SUBSCRIBE TO TMCnet
TMCnet - World's Largest Communications and Technology Community

TMCNet:  SPRINGLEAF HOLDINGS, INC. - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations.

[April 15, 2014]

SPRINGLEAF HOLDINGS, INC. - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations.

(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis of our financial condition and results of operations should be read together with the audited consolidated financial statements and related notes in Item 8. This discussion and analysis contains forward-looking statements that involve risk, uncertainties, and assumptions.


See "Forward-Looking Statements" beginning on page 3 of this report. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of many factors, including those discussed in "Risk Factors" in Item 1A in Part I of this report.

An index to our management's discussion and analysis follows: Topic Page Our Business 45 2013 Initiatives 47 2014 Developments and Outlook 49 Prior Period Revisions 51 Results of Operations 52 Segment Results 59 Credit Quality 72 Liquidity and Capital Resources 75 Off-Balance Sheet Arrangements 81 Critical Accounting Policies and Estimates 81 Recent Accounting Pronouncements 83 Seasonality 83 Glossary of Terms 84 Our Business Springleaf is a leading consumer finance company providing responsible loan products primarily to non-prime customers. We originate consumer loans through our network of over 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 unpaid principal balance ("UPB") consumer loan portfolio through a joint venture in which we own a 47% equity interest.

At December 31, 2013, we had four business segments: Consumer, Insurance, Acquisitions and Servicing, and Real Estate. See Note 1 of the Notes to Consolidated Financial Statements in Item 8 for a description of our segments.

45 -------------------------------------------------------------------------------- Table of Contents 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 December 31, 2013, we had nearly 843,000 personal loans, representing $3.2 billion of net finance receivables, of which $1.4 billion, or 44%, was secured by collateral consisting of titled personal property (such as automobiles), $1.3 billion, or 40%, was secured by consumer household goods or other items of personal property, and the remainder was unsecured.

† SpringCastlePortfolio - We acquired the SpringCastle Portfolio from HSBC on April 1, 2013 through a newly formed 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. We assumed the direct servicing obligations for these loans in September 2013. At December 31, 2013, the SpringCastle Portfolio included over 344,000 of acquired loans, representing $2.5 billion in net finance receivables.

† 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. The ancillary products are home security and auto security membership plans and home appliance service contracts of unaffiliated companies.

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. We continue to service the liquidating real estate loans and support any advances on open-end accounts.

† 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." HOW WE ASSESS OUR BUSINESS PERFORMANCE Our net profit and the return on our investment required to generate net profit are the primary metrics by which we assess our business performance.

Accordingly, we closely monitor the primary drivers of net profit which consist of the following: 46 -------------------------------------------------------------------------------- Table of Contents Net Interest Income We track the spread between the interest income earned on our loans and the interest expense incurred on our debt, and continually monitor the components of our yield and our cost of funds.

Net Credit Losses The credit quality of our loans is driven by our long-standing underwriting philosophy, which takes into account the prospective customer's household budget, and his or her willingness and capacity to repay the proposed loan. The profitability of our loan portfolio is directly connected to net credit losses; therefore, we closely analyze credit performance. We also monitor recovery rates because of their contribution to the reduction in the severity of our charge offs. Additionally, because delinquencies are an early indicator of future net credit losses, we analyze delinquency trends, adjusting for seasonality, to determine whether or not our loans are performing in line with our original estimates.

Operating Expenses We assess our operational efficiency using various metrics and conduct extensive analysis to determine whether fluctuations in cost and expense levels indicate operational trends that need to be addressed. Our operating expense analysis also includes a review of origination and servicing costs to assist us in managing overall profitability.

Because loan volume and portfolio size determine the magnitude of the impact of each of the above factors on our earnings, we also closely monitor origination volume and annual percentage rate.

2013 Initiatives In October 2013, Springleaf became a public company listed on the NYSE. In January 2013, we expanded our business model and began originating personal loans on a centralized basis through our iLoan division. In April 2013, we built up our loan portfolio beyond our branch and internet businesses by acquiring over 415,000 new customer accounts from HSBC through a newly formed joint venture. To complement our Evansville, Indiana servicing operations, we added two servicing facilities in 2013 and welcomed over 400 new employees to our Springleaf Servicing Solutions division.

In February 2013, we demonstrated the ability to attract capital markets funding for our personal loans by completing our first securitization of personal loans, a first for our industry in 15 years. During 2013, we continued to replace our maturing unsecured debt with lower-cost, non-recourse securitization debt backed by our legacy real estate loan portfolio by effecting three mortgage loan securitizations. In May 2013, we re-entered the unsecured debt market, our first unsecured note issuance in six years.

Further information on Springleaf's accomplishments during 2013 are discussed below.

iLOAN DIVISION Our extensive network of branches and expert personnel is complemented by our iLoan division. Formed at the beginning of 2013, the iLoan division allows us to more effectively process applications from customers within our branch footprint who prefer the convenience of online transactions and to reach customers located outside our branch footprint. During 2013, we expanded our iLoan efforts using e-signature and ACH funding capabilities.

47 -------------------------------------------------------------------------------- Table of Contents SPRINGCASTLE PORTFOLIO On April 1, 2013, we acquired the SpringCastle Portfolio from HSBC for a purchase price of $3.0 billion, through a newly formed joint venture in which we own a 47% equity interest. At the time of purchase, the portfolio consisted of over 415,000 finance receivable accounts with an aggregate UPB of $3.9 billion.

The portfolio included both 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).

SPRINGLEAF SERVICING SOLUTIONS We have expanded our loan servicing capabilities to include centralized servicing of our legacy real estate loans and centralized servicing of acquired loan portfolios, such as the SpringCastle Portfolio, as well as our internet-originated loans.

In September 2013, our Springleaf Servicing Solutions division assumed direct servicing of the SpringCastle Portfolio for which we earn a fee from the joint venture. We believe this servicing capability, in addition to efforts to expand our organic centralized servicing capabilities, will enable us to further improve efficiencies in our servicing operations, improve our ability to make future acquisitions of loan portfolios and attract fee-based servicing opportunities.

SECURITIZATIONS In February 2013, we demonstrated the ability to attract capital markets funding for our personal loan business by completing our first consumer loan securitization, a first for our industry in 15 years. Subsequent to our inaugural consumer loan securitization, we completed nine additional securitizations in 2013, including two additional consumer loan securitizations effected in June and September 2013, three mortgage loan securitizations effected in April, July, and October 2013, the SpringCastle Portfolio securitization effected in April 2013, and three conduit securitizations effected in the last half of 2013. See Note 11 of the Notes to Consolidated Financial Statements in Item 8 for further information on our securitizations.

SFC'S OFFERINGS OF SENIOR NOTES On May 29, 2013, SFC issued $300 million aggregate principal amount of 6.00% senior notes due 2020.

On September 24, 2013, SFC issued $650 million aggregate principal amount of 7.75% senior notes due 2021 (the "7.75% Senior Notes") and $300 million aggregate principal amount of 8.25% senior notes due 2023 (the "8.25% Senior Notes"). SFC issued $500 million aggregate principal amount of the 7.75% Senior Notes and $200 million aggregate principal amount of the 8.25% Senior Notes in exchange for $700 million aggregate principal amount of SFC's outstanding 6.90% medium term notes due 2017. SFC used a portion of the proceeds from this offering to repurchase $183.7 million aggregate principal amount of its 6.90% medium term notes due 2017.

REPAYMENTS OF LONG-TERM DEBT In 2013, we repaid $6.4 billion of long-term debt consisting of $3.0 billion of the secured term loan (net of the New Loan Tranche of $750.0 million), $1.7 billion of securitizations, $848.3 million (€668.5 million) of Euro denominated notes, $689.7 million of medium-term notes (net of $700.0 million exchange of SFC's medium-term notes discussed above), and $159.5 million of retail notes.

48 -------------------------------------------------------------------------------- Table of Contents INITIAL PUBLIC OFFERING On October 21, 2013, we completed our initial public offering of common stock.

The Company, together with certain selling stockholders, sold 24,201,920 shares (including 3,156,772 shares sold in connection with the exercise by the underwriters of their over-allotment option) of common stock, par value $0.01 per share, at a price of $17.00 per share, less an underwriting discount of $1.105 per share. As a result of the offering, we received net proceeds of $230.8 million, after deducting underwriting discounts and commissions of $15.8 million and additional offering-related expenses of $4.8 million, for total expenses to us of $20.6 million. We used the proceeds of the offering to repay a portion of our indebtedness as well as for other general corporate purposes, including originations of new personal loans, and to satisfy working capital obligations.

