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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 2-82985

SPRINGLEAF FINANCE, INC.

(Exact name of registrant as specified in its charter)


Indiana		35-1313922
(State of Incorporation)		(I.R.S. Employer Identification No.)

601 N.W. Second Street, Evansville, IN		47708
(Address of principal executive offices)		(Zip Code)

(812) 424-8031

(Registrant’s telephone number, including area code)

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

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

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.

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

At August 11, 2011, there were 2,000,000 shares of the registrant’s common stock, $.50 par value, outstanding.

TABLE OF CONTENTS


				Page
	Item

Part I		1.	Financial Statements		3

		2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		47

		3.	Quantitative and Qualitative Disclosures About Market Risk		74

		4.	Controls and Procedures		75

Part II		1.	Legal Proceedings		75

		1A.	Risk Factors		76

		2.	Unregistered Sales of Equity Securities and Use of Proceeds		78

		3.	Defaults Upon Senior Securities		78

		4.	Removed and Reserved		-

		5.	Other Information		78

		6.	Exhibits		78

AVAILABLE INFORMATION

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

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

•

Annual Reports on Form 10-K;

•

Quarterly Reports on Form 10-Q;

•

Current Reports on Form 8-K; and

•

any amendments to those reports.

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

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

Part I – FINANCIAL INFORMATION

Item 1.

Financial Statements

SPRINGLEAF FINANCE, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)


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

Assets

Net finance receivables:
Real estate loans (includes loans of consolidated VIEs of $2.1 billion in 2011 and $2.2 billion in 2010)	$	10,669,010		$	11,252,484
Non-real estate loans		2,572,018			2,615,969
Retail sales finance		403,651			491,185

Net finance receivables		13,644,679			14,359,638
Allowance for finance receivable losses (includes allowance of consolidated VIEs of $0.8 million in 2011 and $0.1 million in 2010)		(43,130	)		(7,120	)

Net finance receivables, less allowance for finance receivable losses		13,601,549			14,352,518
Investment securities		749,092			745,846
Cash and cash equivalents		2,192,677			1,397,563
Restricted cash (includes restricted cash of consolidated VIEs of $23.5 million in 2011 and $30.9 million in 2010)		55,090			325,780
Other assets		704,096			1,439,243


Total assets	$	17,302,504		$	18,260,950


Liabilities and Shareholder’s Equity

Long-term debt (includes debt of consolidated VIEs of $1.3 billion in 2011 and $1.5 billion in 2010)	$	14,731,055		$	15,168,034
Insurance claims and policyholder liabilities		318,320			340,203
Other liabilities		348,209			608,835
Deferred and accrued taxes		393,656			525,696

Total liabilities		15,791,240			16,642,768


Shareholder’s equity:
Common stock		1,000			1,000
Additional paid-in capital		147,461			147,457
Accumulated other comprehensive income (loss)		3,025			(2,434	)
Retained earnings		1,359,778			1,472,159

Total shareholder’s equity		1,511,264			1,618,182


Total liabilities and shareholder’s equity	$	17,302,504		$	18,260,950

See Notes to Condensed Consolidated Financial Statements.

SPRINGLEAF FINANCE, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)


(dollars in thousands)	Successor Company			Predecessor Company			Successor Company			Predecessor Company
	Three Months Ended June 30, 2011			Three Months Ended June 30, 2010			Six Months Ended June 30, 2011			Six Months Ended June 30, 2010

Interest income:
Finance charges	$	488,041		$	456,113		$	983,503		$	929,551
Finance receivables held for sale originated as held for investment		—			9,547			—			20,418

Total interest income		488,041			465,660			983,503			949,969

Interest expense		346,292			269,979			699,844			535,807


Net interest income		141,749			195,681			283,659			414,162

Provision for finance receivable losses		102,471			54,951			175,869			239,575


Net interest income after provision for finance receivable losses		39,278			140,730			107,790			174,587


Other revenues:
Insurance		29,809			31,361			58,295			62,881
Investment		10,125			10,616			17,915			18,267
Gain on early extinguishment of secured term loan		10,664			—			10,664			—
Other		9,497			(2,614	)		1,549			75,560

Total other revenues		60,095			39,363			88,423			156,708


Other expenses:
Operating expenses:
Salaries and benefits		92,832			97,951			186,188			197,339
Other operating expenses		106,059			85,780			180,587			166,870
Insurance losses and loss adjustment expenses		137			11,246			12,732			26,830

Total other expenses		199,028			194,977			379,507			391,039


Loss before benefit from income taxes		(99,655	)		(14,884	)		(183,294	)		(59,744	)

Benefit from income taxes		(40,191	)		(55,949	)		(70,913	)		(108,436	)


Net (loss) income	$	(59,464	)	$	41,065		$	(112,381	)	$	48,692

See Notes to Condensed Consolidated Financial Statements.

SPRINGLEAF FINANCE, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive (Loss) Income

(Unaudited)


(dollars in thousands)	Successor Company			Predecessor Company			Successor Company	Predecessor Company
	Three Months Ended June 30, 2011			Three Months Ended June 30, 2010			Six Months Ended June 30, 2011	Six Months Ended June 30, 2010

Net (loss) income	$	(59,464	)	$	41,065		$(112,381)	$	48,692


Other comprehensive income:
Net unrealized gains (losses) on:
Investment securities on which other-than-temporary impairments were taken		158			2,188		158		6,924
All other investment securities		9,534			11,897		13,348		20,064
Swap agreements		1,453			35,064		(13,488)		2,054
Foreign currency translation adjustments		255			(1,928	)	3,813		(10,472	)

Income tax effect:
Net unrealized (gains) losses on:
Investment securities on which other-than-temporary impairments were taken		(55	)		(765	)	(55)		(2,423	)
All other investment securities		(3,337	)		(4,164	)	(4,672)		(7,023	)
Swap agreements		(509	)		(12,273	)	4,720		(719	)
Valuation allowance on deferred tax assets for:
Investment securities		—			8,032		—		8,252
Swap agreements		—			12,273		—		719

Other comprehensive income, net of tax, before reclassification adjustments		7,499			50,324		3,824		17,376


Reclassification adjustments included in net (loss) income:
Realized losses on investment securities		345			1,859		2,515		7,103

Income tax effect of realized losses on investment securities		(121	)		(651	)	(880)		(2,486	)

Reclassification adjustments included in net (loss) income, net of tax		224			1,208		1,635		4,617

Other comprehensive income, net of tax		7,723			51,532		5,459		21,993


Comprehensive (loss) income	$	(51,741	)	$	92,597		$(106,922)	$	70,685

See Notes to Condensed Consolidated Financial Statements.

SPRINGLEAF FINANCE, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Shareholder’s Equity

(Unaudited)


(dollars in thousands)	Common Stock		Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)			(Accumulated Deficit) Retained Earnings			Total Shareholder’s Equity

Predecessor Company

Balance, January 1, 2010	$	1,000	$	1,971,175	$	1,846		$	(57,368	)	$	1,916,653
Capital contributions from parent and other		—		11,429		—			—			11,429
Change in net unrealized gains:
Investment securities		—		—		30,411			—			30,411
Swap agreements		—		—		2,054			—			2,054
Foreign currency translation adjustments		—		—		(10,472	)		—			(10,472	)
Net income		—		—		—			48,692			48,692

Balance, June 30, 2010	$	1,000	$	1,982,604	$	23,839		$	(8,676	)	$	1,998,767


Successor Company

Balance, January 1, 2011	$	1,000	$	147,457	$	(2,434	)	$	1,472,159		$	1,618,182
Capital contributions from parent and other		—		4		—			—			4
Change in net unrealized gains (losses):
Investment securities		—		—		10,414			—			10,414
Swap agreements		—		—		(8,768	)		—			(8,768	)
Foreign currency translation adjustments		—		—		3,813			—			3,813
Net loss		—		—		—			(112,381	)		(112,381	)

Balance, June 30, 2011	$	1,000	$	147,461	$	3,025		$	1,359,778		$	1,511,264

See Notes to Condensed Consolidated Financial Statements.

