SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
____________
FORM
10-Q
For
the quarterly period ended September 30, 2009
of
COMPUCREDIT HOLDINGS
CORPORATION
a
Georgia Corporation
IRS
Employer Identification No. 58-2336689
SEC
File Number 0-53717
Five
Concourse Parkway, Suite 400
Atlanta,
Georgia 30328
(770) 828-2000
CompuCredit
Holdings Corporation has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the preceding
twelve months and has been subject to such filing requirements for the past
ninety days. CompuCredit Holdings Corporation is not yet
required to file Interactive Data Files.
CompuCredit
Holdings Corporation is an accelerated filer and is not a shell
company.
As of
October 31, 2009, 47,730,451 shares of Common Stock, no par value, of
CompuCredit Holdings Corporation were outstanding. (This excludes 2,252,388
loaned shares to be returned.)
FORM 10-Q
TABLE
OF CONTENTS
|
Page
|
|||||
|
PART I.
FINANCIAL INFORMATION
|
|||||
|
Item 1.
|
Financial
Statements (Unaudited)
|
||||
| 1 | |||||
| 2 | |||||
| 3 | |||||
| 4 | |||||
| 5 | |||||
| 6 | |||||
|
Item
2.
|
31 | ||||
|
Item
3.
|
55 | ||||
|
Item
4.
|
57 | ||||
|
PART II.
OTHER INFORMATION
|
|||||
|
Item
1.
|
58 | ||||
|
Item 1A.
|
59 | ||||
|
Item
6.
|
72 | ||||
| Signatures | 73 | ||||
Condensed
Consolidated Balance Sheets (Unaudited)
(Dollars
in thousands)
|
September
30,
2009
|
December
31,
2008
|
|||||||
|
(as
adjusted)
|
||||||||
|
Assets
|
||||||||
|
Cash
and cash equivalents (including restricted cash of $3,639 at September 30,
2009 and $19,913 at December 31, 2008)
|
$ | 119,595 | $ | 94,428 | ||||
|
Securitized
earning assets
|
122,107 | 813,793 | ||||||
|
Non-securitized
earning assets, net:
|
||||||||
|
Loans
and fees receivable, net (of $17,440 and $24,757 in deferred revenue and
$59,340 and $55,753 in allowances for uncollectible loans and fees
receivable at September 30, 2009 and December 31, 2008,
respectively)
|
307,109 | 340,734 | ||||||
|
Investments
in previously charged-off receivables
|
29,854 | 47,676 | ||||||
|
Investments
in securities
|
3,151 | 4,678 | ||||||
|
Deferred
costs, net
|
5,202 | 6,161 | ||||||
|
Property
at cost, net of depreciation
|
35,439 | 48,297 | ||||||
|
Investments
in equity-method investees
|
19,152 | 53,093 | ||||||
|
Intangibles,
net
|
3,030 | 4,547 | ||||||
|
Goodwill
|
43,413 | 59,129 | ||||||
|
Prepaid
expenses and other assets
|
41,420 | 52,575 | ||||||
|
Total
assets
|
$ | 729,472 | $ | 1,525,111 | ||||
|
Liabilities
|
||||||||
|
Accounts
payable and accrued expenses
|
$ | 83,601 | $ | 120,235 | ||||
|
Notes
payable and other borrowings
|
60,889 | 199,939 | ||||||
|
Convertible
senior notes (Note 9)
|
307,153 | 299,834 | ||||||
|
Deferred
revenue
|
1,991 | 23,492 | ||||||
|
Current
and deferred income tax liabilities
|
21,695 | 134,754 | ||||||
|
Total
liabilities
|
475,329 | 778,254 | ||||||
|
Commitments
and contingencies (Note 11)
|
||||||||
|
Equity
|
||||||||
|
Common
stock, no par value, 150,000,000 shares authorized: 58,639,531 shares
issued and 49,982,839 shares outstanding at September 30, 2009
(including 2,252,388 loaned shares to be returned); and 59,947,301 shares
issued and 51,213,385 shares outstanding at December 31, 2008
(including 3,651,069 loaned shares to be returned)
|
— | — | ||||||
|
Additional
paid-in capital
|
524,338 | 522,571 | ||||||
|
Treasury
stock, at cost, 8,656,692 and 8,733,916 shares at September 30, 2009 and
December 31, 2008, respectively
|
(220,375 | ) | (222,310 | ) | ||||
|
Accumulated
other comprehensive loss
|
(32,572 | ) | (31,431 | ) | ||||
|
Retained
(deficit) earnings
|
(33,123 | ) | 453,149 | |||||
|
Total
shareholders’ equity (Note 2)
|
238,268 | 721,979 | ||||||
|
Noncontrolling
interests (Note 2)
|
15,875 | 24,878 | ||||||
|
Total
equity
|
254,143 | 746,857 | ||||||
|
Total
liabilities and equity (Note 2)
|
$ | 729,472 | $ | 1,525,111 | ||||
See
accompanying notes.