2014 Developments and Outlook 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.

REPAYMENT OF 2013-BAC TRUST NOTES On September 25, 2013, we completed a private securitization transaction in which Springleaf Funding Trust 2013-BAC (the "2013-BAC Trust"), 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.

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

In February 2014, Third Street Funding LLC, an affiliate of SFC and the owner of the 2009-1 Retained Certificates, offered the Certificates for sale in a competitive auction. On March 6, 2014, Merrill Lynch, Pierce, Fenner and Smith Incorporated ("MLPFS") was declared the winning bidder and we entered into an agreement to sell, subject to certain closing conditions, all of our interest in the 2009-1 Retained Certificates to MLPFS for a price of $738.0 million.

Concurrently, New Residential Investment Corp. and MLPFS entered into an agreement pursuant to which New Residential Investment Corp. agreed to purchase approximately 75% of the 2009-1 Retained Certificates. New Residential Investment Corp. is managed by an affiliate of Fortress.

On March 31, 2014, we completed the sale of the 2009-1 Retained Certificates, some of which were sold through an unaffiliated initial purchaser pursuant to a separate certificate purchase agreement. The real estate loans included in this transaction had a carrying value of $780.7 million as of December 31, 2013 and are included within net finance receivables. We retained no interest in the certificates issued by, or the real estate loans included in, the 2009-1 Trust.

This transaction reflects an acceleration of the 49 -------------------------------------------------------------------------------- Table of Contents liquidation of our legacy real estate portfolio, which we plan to effect through continued runoff and opportunistic sales. While we continue to manage the runoff of the portfolio, we will continue to consider opportunistic sales of additional portions of the portfolio as market conditions allow.

SALE OF REAL ESTATE LOANS On March 7, 2014, we entered into an agreement to sell, subject to certain closing conditions, performing and non-performing real estate loans totaling $70.2 million in carrying value included within net finance receivables as of December 31, 2013. We completed this transaction on March 31, 2014.

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 the Subsidiary Guarantors 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. During 2012 and much of 2013, we experienced unusually low charge-off ratios as a result of tightening underwriting practices in 2010-2011. The personal loan portfolio typically exhibited charge-off ratios in the range of 4.75-5.75% prior to the start of the recession in 2008. We would expect the charge-off ratios of the personal loan portfolio to return to these levels. 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 banks, thrifts, and credit unions as these institutions have retreated from the non-prime market in the face of regulatory scrutiny and in the aftermath of the housing crisis. This reduction in competition has occurred concurrently with the exit of sub-prime credit card providers from the industry. 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 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.

We anticipate the credit quality ratios in our real estate loan portfolio will remain under pressure as the portfolio continues to liquidate, however, performance may improve as a result of strengthening home prices as well as increased centralization of real estate loan servicing and the application of analytics to more effectively target portfolio management and collections strategies.

50 -------------------------------------------------------------------------------- Table of Contents Prior Period Revisions In preparing our annual consolidated financial statements for the year ended December 31, 2013, we identified certain out-of-period errors. In addition to these errors, we previously recorded and disclosed out-of-period adjustments in prior reporting periods when the errors were discovered. As a result, we have revised all previously reported periods included in this report. We have corrected the errors identified in the fourth quarter of 2013 and have included these corrections in the appropriate prior periods. Similarly, we have reversed all out-of period adjustments previously recorded and disclosed, and have 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.

The effect of these revisions decreased net loss by $0.9 million and increased basic and diluted earnings per share by $0.01 in 2012 and increased net loss by $17.6 million and decreased basic and diluted earnings per share by $0.18 in 2011. At September 30, 2013, the cumulative effect of this revision decreased shareholders' equity by $16.5 million, increased total assets by $90.1 million, and increased total liabilities by $106.6 million.

See Note 24 of the Notes to Consolidated Financial Statements in Item 8 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.

51 -------------------------------------------------------------------------------- Table of Contents 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) Years Ended December 31, 2013 2012 2011 Interest income $ 2,154,078 $ 1,714,813 $ 1,871,229 Interest expense 919,749 1,075,205 1,284,773 Net interest income 1,234,329 639,608 586,456 Provision for finance receivable losses 527,661 341,578 329,675 Net interest income after provision for finance receivable losses 706,668 298,030 256,781 Other revenues: Insurance 148,179 126,423 120,190 Investment 35,132 35,896 37,659 Net gain (loss) on repurchases and repayments of debt (41,716 ) (15,542 ) 10,673 Net gain (loss) on fair value adjustments on debt 6,055 (2,992 ) 1,372 Other 5,410 (46,442 ) (28,389 ) Total other revenues 153,060 97,343 141,505 Other expenses: Operating expenses: Salaries and benefits 463,920 320,164 359,724 Other operating expenses 253,372 296,395 343,432 Restructuring expenses - 23,503 - Insurance losses and loss adjustment expenses 64,879 60,679 55,268 Total other expenses 782,171 700,741 758,424 Income (loss) before benefit from income taxes 77,557 (305,368 ) (360,138 ) Benefit from income taxes (16,185 ) (87,671 ) (118,405 ) Net income (loss) 93,742 (217,697 ) (241,733 ) Net income attributable to non-controlling interests 113,043 - - Net loss attributable to Springleaf $ (19,301 ) $ (217,697 ) $ (241,733 ) Share Data: Weighted average number of shares outstanding: Basic and diluted 102,917,172 100,000,000 100,000,000 Earnings (loss) per share: Basic and diluted $ (0.19 ) $ (2.18 ) $ (2.42 ) 52 -------------------------------------------------------------------------------- Table of Contents Comparison of Consolidated Results for 2013 and 2012 (dollars in thousands) Years Ended December 31, 2013 2012 Interest income: Finance charges $ 2,153,745 $ 1,712,073Interest income on finance receivables held for sale originated as held for investment 333 2,740 Total $ 2,154,078 $ 1,714,813 Finance charges increased in 2013 when compared to 2012 due to the net of the following: (dollars in thousands) 2013 compared to 2012 Decrease in average net receivables $ (103,360 ) Increase in yield 63,404 Change in number of days (due to 2012 leap year) (3,495 ) SpringCastle finance charges in 2013 485,123 Total $ 441,672 Average net receivables (excluding SpringCastle Portfolio) decreased in 2013 when compared to 2012 primarily due to our liquidating real estate loan portfolio as well as the impact of our branch office closings during 2012, partially offset by higher personal loan average net receivables resulting from our continued focus on personal loans.

Yield increased in 2013 when compared to 2012 primarily due to our continued focus on personal loans, which have higher yields.

The acquisition of the SpringCastle Portfolio favorably impacted our finance charge revenues.

Interest expense decreased in 2013 when compared to 2012 due to the net of the following: (dollars in thousands) 2013 compared to 2012 Decrease in average debt $ (90,037 )Decrease in weighted average interest rate (137,057 ) SpringCastle interest expense in 2013 71,638 Total $ (155,456 ) Average debt (excluding the securitization of the SpringCastle Portfolio) decreased in 2013 when compared to 2012 primarily due to debt repurchases and repayments of $6.4 billion in 2013. This decrease was partially offset by ten securitization transactions completed in 2013, including the securitization of the SpringCastle Portfolio.

The weighted average interest rate on our debt decreased in 2013 when compared to 2012 primarily due to the debt repurchases and repayments discussed above, which resulted in lower accretion of net discount applied to long-term debt. The lower weighted average interest rate also reflected the completion of ten securitization transactions in 2013, which generally have lower interest rates.

53 -------------------------------------------------------------------------------- Table of Contents Provision for finance receivable losses increased $186.1 million in 2013 when compared to 2012. This increase was primarily due to additional provision from the SpringCastle Portfolio of $133.1 million and the additional allowance requirements of $81.6 million recorded in 2013 on our real estate loans deemed to be troubled debt restructured ("TDR") finance receivables subsequent to the Fortress Acquisition and growth in our personal loans in 2013. These increases were partially offset by $37.2 million of recoveries on charged-off finance receivables resulting from a sale of these finance receivables to an unrelated third party in June 2013 (net of a $4.0 million adjustment for the subsequent buyback of certain finance receivables) and favorable personal and real estate loan delinquency trends. We expect to continue to sell charged-off finance receivables within our portfolios from time to time. If we were to sell additional charged-off finance receivables in a given period, we would recognize a decrease to our provision for finance receivable losses and improve our liquidity. The allowance for finance receivable losses was eliminated with the application of push-down accounting as the allowance for finance receivable losses was incorporated in the new fair value basis of the finance receivables as of the Fortress Acquisition date.

