S-1/A 1 d578314ds1a.htm AMENDMENT NO. 3 TO FORM S-1 Amendment No. 3 to Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on October 7, 2013.

Registration No. 333-190653

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

Amendment No. 3

to

FORM S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

 

SPRINGLEAF HOLDINGS, LLC

(Exact name of registrant as specified in its charter)

 

Delaware   6141   27-3379612

(State or Other Jurisdiction of

Incorporation or Organization)

  (Primary Standard Industrial Classification Code Number)  

(I.R.S. Employer

Identification No.)

601 N.W. Second Street

Evansville, IN 47708

(812) 424-8031

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

Scott D. McKinlay, Esq.

Springleaf Holdings, LLC

601 N.W. Second Street

Evansville, IN 47708

(812) 424-8031

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)

 

 

Copies to:

 

Gregory A. Fernicola, Esq.

Joseph A. Coco, Esq.

Skadden, Arps, Slate, Meagher & Flom LLP

Four Times Square

New York, New York 10036-6522

(212) 735-3000

 

Richard D. Truesdell, Jr. Esq.

Davis Polk & Wardwell LLP

450 Lexington Avenue

New York, New York 10017

(212) 450-4000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.    þ

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:    ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

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)    

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Amount to be

Registered(1)

 

Proposed

Maximum

Offering Price

Per Share(2)

 

Proposed

Maximum

Aggregate

Offering Price(2)

 

Amount of

Registration

Fee(3)

Common Stock, $0.01 par value

 

23,000,000

  $17.00   $391,000,000   $50,360.80

 

 

(1) Includes 3,000,000 shares which may be sold pursuant to the underwriters’ over-allotment option.

 

(2) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(a) under the Securities Act.

 

(3) A registration fee in the amount of $58,050 was previously paid by Springleaf REIT Inc., the registrant’s indirect wholly owned subsidiary, in connection with the filing of a Registration Statement on Form S-11 (Registration No. 333-174208) on May 13, 2011. Pursuant to Rule 457(p) under the Securities Act, the filing fee of $58,050 previously paid by Springleaf REIT Inc. is being used to offset the filing fee of $50,360.80 required for the filing of this Registration Statement.

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. We and the selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED OCTOBER 7, 2013

PRELIMINARY PROSPECTUS

20,000,000 Shares

 

LOGO

Springleaf Holdings, Inc.

(currently named Springleaf Holdings, LLC)

Common Stock

$     Per Share

 

 

This is an initial public offering of common stock of Springleaf Holdings, Inc. (“Springleaf” or “SHI”). We are selling 11,916,667 shares of our common stock. The selling stockholders identified in this prospectus are selling 8,083,333 shares of Springleaf common stock. We will not receive any proceeds from the sale of shares of common stock by the selling stockholders. After this offering, Springleaf Financial Holdings, LLC, an entity owned primarily by a private equity fund managed by an affiliate of Fortress Investment Group LLC (“Fortress”), will own approximately 77.8% of our common stock, or 75.8% if the underwriters’ over-allotment option is fully exercised.

We expect the public offering price to be between $15 and $17 per share. Currently, no public market exists for the shares. Our shares of common stock have been approved for listing on the New York Stock Exchange (“NYSE”) under the symbol “LEAF”.

Investing in our common stock involves risks. See “Risk Factors” beginning on page 15 to read about certain factors you should consider before buying our common stock.

 

    

Per Share

      

Total

 

Public Offering Price

     $                       $               

Underwriting Discount(1)

     $                       $               

Proceeds Before Expenses to Us

     $                       $               

Proceeds Before Expenses to the Selling Stockholders

     $                       $               

 

(1) The underwriters will receive compensation in addition to the underwriting discount. See “Underwriting.”

We have granted the underwriters the right to purchase up to 3,000,000 additional shares of common stock, at the public offering price, less the underwriting discount, for the purpose of covering over-allotments.

Neither the Securities and Exchange Commission (the “SEC”) nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of common stock against payment on or about             , 2013.

 

 

 

BofA Merrill Lynch   Citigroup   Credit Suisse   Allen & Company LLC   Barclays

Keefe, Bruyette & Woods

                          A Stifel  Company

  Stephens Inc.   JMP Securities   Sterne Agee

The date of this prospectus is             , 2013.


Table of Contents

TABLE OF CONTENTS

 

Prospectus Summary

     1   

Risk Factors

     15   

Forward-Looking Statements

     38   

Use of Proceeds

     40   

Capitalization

     41   

Dilution

     42   

Dividend Policy

     44   

Selected Historical Consolidated Financial Data

     45   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     49   

Quantitative and Qualitative Disclosures About Market Risk

     88   

Business

     89   

Management

     102   

Principal and Selling Stockholders

     128   

Certain Relationships and Related Party Transactions

     129   

Description of Indebtedness

     134   

Description of Capital Stock

     139   

Shares Eligible for Future Sale

     145   

United States Federal Income Tax Considerations for Non-U.S. Holders of Common Stock

     147   

Underwriting

     149   

Legal Matters

     157   

Experts

     157   

Market and Industry Data and Forecasts

     157   

Where You Can Find More Information

     157   

Disclosure of Commission Position on Indemnification for Securities Act Liabilities

     158   

Index to Consolidated Financial Statements

     F-1   

You should rely only on the information contained in this prospectus and any free writing prospectus prepared by us or on our behalf that we have referred you to. We, the selling stockholders and the underwriters have not authorized anyone to provide you with additional or different information. If anyone provides you with additional, different or inconsistent information, you should not rely on it. We are not making an offer of these securities in any state, country or other jurisdiction where the offer is not permitted. You should not assume that the information in this prospectus or any free writing prospectus is accurate as of any date other than the date of the applicable document regardless of its time of delivery or the time of any sales of our common stock. Our business, financial condition, results of operations or cash flows may have changed since the date of the applicable document.

Certain of the states in which we are licensed to originate loans and the state in which our insurance subsidiaries are domiciled (Indiana) have laws or regulations which require regulatory approval for the acquisition of “control” of regulated entities. Under some state laws or regulations, there exists a presumption of “control” when an acquiring party acquires as little as 10% of the voting securities of a regulated entity or of a company which itself controls (directly or indirectly) a regulated entity (the threshold is 10% under Indiana’s insurance statutes). Therefore, any person acquiring 10% or more of our common stock may need the prior approval of some state insurance and/or licensing regulators, or a determination from such regulators that “control” has not been acquired.

 

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NON-GAAP FINANCIAL MEASURES

As of June 30, 2013, our segments include: Consumer, Insurance, Portfolio Acquisitions, and Real Estate. Management considers Consumer, Insurance, and Portfolio Acquisitions to be our Core Consumer Operations and Real Estate as our Non-Core Portfolio.

We present pretax core earnings (loss), as described under “Prospectus Summary—Summary Historical Consolidated Financial Data,” as a non-GAAP financial measure in this prospectus. Pretax core earnings (loss) is a key performance measure used by management in evaluating the performance of our Core Consumer Operations. Pretax core earnings (loss) represents our income (loss) before provision for (benefit from) income taxes on a historical accounting basis, and excludes results of operations from our Real Estate segment and other non-core, non-originating legacy operations, restructuring expenses related to our Consumer and Insurance segments, gains (losses) associated with accelerated long-term debt repayment and repurchases of long-term debt, and impact from change in accounting estimate and results of operations attributable to non-controlling interests. Pretax core earnings (loss) is a non-GAAP measure and should be considered in addition to, but not as a substitute for or superior to, operating income, net income, operating cash flow and other measures of financial performance prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). Under “Prospectus Summary—Summary Historical Consolidated Financial Data” herein, we include a quantitative reconciliation from income (loss) before provision for (benefit from) income taxes on a historical accounting basis to pretax core earnings (loss).

We also present our segment financial information on a historical accounting basis (a non-GAAP measure using the same accounting basis that we employed prior to the Fortress Acquisition (described in this prospectus)). This presentation provides us and other interested third parties a consistent basis to better understand our operating results. This presentation is not in accordance with, or a substitute for, GAAP and may be different from, or inconsistent with, non-GAAP financial measures used by other companies. See Note 24 of the Notes to Consolidated Financial Statements for the year ended December 31, 2012 and Note 17 of the Notes to Unaudited Condensed Consolidated Financial Statements for the six months ended June 30, 2013 in each case, included elsewhere in this prospectus, for reconciliations of segment information on a historical accounting basis to consolidated financial statement amounts.

We present income (loss) before provision for (benefit from) income taxes—historical basis of accounting, as described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as a non-GAAP financial measure in this prospectus. Income (loss) before provision for (benefit from) income taxes—historical basis of accounting is a non-GAAP measure and should be considered in addition to, but not as a substitute for or superior to, operating income, net income, operating cash flow and other measures of financial performance prepared in accordance with GAAP. Under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein, we include a quantitative reconciliation from our income (loss) before provision for (benefit from) income taxes on a push-down accounting basis to income (loss) before provision for (benefit from) income taxes—historical accounting basis.

 

ii


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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. It may not contain all the information that may be important to you. You should read this entire prospectus carefully, including the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes included elsewhere in this prospectus, before making a decision to purchase our common stock. Some information in this prospectus contains forward-looking statements. See “Forward-Looking Statements.”

Springleaf Holdings, Inc. (“SHI”) is a newly-formed Delaware corporation. Unless the context suggests otherwise, references in this prospectus to “Springleaf,” the “Company,” “we,” “us,” and “our” refer to Springleaf Holdings, Inc. and its consolidated subsidiaries after the consummation of the Restructuring (as defined below). References in this prospectus to “Fortress” refer to Fortress Investment Group LLC. All amounts in this prospectus are expressed in U.S. dollars, except where noted, and the financial statements have been prepared in accordance with GAAP.

Business Overview

Springleaf is a leading consumer finance company providing responsible loan products to customers through our nationwide branch network and through iLoan, our internet lending division. We have a nearly 100-year track record of high quality origination, underwriting and servicing of personal loans, primarily to non-prime consumers. Our deep understanding of local markets and customers, together with our proprietary underwriting process and data analytics, allow us to price, manage and monitor risk effectively through changing economic conditions. With an experienced management team, a strong balance sheet, proven access to the capital markets and strong demand for consumer credit, we believe we are well positioned for future growth.

We staff each of our 834 branch offices with local, well-trained personnel who have significant experience in the industry and with Springleaf. Our business model revolves around an effective origination, underwriting and servicing process that leverages each branch office’s local presence in these communities along with the personal relationships developed with our customers. Credit quality is also driven by our long-standing underwriting philosophy, which takes into account each prospective customer’s household budget, and his or her willingness and capacity to repay the loan. Our extensive network of branches and expert personnel is complemented by our internet lending division, known as iLoan. Formed at the beginning of this year, our iLoan division allows us to reach customers located outside our branch footprint and to more effectively process applications from customers within our branch footprint who prefer the convenience of online transactions.

In connection with our personal loan business, our two captive insurance subsidiaries offer our customers credit and non-credit insurance policies covering our customers and the property pledged as collateral for our personal loans.

In addition, we pursue strategic acquisitions of loan portfolios through our Springleaf Acquisitions division, which we service through our centralized servicing operation. As part of this strategy, we recently acquired, through a joint venture in which we own a 47% equity interest, a $3.9 billion consumer loan portfolio from HSBC Finance Corporation and certain of its affiliates (collectively, “HSBC”), which we refer to as the “SpringCastle Portfolio.” Through the acquisition of the SpringCastle Portfolio and other similar acquisitions, we expect to achieve a meaningful return on our investment as well as receive a stable servicing fee income stream. We also intend to pursue fee-based opportunities in servicing loans for others through our centralized servicing operation.

 

 

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Industry and Market Overview

We operate in the consumer finance industry serving the large and growing population of consumers who have limited access to credit from banks, credit card companies and other lenders. According to Experian plc, as of June 30, 2013, the U.S. consumer finance industry has grown to approximately $2.9 trillion of outstanding borrowings in the form of personal loans, vehicle loans and leases, credit cards, home equity lines of credit and student loans. According to the Federal Deposit Insurance Corporation, there were approximately 51 million adults living in under-banked households in the United States in 2011. Furthermore, difficult economic conditions in recent years have resulted in an increase in the number of non-prime consumers in the United States.

This industry’s traditional lenders have recently undergone fundamental changes, forcing many to retrench and in some cases to exit the market altogether. Tightened credit requirements imposed by banks, credit card companies, and other traditional lenders that began during the recession of 2008-2009 have further reduced the supply of consumer credit for non-prime borrowers. In addition, we believe that recent regulatory developments create a dis-incentive for these lenders to resume or support these lending activities. As a result, while the number of non-prime consumers in the United States has grown in recent years, the supply of consumer credit to this demographic has contracted. We believe this large and growing number of potential customers in our target market, combined with the decline in available consumer credit, provides an attractive market opportunity for our business model.

Installment lending to non-prime consumers is one of the most highly fragmented sectors of the consumer finance industry. We believe that installment loans made by competitors that we track are presently provided through approximately 5,000 individually-licensed finance company branches in the United States. We are one of the few remaining national participants in the consumer installment lending industry still servicing this large and growing population of non-prime customers. Our iLoan division, combined with the capabilities resident in our national branch system, provides an effective nationwide platform to efficiently and responsibly address this growing market of consumers. We believe we are, therefore, well-positioned to capitalize on the significant growth and expansion opportunity created by the large supply-demand imbalance within our industry.

Competitive Strengths

Extensive Branch Network.    We believe that our branch network is a major competitive advantage and distinguishes us from our competitors. We operate one of the largest consumer finance branch networks in the United States, serving our customers through 834 branches in 26 states. Our branch network is the foundation of our relationship-driven business model and is the product of decades of thoughtful market identification and profitability analysis. It provides us with a proven distribution channel for our personal loan and insurance products, allowing us to provide same-day fulfillment to approved customers and giving us a distinct competitive advantage over many industry participants who do not have—and cannot replicate without significant investment—a similar nationwide footprint.

High Quality Underwriting Supported by Proprietary Analytics.    Our branch managers have on average 12 years of experience with us and, together with their branch staff, have substantial local market knowledge and experience to complement their long-term relationships with millions of our current and former customers. We believe the loyalty and tenure of our employees have allowed us to build a consistent and deeply-engrained underwriting culture that produces consistently well-underwritten loans. In addition, we support and leverage the knowledge that our employees have accumulated about our customers through our proprietary technology, data analytics and decisioning tools, which enhance the quality of our lending and servicing processes. Since the decentralized branch network introduces the potential for greater variation in the application of the Company’s underwriting guidelines, we place district and regional managers in the field to review branch loan underwriting decisions to minimize variations among branches and reduce the potential for heightened delinquencies and charge-offs.

 

 

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High-Touch Relationship-Based Servicing.    Our extensive branch network enables high-touch, relationship-based loan servicing, which we believe is a major component of superior loan performance. Our branch office employees typically live and work in the communities they serve and are often on a first-name basis with our customers. We believe that this high-touch, relationship-based servicing model distinguishes us from our competitors and allows us to react more quickly and efficiently in the event a borrower shows signs of financial or other distress.

Industry-Leading Loan Performance.    We believe that we have historically experienced lower default and delinquency rates than the non-prime consumer finance industry as a whole. This superior level of loan performance has been achieved through the consistent application of time-tested underwriting standards, leveraging the relationships between our branch employees and our customers, and fostering a business owner mindset among our branch managers. In addition, we utilize highly effective, internally developed proprietary risk scoring models and monitoring systems. These models and systems have been developed using performance and customer data from our long history of lending to millions of consumers.

Proven Access to Diversified Funding Sources.    We have the proven ability to finance our businesses from a diversified source of capital and funding, including cash flow from operations and financings in the capital markets in the form of personal loan and mortgage loan securitizations. Earlier this year we demonstrated the ability to attract capital markets funding for our personal loan business by completing two securitizations, a first for our industry in 15 years. We expect to continue to expand this securitization program that locks in our funding for loan originations for multiple years. Over the last several years, we have also demonstrated the ability to replace maturing unsecured debt with lower-cost, non-recourse securitization debt backed by our legacy real estate loan portfolio. We further expanded our available financing alternatives in May 2013 by re-entering the unsecured debt market, our first unsecured note issuance in six years. In addition, we have significant unencumbered assets to support future corporate lines of credit giving us added financial flexibility. Finally, we have one of the largest equity capital bases of any U.S. consumer finance company not affiliated with a bank or an auto or equipment manufacturer, which positions us well to continue the growth in our business and to make appropriate investments in technology, compliance and data analytics.

Experienced Management Team.    Our management team consists of highly talented individuals with significant experience in the consumer finance industry. Their industry experience and complementary backgrounds have enabled us to grow revenue from our Core Consumer Operations (defined in “—Summary Historical Consolidated Financial Data”) by 63% during the first half of 2013 compared to the same period in 2012. Our Chief Executive Officer, Jay Levine, has 29 years of experience in the finance industry, and our senior management team has on average over 25 years of experience across the financial services and consumer finance industries.

Our Strategy

The retreat of banks and other consumer finance companies from the non-prime consumer lending industry positions us as one of the few remaining large independent consumer finance companies able to capitalize on those opportunities. We intend to grow our consumer loan portfolio, expand our products and channels and develop additional portfolio acquisition and servicing fee opportunities. Our growth strategy centers around three broad initiatives:

Drive Revenue Growth through our Extensive Branch Network.    We intend to continue increasing same-store revenues by capitalizing on opportunities to offer our existing customers new products as their credit needs evolve and by refining our existing marketing programs and actively developing new marketing channels, particularly online search and social media. We will continue to expand “turn-down” programs with higher credit-tier lenders to refer to us certain applicants who do not meet the requirements of their underwriting programs, and we will continue growing our successful merchant referral program under which we provide an incentive to retailers for referring customers to us for loans to purchase goods or services.

 

 

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Drive Revenue Increases through New Channels and Acquisitions.    Through the introduction of new channels and portfolio acquisitions, we seek to grow our loan originations and revenue.

 

   

Internet Lending.    In 2013, we expanded our business model and began originating personal loans on a centralized basis through iLoan, our internet lending division, which allows us to reach customers outside of our current geographic footprint. In addition to reaching new customers, the internet channel allows us to more effectively serve customers who are accustomed to the convenience of online transactions. Once fully developed, we expect iLoan to be able to provide internet lending access on a 24/7 basis in 46 states.

 

   

Portfolio Acquisitions.    To build our consumer loan portfolio beyond our branch and internet businesses, we formed Springleaf Acquisitions, a separate division focused on the strategic acquisition of consumer loan portfolios that meet our investment return thresholds. We have a broad range of relationships with institutional sellers, Wall Street intermediaries and financial sponsors, including Fortress, through which we receive numerous requests to review potential acquisition opportunities. We expect to make additional acquisitions similar to our recent acquisition of the $3.9 billion SpringCastle Portfolio.

Pursue Fee Income Opportunities.    Our centralized servicing operation, known as Springleaf Servicing Solutions, gives us a dynamic platform covering all 50 states with which to pursue additional fee opportunities servicing the loans of others. We believe we are among a few platforms with nation-wide coverage offering third-party fee-based servicing for consumer loans. With the increasing cost of regulatory compliance in the consumer finance sector, we expect smaller third-party servicers will be challenged to make the necessary investments in technology and compliance. Finally, by combining the capital commitment capability of Springleaf Acquisitions with the servicing capability of Springleaf Servicing Solutions, we are able to offer third parties a greater alignment of interests. We expect, therefore, to be able to leverage our recent SpringCastle Portfolio acquisition into additional servicing fee opportunities.

Our History and Corporate Information

In November 2010, an affiliate of Fortress indirectly acquired an 80% economic interest in Springleaf Finance, Inc. (“SFI”) a financial services holding company which will become our wholly owned subsidiary upon consummation of the Restructuring (as defined below), from an affiliate of American International Group, Inc. (“AIG”). This transaction is referred to in this prospectus as the Fortress Acquisition. AIG indirectly retained a 20% economic interest in SFI. All of the common stock of Springleaf Finance Corporation (“SFC”) is owned by SFI.

SFC was incorporated in Indiana in 1927 as successor to a business started in 1920. SFI was incorporated in Indiana in 1974. SHI (currently named Springleaf Holdings, LLC) was recently organized in Delaware for the purpose of effecting this offering. Springleaf Financial Holdings, LLC (the “Initial Stockholder”) is owned primarily by a private equity fund managed by an affiliate of Fortress, a leading global investment manager that offers alternative and traditional investment products, and AIG Capital Corporation, a subsidiary of AIG. Prior to the completion of this offering, through a series of restructuring transactions, the Initial Stockholder and certain of our executive officers will own 100% of the equity interests in SHI, the issuer of the common stock offered hereby, and we will own 100% of the equity interests of SFI (the “Restructuring”).