Condensed
Consolidated Statements of Operations (Unaudited)
(Dollars
in thousands, except per share data)
|
For
the Three Months Ended
September
30,
|
For
the Nine Months Ended
September
30,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
(as
adjusted)
|
(as
adjusted)
|
|||||||||||||||
|
Interest
income:
|
||||||||||||||||
|
Consumer
loans, including past due fees
|
$ | 17,987 | $ | 23,556 | $ | 56,755 | $ | 71,338 | ||||||||
|
Other
|
325 | 971 | 906 | 4,444 | ||||||||||||
|
Total
interest income
|
18,312 | 24,527 | 57,661 | 75,782 | ||||||||||||
|
Interest
expense
|
(9,465 | ) | (12,619 | ) | (29,675 | ) | (39,558 | ) | ||||||||
|
Net
interest income before fees and related income on non-securitized earning
assets and provision for loan losses
|
8,847 | 11,908 | 27,986 | 36,224 | ||||||||||||
|
Fees
and related income on non-securitized earning assets
|
58,890 | 42,478 | 142,462 | 146,629 | ||||||||||||
|
Provision
for loan losses
|
(16,712 | ) | (16,700 | ) | (47,520 | ) | (52,585 | ) | ||||||||
|
Net
interest income, fees and related income on non-securitized earning
assets
|
51,025 | 37,686 | 122,928 | 130,268 | ||||||||||||
|
Other
operating (loss) income:
|
||||||||||||||||
|
(Loss)
gain on securitized earning assets
|
(216,416 | ) | 4,238 | (530,130 | ) | (13,830 | ) | |||||||||
|
Servicing
income
|
21,999 | 44,537 | 92,873 | 137,691 | ||||||||||||
|
Ancillary
and interchange revenues
|
4,028 | 14,401 | 15,255 | 45,532 | ||||||||||||
|
Gain
on repurchase of convertible senior notes
|
— | — | 160 | 13,728 | ||||||||||||
|
Gain
on buy-out of equity-method investee members
|
— | — | 20,990 | — | ||||||||||||
|
Equity
in (loss) income of equity-method investees
|
(2,170 | ) | 1,674 | (12,185 | ) | 17,130 | ||||||||||
|
Total
other operating (loss) income
|
(192,559 | ) | 64,850 | (413,037 | ) | 200,251 | ||||||||||
|
Other
operating expense:
|
||||||||||||||||
|
Salaries
and benefits
|
12,182 | 16,407 | 40,257 | 53,094 | ||||||||||||
|
Card
and loan servicing
|
55,930 | 65,188 | 166,680 | 212,301 | ||||||||||||
|
Marketing
and solicitation
|
4,418 | 8,754 | 12,472 | 41,653 | ||||||||||||
|
Depreciation
|
4,520 | 8,351 | 16,161 | 25,621 | ||||||||||||
|
Goodwill
impairment
|
— | 29,164 | 20,000 | 29,164 | ||||||||||||
|
Other
|
22,840 | 27,800 | 73,343 | 92,297 | ||||||||||||
|
Total
other operating expense
|
99,890 | 155,664 | 328,913 | 454,130 | ||||||||||||
|
Loss
from continuing operations before income taxes
|
(241,424 | ) | (53,128 | ) | (619,022 | ) | (123,611 | ) | ||||||||
|
Income
tax benefit
|
2,791 | 20,571 | 123,381 | 42,460 | ||||||||||||
|
Loss
from continuing operations
|
(238,633 | ) | (32,557 | ) | (495,641 | ) | (81,151 | ) | ||||||||
|
Discontinued
operations:
|
||||||||||||||||
|
Loss
from discontinued operations before income taxes
|
— | (1,925 | ) | (6,599 | ) | (9,101 | ) | |||||||||
|
Income
tax benefit
|
— | 674 | 2,310 | 3,186 | ||||||||||||
|
Loss
from discontinued operations
|
— | (1,251 | ) | (4,289 | ) | (5,915 | ) | |||||||||
|
Net
loss
|
(238,633 | ) | (33,808 | ) | (499,930 | ) | (87,066 | ) | ||||||||
|
Net
(income) loss attributable to noncontrolling interests
|
(778 | ) | 30 | 13,658 | (1,471 | ) | ||||||||||
|
Net
loss attributable to controlling interests
|
$ | (239,411 | ) | $ | (33,778 | ) | $ | (486,272 | ) | $ | (88,537 | ) | ||||
|
Loss
from continuing operations attributable to controlling interests per
common share—basic
|
$ | (5.02 | ) | $ | (0.68 | ) | $ | (10.11 | ) | $ | (1.74 | ) | ||||
|
Loss
from continuing operations attributable to controlling interests per
common share—diluted
|
$ | (5.02 | ) | $ | (0.68 | ) | $ | (10.11 | ) | $ | (1.74 | ) | ||||
|
Loss
from discontinued operations attributable to controlling interests per
common share—basic
|
$ | — | $ | (0.03 | ) | $ | (0.09 | ) | $ | (0.12 | ) | |||||
|
Loss
from discontinued operations attributable to controlling interests per
common share—diluted
|
$ | — | $ | (0.03 | ) | $ | (0.09 | ) | $ | (0.12 | ) | |||||
|
Net
loss attributable to controlling interests per common
share—basic
|
$ | (5.02 | ) | $ | (0.71 | ) | $ | (10.20 | ) | $ | (1.86 | ) | ||||
|
Net
loss attributable to controlling interests per common
share—diluted
|
$ | (5.02 | ) | $ | (0.71 | ) | $ | (10.20 | ) | $ | (1.86 | ) | ||||
See
accompanying notes.
Condensed
Consolidated Statement of Equity (Unaudited)
For
the Nine months Ended September 30, 2009
(Dollars
in thousands)
|
Common
Stock
|
||||||||||||||||||||||||||||||||||||
|
Shares
Issued
|
Amount
|
Additional
Paid-In Capital
|
Treasury
Stock
|
Accumulated
Other Comprehensive Loss
|
Retained
Earnings (Deficit)
|
Noncontrolling
Interests
|
Comprehensive
Loss
|
Total
Equity
|
||||||||||||||||||||||||||||
|
Balance
at December 31, 2008 (as adjusted)
|
59,947,301 | $ | — | $ | 522,571 | $ | (222,310 | ) | $ | (31,431 | ) | $ | 453,149 | $ | 24,878 | $ | — | $ | 746,857 | |||||||||||||||||
|
Use
of treasury stock for stock-based compensation plans
|
(114,898 | ) | — | (2,054 | ) | 2,054 | — | — | — | — | — | |||||||||||||||||||||||||
|
Issuance
of restricted stock
|
205,809 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
Amortization
of deferred stock-based compensation costs
|
— | — | 6,738 | — | — | — | — | — | 6,738 | |||||||||||||||||||||||||||
|
Purchase
of treasury stock
|
— | — | — | (119 | ) | — | — | — | — | (119 | ) | |||||||||||||||||||||||||
|
Tax
effects of stock-based compensation plans
|
— | — | (1,321 | ) | — | — | — | — | — | (1,321 | ) | |||||||||||||||||||||||||
|
Settlement
of contingent earn-out as referenced in Note 10, “Goodwill and Intangible
Assets”
|
— | — | (1,596 | ) | — | — | — | 5,431 | — | 3,835 | ||||||||||||||||||||||||||
|
Distributions
to owners of noncontrolling interests
|
— | — | — | — | — | — | (774 | ) | — | (774 | ) | |||||||||||||||||||||||||
|
Retired
shares
|
(1,398,681 | ) | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
|
Comprehensive
loss:
|
||||||||||||||||||||||||||||||||||||
|
Net
loss
|
— | — | — | — | — | (486,272 | ) | (13,658 | ) | (499,930 | ) | (499,930 | ) | |||||||||||||||||||||||
|
Foreign
currency translation adjustment, net of tax
|
— | — | — | — | (1,141 | ) | — | (2 | ) | (1,143 | ) | (1,143 | ) | |||||||||||||||||||||||
|
Comprehensive
loss
|
— | — | — | — | — | — | — | $ | (501,073 | ) | — | |||||||||||||||||||||||||
|
Balance
at September 30, 2009
|
58,639,531 | $ | — | $ | 524,338 | $ | (220,375 | ) | $ | (32,572 | ) | $ | (33,123 | ) | $ | 15,875 | $ | 254,143 | ||||||||||||||||||
See
accompanying notes.
