Attached files

file filename
EX-12 - SLFC EX. 12 FOR THE PERIOD ENDED 03/31/11 - ONEMAIN FINANCE CORPx12c0311.htm
EX-32 - SLFC EX. 32 FOR THE PERIOD ENDED 03/31/11 - ONEMAIN FINANCE CORPx32c0311.htm
EX-31.2 - SLFC EX. 31.2 FOR THE PERIOD ENDED 03/31/11 - ONEMAIN FINANCE CORPx312c0311.htm
EX-31.1 - SLFC EX. 31.1 FOR THE PERIOD ENDED 03/31/11 - ONEMAIN FINANCE CORPx311c0311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549


FORM 10-Q


(Mark One)


þ

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

ACT OF 1934


For the quarterly period ended

March 31, 2011


OR


¨

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

ACT OF 1934


For the transition period from



to



Commission file number 1-06155


SPRINGLEAF FINANCE CORPORATION

(Exact name of registrant as specified in its charter)


Indiana

 


35-0416090

(State of Incorporation)

 

(I.R.S. Employer Identification No.)


601 N.W. Second Street, Evansville, IN

 


47708

(Address of principal executive offices)

 

(Zip Code)


(812) 424-8031

(Registrant’s telephone number, including area code)


American General Finance Corporation

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ      No ¨


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ¨      No ¨


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

Large accelerated filer ¨         Accelerated filer ¨          Non-accelerated filer þ         Smaller reporting company ¨

(Do not check if a smaller

reporting company)


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨      No þ


At May 16, 2011, there were 10,160,013 shares of the registrant’s common stock, $.50 par value, outstanding.



73



TABLE OF CONTENTS





Item

 


Page


Part I


1.


Financial Statements


3

 


2.


Management’s Discussion and Analysis of Financial Condition and

Results of Operations



43

 


3.


Quantitative and Qualitative Disclosures About Market Risk


69

 


4.


Controls and Procedures


69


Part II


1.


Legal Proceedings


69

 


1A.


Risk Factors


70

 


2.


Unregistered Sales of Equity Securities and Use of Proceeds


71

 


3.


Defaults Upon Senior Securities


71

 


4.


Removed and Reserved


 


5.


Other Information


71

 


6.


Exhibits


71




AVAILABLE INFORMATION



Springleaf Finance Corporation (SLFC) files annual, quarterly, and current reports and other information with the Securities and Exchange Commission (the SEC). The SEC’s website, www.sec.gov, contains these reports and other information that registrants (including SLFC) file electronically with the SEC.


The following reports are available free of charge through our website, www.SpringleafFinancial.com (posted on the “About Us – Financial Information” section), as soon as reasonably practicable after we file them with or furnish them to the SEC:


·

Annual Reports on Form 10-K;

·

Quarterly Reports on Form 10-Q;

·

Current Reports on Form 8-K; and

·

any amendments to those reports.


In addition, our Code of Ethics for Principal Executive and Senior Financial Officers (the Code of Ethics) is posted on the “About Us – Financial Information” section of our website at www.SpringleafFinancial.com. We will post on our website any amendments to the Code of Ethics and any waivers that are required to be described.


The information on our website is not incorporated by reference into this report. The website addresses listed above are provided for the information of the reader and are not intended to be active links.



2



Part I – FINANCIAL INFORMATION



Item 1.  Financial Statements




SPRINGLEAF FINANCE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)




(dollars in thousands)

Successor

Company

Predecessor

Company

Three Months Ended March 31,

2011

2010


Revenues

Finance charges



$487,636 



$468,986 

Insurance

28,486 

31,520 

Finance receivables held for sale originated as

held for investment


-      


10,871 

Investment

7,779 

7,650 

Other

(7,054)

79,998 

Total revenues

516,847 

599,025 


Expenses

Interest expense



350,633 



256,993 

Operating expenses:

Salaries and benefits


93,329 


99,388 

Other operating expenses

74,476 

81,062 

Provision for finance receivable losses

73,138 

184,621 

Insurance losses and loss adjustment expenses

12,595 

15,584 

Total expenses

604,171 

637,648 


Loss before benefit from income taxes


(87,324)


(38,623)


Benefit from income taxes


(32,145)


(51,067)


Net (loss) income


$ (55,179)


$  12,444 





See Notes to Condensed Consolidated Financial Statements.



3



SPRINGLEAF FINANCE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)




(dollars in thousands)

Successor

Company

 

March 31,

2011

December 31,

2010


Assets


Net finance receivables:

Real estate loans (includes loans of consolidated

VIEs of $2.0 billion in 2011 and $2.1 billion in 2010)






$10,794,737 






$11,064,444 

Non-real estate loans

2,509,830 

2,615,969 

Retail sales finance

433,040 

491,185 

Net finance receivables

13,737,607 

14,171,598 

Allowance for finance receivable losses (includes allowance

of consolidated VIEs of $0.4 million in 2011 and $0.1 million

in 2010)



(25,610)



(7,120)

Net finance receivables, less allowance for finance

receivable losses


13,711,997 


14,164,478 

Investment securities

722,225 

745,846 

Cash and cash equivalents

1,280,735 

1,381,534 

Notes receivable from parent

537,989 

537,989 

Restricted cash (includes restricted cash of consolidated VIEs of

$23.4 million in 2011 and $30.9 million in 2010)


288,751 


320,662 

Other assets

807,003 

982,451 


Total assets


$17,348,700 


$18,132,960 



Liabilities and Shareholder’s Equity


Long-term debt (includes debt of consolidated VIEs

of $1.2 billion in 2011 and $1.3 billion in 2010)






$14,504,638 






$14,940,989 

Insurance claims and policyholder liabilities

330,954 

340,203 

Other liabilities

371,143 

607,788 

Deferred and accrued taxes

500,409 

544,980 

Total liabilities

15,707,144 

16,433,960 


Shareholder’s equity:

Common stock



5,080 



5,080 

Additional paid-in capital

225,565 

225,566 

Accumulated other comprehensive loss

(4,698)

(2,434)

Retained earnings

1,415,609 

1,470,788 

Total shareholder’s equity

1,641,556 

1,699,000 


Total liabilities and shareholder’s equity


$17,348,700 


$18,132,960 





See Notes to Condensed Consolidated Financial Statements.



4



SPRINGLEAF FINANCE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)




(dollars in thousands)

Successor

Company

Predecessor

Company

Three Months Ended March 31,

2011

2010


Cash Flows from Operating Activities

Net (loss) income



$    (55,179)



$     12,444 

Reconciling adjustments:

Provision for finance receivable losses


73,138 


184,621 

Depreciation and amortization

54,729 

35,819 

Deferral of finance receivable origination costs

(8,832)

(7,917)

Deferred income tax benefit

(67,056)

(269)

Net realized losses on investment securities

2,170 

5,244 

Change in other assets and other liabilities

21,143 

(80,525)

Writedowns and net loss on sales of real estate owned

13,481 

11,185 

Change in insurance claims and policyholder liabilities

(9,249)

(11,265)

Change in taxes receivable and payable

25,852 

(55,974)

Change in accrued finance charges

15,433 

17,946 

Change in restricted cash

24,381 

(984)

Other, net

799 

787 

Net cash provided by operating activities

90,810 

111,112 


Cash Flows from Investing Activities

Finance receivables originated or purchased



(344,898)



(312,059)

Principal collections on finance receivables

733,477 

891,647 

Affiliates contributed by SLFI to SLFC

-      

466 

Sales and principal collections on finance receivables held for sale

originated as held for investment


-      


25,518 

Investment securities purchased

(4,300)

(56,011)

Investment securities called and sold

29,551 

14,168 

Investment securities matured

-      

5,070 

Change in notes receivable from parent and AIG

-      

1,483,848 

Change in restricted cash

7,686 

(26,207)

Proceeds from sale of real estate owned

48,340 

56,265 

Other, net

(2,049)

(2,523)

Net cash provided by investing activities

467,807 

2,080,182 


Cash Flows from Financing Activities

Proceeds from issuance of long-term debt



-      



498,066 

Repayment of long-term debt

(659,795)

(828,375)

Change in short-term debt

-      

(2,342,201)

Capital contributions from parent

-      

11,032 

Net cash used for financing activities

(659,795)

(2,661,478)


Effect of exchange rate changes


379 


(377)


Decrease in cash and cash equivalents


(100,799)


(470,561)

Cash and cash equivalents at beginning of period

1,381,534 

1,292,621 

Cash and cash equivalents at end of period

$1,280,735 

$   822,060 




See Notes to Condensed Consolidated Financial Statements.



5



SPRINGLEAF FINANCE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)




(dollars in thousands)

Successor

Company

Predecessor

Company

Three Months Ended March 31,

2011

2010


Net (loss) income


$(55,179)


$  12,444 


Other comprehensive loss:

Net unrealized gains (losses) on:

Investment securities on which other-than-temporary

impairments were taken





-      





4,736 

All other investment securities

3,814 

8,167 

Swap agreements

(14,941)

(33,010)

Foreign currency translation adjustments

3,558 

(8,544)


Income tax effect:

Net unrealized (gains) losses on:

Investment securities on which other-than-temporary

impairments were taken





-      





(1,658)

All other investment securities

(1,335)

(2,859)

Swap agreements

5,229 

11,554 

Valuation allowance on deferred tax assets for:

Investment securities


-      


220 

Swap agreements

-      

(11,554)

Other comprehensive loss, net of tax, before

reclassification adjustments


(3,675)


(32,948)


Reclassification adjustments included in net (loss) income:

Realized losses on investment securities



2,170 



5,244 


Income tax effect of realized losses on investment

securities



(759)



(1,835)

Reclassification adjustments included in net (loss) income,

net of tax


1,411 


3,409 

Other comprehensive loss, net of tax

(2,264)

(29,539)


Comprehensive loss


$(57,443)


$(17,095)





See Notes to Condensed Consolidated Financial Statements.



6



SPRINGLEAF FINANCE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Shareholder’s Equity

(Unaudited)




(dollars in thousands)

Successor

Company

Predecessor

Company

Three Months Ended March 31,

2011

2010


Common stock

Balance at beginning of period



$       5,080 



$       5,080 

Balance at end of period

5,080 

5,080 


Additional paid-in capital

Balance at beginning of period



225,566 



2,121,777 

Capital contributions from parent and other

(1)

11,029 

Balance at end of period

225,565 

2,132,806 


Accumulated other comprehensive (loss) income

Balance at beginning of period



(2,434)



1,846 

Change in net unrealized gains (losses):

Investment securities


3,890 


12,015 

Swap agreements

(9,712)

(33,010)

Foreign currency translation adjustments

3,558 

(8,544)

Other comprehensive loss, net of tax

(2,264)

(29,539)

Balance at end of period

(4,698)

(27,693)


Retained earnings

Balance at beginning of period



1,470,788 



246,911 

Net (loss) income

(55,179)

12,444 

Balance at end of period

1,415,609 

259,355 


Total shareholder’s equity


$1,641,556 


$2,369,548 





See Notes to Condensed Consolidated Financial Statements.



7



SPRINGLEAF FINANCE CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2011



Note 1.  Basis of Presentation


Springleaf Finance Corporation (SLFC or, collectively with its subsidiaries, whether directly or indirectly owned, the Company, we, or our) (formerly American General Finance Corporation) is a wholly owned subsidiary of Springleaf Finance, Inc. (SLFI) (formerly American General Finance, Inc.).


Until November 30, 2010, SLFI was a direct wholly owned subsidiary of AIG Capital Corporation (ACC), a direct wholly owned subsidiary of American International Group, Inc. (AIG), a Delaware corporation. On August 11, 2010, AIG and FCFI Acquisition LLC (FCFI), an affiliate of Fortress Investment Group LLC (Fortress), announced a definitive agreement (Stock Purchase Agreement) whereby FCFI would indirectly acquire an 80% economic interest in SLFI from ACC (the FCFI Transaction). AIG, through ACC, indirectly retained a 20% economic interest in SLFI. On November 30, 2010 and immediately prior to the consummation of the FCFI Transaction, ACC contributed all of its outstanding shares of common stock in SLFI to AGF Holding Inc. (AGF Holding), a wholly owned subsidiary of ACC. In accordance with the Stock Purchase Agreement, it was necessary that this restructuring be completed prior to the closing of the FCFI Transaction. AIG then caused ACC to sell to FCFI 80% of the outstanding shares of AGF Holding.


We prepared our condensed consolidated financial statements using accounting principles generally accepted in the United States of America (GAAP). These statements are unaudited. The statements include the accounts of SLFC and its subsidiaries, all of which are wholly owned. We eliminated all material intercompany accounts and transactions. We made estimates and assumptions that affect amounts reported in our condensed consolidated financial statements and disclosures of contingent assets and liabilities. Ultimate results could differ from our estimates. We evaluated the effects of and the need to disclose events that occurred subsequent to the balance sheet date. You should read these statements in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010. To conform to the 2011 presentation, we reclassified certain items in the prior period.


Because of the nature of the FCFI Transaction, the significance of the ownership interest acquired, and at the direction of our acquirer, we applied push-down accounting to SLFI and SLFC as the acquired businesses. We revalued our assets and liabilities based on their fair values at the date of the FCFI Transaction in accordance with business combination accounting standards (push-down accounting). Accordingly, a new basis of accounting was established and, for accounting purposes, the old entity (the Predecessor Company) was terminated and a new entity (the Successor Company) was created. This distinction is made throughout this Quarterly Report on Form 10-Q through the inclusion of a vertical black line between the Predecessor Company and the Successor Company columns.


As a result of the application of push-down accounting, the bases of the assets and liabilities of the Successor Company are not comparable to those of the Predecessor Company, nor would the income statement items for the three months ended March 31, 2011 have been the same as those reported if push-down accounting had not been applied.



8



Note 2.  Recent Accounting Standards


We will adopt the following accounting standards in the future:


Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts


In October 2010, the Financial Accounting Standards Board (FASB) issued an accounting standard update that amends the accounting for costs incurred by insurance companies that can be capitalized in connection with acquiring or renewing insurance contracts. The new standard clarifies how to determine whether the costs incurred in connection with the acquisition of new or renewal insurance contracts qualify as deferred acquisition costs. The new standard is effective for interim and annual periods beginning on January 1, 2012 with early adoption permitted. Prospective or retrospective application is permitted. The adoption of this new standard will not have a material effect on our consolidated financial condition, results of operations, or cash flows.



A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring


In April 2011, the FASB issued an accounting standard that clarifies which loan modifications constitute troubled debt restructurings (TDR). In evaluating whether a restructuring constitutes a TDR, a creditor must separately conclude that both of the following exist: (1) the restructuring constitutes a concession; and (2) the debtor is experiencing financial difficulties. This standard amends the accounting guidance on a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties. The new standard is effective for the first interim or annual period beginning on or after June 15, 2011. Early application is permitted. The adoption of this new standard will not have a material effect on our consolidated financial condition, results of operations, or cash flows.



Reconsideration of Effective Control for Repurchase Agreements


In April 2011, the FASB issued an amendment to existing criteria for determining whether or not a transferor has retained effective control over securities sold under agreements to repurchase. A secured borrowing is recorded when effective control over the transferred financial assets is maintained while a sale is recorded when effective control over the transferred financial assets has not been maintained. The amendment removes the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee. The collateral maintenance implementation guidance related to this criterion also is removed. The collateral maintenance implementation guidance was a requirement of the transferor to demonstrate that it possessed adequate collateral to fund substantially all the cost of purchasing the replacement financial assets. The amendment is effective for us beginning January 1, 2012. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. We are in the process of reviewing the potential impact to us.



9



Note 3.  Finance Receivables


Components of net finance receivables by type were as follows:


(dollars in thousands)

Real

Non-Real

Retail

 

 

Estate Loans

Estate Loans

Sales Finance

Total


Successor Company

March 31, 2011


Gross receivables





$10,734,898 





$2,745,108 





$474,089 





$13,954,095 

Unearned finance charges

and points and fees


(14,054)


(276,297)


(44,450)


(334,801)

Accrued finance charges

73,723 

31,004 

3,401 

108,128 

Deferred origination costs

186 

10,015 

-       

10,201 

Premiums, net of discounts

(16)

-       

-       

(16)

Total

$10,794,737 

$2,509,830 

$433,040 

$13,737,607 


Successor Company

December 31, 2010


Gross receivables





$11,010,758 





$2,853,633 





$536,144 





$14,400,535 

Unearned finance charges

and points and fees


(15,963)


(274,907)


(48,386)


(339,256)

Accrued finance charges

69,624 

33,747 

3,427 

106,798 

Deferred origination costs

25 

3,496 

-       

3,521 

Total

$11,064,444 

$2,615,969 

$491,185 

$14,171,598 



Included in the table above are real estate finance receivables associated with securitizations that remain on our balance sheet totaling $2.0 billion at March 31, 2011 and $2.1 billion at December 31, 2010. See Note 4 and Note 9 for further discussion regarding our securitization transactions. Also included in the table above are finance receivables that have been pledged as collateral for our secured term loan totaling $7.4 billion at March 31, 2011 and December 31, 2010.


Unused credit limits extended to customers by the Company totaled $182.0 million at March 31, 2011 and $162.3 million at December 31, 2010. All unused credit limits, in part or in total, can be cancelled at the discretion of the Company.


There are many different categorizations used in the consumer lending industry to describe the creditworthiness of a borrower, including “prime”, “non-prime”, and “sub-prime”. While there are no industry-wide agreed upon definitions for these categorizations, many market participants utilize third-party credit scores as a means to categorize the creditworthiness of the borrower and his or her finance receivable. Our finance receivable underwriting process does not use third-party credit scores as a primary determinant for credit decisions. However, we do, in part, use such scores to analyze performance of our finance receivable portfolio.