As part of a strategic effort to reposition the company and to renew focus on the personal loan business, we initiated a number of restructuring activities during the first half of 2012, including the following: (1) ceased originating real estate loans nationwide and in the United Kingdom; (2) ceased retail sales financing; (3) consolidated certain branch operations resulting in closure of 231 branch offices. As a result of these initiatives, we reduced our workforce in our branch operations and at our Evansville, Indiana headquarters, and operations in the United Kingdom by 820 employees.

 

 

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Our executive offices are located at 601 N.W. Second Street, Evansville, Indiana 47708, and our telephone number is (812) 424-8031. Our website address is www.SpringleafFinancial.com. The information on our website is not a part of this prospectus.

Our Principal Stockholders

Immediately following the completion of this offering, the Initial Stockholder will own approximately 77.8% of our outstanding common stock, or 75.8 % if the underwriters’ over-allotment option is fully exercised. This level of share ownership is sufficient to control the vote on matters and transactions requiring stockholder approval. See “Risk Factors—Risks Related to Our Organization and Structure” and “Principal and Selling Stockholders.”

Ownership Structure

Set forth below is the ownership structure of Springleaf Holdings, Inc. and its subsidiaries upon consummation of the Restructuring and this offering.

 

LOGO

 

 

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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA

The summary consolidated statement of operations data for the eleven months ended November 30, 2010, for the one month ended December 31, 2010 and for the years ended December 31, 2011 and 2012 and the summary consolidated balance sheet data as of December 31, 2011 and 2012 have been derived from our audited financial statements included elsewhere in this prospectus. The consolidated balance sheet data as of December 31, 2010 has been derived from our audited financial statements not included in this prospectus. The summary consolidated statement of operations data for the six months ended June 30, 2012 and 2013 and the summary consolidated balance sheet data as of June 30, 2013 have been derived from our unaudited financial statements included elsewhere in this prospectus.

The unaudited financial statements have been prepared on the same basis as the audited financial statements and, in the opinion of our management, include all adjustments necessary for a fair presentation of the information set forth herein. Operating results for the six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013 or for any future period. Results for the six months ended June 30, 2013 include the SpringCastle Portfolio, which we acquired on April 1, 2013 through a newly-formed joint venture in which we own a 47% equity interest and consolidate in our financial statements. The summary financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited and unaudited consolidated financial statements and related notes included elsewhere in this prospectus.

As a result of the Fortress Acquisition, 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 prospectus through the inclusion of a vertical black line between the Successor Company and the Predecessor Company columns. Due to the nature of the Fortress Acquisition, we revalued our assets and liabilities based on their fair values at the date of the Fortress Acquisition in accordance with business combination accounting standards (“push-down accounting”), which resulted in a $1.5 billion bargain purchase gain for the one month ended December 31, 2010. Push-down accounting also affected and continues to affect, among other things, the carrying amount of our finance receivables and long-term debt, our finance charges on our finance receivables and related yields, our interest expense, our allowance for finance receivable losses, and our net charge-off and charge-off ratio. In general, on a quarterly basis, we accrete or amortize the valuation adjustment recorded in connection with the Fortress Acquisition, or record adjustments based on current expected cash flows as compared to expected cash flows at the time of the Fortress Acquisition, in each case, as described in more detail in the footnotes to the tables below and in the Notes to Consolidated Financial Statements for the year ended December 31, 2012 included elsewhere in this prospectus.

The financial information for 2010 includes the financial information of the Successor Company for the one month ended December 31, 2010 and of the Predecessor Company for the eleven months ended November 30, 2010. These separate periods are presented to reflect the new accounting basis established for our Company as of November 30, 2010.

As a result of the application of push-down accounting, the assets and liabilities of the Successor Company are not comparable to those of the Predecessor Company, and the income statement items for the one month ended December 31, 2010 and the years ended December 31, 2011 and 2012 would not have been the same as those reported if push-down accounting had not been applied. In addition, key ratios of the Successor Company are not comparable to those of the Predecessor Company, and are not comparable to other institutions due to the new accounting basis established.

 

 

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    Successor Company     Predecessor
Company
 
    Six Months
Ended
June 30,
    Year Ended
December 31,
    One Month
Ended

December 31,
2010
    Eleven Months
Ended
November 30,
2010
 
    2013     2012     2012     2011      
    (in thousands, except share data)  

Statement of Operations Data:

             

Interest income

    $993,634        $864,313        $1,706,292        $1,885,547        $181,329        $1,688,720   

Interest expense

    468,926        560,273        1,068,391        1,268,047        118,693        996,469   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

    524,708        304,040        637,901        617,500        62,636        692,251   

Provision for finance receivable losses

    182,938        136,939        338,219        332,848        38,767        444,349   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for finance receivable losses

    341,770        167,101        299,682        284,652        23,869        247,902   

Other revenues

    95,126        47,892        94,203        138,159        31,812        224,422   

Other expenses

    310,369        356,480        700,741        746,016        61,976        737,052   

Bargain purchase gain

                                1,469,182          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before provision for (benefit from) income taxes

    126,527        (141,487     (306,856     (323,205     1,462,887        (264,728

Provision for (benefit from) income taxes

    27,708        (48,481     (88,222     (99,049     (1,388     (250,697
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    98,819        (93,006     (218,634     (224,156     1,464,275        (14,031
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less: Net income attributable to non-controlling interests

    53,948                                      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Springleaf

    $44,871        $(93,006     $(218,634     $(224,156     $1,464,275        $(14,031
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Share Data:

             

Number of shares of SHI outstanding

             

Basic and diluted

    100,000,000        100,000,000        100,000,000        100,000,000        100,000,000        100,000,000   

Earnings (loss) per share of SHI

             

Basic and diluted

    $0.45        $(0.93     $(2.19     $(2.24     $14.64        $(0.14

 

 

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            Successor Company  
            June  30,
2013
    December 31,  
              2012     2011     2010  
            (in thousands)  

Balance Sheet Data:

           

Net finance receivables, net of allowance

    $14,056,498        $11,633,366        $13,098,754        $14,352,518   

Cash and cash equivalents

    646,372        1,554,348        689,586        1,397,563   

Total assets

    16,042,293        14,673,515        15,494,888        18,260,950   

Long-term debt*

    13,470,413        12,596,577        13,070,393        15,168,034   

Total liabilities

    14,318,567        13,473,388        14,131,984        16,650,652   

Springleaf shareholder’s equity

    1,238,216        1,200,127        1,362,904        1,610,298   

Non-controlling interests

    485,510                        

Total equity

    1,723,726        1,200,127        1,362,904        1,610,298   

 

* Long-term debt comprises the following:

 

     June  30,
2013
     December 31,  
        2012      2011      2010  
     (in thousands)  

Long-term debt:

           

Secured term loan

     $2,042,370         $3,765,249         $3,768,257         $3,033,185   

Securitization debt:

           

Real estate

     3,528,440         3,120,599         1,385,847         1,526,770   

Consumer

     823,003                           

SpringCastle Portfolio

     2,018,486                           
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securitization debt

     6,369,929         3,120,599         1,385,847         1,526,770   
  

 

 

    

 

 

    

 

 

    

 

 

 

Retail notes

     413,434         522,416         587,219         815,437   

Medium-term notes

     4,064,927         4,162,674         5,999,325         7,850,175   

Euro denominated notes

     408,195         854,093         1,158,223         1,770,965   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total unsecured senior debt

     4,886,556         5,539,183         7,744,767         10,436,577   

Junior subordinated debt

     171,558         171,546         171,522         171,502   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     $13,470,413         $12,596,577         $13,070,393         $15,168,034   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Successor Company     Predecessor
Company
 
     Six Months Ended
June 30,
    Year Ended
December 31,
    One Month
Ended

December 31,
2010
    Eleven Months
Ended
November 30,
2010
 
     2013     2012     2012     2011      
     (in thousands)  

Other Financial Data:

              

Cash flows from operating activities

     $118,888        $163,976        $215,898        $180,606        $(110,808     $383,554   

Cash flows from investing activities

     (2,249,594     657,350        1,433,964        1,540,673        140,994        3,198,343   

Cash flows from financing activities

     1,224,248        (92,163     (788,049     (2,430,367     (122,712     (3,402,963

 

 

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As of June 30, 2013, our segments include: Consumer, Insurance, Portfolio Acquisitions and Real Estate. Management considers Consumer, Insurance, and Portfolio Acquisitions to be our Core Consumer Operations and Real Estate as our Non-Core Portfolio.

 

    At or for the Six Months
Ended June 30,
    At or for the Year Ended December 31,  
    2013     2012     2012     2011     2010  
    (in thousands)  

Selected Data—Historical Accounting Basis:(1)

         
         

Core Consumer Operations

         

Pretax core earnings (loss)(2)

    $164,746        $39,159        $87,847        $47,439        $(50,099
         

Consumer

         

Pretax operating income (loss)

    $92,755        $2,077        $33,461        $33,621        $(107,097

Average net finance receivables—personal

    2,609,480        2,366,672        2,426,968        2,337,210        2,527,999   

Yield

    25.49     23.75     24.10     22.88     21.70

Gross charge-off ratio(3)

    5.50     4.39     4.63     5.09     7.26

Recovery ratio(4)

    (3.22 )%      (1.30 )%      (0.99 )%      (1.14 )%      (1.12 )% 

Net charge-off ratio(3)(4)

    2.28     3.09     3.64     3.95     6.14

Delinquency ratio(5)

    1.92     2.43     2.75     2.98     3.67
         

Insurance

         

Pretax operating income

    $24,415        $23,861        $44,402        $53,753        $56,998   
         

Portfolio Acquisitions

         

Pretax operating income

    $100,024        N/A        N/A        N/A        N/A   

Pretax operating income attributable to Springleaf

    46,076        N/A        N/A        N/A        N/A   

Average net finance receivables—SpringCastle Portfolio

    2,865,605        N/A        N/A        N/A        N/A   

Yield

    23.31     N/A        N/A        N/A        N/A   

Net charge-off ratio

    2.48     N/A        N/A        N/A        N/A   

Delinquency ratio

    4.70     N/A        N/A        N/A        N/A   
         

Non-Core Portfolio

         

Real Estate

         

Pretax operating loss

    $(137,760     $(90,038     $(64,060     $(257,203     $(230,981

Average net finance receivables — real estate

    10,245,790        11,510,840        11,183,176        12,596,103        13,974,060   

Provision for finance receivable losses(6)

    149,624        81,545        51,130        249,268        315,018   

Loss ratio(7)

    2.13     2.80     2.73     3.22     3.39
         

Total Company (including non-controlling interests)

         

Income (loss) before provision for (benefit from) income taxes(1)

    $84,300        $(73,263     $(53,387     $(164,053     $(288,474

 

 

Notes:

 

(1)

Historical accounting basis is a non-GAAP measure using the same accounting basis that we employed prior to the Fortress Acquisition. Due to the nature of the Fortress Acquisition, we revalued our assets and liabilities based on their fair values at November 30, 2010, the date of the Fortress Acquisition. This revaluation continues to affect, among other things, interest income, interest expense, provision for finance

 

 

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  receivable losses and amortization of other intangible assets. This historical accounting basis presentation provides us and other interested third parties a consistent basis to better understand our operating results. This measure is not in accordance with, or a substitute for, GAAP and may be different from, or inconsistent with, non-GAAP financial measures used by other companies. See Note 24 of the Notes to Consolidated Financial Statements for the year ended December 31, 2012 and Note 17 of the Notes to Unaudited Condensed Consolidated Financial Statements for the six months ended June 30, 2013, included elsewhere in this prospectus, for reconciliations of segment information on a historical accounting basis to consolidated financial statement amounts.

 

     The following is a reconciliation of income (loss) before provision for (benefit from) income taxes from push-down accounting basis to the historical accounting basis.

 

    Successor Company     Predecessor
Company
 
    Six Months
Ended
June 30,
    Year Ended
December 31,
    One Month
Ended
December 31,

2010
    Eleven Months
Ended
November 30,

2010
 
    2013     2012     2012     2011      
    (in thousands)  

Income (loss) before provision for (benefit from) income taxes—push-down accounting basis

    $126,527        $(141,487     $(306,856     $(323,205     $1,462,887        $(264,728

Adjustments:

             

Interest income

    (103,532     (94,590     (197,981     (261,490     (36,663       

Interest expense

    70,187        125,238        220,969        339,022        28,809          

Provision for finance receivable losses

    7,250        22,023        185,859        79,287        (1,488       

Repurchases and repayments of long-term debt

    (21,316     10,967        39,411                        

Amortization of other intangible assets

    2,718        5,555        13,618        41,085        3,797          

Bargain purchase gain

                                (1,469,182       

Other

    2,466        (969     (8,407     (38,752     (11,906       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before provision for (benefit from) income taxes – historical accounting basis

    $84,300        $(73,263     $(53,387     $(164,053     $(23,746     $(264,728
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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(2) The following is a reconciliation from income (loss) before provision for (benefit from) income taxes on a historical accounting basis to pretax core earnings (loss):

 

     Six Months Ended June 30,     Year Ended December 31,  
     2013      2012     2012     2011     2010  
     (in thousands)  

Income (loss) before provision for (benefit from) income taxes—historical accounting basis

     $84,300         $(73,263     $(53,387     $(164,053     $(288,474

Adjustments:

           

Pretax operating loss—Non-Core Portfolio

     137,760         90,038        64,060        257,203        230,981   

Pretax operating (income) loss—Other/non-originating legacy operations

     (4,866      9,163        67,190        (5,776     7,394   

Restructuring expenses—Core Consumer Operations

             15,863        15,863                 

(Gain) loss from accelerated repayment/repurchase of debt—Consumer

     1,500         (2,642     (5,879              

Impact from change in accounting estimate—Consumer(a)

                           (39,935       

Pretax operating income attributable to non-controlling interests

     (53,948         
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Pretax core earnings (loss)

     $164,746         $39,159        $87,847        $47,439        $(50,099
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a) Impact from change in accounting estimate – Consumer represents a change from a migration analysis to a roll rate-based model for purposes of calculating allowance for finance receivable losses for the Consumer segment.

 

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

 

(3) Represents annualized charge-offs as a percentage of the average of net finance receivables at the beginning of each month in the period—Consumer. Reflects $14.5 million of additional charge-offs recorded in March 2013 (on a historical accounting basis) related to our change in charge-off policy for personal loans effective March 31, 2013. Excluding these additional charge-offs, our Consumer segment gross charge-off ratio would have been 4.39% for the six months ended June 30, 2013.

 

(4) Reflects $25.4 million of recoveries on charged-off personal loans resulting from a sale of our charged-off finance receivables in June 2013. Excluding these recoveries, our Consumer segment recovery ratio would have been (1.28)% for the six months ended June 30, 2013. Excluding the impacts of the $14.5 million of additional charge-offs and the $25.4 million of recoveries on charged-off personal loans, our Consumer segment net charge-off ratio would have been 3.11% for the six months ended June 30, 2013.

 

(5) Represents unpaid principal balance (“UPB”) of 60 days or more past due as a percentage of UPB.

 

 

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(6) Reflects the impact from change in accounting estimate for the year ended December 31, 2012, from a switch from a migration analysis to a roll rate-based model for purposes of calculating allowance for finance receivable losses for the Real Estate segment.

 

(7) Represents the sum of annualized net charge-offs, writedowns and net gain (loss) on sales of, and operating expenses related to real estate owned as a percentage of the average of net finance receivables—Real Estate.

 

 

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The Offering

 

Common stock we are offering

11,916,667 shares.

 

Common stock the selling stockholders are offering

8,083,333 shares.

 

Common stock to be issued and outstanding after this offering

111,916,667 shares (114,916,667 shares if the underwriters exercise their over-allotment option in full).

 

Common stock to be owned by the Initial Stockholder after this offering

87,109,375 shares.

 

Use of proceeds

We currently intend to use the net proceeds from this offering to repay or repurchase outstanding indebtedness as well as other general corporate purposes, including originations of new personal loans and potential portfolio acquisitions, and to satisfy working capital obligations. Indebtedness to be repaid may include SFC’s 6.90% medium term notes, Series J, due 2017, or certain of our as yet unfunded private securitization transactions, which we intend to draw down to fully repay our Secured Term Loan. We will not receive any proceeds from the sale of shares of common stock by the selling stockholders.

 

Dividend Policy

We do not currently anticipate paying dividends on our common stock. Any declaration and payment of future dividends to holders of our common stock will be at the sole discretion of our board of directors and will depend on many factors, including our financial condition, earnings, capital requirements, level of indebtedness, statutory and contractual restrictions applicable to the payment of dividends and other considerations that our board of directors deems relevant. Because we are a holding company and have no direct operations, we will only be able to pay dividends from our available cash on hand and any funds we receive from our subsidiaries. Our insurance subsidiaries are subject to regulations that limit their ability to pay dividends or make loans or advances to us, principally to protect policyholders, and certain of our debt agreements limit the ability of certain of our subsidiaries to pay dividends. See “Dividend Policy.”

 

Risk factors

See “Risk Factors” for a discussion of factors you should carefully consider before deciding to invest in our common stock.

 

NYSE Symbol

“LEAF”.

 

 

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Except as otherwise indicated, all of the information in this prospectus:

 

   

gives retroactive effect to a 1,000,000-for-1 stock split of SHI shares (the “Stock Split”) to be effected prior to the effective date of the offering;

 

   

assumes no exercise of the underwriters’ option to purchase up to 3,000,000 additional shares of common stock from us;

 

   

assumes an initial offering price of $16 per share, which is the midpoint of the offering price range set forth on the cover page of this prospectus; and

 

   

does not include 1,443,750 shares of our common stock underlying equity incentive awards that we intend to grant to certain of our non-employee directors, executive officers and other employees.

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as other information contained in this prospectus, before deciding to invest in our common stock. The occurrence of any of the following risks could materially and adversely affect our business, prospects, financial condition, results of operations and cash flow, in which case, the trading price of our common stock could decline and you could lose all or part of your investment.

Risks Relating to Our Business

Our consolidated results of operations and financial condition and our borrowers’ ability to make payments on their loans have been, and may in the future be, adversely affected by economic conditions and other factors that we cannot control.

Uncertainty and negative trends in general economic conditions in the United States and abroad, including significant tightening of credit markets and a general decline in the value of real property, historically have created a difficult operating environment for our businesses and other companies in our industries. Many factors, including factors that are beyond our control, may impact our consolidated results of operations or financial condition and/or affect our borrowers’ willingness or capacity to make payments on their loans. These factors include: unemployment levels, housing markets, energy costs and interest rates; events such as natural disasters, acts of war, terrorism, catastrophes, major medical expenses, divorce or death that affect our borrowers; and the quality of the collateral underlying our receivables. If we experience an economic downturn or if the U.S. economy is unable to continue or sustain its recovery from the most recent economic downturn, or if we become affected by other events beyond our control, we may experience a significant reduction in revenues, earnings and cash flows, difficulties accessing capital and a deterioration in the value of our investments. We may also become exposed to increased credit risk from our customers and third parties who have obligations to us.

Moreover, a substantial majority of our customers are subprime or non-prime borrowers. Accordingly, such borrowers have historically been, and may in the future become, more likely to be affected, or more severely affected, by adverse macroeconomic conditions. If our borrowers default under a finance receivable held directly by us, we will bear a risk of loss of principal to the extent of any deficiency between the value of the collateral, if any, and the outstanding principal and accrued but unpaid interest of the finance receivable, which could adversely affect our cash flow from operations. In addition, foreclosure of a real estate loan (part of our legacy real estate portfolio) is an expensive and lengthy process that can negatively affect our anticipated return on the foreclosed loan. The cost to service our loans may also increase without a corresponding increase in our finance charge income.

If aspects of our business, including the quality of our finance receivables portfolio or our borrowers, are significantly affected by economic changes or any other conditions in the future, we cannot be certain that our policies and procedures for underwriting, processing and servicing loans will adequately adapt to such changes. If we fail to adapt to changing economic conditions or other factors, or if such changes affect our borrowers’ willingness or capacity to repay their loans, our results of operations, financial condition and liquidity would be materially adversely affected.

As part of our growth strategy, we have committed to building our consumer lending business. If we are unable to successfully implement our growth strategy, our results of operations, financial condition and liquidity may be materially adversely affected.

We believe that our future success depends on our ability to implement our growth strategy, the key feature of which has been to shift our primary focus to originating consumer loans as well as acquiring portfolios of consumer loans, such as our SpringCastle Portfolio that we recently acquired through our Springleaf Acquisitions division. In connection with this revised focus, we have also recently expanded into internet lending through our iLoan division.