Insurance revenues increased $21.8 million in 2013 when compared to 2012 primarily due to increases in credit and non-credit earned premiums reflecting higher originations of personal loans in 2013.

Net loss on repurchases and repayments of debt increased $26.2 million in 2013 when compared to 2012 primarily due to the repurchases of debt in 2013 at net amounts greater than par compared to the repurchases of debt in 2012 at net amounts less than par, as well as repurchases of debt in 2013 with higher fair value mark losses when compared to 2012.

Net gain (loss) on fair value adjustments on debt increased $9.0 million in 2013 when compared to 2012 reflecting net unrealized gains on long-term debt issuances associated with securitizations that were issued at a discount or revalued at a discount based on its fair value at the time of the Fortress Acquisition, which we record at fair value.

Other revenues - other increased $51.9 million in 2013 when compared to 2012 reflecting favorable variances in writedowns and net gain (loss) on sales of real estate owned primarily due to a decrease in the number of real estate owned properties.

Salaries and benefits increased $143.8 million in 2013 when compared to 2012 primarily due to $146.0 million of share-based compensation expense due to the grant of restricted stock units ("RSUs") to certain of our executives and employees in the second half of 2013 and higher bonus and commissions accruals resulting from increased originations of personal loans, partially offset by lower pension expenses primarily due to the pension plan freeze effective December 31, 2012.

Other operating expenses decreased $43.0 million in 2013 when compared to 2012 primarily due to lower expenses recorded in 2013 for refunds to customers of our United Kingdom subsidiary relating to payment protection insurance, lower real estate expenses on real estate owned, and lower occupancy costs as a result of fewer branch offices in 2013. These decreases were partially offset by 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 and higher professional services expenses.

Benefit from income taxes decreased $71.5 million in 2013 when compared to 2012.

The effective tax rate in 2013 was (20.9)%. The effective tax rate for 2013 differed from the federal statutory rate primarily due to the effects of the non-controlling interest in our joint venture, which decreased the effective tax rate by 51.0%, a change in tax status, which decreased the effective tax rate by 14.6%, and interest and penalties on prior year tax returns, which increased the effective tax rate by 7.7%.

54 -------------------------------------------------------------------------------- Table of Contents Comparison of Consolidated Results for 2012 and 2011 (dollars in thousands) Years Ended December 31, 2012 2011 Interest income: Finance charges $ 1,712,073 $ 1,871,229Interest income on finance receivables held for sale originated as held for investment 2,740 - Total $ 1,714,813 $ 1,871,229 Finance charges decreased in 2012 when compared to 2011 due to the net of the following: (dollars in thousands) 2012 compared to 2011 Decrease in average net receivables $ (167,929 ) Increase in yield 4,874 Increase in number of days (due to 2012 leap year) 3,899 Total $ (159,156 ) Average net receivables decreased in 2012 when compared to 2011 primarily due to our liquidating real estate loan portfolio as well as the impact of our branch office closings during 2012, which were partially offset by an increase in personal loans average net receivables.

Yield increased in 2012 when compared to 2011 primarily due to a higher proportion of personal loans in our finance receivable portfolio, which have higher yields. This increase was partially offset by the increase in TDR finance receivables and the diminishing impact on yield from the effects of push-down accounting over time.

Interest expense decreased in 2012 when compared to 2011 due to the following: (dollars in thousands) 2012 compared to 2011 Decrease in average debt $ (127,517 )Decrease in weighted average interest rate (82,051 ) Total $ (209,568 ) Average debt decreased in 2012 when compared to 2011 primarily due to the repayment or repurchase of $3.0 billion of debt at maturity in 2012. The weighted average interest rate on our debt decreased in 2012, when compared to 2011, primarily due to debt repurchases in 2012 resulting in lower accretion of net discount applied to long-term debt from the effects of push-down accounting and the completion of three securitization transactions.

Provision for finance receivable losses increased $11.9 million in 2012 when compared to 2011. While our overall net finance receivables declined by 10.2% and our delinquency and charge-off trends improved in 2012 when compared to 2011, we increased our allowance for finance receivable losses (through the provision for finance receivable losses) by $114.6 million. The increase in the allowance for finance receivable losses during 2012 reflected the additional allowance requirements on our real estate loans deemed to be TDR finance receivables, and on our finance receivables originated, in each case 55 -------------------------------------------------------------------------------- Table of Contents subsequent to the Fortress Acquisition. Finance receivables were revalued at the time of the Fortress Acquisition at fair value, resulting in no allowance reserved.

Net loss on repurchases and repayments of debt totaled $15.5 million in 2012 resulting from the repurchases of debt in 2012 at net amounts less than par and with fair value mark losses compared to a net gain on repurchases and repayments of debt of $10.7 million in 2011 resulting from the refinancing of our secured term loan in May 2011.

Net gain (loss) on fair value adjustments on debt decreased $4.4 million in 2012 when compared to 2011 reflecting net unrealized losses on a long-term debt issuance associated with a mortgage securitization that was revalued at a discount based on its fair value at the time of the Fortress Acquisition, which we record at fair value.

Other revenues - other decreased $18.1 million in 2012 when compared to 2011 primarily due to unfavorable variances in foreign exchange gains (losses) on Euro denominated debt and related derivative adjustments, partially offset by foreign exchange transaction gains in 2012.

Salaries and benefits decreased $39.6 million in 2012 when compared to 2011 primarily due to having fewer employees in 2012 as a result of the restructuring activities during the first half of 2012.

Other operating expenses decreased $47.0 million in 2012 when compared to 2011 primarily due to fewer branch offices in 2012, lower amortization of other intangible assets resulting from the write off of our United Kingdom subsidiary's trade names and customer relationship intangible assets in fourth quarter 2011 and our United Kingdom subsidiary's customer lists intangible assets in third quarter 2012. These decreases were partially offset by additional expenses recorded in 2012 for refunds to our United Kingdom subsidiary's customers relating to payment protection insurance.

We recorded restructuring expenses of $23.5 million in 2012 due to our branch office closings and workforce reductions, which were instituted as part of a strategic effort to reposition the Company and to renew focus on the personal loan business. See Note 18 of the Notes to Consolidated Financial Statements in Item 8 for further information on the restructuring expenses.

56 -------------------------------------------------------------------------------- Table of Contents Reconciliation of Income (Loss) before Benefit from Income Taxes on Push-Down Accounting Basis to Income (Loss) before Provision for (Benefit from) Income Taxes on 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 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) Years Ended December 31, 2013 2012 2011 Income (loss) before benefit from income taxes - push-down accounting basis $ 77,557 $ (305,368 ) $ (360,138 ) Interest income adjustments (a) (199,650 ) (206,502 ) (247,172 ) Interest expense adjustments (b) 137,875 230,746 350,266 Provision for finance receivable losses adjustments (c) 22,416 180,719 79,157 Repurchases and repayments of long-term debt adjustments (d) (11,097 ) 36,624 (35,100 ) Fair value adjustments on debt (e) 56,369 13,361 78,552 Amortization of other intangible assets (f) 5,113 13,618 41,085 Other (g) 6,477 (9,647 ) (951 ) Income (loss) before provision for (benefit from) income taxes - historical accounting basis $ 95,060 $ (46,449 ) $ (94,301 ) -------------------------------------------------------------------------------- (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.

57 -------------------------------------------------------------------------------- Table of Contents Components of interest income adjustments consisted of: (dollars in thousands) Years Ended December 31, 2013 2012 2011 Accretion of net discount applied to non-credit impaired net finance receivables $ (157,891 ) $ (170,166 ) $ (227,334 ) Purchased credit impaired finance receivables finance charges (57,443 ) (53,096 ) (42,921 ) Elimination of accretion or amortization of historical unearned points and fees, deferred origination costs, premiums, and discounts 15,684 16,760 23,083 Total $ (199,650 ) $ (206,502 ) $ (247,172 ) (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) Years Ended December 31, 2013 2012 2011 Accretion of net discount applied to long-term debt $ 178,450 $ 285,449 $ 403,877 Elimination of accretion or amortization of historical discounts, premiums, commissions, and fees (40,575 ) (54,703 ) (53,611 ) Total $ 137,875 $ 230,746 $ 350,266 (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 reflects 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 reflects 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) Years Ended December 31, 2013 2012 2011 Allowance for finance receivable losses adjustments $ 85,904 $ 279,427 $ 255,631 Net charge-offs (63,488 ) (98,708 ) (176,474 ) Total $ 22,416 $ 180,719 $ 79,157 (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 relating to fair value adjustments to long-term debt associated with securitizations that were issued at a discount or revalued at a discount based on its fair value at the time of the Fortress Acquisition.

