | | 11 | | | — | |
Income tax effect: | | | | | | | | | | |
Net change in unrealized gains (losses) on non-credit impaired available-for-sale securities | | | | | | 50 | | | 12 | | | (15) | |
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Retirement plan liability adjustments | | | | | | 3 | | | 1 | | | — | |
Foreign currency translation adjustments | | | | | | 2 | | | — | | | — | |
Other | | | | | | (5) | | | (3) | | | — | |
Other comprehensive income (loss), net of tax, before reclassification adjustments | | | | | | (179) | | | (32) | | | 51 | |
Reclassification adjustments included in net income, net of tax: | | | | | | | | | | |
Net realized losses on available-for-sale securities, net of tax | | | | | | (1) | | | (1) | | | (1) | |
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Reclassification adjustments included in net income, net of tax | | | | | | (1) | | | (1) | | | (1) | |
Other comprehensive income (loss), net of tax | | | | | | (180) | | | (33) | | | 50 | |
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Comprehensive income | | | | | | $ | 698 | | | $ | 1,281 | | | $ | 780 | |
See Notes to the Consolidated Financial Statements.
ONEMAIN HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | OneMain Holdings, Inc. Shareholders’ Equity |
(dollars in millions) | | Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Treasury Stock | | Total Shareholders’ Equity |
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Balance, January 1, 2022 | | $ | 1 | | | $ | 1,672 | | | $ | 61 | | | $ | 1,727 | | | $ | (368) | | | $ | 3,093 | |
Common stock repurchased | | — | | | — | | | — | | | — | | | (303) | | | (303) | |
Treasury stock issued | | — | | | — | | | — | | | (2) | | | 4 | | | 2 | |
Share-based compensation expense, net of forfeitures | | — | | | 31 | | | — | | | — | | | — | | | 31 | |
Withholding tax on share-based compensation | | — | | | (14) | | | — | | | — | | | — | | | (14) | |
Other comprehensive loss | | — | | | — | | | (180) | | | — | | | — | | | (180) | |
Cash dividends (a) | | — | | | — | | | — | | | (478) | | | — | | | (478) | |
Net income | | — | | | — | | | — | | | 878 | | | — | | | 878 | |
Balance, December 31, 2022 | | $ | 1 | | | $ | 1,689 | | | $ | (119) | | | $ | 2,125 | | | $ | (667) | | | $ | 3,029 | |
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Balance, January 1, 2021 | | $ | 1 | | | $ | 1,655 | | | $ | 94 | | | $ | 1,691 | | | $ | — | | | $ | 3,441 | |
Common stock repurchased | | — | | | — | | | — | | | — | | | (368) | | | (368) | |
Share-based compensation expense, net of forfeitures | | — | | | 23 | | | — | | | — | | | — | | | 23 | |
Withholding tax on share-based compensation | | — | | | (6) | | | — | | | — | | | — | | | (6) | |
Other comprehensive loss | | — | | | — | | | (33) | | | — | | | — | | | (33) | |
Cash dividends (a) | | — | | | — | | | — | | | (1,278) | | | — | | | (1,278) | |
Net income | | — | | | — | | | — | | | 1,314 | | | — | | | 1,314 | |
Balance, December 31, 2021 | | $ | 1 | | | $ | 1,672 | | | $ | 61 | | | $ | 1,727 | | | $ | (368) | | | $ | 3,093 | |
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Balance, January 1, 2020 (pre-adoption) | | $ | 1 | | | $ | 1,689 | | | $ | 44 | | | $ | 2,596 | | | $ | — | | | $ | 4,330 | |
Net impact of adoption of ASU 2016-13 (b) | | — | | | — | | | — | | | (828) | | | — | | | (828) | |
Balance, January 1, 2020 (post-adoption) | | 1 | | | 1,689 | | | 44 | | | 1,768 | | | — | | | 3,502 | |
Common stock repurchased (c) | | — | | | (45) | | | — | | | — | | | — | | | $ | (45) | |
Share-based compensation expense, net of forfeitures | | — | | | 17 | | | — | | | — | | | — | | | 17 | |
Withholding tax on share-based compensation | | — | | | (6) | | | — | | | — | | | — | | | (6) | |
Other comprehensive income | | — | | | — | | | 50 | | | — | | | — | | | 50 | |
Cash dividends (a) | | — | | | — | | | — | | | (807) | | | — | | | (807) | |
Net income | | — | | | — | | | — | | | 730 | | | — | | | 730 | |
Balance, December 31, 2020 | | $ | 1 | | | $ | 1,655 | | | $ | 94 | | | $ | 1,691 | | | $ | — | | | $ | 3,441 | |
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(a) Cash dividends declared were $3.80 per share, $9.55 per share, and $5.94 per share in 2022, 2021, and 2020, respectively.
(b) As a result of the adoption of ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments, on January 1, 2020, we recorded a one-time cumulative reduction to retained earnings, net of tax.
(c) The common stock repurchased was retired in 2020.
See Notes to the Consolidated Financial Statements.
ONEMAIN HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
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(dollars in millions) | | | | | | |
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Years Ended December 31, | | 2022 | | 2021 | | 2020 |
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Cash flows from operating activities | | | | | | |
Net income | | $ | 878 | | | $ | 1,314 | | | $ | 730 | |
Reconciling adjustments: | | | | | | |
Provision for finance receivable losses | | 1,402 | | | 593 | | | 1,319 | |
Depreciation and amortization | | 262 | | | 264 | | | 264 | |
Deferred income tax charge (benefit) | | (62) | | | 78 | | | (42) | |
Net loss on repurchases and repayments of debt | | 27 | | | 78 | | | 39 | |
Share-based compensation expense, net of forfeitures | | 31 | | | 23 | | | 17 | |
Gain on sales of finance receivables | | (63) | | | (47) | | | — | |
Other | | 2 | | | (8) | | | 3 | |
Cash flows due to changes in other assets and other liabilities | | (90) | | | (48) | | | (118) | |
Net cash provided by operating activities | | 2,387 | | | 2,247 | | | 2,212 | |
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Cash flows from investing activities | | | | | | |
Net principal originations and purchases of finance receivables | | (2,775) | | | (2,514) | | | (748) | |
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Proceeds from sales of finance receivables | | 790 | | | 560 | | | — | |
Available-for-sale securities purchased | | (530) | | | (517) | | | (456) | |
Available-for-sale securities called, sold, and matured | | 463 | | | 404 | | | 478 | |
Other securities purchased | | (6) | | | (708) | | | (538) | |
Other securities called, sold, and matured | | 14 | | | 701 | | | 542 | |
Other, net | | (75) | | | (69) | | | (29) | |
Net cash used for investing activities | | (2,119) | | | (2,143) | | | (751) | |
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Cash flows from financing activities | | | | | | |
Proceeds from issuance and borrowings of long-term debt, net of issuance costs | | 5,618 | | | 3,759 | | | 7,279 | |
Repayments and repurchases of long-term debt | | (5,149) | | | (3,921) | | | (6,792) | |
Cash dividends | | (480) | | | (1,274) | | | (806) | |
Common stock repurchased | | (303) | | | (368) | | | (45) | |
Treasury stock issued | | 2 | | | — | | | — | |
Withholding tax on share-based compensation | | (14) | | | (6) | | | (6) | |
Net cash used for financing activities | | (326) | | | (1,810) | | | (370) | |
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Net change in cash and cash equivalents and restricted cash and restricted cash equivalents | | (58) | | | (1,706) | | | 1,091 | |
Cash and cash equivalents and restricted cash and restricted cash equivalents at beginning of period | | 1,017 | | | 2,723 | | | 1,632 | |
Cash and cash equivalents and restricted cash and restricted cash equivalents at end of period | | $ | 959 | | | $ | 1,017 | | | $ | 2,723 | |
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ONEMAIN HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Continued) | | | | | | |
(dollars in millions) | | | | | | |
Years Ended December 31, | | 2022 | | 2021 | | 2020 |
| | | | | | |
Supplemental cash flow information | | | | | | |
Cash and cash equivalents | | $ | 498 | | | $ | 541 | | | $ | 2,272 | |
Restricted cash and restricted cash equivalents | | 461 | | | 476 | | | 451 | |
Total cash and cash equivalents and restricted cash and restricted cash equivalents | | $ | 959 | | | $ | 1,017 | | | $ | 2,723 | |
| | | | | | |
Interest paid | | $ | (857) | | | $ | (891) | | | $ | (978) | |
Income taxes paid | | (343) | | | (403) | | | (289) | |
Cash paid for amounts included in the measurement of operating lease liabilities | | (58) | | | (58) | | | (57) | |
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Supplemental non-cash activities | | | | | | |
Right-of-use assets obtained in exchange for operating lease obligations | | $ | 66 | | | $ | 43 | | | $ | 47 | |
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Restricted cash and restricted cash equivalents primarily represent funds required to be used for future debt payments relating to our secured transactions.
See Notes to the Consolidated Financial Statements.
ONEMAIN FINANCE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
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(dollars in millions, except par value amount) | | | | |
December 31, | | 2022 | | 2021 |
| | | | |
Assets | | | | |
Cash and cash equivalents | | $ | 490 | | | $ | 510 | |
Investment securities (includes available-for-sale securities with a fair value and an amortized cost basis of $1.7 billion and $1.9 billion in 2022, respectively, and $1.9 billion and $1.8 billion in 2021, respectively) | | 1,800 | | | 1,992 | |
Net finance receivables (includes loans of consolidated VIEs of $10.4 billion in 2022 and $8.8 billion in 2021) | | 19,986 | | | 19,212 | |
Unearned insurance premium and claim reserves | | (749) | | | (761) | |
Allowance for finance receivable losses (includes allowance of consolidated VIEs of $1.1 billion in 2022 and $910 million in 2021) | | (2,311) | | | (2,095) | |
Net finance receivables, less unearned insurance premium and claim reserves and allowance for finance receivable losses | | 16,926 | | | 16,356 | |
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Restricted cash and restricted cash equivalents (includes restricted cash and restricted cash equivalents of consolidated VIEs of $442 million in 2022 and $466 million in 2021) | | 461 | | | 476 | |
Goodwill | | 1,437 | | | 1,437 | |
Other intangible assets | | 261 | | | 274 | |
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Other assets | | 1,148 | | | 1,001 | |
Total assets | | $ | 22,523 | | | $ | 22,046 | |
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Liabilities and Shareholder’s Equity | | | | |
Long-term debt (includes debt of consolidated VIEs of $9.4 billion in 2022 and $8.0 billion in 2021) | | $ | 18,281 | | | $ | 17,750 | |
Insurance claims and policyholder liabilities | | 602 | | | 621 | |
Deferred and accrued taxes | | 5 | | | 1 | |
Other liabilities (includes other liabilities of consolidated VIEs of $20 million in 2022 and $13 million in 2021) | | 617 | | | 614 | |
Total liabilities | | 19,505 | | | 18,986 | |
Contingencies (Note 14) | | | | |
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Shareholder’s equity: | | | | |
Common stock, par value $0.50 per share; 25,000,000 shares authorized, 10,160,021 shares issued and outstanding at December 31, 2022 and December 31, 2021 | | 5 | | | 5 | |
Additional paid-in capital | | 1,933 | | | 1,916 | |
Accumulated other comprehensive income (loss) | | (119) | | | 61 | |
Retained earnings | | 1,199 | | | 1,078 | |
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Total shareholder’s equity | | 3,018 | | | 3,060 | |
Total liabilities and shareholder’s equity | | $ | 22,523 | | | $ | 22,046 | |
See Notes to the Consolidated Financial Statements.
ONEMAIN FINANCE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
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(dollars in millions) | | | | | | | | | | |
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Years Ended December 31, | | | | | | 2022 | | 2021 | | 2020 |
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Interest income | | | | | | $ | 4,435 | | | $ | 4,364 | | | $ | 4,368 | |
| | | | | | | | | | |
Interest expense | | | | | | 892 | | | 937 | | | 1,027 | |
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Net interest income | | | | | | 3,543 | | | 3,427 | | | 3,341 | |
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Provision for finance receivable losses | | | | | | 1,402 | | | 593 | | | 1,319 | |
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Net interest income after provision for finance receivable losses | | | | | | 2,141 | | | 2,834 | | | 2,022 | |
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Other revenues: | | | | | | | | | | |
Insurance | | | | | | 445 | | | 434 | | | 443 | |
Investment | | | | | | 61 | | | 65 | | | 75 | |
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Gain on sales of finance receivables | | | | | | 63 | | | 47 | | | — | |
Net loss on repurchases and repayments of debt | | | | | | (27) | | | (78) | | | (39) | |
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Other | | | | | | 87 | | | 63 | | | 47 | |
Total other revenues | | | | | | 629 | | | 531 | | | 526 | |
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Other expenses: | | | | | | | | | | |
Salaries and benefits | | | | | | 836 | | | 839 | | | 756 | |
Other operating expenses | | | | | | 621 | | | 609 | | | 573 | |
Insurance policy benefits and claims | | | | | | 150 | | | 176 | | | 242 | |
Total other expenses | | | | | | 1,607 | | | 1,624 | | | 1,571 | |
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Income before income taxes | | | | | | 1,163 | | | 1,741 | | | 977 | |
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Income taxes | | | | | | 285 | | | 427 | | | 247 | |
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Net income | | | | | | $ | 878 | | | $ | 1,314 | | | $ | 730 | |
See Notes to the Consolidated Financial Statements.
ONEMAIN FINANCE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
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(dollars in millions) | | | | | | | | | | |
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Years Ended December 31, | | | | | | 2022 | | 2021 | | 2020 |
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Net income | | | | | | $ | 878 | | | $ | 1,314 | | | $ | 730 | |
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Other comprehensive income (loss): | | | | | | | | | | |
Net change in unrealized gains (losses) on non-credit impaired available-for-sale securities | | | | | | (229) | | | (53) | | | 66 | |
| | | | | | | | | | |
Retirement plan liability adjustments | | | | | | (12) | | | (1) | | | (2) | |
Foreign currency translation adjustments | | | | | | (10) | | | 1 | | | 2 | |
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Other | | | | | | 22 | | | 11 | | | — | |
Income tax effect: | | | | | | | | | | |
Net change in unrealized gains (losses) on non-credit impaired available-for-sale securities | | | | | | 50 | | | 12 | | | (15) | |
| | | | | | | | | | |
Retirement plan liability adjustments | | | | | | 3 | | | 1 | | | — | |
Foreign currency translation adjustments | | | | | | 2 | | | — | | | — | |
Other | | | | | | (5) | | | (3) | | | — | |
Other comprehensive income (loss), net of tax, before reclassification adjustments | | | | | | (179) | | | (32) | | | 51 | |
Reclassification adjustments included in net income, net of tax: | | | | | | | | | | |
Net realized losses on available-for-sale securities, net of tax | | | | | | (1) | | | (1) | | | (1) | |
Reclassification adjustments included in net income, net of tax | | | | | | (1) | | | (1) | | | (1) | |
Other comprehensive income (loss), net of tax | | | | | | (180) | | | (33) | | | 50 | |
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Comprehensive income | | | | | | $ | 698 | | | $ | 1,281 | | | $ | 780 | |
See Notes to the Consolidated Financial Statements.
ONEMAIN FINANCE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholder’s Equity
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| | OneMain Finance Corporation Shareholder's Equity |
(dollars in millions) | | Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | | | Total Shareholder’s Equity |
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Balance, January 1, 2022 | | $ | 5 | | | $ | 1,916 | | | $ | 61 | | | $ | 1,078 | | | | | $ | 3,060 | |
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Share-based compensation expense, net of forfeitures | | — | | | 31 | | | — | | | — | | | | | 31 | |
Withholding tax on share-based compensation | | — | | | (14) | | | — | | | — | | | | | (14) | |
Other comprehensive loss | | — | | | — | | | (180) | | | — | | | | | (180) | |
Cash dividends | | — | | | — | | | — | | | (757) | | | | | (757) | |
Net income | | — | | | — | | | — | | | 878 | | | | | 878 | |
Balance, December 31, 2022 | | $ | 5 | | | $ | 1,933 | | | $ | (119) | | | $ | 1,199 | | | | | $ | 3,018 | |
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Balance, January 1, 2021 | | $ | 5 | | | $ | 1,899 | | | $ | 94 | | | $ | 1,442 | | | | | $ | 3,440 | |
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Share-based compensation expense, net of forfeitures | | — | | | 23 | | | — | | | — | | | | | 23 | |
Withholding tax on shared-based compensation | | — | | | (6) | | | — | | | — | | | | | (6) | |
Other comprehensive loss | | — | | | — | | | (33) | | | — | | | | | (33) | |
Cash dividends | | — | | | — | | | — | | | (1,678) | | | | | (1,678) | |
Net income | | — | | | — | | | — | | | 1,314 | | | | | 1,314 | |
Balance, December 31, 2021 | | $ | 5 | | | $ | 1,916 | | | $ | 61 | | | $ | 1,078 | | | | | $ | 3,060 | |
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Balance, January 1, 2020 (pre-adoption) | | $ | 5 | | | $ | 1,888 | | | $ | 44 | | | $ | 2,388 | | | | | $ | 4,325 | |
Net impact of adoption of ASU 2016-13 * | | — | | | — | | | — | | | (828) | | | | | (828) | |
Balance, January 1, 2020 (post-adoption) | | 5 | | | 1,888 | | | 44 | | | 1,560 | | | | | 3,497 | |
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Share-based compensation expense, net of forfeitures | | — | | | 17 | | | — | | | — | | | | | 17 | |
Withholding tax on share-based compensation | | — | | | (6) | | | — | | | — | | | | | (6) | |
Other comprehensive income | | — | | | — | | | 50 | | | — | | | | | 50 | |
Cash dividends | | — | | | — | | | — | | | (848) | | | | | (848) | |
Net income | | — | | | — | | | — | | | 730 | | | | | 730 | |
Balance, December 31, 2020 | | $ | 5 | | | $ | 1,899 | | | $ | 94 | | | $ | 1,442 | | | | | $ | 3,440 | |
* As a result of the adoption of ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments on January 1, 2020, we recorded a one-time cumulative reduction to retained earnings, net of tax.
See Notes to the Consolidated Financial Statements.