We present below our net finance receivables and delinquency ratios grouped into the following categories based solely on borrower Fair Isaac Corporation (FICO) credit scores at the date of origination or renewal:


·

Prime:  Borrower FICO score greater than or equal to 660

·

Non-prime:  Borrower FICO score greater than 619 and less than 660

·

Sub-prime:  Borrower FICO score less than or equal to 619



10



Many finance receivables included in the “prime” category in the table below might not meet other market definitions of prime loans due to certain characteristics of the borrowers, such as their elevated debt-to-income ratios, lack of income stability, or level of income disclosure and verification, as well as credit repayment history or similar measurements.


FICO-delineated prime, non-prime, and sub-prime categories for net finance receivables by portfolio segment and by class were as follows:


(dollars in thousands)

Branch

Centralized

Branch Non-

Branch

 

Real Estate

Real Estate

Real Estate

Retail


Successor Company

March 31, 2011


Prime





$1,034,779





$3,295,931 





$   507,664 





$185,474

Non-prime

1,131,654

869,341 

569,815 

62,590

Sub-prime

3,992,308

341,628 

1,422,014 

184,094

Other/FICO unavailable

927

729 

10,337 

882

Total

$6,159,668

$4,507,629 

$2,509,830 

$433,040


Successor Company

December 31, 2010


Prime





$1,063,809





$3,399,329 





$   528,435 





$220,677

Non-prime

1,159,673

885,817 

592,163 

72,261

Sub-prime

4,089,894

348,773 

1,482,975 

197,484

Other/FICO unavailable

991

417 

12,396 

762

Total

$6,314,367

$4,634,336 

$2,615,969 

$491,184



FICO-delineated prime, non-prime, and sub-prime categories for delinquency ratios by portfolio segment and by class were as follows:


 

Branch

Centralized

Branch Non-

Branch

 

Real Estate

Real Estate

Real Estate

Retail


Successor Company

March 31, 2011


Prime





3.63%





7.76%





1.82%





3.48%

Non-prime

5.48    

13.44    

2.72    

5.31    

Sub-prime

6.63    

13.71    

4.22    

4.63    

Other/FICO unavailable

14.44    

41.03    

3.97    

3.64    


Total


5.92    


9.33    


3.40    


4.23    


Successor Company

December 31, 2010


Prime





3.61%





7.31%





2.04%





3.95%

Non-prime

5.21   

12.39   

3.11   

6.32   

Sub-prime

6.89   

12.43   

4.75   

5.71   

Other/FICO unavailable

3.81   

-       

N/M*  

6.94   


Total


6.03   


8.67   


3.84   


5.01   


*

Not meaningful



11



Our net finance receivables by performing and nonperforming (nonaccrual) by portfolio segment and by class were as follows:


(dollars in thousands)

Branch

Centralized

Branch Non-

Branch

 

Real Estate

Real Estate

Real Estate

Retail


Successor Company

March 31, 2011


Performing





$5,914,211





$4,176,662





$2,475,690





$428,126

Nonperforming

245,457

330,967

34,140

4,914

Total

$6,159,668

$4,507,629

$2,509,830

$433,040


Successor Company

December 31, 2010


Performing





$6,085,476





$4,323,802





$2,590,614





$488,377

Nonperforming

228,891

310,534

25,355

2,807

Total

$6,314,367

$4,634,336

$2,615,969

$491,184



Our delinquency by portfolio segment and by class were as follows:


(dollars in thousands)

Branch

Centralized

Branch Non-

Branch

 

Real Estate

Real Estate

Real Estate

Retail


Successor Company

March 31, 2011


Unpaid principal balance:

30-59 days past due






$   117,117






$   134,207






$     35,874






$    8,731

60-89 days past due

65,099

76,431

20,252

5,639

Greater than 90 days

356,151

453,347

76,247

16,002

Total past due

538,367

663,985

132,373

30,372

Current

6,582,797

5,016,439

2,701,570

481,588

Total

$7,121,164

$5,680,424

$2,833,943

$511,960


Successor Company

December 31, 2010


Unpaid principal balance:

30-59 days past due






$   129,188






$   108,971






$     44,748






$     13,279

60-89 days past due

77,890

83,352

27,498

8,651

Greater than 90 days

363,928

434,797

86,816

20,779

Total past due

571,006

627,120

159,062

42,709

Current

6,743,272

5,216,774

2,814,633

545,159

Total

$7,314,278

$5,843,894

$2,973,695

$   587,868



As a result of the FCFI Transaction, we evaluated the credit quality of our finance receivable portfolio in order to identify finance receivables that, as of the acquisition date, have evidence of credit quality deterioration.



12



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


(dollars in thousands)

Successor

Company

 

March 31,

2011

December 31,

2010


Carrying amount, net of allowance


$1,717,992  


$1,833,819  


Outstanding balance


$2,495,026  


$2,661,367  


Allowance for credit impaired finance receivable losses


$         -        


$         -        



We did not create an allowance for credit impaired finance receivable losses in the first quarter of 2011 since the net carrying value of these credit impaired finance receivables was less than the present value.


Changes in accretable yield of these finance receivables were as follows:


(dollars in thousands)

Successor

Company

Predecessor

Company

At or for the Three Months Ended March 31,

2011

2010*


Balance at beginning of period


$640,619    


$      -          

Additions

-          

-          

Accretion

(35,595)   

-          

Reclassifications from (to) nonaccretable difference

-          

-          

Disposals

(13,566)   

-          

Balance at end of period

$591,458    

$      -          


*

Prior to the FCFI Transaction, the accretable yield of our credit impaired finance receivables was immaterial.



13



FICO-delineated prime, non-prime, and sub-prime categories for credit impaired finance receivables by portfolio segment and by class were as follows:


(dollars in thousands)

Branch

Centralized

Branch Non-

Branch

 

Real Estate

Real Estate

Real Estate

Retail


Successor Company

March 31, 2011


Prime





$  62,162





$   586,277





$     361





$     11

Non-prime

112,794

284,711

762

9

Sub-prime

548,998

117,799

3,880

47

Other/FICO unavailable

179

-     

2

-   

Total

$724,133

$   988,787

$  5,005

$     67


Successor Company

December 31, 2010


Prime





$  67,864





$   619,550





$  2,182





$   566

Non-prime

120,370

294,814

4,317

374

Sub-prime

581,082

120,647

19,646

2,205

Other/FICO unavailable

179

-     

9

14

Total

$769,495

$1,035,011

$26,154

$3,159



FICO-delineated prime, non-prime, and sub-prime categories for delinquency ratios for credit impaired finance receivables by portfolio segment and by class were as follows:


 

Branch

Centralized

Branch Non-

Branch

 

Real Estate

Real Estate

Real Estate

Retail


Successor Company

March 31, 2011


Prime





22.79%





29.53%





80.74%





66.21%

Non-prime

21.04    

29.98    

81.95    

66.17    

Sub-prime

19.90    

27.35    

80.62    

57.18    

Other/FICO unavailable

62.88    

-        

100.00    

69.59    


Total


20.33    


29.40    


80.83    


59.88    


Successor Company

December 31, 2010


Prime





29.32%





33.56%





94.63%





93.40%

Non-prime

24.90   

32.53   

93.69   

90.28   

Sub-prime

24.42   

31.15   

92.44   

89.50   

Other/FICO unavailable

62.92   

-       

100.00   

88.37   


Total


24.94   


32.99   


92.83   


90.31   



If the timing and/or amounts of expected cash flows on credit impaired finance receivables were determined to not be reasonably estimable, no interest would be accreted and the finance receivables would be reported as nonaccrual finance receivables. However, since the timing and amounts of expected cash flows for our four pools are reasonably estimable, interest is being accreted and the finance receivables are being reported as performing finance receivables.



14



Information regarding TDR finance receivables (which are all real estate loans) was as follows:


(dollars in thousands)

Successor

Company

 

March 31,

2011

December 31,

2010


TDR net finance receivables


$95,384     


$28,195    


TDR net finance receivables that have an allowance


$95,384     


$28,195    


Allowance for TDR finance receivable losses


$12,410     


$  2,835    



As a result of the FCFI Transaction, all TDR finance receivables that existed as of November 30, 2010 were reclassified to and are accounted for prospectively as credit impaired finance receivables. We have no commitments to lend additional funds on our TDR finance receivables.


TDR average net receivables and finance charges recognized on TDR finance receivables were as follows:


(dollars in thousands)

Successor

Company

Predecessor

Company

Three Months Ended March 31,

2011

2010


TDR average net receivables


$72,165    


$1,530,113 

 

 

 

TDR finance charges recognized

$     723    

$     19,738 



In third quarter 2009, MorEquity, Inc. (MorEquity) entered into a Commitment to Purchase Financial Instrument and Servicer Participation Agreement (the Agreement) with the Federal National Mortgage Association as financial agent for the United States Department of the Treasury, which provides for participation in the Home Affordable Modification Program (HAMP). MorEquity entered into the Agreement as the servicer with respect to our centralized real estate finance receivables, with an effective date of September 1, 2009. On February 1, 2011, MorEquity entered into Subservicing Agreements for the servicing of its centralized real estate finance receivables with Nationstar Mortgage LLC (Nationstar), a non-subsidiary affiliate of SLFC. In light of the subservicing transfer and the fact that MorEquity no longer is servicing loans, it has requested that the Agreement be terminated. “Eligible Loans” subserviced by Nationstar would still be subject to HAMP. As of March 31, 2011, MorEquity had completed 1,250 HAMP modifications and 150 trial HAMP modifications were in process.


Other subsidiaries of the Company have not entered into HAMP but operate a proprietary loan modification/loss mitigation program.



15



Note 4.  On-Balance Sheet Securitization Transactions


As part of our overall funding strategy and as part of our efforts to support our liquidity from sources other than our traditional capital market sources, we have transferred certain finance receivables to variable interest entities (VIEs) for securitization transactions. These securitization transactions do not satisfy the requirements for accounting sale treatment because the securitization trusts do not have the right to freely pledge or exchange the transferred assets. We also have significant discretion for working out and disposing of defaulted real estate loans and disposing of any foreclosed real estate held by the VIEs. Since the transactions do not meet all of the criteria for sale accounting treatment, the securitized assets and related liabilities are included in our financial statements and are accounted for as secured borrowings.


Our on-balance sheet securitizations of real estate loans and the related debt were as follows:


(dollars in thousands)

Real Estate

Loans

Long-term

Debt


Successor Company

March 31, 2011


2009 securitization





$1,277,588





$816,889

2010 securitization

723,307

396,820


Successor Company

December 31, 2010


2009 securitization





$1,316,280





$876,607

2010 securitization

740,794

423,119



We have limited continued involvement with the finance receivables that have been included in these securitization transactions. Our 2009 securitization transaction utilizes a third-party servicer to service the finance receivables. Although we have servicer responsibilities for the finance receivables for our 2010 securitization transaction, effective February 1, 2011, Nationstar began subservicing these finance receivables. In the case of each existing securitization transaction, the related finance receivables have been legally isolated and are only available for payment of the debt and other obligations issued or arising in the applicable securitization transaction. The cash and cash equivalent balances relating to securitization transactions are used only to support the on-balance sheet securitization transactions and are recorded as restricted cash. We hold the right to the excess cash flows not needed to pay the debt and other obligations issued or arising in our securitization transactions. The asset-backed debt has been issued by consolidated VIEs.



16



Note 5.  Allowance for Finance Receivable Losses


Changes in the allowance for finance receivable losses and net finance receivables by portfolio segment and by class were as follows:


(dollars in thousands)

Branch

Centralized

Branch Non-

Branch

 

Consolidated

 

Real Estate

Real Estate

Real Estate

Retail

All Other

Total


Successor Company

Three Months Ended

March 31, 2011


Balance at beginning of

period







$       2,465 







$          488 







$       4,111 







$         56 







$      -       







$         7,120 

Provision for finance

receivable losses (a)


19,103 


27,449 


21,295 


5,291 


-       


73,138 

Charge-offs

(18,691)

(25,078)

(22,355)

(8,808)

-       

(74,932)

Recoveries (b)

6,760 

151 

9,708 

3,665 

-       

20,284 

Balance at end of period

$       9,637 

$       3,010 

$     12,759 

$       204 

$      -       

$       25,610 


Net finance receivables


$6,159,668 


$4,507,629 


$2,509,830 


$433,040 


$127,440 


$13,737,607 


Predecessor Company

Three Months Ended

March 31, 2010


Balance at beginning of

period







$   624,303 







$   536,440 







$   288,420 







$  63,621 







$    3,514 







$  1,516,298 

Provision for finance

receivable losses


5,712 


103,676 


57,468 


17,523 


242 


184,621 

Charge-offs

(67,562)

(41,921)

(64,624)

(26,716)

64 

(200,759)

Recoveries

2,510 

803 

9,574 

3,245 

16,138 

Affiliates contributed by

SLFI to SLFC (c)


8,869 


-       


3,575 


3,743 


-       


16,187 

Balance at end of period

$   573,832 

$   598,998 

$   294,413 

$  61,416 

$    3,826 

$  1,532,485 


Net finance receivables


$7,731,954 


$6,126,783 


$2,963,373 


$896,241 


$118,753 


$17,837,104 


(a)

Provision for finance receivable losses for the Successor Company includes $37.0 million of net charge-offs on credit impaired finance receivables, $17.5 million on non-credit impaired finance receivables, and $0.1 million for new origination activity and TDR activity during the three months ended March 31, 2011. As a result of charging off the non-credit impaired finance receivables, $15.3 million of valuation discount accretion was accelerated and is included as a component of finance charges within revenues.


(b)

Successor Company includes $5.0 million of recoveries ($2.9 million branch real estate loan recoveries, $1.9 million branch non-real estate loan recoveries, and $0.2 million branch retail sales finance recoveries) as a result of a settlement of claims relating to our February 2008 purchase of Equity One, Inc.’s consumer branch finance receivable portfolio.


(c)

Effective January 1, 2010, SLFI contributed two of its wholly-owned subsidiaries to SLFC. The contribution included $16.2 million of allowance for finance receivable losses.



Within our three main finance receivable types are sub-portfolios, each consisting of a large number of relatively small, homogenous accounts. We evaluate these sub-portfolios for impairment as groups. None of our accounts are large enough to warrant individual evaluation for impairment.



17



We estimate our allowance for finance receivable losses primarily using the authoritative guidance for contingencies. We base our allowance for finance receivable losses primarily on historical loss experience using migration analysis and the Monte Carlo technique applied to sub-portfolios of large numbers of relatively small homogenous accounts. Both techniques are historically-based statistical techniques that attempt to predict the future amount of losses for existing pools of finance receivables. We adjust the amounts determined by migration and Monte Carlo for management’s estimate of the effects of model imprecision, any changes to its underwriting criteria, portfolio seasoning, and current economic conditions, including the levels of unemployment and personal bankruptcies.


We use our internal data of net charge-offs and delinquency by sub-portfolio as the basis to determine the historical loss experience component of our allowance for finance receivable losses. We use monthly bankruptcy statistics, monthly unemployment statistics, and various other monthly or periodic economic statistics published by departments of the U.S. government and other economic statistics providers to determine the economic component of our allowance for finance receivable losses.


The allowance for finance receivable losses related to our credit impaired finance receivables is calculated using updated cash flows expected to be collected, incorporating assumptions regarding default rates, loss severities, the amounts and timing of prepayments and other factors that are reflective of current market conditions. Probable decreases in expected finance receivable principal cash flows result in the recognition of impairment. Probable and significant increases (defined as a change in cash flows equal to 10 percent or more) in expected cash flows to be collected would first reverse any previously recorded allowance for finance receivable losses.


We also establish reserves for TDR finance receivables, which are included in our allowance for finance receivable losses. The allowance for finance receivable losses related to our TDRs is calculated in homogeneous aggregated pools of impaired finance receivables that have common risk characteristics. We establish our allowance for finance receivable losses related to our TDRs by calculating the present value (discounted at the loan’s effective interest rate prior to modification) of all expected cash flows less the recorded investment in the aggregated pool. We use certain assumptions to estimate the expected cash flows from our TDRs. The primary assumptions for our model are prepayment speeds, default rates, and severity rates.



18



Note 6.  Investment Securities


Cost/amortized cost, unrealized gains and losses, and fair value of investment securities by type, which are classified as available-for-sale, were as follows:


(dollars in thousands)



Cost/

Amortized




Unrealized




Unrealized




Fair

Other-

Than-

Temporary

Impairments

 

Cost

Gains

Losses

Value

in AOCI(L) (a)


Successor Company

March 31, 2011


Fixed maturity investment securities:

Bonds:

U.S. government and government

sponsored entities








$    9,518 








$     -     








$    (265)








$    9,253








$  -     

Obligations of states, municipalities,

and political subdivisions


222,868 


473 


(3,029)


220,312


-     

Corporate debt

341,851 

2,342 

(6,378)

337,815

-     

Mortgage-backed, asset-backed,

and collateralized:

RMBS



96,486 



1,506 



(810)



97,182



-     

CMBS

16,744 

2,594 

(80)

19,258

-     

CDO/ABS

23,993 

673 

(357)

24,309

-     

Total

711,460 

7,588 

(10,919)

708,129

-     

Preferred stocks

4,960 

-     

(394)

4,566

-     

Other long-term investments (b)

4,357 

3,131 

-     

7,488

-     

Common stocks

676 

(2)

683

-     

Total

$721,453 

$10,728 

$(11,315)

$720,866

$  -     


Successor Company

December 31, 2010


Fixed maturity investment securities:

Bonds:

U.S. government and government

sponsored entities








$    9,566 








$     -     








$    (174)








$    9,392








$  -     

Obligations of states, municipalities,

and political subdivisions


226,023 


201 


(2,257)


223,967


-     

Corporate debt

345,735 

3,098 

(6,084)

342,749

-     

Mortgage-backed, asset-backed,

and collateralized:

RMBS



129,411 



201 



(1,486)



128,126



-     

CMBS

10,064 

492 

(90)

10,466

-     

CDO/ABS

17,980 

113 

(158)

17,935

-     

Total

738,779 

4,105 

(10,249)

732,635

-     

Preferred stocks

4,959 

-     

(206)

4,753

-     

Other long-term investments (b)

6,653 

-     

(221)

6,432

-     

Common stocks

676 

-     

677

-     

Total

$751,067 

$  4,106 

$(10,676)

$744,497

$  -     


(a)

In 2011, we reclassified $0.1 million of previously recorded other-than-temporary impairments in accumulated other comprehensive loss to unrealized gains on investment securities in accumulated other comprehensive loss to reflect the proper classification of these investment securities.