 

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Table of Contents

We may not be able to implement our new strategy successfully, and our success depends on a number of factors, including, but not limited to, our ability to:

 

   

address the risks associated with our new focus on personal loan receivables, including, but not limited to consumer demand for finance receivables, and changes in economic conditions and interest rates;

 

   

address the risks associated with the new centralized method of originating and servicing our internet loans through iLoan, which represents a departure from our traditional high-touch branch-based servicing function and includes the potential for higher default and delinquency rates;

 

   

integrate, and develop the expertise required to capitalize on, our iLoan internet lending division;

 

   

comply with regulations in connection with doing business and offering loan products over the internet, including various state and federal e-signature rules mandating that certain disclosures be made and certain steps be followed in order to obtain and authenticate e-signatures, with which we have limited experience; and

 

   

successfully source, underwrite and integrate new acquisitions of loan portfolios and of other businesses.

In order for us to realize the benefits associated with our new focus on originating and servicing consumer loans and grow our business, we must implement our strategic objectives in a timely and cost-effective manner as well as anticipate and address any risks to which we may become subject. If we are not able to do so, or if we do not do so in a timely manner, our results of operations, financial condition and liquidity could be negatively affected which would have a material adverse effect on business.

We recently ceased real estate lending and the purchase of retail finance contracts and are in the process of liquidating these portfolios, which subjects us to certain risks which if we do not manage could adversely affect our results of operations, financial condition and liquidity.

In connection with our plan for strategic growth and new focus on consumer lending, we engaged in a number of restructuring initiatives, including but not limited to, ceasing real estate lending, ceasing purchasing retail sales contracts and revolving retail accounts from the sale of consumer goods and services by retail merchants, closing certain of our branches and reducing our workforce.

Since terminating our real estate lending business, which historically accounted for in excess of 50% of the interest income of our business, and ceasing retail sales purchases, we have begun the multi-year process of liquidating these legacy portfolios. However, notwithstanding our decision to exit real estate lending and retail sales and the liquidating status of these portfolios, as of June 30, 2013 we owned $9.9 billion in UPB of real estate loans. The continuation or worsening of volatility in residential real estate values could continue to adversely affect our business and results of operations, and such adverse conditions could result in significant write-downs in the future. Similarly, due to the fact that we are no longer able to offer our legacy real estate lending customers the same range of loan restructuring alternatives in delinquency situations that we may historically have extended to them, such customers may be less able, and less likely, to repay their loans.

We may be unable to efficiently manage our restructuring and the liquidation of our legacy portfolios. In particular, we may not achieve the cost-savings and operational synergies expected as a result of closing certain of our branches and reducing personnel. Similarly, we may be unable to originate or acquire new consumer loans via our branches and over the internet at a level that is sufficient to offset the impact that liquidating our real estate and retail sales portfolios may have on our financial condition. If we fail to realize the anticipated benefits of the restructuring of our business and associated liquidation of our legacy portfolios, we may experience an adverse effect on our results of operations, financial condition and liquidity.

 

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There are risks associated with the acquisition of large loan portfolios, such as the SpringCastle Portfolio, including the possibility of increased delinquencies and losses, difficulties with integrating the loans into our servicing platform and disruption to our ongoing business, which could have a material adverse effect on our results of operations, financial condition and liquidity.

On April 1, 2013, we acquired the SpringCastle Portfolio, a $3.9 billion consumer loan portfolio consisting of over 415,000 unsecured loans and loans secured by subordinate residential real estate mortgages (which we service as unsecured loans due to the fact that the liens are subordinated to superior ranking security interests). We acquired the portfolio from HSBC through a newly-formed joint venture in which we own a 47% equity interest. In the future, we may acquire additional large portfolios of finance receivables either through the direct purchase of such assets or the purchase of the equity of a company with such a portfolio. Since we will not have originated or serviced the loans we acquire, including the SpringCastle Portfolio, we may not be aware of legal or other deficiencies related to origination or servicing, and our review of the portfolio prior to purchase may not uncover those deficiencies. Further, we may have limited recourse against the seller of the portfolio.

The ability to integrate and service the SpringCastle Portfolio successfully will depend in large part on the success of our development and integration of expanded servicing capabilities, including additional personnel, with our current operations. Similar integration issues are likely to occur with future large portfolio acquisitions. We may fail to realize some or all of the anticipated benefits of the transaction if the integration process takes longer, or is more costly, than expected. Our failure to meet the challenges involved in successfully integrating the SpringCastle Portfolio with our current business or otherwise to realize any of the anticipated benefits of the transaction, could impair our operations. In addition, we anticipate that integration will be a complex, time-consuming and expensive process that, without proper planning and effective and timely implementation, could significantly disrupt our business.

Potential difficulties we may encounter during the integration process with the SpringCastle Portfolio or future acquisitions include, but are not limited to, the following:

 

   

the integration of the portfolio into our information technology platforms and servicing systems;

 

   

the quality of servicing during any interim servicing period after we purchase the portfolio but before we assume servicing obligations from the seller or its agents;

 

   

the disruption to our ongoing businesses and distraction of our management teams from ongoing business concerns;

 

   

incomplete or inaccurate files and records;

 

   

the retention of existing customers;

 

   

the creation of uniform standards, controls, procedures, policies and information systems;

 

   

the occurrence of unanticipated expenses; and

 

   

potential unknown liabilities associated with the transactions, including legal liability related to origination and servicing prior to the acquisition.

For example, it is possible that the SpringCastle Portfolio data we acquire upon assuming the direct servicing obligations for the loans may not transfer from the HSBC platform to our systems properly. This may result in data being lost, key information not being locatable on our systems, or the complete failure of the transfer. In addition, in some cases loan files and other information related to the SpringCastle Portfolio (including servicing records) are incomplete or inaccurate. If our employees are unable to access customer information easily, or if we are unable to produce originals or copies of documents or accurate information about

 

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the loans, collections could be affected significantly, and we may not be able to enforce our right to collect in some cases. Similarly, collections could be affected by any changes to our collections practices, the restructuring of any key servicing functions, transfer of files and other changes that occur as a result of the transfer of servicing obligations from HSBC to us.

The anticipated benefits and synergies from the acquisition and servicing of the SpringCastle Portfolio assume, and our future acquisitions will assume, a successful integration, and are or will be based on projections, which are inherently uncertain, as well as other assumptions. Even if integration is successful, anticipated benefits and synergies may not be achieved.

There are risks associated with our ability to expand our centralized loan servicing capabilities through the acquisition and integration of the servicing facility in London, Kentucky which could have a material adverse effect on our results of operations, financial condition and liquidity.

A key part of our efforts to expand our centralized loan servicing capacity will depend in large part on the success of management’s efforts to integrate the acquisition of a servicing facility in London, Kentucky that we acquired from a subsidiary of HSBC (the “Kentucky Facility”) on September 1, 2013 and its personnel with our current operations following the completion of the transaction. We may fail to realize some or all of the anticipated benefits of the transaction if the integration process takes longer, or is more costly, than expected. Our failure to meet the challenges involved in successfully integrating the Kentucky Facility with our current business or otherwise to realize any of the anticipated benefits of the transaction, including additional revenue opportunities, could impair our operations and our ability to support additional servicing requirements from acquisitions including our acquisition of the SpringCastle Portfolio. In addition, we anticipate that integration will be a complex, time-consuming and expensive process that, without proper planning and effective and timely implementation, could significantly disrupt our business. Potential difficulties we may encounter during the integration process may include, but are not limited to, the following:

 

   

the integration of the personnel with certain of our management teams, strategies, operations, products and services;

 

   

the integration of the physical facilities with our information technology platforms and servicing systems;

 

   

the disruption to our ongoing businesses and distraction of our management teams from ongoing business concerns; and

 

   

the retention of key employees, especially former employees of the seller who are familiar with the portfolio and systems, along with the integration of corporate cultures and maintenance of employee morale.

If our estimates of finance receivable losses are not adequate to absorb actual losses, our provision for finance receivable losses would increase, which would adversely affect our results of operations.

We maintain an allowance for finance receivable losses. To estimate the appropriate level of allowance for finance receivable losses, we consider known and relevant internal and external factors that affect finance receivable collectability, including the total amount of finance receivables outstanding, historical finance receivable charge-offs, our current collection patterns, and economic trends. Our methodology for establishing our allowance for finance receivable losses is based on the guidance in Accounting Standards Codification (ASC) 450 and, in part, on our historic loss experience. If customer behavior changes as a result of economic conditions and if we are unable to predict how the unemployment rate, housing foreclosures, and general economic uncertainty may affect our allowance for finance receivable losses, our provision may be inadequate. Our allowance for finance receivable losses is an estimate, and if actual finance receivable losses are materially greater than our allowance for finance receivable losses, our results of operations could be adversely affected. Neither state

 

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regulators nor federal regulators regulate our allowance for finance receivable losses. Additional information regarding our allowance for finance receivable losses is included in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Allowance for Finance Receivable Losses.”

Our risk management efforts may not be effective.

We could incur substantial losses and our business operations could be disrupted if we are unable to effectively identify, manage, monitor, and mitigate financial risks, such as credit risk, interest rate risk, prepayment risk, liquidity risk, and other market-related risks, as well as operational risks related to our business, assets and liabilities. To the extent our models used to assess the creditworthiness of potential borrowers do not adequately identify potential risks, the valuations produced would not adequately represent the risk profile of the borrower and could result in a riskier finance receivable profile than originally identified. Our risk management policies, procedures, and techniques, including our scoring technology, may not be sufficient to identify all of the risks we are exposed to, mitigate the risks we have identified or identify concentrations of risk or additional risks to which we may become subject in the future.

Our branch loan approval process is decentralized, which may result in variability of loan structures, and could adversely affect our results of operations, financial condition and liquidity.

Our branch finance receivable origination system is decentralized. We train our employees individually on-site in the branch to make loans that conform to our underwriting standards. Such training includes critical aspects of state and federal regulatory compliance, cash handling, account management and customer relations. Subject to approval by district managers and/or directors of operations in certain cases, our branch officers have the authority to approve and structure loans within broadly written underwriting guidelines rather than having all loan terms approved centrally. As a result, there may be variability in finance receivable structure (e.g., whether or not collateral is taken for the loan) and loan portfolios among branch offices or regions, even when underwriting policies are followed. Moreover, we cannot be certain that every loan is made in accordance with our underwriting standards and rules and we have in the past experienced some instances of loans extended that varied from our underwriting standards. The nature of our approval process could adversely affect our operating results and variances in underwriting standards and lack of supervision could expose us to greater delinquencies and charge-offs than we have historically experienced, which could adversely affect our results of operations, financial condition and liquidity.

Changes in market conditions, including rising interest rates, could adversely affect the rate at which our borrowers prepay their loans and the value of our finance receivables portfolio, as well as increase our financing cost, which could negatively affect our results of operations, financial condition and liquidity.

Changing market conditions, including but not limited to, changes in interest rates, the availability of credit, changes in housing prices, the relative economic vitality of the area in which our borrowers and their assets are located, changes in tax laws, other opportunities for investment available to our customers, homeowner mobility, and other economic, social, geographic, demographic, and legal factors beyond our control, may affect the rates at which our borrowers prepay their loans. Generally, in situations where prepayment rates have slowed, the weighted-average life of our finance receivables has increased. However, the current challenging economic conditions and recent significant declines in home values (and the resulting loss of homeowner equity) has limited many homeowners’ ability to refinance mortgage loans and reduced prepayment rates for real estate loans, even in the current low interest rate environment. Any increase in interest rates may further slow the rate of prepayment for our finance receivables, which could adversely affect our liquidity by reducing the cash flows from, and the value of, the finance receivables we hold for sale or utilize as collateral in our secured funding transactions.

Moreover, the vast majority of our finance receivables are fixed-rate finance receivables, which generally decline in value if interest rates increase. As such, if changing market conditions cause interest rates to increase substantially, the value of our fixed-rate finance receivables could decline. In addition, rising interests

 

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rates will increase our cost of capital. Accordingly, any increase in interest rates could negatively affect our results of operations, financial condition and liquidity.

We may be required to indemnify, or repurchase finance receivables from, purchasers of finance receivables that we have sold or securitized, or which we will sell or securitize in the future, if our finance receivables fail to meet certain criteria or characteristics or under other circumstances, which could adversely affect our results of operations, financial condition and liquidity.

We have securitized a large part of our legacy real estate portfolio and have started to securitize our consumer portfolio. In addition, we have sold finance receivables from time to time. The documents governing our finance receivable sales and securitizations contain provisions that require us to indemnify the purchasers of securitized finance receivables, or to repurchase the affected finance receivables, under certain circumstances. While our sale and securitization documents vary, they generally contain customary provisions that may require us to repurchase finance receivables if:

 

   

our representations and warranties concerning finance receivable quality and circumstances are inaccurate, including representations concerning the licensing of a mortgage broker;

 

   

there is borrower fraud or if a payment default occurs on a finance receivable shortly after its origination;

 

   

we fail to comply, at the individual finance receivable level or otherwise, with regulatory requirements; and

 

   

in limited instances, an individual finance receivable reaches certain defined finance delinquency limits.

As a result of the current market environment, we believe that many purchasers of real estate loans (including through securitizations) are particularly aware of the conditions under which originators must indemnify purchasers or repurchase finance receivables, and would benefit from enforcing any repurchase remedies that they may have. At its extreme, our exposure to repurchases or our indemnification obligations under our representations and warranties could include the current unpaid balance of all finance receivables that we have sold or securitized and which are not subject to settlement agreements with purchasers.

The risk of loss on the finance receivables that we have securitized is recognized in our allowance for finance receivable losses since all of our securitizations are recorded on-balance sheet. If we are required to indemnify purchasers or repurchase finance receivables that we sell that result in losses that exceed our reserve for sales recourse, or recognize losses on securitized finance receivables that exceed our recorded allowance for finance receivable losses associated with our securitizations, this could adversely affect our results of operations, financial condition and liquidity.

Our insurance operations are subject to a number of risks and uncertainties, including claims, catastrophic events, underwriting risks and dependence on a sole distribution channel.

Insurance claims and policyholder liabilities are difficult to predict and may exceed the related reserves set aside for claims (losses) and associated expenses for claims adjudication (loss adjustment expenses). Additionally, events such as hurricanes, tornados, earthquakes, pandemic disease, cyber security breaches and other types of catastrophes, and prolonged economic downturns, could adversely affect our financial condition or results of operations. Other risks relating to our insurance operations include changes to laws and regulations applicable to us, as well as changes to the regulatory environment. Examples include changes to laws or regulations affecting capital and reserve requirements; frequency and type of regulatory monitoring and reporting; consumer privacy, use of customer data and data security; benefits or loss ratio requirements; insurance producer licensing or appointment requirements; and required disclosures to consumers; and collateral

 

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protection insurance (i.e., insurance that our lender companies purchase, at the customer’s expense, on the customer’s loan collateral for the periods of time the borrower fails to adequately, as required by his loan, insure that collateral). Because our customer does not affirmatively consent to collateral protection insurance at the time it is purchased and hence, directly agree to the amount charged for it, regulators may in the future prohibit our insurance company from providing this insurance to our lending operations. Moreover, our insurance companies are dependent on our lending operations for the sole source of business and product distribution. If our lending operations discontinue offering insurance products, including as a result of regulatory requirements, our insurance operations would have no method of distribution for their products.

We are a party to various lawsuits and proceedings which, if resolved in a manner adverse to us, could materially adversely affect our results of operations, financial condition and liquidity.

We are a party to various legal proceedings, including certain purported class action claims, arising in the ordinary course of our business. Some of these proceedings are pending in jurisdictions that permit damage awards disproportionate to the actual economic damages alleged to have been incurred. The continued occurrences of large damage awards in general in the United States, including large punitive damage awards in certain jurisdictions that bear little or no relation to actual economic damages incurred by plaintiffs, create the potential for an unpredictable result in any given proceeding. A large judgment that is adverse to us could cause our reputation to suffer, encourage additional lawsuits against us and have a material adverse effect on our results of operations, financial condition and liquidity.

If we lose the services of any of our key management personnel, our business could suffer.

Our future success significantly depends on the continued service and performance of our key management personnel. Competition for these employees is intense and we may not be able to attract and retain key personnel. We do not maintain any “key man” or other related insurance. The loss of the service of members of our senior management or key team members, or the inability to attract additional qualified personnel as needed, could materially harm our business.

Employee misconduct could harm us by subjecting us to monetary loss, significant legal liability, regulatory scrutiny and reputational harm.

Our reputation is critical to maintaining and developing relationships with our existing and potential customers and third parties with whom we do business. There is a risk that our employees could engage in misconduct that adversely affects our business. For example, if an employee were to engage—or be accused of engaging—in illegal or suspicious activities including fraud or theft, we could suffer direct losses from the activity, and in addition we could be subject to regulatory sanctions and suffer serious harm to our reputation, financial condition, customer relationships, and ability to attract future customers. Employee misconduct could prompt regulators to allege or to determine based upon such misconduct that we have not established adequate supervisory systems and procedures to inform employees of applicable rules or to detect and deter violations of such rules. It is not always possible to deter employee misconduct, and the precautions we take to detect and prevent misconduct may not be effective in all cases. Misconduct by our employees, or even unsubstantiated allegations of misconduct, could result in a material adverse effect on our reputation and our business.

Security breaches in our information systems, in the information systems of third parties or in our branches or our internet lending platform could adversely affect our reputation and could subject us to significant costs and regulatory penalties.

Our operations rely heavily on the secure processing, storage and transmission of confidential customer and other information in our computer systems and networks. Each branch office, as well as our iLoan division, is part of an electronic information network that is designed to permit us to originate and track finance receivables and collections, and perform several other tasks that are part of our everyday operations. Our computer systems, software, and networks may be vulnerable to breaches, unauthorized access, misuse, computer

 

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viruses, or other malicious code that could result in disruption to our business, or the loss or theft of confidential information, including customer information. Any failure, interruption, or breach in our cyber security, including any failure of our back-up systems or failure to maintain adequate security surrounding customer information, could result in reputational harm, disruption in the management of our customer relationships, or the inability to originate, process and service our finance receivable products. Further, any of these cyber security and operational risks could result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to lawsuits by customers for identity theft or other damages resulting from the misuse of their personal information and possible financial liability, any of which could have a material adverse effect on our results of operations, financial condition and liquidity. In addition, regulators may impose penalties or require remedial action if they identify weaknesses in our security systems, and we may be required to incur significant costs to increase our cyber security to address any vulnerabilities that may be discovered or to remediate the harm caused by any security breaches. As part of our business, we may share confidential customer information and proprietary information with clients, vendors, service providers, and business partners. The information systems of these third parties may be vulnerable to security breaches and we may not be able to ensure that these third parties have appropriate security controls in place to protect the information we share with them. If our confidential information is intercepted, stolen, misused, or mishandled while in possession of a third party, it could result in reputational harm to us, loss of customer business, and additional regulatory scrutiny, and it could expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our results of operations, financial condition and liquidity. Although we have insurance that is intended to cover certain losses from such events, there can be no assurance that such insurance will be adequate or available.

Our branch offices have physical customer records necessary for day-to-day operations that contain extensive confidential information about our customers, including financial and personally identifiable information. We also retain physical records in various storage locations outside of our branch offices. The loss or theft of customer information and data from our branch offices or other storage locations could subject us to additional regulatory scrutiny and penalties, and could expose us to civil litigation and possible financial liability, which could have a material adverse effect on our results of operations, financial condition and liquidity. In addition, if we cannot locate original documents (or copies, in some cases), we may not be able to collect on the finance receivables for which we do not have documents.

We may not be able to make technological improvements as quickly as some of our competitors, which could harm our ability to compete with our competitors and adversely affect our results of operations, financial condition and liquidity.

The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial and lending institutions to better serve customers and reduce costs. Our future success and, in particular, the success of our iLoan division, will depend, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience, as well as to create additional efficiencies in our operations. We may not be able to effectively implement new technology-driven products and services as quickly as some of our competitors or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could harm our ability to compete with our competitors and adversely affect our results of operations, financial condition and liquidity.

We could face environmental liability and costs for damage caused by hazardous waste (including the cost of cleaning up contaminated property) if we foreclose upon or otherwise take title to real estate pledged as collateral.