Condensed
Consolidated Statements of Comprehensive Loss (Unaudited)
(Dollars
in thousands)
|
For the Three
Months Ended
September
30,
|
For the Nine
Months Ended
September
30,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
(as
adjusted)
|
(as
adjusted)
|
|||||||||||||||
|
Net
loss
|
$ | (238,633 | ) | $ | (33,808 | ) | $ | (499,930 | ) | $ | (87,066 | ) | ||||
|
Other
comprehensive loss:
|
||||||||||||||||
|
Foreign
currency translation adjustment
|
(2,484 | ) | (15,993 | ) | 10,763 | (16,272 | ) | |||||||||
|
Income
tax benefit (expense) related to other comprehensive loss
|
1 | 4,502 | (11,906 | ) | 4,598 | |||||||||||
|
Comprehensive
loss
|
(241,116 | ) | (45,299 | ) | (501,073 | ) | (98,740 | ) | ||||||||
|
Comprehensive
(income) loss attributable to noncontrolling interests
|
(778 | ) | 29 | 13,660 | (1,476 | ) | ||||||||||
|
Comprehensive
loss attributable to controlling interests
|
$ | (241,894 | ) | $ | (45,270 | ) | $ | (487,413 | ) | $ | (100,216 | ) | ||||
See
accompanying notes.
Condensed
Consolidated Statements of Cash Flows (Unaudited)
(Dollars
in thousands)
|
For
the Nine Months Ended
September 30,
|
||||||||
|
2009
|
2008
|
|||||||
|
(as
adjusted)
|
||||||||
|
Operating
activities
|
||||||||
|
Net
loss
|
$ | (499,930 | ) | $ | (87,066 | ) | ||
|
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
||||||||
|
Depreciation
expense
|
16,202 | 25,756 | ||||||
|
Impairment
of goodwill
|
23,483 | 30,296 | ||||||
|
Provision
for loan losses
|
48,212 | 53,792 | ||||||
|
Amortization
and impairment of intangibles
|
1,518 | 1,840 | ||||||
|
Accretion
of deferred revenue
|
(21,500 | ) | (11,583 | ) | ||||
|
Stock-based
compensation expense
|
6,738 | 7,499 | ||||||
|
Retained
interests adjustments, net
|
960,764 | 451,264 | ||||||
|
Unrealized
loss on debt and equity securities classified as trading
securities
|
— | 1,950 | ||||||
|
Gain
on repurchase of convertible senior notes
|
(160 | ) | (13,728 | ) | ||||
|
Interest
expense accreted on convertible senior notes
|
7,572 | 7,570 | ||||||
|
Gain
on buy-out of equity-method investee members
|
(20,990 | ) | — | |||||
|
Income
in excess of distributions from equity-method investments
|
— | (20 | ) | |||||
|
Changes
in assets and liabilities, exclusive of business
acquisitions:
|
||||||||
|
Net
(increase) decrease in valuation of debt, equity and U.S. government
securities classified as trading securities
|
(309 | ) | 18,217 | |||||
|
Decrease
in uncollected fees on non-securitized earning assets
|
6,870 | 11,411 | ||||||
|
Decrease
in deferred costs
|
958 | 1,799 | ||||||
|
(Decrease)
increase in income tax liability
|
(126,208 | ) | 41,524 | |||||
|
Increase
in deferred revenue
|
— | 1,914 | ||||||
|
Decrease
(increase) in prepaid expenses
|
6,177 | (25,972 | ) | |||||
|
Decrease
in accounts payable and accrued expenses
|
(34,721 | ) | (39,667 | ) | ||||
|
Other
|
4,566 | (10,248 | ) | |||||
|
Net
cash provided by operating activities
|
379,242 | 466,548 | ||||||
|
Investing
activities
|
||||||||
|
Purchase
of third-party interest in equity-method investee
|
(19,542 | ) | — | |||||
|
Proceeds
from equity-method investees
|
53,483 | 9,506 | ||||||
|
Investments
in securitized earning assets
|
(448,544 | ) | (1,358,460 | ) | ||||
|
Proceeds
from securitized earning assets
|
209,695 | 1,023,686 | ||||||
|
Investments
in non-securitized earning assets
|
(711,248 | ) | (925,405 | ) | ||||
|
Proceeds
from non-securitized earning assets
|
709,233 | 820,963 | ||||||
|
Acquisition
of assets
|
(621 | ) | — | |||||
|
Purchases
and development of buildings, software, furniture, fixtures and equipment,
net of disposals
|
(2,444 | ) | (6,865 | ) | ||||
|
Net
cash used in investing activities
|
(209,988 | ) | (436,575 | ) | ||||
|
Financing
activities
|
||||||||
|
Noncontrolling
interests distributions, net
|
(774 | ) | (4,880 | ) | ||||
|
Proceeds
from exercise of stock options
|
— | 74 | ||||||
|
Purchase
of treasury stock
|
(119 | ) | (564 | ) | ||||
|
Purchase
of noncontrolling interest
|
(1,096 | ) | — | |||||
|
Proceeds
from borrowings
|
52,897 | 88,376 | ||||||
|
Repayment
of borrowings
|
(195,755 | ) | (129,402 | ) | ||||
|
Net
cash used in financing activities
|
(144,847 | ) | (46,396 | ) | ||||
|
Effect
of exchange rate changes on cash
|
760 | (1,739 | ) | |||||
|
Net
increase (decrease) in cash
|
25,167 | (18,162 | ) | |||||
|
Cash
and cash equivalents at beginning of period
|
94,428 | 137,526 | ||||||
|
Cash
and cash equivalents at end of period
|
$ | 119,595 | $ | 119,364 | ||||
|
Supplemental
cash flow information
|
||||||||
|
Cash
paid for interest
|
$ | 23,284 | $ | 22,699 | ||||
|
Net
cash paid for (refunds of) income taxes
|
$ | 131 | $ | (87,094 | ) | |||
|
Supplemental
non-cash information
|
||||||||
|
Notes
payable associated with capital leases
|
$ | 1,011 | $ | 6,839 | ||||
|
Issuance
of stock options and restricted stock
|
$ | 1,129 | $ | 6,989 | ||||
See
accompanying notes.