(b)

Excludes interest in a limited partnership that we account for using the equity method ($1.4 million at March 31, 2011 and December 31, 2010).



19



Fair value and unrealized losses on investment securities by type and length of time in a continuous unrealized loss position were as follows:


(dollars in thousands)

12 Months or Less

 

More Than 12 Months

 

Total

 

Fair

Value

Unrealized

Losses

 

Fair

Value

Unrealized

Losses

 

Fair

Value

Unrealized

Losses


Successor Company

March 31, 2011


Bonds:

U.S. government and

government

sponsored entities








$    8,993








$    (265)

 








$    -      








$      -      

 








$    8,993








$    (265)

Obligations of states,

municipalities, and

political subdivisions



155,486



(3,029)

 



-      



-      

 



155,486



(3,029)

Corporate debt

234,305

(6,378)

 

-      

-      

 

234,305

(6,378)

RMBS

73,775

(810)

 

-      

-      

 

73,775

(810)

CMBS

1,583

(80)

 

-      

-      

 

1,583

(80)

CDO/ABS

13,795

(357)

 

-      

-      

 

13,795

(357)

Total

487,937

(10,919)

 

-      

-      

 

487,937

(10,919)

Preferred stocks

4,566

(394)

 

-      

-      

 

4,566

(394)

Other long-term

investments


29


-      

 


-      


-      

 


29


-      

Common stocks

3

(2)

 

-      

-      

 

3

(2)

Total

$492,535

$(11,315)

 

$    -      

$    -      

 

$492,535

$(11,315)


Successor Company

December 31, 2010


Bonds:

U.S. government and

government

sponsored entities








$    9,392








$    (174) 

 








$    -      








$      -      

 








$    9,392








$     (174)

Obligations of states,

municipalities, and

political subdivisions



207,378



(2,257)

 



-      



-      

 



207,378



(2,257)

Corporate debt

273,766

(6,084)

 

-      

-      

 

273,766

(6,084)

RMBS

111,384

(1,486)

 

-      

-      

 

111,384

(1,486)

CMBS

7,966

(90)

 

-      

-      

 

7,966

(90)

CDO/ABS

10,128

(158)

 

-      

-      

 

10,128

(158)

Total

620,014

(10,249)

 

-      

-      

 

620,014

(10,249)

Preferred stocks

4,753

(206)

 

-      

-      

 

4,753

(206)

Other long-term

investments


6,403


(221)

 


-      


-      

 


6,403


(221)

Total

$631,170

$(10,676)

 

$    -      

$    -      

 

$631,170

$(10,676)



Management reviews all securities in an unrealized loss position on a quarterly basis to determine the ability and intent to hold such securities to recovery, which could be maturity, if necessary, by performing an evaluation of expected cash flows. Management considers factors such as our investment strategy, liquidity requirements, overall business plans, and recovery periods for securities in previous periods of broad market declines. For fixed-maturity securities with significant declines, management performs extended fundamental credit analysis on a security-by-security basis, which includes consideration of credit enhancements, expected defaults on underlying collateral, review of relevant industry analyst reports and forecasts and other market available data.



20



We did not recognize in earnings the unrealized losses on fixed-maturity securities at March 31, 2011, because management neither intends to sell the securities nor does it believe that it is more likely than not that it will be required to sell these securities before recovery of their amortized cost basis. Furthermore, management expects to recover the entire amortized cost basis of these securities (that is, they are not credit impaired).


As of March 31, 2011 and December 31, 2010, we had no investment securities which had been in an unrealized loss position of more than 50% for more than 12 months. As part of our credit evaluation procedures applied to investment securities, we consider the nature of both the specific securities and the general market conditions for those securities. Based on management’s analysis, we continue to believe the expected cash flows from our investment securities will be sufficient to recover the amortized cost of our investment. We continue to monitor these positions for potential credit impairments.


At March 31, 2011, we had no unrealized losses on investment securities for which an other-than-temporary impairment was recognized. In 2011, we reclassified $0.4 million in unrealized losses on investment securities, previously classified as other-than-temporarily impaired, to unrealized losses on all other investment securities to reflect the proper classification of these investment securities for which no other-than-temporary impairment was recognized.


Components of the other-than-temporary impairment charges on investment securities were as follows:


(dollars in thousands)

Successor

Company

Predecessor

Company

Three Months Ended March 31,

2011

2010


Total other-than-temporary impairment losses


$(1,929)


$(1,806)

Portion of loss recognized in accumulated

other comprehensive loss


-      


(2,442)

Net impairment losses recognized in net (loss) income

(1,929)

(4,248)



Changes in credit impairments recognized in earnings on investment securities for which a portion of an other-than-temporary impairment was recognized in accumulated other comprehensive loss were as follows:


(dollars in thousands)

Successor

Company

Predecessor

Company

At or for the Three Months Ended March 31,

2011

2010


Balance at beginning of period*


$    -       


$3,150   

Additions:

Due to other-than-temporary impairments:

Not previously impaired/impairment not previously recognized



1,929   



9   

Previously impaired/impairment previously recognized

-       

4,235   

Reductions:

Realized due to sales with no prior intention to sell


-       


-        

Realized due to intention to sell

-       

-        

Accretion of credit impaired securities

-       

(26)  

Balance at end of period

$1,929   

$7,368   


*

In 2011, we reclassified $31,000 of the balance at the beginning of the 2011 period, which was previously recorded as accretion of credit impaired securities, to interest income on all other investment securities to reflect the proper classification of these investment securities for which no other-than-temporary impairment was recognized.



21



The fair values of investment securities sold or redeemed and the resulting realized gains, realized losses, and net realized losses were as follows:


(dollars in thousands)

Successor

Company

Predecessor

Company

Three Months Ended March 31,

2011

2010


Fair value


$27,329   


$84,051   


Realized gains


$       78   


$       37   

Realized losses

(319)  

(65)  

Net realized losses

$   (241)  

$     (28)  



Contractual maturities of fixed-maturity investment securities at March 31, 2011 were as follows:


(dollars in thousands)

Fair

Amortized

March 31, 2011

Value

Cost


Fixed maturities, excluding mortgage-backed

securities:

Due in 1 year or less




$  17,758




$  17,802

Due after 1 year through 5 years

152,283

153,782

Due after 5 years through 10 years

215,027

217,841

Due after 10 years

182,312

184,812

Mortgage-backed securities

140,749

137,223

Total

$708,129

$711,460



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



Note 7.  Restricted Cash


Restricted cash at March 31, 2011 and December 31, 2010 included funds related to our $3.0 billion secured term loan executed in April 2010, funds to be used for future debt payments relating to our securitization transactions (see Note 4), and escrow deposits.



Note 8.  Related Party Transactions


AFFILIATE LENDING


Prior to the FCFI Transaction, SLFC made loans to AIG under demand note agreements as a short-term investment source for cash. Interest revenue on notes receivable from AIG totaled zero for the three months ended March 31, 2011 and $2.4 million for the three months ended March 31, 2010.


Notes receivable from SLFI totaled $538.0 million at March 31, 2011 and December 31, 2010, which included interest receivable of $1.5 million and $1.9 million, respectively. The interest rate for the unpaid principal balance is prime plus 100 basis points. Interest revenue on notes receivable from SLFI totaled $4.3 million during the three months ended March 31, 2011 and $1.6 million during the three months ended March 31, 2010.



22



COST SHARING AGREEMENTS


Prior to the FCFI Transaction, we were party to cost sharing agreements, including tax sharing arrangements, with AIG. Generally, these agreements provided for the allocation of shared corporate costs based upon a proportional allocation of costs to all AIG subsidiaries. See Note 12 for further information on the tax sharing arrangements


We also reimburse AIG Federal Savings Bank (AIG Bank), a subsidiary of AIG, for costs associated with a remediation program related to a Supervisory Agreement among AIG Bank, Wilmington Finance, Inc. (WFI), SLFI, and the Office of Thrift Supervision dated June 7, 2007 (the Supervisory Agreement). As of March 31, 2011, we have made reimbursements of $61.9 million for payments made by AIG Bank to refund certain fees to customers pursuant to the terms of the Supervisory Agreement. At March 31, 2011, the remaining reserve, which reflects management’s best estimate of the expected costs of the remediation program, totaled $1.4 million.



REINSURANCE AGREEMENTS


Merit Life Insurance Co. (Merit), a wholly-owned subsidiary of SLFC, enters into reinsurance agreements with subsidiaries of AIG, for reinsurance of various group annuity, credit life, and credit accident and health insurance where Merit reinsures the risk of loss. The reserves for this business fluctuate over time and in some instances are subject to recapture by the insurer. Reserves on the books of Merit for reinsurance agreements with subsidiaries of AIG totaled $50.5 million at March 31, 2011 and $51.2 million at December 31, 2010.



DERIVATIVES


At March 31, 2011 and December 31, 2010 all of our derivative financial instruments were with AIG Financial Products Corp. (AIGFP), a subsidiary of AIG. See Note 10 for further information on our derivatives.



SUBSERVICING AND REFINANCE AGREEMENTS


Effective February 1, 2011, Nationstar began subservicing the centralized real estate loans of MorEquity and two other subsidiaries of SLFC (collectively, the Owners). In addition, Nationstar began subservicing certain real estate loans that MorEquity had been servicing in conjunction with the 2010 securitization of these real estate loans and began refinancing certain first lien mortgage loans. During the three months ended March 31, 2011, the Owners paid Nationstar $2.2 million in fees for its subservicing services and $0.7 million to pay closing costs and reduce the principal amount of refinancings.



23



Note 9.  VIEs


CONSOLIDATED VIES


We use special purpose entities (securitization trusts) to issue asset-backed securities in securitization transactions to investors. We evaluated the securitization trusts, determined that these entities are VIEs of which we are the primary beneficiary, and therefore consolidated such entities. We are deemed to be the primary beneficiaries of these VIEs because we have power to direct the activities of the VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses and the right to receive benefits that are potentially significant to the VIE. We have consent power over sales of defaulted real estate loans, which is a significant loss mitigation procedure, and, therefore, a significant control, and our retained subordinated and residual interest trust certificates expose us to potentially significant losses and potentially significant returns.


The asset-backed securities are backed by the expected cash flows from securitized real estate loans. Payments from these real estate loans are not available to us until the repayment of the debt issued in connection with the securitization transactions has occurred. We recorded these transactions as “on-balance sheet” secured financings because the transfer of these real estate loans to the trusts did not qualify for sale accounting treatment. We retain interests in these securitization transactions, including senior and subordinated securities issued by the VIEs and residual interests. We retain credit risk in the securitizations because our retained interests include the most subordinated interest in the securitized assets, which are the first to absorb credit losses on the securitized assets. At March 31, 2011, these retained interests were primarily comprised of $1.4 billion, or 46%, of the assets transferred in connection with the on-balance sheet securitizations. We expect that any credit losses in the pools of securitized assets would likely be limited to our retained interests. We have no obligation to repurchase or replace qualified securitized assets that subsequently become delinquent or are otherwise in default. See Note 4 for further discussion regarding these securitization transactions.


The total consolidated VIE assets and liabilities associated with our securitization transactions were as follows:


(dollars in thousands)

Successor

Company

 

March 31,

2011

December 31,

2010

 

 

 

Assets:

 

 

Finance receivables

$2,000,895    

$2,057,074    

Allowance for finance receivable losses

421    

80    

Restricted cash

23,429    

30,946    

 

 

 

Liabilities

 

 

Long-term debt

$1,213,709    

$1,299,726    



We had no off-balance sheet exposure associated with our variable interests in the consolidated VIEs. No additional support to these VIEs beyond what was previously contractually required has been provided by us. Consolidated interest expense related to these VIEs for the three months ended March 31, 2011 and 2010 totaled $15.4 million and $39.0 million, respectively.



24



UNCONSOLIDATED VIE


We have established a VIE, primarily related to a debt issuance, of which we are not the primary beneficiary, and in which we do not have a variable interest. Therefore, we do not consolidate such entity. We calculate our maximum exposure to loss primarily to be the amount of debt issued to or equity invested in a VIE. Our on-balance sheet maximum exposure to loss associated with this unconsolidated VIE was $171.5 million at March 31, 2011 and December 31, 2010. We had no off-balance sheet exposure to loss associated with this VIE at March 31, 2011 or December 31, 2010.



Note 10.  Derivative Financial Instruments


SLFC uses derivative financial instruments in managing the cost of its debt by mitigating its exposures (interest rate and currency) in conjunction with specific long-term debt issuances and has used them in managing its return on finance receivables held for sale, but is neither a dealer nor a trader in derivative financial instruments. SLFC’s derivative financial instruments consist of interest rate, cross currency, cross currency interest rate, and equity-indexed swap agreements.


While all of our interest rate, cross currency, cross currency interest rate, and equity-indexed swap agreements mitigate economic exposure of related debt, not all of these swap agreements currently qualify as cash flow or fair value hedges under GAAP. At March 31, 2011, equity-indexed debt and related swaps were immaterial.


In the first quarter of 2010, we re-examined our accounting for a second quarter 2009 de-designated trade and determined that our method for amortizing the debt basis adjustments related to hedge accounting for this second quarter 2009 de-designated trade contained two errors. The debt basis adjustment to be amortized incorrectly included an accounting adjustment on the hedged debt. Secondly, the amortization method did not take into account all cash flows on the debt when calculating the effective yield amortization. In addition, we did not record the foreign exchange translation on the unamortized debt basis. As a result of these errors, we recorded an out-of-period adjustment in the first quarter of 2010, which reduced other revenues by $8.2 million during the three months ended March 31, 2010. The impact of this error did not have a material effect on our financial condition or results of operations for previously reported periods.


Fair value of derivative instruments presented on a gross basis by type were as follows:


 

Successor

Company

 

March 31, 2011

December 31, 2010

 

Notional

Amount

Derivative

Assets

Derivative

Liabilities

Notional

Amount

Derivative

Assets

Derivative

Liabilities


Hedging Instruments

Cross currency and cross currency

interest rate




$1,226,250




$174,386




$    -     




$1,226,250




$114,001




$    -     

Interest rate

850,000

-    

31,016

850,000

-    

40,057

Total

2,076,250

174,386

31,016

2,076,250

114,001

40,057


Non-Designated Hedging Instruments

Cross currency and cross currency

interest rate




644,250




99,921




-     




644,250




75,159




-     

Equity-indexed

6,886

1,731

137

6,886

1,720

213

Total

651,136

101,652

137

651,136

76,879

213

Total derivative instruments*

$2,727,386

$276,038

$31,153

$2,727,386

$190,880

$40,270


*

Master netting arrangements had no effect.



25



The amount of gain (loss) for cash flow hedges recognized in accumulated other comprehensive income or loss (effective portion), reclassified from accumulated other comprehensive income or loss into other revenues (effective portion), and recognized in other revenues (ineffective portion) were as follows:


(dollars in thousands)

Effective

 

Ineffective

 


AOCI(L)*

From AOCI(L)

to Revenues

 


Revenues


Successor Company

Three Months Ended March 31, 2011


Interest rate





$ (2,165)  





$    (476)  

 





$(2,524)   

Cross currency and cross currency interest rate

65,611   

78,863   

 

460    

Total

$63,446   

$78,387   

 

$(2,064)   


Predecessor Company

Three Months Ended March 31, 2010


Interest rate





$  7,406   





$  2,356   

 





$   (826)   

Cross currency and cross currency interest rate

34,248   

72,308   

 

(6,398)   

Total

$41,654   

$74,664   

 

$(7,224)   


* accumulated other comprehensive income (loss)



We immediately recognize the portion of the gain or loss in the fair value of a derivative instrument in a cash flow hedge that represents hedge ineffectiveness in current period earnings in other revenues. We included all components of each derivative’s gain or loss in the assessment of hedge effectiveness.


At March 31, 2011, we expect $9.6 million of the deferred net loss on cash flow hedges to be reclassified from accumulated other comprehensive loss to earnings during the next twelve months.


For the three months ended March 31, 2011, there were no instances in which we reclassified amounts from accumulated other comprehensive income or loss to earnings as a result of a discontinuance of a cash flow hedge due to it becoming probable that the original forecasted transaction would not occur at the end of the originally specified time period.


The amount recognized in other revenues for non-designated hedging instruments were as follows:


(dollars in thousands)

Non-Designated Hedging

 

Instruments


Successor Company

Three Months Ended March 31, 2011

 


Cross currency and cross currency interest rate


$39,752     

Equity-indexed

80     

Total

$39,832     


Predecessor Company

Three Months Ended March 31, 2010

 


Cross currency and cross currency interest rate


$46,064     

Equity-indexed

82     

Total

$46,146     



26



During the three months ended March 31, 2011, we recognized a mark to market gain of $19.5 million on our non-designated cross currency derivative. During the three months ended March 31, 2010, we recognized gains of $68.8 million on the release of other comprehensive income related to cash flow hedge maturities, partially offset by a mark to market loss of $34.3 million on our non-designated cross currency derivative. We included all components of each derivative’s gain or loss in the assessment of hedge effectiveness.


SLFC is exposed to credit risk if counterparties to swap agreements do not perform. SLFC regularly monitors counterparty credit ratings throughout the term of the agreements. SLFC’s exposure to market risk is limited to changes in the value of swap agreements offset by changes in the value of the hedged debt. In compliance with the authoritative guidance for fair value measurements, our valuation methodology for derivatives incorporates the effect of our non-performance risk and the non-performance risk of our counterparties.


