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


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

FORM 10-Q

(Mark One)
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2014
 
OR
 
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from to
 
Commission file number 001-36129

SPRINGLEAF HOLDINGS, INC.
(Exact name of registrant as specified in its charter)

Delaware
 
27-3379612
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
 
 
 
601 N.W. Second Street, Evansville, IN
 
47708
(Address of principal executive offices)
 
(Zip Code)

(812) 424-8031
(Registrant’s telephone number, including area code)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer o
 
Non-accelerated filer x
 
Smaller reporting company o
 
 
 
 
(Do not check if a smaller reporting company)
 
 

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

At November 14, 2014, there were 114,832,895 shares of the registrant’s common stock, $.01 par value, outstanding.
 


Table of Contents

TABLE OF CONTENTS

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.    

SPRINGLEAF HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)

(dollars in thousands)
 
September 30,
2014
 
December 31,
2013
 
 
 
 
 
Assets
 
 

 
 

 
 
 
 
 
Cash and cash equivalents
 
$
1,970,512

 
$
431,409

Investment securities
 
1,723,381

 
582,090

Net finance receivables:
 
 

 
 

Personal loans (includes loans of consolidated VIEs of $1.8 billion in 2014 and $1.6 billion in 2013)
 
3,607,209

 
3,171,704

SpringCastle Portfolio (includes loans of consolidated VIEs of $2.1 billion in 2014 and $2.5 billion in 2013)
 
2,083,145

 
2,505,349

Real estate loans (includes loans of consolidated VIEs of $0 in 2014 and $5.7 billion in 2013)
 
655,299

 
7,982,349

Retail sales finance
 
56,900

 
98,911

Net finance receivables
 
6,402,553

 
13,758,313

Allowance for finance receivable losses (includes allowance of consolidated VIEs of $67.8 million in 2014 and $153.7 million in 2013)
 
(163,636
)
 
(333,325
)
Net finance receivables, less allowance for finance receivable losses
 
6,238,917

 
13,424,988

Finance receivables held for sale
 
493,196

 

Restricted cash (includes restricted cash of consolidated VIEs of $295.7 million in 2014 and $522.8 million in 2013)
 
312,825

 
536,005

Other assets
 
523,987

 
428,194

 
 
 
 
 
Total assets
 
$
11,262,818

 
$
15,402,686

 
 
 
 
 
Liabilities and Shareholders’ Equity
 
 

 
 

 
 
 
 
 
Long-term debt (includes debt of consolidated VIEs of $3.1 billion in 2014 and $7.3 billion in 2013)
 
$
7,858,037

 
$
12,769,036

Insurance claims and policyholder liabilities
 
430,052

 
394,168

Deferred and accrued taxes
 
153,873

 
145,520

Other liabilities
 
310,738

 
207,334

Total liabilities
 
8,752,700

 
13,516,058

Commitments and contingent liabilities (Note 13)
 
 
 
 
 
 
 
 
 
Shareholders’ equity:
 
 

 
 

Common stock, par value $.01 per share; 2,000,000,000 shares authorized, 114,832,895 shares issued and outstanding at September 30, 2014 and December 31, 2013
 
1,148

 
1,148

Additional paid-in capital
 
528,177

 
524,087

Accumulated other comprehensive income
 
34,289

 
28,095

Retained earnings
 
1,538,153

 
986,690

Springleaf Holdings, Inc. shareholders’ equity
 
2,101,767

 
1,540,020

Non-controlling interests
 
408,351

 
346,608

Total shareholders’ equity
 
2,510,118

 
1,886,628

 
 
 
 
 
Total liabilities and shareholders’ equity
 
$
11,262,818

 
$
15,402,686


See Notes to Condensed Consolidated Financial Statements.

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Table of Contents

SPRINGLEAF HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)

(dollars in thousands except earnings (loss) per share)
 
Three Months 
 Ended 
 September 30, 
 2014
 
Three Months 
 Ended 
 September 30, 
 2013
 
Nine Months 
 Ended 
 September 30, 
 2014
 
Nine Months 
 Ended 
 September 30, 
 2013
 
 
 
 
Revised
 
 
 
Revised
Interest income:
 
 
 
 
 
 
 
 
Finance charges
 
$
435,445

 
$
583,926

 
$
1,513,590

 
$
1,577,561

Finance receivables held for sale originated as held for investment
 
47,679

 

 
54,921

 

Total interest income
 
483,124

 
583,926

 
1,568,511

 
1,577,561

 
 
 
 
 
 
 
 
 
Interest expense
 
180,142

 
229,157

 
576,863

 
700,868

 
 
 
 
 
 
 
 
 
Net interest income
 
302,982

 
354,769

 
991,648

 
876,693

 
 
 
 
 
 
 
 
 
Provision for finance receivable losses
 
102,971

 
162,264

 
379,196

 
339,061

 
 
 
 
 
 
 
 
 
Net interest income after provision for finance receivable losses
 
200,011

 
192,505

 
612,452

 
537,632

 
 
 
 
 
 
 
 
 
Other revenues:
 
 

 
 

 
 

 
 

Insurance
 
44,010

 
38,277

 
125,116

 
107,144

Investment
 
11,251

 
6,532

 
31,334

 
27,254

Net loss on repurchases and repayments of debt
 

 
(33,572
)
 
(6,615
)
 
(33,809
)
Net gain (loss) on fair value adjustments on debt
 
1,352

 
6,586

 
(15,033
)
 
7,097

Net gain on sales of real estate loans and related trust assets
 
641,328

 

 
731,314

 

Other
 
(11,975
)
 
1,603

 
(7,403
)
 
6,986

Total other revenues
 
685,966

 
19,426

 
858,713

 
114,672

 
 
 
 
 
 
 
 
 
Other expenses:
 
 

 
 

 
 

 
 

Operating expenses:
 
 

 
 

 
 

 
 

Salaries and benefits
 
94,702

 
214,552

 
278,504

 
371,842

Other operating expenses
 
75,117

 
72,478

 
192,889

 
194,457

Insurance losses and loss adjustment expenses
 
20,141

 
16,550

 
57,173

 
47,650

Total other expenses
 
189,960

 
303,580

 
528,566

 
613,949

 
 
 
 
 
 
 
 
 
Income (loss) before provision for (benefit from) income taxes
 
696,017

 
(91,649
)
 
942,599

 
38,355

 
 
 
 
 
 
 
 
 
Provision for (benefit from) income taxes
 
234,322

 
(30,698
)
 
309,594

 
(1,998
)
 
 
 
 
 
 
 
 
 
Net income (loss)
 
461,695

 
(60,951
)
 
633,005

 
40,353

 
 
 
 
 
 
 
 
 
Net income attributable to non-controlling interests
 
34,945

 
31,643

 
81,542

 
86,383

 
 
 
 
 
 
 
 
 
Net income (loss) attributable to Springleaf Holdings, Inc.
 
$
426,750

 
$
(92,594
)
 
$
551,463

 
$
(46,030
)
 
 
 
 
 
 
 
 
 
Share Data:
 
 

 
 

 
 

 
 

Weighted average number of shares outstanding:
 
 

 
 

 
 

 
 

Basic
 
114,788,439

 
100,000,000

 
114,788,439

 
100,000,000

Diluted
 
115,316,314

 
100,000,000

 
115,212,398

 
100,000,000

Earnings (loss) per share:
 
 

 
 

 
 

 
 

Basic
 
$
3.72

 
$
(0.93
)
 
$
4.80

 
$
(0.46
)
Diluted
 
$
3.70

 
$
(0.93
)
 
$
4.79

 
$
(0.46
)

See Notes to Condensed Consolidated Financial Statements.

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SPRINGLEAF HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

(dollars in thousands)
 
Three Months 
 Ended 
 September 30, 
 2014
 
Three Months 
 Ended 
 September 30, 
 2013
 
Nine Months 
 Ended 
 September 30, 
 2014
 
Nine Months 
 Ended 
 September 30, 
 2013
 
 
 
 
Revised
 
 
 
Revised
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
461,695

 
$
(60,951
)
 
$
633,005

 
$
40,353

 
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 

 
 

 
 

 
 

Net unrealized gains (losses) on:
 
 

 
 

 
 

 
 

Investment securities on which other-than-temporary impairments were taken
 
(8
)
 
(17
)
 
(357
)
 
(135
)
All other investment securities
 
(3,844
)
 
(429
)
 
15,498

 
(10,989
)
Foreign currency translation adjustments
 
761

 
(2,056
)
 
267

 
38

 
 
 
 
 
 
 
 
 
Income tax effect:
 
 

 
 

 
 

 
 

Net unrealized (gains) losses on:
 
 

 
 

 
 

 
 

Investment securities on which other-than-temporary impairments were taken
 
3

 
6

 
125

 
47

All other investment securities
 
1,346

 
149

 
(5,426
)
 
3,844

Other comprehensive income (loss), net of tax, before reclassification adjustments
 
(1,742
)
 
(2,347
)
 
10,107

 
(7,195
)
 
 
 
 
 
 
 
 
 
Reclassification adjustments included in net income (loss):
 
 

 
 

 
 

 
 

Net realized (gains) losses on investment securities
 
(2,750
)
 
355

 
(6,019
)
 
(2,253
)
Cash flow hedges
 

 

 

 
(160
)
 
 
 
 
 
 
 
 
 
Income tax effect:
 
 

 
 

 
 

 
 

Net realized gains (losses) on investment securities
 
962

 
(124
)
 
2,106

 
789

Cash flow hedges
 

 

 

 
56

Reclassification adjustments included in net income (loss), net of tax
 
(1,788
)
 
231

 
(3,913
)
 
(1,568
)
Other comprehensive income (loss), net of tax
 
(3,530
)
 
(2,116
)
 
6,194

 
(8,763
)
 
 
 
 
 
 
 
 
 
Comprehensive income (loss)
 
458,165

 
(63,067
)
 
639,199

 
31,590

 
 
 
 
 
 
 
 
 
Comprehensive income attributable to non-controlling interests
 
34,945

 
31,643

 
81,542

 
86,383

 
 
 
 
 
 
 
 
 
Comprehensive income (loss) attributable to Springleaf Holdings, Inc.
 
$
423,220

 
$
(94,710
)
 
$
557,657

 
$
(54,793
)

See Notes to Condensed Consolidated Financial Statements.


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SPRINGLEAF HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)

 
 
Springleaf Holdings, Inc. Shareholders’ Equity
 
 
 
 
(dollars in thousands)
 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
 
Springleaf
Holdings, Inc.
Shareholders’
Equity
 
Non-controlling
Interests
 
Total
Shareholders’
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2014
 
$
1,148

 
$
524,087

 
$
28,095

 
$
986,690

 
$
1,540,020

 
$
346,608

 
$
1,886,628

Share-based compensation expense, net of forfeitures
 

 
4,090

 

 

 
4,090

 

 
4,090

Change in non-controlling interests:
 
 
 
 
 
 
 
 
 
 

 
 
 
 

Distributions declared to joint venture partners
 

 

 

 

 

 
(19,799
)
 
(19,799
)
Change in net unrealized gains:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Investment securities
 

 

 
5,927

 

 
5,927

 

 
5,927

Foreign currency translation adjustments
 

 

 
267

 

 
267

 

 
267

Net income
 

 

 

 
551,463

 
551,463

 
81,542

 
633,005

Balance, September 30, 2014
 
$
1,148

 
$
528,177

 
$
34,289

 
$
1,538,153

 
$
2,101,767

 
$
408,351

 
$
2,510,118

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2013 - Revised
 
$
1,000

 
$
147,459

 
$
26,472

 
$
1,005,991

 
$
1,180,922

 
$

 
$
1,180,922

Share-based compensation expense, net of forfeitures
 

 
131,250

 

 

 
131,250

 

 
131,250

Change in non-controlling interests:
 
 

 
 

 
 

 
 

 
 

 
 

 
 
Contributions from joint venture partners
 

 

 

 

 

 
438,081

 
438,081

Distributions declared to joint venture partners
 

 

 

 

 

 
(204,516
)
 
(204,516
)
Change in net unrealized losses:
 
 

 
 

 
 

 
 

 
 

 
 

 
 
Investment securities
 

 

 
(8,697
)
 

 
(8,697
)
 

 
(8,697
)
Cash flow hedges
 

 

 
(104
)
 

 
(104
)
 

 
(104
)
Foreign currency translation adjustments
 

 

 
38

 

 
38

 

 
38

Net income (loss)
 

 

 

 
(46,030
)
 
(46,030
)
 
86,383

 
40,353

Balance, September 30, 2013 - Revised
 
$
1,000

 
$
278,709

 
$
17,709

 
$
959,961

 
$
1,257,379

 
$
319,948

 
$
1,577,327


See Notes to Condensed Consolidated Financial Statements.


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Table of Contents

SPRINGLEAF HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)

(dollars in thousands)
 
 
 
 
Nine Months Ended September 30,
 
2014
 
2013
 
 
 
 
Revised
Cash flows from operating activities
 
 

 
 

Net income
 
$
633,005

 
$
40,353

Reconciling adjustments:
 
 

 
 

Provision for finance receivable losses
 
379,196

 
339,061

Depreciation and amortization
 
(43,342
)
 
(39,138
)
Deferred income tax charge (benefit)
 
14,970

 
(88,476
)
Net loss (gain) on fair value adjustments on debt
 
15,033

 
(7,097
)
Net gain on sales of real estate loans and related trust assets
 
(731,314
)
 

Net charge-offs on finance receivables held for sale
 
10,713

 

Net loss on repurchases and repayments of debt
 
6,615

 
33,809

Share-based compensation expense, net of forfeitures
 
4,090

 
131,250

Other
 
852

 
(707
)
Cash flows due to changes in:
 
 

 
 

Other assets and other liabilities
 
63,004

 
91,943

Insurance claims and policyholder liabilities
 
35,884

 
14,917

Taxes receivable and payable
 
(27,456
)
 
(24,732
)
Accrued interest and finance charges
 
(7,900
)
 
(30,566
)
Restricted cash not reinvested
 
(18,765
)
 
33,885

Other, net
 
892

 
(828
)
Net cash provided by operating activities
 
335,477

 
493,674

 
 
 
 
 
Cash flows from investing activities
 
 

 
 

Finance receivables originated or purchased, net of deferred origination costs
 
(1,914,270
)
 
(1,688,630
)
Principal collections on finance receivables
 
2,294,057

 
2,386,086

Purchase of SpringCastle Portfolio
 

 
(2,963,547
)
Sales and principal collections on finance receivables held for sale originated as held for investment
 
3,437,430

 

Available-for-sale investment securities purchased
 
(273,972
)
 
(442,686
)
Trading investment securities purchased
 
(1,085,187
)
 
(6,295
)
Available-for-sale investment securities called, sold, and matured
 
226,658

 
721,042

Trading investment securities called, sold, and matured
 
32,415

 
7,492

Change in restricted cash
 
24,502

 
(395,552
)
Proceeds from sale of real estate owned
 
51,386

 
88,346

Other, net
 
(4,571
)
 
(4,749
)
Net cash provided by (used for) investing activities
 
2,788,448

 
(2,298,493
)
 
 
 
 
 
Cash flows from financing activities
 
 

 
 

Proceeds from issuance of long-term debt, net of commissions
 
672,440

 
5,990,565

Repayment of long-term debt
 
(2,237,362
)
 
(4,723,188
)
Contributions from joint venture partners
 

 
438,081

Distributions to joint venture partners
 
(19,799
)
 
(204,516
)
Net cash provided by (used for) financing activities
 
(1,584,721
)
 
1,500,942

 
Condensed Consolidated Statements of Cash Flows (Unaudited) (Continued)
 
 
 
 
 
 
 
 
 
(dollars in thousands)
 
 

 
 

Nine Months Ended September 30,
 
2014
 
2013
 
 
 
 
Revised
 
 
 
 
 
Effect of exchange rate changes
 
(101
)
 
(835
)
 
 
 
 
 
Net change in cash and cash equivalents
 
1,539,103

 
(304,712
)
Cash and cash equivalents at beginning of period
 
431,409

 
1,554,348

Cash and cash equivalents at end of period
 
$
1,970,512

 
$
1,249,636

 
 
 
 
 
Supplemental non-cash activities
 
 

 
 

Transfer of finance receivables to real estate owned
 
$
46,982

 
$
70,004

Transfer of finance receivables held for investment to finance receivables held for sale (prior to deducting allowance for finance receivable losses)
 
$
6,901,755

 
$

Unsettled investment security purchases and sales
 
$
28,684

 
$


See Notes to Condensed Consolidated Financial Statements.

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SPRINGLEAF HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2014

1. Business and Summary of Significant Accounting Policies    

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

On October 21, 2013, SHI completed the initial public offering of its common stock. At September 30, 2014, the Initial Stockholder owned approximately 75% of SHI’s common stock. The Initial Stockholder is owned primarily by a private equity fund managed by an affiliate of Fortress Investment Group LLC (“Fortress”) and AIG Capital Corporation, a subsidiary of American International Group, Inc. (“AIG”).

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

BASIS OF PRESENTATION

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

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

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

Prior Period Revisions

As disclosed in our 2013 Annual Report on Form 10-K, we identified certain out-of-period errors in preparing our annual consolidated financial statements for the year ended December 31, 2013. In addition to these errors, we had previously recorded and disclosed out-of-period adjustments in prior reporting periods when the errors were discovered. As a result, we revised all previously reported periods included in our 2013 Annual Report on Form 10-K. Similarly, we have revised all previously reported periods included in this report. We corrected the errors identified in the fourth quarter of 2013 and included these corrections in the appropriate prior periods. In addition, we reversed all out-of period adjustments previously recorded and disclosed, and included the adjustments in the appropriate periods. After evaluating the quantitative and qualitative aspects of these corrections, we have determined that our previous applicable quarterly condensed financial statements and our annual consolidated financial statements were not materially misstated.

See Note 17 for further information on the prior period revisions.

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

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

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

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

Fortress Acquisition

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

SIGNIFICANT REAL ESTATE LOAN TRANSACTIONS

In the third quarter of 2014, we entered into a series of transactions relating to the sales of our beneficial interests in our non-core real estate loans, the related servicing of these loans, and the sales of certain performing and non-performing real estate loans. The 2006-1 Securitization Assets Sale, the Securitization Assets Sale, the MSR Sale, and the September Whole Loan Sales are each defined below and are collectively referred to as the “Asset Sale.” The Asset Sale, along with the real estate transactions that were completed in the first half of 2014 (the “Prior Dispositions”) substantially complete the Company’s previously disclosed plan to liquidate its non-core real estate loans.

In conjunction with these real estate loan transactions, we have closed our servicing centers in Dallas, Texas, Rancho Cucamonga, California, and Wesley Chapel, Florida, and have eliminated certain staff positions in our Evansville, Indiana, location. In total, approximately 300 staff positions were eliminated. However, the total reduction in workforce was approximately 170 employees, as 130 employees have been transferred into other positions at Springleaf. We recorded restructuring costs of $4.3 million in the third quarter of 2014 due to the workforce reductions and the closings of the servicing facilities.

Our insurance subsidiaries have written certain insurance policies on properties collateralizing the loans that have been deconsolidated or disposed of as a result of these sales. As part of the disposition, the insurance policies associated with the sold loans have been or will be cancelled.

The “2006-1 Securitization Assets Sale”

On July 31, 2014, Second Street Funding LLC (“Second Street”), an indirect subsidiary of SHI, entered into an agreement to sell certain mortgage-backed notes and trust certificates issued by American General Mortgage Loan Trust 2006-1 to an unaffiliated third party, for a purchase price of $9.5 million subject to customary closing conditions. On August 1, 2014, the real estate loans included in the transaction were transferred from held for investment to held for sale, due to management’s intent to no longer hold these finance receivables for the foreseeable future. Second Street completed this transaction on September 30, 2014, at which time, the real estate loans included in the transaction had a carrying value of $87.8 million (after the basis adjustment for the related allowance for finance receivable losses). As a result of the sale, we deconsolidated the securitization trust holding the underlying real estate loans and previously issued securitized interests which were reported in long-term debt, as we no longer were considered the primary beneficiary.

The “Securitization Assets Sale”

On August 6, 2014, SFC and Eighth Street Funding, LLC, Eleventh Street Funding, LLC, Twelfth Street Funding, LLC, Fourteenth Street Funding, LLC, Fifteenth Street Funding, LLC, Seventeenth Street Funding, LLC, and Nineteenth Street Funding, LLC (each a wholly owned subsidiary of SFC and collectively, the “Depositors”) entered into an agreement to sell,

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subject to certain closing conditions, certain notes and trust certificates (collectively, the “Securities”) backed by mortgage loans of the Springleaf Mortgage Loan Trust (“SMLT”) 2011-1, SMLT 2012-1, SMLT 2012-2, SMLT 2012-3, SMLT 2013-1, SMLT 2013-2, and SMLT 2013-3 (each, a “Trust”, and the issuance of the Securities by each Trust, a “Springleaf Transaction”) to Credit Suisse Securities (USA) LLC and its affiliates (“Credit Suisse”). The agreement also included the sale of the rights to receive any funds remaining in the reserve account established for each Springleaf Transaction, and certain related rights, representing substantially all of the Company’s remaining interests in the Trusts, to Credit Suisse.

On August 1, 2014, the real estate loans included in the transaction were transferred from held for investment to held for sale, due to management’s intent to no longer hold these finance receivables for the foreseeable future. The Depositors completed this transaction on August 29, 2014, at which time, the real estate loans included in the transaction had a carrying value of $4.0 billion (after the basis adjustment for the related allowance for finance receivable losses). The purchase price for the Securitization Asset Sale was $1.6 billion. As a result of the sale, we deconsolidated the securitization trusts holding the underlying real estate loans and previously issued securitized interests which were reported in long-term debt, as we no longer were considered the primary beneficiary.

The “MSR Sale”

Additionally, in a separate transaction on August 6, 2014, SFC and its wholly owned subsidiary, MorEquity, Inc. (“MorEquity”) (collectively, the “Sellers”), entered into a Mortgage Servicing Rights Purchase and Sale Agreement, dated and effective as of August 1, 2014, with Nationstar Mortgage LLC (“Nationstar”), pursuant to which the Sellers agreed to sell to Nationstar all of their rights and responsibilities as servicer, primary servicer, and/or master servicer of the mortgage loans primarily underlying the Sellers’ securitizations completed in 2011, 2012 and 2013 (each a “Pool” and collectively, the “Pools”) with an aggregate unpaid principal balance (“UPB”) of approximately $5 billion. Additionally, Nationstar agreed to assume on and after the effective date, all of the Sellers’ rights and responsibilities as servicer, primary servicer and/or master servicer, as applicable, for each Pool arising and to be performed on and after the sale date, which include, among other things, the right to receive the related servicing fee on a monthly basis.

The purchase price for the MSR Sale was $38.8 million. Approximately 50% of the proceeds of the MSR Sale were received on August 29, 2014, the closing date, and 40% of the proceeds of the MSR Sale were received on October 23, 2014. The remaining 10% is subject to a holdback for resolution of missing documentation and other customary conditions, and is expected to be received no later than 120 days after the date of transfer of servicing upon resolution of those conditions. See Note 20 for further information on the subsequent payment received from Nationstar on October 23, 2014. Investment funds managed by affiliates of Fortress indirectly own a majority interest in Nationstar.

The servicing for each Pool was transferred on September 30, 2014. From the closing of the MSR Sale on August 29, 2014, until the servicing transfer on September 30, 2014, the Company continued to service certain loans on behalf of Nationstar under an interim servicing agreement.

The “September Whole Loan Sales”

On August 6, 2014, SFC and Credit Suisse agreed to the terms of sale of certain performing and non-performing mortgage loans by certain indirect subsidiaries of SHI (referred to herein as the “Probable Whole Loan Sales”). On August 1, 2014, the real estate loans included in the Probable Whole Loan Sales were transferred from held for investment to held for sale, due to management’s intent to no longer hold these finance receivables for the foreseeable future. We completed the sale of a portion of the Probable Whole Loan Sales on September 30, 2014 (the “September Whole Loan Sales”) at which time, the real estate loans included in the September Whole Loan Sales had a carrying value of $768.6 million (after the basis adjustment for the related allowance for finance receivable losses).

The aggregate purchase price of $795.1 million for the September Whole Loan Sales included a holdback provision of $120 million of which $40 million was subject to finalization of the terms and conditions of administering the holdback and the remainder was subject to our ability to cure certain documentation deficiencies within the 60 day period (subject to extension under certain circumstances) subsequent to the closing of the sale. See Note 20 for further information on the subsequent payments received from Credit Suisse on October 16 and November 7, 2014.


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Prior Dispositions

The “Prior Dispositions” included the following transactions:

The “Sixth Street Disposition”. On May 23, 2014, Sixth Street Funding LLC (“Sixth Street”), a wholly owned subsidiary of SFC, agreed to sell and transfer its beneficial interests in the mortgage-backed retained certificates related to a securitization transaction completed in 2010 to Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPFS”) for a purchase price of $263.7 million. On June 1, 2014, the real estate loans included in the transaction were transferred from held for investment to held for sale, due to management’s intent to no longer hold these finance receivables for the foreseeable future. Sixth Street completed this transaction on June 30, 2014, at which time, the real estate loans included in the transaction had a carrying value of $444.4 million (after the basis adjustment for the related allowance for finance receivable losses). As a result of the sale, we deconsolidated the securitization trust holding the underlying real estate loans and previously issued securitized interests which were reported in long-term debt, as we no longer were considered the primary beneficiary.

The “Third Street Disposition”. On March 6, 2014, Third Street Funding LLC (“Third Street”), a wholly owned subsidiary of SFC, agreed to sell and transfer its beneficial interests in the mortgage-backed retained certificates related to a securitization transaction completed in 2009 to MLPFS for a purchase price of $737.2 million. On March 1, 2014, the real estate loans included in the transaction were transferred from held for investment to held for sale, due to management’s intent to no longer hold these finance receivables for the foreseeable future. Third Street completed this transaction on March 31, 2014, at which time, the real estate loans included in the transaction had a carrying value of $724.9 million (after the basis adjustment for the related allowance for finance receivable losses). As a result of the sale, we deconsolidated the securitization trust holding the underlying real estate loans and previously issued securitized interests which were reported in long-term debt, as we no longer were considered the primary beneficiary.

The “MorEquity Disposition”. On March 7, 2014, MorEquity entered into an agreement to sell, subject to certain closing conditions, certain performing and non-performing real estate loans for a purchase price of $79.0 million. On March 1, 2014, these loans were transferred from held for investment to held for sale, due to management’s intent to no longer hold these finance receivables for the foreseeable future. MorEquity completed this sale on March 31, 2014, at which time, the real estate loans included in the transaction had a carrying value of $89.9 million (after the basis adjustment for the related allowance for finance receivable losses).

ACCOUNTING PRONOUNCEMENTS ADOPTED

Income Taxes

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

ACCOUNTING PRONOUNCEMENTS TO BE ADOPTED

Troubled Debt Restructurings

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


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Revenue from Contracts

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

Share-based Payments

In June 2014, the FASB issued ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period, which clarifies that performance targets within share-based payment awards that can be met after the requisite service period should be considered performance conditions that affect vesting. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. We have evaluated this ASU and concluded that it is not applicable to the Company at this time.

Going Concern

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which requires management to assess a company’s ability to continue as a going concern for each annual and interim reporting period, and disclose in its financial statements whether there is substantial doubt about the company’s ability to continue as a going concern within one year after the date that the financial statements are issued. The new standard applies to all companies and is effective for the annual period ending after December 15, 2016, and all annual and interim periods thereafter. The new standard can also be early adopted. Upon adoption, we will perform the going concern assessment in accordance with the requirements of the new ASU.

ACCOUNTING POLICY ELECTIONS

We made certain policy elections with regard to the issuance of long-term debt related to a consumer loan securitization completed on March 26, 2014 (the “2014-A securitization”) and have updated our long-term debt policy previously disclosed in our 2013 Annual Report on Form 10-K to reflect these elections going forward. The updated long-term debt policy is presented below:

Long-term Debt

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

2. Finance Receivables    

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

Personal loans — are secured by consumer goods, automobiles, or other personal property or are unsecured, generally have maximum original terms of four years, and are usually fixed-rate, fixed-term loans. At September 30, 2014, $1.7 billion of personal loans, or 48%, were secured by collateral consisting of titled personal property (such as automobiles), $1.3 billion, or 37%, were secured by consumer household goods or other items of personal property, and the remainder was unsecured.


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

Real estate loans — are secured by first or second mortgages on residential real estate, generally have maximum original terms of 360 months, and are considered non-conforming. At September 30, 2014, $233.8 million of real estate loans, or 36%, were secured by first mortgages and $421.5 million, or 64%, were secured by second mortgages. Real estate loans may be closed-end accounts or open-end home equity lines of credit and are primarily fixed-rate products.

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

Components of net finance receivables by type were as follows:
(dollars in thousands)
 
Personal
Loans
 
SpringCastle
Portfolio
 
Real
Estate Loans
 
Retail
Sales Finance
 
Total
 
 
 
 
 
 
 
 
 
 
 
September 30, 2014
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Gross receivables*
 
$
4,209,056

 
$
2,067,719

 
$
652,839

 
$
62,342

 
$
6,991,956

Unearned finance charges and points and fees
 
(696,696
)
 

 
(3,260
)
 
(5,922
)
 
(705,878
)
Accrued finance charges
 
52,688

 
15,426

 
5,625

 
480

 
74,219

Deferred origination costs
 
42,161

 

 
95

 

 
42,256

Total
 
$
3,607,209

 
$
2,083,145

 
$
655,299


$
56,900


$
6,402,553

 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Gross receivables*
 
$
3,644,030

 
$
2,484,719

 
$
7,940,500

 
$
108,457

 
$
14,177,706

Unearned finance charges and points and fees
 
(560,104
)
 

 
(1,115
)
 
(10,444
)
 
(571,663
)
Accrued finance charges
 
48,179

 
20,630

 
42,690

 
898

 
112,397

Deferred origination costs
 
39,599

 

 
274

 

 
39,873

Total
 
$
3,171,704

 
$
2,505,349

 
$
7,982,349

 
$
98,911

 
$
13,758,313

                                      
*
Gross receivables are defined as follows:

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

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

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


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Included in the table above are personal loans with a carrying value of $1.8 billion at September 30, 2014 and $1.6 billion at December 31, 2013 and SpringCastle Portfolio loans with a carrying value of $2.1 billion at September 30, 2014 and $2.5 billion at December 31, 2013 associated with securitizations that remain on our balance sheet. Also included in the table above are real estate loans with a carrying value of $5.7 billion at December 31, 2013 associated with mortgage securitizations that have been sold or transferred to finance receivables held for sale during the nine months ended September 30, 2014. See Note 1 for further information on these sales. The carrying value of consolidated long-term debt associated with securitizations totaled $3.1 billion at September 30, 2014 and $7.3 billion at December 31, 2013. See Note 8 for further discussion regarding our securitization transactions. Also included in the table above are finance receivables with a carrying value of $1.0 billion at December 31, 2013, which were pledged as collateral for our secured term loan that we fully repaid in March 2014. See Note 7 for further discussion of the repayment of our secured term loan.

Unused lines of credit extended to customers by the Company were as follows:
(dollars in thousands)
 
September 30,
2014
 
December 31,
2013
 
 
 
 
 
Personal loans
 
$
1,462

 
$
4,996

SpringCastle Portfolio
 
357,914

 
366,060

Real estate loans
 
30,437

 
32,338

Total
 
$
389,813

 
$
403,394


Unused lines of credit on our personal loans can be suspended if one of the following occurs: the value of the collateral declines significantly; we believe the borrower will be unable to fulfill the repayment obligations; or any other default by the borrower of any material obligation under the agreement. Unused lines of credit on our real estate loans and the SpringCastle Portfolio secured by subordinate residential real estate mortgages can be suspended if one of the following occurs: (1) the value of the real estate declines significantly below the property’s initial appraised value; (2) we believe the borrower will be unable to fulfill the repayment obligations because of a material change in the borrower’s financial circumstances; or (3) any other default by the borrower of any material obligation under the agreement occurs. Unused lines of credit on home equity lines of credit, including the SpringCastle Portfolio secured by subordinate residential real estate mortgages, can be terminated for delinquency. Unused lines of credit on the unsecured loans of the SpringCastle Portfolio can be terminated at our discretion.