ONEMAIN FINANCE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
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(dollars in millions) | | | | | | |
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Years Ended December 31, | | 2022 | | 2021 | | 2020 |
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Cash flows from operating activities | | | | | | |
Net income | | $ | 878 | | | $ | 1,314 | | | $ | 730 | |
Reconciling adjustments: | | | | | | |
Provision for finance receivable losses | | 1,402 | | | 593 | | | 1,319 | |
Depreciation and amortization | | 262 | | | 264 | | | 264 | |
Deferred income tax charge (benefit) | | (62) | | | 78 | | | (42) | |
Net loss on repurchases and repayments of debt | | 27 | | | 78 | | | 39 | |
Share-based compensation expense, net of forfeitures | | 31 | | | 23 | | | 17 | |
Gain on sales of finance receivables | | (63) | | | (47) | | | — | |
Other | | 2 | | | (8) | | | 3 | |
Cash flows due to changes in other assets and other liabilities | | (89) | | | (44) | | | (123) | |
Net cash provided by operating activities | | 2,388 | | | 2,251 | | | 2,207 | |
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Cash flows from investing activities | | | | | | |
Net principal originations and purchases of finance receivables | | (2,775) | | | (2,514) | | | (748) | |
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Proceeds from sales of finance receivables | | 790 | | | 560 | | | — | |
Available-for-sale securities purchased | | (530) | | | (517) | | | (456) | |
Available-for-sale securities called, sold, and matured | | 463 | | | 404 | | | 478 | |
Other securities purchased | | (6) | | | (708) | | | (538) | |
Other securities called, sold, and matured | | 14 | | | 701 | | | 542 | |
Other, net | | (75) | | | (69) | | | (29) | |
Net cash used for investing activities | | (2,119) | | | (2,143) | | | (751) | |
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Cash flows from financing activities | | | | | | |
Proceeds from issuance and borrowings of long-term debt, net of issuance costs | | 5,618 | | | 3,759 | | | 7,279 | |
Repayments and repurchases of long-term debt | | (5,149) | | | (3,921) | | | (6,792) | |
Cash dividends | | (759) | | | (1,677) | | | (846) | |
Withholding tax on share-based compensation | | (14) | | | (6) | | | (6) | |
Net cash used for financing activities | | (304) | | | (1,845) | | | (365) | |
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Net change in cash and cash equivalents and restricted cash and restricted cash equivalents | | (35) | | | (1,737) | | | 1,091 | |
Cash and cash equivalents and restricted cash and restricted cash equivalents at beginning of period | | 986 | | | 2,723 | | | 1,632 | |
Cash and cash equivalents and restricted cash and restricted cash equivalents at end of period | | $ | 951 | | | $ | 986 | | | $ | 2,723 | |
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ONEMAIN FINANCE CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (Continued) | | | | | | |
(dollars in millions) | | | | | | |
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Years Ended December 31, | | 2022 | | 2021 | | 2020 |
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Supplemental cash flow information | | | | | | |
Cash and cash equivalents | | $ | 490 | | | $ | 510 | | | $ | 2,272 | |
Restricted cash and restricted cash equivalents | | 461 | | | 476 | | | 451 | |
Total cash and cash equivalents and restricted cash and restricted cash equivalents | | $ | 951 | | | $ | 986 | | | $ | 2,723 | |
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Interest paid | | $ | (857) | | | $ | (891) | | | $ | (978) | |
Income taxes paid | | (343) | | | (403) | | | (289) | |
Cash paid for amounts included in the measurement of operating lease liabilities | | (58) | | | (58) | | | (57) | |
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Supplemental non-cash activities | | | | | | |
Right-of-use assets obtained in exchange for operating lease obligations | | $ | 66 | | | $ | 43 | | | $ | 47 | |
Restricted cash and restricted cash equivalents primarily represent funds required to be used for future debt payments relating to our secured transactions.
See Notes to the Consolidated Financial Statements.
ONEMAIN HOLDINGS, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2022
OneMain Holdings, Inc. (“OMH”) and its wholly owned direct subsidiary, OneMain Finance Corporation (“OMFC”), are financial services holding companies whose subsidiaries engage in the consumer finance and insurance businesses.
The results of OMFC are consolidated into the results of OMH. Due to the nominal differences between OMFC and OMH, content throughout this filing relates to both OMH and OMFC, except where otherwise indicated. OMH and OMFC are referred to in this report, collectively with their subsidiaries, whether directly or indirectly owned, as “the Company,” “OneMain,” “we,” “us,” or “our.”
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2. Summary of Significant Accounting Policies |
BASIS OF PRESENTATION
We prepared our consolidated financial statements using generally accepted accounting principles in the United States of America ("GAAP"). The statements include the accounts of OMH, its wholly owned subsidiaries, and variable interest entities ("VIEs") in which we hold a controlling financial interest and for which we are considered to be the primary beneficiary as of the financial statement date.
We eliminated all material intercompany accounts and transactions. We made judgments, estimates, and assumptions that affect amounts reported in our consolidated financial statements and disclosures of contingent assets and liabilities. In management’s opinion, the consolidated financial statements include the normal, recurring adjustments necessary for a fair statement of results. Ultimate results could differ from our estimates. We evaluated the effects of and the need to disclose events that occurred subsequent to the balance sheet date. To conform to the 2022 presentation, we reclassified certain items in prior periods of our consolidated financial statements.
ACCOUNTING POLICIES
Operating Segment
At December 31, 2022, Consumer and Insurance (“C&I”) is our only reportable segment. The remaining components (which we refer to as “Other”) consist of our liquidating SpringCastle Portfolio servicing activity and our non-originating legacy operations, which primarily include our liquidating real estate loans.
Finance Receivables
Generally, we classify finance receivables as held for investment based on management’s intent at the time of origination. We determine classification on a receivable-by-receivable basis. We classify finance receivables as held for investment due to our ability and intent to hold them until their contractual maturities. Our finance receivables held for investment consist of our personal loans and credit cards. We carry finance receivables at amortized cost which includes accrued finance charges, net unamortized deferred origination costs and unamortized fees, unamortized net premiums and discounts on purchased finance receivables, and unamortized finance charges on precomputed receivables.
We include the cash flows from finance receivables held for investment in our consolidated statements of cash flows as investing activities, except for collections of interest, which we include as cash flows from operating activities. We may finance certain insurance products offered to our customers as part of finance receivables. In such cases, the insurance premium is included as an operating cash inflow and the financing of the insurance premium is included as part of the finance receivable as an investing cash flow in our consolidated statements of cash flows.
Finance Receivable Revenue Recognition
We recognize finance charges as revenue on the accrual basis using the interest method, which we report in Interest income in our consolidated statements of operations. We defer and amortize the costs to originate certain finance receivables and the revenue from nonrefundable fees, along with any premiums or discounts, as an adjustment to finance charge income using the interest method. For credit cards, we amortize certain deferred costs on a straight-line basis over a twelve-month period.
For our personal loans, we stop accruing finance charges when four payments (approximately 90 days) become contractually past due. We reverse finance charge amounts previously accrued upon suspension of accrual of finance charges. For credit cards, we continue to accrue finance charges and fees until charge-off when seven payments (approximately 180 days) become contractually past due, at which point we reverse finance charges and fees previously accrued.
For certain finance receivables that had a carrying value that included a purchase premium or discount, we stop accreting the premium or discount at the time we stop accruing finance charges. We do not reverse accretion of premium or discount that was previously recognized.
For our personal loans, we recognize the contractual interest portion of payments received on nonaccrual finance receivables as finance charges at the time of receipt. We resume the accrual of interest on a nonaccrual personal loans when the past due status on the individual finance receivable improves to the point that the finance receivable no longer meets our policy for nonaccrual. At that time, we also resume accretion of any unamortized premium or discount resulting from a previous purchase premium or discount.
Troubled Debt Restructured Finance Receivables
We make modifications to our finance receivables to assist borrowers who are experiencing financial difficulty, participating in a counseling or settlement arrangement, or are in bankruptcy. When we modify the contractual terms for economic or other reasons related to the borrower’s financial difficulties and grant a concession that we would not otherwise consider, we classify that receivable as a TDR finance receivable. We restructure finance receivables only if we believe the customer has the ability to pay under the restructured terms for the foreseeable future. We establish reserves on our TDR finance receivables by discounting the estimated cash flows associated with the respective receivables at the effective interest rate prior to the modification to the account and record any difference between the discounted cash flows and the carrying value as an allowance adjustment.
When we modify an account, we primarily use a combination of the following to reduce the borrower’s monthly payment: reduce interest rate, extend the term, defer or forgive past due interest, or forgive principal. Additionally, as part of the modification, we may require qualifying payments and then the accounts are generally brought current for delinquency reporting.
Account modifications that are deemed to be a TDR finance receivable are measured for impairment. Account modifications that are not classified as a TDR finance receivable are measured for impairment in accordance with our policy for allowance for finance receivable losses.
Allowance for Finance Receivable Losses
We establish the allowance for finance receivable losses through the provision for finance receivable losses. We evaluate our finance receivable portfolio by level of contractual delinquency in the portfolio, specifically in the late stage delinquency buckets and inclusive of the migration of the loans through the delinquency buckets. Our finance receivables consist of a large number of relatively small, homogeneous accounts. We evaluate our finance receivables for impairment as pools. None of our accounts are large enough to warrant individual evaluation for impairment.
We estimate the allowance for finance receivable losses primarily on historical loss experience using a cumulative loss model applied to our personal loan portfolios. Our gross credit loss expectation is offset by the estimate of future recoveries using historical recovery curves. Our personal loans are primarily segmented in the loss model by contractual delinquency status. Other attributes in the model include collateral mix and recent credit score. To estimate the gross credit losses, the model utilizes a roll rate matrix to project the first 12 months of losses and historical cohort performance to project the expected losses over the remaining term. Our methodology relies on historical loss experience to forecast the corresponding future outcomes. These patterns are then applied to the current portfolio to obtain an estimate of future losses. We also consider key economic trends including unemployment rates. Forecasted macroeconomic conditions extend to our reasonable and supportable forecast period and revert to a historical average. No new volume is assumed. Personal loan renewals are a significant piece of our new volume and are considered a terminal event of the previous loan.
For our personal loans, we have elected not to measure an allowance on accrued finance charges as it is our policy to reverse finance charge amounts previously accrued after four contractual payments become past due. For credit cards, we measure an allowance on uncollected finance charges, but do not measure an allowance on the unfunded portion of the credit card lines as the accounts are unconditionally cancellable.
Management exercises its judgment when determining the amount of allowance for finance receivable losses. Our judgment is based on quantitative analyses, qualitative factors (such as recent portfolio, industry, and other economic trends), and experience in the consumer finance industry. We adjust the amounts determined by our model for management’s estimate of the effects of model imprecision which include but are not limited to, any changes to underwriting criteria and portfolio seasoning.
We generally charge-off to the allowance for finance receivable losses on personal loans and credit cards that are beyond seven payments (approximately 180 days) past due. Exceptions include accounts in bankruptcy, which are generally charged off at the earlier of notice of discharge or when the customer becomes seven payments past due, and accounts of deceased borrowers, which are generally charged off at the time of notice. Generally, we start repossession of any titled personal property when the customer becomes two payments (approximately 30 days) past due and may charge-off prior to the account becoming seven payments (approximately 180 days) past due.
We may renew delinquent secured or unsecured personal loan accounts if the customer meets current underwriting criteria and it does not appear that the cause of past delinquency will affect the customer’s ability to repay the renewed loan. We subject all renewals to the same credit risk underwriting process as we would a new application for credit.
We also establish reserves for TDR finance receivables, which are included in Allowance for finance receivable losses in our consolidated balance sheets. The allowance for finance receivable losses related to our TDR finance receivables represent loan-specific reserves based on an analysis of the present value of expected future cash flows. We establish our allowance for finance receivable losses related to our TDR finance receivables by calculating the present value (discounted at the loan’s effective interest rate prior to modification) of all expected cash flows less the recorded investment in the aggregated pool. We use certain assumptions to estimate the expected cash flows from our TDR finance receivables. The primary assumptions to estimate these expected cash flows are prepayment speeds, default rates, and loss severity rates.
Goodwill
Goodwill represents the amount of purchase price over the fair value of net assets we acquired in connection with business combinations, primarily related to the OneMain Acquisition. We test goodwill for potential impairment annually as of October 1 of each year and whenever events occur or circumstances change that would more likely than not reduce the fair value of our reporting unit below its carrying amount.
We first complete a qualitative assessment to determine whether it is necessary to perform a quantitative impairment test. If the qualitative assessment indicates that it is more likely than not that the reporting unit’s fair value is less than its carrying amount, we proceed with the quantitative impairment test. When necessary, the fair value of the reporting unit is calculated utilizing the income approach, which uses prospective financial information of the reporting unit discounted at a rate we estimate a market participant would use.
Intangible Assets other than Goodwill
At the time we initially recognize intangible assets, a determination is made with regard to each asset’s useful life. We have determined that each of our remaining intangible assets have indefinite lives with the exception of value of business acquired (“VOBA”), which has a finite useful life. We amortize our finite useful life intangible assets in a manner that reflects the pattern of economic benefit used.
For intangible assets with a finite useful life, we review for impairment at least annually and whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Impairment is indicated if the sum of undiscounted estimated future cash flows is less than the carrying value of the respective asset. Impairment is permanently recognized by writing down the asset to the extent that the carrying value exceeds the estimated fair value.
For indefinite-lived intangible assets, we review for impairment at least annually and whenever events or changes in circumstances indicate the assets are more likely than not to be impaired. We first complete a qualitative assessment to determine whether it is necessary to perform a quantitative impairment test. If the qualitative assessment indicates that the assets are more likely than not to have been impaired, we proceed with the fair value calculation of the assets. The fair value is determined in accordance with our fair value measurement policy. If the carrying value exceeds the estimated fair value, an impairment loss will be recognized in an amount equal to the difference and the indefinite life classification will be evaluated to determine whether such classification remains appropriate.
Leases
All our leases are classified as operating leases, and we are the lessee or sublessor in all our lease arrangements. At inception of an arrangement, we determine if a lease exists. At lease commencement date, we recognize a right-of-use asset and a lease liability measured at the present value of lease payments over the lease term. Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Since our operating leases do not provide an implicit rate, we utilize the best available information to determine our incremental borrowing rate, which is used to calculate the present value of lease payments. The right-of-use asset also includes any prepaid fixed lease payments and excludes lease incentives. Options to extend or terminate a lease may be included in our lease arrangements. We reflect the renewal or termination option in the right-of-use asset and lease liability when it is reasonably certain that we will exercise those options. In the normal course of business, we will renew leases that expire or replace them with leases on other properties.
We have elected the practical expedient to treat both the lease component and non-lease component for our leased office space portfolio as a single lease component. Operating lease costs for lease payments are recognized on a straight-line basis over the lease term and are included in Other operating expenses in our consolidated statements of operations. In addition to rent, we pay taxes, insurance, and maintenance expenses under certain leases as variable lease payments. The lease right-of-use assets are included in Other assets and the lease liabilities are included in Other liabilities in our consolidated balance sheets.
Insurance Premiums
We recognize revenue for short-duration contracts over the related contract period. Short-duration contracts primarily consist of credit life, credit disability, credit involuntary unemployment insurance, and collateral protection policies. We defer single premium credit insurance premiums from affiliates in unearned premium reserves, which we include as a reduction to Net finance receivables in our consolidated balance sheets. We recognize unearned premiums on credit life, credit disability, credit involuntary unemployment insurance, and collateral protection insurance as revenue using the sum-of-the-digits, straight-line or other appropriate methods over the terms of the policies. Premiums from reinsurance assumed are earned over the related contract period.
We recognize revenue on long-duration contracts when due from policyholders. Long-duration contracts include term and whole life, accidental death and dismemberment, and disability income protection. For single premium long-duration contracts, a liability is accrued, which represents the present value of estimated future policy benefits to be paid to or on behalf of policyholders and related expenses, when premium revenue is recognized. The effects of changes in such estimated future policy benefit reserves are classified in Insurance policy benefits and claims in our consolidated statements of operations.
We recognize commissions on optional products as Other revenues - other in our consolidated statements of operations when earned.
We may finance certain insurance products offered to our customers as part of finance receivables. In such cases, unearned premiums and certain unpaid claim liabilities related to our borrowers are netted and classified as contra-assets in Net finance receivables in our consolidated balance sheets. The insurance premium is included as an operating cash inflow and the financing of the insurance premium is included as part of the finance receivable as an investing cash flow in our consolidated statements of cash flows.
Policy and Claim Reserves
Policy reserves for credit life, credit disability, credit involuntary unemployment, and collateral protection insurance equal related unearned premiums. Reserves for losses and loss adjustment expenses are based on claims experience, actual claims reported, and estimates of claims incurred but not reported. Assumptions utilized in determining appropriate reserves are based on historical experience, adjusted to provide for possible adverse deviation. These estimates are periodically reviewed and compared with actual experience and industry standards, and revised if it is determined that future experience will differ substantially from that previously assumed. Since reserves are based on estimates, the ultimate liability may be more or less than such reserves. The effects of changes in such estimated reserves are classified in Insurance policy benefits and claims in our consolidated statements of operations in the period in which the estimates are changed.
We accrue liabilities for future life insurance policy benefits associated with non-credit life contracts and base the amounts on assumptions as to investment yields, mortality, and surrenders. We base annuity reserves on assumptions as to investment yields and mortality. Ceded insurance reserves are included in Other assets in our consolidated balance sheets and include estimates of the amounts expected to be recovered from reinsurers on insurance claims and policyholder liabilities.
Insurance Policy Acquisition Costs
We defer insurance policy acquisition costs (primarily commissions, reinsurance fees, and premium taxes). We include deferred policy acquisition costs in Other assets in our consolidated balance sheets and amortize these costs over the terms of the related policies, whether directly written or reinsured.
Investment Securities
We generally classify our investment securities as available-for-sale or other, depending on management’s intent. Other securities primarily consist of equity securities and those securities for which the fair value option was elected.
Our investment securities classified as available-for-sale are recorded at fair value. We adjust related balance sheet accounts to reflect the current fair value of investment securities and record the adjustment, net of tax, in accumulated other comprehensive income or loss in shareholders’ equity. We record interest receivable on investment securities in Other assets in our consolidated balance sheets.
Under the fair value option, we may elect to measure at fair value, financial assets that are not otherwise required to be carried at fair value. We elect the fair value option for available-for-sale securities that are deemed to incorporate an embedded derivative and for which it is impracticable for us to isolate and/or value the derivative. We recognize any changes in fair value in investment revenues.
We classify our investment securities in the fair value hierarchy framework based on the observability of inputs. Inputs to the valuation techniques are described as being either observable (Level 1 or 2) or unobservable (Level 3) assumptions (as further described in “Fair Value Measurements” below) that market participants would use in pricing an asset or liability.
Impairments on Investment Securities
We evaluate our available-for-sale securities on an individual basis to identify any instances where the fair value of the investment security is below its amortized cost. For these securities, we then evaluate whether an impairment exists if any of the following conditions are present:
•we intend to sell the security;
•it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis; or
•we do not expect to recover the security’s entire amortized cost basis (even if we do not intend to sell the security).
If we intend to sell an impaired investment security or we will likely be required to sell the security before recovery of its amortized cost basis less any current period credit loss, we recognize the impairment as a direct write-down in Other revenues - investment in our consolidated statements of operation equal to the difference between the investment security’s amortized cost and its fair value at the balance sheet date. Once the impairment is recorded, we adjust the investment security to a new amortized cost basis equal to the previous amortized cost basis less the impairment write-down recognized in the current period.