Credit valuation adjustment (losses) gains recorded in other revenues for our non-designated derivative and in accumulated other comprehensive income or loss for our cash flow hedges were as follows:


(dollars in thousands)

Successor

Company

Predecessor

Company

Three Months Ended March 31,

2011

2010


Credit valuation adjustment (losses) gains:


Non-designated derivative




$(1,997) 




$  9,052  

Cash flow hedges

$(3,558) 

$17,216  



If we do not exit these derivatives prior to maturity and no counterparty defaults occur, the credit valuation adjustment will result in no impact to earnings over the life of the agreements. We currently do not anticipate exiting these derivatives for the foreseeable future. These derivatives are with AIGFP, a subsidiary of AIG.


See Note 16 for information on how we determine fair value on our derivative financial instruments.



Note 11.  Accumulated Other Comprehensive Loss


Components of accumulated other comprehensive loss were as follows:


(dollars in thousands)

Successor

Company

 

March 31,

2011

December 31,

2010


Net unrealized (losses) gains on:

Investment securities



$   (382)   



$(4,272)  

Swap agreements

(8,685)   

1,027   

Foreign currency translation adjustments

3,944    

386   

Retirement plan liabilities adjustment

425    

425   

Accumulated other comprehensive loss

$(4,698)   

$(2,434)  



27



Note 12.  Income Taxes


Benefit from income taxes decreased for the three months ended March 31, 2011 when compared to the same period in 2010 as a result of the FCFI Transaction and the resulting changes in the book and tax basis of our assets and liabilities. The Company was in a net deferred tax liability position at March 31, 2011, and based on the timing and reversal of the deferred tax liabilities, we have concluded that a valuation allowance was required on our United Kingdom operations of $1.7 million, but no valuation allowance was required on our remaining gross deferred tax assets.


Before the FCFI Transaction, the Company was in a net deferred tax asset position and, excluding the foreign operations, the assets were subject to a full valuation allowance.


Benefit from income taxes for the three months ended March 31, 2010 reflected AIG’s projection that it would have sufficient taxable income in 2010 to utilize our 2010 estimated tax losses. As a result, we had classified $52.9 million of our 2010 losses as a current tax receivable. In connection with the closing of the FCFI Transaction on November 30, 2010, AIG and SLFI amended their tax sharing agreement, which terminated on the closing, (1) to provide that the parties’ payment obligations under the tax sharing agreement were limited to the payments required to be made by AIG to SLFI with respect to the 2009 taxable year, and (2) to include the terms of the promissory note to be issued by AIG in satisfaction of its 2009 taxable year payment obligation to SLFI. At December 31, 2010, SLFI’s note receivable from AIG relating to the 2009 taxable year totaled $470.2 million. On March 24, 2011, SLFI sold its $468.7 million note receivable from AIG at a net price after transaction fees of $469.8 million. Due to the amendment of the tax sharing agreement, SLFI did not receive the payment for the tax period ending November 30, 2010. As a result, we recorded a dividend to SLFI for the amount of the income tax receivable at the closing of the FCFI Transaction.



Note 13.  Supplemental Cash Flow Information


Supplemental disclosure of non-cash activities was as follows:


(dollars in thousands)

Successor

Company

Predecessor

Company

Three Months Ended March 31,

2011

2010


Transfer of finance receivables held for sale to finance

receivables held for investment



$     -        



$170,674   


Transfer of finance receivables to real estate owned


$57,584   


$  70,106   



Note 14.  Segment Information


We have three business segments:  branch, centralized real estate, and insurance. We define our segments by types of financial service products we offer, nature of our production processes, and methods we use to distribute our products and to provide our services, as well as our management reporting structure.



28



In our branch business segment, we:


·

originate secured and unsecured non-real estate loans;

·

originate real estate loans secured by first or second mortgages on residential real estate, which may be closed-end accounts or open-end home equity lines of credit and are generally considered non-conforming;

·

purchase retail sales contracts and provide revolving retail sales financing services arising from the retail sale of consumer goods and services by retail merchants; and

·

purchased private label finance receivables originated by AIG Bank under a participation agreement which we terminated on September 30, 2010.


To supplement our lending and retail sales financing activities, we have historically purchased portfolios of real estate loans, non-real estate loans, and retail sales finance receivables originated by other lenders. We also offer credit and non-credit insurance and ancillary products to all eligible branch customers.


In our centralized real estate business segment, we originated or acquired, as well as serviced, a portfolio of residential real estate loans unrelated to our branch business.


Effective February 1, 2011, Nationstar began subservicing the centralized real estate loans of MorEquity and two other subsidiaries of SLFC. In addition, Nationstar began subservicing certain real estate loans that MorEquity had been servicing in conjunction with the 2010 securitization of these real estate loans.


In our insurance business segment, we write and reinsure credit life, credit accident and health, credit-related property and casualty, and credit involuntary unemployment insurance covering our customers and the property pledged as collateral through products that the branch business segment offers to its customers. We also offer non-credit insurance products.


The following table presents information about our segments as well as reconciliations to our condensed consolidated financial statement amounts.


(dollars in thousands)


Branch

Centralized

Real Estate


Insurance


All

 

Push-down

Accounting


Consolidated

 

Segment

Segment

Segment

Other

Adjustments

Adjustments

Total


Successor Company

Three Months Ended

March 31, 2011


Revenues:

External:

Finance charges








$ 325,807 








$  89,348 








$     -      








$       12 








$    -      








$ 72,469 








$487,636 

Insurance

86 

-      

28,506 

18 

-      

(124)

28,486 

Other

1,625 

(2,941)

12,664 

(19,542)

(2,351)

11,270 

725 

Intercompany

16,053 

(437)

(11,354)

(4,262)

-      

-      

-       

Pretax (loss) income

(169,208)

168,404 

11,668 

(68,999)

(1,522)

(27,667)

(87,324)


Predecessor Company

Three Months Ended

March 31, 2010


Revenues:

External:

Finance charges








$ 375,041 








$  94,845 








$     -      








$    (900)








$    -      








$     -      








$468,986 

Insurance

106 

-       

31,434 

(20)

-      

-      

31,520 

Other

1,505 

11,081 

13,607 

77,535 

(5,209)

-      

98,519 

Intercompany

16,278 

396 

(12,524)

(4,150)

-      

-      

-      

Pretax income (loss)

7,141 

(88,611)

11,406 

31,231 

210 

-      

(38,623)



29



The “All Other” column includes:


·

corporate revenues and expenses such as management and administrative revenues and expenses and derivatives adjustments and foreign exchange gain or loss on foreign currency denominated debt that are not considered pertinent in determining segment performance; and

·

revenues from our foreign subsidiary, Ocean Finance and Mortgages Limited (Ocean).


The “Adjustments” column includes:

·

realized gains (losses) on investment securities and commercial mortgage loans;

·

interest expense related to re-allocations of debt among business segments; and

·

provision for finance receivable losses due to redistribution of amounts provided for the allowance for finance receivable losses.


The push down accounting adjustments include the accretion or amortization of the valuation adjustments on the applicable revalued assets and liabilities resulting from the FCFI Transaction.



Note 15.  Benefit Plans


On January 1, 2011, as a requirement of the FCFI Transaction, we established a defined benefit retirement plan (the Retirement Plan) in which most of our employees are eligible to participate. The Retirement Plan is based on substantially the same terms as the AIG plan it replaced. The Company’s employees in Puerto Rico and the U.S. Virgin Islands participate in a defined benefit pension plan sponsored by CommoLoCo, Inc. The disclosures related to this plan are immaterial to the financial statements of the Company.


Between the closing of the FCFI Transaction and January 1, 2011, we continued to participate in various benefit plans sponsored by AIG in accordance with the terms of the FCFI Transaction. These plans included a noncontributory qualified defined benefit retirement plan, post retirement health and welfare and life insurance plans, various stock option, incentive and purchase plans, and a 401(k) plan.


The following table presents the components of net periodic benefit cost with respect to our defined benefit pension plans and other postretirement benefit plans:


(dollars in thousands)

Pension

Postretirement


Successor Company

Three Months Ended March 31, 2011


Components of net periodic benefit cost:

 

 

Service cost

$ 3,401   

$  65   

Interest cost

4,504   

72   

Expected return on assets

(4,239)  

-    

Net periodic benefit cost

$ 3,666   

$137   



For the three months ended March 31, 2011, the Company contributed $4.1 million to its pension plans and expects to contribute an additional $0.2 million for the remainder of 2011. These estimates are subject to change, since contribution decisions are affected by various factors including our liquidity, asset dispositions, market performance, and management’s discretion.



30



Note 16.  Fair Value Measurements


The fair value of a financial instrument is the amount that would be received if an asset were to be sold or the amount that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The degree of judgment used in measuring the fair value of financial instruments generally correlates with the level of pricing observability. Financial instruments with quoted prices in active markets generally have more pricing observability and less judgment is used in measuring fair value. Conversely, financial instruments traded in other-than-active markets or that do not have quoted prices have less observability and are measured at fair value using valuation models or other pricing techniques that require more judgment. An other-than-active market is one in which there are few transactions, the prices are not current, price quotations vary substantially either over time or among market makers, or little information is released publicly for the asset or liability being valued. Pricing observability is affected by a number of factors, including the type of financial instrument, whether the financial instrument is listed on an exchange or traded over-the-counter or is new to the market and not yet established, the characteristics specific to the transaction, and general market conditions.


Management is responsible for the determination of the value of the financial assets and financial liabilities carried at fair value and the supporting methodologies and assumptions. Third-party valuation service providers are employed to gather, analyze, and interpret market information and derive fair values based upon relevant methodologies and assumptions for individual instruments. When the valuation service providers are unable to obtain sufficient market observable information upon which to estimate the fair value for a particular security, fair value is determined either by requesting brokers who are knowledgeable about these securities to provide a quote, which is generally non-binding, or by employing widely accepted internal valuation models.


Valuation service providers typically obtain data about market transactions and other key valuation model inputs from multiple sources and, through the use of widely accepted internal valuation models, provide a single fair value measurement for individual securities for which a fair value has been requested. The inputs used by the valuation service providers include, but are not limited to, market prices from recently completed transactions and transactions of comparable securities, interest rate yield curves, credit spreads, currency rates, and other market-observable information as of the measurement date as well as the specific attributes of the security being valued, including its term, interest rate, credit rating, industry sector, and other issue or issuer-specific information. When market transactions or other market observable data is limited, the extent to which judgment is applied in determining fair value is greatly increased. We assess the reasonableness of individual security values received from valuation service providers through various analytical techniques. In addition, we may validate the reasonableness of fair values by comparing information obtained from the valuation service providers to other third-party valuation sources for selected securities. We also validate prices for selected securities obtained from brokers through reviews by members of management who have relevant expertise and who are independent of those charged with executing investing transactions.


On November 30, 2010, FCFI indirectly acquired an 80% economic interest in SLFI from ACC. AIG, through ACC, indirectly retained a 20% economic interest in SLFI. Because of the nature of the FCFI Transaction, the significance of the ownership interest acquired, and at the direction of our acquirer, we applied push-down accounting to SLFI and SLFC as the acquired businesses. We revalued our assets and liabilities based on their fair values at the date of the FCFI Transaction in accordance with business combination accounting standards.



31



FAIR VALUE HIERARCHY


We measure and classify assets and liabilities recorded at fair value in the consolidated balance sheets in a hierarchy for disclosure purposes consisting of three “Levels” based on the observability of inputs available in the market place used to measure the fair values. In general, we determine the fair value measurements classified as Level 1 based on inputs utilizing quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access. We generally obtain market price data from exchange or dealer markets. We do not adjust the quoted price for such instruments.


We determine the fair value measurements classified as Level 2 based on inputs utilizing other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.


Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.


In certain cases, the inputs we use to measure the fair value of an asset may fall into different levels of the fair value hierarchy. In such cases, we determine the level in the fair value hierarchy within which the fair value measurement in its entirety falls based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.



Fair Value Measurements – Recurring Basis


The following table presents information about our assets and liabilities measured at fair value on a recurring basis and indicates the fair value hierarchy based on the levels of inputs we utilized to determine such fair value:






32




(dollars in thousands)

Fair Value Measurements Using

Total Carried

 

Level 1

Level 2

Level 3

At Fair Value


Successor Company

March  31, 2011


Assets

Investment securities:

Bonds:

U.S. government and government

sponsored entities









$         -  









$    9,253









$     -     









$       9,253

Obligations of states, municipalities,

and political subdivisions


-  


220,312


-     


220,312

Corporate debt

-  

335,015

2,800

337,815

RMBS

-  

95,840

1,342

97,182

CMBS

-  

10,079

9,179

19,258

CDO/ABS

-  

13,617

10,692

24,309

Total

-  

684,116

24,013

708,129

Preferred stocks

-  

4,566

-     

4,566

Other long-term investments (a)

-  

-  

7,488

7,488

Common stocks (b)

124

-  

3

127

Total

124

688,682

31,504

720,310

Cash and cash equivalents in mutual funds

106,470

-  

-     

106,470

Derivatives:

Cross currency and cross currency interest rate


-  


274,307


-     


274,307

Equity-indexed

-  

-  

1,731

1,731

Total

-  

274,307

1,731

276,038

Total

$106,594

$962,989

$33,235

$1,102,818


Liabilities

 

 

 

 

Derivatives:

Cross currency and cross currency interest rate


$         -  


$  31,016


$     -     


$     31,016

Equity-indexed

-  

137

-     

137

Total

$         -  

$  31,153

$     -     

$     31,153


Successor Company

December 31, 2010


Assets

Investment securities:

Bonds:

U.S. government and government

sponsored entities









$       -  









$    9,392









$     -     









$       9,392

Obligations of states, municipalities,

and political subdivisions


-  


223,967


-     


223,967

Corporate debt

-  

339,638

3,110

342,748

RMBS

-  

127,067

1,059

128,126

CMBS

-  

1,096

9,370

10,466

CDO/ABS

-  

7,636

10,298

17,934

Total

-  

708,796

23,837

732,633

Preferred stocks

-  

4,753

-     

4,753

Other long-term investments (a)

-  

-  

6,432

6,432

Common stocks (b)

117

-  

5

122

Total

117

713,549

30,274

743,940

Cash and cash equivalents in mutual funds

88,703

-  

-     

88,703

Short-term investments

-  

10

-     

10

Derivatives:

Cross currency and cross currency interest rate


-  


189,160


-     


189,160

Equity-indexed

-  

-  

1,720

1,720

Total

-  

189,160

1,720

190,880

Total

$  88,820

$902,719

$31,994

$1,023,533


Liabilities

 

 

 

 

Derivatives:

Cross currency and cross currency interest rate


$         -  


$  40,057


$     -     


$     40,057

Equity-indexed

-  

213

-     

213

Total

$         -  

$  40,270

$     -     

$     40,270


(a)

Other long-term investments excluded our interest in a limited partnership of $1.4 million at March 31, 2011 and December 31, 2010 that we account for using the equity method.


(b)

Common stocks excluded stocks not carried at fair value of $0.6 million at March 31, 2011 and December 31, 2010.



33



We had no transfers between Level 1 and Level 2 during the three months ended March 31, 2011.


The following table presents changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the three months ended March 31, 2011:


(dollars in thousands)

 

Net (losses) gains included in:

 

 

 

 

 



Balance at

beginning

of period




Other

revenues



Other

comprehensive

income

Purchases,

sales,

issuances,

settlements

(b)



Transfers

into

Level 3



Transfers

out of

Level 3



Balance

at end of

period


Successor Company

Three Months Ended

March 31, 2011


Investment securities:

Bonds:

Corporate debt




$  3,110

$  (10)

$  (200)

$   (100)




$    -     




$    -     

$  2,800

RMBS

1,059

(544)

887 

(60)

-    

-    

1,342

CMBS

9,370

(12)

83 

(262)

-    

-    

9,179

CDO/ABS

10,298

28 

499 

(133)

-    

-    

10,692

Total

23,837

(538)

1,269 

(555)

-    

-    

24,013

Other long-term

investments (a)


6,432


-    


3,353 


(2,297)


-    


-    


7,488

Common stocks

5

-    

(2)

-    

-    

-    

3

Total investment

securities


30,274


(538)


4,620 


(2,852)


-    


-    


31,504

Derivatives

1,720

-    

-    

-    

1,731

Total assets

$31,994

$(533)

$4,620 

$(2,846)

$    -     

$    -     

$33,235


(a)

Other long-term investments excluded our interest in a limited partnership of $1.4 million at March 31, 2011 that we account for using the equity method.


(b)

The detail of purchases, sales, issuances, and settlements for the three months ended March 31, 2011 is presented in the table below.



The following table presents the detail of purchases, sales, issuances, and settlements of Level 3 assets and liabilities measured at fair value on a recurring basis for the three months ended March 31, 2011:


(dollars in thousands)

Purchases

Sales

Issuances

Settlements

Total


Successor Company

Three Months Ended

March 31, 2011


Investment securities:

Bonds:

Corporate debt

$    -   

$     -    

$    -   

$(100)

$   (100)

RMBS

-   

-    

-   

(60)

(60)

CMBS

-   

-    

-   

(262)

(262)

CDO/ABS

-   

-    

-   

(133)

(133)

Total

-   

-    

-   

(555)

(555)

Other long-term investments

-   

(2,297)

-   

-   

(2,297)

Total investment securities

-   

(2,297)

-   

(555)

(2,852)

Derivatives

-   

-    

-    

Total assets

$    -   

$(2,297)

$    -   

$(549)

$(2,846)



34



The following table presents changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the three months ended March 31, 2010:


(dollars in thousands)

 

Net (losses) gains included in:

 

 

 

 


Balance at

beginning

of period



Other

revenues


Other

comprehensive

income

Purchases

sales,

issuances,

settlements


Transfers

in (out) of

Level 3


Balance

at end of

period


Predecessor Company

Three Months Ended

March 31, 2010


Investment securities:

Bonds:

Corporate debt




$49,978




$    -     




$    905 




$(3,479)




$(10,466)




$36,938

RMBS

449

97 

-     

-     

547

CMBS

7,841

(3,069)

3,291 

(81)

4,137 

12,119

CDO/ABS

11,381

(2)

702 

(841)

-     

11,240

Total

69,649

(3,070)

4,995 

(4,401)

(6,329)

60,844

Other long-term

investments*


7,758


(811)


404 


(232)


-     


7,119

Common stocks

261

(2)

-     

-     

261

Total investment

securities


77,668


(3,883)


5,401 


(4,633)


(6,329)


68,224

Derivatives

1,645

210 

-      

-      

1,860

Total assets

$79,313

$(3,673)

$ 5,401 

$(4,628)

$  (6,329)

$70,084


*

Other long-term investments excluded our interest in a limited partnership of $1.3 million at March 31, 2010 that we account for using the equity method.