If a real estate loan goes into default, we start foreclosure proceedings in appropriate circumstances, which could result in our taking title to the mortgaged real estate. We also consider alternatives to foreclosure, such as “short sales,” where we do not take title to mortgaged real estate. There is a risk that toxic or hazardous substances could be found on property after we take title. In addition, we own certain properties through which

 

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we operate our business, such as the buildings at our headquarters, and the Kentucky Facility acquired on September 1, 2013. As the owner of any property where hazardous waste is present, we could be held liable for clean-up and remediation costs, as well as damages for any personal injuries or property damage caused by the condition of the property. We may also be responsible for these costs if we are in the chain of title for the property, even if we were not responsible for the contamination and even if the contamination is not discovered until after we have sold the property. Costs related to these activities and damages could be substantial. Although we have policies and procedures in place to investigate properties for potential hazardous substances before taking title to properties, these reviews may not always uncover potential environmental hazards.

We are not able to track the default status of the senior lien loans for our second mortgages if we are not the holder of the senior loan.

Second mortgages constituted 6% of our real estate loans as of June 30, 2013. In instances where we hold the second mortgage, either we or another creditor holds the first mortgage on the property, and our second mortgage is subordinate in right of payment to the first mortgage holder’s right to receive payment. If we are not the holder of the related first mortgage, we are not able to track the default status of a first mortgage for our second mortgages. In such instances, the value of our second mortgage may be lower than our records indicate and the provisions we maintain for finance receivable losses associated with such second mortgages may be inadequate.

The financial condition of counterparties, including other financial institutions, could adversely affect our results of operations, financial condition and liquidity.

We have entered into, and may in the future enter into, derivative transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. Many of these transactions expose us to credit risk in the event of a default by the counterparty or client, which can be exacerbated during periods of market illiquidity. During such periods, our credit risk may be further increased when any collateral held by us cannot be realized upon or is liquidated at prices that are not sufficient to recover the full amount of our exposure.

We may be required to take impairment charges for intangible assets related to the Fortress Acquisition.

As a result of the application of push-down accounting, we recorded intangible assets related to the Fortress Acquisition, which had a carrying value of $26.3 million as of June 30, 2013. As a result of our future quarterly reviews and evaluation of our intangible assets for potential impairment, we may be required to take an impairment charge to the extent that the carrying values of our intangible assets exceed their fair value. Also, if we sell a business for less than the carrying value of the assets sold, including intangible assets attributable to that business, we may be required to take an impairment charge on all or part of the intangible assets attributable to that business.

We have recognized impairments on several of the intangible assets related to the Fortress Acquisition. We cannot give assurances that we will not have to recognize additional material impairment charges in the future. See Notes 10 and 25 of the Notes to Consolidated Financial Statements for the year ended December 31, 2012 included elsewhere in this prospectus for further information on the impairments of our intangible assets.

Risks Related to our Industry and Regulation

We operate in a highly competitive market, and we cannot ensure that the competitive pressures we face will not have a material adverse effect on our results of operations, financial condition and liquidity.

The consumer finance industry is highly competitive. Our profitability depends, in large part, on our ability to originate finance receivables. We compete with other consumer finance companies as well as other types of financial institutions that offer similar products and services in originating finance receivables. Some of

 

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these competitors may have greater financial, technical and marketing resources than we possess. Some competitors may also have a lower cost of funds and access to funding sources that may not be available to us. While banks and credit card companies have decreased their lending to non-prime customers in recent years, there is no assurance that such lenders will not resume those lending activities. Further, because of increased regulatory pressure on payday lenders, many of those lenders are starting to make more traditional installment consumer loans in order to reduce regulatory scrutiny of their practices, which could increase competition in markets in which we operate. In addition, in July 2013, the Dodd-Frank Wall Street Reform and Consumer Protection Act’s (the “Dodd-Frank Act”) three-year moratorium on banks affiliated with non-financial businesses expired. When the Dodd-Frank Act was enacted in 2010, a moratorium was imposed that prohibited the Federal Deposit Insurance Corporation from approving deposit insurance for certain banks controlled by non-financial commercial enterprises. The expiration of the moratorium could result in an increase of traditionally non-financial enterprises entering the banking space, which could increase the number of our competitors. There can be no assurance that the competitive pressures we face will not have a material adverse effect on our results of operations, financial condition and liquidity.

Our businesses are subject to regulation in the jurisdictions in which we conduct our business.

Our businesses are subject to numerous federal, state and local laws and regulations, and various state authorities regulate and supervise our insurance operations. The laws under which a substantial amount of our consumer and real estate businesses are conducted generally: provide for state licensing of lenders and, in some cases, licensing of employees involved in real estate loan modifications; impose limits on the term of a finance receivable, amounts, interest rates and charges on the finance receivables; regulate whether and under what circumstances insurance and other ancillary products may be offered to consumers in connection with a lending transaction; regulate the manner in which we use personal data; and provide for other consumer protections. We are also subject to extensive servicing regulations which we must comply with when servicing our legacy real estate loans and which we will have to comply with when we assume the direct servicing obligations for the loans in the SpringCastle Portfolio and other future portfolios we may acquire. The extent of state regulation of our insurance business varies by product and by jurisdiction, but relates primarily to the following: licensing; conduct of business; periodic examination of the affairs of insurers; form and content of required financial reports; standards of solvency; limitations on dividend payments and other related party transactions; types of products offered; approval of policy forms and premium rates; permissible investments; deposits of securities for the benefit of policyholders; reserve requirements for unearned premiums, losses and other purposes; and claims processing.

All of our operations are subject to regular examination by state and federal regulators, and as a whole, our entities are subject to several hundred regulatory examinations in a given year. These examinations may result in requirements to change our policies or practices, and in some cases, we are required to pay monetary fines or make reimbursements to customers. Many state regulators and some federal regulators have indicated an intention to pool their resources in order to conduct examinations of licensed entities, including us, at the same time (referred to as a “multi-state” examination). This could result in more in-depth examinations, which could be more costly and lead to more significant enforcement actions.

We believe that we maintain all material licenses and permits required for our current operations and are in substantial compliance with all applicable federal, state and local regulations, but we may not be able to maintain all requisite licenses and permits, and the failure to satisfy those and other regulatory requirements could have a material adverse effect on our operations. In addition, changes in laws or regulations applicable to us could subject us to additional licensing, registration and other regulatory requirements in the future or could adversely affect our ability to operate or the manner in which we conduct business.

A material failure to comply with applicable laws and regulations could result in regulatory actions, lawsuits and damage to our reputation, which could have a material adverse effect on our results of operations, financial condition and liquidity.

 

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For more information with respect to the regulatory framework affecting our businesses, see “Business—Regulation” included elsewhere in this prospectus.

The enactment of the Dodd-Frank Act and the creation of the CFPB may significantly increase our regulatory costs and burdens.

On July 21, 2010, the President of the United States signed the Dodd-Frank Act into law, which, among other things, provided for the creation of the Federal Consumer Financial Protection Bureau (the “CFPB”). This law, and the regulations already promulgated and to be promulgated under it, are likely to affect our operations in terms of increased oversight of financial services products by the CFPB, and the imposition of restrictions on the allowable terms for certain consumer credit transactions. The CFPB has significant authority to implement and enforce federal consumer finance laws, including the Truth in Lending Act, the Equal Credit Opportunity Act, the Fair Credit Billing Act and new requirements for financial services products provided for in the Dodd-Frank Act, as well as the authority to identify and prohibit unfair, deceptive, or abusive acts and practices. In addition, the Dodd-Frank Act provides the CFPB with broad supervisory, examination and enforcement authority over various consumer financial products and services, including the ability to require reimbursements and other payments to customers for alleged legal violations, and to impose significant penalties, as well as injunctive relief that prohibits lenders from engaging in allegedly unlawful practices. In addition to the foregoing, the CFPB has the authority to obtain cease and desist orders providing for affirmative relief and/or monetary penalties. Further, state attorneys general and state regulators are authorized to bring civil actions to enforce certain consumer protection provisions of the Dodd-Frank Act. The Dodd-Frank Act and accompanying regulations are being phased in over time, and while some regulations have been promulgated, many others have not yet been proposed or finalized. We cannot predict the terms of all of the final regulations, their intended consequences or how such regulations will affect us or our industry.

The CFPB currently has supervisory authority over our real estate servicing activities, and likely will have supervisory authority over our consumer lending business. It also has the authority to bring enforcement actions for violations of laws over which it has jurisdiction regardless of whether it has supervisory authority for a given product or service. The CFPB recently finalized mortgage servicing regulations that become effective in January 2014 and will make it more difficult and expensive to service mortgages. In addition, the Dodd-Frank Act also gives the CFPB supervisory authority over entities that are designated as “larger participants” in certain financial services markets, including consumer installment loans and related products. The CFPB has not yet promulgated regulations that designate “larger participants” for consumer finance companies. If we are designated as a “larger participant” for this market, we also will be subject to supervision and examination by the CFPB with respect to our consumer loan business. We expect to be designated as a “larger participant.” The CFPB’s broad supervisory and enforcement powers could affect our business and operations significantly in terms of increased operating and regulatory compliance costs, and limits on the types of products we offer and the manner in which they are offered, among other things. See “Business—Regulation.”

The CFPB and certain state regulators recently have brought enforcement actions against lenders for the sale of ancillary products, such as “debt forgiveness” products that forgive a borrower’s debt if certain events occur (e.g., death or disability). Among other things, the regulators have questioned the cost of the product when compared to the benefits and whether the tactics used by the lender to sell the products mislead consumers. Although our insurance products are regulated by insurance regulators, sales of insurance could be challenged in a similar manner. In addition, we sell a few other ancillary products that are not considered to be insurance, and which could be subject to additional CFPB or state regulator scrutiny.

We purchase and sell finance receivables, including charged off receivables and receivables where the borrower is in default. This practice could subject us to heightened regulatory scrutiny, which may expose us to legal action, cause us to incur losses and/or limit or impede our collection activity.

As part of our business model, we purchase and sell finance receivables and plan to expand this practice in the future. Although the borrowers for some of these finance receivables are current on their payments, other

 

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borrowers may be in default (including in bankruptcy) or the debt may have been charged off as uncollectible. The CFPB and other regulators have recently significantly increased their scrutiny of the purchase and sale of debt, and collections practices undertaken by purchasers of debt, especially delinquent and charged off debt. The CFPB has criticized sellers of debt for not maintaining sufficient documentation to support and verify the validity or amount of the debt. It has also criticized debt collectors for, among other things, their collection tactics, attempting to collect debts that no longer are valid, misrepresenting the amount of the debt and not having sufficient documentation to verify the validity or amount of the debt. Our purchases or sales of receivables could expose us to lawsuits or fines by regulators if we do not have sufficient documentation to support and verify the validity and amount of the finance receivables underlying these transactions, or if we or purchasers of our finance receivables use collection methods that are viewed as unfair or abusive. In addition, our collections could suffer and we may incur additional expenses if we are required to change collection practices or stop collecting on certain debts as a result of a lawsuit or action on the part of regulators.

The Dodd-Frank Act also may adversely affect the securitization market because it requires, among other things, that a securitizer generally retain not less than 5% of the credit risk for certain types of securitized assets that are transferred, sold, or conveyed through issuance of asset-backed securities (“ABS”). Moreover, the SEC has proposed significant changes to Regulation AB, which, if adopted in their present form, could result in sweeping changes to the commercial and residential mortgage loan securitization markets, as well as to the market for the re-securitization of mortgage-backed securities. The SEC also has proposed rules that would require issuers and underwriters to make any third-party due diligence reports on ABS publicly available. These changes could result in additional costs or limit our ability to securitize loans.

For more information with respect to the regulatory framework affecting our businesses, see “Business—Regulation” included elsewhere in this prospectus.

Potential changes to the Investment Company Act could affect our method of doing business.

The SEC recently solicited public comment on a wide range of issues relating to certain existing provisions of the Investment Company Act of 1940, as amended (the “Investment Company Act”), including the nature of real estate or real estate related assets that qualify for purposes of certain exemptions. There can be no assurance that the laws and regulations governing the Investment Company Act status of real estate or real estate related assets or SEC guidance regarding Investment Company Act exemptions for real estate assets will not change in a manner that adversely affects our operations.

Real estate loan servicing and loan modifications have come under increasing scrutiny from government officials and others, which could make servicing our legacy real estate portfolio more costly and difficult.

Real estate loan servicers have recently come under increasing scrutiny. In addition, some states and municipalities have passed laws that impose additional duties on foreclosing lenders and real estate loan servicers, such as mandatory mediation or extensive requirements for maintenance of vacant properties, which, in some cases, begin even before a lender has taken title to property. These additional requirements can delay foreclosures, make it uneconomical to foreclose on mortgaged real estate or result in significant additional costs, which could materially adversely affect the value of our portfolio.

The U.S. Government has implemented a number of federal programs designed to assist homeowners, including the Home Affordable Modification Program (“HAMP”), which provides homeowners with assistance in avoiding residential real estate loan foreclosures. In third quarter 2009, our subsidiary, MorEquity, Inc. (“MorEquity”) entered into a Commitment to Purchase Financial Instrument and Servicer Participation Agreement with the Federal National Mortgage Association as financial agent for the United States Department of the Treasury, which provides for participation in HAMP. On February 1, 2011, MorEquity entered into subservicing agreements for the servicing of its real estate loans with Nationstar Mortgage LLC (“Nationstar”). Loans subserviced by Nationstar and servicers for certain securitized loans that are eligible for modification pursuant to HAMP guidelines are subject to HAMP. We also have implemented proprietary real estate loan modification programs in order to help

 

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customers in our branch segment remain current on their loans and avoid foreclosure. HAMP, our proprietary loan modification programs and other existing or future legislative or regulatory actions, including possible amendments to the bankruptcy laws, which result in the modification of outstanding real estate loans, may adversely affect the value of, and the returns on, our existing portfolio and the assets we acquire in the future.

Risks Related to our Indebtedness

An inability to access adequate sources of liquidity may adversely affect our ability to fund operational requirements and satisfy financial obligations.

Our ability to access capital and credit was significantly affected by the substantial disruption in the U.S. credit markets and the associated credit rating downgrades on our debt. In addition, the risk of volatility surrounding the global economic system and uncertainty surrounding regulatory reforms such as the Dodd-Frank Act continue to create uncertainty around access to the capital markets. Historically, we funded our operations and repaid our debt and other obligations using funds collected from our finance receivable portfolio and new debt issuances. Although market conditions have improved recently, for a number of years following the economic downturn and disruption in the credit markets, our traditional borrowing sources, including our ability to cost effectively issue large amounts of unsecured debt in the capital markets, particularly issuances of commercial paper, have generally not been available to us. Instead we have primarily raised capital through securitization transactions and, although there can be no assurances that we will be able to complete additional securitizations, we currently expect our near-term sources of capital markets funding to continue to derive from securitization transactions.

If we are unable to complete additional securitization transactions on a timely basis or upon terms acceptable to us or otherwise access adequate sources of liquidity, our ability to fund our own operational requirements and satisfy financial obligations may be adversely affected.

Our indebtedness is significant, which could affect our ability to meet our obligations under our debt instruments and could materially and adversely affect our business and ability to react to changes in the economy or our industry.

We currently have a significant amount of indebtedness. As of June 30, 2013, we had $13.5 billion of indebtedness outstanding (including securitizations and secured indebtedness). Interest expense on our indebtedness was $1.1 billion in 2012. There can be no assurance that we will be able to repay or refinance our debt in the future.

The amount of indebtedness could have important consequences, including the following:

 

   

it may require us to dedicate a significant portion of our cash flow from operations to the payment of the principal of, and interest on, our indebtedness, which reduces the funds available for other purposes, including finance receivable originations;

 

   

it could limit our ability to withstand competitive pressures and reduce our flexibility in responding to changing regulatory, business and economic conditions;

 

   

it may limit our ability to incur additional borrowings or securitizations for working capital, capital expenditures, business development, debt service requirements, acquisitions or general corporate or other purposes, or to refinance our indebtedness;

 

   

it may require us to seek to change the maturity, interest rate and other terms of our existing debt;

 

   

it may cause a further downgrade of our debt and long-term corporate ratings; and

 

   

it may cause us to be more vulnerable to periods of negative or slow growth in the general economy or in our business.

 

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In addition, meeting our anticipated liquidity requirements is contingent upon our continued compliance with our existing debt agreements. An event of default or declaration of acceleration under one of our existing debt agreements could also result in an event of default and declaration of acceleration under certain of our other existing debt agreements. Such an acceleration of our debt would have a material adverse effect on our liquidity and our ability to continue as a going concern. Furthermore, our existing debt agreements do not restrict us from incurring significant additional indebtedness. If our debt obligations increase, whether due to the increased cost of existing indebtedness or the incurrence of additional indebtedness, the consequences described above could be magnified.

Our secured term loan and certain of our outstanding notes contain covenants that restrict our operations and may inhibit our ability to grow our business and increase revenues.

Springleaf Financial Funding Company (“SFFC”), a subsidiary of SFC, is the borrower under our senior secured term loan facility (the “Secured Term Loan”). SFC and most of its consumer finance operating subsidiaries guarantee the Secured Term Loan. The Secured Term Loan contains restrictions, covenants, and representations and warranties that apply to SFC and certain of its subsidiaries. If SFC, SFFC or any subsidiary guarantor fails to comply with any of these covenants or breaches these representations or warranties, such noncompliance would constitute a default under the Secured Term Loan (subject to applicable cure periods), and the lenders could elect to declare all amounts outstanding under the agreements related thereto to be immediately due and payable and enforce their respective interests against collateral pledged under such agreements.

The covenants and restrictions in the Secured Term Loan generally restrict certain of SFC’s subsidiaries’ ability to, among other things:

 

   

incur or guarantee additional debt;

 

   

make certain investments or acquisitions;

 

   

transfer or sell assets;

 

   

make distributions on common stock;

 

   

create or incur liens;

 

   

enter into transactions with affiliates; and

 

   

make certain amendments to organizational documents or documents relating to intercompany secured loans.

In certain cases (e.g., the restriction on incurring liens), the restrictions also apply to SFC. They do not generally apply to us or SFI and its subsidiaries (other than SFC and SFC’s consumer finance operating subsidiaries who guarantee the loans). In addition, the Secured Term Loan generally restricts the ability of SFC to engage in mergers or consolidations. Certain of SFC’s indentures and notes also contain a covenant that limits SFC’s and its subsidiaries’ ability to create or incur liens.

The restrictions described above may interfere with our ability to obtain new or additional financing or may affect the manner in which we structure such new or additional financing or engage in other business activities, which may significantly limit or harm our results of operations, financial condition and liquidity. A default and resulting acceleration of obligations could also result in an event of default and declaration of acceleration under certain of our other existing debt agreements. Such an acceleration of our debt would have a material adverse effect on our liquidity and our ability to continue as a going concern. A default could also significantly limit our alternatives to refinance both the debt under which the default occurred and other indebtedness. This limitation may significantly restrict our financing options during times of either market distress or our financial distress, which are precisely the times when having financing options is most important.

 

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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 our liquidity, including but not limited to:

 

   

our ability to generate sufficient cash to service all of our outstanding debt;

 

   

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

 

   

our ability to complete on favorable terms, as needed, additional borrowings, securitizations, finance receivable 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;

 

   

the potential for downgrade of our debt by rating agencies, which would have a negative impact on our cost of, and access to, capital;

 

   

our ability to comply with our debt covenants, including the borrowing base for the Secured Term Loan;

 

   

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 finance receivable portfolio sales; and

 

   

the potential for reduced income due to the possible deterioration of the credit quality of our finance receivable portfolios.

Additionally, there are numerous risks to our financial results, liquidity, and capital raising and debt refinancing plans that are not quantified in our current liquidity forecasts. These risks include, but are not limited, to the following:

 

   

the liquidation and related losses within our real estate portfolio could be substantial and result in reduced cash receipts;

 

   

our inability to grow our personal loan portfolio with adequate profitability to fund operations, loan losses, and other expenses;

 

   

our inability to monetize assets including, but not limited to, our access to debt and securitization markets;

 

   

the effect of federal, state and local laws, regulations, or regulatory policies and practices, including the Dodd-Frank Act (which, among other things, established the CFPB with broad authority to regulate and examine financial institutions), on 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 potential for increasing costs and difficulty in servicing our loan portfolio, especially our liquidating real estate loan portfolio (including costs and delays associated with foreclosure on real

 

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estate collateral), as a result of heightened nationwide regulatory scrutiny of loan servicing and foreclosure practices in the industry generally, and related costs that could be passed on to us in connection with the subservicing of our real estate loans that were originated or acquired centrally;

 

   

potential liability relating to real estate and personal loans which we have sold or may sell in the future, or relating to securitized loans, if it is determined that there was a non-curable breach of a warranty made in connection with 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; and

 

   

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

We intend to support our liquidity position by managing originations (including our decision to cease real estate loan originations effective January 1, 2012) and purchases of finance receivables (including our decision to no longer purchase retail sales finance receivables after January 15, 2013) and maintaining disciplined underwriting standards and pricing on such finance receivables. We intend to support operations and repay indebtedness with one or more of the following activities, among others: finance receivable collections, cash on hand, additional debt financings (particularly new securitizations and possible new issuances and/or debt refinancing transactions), finance receivable portfolio sales, or a combination of the foregoing. There can be no assurance that we will be successful in undertaking any of these activities to support our operations and repay our obligations.