58 -------------------------------------------------------------------------------- Table of Contents (f) 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.

(g) "Other" items reflects less significant 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 December 31, 2013, the remaining un-accreted push-down basis totaled $631.3 million for net finance receivables, less allowance for finance receivable losses and $733.9 million for long-term debt.

Segment Results See Note 1 of the Notes to Consolidated Financial Statements in Item 8 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 22 of the Notes to Consolidated Financial Statements in Item 8 for reconciliations of segment totals to consolidated financial statement amounts.

59 -------------------------------------------------------------------------------- Table of Contents 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.

Disaggregated into three categories based on the underlying debt that the expense pertains to: (1) securitizations, (2) secured term loan, and (3) unsecured debt. Securitizations and the secured term Interest expense loan are allocated to the segments whose finance receivables serve as the collateral securing each of the respective debt instruments. The unsecured debt is allocated to the segments based on the remaining balance of debt by segment.

Directly correlated with a specific segment except for Provision for finance allocations to "other," which are based on the remaining receivable losses 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 Allocated to the segments based on the interest expense repurchases and allocation of unsecured debt.

repayments of debt Net gain (loss) on fair value adjustments Directly correlated with a specific segment.

on debt Directly correlated with a specific segment except for gains and losses on foreign currency exchange and Other revenues - other derivatives. These items are allocated to the segments based on the interest expense allocation of unsecured debt.

Directly correlated with a specific segment. Other Salaries and benefits salaries and benefits not directly correlated with a specific segment are allocated to each of the segments based on services provided.

Directly correlated with a specific segment. Other Other operating operating expenses not directly correlated with a expenses specific segment are allocated to each of the segments based on services provided.

Insurance losses and loss adjustment Directly correlated with a specific segment.

expenses 60 -------------------------------------------------------------------------------- Table of Contents 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) Years Ended December 31, 2013 2012 2011 Interest income $ 1,211,036 $ 585,041 $ 534,861 Interest expense 220,638 141,440 125,268 Net interest income 990,398 443,601 409,593 Provision for finance receivable losses 250,288 90,598 8,607 Net interest income after provision for finance receivable losses 740,110 353,003 400,986 Other revenues: Insurance 148,131 126,423 120,456 Investments 41,705 41,418 47,822 Net gain (loss) on repurchases and repayments of debt (5,357 ) 5,879 (3,275 ) Net gain on fair value adjustments on debt 5,534 - - Other 43,607 10,519 (3,366 ) Total other revenues 233,620 184,239 161,637 Other expenses: Operating expenses: Salaries and benefits 270,299 258,828 273,602 Other operating expenses 212,942 120,492 153,905 Restructuring expenses - 15,863 -Insurance loss and loss adjustment expenses 65,783 62,092 56,490 Total other expenses 549,024 457,275 483,997 Pretax operating income 424,706 79,967 78,626 Pretax operating income attributable to non-controlling interests 113,043 - - Pretax operating income attributable to Springleaf $ 311,663 $ 79,967 $ 78,626 61 -------------------------------------------------------------------------------- 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) At or for the Years Ended December 31, 2013 2012 2011 Consumer Net finance receivables $ 3,140,792 $ 2,544,614 $ 2,413,881 Number of accounts 830,513 729,140 690,509 Average net receivables $ 2,793,060 $ 2,426,968 $ 2,337,210 Yield 25.84 % 24.10 % 22.88 % Gross charge-off ratio (a) 5.18 % 4.63 % 5.09 % Recovery ratio (b) (1.66 )% (0.99 )% (1.14 )% Charge-off ratio (a)(b) 3.52 % 3.64 % 3.95 % Delinquency ratio 2.60 % 2.75 % 2.98 % Origination volume $ 3,253,008 $ 2,465,110 $ 2,258,235 Number of accounts 790,943 652,111 604,844 Acquisitions and Servicing Net finance receivables $ 2,505,349 - - Number of accounts 344,045 - - Average net receivables $ 2,730,979 - - Yield 23.78 % - - Net charge-off ratio 6.44 % - - Delinquency ratio 8.18 % - - -------------------------------------------------------------------------------- (a) The gross charge-off ratio and charge-off ratio in 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 4.66% in 2013.

(b) The recovery ratio and charge-off ratio in 2013 reflects $22.7 million of recoveries on charged-off personal loans resulting from a sale of our charged-off finance receivables in June 2013, net of a $2.7 million adjustment for the subsequent buyback of certain personal loans. Excluding the impacts of the $14.5 million of additional charge-offs and the $22.7 million of recoveries on charged-off personal loans, our Consumer charge-off ratio would have been 3.81% in 2013.

Comparison of Pretax Operating Results for 2013 and 2012 (dollars in thousands) Years Ended December 31, 2013 2012 Interest income: Finance charges - Consumer $ 721,772 $ 585,041 Finance charges - Acquisitions and Servicing 489,264 - Total $ 1,211,036 $ 585,041 62 -------------------------------------------------------------------------------- Table of Contents Finance charges - Consumer increased $136.7 million in 2013 when compared to 2012 primarily due to increases in yield and average net receivables. Yield increased in 2013 when compared to 2012 primarily due to pricing of new personal loans at higher state specific rates with concentrations in states with more favorable returns as a result of the restructuring activities during the first half of 2012. Average net receivables increased in 2013 when compared to 2012 primarily due to increased originations of personal loans resulting from our continued focus on personal loans.

Finance charges - Acquisitions and Servicing reflected the purchase of the SpringCastle Portfolio on April 1, 2013.

(dollars in thousands) Years Ended December 31, 2013 2012 Interest expense - Consumer $ 149,000 $ 141,440 Interest expense - Acquisitions and Servicing 71,638 - Total $ 220,638 $ 141,440 Interest expense - Consumer increased $7.6 million in 2013 when compared to 2012 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 resulted from the securitization of the SpringCastle Portfolio on April 1, 2013.

(dollars in thousands) Years Ended December 31, 2013 2012 Provision for finance receivable losses - Consumer $ 117,172 $ 90,598 Provision for finance receivable losses - Acquistions and Servicing 133,116 - Total $ 250,288 $ 90,598 Provision for finance receivable losses - Consumer increased $26.6 million in 2013 when compared to 2012 primarily due to higher increases to our allowance for finance receivable losses in 2013 reflecting increased originations of personal loans in 2013. This increase was partially offset by $22.7 million of recoveries on charged-off personal loans resulting from the sale of these loans in June 2013 (net of a $2.7 million adjustment for the subsequent buyback of certain personal loans) and improving delinquency trends.

Insurance revenues increased $21.7 million in 2013 when compared to 2012 primarily due to increases in credit and non-credit earned premiums reflecting higher originations of personal loans in 2013.

Net loss on repurchases and repayments of debt totaled $5.4 million in 2013 compared to net gain on repurchases and repayments of debt of $5.9 million in 2012. The unfavorable variance in net gain (loss) on repurchases and repayments of debt in 2013 when compared to 2012 was primarily due to the repurchase of debt in 2013 with deferred costs remaining and at net amounts greater than par compared to repurchases of debt in 2012 at net amounts less than par.

Net gain on fair value adjustments on debt - Acquisitions and Servicing resulted from the long-term debt associated with the securitization of the SpringCastle Portfolio that was issued at a discount.

63 -------------------------------------------------------------------------------- Table of Contents Other revenues - other increased $33.1 million in 2013 when compared to 2012 primarily due to servicing fee revenues of $31.2 million for the fees charged by Acquisitions and Servicing for servicing the SpringCastle Portfolio beginning on April 1, 2013, the acquisition date. These fees are eliminated in consolidated operating results with the servicing fee expenses, which are included in other operating expenses.