During the three months ended March 31, 2010, we transferred into Level 3 approximately $4.1 million of assets, consisting of certain CMBS. Transfers into Level 3 for investments in CMBS are primarily due to a decrease in market transparency and downward credit migration of these securities.


During the three months ended March 31, 2010, we transferred approximately $10.5 million of assets out of Level 3, consisting of certain private placement corporate debt. Transfers out of Level 3 for private placement corporate debt are primarily the result of using observable pricing information or a third-party pricing quote that appropriately reflects the fair value of those securities, without the need for adjustment based on our own assumptions regarding the characteristics of a specific security or the current liquidity in the market.


There were no unrealized gains or losses recognized in earnings on instruments held at March 31, 2011 or 2010.


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



Fair Value Measurements – Non-recurring Basis


We measure the fair value of certain assets on a non-recurring basis when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.



35



Impairment charges recorded on assets measured at fair value on a non-recurring basis were as follows:


(dollars in thousands)

Successor

Company

Predecessor

Company

Three Months Ended March 31,

2011

2010


Real estate owned


$8,907  


$7,732  



Assets measured at fair value on a non-recurring basis on which we recorded impairment charges were as follows:


(dollars in thousands)

Fair Value Measurements Using

 

 

Level 1

Level 2

Level 3

Total


Successor Company

March 31, 2011


Real estate owned





$   -    





$   -    





$205,488





$205,488


Successor Company

December 31, 2010


Real estate owned





$   -    





$   -    





$210,473





$210,473



In accordance with the authoritative guidance for the accounting for the impairment of long-lived assets, we wrote down certain real estate owned reported in our branch and centralized real estate business segments to their fair value for the three months ended March 31, 2011 and 2010 and recorded the writedowns in other revenues. The fair values disclosed in the table above are unadjusted for transaction costs as required by the authoritative guidance for fair value measurements. The amounts recorded on the balance sheet are net of transaction costs as required by the authoritative guidance for accounting for the impairment of long-lived assets.



36



Financial Instruments Not Measured at Fair Value


In accordance with the amended authoritative guidance for the fair value disclosures of financial instruments, we present the carrying values and estimated fair values of certain of our financial instruments below. Readers should exercise care in drawing conclusions based on fair value, since the fair values presented below can be misinterpreted since they were estimated at a particular point in time and do not include the value associated with all of our assets and liabilities.


(dollars in thousands)

Successor

Company

 

March 31, 2011

December 31, 2010

 

Carrying

Value

Fair

Value

Carrying

Value

Fair

Value


Assets

Net finance receivables, less allowance

for finance receivable losses




$13,711,997




$13,662,430




$14,164,478




$13,976,987

Cash and cash equivalents (excluding cash

and cash equivalents in mutual funds and

short-term investments)



1,174,265



1,174,265



1,292,821



1,292,821



Liabilities

Long-term debt




14,504,638




15,306,271




14,940,989




15,045,128



Off-balance sheet financial

instruments

Unused customer credit limits





-      





-      





-      





-      



FAIR VALUE MEASUREMENTS –

VALUATION METHODOLOGIES AND ASSUMPTIONS


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



Finance Receivables


The fair value of net finance receivables, less allowance for finance receivable losses, both non-impaired and credit impaired, were determined using discounted cash flow methodologies. The application of these methodologies required us to make certain judgments and estimates based on our perception of market participant views related to the economic and competitive environment, the characteristics of our finance receivables, and other similar factors. The most significant judgments and estimates made relate to prepayment speeds, default rates, loss severity, and discount rates. The degree of judgment and estimation applied was significant in light of the current capital markets and, more broadly, economic environments. Therefore, the fair value of our finance receivables could not be determined with precision and may not be realized in an actual sale. Additionally, there may be inherent weaknesses in the valuation methodologies we employed, and changes in the underlying assumptions used could significantly affect the results of current or future values.



37



Real Estate Owned


We initially based our estimate of the fair value on third-party appraisals at the time we took title to real estate owned. Subsequent changes in fair value are based upon management’s judgment of national and local economic conditions to estimate a price that would be received in a then current transaction to sell the asset.



Investment Securities


To measure the fair value of investment securities (which consist primarily of bonds), we maximized the use of observable inputs and minimized the use of unobservable inputs. Whenever available, we obtained quoted prices in active markets for identical assets at the balance sheet date to measure investment securities at fair value. We generally obtained market price data from exchange or dealer markets.


We estimated the fair value of fixed maturity investment securities not traded in active markets by referring to traded securities with similar attributes, using dealer quotations and a matrix pricing methodology, or discounted cash flow analyses. This methodology considers such factors as the issuer’s industry, the security’s rating and tenor, its coupon rate, its position in the capital structure of the issuer, yield curves, credit curves, prepayment rates and other relevant factors. For fixed maturity investment securities that are not traded in active markets or that are subject to transfer restrictions, we adjusted the valuations to reflect illiquidity and/or non-transferability. Such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used.


We initially estimated the fair value of equity instruments not traded in active markets by reference to the transaction price. We adjusted this valuation only when changes to inputs and assumptions were corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalizations, and other transactions across the capital structure, offerings in the equity capital markets, and changes in financial ratios or cash flows. For equity securities that are not traded in active markets or that are subject to transfer restrictions, we adjusted the valuations to reflect illiquidity and/or non-transferability. Such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used.



Cash and Cash Equivalents


We estimated the fair value of cash and cash equivalents using quoted prices where available and industry standard valuation models using market-based inputs when quoted prices were unavailable.



Short-term Investments


We estimated the fair value of short-term investments using quoted prices where available and industry standard valuation models using market-based inputs when quoted prices were unavailable.



Derivatives


Our derivatives are not traded on an exchange. The valuation model used to calculate fair value of our derivative instruments includes a variety of observable inputs, including contractual terms, interest rate curves, foreign exchange rates, yield curves, credit curves, measure of volatility, and correlations of such inputs. Valuation adjustments may be made in the determination of fair value. These adjustments include amounts to reflect counterparty credit quality and liquidity risk, as well as credit and market valuation adjustments. The credit valuation adjustment adjusts the valuation of derivatives to account for



38



nonperformance risk of our counter-party with respect to all net derivative assets positions. The credit valuation adjustment also accounts for our own credit risk in the fair value measurement of all net derivative liabilities’ positions, when appropriate. The market valuation adjustment adjusts the valuation of derivatives to reflect the fact that we are an “end-user” of derivative products. As such, the valuation is adjusted to take into account the bid-offer spread (the liquidity risk), as we are not a dealer of derivative products.



Long-term Debt


Where market-observable prices are not available, we estimated the fair values of long-term debt using projected cash flows discounted at each balance sheet date’s market-observable implicit-credit spread rates for our long-term debt and adjusted for foreign currency translations.



Unused Customer Credit Limits


The unused credit limits available to our customers have no fair value. The interest rates charged on our loan and retail revolving lines of credit are adjustable and reprice frequently. These amounts, in part or in total, can be cancelled at our discretion.



39



Note 17.  Risks and Uncertainties


In assessing our current financial position and developing operating plans for the future, management has made significant judgments and estimates with respect to the potential financial and liquidity effects of our risks and uncertainties, including but not limited to:


·

the amount of cash expected to be received from our finance receivable portfolio through collections (including prepayments) and receipt of finance charges, which could be materially different than our estimates;

·

the potential for declining financial flexibility and reduced income should we use more of our assets for securitizations and portfolio sales;

·

reduced income due to the possible deterioration of the credit quality of our finance receivable portfolios;

·

our ability to complete on favorable terms, as needed, additional borrowings, securitizations, portfolio sales, or other transactions to support liquidity, and the costs associated with these funding sources, including sales at less than carrying value and limits on the types of assets that can be securitized or sold, which would affect profitability;

·

risks that would be assumed for a recently established real estate investment trust (REIT) subsidiary which we expect to manage and which we expect to own a significant portion of our finance receivable portfolio;

·

our ability to comply with our debt covenants;

·

our access to debt markets and other sources of funding on favorable terms;

·

potential costs for our United Kingdom subsidiaries resulting from the retroactive imposition of guidelines issued in August 2010 by the United Kingdom Financial Services Authority for sales of payment protection insurance that occurred after January 1, 2005, including possible refunds to customers;

·

the potential for increased costs related to our foreclosure practices and procedures as a result of heightened nationwide regulatory scrutiny of foreclosure practices in the industry generally;

·

potential liability relating to real estate loans which we have sold or securitized if it is determined that there was a breach of a warranty made in connection with the transaction;

·

the potential for additional unforeseen cash demands or accelerations of obligations;

·

reduced income due to loan modifications where the borrower’s interest rate is reduced, principal payments are deferred, or other concessions are made;

·

the potential for declines in bond and equity markets;

·

the potential effect on us if the capital levels of our regulated and unregulated subsidiaries prove inadequate to support current business plans;

·

the potential loss of key personnel; and

·

the undetermined effects of the FCFI Transaction, including the availability of support from our new owner and the effect of any changes to our operations, capitalization, and business strategies.


We have assumed that there will be no support required from FCFI and no material change in our recent liquidity sources and capitalization management beyond the refinancing of the secured term loan facility discussed in Note 20. We intend to support our liquidity position by managing originations and purchases of finance receivables and maintaining disciplined underwriting standards and pricing on such loans. We intend to support operations and repay obligations with one or more of the following: finance receivable collections from operations, securitizations, additional term loans, potential unsecured debt offerings, potential REIT stock offering proceeds, and portfolio sales.


Based on our estimates and taking into account the risks and uncertainties of such 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.



40



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 about the potential effects of these risks and uncertainties could prove to be materially incorrect.



Note 18.  Legal Settlements


In March 2010, WFI and AIG Bank settled a civil lawsuit brought by the United States Department of Justice (DOJ) for alleged violations of the Fair Housing Act and the Equal Credit Opportunity Act. The DOJ alleged that WFI and AIG Bank allowed independent wholesale mortgage loan brokers to charge certain minority borrowers higher broker fees than were charged to certain other borrowers between 2003 and 2006. WFI and AIG Bank denied any legal violation, and maintained that at all times they conducted their lending and other activities in compliance with fair-lending and other laws. As part of the settlement, WFI and AIG Bank agreed to provide $6.1 million for borrower remediation. In March 2010, we paid $6.1 million into an escrow account pursuant to the terms of the settlement agreement with the DOJ. Upon completion of the remediation, all remaining funds will be distributed for consumer education purposes. In the event that the remaining funds do not total at least $1 million, AIG Bank and WFI have agreed to replenish the fund up to $1 million for distribution for educational purposes. In addition, AIG Bank and WFI will incur certain costs associated with administering the settlement. WFI is obligated to indemnify AIG Bank for all amounts that AIG Bank is required to pay pursuant to the terms of the DOJ settlement.


In June 2010, MorEquity settled certain claims relating to the sale of mortgage loans by MorEquity. The opposing parties alleged that they had a binding contract to purchase such loans in 2008, while MorEquity claimed that no such contract existed. On June 17, 2010, MorEquity paid $12.5 million to resolve the dispute.



Note 19.  Legal Contingencies


SLFC and certain of its subsidiaries are parties to various legal proceedings, including certain purported class action claims such as the one described below, arising in the ordinary course of business. Some of these proceedings are pending in jurisdictions that permit damage awards disproportionate to the actual economic damages alleged to have been incurred. Based upon information presently available, we believe that the total amounts, if any, that will ultimately be paid arising from these legal proceedings will not have a material adverse effect on our consolidated results of operations or financial position. However, the continued occurrences of large damage awards in general in the United States, including, in some jurisdictions, large punitive damage awards that bear little or no relation to actual economic damages incurred by plaintiffs, create the potential for an unpredictable result in any given proceeding.


King v. American General Finance, Inc., Case No. 96-CP-38-595 in the Court of Common Pleas for Orangeburg County, South Carolina. In this lawsuit, filed in 1996, Plaintiffs assert class action claims against our South Carolina operating entity for alleged violations of S.C. Code § 37-10-102(a), which requires, inter alia, a lender making a mortgage loan to ascertain the preference of the borrower as to an attorney who will represent the borrower in closing the loan. The Plaintiffs and SLFI have filed various motions, which remain pending. The case has been reassigned to a new judge, who will hear and rule on the motions, including Plaintiffs’ motion for summary judgment. SLFI has filed additional motions to be heard by the new judge. Based on Plaintiffs’ allegations, if the case proceeds as a class action and if the court should find liability, the size of the class will range from about 5,000 to 9,000 members depending upon the final class definition. The statute provides for a penalty range of $1,500 to $7,500 per class member, to be determined by the judge. SLFI is defending the case vigorously.



41



Note 20.  Subsequent Event


Refinancing of Secured Term Loan Facility


As disclosed in SLFC’s Current Report on Form 8-K dated May 6, 2011, we successfully refinanced Springleaf Financial Funding Company’s existing $3.0 billion secured term loan facility (the “Refinancing Facility”) on May 10, 2011. The Refinancing Facility increased total borrowings of the term loan to $3.75 billion, extended the maturity by two years until May 2017, lowered borrowing costs, and reduced collateral requirements. The borrower under the Refinancing Facility is Springleaf Financial Funding Company. The Refinancing Facility is guaranteed by SLFC and certain of its operating subsidiaries and secured to the extent permitted under SLFC’s existing debt agreements.



42



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



FORWARD-LOOKING STATEMENTS


This Quarterly Report on Form 10-Q and our other publicly available documents may include, and the Company’s officers and representatives may from time to time make, statements which may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not historical facts but instead represent only our belief regarding future events, many of which are inherently uncertain and outside of our control. These statements may address, among other things, our strategy for growth, product development, regulatory approvals, market position, financial results and reserves. Our actual results and financial condition may differ from the anticipated results and financial condition indicated in these forward-looking statements. The important factors, many of which are outside of our control, that could cause our actual results to differ, possibly materially, include, but are not limited to, the following:


·

our continued ability to access the capital markets or the sufficiency of our current sources of funds to satisfy our cash flow requirements;

·

changes in the rate at which we can collect or potentially sell our finance receivable portfolio;

·

the impacts of our securitizations and borrowings;

·

risks that would be assumed for a recently established REIT subsidiary which we expect to manage and which we expect to own a significant portion of our finance receivable portfolio;

·

our ability to comply with our debt covenants;

·

changes in general economic conditions, including the interest rate environment in which we conduct business and the financial markets through which we can access capital and also invest cash flows from the insurance business segment;

·

changes in the competitive environment in which we operate, including the demand for our products, customer responsiveness to our distribution channels, and the formation of business combinations among our competitors;

·

the effectiveness of our credit risk scoring models in assessing the risk of customer unwillingness or inability to repay;

·

shifts in collateral values, delinquencies, or credit losses;

·

shifts in residential real estate values;

·

levels of unemployment and personal bankruptcies;

·

potential costs for our United Kingdom subsidiaries resulting from the retroactive imposition of guidelines issued in August 2010 by the United Kingdom Financial Services Authority for sales of payment protection insurance that occurred after January 1, 2005, including possible refunds to customers;

·

the potential for increased costs related to our foreclosure practices and procedures as a result of heightened nationwide regulatory scrutiny of foreclosure practices in the industry generally;

·

potential liability relating to real estate loans which we have sold or securitized if it is determined that there was a breach of a warranty made in connection with the transaction;

·

changes in laws, regulations, or regulatory policies and practices, including the Dodd-Frank Wall Street Reform and Consumer Protection Act, that affect our ability to conduct business or the manner in which we conduct business, such as licensing requirements, pricing limitations or restrictions on the method of offering products, as well as changes that may result from increased regulatory scrutiny of the sub-prime lending industry;

·

the effects of participation in the HAMP by subservicers of our loans;

·

the costs and effects of any litigation or governmental inquiries or investigations involving us, particularly those that are determined adversely to us;

·

changes in accounting standards or tax policies and practices and the application of such new policies and practices to the manner in which we conduct business;

·

the undetermined effects of the FCFI Transaction, including the availability of support from our new owner and the effect of any changes to our operations, capitalization, and business strategies;



43



·

our ability to maintain sufficient capital levels in our regulated and unregulated subsidiaries;

·

changes in our ability to attract and retain employees or key executives to support our businesses;

·

natural or accidental events such as earthquakes, hurricanes, tornadoes, fires, or floods affecting our customers, collateral, or branches or other operating facilities; and

·

war, acts of terrorism, riots, civil disruption, pandemics, or other events disrupting business or commerce.


We also direct readers to other risks and uncertainties discussed in “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and in other documents we file with the SEC (including “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010). We are under no obligation (and expressly disclaim any obligation) to update or alter any forward-looking statement, whether written or oral, that we may make from time to time, whether as a result of new information, future events or otherwise.



FCFI TRANSACTION


On November 30, 2010, FCFI indirectly acquired an 80% economic interest in SLFI from ACC. AIG, through ACC, indirectly retained a 20% economic interest in SLFI.



CAPITAL RESOURCES AND LIQUIDITY


Capital Resources


Our capital has varied primarily with the amount of our net finance receivables. We have historically based our mix of debt and equity, or “leverage”, primarily upon maintaining leverage that supports cost-effective funding.


