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LEAF > SEC Filings for LEAF > Form 10-Q on 15-May-2014All Recent SEC Filings

Show all filings for SPRINGLEAF HOLDINGS, INC.

Form 10-Q for SPRINGLEAF HOLDINGS, INC.


15-May-2014

Quarterly Report


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

Forward-Looking Statements

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

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

levels of unemployment and personal bankruptcies;

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

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

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;

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

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

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

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

          shifts in residential real estate values;

          shifts in collateral values, delinquencies, or credit losses;

          changes in federal, state and local laws, regulations, or regulatory

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

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;


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

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

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

          our ability to comply with our debt covenants;

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

          our substantial indebtedness, which could prevent us from meeting our

obligations under our debt instruments and limit our ability to react to changes in the economy or our industry, or our ability to incur additional borrowings;

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

          the impacts of our securitizations and borrowings;

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

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

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

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

Overview

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

At March 31, 2014, we had four business segments: Consumer, Insurance, Acquisitions and Servicing, and Real Estate. See Note 16 of the Notes to Condensed Consolidated Financial Statements for a description of our segments.

OUR PRODUCTS

Our core product offerings include:

Personal Loans - We offer personal loans through our branch network and over the internet through our iLoan division to customers who generally need timely access to cash. Our personal


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loans are typically non-revolving with a fixed-rate and a fixed, original term of two to four years. At March 31, 2014, we had over 836,000 personal loans, representing $3.2 billion of net finance receivables, of which $1.4 billion, or 45%, were secured by collateral consisting of titled personal property (such as automobiles), $1.3 billion, or 39%, were secured by consumer household goods or other items of personal property, and the remainder was unsecured.

SpringCastle Portfolio - We acquired the SpringCastle Portfolio from HSBC on April 1, 2013 through a joint venture in which we own a 47% equity interest. These loans included unsecured loans and loans secured by subordinate residential real estate mortgages (which we service as unsecured loans due to the fact that the liens are subordinated to superior ranking security interests). The SpringCastle Portfolio includes both closed-end accounts and open-end lines of credit. These loans are in a liquidating status and vary in substance and form from our originated loans. We assumed the direct servicing obligations for these loans in September 2013. At March 31, 2014, the SpringCastle Portfolio included nearly 324,000 of acquired loans, representing $2.3 billion in net finance receivables.

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

Our legacy products include:

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

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

Recent Developments

SECURITIZATION

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

REPAYMENT OF 2013-BAC TRUST NOTES

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


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SALE OF 2009-1 RETAINED CERTIFICATES

On March 31, 2014, we completed the sale of the 2009-1 Retained Certificates. See Note 1 of the Condensed Consolidated Financial Statements for further information on this sale.

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

SALE OF REAL ESTATE LOANS

On March 31, 2014, we completed the sale of certain performing and non-performing real estate loans. See Note 1 of the Condensed Consolidated Financial Statements for further information on this sale.

PREPAYMENT OF SECURED TERM LOAN

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

OUTLOOK

Assuming the U.S. economy continues to experience slow to moderate growth, we expect to continue our long history of strong credit performance. During 2012 and much of 2013, we experienced unusually low charge-off ratios as a result of tightening underwriting practices in 2010-2011. The personal loan portfolio typically exhibited charge-off ratios in the range of 4.75-5.75% prior to the start of the recession in 2008 and has returned to these levels, as we expected. We believe the strong credit quality of our personal loan portfolio is the result of our disciplined underwriting practices and ongoing collection efforts. We also continue to see growth in the volume of personal loan originations driven by the following factors:

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

Slow but sustained economic growth.

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

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

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

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


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Results of Operations



CONSOLIDATED RESULTS



See table below for our consolidated operating results. A further discussion of
our operating results for each of our business segments is provided under
"-Segment Results."



(dollars in thousands except earnings (loss) per share)
Three Months Ended March 31,                                     2014             2013

Interest income                                              $     552,637    $     413,038

Interest expense                                                   205,420          231,293

Net interest income                                                347,217          181,745

Provision for finance receivable losses                            160,878           94,486

Net interest income after provision for finance
receivable losses                                                  186,339           87,259

Other revenues:
Insurance                                                           38,419           32,900
Investment                                                           9,461           10,124
Net loss on repurchases and repayments of debt                      (6,615 )              -
Net loss on fair value adjustments on debt                         (16,867 )           (241 )
Net gain on sales of real estate loans and related trust
assets                                                              55,186                -
Other                                                                1,820              873
Total other revenues                                                81,404           43,656

Other expenses:
Operating expenses:
Salaries and benefits                                               92,519           78,428
Other operating expenses                                            57,709           51,610
Insurance losses and loss adjustment expenses                       18,365           14,754
Total other expenses                                               168,593          144,792

Income (loss) before provision for (benefit from) income
taxes                                                               99,150          (13,877 )

Provision for (benefit from) income taxes                           30,518           (4,263 )

Net income (loss)                                                   68,632           (9,614 )

Net income attributable to non-controlling interests                16,308                -

Net income (loss) attributable to Springleaf                 $      52,324    $      (9,614 )