(dollars in thousands) Years Ended December 31, 2013 2012 Salaries and benefits - Consumer $ 240,893 $ 247,048 Salaries and benefits - Insurance 15,829 11,780 Salaries and benefits - Acquisitions and Servicing 13,577 - Total $ 270,299 $ 258,828 (dollars in thousands) Years Ended December 31, 2013 2012 Other operating expenses - Consumer $ 118,107 $ 110,386 Other operating expenses - Insurance 11,193 10,106 Other operating expenses - Acquisitions and Servicing 83,642 - Total $ 212,942 $ 120,492 Other operating expenses for Consumer and Insurance increased $8.8 million in 2013 when compared to 2012 primarily due to higher advertising and professional services expenses. These increases were partially offset by lower occupancy costs as a result of fewer branch offices in 2013.

Insurance losses and loss adjustment expenses increased $3.7 million in 2013 when compared to 2012 primarily due to an unfavorable variance in change in benefit reserves resulting from higher levels of insurance in force, partially offset by lower claims incurred.

Comparison of Pretax Operating Results for 2012 and 2011 Finance charges for Consumer increased $50.2 million in 2012 when compared to 2011 primarily due to increases in yield and average net receivables. Average net receivables increased in 2012 when compared to 2011 due to higher personal loan average net receivables from increased originations of personal loans.

Interest expense for Consumer increased $16.2 million in 2012 when compared to 2011 primarily due to higher unsecured debt interest expense allocated to Consumer reflecting the higher proportion of personal loans allocated to our unsecured debt.

Provision for finance receivable losses for Consumer increased $82.0 million in 2012 when compared to 2011 primarily due to increasing the allowance for finance receivable losses in 2012 as opposed to recording an allowance reduction in 2011. Effective September 30, 2011, we switched from a migration analysis to a roll rate-based model for purposes of computing our allowance for finance receivable losses for our personal loans. While the delinquency and charge-off trends of our personal loans improved in 2012 over 2011, we increased our allowance for finance receivable losses during 2012 due to a 5.4% growth in these finance receivables during 2012.

Insurance revenues increased $6.0 million in 2012 when compared to 2011 primarily due to increases in credit earned premiums reflecting higher originations of personal loans in 2012, partially offset by a decrease in premiums assumed under reinsurance agreements.

64 -------------------------------------------------------------------------------- Table of Contents Investment revenues for Insurance decreased $6.4 million in 2012 when compared to 2011 primarily due to decreases in average invested assets and average invested asset yield, partially offset by a favorable variance in net realized gains (losses) on investment securities.

Net gain on repurchases and repayments of debt of $5.9 million in 2012 reflected repurchases of debt in 2012 at net amounts less than par compared to a loss on repurchases and repayments of debt of $3.3 million in 2011 resulting from the refinancing of our secured term loan in May 2011.

Other revenues - other for Consumer and Insurance increased $13.9 million in 2012 when compared to 2011 primarily due to foreign exchange transaction gains in 2012, curtailment gain in 2012 as a result of our pension plan freeze, partially offset by unfavorable variances in foreign exchange gains (losses) on Euro denominated debt and related derivative adjustments.

Salaries and benefits for Consumer and Insurance decreased $14.8 million in 2012 when compared to 2011 primarily due to having fewer employees in 2012 as a result of the restructuring activities during the first half of 2012.

Other operating expenses for Consumer and Insurance decreased $33.4 million in 2012 when compared to 2011 primarily due to fewer branch offices in 2012.

We recorded restructuring expenses of $15.9 million during the first half of 2012 in connection with our restructuring activities in 2012.

Insurance losses and loss adjustment expenses increased $5.6 million in 2012 when compared to 2011 primarily due to an unfavorable variance in change in claim reserves.

65 -------------------------------------------------------------------------------- Table of Contents 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 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, restructuring expenses related to Consumer and Insurance, gains (losses) resulting from accelerated long-term debt repayment and repurchases of long-term debt related to Consumer, 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 from income (loss) before benefit from income taxes on a historical accounting basis to pretax core earnings: (dollars in thousands) Years Ended December 31, 2013 2012 2011 Income (loss) before provision for (benefit from) income taxes - historical accounting basis $ 95,060 $ (46,449 ) $ (94,301 ) Adjustments: Pretax operating loss - Non-Core Portfolio Operations 180,339 59,200 178,897 Pretax operating (income) loss - Other/non-originating legacy operations 149,307 67,218 (5,970 ) Restructuring expenses - Core Consumer Operations - 15,863 - Net (gain) loss from accelerated repayment/repurchase of debt - Consumer 5,357 (5,879 ) 3,275 Net gain on fair value adjustments on debt - Core Consumer Operations (attributable to SHI) (2,601 ) - - Impact from change in accounting estimate - Consumer - - (39,935 ) Pretax operating income attributable to non-controlling interests (113,043 ) - - Pretax core earnings $ 314,419 $ 89,953 $ 41,966 66 -------------------------------------------------------------------------------- Table of Contents NON-CORE PORTFOLIO Pretax operating results for Real Estate (which are reported on a historical accounting basis) were as follows: (dollars in thousands) Years Ended December 31, 2013 2012 2011 Interest income $ 698,026 $ 823,173 $ 939,053 Interest expense 546,266 669,308 760,620 Net interest income 151,760 153,865 178,433 Provision for finance receivable losses 255,157 59,601 246,225 Net interest income after provision for finance receivable losses (103,397 ) 94,264 (67,792 ) Other revenues: Net gain (loss) on repurchases and repayments of debt (46,385 ) 13,790 (17,924 ) Net gain on fair value adjustments on debt 56,890 10,369 79,924 Other (4,289 ) (75,088 ) (44,142 ) Total other revenues 6,216 (50,929 ) 17,858 Other expenses: Operating expenses: Salaries and benefits 27,312 29,680 31,310 Other operating expenses 55,846 72,037 97,653 Restructuring expenses - 818 - Total other expenses 83,158 102,535 128,963 Pretax operating loss $ (180,339 ) $ (59,200 ) $ (178,897 ) 67 -------------------------------------------------------------------------------- Table of Contents Selected financial statistics for Real Estate (which are reported on a historical accounting basis) were as follows: (dollars in thousands) At or for the Years Ended December 31, 2013 2012 2011 Real estate Net finance receivables $ 9,335,357 $ 10,552,557 $ 11,857,850 Number of accounts 119,483 135,151 151,731 TDR finance receivables $ 3,263,249 $ 2,772,886 $ 2,299,679 Allowance for finance receivables losses - TDR $ 754,912 $ 639,948 $ 540,740 Provision for finance receivable losses - TDR $ 184,354 $ 158,563 $ 134,229 Average net receivables $ 9,932,047 $ 11,183,176 $ 12,596,103 Yield 7.03 % 7.34 % 7.49 % Loss ratio* 2.20 % 2.73 % 3.22 % Delinquency ratio 8.04 % 7.78 % 8.03 % -------------------------------------------------------------------------------- * The loss ratio in 2013 reflects $9.1 million of recoveries on charged-off real estate loans resulting from a sale of our charged-off finance receivables in June 2013, net of a $0.8 million adjustment for the subsequent buyback of certain real estate loans. Excluding these recoveries, our Real Estate loss ratio would have been 2.30% in 2013.

Comparison of Pretax Operating Results for 2013 and 2012 (dollars in thousands) Years Ended December 31, 2013 2012 Interest income: Finance charges $ 698,026 $ 820,439Interest income on finance receivables held for sale originated as held for investment - 2,734 Total $ 698,026 $ 823,173 Finance charges decreased $122.4 million in 2013 when compared to 2012 primarily due to decreases in average net receivables and yield. Average net receivables decreased in 2013 when compared to 2012 primarily due to the cessation of new originations of real estate loans as of January 1, 2012 and the continued liquidation of the portfolio. Yield decreased in 2013 when compared to 2012 primarily due to the increase in TDR finance receivables (which result in reduced finance charges reflecting the reductions to the interest rates on these TDR finance receivables).

Interest expense decreased $123.0 million in 2013 when compared to 2012 primarily due to lower secured term loan and unsecured debt interest expense allocated to Real Estate, partially offset by higher ratio of securitization interest expense reflecting Real Estate's utilization of three real estate loan securitization transactions in 2013.

Provision for finance receivable losses increased $195.6 million in 2013 when compared to 2012. In September 2012, we switched from a migration analysis to a roll rate-based model for purposes of computing our allowance for finance receivable losses for our real estate loans, which resulted in a $144.6 68 -------------------------------------------------------------------------------- Table of Contents million decrease in the allowance for finance receivable losses. The increase in provision for finance receivable losses also reflected the additional allowance requirements recorded in 2013 on our real estate loans deemed to be TDR finance receivables subsequent to the Fortress Acquisition compared to reductions to the allowance for finance receivable losses for real estate loans in 2012 primarily due to the cessation of real estate loan originations as of January 1, 2012.