Notes
to Condensed Consolidated Financial Statements
September
30, 2009
|
1.
|
Basis
of Presentation
|
We have
prepared our condensed consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America
(“GAAP”) for interim financial information and with the instructions to
Form 10-Q and Article 10 of Securities and Exchange Commission (“SEC”)
Regulation S-X. Accordingly, they do not include all of the information and
notes required by GAAP for complete consolidated financial statements. In the
opinion of management, all normal recurring adjustments considered necessary to
fairly state the results for the interim periods presented have been included.
The preparation of condensed consolidated financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of our condensed consolidated financial statements,
as well as the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from these estimates. Certain estimates,
such as credit losses, payment rates, costs of funds, discount rates and the
yields earned on securitized receivables, significantly affect our reported loss
on retained interests in credit card receivables securitized (which is a
component of loss on securitized earning assets on our condensed consolidated
statements of operations) and the reported value of securitized earning assets
on our condensed consolidated balance sheets. Additionally, estimates of future
credit losses on our non-securitized loans and fees receivable have a
significant effect on the provision for loan losses within our condensed
consolidated statements of operations and loans and fees receivable, net, which
is a component of non-securitized earning assets, net on our condensed
consolidated balance sheets. Operating results for the three and nine months
ended September 30, 2009 are not necessarily indicative of what our results will
be for the year ending December 31, 2009.
We have
reclassified certain amounts in our prior period condensed consolidated
financial statements to conform to current period presentation, and we have
eliminated all significant intercompany balances and transactions for financial
reporting purposes.
Our prior
year reclassifications include those required for the retrospective application
of two new accounting pronouncements that are first effective for us under GAAP
in our 2009 consolidated financial statements—specifically, a pronouncement that
resulted in the reclassification of our prior liability for minority interests
to a new noncontrolling interests component of total equity and a pronouncement
that resulted in reclassifications of consolidated balance sheet balances from
deferred loan costs and convertible senior notes to additional paid-in capital
and in associated reclassifications among retained earnings and deferred tax
liabilities. Retrospective application of this latter pronouncement also had the
effect of increasing interest expense and, accordingly, decreasing net income
within our condensed consolidated statements of operations for the three and
nine months ended September 30, 2008.
On
June 30, 2009, we completed a reorganization through which CompuCredit
Corporation, our former parent company, became a wholly owned subsidiary of
CompuCredit Holdings Corporation. We effected this reorganization through a
merger pursuant to an Agreement and Plan of Merger, dated as of June 2,
2009, by and among CompuCredit Corporation, CompuCredit Holdings Corporation and
CompuCredit Merger Sub, Inc., and as a result of the reorganization, each
outstanding share of CompuCredit Corporation common stock was automatically
converted into one share of CompuCredit Holdings Corporation common
stock.
As a
result of the reorganization, CompuCredit Corporation common stock is no longer
publicly traded, and CompuCredit Holdings Corporation common stock commenced
trading on the NASDAQ Global Select Market on July 1, 2009 under the symbol
“CCRT,” the same symbol under which CompuCredit Corporation common stock was
previously listed and traded.
The
post-reorganization condensed consolidated financial statements presented herein
are presented on the same basis as and can be compared to the condensed
consolidated financial statements reported in CompuCredit Corporation’s prior
quarterly and annual reports filed with the SEC. The accompanying condensed
consolidated balance sheet as of December 31, 2008 has been derived from
and should be read in connection with the audited consolidated financial
statements included in CompuCredit Corporation’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2008; likewise, it should be read in
conjunction with management’s discussion and analysis of financial condition and
results of operations also contained in that Annual Report.
2. Summary of Significant Accounting
Policies and Condensed Consolidated Financial Statement
Components
The
following is a summary of significant accounting policies we follow in preparing
our consolidated financial statements, as well as a description of significant
components of our consolidated financial statements.
Restricted
Cash
Restricted
cash as of September 30, 2009 includes (1) certain collections on receivables
within our Auto Finance segment, the cash balances of which are required to be
distributed to noteholders under our debt facilities and (2) cash collateral
balances underlying standby letters of credit that have been issued in favor of
certain regulators in connection with our retail micro-loan
activities.
Non-Securitized
Earning Assets, Net
The
components of non-securitized earning assets, net, on our condensed consolidated
balance sheets include (1) loans and fees receivable, net, (2) investments in
previously charged-off receivables and (3) investments in
securities.
Loans and Fees
Receivable, Net. Loans and fees
receivable, net, currently consists of receivables associated with our retail
and Internet micro-loan activities, our auto finance business and credit card
accounts opened under our Investment in Previously Charged-off Receivables
segment’s balance transfer program.
As
applicable, we show loans and fees receivable net of both an allowance for
uncollectible loans and fees receivable and unearned fees (or “deferred
revenue”) in accordance with applicable accounting rules.