CREDIT QUALITY INDICATORS

We consider the delinquency status and nonperforming status of the finance receivable as our credit quality indicators.

We accrue finance charges on revolving retail finance receivables up to the date of charge-off at 180 days past due. We had $0.1 million of revolving retail finance receivables that were more than 90 days past due and still accruing finance charges at September 30, 2014, compared to $0.4 million at December 31, 2013. Our personal loans, SpringCastle Portfolio, and real estate loans do not have finance receivables that were more than 90 days past due and still accruing finance charges.


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Delinquent Finance Receivables

We consider the delinquency status of the finance receivable as our primary credit quality indicator. We monitor delinquency trends to manage our exposure to credit risk. We consider finance receivables 60 days or more past due as delinquent and consider the likelihood of collection to decrease at such time.

The following is a summary of net finance receivables by type and by days delinquent:
(dollars in thousands)
 
Personal
Loans
 
SpringCastle
Portfolio
 
Real
Estate Loans
 
Retail
Sales Finance
 
Total
 
 
 
 
 
 
 
 
 
 
 
September 30, 2014
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Net finance receivables:
 
 

 
 

 
 

 
 

 
 

60-89 days past due
 
$
32,384

 
$
33,379

 
$
13,151

 
$
770

 
$
79,684

90-119 days past due
 
25,688

 
20,955

 
7,842

 
429

 
54,914

120-149 days past due
 
21,132

 
15,826

 
5,629

 
558

 
43,145

150-179 days past due
 
16,727

 
13,102

 
5,557

 
303

 
35,689

180 days or more past due
 
1,088

 
4,946

 
11,947

 
46

 
18,027

Total delinquent finance receivables
 
97,019

 
88,208

 
44,126

 
2,106

 
231,459

Current
 
3,456,829

 
1,932,945

 
588,796

 
53,522

 
6,032,092

30-59 days past due
 
53,361

 
61,992

 
22,377

 
1,272

 
139,002

Total
 
$
3,607,209

 
$
2,083,145

 
$
655,299

 
$
56,900

 
$
6,402,553

 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Net finance receivables:
 
 

 
 

 
 

 
 

 
 

60-89 days past due
 
$
28,504

 
$
60,669

 
$
97,567

 
$
1,290

 
$
188,030

90-119 days past due
 
22,804

 
47,689

 
68,190

 
1,017

 
139,700

120-149 days past due
 
18,780

 
33,671

 
55,222

 
757

 
108,430

150-179 days past due
 
14,689

 
26,828

 
45,158

 
740

 
87,415

180 days or more past due
 
938

 
3,579

 
356,766

 
173

 
361,456

Total delinquent finance receivables
 
85,715

 
172,436

 
622,903

 
3,977

 
885,031

Current
 
3,038,307

 
2,232,965

 
7,183,437

 
92,093

 
12,546,802

30-59 days past due
 
47,682

 
99,948

 
176,009

 
2,841

 
326,480

Total
 
$
3,171,704

 
$
2,505,349

 
$
7,982,349

 
$
98,911

 
$
13,758,313


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Table of Contents

Nonperforming Finance Receivables

We also monitor finance receivable performance trends to evaluate the potential risk of future credit losses. At 90 days or more past due, we consider our finance receivables to be nonperforming. Once the finance receivables are considered as nonperforming, we consider them to be at increased risk for credit loss.

Our performing and nonperforming net finance receivables by type were as follows:
(dollars in thousands)

Personal
Loans
 
SpringCastle
Portfolio
 
Real
Estate Loans
 
Retail
Sales Finance
 
Total




 


 


 


 


September 30, 2014

 

 
 

 
 

 
 

 
 





 


 


 


 


Performing

$
3,542,574

 
$
2,028,316

 
$
624,324

 
$
55,564

 
$
6,250,778

Nonperforming

64,635

 
54,829

 
30,975

 
1,336

 
151,775

Total

$
3,607,209

 
$
2,083,145

 
$
655,299

 
$
56,900

 
$
6,402,553





 


 


 


 


December 31, 2013

 

 
 

 
 

 
 

 
 





 


 


 


 


Performing

$
3,114,493

 
$
2,393,582

 
$
7,457,013

 
$
96,224

 
$
13,061,312

Nonperforming

57,211

 
111,767

 
525,336

 
2,687

 
697,001

Total

$
3,171,704

 
$
2,505,349

 
$
7,982,349

 
$
98,911

 
$
13,758,313


PURCHASED CREDIT IMPAIRED FINANCE RECEIVABLES

As a result of the Fortress Acquisition, we applied push-down accounting and adjusted the carrying value of our finance receivables (the “FA Loans”) to their fair value on November 30, 2010.

In connection with the acquisition of the SpringCastle Portfolio (the “SCP Loans”), we recorded the acquired loans at their fair value of $748.9 million on April 1, 2013, the day of purchase, and determined at this date that these loans with contractually required principal and interest of $1.9 billion and expected undiscounted cash flows of $1.2 billion were credit impaired.

We include the carrying amount (which initially was the fair value) of our purchased credit impaired finance receivables in net finance receivables, less allowance for finance receivable losses. Prepayments reduce the outstanding balance, contractual cash flows, and cash flows expected to be collected.

We report finance receivables held for sale of $493.2 million at September 30, 2014, which consist of our non-core real estate loans. See Note 4 for further information on our finance receivables held for sale. At September 30, 2014, finance receivables held for sale include purchased credit impaired real estate loans, as well as troubled debt restructured (“TDR”) real estate loans. Therefore, we are presenting the financial information for the purchased credit impaired finance receivables and the TDR finance receivables by finance receivables held for investment and finance receivables held for sale in the tables below.


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Information regarding these purchased credit impaired finance receivables held for investment and held for sale were as follows:
(dollars in thousands)
 
SCP Loans
 
FA Loans
 
Total
 
 
 
 
 
 
 
September 30, 2014
 
 

 
 

 
 

 
 
 
 
 
 
 
Carrying amount, net of allowance (a)
 
$
370,967

 
$
191,725

 
$
562,692

Outstanding balance (b)
 
$
682,389

 
$
300,128

 
$
982,517

Allowance for purchased credit impaired finance receivable losses
 
$

 
$
4,513

 
$
4,513

 
 
 
 
 
 
 
December 31, 2013
 
 

 
 

 
 

 
 
 
 
 
 
 
Carrying amount, net of allowance
 
$
530,326

 
$
1,257,047

 
$
1,787,373

Outstanding balance
 
$
851,211

 
$
1,791,882

 
$
2,643,093

Allowance for purchased credit impaired finance receivable losses
 
$

 
$
57,334

 
$
57,334

                                      
(a)
The carrying amount of purchased credit impaired finance receivables at September 30, 2014 includes $165.5 million of purchased credit impaired finance receivables held for sale.

(b)
The outstanding balance of purchased credit impaired finance receivables at September 30, 2014 includes $246.1 million of purchased credit impaired finance receivables held for sale.

The allowance for purchased credit impaired finance receivable losses at September 30, 2014 and December 31, 2013, reflected the net carrying value of these purchased credit impaired finance receivables being higher than the present value of the expected cash flows.


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Changes in accretable yield for purchased credit impaired finance receivables held for investment and held for sale were as follows:
(dollars in thousands)
 
SCP Loans
 
FA Loans
 
Total
 
 
 
 
 
 
 
At or for the Three Months Ended 
 September 30, 2014
 
 

 
 

 
 

 
 
 
 
 
 


Balance at beginning of period
 
$
267,251

 
$
627,125

 
$
894,376

Accretion (a)
 
(15,791
)
 
(20,771
)
 
(36,562
)
Transfers due to finance receivables sold
 

 
(563,891
)
 
(563,891
)
Disposals of finance receivables (b)
 
(5,039
)
 
(3,640
)
 
(8,679
)
Balance at end of period
 
$
246,421

 
$
38,823

 
$
285,244

 
 
 
 
 
 
 
At or for the Three Months Ended 
 September 30, 2013
 
 

 
 

 
 

 
 
 
 
 
 
 
Balance at beginning of period
 
$
407,237

 
$
849,153

 
$
1,256,390

Accretion
 
(25,887
)
 
(32,224
)
 
(58,111
)
Reclassifications from nonaccretable difference (c)
 

 
2,741

 
2,741

Disposals of finance receivables (b)
 
(19,078
)
 
(8,471
)
 
(27,549
)
Balance at end of period
 
$
362,272

 
$
811,199

 
$
1,173,471

 
 
 
 
 
 
 
At or for the Nine Months Ended 
 September 30, 2014
 
 

 
 

 
 

 
 
 
 
 
 
 
Balance at beginning of period
 
$
325,201

 
$
771,491

 
$
1,096,692

Accretion (a)
 
(53,514
)
 
(76,326
)
 
(129,840
)
Reclassifications to nonaccretable difference (c)
 
(527
)
 

 
(527
)
Transfers due to finance receivables sold
 

 
(641,559
)
 
(641,559
)
Disposals of finance receivables (b)
 
(24,739
)
 
(14,783
)
 
(39,522
)
Balance at end of period
 
$
246,421

 
$
38,823

 
$
285,244

 
 
 
 
 
 
 
At or for the Nine Months Ended 
 September 30, 2013
 
 

 
 

 
 

 
 
 
 
 
 
 
Balance at beginning of period
 
$

 
$
629,200

 
$
629,200

Additions
 
437,604

 

 
437,604

Accretion
 
(54,190
)
 
(97,616
)
 
(151,806
)
Reclassifications from nonaccretable difference (c)
 

 
304,575

 
304,575

Disposals of finance receivables (b)
 
(21,142
)
 
(24,960
)
 
(46,102
)
Balance at end of period
 
$
362,272

 
$
811,199

 
$
1,173,471

                                      
(a)
Accretion on our purchased credit impaired finance receivables for the three and nine months ended September 30, 2014 includes $11.2 million and $11.4 million, respectively, of accretion on purchased credit impaired finance receivables held for sale, which is reported as interest income on finance receivables held for sale originated as held for investment.

(b)
Disposals of finance receivables represent finance charges forfeited due to purchased credit impaired finance receivables charged-off during the period.

(c)
Reclassifications from (to) nonaccretable difference represent the increases (decreases) in accretion resulting from higher (lower) estimated undiscounted cash flows.



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Table of Contents

TROUBLED DEBT RESTRUCTURED FINANCE RECEIVABLES

Information regarding TDR finance receivables held for investment and held for sale were as follows:
(dollars in thousands)
 
Real Estate Loans
 
 
 

September 30, 2014
 
 

 
 
 

TDR gross finance receivables (a) (b)
 
$
334,141

TDR net finance receivables (c)
 
$
335,512

Allowance for TDR finance receivable losses
 
$
31,205

 
 
 

December 31, 2013
 
 

 
 
 

TDR gross finance receivables (a)
 
$
1,375,230

TDR net finance receivables
 
$
1,380,223

Allowance for TDR finance receivable losses
 
$
176,455

                                      
(a)
As defined earlier in this Note.

(b)
TDR gross finance receivables at September 30, 2014 include $230.7 million of TDR finance receivables held for sale.

(c)
TDR net finance receivables at September 30, 2014 includes $231.6 million of TDR finance receivables held for sale.

We have no commitments to lend additional funds on our TDR finance receivables.

TDR average net receivables held for investment and held for sale and finance charges recognized on TDR finance receivables held for investment and held for sale were as follows:
(dollars in thousands)
 
Three Months 
 Ended 
 September 30, 
 2014
 
Three Months 
 Ended 
 September 30, 
 2013
 
Nine Months 
 Ended 
 September 30, 
 2014
 
Nine Months 
 Ended 
 September 30, 
 2013
 
 
 
 
Revised
 
 
 
Revised
Real Estate Loans
 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
TDR average net receivables (a)
 
$
799,353

 
$
1,206,729

 
$
1,194,193

 
$
1,055,652

TDR finance charges recognized (b)
 
$
10,071

 
$
16,736

 
$
44,896

 
$
45,792

                                      
(a)
TDR average net receivables for the three and nine months ended September 30, 2014 include $411.1 million of TDR average net receivables held for sale, which reflect a two-month average since the real estate loans were transferred to finance receivables held for sale on August 1, 2014.

(b)
TDR finance charges recognized for the three and nine months ended September 30, 2014 include $3.1 million of interest income on TDR finance receivables held for sale.

The impact of the transfers of finance receivables held for investment to finance receivables held for sale and the subsequent sales of finance receivables held for sale during the first half of 2014 was immaterial since the loans were transferred and sold within the same months.


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Information regarding the new volume of the TDR finance receivables held for investment and held for sale were as follows:
(dollars in thousands)
 
Three Months 
 Ended 
 September 30, 
 2014
 
Three Months 
 Ended 
 September 30, 
 2013
 
Nine Months 
 Ended 
 September 30, 
 2014
 
Nine Months 
 Ended 
 September 30, 
 2013
 
 
 
 
Revised
 
 
 
Revised
Real Estate Loans
 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
Number of TDR accounts (a)
 
405

 
1,621

 
2,301

 
5,773

Pre-modification TDR net finance receivables (b)
 
$
28,665

 
$
131,865

 
$
211,088

 
$
451,697

Post-modification TDR net finance receivables (b)
 
$
29,348

 
$
140,333

 
$
200,154

 
$
483,233

                                      
(a)
Number of new TDR accounts for the three and nine months ended September 30, 2014 includes 89 new TDR accounts that were held for sale.

(b)
TDR net finance receivables for the three and nine months ended September 30, 2014 include $6.0 million of pre-modification and $6.5 million of post-modification TDR net finance receivables held for sale.

Net finance receivables held for investment and held for sale 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) were as follows:
(dollars in thousands)
 
Three Months 
 Ended 
 September 30, 
 2014
 
Three Months 
 Ended 
 September 30, 
 2013
 
Nine Months 
 Ended 
 September 30, 
 2014
 
Nine Months 
 Ended 
 September 30, 
 2013
 
 
 

 
Revised
 
 

 
Revised
Real Estate Loans
 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
Number of TDR accounts (a)
 
54

 
370

 
488

 
797

TDR net finance receivables (a) (b)
 
$
2,788

 
$
25,848

 
$
31,465

 
$
59,809

                                      
(a)
Number and amount of TDR net finance receivables for the three and nine months ended September 30, 2014 that defaulted during the previous 12 month period include 30 TDR accounts that were held for sale totaling $1.8 million.

(b)
Represents the corresponding balance of TDR net finance receivables at the end of the month in which they defaulted.


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Table of Contents

3. Allowance for Finance Receivable Losses    

Changes in the allowance for finance receivable losses by finance receivable type were as follows:
(dollars in thousands)
 
Personal
Loans
 
SpringCastle
Portfolio
 
Real
Estate Loans
 
Retail
Sales Finance
 
Consolidated Total
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended 
 September 30, 2014
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
107,030

 
$
710

 
$
259,182

 
$
1,350

 
$
368,272

Provision for finance receivable losses (a)
 
57,990

 
28,330

 
15,982

 
669

 
102,971

Charge-offs
 
(47,625
)
 
(31,533
)
 
(13,159
)
 
(1,199
)
 
(93,516
)
Recoveries
 
7,094

 
2,812

 
962

 
374

 
11,242

Reduction in the carrying value of real estate loans transferred to finance receivables held for sale (b)
 

 

 
(225,333
)
 

 
(225,333
)
Balance at end of period
 
$
124,489

 
$
319

 
$
37,634

 
$
1,194

 
$
163,636

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended 
 September 30, 2013 - Revised
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
60,250

 
$

 
$
180,565

 
$
920

 
$
241,735

Provision for finance receivable losses (a)
 
39,747

 
60,662

 
60,012

 
1,843

 
162,264

Charge-offs
 
(32,528
)
 
(61,470
)
 
(33,384
)
 
(2,032
)
 
(129,414
)
Recoveries
 
2,136

 
2,210

 
1,326

 
294

 
5,966

Balance at end of period
 
$
69,605

 
$
1,402

 
$
208,519

 
$
1,025

 
$
280,551

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended 
 September 30, 2014
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
94,880

 
$
1,056

 
$
235,549

 
$
1,840

 
$
333,325

Provision for finance receivable losses (a)
 
151,445

 
121,680

 
103,408

 
2,663

 
379,196

Charge-offs
 
(139,450
)
 
(133,044
)
 
(67,099
)
 
(4,310
)
 
(343,903
)
Recoveries (c)
 
17,614

 
10,627

 
5,788

 
1,001

 
35,030

Reduction in the carrying value of real estate loans transferred to finance receivables held for sale (b)
 

 

 
(240,012
)
 

 
(240,012
)
Balance at end of period
 
$
124,489


$
319


$
37,634


$
1,194


$
163,636

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended 
 September 30, 2013 - Revised
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
66,580

 
$

 
$
113,813

 
$
2,260

 
$
182,653

Provision for finance receivable losses (a)
 
64,344

 
78,459

 
200,492

 
(4,234
)
 
339,061

Charge-offs (d)
 
(106,162
)
 
(79,267
)
 
(121,398
)
 
(7,338
)
 
(314,165
)
Recoveries (e)
 
44,843

 
2,210

 
15,612

 
10,337

 
73,002

Balance at end of period
 
$
69,605

 
$
1,402

 
$
208,519

 
$
1,025

 
$
280,551



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(a)
Components of provision for finance receivable losses on our real estate loans were as follows:
(dollars in thousands)
 
Three Months 
 Ended 
 September 30, 
 2014
 
Three Months 
 Ended 
 September 30, 
 2013
 
Nine Months 
 Ended 
 September 30, 
 2014
 
Nine Months 
 Ended 
 September 30, 
 2013
 
 
 
 
Revised
 
 
 
Revised
Real estate loans
 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
Provision for finance receivable losses
 
 

 
 

 
 

 
 

Non-credit impaired finance receivables
 
$
6,246

 
$
17,946

 
$
32,266

 
$
63,037

Purchased credit impaired finance receivables
 
3,009

 
21,191

 
28,785

 
60,708

TDR finance receivables
 
6,727

 
20,875

 
42,357

 
76,747

Total
 
$
15,982

 
$
60,012

 
$
103,408

 
$
200,492


(b)
During the three and nine months ended September 30, 2014, we reduced the carrying value of certain real estate loans to $5.4 billion and $6.7 billion, respectively, as a result of the transfers of these loans from finance receivables held for investment to finance receivables held for sale due to management’s intent to no longer hold these finance receivables for the foreseeable future.

(c)
Recoveries during the nine months ended September 30, 2014 included $2.2 million of real estate loan recoveries resulting from a sale of previously charged-off real estate loans in March 2014, net of a $0.2 million reserve for subsequent buybacks.

(d)
Effective March 31, 2013, we charge off to the allowance for finance receivable losses personal loans that are 180 days past due. Previously, we charged-off to the allowance for finance receivable losses personal loans on which payments received in the prior six months totaled less than 5% of the original loan amount. As a result of this change, we recorded $13.3 million of additional charge-offs in March 2013.

(e)
Recoveries during the nine months ended September 30, 2013 included $39.6 million ($23.8 million of personal loan recoveries, $9.9 million of real estate loan recoveries, and $5.9 million of retail sales finance recoveries) resulting from a sale of previously charged-off finance receivables in June 2013, net of a $1.6 million adjustment for the subsequent buyback of certain finance receivables.

Included in the allowance for finance receivable losses are allowances associated with securitizations that totaled $67.8 million at September 30, 2014 and $153.7 million at December 31, 2013. See Note 8 for further discussion regarding our securitization transactions.

The carrying value charged-off for purchased credit impaired loans was as follows:
(dollars in thousands)
 
Three Months 
 Ended 
 September 30, 
 2014
 
Three Months 
 Ended 
 September 30, 
 2013
 
Nine Months 
 Ended 
 September 30, 
 2014
 
Nine Months 
 Ended 
 September 30, 
 2013
 
 
 
 
 
 
 
 
 
Charged-off against provision for finance receivable losses:
 
 

 
 

 
 

 
 

SCP Loans
 
$
7,837

 
$
31,544

 
$
39,368

 
$
48,717

FA Loans gross charge-offs*
 
$
2,017

 
$
10,074

 
$
14,944

 
$
31,737

                                      
*
Represents additional impairment recognized, subsequent to the establishment of the pools of purchased credit impaired loans, related to loans that have been foreclosed and transferred to real estate owned status.


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Table of Contents

The allowance for finance receivable losses and net finance receivables by type and by impairment method were as follows:
(dollars in thousands)
 
Personal
Loans
 
SpringCastle
Portfolio
 
Real
Estate Loans
 
Retail
Sales Finance
 
Total
 
 
 
 
 
 
 
 
 
 
 
September 30, 2014
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Allowance for finance receivable losses for finance receivables:
 
 

 
 

 
 

 
 

 
 

Collectively evaluated for impairment
 
$
124,489

 
$
319

 
$
1,916

 
$
1,194

 
$
127,918

Acquired with deteriorated credit quality (purchased credit impaired finance receivables)
 

 

 
4,513

 

 
4,513

Individually evaluated for impairment (TDR finance receivables)
 

 

 
31,205

 

 
31,205

Total
 
$
124,489

 
$
319

 
$
37,634

 
$
1,194

 
$
163,636

 
 
 
 
 
 
 
 
 
 
 
Finance receivables:
 
 

 
 

 
 

 
 

 
 

Collectively evaluated for impairment
 
$
3,607,209

 
$
1,712,178

 
$
520,712

 
$
56,900

 
$
5,896,999

Purchased credit impaired finance receivables
 

 
370,967

 
30,697

 

 
401,664

TDR finance receivables
 

 

 
103,890

 

 
103,890

Total
 
$
3,607,209

 
$
2,083,145

 
$
655,299

 
$
56,900

 
$
6,402,553

 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Allowance for finance receivable losses for finance receivables:
 
 

 
 

 
 

 
 

 
 

Collectively evaluated for impairment
 
$
94,880

 
$
1,056

 
$
1,760

 
$
1,840

 
$
99,536

Purchased credit impaired finance receivables
 

 

 
57,334

 

 
57,334

TDR finance receivables
 

 

 
176,455

 

 
176,455

Total
 
$
94,880

 
$
1,056

 
$
235,549

 
$
1,840

 
$
333,325

 
 
 
 
 
 
 
 
 
 
 
Finance receivables:
 
 

 
 

 
 

 
 

 
 

Collectively evaluated for impairment
 
$
3,171,704

 
$
1,975,023

 
$
5,287,745

 
$
98,911

 
$
10,533,383

Purchased credit impaired finance receivables
 

 
530,326

 
1,314,381

 

 
1,844,707

TDR finance receivables
 

 

 
1,380,223

 

 
1,380,223

Total
 
$
3,171,704

 
$
2,505,349

 
$
7,982,349

 
$
98,911

 
$
13,758,313


4. Finance Receivables Held for Sale    

We report finance receivables held for sale of $493.2 million at September 30, 2014, which are carried at lower of cost or fair value. We used the aggregate basis to determine the lower of cost or fair value of the finance receivables held for sale since the underlying real estate loans were presented to the buyers on a portfolio basis. We also separately present the interest income on our finance receivables held for sale as interest income on finance receivables held for sale originated as held for investment on our interim consolidated statements of operations, which totaled $47.7 million and $54.9 million for the three and nine months ended September 30, 2014, respectively.

On August 1, 2014, we transferred real estate loans with a carrying value of $5.4 billion (after the basis adjustment for the related allowance for finance receivable losses) from finance receivables held for investment to held for sale due to management’s intent to no longer hold these finance receivables for the foreseeable future. On August 29, 2014, we sold finance receivables held for sale with a carrying value of $4.0 billion and related trust assets and recorded a net gain at the time of sale of $604.9 million primarily resulting from the reversal of the remaining unaccreted push-down accounting basis for these finance receivables, less allowance for finance receivable losses that we established at the date of the Fortress Acquisition. The net gain on this sale included proceeds of $38.8 million from the related MSR Sale. On September 30, 2014,

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Table of Contents

we sold finance receivables held for sale with a carrying value of $856.4 million and related trust assets and recorded a net gain at the time of sale of $36.5 million primarily resulting from the reversal of the remaining unaccreted push-down accounting basis for these finance receivables, less allowance for finance receivable losses that we established at the date of the Fortress Acquisition.

On June 1, 2014, we transferred real estate loans with a carrying value of $451.2 million (after the basis adjustment for the related allowance for finance receivable losses) from finance receivables held for investment to held for sale due to management’s intent to no longer hold these finance receivables for the foreseeable future. On June 30, 2014, we sold finance receivables held for sale with a carrying value of $444.4 million and related trust assets and recorded a net gain at the time of sale of $34.8 million primarily resulting from the reversal of the remaining unaccreted push-down accounting basis for these finance receivables, less allowance for finance receivable losses that we established at the date of the Fortress Acquisition.

On March 1, 2014, we transferred real estate loans with a carrying value of $825.2 million (after the basis adjustment for the related allowance for finance receivable losses) from finance receivables held for investment to held for sale due to management’s intent to no longer hold these finance receivables for the foreseeable future. On March 31, 2014, we sold finance receivables held for sale with a carrying value of $814.8 million and related trust assets and recorded a net gain at the time of sale of $55.2 million primarily resulting from the reversal of the remaining unaccreted push-down accounting basis for these finance receivables, less allowance for finance receivable losses that we established at the date of the Fortress Acquisition.

See Note 1 for further information on these sales. We did not have any transfer activity between finance receivables held for investment to finance receivables held for sale during the first nine months of 2013.

LOAN REPURCHASES

We repurchased four loans for $0.6 million during the three months ended September 30, 2014 and nine loans for $1.5 million during the nine months ended September 30, 2014. We repurchased two loans for $0.3 million during the three months ended September 30, 2013 and 19 loans for $2.8 million during the nine months ended September 30, 2013. In each period, we repurchased the loans that were previously sold to HSBC because these loans were reaching the defined delinquency limits or had breached the contractual representations and warranties under the loan sale agreements. At September 30, 2014, there were no unresolved recourse requests.

During the third quarter of 2014, we established a reserve for sales recourse obligations of $9.9 million related to the sales of real estate loans with a total carrying value of $6.1 billion during the first nine months of 2014. As of September 30, 2014, we had no repurchase activity or recourse losses associated with these sales. However, we will continue to monitor any repurchase activity in the future and will adjust the reserve accordingly.

The activity in our reserve for sales recourse obligations associated with the real estate loan sales during the first nine months of 2014 and the loans that were previously sold to HSBC were as follows:
(dollars in thousands)
 
At or for the Three Months 
 Ended 
 September 30, 
 2014
 
At or for the Three Months 
 Ended 
 September 30, 
 2013
 
At or for the Nine Months 
 Ended 
 September 30, 
 2014
 
At or for the Nine Months 
 Ended 
 September 30, 
 2013
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
4,724

 
$
4,766

 
$
4,702

 
$
4,863

Provision for recourse obligations
 
8,543

 

 
8,706

 
322

Recourse losses
 
(70
)
 
(42
)
 
(211
)
 
(461
)
Balance at end of period
 
$
13,197

 
$
4,724

 
$
13,197

 
$
4,724




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Table of Contents

5. Investment Securities    

AVAILABLE-FOR-SALE SECURITIES

Cost/amortized cost, unrealized gains and losses, and fair value of available-for-sale securities by type were as follows:
(dollars in thousands)
 
Cost/
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
 
 
 
 
 
 
 
 
September 30, 2014
 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
Fixed maturity available-for-sale securities:
 
 

 
 

 
 

 
 

Bonds:
 
 

 
 

 
 

 
 

U.S. government and government sponsored entities
 
$
55,427

 
$
930

 
$
(159
)
 
$
56,198

Obligations of states, municipalities, and political subdivisions
 
115,916

 
2,618

 
(82
)
 
118,452

Corporate debt
 
258,172

 
11,466

 
(1,200
)
 
268,438

Mortgage-backed, asset-backed, and collateralized:
 
 

 
 

 
 

 
 
Residential mortgage-backed securities (“RMBS”)
 
77,845

 
2,379

 
(42
)
 
80,182

Commercial mortgage-backed securities (“CMBS”)
 
23,231

 
83

 
(149
)
 
23,165

Collateralized debt obligations (“CDO”)/Asset-backed securities (“ABS”)
 
21,582

 
34

 
(51
)
 
21,565

Total
 
552,173

 
17,510

 
(1,683
)
 
568,000

Preferred stock
 
7,163

 
84

 
(204
)
 
7,043

Other long-term investments*
 
1,306

 
131

 
(7
)
 
1,430

Common stocks
 
850

 

 

 
850

Total
 
$
561,492

 
$
17,725

 
$
(1,894
)
 
$
577,323

 
 
 
 
 
 
 
 
 
December 31, 2013
 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
Fixed maturity available-for-sale securities:
 
 

 
 

 
 

 
 

Bonds:
 
 

 
 

 
 

 
 

U.S. government and government sponsored entities
 
$
59,800

 
$
565

 
$
(681
)
 
$
59,684

Obligations of states, municipalities, and political subdivisions
 
101,913

 
1,703

 
(80
)
 
103,536

Corporate debt
 
247,793

 
6,143

 
(2,191
)
 
251,745

Mortgage-backed, asset-backed, and collateralized:
 
 

 
 

 
 

 
 
RMBS
 
82,406

 
1,931

 
(559
)
 
83,778

CMBS
 
10,931

 
77

 
(32
)
 
10,976

CDO/ABS
 
10,200

 
23

 
(26
)
 
10,197

Total
 
513,043

 
10,442

 
(3,569
)
 
519,916

Preferred stock
 
7,844

 

 
(39
)
 
7,805

Other long-term investments*
 
1,394

 

 
(125
)
 
1,269

Common stocks
 
850

 

 

 
850

Total
 
$
523,131

 
$
10,442

 
$
(3,733
)
 
$
529,840

                                      
*
Excludes interest in a limited partnership that we account for using the equity method ($0.5 million at September 30, 2014 and $0.6 million at December 31, 2013).


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Table of Contents

As of September 30, 2014 and December 31, 2013, we had no available-for-sale securities with other-than-temporary impairments recognized in accumulated other comprehensive income or loss.

Fair value and unrealized losses on investment securities by type and length of time in a continuous unrealized loss position were as follows:
 
 
Less Than 12 Months
 
12 Months or Longer
 
Total
(dollars in thousands)
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2014
 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
Bonds:
 
 

 
 

 
 

 
 

 
 

 
 

U.S. government and government sponsored entities
 
$
17,827

 
$
(53
)
 
$
13,468

 
$
(106
)
 
$
31,295

 
$
(159
)
Obligations of states, municipalities, and political subdivisions
 
17,917

 
(54
)
 
1,053

 
(28
)
 
18,970

 
(82
)
Corporate debt
 
34,154

 
(358
)
 
15,356

 
(842
)
 
49,510

 
(1,200
)
RMBS
 
12,310

 
(19
)
 
2,635

 
(23
)
 
14,945

 
(42
)
CMBS
 
18,605

 
(149
)
 
166

 

 
18,771

 
(149
)
CDO/ABS
 
7,440

 
(51
)
 
223

 

 
7,663

 
(51
)
Total
 
108,253

 
(684
)
 
32,901

 
(999
)
 
141,154

 
(1,683
)
Preferred stock
 
6,019

 
(204
)
 

 

 
6,019

 
(204
)
Other long-term investments
 

 

 
104

 
(7
)
 
104

 
(7
)
Total
 
$
114,272

 
$
(888
)
 
$
33,005

 
$
(1,006
)
 
$
147,277

 
$
(1,894
)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
Bonds:
 
 

 
 

 
 

 
 

 
 

 
 

U.S. government and government sponsored entities
 
$
45,264

 
$
(681
)
 
$

 
$

 
$
45,264

 
$
(681
)
Obligations of states, municipalities, and political subdivisions
 
14,756

 
(80
)
 

 

 
14,756

 
(80
)
Corporate debt
 
71,312

 
(1,539
)
 
11,772

 
(652
)
 
83,084

 
(2,191
)
RMBS
 
18,322

 
(559
)
 

 

 
18,322

 
(559
)
CMBS
 
5,517

 
(32
)
 

 

 
5,517

 
(32
)
CDO/ABS
 
5,123

 
(26
)
 

 

 
5,123

 
(26
)
Total
 
160,294

 
(2,917
)
 
11,772

 
(652
)
 
172,066

 
(3,569
)
Preferred stock
 
7,805

 
(39
)
 

 

 
7,805

 
(39
)
Other long-term investments
 
1,269

 
(125
)
 

 

 
1,269

 
(125
)
Total
 
$
169,368

 
$
(3,081
)
 
$
11,772

 
$
(652
)
 
$
181,140

 
$
(3,733
)

We continue to monitor unrealized loss positions for potential impairments. During the nine months ended September 30, 2014, we did not recognize any other-than-temporary impairment credit loss write-downs to investment revenues. During the nine months ended September 30, 2013, we recognized other-than-temporary impairment credit loss write-downs to investment revenues on RMBS totaling $26 thousand.