SPRINGLEAF FINANCE, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)


(dollars in thousands)	Successor Company			Predecessor Company
Six Months Ended June 30,	2011			2010

Cash Flows from Operating Activities
Net (loss) income	$	(112,381	)	$	48,692
Reconciling adjustments:
Provision for finance receivable losses		175,869			239,575
Depreciation and amortization		107,476			75,107
Deferral of finance receivable origination costs		(20,629	)		(18,046	)
Deferred income tax benefit		(129,166	)		(216	)
Net realized losses on investment securities		2,515			7,103
Change in other assets and other liabilities		68,607			(90,335	)
Writedowns and net loss on sales of real estate owned		31,645			20,830
Gain on early extinguishment of secured term loan		(10,664	)		—
Change in insurance claims and policyholder liabilities		(21,883	)		(18,859	)
Change in taxes receivable and payable		(6,370	)		(108,045	)
Change in accrued finance charges		11,339			22,565
Change in restricted cash		14,394			(3,366	)
Other, net		(1,528	)		804

Net cash provided by operating activities		109,224			175,809


Cash Flows from Investing Activities
Finance receivables originated or purchased		(835,575	)		(709,694	)
Principal collections on finance receivables		1,441,938			1,701,887
Sales and principal collections on finance receivables held for sale originated as held for investment		—			37,764
Investment securities purchased		(56,582	)		(74,409	)
Investment securities called, sold, and matured		62,949			36,294
Change in notes receivable from AIG		468,662			800,862
Change in restricted cash		256,069			(153,645	)
Proceeds from sale of real estate owned		107,011			117,949
Other, net		(8,592	)		(3,687	)

Net cash provided by investing activities		1,435,880			1,753,321


Cash Flows from Financing Activities
Proceeds from issuance of long-term debt		2,119,594			3,496,468
Debt commissions on issuance of long-term debt		(20,076	)		(82,500	)
Repayment of long-term debt		(2,850,031	)		(3,619,640	)
Change in short-term debt		—			(2,450,000	)
Capital contributions from parent		—			11,429

Net cash used for financing activities		(750,513	)		(2,644,243	)


Effect of exchange rate changes		523			(339	)


Increase (decrease) in cash and cash equivalents		795,114			(715,452	)
Cash and cash equivalents at beginning of period		1,397,563			1,311,842

Cash and cash equivalents at end of period	$	2,192,677		$	596,390

See Notes to Condensed Consolidated Financial Statements.

SPRINGLEAF FINANCE, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

June 30, 2011

Note 1. Basis of Presentation

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

We prepared our condensed consolidated financial statements using accounting principles generally accepted in the United States of America (U.S. GAAP). These statements are unaudited. The year-end condensed balance sheet data was derived from our audited financial statements, but does not include all disclosures required by U.S. GAAP. The statements include the accounts of SLFI and its subsidiaries, all of which are wholly owned. We eliminated all material intercompany accounts and transactions. We made estimates and assumptions that affect amounts reported in our condensed consolidated financial statements and disclosures of contingent assets and liabilities. In management’s opinion, the condensed consolidated financial statements include the normal, recurring adjustments necessary for a fair statement of results, except for the out of period adjustment recorded in second quarter 2011 discussed below. Ultimate results could differ from our estimates. We evaluated the effects of and the need to disclose events that occurred subsequent to the balance sheet date. In second quarter 2011, we revised the presentation of our condensed consolidated statements of operations to report net interest income. We believe this presentation more clearly shows the key components of our operating income source and use of funds. You should read these statements in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010. To conform to the 2011 presentation, we reclassified certain items in the prior period.

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

As a result of the application of push-down accounting, the bases of the assets and liabilities of the Successor Company are not comparable to those of the Predecessor Company, nor would the income statement items for the three and six months ended June 30, 2011 have been the same as those reported if push-down accounting had not been applied.

In second quarter 2011, we recorded an out of period adjustment related to prior periods, which decreased insurance losses and loss adjustment expenses by $14.2 million for the three and six months ended June 30, 2011. This adjustment related to the correction of a benefit reserve error related to a closed block of annuities. After evaluating the quantitative and qualitative aspects of this correction, management has determined that the out of period adjustment is immaterial to our estimated full year results and that our previously issued quarterly and annual consolidated financial statements were not materially misstated.

Note 2. Recent Accounting Pronouncements

We adopted the following accounting standard in 2011:

Presentation of Comprehensive Income

In June 2011, the Financial Accounting Standards Board (FASB) issued an accounting standard that requires companies to report total comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements, bringing U.S. GAAP and International Financial Reporting Standards (IFRS) into alignment on the required presentation of other comprehensive income. The new standard is effective for interim and annual periods beginning on January 1, 2012. Early application is permitted. The adoption of this new standard did not have a material effect on our consolidated financial condition, results of operations, or cash flows.

We will adopt the following accounting standards in the future:

Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts

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

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

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

Reconsideration of Effective Control for Repurchase Agreements

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

Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs

In May 2011, the FASB and the International Accounting Standards Board jointly issued an accounting standard resulting in a common fair value meaning between U.S. GAAP and IFRS and consistency of disclosures relating to fair value. The new standard is effective for interim and annual periods beginning after December 15, 2011. Early application is not permitted. We are in the process of reviewing the potential impact on our consolidated financial condition, results of operations, and cash flows.

Note 3. Finance Receivables

Components of net finance receivables by type were as follows:


(dollars in thousands)	Real Estate Loans			Non-Real Estate Loans			Retail Sales Finance			Total

Successor Company June 30, 2011

Gross receivables	$	10,617,377		$	2,826,281		$	445,330		$	13,888,988
Unearned finance charges and points and fees		(13,387	)		(304,638	)		(45,075	)		(363,100	)
Accrued finance charges		64,637			32,872			3,409			100,918
Deferred origination costs		390			17,503			—			17,893
Premiums, net of discounts		(7	)		—			(13	)		(20	)

Total	$	10,669,010		$	2,572,018		$	403,651		$	13,644,679


Successor Company December 31, 2010

Gross receivables	$	11,197,768		$	2,853,633		$	536,144		$	14,587,545
Unearned finance charges and points and fees		(15,963	)		(274,907	)		(48,386	)		(339,256	)
Accrued finance charges		70,654			33,747			3,427			107,828
Deferred origination costs		25			3,496			—			3,521

Total	$	11,252,484		$	2,615,969		$	491,185		$	14,359,638

Included in the table above are real estate finance receivables associated with securitizations that remain on our balance sheet totaling $2.1 billion at June 30, 2011 and $2.2 billion at December 31, 2010. See Note 4 and Note 9 for further discussion regarding our securitization transactions. Also included in the table above are finance receivables that have been pledged as collateral for SLFC’s secured term loan totaling $5.6 billion at June 30, 2011 and $7.4 billion at December 31, 2010.