In determining whether a credit loss exists, we compare our best estimate of the present value of the cash flows expected to be collected from the security to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis of the security, a credit loss exists and an allowance for credit losses is recorded, not to exceed the total unrealized loss on the security. The cash flows expected to be collected are determined by assessing all available information, including issuer default rate, ratings changes and adverse conditions related to the industry sector, financial condition of issuer, credit enhancements, collateral default rates, and other relevant criteria. Management considers factors such as our investment strategy, liquidity requirements, overall business plans, and recovery periods for securities in previous periods of broad market declines.
If a credit loss exists with respect to an investment in a security (i.e., we do not expect to recover the entire amortized cost basis of the security), we would be unable to assert that we will recover our amortized cost basis even if we do not intend to sell the security. Therefore, in these situations, a credit impairment is considered to have occurred.
If a credit impairment exists, but we do not intend to sell the security and we will likely not be required to sell the security before recovery of its amortized cost basis less any current period credit loss, the impairment is bifurcated as: (i) the estimated amount relating to credit loss; and (ii) the amount relating to non-credit related factors. We recognize the estimated credit loss as an allowance on the balance sheet in investment securities, with a corresponding loss in investment revenues, and the non-credit loss amount in accumulated other comprehensive income or loss.
For investment securities in which a credit impairment was recorded through an allowance, we record subsequent increases and decreases in the allowance for credit losses as credit loss expense or reversal of credit loss expense in investment revenues. We will not reverse a previously recorded allowance to an amount below zero. We recognize subsequent increases and decreases in the fair value of our available-for-sale securities from non-credit related factors in accumulated other comprehensive income or loss.
Interest receivables on our investment securities are excluded from the amortized cost and fair value and are recorded in Other assets in our consolidated balance sheets. We have elected not to measure an allowance on interest receivables due to our policy to reverse interest receivable at the time collectability is uncertain. The reversal of interest receivable is recorded in Other revenues - investment in our consolidated statements of operations.
Investment Revenue Recognition
We recognize interest on interest bearing fixed-maturity investment securities as revenue on the accrual basis. We amortize any premiums or accrete any discounts as a revenue adjustment using the interest method. We stop accruing interest revenue when the collection of interest becomes uncertain. We record dividends on equity securities as revenue on ex-dividend dates. We recognize income on mortgage-backed and asset-backed securities as revenue using an effective yield based on estimated prepayments of the underlying collateral. If actual prepayments differ from estimated prepayments, we calculate a new effective yield and adjust the net investment in the security accordingly. We record the adjustment, along with all investment securities revenue, in Other revenues - investment in our consolidated statements of operations. We specifically identify realized gains and losses on investment securities and include them in Other revenues - investment in our consolidated statements of operations.
Variable Interest Entities
An entity is a VIE if the entity does not have sufficient equity at risk for the entity to finance its activities without additional financial support or has equity investors who lack the characteristics of a controlling financial interest. A VIE is consolidated into the financial statements of its primary beneficiary. When we have a variable interest in a VIE, we qualitatively assess whether we have a controlling financial interest in the entity and, if so, whether we are the primary beneficiary. In applying the qualitative assessment to identify the primary beneficiary of a VIE, we are determined to have a controlling financial interest if we have (i) the power to direct the activities that most significantly impact the economic performance of the VIE, and (ii) the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. We consider the VIE’s purpose and design, including the risks that the entity was designed to create and pass through to its variable interest holders. We continually reassess the VIE’s primary beneficiary and whether we have acquired or divested the power to direct the activities of the VIE through changes in governing documents or other circumstances.
Cash and Cash Equivalents
We consider unrestricted cash on hand and short-term investments having maturity dates within three months of their date of acquisition to be cash and cash equivalents.
We typically maintain cash in financial institutions in excess of the Federal Deposit Insurance Corporation’s insurance limits. We evaluate the creditworthiness of these financial institutions in determining the risk associated with these cash balances. We do not believe that the Company is exposed to any significant credit risk on these accounts and have not experienced any losses in such accounts.
Restricted Cash and Cash Equivalents
We include funds to be used for future debt payments and collateral relating to our secured debt, insurance regulatory deposits, and reinsurance trusts with third parties, in each case, in restricted cash and cash equivalents.
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, unamortized premium, or unamortized debt issuance costs associated with the debt. Other than securitized products, we generally accrete discounts, premiums, and debt issuance costs over the contractual life of the security using contractual payment terms. With respect to securitized products, we have elected to amortize deferred costs over the contractual life of the security. Accretion of discounts and premiums are recorded to Interest expense in our consolidated statements of operations.
Income Taxes
We recognize income taxes using the asset and liability method. We establish deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of assets and liabilities, using the tax rates expected to be in effect when the temporary differences reverse. Deferred tax assets are also recognized for tax attributes such as net operating loss carryforwards.
Realization of our gross deferred tax asset depends on our ability to generate sufficient taxable income of the appropriate character within the carryforward periods of the jurisdictions in which the net operating and capital losses, deductible temporary differences and credits were generated. When we assess our ability to realize deferred tax assets, we consider all available evidence and we record valuation allowances to reduce deferred tax assets to the amounts that management conclude are more-likely-than-not to be realized.
We recognize income tax benefits associated with uncertain tax positions, when, in our judgment, it is more likely than not that the position will be sustained upon examination by a taxing authority. For a tax position that meets the more likely than not recognition threshold, we initially and subsequently measure the tax benefit as the largest amount that we judge to have a greater than 50% likelihood of being realized upon ultimate settlement with the taxing authority.
Retirement Benefit Plans
We have funded and unfunded noncontributory defined pension plans. We recognize the net pension asset or liability, also referred to herein as the funded status of the benefit plan, in Other assets or Other liabilities in our consolidated balance sheets, depending on the funded status at the end of each reporting period. We recognize the net actuarial gains or losses and prior service cost or credit that arise during the period in other comprehensive income or loss.
Many of our employees are participants in our 401(k) Plan. Our contributions to the plan are charged to Salaries and benefits in our consolidated statements of operations.
Share-based Compensation Plans
We measure compensation cost for service-based and performance-based awards at estimated fair value and recognize compensation expense over the requisite service period for awards expected to vest. The estimation of awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from current estimates, such amounts will be recorded as a cumulative adjustment to Salaries and benefits in our consolidated statements of operations in the period estimates are revised. For service-based awards subject to graded vesting, expense is recognized under the straight-line method. Expense for performance-based awards with graded vesting is recognized under the accelerated method, whereby each vesting is treated as a separate award with expense for each vesting recognized ratably over the requisite service period.
Fair Value Measurements
Management is responsible for the determination of the fair value of our financial assets and financial liabilities and the supporting methodologies and assumptions. We employ widely accepted internal valuation models or utilize third-party valuation service providers to gather, analyze, and interpret market information and derive fair values based upon relevant methodologies and assumptions for individual instruments or pools of finance receivables. When our valuation service providers are unable to obtain sufficient market observable information upon which to estimate the fair value for a particular security, we determine fair value either by requesting brokers who are knowledgeable about these securities to provide a quote, which is generally non-binding, or by employing widely accepted internal valuation models.
Our valuation process typically requires obtaining data about market transactions and other key valuation model inputs from internal or external sources and, through the use of widely accepted valuation models, provides a single fair value measurement for individual securities or pools of finance receivables. The inputs used in this process include, but are not limited to, market prices from recently completed transactions and transactions of comparable securities, interest rate yield curves, credit spreads, bid-ask spreads, currency rates, and other market-observable information as of the measurement date as well as the specific attributes of the security being valued, including its term, interest rate, credit rating, industry sector, and other issue or issuer-specific information. When market transactions or other market observable data is limited, the extent to which judgment is applied in determining fair value is greatly increased. We assess the reasonableness of individual security values received from our valuation service providers through various analytical techniques. As part of our internal price reviews, assets that fall outside a price change tolerance are sent to our third-party investment manager for further review. In addition, we may validate the reasonableness of fair values by comparing information obtained from our valuation service providers to other third-party valuation sources for selected securities.
We measure and classify assets and liabilities in our consolidated balance sheets in a hierarchy for disclosure purposes consisting of three “Levels” based on the observability of inputs available in the marketplace used to measure the fair values. In general, we determine the fair value measurements classified as Level 1 based on inputs utilizing quoted prices in active markets for identical assets or liabilities that we have the ability to access. We generally obtain market price data from exchange or dealer markets. We do not adjust the quoted price for such instruments.
We determine the fair value measurements classified as Level 2 based on inputs utilizing other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. The use of observable and unobservable inputs is further discussed in Note 18.
In certain cases, the inputs we use to measure the fair value of an asset may fall into different levels of the fair value hierarchy. In such cases, we determine the level in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Our fair value processes include controls that are designed to ensure that fair values are appropriate. Such controls include model validation, review of key model inputs, analysis of period-over-period fluctuations, and reviews by senior management.
Earnings Per Share (OMH Only)
Basic earnings per share is computed by dividing net income or loss by the weighted-average number of shares outstanding during each period. Diluted earnings per share is computed based on the weighted-average number of common shares plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares represent outstanding unvested restricted stock units and awards.
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3. Recent Accounting Pronouncements |
ACCOUNTING PRONOUNCEMENTS TO BE ADOPTED
Insurance
In August of 2018, the FASB issued ASU 2018-12, Financial Services - Insurance: Targeted Improvements to the Accounting for Long-Duration Contracts, which provides targeted improvements to Topic 944 for the assumptions used to measure the liability for future policy benefits for nonparticipating traditional and limited-payment contracts; measurement of market risk benefits; amortization of deferred acquisition costs; and enhanced disclosures. Upon adoption, our assumptions used to measure the liability for future policy benefits will be updated at least annually. The guidance requires the discount rate used to measure the liability to be an upper-medium grade fixed-income instrument yield and updated at each reporting date with changes in the liability due to the discount rate recognized in other comprehensive income.
The amendments in this ASU become effective for the Company beginning January 1, 2023 and we will adopt using the modified retrospective transition method. This ASU requires a transition date of January 1, 2021 and will result in recasting prior periods.
Our long-duration contracts include term and whole life, accidental death and dismemberment, and disability income protection. The adoption of this ASU resulted in an increase to insurance claims and policyholder liabilities of $97 million, $71 million, and $18 million as of January 1, 2021, December 31, 2021, and December 31, 2022, respectively, and a reduction to accumulated other comprehensive income, net of tax, of $75 million, $56 million, and $8 million as of January 1, 2021, December 31, 2021, and December 31, 2022, respectively. The impact to retained earnings was immaterial as of January 1, 2021, December 31, 2021, and December 31, 2022.
Financial Instruments
In March of 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses: Troubled Debt Restructurings and Vintage Disclosures, which eliminates the accounting for troubled debt restructurings by creditors while enhancing the disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. The amendment also requires disclosure of gross charge-offs by year of origination for finance receivables.
The amendments in this ASU become effective for the Company beginning January 1, 2023 and we will adopt using the modified retrospective transition method. The adoption of this ASU will not have a material impact on the consolidated financial statements.
We do not believe that any other accounting pronouncements issued, but not yet effective, would have a material impact on our consolidated financial statements or disclosures, if adopted.
Our finance receivables consist of personal loans and credit cards. Personal loans are non-revolving, with a fixed rate, have fixed terms generally between three and six years, and are secured by automobiles, other titled collateral, or are unsecured. During the third quarter of 2021, we began offering credit cards. Credit cards are open-ended, revolving, with a fixed rate, and are unsecured.
Components of our net finance receivables were as follows:
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(dollars in millions) | | Personal Loans | | Credit Cards | | Total |
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December 31, 2022 | | | | | | |
Gross finance receivables * | | $ | 19,615 | | | $ | 107 | | | $ | 19,722 | |
Unearned fees | | (220) | | | — | | | (220) | |
Accrued finance charges and fees | | 299 | | | — | | | 299 | |
Deferred origination costs | | 185 | | | — | | | 185 | |
Total | | $ | 19,879 | | | $ | 107 | | | $ | 19,986 | |
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December 31, 2021 | | | | | | |
Gross finance receivables * | | $ | 18,944 | | | $ | 24 | | | $ | 18,968 | |
Unearned fees | | (225) | | | (1) | | | (226) | |
Accrued finance charges and fees | | 289 | | | — | | | 289 | |
Deferred origination costs | | 179 | | | 2 | | | 181 | |
Total | | $ | 19,187 | | | $ | 25 | | | $ | 19,212 | |
* Personal loan gross finance receivables equal the unpaid principal balance. For precompute personal loans, unpaid principal balance is the gross contractual payments less the unaccreted balance of unearned finance charges. Credit card gross finance receivables equal the principal balance and billed interest and fees.
GEOGRAPHIC DIVERSIFICATION
Geographic diversification of finance receivables reduces the concentration of credit risk associated with economic stresses in any one region. The largest concentrations of net finance receivables were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, | | 2022 | | 2021 (a) |
(dollars in millions) | | Amount | | Percent | | Amount | | Percent |
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Personal Loans: | | | | | | | | |
Texas | | $ | 1,954 | | | 10 | % | | $ | 1,812 | | | 9 | % |
Florida | | 1,446 | | | 7 | | | 1,255 | | | 7 | |
California | | 1,391 | | | 7 | | | 1,289 | | | 7 | |
Pennsylvania | | 1,249 | | | 6 | | | 1,199 | | | 6 | |
North Carolina | | 1,110 | | | 6 | | | 1,117 | | | 6 | |
Ohio | | 963 | | | 5 | | | 960 | | | 5 | |
Georgia | | 792 | | | 4 | | | 770 | | | 4 | |
Illinois | | 777 | | | 4 | | | 765 | | | 4 | |
New York | | 749 | | | 4 | | | 681 | | | 4 | |
Indiana | | 726 | | | 4 | | | 728 | | | 4 | |
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Other | | 8,722 | | | 43 | | | 8,611 | | | 44 | |
Total personal loans | | $ | 19,879 | | | 100 | % | | $ | 19,187 | | | 100 | % |
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Credit Cards: | | | | | | | | |
California | | $ | 26 | | | 24 | % | | $ | 7 | | | 28 | % |
Texas | | 15 | | | 14 | | | 4 | | | 14 | |
Florida | | 8 | | | 8 | | | 2 | | | 7 | |
Washington | | 5 | | | 5 | | | 1 | | | 5 | |
Arizona | | 4 | | | 4 | | | 1 | | | 4 | |
Pennsylvania | | 4 | | | 4 | | | 1 | | | 4 | |
Other | | 45 | | | 41 | | | 9 | | | 38 | |
Total credit cards | | $ | 107 | | | 100 | % | | $ | 25 | | | 100 | % |
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(a) December 31, 2021 concentrations of net finance receivables are presented in the order of December 31, 2022 state concentrations.
WHOLE LOAN SALE TRANSACTIONS
As of December 31, 2022, we have whole loan sale flow agreements with third parties, with remaining terms of up to one year, in which we agreed to sell a combined total of $180 million gross receivables per quarter of newly originated unsecured personal loans along with any associated accrued interest. These unsecured personal loans are derecognized from our balance sheet at the time of sale. We service the personal loans sold and are entitled to a servicing fee and other fees commensurate with the services performed as part of the agreements. The gain on sales and servicing fees are recorded in Other revenues - other in our consolidated statements of operations. We sold $720 million and $505 million of gross finance receivables during the years ended December 31, 2022 and 2021, respectively. The gain on the sales were $63 million and $47 million during the years ended December 31, 2022 and 2021, respectively.
CREDIT QUALITY INDICATOR
We consider the delinquency status of our finance receivables as our key credit quality indicator. We monitor the delinquency of our finance receivable portfolio, including the migration between the delinquency buckets and changes in the delinquency trends to manage our exposure to credit risk in the portfolio.
When personal loans are 60 days contractually past due, we consider these accounts to be at an increased risk for loss and collection of these accounts is managed by our centralized operations. We consider our personal loans to be nonperforming at 90 days or more contractually past due, at which point we stop accruing finance charges and reverse finance charges previously accrued. For our personal loans, we reversed net accrued finance charges of $126 million and $77 million during the years ended December 31, 2022 and 2021, respectively.
Finance charges recognized from the contractual interest portion of payments received on nonaccrual personal loans totaled $16 million and $13 million during the years ended December 31, 2022 and 2021, respectively. All personal loans in nonaccrual status are considered in our estimate of allowance for finance receivable losses.
We accrue finance charges and fees on credit cards until charge-off at approximately 180 days past due, at which point we reverse finance charges and fees previously accrued. For credit cards, net accrued finance charges and fees reversed for the years ended December 31, 2022 and 2021 were immaterial.
The following tables below are a summary of our personal loans by the year of origination and number of days delinquent:
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(dollars in millions) | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | Total |
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December 31, 2022 | | | | | | | | | | | | | | |
Performing | | | | | | | | | | | | | | |
Current | | $ | 10,614 | | | $ | 4,927 | | | $ | 1,758 | | | $ | 1,081 | | | $ | 240 | | | $ | 105 | | | $ | 18,725 | |
30-59 days past due | | 136 | | | 136 | | | 43 | | | 28 | | | 9 | | | 5 | | | 357 | |
60-89 days past due | | 92 | | | 101 | | | 32 | | | 19 | | | 6 | | | 3 | | | 253 | |
Total performing | | 10,842 | | | 5,164 | | | 1,833 | | | 1,128 | | | 255 | | | 113 | | | 19,335 | |
Nonperforming (Nonaccrual) | | | | | | | | | | | | | | |
90+ days past due | | 160 | | | 246 | | | 74 | | | 44 | | | 13 | | | 7 | | | 544 | |
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Total | | $ | 11,002 | | | $ | 5,410 | | | $ | 1,907 | | | $ | 1,172 | | | $ | 268 | | | $ | 120 | | | $ | 19,879 | |
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(dollars in millions) | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Total |
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December 31, 2021 | | | | | | | | | | | | | | |
Performing | | | | | | | | | | | | | | |
Current | | $ | 10,645 | | | $ | 3,935 | | | $ | 2,641 | | | $ | 814 | | | $ | 193 | | | $ | 109 | | | $ | 18,337 | |
30-59 days past due | | 125 | | | 74 | | | 53 | | | 19 | | | 6 | | | 5 | | | 282 | |
60-89 days past due | | 81 | | | 53 | | | 33 | | | 11 | | | 4 | | | 3 | | | 185 | |
Total performing | | 10,851 | | | 4,062 | | | 2,727 | | | 844 | | | 203 | | | 117 | | | 18,804 | |
Nonperforming (Nonaccrual) | | | | | | | | | | | | | | |
90+ days past due | | 125 | | | 130 | | | 85 | | | 28 | | | 9 | | | 6 | | | 383 | |
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Total | | $ | 10,976 | | | $ | 4,192 | | | $ | 2,812 | | | $ | 872 | | | $ | 212 | | | $ | 123 | | | $ | 19,187 | |
The following is a summary of credit cards by number of days delinquent:
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(dollars in millions) | | | | | | | | |
December 31, | | 2022 | | 2021 | | | | |
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Current | | $ | 93 | | | $ | 25 | | | | | |
30-59 days past due | | 3 | | | — | | | | | |
60-89 days past due | | 3 | | | — | | | | | |
90+ days past due | | 8 | | | — | | | | | |
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Total | | $ | 107 | | | $ | 25 | | | | | |
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There were no credit cards that were converted to term loans at December 31, 2022 or December 31, 2021.