We account for the loans
and fees receivable associated with our acquisition of a $189.0 million auto
loan portfolio from Patelco Credit Union (“Patelco”) under accounting rules that
limit the yield that may be accreted (accretable yield) to the excess of our
estimate of undiscounted expected principal, interest, and other cash flows
(including the effects of prepayments) expected to be collected on the date of
acquisition over our initial investment in the loans and fees receivable. The
excess of contractual cash flows over cash flows expected to be collected
(nonaccretable difference) is not recognized as an adjustment of yield, loss
accrual or valuation allowance. The following tables show (in thousands) a
roll-forward of accretable yield for our loans for which we apply these rules,
as well as the carrying amounts of and gross loans and fees receivable balances
of our loans for which we apply these rules.
|
For the Three
Months Ended
September
30,
|
For the Nine
Months Ended
September
30,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Roll-forward
of accretable yield:
|
||||||||||||||||
|
Balance
at beginning of period
|
$ | (10,923 | ) | $ | (20,363 | ) | $ | (15,934 | ) | $ | (28,737 | ) | ||||
|
Impairment
of accretable yield
|
— | — | (404 | ) | — | |||||||||||
|
Accretion
of yield
|
2,212 | 3,506 | 7,627 | 11,880 | ||||||||||||
|
Balance
at end of period
|
$ | (8,711 | ) | $ | (16,857 | ) | $ | (8,711 | ) | $ | (16,857 | ) | ||||
|
Acquired
loans and fees receivable subject to accretable yield accounting
rules:
|
||||
|
Carrying
amount of loans and fees receivable at acquisition date
|
$ | 160,592 | ||
|
Carrying
amount of loans and fees receivable at September 30, 2009
|
$ | 43,976 | ||
|
Gross
loans and fees receivable balance at acquisition date
|
$ | 191,976 | ||
|
Gross
loans and fees receivable balance at September 30, 2009
|
$ | 50,220 | ||
A
roll-forward of the components of loans and fees receivable, net (in millions)
between our December 31, 2008 and September 30, 2009 consolidated balance sheet
dates is as follows:
|
Balance
at
December 31,
2008
|
Additions
|
Subtractions
|
Balance
at
September
30,
2009
|
|||||||||||||
|
Loans and fees receivable, gross
|
$ | 421.3 | $ | 765.3 | $ | (802.8 | ) | $ | 383.8 | |||||||
|
Deferred
revenue
|
(24.8 | ) | (51.5 | ) | 58.9 | (17.4 | ) | |||||||||
|
Allowance
for uncollectible loans and fees receivable
|
(55.8 | ) | (47.5 | ) | 44.0 | (59.3 | ) | |||||||||
| Loans and fees receivable, net | $ |
340.7
|
$ |
666.3
|
$ |
(699.9)
|
$ | 307.1 | ||||||||
As of
September 30, 2009, the weighted average remaining accretion period for the
$17.4 million of deferred revenue reflected in the above table was 22.6
months.
A
roll-forward of our allowance for uncollectible loans and fees receivable (in
millions) during each of the three and nine months ended September 30, 2009 and
2008, respectively, is as follows:
|
For
the Three Months Ended
September
30,
|
For
the Nine Months Ended
September
30,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Balance
at beginning of period
|
$ | (56.7 | ) | $ | (55.7 | ) | $ | (55.8 | ) | $ | (51.5 | ) | ||||
|
Provision
for loan losses
|
(16.7 | ) | (16.7 | ) | (47.5 | ) | (52.6 | ) | ||||||||
|
Charge
offs
|
15.0 | 21.2 | 47.8 | 57.9 | ||||||||||||
|
Recoveries
|
(0.9 | ) | (1.5 | ) | (3.8 | ) | (6.5 | ) | ||||||||
|
Balance
at end of period
|
$ | (59.3 | ) | $ | (52.7 | ) | $ | (59.3 | ) | $ | (52.7 | ) | ||||
Investments in
Previously Charged-Off Receivables. The following table shows (in
thousands) a roll-forward of our investments in previously charged-off
receivables activities:
|
For the Three
Months
Ended
September
30, 2009
|
For the Nine
Months
Ended
September
30, 2009
|
|||||||
|
Unrecovered
balance at beginning of period
|
$ | 59,271 | $ | 47,676 | ||||
|
Acquisitions
of defaulted accounts
|
8,776 | 40,427 | ||||||
|
Cash
collections
|
(54,668 | ) | (82,889 | ) | ||||
|
Cost-recovery
method income recognized on defaulted accounts (included within fees and
related income on non-securitized earning assets on our consolidated
statements of operations) (1)
|
16,475 | 24,640 | ||||||
|
Unrecovered
balance at end of period
|
$ | 29,854 | $ | 29,854 | ||||
|
Estimated
remaining collections (“ERC”)
|
$ | 86,946 | $ | 86,946 | ||||
(1)
Amount includes $21.2 million in accretion associated with the culmination of
the Encore forward flow agreement.
Our
previously charged-off receivables consist of amounts associated with normal
delinquency charged-off accounts, accounts for which debtors have filed for
bankruptcy protection under Chapter 13 of the United States Bankruptcy Code
(“Chapter 13 Bankruptcies”) and accounts participating in or acquired in
connection with our balance transfer program prior to such time as we issue
credit cards relating to the accounts.
We
estimate the life of each pool of previously charged-off receivables acquired by
us generally to be between twenty-four and thirty-six months for normal
delinquency charged-off accounts and approximately sixty months for Chapter 13
Bankruptcies. We anticipate collecting 37.7% of the ERC of the existing accounts
over the next twelve months, with the balance to be collected
thereafter.
In 2005,
our Investment in Previously Charged-off Receivables segment entered into a
forward flow contract to sell previously charged-off receivables to a subsidiary
of Encore Capital Group, Inc. (collectively with all other subsidiaries or
affiliates of Encore Capital Group, Inc. to which we refer, “Encore”). On
July 10, 2008, Encore did not purchase certain accounts as contemplated by
the forward flow contract, alleging that we breached certain representations and
warranties set forth in the contract (based upon then-outstanding allegations
made by the Federal Trade Commission (“FTC”)). Subsequently, both our subsidiary
and Encore advised one another that they were in default of various obligations
under the contract and various related agreements among them, and the parties
proceeded to resolve these disputes through arbitration. Immediately prior to
the arbitration panel hearing in the third quarter of 2009, we settled our
outstanding disputes with Encore. The settlement resulted in the recognition of
the remaining $21.2 million in deferred revenue in the third quarter of 2009 and
a corresponding release of $8.7 million in restricted cash—both in exchange for
Encore’s purchase of previously charged-off credit card receivables that had
been offered to Encore throughout the period covered by the forward flow
agreement and Encore’s resumed offering of volumes of previously charged-off
receivables it has purchased for placement under our balance transfer program.