However, the actual outcome of one or more of our plans could be materially different than expected or one or more of our significant judgments or estimates about the potential effects of these risks and uncertainties could prove to be materially incorrect. In the event of such an occurrence, if third-party financing is not available, our liquidity could be substantially and materially affected, and as a result, substantial doubt could exist about our ability to continue as a going concern.

Current ratings could adversely affect our ability to raise capital in the debt markets at attractive rates, which could negatively affect our results of operations, financial condition and liquidity.

Each of Standard & Poor’s Ratings Services (“S&P”), Moody’s Investors Service, Inc. (“Moody’s”), and Fitch, Inc. (“Fitch”) rates SFC’s debt. SFC’s long term corporate debt rating is currently rated B- with a stable outlook by S&P, B- with a stable outlook by Fitch and Caa1 with a positive outlook by Moody’s. Currently, no other Springleaf entity has a corporate debt rating, though they may be rated in the future. Ratings reflect the rating agencies’ opinions of a company’s financial strength, operating performance, strategic position and ability to meet our obligations. Agency ratings are not a recommendation to buy, sell or hold any security, and may be revised or withdrawn at any time by the issuing organization. Each agency’s rating should be evaluated independently of any other agency’s rating.

If SFC’s current ratings continue in effect or our ratings are downgraded, it will likely increase the interest rate that we would have to pay to raise money in the capital markets, making it more expensive for us to borrow money and adversely impacting our access to capital. As a result, our ratings could negatively impact our results of operations, financial condition and liquidity.

 

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Our securitizations may expose us to financing and other risks, and there can be no assurance that we will be able to access the securitization market in the future, which may require us to seek more costly financing.

We have securitized, and may in the future securitize, certain of our finance receivables to generate cash to originate or purchase new finance receivables or pay our outstanding indebtedness. In each such transaction, we convey a pool of finance receivables to a special purpose entity (“SPE”), which, in turn, conveys the finance receivables to a trust (the issuing entity). Concurrently, the trust issued non-recourse notes or certificates pursuant to the terms of an indenture or pooling and servicing agreement, respectively, which then are transferred to the SPE in exchange for the finance receivables. The securities issued by the trust are secured by the pool of finance receivables. In exchange for the transfer of finance receivables to the issuing entity, we receive the cash proceeds from the sale of the trust securities, all residual interests, if any, in the cash flows from the finance receivables after payment of the trust securities, and a 100% beneficial interest in the issuing entity. As a result of the challenging credit and liquidity conditions, the value of the subordinated securities we retain in our securitizations might be reduced or, in some cases, eliminated.

The more limited securitization markets since 2007 have impaired our ability to complete securitizations. Although we were able to complete a securitization during the third quarter of 2011, three during 2012 and eight so far during 2013, the securitization market remains constrained, and we can give no assurances that we will be able to complete additional securitizations. In addition, since the onset of the recent financial crisis, we have only completed two securitizations of personal loan receivables, and we may face challenges executing future personal loan securitizations in the future.

Rating agencies may also affect our ability to execute a securitization transaction, or increase the costs we expect to incur from executing securitization transactions, not only by deciding not to issue ratings for our securitization transactions, but also by altering the criteria and process they follow in issuing ratings. Rating agencies could alter their ratings processes or criteria after we have accumulated finance receivables for securitization in a manner that effectively reduces the value of those finance receivables by increasing our financing costs or otherwise requiring that we incur additional costs to comply with those processes and criteria. We have no ability to control or predict what actions the rating agencies may take.

Further, other matters, such as (i) accounting standards applicable to securitization transactions and (ii) capital and leverage requirements applicable to banks and other regulated financial institutions holding residential mortgage-backed securities or other asset-backed securities, could result in decreased investor demand for securities issued through our securitization transactions, or increased competition from other institutions that undertake securitization transactions. In addition, compliance with certain regulatory requirements, including the Dodd-Frank Act and the Investment Company Act, may affect the type of securitizations that we are able to complete.

If it is not possible or economical for us to securitize our finance receivables in the future, we would need to seek alternative financing to support our operations and to meet our existing debt obligations, which may be less efficient and more expensive than raising capital via securitizations and may have a material adverse effect on our results of operations, financial condition and liquidity.

Risks Related to Our Organization and Structure

If the ownership of our common stock continues to be highly concentrated, it may prevent you and other minority stockholders from influencing significant corporate decisions and may result in conflicts of interest.

Immediately following the completion of this offering, the Initial Stockholder, which is primarily owned by a private equity fund managed by an affiliate of Fortress, will own approximately 77.8% of our outstanding common stock or 75.8% if the underwriters’ overallotment option is fully exercised. As a result, the Initial Stockholder will own shares sufficient for the majority vote over all matters requiring a stockholder vote, including: the election of directors; mergers, consolidations and acquisitions; the sale of all or substantially all of our assets and other decisions affecting our capital structure; the amendment of our certificate of incorporation

 

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and our bylaws; and our winding up and dissolution. This concentration of ownership may delay, deter or prevent acts that would be favored by our other stockholders. The interests of the Initial Stockholder may not always coincide with our interests or the interests of our other stockholders. This concentration of ownership may also have the effect of delaying, preventing or deterring a change in control of us. Also, the Initial Stockholder may seek to cause us to take courses of action that, in its judgment, could enhance its investment in us, but which might involve risks to our other stockholders or adversely affect us or our other stockholders, including investors in this offering. As a result, the market price of our common stock could decline or stockholders might not receive a premium over the then-current market price of our common stock upon a change in control. In addition, this concentration of share ownership may adversely affect the trading price of our common stock because investors may perceive disadvantages in owning shares in a company with significant stockholders. See “Principal and Selling Stockholders” and “Description of Capital Stock—Anti-Takeover Effects of Delaware Law, Our Restated Certificate of Incorporation and Restated Bylaws.”

We are a holding company with no operations and will rely on our operating subsidiaries to provide us with funds necessary to meet our financial obligations and to pay dividends.

We are a holding company with no material direct operations. Our principal assets are the equity interests we directly or indirectly hold in our operating subsidiaries, which own our operating assets. As a result, we will be dependent on loans, dividends and other payments from our subsidiaries to generate the funds necessary to meet our financial obligations and to pay dividends on our common stock. Our subsidiaries are legally distinct from us and may be prohibited or restricted from paying dividends or otherwise making funds available to us under certain conditions. For example, our insurance subsidiaries are subject to regulations that limit their ability to pay dividends or make loans or advances to us, principally to protect policyholders, and certain of our debt agreements limit the ability of certain of our subsidiaries to pay dividends. See “Description of Indebtedness.” If we are unable to obtain funds from our subsidiaries, we may be unable to, or our board may exercise its discretion not to, pay dividends.

We do not anticipate paying any dividends on our common stock in the foreseeable future.

We have no plans to pay regular dividends on our common stock, and we anticipate that a significant amount of any free cash flow generated from our operations will be utilized to redeem or prepay outstanding indebtedness, including debt under our Secured Term Loan and accordingly would not be available for dividends. Any declaration and payment of future dividends to holders of our common stock will be at the sole discretion of our board of directors and will depend on many factors, including our financial condition, earnings, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends and other considerations that our board of directors deems relevant. Until such time that we pay a dividend, our investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment.

Certain provisions of a stockholders agreement we expect to enter into with our Initial Stockholder (the “Stockholders Agreement”), our restated certificate of incorporation and our amended and restated bylaws could hinder, delay or prevent a change in control of us, which could adversely affect the price of our common stock.

Certain provisions of the Stockholders Agreement, our restated certificate of incorporation and our amended and restated bylaws contain provisions that could make it more difficult for a third party to acquire us without the consent of our board of directors or Fortress. These provisions provide for:

 

   

a classified board of directors with staggered three-year terms;

 

   

removal of directors only for cause and only with the affirmative vote of at least 80% of the voting interest of stockholders entitled to vote (provided, however, that for so long as Fortress and certain of its affiliates and permitted transferees beneficially own, directly or indirectly, at least 30% of our issued and outstanding common stock (including Fortress’ proportionate interest in shares of our

 

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common stock held by the Initial Stockholder), directors may be removed with or without cause with the affirmative vote of a majority of the voting interest of stockholders entitled to vote);

 

   

provisions in our restated certificate of incorporation and amended and restated bylaws prevent stockholders from calling special meetings of our stockholders (provided, however, that for so long as Fortress and certain of its affiliates and permitted transferees beneficially own, directly or indirectly, at least 20% of our issued and outstanding common stock (including Fortress’ proportionate interest in shares of our common stock held by the Initial Stockholder), any stockholders that collectively beneficially own at least 20% of our issued and outstanding common stock may call special meetings of our stockholders);

 

   

advance notice requirements by stockholders with respect to director nominations and actions to be taken at annual meetings;

 

   

certain rights to Fortress and certain of its affiliates and permitted transferees with respect to the designation of directors for nomination and election to our board of directors, including the ability to appoint a majority of the members of our board of directors, plus one director, for so long as Fortress and certain of its affiliates and permitted transferees continue to beneficially own, directly or indirectly at least 30% of our issued and outstanding common stock (including Fortress’s proportionate interest in shares of our common stock held by the Initial Stockholder). See “Certain Relationships and Related Party Transactions—Stockholders Agreement”;

 

   

no provision in our restated certificate of incorporation or amended and restated bylaws for cumulative voting in the election of directors, which means that the holders of a majority of the outstanding shares of our common stock can elect all the directors standing for election;

 

   

our restated certificate of incorporation and our amended and restated bylaws only permit action by our stockholders outside a meeting by unanimous written consent, provided, however, that for so long as Fortress and certain of its affiliates and permitted transferees beneficially own, directly or indirectly, at least 20% of our issued and outstanding common stock (including Fortress’s proportionate interest in shares of our common stock held by the Initial Stockholder), our stockholders may act without a meeting by written consent of a majority of our stockholders; and

 

   

under our restated certificate of incorporation, our board of directors has authority to cause the issuance of preferred stock from time to time in one or more series and to establish the terms, preferences and rights of any such series of preferred stock, all without approval of our stockholders. Nothing in our restated certificate of incorporation precludes future issuances without stockholder approval of the authorized but unissued shares of our common stock.

In addition, these provisions may make it difficult and expensive for a third party to pursue a tender offer, change in control or takeover attempt that is opposed by Fortress, our management or our board of directors. Public stockholders who might desire to participate in these types of transactions may not have an opportunity to do so, even if the transaction is favorable to stockholders. These anti-takeover provisions could substantially impede the ability of public stockholders to benefit from a change in control or change our management and board of directors and, as a result, may adversely affect the market price of our common stock and your ability to realize any potential change of control premium. See “Description of Capital Stock—Anti-Takeover Effects of Delaware Law, Our Restated Certificate of Incorporation and Amended and Restated Bylaws.”

Certain of our stockholders have the right to engage or invest in the same or similar businesses as us.

Fortress and AIG and their respective affiliates, including the Initial Stockholder, engage in other investments and business activities in addition to their ownership of us. Under our restated certificate of incorporation, Fortress and AIG and their respective affiliates, including the Initial Stockholder, have the right,

 

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and have no duty to abstain from exercising such right, to engage or invest in the same or similar businesses as us, do business with any of our clients, customers or vendors or employ or otherwise engage any of our officers, directors or employees. If Fortress and AIG and their respective affiliates, including the Initial Stockholder, or any of their officers, directors or employees acquire knowledge of a potential transaction that could be a corporate opportunity, they have no duty, to the fullest extent permitted by law, to offer such corporate opportunity to us, our stockholders or our affiliates.

In the event that any of our directors and officers who is also a director, officer or employee of any of Fortress, AIG or their respective affiliates, including the Initial Stockholder, acquires knowledge of a corporate opportunity or is offered a corporate opportunity, provided that this knowledge was not acquired solely in such person’s capacity as our director or officer and such person acts in good faith, then even if Fortress or AIG or their respective affiliates, including the Initial Stockholder, pursues or acquires the corporate opportunity or if Fortress or AIG or their respective affiliates, including the Initial Stockholder, do not present the corporate opportunity to us such person is deemed to have fully satisfied such person’s fiduciary duties owed to us and is not liable to us. See “Certain Relationships and Related Party Transactions—Stockholders Agreement.”

Licensing and insurance laws and regulations may delay or impede purchases of our common stock.

Certain of the states in which we are licensed to originate loans and the state in which our insurance subsidiaries are domiciled (Indiana) have laws or regulations which require regulatory approval for the acquisition of “control” of regulated entities. In addition, the insurance laws and regulations in Indiana generally provide that no person may acquire control, directly or indirectly, of a domiciled insurer, unless the person has provided required information to, and the acquisition is approved or not disapproved by, the Indiana Department of Insurance. Under some state laws or regulations, there exists a presumption of “control” when an acquiring party acquires as little as 10% of the voting securities of a regulated entity or of a company which itself controls (directly or indirectly) a regulated entity (the threshold is 10% under Indiana’s insurance statutes). Therefore, any person acquiring 10% or more of our common stock may need the prior approval of some state insurance and/or licensing regulators, or a determination from such regulators that “control” has not been acquired, which could significantly delay or otherwise impede their ability to complete such purchase.

Risks Related to this Offering

An active trading market for our common stock may never develop or be sustained.

Although our common stock has been approved for listing on the NYSE, an active trading market for our common stock may not develop on that exchange or elsewhere or, if developed, that market may not be sustained. Accordingly, if an active trading market for our common stock does not develop or is not maintained, the liquidity of our common stock, your ability to sell your shares of common stock when desired and the prices that you may obtain for your shares of common stock will be adversely affected.

The market price and trading volume of our common stock may be volatile, which could result in rapid and substantial losses for our stockholders.

Even if an active trading market develops, the market price of our common stock may be highly volatile and could be subject to wide fluctuations. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. The initial public offering price of our common stock will be determined by negotiation between us, the representatives of the underwriters and the selling stockholders based on a number of factors and may not be indicative of prices that will prevail in the open market following completion of this offering. If the market price of our common stock declines significantly, you may be unable to resell your shares at or above your purchase price, if at all. The market price of our common stock may fluctuate or decline significantly in the future. Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our common stock include:

 

   

variations in our quarterly or annual operating results;

 

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changes in our earnings estimates (if provided) or differences between our actual financial and operating results and those expected by investors and analysts;

 

   

the contents of published research reports about us or our industry or the failure of securities analysts to cover our common stock after this offering;

 

   

additions to, or departures of, key management personnel;

 

   

any increased indebtedness we may incur in the future;

 

   

announcements by us or others and developments affecting us;

 

   

actions by institutional stockholders;

 

   

litigation and governmental investigations;

 

   

changes in market valuations of similar companies;

 

   

speculation or reports by the press or investment community with respect to us or our industry in general;

 

   

increases in market interest rates that may lead purchasers of our shares to demand a higher yield;

 

   

announcements by us or our competitors of significant contracts, acquisitions, dispositions, strategic relationships, joint ventures or capital commitments; and

 

   

general market, political and economic conditions, including any such conditions and local conditions in the markets in which our borrowers are located.

These broad market and industry factors may decrease the market price of our common stock, regardless of our actual operating performance. The stock market in general has from time to time experienced extreme price and volume fluctuations, including in recent months. In addition, in the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

Future offerings of debt or equity securities by us may adversely affect the market price of our common stock.

In the future, we may attempt to obtain financing or to further increase our capital resources by issuing additional shares of our common stock or offering debt or other equity securities, including commercial paper, medium-term notes, senior or subordinated notes, debt securities convertible into equity or shares of preferred stock. In particular, we intend to continue to seek opportunities to acquire consumer finance portfolios and/or businesses that engage in consumer finance loan servicing and/or consumer finance loan originations. Future acquisitions could require substantial additional capital in excess of cash from operations. We would expect to finance the capital required for acquisitions through a combination of additional issuances of equity, corporate indebtedness, asset-backed acquisition financing and/or cash from operations.

Issuing additional shares of our common stock or other equity securities or securities convertible into equity may dilute the economic and voting rights of our stockholders at the time of such issuance or reduce the market price of our common stock or both. Upon liquidation, holders of debt securities and preferred shares, if issued, and lenders with respect to other borrowings would receive a distribution of our available assets prior to the holders of our common stock. Debt securities convertible into equity could be subject to adjustments in the conversion ratio pursuant to which certain events may increase the number of equity securities issuable upon conversion.

 

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Preferred shares, if issued, could have a preference with respect to liquidating distributions or a preference with respect to dividend payments that could limit our ability to pay dividends to the holders of our common stock. Our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, which may adversely affect the amount, timing or nature of our future offerings. Thus, holders of our common stock bear the risk that our future offerings may reduce the market price of our common stock and dilute their stockholdings in us. See “Description of Capital Stock.”

The market price of our common stock could be negatively affected by sales of substantial amounts of our common stock in the public markets.

After this offering, there will be 111,916,667 shares of common stock outstanding, or 114,916,667 shares outstanding if the underwriters exercise their overallotment option in full. Of our issued and outstanding shares, all the common stock sold in this offering will be freely transferable, except for any shares held by our “affiliates,” as that term is defined in Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”). Following completion of the offering, approximately 77.8% of our outstanding common stock (or 75.8% if the underwriters exercise their overallotment option in full) will be held by the Initial Stockholder and can be resold into the public markets in the future in accordance with the requirements of Rule 144. See “Shares Eligible For Future Sale.”

We and our executive officers, directors and the Initial Stockholder (who will hold in the aggregate approximately 82.1% of our outstanding common stock immediately after the completion of this offering or 80.0% if the underwriters exercise their overallotment option in full) have agreed with the underwriters that, subject to certain exceptions, for a period of 180 days after the date of this prospectus, we and they will not directly or indirectly offer, pledge, sell, contract to sell, sell any option or contract to purchase or otherwise dispose of any common stock or any securities convertible into or exercisable or exchangeable for common stock, or in any manner transfer all or a portion of the economic consequences associated with the ownership of common stock, or cause a registration statement covering any common stock to be filed, without the prior written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated. See “Underwriting.” Merrill Lynch, Pierce, Fenner & Smith Incorporated may waive these restrictions at its discretion.

Pursuant to the Stockholders Agreement, the Initial Stockholder and certain of its affiliates and permitted third party transferees have the right, in certain circumstances, to require us to register their approximately 87,109,375 shares of our common stock under the Securities Act for sale into the public markets. Upon the effectiveness of such a registration statement, all shares covered by the registration statement will be freely transferable. See “Certain Relationships and Related Party Transactions—Stockholders Agreement.”

The market price of our common stock may decline significantly when the restrictions on resale by our existing stockholders lapse. A decline in the price of our common stock might impede our ability to raise capital through the issuance of additional common stock or other equity securities.

The future issuance of additional common stock in connection with our incentive plans, acquisitions or otherwise will dilute all other stockholdings.

After this offering, assuming the underwriters exercise their overallotment option in full, we will have an aggregate of 1,885,083,333 shares of common stock authorized but unissued. We may issue all of these shares of common stock without any action or approval by our stockholders, subject to certain exceptions. We also intend to continue to evaluate acquisition opportunities and may issue common stock in connection with these acquisitions. Any common stock issued in connection with our incentive plans, acquisitions, the exercise of outstanding stock options or otherwise would dilute the percentage ownership held by the investors who purchase common stock in this offering.

 

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Investors in this offering will suffer immediate and substantial dilution.

The initial public offering price of our common stock will be substantially higher than the as adjusted net tangible book value per share issued and outstanding immediately after this offering. Our net tangible book value per share as of June 30, 2013 was approximately $12.12 and represents the amount of book value of our total tangible assets minus the book value of our total liabilities, after giving effect to the Stock Split, divided by the number of our shares of common stock then issued and outstanding. Investors who purchase common stock in this offering will pay a price per share that substantially exceeds the net tangible book value per share of common stock. If you purchase shares of our common stock in this offering, you will experience immediate and substantial dilution of $3.61 in the net tangible book value per share, based upon the initial public offering price of $16 per share (the midpoint of the estimated initial public offering price range set forth on the cover of this prospectus). Investors that purchase common stock in this offering will have purchased 17.9% of the shares issued and outstanding immediately after the offering, but will have paid 37.7% of the total consideration for those shares.