TROUBLED DEBT RESTRUCTURED FINANCE RECEIVABLES
Information regarding TDR finance receivables were as follows:
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(dollars in millions) | | | | |
December 31, | | 2022 | | 2021 |
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TDR gross finance receivables | | $ | 898 | | | $ | 646 | |
TDR net finance receivables * | | 904 | | | 650 | |
Allowance for TDR finance receivable losses | | 369 | | | 270 | |
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* TDR net finance receivables are TDR gross finance receivables net of unearned fees, accrued finance charges, and deferred origination costs.
There were no credit cards classified as TDR finance receivables at December 31, 2022 or December 31, 2021.
Information regarding the new volume of the TDR finance receivables were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in millions) | | | | | | | | | | | | |
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Years Ended December 31, | | | | | | 2022 | | 2021 | | 2020 | | |
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Pre-modification TDR net finance receivables | | | | | | $ | 738 | | | $ | 453 | | | $ | 499 | | | |
Post-modification TDR net finance receivables: | | | | | | | | | | | | |
Rate reduction | | | | | | 465 | | | 310 | | | 312 | | | |
Other * | | | | | | 273 | | | 143 | | | 187 | | | |
Total post-modification TDR net finance receivables | | | | | | $ | 738 | | | $ | 453 | | | $ | 499 | | | |
Number of TDR accounts | | | | | | 88,901 | | | 55,229 | | | 66,484 | | | |
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* “Other” modifications primarily consist of loans with both rate reductions and the potential of principal forgiveness contingent on future payment performance by the borrower under the modified terms.
Finance receivables that were modified as TDR finance receivables within the previous 12 months and for which there was a default during the period to cause the TDR finance receivables to be considered nonperforming (90 days or more past due) are reflected in the following table: | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in millions) | | | | | | | | | | | | |
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Years Ended December 31, | | | | | | 2022 | | 2021 | | 2020 | | |
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TDR net finance receivables * | | | | | | $ | 136 | | | $ | 117 | | | $ | 105 | | | |
Number of TDR accounts | | | | | | 17,297 | | | 16,046 | | | 15,229 | | | |
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* Represents the corresponding balance of TDR net finance receivables at the end of the month in which they defaulted.
UNFUNDED LENDING COMMITMENTS
Our unfunded lending commitments consist of the unused credit card lines, which are unconditionally cancellable. We do not anticipate that all of our customers will access their entire available line at any given point in time. The unused credit card lines totaled $81 million at December 31, 2022 and $54 million at December 31, 2021.
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5. Allowance for Finance Receivable Losses |
We establish an allowance for finance receivable losses through the provision for finance receivable losses. We evaluate our finance receivable portfolio by the level of contractual delinquency in the portfolio, specifically in the late stage delinquency buckets and inclusive of the migration of the finance receivables through the delinquency buckets. We estimate and record an allowance for finance receivable losses to cover the estimated lifetime expected credit losses on our finance receivables, pursuant to the adoption of ASU 2016-13 on January 1, 2020. Our allowance for finance receivable losses may fluctuate based upon changes in portfolio growth, credit quality, and economic conditions. See Note 2 for additional information regarding our accounting policies for allowance for finance receivable losses.
Our current methodology to estimate expected credit losses used the most recent macroeconomic forecasts, which incorporated the overall unemployment rate. Our unemployment outlook leveraged economic projections from various industry leading forecast providers. We also considered inflationary pressures, consumer confidence levels, and continued interest rate increases negatively impacting the economic outlook. At December 31, 2022, our economic forecast used a reasonable and supportable period of 12 months. The increase in our allowance for finance receivable losses for the year ended December 31, 2022 was primarily due to the weakened macroeconomic environment and growth in our loan portfolio. We may experience further changes to the macroeconomic assumptions within our forecast, as well as changes to our loan loss performance outlook, both of which could lead to further changes in our allowance for finance receivable losses, allowance ratio, and provision for finance receivable losses.
Changes in the allowance for finance receivable losses were as follows: | | | | | | | | | | | | | | | | | | | | |
(dollars in millions) | | Personal Loans | | Credit Cards | | Total |
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Year Ended December 31, 2022 | | | | | | |
Balance at beginning of period | | $ | 2,090 | | | $ | 5 | | | $ | 2,095 | |
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Provision for finance receivable losses | | 1,379 | | | 23 | | | 1,402 | |
Charge-offs | | (1,431) | | | (7) | | | (1,438) | |
Recoveries | | 252 | | | — | | | 252 | |
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Balance at end of period | | $ | 2,290 | | | $ | 21 | | | $ | 2,311 | |
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Year Ended December 31, 2021 | | | | | | |
Balance at beginning of period | | $ | 2,269 | | | $ | — | | | $ | 2,269 | |
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Provision for finance receivable losses | | 588 | | | 5 | | | 593 | |
Charge-offs | | (989) | | | — | | | (989) | |
Recoveries | | 222 | | | — | | | 222 | |
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Balance at end of period | | $ | 2,090 | | | $ | 5 | | | $ | 2,095 | |
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Year Ended December 31, 2020 (a) | | | | | | |
Balance at beginning of period | | $ | 829 | | | $ | — | | | $ | 829 | |
Impact of adoption of ASU 2016-13 (b) | | 1,118 | | | — | | | 1,118 | |
Provision for finance receivable losses | | 1,319 | | | — | | | 1,319 | |
Charge-offs | | (1,162) | | | — | | | (1,162) | |
Recoveries | | 165 | | | — | | | 165 | |
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Balance at end of period | | $ | 2,269 | | | $ | — | | | $ | 2,269 | |
(a) There were no credit cards for the year ended December 31, 2020 as the product offering began in 2021.
(b) As a result of the adoption of ASU 2016-13 on January 1, 2020, we recorded a one-time adjustment to the allowance for finance receivable losses.
The allowance for finance receivable losses and net finance receivables by impairment method were as follows: | | | | | | | | | | | | | | | | | | | | |
(dollars in millions) | | Personal Loans | | Credit Cards | | Total |
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December 31, 2022 | | | | | | |
Allowance for finance receivable losses: | | | | | | |
Collectively evaluated for impairment | | $ | 1,921 | | | $ | 21 | | | $ | 1,942 | |
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TDR finance receivables | | 369 | | | — | | | 369 | |
Total | | $ | 2,290 | | | $ | 21 | | | $ | 2,311 | |
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Finance receivables: | | | | | | |
Collectively evaluated for impairment | | $ | 18,975 | | | $ | 107 | | | $ | 19,082 | |
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TDR finance receivables | | 904 | | | — | | | 904 | |
Total | | $ | 19,879 | | | $ | 107 | | | $ | 19,986 | |
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Allowance for finance receivable losses as a percentage of finance receivables | | 11.52 | % | | 19.12 | % | | 11.56 | % |
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December 31, 2021 | | | | | | |
Allowance for finance receivable losses: | | | | | | |
Collectively evaluated for impairment | | $ | 1,820 | | | $ | 5 | | | $ | 1,825 | |
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TDR finance receivables | | 270 | | | — | | | 270 | |
Total | | $ | 2,090 | | | $ | 5 | | | $ | 2,095 | |
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Finance receivables: | | | | | | |
Collectively evaluated for impairment | | $ | 18,537 | | | $ | 25 | | | $ | 18,562 | |
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TDR finance receivables | | 650 | | | — | | | 650 | |
Total | | $ | 19,187 | | | $ | 25 | | | $ | 19,212 | |
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Allowance for finance receivable losses as a percentage of finance receivables | | 10.89 | % | | 19.91 | % | | 10.90 | % |
AVAILABLE-FOR-SALE SECURITIES
Cost/amortized cost, allowance for credit losses, unrealized gains and losses, and fair value of fixed maturity available-for-sale securities by type were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in millions) | | Cost/ Amortized Cost | | | | Unrealized Gains | | Unrealized Losses | | Fair Value |
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December 31, 2022* | | | | | | | | | | |
Fixed maturity available-for-sale securities: | | | | | | | | | | |
U.S. government and government sponsored entities | | $ | 17 | | | | | $ | — | | | $ | (1) | | | $ | 16 | |
Obligations of states, municipalities, and political subdivisions | | 74 | | | | | — | | | (8) | | | 66 | |
Commercial paper | | 55 | | | | | — | | | — | | | 55 | |
Non-U.S. government and government sponsored entities | | 150 | | | | | — | | | (8) | | | 142 | |
Corporate debt | | 1,251 | | | | | 1 | | | (115) | | | 1,137 | |
Mortgage-backed, asset-backed, and collateralized: | | | | | | | | | | |
RMBS | | 217 | | | | | — | | | (25) | | | 192 | |
CMBS | | 38 | | | | | — | | | (3) | | | 35 | |
CDO/ABS | | 95 | | | | | — | | | (9) | | | 86 | |
Total | | $ | 1,897 | | | | | $ | 1 | | | $ | (169) | | | $ | 1,729 | |
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December 31, 2021* | | | | | | | | | | |
Fixed maturity available-for-sale securities: | | | | | | | | | | |
U.S. government and government sponsored entities | | $ | 16 | | | | | $ | — | | | $ | — | | | $ | 16 | |
Obligations of states, municipalities, and political subdivisions | | 76 | | | | | 3 | | | — | | | 79 | |
Commercial paper | | 50 | | | | | — | | | — | | | 50 | |
Non-U.S. government and government sponsored entities | | 151 | | | | | 4 | | | — | | | 155 | |
Corporate debt | | 1,246 | | | | | 61 | | | (5) | | | 1,302 | |
Mortgage-backed, asset-backed, and collateralized: | | | | | | | | | | |
RMBS | | 169 | | | | | 3 | | | (2) | | | 170 | |
CMBS | | 44 | | | | | 1 | | | — | | | 45 | |
CDO/ABS | | 90 | | | | | 1 | | | (1) | | | 90 | |
Total | | $ | 1,842 | | | | | $ | 73 | | | $ | (8) | | | $ | 1,907 | |
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* The allowance for credit losses related to our investment securities as of December 31, 2022 and December 31, 2021 were immaterial.
Interest receivables reported in Other assets in our consolidated balance sheets totaled $14 million as of December 31, 2022 and $13 million as of December 31, 2021, respectively. There were no material amounts reversed from investment revenue for available-for-sale securities for the years ended December 31, 2022 and 2021.
Fair value and unrealized losses on available-for-sale securities by type and length of time in a continuous unrealized loss position without an allowance for credit losses were as follows:
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| | Less Than 12 Months | | 12 Months or Longer | | Total |
(dollars in millions) | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
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December 31, 2022 | | | | | | | | | | | | |
U.S. government and government sponsored entities | | $ | 10 | | | $ | — | | | $ | 6 | | | $ | (1) | | | $ | 16 | | | $ | (1) | |
Obligations of states, municipalities, and political subdivisions | | 48 | | | (5) | | | 15 | | | (3) | | | 63 | | | (8) | |
Commercial paper | | 51 | | | — | | | — | | | — | | | 51 | | | — | |
Non-U.S. government and government sponsored entities | | 104 | | | (3) | | | 32 | | | (5) | | | 136 | | | (8) | |
Corporate debt | | 779 | | | (54) | | | 299 | | | (61) | | | 1,078 | | | (115) | |
Mortgage-backed, asset-backed, and collateralized: | | | | | | | | | | | | |
RMBS | | 106 | | | (9) | | | 68 | | | (16) | | | 174 | | | (25) | |
CMBS | | 21 | | | (2) | | | 13 | | | (1) | | | 34 | | | (3) | |
CDO/ABS | | 45 | | | (3) | | | 35 | | | (6) | | | 80 | | | (9) | |
Total | | $ | 1,164 | | | $ | (76) | | | $ | 468 | | | $ | (93) | | | $ | 1,632 | | | $ | (169) | |
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December 31, 2021 | | | | | | | | | | | | |
U.S. government and government sponsored entities | | $ | 6 | | | $ | — | | | $ | — | | | $ | — | | | $ | 6 | | | $ | — | |
Obligations of states, municipalities, and political subdivisions | | 10 | | | — | | | — | | | — | | | 10 | | | — | |
Commercial paper | | 46 | | | — | | | — | | | — | | | 46 | | | — | |
Non-U.S. government and government sponsored entities | | 19 | | | — | | | 5 | | | — | | | 24 | | | — | |
Corporate debt | | 208 | | | (3) | | | 38 | | | (2) | | | 246 | | | (5) | |
Mortgage-backed, asset-backed, and collateralized: | | | | | | | | | | | | |
RMBS | | 81 | | | (1) | | | 15 | | | (1) | | | 96 | | | (2) | |
CMBS | | 7 | | | — | | | — | | | — | | | 7 | | | — | |
CDO/ABS | | 41 | | | (1) | | | 3 | | | — | | | 44 | | | (1) | |
Total | | $ | 418 | | | $ | (5) | | | $ | 61 | | | $ | (3) | | | $ | 479 | | | $ | (8) | |
On a lot basis, we had 2,280 and 570 investment securities in an unrealized loss position at December 31, 2022 and December 31, 2021, respectively. We do not consider the unrealized losses to be credit-related, as these unrealized losses primarily relate to changes in interest rates and market spreads subsequent to purchase. Additionally, as of December 31, 2022, there were no credit impairments on investment securities that we intend to sell. We do not have plans to sell any of the remaining investment securities with unrealized losses as of December 31, 2022, and we believe it is more likely than not that we would not be required to sell such investment securities before recovery of their amortized cost.
We continue to monitor unrealized loss positions for potential credit impairments. During the years ended December 31, 2022 and 2021, there were no material credit impairments related to our investment securities. Therefore, there were no material additions or reductions in the allowance for credit losses (impairments recognized or reversed in earnings) on credit impaired available-for-sale securities for the years ended December 31, 2022 and 2021.
The proceeds of available-for-sale securities sold or redeemed totaled $278 million, $250 million and $259 million during 2022, 2021, and 2020, respectively. The net realized gains and losses were immaterial during the years ended December 31, 2022, 2021 and 2020.
Contractual maturities of fixed-maturity available-for-sale securities at December 31, 2022 were as follows: | | | | | | | | | | | | | | |
(dollars in millions) | | Fair Value | | Amortized Cost |
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Fixed maturities, excluding mortgage-backed, asset-backed, and collateralized securities: | | | | |
Due in 1 year or less | | $ | 200 | | | $ | 201 | |
Due after 1 year through 5 years | | 518 | | | 548 | |
Due after 5 years through 10 years | | 541 | | | 614 | |
Due after 10 years | | 157 | | | 184 | |
Mortgage-backed, asset-backed, and collateralized securities | | 313 | | | 350 | |
Total | | $ | 1,729 | | | $ | 1,897 | |
Actual maturities may differ from contractual maturities since issuers and borrowers may have the right to call or prepay obligations. We may sell investment securities before maturity for general corporate and working capital purposes and to achieve certain investment strategies.
The fair value of securities on deposit with third parties totaled $532 million and $587 million at December 31, 2022 and December 31, 2021, respectively.
OTHER SECURITIES
The fair value of other securities by type was as follows: | | | | | | | | | | | | | | |
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(dollars in millions) | | December 31, 2022 | | December 31, 2021 |
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Fixed maturity other securities: | | | | |
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Bonds | | $ | 23 | | | $ | 30 | |
Preferred stock * | | 15 | | | 22 | |
Common stock * | | 33 | | | 33 | |
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Total | | $ | 71 | | | $ | 85 | |
* We employ an income equity strategy targeting investments in stocks with strong current dividend yields. Stocks included have a history of stable or increasing dividend payments.
Net unrealized losses on other securities held were $9 million for the year ended December 31, 2022 and immaterial for the years ended December 31, 2021 and 2020. Net realized gains and losses on other securities sold or redeemed were immaterial during 2022, 2021, and 2020.
Other securities primarily consist of equity securities and those securities for which the fair value option was elected. We report net unrealized and realized gains and losses on other securities held, sold, or redeemed in investment revenue.
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7. Goodwill and Other Intangible Assets |
GOODWILL
The carrying amount of goodwill totaled $1.4 billion at December 31, 2022 and 2021. We did not record any impairments to goodwill during 2022, 2021 and 2020.
OTHER INTANGIBLE ASSETS
The gross carrying amount and accumulated amortization, in total and by major intangible asset class were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in millions) | | Gross Carrying Amount | | Accumulated Amortization | | Net Other Intangible Assets | | | | | | | | | | | | | | | | | | | | | |
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December 31, 2022 | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Trade names | | $ | 220 | | | $ | — | | | $ | 220 | | | | | | | | | | | | | | | | | | | | | | |
Licenses | | 25 | | | — | | | 25 | | | | | | | | | | | | | | | | | | | | | | |
VOBA | | 105 | | | (90) | | | 15 | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other | | 1 | | | — | | | 1 | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 351 | | | $ | (90) | | | $ | 261 | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2021 | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Trade names | | $ | 220 | | | $ | — | | | $ | 220 | | | | | | | | | | | | | | | | | | | | | | |
VOBA | | 105 | | | (77) | | | 28 | | | | | | | | | | | | | | | | | | | | | | |
Licenses | | 25 | | | — | | | 25 | | | | | | | | | | | | | | | | | | | | | | |
Customer relationships | | 223 | | | (223) | | | — | | | | | | | | | | | | | | | | | | | | | | |
Other | | 13 | | | (12) | | | 1 | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 586 | | | $ | (312) | | | $ | 274 | | | | | | | | | | | | | | | | | | | | | | |
Amortization expense totaled $13 million in 2022, $32 million in 2021, and $37 million in 2020. The estimated aggregate amortization of other intangible assets for each of the next five years is immaterial.