Inclusive of all liabilities extinguished and amounts received and paid in
connection with our settlement with Encore, the settlement resulted in a net
gain of $11.0 million which is reflected in our condensed consolidated
statements of operations for the three and nine months ended September 30,
2009.
Investments in
Securities. We periodically have invested in debt and equity securities.
We generally have classified our purchased debt and equity securities as trading
securities and included realized and unrealized gains and losses in earnings in
accordance with applicable accounting rules. Additionally, we occasionally have
received distributions of debt securities from our equity-method investees, and
we have classified such distributed debt securities as held to maturity. The
carrying values (in thousands) of our investments in debt and equity securities
are as follows:
|
As
of
September 30,
2009
|
As
of
December
31, 2008
|
|||||||
|
Held
to maturity:
|
||||||||
|
Investments
in debt securities of equity-method investees
|
$ | 2,549 | $ | 4,385 | ||||
|
Trading:
|
||||||||
|
Investments
in equity securities
|
602 | 293 | ||||||
|
Total
investments in securities
|
$ | 3,151 | $ | 4,678 | ||||
Prepaid
Expenses and Other Assets
Prepaid
expenses and other assets include amounts paid to third parties for marketing
and other services. We expense these amounts once services have been performed
or marketing efforts have been undertaken. Also included are (1) various
deposits (totaling $11.1 million as of September 30, 2009) required to be
maintained with our third-party issuing bank partners and retail electronic
payment network providers (including $6.9 million as of September 30, 2009
associated with our ongoing servicing efforts in the United Kingdom),
(2) vehicle inventory held by our buy-here, pay-here auto dealerships that
we expense as cost of goods sold (within fees and related income on
non-securitized earning assets on our consolidated statements of operations) as
we earn associated sales revenues, and (3) a $10.0 million deposit at a former
third-party issuing bank partner (Columbus Bank and Trust Company) which is the
subject of broader outstanding litigation between Columbus Bank and Trust
Company and Synovus Financial Corporation (collectively, “CB&T”) and us. See
Note 11, “Commitments and Contingencies,” for additional information regarding
this outstanding litigation.
Deferred
Costs
The
principal components of deferred costs include unamortized costs associated with
our (1) receivables origination activities and (2) issuances of
convertible senior notes and other debt. We defer direct receivables origination
costs for our credit card receivables and amortize them against credit card fee
income on a straight-line basis over the privilege period, which is typically
one year. We generally amortize deferred costs associated with our convertible
senior notes into interest expense over the expected life of the instruments;
however, we accelerate the recovery of an appropriate pro-rata portion of these
costs against gains on repurchases of our convertible senior notes. On January
1, 2009, we were required to adopt a GAAP pronouncement that resulted in the
reclassification of $4.8 million of deferred loan costs associated with our
convertible senior notes as a reduction to equity, and as required, we have
retrospectively applied this pronouncement within prior period consolidated
financial statements as if the accounting pronouncement had applied in financial
reporting periods prior to its January 1, 2009 effective date. See Note 9,
“Convertible Senior Notes, Notes Payable and Other Borrowings,” for additional
effects of our adoption of this pronouncement.
Income
Taxes
We
account for income taxes based on the liability method required by applicable
accounting rules. Under the liability method, deferred income taxes reflect the
net tax effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for income
tax purposes. Additionally, we assess the probability that a tax position we
have taken may not ultimately be sustained on audit, and we reevaluate our
uncertain tax positions on a quarterly basis. We base these reevaluations on
factors including, but not limited to, changes in facts and circumstances,
changes in tax law, effectively settled issues under audit, and new audit
activity. A change in recognition or measurement would result in the
recognition of a tax benefit or an additional charge to tax expense. The
accounting rules also require that we assess the need to establish a valuation
allowance against deferred tax assets by evaluating available evidence to
determine whether it is more likely than not that some or all of the deferred
tax assets will be realized in the future. To the extent there is
insufficient positive evidence to support the realization of the deferred tax
assets, we establish a valuation allowance.
We
conduct business globally, and as a result, one or more of our subsidiaries
files U.S. federal, state and/or foreign income tax returns. In the normal
course of business we are subject to examination by taxing authorities
throughout the world, including such major jurisdictions as the United States,
the United Kingdom, and the Netherlands. With a few exceptions, we are no longer
subject to U.S. federal, state, local, or foreign income tax examinations for
years prior to 2006. Currently, we are under audit by various jurisdictions for
various years, including the Internal Revenue Service for the 2007
tax year.
Although the audits have not been concluded, we do not expect any changes to the
tax liabilities reported in those years. If any such changes arise, however, we
do not expect them to be material.
We
recognize potential accrued interest and penalties related to unrecognized tax
benefits in income tax expense. We recognized $0.6 million and $2.0
million and $0.7 million and $2.1 million in potential interest and penalties
associated with uncertain tax positions during the three and nine months ended
September 30, 2009 and September 30, 2008, respectively. To the
extent such interest and penalties are not assessed as a result of a resolution
of the underlying tax position, amounts accrued will be reduced and reflected as
a reduction of income tax expense. We recognized such a reduction in the amount
of $1.8 million in the three months ended September 30, 2009, related to
the closing of the statute of limitations for our 2005 U.S. federal income tax
return.
Our
overall effective tax rates (computed considering results for both continuing
and discontinued operations before income taxes in the aggregate) were 1.2% and
20.1% for the three and nine months ended September 30, 2009, compared to 38.6%
and 34.4% for the three and nine months ended September 30, 2008. We have
experienced no material changes in effective tax rates associated with
differences in filing jurisdictions or changes in law between these periods, and
the variations in effective tax rates between these periods are substantially
related to the effects of $85.1 million and $95.8 million in valuation
allowances provided against income statement-oriented U.S. federal deferred tax
assets during the three and nine months ended September 30, 2009, respectively.
As computed without regard to the effects of all U.S. federal, state, local and
foreign tax valuation allowances taken against income statement-oriented
deferred tax assets, our effective tax rates would have been 36.4% and 35.4% for
the three and nine months ended September 30, 2009, respectively, and 39.1% and
34.6% for the three and nine months ended September 30, 2008,
respectively.