These increases were partially offset by $9.1 million of recoveries on charged-off real estate loans resulting from the sale of these loans in June 2013 (net of a $0.8 million adjustment for the subsequent buyback of certain real estate loans) and continued liquidation of the real estate portfolio.

Net loss on repurchases and repayments of debt totaled $46.4 million in 2013 compared to net gain on repurchases and repayments of debt of $13.8 million in 2012. The unfavorable variance in net gain (loss) on repurchases and repayments of debt in 2013 when compared to 2012 was primarily due to the repurchase of debt in 2013 with deferred costs remaining and at net amounts greater than par compared to repurchases of debt in 2012 at net amounts less than par.

Net gain on fair value adjustments on debt increased $46.5 million in 2013 when compared to 2012 reflecting net unrealized gains on a long-term debt issuance associated with a mortgage securitization that was issued at a discount or revalued at a discount based on its fair value at the time of the Fortress Acquisition, which we record at fair value.

Other revenues - other increased $70.8 million in 2013 when compared to 2012 primarily due to favorable variances in writedowns and net gain (loss) on sales of real estate owned and lower net losses on foreign exchange transactions relating to our Euro denominated debt, cross currency interest rate swap agreement, and Euro denominated cash and cash equivalents.

Other operating expenses decreased $16.2 million in 2013 when compared to 2012 primarily due to lower real estate expenses on real estate owned.

Comparison of Pretax Operating Results for 2012 and 2011 (dollars in thousands) Years Ended December 31, 2012 2011 Interest income: Finance charges $ 820,439 $ 939,053Interest income on finance receivables held for sale originated as held for investment 2,734 - Total $ 823,173 $ 939,053 Finance charges decreased $118.6 million in 2012 when compared to 2011 primarily due to decreases in average net receivables and yield. Average net receivables decreased in 2012 when compared to 2011 primarily due to the cessation of new originations of real estate loans as of January 1, 2012.

Interest expense decreased $91.3 million in 2012 when compared to 2011 primarily due to lower unsecured debt interest expense allocated to Real Estate. The lower proportion of real estate loans allocated to our unsecured debt reflected Real Estate's utilization of three securitization transactions in 2012 that have lower cost of funds.

Provision for finance receivable losses decreased $186.6 million in 2012 when compared to 2011 due to lower required allowance for finance receivable losses in response to the 11.0% decline in our real estate loans during 2012 and the improved delinquency and charge-off trends of these finance receivables. We switched from a migration analysis to a roll rate-based model for purposes of computing our allowance 69 -------------------------------------------------------------------------------- Table of Contents for finance receivable losses for our real estate loans. There was no requirement for further increase to our allowance for finance receivable losses under the new roll rate analysis and after consideration of the improved delinquency and charge-off trends of our real estate loans in 2012 when compared to 2011 and the decline in these finance receivables during 2012.

Net gain on repurchases and repayments of debt of $13.8 million in 2012 reflected repurchases of debt in 2012 at net amounts less than par compared to a loss on repurchases and repayments of debt of $17.9 million in 2011 resulting from the refinancing of our secured term loan in May 2011.

Net gain on fair value adjustments on debt decreased $69.6 million in 2012 when compared to 2011 reflecting net unrealized losses on a long-term debt issuance associated with a mortgage securitization that was issued at a discount or revalued at a discount based on its fair value at the time of the Fortress Acquisition, which we record at fair value.

Other operating expenses decreased $25.6 million in 2012 when compared to 2011 primarily due to fewer branch offices in 2012 and lower real estate expenses on real estate owned.

We recorded restructuring expenses of $0.8 million in 2012 in connection with our branch office closings and workforce reductions in 2012.

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. Other also includes $146.0 million of share-based compensation expense due to the grant of RSUs to certain of our executives and employees in the second half of 2013, which is not considered pertinent in determining segment performance.

70 -------------------------------------------------------------------------------- Table of Contents Pretax operating results of the Other components (which are reported on a historical accounting basis) were as follows: (dollars in thousands) Years Ended December 31, 2013 2012 2011 Interest income $ 45,366 $ 100,097 $ 150,143 Interest expense 14,970 33,711 48,619 Net interest income 30,396 66,386 101,524 Provision for finance receivable losses (200 ) 10,660 (4,314 ) Net interest income after provision for finance receivable losses 30,596 55,726 105,838 Other revenues: Insurance 80 108 111 Investments 1,521 4,758 1,161 Net gain (loss) on repurchases and repayments of debt (1,071 ) 1,413 (3,228 ) Other (2,330 ) 3,911 14,056 Total other revenues (1,800 ) 10,190 12,100 Other expenses: Operating expenses: Salaries and benefits* 166,507 32,186 55,186 Other operating expenses 11,596 94,126 56,782 Restructuring expenses - 6,822 - Total other expenses 178,103 133,134 111,968 Pretax operating income (loss) $ (149,307 ) $ (67,218 ) $ 5,970 -------------------------------------------------------------------------------- * Salaries and benefits in 2013 include $146.0 million of share-based compensation expense due to the grant of RSUs to certain of our executives and employees in the second half of 2013.

Net finance receivables of the Other components (which are reported on a historical accounting basis) were as follows: (dollars in thousands) December 31, 2013 2012 2011 Net finance receivables: Personal loans $ 38,149 $ 122,417 $ 310,514 Real estate loans 7,456 8,570 130,248 Retail sales finance 103,037 217,092 390,528 Total $ 148,642 $ 348,079 $ 831,290 On December 20, 2013, we sold personal loans totaling $18.3 million (on a historical accounting basis) from our lending operations in Puerto Rico.

Pursuant to an interim servicing agreement, we will continue to service these loans and perform collection services prior to the servicing transfer date, which we anticipate to be in March 2014.

71 -------------------------------------------------------------------------------- Table of Contents 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.

72 -------------------------------------------------------------------------------- Table of Contents 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) December 31, 2013 2012 Personal Loans FA Performing Loans at Fortress Acquisition $ 168,386 $ 336,141 Originated after Fortress Acquisition 3,003,318 2,313,591 Allowance for finance receivable losses (94,880 ) (66,580 ) Personal loans, less allowance for finance receivable losses 3,076,824 2,583,152 SpringCastle Portfolio SCP Performing Loans 1,975,023 - SCP Credit Impaired Loans 530,326 - Allowance for finance receivable losses (1,056 ) - SpringCastle Portfolio, less allowance for finance receivable losses 2,504,293 - Real Estate Loans FA Performing Loans at Fortress Acquisition 6,597,300 7,463,046 FA Credit Impaired Loans 1,314,381 1,398,767 Originated after Fortress Acquisition* 70,668 90,090 Allowance for finance receivable losses (235,549 ) (113,813 ) Real estate loans, less allowance for finance receivable losses 7,746,800 8,838,090 Retail Sales Finance FA Performing Loans at Fortress Acquisition 63,158 126,558 Originated after Fortress Acquisition 35,753 81,799 Allowance for finance receivable losses (1,840 ) (2,260 ) Retail sales finance, less allowance for finance receivable losses 97,071 206,097 Total net finance receivables, less allowance $ 13,424,988 $ 11,627,339 Allowance for finance receivable losses as a percentage of finance receivables Personal loans 2.99 % 2.51 % SpringCastle Portfolio 0.04 % - Real estate loans 2.95 % 1.27 % Retail sales finance 1.86 % 1.08 % -------------------------------------------------------------------------------- * Real estate loan originations in 2013 and 2012 were from advances on home equity lines of credit.