Carrying value and fair value of long-term debt by type were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
(dollars in millions) | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| | | | | | | | |
Senior debt | | $ | 18,109 | | | $ | 16,782 | | | $ | 17,578 | | | $ | 18,574 | |
Junior subordinated debt | | 172 | | | 187 | | | 172 | | | 207 | |
Total | | $ | 18,281 | | | $ | 16,969 | | | $ | 17,750 | | | $ | 18,781 | |
Weighted average effective interest rates on long-term debt by type were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | At December 31, |
| | 2022 | | 2021 | | 2020 | | 2022 | | 2021 |
| | | | | | | | | | |
Senior debt | | 4.97 | % | | 5.38 | % | | 5.68 | % | | 5.06 | % | | 5.05 | % |
Junior subordinated debt | | 7.42 | | | 4.02 | | | 5.64 | | | 11.91 | | | 3.86 | |
Total | | 4.99 | | | 5.37 | | | 5.68 | | | 5.12 | | | 5.03 | |
Principal maturities of long-term debt by type of debt at December 31, 2022 were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Senior Debt | | | | |
(dollars in millions) | | Securitizations | | Private Secured Term Funding | | Revolving Conduit Facilities | | | | Unsecured Notes (a) (e) | | Junior Subordinated Debt (a) | | Total |
| | | | | | | | | | | | | | |
Interest rates (b) | | 0.87%-6.55% | | 5.24 | % | | 4.57% | | | | 3.50%-8.25% | | 5.83 | % | | |
| | | | | | | | | | | | | | |
2023 | | $ | — | | | $ | — | | | $ | — | | | | | $ | 1,004 | | | $ | — | | | $ | 1,004 | |
2024 | | — | | | — | | | — | | | | | 1,270 | | | — | | | 1,270 | |
2025 | | — | | | — | | | — | | | | | 1,249 | | | — | | | 1,249 | |
2026 | | — | | | — | | | — | | | | | 1,600 | | | — | | | 1,600 | |
2027 | | — | | | — | | | — | | | | | 750 | | | — | | | 750 | |
2028-2067 | | — | | | — | | | — | | | | | 2,933 | | | 350 | | | 3,283 | |
Secured (c) | | 9,003 | | | 350 | | | 50 | | | | | — | | | — | | | 9,403 | |
| | | | | | | | | | | | | | |
Total principal maturities | | $ | 9,003 | | | $ | 350 | | | $ | 50 | | | | | $ | 8,806 | | | $ | 350 | | | $ | 18,559 | |
| | | | | | | | | | | | | | |
Total carrying amount | | $ | 8,962 | | | $ | 349 | | | $ | 50 | | | | | $ | 8,748 | | | $ | 172 | | | $ | 18,281 | |
Debt issuance costs (d) | | (38) | | | (1) | | | — | | | | | (62) | | | — | | | (101) | |
(a) Pursuant to the Base Indenture, the Supplemental Indentures and the Guaranty Agreements, OMH agreed to fully and unconditionally guarantee, on a senior unsecured basis, payments of principal, premium and interest on the Unsecured Notes and Junior Subordinated Debenture. The OMH guarantees of OMFC’s long-term debt are subject to customary release provisions.
(b) The interest rates shown are the range of contractual rates in effect at December 31, 2022.
(c) Securitizations, private secured term funding, and borrowings under the revolving conduit facilities are not included in the above maturities by period due to their variable monthly repayments, which may result in pay-off prior to the stated maturity date. See Note 9 for further information on our long-term debt associated with securitizations, private secured term funding, and revolving conduit facilities.
(d) Debt issuance costs are reported as a direct deduction from long-term debt, with the exception of debt issuance costs associated with our revolving conduit facilities and unsecured corporate revolver, which totaled $31 million at December 31, 2022 and are reported in Other assets in our consolidated balance sheets.
(e) During the year ended December 31, 2022, we repurchased, in the open market, portions of our Unsecured Notes in the amount of $269 million. In connection with these repurchases, we recognized a net gain of $2 million in Net loss on repurchases and repayments of debt in our consolidated statements of operations.
2022 DEBT ISSUANCES AND REDEMPTIONS
Redemption of 8.875% Senior Notes Due 2025
On April 26, 2022, OMFC issued a notice to fully redeem its 8.875% Senior Notes due 2025. On June 1, 2022, OMFC paid a net aggregate amount of $637 million, inclusive of accrued interest and premiums, to complete the redemption. In connection with the redemption, we recognized $26 million of net loss on repurchases and repayments of debt during the second quarter of 2022.
UNSECURED CORPORATE REVOLVER
On June 15, 2022, OMFC increased the total maximum borrowing capacity of its unsecured corporate revolver to $1.25 billion. The corporate revolver has a five-year term beginning October 25, 2021, during which draws and repayments may occur. Any outstanding principal balance is due and payable on October 25, 2026. At December 31, 2022, no amounts were drawn under this facility.
DEBT COVENANTS
OMFC Debt Agreements
The debt agreements to which OMFC and its subsidiaries are a party include customary terms and conditions, including covenants and representations and warranties. Some or all of these agreements also contain certain restrictions, including (i) restrictions on the ability to create senior liens on property and assets in connection with any new debt financings and (ii) OMFC’s ability to sell or convey all or substantially all of its assets, unless the transferee assumes OMFC’s obligations under the applicable debt agreement. In addition, the OMH guarantees of OMFC’s long-term debt discussed above are subject to customary release provisions.
With the exception of OMFC’s junior subordinated debenture and unsecured corporate revolver, none of our debt agreements requires OMFC or any of its subsidiaries to meet or maintain any specific financial targets or ratios. However, certain events, including non-payment of principal or interest, bankruptcy or insolvency, or a breach of a covenant or a representation or warranty, may constitute an event of default and trigger an acceleration of payments. In some cases, an event of default or acceleration of payments under one debt agreement may constitute a cross-default under other debt agreements resulting in an acceleration of payments under the other agreements.
As of December 31, 2022, OMFC was in compliance with all of the covenants under its debt agreements.
Junior Subordinated Debenture
In January of 2007, OMFC issued the Junior Subordinated Debenture, consisting of $350 million aggregate principal amount of 60-year junior subordinated debt. The Junior Subordinated Debenture underlies the trust preferred securities sold by a trust sponsored by OMFC. OMFC can redeem the Junior Subordinated Debenture at par. On December 30, 2013, OMH entered into a guaranty agreement whereby it agreed to fully and unconditionally guarantee, on a junior subordinated basis, the payment of principal, premium (if any), and interest on the Junior Subordinated Debenture. The interest rate on the remaining principal balance of the Junior Subordinated Debenture consists of a variable floating rate (determined quarterly) equal to 3-month LIBOR plus 1.75%, or 5.83% as of December 31, 2022. ICE Benchmark Administration and the Financial Conduct Authority have announced that the publication of the most commonly used USD LIBOR settings will cease to be provided or cease to be representative after June 30, 2023. We expect the Junior Subordinated Debenture to transition from a LIBOR-based interest rate to a SOFR-based interest rate in accordance with the statutory framework provided by the Adjustable Interest Rate (LIBOR) Act, enacted in March 2022, and the rules adopted in December 2022 by the Board of Governors of the Federal Reserve System.
Pursuant to the terms of the Junior Subordinated Debenture, OMFC, upon the occurrence of a mandatory trigger event, is required to defer interest payments to the holders of the Junior Subordinated Debenture (and not make dividend payments) unless OMFC obtains non-debt capital funding in an amount equal to all accrued and unpaid interest on the Junior Subordinated Debenture otherwise payable on the next interest payment date and pays such amount to the holders of the Junior Subordinated Debenture. A mandatory trigger event occurs if OMFC’s (i) tangible equity to tangible managed assets is less than 5.5% or (ii) average fixed charge ratio is not more than 1.10x for the trailing four quarters.
Based upon OMFC’s financial results for the year ended December 31, 2022, a mandatory trigger event did not occur with respect to the interest payment due in January of 2023, as OMFC was in compliance with both required ratios discussed above.
| | |
9. Variable Interest Entities |
CONSOLIDATED VIES
As part of our overall funding strategy and as part of our efforts to support our liquidity from sources other than our traditional capital market sources, we have transferred certain finance receivables to VIEs for asset-backed financing transactions, including secured debt and revolving conduit transactions. We have determined that OMFC or OneMain Financial Holdings, LLC (“OMFH”) is the primary beneficiary of these VIEs and, as a result, we include each VIE’s assets, including any finance receivables securing the VIE’s debt obligations, and related liabilities in our consolidated financial statements and each VIE’s asset-backed debt obligations are accounted for as secured borrowings. OMFC or OMFH is deemed to be the primary beneficiary of each VIE because OMFC or OMFH, as applicable, has the ability to direct the activities of the VIE that most significantly impact its economic performance, including the losses it absorbs and its right to receive economic benefits that are potentially significant. Such ability arises from OMFC’s or OMFH’s and their affiliates’ contractual right to service the finance receivables securing the VIEs’ debt obligations. To the extent we retain any debt obligation or residual interest in an asset-backed financing facility, we are exposed to potentially significant losses and potentially significant returns.
The asset-backed debt obligations and conduits issued by the VIEs are supported by the expected cash flows from the underlying finance receivables securing such debt obligations. Cash inflows from these finance receivables are distributed to repay the debt obligations and related service providers in accordance with each transaction’s contractual priority of payments, referred to as the “waterfall.” The holders of the asset-backed debt obligations have no recourse to the Company if the cash flows from the underlying finance receivables securing such debt obligations are not sufficient to pay all principal and interest on the asset-backed debt obligations. With respect to any asset-backed financing transaction that has multiple classes of debt obligations, substantially all cash inflows will be directed to the senior debt obligations until fully repaid and, thereafter, to the subordinate debt obligations on a sequential basis. We retain an interest and credit risk in these financing transactions through our ownership of the residual interest in each VIE and, in some cases, the most subordinate class of debt obligations issued by the VIE, which are the first to absorb credit losses on the finance receivables securing the debt obligations. With respect to each financing transaction that is subject to the risk retention requirements of the Dodd-Frank Act, we either retain at least 5% of the balance of each such class of debt obligations and at least 5% of the residual interest in each related VIE or retain at least 5% of the fair value of all ABS interests (as defined in the risk retention requirements), which is satisfied by retention of the residual interest in each related VIE, which, in each case, collectively, represents at least 5% of the economic interest in the credit risk of the securitized assets in satisfaction of the risk retention requirements. We expect that any credit losses in the pools of finance receivables securing the asset-backed debt obligations will likely be limited to our retained interests described above. We have no obligation to repurchase or replace qualified finance receivables that subsequently become delinquent or are otherwise in default.
We parenthetically disclose on our consolidated balance sheets the VIE’s assets that can only be used to settle the VIE’s obligations and liabilities if its creditors have no recourse against the primary beneficiary’s general credit. The carrying amounts of consolidated VIE assets and liabilities associated with our securitization trusts, private secured term funding, and revolving conduit facilities were as follows: | | | | | | | | | | | | | | |
(dollars in millions) | | | | |
December 31, | | 2022 | | 2021 |
| | | | |
Assets | | | | |
Cash and cash equivalents | | $ | 2 | | | $ | 2 | |
Net finance receivables | | 10,432 | | | 8,821 | |
Allowance for finance receivable losses | | 1,126 | | | 910 | |
Restricted cash and restricted cash equivalents | | 442 | | | 466 | |
Other assets | | 28 | | | 26 | |
| | | | |
Liabilities | | | | |
Long-term debt | | $ | 9,361 | | | $ | 7,999 | |
Other liabilities | | 20 | | | 13 | |
Other than the retained subordinate and residual interests in our consolidated VIEs, we are under no further obligation than is otherwise noted herein, either contractually or implicitly, to provide financial support to these entities. Consolidated interest expense related to our VIEs totaled $305 million in 2022, $293 million in 2021, and $338 million in 2020.
SECURITIZED BORROWINGS
Each of our securitizations contains a revolving period ranging from two to seven years during which no principal payments are required to be made on the related asset-backed notes. The indentures governing our securitization borrowings contain early amortization events and events of default, that, if triggered, may result in the acceleration of the obligation to pay principal and interest on the related asset-backed notes.
PRIVATE SECURED TERM FUNDING
At December 31, 2022, an aggregate amount of $350 million was outstanding under the private secured term funding collateralized by our personal loans. No principal payments are required to be made until after April 25, 2025, followed by a subsequent one-year amortization period, at the expiration of which the outstanding principal amount is due and payable.
REVOLVING CONDUIT FACILITIES
We had access to 15 revolving conduit facilities with a total maximum borrowing capacity of $6.2 billion as of December 31, 2022. Our conduit facilities contain revolving periods during which time no principal payments are required, but may be made without penalty, followed by a subsequent amortization period. Principal balances of outstanding loans, if any, are due and payable in full over periods ranging up to ten years as of December 31, 2022. Amounts drawn on these facilities are collateralized by our personal loans.
At December 31, 2022, $50 million was drawn under these facilities and the remaining borrowing capacity was $6.1 billion.
Our insurance business is conducted through our wholly owned insurance subsidiaries, American Health and Life Insurance Company (“AHL”) and Triton Insurance Company (“Triton”). AHL is a life and health insurance company licensed in 49 states, the District of Columbia, and Canada to write credit life, credit disability, and non-credit insurance products. Triton is a property and casualty insurance company licensed in 50 states, the District of Columbia, and Canada to write credit involuntary unemployment, credit disability, and collateral protection insurance.
INSURANCE RESERVES
Components of our insurance reserves were as follows:
| | | | | | | | | | | | | | |
(dollars in millions) | | | | |
December 31, | | 2022 | | 2021 |
| | | | |
Finance receivable related: | | | | |
Payable to OMH: | | | | |
Unearned premium reserves | | $ | 672 | | | $ | 677 | |
Claim reserves | | 77 | | | 84 | |
Subtotal (a) | | 749 | | | 761 | |
Payable to third-party beneficiaries (b) | | 257 | | | 256 | |
| | | | |
| | | | |
| | | | |
| | | | |
Non-finance receivable related (b) | | 345 | | | 365 | |
| | | | |
| | | | |
| | | | |
| | | | |
Total | | $ | 1,351 | | | $ | 1,382 | |
(a) Reported in Unearned insurance premium and clam reserves in our consolidated balance sheets.
(b) Reported in Insurance claims and policyholder liabilities in our consolidated balance sheets.
Our insurance subsidiaries enter into reinsurance agreements with other insurers. Reserves related to unearned premiums, claims and benefits assumed from non-affiliated insurance companies totaled $305 million and $322 million at December 31, 2022 and 2021, respectively.
Reserves related to unearned premiums, claims and benefits ceded to non-affiliated insurance companies totaled $60 million and $62 million at December 31, 2022 and 2021, respectively.
Changes in the reserve for unpaid claims and loss adjustment expenses (net of reinsurance recoverables):
| | | | | | | | | | | | | | | | | | | | |
(dollars in millions) | | | | | | |
At or for the Years Ended December 31, | | 2022 | | 2021 | | 2020 |
| | | | | | |
Balance at beginning of period | | $ | 118 | | | $ | 148 | | | $ | 117 | |
Less reinsurance recoverables | | (3) | | | (3) | | | (4) | |
| | | | | | |
Net balance at beginning of period | | 115 | | | 145 | | | 113 | |
| | | | | | |
Additions for losses and loss adjustment expenses incurred to: | | | | | | |
Current year | | 177 | | | 212 | | | 272 | |
Prior years * | | (11) | | | (18) | | | (11) | |
Total | | 166 | | | 194 | | | 261 | |
Reductions for losses and loss adjustment expenses paid related to: | | | | | | |
Current year | | (108) | | | (135) | | | (161) | |
Prior years | | (72) | | | (89) | | | (67) | |
Total | | (180) | | | (224) | | | (228) | |
Foreign currency translation adjustment | | 1 | | | — | | | (1) | |
Net balance at end of period | | 102 | | | 115 | | | 145 | |
Plus reinsurance recoverables | | 3 | | | 3 | | | 3 | |
| | | | | | |
Balance at end of period | | $ | 105 | | | $ | 118 | | | $ | 148 | |
* At December 31, 2022, $11 million reflected a redundancy in the prior years’ net reserves, primarily due to net favorable developments of credit life, credit disability, and term life claims. At December 31, 2021, $18 million reflected a redundancy in the prior years’ net reserves, primarily due to net favorable developments of credit disability and unemployment claims. At December 31, 2020, $11 million reflected a redundancy in the prior years’ net reserves, primarily due to net favorable developments of credit life, credit disability, and term life claims.
Incurred claims and allocated claim adjustment expenses, net of reinsurance, as of December 31, 2022, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | | At December 31, 2022 |
(dollars in millions) | | | 2018 (a) | | 2019 (a) | | 2020 (a) | | 2021 (a) | | 2022 | | Incurred-but- not-reported Liabilities (b) | | Cumulative Number of Reported Claims | | Cumulative Frequency (c) |
Credit Insurance | | | | | | | | | | | | | | | | | |
Accident Year | | | | | | | | | | | | | | | | | |
2018 | | | $ | 146 | | | $ | 135 | | | $ | 134 | | | $ | 132 | | | $ | 131 | | | $ | — | | | 42,897 | | | 2.2 | % |
2019 | | | — | | | 155 | | | 150 | | | 150 | | | 147 | | | 3 | | | 45,492 | | | 2.0 | % |
2020 | | | — | | | — | | | 226 | | | 209 | | | 205 | | | 8 | | | 68,766 | | | 3.1 | % |
2021 | | | — | | | — | | | — | | | 162 | | | 156 | | | 19 | | | 37,845 | | | 1.7 | % |
2022 | | | — | | | — | | | — | | | — | | | 140 | | | 58 | | | 27,284 | | | 1.2 | % |
Total | | | | | | | | | | | $ | 779 | | | | | | | |
(a) Unaudited.
(b) Includes expected development on reported claims.
(c) Frequency for each accident year is calculated as the ratio of all reported claims incurred to the total exposures in force.
Cumulative paid claims and allocated claim adjustment expenses, net of reinsurance, as of December 31, 2022, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
(dollars in millions) | | 2018 * | | 2019 * | | 2020 * | | 2021 * | | 2022 |
Credit Insurance | | | | | | | | | | |
Accident Year | | | | | | | | | | |
2018 | | $ | 81 | | | $ | 115 | | | $ | 124 | | | $ | 129 | | | $ | 130 | |
2019 | | — | | | 88 | | | 128 | | | 139 | | | 144 | |
2020 | | — | | | — | | | 128 | | | 186 | | | 197 | |
2021 | | — | | | — | | | — | | | 99 | | | 137 | |
2022 | | — | | | — | | | — | | | — | | | 83 | |
Total | | | | | | | | | | $ | 691 | |
| | | | | | | | | | |
All outstanding liabilities before 2018, net of reinsurance | | — | |
Liabilities for claims and claim adjustment expenses, net of reinsurance | | $ | 88 | |
* Unaudited.
The reconciliations of the net incurred and paid claims development to the liability for claims and claim adjustment expenses were as follows:
| | | | | | | | | | | | |
(dollars in millions) | | |
December 31, | | 2022 | | | | |
| | | | | | |
Liabilities for unpaid claims and claim adjustment expenses, net of reinsurance: | | | | | | |
Credit insurance | | $ | 88 | | | | | |
Other short-duration insurance lines | | 2 | | | | | |
Total | | 90 | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Insurance lines other than short-duration | | 15 | | | | | |
Total gross liability for unpaid claims and claim adjustment expense | | $ | 105 | | | | | |
We use completion factors to estimate the unpaid claim liability for credit insurance and most other short-duration products. For some products, the unpaid claim liability is estimated as a percent of exposure.
There have been no significant changes in methodologies or assumptions during 2022.