We will have broad discretion in the use of a significant part of the net proceeds from this offering and may not use them effectively.

Our management currently intends to use the net proceeds from this offering in the manner described in “Use of Proceeds” and will have broad discretion in the application of a significant part of the net proceeds from this offering. The failure by our management to apply these funds effectively could affect our ability to operate and grow our business.

As a public company, we will incur additional costs and face increased demands on our management.

Although our subsidiary, SFC, is an existing reporting company for the purposes of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), and is already subject to extensive regulation, SHI, as a newly public company with shares listed on a U.S. exchange, will need to comply with an extensive body of regulations that did not apply to us previously, including certain provisions of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), regulations of the SEC and requirements of the NYSE. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. For example, as a result of becoming a public company, we intend to add independent directors and create additional board committees. In addition, we may incur additional costs associated with our public company reporting requirements and maintaining directors’ and officers’ liability insurance. We are currently evaluating and monitoring developments with respect to these rules, which may impose additional costs on us and materially affect our results of operations, financial condition and liquidity.

We will be required by Section 404 of the Sarbanes-Oxley Act to evaluate the effectiveness of our internal controls by the end of our fiscal year ending December 31, 2014, and the outcome of that effort may adversely affect our results of operations, financial condition and liquidity.

As a U.S.-listed public company, we will be required to comply with Section 404 of the Sarbanes-Oxley Act by December 31, 2014. Section 404 will require that we evaluate our internal control over financial reporting to enable management to report on, and our independent auditors to audit as of the end of our fiscal year ended December 31, 2014, the effectiveness of those controls. Our subsidiary, SFC, is already required to comply with Section 404, however we need to undertake a separate review of our internal controls and procedures. While we have begun the process of evaluating our internal controls, we are in the early phases of our review and will not complete our review until after this offering is completed. The outcome of our review may adversely affect our results of operations, financial condition and liquidity. During the course of our review, we may identify control deficiencies of varying degrees of severity, and we may incur significant costs to remediate those deficiencies or otherwise improve our internal controls. As a public company, we will be required to report control deficiencies that constitute a “material weakness” in our internal control over financial reporting. We would also be required to obtain an audit report from our independent auditors regarding the effectiveness of our internal controls over financial reporting. If we fail to implement the requirements of Section 404 in a timely manner, we may be subject to sanctions or investigation by regulatory authorities, including the SEC or the NYSE. Furthermore, if we discover a material weakness or our auditor does not provide an unqualified audit report, our share price could decline and our ability to raise capital could be impaired.

 

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FORWARD-LOOKING STATEMENTS

Some of the information contained in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and elsewhere in this prospectus may contain forward-looking statements that reflect our current views with respect to, among other things, future events and financial performance. You can identify these forward-looking statements by the use of forward-looking words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates,” “target,” “projects,” “contemplates” or the negative version of those words or other comparable words. Any forward-looking statements contained in this prospectus are based upon our historical performance and on our current plans, estimates and expectations in light of information currently available to us. The inclusion of this forward-looking information should not be regarded as a representation by us, Fortress, the Initial Stockholder, the underwriters or any other person that the future plans, estimates or expectations contemplated by us will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions relating to our operations, financial results, financial condition, business, prospects, growth strategy and liquidity. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements. We believe that these factors include, but are not limited to:

 

   

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

 

   

levels of unemployment and personal bankruptcies;

 

   

shifts in residential real estate values;

 

   

shifts in collateral values, delinquencies, or credit losses;

 

   

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

 

   

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

 

   

our ability to successfully realize the benefits of the SpringCastle Portfolio as a result of integration difficulties and other challenges;

 

   

the potential liabilities and increased regulatory scrutiny associated with the SpringCastle Portfolio;

 

   

our ability to successfully integrate the intended acquisition of the Kentucky Facility and its personnel;

 

   

changes in the rate at which we can collect or potentially sell our finance receivables portfolios;

 

   

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

 

   

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

 

   

changes in the competitive environment in which we operate, including the demand for our products, customer responsiveness to our distribution channels, and the strength and ability of our competitors to operate independently or to enter into business combinations that result in a more attractive range of customer products or provide greater financial resources;

 

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changes in federal, state and local laws, regulations, or regulatory policies and practices, including the Dodd-Frank Act (which, among other things, established the CFPB, which has broad authority to regulate and examine financial institutions), that affect our ability to conduct business or the manner in which we conduct business, such as licensing requirements, pricing limitations or restrictions on the method of offering products, as well as changes that may result from increased regulatory scrutiny of the sub-prime lending industry;

 

   

the potential for increased costs and difficulty in servicing our legacy real estate loan portfolio (including costs and delays associated with foreclosure on real estate collateral), as a result of heightened nationwide regulatory scrutiny of loan servicing and foreclosure practices in the industry generally, and related costs that could be passed on to us in connection with the subservicing of our real estate loans that were originated or acquired centrally;

 

   

potential liability relating to real estate and personal loans which we have sold or may sell in the future, or relating to securitized loans, if it is determined that there was a non-curable breach of a warranty made in connection with such transactions;

 

   

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

 

   

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

 

   

our ability to comply with our debt covenants, including the borrowing base for the Secured Term Loan;

 

   

our ability to generate sufficient cash to service all of our indebtedness;

 

   

our substantial indebtedness, which could prevent us from meeting our obligations under our debt instruments and limit our ability to react to changes in the economy or our industry, or our ability to incur additional borrowings;

 

   

the potential for downgrade of our debt by rating agencies, which would have a negative impact on our cost of, and access to, capital;

 

   

the impacts of our securitizations and borrowings;

 

   

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

 

   

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; and

 

   

other risks described in the “Risk Factors” section of this prospectus.

These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this prospectus. The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We do not undertake any obligation to publicly update or review any forward-looking statement except as required by law, whether as a result of new information, future developments or otherwise.

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

 

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USE OF PROCEEDS

The net proceeds to us from our sale of 11,916,667 shares of common stock offered hereby are estimated to be approximately $175.0 million, assuming an initial public offering price of $16 per share (the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus) and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use the net proceeds from this offering to repay or repurchase outstanding indebtedness as well as for other general corporate purposes, including originations of new personal loans and potential portfolio acquisitions, and to satisfy working capital obligations. Indebtedness to be repaid may include SFC’s 6.90% medium term notes, Series J, due 2017, or certain of our as yet unfunded private securitization transactions, which we intend to draw down to fully repay our Secured Term Loan. Although we regularly consider potential portfolio acquisition opportunities, we are not currently engaged in any discussions or negotiations regarding any potential material portfolio acquisitions. For a description of our Secured Term Loan, see “Description of Indebtedness—Credit Facility.” We will not receive any proceeds from the sale of shares of common stock by the selling stockholders.

A $1.00 increase (decrease) in the assumed initial public offering price of $16.00 per share (the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus) would increase (decrease) the net proceeds to us from this offering by $11.1 million, assuming the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

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CAPITALIZATION

The following table sets forth our capitalization as of June 30, 2013:

 

   

on an actual basis; and

 

   

on an as adjusted basis to give effect to the sale of 11,916,667 shares of common stock by us in this offering, at an assumed initial public offering price of $16 per share, the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus, after deducting the underwriting discount and estimated offering expenses payable by us, as if the sale were consummated on June 30, 2013.

This table should be read in conjunction with “Selected Historical Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our unaudited condensed consolidated financial statements and related notes included elsewhere in this prospectus. The following table does not give effect to any of our financing transactions consummated after June 30, 2013, and described under “Description of Indebtedness” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” or to the use of proceeds from this offering.

 

     As of June 30, 2013  
     Actual      As Adjusted  
     (in thousands)  

Cash and cash equivalents

   $ 646,372       $ 821,323   
  

 

 

    

 

 

 

Long-term debt

     

Secured term loan

     2,042,370         2,042,370   

Securitization debt:

     

Real estate

     3,528,440         3,528,440   

Consumer

     823,003         823,003   

SpringCastle Portfolio

     2,018,486         2,018,486   

Retail notes

     413,434         413,434   

Medium-term notes

     4,064,927         4,064,927   

Euro denominated notes

     408,195         408,195   

Junior subordinated debt

     171,558         171,558   
  

 

 

    

 

 

 

Total debt

   $ 13,470,413       $ 13,470,413   
  

 

 

    

 

 

 

Equity

     

Common Stock, par value: $0.01 per share, 2,000,000,000 shares authorized, 100,000,000 shares issued and outstanding (actual), 111,916,667 shares issued and outstanding (as adjusted)(1)

     1,000         1,119   

Additional paid-in capital

     147,454         322,286   

Accumulated other comprehensive income

     23,406         23,406   

Retained Earnings

     1,066,356         1,066,356   
  

 

 

    

 

 

 

Springleaf shareholder’s equity

     1,238,216         1,413,167   

Non-controlling interests

     485,510         485,510   
  

 

 

    

 

 

 

Total equity

     1,723,726         1,898,677   
  

 

 

    

 

 

 

Total capitalization

   $ 15,194,139       $ 15,369,090   
  

 

 

    

 

 

 

 

(1) Gives retrospective effect to the Stock Split.

 

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DILUTION

If you invest in our common stock, your ownership interest will be diluted to the extent of the difference between the initial public offering price in this offering per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock upon consummation of this offering. Net tangible book value per share represents the book value of our total tangible assets less the book value of our total liabilities and non-controlling interests, divided by the number of shares of common stock then issued and outstanding.

Our net tangible book value as of June 30, 2013 was approximately $1.212 billion, or approximately $12.12 per share based on the 100,000,000 shares of common stock issued and outstanding as of such date after giving effect to the Stock Split of our common stock. After giving effect to our sale of common stock in this offering at the initial public offering price of $16 per share (the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus), and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of June 30, 2013 would have been $1.387 billion, or $12.39 per share (assuming no exercise of the underwriters’ overallotment option). This represents an immediate and substantial dilution of $3.61 per share to new investors purchasing common stock in this offering. The following table illustrates this dilution per share:

 

Assumed initial public offering price per share

      $ 16.00   

Net tangible book value per share as of June 30, 2013 giving effect to the Stock Split

   $ 12.12      

Increase in net tangible book value per share attributable to this offering

     0.27      
  

 

 

    

Pro forma as adjusted net tangible book value per share after giving effect to this offering

        12.39   
     

 

 

 

Dilution per share to new investors in this offering

      $ 3.61   
     

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $16 per share (the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus) would increase (decrease) our pro forma as adjusted net tangible book value by $11.1 million, the pro forma as adjusted net tangible book value per share after this offering by $0.10 per share and the dilution to new investors in this offering by $0.90 per share, assuming the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The following table summarizes, on a pro forma basis as of June 30, 2013, the differences between the number of shares of common stock purchased from us, the total price and the average price per share paid by existing stockholders and by the new investors in this offering, before deducting the underwriting discounts and commissions and estimated offering expenses payable by us, at an assumed initial public offering price of $16 per share (the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus).

 

     Shares Purchased     Total Consideration     Average
Price per
Share
 
      Number      Percent     Amount      Percent    
     (in thousands)     (in thousands)        

Stockholders at the time of the offering

     100,000         89.4     603,774         76.0   $ 6.58   

New Investors pursuant to the primary portion of the offering

     11,917         10.6        190,667         24.0        16.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     111,917         100   $ 794,441         100  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

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Sales by the selling stockholders in this offering will reduce the number of shares of common stock held by existing stockholders to 91,916,667, or approximately 82.1%, and will increase the number of shares of common stock to be purchased by new investors to 20,000,000, or approximately 17.9% of the total shares of common stock outstanding after this offering.

A $1.00 increase (decrease) in the assumed initial offering price would increase (decrease) total consideration paid by new investors and average price per share paid by new investors by $20.0 million and $1.00 per share, respectively. An increase (decrease) of 1.0 million in the number of shares offered by us would increase (decrease) total consideration paid by new investors and average price per share paid by new investors by $16.0 million and $0 per share, respectively.

If the underwriters’ overallotment option is fully exercised, the pro forma as adjusted net tangible book value per share after this offering as of June 30, 2013 would be approximately $12.46 per share and the dilution to new investors per share after this offering would be $3.54 per share.

 

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DIVIDEND POLICY

We do not currently anticipate paying dividends on our common stock. Any declaration and payment of future dividends to holders of our common stock will be at the discretion of our board of directors and will depend on many factors, including our financial condition, earnings, cash flows, capital requirements, level of indebtedness, statutory and contractual restrictions applicable to the payment of dividends and other considerations that our board of directors deems relevant.

Because we are a holding company and have no direct operations, we will only be able to pay dividends from our available cash on hand and any funds we receive from our subsidiaries. Our insurance subsidiaries are subject to regulations that limit their ability to pay dividends or make loans or advances to us, principally to protect policyholders, and certain of our debt agreements limit the ability of certain of our subsidiaries to pay dividends. See “Description of Indebtedness.” Under Delaware law, dividends may be payable only out of surplus, which is calculated as our net assets less our liabilities and our capital, or, if we have no surplus, out of our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The selected consolidated statement of operations data for the eleven months ended November 30, 2010, for the one month ended December 31, 2010 and for the years ended December 31, 2011 and 2012 and the selected consolidated balance sheet data as of December 31, 2011 and 2012 have been derived from our audited financial statements included elsewhere in this prospectus. The selected consolidated statement of operations data for the years ended December 31, 2008 and 2009 and the consolidated balance sheet data as of December 31, 2008, 2009 and 2010 have been derived from our audited financial statements not included in this prospectus. The summary consolidated statement of operations data for the six months ended June 30, 2012 and 2013 and the summary consolidated balance sheet data as of June 30, 2013 have been derived from our unaudited financial statements included elsewhere in this prospectus.

The unaudited financial statements have been prepared on the same basis as the audited financial statements and, in the opinion of our management, include all adjustments necessary for a fair presentation of the information set forth herein. Operating results for the six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013 or for any future period. Results for the six months ended June 30, 2013 include the SpringCastle Portfolio, which we acquired on April 1, 2013 through a newly-formed joint venture in which we own a 47% equity interest and consolidate in our financial statements. The selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited and unaudited consolidated financial statements and related notes included elsewhere in this prospectus.

As a result of the Fortress Acquisition, a new basis of accounting was established and, for accounting purposes, the Predecessor Company was terminated and a Successor Company was created. This distinction is made throughout this prospectus through the inclusion of a vertical black line between the Successor Company and the Predecessor Company columns. Due to the nature of the Fortress Acquisition, we revalued our assets and liabilities based on their fair values at the date of the Fortress Acquisition in accordance with push-down accounting, which resulted in a $1.5 billion bargain purchase gain for the one month ended December 31, 2010. Push-down accounting also affected and continues to affect, among other things, the carrying amount of our finance receivables and long-term debt, our finance charges on our finance receivables and related yields, our interest expense, our allowance for finance receivable losses, and our net charge-off and charge-off ratio. In general, on a quarterly basis, we accrete or amortize the valuation adjustment recorded in connection with the Fortress Acquisition, or record adjustments based on current expected cash flows as compared to expected cash flows at the time of the Fortress Acquisition, in each case, as described in more detail in the footnotes to the tables below and in the Notes to Consolidated Financial Statements for the year ended December 31, 2012 included elsewhere in this prospectus.

The financial information for 2010 includes the financial information of the Successor Company for the one month ended December 31, 2010 and of the Predecessor Company for the eleven months ended November 30, 2010. These separate periods are presented to reflect the new accounting basis established for our Company as of November 30, 2010.

As a result of the application of push-down accounting, the assets and liabilities of the Successor Company are not comparable to those of the Predecessor Company, and the income statement items for the one month ended December 31, 2010 and the years ended December 31, 2011 and 2012 would not have been the same as those reported if push-down accounting had not been applied. In addition, key ratios of the Successor Company are not comparable to those of the Predecessor Company, and are not comparable to other institutions due to the new accounting basis established.

 

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    Successor Company     Predecessor Company  
     Six Months Ended
June 30,
    Year Ended
December 31,
    One Month
Ended
December 31,

2010
    Eleven
Months
Ended
November 30,

2010
    Year Ended
December 31,
 
    2013     2012     2012     2011         2009     2008  
    (in thousands except per share data)  

Statement of Operations Data:

                 

Interest income

    $993,634        $864,313        $1,706,292        $1,885,547        $181,329        $1,688,720        $2,133,968        $2,631,868   

Interest expense

    468,926        560,273        1,068,391        1,268,047        118,693        996,469        1,091,163        1,254,094   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

    524,708        304,040        637,901        617,500        62,636        692,251        1,042,805        1,377,774   

Provision for finance receivable losses

    182,938        136,939        338,219        332,848        38,767        444,349        1,275,546        1,080,968   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for finance receivable losses

    341,770        167,101        299,682        284,652        23,869        247,902        (232,741     296,806   

Other revenues

    95,126        47,892        94,203        138,159        31,812        224,422        126,986        149,157   

Other expenses

    310,369        356,480        700,741        746,016        61,976        737,052        803,435        1,396,656   

Bargain purchase gain

                                1,469,182                        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before provision for (benefit from) income taxes

    126,527        (141,487     (306,856     (323,205     1,462,887        (264,728     (909,190     (950,693

Provision for (benefit from) income taxes

    27,708        (48,481     (88,222     (99,049     (1,388     (250,697     (431,515     394,959   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    98,819        (93,006     (218,634     (224,156     1,464,275        (14,031     (477,675     (1,345,652
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less: Net income (loss) attributable to non-controlling interests

    53,948                                                    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Springleaf

    $44,871        $(93,006     $(218,634     $(224,156     $1,464,275        $(14,031     $(477,675     $(1,345,652
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Share Data:

                 

Number of shares of SHI outstanding

                 

Basic and diluted

    100,000,000        100,000,000        100,000,000        100,000,000        100,000,000        100,000,000        100,000,000        100,000,000   

Earnings (loss) per share of SHI

                 

Basic and diluted

    $0.45        $(0.93     $(2.19     $(2.24     $14.64        $(0.14     $(4.78     $(13.46

 

 

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    Successor Company     Predecessor Company  
    June  30,
2013
    December 31,     December 31,  
      2012     2011     2010     2009     2008  
                (in thousands)              

Balance Sheet Data:

             

Net finance receivables, net of allowance

    $14,056,498        $11,633,366        $13,098,754        $14,352,518        $17,306,700        $23,458,949   

Cash and cash equivalents

    646,372        1,554,348        689,586        1,397,563        1,311,842        916,318   

Total assets

    16,042,293        14,673,515        15,494,888        18,260,950        22,787,386        26,547,375   

Long-term debt*

    13,470,413        12,596,577        13,070,393        15,168,034        17,743,343        20,980,980   

Total liabilities

    14,318,567        13,473,388        14,131,984        16,650,652        20,870,733        24,908,044   

Springleaf shareholder’s equity

    1,238,216        1,200,127        1,362,904        1,610,298        1,916,653        1,639,331   

Non-controlling interests

    485,510                                      

Total equity

    1,723,726        1,200,127        1,362,904        1,610,298        1,916,653        1,639,331   

 

* Long-term debt comprises the following:

 

    Successor Company     Predecessor Company  
    June 30,
2013
    December 31,     December 31,  
       2012     2011     2010     2009     2008  
                (in thousands)              

Long-term debt:

             

Secured term loan

    $2,042,370        $3,765,249        $3,768,257        $3,033,185        $—        $—   

Securitization debt:

             

Real estate

    3,528,440        3,120,599        1,385,847        1,526,770        1,168,379        333,709   

Consumer

    823,003                                      

SpringCastle Portfolio

    2,018,486                                      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total securitization debt

    6,369,929        3,120,599        1,385,847        1,526,770        1,168,379        333,709   

Credit facility

                                2,125,000        2,125,000   

SFI credit agreements

                                       165,000   

Retail notes

    413,434        522,416        587,219        815,437        1,150,216        1,321,453   

Medium-term notes

    4,064,927        4,162,674        5,999,325        7,850,175        10,179,972        14,024,078   

Euro denominated notes

    408,195        854,093        1,158,223        1,770,965        2,770,429        2,662,464   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total unsecured senior debt

    4,886,556        5,539,183        7,744,767        10,436,577        16,225,617        20,297,995   

Junior subordinated debt (hybrid debt)

    171,558        171,546        171,522        171,502        349,347        349,276   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    $13,470,413        $12,596,577        $13,070,393        $15,168,034        $17,743,343        $20,980,980   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
    Successor Company     Predecessor Company  
    Six Months Ended
June 30,
    Year Ended
December 31,
    One Month
Ended
December 31,

2010
    Eleven
Months
Ended
November 30,

2010
    Year Ended
December 31,
 
     2013     2012     2012     2011         2009     2008  
                      (in thousands)                    

Other Financial Data:

                 

Cash flows from operating activities

    $118,888        $163,976        $215,898        $180,606        $(110,808     $383,554        $554,755        $842,466   

Cash flows from investing activities

    (2,249,594     657,350        1,433,964        1,540,673        140,994        3,198,343        3,286,282        (237,678

Cash flows from financing activities

    1,224,248        (92,163     (788,049     (2,430,367     (122,712     (3,402,963     (3,445,480     (1,776,866

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and related notes and other financial information appearing elsewhere in this prospectus. This discussion and analysis contains forward-looking statements that involve risk, uncertainties and assumptions. See “Forward-Looking Statements.” Our actual results could differ materially from those anticipated in the forward-looking statements as a result of many factors, including those discussed in “Risk Factors” and elsewhere in this prospectus.