73 -------------------------------------------------------------------------------- Table of Contents 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 by days delinquent: Personal SpringCastle Real Retail (dollars in thousands) Loans Portfolio Estate Loans Sales Finance Total 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 December 31, 2012 Net finance receivables: 60-89 days past due $ 21,683 $ - $ 99,956 $ 2,107 $ 123,746 90-119 days past due 17,538 - 73,803 1,416 92,757 120-149 days past due 14,050 - 58,364 1,171 73,585 150-179 days past due 9,613 - 45,648 743 56,004 180 days or more past due 12,107 - 382,562 331 395,000 Total delinquent finance receivables 74,991 - 660,333 5,768 741,092 Current 2,534,960 - 8,094,459 197,392 10,826,811 30-59 days past due 39,781 - 197,111 5,197 242,089 Total $ 2,649,732 $ - $ 8,951,903 $ 208,357 $ 11,809,992 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 were as follows: (dollars in thousands) December 31, 2013 2012 TDR net finance receivables $ 1,380,223 $ 834,979 Allowance for TDR finance receivable losses $ 176,455 $ 94,855 Allowance as a percentage of TDR net finance receivables 12.78 % 11.36 % Number of TDR accounts 14,609 8,054 74 -------------------------------------------------------------------------------- Table of Contents Net finance receivables that were modified as TDR finance receivables within the previous 12 months and for which there was a default during the period were as follows: (dollars in thousands) Years Ended December 31, 2013 2012 2011 Real Estate Loans Number of TDR accounts 929 594 188 TDR net finance receivables* $ 68,901 $ 66,096 $ 19,941 -------------------------------------------------------------------------------- * 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 less than $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 $67.9 million as of December 31, 2013.

At December 31, 2013, we had $431.4 million of cash and cash equivalents and in 2013 SHI generated a net loss of $19.3 million. Our net cash outflow from operating and investing activities totaled $1.4 billion in 2013 as a result of the purchase of the SpringCastle Portfolio. At December 31, 2013, our scheduled principal and interest payments for 2014 on our existing debt (excluding securitizations) totaled $754.9 million. As of December 31, 2013, we had $1.7 billion UPB of unencumbered personal loans and $1.4 billion 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.

75 -------------------------------------------------------------------------------- Table of Contents 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 8% of our borrowings at December 31, 2013 and 31% at December 31, 2012 (which included the impact of our remaining interest rate swap agreement).

LIQUIDITY Operating Activities Cash from operations increased $447.1 million in 2013 when compared to 2012 primarily due to higher net interest income, lower pension expenses primarily due to the pension plan freeze effective December 31, 2012, and lower occupancy expenses reflecting fewer branch offices in 2013 as a result of the restructuring activities during the first half of 2012. These increases were partially offset by 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, higher professional services expenses, and higher advertising expenses.

Cash from operations increased $56.8 million in 2012 when compared to 2011 primarily due to lower salaries and benefits and other operating expenses reflecting fewer employees and branch offices in 2012 due to the restructuring activities during the first half of 2012, as well as higher net interest income.

Investing Activities Net cash provided by (used for) investing activities decreased $3.5 billion in 2013 when compared to 2012 primarily due to the purchase of the SpringCastle Portfolio.

Net cash provided by investing activities decreased $89.7 million in 2012 when compared to 2011 primarily due to the settlement of a note receivable from AIG in 2011 and restrictions on cash due to the completion of three securitization transactions during 2012 and the modification of our secured term loan in 2011 combined with an increase in proceeds from net sales of investment securities and sales of finance receivables held for sale in 2012.

Financing Activities Net cash provided by (used for) financing activities increased $1.1 billion in 2013 when compared to 2012 primarily due to higher net issuances of long-term debt reflecting ten securitization transactions and three unsecured offerings of senior notes in 2013.

Net cash used for financing activities decreased $1.6 billion in 2012 when compared to 2011 primarily due to higher amounts of long-term debt repayments in 2011.

Liquidity Risks and Strategies We currently have a significant amount of indebtedness in relation to our equity. SFC's credit ratings are non-investment grade, which have a significant impact on our cost of, and access to, capital. This, in turn, negatively affects our ability to manage our liquidity and our ability and cost to refinance our indebtedness.

76 -------------------------------------------------------------------------------- Table of Contents 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 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 real estate portfolio could be substantial and 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 bond 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 or our affiliates 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. Our insurance subsidiaries paid $150.0 million of extraordinary dividends during each of the third quarter of 2013 and the second quarter of 2012 upon receiving prior approval and $45.0 million of dividends in the second quarter of 2011 that did not require prior approval. 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 payment of principal of, 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 77 -------------------------------------------------------------------------------- Table of Contents 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.

The debt agreements to which SFC and its subsidiaries are a party include customary terms and conditions, including covenants and representations and warranties. 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 restrictions on the intercompany transfer of funds from certain subsidiaries to SFC or SFI, except for those funds needed for debt payments and operating expenses.

With the exception of SFC's junior subordinated debentures and two certain consumer loan securitizations, 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 December 31, 2013, we were in compliance with all of the covenants under our debt agreements.

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

The Junior Subordinated Indenture restricts SFC's ability to sell or convey all or substantially all of its assets, unless the transferee assumes SFC's obligations and covenants under the Junior Subordinated Indenture. The Junior Subordinated Indenture provides for customary events of default, including: payment defaults; bankruptcy and insolvency; and upon admission by SFC in writing of its inability to pay its debts generally as they become due or that it has taken corporate action with regard to the commencement of voluntary bankruptcy or insolvency proceedings. In the case of an event of default arising from certain events of bankruptcy or insolvency, all outstanding debentures will become due and payable immediately without further action or notice. If any other event of default occurs and is continuing, the trustee or the holders of at least 25% in aggregate principal amount of the then outstanding debentures may declare all the debentures to be due and payable immediately.

Further, pursuant to the terms of the debentures, SFC, upon the occurrence of a mandatory trigger event, is required to defer interest payments to the holders of the debentures (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 debentures otherwise payable on the next interest payment date and pays such amount to the holders 78 -------------------------------------------------------------------------------- Table of Contents of the debentures. 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, 2013, a mandatory trigger event occurred with respect to the payment due in January 2014 as the average fixed charge ratio was 0.75x. On January 10, 2014, SFC issued one share of SFC common stock to SFI for $10.5 million to satisfy the January 2014 interest payments required by SFC's debentures.

Consumer Loan Securitizations In connection with the 2013-BAC securitization, SFC is required to maintain a consolidated tangible net worth covenant. At December 31, 2013, SFC is in compliance with this covenant.

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 December 31, 2013, SFC is in compliance with these covenants.

Secured Term Loan SFFC, a wholly owned subsidiary of SFC, was party to a secured term loan maturing in 2017 pursuant to a credit agreement among SFFC, SFC, the Subsidiary Guarantors, and a syndicate of lenders, various agents, and Bank of America, N.A, as administrative agent. SFC subsidiaries that borrowed funds through the secured term loan were required to pledge eligible finance receivables or certain other assets to support their borrowings under the secured term loan.

On September 30, 2013, SFC, SFFC, and the Subsidiary Guarantors entered into an incremental facility joinder agreement with Bank of America, N.A., as lender, administrative agent and collateral agent, and established new term loan commitments totaling $750.0 million under the secured term loan (the "New Loan Tranche"). SFFC remained the borrower of the loans made under the New Loan Tranche. The New Loan Tranche is guaranteed by SFC and by the Subsidiary Guarantors and is secured by the same collateral as, and on a pro rata basis with, the initial loans under the secured term loan.

During 2013, SFFC made prepayments, without penalty or premium, and the initial loans under the secured term loan maturing in 2017 were fully repaid in October 2013. At December 31, 2013, the outstanding principal amount of loans under the New Loan Tranche of the secured term loan maturing in 2019 totaled $750.0 million, which we repaid in March 2014.

79 -------------------------------------------------------------------------------- Table of Contents Structured Financings We execute private securitizations under Rule 144A of the Securities Act. As of December 31, 2013, our structured financings consisted of the following: Current Current Initial Note Initial Note Current Weighted Amounts Collateral Amounts Collateral Average Collateral Revolving (dollars in thousands) Issued (a) Balance Outstanding Balance (b) Interest Rate Type Period Mortgage Securitizations Mortgage AGFMT 2006-1 $ 457,061 $ 473,570 $ 116,580 $ 136,350 5.7500 % loans N/A Mortgage AGFMT 2009-1 1,179,513 1,965,856 147,153 967,229 5.7500 % loans N/A Mortgage AGFMT 2010-1 716,897 1,002,653 284,168 600,363 5.5293 % loans N/A Mortgage SLFMT 2011-1 365,441 496,861 249,504 376,247 4.8581 % loans N/A Mortgage SLFMT 2012-1 394,611 473,009 281,869 389,388 4.0243 % loans N/A Mortgage SLFMT 2012-2 770,806 970,034 596,431 845,784 3.2742 % loans N/A Mortgage SLFMT 2012-3 794,854 1,030,568 642,967 929,604 2.4555 % loans N/A Mortgage SLFMT 2013-1 782,489 1,021,846 689,749 953,299 2.2496 % loans N/A Mortgage SLFMT 2013-2 756,878 1,137,307 709,631 1,102,832 2.6699 % loans N/A Mortgage SLFMT 2013-3 292,978 500,390 286,586 495,617 2.8285 % loans N/A Consumer Securitizations Personal SLFMT 2013-A 567,880 662,247 567,880 662,250 2.7526 % loans 2 years Personal SLFMT 2013-B 370,170 441,989 370,170 441,992 3.9872 % loans 3 years Personal SLFMT 2013-BAC 500,000 645,162 351,046 496,207 (c) loans N/A Total mortgage and consumer securitizations 7,949,578 10,821,492 5,293,734 8,397,162 SpringCastle Securitization Personal and junior mortgage SCFT 2013-1 2,572,000 3,934,955 2,029,034 3,422,471 3.7958 % loans N/A Total secured structured financings $ 10,521,578 $ 14,756,447 $ 7,322,768 $ 11,819,633 -------------------------------------------------------------------------------- (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.