Our average annual percentage payout of incurred claims by age, net of reinsurance, as of December 31, 2022, were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Years | | 1 | | 2 | | 3 | | 4 | | 5 |
| | | | | | | | | | |
Credit insurance* | | 61.5 | % | | 26.5 | % | | 6.5 | % | | 3.6 | % | | 1.3 | % |
* Unaudited.
STATUTORY ACCOUNTING
Our insurance subsidiaries file financial statements prepared using statutory accounting practices prescribed or permitted by the Department of Insurance (“DOI”) which is a comprehensive basis of accounting other than GAAP. The primary differences between statutory accounting practices and GAAP are that under statutory accounting, policy acquisition costs are expensed as incurred, policyholder liabilities are generally valued using prescribed actuarial assumptions, and certain investment securities are reported at amortized cost. We are not required and did not apply purchase accounting to the insurance subsidiaries on a statutory basis.
Statutory net income (loss) for our insurance companies by type of insurance was as follows:
| | | | | | | | | | | | | | | | | | | | |
(dollars in millions) | | | | | | |
Years Ended December 31, | | 2022 | | 2021 | | 2020 |
| | | | | | |
Property and casualty: | | | | | | |
| | | | | | |
Triton | | $ | 58 | | | $ | 66 | | | $ | (7) | |
| | | | | | |
Life and health: | | | | | | |
| | | | | | |
AHL | | $ | 98 | | | $ | 79 | | | $ | 114 | |
Statutory capital and surplus for our insurance companies by type of insurance were as follows:
| | | | | | | | | | | | | | |
(dollars in millions) | | | | |
December 31, | | 2022 | | 2021 |
| | | | |
Property and casualty: | | | | |
Triton | | $ | 210 | | | $ | 210 | |
| | | | |
Life and health: | | | | |
| | | | |
AHL | | $ | 387 | | | $ | 292 | |
Our insurance companies are also subject to risk-based capital requirements adopted by the Texas DOI. Minimum statutory capital and surplus is the risk-based capital level that would trigger regulatory action. At December 31, 2022 and 2021, our insurance subsidiaries’ statutory capital and surplus exceeded the risk-based capital minimum required levels.
DIVIDEND RESTRICTIONS
Our insurance subsidiaries are subject to domiciliary state regulations that limit their ability to pay dividends. AHL and Triton are domiciled in Texas. State law restricts the amounts that our insurance subsidiaries may pay as dividends without prior notice to the state of domicile DOI. The maximum amount of dividends, referred to as “ordinary dividends,” for a Texas domiciled life insurance company that can be paid without prior approval in a 12 month period (measured retrospectively from the date of payment) is the greater of: (i) 10% of policyholders’ surplus as of the prior year-end or (ii) the statutory net gain from operations as of the prior year-end. Any amount greater must be approved by the state of domicile DOI. The maximum ordinary dividends for a Texas domiciled property and casualty insurance company that can be paid without prior approval in a 12 month period (measured retrospectively from the date of payment) is the greater of: (i) 10% of policyholders’ surplus as of the prior year-end or (ii) the statutory net income. Any amount greater must be approved by the state of domicile DOI. These approved dividends are called “extraordinary dividends.”
Ordinary dividends paid were as follows:
| | | | | | | | | | | | | | | | | | | | |
(dollars in millions) | | | | | | |
Years Ended December 31, | | 2022 | | 2021 | | 2020 |
| | | | | | |
Property and casualty: | | | | | | |
Triton | | $ | 50 | | | $ | — | | | $ | — | |
Life and health: | | | | | | |
AHL | | $ | — | | | $ | 50 | | | $ | 48 | |
| | | | | | |
| | | | | | |
No extraordinary dividends were paid during 2022, 2021, or 2020.
| | |
11. Capital Stock and Earnings Per Share (OMH Only) |
CAPITAL STOCK
OMH has two classes of authorized capital stock: preferred stock and common stock. OMFC has two classes of authorized capital stock: special stock and common stock. OMH and OMFC may issue preferred stock and special stock, respectively, in one or more series. The OMH Board of Directors (the “Board”) and the OMFC Board of Directors determine the dividend, liquidation, redemption, conversion, voting, and other rights prior to issuance.
Par value and shares authorized at December 31, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | OMH | | OMFC |
| | Preferred Stock * | | Common Stock | | Special Stock | | Common Stock |
| | | | | | | | |
Par value | | $ | 0.01 | | | $ | 0.01 | | | $ | — | | | $ | 0.50 | |
Shares authorized | | 300,000,000 | | | 2,000,000,000 | | | 25,000,000 | | | 25,000,000 | |
* No shares of OMH preferred stock or OMFC special stock were issued and outstanding at December 31, 2022 or 2021.
Changes in OMH shares of common stock issued and outstanding were as follows: | | | | | | | | | | | | | | | | | | | | | | | | |
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At or for the Years Ended December 31, | | | | | | 2022 | | 2021 | | 2020 |
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Balance at beginning of period | | | | | | 127,809,640 | | | 134,341,724 | | | 136,101,156 | |
Common shares issued | | | | | | 333,038 | | | 180,839 | | | 272,266 | |
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Common shares repurchased* | | | | | | (7,181,023) | | | (6,712,923) | | | (2,031,698) | |
Treasury stock issued | | | | | | 80,470 | | | — | | | — | |
Balance at end of period | | | | | | 121,042,125 | | | 127,809,640 | | | 134,341,724 | |
* During the years ended December 31, 2022 and 2021, the common stock repurchased was held in treasury. During the year ended December 31, 2020, the common stock repurchased was retired.
OMFC shares issued and outstanding were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Special Stock | | Common Stock |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | | |
Shares issued and outstanding | | — | | | — | | | 10,160,021 | | | 10,160,021 | |
EARNINGS PER SHARE (OMH ONLY)
The computation of earnings per share was as follows: | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in millions, except per share data) | | | | | | | | | | |
| | | | | | |
Years Ended December 31, | | | | | | 2022 | | 2021 | | 2020 |
| | | | | | | | | | |
Numerator (basic and diluted): | | | | | | | | | | |
Net income | | | | | | $ | 878 | | | $ | 1,314 | | | $ | 730 | |
Denominator: | | | | | | | | | | |
Weighted average number of shares outstanding (basic) | | | | | | 124,178,643 | | | 132,653,889 | | | 134,716,012 | |
Effect of dilutive securities * | | | | | | 238,631 | | | 400,605 | | | 203,246 | |
Weighted average number of shares outstanding (diluted) | | | | | | 124,417,274 | | | 133,054,494 | | | 134,919,258 | |
Earnings per share: | | | | | | | | | | |
Basic | | | | | | $ | 7.07 | | | $ | 9.90 | | | $ | 5.42 | |
Diluted | | | | | | $ | 7.06 | | | $ | 9.87 | | | $ | 5.41 | |
* We have excluded weighted-average unvested restricted stock units totaling 1,335,442, 421,511, and 231,125 for 2022, 2021, and 2020, respectively, from the fully-diluted earnings per share calculations as these shares would be anti-dilutive, which could impact the earnings per share calculation in the future.
Basic earnings per share is computed by dividing net income by the weighted-average number of shares outstanding during each period. Diluted earnings per share is computed based on the weighted-average number of shares outstanding plus the effect of potentially dilutive shares outstanding during the period using the treasury stock method. The potentially dilutive shares represent outstanding unvested restricted stock units (“RSUs”).
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12. Accumulated Other Comprehensive Income (Loss) |
Changes, net of tax, in accumulated other comprehensive income (loss) were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in millions) | | Unrealized Gains (Losses) Available-for-Sale Securities (a) | | Retirement Plan Liabilities Adjustments | | Foreign Currency Translation Adjustments | | Other (b) | | Total Accumulated Other Comprehensive Income (Loss) |
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Year Ended December 31, 2022 | | | | | | | | | | |
Balance at beginning of period | | $ | 49 | | | $ | 1 | | | $ | 3 | | | $ | 8 | | | $ | 61 | |
Other comprehensive income (loss) before reclassifications | | (179) | | | (9) | | | (8) | | | 17 | | | (179) | |
Reclassification adjustments from accumulated other comprehensive income | | (1) | | | — | | | — | | | — | | | (1) | |
Balance at end of period | | $ | (131) | | | $ | (8) | | | $ | (5) | | | $ | 25 | | | $ | (119) | |
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Year Ended December 31, 2021 | | | | | | | | | | |
Balance at beginning of period | | $ | 91 | | | $ | 1 | | | $ | 2 | | | $ | — | | | $ | 94 | |
Other comprehensive income (loss) before reclassifications | | (41) | | | — | | | 1 | | | 8 | | | (32) | |
Reclassification adjustments from accumulated other comprehensive income | | (1) | | | — | | | — | | | — | | | (1) | |
Balance at end of period | | $ | 49 | | | $ | 1 | | | $ | 3 | | | $ | 8 | | | $ | 61 | |
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Year Ended December 31, 2020 | | | | | | | | | | |
Balance at beginning of period | | $ | 41 | | | $ | 3 | | | | | $ | — | | | $ | 44 | |
Other comprehensive income (loss) before reclassifications | | 51 | | | (2) | | | 2 | | | — | | | 51 | |
Reclassification adjustments from accumulated other comprehensive income | | (1) | | | — | | | — | | | — | | | (1) | |
Balance at end of period | | $ | 91 | | | $ | 1 | | | $ | 2 | | | $ | — | | | $ | 94 | |
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(a) There were no material amounts related to available-for-sale debt securities for which an allowance for credit losses was recorded during the years ended December 31, 2022 and 2021.
(b) Other primarily includes changes in the fair value of our mark-to-market derivative instruments that have been designated as cash flow hedges.
Reclassification adjustments from accumulated other comprehensive income (loss) to the applicable line item on our consolidated statements of operations were immaterial for the years ended December 31, 2022, 2021, and 2020.
OMH and all of its eligible domestic U.S. subsidiaries file a consolidated life/non-life federal tax return with the IRS. Income taxes from the consolidated federal and state tax returns are allocated to our eligible subsidiaries under a tax sharing agreement with OMH.
The Company’s foreign subsidiaries/branches file tax returns in Canada, Puerto Rico, and the U.S. Virgin Islands. The Company recognizes a deferred tax liability for the undistributed earnings of its foreign operations, if any, as we do not consider the amounts to be permanently reinvested. As of December 31, 2022, the Company had no undistributed foreign earnings.
Components of income before income tax expense were as follows:
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(dollars in millions) | | | | | | |
Years Ended December 31, | | 2022 | | 2021 | | 2020 |
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Income before income tax expense - U.S. operations | | $ | 1,142 | | | $ | 1,722 | | | $ | 973 | |
Income before income tax expense - foreign operations | | 21 | | | 19 | | | 4 | |
Total | | $ | 1,163 | | | $ | 1,741 | | | $ | 977 | |
Components of income tax expense (benefit) were as follows:
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(dollars in millions) | | | | | | |
Years Ended December 31, | | 2022 | | 2021 | | 2020 |
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Current: | | | | | | |
Federal | | $ | 288 | | | $ | 298 | | | $ | 235 | |
Foreign | | 4 | | | 1 | | | 9 | |
State | | 55 | | | 50 | | | 45 | |
Total current | | 347 | | | 349 | | | 289 | |
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Deferred: | | | | | | |
Federal | | (51) | | | 55 | | | (43) | |
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State | | (11) | | | 23 | | | 1 | |
Total deferred | | (62) | | | 78 | | | (42) | |
Total | | $ | 285 | | | $ | 427 | | | $ | 247 | |
Expense from foreign income taxes includes foreign subsidiaries/branches that operate in Canada, Puerto Rico, and the U.S. Virgin Islands.
OMH's and OMFC’s reconciliations of the statutory federal income tax rate to the effective income tax rate were as follows:
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Years Ended December 31, | | 2022 | | 2021 | | 2020 |
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Statutory federal income tax rate | | 21.00 | % | | 21.00 | % | | 21.00 | % |
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State income taxes, net of federal | | 2.93 | | | 3.27 | | | 3.52 | |
Change in valuation allowance | | 0.18 | | | 0.24 | | | 0.08 | |
Nondeductible compensation | | 0.48 | | | 0.50 | | | 0.25 | |
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Other, net | | (0.08) | | | (0.45) | | | 0.48 | |
Effective income tax rate | | 24.51 | % | | 24.56 | % | | 25.33 | % |
The lower effective income tax rate in 2022 as compared to 2021 is primarily due to lower state tax expense. The lower effective income tax rate in 2021 as compared to 2020 is primarily due to recording the benefit of tax credits and lower state tax expense.
A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits (all of which would affect the effective income tax rate if recognized) is as follows:
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(dollars in millions) | | | | | | |
Years Ended December 31, | | 2022 | | 2021 | | 2020 |
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Balance at beginning of year | | $ | 8 | | | $ | 10 | | | $ | 12 | |
Lapse in statute of limitations | | (3) | | | (2) | | | (4) | |
Increases in tax positions for prior years | | 1 | | | 2 | | | — | |
Increases in tax positions for current years | | — | | | 2 | | | 2 | |
Settlements with tax authorities | | — | | | (4) | | | — | |
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Balance at end of year | | $ | 6 | | | $ | 8 | | | $ | 10 | |
Our gross unrecognized tax benefits include related interest and penalties. We accrue interest and penalties related to uncertain tax positions in income tax expense. The amount of any change in the balance of uncertain tax liabilities over the next 12 months is not expected to be material to our consolidated financial statements.
We are under examination by various states for the years 2017 to 2021. Management believes it has adequately provided for taxes for such years.
Components of deferred tax assets and liabilities were as follows:
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(dollars in millions) | | | | |
December 31, | | 2022 | | 2021 |
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Deferred tax assets: | | | | |
Allowance for loan losses | | $ | 573 | | | $ | 523 | |
Net operating losses and tax credits | | 35 | | | 32 | |
Fair value of equity and securities investments | | 29 | | | — | |
Capitalized research and experimental costs | | 29 | | | — | |
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Insurance reserves | | 24 | | | 34 | |
Pension/employee benefits | | 24 | | | 22 | |
Other | | 28 | | | 32 | |
Total | | 742 | | | 643 | |
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Deferred tax liabilities: | | | | |
Goodwill | | 166 | | | 144 | |
Debt fair value adjustment | | 42 | | | 43 | |
Deferred loan fees | | 25 | | | 33 | |
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Fair value of equity and securities investments | | — | | | 17 | |
Fixed assets | | 16 | | | 13 | |
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Other | | 11 | | | 26 | |
Total | | 260 | | | 276 | |
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Net deferred tax assets before valuation allowance | | 482 | | | 367 | |
Valuation allowance | | (30) | | | (28) | |
Net deferred tax assets | | $ | 452 | | | $ | 339 | |
The gross deferred tax liabilities are expected to reverse in time, and projected taxable income is expected to be sufficient to create positive taxable income, which will allow for the realization of all of our gross federal deferred tax assets and a portion of the state deferred tax assets. The increase in net deferred tax assets of $113 million was primarily due to the tax effect of the increase in the allowance for finance receivable losses, the capitalization of research and experimental costs, and the fair value of investment securities.
At December 31, 2022, we had state net operating loss carryforwards of $480 million compared to $375 million at December 31, 2021. The state net operating loss carryforwards mostly expire between 2038 and 2043, except for some states which conform to the federal rules for indefinite carryforward. We had a valuation allowance on our gross state deferred tax assets, net of deferred federal tax benefit, of $24 million and $23 million at December 31, 2022 and 2021, respectively. The total valuation allowance was established based on management’s determination that the deferred tax assets are more likely than not to not be realized.
On August 16, 2022, the Inflation Reduction Act of 2022 (“IRA”) was signed into law. The IRA includes a 15% Corporate Alternative Minimum Tax (“Corporate AMT”) for tax years beginning after December 31, 2022. We do not expect the Corporate AMT to have a material impact on our consolidated financial statements. Additionally, the IRA imposes a 1% excise tax on net repurchases of stock by certain publicly traded corporations. The excise tax is imposed on the value of the net stock repurchased or treated as repurchased. The new law will apply to stock repurchases occurring after December 31, 2022.
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14. Leases and Contingencies |
LEASES
Our operating leases primarily consist of leased office space, automobiles, and information technology equipment and have remaining lease terms of one to ten years.
Our operating right-of-use asset and liability balances were $152 million and $161 million, respectively, at December 31, 2022 and $140 million and $151 million, respectively, at December 31, 2021.
At December 31, 2022, maturities of lease liabilities, excluding leases on a month-to-month basis, were as follows: | | | | | | | | |
(dollars in millions) | | Operating Leases |
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2023 | | $ | 58 | |
2024 | | 46 | |
2025 | | 35 | |
2026 | | 23 | |
2027 | | 14 | |
2028 | | 2 | |
Thereafter | | 1 | |
Total lease payments | | 179 | |
Imputed interest | | (18) | |
Total | | $ | 161 | |
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Weighted Average Remaining Lease Term | | 3.71 |
Weighted Average Discount Rate | | 3.24 | % |
Operating lease cost and variable lease cost, which are recorded in Other operating expenses in our consolidated statements of operations, were as follows:
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(dollars in millions) | | | | | | |
Years Ended December 31, | | 2022 | | 2021 | | 2020 |
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Operating lease cost | | $ | 58 | | | $ | 60 | | | $ | 63 | |
Variable lease cost | | 14 | | | 15 | | | 15 | |
Total | | $ | 72 | | | $ | 75 | | | $ | 78 | |
Our sublease income was immaterial for the years ended December 31, 2022, 2021, and 2020.
LEGAL CONTINGENCIES
In the normal course of business, we have been named, from time to time, as defendants in various legal actions, including arbitrations, class actions, and other litigation arising in connection with our activities. Some of the actual or threatened legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. While we will continue to evaluate legal actions to determine whether a loss is reasonably possible or probable and is reasonably estimable, there can be no assurance that material losses will not be incurred from pending, threatened or future litigation, investigations, examinations, or other claims.
We contest liability and/or the amount of damages, as appropriate, in each pending matter. Where available information indicates that it is probable that a liability had been incurred at the date of the consolidated financial statements and we can reasonably estimate the amount of that loss, we accrue the estimated loss by a charge to income. In many actions, however, it is inherently difficult to determine whether any loss is probable or even reasonably possible, or to estimate the amount of any loss. In addition, even where loss is reasonably possible or an exposure to loss exists in excess of the liability already accrued with respect to a previously recognized loss contingency, it is not always possible to reasonably estimate the size of the possible loss or range of loss.
For certain legal actions, we cannot reasonably estimate such losses, particularly for actions that are in their early stages of development or where plaintiffs seek substantial or indeterminate damages. Numerous issues may need to be resolved, including through potentially lengthy discovery and determination of important factual matters, and by addressing novel or unsettled legal questions relevant to the actions in question, before a loss or additional loss or range of loss or range of additional loss can be reasonably estimated for any given action.