(dollars in millions)

Successor

Company

Predecessor

Company

March 31,

2011

2010

 

Amount

Percent

Amount

Percent


Long-term debt


$14,504.6 


90%


$17,099.1 


88%

Equity

1,641.6 

10    

2,369.6 

12   

Total capital

$16,146.2 

100%

$19,468.7 

100%


Net finance receivables


$13,737.6 

 


$17,837.1 

 



We have historically issued a combination of fixed-rate debt, principally long-term, and floating-rate debt, both long-term and short-term. Until September 2008, SLFC obtained our fixed-rate funding by issuing public or private long-term unsecured debt with maturities primarily ranging from three to ten years, and SLFC obtained most of our floating-rate funding by issuing and refinancing commercial paper and by issuing long-term, floating-rate unsecured debt. Since that time we have arranged for a five-year term loan in April 2010 and completed on-balance sheet securitizations in March 2010 and July 2009.



44



In April 2010, Springleaf Financial Funding Company, a wholly owned subsidiary of SLFC, entered into and fully drew down a $3.0 billion, five-year term loan pursuant to a Credit Agreement among Springleaf Financial Funding Company, SLFC, and most of the consumer finance operating subsidiaries of SLFC (collectively, the Subsidiary Guarantors), and a syndicate of lenders, various agents, and Bank of America, N.A, as administrative agent. Any portion of the term loan that is repaid (whether at or prior to maturity) will permanently reduce the principal amount outstanding and may not be reborrowed.


The term loan is guaranteed by SLFC and by the Subsidiary Guarantors. In addition, other SLFC operating subsidiaries that from time to time meet certain criteria will be required to become Subsidiary Guarantors. The term loan is secured by a first priority pledge of the stock of Springleaf Financial Funding Company that was limited at the transaction date, in accordance with existing SLFC debt agreements, to approximately 10% of SLFC’s consolidated net worth.


Springleaf Financial Funding Company used the proceeds from the term loan to make intercompany loans to the Subsidiary Guarantors. The intercompany loans are secured by a first priority security interest in eligible loan receivables, according to pre-determined eligibility requirements and in accordance with a borrowing base formula. The Subsidiary Guarantors used proceeds of the loans to pay down their intercompany loans from SLFC. SLFC used the payments from Subsidiary Guarantors to, among other things, repay debt and fund operations. In May 2011, we refinanced this term loan. See Liquidity for further information.


Certain debt agreements of the Company contain terms that could result in acceleration of payments. Under certain circumstances, an event of default or declaration of acceleration under the borrowing agreements of the Company could also result in an event of default and declaration of acceleration under other borrowing agreements of the Company.


Based upon SLFC’s financial results for the twelve months ended March 31, 2011, a mandatory trigger event occurred under SLFC’s hybrid debt with respect to the hybrid debt’s semi-annual payment due in July 2011. The mandatory trigger event requires SLFC to defer interest payments to the junior subordinated debt holders (and not make dividend payments to SLFI) unless SLFC obtains non-debt capital funding in an amount equal to all accrued and unpaid interest on the hybrid debt otherwise payable on the next interest payment date and pays such amount to the junior subordinated debt holders. As of March 31, 2011, SLFC had not received the non-debt capital funding necessary to satisfy the July 2011 interest payments required by SLFC’s hybrid debt.


Historically, we targeted our leverage to be a ratio of 7.5x of adjusted debt to adjusted tangible equity, where adjusted debt equals total debt less 75% of our junior subordinated debentures (hybrid debt) and where adjusted tangible equity equals total shareholder’s equity plus 75% of hybrid debt and less goodwill, other intangible assets, and accumulated other comprehensive income or loss. Our method of measuring target leverage reflects SLFC’s issuance of $350.0 million aggregate principal amount of 60-year junior subordinated debentures following our acquisition of Ocean in January 2007. The debentures underlie a series of trust preferred securities sold by a trust sponsored by SLFC in a Rule 144A/Regulation S offering. SLFC can redeem the debentures at par beginning in January 2017. Based upon the “equity-like” terms of these junior subordinated debentures, our leverage calculation treated the hybrid debt as 75% equity and 25% debt.


Due to the Company’s and our former indirect parent’s liquidity positions, our primary capitalization efforts have been focused on improving liquidity and maintaining compliance with our existing debt agreements, and not on achieving a targeted leverage. Additionally, the application of push-down accounting significantly altered the presentation of many leverage calculation components and has thereby made our historical methods of leverage calculation less meaningful, particularly when compared to leverage measurements of the Predecessor Company. Our adjusted tangible leverage at March 31, 2011 was 8.45x compared to 8.48x at December 31, 2010, and 6.33x at March 31, 2010. In calculating March 31, 2011 leverage, management deducted $1.1 billion of cash equivalents from adjusted debt, resulting in an effective adjusted tangible leverage of 7.82x. In calculating December 31, 2010 leverage, management



45



deducted $1.2 billion of cash equivalents from adjusted debt, resulting in an effective adjusted tangible leverage of 7.82x. In calculating March 31, 2010 leverage, management deducted $703.2 million of cash equivalents from adjusted debt, resulting in an effective adjusted tangible leverage of 6.07x.


Reconciliations of total debt to adjusted debt were as follows:


(dollars in millions)

Successor

Company

Predecessor

Company

 

March 31,

2011

December 31,

2010

March 31,

2010


Total debt


$14,504.6 


$14,941.0 


$17,099.1 

75% of hybrid debt

(128.6)

(128.6)

(262.0)

Adjusted debt

$14,376.0 

$14,812.4 

$16,837.1 



Reconciliations of equity to adjusted tangible equity were as follows:


(dollars in millions)

Successor

Company

Predecessor

Company

 

March 31,

2011

December 31,

2010

March 31,

2010


Equity


$1,641.6 


$1,699.0 


$2,369.6 

75% of hybrid debt

128.6 

128.6 

262.0 

Net other intangible assets

(73.3)

(83.7)

-   

Accumulated other comprehensive loss

4.7 

2.5 

27.7 

Adjusted tangible equity

$1,701.6 

$1,746.4 

$2,659.3 



Liquidity Facilities


We historically maintained credit facilities to support the issuance of commercial paper and to provide an additional source of funds for operating requirements. Due to the extraordinary events in the credit markets since 2008, AIG’s liquidity issues, and our reduced liquidity, we borrowed all available commitments under our primary credit facilities during September 2008, including our 364-day facility ($2.050 billion drawn by SLFC and $400.0 million drawn by SLFI) and the SLFC $2.125 billion multi-year facility. On July 9, 2009, we converted the outstanding amounts under our expiring 364-day facility into one-year term loans that would mature on July 9, 2010. On March 25, 2010, SLFC and SLFI each repaid all of their respective outstanding obligations under their one-year term loans ($2.050 billion repaid by SLFC and $400.0 million repaid by SLFI). With these repayments, the related contractual support agreement between SLFC and AIG was terminated. At March 31, 2010, SLFC’s outstanding borrowings under the multi-year facility totaled $2.125 billion. On April 26, 2010, SLFC repaid its outstanding borrowings under the multi-year facility. With this repayment, the borrowing commitments under the multi-year facility were terminated.


SLFC and certain of its subsidiaries also had an uncommitted credit facility of $75.0 million at March 31, 2011 and 2010. A portion of the uncommitted facility was shared with SLFI and could be increased depending upon lender ability to participate its loans under the facility. There were no amounts outstanding under the uncommitted credit facility at March 31, 2011 or 2010.


SLFC does not guarantee any borrowings of SLFI.



46



Liquidity


Our sources of funds have included cash flows from operations, issuances of long-term debt, borrowings from banks under credit facilities, sales of finance receivables, and securitizations. On May 10, 2011, we successfully refinanced our $3.0 billion secured term loan with an additional $750.0 million of borrowings, a two-year maturity extension to May 2017, lower borrowing costs, and reduced collateral requirements. Subject to insurance regulations, we also have received dividends from our insurance subsidiaries. On May 12, 2011, we received $45.0 million of dividends from our insurance subsidiaries.


We anticipate that our near-term primary sources of funds to support operations and repay obligations will be finance receivable collections from operations, cash on hand, and, as needed and available, additional borrowings, securitizations, potential REIT stock offering proceeds, or portfolio sales.


The principal factors that could decrease our liquidity are customer non-payment, a decline in customer prepayments, and a prolonged inability to adequately access capital market funding. We intend to support our liquidity position by operating the Company utilizing the following strategies:


·

managing originations and purchases of finance receivables and maintaining disciplined underwriting standards and pricing for such loans; and

·

as needed, pursuing additional borrowings, securitizations, or portfolio sales.


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.


Principal sources and uses of cash were as follows:


(dollars in millions)

Successor

Company

Predecessor

Company

Three Months Ended March 31,

2011

2010


Principal sources of cash:

Net collections/originations and purchases of finance receivables



$388.6   



$   579.6   

Operations

90.8   

111.1   

Repayment of note receivable from AIG

-     

1,550.9   

Sales and principal collections of finance receivables held for sale

originated as held for investment


-     


25.5   

Capital contributions

-     

11.0   

Total

$479.4   

$2,278.1   


Principal uses of cash:

Net repayment/issuances of debt



$659.8   



$2,672.5   

Total

$659.8   

$2,672.5   



CRITICAL ACCOUNTING ESTIMATES


For a discussion of the critical accounting estimates relating to our businesses, see “Critical Accounting Estimates” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010. There have been no significant changes to our critical accounting estimates during the three months ended March 31, 2011.



47



OFF-BALANCE SHEET ARRANGEMENTS


We have no material off-balance sheet arrangements as defined by SEC rules. We had no off-balance sheet exposure to losses associated with unconsolidated VIEs at March 31, 2011 or December 31, 2010.



48



SELECTED SEGMENT INFORMATION


See Note 14 of the Notes to Condensed Consolidated Financial Statements for a description of our business segments.


The following statistics are derived from the Company’s segment reporting. We report our segment statistics using the historical basis of accounting. We believe the following segment statistics are relevant to the reader because they are used by management to analyze and evaluate the performance of our business segments. “All Other” includes push-down accounting adjustments and other items that are not identified as part of our business segments and are excluded from our segment reporting. Selected statistics for the business segments (which are reported on a historical basis of accounting) were as follows:


(dollars in millions)

Successor

Company

Predecessor

Company

At or for the Three Months Ended March 31,

2011

2010


Net finance receivables:

Branch real estate loans



$  7,096.7 



$  7,754.1 

Centralized real estate

5,874.3 

6,399.0 

Branch non-real estate loans

2,594.3 

2,963.4 

Branch retail sales finance

469.2 

896.2 

Total segment net finance receivables

16,034.5 

18,012.7 

All other

(2,296.9)

(175.6)

Net finance receivables

$13,737.6 

$17,837.1 


Yield:

Branch real estate loans



8.94%



9.08%

Centralized real estate

6.08    

6.00   

Branch non-real estate loans

22.69    

21.38   

Branch retail sales finance

14.39    

15.06   


Total segment yield


10.30    


10.39   

All other effect on yield

3.85    

0.08   


Total yield


14.15    


10.47   


Charge-off ratio:

Branch real estate loans



2.36%



3.32%

Centralized real estate

1.63    

2.56   

Branch non-real estate loans

4.19    

7.14   

Branch retail sales finance

6.49    

9.04   


Total segment charge-off ratio


2.52    


4.02   

All other effect on charge-off ratio

(0.96)   

0.04   


Total charge-off ratio


1.56    


4.06   


Delinquency ratio:

Branch real estate loans



5.91%



6.74%

Centralized real estate

9.12    

8.07   

Branch non-real estate loans

3.41    

4.56   

Branch retail sales finance

4.23    

6.02   


Total segment delinquency ratio


6.58    


6.79   

All other effect on delinquency ratio

0.03    

0.07   


Total delinquency ratio


6.61    


6.86   



49



ANALYSIS OF FINANCIAL CONDITION


Finance Receivables


Fair Isaac Corporation (FICO) Credit Scores. There are many different categorizations used in the consumer lending industry to describe the creditworthiness of a borrower, including “prime”, “non-prime”, and “sub-prime”. While there are no industry-wide agreed upon definitions for these categorizations, many market participants utilize third-party credit scores as a means to categorize the creditworthiness of the borrower and his or her finance receivable. Our finance receivable underwriting process does not use third-party credit scores as a primary determinant for credit decisions. However, we do, in part, use such scores to analyze performance of our finance receivable portfolio and for informational purposes we present below our net finance receivables and delinquency ratios grouped into the following categories based solely on borrower FICO credit scores at the date of origination or renewal:


·

Prime:  Borrower FICO score greater than or equal to 660

·

Non-prime:  Borrower FICO score greater than 619 and less than 660

·

Sub-prime:  Borrower FICO score less than or equal to 619


Many finance receivables included in the “prime” category in the table below might not meet other market definitions of prime loans due to certain characteristics of the borrowers, such as their elevated debt-to-income ratios, lack of income stability, or level of income disclosure and verification, as well as credit repayment history or similar measurements.



50



FICO-delineated prime, non-prime, and sub-prime categories for net finance receivables by portfolio segment and by class were as follows:


(dollars in millions)

Successor

Company

 

March 31,

2011

December 31,

2010


Net finance receivables:

Branch real estate loans:

 

 

Prime

$1,034.8 

$1,063.8 

Non-prime

1,131.7 

1,159.7 

Sub-prime

3,992.3 

4,089.9 

Other/FICO unavailable

0.9 

1.0 

Total

$6,159.7 

$6,314.4 


Centralized real estate loans:

 

 

Prime

$3,295.9 

$3,399.3 

Non-prime

869.4 

885.8 

Sub-prime

341.6 

348.8 

Other/FICO unavailable

0.7 

0.4 

Total

$4,507.6 

$4,634.3 


Branch non-real estate loans:

 

 

Prime

$   507.7 

$   528.4 

Non-prime

569.8 

592.2 

Sub-prime

1,422.0 

1,483.0 

Other/FICO unavailable

10.3 

12.4 

Total

$2,509.8 

$2,616.0 


Branch retail sales finance:

 

 

Prime

$   185.5 

$   220.7 

Non-prime

62.6 

72.3 

Sub-prime

184.1 

197.5 

Other/FICO unavailable

0.8 

0.7 

Total

$   433.0 

$   491.2 



51



FICO-delineated prime, non-prime, and sub-prime categories for delinquency ratios by portfolio segment and by class were as follows:


 

Successor

Company

 

March 31,

2011

December 31,

2010


Delinquency ratio:

Branch real estate loans:

 

 

Prime

3.63%

3.61%

Non-prime

5.48    

5.21   

Sub-prime

6.63    

6.89   

Other/FICO unavailable

14.44    

3.81   


Total


5.92    


6.03   


Centralized real estate loans:

 

 

Prime

7.76%

7.31%

Non-prime

13.44    

12.39   

Sub-prime

13.71    

12.43   

Other/FICO unavailable

41.03    

-      


Total


9.33    


8.67   


Branch non-real estate loans:

 

 

Prime

1.82%

2.04%

Non-prime

2.72    

3.11   

Sub-prime

4.22    

4.75   

Other/FICO unavailable

3.97    

N/M*  


Total


3.40    


3.84   


Branch retail sales finance:

 

 

Prime

3.48%

3.95%

Non-prime

5.31    

6.32   

Sub-prime

4.63    

5.71   

Other/FICO unavailable

3.64    

6.94   


Total


4.23    


5.01   


*

Not meaningful



Higher-risk Real Estate Loans. Certain types of our real estate loans, such as interest only real estate loans, sub-prime real estate loans, second mortgages, high loan-to-value (LTV) ratio mortgages, and low documentation real estate loans, can have a greater risk of non-collection than our other real estate loans. Interest only real estate loans contain an initial period where the scheduled monthly payment amount is equal to the interest charged on the loan. The payment amount resets upon the expiration of this period to an amount sufficient to amortize the balance over the remaining term of the loan. Sub-prime real estate loans are loans originated to a borrower with a FICO score at the date of origination or renewal of less than or equal to 619. Second mortgages are secured by a mortgage the rights of which are subordinate to those of a first mortgage. High LTV ratio mortgages have an original amount equal to or greater than 95.5% of the value of the collateral property at the time the loan was originated. Low documentation real estate loans are loans to a borrower that meets certain criteria which gives the borrower the option to supply less than the normal amount of supporting documentation for income.



52



Additional information regarding these higher-risk real estate loans for our branch and centralized real estate business segments follows (our higher-risk real estate loans can be included in more than one of the types of higher-risk real estate loans):


(dollars in millions)

 

Delinquency

Average

Average

 

Amount

Ratio

LTV

FICO


Successor Company

March 31, 2011


Branch higher-risk real estate loans:

Interest only (a)

 

 

 

 

Sub-prime

$3,992.3

6.63%

74.8%

557

Second mortgages

$   803.5

7.57%

N/A (b)

602

LTV greater than 95.5% at origination

$   229.6

5.35%

97.8%

611

Low documentation (a)

 

 

 

 


Centralized real estate higher-risk loans:

Interest only

$   742.0



11.05%

88.7%



707

Sub-prime

$   341.6

13.71%

77.4%

586

Second mortgages

$     31.3

3.48%

N/A  

704

LTV greater than 95.5% at origination

$1,554.1

7.79%

99.4%

709

Low documentation

$   262.9

14.49%

76.4%

663


Successor Company

December 31, 2010


Branch higher-risk real estate loans:

Interest only (a)

 

 

 

 

Sub-prime

$4,089.9

6.89%

74.8%

557

Second mortgages

$   835.9

7.43%

N/A  

602

LTV greater than 95.5% at origination

$   147.2

5.50%

97.8%

611

Low documentation (a)

 

 

 

 


Centralized real estate higher-risk loans:

Interest only



$   764.9



11.08%



88.6%



707

Sub-prime

$   348.8

12.43%

77.4%

586

Second mortgages

$     32.9

2.61%

N/A  

703

LTV greater than 95.5% at origination

$1,600.2

7.82%

99.4%

709

Low documentation

$   269.7

13.32%

76.4%

664


(a)

Not applicable because these higher-risk loans are not offered by our branch business segment.


(b)

Not available.