Unused credit limits extended to customers by the Company totaled $200.9 million at June 30, 2011 and $162.3 million at December 31, 2010. All unused credit limits, in part or in total, can be cancelled at the discretion of the Company.

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

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

•

Prime: Borrower FICO score greater than or equal to 660

•

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

•

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

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

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


(dollars in thousands)	Branch Real Estate		Centralized Real Estate		Branch Non- Real Estate		Branch Retail

Successor Company June 30, 2011

Prime	$	1,010,419	$	3,305,453	$	517,721	$	169,037
Non-prime		1,104,073		870,363		586,837		57,102
Sub-prime		3,915,478		343,767		1,454,513		176,515
Other/FICO unavailable		983		1,075		12,947		997

Total	$	6,030,953	$	4,520,658	$	2,572,018	$	403,651


Successor Company December 31, 2010

Prime	$	1,067,320	$	3,535,214	$	528,435	$	220,677
Non-prime		1,162,387		912,835		592,163		72,261
Sub-prime		4,099,761		357,870		1,482,975		197,484
Other/FICO unavailable		991		418		12,396		762

Total	$	6,330,459	$	4,806,337	$	2,615,969	$	491,184

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


	Branch Real Estate			Centralized Real Estate			Branch Non- Real Estate			Branch Retail

Successor Company June 30, 2011

Prime		3.54	%		7.77	%		1.61	%		2.81	%
Non-prime		5.37			13.06			2.37			5.05
Sub-prime		6.69			13.27			3.84			3.93
Other/FICO unavailable		13.80			22.31			1.21			2.89

Total		5.93			9.23			3.06			3.61

Successor Company December 31, 2010

Prime		3.61	%		7.31	%		2.04	%		3.95	%
Non-prime		5.21			12.39			3.11			6.32
Sub-prime		6.89			12.43			4.75			5.71
Other/FICO unavailable		3.81			—			N/M	*		6.94

Total		6.03			8.67			3.84			5.01

*	Not meaningful

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


(dollars in thousands)	Branch Real Estate		Centralized Real Estate		Branch Non- Real Estate		Branch Retail

Successor Company June 30, 2011

Performing	$	5,786,076	$	4,188,028	$	2,536,941	$	398,641
Nonperforming		244,877		332,630		35,077		5,010

Total	$	6,030,953	$	4,520,658	$	2,572,018	$	403,651


Successor Company December 31, 2010

Performing	$	6,101,243	$	4,490,825	$	2,590,614	$	488,377
Nonperforming		229,216		315,512		25,355		2,807

Total	$	6,330,459	$	4,806,337	$	2,615,969	$	491,184

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


(dollars in thousands)	Branch Real Estate		Centralized Real Estate		Branch Non- Real Estate		Branch Retail

Successor Company June 30, 2011

Unpaid principal balance:
30-59 days past due	$	121,667	$	113,552	$	40,527	$	9,727
60-89 days past due		72,085		79,213		21,381		5,324
90 days or more past due		339,947		446,811		67,281		11,866

Total past due		533,699		639,576		129,189		26,917
Current		6,416,983		5,061,294		2,766,952		449,658

Total	$	6,950,682	$	5,700,870	$	2,896,141	$	476,575


Successor Company December 31, 2010

Unpaid principal balance:
30-59 days past due	$	129,420	$	110,552	$	44,748	$	13,279
60-89 days past due		78,180		85,146		27,498		8,651
90 days or more past due		364,391		441,885		86,816		20,779

Total past due		571,991		637,583		159,062		42,709
Current		6,762,015		5,442,582		2,814,633		545,159

Total	$	7,334,006	$	6,080,165	$	2,973,695	$	587,868

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

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


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

Carrying amount, net of allowance	$	1,650,992	$	1,847,175

Outstanding balance	$	2,381,409	$	2,680,421

Allowance for credit impaired finance receivable losses	$	—	$	—

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

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

(dollars in thousands)

Successor
Company

Predecessor
Company

Successor
Company

Predecessor
Company

At or for the
Three Months
Ended
June 30,
2011

At or for the
Three Months
Ended
June 30,
2010*

At or for the
Six Months
Ended
June 30,
2011

At or for the
Six Months
Ended
June 30,
2010*

Balance at beginning of period

595,051

—

644,681

—

Additions

—

Accretion

(42,015

)

—

(77,863

)

—

Reclassifications from (to) nonaccretable difference

15,490

—

15,490

—

Disposals

(12,832

)

—

(26,614

)

—

Balance at end of period

555,694

—

555,694

—

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

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


(dollars in thousands)	Branch Real Estate		Centralized Real Estate		Branch Non- Real Estate		Branch Retail

Successor Company June 30, 2011

Prime	$	59,327	$	564,101	$	—	$	—
Non-prime		106,501		276,271		—		—
Sub-prime		527,487		117,125		—		—
Other/FICO unavailable		179		1		—		—

Total	$	693,494	$	957,498	$	—	$	—


Successor Company December 31, 2010

Prime	$	68,125	$	627,177	$	2,182	$	566
Non-prime		120,470		297,927		4,317		374
Sub-prime		581,581		122,403		19,646		2,205
Other/FICO unavailable		179		—		9		14

Total	$	770,355	$	1,047,507	$	26,154	$	3,159

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


	Branch Real Estate			Centralized Real Estate			Branch Non- Real Estate			Branch Retail

Successor Company June 30, 2011

Prime		19.04	%		26.41	%		N/M	*		N/M
Non-prime		17.77			27.42			N/M			N/M
Sub-prime		17.93			25.89			N/M			N/M
Other/FICO unavailable		62.94			—			N/M			N/M

Total		18.01			26.63			N/M			N/M

Successor Company December 31, 2010

Prime		29.49	%		33.69	%		94.63	%		93.40	%
Non-prime		24.95			32.57			93.69			90.28
Sub-prime		24.43			31.18			92.44			89.50
Other/FICO unavailable		62.92			—			100.00			88.37

Total		24.97			33.08			92.83			90.31

*	Not meaningful

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

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


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

TDR net finance receivables	$	160,293	$	28,195

TDR net finance receivables that have an allowance	$	160,293	$	28,195

Allowance for TDR finance receivable losses	$	17,990	$	2,835

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

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


(dollars in thousands)	Successor Company		Predecessor Company		Successor Company		Predecessor Company
	Three Months Ended June 30, 2011		Three Months Ended June 30, 2010		Six Months Ended June 30, 2011		Six Months Ended June 30, 2010

TDR average net receivables	$	138,518	$	1,768,164	$	105,029	$	1,648,944

TDR finance charges recognized	$	1,402	$	21,938	$	2,124	$	41,674

In third quarter 2009, MorEquity, Inc. (MorEquity) entered into a Commitment to Purchase Financial Instrument and Servicer Participation Agreement (the Agreement) with the Federal National Mortgage Association as financial agent for the United States Department of the Treasury, which provides for participation in the Home Affordable Modification Program (HAMP). MorEquity entered into the Agreement as the servicer with respect to our centralized real estate finance receivables, with an effective date of September 1, 2009. On February 1, 2011, MorEquity entered into Subservicing Agreements for the servicing of its centralized real estate finance receivables with Nationstar Mortgage LLC (Nationstar), a non-subsidiary affiliate of SLFC. As a result of the subservicing transfer, the Agreement was terminated on May 26, 2011. “Eligible Loans” subserviced by Nationstar are still subject to HAMP.