In
addition to the U.S. federal, state, local and foreign tax valuation allowances
taken against income statement-oriented deferred tax assets in the three and
nine months ended September 30, 2009, we provided a $0.3 million and $9.3
million valuation allowance against U.S. federal deferred tax assets related to
the accumulated other comprehensive loss component within consolidated
shareholders’ equity in the three and nine months ended September 30,
2009.
Fees
and Related Income on Non-Securitized Earning Assets
Fees and
related income on non-securitized earning assets primarily
include: (1) lending fees associated with our retail and
Internet micro-loan activities; (2) fees associated with our lower-tier
credit card receivables during periods in which we have held them on balance
sheet; (3) income associated with our investments in previously
charged-off receivables; (4) gains and losses associated with our
investments in securities; and (5) gross profits from auto sales within our
Auto Finance segment.
The
components (in thousands) of our fees and related income on non-securitized
earning assets are as follows:
|
For
the Three Months Ended
September
30,
|
For
the Nine Months Ended
September
30,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Retail
micro-loan fees
|
$ | 19,393 | $ | 16,177 | $ | 52,635 | $ | 51,384 | ||||||||
|
Internet
micro-loan fees
|
18,636 | 12,362 | 45,528 | 30,132 | ||||||||||||
|
Fees
on lower-tier credit card receivables while held on balance
sheet
|
— | 960 | — | 6,363 | ||||||||||||
|
Income
on investments in previously charged-off receivables (including income
associated with the settlement of our dispute with Encore)
|
16,475 | 4,892 | 24,640 | 34,718 | ||||||||||||
|
Gross
profit on auto sales
|
4,274 | 7,355 | 17,883 | 25,362 | ||||||||||||
|
Gains
(losses) on investments in securities
|
146 | (276 | ) | 309 | (6,527 | ) | ||||||||||
|
Other
|
(34 | ) | 1,008 | 1,467 | 5,197 | |||||||||||
|
Total
fees and related income on non-securitized earning assets
|
$ | 58,890 | $ | 42,478 | $ | 142,462 | $ | 146,629 | ||||||||
Loss
on Securitized Earning Assets
Loss on
securitized earning assets is the net of (1) securitization gains, (2)
losses on retained interests in credit card receivables securitized and
(3) returned-check, cash advance and certain other fees associated with our
securitized credit card receivables, both of which are detailed (in thousands)
in the following table.
|
For the Three Months
Ended
September
30,
|
For
the Nine Months Ended
September
30,
|
|||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
|
Securitization
gain
|
$ | 113,961 | $ | — | $ | 113,961 | $ | — | ||||||||
|
Loss
on retained interests in credit card receivables
securitized
|
(334,035 | ) | (3,571 | ) | (657,869 | ) | (37,409 | ) | ||||||||
|
Fees
on securitized receivables
|
3,658 | 7,809 | 13,778 | 23,579 | ||||||||||||
|
Total
(loss) gain on securitized earning assets
|
$ | (216,416 | ) | $ | 4,238 | $ | (530,130 | ) | $ | (13,830 | ) | |||||
Recent
Accounting Pronouncements
In
October 2009, the Financial Accounting Standards Board (the “FASB”) issued new
rules providing that at the date of issuance, a share-lending arrangement
entered into on an entity's own shares in contemplation of a convertible debt
offering or other financing is required to be measured at fair value and
recognized as a debt issuance cost in the financial statements of the entity.
The debt issuance cost shall be amortized using the effective interest method
over the life of the financing arrangement as interest cost. The new
rules also provide that the loaned shares are excluded from basic and diluted
earnings per share unless default of the share-lending arrangement occurs, at
which time the loaned shares would be included in the common and diluted
earnings per share calculations. These new rules are effective for
fiscal years, and interim periods within those years, beginning after December
15, 2009 and are to be applied retrospectively to all arrangements outstanding
on the effective date. We currently are assessing the impact of this development
on the convertible senior notes that we issued in November 2005.
In June
2009, the FASB issued new accounting rules that, in addition to requiring
certain new securitization and structured financing-related disclosures that
have been incorporated into our condensed consolidated financial statements as
of and for the three and nine months ended September 30, 2009, are expected to
result in the consolidation of our securitization trusts onto our consolidated
balance sheet effective as of January 1, 2010. As a result, cash and credit card
receivables held by our securitization trusts and debt issued from those
entities will be presented as assets and liabilities on our consolidated balance
sheet effective on that date. Initial adoption of these new accounting rules is
expected to have a material impact on our reported financial condition. However,
because we have not yet decided whether to exercise an available option under
these rules under which we would be required to value both the credit card
receivables and debt outstanding within our securitization trusts at fair value,
we are uncertain whether our adoption of the new rules will result in materially
favorable or adverse effects on our reported financial condition. If we exercise
the fair value option permitted under the new rules, we expect favorable effects
on our reported financial condition; whereas, if we do not exercise the fair
value option, we expect adverse effects on our reported financial condition.
Moreover, after adoption of these new rules, we will no longer reflect our
securitization trusts’ results of operations within losses on retained interests
in credit card receivables securitized, but will instead report interest income
and provisions for loan losses (as well as gains and/or losses associated with
fair value changes should we exercise the fair value option) with respect to the
credit card receivables held within our securitization trusts; similarly, we
will begin to separately report interest expense (as well as gains and/or losses
associated with fair value changes should we exercise the fair value option)
with respect to the debt issued from the securitization trusts. Lastly, because
we will account for our securitization transactions under these new accounting
rules as secured borrowings rather than asset sales, we will begin to present
the cash flows from these transactions as cash flows from financing activities,
rather than as cash flows from investing activities.
In April
2009, the FASB issued new other-than-temporary impairment accounting rules for
debt securities, indicating that a company should continue to assess its intent
and ability to hold a security to maturity and to assess whether the fair value
of a debt security is less than its amortized cost basis. If the fair value is
determined to be less than the amortized cost basis, the company should make the
determination of whether the impairment is other-than-temporary. The new rules
also call for additional disclosure and are effective for periods ending after
June 15, 2009. Our adoption of these rules did not have a material impact on our
condensed consolidated financial statements.
In June
2008, the FASB ratified a consensus reached by the EITF on the determination of
whether an equity-linked financial instrument (or embedded feature) is indexed
to an entity's own stock. After considering these new rules, we re-affirmed our
conclusion reached in 2005 that we are not required to bifurcate and separately
account for any of the embedded features within our convertible senior
notes.