Share Data:
Weighted average number of shares outstanding:
Basic                                                          114,788,439      100,000,000
Diluted                                                        115,144,858      100,000,000
Earnings (loss) per share:
Basic                                                        $        0.46    $       (0.10 )
Diluted                                                      $        0.45    $       (0.10 )


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Comparison of Consolidated Results for Three Months Ended March 31, 2014 and 2013

(dollars in thousands)
Three Months Ended March 31,                                2014           2013

Interest income:
Finance charges                                          $   548,059    $   413,038
Interest income on finance receivables held for sale
originated as held for investment                              4,578              -
Total                                                    $   552,637    $   413,038

Finance charges increased for the three months ended March 31, 2014 when compared to the same period in 2013 due to the net of the following:

(dollars in thousands)

2014 compared to 2013 - Three Months Ended March 31

Decrease in average net receivables                   $ (12,263 )
Increase in yield                                         4,050
SpringCastle finance charges                            143,234
Total                                                 $ 135,021

Average net receivables (excluding SpringCastle Portfolio) decreased for the three months ended March 31, 2014 when compared to the same period in 2013 primarily due to our liquidating real estate loan portfolio, including the transfers of $742.0 million real estate loans associated with the 2009 securitization and an additional $93.3 million real estate loans to finance receivables held for sale on March 1, 2014 and the subsequent sales of these real estate loans on March 31, 2014. The increase was partially offset by higher personal loan average net receivables resulting from our continued focus on personal loans.

Yield increased for the three months ended March 31, 2014 when compared to the same period in 2013 primarily due to our continued focus on personal loans, which have higher yields.

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

Interest expense decreased for the three months ended March 31, 2014 when compared to the same period in 2013 due to the net of the following:

(dollars in thousands)

2014 compared to 2013 - Three Months Ended March 31

Decrease in average debt                              $ (33,684 )
Decrease in weighted average interest rate              (14,383 )
SpringCastle interest expense                            22,194
Total                                                 $ (25,873 )

Average debt (excluding the securitization of the SpringCastle Portfolio) decreased for the three months ended March 31, 2014 when compared to the same period in 2013 primarily due to debt repurchases and repayments of $7.4 billion during the past twelve months. These decreases were partially offset by ten securitization transactions completed during the past twelve months.

The weighted average interest rate on our debt decreased for the three months ended March 31, 2014 when compared to the same period in 2013 primarily due to the debt repurchases and repayments discussed above, which resulted in lower accretion of net discount applied to long-term debt. The lower weighted average interest rate also reflected the completion of ten securitization transactions during the past twelve months, which generally have lower interest rates.


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Provision for finance receivable losses increased $66.4 million for the three months ended March 31, 2014 when compared to the same period in 2013. This increase was primarily due to the additional provision from the SpringCastle Portfolio of $53.0 million and additional allowance requirements reflecting growth in our personal loans during the 2014 period and higher real estate and personal loan delinquency ratios at March 31, 2014. These increases were partially offset by a reduction in the allowance requirements on our real estate loans deemed to be purchased credit impaired finance receivables and TDR finance receivables subsequent to the Fortress Acquisition. The allowance for finance receivables losses was eliminated with the application of push-down accounting as the allowance for finance receivable losses was incorporated in the new fair value basis of the finance receivables as of the Fortress Acquisition date.

Net loss on repurchases and repayments of debt of $6.6 million for the three months ended March 31, 2014 reflected repurchases of debt in 2014 at net amounts greater than par.

Net loss on fair value adjustments on debt of $16.9 million for the three months ended March 31, 2014 reflected net unrealized losses on a long-term debt issuance associated with a mortgage securitization accounted for at fair value.

Net gain on sales of real estate loans and related trust assets of $55.2 million for the three months ended March 31, 2014 reflected the reversal of the remaining un-accreted push-down accounting basis for these real estate loans, less allowance for finance receivable losses that we established at the date of the Fortress Acquisition. See Note 1 of the Notes to Condensed Financial Statements for further information on these sales.

Salaries and benefits increased $14.1 million for the three months ended March 31, 2014 when compared to the same period in 2013 primarily due to higher bonus and commissions accruals resulting from increased originations of personal loans. The increase also reflected higher salary accruals reflecting annual, competitive performance increases in the first quarter of 2014 and share-based compensation expense due to the grant of restricted stock units ("RSUs") to certain employees in the first quarter of 2014.

Other operating expenses increased $6.1 million for the three months ended March 31, 2014 when compared to the same period in 2013 primarily due to higher advertising and information technology expenses.

Provision for income taxes totaled $30.5 million for the three months ended March 31, 2014 compared to benefit from income taxes of $4.3 million for the three months ended March 31, 2013. The effective tax rate for the three months ended March 31, 2014 and 2013 was 30.8%. The effective tax rate for the three months ended March 31, 2014 differed from the federal statutory rate primarily due to the effect of the non-controlling interest in our joint venture, which decreased the effective tax rate by 7.0%. The effective tax rate for the three months ended March 31, 2013 differed from the federal statutory rate primarily due to the effect of the state income taxes.


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

(dollars in thousands)
Three Months Ended March 31,                                   2014          2013

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