Overview

Springleaf is a leading consumer finance company providing responsible loan products to customers through our nationwide branch network and iLoan, our internet lending division. We have a nearly 100-year track record of high quality origination, underwriting and servicing of personal loans primarily to non-prime consumers. We leverage our knowledge of consumer behavior and sophisticated proprietary analytics and tools to price and manage risk. We originate consumer loans through our network of 834 branch offices in 26 states and on a centralized basis as part of our iLoan division. Through two insurance subsidiaries, we write credit and non-credit insurance policies covering our customers and the property pledged as collateral for our loans. We also pursue strategic acquisitions of loan portfolios. As part of this strategy, we recently acquired from HSBC a $3.9 billion consumer loan portfolio through a joint venture in which we own a 47% equity interest. We expect to achieve a meaningful return on our investment in the portfolio, which we refer to as the SpringCastle Portfolio, as well as a stable servicing fee income stream.

We have the proven ability to finance our businesses from a diversified source of capital and funding, including cash flow from operations and financings in the capital markets in the form of personal loan and mortgage loan securitizations. Earlier this year we demonstrated the ability to attract capital markets funding for our core personal loans by completing two securitizations of personal loans, a first for our industry in 15 years. We expect to continue to expand this program that locks in our funding for loan originations for multiple years. Over the last several years we have also demonstrated the ability to replace maturing unsecured debt with lower-cost, non-recourse securitization debt backed by our legacy real estate loan portfolio. We further expanded our available financing alternatives in May 2013 by re-entering the unsecured debt market, our first unsecured note issuance in six years. We also have significant unencumbered assets to support future corporate lines of credit that will give us added financial flexibility.

As of June 30, 2013, we had four business segments: Consumer, Insurance, Portfolio Acquisitions and Real Estate. For a discussion of our segments see “—Segment Overview” below.

Our Products and Services

We provide secured and unsecured loans and related insurance products to individuals.

Personal Loans

We offer personal loans through our branch offices and over the internet through our iLoan division to customers who generally need timely access to cash. Our personal loans are typically non-revolving with a fixed-rate and a fixed, original term of two to four years. At June 30, 2013, we had over 786,000 personal loans, representing $2.9 billion in net finance receivables, of which $1.3 billion, or 45%, was secured by collateral consisting of titled personal property, $1.2 billion, or 40%, was secured by consumer household goods or other items of personal property, and the remainder was unsecured.

 

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Insurance Products

In connection with our personal loan business we offer our customers credit insurance (life insurance, accident and health insurance, and involuntary unemployment insurance), non-credit insurance, and ancillary products, such as warranty protection. Credit insurance and non-credit insurance products are provided by our subsidiaries, Merit Life Insurance Co. (“Merit”) and Yosemite Insurance Company (“Yosemite”).

In addition, in April 2013, through our Springleaf Acquisitions division, we acquired from HSBC the SpringCastle Portfolio, a $3.9 billion consumer loan portfolio consisting of more than 415,000 loans, at a purchase price of $3.0 billion. We acquired the portfolio through a newly-formed joint venture in which we own a 47% equity interest and which we consolidate in our financial statements. The portfolio includes primarily unsecured personal loans as well as loans secured with subordinate residential real estate mortgages. Because the subordinate residential real estate mortgages are primarily revolving loans secured by junior liens with little, if any, underlying real estate value, we believe these loans exhibit characteristics and performance more closely resembling unsecured personal loans. The junior lien loans are therefore characteristically distinct from our legacy real estate portfolio, which is comprised generally of fixed rate loans secured by first lien mortgages. Accordingly, we intend to service these loans as personal loans which is consistent with the manner in which they were serviced by HSBC. We assumed the direct servicing obligations for these loans in September, 2013 and earn a servicing fee from the joint venture.

We ceased real estate lending in January 2012, and ceased purchasing retail sales contracts and revolving retail accounts in January 2013. We are currently in the process of liquidating these legacy portfolios. Until the liquidation is complete, we will continue to report these products as legacy businesses. As of June 30, 2013, our real estate loans and our retail sales contracts had $8.5 billion and $140.8 million in net finance receivables, respectively.

How We Assess Our Business Performance

Our net profit and the return on our investment required to generate net profit are the primary metrics by which we assess our business performance. Accordingly, we closely monitor the primary drivers of net profit which consist of the following:

Net Interest Income

We track the spread between the interest income earned on our loans and the interest expense incurred on our debt, and continually monitor the components of our yield and our cost of funds.

Net Credit Losses

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

Operating Expenses

We assess our operational efficiency using various metrics and conduct extensive analysis to determine whether fluctuations in cost and expense levels indicate operational trends that need to be addressed. As a result of the restructuring of our business in 2012, we believe our operating expenses will be reduced significantly in 2013 compared to 2011, before considering the impact from the acquisition of the SpringCastle Portfolio. These reductions in operating expenses will be achieved primarily through reduced salaries and benefits from the reduction in our workforce and decreased occupancy and other related operating expenses due to the reduction in

 

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the number of branch offices during 2012, which are described elsewhere in this prospectus. Our operating expense analysis also includes a review of origination and servicing costs to assist us in managing overall profitability.

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

Certain Recent Developments

iLoan Division

Our extensive network of branches and expert personnel is complemented by our internet lending division, known as iLoan. Formed at the beginning of this year, the iLoan division allows us to reach customers located outside our branch footprint and to more effectively process applications from customers within our branch footprint who prefer the convenience of online transactions.

We have recently expanded our efforts related to our iLoan division using e-signature and automated clearinghouse (“ACH”) funding capabilities. As of June 30, 2013, the iLoan division was lending in 20 states. We intend to expand our capabilities into another 26 states by the end of this year.

SpringCastle Portfolio

On April 1, 2013, as part of our focus on our consumer lending business, we acquired from HSBC the SpringCastle Portfolio, a $3.9 billion consumer loan portfolio consisting of more than 415,000 loans, at a purchase price of $3.0 billion. The portfolio includes primarily unsecured personal loans as well as loans secured with subordinate residential real estate mortgages. Because the subordinate residential real estate mortgages are primarily revolving loans secured by junior liens with little, if any, underlying real estate value, we believe these loans exhibit characteristics and performance more closely resembling unsecured personal loans. The junior lien loans are therefore characteristically distinct from our legacy real estate portfolio, which is comprised generally of fixed rate loans secured by first lien mortgages. Accordingly, we intend to service these loans as personal loans which is consistent with the manner in which they were serviced by HSBC.

Our Springleaf Acquisitions division effected the purchase of the SpringCastle Portfolio through a three-way joint venture with an entity controlled by Newcastle Investment Corp. (“Newcastle”), which is managed by an affiliate of Fortress, and with an affiliate of Blackstone Tactical Opportunities Advisors L.L.C. (“Blackstone”). We own a 47% equity interest in the joint venture.

Springleaf Servicing Solutions

We have expanded our personal loan servicing capabilities to include centralized servicing of acquired loan portfolios, such as the SpringCastle Portfolio, as well as our internet-originated loans.

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

Consumer Loan Securitizations

Earlier this year we demonstrated the ability to attract capital markets funding for our personal loan business by completing two securitizations of personal loans, a first for our industry in 15 years. The first was a securitization closed in February 2013 that includes a two-year revolving period. This successful transaction was followed in June 2013 with a three-year revolving personal loan securitization. We expect to continue to expand

 

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this program that locks in our funding for loan originations for multiple years. Over the last several years we have also demonstrated the ability to replace maturing unsecured debt with lower-cost, non-recourse securitization debt backed by our personal loan and legacy real estate loan portfolios.

On September 25, 2013, we completed a private securitization transaction in which Springleaf Funding Trust 2013-BAC (the “2013-BAC Trust”), a wholly owned special purpose vehicle of SFC, issued $500.0 million of notes backed by an amortizing pool of personal loans acquired from subsidiaries of SFC. We sold the personal loan-backed notes for gross proceeds of $500.0 million.

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

On September 27, 2013, we established a private securitization facility pursuant to which Springleaf Funding Trust 2013-VFN1 (the “Springleaf 2013-VFN1 Trust”), a wholly owned special purpose vehicle of SFC, may issue variable funding notes with a maximum principal balance of $350 million to be backed by personal loans acquired from subsidiaries of SFC from time to time. No amounts were funded at closing, but may be funded from time to time over a two-year period, which may be extended for one year, subject to the satisfaction of customary conditions precedent. During this period, the notes can also be paid down in whole or in part and then redrawn. Following the two- or three-year funding period, as the case may be, the principal amount of the notes, if any, will amortize and will be due and payable in full in October 2019.

Secured Term Loan Prepayments

On July 29, 2013 and September 30, 2013, SFFC made prepayments, without penalty or premium, of $235.1 million and $1.25 billion, respectively, of outstanding principal (plus accrued interest) on the Secured Term Loan. In addition, on September 30, 2013, the parties to the Secured Term Loan entered into an incremental facility joinder agreement with Bank of America, N.A., as lender, administrative agent and collateral agent, whereby $750.0 million of new term loans due September 30, 2019 (the “New Loan Tranche”) were made. Proceeds from the New Loan Tranche were used to fund the $1.25 billion prepayment of existing secured term loans due 2017. Following the prepayments, the outstanding principal amount of existing secured term loans due 2017 totaled $550.0 million.

On October 6, 2013, SFFC delivered an irrevocable written notice of its intent to make a prepayment, without penalty or premium, on October 11, 2013, of $550.0 million of initial loans under the Secured Term Loan. Following the prepayment, the initial loans under the Secured Term Loan maturing in 2017 will be fully repaid, and the outstanding principal amount of loans under the New Loan Tranche will be $750.0 million. Upon the repayment in full of the initial loans under the Secured Term Loan, pursuant to the incremental facility joinder agreement to the Secured Term Loan dated September 30, 2013, which established the New Loan Tranche, (i) the borrowing base formula will be modified to increase the amount and expand the categories of assets eligible for inclusion in the borrowing base, and (ii) certain restrictions contained in the negative covenants under the Secured Term Loan will be revised to provide for more flexibility for the Company and its subsidiaries.

SFC’s Offerings of Senior Notes

A key component of our strategy is issuing new debt on attractive terms to raise funds for our operations. On May 29, 2013, SFC issued $300 million aggregate principal amount of 6.00% senior notes due

 

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2020 (the “6.00% Senior Notes”). The size of the offering was increased from an original $250 million, and we believe the demand for this debt instrument is indicative of our strong capital structure and access to diverse sources of liquidity.

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

Springleaf Holdings, LLC Restricted Stock Units

Springleaf Holdings, LLC granted fully vested restricted stock units (“RSUs”) to certain executives of the Company. The common units underlying these RSUs will be delivered to the executives no later than March 15, 2014 and generally cannot be sold or otherwise transferred for 5 years following the date of delivery, except to the extent necessary to satisfy certain tax obligations.

The Company has recognized this grant in accordance with ASC 718, Compensation—Stock Compensation. This guidance requires all share-based payments to employees, including grants of employee stock options, to be recognized as an expense in the consolidated statements of income and comprehensive income, based on the fair values. The amount of compensation is measured at the fair value of the awards when granted and this cost is expensed over the required service period, which is normally the vesting period of the award, in this case, fully expensed on September 30, 2013.

Springleaf Financial Holdings, LLC Incentive Units

Prior to the consummation of this offering, and subject to the approval of the board of the Initial Stockholder, certain executives of the Company will receive a grant of incentive units in the Initial Stockholder. These incentive units are intended to encourage the executives to create sustainable, long-term value for the Company by providing them with interests that will be subject to their continued employment with the Company and that will only provide benefits (in the form of distributions) if the Initial Stockholder makes distributions to one or more of its common members that exceed specified amounts. We expect that the incentive units will be entitled to vote together with the holders of common units in the Initial Stockholder as a single class on all matters. We also expect that these incentive units will not be able to be sold or otherwise transferred and the executives will be entitled to receive these distributions only while they are employed with the Company, unless the executive’s termination of employment results from the executive’s death, in which case the executive’s beneficiaries will be entitled to receive any future distributions.

The Company will recognize these incentive units in accordance with ASC 710, Compensation— General, and will recognize compensation expense at the time distributions are made to the executives.

Preliminary Financial Information

The following preliminary, unaudited financial information included in this prospectus has been prepared by, and is the responsibility of management and reflects our expectations with respect to our results of operations for the quarter ended September 30, 2013, based on currently available information. We have not yet finalized our financial statements as of and for the quarter ended September 30, 2013, and our independent registered public accounting firm has not audited, reviewed, compiled or performed any procedures, with respect

 

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to the preliminary financial information presented below and accordingly does not express an opinion or any form of assurance with respect thereto.

Actual results for the period may differ materially from the preliminary estimates discussed below. Our preliminary information indicates that our third quarter 2013 net income attributable to Springleaf may be lower than the second quarter 2013, due to the following items (all amounts set out below are before impact from taxes) :

 

   

$41.2 million of recoveries on charged off finance receivables recognized in the second quarter of 2013, resulting from a sale of finance receivables to an unrelated third party in June 2013.

 

   

An increase in provision for finance receivables losses in our SpringCastle Portfolio in the third quarter of 2013 (as compared to the second quarter of 2013). We acquired the SpringCastle Portfolio at the beginning of the second quarter, and we expected this increase to occur as the portfolio normalizes to a stabilized charge off ratio after it was recorded at fair value at the time of the acquisition. We expect this provision for finance receivable losses to be in the range of $64 million to $67 million in the third quarter 2013, compared to $17.8 million in the second quarter 2013. After deducting the non-controlling interest impact of these amounts, we expect the provision attributable to Springleaf to be in the range of $30 million to $31 million in the third quarter 2013 compared to $8.4 million in the second quarter 2013.

 

   

A loss of approximately $35 million due to the accelerated repurchase of approximately $184 million aggregate principal balance of our outstanding 6.90% medium term notes, Series J, due 2017.

 

   

Non-cash stock compensation expense of approximately $131 million (assuming a $1.6 billion valuation on equity prior to consummation of this offering) due to the grant of restricted stock units (fully vested at grant) to certain of our executives in the third quarter 2013.

Outlook

Assuming the U.S. economy continues to experience slow to moderate growth, we expect to maintain the favorable performance of our personal loans achieved during 2012 and the first half of 2013. We believe the strong credit quality of our personal loan portfolio is the result of our disciplined underwriting practices and ongoing collection efforts. We also continue to see growth in the volume of personal loan originations driven by several factors:

 

   

Declining competition from banks, thrifts and credit unions as these institutions have retreated from the non-prime market in the face of regulatory scrutiny and in the aftermath of the housing crisis. This reduction in competition has occurred concurrently with the exit of subprime credit card providers from the industry. As a result of the reduced lending of these competitors, access to credit has fallen substantially for the non-prime segment of customers, which, in turn, has increased our potential customer base.

 

   

Slow but sustained economic growth.

 

   

Migration of customer activity from traditional channels such as direct mail to online channels (served by our iLoan division) where we are well suited to capture volume due to our scale, technology and deployment of advanced analytics.

 

   

Our renewed focus on our personal loan business as we have discontinued real estate and other product originations both in our branches and in centralized lending.

We anticipate the credit quality ratios in our real estate loan portfolio will remain under pressure as the portfolio continues to liquidate, however, performance may improve as a result of strengthening home prices as

 

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well as increased centralization of real estate loan servicing and the application of analytics to more effectively target portfolio management and collections strategies.

Results of Operations

Consolidated Results

See table below for our consolidated operating results. A further discussion of our operating results for each of our segments is provided under “—Segment Results.”

 

     Successor Company     Predecessor
Company
 
     Six Months Ended
June 30,
    Year Ended
December 31,
    One Month
Ended
December 31,

2010
    Eleven Months
Ended
November 30,

2010
 
     2013      2012     2012     2011      
     (in thousands)  

Interest income:

               

Finance charges

     $993,634         $861,919        $1,703,552        $1,885,547        $181,329        $1,668,302   

Finance receivables held for sale originated as held for investment

             2,394        2,740                      20,418   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     993,634         864,313        1,706,292        1,885,547        181,329        1,688,720   

Interest expense

     468,926         560,273        1,068,391        1,268,047        118,693        996,469   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     524,708         304,040        637,901        617,500        62,636        692,251   

Provision for finance receivable losses

     182,938         136,939        338,219        332,848        38,767        444,349   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for finance receivable losses

     341,770         167,101        299,682        284,652        23,869        247,902   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other revenues:

               

Insurance

     68,867         61,323        126,423        120,190        11,269        113,604   

Investment

     20,931         18,167        32,550        35,694        431        37,789   

Other

     5,328         (31,598     (64,770     (17,725     20,112        73,029   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other revenues

     95,126         47,892        94,203        138,159        31,812        224,422   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expenses:

               

Operating expenses:

               

Salaries and benefits

     157,290         162,992        320,164        359,724        31,168        390,255   

Other operating expenses

     121,979         142,835        296,395        345,178        26,223        303,221   

Restructuring expenses

             23,503        23,503                        

Insurance losses and loss adjustment expenses

     31,100         27,150        60,679        41,114        4,585        43,576   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expenses

     310,369         356,480        700,741        746,016        61,976        737,052   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Bargain purchase gain

                                  1,469,182          
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before provision for (benefit from) income taxes

     126,527         (141,487     (306,856     (323,205     1,462,887        (264,728

Provision for (benefit from) income taxes

     27,708         (48,481     (88,222     (99,049     (1,388     (250,697
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     98,819         (93,006     (218,634     (224,156     1,464,275        (14,031

Less: Net income attributable to non-controlling interests

     53,948                                       
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Springleaf

     $44,871         $(93,006     $(218,634     $(224,156     $1,464,275        $(14,031
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Comparison of Consolidated Results for Six Months Ended June 30, 2013 and 2012

Finance charges for the six months ended June 30, 2013 when compared to the same period in 2012 increased due to the net of the following:

 

     2013 Compared to 2012
Six Months Ended
 
     (in thousands)  

Decrease in average net receivables

     $(71,959

Increase in yield

     40,318   

Change in number of days (due to 2012 leap year)

     (3,522

SpringCastle finance charges in 2013

     166,878   
  

 

 

 

Total

     $131,715   
  

 

 

 

Average net receivables (excluding SpringCastle Portfolio) decreased for the six months ended June 30, 2013 when compared to the same period in 2012 primarily due to our liquidating real estate loan and retail sales finance portfolios as well as the impact of our branch office closings during 2012, partially offset by higher personal loan average net receivables resulting from our new focus on personal loans.

Yield increased for the six months ended June 30, 2013 when compared to the same period in 2012 primarily due to our continued focus on personal loans, which have higher yields. These increases were partially offset by the increase in Troubled Debt Restructuring (“TDR”) finance receivables (which result in reduced finance charges reflecting the reductions to the interest rates on these TDR finance receivables) and the diminishing impact on yield from the effects of push-down accounting over time.

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

Interest expense decreased for the six months ended June 30, 2013 when compared to the same period in 2012 due to the following:

 

     2013 Compared to 2012
Six Months Ended
 
     (in thousands)  

Decrease in average debt

     $(44,924

Decrease in weighted average interest rate

     (71,014

SpringCastle interest expense in 2013

     24,591   
  

 

 

 

Total

     $(91,347
  

 

 

 

Average debt decreased for the six months ended June 30, 2013 when compared to the same period in 2012 primarily due to debt repurchases and repayments of $2.3 billion during the last half of 2012 and $3.3 billion during the first half of 2013. These decreases were partially offset by six securitization transactions completed during the past 12 months, including the securitization of the SpringCastle Portfolio. The weighted average interest rate on our debt decreased for the six months ended June 30, 2013 when compared to the same period in 2012 primarily due to debt repurchases and repayments during the last half of 2012 and the first half of 2013, which resulted in lower accretion of net discount applied to long-term debt. The lower weighted average interest rate also reflected the completion of the securitization transactions described above, which generally have lower interest rates.