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Changes in the cumulative amount of credit losses (recognized in earnings) on other-than-temporarily impaired available-for-sale securities were as follows:
(dollars in thousands)
 
At or for the Three Months 
 Ended 
 September 30, 
 2014
 
At or for the Three Months 
 Ended 
 September 30, 
 2013
 
At or for the Nine Months 
 Ended 
 September 30, 
 2014
 
At or for the Nine Months 
 Ended 
 September 30, 
 2013
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
1,318

 
$
1,523

 
$
1,523

 
$
1,650

Additions:
 
 

 
 

 
 

 
 

Due to other-than-temporary impairments:
 
 

 
 

 
 

 
 

Impairment previously recognized
 

 

 

 
26

Reductions:
 
 

 
 

 
 

 
 

Realized due to dispositions with no prior intention to sell
 

 

 
(205
)
 
(153
)
Balance at end of period
 
$
1,318

 
$
1,523

 
$
1,318

 
$
1,523


The fair values of available-for-sale securities sold or redeemed and the resulting realized gains, realized losses, and net realized gains (losses) were as follows:
(dollars in thousands)
 
Three Months 
 Ended 
 September 30, 
 2014
 
Three Months 
 Ended 
 September 30, 
 2013
 
Nine Months 
 Ended 
 September 30, 
 2014
 
Nine Months 
 Ended 
 September 30, 
 2013
 
 
 
 
Revised
 
 
 
Revised
 
 
 
 
 
 
 
 
 
Fair value
 
$
107,327

 
$
51,241

 
$
214,811

 
$
491,188

 
 
 
 
 
 
 
 
 
Realized gains
 
$
4,619

 
$
174

 
$
7,217

 
$
3,203

Realized losses
 
(71
)
 
(270
)
 
(343
)
 
(665
)
Net realized gains (losses)
 
$
4,548

 
$
(96
)
 
$
6,874

 
$
2,538


Contractual maturities of fixed-maturity available-for-sale securities at September 30, 2014 were as follows:
 
 
Fair
 
Amortized
(dollars in thousands)
 
Value
 
Cost
 
 
 
 
 
Fixed maturities, excluding mortgage-backed, asset-backed, and collateralized securities:
 
 

 
 

Due in 1 year or less
 
$
29,862

 
$
29,267

Due after 1 year through 5 years
 
182,638

 
178,633

Due after 5 years through 10 years
 
94,638

 
93,428

Due after 10 years
 
135,950

 
128,187

Mortgage-backed, asset-backed, and collateralized securities
 
124,912

 
122,658

Total
 
$
568,000

 
$
552,173


Actual maturities may differ from contractual maturities since borrowers may have the right to call or prepay obligations. We may sell investment securities before maturity to achieve corporate requirements and investment strategies.

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TRADING SECURITIES

The fair value of trading securities by type was as follows:
(dollars in thousands)
 
September 30,
2014
 
December 31,
2013
 
 
 
 
 
Fixed maturity trading securities:
 
 

 
 

Bonds:
 
 

 
 

U.S. government and government sponsored entities
 
$
136,681

 
$

Obligations of states, municipalities, and political subdivisions
 
88,407

 

Corporate debt
 
449,104

 
1,837

Mortgage-backed, asset-backed, and collateralized:
 
 

 
 

RMBS
 
65,103

 
10,671

CMBS
 
107,937

 
29,897

CDO/ABS
 
298,342

 
9,249

Total
 
$
1,145,574

 
$
51,654


The net unrealized and realized gains (losses) on our trading securities were as follows:
(dollars in thousands)
 
Three Months 
 Ended 
 September 30, 
 2014
 
Three Months 
 Ended 
 September 30, 
 2013
 
Nine Months 
 Ended 
 September 30, 
 2014
 
Nine Months 
 Ended 
 September 30, 
 2013
 
 
 
 
Revised
 
 
 
Revised
 
 
 
 
 
 
 
 
 
Net unrealized losses on trading securities held at period end
 
$
(2,044
)
 
$
(224
)
 
$
(1,128
)
 
$
(433
)
Net realized gains on trading securities sold or redeemed
 
246

 
63

 
273

 
174

Total
 
$
(1,798
)
 
$
(161
)
 
$
(855
)
 
$
(259
)

6. Transactions with Affiliates of Fortress or AIG    

SUBSERVICING AND REFINANCE AGREEMENTS

Nationstar subservices the real estate loans of certain indirect subsidiaries (collectively, the “Owners”). Investment funds managed by affiliates of Fortress indirectly own a majority interest in Nationstar.

The Owners paid Nationstar fees for its subservicing and to facilitate the repayment of our real estate loans through refinancings with other lenders as follows:
(dollars in thousands)
 
Three Months 
 Ended 
 September 30, 
 2014
 
Three Months 
 Ended 
 September 30, 
 2013
 
Nine Months 
 Ended 
 September 30, 
 2014
 
Nine Months 
 Ended 
 September 30, 
 2013
 
 
 
 
 
 
 
 
 
Subservicing fees
 
$
1,221

 
$
2,132

 
$
4,922

 
$
6,556

Refinancing concessions
 
$

 
$

 
$

 
$
265


As a result of the recent sales of our real estate loans, some of which were serviced by Nationstar, and the MSR Sale our exposure to these affiliated services is reduced.

INVESTMENT MANAGEMENT AGREEMENT

Logan Circle Partners, L.P. (“Logan Circle”) provides investment management services for our investments. Logan Circle is a wholly owned subsidiary of Fortress. Costs and fees incurred for these investment management services totaled $0.3 million and $0.8 million for the three and nine months ended September 30, 2014, respectively, compared to $0.2 million and $0.9 million for the three and nine months ended September 30, 2013, respectively.

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REINSURANCE AGREEMENTS

Merit Life Insurance Co. (“Merit”), our indirect wholly owned subsidiary, enters into reinsurance agreements with subsidiaries of AIG, for reinsurance of various group annuity, credit life, and credit accident and health insurance where Merit reinsures the risk of loss. The reserves for this business fluctuate over time and, in some instances, are subject to recapture by the insurer. Reserves recorded by Merit for reinsurance agreements with subsidiaries of AIG totaled $43.9 million at September 30, 2014 and $45.6 million at December 31, 2013.

JOINT VENTURE

Certain subsidiaries of New Residential Investment Corp. (“NRZ”), own a 30% equity interest in the joint venture established in conjunction with the purchase of the SpringCastle Portfolio on April 1, 2013. NRZ is managed by an affiliate of Fortress.

THIRD STREET DISPOSITION

As discussed in Note 1, on March 6, 2014, we entered into an agreement to sell, subject to certain closing conditions, all of our interest in the mortgage-backed retained certificates related to a securitization transaction completed in 2009 to MLPFS for a price of $737.2 million. Concurrently, NRZ and MLPFS entered into an agreement pursuant to which NRZ agreed to purchase approximately 75% of these retained certificates. NRZ is managed by an affiliate of Fortress. See Note 1 for further information on this sale.

MSR SALE

As discussed in Note 1, on August 6, 2014, SFC and MorEquity entered into an agreement, dated and effective August 1, 2014, to sell the servicing rights of the mortgage loans primarily underlying the mortgage securitizations completed during 2011 through 2013 to Nationstar for a purchase price of $38.8 million. Approximately 50% of the proceeds of the MSR Sale were received on August 29, 2014, the closing date, and 40% were received on October 23, 2014. See Note 1 and Note 20 for further information on the MSR Sale. Investment funds managed by affiliates of Fortress indirectly own a majority interest in Nationstar.

7. Long-term Debt    

Principal maturities of long-term debt (excluding projected securitization repayments by period) by type of debt at September 30, 2014 were as follows:
(dollars in thousands)
 
Retail
Notes
 
Medium
Term
Notes
 
Securitizations
 
Junior
Subordinated
Debt
 
Total
 
 
 
 
 
 
 
 
 
 
 
Interest rates (a)
 
6.00%-7.50%
 
5.40%-8.25%
 
1.76%-5.00%
 
6.00
%
 
 

 
 
 
 
 
 
 
 
 
 
 
Fourth quarter 2014
 
$
335,486

 
$

 
$

 
$

 
$
335,486

First quarter 2015
 
16,575

 

 

 

 
16,575

Second quarter 2015
 
7,092

 

 

 

 
7,092

Third quarter 2015
 
23,544

 

 

 

 
23,544

Remainder of 2015
 

 
750,000

 

 

 
750,000

2016
 

 
375,000

 

 

 
375,000

2017
 

 
2,360,837

 

 

 
2,360,837

2018
 

 

 

 

 

2019-2067
 

 
1,250,000

 

 
350,000

 
1,600,000

Securitizations (b)
 

 

 
3,055,588

 

 
3,055,588

Total principal maturities
 
$
382,697

 
$
4,735,837

 
$
3,055,588

 
$
350,000

 
$
8,524,122

 
 
 
 
 
 
 
 
 
 
 
Total carrying amount (c)
 
$
379,585

 
$
4,253,867

 
$
3,052,972

 
$
171,613

 
$
7,858,037

                                      
(a)
The interest rates shown are the range of contractual rates in effect at September 30, 2014.


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(b)
Securitizations are not included in above maturities by period due to their variable monthly repayments. See Note 8 for further information on our long-term debt associated with securitizations.

(c)
The net carrying amount of our long-term debt associated with certain securitizations that were either 1) issued at a premium or discount or 2) revalued at a premium or discount based on its fair value at the time of the Fortress Acquisition or 3) recorded at fair value on a recurring basis in circumstances when the embedded derivative within the securitization structure cannot be separately accounted for at fair value.

GUARANTY AGREEMENTS

On December 30, 2013, SHI entered into Guaranty Agreements whereby it agreed to fully and unconditionally guarantee the payments of principal, premium (if any), and interest on approximately $5.2 billion aggregate principal amount of senior notes on a senior basis and $350.0 million aggregate principal amount of a junior subordinated debenture (collectively, the “notes”) on a junior subordinated basis issued by SFC. The notes consist of the following: 8.250% Senior Notes due 2023; 7.750% Senior Notes due 2021; 6.00% Senior Notes due 2020; a 60-year junior subordinated debenture; and all senior notes outstanding on December 30, 2013, issued pursuant to the Indenture dated as of May 1, 1999 (the “1999 Indenture”), between SFC and Wilmington Trust, National Association (the successor trustee to Citibank N.A.). As of December 30, 2013, approximately $3.9 billion aggregate principal amount of senior notes were outstanding under the 1999 Indenture. The 60-year junior subordinated debenture underlies the trust preferred securities sold by a trust sponsored by SFC. On December 30, 2013, SHI entered into a Trust Guaranty Agreement whereby it agreed to fully and unconditionally guarantee the related payment obligations under the trust preferred securities. As of September 30, 2014, approximately $5.1 billion aggregate principal amount of senior notes, including $3.9 billion aggregate principal amount of senior notes under the 1999 Indenture, and $350.0 million aggregate principal amount of a junior subordinated debenture were outstanding.

REPURCHASE OR REPAYMENT OF DEBT

In connection with our liability management efforts, we or our affiliates from time to time have purchased, or may in the future purchase, portions of our outstanding indebtedness. Any such purchases may be made 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 or any such affiliates may determine. Our plans are dynamic and we may adjust our plans in response to changes in our expectations and changes in market conditions.

On March 31, 2014, Springleaf Financial Funding Company (“SFFC”) prepaid, without penalty or premium, the entire $750.0 million outstanding principal balance of the secured term loan, plus accrued and unpaid interest. Effective upon the prepayment, all obligations of SFFC, SFC, and most of the consumer finance operating subsidiaries of SFC under the secured term loan (other than contingent reimbursement obligations and indemnity obligations) were terminated and all guarantees and security interests were released.

8. Variable Interest Entities    

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 securitization transactions. Since these transactions involve securitization trusts required to be consolidated, the securitized assets and related liabilities are included in our condensed consolidated financial statements and are accounted for as secured borrowings. As a result of the sales of the Company’s beneficial interests in the mortgage-backed retained certificates related to its previous mortgage securitization transactions, we deconsolidated the underlying real estate loans and previously issued securitized interests which were reported in long-term debt.

CONSOLIDATED VIES

We evaluated the securitization trusts and determined that these entities are VIEs of which we are the primary beneficiary; therefore, we consolidate such entities. We are deemed to be the primary beneficiaries of these VIEs because we have the ability to direct the activities of each VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses and the right to receive benefits that are potentially significant to the VIE. Such ability stems from SHI’s and/or its affiliates’ contractual right to service the securitized finance receivables. Our retained subordinated notes and residual interest trust certificates expose us to potentially significant losses and potentially significant returns.

The remaining asset-backed securities issued by the securitization trusts are supported by the expected cash flows from the underlying securitized finance receivables. Cash inflows from these finance receivables are distributed to investors and service

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providers in accordance with each transaction’s contractual priority of payments (“waterfall”) and, as such, most of these inflows must be directed first to service and repay each trust’s senior notes or certificates held principally by third-party investors. After these senior obligations are extinguished, substantially all cash inflows will be directed to the subordinated notes until fully repaid and, thereafter, to the residual interest that we own in each trust. We retain interests in these securitization transactions, including senior and subordinated securities issued by the VIEs and residual interests. We retain credit risk in the securitizations because our retained interests include the most subordinated interest in the securitized assets, which are the first to absorb credit losses on the securitized assets. We expect that any credit losses in the pools of securitized assets will likely be limited to our subordinated and residual retained interests. We have no obligation to repurchase or replace qualified securitized assets that subsequently become delinquent or are otherwise in default.

The carrying amounts of consolidated VIE assets and liabilities associated with our securitization trusts were as follows:
(dollars in thousands)
 
September 30,
2014
 
December 31,
2013
 
 
 
 
 
Assets
 
 

 
 

Finance receivables:
 
 

 
 

Personal loans
 
$
1,841,139

 
$
1,572,070

SpringCastle Portfolio
 
$
2,083,145

 
$
2,505,349

Real estate loans
 
$

 
$
5,694,176

Allowance for finance receivable losses
 
$
67,800

 
$
153,657

Restricted cash
 
$
295,693

 
$
522,752

 
 
 
 
 
Liabilities
 
 

 
 

Long-term debt
 
$
3,052,972

 
$
7,288,535


2014 Consumer Loan Securitizations

Whitford Brook 2014-VFN1 Securitization. On June 26, 2014, we established a private securitization facility in which Whitford Brook Funding Trust 2014-VFN1 (the “Whitford Brook 2014-VFN1 Trust”), a wholly owned special purpose vehicle of SFC, may issue variable funding notes with a maximum principal balance of $300 million to be backed by personal loans acquired from subsidiaries of SFC. The notes will be funded over a three-year period, subject to the satisfaction of customary conditions precedent. During this period, the notes can also be paid down to the required minimum balance of $100 million and then redrawn. Following the three-year funding period, the principal amount of the notes will be reduced as cash payments are received on the underlying personal loans and will be due and payable in full in July 2018, unless an option to prepay is elected between July 2017 and July 2018. At September 30, 2014, the required minimum balance of $100 million was drawn under the notes.

2014-A Securitization. On March 26, 2014, we completed a private securitization transaction in which a wholly owned special purpose vehicle of SFC sold $559.3 million of notes backed by personal loans held by Springleaf Funding Trust 2014-A (the “2014-A Trust”), at a 2.62% weighted average yield. We sold the asset-backed notes for $559.2 million, after the price discount but before expenses and a $6.4 million interest reserve requirement. We initially retained $32.9 million of the 2014-A Trust’s subordinate asset-backed notes.

Sales of Previously Retained Notes

As discussed in Note 1, the Company’s remaining beneficial interests in the mortgage-backed retained certificates related to its previous mortgage securitization transactions were sold in four separate transactions on March 31, June 30, August 29, and September 30, 2014. As a result of these sales, we deconsolidated the securitization trusts holding the underlying real estate loans and previously issued securitized interests which were reported in long-term debt, as we no longer were considered the primary beneficiary.


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During the nine months ended September 30, 2013, we sold the following previously retained mortgage-backed and asset-backed notes:
(dollars in thousands)
 
Principal Amount of
Previously Retained Notes Issued
 
Carrying Amount of
Additional Debt Recorded
 
 
 
 
 
Mortgage Securitizations
 
 

 
 

SLFMT 2012-2
 
$
20,000

 
$
20,675

SLFMT 2012-3
 
$
7,500

 
$
7,753

SLFMT 2013-2
 
$
157,517

 
$
148,559

 
 
 
 
 
Consumer Securitizations
 
 
 
 
SLFMT 2013-B
 
$
114,000

 
$
111,578

 
 
 
 
 
SpringCastle Securitizations
 
 
 
 
SCFT 2013-1
 
$
372,000

 
$
357,120


Renewal of Midbrook 2013-VFN1 Securitization

On September 26, 2013, we established a private securitization facility in which Midbrook Funding Trust 2013-VFN1 (the “Midbrook 2013-VFN1 Trust”), a wholly owned special purpose vehicle of SFC, could issue variable funding notes with a maximum principal balance of $300 million to be backed by personal loans acquired from subsidiaries of SFC from time to time. No amounts were funded at closing, but could be funded from time to time over a one-year period, subject to the satisfaction of customary conditions precedent. During this period, the notes could also be paid down in whole or in part and then redrawn. Following the one-year funding period, the principal amount of the notes, if any, would amortize and would be due and payable in full in October 2017.

On June 13, 2014, we amended the note purchase agreement with Midbrook 2013-VFN1 Trust to extend the one-year funding period to a two-year funding period. Following the two-year funding period, the principal amount of the notes, if any, will be reduced as cash payments are received on the underlying personal loans and will be due and payable in full in July 2019. The maximum principal balance of variable funding notes that can be issued remained at $300 million. No amounts have been funded.

Repayment of 2013-BAC Trust Notes

On September 25, 2013, we completed a private securitization transaction in which Springleaf Funding Trust 2013-BAC, a wholly owned special purpose vehicle of SFC, issued $500 million of notes backed by an amortizing pool of personal loans acquired from subsidiaries of SFC. On March 27, 2014, we repaid the entire $231.3 million outstanding principal balance of the notes, plus accrued and unpaid interest.

VIE Interest Expense

Other than our retained subordinate and residual interests in the remaining consolidated securitization trusts, we are under no obligation, either contractually or implicitly, to provide financial support to these entities. Consolidated interest expense related to our VIEs for the three and nine months ended September 30, 2014 totaled $50.8 million and $180.3 million, respectively, compared to $64.0 million and $153.4 million for the three and nine months ended September 30, 2013, respectively.

DECONSOLIDATED VIES

As a result of the sales of the mortgage-backed retained certificates during the first nine months of 2014, we deconsolidated the securitization trusts holding the underlying real estate loans and previously issued securitized interests which were reported in long-term debt. The total carrying value of these real estate loans as of the sale dates was $5.2 billion. We have certain representations and warranties associated with these sales that may expose us to future losses. During the third quarter of 2014, we established a reserve for sales recourse obligations of $6.7 million related to these sales. As of September 30, 2014, we had no repurchase activity associated with these sales. However, we will continue to monitor any repurchase activity in the future and will adjust the reserve accordingly.


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9. Derivative Financial Instruments    

Our principal borrowing subsidiary is SFC. During the three and nine months ended September 30, 2014, SFC did not have any derivative activity.

In January 2013, we reclassified $0.2 million of deferred net gain from accumulated other comprehensive income or loss to interest expense related to SFC’s election to discontinue and terminate one of its cash flow hedges in 2012. On August 5, 2013, SFC terminated its remaining cross currency interest rate swap agreement with AIG Financial Products Corp., a subsidiary of AIG, and recorded a loss of $1.9 million in other revenues — other. Immediately following this termination, we had no derivative financial instruments.

For the three and nine months ended September 30, 2013, we recognized $1.0 million of net gains and $3.4 million of net losses, respectively, on SFC’s non-designated hedging instruments in other revenues — other.

Derivative adjustments included in other revenues — other consisted of the following:
(dollars in thousands)
 
Three Months 
 Ended 
 September 30, 
 2013
 
Nine Months 
 Ended 
 September 30, 
 2013
 
 
 
 
 
Mark to market gains (losses)
 
$
6,260

 
$
(8,244
)
Net interest income
 
1,701

 
9,161

Credit valuation adjustment gains
 
11

 
50

Other
 
(292
)
 
(292
)
Total
 
$
7,680

 
$
675


SFC was exposed to credit risk if counterparties to its swap agreement did not perform. SFC regularly monitored counterparty credit ratings throughout the term of the agreement. SFC’s exposure to market risk was limited to changes in the value of its swap agreement offset by changes in the value of the hedged debt. While SFC’s cross currency interest rate swap agreement mitigated economic exposure of related debt, it did not qualify as a cash flow or fair value hedge under U.S. GAAP.

10. Earnings Per Share    

The computation of earnings per share was as follows:
(dollars in thousands except earnings (loss) per share)
 
Three Months 
 Ended 
 September 30, 
 2014
 
Three Months 
 Ended 
 September 30, 
 2013
 
Nine Months 
 Ended 
 September 30, 
 2014
 
Nine Months 
 Ended 
 September 30, 
 2013
 
 
 
 
Revised
 
 
 
Revised
Numerator (basic and diluted):
 
 

 
 

 
 

 
 

Net income (loss) attributable to Springleaf Holdings, Inc.
 
$
426,750

 
$
(92,594
)
 
$
551,463

 
$
(46,030
)
Denominator:
 
 

 
 

 
 

 
 

Weighted average number of shares outstanding (basic)
 
$
114,788,439


$
100,000,000


$
114,788,439


$
100,000,000

Effect of dilutive securities
 
527,875




423,959



Weighted average number of shares outstanding (diluted)
 
$
115,316,314


$
100,000,000


$
115,212,398


$
100,000,000

Earnings (loss) per share:
 
 

 
 

 
 

 
 

Basic
 
$
3.72

 
$
(0.93
)
 
$
4.80

 
$
(0.46
)
Diluted
 
$
3.70

 
$
(0.93
)
 
$
4.79

 
$
(0.46
)

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 (“RSUs”) and awards.

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11. Accumulated Other Comprehensive Income    

Changes in accumulated other comprehensive income were as follows:
(dollars in thousands)
 
Unrealized
Gains (Losses)
Investment
Securities
 
Unrealized
Gains (Losses)
Cash Flow
Hedges
 
Retirement
Plan
Liabilities
Adjustments
 
Foreign
Currency
Translation
Adjustments
 
Total
Accumulated
Other
Comprehensive
Income
(Loss)
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended 
 September 30, 2014
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
14,580

 
$

 
$
20,153

 
$
3,086

 
$
37,819

Other comprehensive income (loss) before reclassifications
 
(2,503
)
 

 

 
761

 
(1,742
)
Reclassification adjustments from accumulated other comprehensive income
 
(1,788
)
 

 

 

 
(1,788
)
Balance at end of period
 
$
10,289

 
$

 
$
20,153

 
$
3,847

 
$
34,289

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended 
 September 30, 2013 - Revised
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
5,484

 
$

 
$
8,120

 
$
6,221

 
$
19,825

Other comprehensive loss before reclassifications
 
(291
)
 

 

 
(2,056
)
 
(2,347
)
Reclassification adjustments from accumulated other comprehensive income
 
231

 

 

 

 
231

Balance at end of period
 
$
5,424

 
$

 
$
8,120

 
$
4,165

 
$
17,709

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended 
 September 30, 2014
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
4,362

 
$

 
$
20,153

 
$
3,580

 
$
28,095

Other comprehensive income before reclassifications
 
9,840

 

 

 
267

 
10,107

Reclassification adjustments from accumulated other comprehensive income
 
(3,913
)
 

 

 

 
(3,913
)
Balance at end of period
 
$
10,289

 
$

 
$
20,153

 
$
3,847

 
$
34,289

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended 
 September 30, 2013 - Revised
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
14,121

 
$
104

 
$
8,120

 
$
4,127

 
$
26,472

Other comprehensive income (loss) before reclassifications
 
(7,233
)
 

 

 
38

 
(7,195
)
Reclassification adjustments from accumulated other comprehensive income
 
(1,464
)
 
(104
)
 

 

 
(1,568
)
Balance at end of period
 
$
5,424

 
$

 
$
8,120

 
$
4,165

 
$
17,709



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Table of Contents

Reclassification adjustments from accumulated other comprehensive income to the applicable line item on our condensed consolidated statements of operations were as follows:
(dollars in thousands)
 
Three Months 
 Ended 
 September 30, 
 2014
 
Three Months 
 Ended 
 September 30, 
 2013
 
Nine Months 
 Ended 
 September 30, 
 2014
 
Nine Months 
 Ended 
 September 30, 
 2013
 
 
 
 
Revised
 
 
 
Revised
Unrealized gains (losses) on investment securities:
 
 

 
 

 
 

 
 

Reclassification from accumulated other comprehensive income to investment revenues, before taxes
 
$
2,750

 
$
(355
)
 
$
6,019

 
$
2,253

Income tax effect
 
(962
)
 
124

 
(2,106
)
 
(789
)
Reclassification from accumulated other comprehensive income to investment revenues, net of taxes
 
1,788

 
(231
)
 
3,913

 
1,464

 
 
 
 
 
 
 
 
 
Unrealized gains on cash flow hedges:
 
 

 
 

 
 

 
 

Reclassification from accumulated other comprehensive income to interest expense, before taxes
 

 

 

 
160

Income tax effect
 

 

 

 
(56
)
Reclassification from accumulated other comprehensive income to interest expense, net of taxes
 

 

 

 
104

Total
 
$
1,788

 
$
(231
)
 
$
3,913

 
$
1,568


12. Income Taxes    

At September 30, 2014, we had a net deferred tax liability of $146.4 million, compared to $128.3 million at December 31, 2013. The increase in the net deferred tax liability was primarily due to the sales of the mortgage securitizations during the first nine months of 2014. We have a valuation allowance on our gross state deferred tax assets, net of a deferred federal tax benefit of $24.9 million, at September 30, 2014 compared to $23.8 million at December 31, 2013. We also had a valuation allowance against our United Kingdom and Puerto Rico operations of $22.2 million at September 30, 2014 and $21.4 million at December 31, 2013. The impact to our uncertain tax positions was immaterial.

The effective tax rate for the nine months ended September 30, 2014 was 32.8% compared to (5.2)% for the same period in 2013. The effective tax rate for the nine months ended September 30, 2014 differed from the federal statutory rate primarily due to the effect of the non-controlling interest in our joint venture, which decreased the effective tax rate by 3.6%, partially offset by the effect of our state income taxes, which increased the effective tax rate by 1.4%. The effective tax rate for the nine months ended September 30, 2013 differed from the federal statutory rate primarily due to the effect of the non-controlling interest in our joint venture.

13. Contingencies    

LEGAL CONTINGENCIES

In the normal course of business, the Company has been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions and other litigation arising in connection with its 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 identify certain legal actions where we believe a material loss to be reasonably possible and reasonably estimable, there can be no assurance that material losses will not be incurred from claims that we have not yet been notified of or are not yet determined to be probable or reasonably possible and reasonably estimable.

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 condensed 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.


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Table of Contents

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 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 condensed consolidated financial statements as a whole.

PAYMENT PROTECTION INSURANCE

Our United Kingdom subsidiary provides payments of compensation to its customers who have made claims concerning Payment Protection Insurance (“PPI”) policies sold in the normal course of business by insurance intermediaries. On April 20, 2011, the High Court in the United Kingdom handed down judgment supporting the Financial Services Authority (now known as the Financial Conduct Authority) (“FCA”) guidelines on the treatment of PPI complaints. In addition, the FCA issued a guidance consultation paper in March 2012 on the PPI customer contact letters. As a result, we have concluded that there are certain circumstances where customer contact and/or redress is appropriate; therefore, this activity is ongoing. The total reserves related to the estimated PPI claims were $22.1 million at September 30, 2014 and $33.5 million at December 31, 2013.

14. Benefit Plans    

PENSION AND POSTRETIREMENT PLANS

Effective December 31, 2012, the Springleaf Financial Services Retirement Plan (the “Retirement Plan”) and the CommoLoCo Retirement Plan (a defined benefit pension plan for our employees in Puerto Rico) were frozen. Our current and former employees will not lose any vested benefits in the Retirement Plan or the CommoLoCo Retirement Plan that accrued prior to January 1, 2013.

The following table presents the components of net periodic benefit cost with respect to our defined benefit pension plans and other postretirement benefit plans:
(dollars in thousands)
 
Three Months 
 Ended 
 September 30, 
 2014
 
Three Months 
 Ended 
 September 30, 
 2013
 
Nine Months 
 Ended 
 September 30, 
 2014
 
Nine Months 
 Ended 
 September 30, 
 2013
 
 
 
 
 
 
 
 
 
Pension
 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
Components of net periodic benefit cost:
 
 

 
 

 
 

 
 

Interest cost
 
$
3,805

 
$
3,589

 
$
11,441

 
$
10,769

Expected return on assets
 
(4,107
)
 
(3,874
)
 
(12,326
)
 
(11,622
)
Amortization of net loss
 
2

 
12

 
4

 
35

Net periodic benefit cost
 
$
(300
)
 
$
(273
)
 
$
(881
)
 
$
(818
)
 
 
 
 
 
 
 
 
 
Postretirement
 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
Components of net periodic benefit cost:
 
 

 
 

 
 

 
 

Service cost
 
$
20

 
$
81

 
$
64

 
$
242

Interest cost
 
21

 
64

 
73

 
193

Amortization of net gain
 
(81
)
 

 
(215
)
 

Net periodic benefit cost
 
$
(40
)
 
$
145

 
$
(78
)
 
$
435

 

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Table of Contents

15. Share-Based Compensation    

Total share-based compensation expense, net of forfeitures, for all stock-based awards during the three and nine months ended September 30, 2014 was $0.5 million and $4.1 million, respectively, compared to $131.3 million during the three and nine months ended September 30, 2013.

16. Segment Information    

Our segments coincide with how our businesses are managed. At September 30, 2014, our four segments include: Consumer, Insurance, Acquisitions and Servicing, and Real Estate. The Acquisitions and Servicing segment was added effective April 1, 2013, as a result of our co-investment in the SpringCastle Portfolio.

Management considers Consumer, Insurance, and Acquisitions and Servicing as our “Core Consumer Operations” and Real Estate as our “Non-Core Portfolio.”

Our segments are managed as follows:

Core Consumer Operations

Consumer — We originate and service personal loans (secured and unsecured) through two business divisions: branch operations and centralized internet lending. Branch operations primarily conduct business in 26 states, which are our core operating states. Our Centralized Internet Group (“CIG”) processes and underwrites loan applications that we receive through an internet portal. If the applicant is located near an existing branch (“in footprint”), CIG makes the credit decision regarding the application and then refers the customer to a nearby branch for closing, funding and servicing. If the applicant is not located near a branch (“out of footprint”), CIG originates the loan.

Insurance — We offer credit insurance (life insurance, accident and health insurance, and involuntary unemployment insurance), non-credit insurance, and ancillary products, such as warranty protection.