Note 4. On-Balance Sheet Securitization Transactions

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

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


(dollars in thousands)	Real Estate Loans		Long-term Debt

Successor Company June 30, 2011

2003 securitization	$	14,588	$	15,249
2006 securitization		153,794		188,665
2009 securitization		1,246,542		770,544
2010 securitization		700,828		366,064

Successor Company December 31, 2010

2003 securitization	$	16,147	$	17,249
2006 securitization		171,989		209,795
2009 securitization		1,316,280		876,607
2010 securitization		740,794		423,119

We have limited continued involvement with the finance receivables that have been included in these securitization transactions. Our 2009 securitization transaction utilizes a third-party servicer to service the finance receivables. Although we have servicer responsibilities for the finance receivables for our other existing securitization transactions, effective February 1, 2011, Nationstar began subservicing the finance receivables for the 2006 and 2010 securitization transactions. In the case of each existing securitization transaction, the related finance receivables have been legally isolated and are only available for payment of the debt and other obligations issued or arising in the applicable securitization transaction. The cash and cash equivalent balances relating to securitization transactions are used only to support the on-balance sheet securitization transactions and are recorded as restricted cash. We hold the right to the excess cash flows not needed to pay the debt and other obligations issued or arising in our securitization transactions. The asset-backed debt has been issued by consolidated VIEs.

Note 5. Allowance for Finance Receivable Losses

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


(dollars in thousands)	Branch Real Estate			Centralized Real Estate			Branch Non- Real Estate			Branch Retail			All Other			Consolidated Total

Successor Company Three Months Ended June 30, 2011

Balance at beginning of period	$	9,637		$	3,010		$	12,759		$	204		$	—		$	25,610
Provision for finance receivable losses (a)		33,513			32,121			30,958			5,879			—			102,471
Charge-offs		(31,975	)		(30,127	)		(28,533	)		(8,728	)		—			(99,363	)
Recoveries		2,334			(14	)		9,012			3,080			—			14,412

Balance at end of period	$	13,509		$	4,990		$	24,196		$	435		$	—		$	43,130


Predecessor Company Three Months Ended June 30, 2010

Balance at beginning of period	$	573,832		$	598,998		$	294,413		$	61,416		$	3,826		$	1,532,485
Provision for finance receivable losses		27,891			23,871			(2,099	)		4,916			372			54,951
Charge-offs		(64,329	)		(29,222	)		(54,960	)		(22,792	)		(246	)		(171,549	)
Recoveries		2,849			731			9,805			3,341			(1	)		16,725

Balance at end of period	$	540,243		$	594,378		$	247,159		$	46,881		$	3,951		$	1,432,612

(a)

Provision for finance receivable losses for the Successor Company includes $30.4 million of net charge-offs on credit impaired finance receivables, $53.7 million on non-credit impaired finance receivables, and $0.9 million for new origination activity and TDR activity during the three months ended June 30, 2011. As a result of charging off the non-credit impaired finance receivables, $20.4 million of valuation discount accretion was accelerated and is included as a component of finance charges within revenues.


(dollars in thousands)	Branch Real Estate			Centralized Real Estate			Branch Non- Real Estate			Branch Retail			All Other			Consolidated Total

Successor Company Six Months Ended June 30, 2011

Balance at beginning of period	$	2,465		$	488		$	4,111		$	56		$	—		$	7,120
Provision for finance receivable losses (a)		52,876			59,570			52,253			11,170			—			175,869
Charge-offs		(50,935	)		(55,205	)		(50,888	)		(17,536	)		—			(174,564	)
Recoveries (b)		9,103			137			18,720			6,745			—			34,705

Balance at end of period	$	13,509		$	4,990		$	24,196		$	435		$	—		$	43,130


Net finance receivables	$	6,030,953		$	4,520,658		$	2,572,018		$	403,651		$	117,399		$	13,644,679


Predecessor Company Six Months Ended June 30, 2010

Balance at beginning of period	$	633,172		$	536,440		$	291,995		$	67,364		$	3,514		$	1,532,485
Provision for finance receivable losses		33,603			127,547			55,369			22,439			617			239,575
Charge-offs		(131,891	)		(71,143	)		(119,584	)		(49,508	)		(185	)		(372,311	)
Recoveries		5,359			1,534			19,379			6,586			5			32,863

Balance at end of period	$	540,243		$	594,378		$	247,159		$	46,881		$	3,951		$	1,432,612


Net finance receivables	$	7,733,410		$	6,513,044		$	2,887,884		$	733,201		$	118,762		$	17,986,301

(a)

Provision for finance receivable losses for the Successor Company includes $67.8 million of net charge-offs on credit impaired finance receivables, $71.2 million on non-credit impaired finance receivables, and $1.0 million for new origination activity and TDR activity during the six months ended June 30, 2011. As a result of charging off the non-credit impaired finance receivables, $35.7 million of valuation discount accretion was accelerated and is included as a component of finance charges within revenues.

(b)

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

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

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

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

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

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

Note 6. Investment Securities

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


(dollars in thousands)	Cost/ Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value		Other- Than- Temporary Impairments in AOCI(L) (a)

Successor Company June 30, 2011

Fixed maturity investment securities:
Bonds:
U.S. government and government sponsored entities	$	38,699	$	198	$	(153	)	$	38,744	$	—
Obligations of states, municipalities, and political subdivisions		209,636		1,589		(600	)		210,625		—
Corporate debt		334,057		5,113		(3,678	)		335,492		—
Mortgage-backed, asset-backed, and collateralized:
RMBS		115,471		2,408		(15	)		117,864		—
CMBS		16,446		2,390		(240	)		18,596		—
CDO/ABS		14,297		772		(52	)		15,017		—

Total		728,606		12,470		(4,738	)		736,338		—
Preferred stocks		4,959		—		(212	)		4,747		—
Other long-term investments (b)		3,456		1,974		(42	)		5,388		—
Common stocks		840		—		(3	)		837		—

Total	$	737,861	$	14,444	$	(4,995	)	$	747,310	$	—


Successor Company December 31, 2010

Fixed maturity investment securities:
Bonds:
U.S. government and government sponsored entities	$	9,566	$	—	$	(174	)	$	9,392	$	—
Obligations of states, municipalities, and political subdivisions		226,023		201		(2,257	)		223,967		—
Corporate debt		345,735		3,098		(6,084	)		342,749		—
Mortgage-backed, asset-backed, and collateralized:
RMBS		129,411		201		(1,486	)		128,126		—
CMBS		10,064		492		(90	)		10,466		—
CDO/ABS		17,980		113		(158	)		17,935		—

Total		738,779		4,105		(10,249	)		732,635		—
Preferred stocks		4,959		—		(206	)		4,753		—
Other long-term investments (b)		6,653		—		(221	)		6,432		—
Common stocks		676		1		—			677		—

Total	$	751,067	$	4,106	$	(10,676	)	$	744,497	$	—

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

(b)	Excludes interest in a limited partnership that we account for using the equity method ($1.8 million at June 30, 2011 and $1.4 million at December 31, 2010).