(c) Current weighted average interest for SLFMT 2013-BAC was the average daily one-month LIBOR plus 2.00%.

In addition to the structured financings included in the table above, we completed three conduit securitizations in 2013, as discussed in Note 11 of the Notes to Consolidated Financial Statements in Item 8. At December 31, 2013, there were no amounts drawn under these notes.

Our 2013 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: Years Ended December 31, 2013 2012 2011 Weighted average interest rate 5.48 % 6.03 % 5.96 % 80 -------------------------------------------------------------------------------- Table of Contents Contractual Obligations At December 31, 2013, our material contractual obligations were as follows: (dollars in thousands) 2014 2015-2016 2017-2018 2019+ Securitizations (a) Total Principal maturities on long-term debt: Secured term loan $ - $ - $ - $ 750,000 $ - $ 750,000 Securitization debt: Real estate - - - - 4,004,638 4,004,638 Consumer - - - - 1,289,096 1,289,096 SpringCastle Portfolio - - - - 2,029,034 2,029,034 Retail notes 356,052 47,254 - - - 403,306 Medium-term notes - 1,125,000 2,379,337 1,250,000 - 4,754,337 Junior subordinated debt - - - 350,000 - 350,000 Total principal maturities 356,052 1,172,254 2,379,337 2,350,000 7,322,768 13,580,411 Interest payments on debt (a) (b) 398,813 711,138 443,200 663,939 1,801,814 4,018,904 Operating leases (c) 25,443 33,401 13,102 2,876 - 74,822 Total $ 780,308 $ 1,916,793 $ 2,835,639 $ 3,016,815 $ 9,124,582 $ 17,674,137 -------------------------------------------------------------------------------- (a) On-balance sheet securitizations are not included in maturities by period due to their variable monthly payments.

(b) Future interest payments on floating-rate debt are estimated based upon floating rates in effect at December 31, 2013.

(c) Operating leases include annual rental commitments for leased office space, automobiles, and information technology and related equipment.

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 variable interest entities ("VIEs") at December 31, 2013 or 2012.

Critical Accounting Policies and Estimates We consider the following policies to be our most critical accounting policies because they involve critical accounting estimates and a significant degree of management judgment: † allowance for finance receivable losses; † purchased credit impaired finance receivables; † TDR finance receivables; † push-down accounting; and † fair value measurements.

See Note 2 of the Notes to Consolidated Financial Statements in Item 8 for a discussion of these accounting policies.

We believe the amount of the allowance for finance receivable losses is the most significant estimate we make. See "Allowance for Finance Receivable Losses" below for further discussion of the models and assumptions used to assess the adequacy of the allowance for finance receivable losses.

81 -------------------------------------------------------------------------------- Table of Contents ALLOWANCE FOR FINANCE RECEIVABLE LOSSES We base our allowance for finance receivable losses primarily on historical loss experience using a roll rate-based model applied to our finance receivable portfolios. We switched from the migration analysis to the roll rate-based model effective September 30, 2012 for our retail sales finance and real estate loan portfolios and effective September 30, 2011 for our personal loans. These changes in methodology were considered changes in estimates and incorporated prospectively into our calculation of allowance for finance receivable losses on the respective effective dates. As of September 30, 2012, we recorded an allowance for finance receivable losses for our retail and real estate loans using the roll rate-based model that was $0.7 million higher than the equivalent number produced using migration analysis. As of September 30, 2011, we recorded an allowance for finance receivable losses for our personal loans using the roll-rate based model that was $6.2 million lower than the equivalent number produced using migration analysis. We adopted the roll rate-based model as follows: In our roll rate-based model, our finance receivable types are stratified by delinquency stages (i.e., current, 1-29 days past due, 30-59 days past due, etc.) and projected forward in one-month increments using historical roll rates. In each month of the simulation, losses on our finance receivable types are captured, and the ending delinquency stratification serves as the beginning point of the next iteration. No new volume is assumed. This process is repeated until the number of iterations equals the loss emergence period (the interval of time between the event which causes a borrower to default on a finance receivable and our recording of the charge- off) for our finance receivable types. As delinquency is a primary input into our roll rate-based model, we inherently consider nonaccrual loans in our estimate of the allowance for finance receivable losses.

Management exercises its judgment, based on quantitative analyses, qualitative factors such as recent delinquency and other credit trends, and experience in the consumer finance industry, when determining the amount of the allowance for finance receivable losses. We adjust the amounts determined by the roll rate-based model for management's estimate of the effects of model imprecision, any changes to underwriting criteria, portfolio seasoning, and current economic conditions, including levels of unemployment and personal bankruptcies. We charge or credit this adjustment to expense through the provision for finance receivable losses.

We based our allowance for finance receivable losses primarily on historical loss experience using migration analysis prior to September 30, 2012 for our retail sales finance and real estate loan portfolios and prior to September 30, 2011 for our personal loans. Our migration analysis utilized a rolling 12 months of historical data that was updated quarterly for our real estate loan and retail sales finance receivable portfolios. The primary inputs for our migration analysis were (1) the related historical finance receivable balances, (2) the historical delinquency, charge-off, recovery and repayment amounts, and (3) the related finance receivable balances in each stage of delinquency (i.e., current, greater than 30 days past due, greater than 60 days past due, etc.). The primary assumptions used in our migration analysis were the weighting of historical data and our estimate of the loss emergence period for the portfolio.

Management considers the performance of our junior-lien real estate loans portfolio when estimating the allowance for finance receivable losses at the time we evaluate our real estate loan portfolio for impairments. However, we are not able to track the default status of the first lien position for our junior lien loans if we are not the holders of the first lien position. We attempt to mitigate the risk resulting from the inability to track this information by utilizing our roll rate-based model. Our roll rate-based model incorporates the historical performance of our real estate portfolio (including junior lien loans) and its output will therefore be impacted by any actual delinquency and charge-offs from junior lien loans.

82 -------------------------------------------------------------------------------- Table of Contents Recent Accounting Pronouncements See Note 3 of the Notes to Consolidated Financial Statements in Item 8 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.

83 -------------------------------------------------------------------------------- Table of Contents Glossary of Terms Average debt average of debt for each day in the period Average net average of net finance receivables at the beginning and receivables end of each month in the period annualized net charge-offs as a percentage of the average Charge-off ratio 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 annualized gross charge-offs as a percentage of the ratio average of net finance receivables at the beginning of each month in the period capital securities classified as debt for accounting Junior Subordinated purposes but due to their terms are afforded, at least in Indenture part, equity capital treatment in the calculation of effective leverage by rating agencies annualized net charge-offs, net writedowns on real estate owned, net gain (loss) on sales of real estate owned, and Loss ratio 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 annualized recoveries on net-charge offs as a percentage Recovery ratio 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 annualized interest expense as a percentage of average interest rate debt Yield annualized finance charges as a percentage of average net receivables 84 -------------------------------------------------------------------------------- Table of Contents

[ Back To Technology News's Homepage ]

OTHER NEWS PROVIDERS







Technology Marketing Corporation

800 Connecticut Ave, 1st Floor East, Norwalk, CT 06854 USA
Ph: 800-243-6002, 203-852-6800
Fx: 203-866-3326

General comments: tmc@tmcnet.com.
Comments about this site: webmaster@tmcnet.com.

STAY CURRENT YOUR WAY

© 2014 Technology Marketing Corporation. All rights reserved | Privacy Policy