53



Charge-off ratios for these higher-risk real estate loans for our branch and centralized real estate business segments were as follows:


(dollars in millions)

Successor

Company

Predecessor

Company

Three Months Ended March 31,

2011

2010


Charge-off ratios:

Branch higher-risk real estate loans:

Interest only*

 

 

Sub-prime

2.00%

3.52%

Second mortgages

5.43%

10.04%

LTV greater than 95.5% at origination

2.61%

4.81%

Low documentation*

 

 


Centralized real estate higher-risk loans:

Interest only



2.93%



3.43%

Sub-prime

1.56%

3.50%

Second mortgages

1.57%

5.00%

LTV greater than 95.5% at origination

2.21%

2.74%

Low documentation

1.40%

2.41%


*

Not applicable because these higher-risk loans are not offered by our branch business segment.



A decline in the value of assets serving as collateral for our real estate loans may impact our ability to collect on these real estate loans. The total amount of all real estate loans for which the estimated LTV ratio exceeds 100% at March 31, 2011 was $2.1 billion, or 19%, of total real estate loans.



54



Allowance for Finance Receivable Losses


Our Credit Strategy and Policy Committee evaluates our finance receivable portfolio monthly by real estate loans, non-real estate loans, and retail sales finance. Allowance for finance receivable losses is calculated for each product and then allocated to each segment based upon its delinquency. Changes in the allowance for finance receivable losses by portfolio segment and by class were as follows:


(dollars in millions)

Successor

Company

Predecessor

Company

Three Months Ended March 31,

2011

2010


Balance at beginning of period:

Branch real estate loans



$   2.5 



$   624.3 

Centralized real estate

0.5 

536.4 

Branch non-real estate loans

4.1 

288.5 

Branch retail sales finance

-  

63.6 

Total segment

7.1 

1,512.8 

All other

-  

3.5 

Total

$   7.1 

$1,516.3 


Provision for finance receivable losses (a):

Branch real estate loans



$ 19.1 



$       5.7 

Centralized real estate

27.4 

103.7 

Branch non-real estate loans

21.3 

57.5 

Branch retail sales finance

5.3 

17.5 

Total segment

73.1 

184.4 

All other

-  

0.2 

Total

$ 73.1 

$   184.6 


Charge-offs:

Branch real estate loans



$(18.7)



$    (67.5)

Centralized real estate

(25.1)

(41.9)

Branch non-real estate loans

(22.3)

(64.7)

Branch retail sales finance

(8.8)

(26.7)

Total segment

(74.9)

(200.8)

All other

-  

0.1 

Total

$(74.9)

$  (200.7)


Recoveries (b):

Branch real estate loans



$   6.7 



$       2.5 

Centralized real estate

0.2 

0.8 

Branch non-real estate loans

9.7 

9.6 

Branch retail sales finance

3.7 

3.2 

Total segment

20.3 

16.1 

All other

-  

-  

Total

$ 20.3 

$     16.1 


Affiliates contributed by SLFI to SLFC (c):

Branch real estate loans



$    -    



$       8.9 

Branch non-real estate loans

-    

3.5 

Branch retail sales finance

-    

3.8 

Total segment

$    -    

$     16.2 


Balance at end of period:

Branch real estate loans



$   9.6 



$   573.9 

Centralized real estate

3.0 

599.0 

Branch non-real estate loans

12.8 

294.4 

Branch retail sales finance

0.2 

61.4 

Total segment

25.6 

1,528.7 

All other

-  

3.8 

Total

$ 25.6 

$1,532.5 



55



(a)

Provision for finance receivable losses for the Successor Company includes $37.0 million of net charge-offs on credit impaired finance receivables, $17.5 million on non-credit impaired finance receivables, and $0.1 million for new origination activity and TDR activity during the three months ended March 31, 2011. As a result of charging off the non-credit impaired finance receivables, $15.3 million of valuation discount accretion was accelerated and is included as a component of finance charges within revenues.


(b)

Successor Company includes $5.0 million of recoveries ($2.9 million branch real estate loan recoveries, $1.9 million branch non-real estate loan recoveries, and $0.2 million branch retail sales finance recoveries) as a result of a settlement of claims relating to our February 2008 purchase of Equity One, Inc.’s consumer branch finance receivable portfolio.


(c)

Effective January 1, 2010, SLFI contributed two of its wholly-owned subsidiaries to SLFC. The contribution included $16.2 million of allowance for finance receivable losses.



Real Estate Owned


Changes in the amount of real estate owned were as follows.


(dollars in millions)

Successor

Company

Predecessor

Company

At or for the Three Months Ended March 31,

2011

2010


Balance at beginning of period


$178.9      


$138.5   

Properties acquired

57.6      

72.2   

Properties sold or disposed of

(52.9)     

(60.4)  

Writedowns

(8.9)     

(7.7)  

Affiliates contributed by SLFI to SLFC*

-       

4.6   

Balance at end of period

$174.7      

$147.2   


Real estate owned as a percentage of real estate loans


1.62%     


1.05%  


*

Effective January 1, 2010, SLFI contributed two of its wholly-owned subsidiaries to SLFC. The contribution included $4.6 million of real estate owned.



Investments


Insurance investments by type were as follows:


(dollars in millions)

Successor

Company

 

March 31,

2011

December 31,

2010


Investment securities


$722.2   


$745.8   

Commercial mortgage loans

127.4   

128.4   

Policy loans

1.6   

1.5   

Total

$851.2   

$875.7   



Investment securities are the majority of our insurance business segment’s investment portfolio. Our investment strategy is to optimize after-tax returns on invested assets, subject to the constraints of liquidity, diversification, and regulation. See Note 6 of the Notes to Condensed Consolidated Financial Statements for further information on investment securities.



56



Asset/Liability Management


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. We have based the mix of fixed-rate and floating-rate debt issuances, in part, on the nature of the finance receivables being supported.


We have historically issued fixed-rate, long-term unsecured debt as the primary source of fixed-rate debt and have also employed interest rate swap agreements to adjust our fixed/floating mix of total debt. Including the impact of interest rate swap agreements that effectively fix floating-rate debt or float fixed-rate debt, our floating-rate debt represented 23% of our borrowings at March 31, 2011, compared to 16% at March 31, 2010. Adjustable-rate net finance receivables represented 5% of our total portfolio at March 31, 2011 and 2010.


For the past several quarters, we have had limited direct control of our asset/liability mix as a result of our limited access to capital markets, our significantly restricted origination of finance receivables, and our sale or securitization of finance receivables.



ANALYSIS OF OPERATING RESULTS


Net (Loss) Income


(dollars in millions)

Successor

Company

Predecessor

Company

Three Months Ended March 31,

2011

2010


Net (loss) income


$(55.2)   


$  12.4   

Amount change

$(67.6)   

$253.0   

Percent change

(543)%  

105%  


Return on average assets


(1.24)%  


0.22%  

Return on average equity

(13.17)%  

2.09%  

Ratio of earnings to fixed charges*

N/A     

N/A    


*

Not applicable. Earnings were inadequate to cover total fixed charges by $87.3 million for the three months ended March 31, 2011 and $38.6 million for the three months ended March 31, 2010.



During 2009, the U.S. residential real estate and credit markets experienced significant disruption as housing prices generally declined, unemployment increased, consumer delinquencies increased, and credit availability contracted and became more expensive for consumers and financial institutions. Many of these 2009 trends carried over into 2010 and 2011. These market disruptions negatively impacted our results for the three months ended March 31, 2011 and 2010.


Decreased property values that accompany a market downturn can reduce a borrower’s willingness to repay and their ability to refinance his or her mortgage. In addition, interest rate resets on adjustable-rate loans could negatively impact a borrower’s ability to repay. Defaults by borrowers on real estate loans could cause losses to us, could lead to increased claims relating to non-prime or sub-prime mortgage origination practices, and could encourage increased or changing regulation. Any increased or changing regulation could limit the availability of, or require changes in, the terms of certain real estate loan products and could also require us to devote additional resources to comply with that regulation.



57



Net loss for the three months ended March 31, 2011 when compared to net income in the same period in 2010 reflected higher interest expense, lower other revenues resulting from foreign exchange losses on foreign currency denominated debt, and lower benefit from income taxes, partially offset by lower provision for finance receivable losses and higher finance charges. See Interest Expense, Other Revenues, Benefit from Income Taxes, Provision for Finance Receivable Losses, and Finance Charges for further information.


See Note 14 of the Notes to Condensed Consolidated Financial Statements for information on the results of the Company’s business segments.


For a discussion of risk factors relating to our businesses, see “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.


Factors that affected the Company’s operating results were as follows:


Finance Charges


Finance charges by type were as follows:


(dollars in millions)

Successor

Company

Predecessor

Company

Three Months Ended March 31,

2011

2010


Real estate loans


$     300.0 


$     269.3 

Non-real estate loans

161.8 

162.2 

Retail sales finance

25.8 

37.5 

Total

$     487.6 

$     469.0 


Amount change


$       18.6 


$    (118.4)

Percent change

4%

(20)%


Average net receivables


$13,953.3 


$18,132.4 

Yield

14.15%

10.47%



Finance charges increased (decreased) due to the following:


(dollars in millions)

Successor

Company

Predecessor

Company

Three Months Ended March 31,

2011

2010


Increase in yield


$ 122.6   


$   11.7   

Decrease in average net receivables

(104.0)  

(130.1)  

Total

$    18.6   

$(118.4)  



58



Average net receivables and changes in average net receivables by type were as follows:


(dollars in millions)

Successor

Company

Predecessor

Company

Three Months Ended March 31,

2011

2010

 

Amount

Change

Amount

Change


Real estate loans


$10,937.0


$(3,128.7)


$14,065.7


$(3,378.2)

Non-real estate loans

2,554.4

(506.0)

3,060.4

(770.4)

Retail sales finance

461.9

(544.4)

1,006.3

(1,025.3)

Total

$13,953.3

$(4,179.1)

$18,132.4

$(5,173.9)


Percent change

 


(23)%

 


(22)%



Average net receivables decreased for the three months ended March 31, 2011 when compared to the same period in 2010 primarily due to the impact of push-down accounting adjustments, which decreased average net receivables by $2.2 billion for the three months ended March 31, 2011. The decrease in average net finance receivables for the three months ended March 31, 2011 when compared to the same period in 2010 also reflected our tighter underwriting guidelines and liquidity management efforts, partially offset by the transfer of $484.9 million of real estate loans from finance receivables held for sale back to finance receivables held for investment in June 2010 due to management’s intent to hold these finance receivables for the foreseeable future.


Yield and changes in yield in basis points (bp) by type were as follows:


 

Successor

Company

Predecessor

Company

Three Months Ended March 31,

2011

2010

 

Yield

Change

Yield

Change


Real estate loans


11.12% 


336  bp


7.76% 


(13) bp

Non-real estate loans

25.57     

419      

21.38    

116      

Retail sales finance

22.57     

750      

15.07    

395      


Total


14.15     


368      


10.47    


27      



Yield increased for the three months ended March 31, 2011 when compared to the same period in 2010 primarily due to the impact of valuation discount accretion resulting from the push-down accounting adjustments, which increased yield by 377 basis points for the three months ended March 31, 2011. The increase in yield for the three months ended March 31, 2011 when compared to the same period in 2010 was partially offset by promotional product mix.



59



Insurance Revenues


Insurance revenues were as follows:


(dollars in millions)

Successor

Company

Predecessor

Company

Three Months Ended March 31,

2011

2010


Earned premiums


$28.5    


$31.4    

Commissions

-     

0.1    

Total

$28.5    

$31.5    


Amount change


$ (3.0)   


$ (3.6)   

Percent change

(10)%   

(10)%   



Earned premiums decreased for the three months ended March 31, 2011 when compared to the same period in 2010 primarily due to a decrease in credit earned premiums.



Finance Receivables Held for Sale Originated as Held for Investment Revenues


Finance receivables held for sale originated as held for investment revenues were as follows:


(dollars in millions)

Successor

Company

Predecessor

Company

Three Months Ended March 31,

2011

2010


Finance receivables held for sale originated as held for

investment revenues



$    -       



$10.9    

Amount change

$(10.9)   

$25.6    

Percent change

(100)%   

174%   



In June 2010, we transferred $484.9 million of real estate loans at the lower of cost or fair value from finance receivables held for sale back to finance receivables held for investment due to management’s intent to hold these finance receivables for the foreseeable future.



Investment Revenue


(dollars in millions)

Successor

Company

Predecessor

Company

Three Months Ended March 31,

2011

2010


Investment revenue


$7.8    


$  7.7    

Amount change

$0.1    

$(0.9)   

Percent change

2%   

(12)%   




60



Investment revenue was affected by the following:


(dollars in millions)

Successor

Company

Predecessor

Company

Three Months Ended March 31,

2011

2010


Average invested assets


$992.5   


$946.1   

Average invested asset yield

3.92%  

5.45%  

Net realized losses on investment securities

$  (2.2)  

$  (5.2)  



Average invested assets increased for the three months ended March 31, 2011 when compared to the same period in 2010 primarily due to the impact of push-down accounting adjustments, which increased average invested assets by $38.0 million for three months ended March 31, 2011. Average invested asset yield decreased for the three months ended March 31, 2011 when compared to the same period in 2010 primarily due to the impact of push-down accounting adjustments, which decreased average invested asset yield by 112 basis points for the three months ended March 31, 2011.



Other Revenues


Other revenues were as follows:


(dollars in millions)

Successor

Company

Predecessor

Company

Three Months Ended March 31,

2011

2010


Foreign exchange (losses) gains on foreign

currency denominated debt



$(39.1)   



$  42.3    

Derivative adjustments

37.8    

38.9    

Writedowns on real estate owned

(8.9)   

(7.7)   

Net loss on sales of real estate owned

(4.6)   

(3.5)   

Interest revenue – notes receivable from SLFI

4.3    

1.6    

Loan brokerage fees

1.2    

1.5    

Mortgage banking revenues

0.7    

2.2    

Net service fees

-      

0.4    

Other

1.5    

4.3    

Total

$  (7.1)   

$  80.0    


Amount change


$(87.1)   


$111.2    

Percent change

(109)%   

356%   



Other revenues for the three months ended March 31, 2011 reflected foreign exchange losses on foreign currency denominated debt and writedowns on real estate owned, partially offset by gains arising from derivative adjustments. Derivative adjustments for the three months ended March 31, 2011 included a mark to market gain of $19.5 million on our non-designated cross currency derivative and a net gain of $18.3 million reflecting derivative gains and net interest income, partially offset by a credit valuation adjustment loss on our non-designated cross currency derivative and ineffectiveness losses on our cash flow derivatives. Other revenues for the three months ended March 31, 2010 reflected foreign exchange gains on foreign currency denominated debt and gains arising from derivative adjustments. Derivative adjustments for the three months ended March 31, 2010 included an other comprehensive income release gain of $68.8 million on cash flow hedge maturities and a credit valuation adjustment gain of $9.1 million on our non-designated cross currency derivative. These gains were partially offset by a mark to market loss of $34.3 million on our non-designated cross currency derivative and ineffectiveness losses of $7.2 million on our cash flow derivatives. The credit valuation adjustment gains on our non-designated cross currency derivative for the three months ended March 31, 2011 and 2010 resulted from the measurement



61



of credit risk using credit default swap valuation modeling. If we do not exit these derivatives prior to maturity, the credit valuation adjustment will result in no impact to earnings over the life of the agreements. We currently do not anticipate exiting these derivatives for the foreseeable future.



Interest Expense


The impact of using the swap agreements that qualify for hedge accounting under GAAP is included in interest expense and the related borrowing statistics below. Interest expense by type was as follows:


(dollars in millions)

Successor

Company

Predecessor

Company

Three Months Ended March 31,

2011

2010


Long-term debt


$     350.6 


$     229.9 

Short-term debt

-    

27.1 

Total

$     350.6 

$     257.0 


Amount change


$       93.6 


$      (11.4)

Percent change

36%

(4)%


Average borrowings


$14,755.6 


$18,985.6 

Interest expense rate

9.51%

5.42%



Interest expense increased (decreased) due to the following:


(dollars in millions)

Successor

Company

Predecessor

Company

Three Months Ended March 31,

2011

2010


Increase in interest expense rate


$150.9   


$ 27.4   

Decrease in average borrowings

(57.3)  

(38.8)  

Total

$  93.6   

$(11.4)  



Average borrowings and changes in average borrowings by type were as follows:


(dollars in millions)

Successor

Company

Predecessor

Company

Three Months Ended March 31,

2011

2010

 

Amount

Change

Amount

Change


Long-term debt


$14,755.6


$(2,339.5)


$17,095.1


$(2,495.8)

Short-term debt

-     

(1,890.5)

1,890.5

(700.4)

Total

$14,755.6

$(4,230.0)

$18,985.6

$(3,196.2)


Percent change

 


(22)%

 


(14)%



Average borrowings decreased for the three months ended March 31, 2011 when compared to the same period in 2010 primarily due to liquidity management efforts. The decrease in average borrowings for the three months ended March 31, 2011 when compared to the same period in 2010 also reflected the impact of push-down accounting adjustments, which decreased average borrowings by $1.3 billion for the three months ended March 31, 2011, partially offset by issuances of $3.9 billion of long-term debt during the past twelve months, including a $3.0 billion secured term loan executed in April 2010. We used the



62



proceeds of these long-term debt issuances to support our liquidity position and to refinance maturing debt.


Principal maturities of long-term debt (excluding projected securitization repayments by period) at March 31, 2011 were as follows:


(dollars in millions)

Long-term

 

Debt


Remainder of 2011


$  2,400.1   

2012

2,083.6   

2013

1,927.8   

2014

369.8   

2015

3,798.9   

2016-2067

4,025.0   

Total excluding securitizations*

14,605.2   

Securitizations

1,188.1   

Total

$15,793.3   


*

Securitizations are not included in above maturities by period due to their variable monthly repayments.