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


(dollars in thousands)	12 Months or Less					More Than 12 Months				Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses

Successor Company June 30, 2011

Bonds:
U.S. government and government sponsored entities	$	3,505	$	(153	)	$	—	$	—	$	3,505	$	(153	)
Obligations of states, municipalities, and political subdivisions		65,014		(600	)		—		—		65,014		(600	)
Corporate debt		137,392		(3,678	)		—		—		137,392		(3,678	)
RMBS		6,276		(15	)		—		—		6,276		(15	)
CMBS		5,882		(240	)		—		—		5,882		(240	)
CDO/ABS		4,750		(52	)		—		—		4,750		(52	)

Total		222,819		(4,738	)		—		—		222,819		(4,738	)
Preferred stocks		4,747		(212	)		—		—		4,747		(212	)
Other long-term investments		1,329		(42	)		—		—		1,329		(42	)
Common stocks		116		(3	)		—		—		116		(3	)

Total	$	229,011	$	(4,995	)	$	—	$	—	$	229,011	$	(4,995	)


Successor Company December 31, 2010

Bonds:
U.S. government and government sponsored entities	$	9,392	$	(174	)	$	—	$	—	$	9,392	$	(174	)
Obligations of states, municipalities, and political subdivisions		207,378		(2,257	)		—		—		207,378		(2,257	)
Corporate debt		273,766		(6,084	)		—		—		273,766		(6,084	)
RMBS		111,384		(1,486	)		—		—		111,384		(1,486	)
CMBS		7,966		(90	)		—		—		7,966		(90	)
CDO/ABS		10,128		(158	)		—		—		10,128		(158	)

Total		620,014		(10,249	)		—		—		620,014		(10,249	)
Preferred stocks		4,753		(206	)		—		—		4,753		(206	)
Other long-term investments		6,403		(221	)		—		—		6,403		(221	)

Total	$	631,170	$	(10,676	)	$	—	$	—	$	631,170	$	(10,676	)

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

We did not recognize in earnings the unrealized losses on fixed-maturity securities at June 30, 2011, because management neither intends to sell the securities nor does it believe that it is more likely than not that it will be required to sell these securities before recovery of their amortized cost basis. Furthermore, management expects to recover the entire amortized cost basis of these securities (that is, they are not credit impaired).

As of June 30, 2011 and December 31, 2010, we had no investment securities which had been in an unrealized loss position of more than 50% for more than 12 months. As part of our credit evaluation procedures applied to investment securities, we consider the nature of both the specific securities and the general market conditions for those securities. Based on management’s analysis, we continue to believe that the expected cash flows from our investment securities will be sufficient to recover the amortized cost of our investment. We continue to monitor these positions for potential credit impairments.

At June 30, 2011, we had no unrealized losses on investment securities for which an other-than-temporary impairment was recognized. In January 2011, we reclassified $0.4 million in unrealized losses on investment securities, previously classified as other-than-temporarily impaired, to unrealized losses on all other investment securities to reflect the proper classification of these investment securities for which no other-than-temporary impairment was recognized.

We recognize credit losses into earnings on securities in an unrealized loss position for which we do not expect to recover the entire amortized cost basis. Non-credit losses are recognized in accumulated other comprehensive income or loss since we do not intend to sell these securities, and we believe it is more likely than not that we will not be required to sell any investment security before the recovery of its amortized cost basis.

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


(dollars in thousands)	Successor Company			Predecessor Company			Successor Company			Predecessor Company
	Three Months Ended June 30, 2011			Three Months Ended June 30, 2010			Six Months Ended June 30, 2011			Six Months Ended June 30, 2010

Total other-than-temporary impairment losses	$	(298	)	$	(171	)	$	(2,227	)	$	(1,977	)
Portion of loss recognized in accumulated other comprehensive loss		—			(1,620	)		—			(4,062	)

Net impairment losses recognized in net (loss) income	$	(298	)	$	(1,791	)	$	(2,227	)	$	(6,039	)

Changes in the cumulative amount of credit losses (recognized in earnings) on other-than-temporarily impaired investment securities were as follows:


(dollars in thousands)	Successor Company			Predecessor Company			Successor Company			Predecessor Company
	At or for the Three Months Ended June 30, 2011			At or for the Three Months Ended June 30, 2010			At or for the Six Months Ended June 30, 2011			At or for the Six Months Ended June 30, 2010

Balance at beginning of period*	$	1,929		$	7,368		$	—		$	3,150
Additions:
Due to other-than-temporary impairments:
Not previously impaired/impairment not previously recognized		264			—			2,193			9
Previously impaired/impairment previously recognized		34			1,705			34			5,940
Reductions:
Realized due to sales with no prior intention to sell		—			—			—			—
Realized due to intention to sell		—			—			—			—
Accretion of credit impaired securities		(39	)		(57	)		(39	)		(83	)

Balance at end of period	$	2,188		$	9,016		$	2,188		$	9,016

In January 2011, we reclassified $31,000 of the balance at the beginning of the six months ended June 30, 2011 period, which was previously recorded as accretion of credit impaired securities, to interest income on all other investment securities to reflect the proper classification of these investment securities for which no other-than-temporary impairment was recognized.

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


(dollars in thousands)	Successor Company			Predecessor Company			Successor Company			Predecessor Company
	Three Months Ended June 30, 2011			Three Months Ended June 30, 2010			Six Months Ended June 30, 2011			Six Months Ended June 30, 2010

Fair value	$	8,575		$	53,728		$	35,904		$	137,779


Realized gains	$	91		$	—		$	169		$	37
Realized losses		(138	)		(68	)		(457	)		(133	)

Net realized losses	$	(47	)	$	(68	)	$	(288	)	$	(96	)

Contractual maturities of fixed-maturity investment securities at June 30, 2011 were as follows:


(dollars in thousands) June 30, 2011	Fair Value		Amortized Cost

Fixed maturities, excluding mortgage-backed securities:
Due in 1 year or less	$	42,771	$	42,690
Due after 1 year through 5 years		162,259		162,010
Due after 5 years through 10 years		211,081		209,507
Due after 10 years		168,750		168,185
Mortgage-backed securities		151,477		146,214

Total	$	736,338	$	728,606

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

Note 7. Restricted Cash

Restricted cash at June 30, 2011 and December 31, 2010 included funds to be used for future debt payments relating to our securitization transactions (see Note 4), escrow deposits, and funds related to SLFC’s secured term loan. The decrease in restricted cash at June 30, 2011 when compared to December 31, 2010 was primarily due to reduced collateral requirements on SLFC’s secured term loan, which was refinanced in May 2011.

Note 8. Related Party Transactions

AFFILIATE LENDING

Prior to the FCFI Transaction, SLFC made loans to AIG under demand note agreements as a short-term investment source for cash. Interest revenue on notes receivable from AIG for the three and six months ended June 30, 2010 totaled $2.3 million and $4.7 million, respectively.

In April 2010, Springleaf Financial Funding Company, a wholly owned subsidiary of SLFC, entered into and fully drew down a $3.0 billion, five-year term loan pursuant to a Credit Agreement among Springleaf Financial Funding Company, SLFC, and most of the consumer finance operating subsidiaries of SLFC (collectively, the Subsidiary Guarantors), and a syndicate of lenders, various agents, and Bank of America, N.A, as administrative agent. At December 31, 2010, affiliates of Fortress and affiliates of AIG were included in the syndicate of lenders.

In May 2011, the $3.0 billion term loan was refinanced to increase total borrowing to $3.75 billion with a new six-year term, significantly improved advance rates, and lower borrowing costs. Any portion of the term loan that is repaid (whether at or prior to maturity) will permanently reduce the principal amount outstanding and may not be reborrowed. At June 30, 2011, affiliates of Fortress and affiliates of AIG were included in the syndicate of lenders.