Acquisitions and Servicing — On April 1, 2013, we acquired the SpringCastle Portfolio through a joint venture in which we own a 47% equity interest. The SpringCastle Portfolio consists of unsecured loans and loans secured by subordinate residential real estate mortgages (which we service as unsecured loans due to the fact that the liens are subordinated to superior ranking security interests). These loans vary in form and substance from our typical branch serviced loans and are in a liquidating status with no anticipation of significant renewal activity. Future strategic portfolio or business acquisitions will also be a part of this segment.

Non-Core Portfolio

Real Estate — We service and hold real estate loans secured by first or second mortgages on residential real estate. Real estate loans previously originated through our branch offices or previously acquired or originated through centralized distribution channels are either serviced by: (i) MorEquity, an indirect wholly owned subsidiary, all of which are subserviced by Nationstar or (ii) our centralized servicing operation. Investment funds managed by affiliates of Fortress indirectly own a majority interest in Nationstar.

The remaining components (which we refer to as “Other”) consist of our other non-core, non-originating legacy operations, which are isolated by geographic market and/or distribution channel from our Core Consumer Operations and our Non-Core Portfolio. These operations include our legacy operations in 14 states where we have also ceased branch-based personal lending, our liquidating retail sales finance portfolio (including our retail sales finance accounts from our dedicated auto finance operation), our lending operations in Puerto Rico and the U.S. Virgin Islands, and the operations of our United Kingdom subsidiary. Effective June 1, 2014, we also report (on a prospective basis) certain real estate loans with equity capacity in Other. These short equity loans, which have liquidated down to an immaterial level, were previously included in our Core Consumer Operations. At June 1, 2014, the transfer date, the carrying value of these loans totaled $16.3 million.


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Table of Contents

Due to the nature of the Fortress Acquisition, we applied push-down accounting. However, we report the operating results of our Core Consumer Operations, Non-Core Portfolio, and Other using the same accounting basis that we employed prior to the Fortress Acquisition, which we refer to as “historical accounting basis,” to provide a consistent basis for both management and other interested third parties to better understand the operating results of these segments. The historical accounting basis (which is a basis of accounting other than U.S. GAAP) also provides better comparability of the operating results of these segments to our competitors and other companies in the financial services industry. The historical accounting basis is not applicable to the Acquisitions and Servicing segment since this segment resulted from the purchase of the SpringCastle Portfolio on April 1, 2013 and therefore, was not affected by the Fortress Acquisition.

The “Push-down Accounting Adjustments” column in the following tables primarily consists of:

the accretion or amortization of the valuation adjustments on the applicable revalued assets and liabilities;
the difference in finance charges on our purchased credit impaired finance receivables compared to the finance charges on these finance receivables on a historical accounting basis;
the elimination of accretion or amortization of historical based discounts, premiums, and other deferred costs on our finance receivables and long-term debt;
the difference in provision for finance receivable losses required based upon the differences in historical accounting basis and push-down accounting basis of the finance receivables;
the acceleration of the accretion of the net discount or amortization of the net premium applied to long-term debt that we repurchase or repay;
the reversal of the remaining unaccreted push-down accounting basis for net finance receivables, less allowance for finance receivable losses established at the date of the Fortress Acquisition on finance receivables held for sale that we sold; and
the difference in the fair value of long-term debt based upon the differences between historical accounting basis where certain long-term debt components are marked-to-market on a recurring basis, and push-down accounting basis where long-term debt is no longer marked-to-market on a recurring basis.


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Table of Contents

The following tables present information about the Company’s segments as well as reconciliations to the condensed consolidated financial statement amounts.
(dollars in thousands)
 
Consumer
 
Insurance
 
Acquisitions and Servicing
 
Real Estate
 
Other
 
Eliminations
 
Push-down
Accounting
Adjustments
 
Consolidated
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended 
 September 30, 2014
 
 
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Finance charges
 
$
236,190

 
$

 
$
130,981

 
$
53,568

 
$
3,850

 
$

 
$
10,856

 
$
435,445

Finance receivables held for sale originated as held for investment
 

 

 

 
41,468

 

 

 
6,211

 
47,679

Total interest income
 
236,190

 

 
130,981

 
95,036

 
3,850

 

 
17,067

 
483,124

Interest expense
 
40,466

 

 
17,685

 
83,795

 
1,837

 

 
36,359

 
180,142

Net interest income
 
195,724

 

 
113,296

 
11,241

 
2,013

 

 
(19,292
)
 
302,982

Provision for finance receivable losses
 
56,087

 

 
28,332

 
37,192

 
1,290

 

 
(19,930
)
 
102,971

Net interest income (loss) after provision for finance receivable losses
 
139,637

 

 
84,964

 
(25,951
)
 
723

 

 
638

 
200,011

Other revenues:
 
 
 
 
 
 

 
 

 
 

 
 

 
 

 
 
Insurance
 

 
43,997

 

 

 
14

 

 
(1
)
 
44,010

Investment
 

 
13,723

 

 
(954
)
 
45

 

 
(1,563
)
 
11,251

Intersegment - insurance commissions
 
19,540

 
(19,759
)
 

 
220

 
(1
)
 

 

 

Portfolio servicing fees from SpringCastle
 

 

 
16,006

 

 

 
(16,006
)
 

 

Net gain (loss) on fair value adjustments on debt
 

 

 
1,522

 

 

 

 
(170
)
 
1,352

Net gain on sales of real estate loans and related trust assets *
 

 

 

 
279,889

 

 

 
361,439

 
641,328

Other
 
618

 
2,428

 
264

 
(2,593
)
 
8

 

 
(12,700
)
 
(11,975
)
Total other revenues
 
20,158

 
40,389

 
17,792

 
276,562

 
66

 
(16,006
)
 
347,005

 
685,966

Other expenses:
 
 
 
 
 
 

 
 

 
 

 
 

 
 

 
 

Operating expenses:
 
 
 
 
 
 

 
 

 
 

 
 

 
 

 
 

Salaries and benefits
 
64,015

 
4,791

 
6,837

 
17,186

 
1,915

 

 
(42
)
 
94,702

Other operating expenses
 
44,554

 
3,758

 
5,493

 
18,984

 
1,365

 

 
963

 
75,117

Portfolio servicing fees to Springleaf
 

 

 
16,006

 

 

 
(16,006
)
 

 

Insurance losses and loss adjustment expenses
 

 
20,451

 

 

 

 

 
(310
)
 
20,141

Total other expenses
 
108,569

 
29,000

 
28,336

 
36,170

 
3,280

 
(16,006
)
 
611

 
189,960

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before provision for (benefit from) income taxes
 
51,226

 
11,389

 
74,420

 
214,441

 
(2,491
)
 

 
347,032

 
696,017

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before provision for income taxes attributable to non-controlling interests
 

 

 
34,945

 

 

 

 

 
34,945

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before provision for (benefit from) income taxes attributable to Springleaf Holdings, Inc.
 
$
51,226

 
$
11,389

 
$
39,475

 
$
214,441

 
$
(2,491
)
 
$

 
$
347,032

 
$
661,072

                                      
*
For purposes of our segment reporting presentation, we have combined the lower of cost or fair value adjustments recorded on the date the real estate loans were transferred to finance receivables held for sale with the final gain (loss) on the sale of these loans.

39

Table of Contents

(dollars in thousands)
 
Consumer
 
Insurance
 
Acquisitions
and
Servicing
 
Real Estate
 
Other
 
Eliminations
 
Push-down
Accounting
Adjustments
 
Consolidated
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended 
 September 30, 2013 - Revised
 
 
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
$
188,601

 
$

 
$
162,918

 
$
170,772

 
$
10,000

 
$

 
$
51,635

 
$
583,926

Interest expense
 
38,241

 

 
22,418

 
131,699

 
3,323

 

 
33,476

 
229,157

Net interest income
 
150,360

 

 
140,500

 
39,073

 
6,677

 

 
18,159

 
354,769

Provision for finance receivable losses
 
38,174

 

 
60,662

 
52,645

 
2,361

 

 
8,422

 
162,264

Net interest income (loss) after provision for finance receivable losses
 
112,186

 

 
79,838

 
(13,572
)
 
4,316

 

 
9,737

 
192,505

Other revenues:
 
 
 
 
 
 

 
 

 
 

 
 

 
 

 
 
Insurance
 

 
38,266

 

 

 
18

 

 
(7
)
 
38,277

Investment
 

 
8,314

 

 

 
(1
)
 

 
(1,781
)
 
6,532

Intersegment - insurance commissions
 
15,131

 
(15,142
)
 

 
36

 
(25
)
 

 

 

Portfolio servicing fees from SpringCastle
 

 

 
9,565

 

 

 
(9,565
)
 

 

Net loss on repurchases and repayments of debt
 
(2,890
)
 

 

 
(15,818
)
 
(706
)
 

 
(14,158
)
 
(33,572
)
Net gain (loss) on fair value adjustments on debt
 

 

 
6,619

 
12,217

 

 

 
(12,250
)
 
6,586

Other
 
910

 
2,426

 
279

 
(2,047
)
 

 

 
35

 
1,603

Total other revenues
 
13,151

 
33,864

 
16,463

 
(5,612
)
 
(714
)
 
(9,565
)
 
(28,161
)
 
19,426

Other expenses:
 
 
 
 
 
 

 
 

 
 

 
 

 
 

 
 

Operating expenses:
 
 
 
 
 
 

 
 

 
 

 
 

 
 

 
 

Salaries and benefits
 
62,318

 
4,481

 
4,006

 
7,551

 
136,249

 

 
(53
)
 
214,552

Other operating expenses
 
30,421

 
3,115

 
21,488

 
14,313

 
2,038

 

 
1,103

 
72,478

Portfolio servicing fees to Springleaf
 

 

 
9,565

 

 

 
(9,565
)
 

 

Insurance losses and loss adjustment expenses
 

 
16,849

 

 

 

 

 
(299
)
 
16,550

Total other expenses
 
92,739

 
24,445

 
35,059

 
21,864

 
138,287

 
(9,565
)
 
751

 
303,580

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before provision for (benefit from) income taxes
 
32,598

 
9,419

 
61,242

 
(41,048
)
 
(134,685
)
 

 
(19,175
)
 
(91,649
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before provision for income taxes attributable to non-controlling interests
 

 

 
31,643

 

 

 

 

 
31,643

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before provision for (benefit from) income taxes attributable to Springleaf Holdings, Inc.
 
$
32,598

 
$
9,419

 
$
29,599

 
$
(41,048
)
 
$
(134,685
)
 
$

 
$
(19,175
)
 
$
(123,292
)





40

Table of Contents

(dollars in thousands)
 
Consumer
 
Insurance
 
Acquisitions
and
Servicing
 
Real Estate
 
Other
 
Eliminations
 
Push-down
Accounting
Adjustments
 
Consolidated
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At or for the Nine Months Ended 
 September 30, 2014
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Finance charges
 
$
666,281

 
$

 
$
413,952

 
$
338,121

 
$
13,265

 
$

 
$
81,971

 
$
1,513,590

Finance receivables held for sale originated as held for investment
 

 

 

 
48,598

 

 

 
6,323

 
54,921

Total interest income
 
666,281

 

 
413,952

 
386,719

 
13,265

 

 
88,294

 
1,568,511

Interest expense
 
122,097

 

 
57,986

 
291,084

 
5,810

 

 
99,886

 
576,863

Net interest income
 
544,184

 

 
355,966

 
95,635

 
7,455

 

 
(11,592
)
 
991,648

Provision for finance receivable losses
 
149,238

 

 
121,681

 
118,992

 
6,557

 

 
(17,272
)
 
379,196

Net interest income (loss) after provision for finance receivable losses
 
394,946

 

 
234,285

 
(23,357
)
 
898

 

 
5,680

 
612,452

Other revenues:
 
 
 
 
 
 

 
 

 
 

 
 

 
 

 
 
Insurance
 

 
125,075

 

 

 
46

 

 
(5
)
 
125,116

Investment
 

 
35,652

 

 
(954
)
 
69

 

 
(3,433
)
 
31,334

Intersegment - insurance commissions
 
51,504

 
(51,936
)
 

 
442

 
(10
)
 

 

 

Portfolio servicing fees from SpringCastle
 

 

 
51,274

 

 

 
(51,274
)
 

 

Net gain (loss) on repurchases and repayments of debt
 
(1,429
)
 

 

 
(10,023
)
 
(47
)
 

 
4,884

 
(6,615
)
Net gain (loss) on fair value adjustments on debt
 

 

 
(14,810
)
 
8,298

 

 

 
(8,521
)
 
(15,033
)
Net gain on sales of real estate loans and related trust assets *
 

 

 

 
194,894

 

 

 
536,420

 
731,314

Other
 
1,742

 
6,103

 
856

 
(4,022
)
 
618

 

 
(12,700
)
 
(7,403
)
Total other revenues
 
51,817

 
114,894

 
37,320

 
188,635

 
676

 
(51,274
)
 
516,645

 
858,713

Other expenses:
 
 
 
 
 
 

 
 

 
 

 
 

 
 

 
 

Operating expenses:
 
 
 
 
 
 

 
 

 
 

 
 

 
 

 
 
Salaries and benefits
 
195,778

 
14,501

 
24,612

 
34,559

 
9,183

 

 
(129
)
 
278,504

Other operating expenses
 
112,668

 
10,745

 
17,763

 
43,616

 
5,190

 

 
2,907

 
192,889

Portfolio servicing fees to Springleaf
 

 

 
51,274

 

 

 
(51,274
)
 

 

Insurance losses and loss adjustment expenses
 

 
57,923

 

 

 

 

 
(750
)
 
57,173

Total other expenses
 
308,446

 
83,169

 
93,649

 
78,175

 
14,373

 
(51,274
)
 
2,028

 
528,566

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before provision for (benefit from) income taxes
 
138,317

 
31,725

 
177,956

 
87,103

 
(12,799
)
 

 
520,297

 
942,599

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before provision for income taxes attributable to non-controlling interests
 

 

 
81,542

 

 

 

 

 
81,542

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before provision for (benefit from) income taxes attributable to Springleaf Holdings, Inc.
 
$
138,317

 
$
31,725

 
$
96,414

 
$
87,103

 
$
(12,799
)
 
$

 
$
520,297

 
$
861,057

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
$
3,651,365

 
$
1,060,074

 
$
2,261,704

 
$
3,656,616

 
$
624,921

 
$

 
$
8,138

 
$
11,262,818

                                      
*
For purposes of our segment reporting presentation, we have combined the lower of cost or fair value adjustments recorded on the dates the real estate loans were transferred to finance receivables held for sale with the final gain (loss) on the sales of these loans.

41

Table of Contents

(dollars in thousands)
 
Consumer
 
Insurance
 
Acquisitions
and
Servicing
 
Real Estate
 
Other
 
Eliminations
 
Push-down
Accounting
Adjustments
 
Consolidated
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At or for the Nine Months Ended 
 September 30, 2013 - Revised
 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
$
519,688

 
$

 
$
331,288

 
$
535,280

 
$
37,631

 
$

 
$
153,674

 
$
1,577,561

Interest expense
 
111,110

 

 
47,009

 
427,608

 
12,164

 

 
102,977

 
700,868

Net interest income
 
408,578

 

 
284,279

 
107,672

 
25,467

 

 
50,697

 
876,693

Provision for finance receivable losses
 
52,188

 

 
78,459

 
188,737

 
(3,385
)
 

 
23,062

 
339,061

Net interest income (loss) after provision for finance receivable losses
 
356,390

 

 
205,820

 
(81,065
)
 
28,852

 

 
27,635

 
537,632

Other revenues:
 
 
 
 
 
 

 
 

 
 

 
 

 
 

 
 
Insurance
 

 
107,114

 

 

 
58

 

 
(28
)
 
107,144

Investment
 

 
31,792

 

 

 
1,396

 

 
(5,934
)
 
27,254

Intersegment - insurance commissions
 
43,341

 
(43,347
)
 

 
94

 
(88
)
 

 

 

Portfolio servicing fees from SpringCastle
 

 

 
11,945

 

 

 
(11,945
)
 

 

Net gain (loss) on repurchases and repayments of debt
 
(4,390
)
 

 

 
(35,418
)
 
(977
)
 

 
6,976

 
(33,809
)
Net gain (loss) on fair value adjustments on debt
 

 

 
6,619

 
45,428

 

 

 
(44,950
)
 
7,097

Other
 
1,698

 
6,797

 
360

 
(1,645
)
 
(90
)
 

 
(134
)
 
6,986

Total other revenues
 
40,649

 
102,356

 
18,924

 
8,459

 
299

 
(11,945
)
 
(44,070
)
 
114,672

Other expenses:
 
 
 
 
 
 

 
 

 
 

 
 

 
 

 
 
Operating expenses:
 
 
 
 
 
 

 
 

 
 

 
 

 
 

 
 

Salaries and benefits
 
184,077

 
11,424

 
6,417

 
20,648

 
149,436

 

 
(160
)
 
371,842

Other operating expenses
 
87,609

 
7,993

 
43,624

 
42,281

 
9,532

 

 
3,418

 
194,457

Portfolio servicing fees to Springleaf
 

 

 
11,945

 

 

 
(11,945
)
 

 

Insurance losses and loss adjustment expenses
 

 
48,373

 

 

 

 

 
(723
)
 
47,650

Total other expenses
 
271,686

 
67,790

 
61,986

 
62,929

 
158,968

 
(11,945
)
 
2,535

 
613,949

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before provision for (benefit from) income taxes
 
125,353

 
34,566

 
162,758

 
(135,535
)
 
(129,817
)
 

 
(18,970
)
 
38,355

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before provision for income taxes attributable to non-controlling interests
 

 

 
86,383

 

 

 

 

 
86,383

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before provision for (benefit from) income taxes attributable to Springleaf Holdings, Inc.
 
$
125,353

 
$
34,566

 
$
76,375

 
$
(135,535
)
 
$
(129,817
)
 
$

 
$
(18,970
)
 
$
(48,028
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
$
3,035,759

 
$
913,440

 
$
2,855,486

 
$
8,901,567

 
$
1,486,783

 
$

 
$
(675,537
)
 
$
16,517,498


17. Prior Period Revisions    

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

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of these corrections, we have determined that our previous quarterly condensed financial statements and our annual consolidated financial statements were not materially misstated.

The errors identified in the fourth quarter of 2013 related to the following: (1) the accretion of net discount applied to long-term debt that was revalued based on its fair value at the time of the Fortress Acquisition; (2) the accretion of original issue net discount on our long-term debt issued subsequent to the Fortress Acquisition; (3) the carrying values of our tranches of long-term debt that were issued at a discount and which have embedded derivatives, and the related change in fair value; (4) the classification of certain investment securities found to contain embedded derivatives and the accounting treatment of the related change in fair value; and (5) the continued accretion of discounts on loans in non-accrual status.

In addition, we made other corrections during the fourth quarter of 2013, which were isolated to intra-periods in 2013, and revised the appropriate periods of 2013 in our 2013 Annual Report on Form 10-K and in this report. These revisions related to the following: (1) servicing fee expenses for the SpringCastle Portfolio pursuant to an interim servicing agreement that was in place between April 1, 2013 and August 31, 2013; (2) accretion of the unearned discount for non-credit impaired loans in the SpringCastle Portfolio and the resulting adjustment to the allowance for finance receivable losses for the SpringCastle Portfolio; (3) finance charge calculation on our internal servicing system for the SpringCastle Portfolio; and (4) charge-offs on certain qualified real estate loans that had not been granted principal forgiveness.

We also recorded the previously disclosed out-of-period adjustments in the appropriate periods. These adjustments primarily related to the following:

capitalized interest on purchased credit impaired finance receivables serviced by a third party;
the difference between the hypothetical derivative interest expense and the contractual derivative interest expense;
the identification of certain bankrupt real estate loan accounts for consideration as TDR finance receivables;
to correct certain inputs in our model supporting the TDR allowance for finance receivable losses;
distributions of limited partnerships;
the calculations of the carrying value for our real estate owned and the net loss on sales of our real estate owned that are externally serviced;
the calculation of real estate owned expenses;
payable to former parent related to any refund of (or credit for) taxes, including any interest received;
benefit reserves related to a closed block of annuities;
change in estimate for the taxable income related to mortgage securitizations; and
the correction of current and deferred tax expense.

In addition to the revisions previously discussed, during the fourth quarter of 2013 we identified presentation errors in the classification of certain line items within our consolidated statement of cash flows and revised the appropriate line items in our 2013 Annual Report on Form 10-K and in this report. These errors related to the following:

the income tax effect on the changes in accumulated other comprehensive income related to net unrealized gains and losses on investment securities and cash flow hedges were incorrectly included in “Change in other assets and other liabilities” instead of “Change in taxes receivable and payable” within the same operating activities section;
certain debt issue costs were incorrectly included in “Change in other assets and other liabilities” within the operating activities section instead of “Proceeds from issuance of long-term debt, net of commissions” within the financing activities section;
advances on SpringCastle’s revolving loans were incorrectly included as a reduction to “Principal collections on finance receivables” instead of “Finance receivables originated or purchased, net of deferred origination costs” within the same investing activities section;
the deferred costs on the repurchased debt incurred after the Fortress Acquisition were incorrectly included in “Change in other assets and other liabilities” instead of “Net loss on repurchases and repayments of debt” within the same operating activities section;
accrued interest and finance charges on real estate loan modifications were incorrectly included in “Principal collections on finance receivables” within the investing activities section instead of “Change in accrued interest and finance charges” within the operating activities section; and
“Deferral of finance receivable origination costs” was incorrectly included within the operating activities section instead of the investing activities section.


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Table of Contents

Revised Condensed Consolidated Statement of Operations (Unaudited)

The following table reconciles the amounts previously reported in our condensed consolidated statement of operations to the corresponding revised amounts. The “Out-of-Period” column reflects the previously disclosed out-of period adjustments that are now being corrected in the appropriate periods. The “Adjustments” column reflects the corrections of the errors discovered during the fourth quarter of 2013.
 
 
Three Months Ended 
 September 30, 2013 (Unaudited)
 
Nine Months Ended 
 September 30, 2013 (Unaudited)
(dollars in thousands except
earnings (loss) per share)
 
As Reported
 
Out-of-Period
 
Adjustments
 
As Revised
 
As Reported
 
Out-of-Period
 
Adjustments
 
As Revised
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
$
585,300

 
$

 
$
(1,374
)
 
$
583,926

 
$
1,578,935

 
$

 
$
(1,374
)
 
$
1,577,561

Interest expense
 
228,439

 

 
718

 
229,157

 
697,365

 

 
3,503

 
700,868

Net interest income
 
356,861

 

 
(2,092
)
 
354,769

 
881,570

 

 
(4,877
)
 
876,693

Provision for finance receivable losses
 
158,785

 
4,424

 
(945
)
 
162,264

 
341,723

 
(853
)
 
(1,809
)
 
339,061

Net interest income after provision for finance receivable losses
 
198,076

 
(4,424
)
 
(1,147
)
 
192,505

 
539,847

 
853

 
(3,068
)
 
537,632

Other revenues:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Insurance
 
38,277

 

 

 
38,277

 
107,144

 

 

 
107,144

Investment
 
6,756

 

 
(224
)
 
6,532

 
27,687

 

 
(433
)
 
27,254

Net loss on repurchases and repayments of debt
 
(34,503
)
 

 
931

 
(33,572
)
 
(34,558
)
 

 
749

 
(33,809
)
Net gain on fair value adjustments on debt
 

 

 
6,586

 
6,586

 

 

 
7,097

 
7,097

Other
 
1,603

 

 

 
1,603

 
6,986

 

 

 
6,986

Total other revenues
 
12,133

 

 
7,293

 
19,426

 
107,259

 

 
7,413

 
114,672

Other expenses:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Operating expenses:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Salaries and benefits
 
214,552

 

 

 
214,552

 
371,842

 

 

 
371,842

Other operating expenses
 
69,595

 

 
2,883

 
72,478

 
191,574

 

 
2,883

 
194,457

Insurance losses and loss adjustment expenses
 
16,550

 

 

 
16,550

 
47,650

 

 

 
47,650

Total other expenses
 
300,697

 

 
2,883

 
303,580

 
611,066

 

 
2,883

 
613,949

Income (loss) before benefit from income taxes
 
(90,488
)
 
(4,424
)
 
3,263

 
(91,649
)
 
36,040

 
853

 
1,462

 
38,355

Benefit from income taxes
 
(29,606
)
 
(1,636
)
 
544

 
(30,698
)
 
(1,898
)
 
315

 
(415
)
 
(1,998
)
Net income (loss)
 
(60,882
)
 
(2,788
)
 
2,719

 
(60,951
)
 
37,938

 
538

 
1,877

 
40,353

Net income attributable to non-controlling interests
 
29,851

 

 
1,792

 
31,643

 
83,800

 

 
2,583

 
86,383

Net loss attributable to Springleaf Holdings, Inc.
 
$
(90,733
)
 
$
(2,788
)
 
$
927

 
$
(92,594
)
 
$
(45,862
)
 
$
538

 
$
(706
)
 
$
(46,030
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Share Data:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Weighted average number of shares outstanding:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Basic and diluted
 
100,000,000

 
 

 
 

 
100,000,000

 
100,000,000

 
 

 
 

 
100,000,000

Earnings (loss) per share:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Basic and diluted
 
$
(0.91
)
 
 

 
 

 
$
(0.93
)
 
$
(0.46
)
 
 

 
 

 
$
(0.46
)


44

Table of Contents

Revised Condensed Consolidated Statement of Comprehensive Loss (Unaudited)

The following table presents the amounts previously reported in our condensed consolidated statement of comprehensive income and the corresponding revised amounts.
 
 
Three Months Ended 
 September 30, 2013 (Unaudited)
 
Nine Months Ended 
 September 30, 2013 (Unaudited)
(dollars in thousands)
 
As Reported
 
As Revised
 
As Reported
 
As Revised
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
(60,882
)
 
$
(60,951
)
 
$
37,938

 
$
40,353

Other comprehensive loss:
 
 

 
 

 
 

 
 

Net unrealized losses on:
 
 

 
 

 
 

 
 

Investment securities on which other-than-temporary impairments were taken
 
(17
)
 
(17
)
 
(135
)
 
(135
)
All other investment securities
 
(331
)
 
(429
)
 
(10,989
)
 
(10,989
)
Foreign currency translation adjustments
 
(2,056
)
 
(2,056
)
 
38

 
38

Income tax effect:
 
 

 
 

 
 

 
 

Net unrealized losses on:
 
 

 
 

 
 

 
 

Investment securities on which other-than-temporary impairments were taken
 
6

 
6

 
47

 
47

All other investment securities
 
116

 
149

 
3,846

 
3,844

Other comprehensive loss, net of tax, before reclassification adjustments
 
(2,282
)
 
(2,347
)
 
(7,193
)
 
(7,195
)
Reclassification adjustments included in net income (loss):
 
 

 
 

 
 

 
 

Net realized (gains) losses on investment securities
 
33

 
355

 
(2,686
)
 
(2,253
)
Cash flow hedges
 

 

 
(160
)
 
(160
)
Income tax effect:
 
 

 
 

 
 

 
 

Net realized gains (losses) on investment securities
 
(12
)
 
(124
)
 
940

 
789

Cash flow hedges
 

 

 
56

 
56

Reclassification adjustments included in net income (loss), net of tax
 
21

 
231

 
(1,850
)
 
(1,568
)
Other comprehensive loss, net of tax
 
(2,261
)
 
(2,116
)
 
(9,043
)
 
(8,763
)
Comprehensive income (loss)
 
(63,143
)
 
(63,067
)
 
28,895

 
31,590

Comprehensive income attributable to non-controlling interests
 
29,851

 
31,643

 
83,799

 
86,383

Comprehensive loss attributable to Springleaf Holdings, Inc.
 
$
(92,994
)
 
$
(94,710
)
 
$
(54,904
)
 
$
(54,793
)


45

Table of Contents

Revised Condensed Consolidated Statement of Cash Flows (Unaudited)

The following table presents the amounts previously reported in our condensed consolidated statement of cash flows and the corresponding revised amounts and includes additional corrections to the classification of certain line items within our condensed consolidated statement of cash flows.
 
 
Nine Months Ended 
 September 30, 2013 (Unaudited)
(dollars in thousands)
 
As Reported
 
As Revised
 
 
 
 
 
Cash flows from operating activities
 
 

 
 

Net income
 
$
37,938

 
$
40,353

Reconciling adjustments:
 
 

 
 

Provision for finance receivable losses
 
341,723

 
339,061

Depreciation and amortization
 
(40,181
)
 
(39,138
)
Deferral of finance receivable origination costs
 
(42,317
)
 

Deferred income tax benefit
 
(88,668
)
 
(88,476
)
Net gain on fair value adjustments of debt
 

 
(7,097
)
Net loss on repurchases and repayments of debt
 
17,075

 
33,809

Share-based compensation expense, net of forfeitures
 
131,250

 
131,250

Other
 
(1,140
)
 
(707
)
Cash flows due to changes in:
 
 

 
 

Other assets and other liabilities
 
50,431

 
91,943

Insurance claims and policyholder liabilities
 
14,917

 
14,917

Taxes receivable and payable
 
(29,177
)
 
(24,732
)
Accrued interest and finance charges
 
1,941

 
(30,566
)
Restricted cash not reinvested
 
33,885

 
33,885

Other, net
 
(824
)
 
(828
)
Net cash provided by operating activities
 
426,853

 
493,674

 
 
 
 
 
Cash flows from investing activities
 
 

 
 

Finance receivables originated or purchased, net of deferred origination costs
 
(1,596,394
)
 
(1,688,630
)
Principal collections on finance receivables
 
2,299,827

 
2,386,086

Purchase of SpringCastle Portfolio
 
(2,963,547
)
 
(2,963,547
)
Available-for-sale investment securities purchased
 
(448,981
)
 
(442,686
)
Trading investment securities purchased
 

 
(6,295
)
Available-for-sale investment securities called, sold, and matured
 
728,534

 
721,042

Trading investment securities called, sold, and matured
 

 
7,492

Change in restricted cash
 
(306,847
)
 
(395,552
)
Proceeds from sale of real estate owned
 
88,346

 
88,346

Other, net
 
(4,748
)
 
(4,749
)
Net cash used for investing activities
 
(2,203,810
)
 
(2,298,493
)
 
 
 
 
 
Cash flows from financing activities
 
 

 
 

Proceeds from issuance of long-term debt, net of commissions
 
6,008,369

 
5,990,565

Repayment of long-term debt
 
(4,768,854
)
 
(4,723,188
)
Contributions from joint venture partners
 
438,081

 
438,081

Distributions to joint venture partners
 
(204,516
)
 
(204,516
)
Net cash provided by financing activities
 
1,473,080

 
1,500,942

 
 
 
 
 
Effect of exchange rate changes
 
(835
)
 
(835
)
 
 
 
 
 
Net change in cash and cash equivalents
 
(304,712
)
 
(304,712
)
Cash and cash equivalents at beginning of period
 
1,554,348

 
1,554,348

Cash and cash equivalents at end of period
 
$
1,249,636

 
$
1,249,636



46

Table of Contents

18. Fair Value Measurements    

The fair value of a financial instrument is the amount that would be received if an asset were to be sold or the 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 or traded over-the-counter or is new to the market and not yet established, the characteristics specific to the transaction, and general market conditions.