Interest expense rate and changes in interest expense rate in basis points by type were as follows:


 

Successor

Company

Predecessor

Company

Three Months Ended March 31,

2011

2010

 

Rate

Change

Rate

Change


Long-term debt


9.51% 


413  bp


5.38% 


52  bp

Short-term debt

-       

N/M*    

5.75    

100      


Total


9.51     


409      


5.42    


57      


*

Not meaningful



Interest expense rate increased for the three months ended March 31, 2011 when compared to the same period in 2010 primarily due to the impact of valuation discount accretion resulting from the push-down accounting adjustments, which increased interest expense rate by 313 basis points for the three months ended March 31, 2011.


Our future overall interest expense rates could be materially higher, but actual future interest expense rates will depend on our funding sources utilized, general interest rate levels and market credit spreads, which are influenced by our asset credit quality, our credit ratings, and the market perception of credit risk for the Company.


The credit ratings of SLFI and SLFC are all non-investment grade and therefore have a significant impact on our cost of and access to borrowed funds. This, in turn, affects our liquidity management.



63



The following table presents the credit ratings of SLFC as of May 12, 2011. These credit ratings may be changed, suspended, or withdrawn at any time by the rating agencies as a result of changes in, or unavailability of, information or based on other circumstances. Ratings may also be withdrawn at our request. SLFC does not intend to disclose any future changes to, or suspensions or withdrawals of, these ratings except in its Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K.


 

Senior Long-term Debt

 

Rating

Status


Moody’s


B3


Developing Outlook

Standard & Poor’s (S&P)

B

Negative Outlook

Fitch

B-

Negative Watch



Operating Expenses


Operating expenses were as follows:


(dollars in millions)

Successor

Company

Predecessor

Company

Three Months Ended March 31,

2011

2010


Salaries and benefits


$  93.3 


$  99.4 

Other operating expenses

74.5 

81.1 

Total

$167.8 

$180.5 


Amount change


$ (12.7)


$   (5.7)

Percent change

(7)%

(3)%


Operating expenses as a percentage of average net receivables


4.81%


3.98%



Salaries and benefits decreased for the three months ended March 31, 2011 when compared to the same period in 2010 primarily due to fewer employees.


Other operating expenses decreased for the three months ended March 31, 2011 when compared to the same period in 2010 primarily due to lower administrative expenses allocated from our former indirect parent, lower state and local taxes, and lower advertising expenses, partially offset by the amortization of other intangible assets.


Operating expenses as a percentage of average net receivables increased for the three months ended March 31, 2011 when compared to the same period in 2010 primarily due to the impact of push-down accounting adjustments, which increased the operating expense ratio by 87 basis points for the three months ended March 31, 2011.



64



Provision for Finance Receivable Losses


(dollars in millions)

Successor

Company

Predecessor

Company

At or for the Three Months Ended March 31,

2011

2010


Provision for finance receivable losses


$     73.1  


$   184.6  

Amount change

$ (111.5) 

$ (166.3) 

Percent change

(60)% 

(47)% 


Net charge-offs


$     54.6  


$   184.6  

Charge-off ratio

1.56% 

4.06% 

Charge-off coverage

0.12x  

2.08x  


60 day+ delinquency


$1,076.0  


$1,250.0  

Delinquency ratio

6.61% 

6.86% 


Allowance for finance receivable losses


$     25.6  


$1,532.5  

Allowance ratio

0.19% 

8.59% 



Provision for finance receivable losses decreased for the three months ended March 31, 2011 when compared to the same period in 2010 primarily due to our lower net charge-offs and delinquency for the three months ended March 31, 2011. Provision for finance receivable losses for the three months ended March 31, 2011 also reflected the impact of credit impaired finance receivables resulting from the push-down accounting adjustments, which decreased net charge-offs by $48.0 million for the three months ended March 31, 2011.


Net charge-offs and changes in net charge-offs by type were as follows:


(dollars in millions)

Successor

Company

Predecessor

Company

Three Months Ended March 31,

2011

2010

 

Amount

Change

Amount

Change


Real estate loans


$36.9  


$  (69.1)  


$106.0  


$ 13.8   

Non-real estate loans

12.6  

(42.5)  

55.1  

(22.1)  

Retail sales finance

5.1  

(18.4)  

23.5  

0.1   

Total

$54.6  

$(130.0)  

$184.6  

$  (8.2)  



Charge-off ratios and changes in charge-off ratios in basis points by type were as follows:


 

Successor

Company

Predecessor

Company

Three Months Ended March 31,

2011

2010

 

Ratio

Change

Ratio

Change


Real estate loans


1.34% 


(167) bp


3.01% 


91  bp

Non-real estate loans

1.97     

(517)     

7.14     

(82)    

Retail sales finance

4.36     

(469)     

9.05     

453     


Total


1.56     


(250)     


4.06     


78     



65



Total charge-off ratio decreased for the three months ended March 31, 2011 when compared to the same period in 2010 reflecting our tighter underwriting guidelines. The decrease in our charge-off ratios for the three months ended March 31, 2011 when compared to the same period in 2010 also reflected the impact of push-down accounting adjustments, which decreased total charge-off ratio by 96 basis points for the three months ended March 31, 2011.


Charge-off coverage, which compares the allowance for finance receivable losses to net charge-offs (annualized), decreased for the three months ended March 31, 2011 when compared to the same period in 2010 primarily due to the impact of push-down accounting adjustments, which decreased charge-off coverage by 313 basis points for the three months ended March 31, 2011.


Delinquency and changes in delinquency by type were as follows:


(dollars in millions)

Successor

Company

Predecessor

Company

March 31,

2011

2010

 

Amount

Change

Amount

Change


Real estate loans


$   957.6  


$(86.7) 


$1,044.3  


$ 73.7  

Non-real estate loans

96.8  

(49.6) 

146.4  

(60.3) 

Retail sales finance

21.6  

(37.7) 

59.3  

(10.2) 

Total

$1,076.0  

$(174.0) 

$1,250.0  

$   3.2  



Delinquency ratios and changes in delinquency ratios in basis points by type were as follows:


 

Successor

Company

Predecessor

Company

March 31,

2011

2010

 

Ratio

Change

Ratio

Change


Real estate loans


7.41% 


(4) bp


7.45% 


167  bp

Non-real estate loans

3.41     

(116)     

4.57    

(59)     

Retail sales finance

4.23     

(179)     

6.02    

268      


Total


6.61     


(25)     


6.86    


141      



The total delinquency ratio at March 31, 2011 decreased when compared to March 31, 2010 primarily due to our tighter underwriting guidelines.


Our Credit Strategy and Policy Committee evaluates our finance receivable portfolio monthly to determine the appropriate level of the allowance for finance receivable losses. We believe the amount of the allowance for finance receivable losses is the most significant estimate we make. In our opinion, the allowance is adequate to absorb losses inherent in our existing portfolio. The decrease in the allowance for finance receivable losses at March 31, 2011 when compared to March 31, 2010 was primarily due to the impact of push-down accounting adjustments, which resulted in reducing the allowance for finance receivables losses to zero at November 30, 2010. We also decreased our allowance for finance receivable losses through the provision for finance receivable losses during the second, third and fourth quarters of 2010 in response to our lower delinquency and net charge-offs in 2010. The allowance for finance receivable losses at March 31, 2011 also included $12.4 million related to TDRs, compared to $362.2 million at March 31, 2010. See Note 3 of the Notes to Consolidated Financial Statements in Item 8 for further information on our TDRs.



66



The decrease in the allowance ratio at March 31, 2011 when compared to March 31, 2010 was primarily due to the impact of push-down accounting adjustments, which reduced the allowance ratio by 819 basis points at March 31, 2011.



Insurance Losses and Loss Adjustment Expenses


Insurance losses and loss adjustment expenses were as follows:


(dollars in millions)

Successor

Company

Predecessor

Company

Three Months Ended March 31,

2011

2010


Claims incurred


$15.1 


$18.0 

Change in benefit reserves

(2.5)

(2.4)

Total

$12.6 

$15.6 


Amount change


$ (3.0)


$ (1.2)

Percent change

(19)%

(7)%



Insurance losses and loss adjustment expenses decreased for the three months ended March 31, 2011 when compared to the same period in 2010 primarily due to lower credit accident and health and credit involuntary unemployment claims incurred.



Benefit from Income Taxes


(dollars in millions)

Successor

Company

Predecessor

Company

Three Months Ended March 31,

2011

2010


Benefit from income taxes


$(32.1) 


$(51.1) 

Amount change

$ 19.0  

$(54.5) 

Percent change

37% 

N/M*


Pretax loss


$(87.3) 


$(38.6) 

Effective income tax rate

36.81% 

132.22% 


*

Not meaningful



Pretax loss for the three months ended March 31, 2011 increased when compared to the same period in 2010 primarily due to higher interest expense and lower other revenues resulting from foreign exchange losses on foreign currency denominated debt, partially offset by lower provision for finance receivable losses and higher finance charges.


Benefit from income taxes decreased for the three months ended March 31, 2011 when compared to the same period in 2010 as a result of the FCFI Transaction and the resulting changes in the book and tax basis of our assets and liabilities.


At March 31, 2011, we recorded a valuation allowance of $1.7 million for our foreign United Kingdom operations to reduce net deferred tax assets to amounts we considered more likely than not (a likelihood of more than 50 percent) to be realized. No valuation allowance was required on our remaining gross deferred tax assets. At March 31, 2011, we had a net deferred tax liability of $457.4 million.



67



Before the FCFI Transaction, the Company was in a net deferred tax asset position and, excluding the foreign operations, the assets were subject to a full valuation allowance.


Benefit from income taxes for the three months ended March 31, 2010 reflected AIG’s projection that it would have sufficient taxable income in 2010 to utilize our 2010 estimated tax losses. As a result, we had classified $52.9 million of our 2010 losses as a current tax receivable. In connection with the closing of the FCFI Transaction, AIG and SLFI amended their tax sharing agreement, which terminated on the closing, (1) to provide that the parties’ payment obligations under the tax sharing agreement were limited to the payments required to be made by AIG to SLFI with respect to the 2009 taxable year, and (2) to include the terms of the promissory note to be issued by AIG in satisfaction of its 2009 taxable year payment obligation to SLFI. Due to the amendment of the tax sharing agreement, SLFI did not receive the payment for the tax period ending November 30, 2010. As a result, we recorded a dividend to SLFI for the amount of the income tax receivable at the closing of the FCFI Transaction.


The lower effective income tax rate for the three months ended March 31, 2011 when compared to the same period in 2010 reflected the impact of the prior year valuation allowance.



68



Item 3.  Quantitative and Qualitative Disclosures About Market Risk.



There have been no significant changes to our market risk since December 31, 2010.




Item 4.  Controls and Procedures.



(a)

Evaluation of Disclosure Controls and Procedures


The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company is recorded, processed, summarized and reported within the time period specified by the SEC’s rules and forms. The Company’s disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed is accumulated and communicated to the Company’s management, including its Chief Executive Officer and its Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.


The Company’s management, including its Chief Executive Officer and its Chief Financial Officer, evaluates the effectiveness of our disclosure controls and procedures as of the end of each quarter and year using the framework and criteria established in “Internal Control – Integrated Framework”, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on an evaluation of the disclosure controls and procedures as of March 31, 2011, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures were effective and that the condensed consolidated financial statements fairly present our consolidated financial position and the results of our operations for the periods presented.


(b)

Changes in Internal Control over Financial Reporting


There have been no changes in the Company’s internal control over financial reporting during the three months ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.




PART II – OTHER INFORMATION



Item 1.  Legal Proceedings.



See Note 19 of the Notes to Condensed Consolidated Financial Statements in Part I of this Quarterly Report on Form 10-Q.



69



Item 1A. Risk Factors



In addition to the risk factors included in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, we are updating the following risk factors:


The assessment of our liquidity is based upon significant judgments or estimates that could prove to be materially incorrect.


In assessing our current financial position and developing operating plans for the future, management has made significant judgments and estimates with respect to the potential financial and liquidity effects of our risks and uncertainties, including but not limited to:


·

the amount of cash expected to be received from our finance receivable portfolio through collections (including prepayments) and receipt of finance charges, which could be materially different than our estimates;

·

the potential for declining financial flexibility and reduced income should we use more of our assets for securitizations and portfolio sales;

·

reduced income due to the possible deterioration of the credit quality of our finance receivable portfolios;

·

our ability to complete on favorable terms, as needed, additional borrowings, securitizations, portfolio sales, or other transactions to support liquidity, and the costs associated with these funding sources, including sales at less than carrying value and limits on the types of assets that can be securitized or sold, which would affect profitability;

·

risks that would be assumed for a recently established REIT subsidiary which we expect to manage and which we expect to own a significant portion of our finance receivable portfolio;

·

our ability to comply with our debt covenants;

·

our access to debt markets and other sources of funding on favorable terms;

·

potential costs for our United Kingdom subsidiaries resulting from the retroactive imposition of guidelines issued in August 2010 by the United Kingdom Financial Services Authority for sales of payment protection insurance that occurred after January 1, 2005, including possible refunds to customers;

·

the potential for increased costs related to our foreclosure practices and procedures as a result of heightened nationwide regulatory scrutiny of foreclosure practices in the industry generally;

·

potential liability relating to real estate loans which we have sold or securitized if it is determined that there was a breach of a warranty made in connection with the transaction;

·

the potential for additional unforeseen cash demands or accelerations of obligations;

·

reduced income due to loan modifications where the borrower’s interest rate is reduced, principal payments are deferred, or other concessions are made;

·

the potential for declines in bond and equity markets;

·

the potential effect on us if the capital levels of our regulated and unregulated subsidiaries prove inadequate to support current business plans;

·

the potential loss of key personnel; and

·

the undetermined effects of the FCFI Transaction, including the availability of support from our new owner and the effect of any changes to our operations, capitalization, and business strategies.


We have assumed that there will be no support required from FCFI and no material change in our recent liquidity sources and capitalization management beyond the refinancing of the secured term loan facility discussed in Note 20 of the Notes to Condensed Consolidated Financial Statements. We intend to support our liquidity position by managing originations and purchases of finance receivables and maintaining disciplined underwriting standards and pricing on such loans. We intend to support operations and repay obligations with one or more of the following: finance receivable collections from operations, securitizations, additional term loans, potential unsecured debt offerings, potential REIT stock offering proceeds, and portfolio sales.



70



Based on our estimates and taking into account the risks and uncertainties of such 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.


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 about the potential effects of these risks and uncertainties could prove to be materially incorrect.




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



None.




Item 3.  Defaults Upon Senior Securities.



None.




Item 5.  Other Information.



None.




Item 6.  Exhibits.



Exhibits are listed in the Exhibit Index beginning on page 73 herein.



71



Signature



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



 

SPRINGLEAF FINANCE CORPORATION

 

 

 

(Registrant)

 



Date:



May 16, 2011

 



By



/s/



Donald R. Breivogel, Jr.

 

 

 

 

Donald R. Breivogel, Jr.

 

 

 

Senior Vice President and Chief Financial Officer

(Duly Authorized Officer and Principal

Financial Officer)

 



72



Exhibit Index


Exhibit


3.1

Amended and Restated Articles of Incorporation of Springleaf Finance Corporation (formerly American General Finance Corporation), as amended to date. Incorporated by reference to Exhibit (3a.) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.


3.2

Amended and Restated By-laws of Springleaf Finance Corporation, as amended to date. Incorporated by reference to Exhibit (3b.) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.


10.1*

Springleaf Finance, Inc. Excess Retirement Income Plan dated as of January 1, 2011. Incorporated by reference to Exhibit (10.1) to the Company’s Current Report on Form 8-K dated December 23, 2010.


10.2*

Springleaf Finance, Inc. Executive Severance Plan dated as of November 30, 2010. Incorporated by reference to Exhibit (10.15) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.


10.3

Subservicing Agreement, dated as of February 1, 2011, among MorEquity, Inc., Springleaf Financial Services of Arkansas, Inc. (formerly American General Financial Services of Arkansas, Inc.), and Springleaf Home Equity, Inc. (formerly American General Home Equity, Inc.), as owners and as servicers, and Nationstar Mortgage LLC, as subservicer (portions of this Exhibit have been omitted pursuant to a request for confidential treatment under Rule 24b-2 under the Securities Exchange Act of 1934). Incorporated by reference to Exhibit (10.1) to the Company’s Current Report on Form 8-K dated January 31, 2011.


10.4

Subservicing Agreement (American General Mortgage Loan Trust 2006-1), dated as of February 1, 2011, between MorEquity, Inc., as servicer, and Nationstar Mortgage LLC, as subservicer (portions of this Exhibit have been omitted pursuant to a request for confidential treatment under Rule 24b-2 under the Securities Exchange Act of 1934). Incorporated by reference to Exhibit (10.2) to the Company’s Current Report on Form 8-K dated January 31, 2011.


10.5

Subservicing Agreement (American General Mortgage Loan Trust 2010-1), dated as of February 1, 2011, between MorEquity, Inc., as servicer, and Nationstar Mortgage LLC, as subservicer (portions of this Exhibit have been omitted pursuant to a request for confidential treatment under Rule 24b-2 under the Securities Exchange Act of 1934). Incorporated by reference to Exhibit (10.3) to the Company’s Current Report on Form 8-K dated January 31, 2011.


10.6

Amended and Restated Credit Agreement, dated as of May 10, 2011, among Springleaf Financial Funding Company; Springleaf Finance Corporation; Bank of America, N.A.; and Other Lenders Party Thereto. Incorporated by reference to Exhibit (10.1) to the Company’s Current Report on Form 8-K dated May 6, 2011.


12

Computation of Ratio of Earnings to Fixed Charges


31.1

Rule 13a-14(a)/15d-14(a) Certifications of the President and Chief Executive Officer of Springleaf Finance Corporation


31.2

Rule 13a-14(a)/15d-14(a) Certifications of the Senior Vice President and Chief Financial Officer of Springleaf Finance Corporation


32

Section 1350 Certifications


*

Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Quarterly Report on Form 10-Q pursuant to Item 15(b).

 



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