COST SHARING AGREEMENTS

Prior to the FCFI Transaction, we were party to cost sharing agreements, including tax sharing arrangements, with AIG. Generally, these agreements provided for the allocation of shared corporate costs based upon a proportional allocation of costs to all AIG subsidiaries. See Note 13 for further information on the tax sharing arrangements.

We also reimburse AIG Federal Savings Bank (AIG Bank), a subsidiary of AIG, for costs associated with a remediation program related to a Supervisory Agreement among AIG Bank, Wilmington Finance, Inc. (WFI), SLFI, and the Office of Thrift Supervision dated June 7, 2007 (the Supervisory Agreement). As of June 30, 2011, we have made reimbursements of $61.9 million for payments made by AIG Bank to refund certain fees to customers pursuant to the terms of the Supervisory Agreement. At June 30, 2011, the remaining reserve, which reflects management’s best estimate of the expected costs of the remediation program, totaled $1.4 million.

REINSURANCE AGREEMENTS

Merit Life Insurance Co. (Merit), a wholly-owned subsidiary of SLFC, enters into reinsurance agreements with subsidiaries of AIG, for reinsurance of various group annuity, credit life, and credit accident and health insurance where Merit reinsures the risk of loss. The reserves for this business fluctuate over time and in some instances are subject to recapture by the insurer. Reserves on the books of Merit for reinsurance agreements with subsidiaries of AIG totaled $50.2 million at June 30, 2011 and $51.2 million at December 31, 2010.

DERIVATIVES

At June 30, 2011, all of our derivative financial instruments were with AIG Financial Products Corp. (AIGFP), a subsidiary of AIG. At December 31, 2010, all but one of our derivative financial instruments were with AIGFP. The derivative financial instrument that was not with AIGFP was terminated in March 2011 due to the sale of the related note receivable from AIG. See Note 11 for further information on our derivatives.

SUBSERVICING AND REFINANCE AGREEMENTS

Effective February 1, 2011, Nationstar began subservicing the centralized real estate loans of MorEquity and two other subsidiaries of SLFC (collectively, the Owners). In addition, Nationstar began subservicing certain real estate loans that MorEquity had been servicing in conjunction with the 2006 and 2010 securitization of these real estate loans and began refinancing certain first lien mortgage loans. During the three and six months ended June 30, 2011, the Owners paid Nationstar $2.7 million and $4.9 million, respectively, in fees for its subservicing. During the three and six months ended June 30, 2011, the Owners paid Nationstar $2.2 million and $2.8 million, respectively, to facilitate the repayment of our centralized real estate loans through refinancings with other lenders.

Note 9. VIEs

CONSOLIDATED VIES

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

The asset-backed securities are backed by the expected cash flows from securitized real estate loans. Other than servicing fees and prepayment penalties (for our 2003 and 2006 securitizations only), payments from these real estate loans are not available to us until the repayment of the debt issued in connection with the securitization transactions has occurred. We recorded these transactions as “on-balance sheet” secured financings because the transfer of these real estate loans to the trusts did not qualify for sale accounting treatment. We retain interests in these securitization transactions, including senior and subordinated securities issued by the VIEs and residual interests. We retain credit risk in the securitizations because our retained interests include the most subordinated interest in the securitized assets, which are the first to absorb credit losses on the securitized assets. At June 30, 2011, these retained interests were primarily comprised of $1.4 billion, or 37%, of the assets transferred in connection with the on-balance sheet securitizations. We expect that any credit losses in the pools of securitized assets would likely be limited to our retained interests. We have no obligation to repurchase or replace qualified securitized assets that subsequently become delinquent or are otherwise in default. See Note 4 for further discussion regarding these securitization transactions.

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


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

Assets:
Finance receivables	$	2,115,752	$	2,245,210
Allowance for finance receivable losses		827		80
Restricted cash		23,526		30,946

Liabilities
Long-term debt	$	1,340,522	$	1,526,770

We had no off-balance sheet exposure associated with our variable interests in the consolidated VIEs. No additional support to these VIEs beyond what was previously contractually required has been provided by us. Consolidated interest expense related to these VIEs for the three and six months ended June 30, 2011 totaled $17.5 million and $35.8 million, respectively. Consolidated interest expense related to these VIEs for the three and six months ended June 30, 2010 totaled $41.2 million and $84.0 million, respectively.

UNCONSOLIDATED VIE

We have established a VIE, primarily related to a debt issuance, of which we are not the primary beneficiary, and in which we do not have a variable interest. Therefore, we do not consolidate such entity. We calculate our maximum exposure to loss primarily to be the amount of debt issued to or equity invested in a VIE. Our on-balance sheet maximum exposure to loss associated with this unconsolidated VIE was $171.5 million at June 30, 2011 and December 31, 2010. We had no off-balance sheet exposure to loss associated with this VIE at June 30, 2011 or December 31, 2010.

Note 10. Refinancing of Secured Term Loan

In May 2011, we refinanced SLFC’s $3.0 billion secured term loan to increase total borrowing to $3.75 billion with a new six-year term, significantly improved advance rates, and lower borrowing costs. The unamortized balance of the fair value mark on the $3.0 billion secured term loan was $30.8 million. We accounted for $20.1 million of the $30.8 million as a modification, which would remain on the balance sheet and amortize over the new term. The remaining $10.7 million was recorded as a gain on the early extinguishment of the secured term loan for the three and six months ended June 30, 2011.

Note 11. Derivative Financial Instruments

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

While all of our interest rate, cross currency, cross currency interest rate, and equity-indexed swap agreements mitigate economic exposure of related debt, not all of these swap agreements currently qualify as cash flow or fair value hedges under U.S. GAAP. At June 30, 2011, equity-indexed debt and related swaps were immaterial.

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

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


	Successor Company
	June 30, 2011						December 31, 2010
	Notional Amount		Derivative Assets		Derivative Liabilities		Notional Amount		Derivative Assets		Derivative Liabilities

Hedging Instruments
Cross currency and cross currency interest rate	$	625,250	$	71,052	$	—	$	1,226,250	$	114,001	$	—
Interest rate		850,000		—		21,237		850,000		—		40,057

Total		1,475,250		71,052		21,237		2,076,250		114,001		40,057

Non-Designated Hedging Instruments
Cross currency and cross currency interest rate		644,250		128,363		—		644,250		75,159		—
Interest rate		—		—		—		468,000		1,148		—
Equity-indexed		6,886		1,735		54		6,886		1,720		213

Total		651,136		130,098		54		1,119,136		78,027		213

Total derivative instruments*	$	2,126,386	$	201,150	$	21,291	$	3,195,386	$	192,028	$	40,270

*	Master netting arrangements had no effect.