The following table summarizes the fair values and carrying values of our financial instruments and indicates the fair value hierarchy based on the level of inputs we utilized to determine such fair values:
 
 
Fair Value Measurements Using
 
Total
Fair
Value
 
Total
Carrying
Value
(dollars in thousands)
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2014
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Assets
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
1,970,512

 
$

 
$

 
$
1,970,512

 
$
1,970,512

Investment securities
 

 
1,709,631

 
13,750

 
1,723,381

 
1,723,381

Net finance receivables, less allowance for finance receivable losses
 

 

 
6,757,907

 
6,757,907

 
6,238,917

Finance receivables held for sale
 

 

 
498,872

 
498,872

 
493,196

Restricted cash
 
312,825

 

 

 
312,825

 
312,825

Other assets:
 
 

 
 

 
 

 
 

 
 

Commercial mortgage loans
 

 

 
80,991

 
80,991

 
87,553

Escrow advance receivable
 

 

 
7,728

 
7,728

 
7,728

 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 

 
 

 
 

 
 

 
 

Long-term debt
 
$

 
$
8,812,305

 
$

 
$
8,812,305

 
$
7,858,037

 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Assets
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
431,409

 
$

 
$

 
$
431,409

 
$
431,409

Investment securities
 

 
558,473

 
23,617

 
582,090

 
582,090

Net finance receivables, less allowance for finance receivable losses
 

 

 
13,774,701

 
13,774,701

 
13,424,988

Restricted cash
 
536,005

 

 

 
536,005

 
536,005

Other assets:
 
 

 
 

 
 

 
 
 
 

Commercial mortgage loans
 

 

 
94,681

 
94,681

 
102,200

Escrow advance receivable
 

 

 
23,527

 
23,527

 
23,527

 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 

 
 

 
 

 
 

 
 

Long-term debt
 
$

 
$
13,914,644

 
$

 
$
13,914,644

 
$
12,769,036

 

47

Table of Contents

FAIR VALUE MEASUREMENTS — RECURRING BASIS

The following table presents information about our assets and liabilities 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 thousands)
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
 
 
 
 
 
 
September 30, 2014
 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
Assets
 
 

 
 

 
 

 
 

Cash equivalents in mutual funds
 
$
622,012

 
$

 
$

 
$
622,012

Investment securities:
 
 

 
 

 
 

 
 

Available-for-sale securities:
 
 

 
 

 
 

 
 

Bonds:
 
 

 
 

 
 

 
 

U.S. government and government sponsored entities
 

 
56,198

 

 
56,198

Obligations of states, municipalities, and political subdivisions
 

 
118,452

 

 
118,452

Corporate debt
 

 
264,313

 
4,125

 
268,438

RMBS
 

 
80,127

 
55

 
80,182

CMBS
 

 
23,150

 
15

 
23,165

CDO/ABS
 

 
21,565

 

 
21,565

Total
 

 
563,805

 
4,195

 
568,000

Preferred stock
 

 
7,043

 

 
7,043

Other long-term investments (a)
 

 

 
1,430

 
1,430

Total available-for-sale securities (b)
 

 
570,848

 
5,625

 
576,473

Trading securities:
 
 

 
 

 
 

 
 

Bonds:
 
 

 
 

 
 

 
 

U.S. government and government sponsored entities
 

 
136,681

 

 
136,681

Obligations of states, municipalities, and political subdivisions
 

 
88,407

 

 
88,407

Corporate debt
 

 
449,104

 

 
449,104

RMBS
 

 
64,742

 
361

 
65,103

CMBS
 

 
107,937

 

 
107,937

CDO/ABS
 

 
291,912

 
6,430

 
298,342

Total trading securities
 

 
1,138,783

 
6,791

 
1,145,574

Total investment securities
 

 
1,709,631

 
12,416

 
1,722,047

Restricted cash in mutual funds
 
290,495

 

 

 
290,495

Total
 
$
912,507

 
$
1,709,631

 
$
12,416

 
$
2,634,554

 
 
 
 
 
 
 
 
 
Liabilities
 
 

 
 

 
 

 
 

Long-term debt
 
$

 
$
317,266

 
$

 
$
317,266

 
 
 
 
 
 
 
 
 
December 31, 2013
 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
Assets
 
 

 
 

 
 

 
 

Cash equivalents in mutual funds
 
$
216,310

 
$

 
$

 
$
216,310

Investment securities:
 
 

 
 

 
 

 
 

Available-for-sale securities:
 
 

 
 

 
 

 
 

Bonds:
 
 

 
 

 
 

 
 

U.S. government and government sponsored entities
 

 
59,684

 

 
59,684

Obligations of states, municipalities, and political subdivisions
 

 
103,536

 

 
103,536

Corporate debt
 

 
239,141

 
12,604

 
251,745

RMBS
 

 
83,665

 
113

 
83,778

CMBS
 

 
10,974

 
2

 
10,976

CDO/ABS
 

 
9,397

 
800

 
10,197

Total
 

 
506,397

 
13,519

 
519,916

Preferred stock
 

 
7,805

 

 
7,805

Other long-term investments (a)
 

 

 
1,269

 
1,269

Total available-for-sale securities (b)
 

 
514,202

 
14,788

 
528,990

Trading securities:
 
 

 
 

 
 

 
 
Bonds:
 
 

 
 

 
 

 
 

Corporate debt
 

 
1,837

 

 
1,837

RMBS
 

 
10,671

 

 
10,671

CMBS
 

 
29,897

 

 
29,897

CDO/ABS
 

 
1,866

 
7,383

 
9,249

Total trading securities
 

 
44,271

 
7,383

 
51,654

Total investment securities
 

 
558,473

 
22,171

 
580,644

Restricted cash in mutual funds
 
493,297

 

 

 
493,297

Total
 
$
709,607

 
$
558,473

 
$
22,171

 
$
1,290,251

 
 
 
 
 
 
 
 
 
Liabilities
 
 

 
 

 
 

 
 

Long-term debt
 
$

 
$
363,677

 
$

 
$
363,677




48

Table of Contents

                                      
(a)
Other long-term investments excludes our interest in a limited partnership of $0.5 million at September 30, 2014 and $0.6 million at December 31, 2013 that we account for using the equity method.

(b)
Common stocks not carried at fair value totaled $0.9 million at September 30, 2014 and December 31, 2013 and therefore have been excluded from the table above.

We had no transfers between Level 1 and Level 2 during the three and nine months ended September 30, 2014.

The following table presents changes for the three months ended September 30, 2014 in Level 3 assets and liabilities measured at fair value on a recurring basis:
 
 
 
 
Net gains (losses) included in:
 
Purchases, sales, issues, settlements(a)
 
Transfers into
Level 3 (b)
 
Transfers
out of
Level 3 (c)
 
Balance
at end of
period
 
 
Balance at beginning
of period
 
Other revenues
 
Other comprehensive
income (loss)
 
 
 
 
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended 
 September 30, 2014
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Available-for-sale securities:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Bonds:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Corporate debt
 
$
4,160

 
$
(27
)
 
$
(8
)
 
$

 
$

 
$

 
$
4,125

RMBS
 
65

 
(4
)
 
(6
)
 

 

 

 
55

CMBS
 
20

 

 
(5
)
 

 

 

 
15

Total
 
4,245

 
(31
)
 
(19
)
 

 

 

 
4,195

Other long-term investments
 
1,254

 

 
176

 

 

 

 
1,430

Total available-for-sale securities
 
5,499

 
(31
)
 
157

 

 

 

 
5,625

Trading securities:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Bonds:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

RMBS
 

 

 

 

 
361

 

 
361

CDO/ABS
 
6,612

 
(24
)
 

 
(23
)
 

 
(135
)
 
6,430

Total trading securities
 
6,612

 
(24
)
 

 
(23
)
 
361

 
(135
)
 
6,791

Total
 
$
12,111

 
$
(55
)
 
$
157

 
$
(23
)
 
$
361

 
$
(135
)
 
$
12,416

                                      
(a)
“Purchases, sales, issues, and settlements” column consists only of settlements. There were no purchases, sales, or issues of investment securities for the three months ended September 30, 2014.

(b)
During the three months ended September 30, 2014, we transferred $0.4 million of RMBS securities into Level 3 primarily related to the re-evaluated observability of pricing inputs.

(c)
During the three months ended September 30, 2014, we transferred CDO/ABS securities totaling $0.1 million out of Level 3 primarily related to the re-evaluated observability of pricing inputs.


49

Table of Contents

The following table presents changes for the three months ended September 30, 2013 in Level 3 assets and liabilities measured at fair value on a recurring basis:
 
 
 
 
Net gains (losses) included in:
 
Purchases,
sales,
issues,
settlements*
 
Transfers into
Level 3
 
Transfers
out of
Level 3 
 
Balance
at end of
period
 
 
Balance at
beginning
of period
 
 
 
 
 
 
 
 
(dollars in thousands)
 
 
Other
revenues
 
Other
comprehensive
income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended 
 September 30, 2013 - Revised
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Available-for-sale securities:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Bonds:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Corporate debt
 
$
13,114

 
$
(58
)
 
$
18

 
$
2,016

 
$

 
$

 
$
15,090

RMBS
 
218

 

 
(133
)
 

 

 

 
85

CMBS
 
2

 

 

 

 

 

 
2

CDO/ABS
 
800

 

 

 

 

 

 
800

Total
 
14,134

 
(58
)
 
(115
)
 
2,016

 

 

 
15,977

Other long-term investments
 
1,478

 

 
(103
)
 

 
 

 
 

 
1,375

Total available-for-sale securities
 
15,612

 
(58
)
 
(218
)
 
2,016

 

 

 
17,352

Trading securities:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Bonds:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

CDO/ABS
 
7,663

 
49

 
(4
)
 
(75
)
 

 

 
7,633

Total
 
$
23,275

 
$
(9
)
 
$
(222
)
 
$
1,941

 
$

 
$

 
$
24,985

                                      
*
The detail of purchases, sales, issues, and settlements for the three months ended September 30, 2013 is presented in the table below.

The following table presents the detail of purchases, sales, issuances, and settlements of Level 3 assets and liabilities measured at fair value on a recurring basis for the three months ended September 30, 2013:
(dollars in thousands)
 
Purchases
 
Sales
 
Issues
 
Settlements
 
Total
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended 
 September 30, 2013 - Revised
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities:
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
Bonds:
 
 
 
 
 
 
 
 
 
 
Corporate debt
 
$
2,016

 
$

 
$

 
$

 
$
2,016

Trading securities:
 
 
 
 
 
 
 
 
 
 
Bonds:
 
 
 
 
 
 
 
 
 
 
CDO/ABS
 

 

 

 
(75
)
 
(75
)
Total
 
$
2,016

 
$

 
$

 
$
(75
)
 
$
1,941



50

Table of Contents

The following table presents changes for the nine months ended September 30, 2014 in Level 3 assets and liabilities measured at fair value on a recurring basis:
 
 
 
 
Net gains (losses) included in:
 
Purchases,
sales,
issues,
settlements(a)
 
Transfers into 
Level 3 (b)
 
Transfers
out of
Level 3 (c)
 
Balance
at end of
period
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
 
Balance at
beginning
of period
 
Other
revenues
 
Other
comprehensive
income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended 
 September 30, 2014
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Available-for-sale securities:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Bonds:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Corporate debt
 
$
12,604

 
$
177

 
$
(263
)
 
$
(8,393
)
 
$

 
$

 
$
4,125

RMBS
 
113

 
(14
)
 
(44
)
 

 

 

 
55

CMBS
 
2

 

 
13

 

 

 

 
15

CDO/ABS
 
800

 

 
3

 

 

 
(803
)
 

Total
 
13,519

 
163

 
(291
)
 
(8,393
)
 

 
(803
)
 
4,195

Other long-term investments
 
1,269

 

 
251

 
(90
)
 

 

 
1,430

Total available-for-sale securities
 
14,788

 
163

 
(40
)
 
(8,483
)
 

 
(803
)
 
5,625

Trading securities:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Bonds:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

RMBS
 

 
4

 

 
(88
)
 
1,602

 
(1,157
)
 
361

CDO/ABS
 
7,383

 
5

 

 
(20
)
 

 
(938
)
 
6,430

Total trading securities
 
7,383

 
9

 

 
(108
)
 
1,602

 
(2,095
)
 
6,791

Total
 
$
22,171

 
$
172

 
$
(40
)
 
$
(8,591
)
 
$
1,602

 
$
(2,898
)
 
$
12,416

                                      
(a)
The detail of purchases, sales, issues, and settlements for the nine months ended September 30, 2014 is presented in the table below.

(b)
During the nine months ended September 30, 2014, we transferred $1.6 million of RMBS securities into Level 3 primarily related to the re-evaluated observability of pricing inputs.

(c)
During the nine months ended September 30, 2014, we transferred RMBS and CDO/ABS securities totaling $2.9 million out of Level 3 primarily related to the re-evaluated observability of pricing inputs.

51

Table of Contents

The following table presents the detail of purchases, sales, issuances, and settlements of Level 3 assets and liabilities measured at fair value on a recurring basis for the nine months ended September 30, 2014:
(dollars in thousands)
 
Purchases
 
Sales
 
Issues
 
Settlements
 
Total
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended 
 September 30, 2014
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Investment securities:
 
 

 
 

 
 

 
 

 
 

Available-for-sale securities:
 
 

 
 

 
 

 
 

 
 

Bonds:
 
 

 
 

 
 

 
 

 
 

Corporate debt
 
$

 
$

 
$

 
$
(8,393
)
 
$
(8,393
)
Other long-term investments
 

 

 

 
(90
)
 
(90
)
Total available-for-sale securities
 

 

 

 
(8,483
)
 
(8,483
)
Trading securities:
 
 

 
 

 
 

 
 

 
 

Bonds:
 
 

 
 

 
 

 
 

 
 

RMBS
 

 

 

 
(88
)
 
(88
)
CDO/ABS
 
135

 

 

 
(155
)
 
(20
)
Total trading securities
 
135

 

 

 
(243
)
 
(108
)
Total
 
$
135

 
$

 
$

 
$
(8,726
)
 
$
(8,591
)

The following table presents changes for the nine months ended September 30, 2013 in Level 3 assets and liabilities measured at fair value on a recurring basis:
 
 
 
 
Net gains (losses) included in:
 
Purchases,
sales,
issues,
settlements*
 
Transfers into
Level 3
 
Transfers
out of
Level 3 
 
Balance
at end of
period
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
 
Balance at
beginning
of period
 
Other
revenues
 
Other
comprehensive
income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended 
 September 30, 2013 - Revised
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Available-for-sale securities:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Bonds:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Corporate debt
 
$
13,417

 
$
(166
)
 
$
304

 
$
1,535

 
$

 
$

 
$
15,090

RMBS
 
74

 
(35
)
 
46

 

 

 

 
85

CMBS
 
1,767

 
(6
)
 
2

 
(1,761
)
 

 

 
2

CDO/ABS
 
2,834

 
8

 
(9
)
 
(2,033
)
 

 

 
800

Total
 
18,092

 
(199
)
 
343

 
(2,259
)
 

 

 
15,977

Other long-term investments
 
1,380

 
2

 
4

 
(11
)
 

 

 
1,375

Total available-for-sale securities
 
19,472

 
(197
)
 
347

 
(2,270
)
 

 

 
17,352

Trading securities:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Bonds:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

CDO/ABS
 
12,192

 
562

 
(426
)
 
(4,695
)
 

 

 
7,633

Total
 
$
31,664

 
$
365

 
$
(79
)
 
$
(6,965
)
 
$

 
$

 
$
24,985

                                      
*
The detail of purchases, sales, issues, and settlements for the nine months ended September 30, 2013 is presented in the table below.




52

Table of Contents

The following table presents the detail of purchases, sales, issuances, and settlements of Level 3 assets and liabilities measured at fair value on a recurring basis for the nine months ended September 30, 2013:
(dollars in thousands)
 
Purchases
 
Sales
 
Issues
 
Settlements
 
Total
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended 
 September 30, 2013 - Revised
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Investment securities:
 
 

 
 

 
 

 
 

 
 

Available-for-sale securities:
 
 

 
 

 
 

 
 

 
 

Bonds:
 
 

 
 

 
 

 
 

 
 

Corporate debt
 
$
2,016

 
$

 
$

 
$
(481
)
 
$
1,535

CMBS
 

 
(1,452
)
 

 
(309
)
 
(1,761
)
CDO/ABS
 

 
(1,633
)
 

 
(400
)
 
(2,033
)
Total
 
2,016

 
(3,085
)
 

 
(1,190
)
 
(2,259
)
Other long-term investments
 

 

 

 
(11
)
 
(11
)
Total available-for-sale securities
 
2,016

 
(3,085
)
 

 
(1,201
)
 
(2,270
)
Trading securities:
 
 

 
 

 
 

 
 

 
 

Bonds:
 
 

 
 

 
 

 
 

 
 

CDO/ABS
 

 

 

 
(4,695
)
 
(4,695
)
Total
 
$
2,016

 
$
(3,085
)
 
$

 
$
(5,896
)
 
$
(6,965
)

We used observable and/or unobservable inputs to determine the fair value of positions that we have classified within the Level 3 category. As a result, the unrealized gains and losses for assets and liabilities within the Level 3 category presented in the Level 3 tables above may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long-dated volatilities) inputs.

The unobservable inputs and quantitative data used in our Level 3 valuations for our investment securities were developed and used in models created by our third-party valuation service providers, which values were used by us for fair value disclosure purposes without adjustment. We applied the third-party exception which allows us to omit certain quantitative disclosures about unobservable inputs for other long-term investments. As a result, the weighted average ranges of the inputs for these investment securities are not applicable in the following table.

Quantitative information about Level 3 inputs for our assets measured at fair value on a recurring basis for which information about the unobservable inputs is reasonably available to us at September 30, 2014 and December 31, 2013 is as follows:
 
 
 
Range (Weighted Average)
 
Valuation Technique(s)
Unobservable Input
September 30, 2014
December 31, 2013
Corporate debt
Discounted cash flows
Yield
0.89% (a)
2.68% – 8.48%
(4.67%)
RMBS
Discounted cash flows
Spread
6.94% (b)

Other long-term investments
Discounted cash flows and indicative valuations
Historical costs Nature of investment Local market conditions Comparables Operating performance Recent financing activity
N/A (c)
N/A (c)
                                      
(a)
At September 30, 2014, corporate debt consisted of one bond.

(b)
At September 30, 2014, RMBS consisted of one bond.

(c)
Not applicable.

The fair values of the assets using significant unobservable inputs are sensitive and can be impacted by significant increases or decreases in any of those inputs. Level 3 broker-priced instruments, including RMBS (except for the one bond previously noted), CMBS, and CDO/ABS, are excluded from the table above because the unobservable inputs are not reasonably available to us.

53

Table of Contents

Our RMBS, CMBS, and CDO/ABS securities have unobservable inputs that are reliant on and sensitive to the quality of their underlying collateral. The inputs, although not identical, have similar characteristics and interrelationships. Generally a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for prepayment speeds. An improvement in the workout criteria related to the restructured debt and/or debt covenants of the underlying collateral may lead to an improvement in the cash flows and have an inverse impact on other inputs, specifically a reduction in the amount of discount applied for marketability and liquidity, making the structured bonds more attractive to market participants.

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.

Assets measured at fair value on a non-recurring basis on which we recorded impairment charges were as follows:
 
 
Fair Value Measurements Using
 
 
(dollars in thousands)
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
 
 
 
 
 
 
September 30, 2014
 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
Assets
 
 

 
 

 
 

 
 

Real estate owned
 
$

 
$

 
$
32,220

 
$
32,220

Commercial mortgage loans
 

 

 
10,792

 
10,792

Total
 
$

 
$

 
$
43,012

 
$
43,012

 
 
 
 
 
 
 
 
 
December 31, 2013
 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
Assets
 
 

 
 

 
 

 
 

Real estate owned
 
$

 
$

 
$
72,242

 
$
72,242

Commercial mortgage loans
 

 

 
11,935

 
11,935

Total
 
$

 
$

 
$
84,177

 
$
84,177


Net impairment charges recorded on assets measured at fair value on a non-recurring basis were as follows:
(dollars in thousands)
 
Three Months 
 Ended 
 September 30, 
 2014
 
Three Months 
 Ended 
 September 30, 
 2013
 
Nine Months 
 Ended 
 September 30, 
 2014
 
Nine Months 
 Ended 
 September 30, 
 2013
 
 
 
 
 
 
 
 
 
Assets
 
 

 
 

 
 

 
 

Real estate owned
 
$
3,186

 
$
5,731

 
$
13,052

 
$
19,389

Commercial mortgage loans
 
(717
)
 
(61
)
 
(1,773
)
 
(1,774
)
Total
 
$
2,469

 
$
5,670

 
$
11,279

 
$
17,615


In accordance with the authoritative guidance for the accounting for the impairment of long-lived assets, we wrote down certain real estate owned reported in our Real Estate segment to their fair value less cost to sell for the three and nine months ended September 30, 2014 and 2013 and recorded the writedowns in other revenues — other. The fair values of real estate owned disclosed in the table above are unadjusted for transaction costs as required by the authoritative guidance for fair value measurements. The amounts of real estate owned recorded in other assets are net of transaction costs as required by the authoritative guidance for accounting for the impairment of long-lived assets.

In accordance with the authoritative guidance for the accounting for the impairment of commercial mortgage loans, we recorded allowance adjustments on certain impaired commercial mortgage loans reported in our Insurance segment to record their fair value for the three and nine months ended September 30, 2014 and 2013 and recorded the net impairments in investment revenues.


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The unobservable inputs and quantitative data used in our Level 3 valuations for our real estate owned and commercial mortgage loans were developed and used in models created by our third-party valuation service providers or valuations provided by external parties, which values were used by us for fair value disclosure purposes without adjustment. We applied the third-party exception which allows us to omit certain quantitative disclosures about unobservable inputs. As a result, the weighted average ranges of the inputs are not applicable in the following table.

Quantitative information about Level 3 inputs for our assets measured at fair value on a non-recurring basis at September 30, 2014 and December 31, 2013 is as follows:
 
 
 
Range (Weighted Average)
 
Valuation Technique(s)
Unobservable Input
September 30, 2014
December 31, 2013
Real estate owned
Market approach
Third-party valuation
N/A*
N/A*
Commercial mortgage loans
Market approach
Local market conditions Nature of investment Comparable property sales Operating performance
N/A*
N/A*
                                      
*
Not applicable.

FAIR VALUE MEASUREMENTS — VALUATION METHODOLOGIES AND ASSUMPTIONS

We use the following methods and assumptions to estimate fair value.

Cash and Cash Equivalents

The carrying amount of cash and cash equivalents approximates fair value.

Mutual Funds

The fair value of mutual funds is based on quoted market prices of the underlying shares held in the mutual funds.

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 as trading 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, 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 classify investment securities that are deemed to incorporate an embedded derivative and for which it is impracticable for us to isolate and/or value as trading securities at fair value.

Finance Receivables

The fair value of net finance receivables, less allowance for finance receivable losses, both non-impaired and purchased credit impaired, are 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 made 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

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realized in an actual sale. Additionally, there may be inherent weaknesses in the valuation methodologies we employed, and changes in the underlying assumptions used could significantly affect the results of current or future values.

Finance Receivables Held for Sale

We determined the fair value of finance receivables held for sale that were originated as held for investment based on negotiations with prospective purchasers (if any) or by using projected cash flows discounted at the weighted-average interest rates offered by us in the market for similar finance receivables. We based cash flows on contractual payment terms adjusted for estimates of prepayments and credit related losses.

Restricted Cash

The carrying amount of restricted cash approximates fair value.

Commercial Mortgage Loans

We utilize third-party valuation service providers to estimate the fair value of commercial mortgage loans using projected cash flows discounted at an appropriate rate based upon market conditions.

Real Estate Owned

We initially based our estimate of the fair value on independent third-party valuations at the time we took title to real estate owned. Subsequent changes in fair value are based upon independent third-party valuations obtained periodically to estimate a price that would be received in a then current transaction to sell the asset.

Escrow Advance Receivable

The carrying amount reported in our condensed consolidated balance sheets approximates fair value.

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 and adjusted for foreign currency translations.

We record long-term debt issuances at fair value that are deemed to incorporate an embedded derivative and for which it is impracticable for us to isolate and/or value the derivative. At September 30, 2014, there was no significant difference between the fair value and the principal amount of the long-term debt for which we have elected the fair value option.

19. Pro Forma Information    

The following unaudited pro forma information presents the combined results of operations of SHI and from the acquisitions of finance receivables and the London, Kentucky loan servicing facility from HSBC (the “HSBC acquisitions”) during 2013 as if the HSBC acquisitions had occurred on January 1, 2013. The pro forma information is not necessarily indicative of what the financial position or results of operations actually would have been had the HSBC acquisitions been completed on January 1, 2013. In addition, the unaudited pro forma financial information is not indicative of, nor does it purport to project, the future financial position or operating results of the HSBC acquisitions. The unaudited pro forma information assumes the full funding of the HSBC acquisitions including the issuance of the associated Class B Notes from our SpringCastle securitization as if they were issued as of January 1, 2013, the adjustment of historical finance charges for estimated impacts of accounting for credit impaired loans and the incorporation of accretion of pro forma purchase discount, and does not give effect to potential cost savings or other operating efficiencies that could result from the HSBC acquisitions.


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The following table presents the unaudited pro forma financial information:
(dollars in thousands except earnings (loss) per share)
 
Three Months 
 Ended 
 September 30, 
 2013
 
Nine Months 
 Ended 
 September 30, 
 2013
 
 
Revised
 
Revised
 
 
 
 
 
Interest income
 
$
574,291

 
$
1,728,429

 
 
 
 
 
Net income (loss) attributable to Springleaf Holdings, Inc.
 
$
(101,976
)
 
$
(41,960
)
 
 
 
 
 
Net income (loss) attributable to Springleaf Holdings, Inc. per weighted average share:
 
 

 
 

Basic
 
$
(1.02
)
 
$
(0.42
)
Diluted
 
$
(1.02
)
 
$
(0.42
)

20. Subsequent Events    

SPRINGCASTLE 2014-A NOTES

On October 3, 2014, certain indirect subsidiaries of SFC associated with a joint venture in which we own a 47% equity interest (the “Co-Issuers”) issued $2.62 billion of the SpringCastle Funding Asset-backed Notes 2014-A (the “SpringCastle 2014-A Notes”) at a 4.68% weighted average yield in a private placement transaction. The SpringCastle 2014-A Notes are collateralized by the SpringCastle Portfolio in which SFC owns a 47% equity interest as a result of SFI’s capital contribution of 100% of SAC’s common stock to SFC on July 31, 2014.

The Co-Issuers sold the SpringCastle 2014-A Notes for approximately $2.55 billion after the price discount but before expenses. The Co-Issuers used the proceeds from the SpringCastle 2014-A Notes to repay in full on October 3, 2014 the SpringCastle Funding Asset-backed Notes 2013-A (the “SpringCastle 2013-A Notes”), which were issued by the Co-Issuers on April 1, 2013. At September 30, 2014, the unpaid principal balance of the SpringCastle 2013-A Notes was $1.46 billion.

On October 3, 2014, SAC purchased $362.5 million initial principal amount of the SpringCastle 2014-A Notes. The Co-Issuers retained $61.6 million of the SpringCastle 2014-A Notes. Certain subsidiaries of NRZ own a 30% equity interest in the Co-Issuers. NRZ is managed by an affiliate of Fortress.

NON-CORE REAL ESTATE LOAN TRANSACTIONS

Proceeds from September Whole Loan Sales

The aggregate purchase price of $795.1 million for the September Whole Loan Sales included a holdback provision of $120 million of which $40 million was subject to finalization of the terms and conditions of administering the holdback and the remainder was subject to our ability to cure certain documentation deficiencies within the 60 day period (subject to extension under certain circumstances) subsequent to the closing of the sale. On October 16 and November 7, 2014, we received $20 million and $21.8 million, respectively, of the holdback provision from Credit Suisse.

Proceeds from MSR Sale

On October 23, 2014, we received $15.7 million from Nationstar, which reflected 40% of the proceeds due from the MSR Sale (50% of the proceeds were received on August 29, 2014). The remaining 10% is subject to a holdback for resolution of missing documentation and other customary conditions, and is expected to be received no later than 120 days after the date of transfer of servicing upon resolution of these conditions. Investment funds managed by affiliates of Fortress indirectly own a majority interest in Nationstar.






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The “November Whole Loan Sales”

As discussed in Note 1, on August 6, 2014, SFC and Credit Suisse agreed to the terms of the Probable Whole Loan Sales. We completed the second sale of certain performing and non-performing mortgage loans on November 7, 2014. The real estate loans included in the November Whole Loan Sales had a carrying value of $251.0 million (after the basis adjustment for the related allowance for finance receivable losses) as of September 30, 2014.

The aggregate purchase price of $270.1 million for the November Whole Loan Sales included a holdback provision of $34.3 million, which is subject to our ability to cure certain documentation deficiencies within a 60 day period (subject to extension under certain circumstances) subsequent to the closing of the sale. On November 7, 2014, we received $235.8 million of the proceeds from Credit Suisse.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements    

This report may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect our current views with respect to, among other things, future events and financial performance. You can identify these forward-looking statements by the use of forward-looking words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates,” “target,” “projects,” “contemplates” or the negative version of those words or other comparable words. Any forward-looking statements contained in this report are based upon our historical performance and on our current plans, estimates and expectations in light of information currently available to us. Such forward-looking statements are subject to various risks and uncertainties and assumptions relating to our operations, financial results, financial condition, business, prospects, growth strategy and liquidity. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements. We believe that these factors include, but are not limited to:

changes in general economic conditions, including the interest rate environment in which we conduct business and the financial markets through which we can access capital and also invest cash flows from our Insurance segment;
levels of unemployment and personal bankruptcies;
natural or accidental events such as earthquakes, hurricanes, tornadoes, fires, or floods affecting our customers, collateral, or branches or other operating facilities;
war, acts of terrorism, riots, civil disruption, pandemics, or other events disrupting business or commerce;
the effect of future sales of our remaining portfolio of real estate loans and the transfer of servicing for these loans;
changes in the rate at which we can collect or potentially sell our finance receivables portfolio;
the effectiveness of our credit risk scoring models in assessing the risk of customer unwillingness or lack of capacity to repay;
changes in our ability to attract and retain employees or key executives to support our businesses;
changes in the competitive environment in which we operate, including the demand for our products, customer responsiveness to our distribution channels, and the strength and ability of our competitors to operate independently or to enter into business combinations that result in a more attractive range of customer products or provide greater financial resources;
shifts in collateral values, delinquencies, or credit losses;
changes in federal, state and local laws, regulations, or regulatory policies and practices, including the Dodd-Frank Wall Street Reform and Consumer Protection Act (which, among other things, established the Consumer Financial Protection Bureau, which has broad authority to regulate and examine financial institutions), that affect our ability to conduct business or the manner in which we conduct business, such as licensing requirements, pricing limitations or restrictions on the method of offering products, as well as changes that may result from increased regulatory scrutiny of the sub-prime lending industry;
potential liability relating to real estate and personal loans which we have sold or may sell in the future, or relating to securitized loans, if it is determined that there was a non-curable breach of a warranty made in connection with such transactions;
the costs and effects of any litigation or governmental inquiries or investigations involving us, particularly those that are determined adversely to us;
our continued ability to access the capital markets or the sufficiency of our current sources of funds to satisfy our cash flow requirements;
our ability to comply with our debt covenants;
our ability to generate sufficient cash to service all of our indebtedness;
our substantial indebtedness, which could prevent us from meeting our obligations under our debt instruments and limit our ability to react to changes in the economy or our industry, or our ability to incur additional borrowings;
the potential for downgrade of our debt by rating agencies, which would have a negative impact on our cost of, and access to, capital;
the impacts of our securitizations and borrowings;
our ability to maintain sufficient capital levels in our regulated and unregulated subsidiaries;
the material weakness that we have identified in our internal control over financial reporting; and
changes in accounting standards or tax policies and practices and the application of such new policies and practices to the manner in which we conduct business.


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We also direct readers to other risks and uncertainties discussed in other documents we file with the Securities and Exchange Commission (the “SEC”). The forward-looking statements made in this report relate only to events as of the date on which the statements are made. We do not undertake any obligation to publicly update or review any forward-looking statement except as required by law, whether as a result of new information, future developments or otherwise.

If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, our actual results may vary materially from what we may have expressed or implied by these forward-looking statements. We caution that you should not place undue reliance on any of our forward-looking statements. You should specifically consider the factors identified in this report that could cause actual results to differ before making an investment decision to purchase our common stock. Furthermore, new risks and uncertainties arise from time to time, and it is impossible for us to predict those events or how they may affect us.