For certain other legal actions, we can estimate reasonably possible losses, additional losses, ranges of loss or ranges of additional loss in excess of amounts accrued, but do not believe, based on current knowledge and after consultation with counsel, that such losses will have a material adverse effect on our consolidated financial statements as a whole.
In March 2022, the staff of the United States Consumer Financial Protection Bureau (“CFPB”) notified us that, in accordance with the CFPB’s discretionary Notice and Opportunity to Respond and Advise (“NORA”) process, it is considering recommending that the CFPB take legal action against the Company in connection with alleged violations of the Consumer Financial Protection Act, 12 U.S.C. §§ 5531, 5536. The staff’s investigation is focused on certain refunding practices for optional insurance and membership plan products that were subsequently canceled by the consumer after purchase. We are cooperating with the CFPB in this matter and expect ongoing interactions. Although the Company believes it has not violated the Consumer Financial Protection Act, we are unable to estimate how long this investigation will continue, whether and in what manner the CFPB may commence legal action, or what the ultimate outcome of this matter will be. Should the CFPB opt to commence legal proceedings, it may seek civil monetary penalties, restitution, injunctive relief, or other damages. The Company does not currently believe that the outcome of this matter will have a material adverse effect on our business, financial condition, or results of operations.
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15. Retirement Benefit Plans |
The Company sponsors various retirement benefit plans to eligible employees of the Company.
DEFINED CONTRIBUTION PLANS
OneMain 401(k) Plan
The OneMain 401(k) Plan (the “401(k) Plan”) provided for a 100% Company matching on the first 4% of the salary reduction contributions of the U.S. employees for 2022, 2021, and 2020. The salaries and benefits expense associated with this plan was $19 million in 2022, $17 million in 2021, and $18 million in 2020.
In addition, the Company may make a discretionary profit sharing contribution to the 401(k) Plan. The Company has full discretion to determine whether to make such a contribution, and the amount of such contribution. In no event, however, will the discretionary profit sharing contribution exceed 4% of annual pay. The Company did not make any discretionary profit sharing contributions to the 401(k) Plan in 2022, 2021, or 2020.
OneMain Nonqualified Deferred Compensation Plan
The OneMain Holdings, Inc. Nonqualified Deferred Compensation Plan (the “NQDC Plan”) was approved by the committee of the Board which oversees OMH’s compensation programs (the “Compensation Committee”) in October 2021 and provides certain eligible employees with the option to defer receipt of some or all of their annual cash incentives and some of their base salaries earned on or after January 1, 2022. Employer contributions are not permitted under the NQDC Plan and employee contributions will be fully vested at all times. Distributions of participant accounts will be made following a participant’s separation of service, death, disability, unforeseeable emergency or as of a future payment date specified by the participant. The NQDC Plan assets and related obligation was immaterial as of December 31, 2022.
Investment income or loss earned by the NQDC Plan is recorded as Other revenues - other in our consolidated statements of operations. The investment income or loss also represents an increase or decrease in the future payout to the participants with an offset recorded as Salaries and benefits in our consolidated statements of operations. The net effect of investment income or loss and the related salaries and benefits expense or benefit has no impact on our net income.
DEFINED BENEFIT PLANS
Springleaf Financial Services Retirement Plan
The Springleaf Financial Services Retirement Plan (the “Springleaf Retirement Plan”) is a qualified non-contributory defined benefit plan, which is subject to the provisions of Employee Retirement Income Security Act of 1974 (“ERISA”). Effective December 31, 2012, the Springleaf Retirement Plan was frozen with respect to both benefits accrual and new participation. U.S. salaried employees who were employed by a participating company, had attained age 21, and completed twelve months of continuous service were eligible to participate in the plan. Employees generally vested after 5 years of service. Prior to January 1, 2013, unreduced benefits were paid to retirees at normal retirement (age 65) and were based upon a percentage of final average compensation multiplied by years of credited service, up to 44 years. Our current and former employees will not lose any vested benefits in the Springleaf Retirement Plan that accrued prior to January 1, 2013.
CommoLoCo Retirement Plan
The CommoLoCo Retirement Plan is a qualified non-contributory defined benefit plan, which is subject to the provisions of ERISA and the Puerto Rico tax code. Effective December 31, 2012, the CommoLoCo Retirement Plan was frozen. Puerto Rican residents employed by CommoLoCo, Inc., our Puerto Rican subsidiary, who had attained age 21 and completed one year of service, were eligible to participate in the plan. Our former employees in Puerto Rico will not lose any vested benefits in the CommoLoCo Retirement Plan that accrued prior to January 1, 2013.
Unfunded Defined Benefit Plans
We sponsor unfunded defined benefit plans for certain employees, including key executives, designed to supplement pension benefits provided by our other retirement plans. These include: (i) the Springleaf Financial Services Excess Retirement Income Plan (the “Excess Retirement Income Plan”), which provides a benefit equal to the reduction in benefits payable to certain employees under our qualified retirement plan as a result of federal tax limitations on compensation and benefits payable; and (ii) the Supplemental Executive Retirement Plan (“SERP”), which provides additional retirement benefits to designated executives. Benefits under the Excess Retirement Income Plan were frozen as of December 31, 2012, and benefits under the SERP were frozen at the end of August 2004.
OBLIGATIONS AND FUNDED STATUS
The following table presents the funded status of the defined benefit pension plans. The funded status of the plans is measured as the difference between the plan assets at fair value and the projected benefit obligation.
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(dollars in millions) | | |
At or for the Years Ended December 31, | | 2022 | | 2021 | | 2020 |
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Projected benefit obligation, beginning of period | | $ | 374 | | | $ | 401 | | | $ | 364 | |
Interest cost | | 8 | | | 7 | | | 10 | |
Actuarial loss (gain) (a) | | (91) | | | (18) | | | 42 | |
Benefits paid: | | | | | | |
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Plan assets | | (16) | | | (16) | | | (15) | |
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Projected benefit obligation, end of period (b) | | 275 | | | 374 | | | 401 | |
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Fair value of plan assets, beginning of period | | 383 | | | 405 | | | 363 | |
Actual return on plan assets, net of expenses | | (90) | | | (7) | | | 56 | |
Company contributions | | 1 | | | 1 | | | 1 | |
Benefits paid: | | | | | | |
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Plan assets | | (16) | | | (16) | | | (15) | |
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Fair value of plan assets, end of period (b) | | 278 | | | 383 | | | 405 | |
Funded status, end of period | | $ | 3 | | | $ | 9 | | | $ | 4 | |
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Net plan assets recognized in our consolidated balance sheets (b) | | $ | 3 | | | $ | 9 | | | $ | 4 | |
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Pretax net gain (loss) recognized in accumulated other comprehensive income (loss) | | $ | (10) | | | $ | 2 | | | $ | 3 | |
(a) For the years ended December 31, 2022, 2021, and 2020, the actuarial gains or losses were primarily due to year-over-year fluctuations in discount rates used to calculate the present value of benefit obligations for the defined benefit plans. Adoption of updated mortality assumptions had additional impacts on calculation of gains or losses.
(b) Includes one overfunded benefit plan with net plan assets recognized in Other assets in our consolidated balance sheets of $14 million, $22 million, and $18 million at December 31, 2022, 2021, and 2020, respectively and three underfunded benefit plans, with net projected benefit obligations recognized in Other liabilities in our consolidated balance sheets of $11 million, $13 million, and $14 million at December 31, 2022, 2021, and 2020, respectively.
The following table presents the components of net periodic benefit cost recognized in income and other amounts recognized in accumulated other comprehensive income or loss with respect to the defined benefit pension plans:
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(dollars in millions) | | |
Years Ended December 31, | | 2022 | | 2021 | | 2020 |
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Components of net periodic benefit cost: | | | | | | |
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Interest cost | | $ | 8 | | | $ | 7 | | | $ | 10 | |
Expected return on assets | | (13) | | | (12) | | | (15) | |
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Net periodic benefit cost | | (5) | | | (5) | | | (5) | |
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Other changes in plan assets and projected benefit obligation recognized in other comprehensive income or loss: | | | | | | |
Net actuarial loss | | 12 | | | 1 | | | 2 | |
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Total recognized in other comprehensive income | | 12 | | | 1 | | | 2 | |
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Total recognized in net periodic benefit cost and other comprehensive income | | $ | 7 | | | $ | (4) | | | $ | (3) | |
Assumptions
The following table summarizes the weighted average assumptions used to determine the projected benefit obligations and the net periodic benefit costs:
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December 31, | | 2022 | | 2021 |
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Projected benefit obligation: | | | | |
Discount rate | | 4.96 | % | | 2.67 | % |
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Net periodic benefit costs: | | | | |
Discount rate | | 2.67 | % | | 2.30 | % |
Expected long-term rate of return on plan assets | | 3.54 | % | | 3.04 | % |
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Discount Rate Methodology
The projected benefit cash flows were discounted using the spot rates derived from the unadjusted FTSE Pension Discount Curve at December 31, 2022 and December 31, 2021, and an equivalent weighted average discount rate was derived that resulted in the same liability.
Investment Strategy
The investment strategy with respect to assets relating to our pension plans is designed to achieve investment returns that will (i) provide for the benefit obligations of the plans over the long term; (ii) limit the risk of short-term funding shortfalls; and (iii) maintain liquidity sufficient to address cash needs. Accordingly, the asset allocation strategy is designed to maximize the investment rate of return while managing various risk factors, including but not limited to, volatility relative to the benefit obligations, diversification and concentration, and the risk and rewards profile indigenous to each asset class.
Allocation of Plan Assets
The long-term strategic asset allocation is reviewed and revised annually. The plans’ assets are monitored by our Retirement Plans Committee and the investment managers, which can entail allocating the plans’ assets among approved asset classes within pre-approved ranges permitted by the strategic allocation.
At December 31, 2022, the actual asset allocation for the primary asset classes was 95% in fixed income securities, 4% in equity securities, and 1% in cash and cash equivalents. The 2023 target asset allocation for the primary asset classes is 95% in fixed income securities and 5% in equity securities. The actual allocation may differ from the target allocation at any particular point in time.
The expected long-term rate of return for the plans was 3.5% for the Springleaf Retirement Plan and 4.75% for the CommoLoCo Retirement Plan for 2022. The expected rate of return is an aggregation of expected returns within each asset class category. The expected asset return and any contributions made by the Company together are expected to maintain the plans’ ability to meet all required benefit obligations. The expected asset return with respect to each asset class was developed based on a building block approach that considers historical returns, current market conditions, asset volatility and the expectations for future market returns. While the assessment of the expected rate of return is long-term, and thus, not expected to change annually, significant changes in investment strategy or economic conditions may warrant such a change.
Expected Cash Flows
Funding for the U.S. pension plan ranges from the minimum amount required by ERISA to the maximum amount that would be deductible for U.S. tax purposes. This range is generally not determined until the fourth quarter. Contributed amounts in excess of the minimum amounts are deemed voluntary. Amounts in excess of the maximum amount would be subject to an excise tax and may not be deductible under the Internal Revenue Code. Supplemental and excess plans’ payments and postretirement plan payments are deductible when paid.
The expected future benefit payments, net of participants’ contributions, of our defined benefit pension plans at December 31, 2022 are as follows:
| | | | | | | | |
(dollars in millions) | | Expected Future Benefit Payments |
| | |
2023 | | $ | 17 | |
2024 | | 17 | |
2025 | | 17 | |
2026 | | 17 | |
2027 | | 18 | |
2028-2032 | | 90 | |
FAIR VALUE MEASUREMENTS — PLAN ASSETS
The inputs and methodology used in determining the fair value of the plan assets are consistent with those used to measure our assets. See Note 2 for a discussion of the accounting policies related to fair value measurements, which includes the valuation process and the inputs used to develop our fair value measurements.
The following table presents information about our plan assets measured at fair value and indicates the fair value hierarchy based on the levels of inputs we utilized to determine such fair value:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in millions) | | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | | | | | |
December 31, 2022 | | | | | | | | |
Assets: | | | | | | | | |
Cash and cash equivalents | | $ | 3 | | | $ | — | | | $ | — | | | $ | 3 | |
Equity securities: | | | | | | | | |
U.S. (a) | | 1 | | | — | | | — | | | 1 | |
International (b) | | 1 | | | — | | | — | | | 1 | |
Fixed income securities: | | | | | | | | |
U.S. investment grade (c) | | 16 | | | 192 | | | — | | | 208 | |
U.S. high yield (d) | | — | | | 3 | | | — | | | 3 | |
Total | | $ | 21 | | | $ | 195 | | | $ | — | | | $ | 216 | |
Investments measured at NAV (e) | | | | | | | | 62 | |
Total investments at fair value | | | | | | | | $ | 278 | |
| | | | | | | | |
December 31, 2021 | | | | | | | | |
Assets: | | | | | | | | |
Cash and cash equivalents | | $ | 4 | | | $ | — | | | $ | — | | | $ | 4 | |
Equity securities: | | | | | | | | |
U.S. (a) | | 1 | | | 1 | | | — | | | 2 | |
International (b) | | 1 | | | — | | | — | | | 1 | |
Fixed income securities: | | | | | | | | |
U.S. investment grade (c) | | 28 | | | 276 | | | — | | | 304 | |
U.S. high yield (d) | | — | | | 4 | | | — | | | 4 | |
Total | | $ | 34 | | | $ | 281 | | | $ | — | | | $ | 315 | |
Investments measured at NAV (e) | | | | | | | | 68 | |
Total investments at fair value | | | | | | | | $ | 383 | |
(a) Includes mutual funds that track common market indexes such as the S&P 500 as well as other indexes comprised of investments in small and large cap companies.
(b) Includes mutual funds that track common market indexes comprised of investments in companies in emerging and developed markets.
(c) Includes mutual funds and collective investment trusts invested in U.S. and non-U.S. government issued bonds, U.S. government agency or sponsored agency bonds, and investment grade corporate bonds.
(d) Includes mutual funds and collective investment trusts invested in securities or debt obligations that have a rating below investment grade.
(e) We have elected the practical expedient to exclude certain investments that were measured at net asset value ("NAV") per share (or equivalent) from the fair value hierarchy.
The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in these securities. Based on our investment strategy, we have no significant concentrations of risks.
| | |
16. Share-Based Compensation |
ONEMAIN HOLDINGS, INC. AMENDED 2013 OMNIBUS INCENTIVE PLAN
In 2013, OMH adopted the OneMain Holdings, Inc. Amended 2013 Omnibus Incentive Plan (the “Omnibus Plan”). As of December 31, 2022, 12,335,931 shares of common stock were reserved for issuance under the Omnibus Plan. The amount of shares reserved is adjusted annually at the beginning of the year by a number of shares equal to the excess of 10% of the number of outstanding shares on the last day of the previous fiscal year over the number of shares reserved and available for issuance as of the last day of the previous fiscal year. The Omnibus Plan allows for issuance of stock options, RSUs, restricted stock awards, stock appreciation rights, and other stock-based awards and cash awards.
Total share-based compensation expense, net of forfeitures, for all equity-based awards totaled $29 million, $22 million, and $15 million during 2022, 2021, and 2020, respectively. The total income tax benefit recognized for stock-based compensation was $7 million, $6 million, and $4 million in 2022, 2021, and 2020, respectively. As of December 31, 2022, there was total unrecognized compensation expense of $41 million related to unvested stock-based awards that are expected to be recognized over a weighted average period of approximately two years.
Service-based Awards
OMH has granted service-based RSUs to certain non-employee directors, executives, and employees. The RSUs are granted with varying service terms of one year to five years and do not provide the holders with any rights as shareholders, except with respect to dividend equivalents. The grant date fair value for RSUs is generally the closing market price of OMH’s common stock on the date of the award.
Expense for service-based awards is amortized on a straight-line basis over the vesting period, based on the number of awards that are ultimately expected to vest. The weighted-average grant date fair value of service-based awards issued in 2022, 2021, and 2020, was $50.43, $55.39, and $39.86, respectively. The total fair value of service-based awards that vested during 2022, 2021, and 2020 was $18 million, $12 million, and $15 million, respectively.
The following table summarizes the service-based stock activity and related information for the Omnibus Plan for 2022:
| | | | | | | | | | | | | | | | | | | | |
| | Number of Shares | | Weighted Average Grant Date Fair Value | | Weighted Average Remaining Term (in Years) |
| | | | | | |
Unvested as of January 1, 2022 | | 736,285 | | | $ | 51.25 | | | |
Granted | | 390,711 | | | 50.43 | | | |
Vested | | (359,145) | | | 48.84 | | | |
Forfeited | | (27,436) | | | 52.11 | | | |
Unvested at December 31, 2022 | | 740,415 | | | 51.43 | | | 2.14 |
Performance-based Awards
During 2022, 2021 and 2020, OMH awarded certain executives performance-based awards that may be earned based on the financial performance of OMH or the market performance of OMH’s common stock. These awards are subject to the achievement of performance goals during either a cumulative three-year period or up to a seven year period. The awards are considered earned after the attainment of the performance goal, which can occur during or after the performance period when results have been evaluated and approved by the Compensation Committee, and vest according to their certain terms and conditions.
The fair value for performance-based awards is typically based on the closing market price of OMH's stock on the date of the award. For performance-based awards with market conditions, the fair value is measured on the grant date using an option-pricing model.
Expense for performance-based awards is typically recognized over the requisite service period when it is probable that the performance goals will be achieved and is based on the total number of units expected to vest. Expense for awards with graded vesting is recognized under the accelerated method, whereby each vesting is treated as a separate award with expense for each vesting recognized ratably over the requisite service period. If minimum targets are not achieved by the end of the respective performance periods, all unvested shares related to those targets will be forfeited and canceled, and all expense recognized to that date is reversed. Expense for performance-based awards with market conditions is recognized over the requisite service period, which represents the period over which the market condition is expected to be satisfied.
The weighted average grant date fair value of performance-based awards issued in 2022, 2021, and 2020 was $50.34, $40.62, and $42.86, respectively. The total fair value of performance-based awards that vested was $7 million during 2022, and immaterial during 2021, and 2020.
The following table summarizes the performance-based stock activity and related information for the Omnibus Plan for 2022:
| | | | | | | | | | | | | | | | | | | | |
| | Number of Shares | | Weighted Average Grant Date Fair Value | | Weighted Average Remaining Term (in Years) |
| | | | | | |
Unvested as of January 1, 2022 | | 974,691 | | | $ | 39.12 | | | |
Granted | | 120,353 | | | 50.34 | | | |
Vested | | (157,948) | | | 31.27 | | | |
Forfeited | | (19,350) | | | 45.12 | | | |
Unvested at December 31, 2022 | | 917,746 | | | 41.77 | | | 1.77 |
OTHER STOCK-BASED PLANS
Cash-settled Stock-based Awards
OMH has granted cash-settled stock-based awards to certain executives. These awards are granted with vesting conditions relating to the trading price of OMH's common stock and the portion of OMH's common stock owned by stockholders other than the Apollo-Värde Group, and certain other terms and conditions. The awards provide for the right to accrue cash dividend equivalents. The grant date fair value of the cash-settled stock-based awards was zero because the satisfaction of the required event-based performance conditions was not considered probable as of the grant dates.