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


(dollars in thousands)	Effective						Ineffective
	AOCI(L)*			From AOCI(L) to Revenues			Revenues

Successor Company Three Months Ended June 30, 2011

Interest rate	$	(715	)	$	(501	)	$	(29	)
Cross currency and cross currency interest rate		29,998			28,331			371

Total	$	29,283		$	27,830		$	342


Predecessor Company Three Months Ended June 30, 2010

Interest rate	$	13,133		$	278		$	(749	)
Cross currency and cross currency interest rate		6,982			(15,227	)		(20,006	)

Total	$	20,115		$	(14,949	)	$	(20,755	)


Successor Company Six Months Ended June 30, 2011

Interest rate	$	(2,880	)	$	(977	)	$	(2,553	)
Cross currency and cross currency interest rate		95,609			107,194			831

Total	$	92,729		$	106,217		$	(1,722	)


Predecessor Company Six Months Ended June 30, 2010

Interest rate	$	20,539		$	2,634		$	(1,575	)
Cross currency and cross currency interest rate		41,230			57,081			(26,404	)

Total	$	61,769		$	59,715		$	(27,979	)

*	accumulated other comprehensive income (loss)

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

At June 30, 2011, we expect $6.8 million of the deferred net loss on cash flow hedges to be reclassified from accumulated other comprehensive loss to earnings during the next twelve months.

For the six months ended June 30, 2011, there were no instances in which we reclassified amounts from accumulated other comprehensive income or loss to earnings as a result of a discontinuance of a cash flow hedge due to it becoming probable that the original forecasted transaction would not occur at the end of the originally specified time period.

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


(dollars in thousands)	Non-Designated Hedging Instruments

Successor Company Three Months Ended June 30, 2011

Cross currency, cross currency interest rate, and interest rate	$	40,364
Equity-indexed		81

Total	$	40,445


Predecessor Company Three Months Ended June 30, 2010

Cross currency and cross currency interest rate	$	(56,192	)
Equity-indexed		78

Total	$	(56,114	)


Successor Company Six Months Ended June 30, 2011

Cross currency, cross currency interest rate, and interest rate	$	78,612
Equity-indexed		161

Total	$	78,773


Predecessor Company Six Months Ended June 30, 2010

Cross currency and cross currency interest rate	$	(10,128	)
Equity-indexed		160

Total	$	(9,968	)

During the three months ended June 30, 2011, we recognized a mark to market gain of $20.8 million on our non-designated cross currency derivative. During the six months ended June 30, 2011, we recognized a mark to market gain of $40.3 million on our non-designated cross currency derivative. During the three months ended June 30, 2010, we recognized a mark to market loss of $61.4 million on our non-designated cross currency derivative. During the six months ended June 30, 2010, we recognized a mark to market loss of $95.7 million on our non-designated cross currency derivative, partially offset by gains of $68.8 million on the release of other comprehensive income related to cash flow hedge maturities. We included all components of each derivative’s gain or loss in the assessment of hedge effectiveness.

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

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


(dollars in thousands)	Successor Company			Predecessor Company		Successor Company			Predecessor Company
	Three Months Ended June 30, 2011			Three Months Ended June 30, 2010		Six Months Ended June 30, 2011			Six Months Ended June 30, 2010

Credit valuation adjustment (losses) gains:

Non-designated derivative	$	(96	)	$	3,791	$	(2,094	)	$	12,866
Cash flow hedges	$	660		$	11,831	$	(2,897	)	$	29,047

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

See Note 17 for information on how we determine fair value on our derivative financial instruments.

Note 12. Accumulated Other Comprehensive Income (Loss)

Components of accumulated other comprehensive income (loss) were as follows:


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

Net unrealized gains (losses) on:
Investment securities	$	6,142		$	(4,272	)
Swap agreements		(7,741	)		1,027
Foreign currency translation adjustments		4,199			386
Retirement plan liabilities adjustment		425			425

Accumulated other comprehensive income (loss)	$	3,025		$	(2,434	)

Note 13. Income Taxes

Benefit from income taxes decreased for the three and six months ended June 30, 2011 when compared to the same periods in 2010 as a result of the FCFI Transaction and the resulting changes in the book and tax basis of our assets and liabilities and the benefit in 2010 from the release of the deferred tax valuation allowance. The Company was in a net deferred tax liability position at June 30, 2011, and based on the timing and reversal of the deferred tax liabilities, we have concluded that a valuation allowance was required on our United Kingdom operations of $0.7 million, but no valuation allowance was required on our remaining gross deferred tax assets.

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

Benefit from income taxes for the three and six months ended June 30, 2010 reflected AIG’s projection that it would have sufficient taxable income in 2010 to utilize our 2010 estimated tax losses. As a result, we had classified $111.4 million of our 2010 losses as a current tax receivable. In connection with the closing of the FCFI Transaction on November 30, 2010, AIG and SLFI amended their tax sharing agreement, which terminated on the closing, (1) to provide that the parties’ payment obligations under the tax sharing agreement were limited to the payments required to be made by AIG to SLFI with respect to the 2009 taxable year, and (2) to include the terms of the promissory note to be issued by AIG in satisfaction of its 2009 taxable year payment obligation to SLFI. At December 31, 2010, the note receivable from AIG relating to the 2009 taxable year totaled $470.2 million. On March 24, 2011, SLFI sold its $468.7 million note receivable from AIG at a net price after transaction fees of $469.8 million. Due to the amendment of the tax sharing agreement, SLFI did not receive the payment for the tax period ending November 30, 2010. As a result, we recorded a dividend to AIG for the amount of the income tax receivable remaining at the closing of the FCFI Transaction.

Note 14. Supplemental Cash Flow Information

Supplemental disclosure of non-cash activities was as follows:


(dollars in thousands)	Successor Company		Predecessor Company
Six Months Ended June 30,	2011		2010

Transfer of finance receivables held for sale to finance receivables held for investment	$	—	$	655,565

Transfer of finance receivables to real estate owned	$	122,733	$	136,142

Note 15. Segment Information

We have three business segments: branch, centralized real estate, and insurance. We report our segment information using the historical basis of accounting because management analyzes each business segment on a historical basis. We define our segments by types of financial service products we offer, nature of our production processes, and methods we use to distribute our products and to provide our services, as well as our management reporting structure.

In our branch business segment, we:

•

originate secured and unsecured non-real estate loans;

•

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

•

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

•

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

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

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

Effective February 1, 2011, Nationstar began subservicing the centralized real estate loans of MorEquity and two other subsidiaries of SLFC. In addition, Nationstar began subservicing certain real estate loans that MorEquity had been servicing in conjunction with the 2006 and 2010 securitization of these real estate loans.

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

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


(dollars in thousands)	Branch Segment			Centralized Real Estate Segment			Insurance Segment			All Other			Adjustments			Push-down Accounting Adjustments			Consolidated Total

Successor Company Three Months Ended June 30, 2011

Revenues:
External:
Finance charges	$	319,400		$	81,353		$	—		$	3,587		$	—		$	83,701		$	488,041
Insurance		81			—			29,803			31			—			(106	)		29,809
Other		1,525			(9,829	)		13,295			(3,564	)		(9	)		28,868			30,286
Intercompany		16,012			—			(11,867	)		(4,145	)		—			—			—
Pretax income (loss)		244,751			(235,143	)		22,518			(61,799	)		(9	)		(69,973	)		(99,655	)

Predecessor Company Three Months Ended June 30, 2010

Revenues:
External:
Finance charges	$	360,653		$	91,984		$	—		$	3,476		$	—		$	—		$	456,113
Insurance		100			—			31,148			113			—			—			31,361
Other		(3,037	)		10,983			14,760			(2,120	)		(3,037	)		—			17,549
Intercompany		16,541			198			(12,391	)		(4,348	)		—			—			—
Pretax income (loss)		30,843			(17,069	)		16,659			(42,280	)		(3,037	)		—			(14,884	)