Overview    

Springleaf is a leading consumer finance company providing responsible loan products primarily to non-prime customers. We originate consumer loans through our network of nearly 830 branch offices in 26 states and on a centralized basis as part of our iLoan division. Through two insurance subsidiaries, we write credit and non-credit insurance policies covering our customers and the property pledged as collateral for our loans. We also pursue strategic acquisitions of loan portfolios. As part of this strategy, in April 2013 we acquired from HSBC a $3.9 billion UPB consumer loan portfolio through a joint venture in which we own a 47% equity interest.

At September 30, 2014, we had four business segments: Consumer, Insurance, Acquisitions and Servicing, and Real Estate. See Note 16 of the Notes to Condensed Consolidated Financial Statements for a description of our segments.

OUR PRODUCTS

Our core product offerings include:

Personal Loans — We offer personal loans through our branch network and over the internet through our iLoan division to customers who generally need timely access to cash. Our personal loans are typically non-revolving with a fixed-rate and a fixed, original term of two to four years. At September 30, 2014, we had over 902,000 personal loans, representing $3.6 billion of net finance receivables, of which $1.7 billion, or 48%, were secured by collateral consisting of titled personal property (such as automobiles), $1.3 billion, or 37%, were secured by consumer household goods or other items of personal property, and the remainder were unsecured.

Insurance Products — We offer our customers credit insurance (life insurance, accident and health insurance, and involuntary unemployment insurance), non-credit insurance, and ancillary products, such as warranty protection, through both our branch operations and our iLoan division. Credit insurance and non-credit insurance products are provided by our subsidiaries, Merit and Yosemite Insurance Company (“Yosemite”). The ancillary products are home security and auto security membership plans and home appliance service contracts of unaffiliated companies.

SpringCastle Portfolio — We acquired the SpringCastle Portfolio from HSBC on April 1, 2013 through a joint venture in which we own a 47% equity interest. These loans included unsecured loans and loans secured by subordinate residential real estate mortgages (which we service as unsecured loans due to the fact that the liens are subordinated to superior ranking security interests). The SpringCastle Portfolio includes both closed-end accounts and open-end lines of credit. These loans are in a liquidating status and vary in substance and form from our originated loans. SFI assumed the direct servicing obligations for these loans in September 2013. At September 30, 2014, the SpringCastle Portfolio included over 291,000 of acquired loans, representing $2.1 billion in net finance receivables.

Our legacy products include:

Real Estate Loans — We ceased real estate lending in January 2012. These loans may be closed-end accounts or open-end home equity lines of credit, generally have a fixed rate and maximum original terms of 360 months, and are secured by first or second mortgages on residential real estate. At September 30, 2014, $233.8 million of real estate loans, or 36%, were secured by first mortgages and $421.5 million, or 64%, were secured by second mortgages. We continue to service the liquidating real estate loans and support any advances on open-end accounts.

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Retail Sales Finance — We ceased purchasing retail sales contracts and revolving retail accounts in January 2013. We continue to service the liquidating retail sales contracts and will provide revolving retail sales financing services on our revolving retail accounts. We refer to retail sales contracts and revolving retail accounts collectively as “retail sales finance.”

Recent Developments    

NON-CORE REAL ESTATE LOAN TRANSACTIONS

During the first nine months of 2014, we entered into a series of transactions relating to the sales of our beneficial interests in our non-core real estate loans, the related servicing of these loans, and the sales of certain performing and non-performing real estate loans. During the first nine months of 2014, we sold finance receivables held for sale with a carrying value of $6.1 billion and recorded net gains totaling $731.3 million. As a result of these transactions, we established a reserve for sales recourse obligations of $9.9 million during the third quarter of 2014. On November 7, 2014, we sold finance receivables held for sale with a carrying value of $251.0 million as of September 30, 2014. These transactions substantially complete the Company’s previously disclosed plan to liquidate its non-core real estate loans. See Note 1 and Note 20 of the Notes to Condensed Consolidated Financial Statements for further information on these sales.

In conjunction with these real estate loan transactions, we have closed our operational locations in Dallas, Texas, Rancho Cucamonga, California, and Wesley Chapel, Florida, and have eliminated certain staff positions in our Evansville, Indiana, location. In total, approximately 300 staff positions were eliminated. However, the total reduction in workforce was approximately 170 employees, as 130 employees have been transferred into other positions at Springleaf. We recorded restructuring costs of $4.3 million in the third quarter of 2014 due to the workforce reductions and the closings of the servicing facilities.

Our insurance subsidiaries have written certain insurance policies on properties collateralizing the loans that have been deconsolidated or disposed of as a result of these sales. As part of the disposition, the insurance policies associated with the sold loans have been or will be cancelled.

CREDIT RATINGS

Moody’s Investors Service (“Moody’s”), Standard & Poor’s Ratings Services (“S&P”), and Fitch, Inc. (“Fitch”) upgraded SFC’s long-term corporate debt rating as follows: (i) from B3 to B2 with a stable outlook by Moody’s on October 8, 2014; (ii) from B- to B with a stable outlook by S&P on August 8, 2014; and (iii) from B- to B with a stable outlook by Fitch on August 7, 2014.

SECURITIZATIONS

Whitford Brook 2014-VFN1 Securitization

On June 26, 2014, we established a private securitization facility in which Whitford Brook 2014-VFN1 Trust, a wholly owned special purpose vehicle of SFC, may issue variable funding notes with a maximum principal balance of $300 million to be backed by personal loans acquired from subsidiaries of SFC. The notes will be funded over a three-year period, subject to the satisfaction of customary conditions precedent. During this period, the notes can also be paid down to the required minimum balance of $100 million and then redrawn. Following the three-year funding period, the principal amount of the notes will be reduced as cash payments are received on the underlying personal loans and will be due and payable in full in July 2018, unless an option to prepay is elected between July 2017 and July 2018. At September 30, 2014, the required minimum balance of $100 million was drawn under the notes.

2014-A Securitization

On March 26, 2014, we completed a private securitization transaction in which a wholly owned special purpose vehicle of SFC sold $559.3 million of notes backed by personal loans held by the 2014-A Trust, at a 2.62% weighted average yield. We sold the asset-backed notes for $559.2 million, after the price discount but before expenses and a $6.4 million interest reserve requirement. We initially retained $32.9 million of the 2014-A Trust’s subordinate asset-backed notes.





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Renewal of Midbrook 2013-VFN1 Securitization

On June 13, 2014, we amended the note purchase agreement with Midbrook 2013-VFN1 Trust, a wholly owned special purpose vehicle of SFC, to extend the one-year funding period to a two-year funding period. Following the two-year funding period, the principal amount of the notes, if any, will be reduced as cash payments are received on the underlying personal loans and will be due and payable in full in July 2019. The maximum principal balance of variable funding notes that can be issued remained at $300 million. No amounts have been funded.

Repayment of 2013-BAC Trust Notes

On September 25, 2013, we completed a private securitization transaction in which Springleaf Funding Trust 2013-BAC, a wholly owned special purpose vehicle of SFC, issued $500 million of notes backed by an amortizing pool of personal loans acquired from subsidiaries of SFC. On March 27, 2014, we repaid the entire $231.3 million outstanding principal balance of the notes, plus accrued and unpaid interest.

SpringCastle 2014-A Notes

On October 3, 2014, the Co-Issuers issued $2.62 billion of the SpringCastle 2014-A Notes at a weighted average yield of 4.68% in a private placement transaction. The SpringCastle 2014-A Notes are collateralized by the SpringCastle Portfolio in which SFC owns a 47% equity interest as a result of SFI’s capital contribution of 100% of SAC’s common stock to SFC on July 31, 2014.

The Co-Issuers sold the SpringCastle 2014-A Notes for approximately $2.55 billion after the price discount but before expenses. The Co-Issuers used the proceeds from the SpringCastle 2014-A Notes to repay in full on October 3, 2014 the SpringCastle 2013-A Notes, which were issued by the Co-Issuers on April 1, 2013. At September 30, 2014, the unpaid principal balance of the SpringCastle 2013-A Notes was $1.46 billion.

On October 3, 2014, SAC purchased $362.5 million initial principal amount of the SpringCastle 2014-A Notes. The Co-Issuers retained $61.6 million of the SpringCastle 2014-A Notes.

PREPAYMENT OF SECURED TERM LOAN

On March 31, 2014, SFFC prepaid, without penalty or premium, the entire $750.0 million outstanding principal balance of the secured term loan, plus accrued and unpaid interest. Effective upon the prepayment, all obligations of SFFC, SFC, and most of the consumer finance operating subsidiaries of SFC under the secured term loan (other than contingent reimbursement obligations and indemnity obligations) were terminated and all guarantees and security interests were released.

OUTLOOK

Assuming the U.S. economy continues to experience slow to moderate growth, we expect to continue our long history of strong credit performance. We believe the strong credit quality of our personal loan portfolio is the result of our disciplined underwriting practices and ongoing collection efforts. We also continue to see growth in the volume of personal loan originations driven by the following factors:

Declining competition from thrifts and banks (although banks continue to serve non-prime customers in other ways) as these institutions have retreated from the non-prime market in the face of regulatory scrutiny and in the aftermath of the housing crisis. As a result of the reduced lending of these competitors, access to credit has fallen substantially for the non-prime segment of customers, which, in turn, has increased our potential customer base.
Slow but sustained economic growth.
Migration of customer activity from traditional channels such as direct mail to online channels (served by our iLoan division) where we believe we are well suited to capture volume due to our scale, technology, and deployment of advanced analytics.
Our renewed focus on our personal loan business as we have discontinued real estate and other product originations both in our branches and in centralized lending.

In addition, with an experienced management team, a strong balance sheet, proven access to the capital markets, and strong demand for consumer credit, we believe we are well positioned for future personal loan growth.


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We regularly consider strategic acquisitions and have been involved in transactions of various magnitudes involving a variety of forms of consideration and financing. Currently, we are evaluating a number of strategic acquisition opportunities, including one opportunity which, if consummated, would be the most significant acquisition transaction ever undertaken by the Company. The purchase price for possible acquisitions could be financed through the issuance of equity (which could significantly increase the number of shares of SHI’s common stock outstanding) or debt securities, bank borrowings, securitizations or a combination thereof. We cannot predict if any such acquisitions will be consummated or, if consummated, will result in a financial or other benefit to the Company. See the discussion under the heading “Risk Factors - There are risks associated with the acquisition of large loan portfolios, such as the SpringCastle Portfolio, including the possibility of increased delinquencies and losses, difficulties with integrating the loans into our servicing platform and disruption to our ongoing business, which could have a material adverse effect on our results of operations, financial condition and liquidity” in our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC for additional information.

Prior Period Revisions    

As disclosed in our 2013 Annual Report on Form 10-K, we identified certain out-of-period errors in preparing our annual consolidated financial statements for the year ended December 31, 2013. In addition to these errors, we had previously recorded and disclosed out-of-period adjustments in prior reporting periods when the errors were discovered. As a result, we revised all previously reported periods included in our 2013 Annual Report on Form 10-K. Similarly, we have revised all previously reported periods included in this report. We corrected the errors identified in the fourth quarter of 2013 and included these corrections in the appropriate prior periods. In addition, we reversed all out-of period adjustments previously recorded and disclosed, and included the adjustments in the appropriate periods. After evaluating the quantitative and qualitative aspects of these corrections, we have determined that our previous quarterly and annual consolidated financial statements were not materially misstated.

See Note 17 of the Notes to Condensed Consolidated Financial Statements for further information on the prior period revisions. All prior period data presented in the discussion and analysis of our financial condition and results of operations reflects the revised balances.



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Results of Operations    

CONSOLIDATED RESULTS

See table below for our consolidated operating results. A further discussion of our operating results for each of our business segments is provided under “—Segment Results.”
(dollars in thousands except earnings (loss) per share)
 
Three Months 
 Ended 
 September 30, 
 2014
 
Three Months 
 Ended 
 September 30, 
 2013
 
Nine Months 
 Ended 
 September 30, 
 2014
 
Nine Months 
 Ended 
 September 30, 
 2013
 
 
 
 
 
 
 
 
 
Interest income:
 
 
 
 
 
 
 
 
Finance charges
 
$
435,445

 
$
583,926

 
$
1,513,590

 
$
1,577,561

Finance receivables held for sale originated as held for investment
 
47,679

 

 
54,921

 

Total interest income
 
483,124

 
583,926

 
1,568,511

 
1,577,561

 
 
 
 
 
 
 
 
 
Interest expense
 
180,142

 
229,157

 
576,863

 
700,868

 
 
 
 
 
 
 
 
 
Net interest income
 
302,982

 
354,769

 
991,648

 
876,693

 
 
 
 
 
 
 
 
 
Provision for finance receivable losses
 
102,971

 
162,264

 
379,196

 
339,061

 
 
 
 
 
 
 
 
 
Net interest income after provision for finance receivable losses
 
200,011

 
192,505

 
612,452

 
537,632

 
 
 
 
 
 
 
 
 
Other revenues:
 
 

 
 

 
 

 
 

Insurance
 
44,010

 
38,277

 
125,116

 
107,144

Investment
 
11,251

 
6,532

 
31,334

 
27,254

Net loss on repurchases and repayments of debt
 

 
(33,572
)
 
(6,615
)
 
(33,809
)
Net gain (loss) on fair value adjustments on debt
 
1,352

 
6,586

 
(15,033
)
 
7,097

Net gain on sales of real estate loans and related trust assets
 
641,328

 

 
731,314

 

Other
 
(11,975
)
 
1,603

 
(7,403
)
 
6,986

Total other revenues
 
685,966

 
19,426

 
858,713

 
114,672

 
 
 
 
 
 
 
 
 
Other expenses:
 
 

 
 

 
 

 
 

Operating expenses:
 
 

 
 

 
 

 
 

Salaries and benefits
 
94,702

 
214,552

 
278,504

 
371,842

Other operating expenses
 
75,117

 
72,478

 
192,889

 
194,457

Insurance losses and loss adjustment expenses
 
20,141

 
16,550

 
57,173

 
47,650

Total other expenses
 
189,960

 
303,580

 
528,566

 
613,949

 
 
 
 
 
 
 
 
 
Income (loss) before provision for (benefit from) income taxes
 
696,017

 
(91,649
)
 
942,599

 
38,355

 
 
 
 
 
 
 
 
 
Provision for (benefit from) income taxes
 
234,322

 
(30,698
)
 
309,594

 
(1,998
)
 
 
 
 
 
 
 
 
 
Net income (loss)
 
461,695

 
(60,951
)
 
633,005

 
40,353

 
 
 
 
 
 
 
 
 
Net income attributable to non-controlling interests
 
34,945

 
31,643

 
81,542

 
86,383

 
 
 
 
 
 
 
 
 
Net income (loss) attributable to Springleaf
 
$
426,750

 
$
(92,594
)
 
$
551,463

 
$
(46,030
)
 
 
 
 
 
 
 
 
 
Share Data:
 
 

 
 

 
 

 
 

Weighted average number of shares outstanding:
 
 

 
 

 
 

 
 

Basic
 
114,788,439

 
100,000,000

 
114,788,439

 
100,000,000

Diluted
 
115,316,314

 
100,000,000

 
115,212,398

 
100,000,000

Earnings (loss) per share:
 
 

 
 

 
 

 
 

Basic
 
$
3.72

 
$
(0.93
)
 
$
4.80

 
$
(0.46
)
Diluted
 
$
3.70

 
$
(0.93
)
 
$
4.79

 
$
(0.46
)


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Comparison of Consolidated Results for Three Months Ended September 30, 2014 and 2013

Finance charges decreased for the three months ended September 30, 2014 when compared to the same period in 2013 due to the net of the following:
(dollars in thousands)
 
 
 

2014 compared to 2013 - Three Months Ended September 30
 

 
 

Decrease in average net receivables
$
(173,878
)
Increase in yield
25,397

Total
$
(148,481
)

Average net receivables decreased for the three months ended September 30, 2014 when compared to the same period in 2013 primarily due to our liquidating real estate loan portfolio, including the transfers of real estate loans with a total carrying value of $6.7 billion to finance receivables held for sale and the subsequent sales of nearly all of these real estate loans during the first nine months of 2014. This decrease also reflected lower SpringCastle average net receivables resulting from liquidations, partially offset by higher personal loan average net receivables.

Yield increased for the three months ended September 30, 2014 when compared to the same period in 2013 primarily from our personal loans, which have higher yields. This increase also reflected a higher proportion of personal loans as a result of the transfers of real estate loans to finance receivables held for sale on August 1, 2014.

Interest expense decreased for the three months ended September 30, 2014 when compared to the same period in 2013 due to the net of the following:
(dollars in thousands)
 
 
 

2014 compared to 2013 - Three Months Ended September 30
 

 
 

Decrease in average debt
$
(65,804
)
Increase in weighted average interest rate
16,789

Total
$
(49,015
)

Average debt decreased for the three months ended September 30, 2014 when compared to the same period in 2013 primarily due to debt repurchases and repayments of $3.8 billion during the past twelve months and the elimination of $3.5 billion of debt associated with our mortgage securitizations as a result of the sales of the Company’s beneficial interests in the mortgage-backed certificates during the first nine months of 2014. These decreases were partially offset by debt issuances pursuant to three consumer securitization transactions completed during the past twelve months.

The weighted average interest rate on our debt increased for the three months ended September 30, 2014 when compared to the same period in 2013 primarily due to the elimination of debt associated with our mortgage securitizations discussed above, which generally have lower interest rates. This increase was partially offset by the debt repurchases and repayments discussed above, which resulted in lower accretion of net discount applied to long-term debt.

Provision for finance receivable losses decreased $59.3 million for the three months ended September 30, 2014 when compared to the same period in 2013 primarily due to a reduction in the allowance requirements on our real estate loans deemed to be purchased credit impaired finance receivables and TDR finance receivables subsequent to the Fortress Acquisition as a result of the transfers of real estate loans with a total carrying value of $6.7 billion to finance receivables held for sale and the subsequent sales of nearly all of these real estate loans during the first nine months of 2014. This decrease was partially offset by additional allowance requirements primarily due to growth in our personal loans during the 2014 period and higher personal loan delinquency ratio at September 30, 2014.

Net loss on repurchases and repayments of debt of $33.6 million for the three months ended September 30, 2013 reflected acceleration of amortization of deferred costs and repurchases of debt at net amounts greater than carrying value.
Net gain on sales of real estate loans and related trust assets of $641.3 million for the three months ended September 30, 2014 reflected the reversal of the remaining unaccreted push-down accounting basis for the real estate loans, less allowance for

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finance receivable losses that we established at the date of the Fortress Acquisition. See Note 1 of the Notes to Condensed Financial Statements for further information on these sales.

Other revenues decreased $13.6 million for the three months ended September 30, 2014 when compared to the same period in 2013 primarily due to net charge-offs on our finance receivables held for sale and provision adjustments for liquidated held for sale accounts during the 2014 period. This decrease was partially offset by servicing fee revenues for the servicing of the real estate loans included in the MSR Sale. We continued to service these loans on behalf of Nationstar until the servicing transfer on September 30, 2014, under an interim servicing agreement.

Salaries and benefits decreased $119.9 million for the three months ended September 30, 2014 when compared to the same period in 2013 primarily due to $131.3 million of share-based compensation expense due to the grant of RSUs to certain of our executives in the third quarter of 2013. This decrease was partially offset by: (i) employee retention and severance accruals of $3.8 million recorded in the third quarter of 2014 due to the recent workforce reduction of approximately 170 employees and (ii) higher salary and bonus accruals reflecting an increase in number of employees and increased originations of personal loans.

Other operating expenses increased $2.6 million for the three months ended September 30, 2014 when compared to the same period in 2013 primarily due to higher professional fees of $24.1 million primarily due to one-time costs and restructuring costs relating to the real estate sales transactions and higher advertising and information technology expenses during the 2014 period. This increase was partially offset by servicing fee expenses charged by HSBC to service the SpringCastle Portfolio pursuant to an interim servicing agreement that was in place between April 1, 2013 and August 31, 2013.

Provision for income taxes totaled $234.3 million for the three months ended September 30, 2014 compared to benefit from income taxes of $30.7 million for the three months ended September 30, 2013. The effective tax rate for the three months ended September 30, 2014 was 33.7% compared to 33.5% for the same period in 2013. The effective tax rates for the three months ended September 30, 2014 and 2013 differed from the federal statutory rates primarily due to the effect of the non-controlling interest in our joint venture, partially offset by the effect of our state income taxes.

Comparison of Consolidated Results for Nine Months Ended September 30, 2014 and 2013

Finance charges decreased for the nine months ended September 30, 2014 when compared to the same period in 2013 due to the net of the following:
(dollars in thousands)
 
 
 

2014 compared to 2013 - Nine Months Ended September 30
 

 
 

Decrease in average net receivables
$
(164,493
)
Increase in yield
100,522

Total
$
(63,971
)

Average net receivables decreased for the nine months ended September 30, 2014 when compared to the same period in 2013 primarily due to our liquidating real estate loan portfolio, including the transfers of real estate loans with a total carrying value of $6.7 billion to finance receivables held for sale and the subsequent sales of nearly all of these real estate loans during the first nine months of 2014. This decrease also reflected lower SpringCastle average net receivables resulting from liquidations, partially offset by higher personal loan average net receivables.

Yield increased for the nine months ended September 30, 2014 when compared to the same period in 2013 primarily from our personal loans, which have higher yields. This increase also reflected a higher proportion of personal loans as a result of the transfers of real estate loans to finance receivables held for sale during the first nine months of 2014.

Finance charges for the nine months ended September 30, 2014 when compared to the same period in 2013 were favorably impacted by an additional three months of finance charges on the SpringCastle Portfolio totaling $143.2 million, which is included in the change in average net receivables and yield in the table above.




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Interest expense decreased for the nine months ended September 30, 2014 when compared to the same period in 2013 due to the following:
(dollars in thousands)
 
 
 

2014 compared to 2013 - Nine Months Ended September 30
 

 
 

Decrease in average debt
$
(112,141
)
Decrease in weighted average interest rate
(11,864
)
Total
$
(124,005
)

Average debt decreased for the nine months ended September 30, 2014 when compared to the same period in 2013 primarily due to debt repurchases and repayments of $3.8 billion during the past twelve months and the elimination of $3.5 billion of debt associated with our mortgage securitizations as a result of the sales of the Company’s beneficial interests in the mortgage-backed certificates during the first nine months of 2014. These decreases were partially offset by debt issuances pursuant to three consumer securitization transactions completed during the past twelve months.

The weighted average interest rate on our debt decreased for the nine months ended September 30, 2014 when compared to the same period in 2013 primarily due to the debt repurchases and repayments discussed above, which resulted in lower accretion of net discount applied to long-term debt. This decrease was partially offset by the elimination of debt associated with our mortgage securitizations discussed above, which generally have lower interest rates.

Interest expense for the nine months ended September 30, 2014 when compared to the same period in 2013 included an additional three months of interest expense on the long-term debt associated with the securitization of the SpringCastle Portfolio totaling $22.2 million, which is included in the change in average debt and weighted average interest rate in the table above.

Provision for finance receivable losses increased $40.1 million for the nine months ended September 30, 2014 when compared to the same period in 2013 primarily due to $39.6 million of recoveries recorded in June 2013 resulting from a sale of previously charged-off finance receivables in June 2013 (net of a $1.6 million adjustment for the subsequent buyback of certain finance receivables). This increase also reflected additional allowance requirements primarily due to growth in our personal loans during the 2014 period and higher personal loan delinquency ratio at September 30, 2014. This increase was partially offset by a reduction in the allowance requirements on our real estate loans deemed to be purchased credit impaired finance receivables and TDR finance receivables subsequent to the Fortress Acquisition as a result of the transfers of real estate loans with a total carrying value of $6.7 billion to finance receivables held for sale and the subsequent sales of nearly all of these real estate loans during the first nine months of 2014.

Net loss on repurchases and repayments of debt of $6.6 million and $33.8 million for the nine months ended September 30, 2014 and 2013, respectively, reflected repurchases of debt at net amounts greater than carrying value.

Net loss on fair value adjustments on debt of $15.0 million for the nine months ended September 30, 2014 and net gain on fair value adjustments on debt of $7.1 million for the nine months ended September 30, 2013, reflected net unrealized (loss) gain, respectively, on fair value adjustments of the long-term debt associated with the securitization of the SpringCastle Portfolio that is accounted for at fair value through earnings.

Net gain on sales of real estate loans and related trust assets of $731.3 million for the nine months ended September 30, 2014 reflected the reversal of the remaining unaccreted push-down accounting basis for the real estate loans, less allowance for finance receivable losses that we established at the date of the Fortress Acquisition. See Note 1 of the Notes to Condensed Financial Statements for further information on these sales.

Other revenues decreased $14.4 million for the nine months ended September 30, 2014 when compared to the same period in 2013 primarily due to net charge-offs on our finance receivables held for sale and provision adjustments for liquidated held for sale accounts during the 2014 period. This decrease was partially offset by servicing fee revenues for the servicing of the real estate loans included in the MSR Sale. We continued to service these loans on behalf of Nationstar until the servicing transfer on September 30, 2014, under an interim servicing agreement.

Salaries and benefits decreased $93.3 million for the nine months ended September 30, 2014 when compared to the same period in 2013 primarily due to $131.3 million of share-based compensation expense due to the grant of RSUs to certain of our

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executives in the third quarter of 2013. This decrease was partially offset by: (i) employee retention and severance accruals of $3.8 million recorded in the third quarter of 2014 due to the recent workforce reduction of approximately 170 employees; (ii) higher salary accruals reflecting an increase in number of employees and increased originations of personal loans; and (iii) share-based compensation expenses during the 2014 period due to the grant of RSUs to certain of our executives and employees subsequent to the initial public offering of SHI common stock.

Provision for income taxes totaled $309.6 million for the nine months ended September 30, 2014 compared to benefit from income taxes of $2.0 million for the nine months ended September 30, 2013. The effective tax rate for the nine months ended September 30, 2014 was 32.8% compared to (5.2)% for the same period in 2013. The effective tax rates for the nine months ended September 30, 2014 and 2013 differed from the federal statutory rates primarily due to the effect of the non-controlling interest in our joint venture, partially offset by the effect of our state income taxes.

Reconciliation of Income (Loss) before Provision for (Benefit from) Income Taxes on Push-Down Accounting Basis to Historical Accounting Basis

Due to the nature of the Fortress Acquisition, we revalued our assets and liabilities based on their fair values at November 30, 2010, the date of the Fortress Acquisition, in accordance with business combination accounting standards, or push-down accounting. Push-down accounting affected and continues to affect, among other things, the carrying amount of our finance receivables and long-term debt, our finance charges on our finance receivables and related yields, our interest expense, our allowance for finance receivable losses, and our net charge-offs and charge-off ratio. In general, on a quarterly basis, we accrete or amortize the valuation adjustments recorded in connection with the Fortress Acquisition, or record adjustments based on current expected cash flows as compared to expected cash flows at the time of the Fortress Acquisition, in each case, as described in more detail in the footnotes to the table below. In addition, push-down accounting resulted in the elimination of accretion or amortization of discounts, premiums, and other deferred costs on our finance receivables and long-term debt prior to the Fortress Acquisition. The reconciliations of income (loss) before provision for (benefit from) income taxes on a push-down accounting basis to income (loss) before provision for (benefit from) income taxes on a historical accounting basis (which is a basis of accounting other than U.S. GAAP that we believe provides a consistent basis for both management and other interested third parties to better understand our operating results) were as follows:
(dollars in thousands)
 
Three Months 
 Ended 
 September 30, 
 2014
 
Three Months 
 Ended 
 September 30, 
 2013
 
Nine Months 
 Ended 
 September 30, 
 2014
 
Nine Months 
 Ended 
 September 30, 
 2013
 
 
 
 
 
 
 
 
 
Income (loss) before provision for (benefit from) income taxes - push-down accounting basis
 
$
696,017

 
$
(91,649
)
 
$
942,599

 
$
38,355

Interest income adjustments (a)
 
(17,067
)
 
(51,635
)
 
(88,294
)
 
(153,674
)
Interest expense adjustments (b)
 
36,359

 
33,476

 
99,886

 
102,977

Provision for finance receivable losses adjustments (c)
 
(19,930
)
 
8,422

 
(17,272
)
 
23,062

Repurchases and repayments of long-term debt adjustments (d)
 

 
14,158

 
(4,884
)
 
(6,976
)
Fair value adjustments on debt (e)
 
170

 
12,250

 
8,521

 
44,950

Sales of finance receivables held for sale originated as held for investment adjustments (f)
 
(361,439
)
 

 
(536,420
)
 

Amortization of other intangible assets (g)
 
1,073

 
1,228

 
3,294

 
3,946

Other (h)
 
13,802

 
1,276

 
14,872

 
4,685

Income (loss) before provision for (benefit from) income taxes - historical accounting basis
 
$
348,985

 
$
(72,474
)
 
$
422,302

 
$
57,325

                                      
(a)
Interest income adjustments consist of: (1) the accretion of the net discount applied to non-credit impaired net finance receivables to revalue the non-credit impaired net finance receivables to their fair value at the date of the Fortress Acquisition using the interest method over the remaining life of the related net finance receivables; (2) the difference in finance charges earned on our pools of purchased credit impaired net finance receivables under a level rate of return over the expected lives of the underlying pools of purchased credit impaired finance receivables, net of the finance charges earned on these finance receivables under historical accounting basis; and (3) the elimination of the accretion or amortization of historical unearned points and fees, deferred origination costs, premiums, and discounts.

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Components of interest income adjustments consisted of:
(dollars in thousands)
 
Three Months 
 Ended 
 September 30, 
 2014
 
Three Months 
 Ended 
 September 30, 
 2013
 
Nine Months 
 Ended 
 September 30, 
 2014
 
Nine Months 
 Ended 
 September 30, 
 2013
 
 
 
 
 
 
 
 
 
Accretion of net discount applied to non-credit impaired net finance receivables
 
$
(13,065
)
 
$
(40,667
)
 
$
(65,454
)
 
$
(122,547
)
Purchased credit impaired finance receivables finance charges
 
(4,653
)
 
(14,619
)
 
(29,143
)
 
(43,137
)
Elimination of accretion or amortization of historical unearned points and fees, deferred origination costs, premiums, and discounts
 
651

 
3,651

 
6,303

 
12,010

Total
 
$
(17,067
)
 
$
(51,635
)
 
$
(88,294
)
 
$
(153,674
)

(b)
Interest expense adjustments consist of: (1) the accretion of the net discount applied to long-term debt to revalue the debt securities to their fair value at the date of the Fortress Acquisition using the interest method over the remaining life of the related debt securities; and (2) the elimination of the accretion or amortization of historical discounts, premiums, commissions, and fees.

Components of interest expense adjustments were as follows:
(dollars in thousands)
 
Three Months 
 Ended 
 September 30, 
 2014
 
Three Months 
 Ended 
 September 30, 
 2013
 
Nine Months 
 Ended 
 September 30, 
 2014
 
Nine Months 
 Ended 
 September 30, 
 2013
 
 
 
 
 
 
 
 
 
Accretion of net discount applied to long-term debt
 
$
37,690

 
$
43,219

 
$
111,078

 
$
138,752

Elimination of accretion or amortization of historical discounts, premiums, commissions, and fees
 
(1,331
)
 
(9,743
)
 
(11,192
)
 
(35,775
)
Total
 
$
36,359

 
$
33,476

 
$
99,886

 
$
102,977


(c)
Provision for finance receivable losses consists of the allowance for finance receivable losses adjustments and net charge-offs quantified in the table below. Allowance for finance receivable losses adjustments reflect the net difference between our allowance adjustment requirements calculated under our historical accounting basis net of adjustments required under push-down accounting basis. Net charge-offs reflect the net charge-off of loans at a higher carrying value under historical accounting basis versus the discounted basis to their fair value at date of the Fortress Acquisition under push-down accounting basis.