No vesting conditions were satisfied during 2022 related to these awards. During 2021, the vesting conditions related to a portion of the cash-settled stock-based awards were satisfied and we recognized $54 million in salaries and benefits expense. For the remaining unvested awards, the fair value was estimated using an option-pricing model on the date the required event-based performance condition was satisfied. The unvested cash-settled stock-based awards are liability-classified and expense is recognized over the requisite service period, which is the period of time the remaining vesting conditions are expected to be satisfied. Additional salaries and benefits expense related to unvested cash-settled stock-based awards was immaterial during 2022 and 2021.
Employee Stock Purchase Plan
The OneMain Employee Stock Purchase Plan (“ESP Plan”) provides certain eligible employees the opportunity to purchase shares of common stock at a discount. The ESP Plan qualifies as an employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986, as amended, and as such is not subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended. The Board and stockholders of OMH approved and authorized 1,000,000 shares for issuance under the ESP Plan and became effective January 1, 2022. The Company issued 80,470 shares of treasury stock associated with the ESP Plan in 2022. The Company’s expense associated with the ESP Plan in 2022 is immaterial and is recorded in Salaries and benefits on our consolidated statements of operations.
At December 31, 2022, 2021, and 2020, Consumer and Insurance (“C&I”) was our only reportable segment. The remaining components (which we refer to as “Other”) consist of our liquidating SpringCastle Portfolio servicing activity and our non-originating legacy operations, which primarily include our liquidating real estate loans.
The accounting policies of the C&I segment are the same as those disclosed in Note 2, except as described below.
We report the operating results of C&I and Other using the Segment Accounting Basis, which (i) reflects our allocation methodologies for interest expense and operating costs, and (ii) excludes the impact of applying purchase accounting.
We allocate revenues and expenses on a Segment Accounting Basis to the C&I segment and Other using the following methodologies:
| | | | | |
Interest income | Directly correlated to C&I segment and Other. |
Interest expense
| C&I and Other - The Company has secured and unsecured debt. The Company first allocates interest expense to its C&I segment based on actual expense for secured debt. Interest expense for unsecured debt is recorded to the C&I segment using a weighted average interest rate applied to allocated average unsecured debt. |
Total average unsecured debt is allocated as follows: |
l Other - at 100% of asset base. (Asset base represents the average net finance receivables including finance receivables held for sale); and |
l C&I - receives remainder of unallocated average debt. |
Provision for finance receivable losses | Directly correlated to the C&I segment. |
Other revenues | Directly correlated to the C&I segment and Other. |
| |
Other expenses | Salaries and benefits - Directly correlated to C&I segment and Other. Other salaries and benefits not directly correlated with the C&I segment and Other are allocated based on services provided. |
Other operating expenses - Directly correlated to the C&I segment and Other. Other operating expenses not directly correlated to the C&I segment and Other are allocated based on services provided. |
Insurance policy benefits and claims - Directly correlated to the C&I segment. |
Acquisition-related transaction and integration expenses - Consist of: (i) acquisition-related transaction and integration costs related to the OneMain Acquisition, including legal and other professional fees, which we primarily report in Other, as these are costs related to acquiring the business as opposed to operating the business; (ii) software termination costs, which are allocated to Consumer and Insurance; and (iii) incentive compensation incurred above and beyond expected cost from acquiring and retaining talent in relation to the OneMain Acquisition, which are allocated to C&I segment and Other based on services provided. |
The "Segment to GAAP Adjustment” column in the following tables primarily consists of:
•Interest income - reverses the impact of premiums/discounts on certain purchased finance receivables and the interest income recognition under guidance in ASC 310-20, Nonrefundable Fees and Other Costs, and ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, prior to the adoption of ASU 2016-13 on January 1, 2020, and reestablishes interest income recognition on a historical cost basis;
•Interest expense - reverses the impact of premiums/discounts on acquired long-term debt and reestablishes interest expense recognition on a historical cost basis;
•Provision for finance receivable losses - reverses the impact of providing an allowance for finance receivable losses upon acquisition and reestablishes the allowance on a historical cost basis leveraging historical TDR receivables;
•Other revenues - reestablishes the historical cost basis of mark-to-market adjustments on finance receivables held for sale and on realized gains/losses associated with our investment portfolio;
•Other expenses - reestablishes expenses on a historical cost basis by reversing the impact of amortization from acquired intangible assets, including amortization of other historical deferred costs and the amortization of purchased software assets on a historical cost basis; and
•Assets - revalues assets based on their fair values at the effective date of the acquisition.
The following tables present information about C&I and Other, as well as reconciliations to the consolidated financial statement amounts.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in millions) | | Consumer and Insurance | | Other | | Segment to GAAP Adjustment | | Consolidated Total |
| | | | | | | | |
At or for the Year Ended December 31, 2022 | | | | | | | | |
Interest income | | $ | 4,429 | | | $ | 5 | | | $ | 1 | | | $ | 4,435 | |
Interest expense | | 886 | | | 3 | | | 3 | | | 892 | |
Provision for finance receivable losses | | 1,399 | | | — | | | 3 | | | 1,402 | |
Net interest income after provision for finance receivable losses | | 2,144 | | | 2 | | | (5) | | | 2,141 | |
Other revenues | | 618 | | | 12 | | | (1) | | | 629 | |
Other expenses | | 1,585 | | | 14 | | | 8 | | | 1,607 | |
Income (loss) before income tax expense (benefit) | | $ | 1,177 | | | $ | — | | | $ | (14) | | | $ | 1,163 | |
| | | | | | | | |
Assets | | $ | 20,487 | | | $ | 35 | | | $ | 2,011 | | | $ | 22,533 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
At or for the Year Ended December 31, 2021 | | | | | | | | |
Interest income | | $ | 4,355 | | | $ | 5 | | | $ | 4 | | | $ | 4,364 | |
Interest expense | | 930 | | | 3 | | | 4 | | | 937 | |
Provision for finance receivable losses | | 587 | | | — | | | 6 | | | 593 | |
Net interest income after provision for finance receivable losses | | 2,838 | | | 2 | | | (6) | | | 2,834 | |
Other revenues | | 527 | | | 12 | | | (8) | | | 531 | |
Other expenses | | 1,577 | | | 21 | | | 26 | | | 1,624 | |
Income (loss) before income tax expense (benefit) | | $ | 1,788 | | | $ | (7) | | | $ | (40) | | | $ | 1,741 | |
| | | | | | | | |
Assets | | $ | 20,019 | | | $ | 40 | | | $ | 2,020 | | | $ | 22,079 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
At or for the Year Ended December 31, 2020 | | | | | | | | |
Interest income | | $ | 4,353 | | | $ | 6 | | | $ | 9 | | | $ | 4,368 | |
Interest expense | | 1,007 | | | 4 | | | 16 | | | 1,027 | |
Provision for finance receivables losses | | 1,313 | | | — | | | 6 | | | 1,319 | |
Net interest income after provision for finance receivable losses | | 2,033 | | | 2 | | | (13) | | | 2,022 | |
| | | | | | | | |
Other revenues | | 515 | | | 13 | | | (2) | | | 526 | |
| | | | | | | | |
Other expenses | | 1,527 | | | 24 | | | 20 | | | 1,571 | |
Income (loss) before income tax expense (benefit) | | $ | 1,021 | | | $ | (9) | | | $ | (35) | | | $ | 977 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Assets | | $ | 20,376 | | | $ | 57 | | | $ | 2,038 | | | $ | 22,471 | |
| | |
18. Fair Value Measurements |
The fair value of a financial instrument is the expected amount that would be received if an asset were to be sold or the expected amount that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The degree of judgment used in measuring the fair value of financial instruments generally correlates with the level of pricing observability. Financial instruments with quoted prices in active markets generally have more pricing observability and less judgment is used in measuring fair value. Conversely, financial instruments traded in other-than-active markets or that do not have quoted prices have less observability and are measured at fair value using valuation models or other pricing techniques that require more judgment. An other-than-active market is one in which there are few transactions, the prices are not current, price quotations vary substantially either over time or among market makers, or little information is released publicly for the asset or liability being valued. Pricing observability is affected by a number of factors, including the type of financial instrument, whether the financial instrument is listed on an exchange, traded over-the-counter, or is new to the market and not yet established, the characteristics specific to the transaction, and general market conditions. See Note 2 for a discussion of the accounting policies related to fair value measurements, which includes the valuation process and the inputs used to develop our fair value measurements.
The following table presents the carrying amounts and estimated fair values of our financial instruments and indicates the level in the fair value hierarchy of the estimated fair value measurement based on the observability of the inputs used:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements Using | | Total Fair Value | | Total Carrying Value |
(dollars in millions) | | Level 1 | | Level 2 | | Level 3 | | |
| | | | | | | | | | |
December 31, 2022 | | | | | | | | | | |
Assets | | | | | | | | | | |
Cash and cash equivalents | | $ | 481 | | | $ | 17 | | | $ | — | | | $ | 498 | | | $ | 498 | |
Investment securities | | 51 | | | 1,744 | | | 5 | | | 1,800 | | | 1,800 | |
Net finance receivables, less allowance for finance receivable losses | | — | | | — | | | 19,272 | | | 19,272 | | | 17,675 | |
Restricted cash and restricted cash equivalents | | 450 | | | 11 | | | — | | | 461 | | | 461 | |
Other assets * | | — | | | — | | | 43 | | | 43 | | | 35 | |
| | | | | | | | | | |
Liabilities | | | | | | | | | | |
Long-term debt | | $ | — | | | $ | 16,969 | | | $ | — | | | $ | 16,969 | | | $ | 18,281 | |
| | | | | | | | | | |
| | | | | | | | | | |
December 31, 2021 | | | | | | | | | | |
Assets | | | | | | | | | | |
Cash and cash equivalents | | $ | 535 | | | $ | 6 | | | $ | — | | | $ | 541 | | | $ | 541 | |
Investment securities | | 59 | | | 1,927 | | | 6 | | | 1,992 | | | 1,992 | |
Net finance receivables, less allowance for finance receivable losses | | — | | | — | | | 20,083 | | | 20,083 | | | 17,117 | |
Restricted cash and restricted cash equivalents | | 476 | | | — | | | — | | | 476 | | | 476 | |
Other assets * | | — | | | — | | | 52 | | | 52 | | | 46 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Liabilities | | | | | | | | | | |
Long-term debt | | $ | — | | | $ | 18,781 | | | $ | — | | | $ | 18,781 | | | $ | 17,750 | |
*Other assets at December 31, 2022 and December 31, 2021 primarily consists of finance receivables held for sale.
FAIR VALUE MEASUREMENTS — RECURRING BASIS
The following tables present information about our assets measured at fair value on a recurring basis and indicates the fair value hierarchy based on the levels of inputs we utilized to determine such fair value:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements Using | | Total Carried At Fair Value |
(dollars in millions) | | Level 1 | | Level 2 | | Level 3 | |
| | | | | | | | |
December 31, 2022 | | | | | | | | |
Assets | | | | | | | | |
Cash equivalents in mutual funds | | $ | 77 | | | $ | — | | | $ | — | | | $ | 77 | |
| | | | | | | | |
Cash equivalents in securities | | — | | | 17 | | | — | | | 17 | |
Investment securities: | | | | | | | | |
Available-for-sale securities | | | | | | | | |
| | | | | | | | |
U.S. government and government sponsored entities | | — | | | 16 | | | — | | | 16 | |
Obligations of states, municipalities, and political subdivisions | | — | | | 66 | | | — | | | 66 | |
Commercial paper | | — | | | 55 | | | — | | | 55 | |
Non-U.S. government and government sponsored entities | | — | | | 142 | | | — | | | 142 | |
Corporate debt | | 5 | | | 1,129 | | | 3 | | | 1,137 | |
RMBS | | — | | | 192 | | | — | | | 192 | |
CMBS | | — | | | 35 | | | — | | | 35 | |
CDO/ABS | | — | | | 86 | | | — | | | 86 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total available-for-sale securities | | 5 | | | 1,721 | | | 3 | | | 1,729 | |
Other securities | | | | | | | | |
| | | | | | | | |
Bonds: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Corporate debt | | — | | | 6 | | | — | | | 6 | |
RMBS | | — | | | 1 | | | — | | | 1 | |
| | | | | | | | |
CDO/ABS | | — | | | 16 | | | — | | | 16 | |
Total bonds | | — | | | 23 | | | — | | | 23 | |
Preferred stock | | 15 | | | — | | | — | | | 15 | |
Common stock | | 31 | | | — | | | 2 | | | 33 | |
| | | | | | | | |
Total other securities | | 46 | | | 23 | | | 2 | | | 71 | |
Total investment securities | | 51 | | | 1,744 | | | 5 | | | 1,800 | |
| | | | | | | | |
Restricted cash equivalents in mutual funds | | 445 | | | — | | | — | | | 445 | |
Restricted cash equivalents in securities | | — | | | 11 | | | — | | | 11 | |
| | | | | | | | |
Total | | $ | 573 | | | $ | 1,772 | | | $ | 5 | | | $ | 2,350 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements Using | | Total Carried At Fair Value |
(dollars in millions) | | Level 1 | | Level 2 | | Level 3 | |
| | | | | | | | |
December 31, 2021 | | | | | | | | |
Assets | | | | | | | | |
Cash equivalents in mutual funds | | $ | 41 | | | $ | — | | | $ | — | | | $ | 41 | |
Cash equivalents in securities | | — | | | 6 | | | — | | | 6 | |
Investment securities: | | | | | | | | |
Available-for-sale securities | | | | | | | | |
| | | | | | | | |
U.S. government and government sponsored entities | | — | | | 16 | | | — | | | 16 | |
Obligations of states, municipalities, and political subdivisions | | — | | | 79 | | | — | | | 79 | |
Commercial paper | | — | | | 50 | | | — | | | 50 | |
Non-U.S. government and government sponsored entities | | — | | | 155 | | | — | | | 155 | |
Corporate debt | | 5 | | | 1,292 | | | 5 | | | 1,302 | |
RMBS | | — | | | 170 | | | — | | | 170 | |
CMBS | | — | | | 45 | | | — | | | 45 | |
CDO/ABS | | — | | | 90 | | | — | | | 90 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total available-for-sale securities | | 5 | | | 1,897 | | | 5 | | | 1,907 | |
Other securities | | | | | | | | |
| | | | | | | | |
Bonds: | | | | | | | | |
| | | | | | | | |
Corporate debt | | — | | | 9 | | | — | | | 9 | |
RMBS | | — | | | 1 | | | — | | | 1 | |
| | | | | | | | |
CDO/ABS | | — | | | 20 | | | — | | | 20 | |
Total bonds | | — | | | 30 | | | — | | | 30 | |
Preferred stock | | 22 | | | — | | | — | | | 22 | |
Common stock | | 32 | | | — | | | 1 | | | 33 | |
| | | | | | | | |
Total other securities | | 54 | | | 30 | | | 1 | | | 85 | |
Total investment securities | | 59 | | | 1,927 | | | 6 | | | 1,992 | |
Restricted cash equivalents in mutual funds | | 468 | | | — | | | — | | | 468 | |
Total | | $ | 568 | | | $ | 1,933 | | | $ | 6 | | | $ | 2,507 | |
Due to the insignificant activity within the Level 3 assets during the years ended December 31, 2022 and 2021, we have omitted the additional disclosures relating to the changes in Level 3 assets measured at fair value on a recurring basis and the quantitative information about Level 3 unobservable inputs.
FAIR VALUE MEASUREMENTS — NON-RECURRING BASIS
We measure the fair value of certain assets on a non-recurring basis when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Net impairment charges recorded on assets measured at fair value on a non-recurring basis were immaterial during the years ended December 31, 2022 and 2021.
FAIR VALUE MEASUREMENTS — VALUATION METHODOLOGIES AND ASSUMPTIONS
We use the following methods and assumptions to estimate fair value.
Cash and Cash Equivalents
Cash equivalents in mutual funds include positions in money market funds with weighted average maturity within three months. Money market funds are reported at their current carrying value, which approximates fair value due to the short-term nature of these instruments and are categorized as Level 1 within the fair value table.
Cash equivalents in securities includes highly liquid investments with a maturity within three months of purchase. The carrying amount of these cash equivalents approximates fair value due to the short time between the purchase and expected maturity of these securities. Cash equivalents in securities are categorized as Level 2 within the fair value table.
Restricted Cash and Restricted Cash Equivalents
The carrying amount of restricted cash and restricted cash equivalents approximates fair value.
Investment Securities
We utilize third-party valuation service providers to measure the fair value of our investment securities, which are classified as available-for-sale or other securities and consist primarily of bonds. Whenever available, we obtain quoted prices in active markets for identical assets at the balance sheet date to measure investment securities at fair value. We generally obtain market price data from exchange or dealer markets.
We estimate the fair value of fixed maturity investment securities not traded in active markets by referring to traded securities with similar attributes, using dealer quotations and a matrix pricing methodology, or discounted cash flow analyses. This methodology considers such factors as the issuer’s industry, the security’s rating and tenor, its coupon rate, its position in the capital structure of the issuer, yield curves, credit curves, composite ratings, bid-ask spreads, prepayment rates and other relevant factors. For fixed maturity investment securities that are not traded in active markets or that are subject to transfer restrictions, we adjust the valuations to reflect illiquidity and/or non-transferability. Such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used.
We elect the fair value option for investment securities that are deemed to incorporate an embedded derivative and for which it is impracticable for us to isolate and/or value the derivative.
The fair value of certain investment securities is based on the amortized cost, which is assumed to approximate fair value.
Finance Receivables
The fair value of net finance receivables, less allowance for finance receivable losses, is primarily determined using discounted cash flow methodologies. The application of these methodologies requires us to make certain judgments and estimates based on our perception of market participant views related to the economic and competitive environment, the characteristics of our finance receivables, and other similar factors. The most significant judgments and estimates relate to prepayment speeds, default rates, loss severity, and discount rates. The degree of judgment and estimation applied is significant in light of the current capital markets and, more broadly, economic environments. Therefore, the fair value of our finance receivables could not be determined with precision and may not be realized in an actual sale. Additionally, there may be inherent limitations in the valuation methodologies we employed, and changes in the underlying assumptions used could significantly affect the results of current or future values.
Long-term Debt
We either receive fair value measurements of our long-term debt from market participants and pricing services or we estimate the fair values of long-term debt using projected cash flows discounted at each balance sheet date’s market-observable implicit-credit spread rates for our long-term debt.
We record at fair value long-term debt issuances that are deemed to incorporate an embedded derivative and for which it is impracticable for us to isolate and/or value the derivative. At December 31, 2022, we had no debt carried at fair value under the fair value option.
We estimate the fair values associated with variable rate secured term funding and revolving lines of credit to be equal to par.