Provision for finance receivable losses increased $46.0 million for the six months ended June 30, 2013 when compared to the same period in 2012. This was primarily due to the additional allowance requirements of $56.1 million recorded in the six months ended June 30, 2013 on our real estate loans deemed to be TDR finance receivables subsequent to the Fortress Acquisition, growth in our personal loans in 2013 and additional provision from the SpringCastle Portfolio. These increases were partially offset by $41.2 million of recoveries on charged-off finance receivables resulting from a sale of these finance receivables to an unrelated third party in June 2013 as well as favorable personal and real estate loan delinquency trends. We expect to continue to sell charged-off

finance receivables within our portfolios from time to time. If we were to sell additional charged-off finance

 

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receivables in a given period, we would recognize a decrease to our provision for finance receivables losses and improve our liquidity. The allowance for finance receivables losses was eliminated with the application of push-down accounting as the allowance for finance receivables losses was incorporated in the new fair value basis of the finance receivables as of the Fortress Acquisition date.

Other revenues increased $36.9 million for the six months ended June 30, 2013 when compared to the same period in 2012 primarily due to $29.2 million in favorable variances in writedowns and net gain (loss) on sales of real estate owned properties primarily due to a decrease in the number of real estate owned properties and partially due to a change in our assumptions with respect to estimating the net realizable value of real estate owned effective December 31, 2012. The change in our assumptions resulted from our valuation assessment of real estate owned in comparison to realization experience. The increase in other revenues also reflected lower net losses on foreign exchange transactions relating to our Euro denominated debt, cross currency interest rate swap agreement, and Euro denominated cash and cash equivalents, which resulted in a favorable variance of $4.0 million during the six months ended June 30, 2013 when compared to the same period in 2012 and lower net losses on debt repurchases and repayments. We do not anticipate recognizing any foreign exchange transaction gains (losses) after our Euro denominated debt due in November 2013 matures.

Salaries and benefits decreased $5.7 million for the six months ended June 30, 2013 when compared to the same period in 2012 primarily due to having fewer employees in 2013 as a result of the restructuring activities during the first half of 2012 and lower pension expenses primarily due to the pension plan freeze effective December 31, 2012.

Other operating expenses decreased $20.9 million for the six months ended June 30, 2013 when compared to the same period in 2012 primarily due to lower occupancy costs as a result of fewer branch offices in 2013, lower real estate expenses, and additional expenses recorded in 2012 for refunds to customers of our United Kingdom subsidiary relating to payment protection insurance, partially offset by servicing fee expenses charged by HSBC to service the SpringCastle Portfolio pursuant to an interim servicing agreement, and higher advertising expenses due to increased mailings and promotions.

As part of a strategic effort to streamline operations and reduce expenses and focus on consumer lending, we initiated the following restructuring activities during the first half of 2012: we ceased originating real estate loans in the United States and the United Kingdom effective January 1, 2012; we also ceased branch-based personal lending and retail sales financing in 14 states where we did not have a significant presence; we consolidated certain branch operations in 26 states and closed 231 branch offices in various states; and in August 2012, we sold our entire UK finance receivable portfolio as well as our UK mortgage brokerage business. As a result of these restructuring activities, we reduced our workforce by 820 employees, which meaningfully reduced our ongoing labor expenses and incurred a pretax charge of $23.5 million during the first half of 2012.

Provision for income taxes totaled $27.7 million for the six months ended June 30, 2013 compared to our benefit from income taxes of $48.5 million for the same period in 2012. Our effective tax rate was 21.9% for the six months ended June 30, 2013. The effective tax rate differed from the federal statutory rate for the six months ended June 30, 2013 primarily due to the effect of the non-controlling interest in our joint venture, which decreased the effective tax rate by 14.9%.

Comparison of Consolidated Results for 2012 and 2011

Finance charges decreased in 2012 when compared to 2011 due to the net of the following:

 

     2012 Compared to 2011
Year Ended December 31, 2012
 
     (in thousands)  

Decrease in average net receivables

     $(168,839

Decrease in yield

     (17,092

Increase in number of days in 2012

     3,936   
  

 

 

 

Total

     $(181,995
  

 

 

 

 

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Average net receivables decreased in 2012 when compared to 2011 primarily due to our liquidating real estate loan portfolio as well as the impact of our branch office closings during 2012, which were partially offset by an increase in personal loans average net receivables.

Yield decreased in 2012 when compared to 2011 primarily due to the increase in TDR finance receivables and the diminishing impact on yield from the effects of push-down accounting over time. This decrease was partially offset by a higher proportion of personal loans in our finance receivable portfolio, which have higher yields. The decrease in yield in 2012 also reflected lower finance charges resulting from an out-of-period adjustment recorded in the second quarter of 2013, which decreased finance charges by $13.9 million ($11.5 million of which related to 2011). The adjustment related to the correction of capitalized interest on purchased credit impaired finance receivables serviced by a third party.

Interest expense decreased in 2012 when compared to 2011 due to the following:

 

     2012 Compared to 2011
Year Ended December 31, 2012
 
     (in thousands)  

Decrease in average debt

     $(127,048

Decrease in weighted average interest rate

     (72,608
  

 

 

 

Total

     $(199,656
  

 

 

 

Average debt decreased in 2012 when compared to 2011 primarily due to the repayment or repurchase of $3.1 billion of debt at maturity in 2012. The weighted average interest rate on our debt decreased in 2012, when compared to 2011, primarily due to debt repurchases in 2012 resulting in lower accretion of net discount applied to long-term debt from the effects of push-down accounting and the completion of three securitization transactions.

Provision for finance receivable losses increased $5.4 million in 2012 when compared to 2011. While our overall net finance receivables declined by 10.3% and our delinquency and charge-off trends improved in 2012 when compared to 2011, we increased our allowance for finance receivable losses (through the provision for finance receivable losses) by $108.1 million. The increase in the allowance for finance receivable losses during 2012 reflected the additional allowance requirements on our real estate loans deemed to be TDR finance receivables, and on our finance receivables originated, in each case subsequent to the Fortress Acquisition. Finance receivables were revalued at the time of the Fortress Acquisition at fair value, resulting in no allowance reserved.

Other revenues decreased $47.0 million in 2012 when compared to 2011 primarily due to unfavorable variances in foreign exchange gains (losses) on Euro denominated debt and related derivative adjustments and net loss on repurchases of debt in 2012, partially offset by foreign exchange transaction gains in 2012.

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

Other operating expenses decreased $48.8 million in 2012 when compared to 2011 primarily due to fewer branch offices in 2012, lower amortization of other intangible assets resulting from the write off of our United Kingdom subsidiary’s trade names and customer relationship intangible assets in fourth quarter 2011 and our United Kingdom subsidiary’s customer lists intangible assets in third quarter 2012. These decreases were partially offset by additional expenses recorded in 2012 for refunds to our United Kingdom subsidiary’s customers relating to payment protection insurance.

We recorded restructuring expenses of $23.5 million during the first half of 2012 in connection with our restructuring activities in 2012.

 

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Comparison of Consolidated Results for 2011 and Eleven Months Ended November 30, 2010

Finance charges increased in 2011 when compared to the eleven months ended November 30, 2010 due to the net of the following:

 

      2011 Compared to 2010
Year Ended December 31, 2011*
 
     (in thousands)  

Increase in yield

     $461,067   

Decrease in average net receivables

     (365,815

Increase in number of days

     121,993   
  

 

 

 

Total

     $217,245   
  

 

 

 

 

* Total change for the year ended December 31, 2011 (Successor Company) is compared to eleven months ended November 30, 2010 (Predecessor Company).

Yield increased in 2011 when compared to the eleven months ended November 30, 2010 primarily due to the impact of valuation discount accretion resulting from the push-down accounting adjustments, which increased yield by 352 basis points in 2011. Average net receivables decreased in 2011 when compared to the eleven months ended November 30, 2010 reflecting the impact of push-down accounting adjustments, which decreased average net receivables by $2.1 billion in 2011 and our tighter underwriting guidelines and liquidity management efforts.

Interest expense increased in 2011 when compared to the eleven months ended November 30, 2010 due to the net of the following:

 

      2011 Compared to 2010
Year Ended December 31, 2011*
 
     (in thousands)  

Decrease in average debt

     $(190,065

Increase in weighted average interest rate

     356,291   

Increase in number of days

     105,352   
  

 

 

 

Total

     $271,578   
  

 

 

 

 

* Total change for the year ended December 31, 2011 (Successor Company) is compared to eleven months ended November 30, 2010 (Predecessor Company).

The weighted average interest rate on our debt increased in 2011 when compared to the eleven months ended November 30, 2010 primarily due to the impact of valuation discount accretion resulting from the push-down accounting adjustments, which increased our interest rate by 284 basis points in 2011. Average debt decreased in 2011 when compared to the eleven months ended November 30, 2010 primarily due to liquidity management efforts and the impact of push-down accounting adjustments, which decreased average debt by $1.2 billion in 2011.

Provision for finance receivable losses decreased $111.5 million in 2011 when compared to eleven months ended November 30, 2010. The 2011 provision for finance receivable losses reflected the requirements for allowance for finance receivable losses under the application of push-down accounting as of the Fortress Acquisition date compared to the historical accounting basis for the eleven months ended November 30, 2010. The two bases of accounting are not comparable. The 2011 provision for finance receivable losses primarily reflected the establishment of new allowance requirements for newly originated finance receivables and for additional allowance requirements for real estate loans deemed to be TDR finance receivables after the Fortress Acquisition date. The allowance for finance receivables losses was eliminated with the application of push-down

 

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accounting as the allowance was incorporated in the new fair value basis of the finance receivables as of the Fortress Acquisition. The provision for finance receivable losses for the eleven months ended November 30, 2010 reflected an overall reduction of allowance for finance receivables of 9.7%, compared to a reduction in our net finance receivables of 10.1%, as well as improved charge-off trends for the period.

Other revenues decreased $90.8 million in 2011 when compared to the eleven months ended November 30, 2010 primarily due to an unfavorable variance in foreign exchange gains on Euro denominated debt and higher writedowns on real estate owned and net loss on sales of real estate owned reflecting the fragile U.S. residential real estate market.

Salaries and benefits decreased $30.5 million in 2011 when compared to the eleven months ended November 30, 2010 primarily due to lower medical claims and premiums paid by the Company in 2011 and fewer employees, which was partially offset by the additional month in the 2011 period.

Other operating expenses increased $42.0 million in 2011 when compared to the eleven months ended November 30, 2010 primarily due to the additional month in the 2011 period, the impact of push-down accounting adjustments (including the amortization of other intangible assets), higher professional services expenses, and higher advertising expenses, partially offset by lower legal accruals and lower administrative expenses allocated from our former indirect parent.

 

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

Due to the nature of the Fortress Acquisition, we revalued our assets and liabilities based on their fair values at November 30, 2010, the date of the Fortress Acquisition, in accordance with business combination accounting standards, or push-down accounting, which resulted in a $1.5 billion bargain purchase gain for the one month ended December 31, 2010. Push-down accounting affected and continues to affect, among other things, the carrying amount of our finance receivables and long-term debt, our finance charges on our finance receivables and related yields, our interest expense, our allowance for finance receivable losses, and our net charge-offs and charge-off ratio. In general, on a quarterly basis, we accrete or amortize the valuation adjustments recorded in connection with the Fortress Acquisition, or record adjustments based on current expected cash flows as compared to expected cash flows at the time of the Fortress Acquisition, in each case, as described in more detail in the footnotes to the table below and in the Notes to Consolidated Financial Statements for the year ended December 31, 2012 included elsewhere in this prospectus. In addition, push-down accounting resulted in the elimination of accretion or amortization of discounts, premiums, and other deferred costs on our finance receivables and long-term debt prior to the Fortress Acquisition. The reconciliations of income (loss) before provision for (benefit from) income taxes on a push-down accounting basis to our historical accounting basis (which is a basis of accounting other than GAAP that we believe provides a consistent basis for both management and other interested third parties to better understand our operating results) were as follows:

 

     Successor Company     Predecessor
Company
 
     Six Months
Ended
June 30,
    Year Ended
December 31,
    One Month
Ended
December  31,
2010
    Eleven  Months
Ended
November  30,
2010
 
     2013     2012     2012     2011      
     (in thousands)  

Income (loss) before provision for (benefit from) income taxes—push-down accounting basis

     $126,527        $(141,487     $(306,856     $(323,205     $1,462,887        $(264,728

Interest income adjustments(a)

     (103,532     (94,590     (197,981     (261,490     (36,663       

Interest expense adjustments(b)

     70,187        125,238        220,969        339,022        28,809          

Provision for finance receivable losses adjustments(c)

     7,250        22,023        185,859        79,287        (1,488       

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

     (21,316     10,967        39,411                        

Amortization of other intangible assets(e)

     2,718        5,555        13,618        41,085        3,797          

Bargain purchase gain

                                 (1,469,182       

Other(f)

     2,466        (969     (8,407     (38,752     (11,906       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before provision for (benefit from) income taxes—historical accounting basis

     $84,300        $(73,263     $(53,387     $(164,053     $(23,746     $(264,728
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

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Components of interest income adjustments consisted of:

 

    Successor Company     Predecessor
Company
 
    Six Months
Ended
June 30,
    Year Ended
December 31,
    One Month
Ended
December  31,
2010
    Eleven  Months
Ended
November  30,
2010
 
    2013     2012     2012     2011      
    (in thousands)  

Accretion of net discount applied to non-credit impaired net finance receivables

    $(83,374     $(93,294     $(173,174     $(230,123     $(36,982     $—   

Purchased credit impaired finance receivables finance charges

    (28,518     (10,702     (41,567     (54,450     (2,630       

Elimination of accretion or amortization of historical unearned points and fees, deferred origination costs, premiums, and discounts

    8,360        9,406        16,760        23,083        2,949          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    $(103,532     $(94,590     $(197,981     $(261,490     $(36,663     $—   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

Components of interest expense adjustments were as follows:

 

     Successor Company     Predecessor
Company
 
     Six Months
Ended
June 30,
    Year Ended
December 31,
    One Month
Ended
December  31,
2010
    Eleven  Months
Ended
November  30,
2010
 
     2013     2012     2012     2011      
     (in thousands)  

Accretion of net discount applied to long-term debt

     $92,748        $153,381        $278,634        $387,152        $34,773        $—   

Elimination of accretion or amortization of historical discounts, premiums, commissions, and fees

     (22,561     (28,143     (57,665     (48,130     (5,964       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     $70,187        $125,238        $220,969        $339,022        $28,809        $—   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

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Components of provision for finance receivable losses adjustments were as follows:

 

     Successor Company     Predecessor
Company
 
     Six Months
Ended
June 30,
    Year Ended
December 31,
    One Month
Ended
December  31,
2010
    Eleven  Months
Ended
November  30,
2010
 
     2013     2012     2012     2011      
     (in thousands)  

Allowance for finance receivable losses adjustments

     $41,573        $74,862        $282,679        $255,213        $22,195        $—   

Net charge-offs

     (34,323     (52,839     (96,820     (175,926     (23,683       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     $7,250        $22,023        $185,859        $79,287        $(1,488     $—   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

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

 

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

As of June 30, 2013, $711.9 million and $830.5 million of un-accreted push-down basis remained for net finance receivables, less allowance and long-term debt, respectively.

Segment Overview

As of June 30, 2013, our segments include: Consumer, Insurance, Portfolio Acquisitions, and Real Estate. Management considers Consumer, Insurance, and Portfolio Acquisitions to be our Core Consumer Operations and Real Estate as our Non-Core Portfolio.

Our segments are managed as follows:

Core Consumer Operations

 

   

Consumer.    We originate and service personal loans (secured and unsecured) through two business divisions: branch operations and our iLoan division. Branch operations primarily conducts business in 26 states, which are our core operating states. The iLoan division processes and underwrites loan applications that we receive through an internet portal. If the applicant is located near an existing branch, our iLoan division makes the credit decision regarding the application and then refers the customer to a nearby branch for closing, funding and servicing. If the applicant is not located near a branch, our iLoan division originates the loan.

 

   

Insurance.    We offer credit insurance (life, accident and health insurance, and involuntary unemployment insurance), non-credit insurance, and ancillary products, such as warranty protection. We also require credit-related property and casualty insurance, when needed, to protect our interest in the property pledged as collateral.

 

   

Portfolio Acquisitions.    We acquired the SpringCastle Portfolio, a $3.9 billion consumer loan portfolio consisting of over 415,000 unsecured loans and loans secured by subordinate residential

 

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real estate mortgages (which we service as unsecured loans due to the fact that the liens are subordinated to superior ranking security interests). This SpringCastle Portfolio was acquired from HSBC through a newly-formed joint venture in which we own a 47% equity interest and which we consolidate in our financial statements. The loans in the SpringCastle Portfolio vary in form and substance from our typical branch serviced loans and are in a liquidating status with no anticipation of significant renewal activity. We assumed the direct servicing obligations for the loans in the SpringCastle Portfolio in September 2013, at which time we changed the name of this segment to “Acquisitions and Servicing.” Future strategic portfolio or business acquisitions will also be a part of this segment.

Non-Core Portfolio

 

   

Real Estate.    We service and hold real estate loans secured by first or second mortgages on residential real estate. Real estate loans previously originated through our branch offices are either serviced by our branch personnel or by our centralized servicing operation. Real estate loans previously acquired or originated through centralized distribution channels are serviced by one of our indirect wholly owned subsidiaries, MorEquity, all of which are subserviced by Nationstar, except for certain securitized real estate loans, which are serviced and subserviced by third parties. Investment funds managed by affiliates of Fortress indirectly own a majority interest in Nationstar. As a result of the cessation of real estate lending effective January 1, 2012, all of our real estate loans are in a liquidating status.

The remaining components (which we refer to as “Other”) consist of our non-core and non-originating legacy operations, which are isolated by geographic market and/or distribution channel from our Core Consumer Operations and our Non-Core Portfolio. These operations include our legacy operations in 14 states where we have also ceased branch-based personal lending as a result of our restructuring activities during the first half of 2012, our liquidating retail sales finance portfolio (including our retail sales finance accounts from our dedicated auto finance operation), our lending operations in Puerto Rico and the U.S. Virgin Islands, and the operations of our United Kingdom subsidiary.

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

 

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We allocate revenues and expenses to each segment using the following methodologies:

 

Finance charges

   Directly correlated with a specific segment.

Interest expense

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

Provision for finance

receivable losses

   Directly correlated with a specific segment except for allocations to “other,” which are based on the remaining delinquent accounts as a percentage of total delinquent accounts.

Insurance revenues

   Directly correlated with a specific segment.

Investment revenues

   Directly correlated with a specific segment.

Other revenues

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

Salary and benefits

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

Other operating expenses

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

Insurance losses and loss

adjustment expenses

   Directly correlated with a specific segment.

 

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Table of Contents

Segment Results

The following section discusses the pretax operating results of our segments:

Core Consumer Operations

Pretax operating results for Consumer and Insurance (which are reported on a historical accounting basis), and Portfolio Acquisitions are presented in the table below on an aggregate basis:

 

     Six Months Ended
June 30,
     Year Ended
December 31,
 
     2013      2012      2012      2011     2010  
     (in thousands)  

Interest income:

             

Finance charges

     $497,965         $280,231         $585,041         $534,861        $548,875   

Finance receivables held for sale originated as held for investment

                                    8,947   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total interest income

     497,965         280,231         585,041         534,861        557,822   

Interest expense

     97,460         66,589         141,440         125,268        142,908   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net interest income

     400,505         213,642         443,601         409,593        414,914   

Provision for finance receivable losses

     31,811         28,838         90,598         8,607        113,612   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net interest income after provision for finance receivable losses

     368,694         184,804         353,003         400,986        301,302   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Other revenues:

             

Insurance

     68,848         61,332         126,423         120,456        124,813   

Investments

     22,746         20,250         39,314         45,172        40,654   

Other

     6,125         3,648         16,398         (6,641     1,610   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total other revenues

     97,719         85,230         182,135         158,987        167,077   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Other expenses:

             

Operating expenses:

             

Salaries and benefits

     131,113         130,061         258,828         273,602        306,398   

Other operating expenses

     86,582         70,456         120,492         154,636        163,812   

Restructuring expenses

             15,863         15,863                  

Insurance losses and loss adjustment expenses

     31,524         27,716         62,092         44,361        48,268   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total other expenses

     249,219         244,096         457,275         472,599        518,478   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Pretax operating income (loss)

     217,194         25,938         77,863         87,374        (50,099

Pretax operating income attributable to non-controlling interests

     53,948