Components of provision for finance receivable losses adjustments were as follows:
(dollars in thousands)
 
Three Months 
 Ended 
 September 30, 
 2014
 
Three Months 
 Ended 
 September 30, 
 2013
 
Nine Months 
 Ended 
 September 30, 
 2014
 
Nine Months 
 Ended 
 September 30, 
 2013
 
 
 
 
 
 
 
 
 
Allowance for finance receivable losses adjustments
 
$
(13,596
)
 
$
22,520

 
$
9,616

 
$
72,348

Net charge-offs
 
(6,334
)
 
(14,098
)
 
(26,888
)
 
(49,286
)
Total
 
$
(19,930
)
 
$
8,422

 
$
(17,272
)
 
$
23,062


(d)
Repurchases and repayments of long-term debt adjustments reflect the impact on acceleration of the accretion of the net discount or amortization of the net premium applied to long-term debt.

(e)
Fair value adjustments on debt reflect differences between historical accounting basis and push-down accounting basis. On a historical accounting basis, certain long-term debt components are marked-to-market on a recurring basis and are no longer marked-to-market on a recurring basis after the application of push-down accounting at the time of the Fortress Acquisition.

(f)
Fair value adjustments on sales of finance receivables held for sale originated as held for investment reflect the reversal of the remaining unaccreted push-down accounting basis for net finance receivables, less allowance for finance receivable losses established at the date of the Fortress Acquisition that were sold in the 2014 period.

(g)
Amortization of other intangible assets reflects the amortization over the remaining estimated life of intangible assets established at the date of the Fortress Acquisition as a result of the application of push-down accounting.


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(h)
“Other” items reflect differences between historical accounting basis and push-down accounting basis relating to various items such as the elimination of deferred charges, adjustments to the basis of other real estate assets, fair value adjustments to fixed assets, adjustments to insurance claims and policyholder liabilities, and various other differences all as of the date of the Fortress Acquisition.

At September 30, 2014, the remaining unaccreted push-down accounting basis totaled $5.3 million for net finance receivables, less allowance for finance receivable losses, and $616.1 million for long-term debt.

Segment Results    

See Note 16 of the Notes to Condensed Consolidated Financial Statements for a description of our segments. Management considers Consumer, Insurance, and Acquisitions and Servicing as our Core Consumer Operations and Real Estate as our Non-Core Portfolio. Due to the nature of the Fortress Acquisition, we applied push-down accounting. However, we report the operating results of our Core Consumer Operations, Non-Core Portfolio, and Other using the same accounting basis that we employed prior to the Fortress Acquisition, which we refer to as “historical accounting basis,” to provide a consistent basis for both management and other interested third parties to better understand the operating results of these segments. The historical accounting basis (which is a basis of accounting other than U.S. GAAP) also provides better comparability of the operating results of these segments to our competitors and other companies in the financial services industry. The historical accounting basis is not applicable to the Acquisitions and Servicing segment since this segment was added effective April 1, 2013 as a result of our co-investment in the SpringCastle Portfolio and therefore, was not affected by the Fortress Acquisition. See Note 16 of the Notes to Condensed Consolidated Financial Statements for reconciliations of segment totals to condensed consolidated financial statement amounts.

We allocate revenues and expenses (on a historical accounting basis) to each segment using the following methodologies:

Interest income
Directly correlated with a specific segment.
Interest expense
Disaggregated into three categories based on the underlying debt that the expense pertains to:
l  securitizations — allocated to the segments whose finance receivables serve as the collateral securing each of the respective debt instruments;
l  unsecured debt — allocated to the segments based on expected leverage for that segment or the balance of unencumbered assets and cash proceeds from sale of receivables in that segment; and
l  secured term loan — allocated to the segments whose finance receivables served as the collateral securing each of the respective debt instruments.
Provision for finance receivable losses
Directly correlated with a specific segment except for allocations to “other,” which are based on the remaining delinquent accounts as a percentage of total delinquent accounts.
Insurance revenues
Directly correlated with a specific segment.
Investment revenues
Directly correlated with a specific segment.
Net gain (loss) on repurchases and repayments of debt
Allocated to the segments based on the interest expense allocation of debt.
Net gain (loss) on fair value adjustments on debt
Directly correlated with a specific segment.
Other revenues — other
Directly correlated with a specific segment except for gains and losses on foreign currency exchange and derivatives. These items are allocated to the segments based on the interest expense allocation of debt.
Salaries and benefits
Directly correlated with a specific segment. Other salaries and benefits not directly correlated with a specific segment are allocated to each of the segments based on services provided.
Other operating expenses
Directly correlated with a specific segment. Other operating expenses not directly correlated with a specific segment are allocated to each of the segments based on services provided.
Insurance losses and loss adjustment expenses
Directly correlated with a specific segment.

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We evaluate the performance of each of our segments based on its pretax operating earnings.

CORE CONSUMER OPERATIONS

Pretax operating results for Consumer and Insurance (which are reported on a historical accounting basis), and Acquisitions and Servicing are presented in the table below on an aggregate basis:
(dollars in thousands)
 
Three Months 
 Ended 
 September 30, 
 2014
 
Three Months 
 Ended 
 September 30, 
 2013
 
Nine Months 
 Ended 
 September 30, 
 2014
 
Nine Months 
 Ended 
 September 30, 
 2013
 
 
 
 
 
 
 
 
 
Interest income
 
$
367,171

 
$
351,519

 
$
1,080,233

 
$
850,976

 
 
 
 
 
 
 
 
 
Interest expense
 
58,151

 
60,659

 
180,083

 
158,119

 
 
 
 
 
 
 
 
 
Net interest income
 
309,020

 
290,860

 
900,150

 
692,857

 
 
 
 
 
 
 
 
 
Provision for finance receivable losses
 
84,419

 
98,836

 
270,919

 
130,647

 
 
 
 
 
 
 
 
 
Net interest income after provision for finance receivable losses
 
224,601

 
192,024

 
629,231

 
562,210

 
 
 
 
 
 
 
 
 
Other revenues:
 
 

 
 

 
 

 
 

Insurance
 
43,997

 
38,266

 
125,075

 
107,114

Investment
 
13,723

 
8,314

 
35,652

 
31,792

Net loss on repurchases and repayments of debt
 

 
(2,890
)
 
(1,429
)
 
(4,390
)
Net gain (loss) on fair value adjustments on debt
 
1,522

 
6,619

 
(14,810
)
 
6,619

Other
 
19,097

 
13,169

 
59,543

 
20,794

Total other revenues
 
78,339

 
63,478

 
204,031

 
161,929

 
 
 
 
 
 
 
 
 
Other expenses:
 
 

 
 

 
 

 
 

Operating expenses:
 
 

 
 

 
 
 
 

Salaries and benefits
 
75,643

 
70,805

 
234,891

 
201,918

Other operating expenses
 
69,811

 
64,589

 
192,450

 
151,171

Insurance loss and loss adjustment expenses
 
20,451

 
16,849

 
57,923

 
48,373

Total other expenses
 
165,905

 
152,243

 
485,264

 
401,462

 
 
 
 
 
 
 
 
 
Pretax operating income
 
137,035

 
103,259

 
347,998

 
322,677

 
 
 
 
 
 
 
 
 
Pretax operating income attributable to non-controlling interests
 
34,945

 
31,643

 
81,542

 
86,383

 
 
 
 
 
 
 
 
 
Pretax operating income attributable to Springleaf
 
$
102,090

 
$
71,616

 
$
266,456

 
$
236,294



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Table of Contents

Selected financial statistics for Consumer (which are reported on a historical accounting basis) and Acquisitions and Servicing were as follows:
(dollars in thousands)
 
Three Months 
 Ended 
 September 30, 
 2014
 
Three Months 
 Ended 
 September 30, 
 2013
 
At or for the Nine Months 
 Ended 
 September 30, 
 2014
 
At or for the Nine Months 
 Ended 
 September 30, 
 2013
 
 
 
 
 
 
 
 
 
Consumer
 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
Net finance receivables
 
 

 
 

 
$
3,578,019

 
$
2,968,211

Number of accounts
 
 

 
 

 
894,182

 
797,406

 
 
 
 
 
 
 
 
 
Average net receivables
 
$
3,480,581

 
$
2,897,354

 
$
3,295,101

 
$
2,705,438

 
 
 
 
 
 
 
 
 
Yield
 
27.02
 %
 
25.92
 %
 
27.00
 %
 
25.65
 %
 
 
 
 
 
 
 
 
 
Gross charge-off ratio (a)
 
5.46
 %
 
4.29
 %
 
5.60
 %
 
5.06
 %
Recovery ratio (b)
 
(0.78
)%
 
(0.26
)%
 
(0.67
)%
 
(2.16
)%
Charge-off ratio (a) (b)
 
4.68
 %
 
4.03
 %
 
4.93
 %
 
2.90
 %
 
 
 
 
 
 
 
 
 
Delinquency ratio
 
 

 
 

 
2.55
 %
 
2.32
 %
 
 
 
 
 
 
 
 
 
Origination volume
 
$
924,317

 
$
767,097

 
$
2,594,645

 
$
2,326,961

Number of accounts
 
193,288

 
192,225

 
566,032

 
563,531

 
 
 
 
 
 
 
 
 
Acquisitions and Servicing
 
 
 
 

 
 
 
 

 
 
 
 
 
 
 
 
 
Net finance receivables
 
 
 
 

 
$
2,083,145

 
$
2,654,238

Number of accounts
 
 
 
 

 
291,153

 
363,912

 
 
 
 
 
 
 
 
 
Average net receivables
 
$
2,141,884

 
$
2,734,454

 
$
2,279,237

 
$
2,808,221

 
 
 
 
 
 
 
 
 
Yield
 
24.26
 %
 
23.64
 %
 
24.28
 %
 
23.53
 %
 
 
 
 
 
 
 
 
 
Net charge-off ratio
 
5.31
 %
 
8.58
 %
 
7.09
 %
 
5.48
 %
 
 
 
 
 
 
 
 
 
Delinquency ratio
 
 

 
 

 
5.11
 %
 
7.45
 %
                                      
(a)
The gross charge-off ratio and charge-off ratio for the nine months ended September 30, 2013 reflect $14.5 million of additional charge-offs recorded in March 2013 (on a historical accounting basis) related to our change in charge-off policy for personal loans effective March 31, 2013. Excluding these additional charge-offs, our Consumer gross charge-off ratio would have been 4.34% for the nine months ended September 30, 2013.

(b)
The recovery ratio and charge-off ratio for the three and nine months ended September 30, 2013 reflect $23.8 million of recoveries on charged-off core personal loans resulting from a sale of previously charged-off finance receivables in June 2013, net of a $1.6 million adjustment recorded in September 2013 for the subsequent buyback of certain personal loans. Excluding these recoveries, our Consumer charge-off ratio would have been 3.81% and 4.09%, respectively, for the three and nine months ended September 30, 2013. Excluding the impacts of the $14.5 million of additional charge-offs and the $23.8 million of recoveries on charged-off core personal loans, our Consumer charge-off ratio would have been 3.36% for the nine months ended September 30, 2013.


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Comparison of Pretax Operating Results for Three Months Ended September 30, 2014 and 2013
(dollars in thousands)
 
 
 
 
Three Months Ended September 30,
 
2014
 
2013
 
 
 
 
 
Interest income:
 
 

 
 

Finance charges - Consumer
 
$
236,190

 
$
188,601

Finance charges - Acquisitions and Servicing
 
130,981

 
162,918

Total
 
$
367,171

 
$
351,519


Finance charges — Consumer increased $47.6 million for the three months ended September 30, 2014 when compared to the same period in 2013 primarily due to increases in average net receivables and yield. Average net receivables increased for the three months ended September 30, 2014 when compared to the same period in 2013 primarily due to increased originations on personal loans resulting from our continued focus on personal loans. Yield increased for the three months ended September 30, 2014 when compared to the same period in 2013 primarily due to pricing of new personal loans at higher state specific rates with concentrations in states with more favorable returns.

Finance charges — Acquisitions and Servicing decreased $31.9 million for the three months ended September 30, 2014 when compared to the same period in 2013 primarily due to lower average net receivables due to the liquidating status of the SpringCastle Portfolio, partially offset by higher yields on the finance receivables remaining in the portfolio.
(dollars in thousands)
 
 
 
 
Three Months Ended September 30,
 
2014
 
2013
 
 
 
 
 
Interest expense - Consumer

$
40,466

 
$
38,241

Interest expense - Acquisitions and Servicing

17,685


22,418

Total

$
58,151


$
60,659


Interest expense — Consumer increased $2.2 million for the three months ended September 30, 2014 when compared to the same period in 2013 primarily due to additional funding required to support increased originations of personal loans. This increase was partially offset by less utilization of financing from unsecured notes that was replaced by consumer loan securitizations, which generally have lower interest rates.

Interest expense — Acquisitions and Servicing decreased $4.7 million for the three months ended September 30, 2014 when compared to the same period in 2013 primarily due to lower average debt required as a result of the liquidating status of the SpringCastle Portfolio.
(dollars in thousands)
 
 
 
 
Three Months Ended September 30,
 
2014
 
2013
 
 
 
 
 
Provision for finance receivable losses - Consumer

$
56,087

 
$
38,174

Provision for finance receivable losses - Acquisitions and Servicing

28,332


60,662

Total

$
84,419


$
98,836


Provision for finance receivable losses — Consumer increased $17.9 million for the three months ended September 30, 2014 when compared to the same period in 2013 primarily due to additional allowance requirements reflecting increased originations of personal loans in the 2014 period and higher personal loan delinquency ratio at September 30, 2014.

Provision for finance receivable losses — Acquisitions and Servicing decreased $32.3 million for the three months ended September 30, 2014 when compared to the same period in 2013 primarily due to lower delinquency ratio of the SpringCastle Portfolio at September 30, 2014 and its liquidating status.

Insurance revenues increased $5.7 million for the three months ended September 30, 2014 when compared to the same period in 2013 primarily due to increases in credit and non-credit earned premiums reflecting higher originations of personal loans in the 2014 period. The increase in credit premiums also reflects the origination of personal loans with longer terms.


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Net gain on fair value adjustments on debt — Acquisitions and Servicing of $1.5 million and $6.6 million for the three months ended September 30, 2014 and 2013 resulted from the unrealized gain on fair value adjustments of the long-term debt associated with the securitization of the SpringCastle Portfolio that is accounted for at fair value through earnings.

Other revenues — other increased $5.9 million for the three months ended September 30, 2014 when compared to the same period in 2013 primarily due to servicing fee revenues for the fees charged by Acquisitions and Servicing for servicing the SpringCastle Portfolio. We assumed the direct servicing obligations for these loans in September 2013. These fees are eliminated in consolidated operating results with the servicing fee expenses, which are included in other operating expenses.
(dollars in thousands)
 
 
 
 
Three Months Ended September 30,
 
2014
 
2013
 
 
 
 
 
Salaries and benefits - Consumer
 
$
64,015

 
$
62,318

Salaries and benefits - Insurance
 
4,791

 
4,481

Salaries and benefits - Acquisitions and Servicing
 
6,837

 
4,006

Total
 
$
75,643

 
$
70,805

(dollars in thousands)
 
 
 
 
Three Months Ended September 30,
 
2014
 
2013
 
 
 
 
 
Other operating expenses - Consumer
 
$
44,554

 
$
30,421

Other operating expenses - Insurance
 
3,758

 
3,115

Other operating expenses - Acquisitions and Servicing
 
21,499

 
31,053

Total
 
$
69,811

 
$
64,589


Other operating expenses for Consumer and Insurance increased $14.8 million for the three months ended September 30, 2014 when compared to the same period in 2013 primarily due to higher advertising, professional fees, and information technology expenses.

Insurance losses and loss adjustment expenses increased $3.6 million for the three months ended September 30, 2014 when compared to the same period in 2013 primarily due to an unfavorable variance in claim reserves.

Comparison of Pretax Operating Results for Nine Months Ended September 30, 2014 and 2013
(dollars in thousands)
 
 
 
 
Nine Months Ended September 30,
 
2014
 
2013
 
 
 
 
 
Interest income:
 
 

 
 

Finance charges - Consumer
 
$
666,281

 
$
519,688

Finance charges - Acquisitions and Servicing
 
413,952

 
331,288

Total
 
$
1,080,233

 
$
850,976


Finance charges — Consumer increased $146.6 million for the nine months ended September 30, 2014 when compared to the same period in 2013 primarily due to increases in average net receivables and yield. Average net receivables increased for the nine months ended September 30, 2014 when compared to the same period in 2013 primarily due to increased originations on personal loans resulting from our continued focus on personal loans. Yield increased for the nine months ended September 30, 2014 when compared to the same period in 2013 primarily due to pricing of new personal loans at higher state specific rates with concentrations in states with more favorable returns.

Finance charges — Acquisitions and Servicing for the nine months ended September 30, 2014 were favorably impacted by an additional three months of finance charges on the SpringCastle Portfolio when compared to the same period in 2013.

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(dollars in thousands)
 
 
 
 
Nine Months Ended September 30,
 
2014
 
2013
 
 
 
 
 
Interest expense - Consumer
 
$
122,097

 
$
111,110

Interest expense - Acquisitions and Servicing
 
57,986

 
47,009

Total
 
$
180,083

 
$
158,119


Interest expense — Consumer increased $11.0 million for the nine months ended September 30, 2014 when compared to the same period in 2013 primarily due to additional funding required to support increased originations of personal loans. This increase was partially offset by less utilization of financing from unsecured notes that was replaced by consumer loan securitizations, which generally have lower interest rates.

Interest expense — Acquisitions and Servicing included an additional three months of interest expense on the long-term debt associated with the securitization of the SpringCastle Portfolio for the nine months ended September 30, 2014 when compared to the same period in 2013.
(dollars in thousands)
 
 
 
 
Nine Months Ended September 30,
 
2014
 
2013
 
 
 
 
 
Provision for finance receivable losses - Consumer
 
$
149,238

 
$
52,188

Provision for finance receivable losses - Acquisitions and Servicing
 
121,681

 
78,459

Total
 
$
270,919

 
$
130,647


Provision for finance receivable losses — Consumer increased $97.1 million for the nine months ended September 30, 2014 when compared to the same period in 2013 primarily due to $23.8 million of recoveries recorded in June 2013 on previously charged-off personal loans resulting from a sale of these loans in June 2013. This increase also reflected additional allowance requirements resulting from increased originations of personal loans in the 2014 period and higher personal loan delinquency ratio at September 30, 2014.

Provision for finance receivable losses — Acquisitions and Servicing included an additional three months of provision for finance receivable losses on the SpringCastle Portfolio for the nine months ended September 30, 2014 when compared to the same period in 2013.

Insurance revenues increased $18.0 million for the nine months ended September 30, 2014 when compared to the same period in 2013 primarily due to increases in credit and non-credit earned premiums reflecting higher originations of personal loans in the 2014 period. The increase in credit premiums also reflects the origination of personal loans with longer terms.

Net loss on repurchases and repayments of debt — Consumer of $1.4 million and $4.4 million for the nine months ended September 30, 2014 and 2013, respectively, reflected repurchases of debt at net amounts greater than carrying value.

Net loss on fair value adjustments on debt — Acquisitions and Servicing of $14.8 million for the nine months ended September 30, 2014 and net gain on fair value adjustments on debt — Acquisitions and Servicing of $6.6 million for the nine months ended September 30, 2013 reflected net unrealized (loss) gain, respectively, on fair value adjustments of the long-term debt associated with the securitization of the SpringCastle Portfolio that is accounted for at fair value through earnings.

Other revenues — other increased $38.7 million for the nine months ended September 30, 2014 when compared to the same period in 2013 primarily due to servicing fee revenues for the fees charged by Acquisitions and Servicing for servicing the SpringCastle Portfolio. We assumed the direct servicing obligations for these loans in September 2013. These fees are eliminated in consolidated operating results with the servicing fee expenses, which are included in other operating expenses.

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(dollars in thousands)
 
 
 
 
Nine Months Ended September 30,
 
2014
 
2013
 
 
 
 
 
Salaries and benefits - Consumer
 
$
195,778

 
$
184,077

Salaries and benefits - Insurance
 
14,501

 
11,424

Salaries and benefits - Acquisitions and Servicing
 
24,612

 
6,417

Total
 
$
234,891

 
$
201,918

(dollars in thousands)
 
 
 
 
Nine Months Ended September 30,
 
2014
 
2013
 
 
 
 
 
Other operating expenses - Consumer
 
$
112,668

 
$
87,609

Other operating expenses - Insurance
 
10,745

 
7,993

Other operating expenses - Acquisitions and Servicing
 
69,037

 
55,569

Total
 
$
192,450

 
$
151,171


Other operating expenses for Consumer and Insurance increased $27.8 million for the nine months ended September 30, 2014 when compared to the same period in 2013 primarily due to higher advertising, professional fees, and information technology expenses.

Insurance losses and loss adjustment expenses increased $9.6 million for the nine months ended September 30, 2014 when compared to the same period in 2013 primarily due to unfavorable variances in benefit reserves and claim reserves.


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Reconciliation of Income (Loss) before Provision for (Benefit from) Income Taxes on Historical Accounting Basis to Pretax Core Earnings

Pretax core earnings is a key performance measure used by management in evaluating the performance of our Core Consumer Operations. Pretax core earnings represents our income (loss) before provision for (benefit from) income taxes on a historical accounting basis and excludes results of operations from our non-core portfolio (Real Estate) and other non-originating legacy operations, gains (losses) resulting from accelerated long-term debt repayment and repurchases of long-term debt related to Consumer, gains (losses) on fair value adjustments on debt related to Core Consumer Operations (attributable to SHI), and results of operations attributable to non-controlling interests. Pretax core earnings provides us with a key measure of our Core Consumer Operations’ performance as it assists us in comparing its performance on a consistent basis. Management believes pretax core earnings is useful in assessing the profitability of our core business and uses pretax core earnings in evaluating our operating performance. Pretax core earnings is a non-GAAP measure and should be considered in addition to, but not as a substitute for or superior to, operating income, net income, operating cash flow, and other measures of financial performance prepared in accordance with U.S. GAAP.

The following is a reconciliation of income (loss) before provision for (benefit from) income taxes on a historical accounting basis to pretax core earnings:
(dollars in thousands)
 
Three Months 
 Ended 
 September 30, 
 2014
 
Three Months 
 Ended 
 September 30, 
 2013
 
Nine Months 
 Ended 
 September 30, 
 2014
 
Nine Months 
 Ended 
 September 30, 
 2013
 
 
 
 
 
 
 
 
 
Income (loss) before provision for (benefit from) income taxes - historical accounting basis *
 
$
348,985

 
$
(72,474
)
 
$
422,302

 
$
57,325

Adjustments:
 
 
 
 

 
 
 
 

Pretax operating (income) loss - Non-Core Portfolio Operations
 
(214,441
)
 
41,048

 
(87,103
)
 
135,535

Pretax operating loss - Other/non- originating legacy operations
 
2,491

 
134,685

 
12,799

 
129,817

Net loss from accelerated repayment/repurchase of debt - Consumer
 

 
2,890

 
1,429

 
4,390

Net (gain) loss on fair value adjustments on debt - Core Consumer Operations (attributable to SHI)
 
(715
)
 
(3,111
)
 
6,961

 
(3,111
)
Pretax operating income attributable to non-controlling interests
 
(34,945
)
 
(31,643
)
 
(81,542
)
 
(86,383
)
Pretax core earnings
 
$
101,375

 
$
71,395

 
$
274,846

 
$
237,573

                                      
*
See reconciliation of income (loss) before provision for (benefit from) income taxes on a push-down accounting basis to a historical accounting basis, which is presented prior to “Segment Results”.

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NON-CORE PORTFOLIO

Pretax operating results for Real Estate (which are reported on a historical accounting basis) were as follows:
(dollars in thousands)
 
Three Months 
 Ended 
 September 30, 
 2014
 
Three Months 
 Ended 
 September 30, 
 2013
 
Nine Months 
 Ended 
 September 30, 
 2014
 
Nine Months 
 Ended 
 September 30, 
 2013
 
 
 
 
 
 
 
 
 
Interest income:












Finance charges

$
53,568


$
170,772


$
338,121


$
535,280

Finance receivables held for sale originated as held for investment

41,468




48,598



Total interest income
 
95,036

 
170,772

 
386,719

 
535,280

 
 
 
 
 
 
 
 
 
Interest expense
 
83,795

 
131,699

 
291,084

 
427,608

 
 
 
 
 
 
 
 
 
Net interest income
 
11,241

 
39,073

 
95,635

 
107,672

 
 
 
 
 
 
 
 
 
Provision for finance receivable losses
 
37,192

 
52,645

 
118,992

 
188,737

 
 
 
 
 
 
 
 
 
Net interest loss after provision for finance receivable losses
 
(25,951
)
 
(13,572
)
 
(23,357
)
 
(81,065
)
 
 
 
 
 
 
 
 
 
Other revenues:
 
 

 
 

 
 

 
 

Investment
 
(954
)
 

 
(954
)
 

Net loss on repurchases and repayments of debt
 

 
(15,818
)
 
(10,023
)
 
(35,418
)
Net gain on fair value adjustments on debt
 

 
12,217

 
8,298

 
45,428

Net gain on sales of real estate loans and related trust assets *
 
279,889

 

 
194,894

 

Other
 
(2,373
)
 
(2,011
)
 
(3,580
)
 
(1,551
)
Total other revenues
 
276,562

 
(5,612
)
 
188,635

 
8,459

 
 
 
 
 
 
 
 
 
Other expenses:
 
 

 
 

 
 

 
 

Operating expenses:
 
 

 
 

 
 

 
 

Salaries and benefits
 
17,186

 
7,551

 
34,559

 
20,648

Other operating expenses
 
18,984

 
14,313

 
43,616

 
42,281

Total other expenses
 
36,170

 
21,864

 
78,175

 
62,929

 
 
 
 
 
 
 
 
 
Pretax operating income (loss)
 
$
214,441

 
$
(41,048
)
 
$
87,103

 
$
(135,535
)
                                      
*
Consistent with our segment reporting presentation in Note 16 of the Notes to Condensed Consolidated Financial Statements, we have combined the lower of cost or fair value adjustments recorded on the dates the real estate loans were transferred to finance receivables held for sale with the final gain (loss) on the sales of these loans.


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Selected financial statistics for Real Estate (which are reported on a historical accounting basis) were as follows:
(dollars in thousands)
 
Three Months 
 Ended 
 September 30, 
 2014
 
Three Months 
 Ended 
 September 30, 
 2013
 
At or for the Nine Months 
 Ended 
 September 30, 
 2014
 
At or for the Nine Months 
 Ended 
 September 30, 
 2013
 
 
 
 
 
 
 
 
 
Real estate
 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
Finance receivables held for investment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net finance receivables
 
 

 
 

 
$
702,456

 
$
9,617,781

Number of accounts
 
 

 
 

 
100,655

 
123,145

 
 
 
 
 
 
 
 
 
TDR finance receivables
 
 
 
 

 
$
160,288

 
$
3,172,955

Allowance for finance receivables losses - TDR
 
 
 
 

 
$
56,073

 
$
730,875

Provision for finance receivable losses - TDR
 
$
8,489

 
$
37,711

 
$
74,717

 
$
141,621

 
 
 
 
 
 
 
 
 
Average net receivables
 
$
2,908,601

 
$
9,767,360

 
$
6,612,761

 
$
10,086,099

 
 
 
 
 
 
 
 
 
Yield
 
7.31
%
 
6.94
%
 
6.84
%
 
7.10
%
 
 
 
 
 
 
 
 
 
Loss ratio (a) (b)
 
2.99
%
 
2.10
%
 
1.94
%
 
2.14
%
 
 
 
 
 
 
 
 
 
Delinquency ratio
 
 

 
 

 
7.31
%
 
7.74
%
 
 
 
 
 
 
 
 
 
Finance receivables held for sale:












 
 
 
 
 
 
 
 
 
Net finance receivables
 
 
 
 
 
$
493,880

 
$

Number of accounts
 
 
 
 
 
7,427

 

 
 
 
 
 
 
 
 
 
TDR finance receivables
 
 
 
 
 
$
486,100

 
$

                                      
(a)
The loss ratio for the nine months ended September 30, 2014 reflects $2.2 million of recoveries on charged-off real estate loans resulting from a sale of previously charged-off real estate loans in March 2014, net of a $0.2 million reserve for subsequent buybacks. Excluding these recoveries, our Real Estate loss ratio would have been 1.99% for the nine months ended September 2014.

(b)
The loss ratio for the nine months ended September 30, 2013 reflects $9.9 million of recoveries on charged-off real estate loans resulting from a sale of previously charged-off finance receivables in June 2013. Excluding these recoveries, our Real Estate loss ratio would have been 2.27% for the nine months ended September 30, 2013.

Comparison of Pretax Operating Results for Three Months Ended September 30, 2014 and 2013

Finance charges decreased $117.2 million for the three months ended September 30, 2014 when compared to the same period in 2013 primarily due to decreases in average net receivables and yield. Average net receivables decreased for the three months ended September 30, 2014 when compared to the same period in 2013 primarily due to the continued liquidation of the real estate portfolio, including the transfers of real estate loans with a total carrying value of $7.2 billion to finance receivables held for sale and the subsequent sales of nearly all of these real estate loans during the first nine months of 2014. The increase in yield for the three months ended September 30, 2014 reflected a higher proportion of our remaining real estate loans that are secured by second mortgages, which generally have higher yields.

Interest expense decreased $47.9 million for the three months ended September 30, 2014 when compared to the same period in 2013 primarily due to lower securitization interest expense as a result of the sales of the Company’s beneficial interests in the mortgage-backed retained certificates related to its previous mortgage securitization transactions. This decrease also reflected lower unsecured debt interest expense allocated to Real Estate.

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Provision for finance receivable losses decreased $15.5 million for the three months ended September 30, 2014 when compared to the same period in 2013. The decrease in provision for finance receivable losses reflected a reduction in the allowance requirements recorded for the three months ended September 30, 2014 as a result of the transfers of real estate loans with a total carrying value of $7.2 billion to finance receivables held for sale and the subsequent sales of nearly all of these real estate loans during the first nine months of 2014. This decrease also reflected lower real estate loan delinquency ratio at September 30, 2014.

Net loss on repurchases and repayments of debt of $15.8 million for the three months ended September 30, 2013 reflected acceleration of amortization of deferred costs and repurchases of debt at net amounts greater than carrying value.

Net gain on fair value adjustments on debt of $12.2 million for the three months ended September 30, 2013 reflected differences between historical accounting basis and push-down accounting basis. On a historical accounting basis, certain long-term debt components are marked-to-market on a recurring basis and are no longer marked-to-market on a recurring basis after the application of push-down accounting at the time of the Fortress Acquisition.

Net gain on sales of real estate loans and related trust assets of $279.9 million for the three months ended September 30, 2014 primarily reflected cash bids of amounts greater than the equity basis of the real estate loans at the date of sale. The net gain also included proceeds of $38.8 million from the related MSR Sale.

Comparison of Pretax Operating Results for Nine Months Ended September 30, 2014 and 2013

Finance charges decreased $197.2 million for the nine months ended September 30, 2014 when compared to the same period in 2013 primarily due to decreases in average net receivables and yield. Average net receivables decreased for the nine months ended September 30, 2014 when compared to the same period in 2013 primarily due to the continued liquidation of the real estate portfolio, including the transfers of real estate loans with a total carrying value of $7.2 billion to finance receivables held for sale and the subsequent sales of nearly all of these real estate loans during the first nine months of 2014. The decrease in yield for the nine months ended September 30, 2014 reflected a higher proportion of TDR finance receivables, which generally have lower rates than non-modified real estate loans. The higher proportion of TDR finance receivables resulted from the transfers of a substantial portion of performing real estate loans to finance receivables held for sale during the first nine months of 2014.

Interest expense decreased $136.5 million for the nine months ended September 30, 2014 when compared to the same period in 2013 primarily due to lower secured term loan interest expense allocated to Real Estate and lower securitization interest expense as a result of the sales of the Company’s beneficial interests in the mortgage-backed retained certificates related to its previous mortgage securitization transactions.

Provision for finance receivable losses decreased $69.7 million for the nine months ended September 30, 2014 when compared to the same period in 2013. The decrease in provision for finance receivable losses reflected a reduction in the allowance requirements recorded for the nine months ended September 30, 2014 as a result of the transfers of real estate loans with a total carrying value of $7.2 billion to finance receivables held for sale and the subsequent sales of nearly all of these real estate loans during the first nine months of 2014. This decrease also reflected lower real estate loan delinquency ratio at September 30, 2014 and was partially offset by $9.9 million of recoveries recorded in June 2013 on previously charged-off real estate loans resulting from a sale of these loans in June 2013.