Successor Company Six Months Ended June 30, 2011

Revenues:
External:
Finance charges	$	645,207		$	170,701		$	—		$	7,270		$	—		$	160,325		$	983,503
Insurance		167			—			58,309			49			—			(230	)		58,295
Other		3,150			(12,770	)		25,959			(23,989	)		(2,360	)		40,138			30,128
Intercompany		32,065			(437	)		(23,221	)		(8,407	)		—			—			—
Pretax income (loss)		75,543			(66,739	)		34,186			(131,172	)		(2,360	)		(92,752	)		(183,294	)

Predecessor Company Six Months Ended June 30, 2010

Revenues:
External:
Finance charges	$	735,694		$	186,829		$	—		$	7,028		$	—		$	—		$	929,551
Insurance		206			—			62,582			93			—			—			62,881
Other		(1,532	)		22,064			28,367			73,592			(8,246	)		—			114,245
Intercompany		32,819			594			(24,915	)		(8,498	)		—			—			—
Pretax income (loss)		37,984			(105,680	)		28,065			(11,867	)		(8,246	)		—			(59,744	)

The “All Other” column includes:

•

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

•

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

The “Adjustments” column includes realized gains (losses) on investment securities and commercial mortgage loans.

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

Note 16. Benefit Plans

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

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

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


(dollars in thousands)	Pension			Postretirement

Successor Company Three Months Ended June 30, 2011

Components of net periodic benefit cost:
Service cost	$	3,400		$	66
Interest cost		4,504			72
Expected return on assets		(4,239	)		—

Net periodic benefit cost	$	3,665		$	138


Successor Company Six Months Ended June 30, 2011

Components of net periodic benefit cost:
Service cost	$	6,801		$	131
Interest cost		9,008			144
Expected return on assets		(8,478	)		—

Net periodic benefit cost	$	7,331		$	275

For the three and six months ended June 30, 2011, the Company contributed $0.1 million and $4.2 million, respectively, to its pension plans and expects to contribute an additional $0.2 million for the remainder of 2011. These estimates are subject to change, since contribution decisions are affected by various factors including our liquidity, asset dispositions, market performance, and management’s discretion.

Note 17. Fair Value Measurements

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

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

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

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

FAIR VALUE HIERARCHY

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

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

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

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

Fair Value Measurements – Recurring Basis

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


(dollars in thousands)	Fair Value Measurements Using						Total Carried At Fair Value
	Level 1		Level 2		Level 3		Total Carried At Fair Value

Successor Company June 30, 2011

Assets
Investment securities:
Bonds:
U.S. government and government sponsored entities	$	—	$	38,744	$	—	$	38,744
Obligations of states, municipalities, and political subdivisions		—		210,625		—		210,625
Corporate debt		—		332,748		2,744		335,492
RMBS		—		116,575		1,289		117,864
CMBS		—		9,964		8,632		18,596
CDO/ABS		—		4,598		10,419		15,017

Total		—		713,254		23,084		736,338
Preferred stocks		—		4,747		—		4,747
Other long-term investments (a)		—		—		5,388		5,388
Common stocks (b)		115		—		3		118

Total		115		718,001		28,475		746,591
Cash and cash equivalents in mutual funds		77,166		—		—		77,166
Derivatives:
Cross currency and cross currency interest rate		—		199,415		—		199,415
Equity-indexed		—		—		1,735		1,735

Total		—		199,415		1,735		201,150

Total	$	77,281	$	917,416	$	30,210	$	1,024,907


Liabilities
Derivatives:
Cross currency and cross currency interest rate	$	—	$	21,237	$	—	$	21,237
Equity-indexed		—		54		—		54

Total	$	—	$	21,291	$	—	$	21,291


Successor Company December 31, 2010

Assets
Investment securities:
Bonds:
U.S. government and government sponsored entities	$	—	$	9,392	$	—	$	9,392
Obligations of states, municipalities, and political subdivisions		—		223,967		—		223,967
Corporate debt		—		339,638		3,110		342,748
RMBS		—		127,067		1,059		128,126
CMBS		—		1,096		9,370		10,466
CDO/ABS		—		7,636		10,298		17,934

Total		—		708,796		23,837		732,633
Preferred stocks		—		4,753		—		4,753
Other long-term investments (a)		—		—		6,432		6,432
Common stocks (b)		117		—		5		122

Total		117		713,549		30,274		743,940
Cash and cash equivalents in mutual funds		88,703		—		—		88,703
Short-term investments		—		10		—		10
Derivatives:
Cross currency and cross currency interest rate		—		189,160		—		189,160
Equity-indexed		—		—		1,720		1,720
Interest rate		—		—		1,148		1,148

Total		—		189,160		2,868		192,028

Total	$	88,820	$	902,719	$	33,142	$	1,024,681


Liabilities
Derivatives:
Cross currency and cross currency interest rate	$	—	$	40,057	$	—	$	40,057
Equity-indexed		—		213		—		213

Total	$	—	$	40,270	$	—	$	40,270

(a)	Other long-term investments excluded our interest in a limited partnership of $1.8 million at June 30, 2011 and $1.4 million December 31, 2010 that we account for using the equity method.

(b)	Common stocks excluded stocks not carried at fair value of $0.7 million at June 30, 2011 and $0.6 million at December 31, 2010.

We had no transfers between Level 1 and Level 2 during the three or six months ended June 30, 2011.

The following table presents changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the three months ended June 30, 2011:


(dollars in thousands)			Net (losses) gains included in:
	Balance at beginning of period		Other revenues			Other comprehensive income			Purchases, sales, issuances, settlements (b)			Transfers into Level 3		Transfers out of Level 3		Balance at end of period

Successor Company Three Months Ended June 30, 2011

Investment securities:
Bonds:
Corporate debt	$	2,800	$	(9	)	$	(47	)	$	—		$	—	$	—	$	2,744
RMBS		1,342		(2	)		—			(51	)		—		—		1,289
CMBS		9,179		(23	)		(136	)		(388	)		—		—		8,632
CDO/ABS		10,692		(228	)		84			(129	)		—		—		10,419

Total		24,013		(262	)		(99	)		(568	)		—		—	$	23,084
Other long-term investments (a)		7,488		—			(1,199	)		(901	)		—		—		5,388
Common stocks		3		—			—			—			—		—		3

Total investment securities		31,504		(262	)		(1,298	)		(1,469	)		—		—		28,475
Derivatives		1,731		(2	)		—			6			—		—		1,735

Total assets	$	33,235	$	(264	)	$	(1,298	)	$	(1,463	)	$	—	$	—	$	30,210

(a)	Other long-term investments excluded our interest in a limited partnership of $1.8 million at June 30, 2011 that we account for using the equity method.

(b)	The detail of purchases, sales, issuances, and settlements for the three months ended June 30, 2011 is presented in the table below.

The following table presents the detail of purchases, sales, issuances, and settlements of Level 3 assets and liabilities measured at fair value on a recurring basis for the three months ended June 30, 2011:

(dollars in thousands)

Purchases

Sales

Issuances

Settlements

Total

Successor Company

Three Months Ended

June 30, 2011

Investment securities:

Bonds:

RMBS

—

(51

)

(51

)

CMBS

—

(388

)

(388

)

CDO/ABS

—

Large accelerated filer

Accelerated filer

Non-accelerated filer

x (Do not check if a smaller reporting company)

Smaller reporting company

SPRINGLEAF FINANCE INC 10-Q