Net loss on repurchases and repayments of debt of $10.0 million and $35.4 million for the nine months ended September 30, 2014 and 2013, respectively, reflected acceleration of amortization of deferred costs and repurchases of debt at net amounts greater than carrying value.

Net gain on fair value adjustments on debt of $8.3 million and $45.4 million for the nine months ended September 30, 2014 and 2013, respectively, reflected differences between historical accounting basis and push-down accounting basis. On a historical accounting basis, certain long-term debt components are marked-to-market on a recurring basis and are no longer marked-to-market on a recurring basis after the application of push-down accounting at the time of the Fortress Acquisition.

Net gain on sales of real estate loans and related trust assets of $194.9 million for the nine months ended September 30, 2014 primarily reflected cash bids of amounts greater than the equity basis of the real estate loans at the date of sale. The net gain also included proceeds of $38.8 million from the related MSR Sale. The net gain was partially offset by the lower of cost or fair value adjustments recorded on the dates the real estate loans were transferred to finance receivables held for sale. Consistent with our segment reporting presentation, we have combined the lower of cost or fair value adjustments with the final gain (loss) on the sales of these loans.

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Table of Contents

OTHER

“Other” consists of our other non-originating legacy operations, which are isolated by geographic market and/or distribution channel from our prospective Core Consumer Operations and our Non-Core Portfolio. These operations include our legacy operations in 14 states where we have also ceased branch-based personal lending as a result of our restructuring activities during the first half of 2012, our liquidating retail sales finance portfolio (including our retail sales finance accounts from our dedicated auto finance operation), our lending operations in Puerto Rico and the U.S. Virgin Islands, and the operations of our United Kingdom subsidiary. Effective June 1, 2014, we also report (on a prospective basis) certain real estate loans with equity capacity in Other. These short equity loans, which have liquidated down to an immaterial level, were previously included in our Core Consumer Operations. At June 1, 2014, the transfer date, the carrying value of these loans totaled $16.3 million.

Pretax operating results of the Other components (which are reported on a historical accounting basis) were as follows:
(dollars in thousands)
 
Three Months 
 Ended 
 September 30, 
 2014
 
Three Months 
 Ended 
 September 30, 
 2013
 
Nine Months 
 Ended 
 September 30, 
 2014
 
Nine Months 
 Ended 
 September 30, 
 2013
 
 
 
 
 
 
 
 
 
Interest income
 
$
3,850

 
$
10,000

 
$
13,265

 
$
37,631

 
 
 
 
 
 
 
 
 
Interest expense
 
1,837

 
3,323

 
5,810

 
12,164

 
 
 
 
 
 
 
 
 
Net interest income
 
2,013

 
6,677

 
7,455

 
25,467

 
 
 
 
 
 
 
 
 
Provision for finance receivable losses
 
1,290

 
2,361

 
6,557

 
(3,385
)
 
 
 
 
 
 
 
 
 
Net interest income after provision for finance receivable losses
 
723

 
4,316

 
898

 
28,852

 
 
 
 
 
 
 
 
 
Other revenues:
 
 

 
 

 
 

 
 

Insurance
 
14

 
18

 
46

 
58

Investment
 
45

 
(1
)
 
69

 
1,396

Net loss on repurchases and repayments of debt
 

 
(706
)
 
(47
)
 
(977
)
Other
 
7

 
(25
)
 
608

 
(178
)
Total other revenues
 
66

 
(714
)
 
676

 
299

 
 
 
 
 
 
 
 
 
Other expenses:
 
 

 
 

 
 

 
 

Operating expenses:
 
 
 
 

 
 

 
 

Salaries and benefits
 
1,915

 
136,249

 
9,183

 
149,436

Other operating expenses
 
1,365

 
2,038

 
5,190

 
9,532

Total other expenses
 
3,280

 
138,287

 
14,373

 
158,968

 
 
 
 
 
 
 
 
 
Pretax operating loss
 
$
(2,491
)
 
$
(134,685
)
 
$
(12,799
)
 
$
(129,817
)

Net finance receivables of the Other components (which are reported on a historical accounting basis) were as follows:
(dollars in thousands)
 
 
 
 
September 30,
 
2014
 
2013
 
 
 
 
 
Net finance receivables:
 
 

 
 

Personal loans
 
$
34,152

 
$
67,616

Real estate loans
 
6,672

 
7,748

Retail sales finance
 
59,478

 
122,797

Total
 
$
100,302

 
$
198,161



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Credit Quality    

Our customers encompass a wide range of borrowers. In the consumer finance industry, they are described as prime or near-prime at one extreme and non-prime or sub-prime (less creditworthy) at the other. Our customers’ incomes are generally near the national median but our customers may vary from national norms as to their debt-to-income ratios, employment and residency stability, and/or credit repayment histories. In general, our customers have lower credit quality and require significant levels of servicing.

As a result of the Fortress Acquisition, we applied push-down accounting and adjusted the carrying value of our finance receivables (the “FA Loans”) to their fair value on November 30, 2010. For purchased finance receivables, such as the SpringCastle Portfolio (“SCP Loans”), we also record these loans at fair value on the day of purchase.

Carrying value of finance receivables includes accrued finance charges, unamortized deferred origination costs and unamortized net premiums and discounts on purchased finance receivables. We record an allowance for loan losses to cover expected losses on our finance receivables.

For both the FA Loans and SCP Loans, we segregate between those considered to be performing (“FA Performing Loans” and “SCP Performing Loans,” respectively) and those for which it was determined it was probable that we would be unable to collect all contractually required payments (“FA Credit Impaired Loans” and “SCP Credit Impaired Loans,” respectively). For the FA Performing Loans and the SCP Performing Loans, we accrete the purchase discount to contractual cash flows over the remaining life of the loan to finance charges. For the FA Credit Impaired Loans and SCP Credit Impaired Loans, we record the expected credit loss at purchase and recognize finance charges on the expected effective yield.


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FINANCE RECEIVABLES

Net finance receivables by originated before and after the Fortress Acquisition and the related allowance for finance receivable losses were as follows:
(dollars in thousands)
 
September 30,
2014
 
December 31,
2013
 
 
 
 
 
Personal Loans
 
 

 
 

FA Performing Loans at Fortress Acquisition
 
$
119,389

 
$
168,386

Originated after Fortress Acquisition
 
3,487,820

 
3,003,318

Allowance for finance receivable losses
 
(124,489
)
 
(94,880
)
Personal loans, less allowance for finance receivable losses
 
3,482,720

 
3,076,824

 
 
 
 
 
SpringCastle Portfolio
 
 

 
 

SCP Performing Loans
 
1,712,178

 
1,975,023

SCP Credit Impaired Loans
 
370,967

 
530,326

Allowance for finance receivable losses
 
(319
)
 
(1,056
)
SpringCastle Portfolio, less allowance for finance receivable losses
 
2,082,826

 
2,504,293

 
 
 
 
 
Real Estate Loans
 
 

 
 

FA Performing Loans at Fortress Acquisition
 
612,224

 
6,597,300

FA Credit Impaired Loans
 
30,697

 
1,314,381

Originated after Fortress Acquisition*
 
12,378

 
70,668

Allowance for finance receivable losses
 
(37,634
)
 
(235,549
)
Real estate loans, less allowance for finance receivable losses
 
617,665

 
7,746,800

 
 
 
 
 
Retail Sales Finance
 
 
 
 

FA Performing Loans at Fortress Acquisition
 
37,489

 
63,158

Originated after Fortress Acquisition
 
19,411

 
35,753

Allowance for finance receivable losses
 
(1,194
)
 
(1,840
)
Retail sales finance, less allowance for finance receivable losses
 
55,706

 
97,071

 
 
 
 
 
Total net finance receivables, less allowance
 
$
6,238,917

 
$
13,424,988

 
 
 
 
 
Allowance for finance receivable losses as a percentage of finance receivables
 
 

 
 

Personal loans
 
3.45
%
 
2.99
%
SpringCastle Portfolio
 
0.02
%
 
0.04
%
Real estate loans
 
5.74
%
 
2.95
%
Retail sales finance
 
2.10
%
 
1.86
%
                                      
*
Real estate loan originations in 2014 and 2013 were from advances on home equity lines of credit.

We consider the delinquency status of the finance receivable as our primary credit quality indicator. We monitor delinquency trends to manage our exposure to credit risk. We consider finance receivables 60 days or more past due as delinquent and consider the likelihood of collection to decrease at such time.


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The following is a summary of net finance receivables by type and by days delinquent:
(dollars in thousands)
 
Personal
Loans
 
SpringCastle
Portfolio
 
Real
Estate Loans
 
Retail
Sales Finance
 
Total
 
 
 
 
 
 
 
 
 
 
 
September 30, 2014
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Net finance receivables:
 
 

 
 

 
 

 
 

 
 

60-89 days past due
 
$
32,384

 
$
33,379

 
$
13,151

 
$
770

 
$
79,684

90-119 days past due
 
25,688

 
20,955

 
7,842

 
429

 
54,914

120-149 days past due
 
21,132

 
15,826

 
5,629

 
558

 
43,145

150-179 days past due
 
16,727

 
13,102

 
5,557

 
303

 
35,689

180 days or more past due
 
1,088

 
4,946

 
11,947

 
46

 
18,027

Total delinquent finance receivables
 
97,019

 
88,208

 
44,126

 
2,106

 
231,459

Current
 
3,456,829

 
1,932,945

 
588,796

 
53,522

 
6,032,092

30-59 days past due
 
53,361

 
61,992

 
22,377

 
1,272

 
139,002

Total
 
$
3,607,209

 
$
2,083,145

 
$
655,299

 
$
56,900

 
$
6,402,553

 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
Net finance receivables:
 
 

 
 

 
 

 
 

 
 

60-89 days past due
 
$
28,504

 
$
60,669

 
$
97,567

 
$
1,290

 
$
188,030

90-119 days past due
 
22,804

 
47,689

 
68,190

 
1,017

 
139,700

120-149 days past due
 
18,780

 
33,671

 
55,222

 
757

 
108,430

150-179 days past due
 
14,689

 
26,828

 
45,158

 
740

 
87,415

180 days or more past due
 
938

 
3,579

 
356,766

 
173

 
361,456

Total delinquent finance receivables
 
85,715

 
172,436

 
622,903

 
3,977

 
885,031

Current
 
3,038,307

 
2,232,965

 
7,183,437

 
92,093

 
12,546,802

30-59 days past due
 
47,682

 
99,948

 
176,009

 
2,841

 
326,480

Total
 
$
3,171,704

 
$
2,505,349

 
$
7,982,349

 
$
98,911

 
$
13,758,313


TROUBLED DEBT RESTRUCTURING

We make modifications to our real estate loans to assist borrowers in avoiding foreclosure. When we modify a real estate 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 finance receivables held for investment and held for sale were as follows:
(dollars in thousands)
 
September 30,
2014
 
December 31,
2013
 
 
 
 
 
TDR net finance receivables (a)
 
$
335,512

 
$
1,380,223

Allowance for TDR finance receivable losses
 
$
31,205

 
$
176,455

Allowance as a percentage of TDR net finance receivables (b)
 
30.04
%
 
12.78
%
Number of TDR accounts
 
5,077

 
14,609

                                      
(a)
TDR net finance receivables at September 30, 2014 includes $231.6 million of TDR finance receivables held for sale.

(b)
Allowance ratio at September 30, 2014 reflects the higher proportion of real estate loans secured by second mortgages as a result of the real estate loan sales during the first nine months of 2014.


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Net finance receivables held for investment and held for sale 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) were as follows:
(dollars in thousands)
 
Three Months 
 Ended 
 September 30, 
 2014
 
Three Months 
 Ended 
 September 30, 
 2013
 
Nine Months 
 Ended 
 September 30, 
 2014
 
Nine Months 
 Ended 
 September 30, 
 2013
 
 
 
 
 
 
 
 
 
Real Estate Loans
 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
Number of TDR accounts (a)
 
54

 
370

 
488

 
797

TDR net finance receivables (a) (b)
 
$
2,788

 
$
25,848

 
$
31,465

 
$
59,809

                                      
(a)
Number and amount of TDR net finance receivables for the three and nine months ended September 30, 2014 that defaulted during the previous 12 month period include 30 TDR accounts that were held for sale totaling $1.8 million.

(b)
Represents the corresponding balance of TDR net finance receivables at the end of the month in which they defaulted.

We may make modifications to loans in our newly acquired SpringCastle Portfolio to assist borrowers in avoiding default and to mitigate the risk of loss. 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. We restructure finance receivables only if we believe the customer has the ability to pay under the restructured terms for the foreseeable future. There were no SpringCastle Portfolio TDR accounts as of the April 1, 2013 acquisition date as any account deemed as a TDR under our policy was categorized as a purchased credit impaired finance receivables. The amount of SpringCastle Portfolio loans that has been classified as a TDR finance receivable subsequent to the acquisition date is $0.2 million and has not yet reached a significant level for detailed disclosure.

Liquidity and Capital Resources    

We have historically financed the majority of our operating liquidity and capital needs through a combination of cash flows from operations, securitization debt, unsecured debt, and borrowings under our secured term loan. In the future, we plan to finance our operating liquidity and capital needs through a combination of cash flows from operations, securitization debt, unsecured debt, other corporate debt facilities, and equity.

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 and, to a lesser extent, expenditures relating to upgrading and monitoring our technology platform, risk systems, and branch locations.

Our insurance subsidiaries maintain reserves as liabilities on the balance sheet to cover future claims for certain insurance products. Claims reserves totaled $71.0 million as of September 30, 2014.

At September 30, 2014, we had $2.0 billion of cash and cash equivalents, and during the nine months ended September 30, 2014, SHI generated net income of $551.5 million. Our net cash inflow from operating and investing activities totaled $3.1 billion for the nine months ended September 30, 2014. At September 30, 2014, our remaining scheduled principal and interest payments for 2014 on our existing debt (excluding securitizations) totaled $483.8 million. As of September 30, 2014, we had $1.9 billion UPB of unencumbered personal loans and $713.2 million UPB of unencumbered real estate loans.

Based on our estimates and taking into account 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 twelve months.

To reduce the risk associated with unfavorable changes in interest rates on our debt not offset by favorable changes in yield of our finance receivables, we monitor the anticipated cash flows of our assets and liabilities, principally our finance receivables and debt. We have funded finance receivables with a combination of fixed-rate and floating-rate debt and equity and have based the mix of fixed-rate and floating-rate debt issuances, in part, on the nature of the finance receivables being supported. On a historical accounting basis, our floating-rate debt represented 1% of our borrowings at September 30, 2014 and 8% at December 31, 2013.

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LIQUIDITY

Operating Activities

Cash from operations decreased $158.2 million for the nine months ended September 30, 2014 when compared to the same period in 2013 primarily due to one-time costs relating to the real estate sales transactions, partially offset by higher net interest income.

Investing Activities

Net cash provided by investing activities of $2.8 billion for the nine months ended September 30, 2014 was primarily due to the sales of finance receivables held for sale originated as held for investment during the first nine months of 2014. Net cash used for investing activities of $2.3 billion for the nine months ended September 30, 2013 reflected the purchase of the SpringCastle Portfolio on April 1, 2013.

Financing Activities

Net cash used for financing activities of $1.6 billion for the nine months ended September 30, 2014 was primarily due to the repayments of the secured term loan and the 2013-BAC trust notes in late March 2014. Net cash provided by financing activities of $1.5 billion for the nine months ended September 30, 2013 was primarily due to the issuance of long-term debt associated with the securitization of the SpringCastle Portfolio in April 2013.

Liquidity Risks and Strategies

SFC’s credit ratings are non-investment grade, which have a significant impact on our cost of, 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;
the liquidation and related losses within our remaining real estate portfolio could result in reduced cash receipts;
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, and a prolonged inability to adequately access capital market funding. We intend to support our liquidity position by utilizing 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 securitizations and new unsecured debt issuances, debt refinancing transactions and standby funding 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 secured revolving credit facilities to allow us to use excess cash to pay down higher cost debt.

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

State law restricts the amounts our insurance subsidiaries, Merit and Yosemite, may pay as dividends without prior notice to, or in some cases approval from, the Indiana Department of Insurance. The maximum amount of dividends that can be paid without prior approval in a 12 month period, measured retrospectively from the date of payment, is the greater of 10% of policyholders’ surplus as of the prior year-end, or the net gain from operations as of the prior year-end. On October 20, 2014,

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Merit paid an ordinary dividend of $18.0 million to SFC that did not require prior approval, and Yosemite paid an extraordinary dividend of $57.0 million to SFC upon receiving prior approval. During the third quarter of 2013, our insurance subsidiaries paid $150.0 million of extraordinary dividends to SFC upon receiving prior approvals. In addition, effective July 31, 2013, Yosemite paid, as an extraordinary dividend to SFC, 100% of the common stock of its wholly owned subsidiary, CommoLoCo, Inc., in the amount of $57.8 million, upon receiving prior approval.

OUR DEBT AGREEMENTS

On December 30, 2013, SHI entered into Guaranty Agreements whereby it agreed to fully and unconditionally guarantee the payments of principal, premium (if any), and interest on approximately $5.2 billion aggregate principal amount of senior notes on a senior basis and $350.0 million aggregate principal amount of a junior subordinated debenture (collectively, the “notes”) on a junior subordinated basis issued by SFC. The notes consist of the following: 8.250% Senior Notes due 2023; 7.750% Senior Notes due 2021; 6.00% Senior Notes due 2020; a 60-year junior subordinated debenture; and all senior notes outstanding on December 30, 2013, issued pursuant to the Indenture dated as of May 1, 1999 (the “1999 Indenture”), between SFC and Wilmington Trust, National Association (the successor trustee to Citibank N.A.). As of December 30, 2013, approximately $3.9 billion aggregate principal amount of senior notes were outstanding under the 1999 Indenture. The 60-year junior subordinated debenture underlies the trust preferred securities sold by a trust sponsored by SFC. On December 30, 2013, SHI entered into a Trust Guaranty Agreement whereby it agreed to fully and unconditionally guarantee the related payment obligations under the trust preferred securities. As of September 30, 2014, approximately $5.1 billion aggregate principal amount of senior notes, including $3.9 billion aggregate principal amount of senior notes under the 1999 Indenture, and $350.0 million aggregate principal amount of a junior subordinated debenture were outstanding.

The debt agreements to which SFC 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 restrictions on the ability to create senior liens on property and assets in connection with any new debt financings and SFC’s ability to sell or convey all or substantially all of its assets, unless the transferee assumes SFC’s obligations under the applicable debt agreement.

With the exception of SFC’s junior subordinated debenture and one consumer loan securitization, none of our debt agreements require SFC or any of its subsidiaries to meet or maintain any specific financial targets or ratios.

Under our debt agreements, 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 September 30, 2014, we were in compliance with all of the covenants under our debt agreements.

Junior Subordinated Debenture

In January 2007, SFC issued $350.0 million aggregate principal amount of 60-year junior subordinated debenture (the “debenture”) under an indenture dated January 22, 2007 (the “Junior Subordinated Indenture”), by and between SFC and Deutsche Bank Trust Company, as trustee. The debenture underlies the trust preferred securities sold by a trust sponsored by SFC. SFC can redeem the debenture at par beginning in January 2017.

Pursuant to the terms of the debenture, SFC, upon the occurrence of a mandatory trigger event, is required to defer interest payments to the holders of the debenture (and not make dividend payments to SFI) unless SFC obtains non-debt capital funding in an amount equal to all accrued and unpaid interest on the debenture otherwise payable on the next interest payment date and pays such amount to the holders of the debenture. A mandatory trigger event occurs if SFC’s (1) tangible equity to tangible managed assets is less than 5.5% or (2) average fixed charge ratio is not more than 1.10x for the trailing four quarters (where the fixed charge ratio equals earnings excluding income taxes, interest expense, extraordinary items, goodwill impairment, and any amounts related to discontinued operations, divided by the sum of interest expense and any preferred dividends).

Based upon SFC’s financial results for the twelve months ended September 30, 2014, a mandatory trigger event did not occur with respect to the payment due in January 2015 as the tangible equity to tangible managed assets was 22.4% and the average fixed charge ratio was 1.11x.


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Consumer Loan Securitization

In connection with the Sumner Brook 2013-VFN1 securitization, SFC is required to maintain an available cash covenant and a consolidated tangible net worth covenant. At September 30, 2014, SFC is in compliance with these covenants.

Structured Financings

We execute private securitizations under Rule 144A of the Securities Act. As of September 30, 2014, our structured financings consisted of the following:
(dollars in thousands)
 
Initial Note
Amounts
Issued (a)
 
Initial
Collateral
Balance (b)
 
Current
Note
Amounts
Outstanding
 
Current
Collateral
Balance (b)
 
Current
Weighted
Average
Interest Rate
 
Collateral
Type
 
Revolving
Period
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer Securitizations
 
 

 
 

 
 

 
 

 
 

 
 
 
 
SLFMT 2013-A
 
$
567,880

 
$
662,247

 
$
567,880

 
$
662,261

 
2.75
%
 
Personal loans
 
2 years
SLFMT 2013-B
 
370,170

 
441,989

 
370,170

 
442,003

 
3.99
%
 
Personal loans
 
3 years
SLFMT 2014-A
 
559,260

 
644,331

 
559,260

 
644,344

 
2.55
%
 
Personal loans
 
2 years
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total consumer securitizations
 
1,497,310

 
1,748,567

 
1,497,310

 
1,748,608

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SpringCastle Securitization
 
 

 
 

 
 

 
 

 
 

 
 
 
 
SCFT 2013-A
 
2,572,000

 
3,934,955

 
1,458,278

 
2,875,348

 
3.80
%
 
Personal and junior mortgage loans
 
N/A
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total secured structured financings
 
$
4,069,310

 
$
5,683,522

 
$
2,955,588

 
$
4,623,956

 
 

 
 
 
 
                                      
(a)
Represents securities sold at time of issuance or at a later date and does not include retained notes.

(b)
Represents UPB of the collateral supporting the issued and retained notes.

In addition to the structured financings included in the table above, we completed one conduit securitization in 2014 and three conduit securitizations in 2013. At September 30, 2014, we had drawn $100 million under these facilities. Also, on October 3, 2014, the Co-Issuers repaid the SpringCastle 2013-A Notes using the proceeds from the sale of the SpringCastle 2014-A Notes. See Note 20 of the Notes to Condensed Consolidated Financial Statements for further information on this subsequent event.

Our 2013 and 2014 securitizations have served to partially replace secured and unsecured debt in our capital structure with more favorable non-recourse funding. Our overall funding costs are positively impacted by our increased usage of securitizations as we typically execute these transactions at interest rates significantly below those of our maturing secured and unsecured debt.

The weighted average interest rates on our debt on a historical accounting basis were as follows:
 
 
Three Months 
 Ended 
 September 30, 
 2014
 
Three Months 
 Ended 
 September 30, 
 2013
 
Nine Months 
 Ended 
 September 30, 
 2014
 
Nine Months 
 Ended 
 September 30, 
 2013
 
 
 
 
 
 
 
 
 
Weighted average interest rate
 
5.42
%
 
5.33
%
 
5.31
%
 
5.57
%



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Off-Balance Sheet Arrangements    

We have no material off-balance sheet arrangements as defined by SEC rules. We had no off-balance sheet exposure to losses associated with unconsolidated VIEs at September 30, 2014 or December 31, 2013, other than certain representations and warranties associated with the sales of the mortgage-backed retained certificates during the first nine months of 2014. As of September 30, 2014, we had no repurchase activity related to these sales.

Critical Accounting Policies and Estimates    

We describe our significant accounting policies used in the preparation of our consolidated financial statements in Note 2 of the Notes to Consolidated Financial Statements in Part II, Item 8 of our 2013 Annual Report on Form 10-K. 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;
purchased credit impaired finance receivables;
TDR finance receivables;
push-down accounting; and
fair value measurements.

We believe the amount of the allowance for finance receivable losses is the most significant estimate we make. See “—Critical Accounting Policies and Estimates — Allowance for Finance Receivable Losses” in Part II, Item 7 of our 2013 Annual Report on Form 10-K for further discussion of the models and assumptions used to assess the adequacy of the allowance for finance receivable losses.

There have been no significant changes to our critical accounting policies or to our methodologies for deriving critical accounting estimates during the nine months ended September 30, 2014.

Recent Accounting Pronouncements    

See Note 1 of the Notes to Condensed Consolidated Financial Statements for discussion of recently issued accounting pronouncements.

Seasonality    

Our personal loan volume is generally highest during the second and fourth quarters of the year, primarily due to marketing efforts, seasonality of demand, and increased traffic in branches after the winter months. 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 tend to peak in the second and third quarters and higher net charge-offs on these loans usually occur at year end. These seasonal trends contribute to fluctuations in our operating results and cash needs throughout the year.


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Table of Contents

Glossary of Terms    

Average debt
average of debt for each day in the period
Average net receivables
average of net finance receivables at the beginning and end of each month in the period
Charge-off ratio
annualized net charge-offs as a percentage of the average of net finance receivables at the beginning of each month in the period
Delinquency ratio
UPB 60 days or more past due (greater than three payments unpaid) as a percentage of UPB
Gross charge-off ratio
annualized gross charge-offs as a percentage of the average of net finance receivables at the beginning of each month in the period
Trust Preferred Securities
capital securities classified as debt for accounting purposes but due to their terms are afforded, at least in part, equity capital treatment in the calculation of effective leverage by rating agencies
Loss ratio
annualized net charge-offs, net writedowns on real estate owned, net gain (loss) on sales of real estate owned, and operating expenses related to real estate owned as a percentage of the average of real estate loans at the beginning of each month in the period
Net interest income
interest income less interest expense
Recovery ratio
annualized recoveries on net charge-offs as a percentage of the average of net finance receivables at the beginning of each month in the period
Tangible equity
total equity less accumulated other comprehensive income or loss
Weighted average interest rate
annualized interest expense as a percentage of average debt
Yield
annualized finance charges as a percentage of average net receivables

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.    

There have been no significant changes to our market risk previously disclosed in Part II, Item 7A of our 2013 Annual Report on Form 10-K.

Item 4. Controls and Procedures.    

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our disclosure controls and procedures include controls and procedures designed to provide reasonable assurance that information required to be disclosed is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Our management, including our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period. Based on their evaluation, and in light of the previously identified material weakness in internal control over financial reporting, as of December 31, 2013, described within the 2013 Annual Report on Form 10-K, our Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures were not effective as of September 30, 2014.

We have developed a remediation plan for this material weakness, including enhancing our complement of resources with accounting and internal control knowledge through additional hiring and/or training to implement and perform additional controls over the initial and subsequent accounting for certain complex non-routine transactions. We are currently implementing this plan. When fully implemented and operating effectively, such enhancements are expected to remediate the material weakness described above. However, we cannot provide any assurance that these remediation efforts will be successful or that our internal control over financial reporting will be effective as a result of these efforts.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


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PART II — OTHER INFORMATION

Item 1. Legal Proceedings.    

See Note 13 of the Notes to Condensed Consolidated Financial Statements in Part I of this Quarterly Report on Form 10-Q.

Item 1A. Risk Factors.    

There have been no material changes to our risk factors previously disclosed in Part I, Item 1A of our 2013 Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.    

None.

Item 3. Defaults Upon Senior Securities.    

None.

Item 4. Mine Safety Disclosures.    

Not applicable.

Item 5. Other Information.    

None.

Item 6. Exhibits.    

Exhibits are listed in the Exhibit Index beginning on page 95 herein.

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Signature    

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
SPRINGLEAF HOLDINGS, INC.
 
 
 
                 (Registrant)
 
 
 
 
Date:
November 14, 2014
 
By
/s/ Minchung (Macrina) Kgil
 
 
 
 
Minchung (Macrina) Kgil
 
 
 
 
Executive Vice President and Chief Financial Officer
 
 
 
 
(Duly Authorized Officer and Principal Financial Officer)

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Exhibit Index    
Exhibit
 
 
 
 
 
3.1
 
Restated Certificate of Incorporation of Springleaf Holdings, Inc. Incorporated by reference to Exhibit (3.1) to our Quarterly Report on Form 10-Q for the period ended September 30, 2013.
 

 
3.2
 
Bylaws of Springleaf Holdings, Inc. Incorporated by reference to Exhibit (3.2) to our Quarterly Report on Form 10-Q for the period ended September 30, 2013.
 
 
 
4.1
 
Indenture, dated as of October 3, 2014, among SpringCastle America Funding, LLC, SpringCastle Credit Funding, LLC, SpringCastle Finance Funding, LLC, Wilmington Trust, National Association, Springleaf Finance, Inc., Wells Fargo Bank, National Association, and U.S. Bank National Association. Incorporated by reference from Spring Holdings, Inc. Current Report on Form 8-K, dated October 6, 2014 (SEC Accession No. 0001104659-14-070339).
 
 
 
10.1
 
Springleaf Holdings, Inc. Annual Leadership Incentive Plan, dated July 31, 2014. Incorporated by reference from Exhibit (10.1) to Springleaf Holdings, Inc.’s Current Report on Form 8-K, dated August 4, 2014 (SEC Accession No. 0001584207-14-000014).
 
 
 
10.2 (a)
 
Commitment Letter, dated August 6, 2014, by and among Eighth Street Funding LLC, Eleventh Street Funding LLC, Twelfth Street Funding LLC, Fourteenth Street Funding LLC, Fifteenth Street Funding LLC, Seventeenth Street Funding LLC, Nineteenth Street Funding LLC, Springleaf Finance Corporation, and Credit Suisse (USA) Securities LLC.
 
 
 
10.3 (a)
 
Amended and Restated Commitment Letter, dated August 26, 2014, by and among Eighth Street Funding LLC, Eleventh Street Funding LLC, Twelfth Street Funding LLC, Fourteenth Street Funding LLC, Fifteenth Street Funding LLC, Seventeenth Street Funding LLC, Nineteenth Street Funding LLC, Springleaf Finance Corporation, and Credit Suisse (USA) Securities LLC.
 
 
 
10.4
 
Amendment No. 1 To Commitment Letter, dated September 30, 2014, by and among Eighth Street Funding LLC, Eleventh Street Funding LLC, Twelfth Street Funding LLC, Fourteenth Street Funding LLC, Fifteenth Street Funding LLC, Seventeenth Street Funding LLC, Nineteenth Street Funding LLC, Springleaf Finance Corporation, and Credit Suisse (USA) Securities LLC.
 
 
 
10.5 (a)
 
Mortgage Servicing Rights Purchase and Sale Agreement, dated August 1, 2014, by and among Springleaf Finance Corporation, MorEquity, Inc., and Nationstar Mortgage LLC.
 
 
 
10.6
 
Amendment No. 1 to Mortgage Servicing Rights Purchase and Sale Agreement, dated August 29, 2014, by and among Springleaf Finance Corporation, MorEquity, Inc., and Nationstar Mortgage LLC.
 
 
 
31.1
 
Rule 13a-14(a)/15d-14(a) Certifications of the President and Chief Executive Officer of Springleaf Holdings, Inc.
 
 
 
31.2
 
Rule 13a-14(a)/15d-14(a) Certifications of the Executive Vice President and Chief Financial Officer of Springleaf Holdings, Inc.
 
 
 
32
 
Section 1350 Certifications
 
 
 
101 (b)
 
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Operations; (iii) Condensed Consolidated Statements of Comprehensive (Loss); (iv) Condensed Consolidated Statements of Shareholders’ Equity; (v) Condensed Consolidated Statements of Cash Flows; and (vi) Notes to Condensed Consolidated Financial Statements.
_______________________________
(a)
The Company has requested confidential treatment with respect to portions of this exhibit. Those portions have been omitted from the exhibit and filed separately with the U.S. Securities and Exchange Commission.

(b)
As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Section 11 and 12 of the Securities and Exchange Act of 1933 and Section 18 of the Securities and Exchange Act of 1934.

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