Also in
June 2008, the FASB issued new rules addressing whether unvested equity-based
awards are participating securities and, therefore, need to be included in the
earnings allocation in computing earnings per share under the two-class method
described in previously issued accounting rules. These new rules were
effective for us January 1, 2009, and all prior period earnings per share data
presented in financial statements have been adjusted retrospectively to conform
to the new rules. See Note 12, “Net Loss Attributable to
Controlling Interests Per Common Share,” for further information regarding the
computation of earnings per share.
In May
2008, the FASB issued new rules addressing convertible instruments that may be
settled in cash upon conversion (including partial cash settlement). These rules
address instruments commonly referred to as Instrument C type instruments. Those
instruments essentially require the issuer to settle the principal amount in
cash and the conversion spread in cash or net shares at the issuer’s option.
These rules are effective for fiscal periods beginning after December 15,
2008, did not permit early application, and are required to be applied
retrospectively to all periods presented. Our January 1, 2009 adoption of these
rules resulted in an increase in shareholders’ equity of $56.1
million. See the table below for a roll-forward of the impacts of our
adoption of these rules.
In December 2007, the FASB
issued new accounting rules that significantly changed the accounting for
business combinations. Under these rules, an acquiring entity is required, with
limited exceptions, to recognize all the assets acquired and liabilities assumed
in a transaction at the acquisition-date fair value. The rules change the
accounting treatment for certain specific items, including:
|
|
•
|
Acquisition
costs generally are expensed as
incurred;
|
|
|
•
|
Noncontrolling
interests (formerly known as minority interests) are valued at fair value
at the acquisition date;
|
|
|
•
|
Acquired
contingent liabilities are recorded at fair value at the acquisition date
and subsequently measured at either the higher of such amount or the
amount determined under previously existing rules for non-acquired
contingencies;
|
|
|
•
|
In-process
research and development is recorded at fair value as an indefinite-lived
intangible asset at the acquisition
date;
|
|
|
•
|
Restructuring
costs associated with a business combination are generally expensed
subsequent to the acquisition date;
and
|
|
|
•
|
Changes
in deferred tax asset valuation allowances and income tax uncertainties
after the acquisition date generally affect income tax
expense.
|
The new
rules also include a substantial number of new disclosure requirements. They
apply prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008, and earlier adoption was prohibited. While the new
rules significantly affect the way that we will account for future acquisitions,
we adopted them on January 1, 2009 with no material effects on our
consolidated results of operations, financial position or cash
flows.
Also in
December 2007, the FASB issued new accounting requirements that establish new
accounting and reporting standards for the noncontrolling interests in a
subsidiary and for the deconsolidation of a subsidiary. Specifically, these
rules require the recognition of any noncontrolling interests (minority
interests) as equity in the consolidated financial statements and separate from
the parent's equity. The amount of net income attributable to the noncontrolling
interests is included in consolidated net income on the face of the income
statement. The rules also clarify that changes in a parent's ownership interest
in a subsidiary that do not result in deconsolidation are equity transactions if
the parent retains its controlling financial interest. In addition, the rules
require that a parent recognize a gain or loss in net income when a subsidiary
is deconsolidated. Such gain or loss is measured using the fair value of the
noncontrolling equity investment on the deconsolidation date. The rules also
include expanded disclosure requirements regarding the interests of the parent
and its noncontrolling interests. These new rules are effective for fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008, and earlier adoption was prohibited. We adopted these
rules on January 1, 2009 with no material effects (other than the effects
of reclassification of our noncontrolling interests as a component of equity) on
our consolidated results of operations, financial position or cash
flows.
The
following details (in thousands, except for per share data) the effects of
retrospective application of the new accounting rules concerning Instrument C
convertible debt and noncontrolling interests:
|
As
originally reported
|
Retrospective
application of Instrument C convertible debt rules
|
Retrospective
application of noncontrolling interests rules
|
As
adjusted
|
|||||||||||||
|
Additional
paid-in capital (as of December 31, 2008)
|
$ | 413,857 | $ | 108,714 | $ | — | $ | 522,571 | ||||||||
|
Retained
earnings (as of December 31, 2008)
|
$ | 505,728 | $ | (52,579 | ) | $ | — | $ | 453,149 | |||||||
|
Total
equity (as of December 31,2008)
|
$ | 665,844 | $ | 56,135 | $ | 24,878 | $ | 746,857 | ||||||||
|
Loss
from continuing operations (for the three months ended September 30, 2008)
(1)
|
$ | (31,001 | ) | $ | (1,526 | ) | $ | (30 | ) | $ | (32,557 | ) | ||||
|
Net
loss (for the three months ended September 30, 2008)
|
$ | (32,252 | ) | $ | (1,526 | ) | $ | (30 | ) | $ | (33,808 | ) | ||||
|
Loss
from continuing operations attributable to controlling interests per
common share (for the three months ended September 30, 2008)—basic
(1)
|
$ | (0.65 | ) | $ | (0.03 | ) | $ | — | $ | (0.68 | ) | |||||
|
Loss
from continuing operations attributable to controlling interests per
common share (for the three months ended September 30, 2008)—diluted
(1)
|
$ | (0.65 | ) | $ | (0.03 | ) | $ | — | $ | (0.68 | ) | |||||
|
Net
loss attributable to controlling interests per common share (for the three
months ended September 30, 2008)—basic
|
$ | (0.68 | ) | $ | (0.03 | ) | $ | — | $ | (0.71 | ) | |||||
|
Net
loss attributable to controlling interests per common share (for the three
months ended September 30, 2008)—diluted
|
$ | (0.68 | ) | $ | (0.03 | ) | $ | — | $ | (0.71 | ) | |||||
|
Loss
from continuing operations (for the nine months ended September 30, 2008)
(1)
|
$ | (68,789 | ) | $ | (13,833 | ) | $ | 1,471 | $ | (81,151 | ) | |||||
|
Net
loss (for the nine months ended September 30, 2008)
|
$ | (74,704 | ) | $ | (13,833 | ) | $ | 1,471 | $ | (87,066 | ) | |||||
|
Loss
from continuing operations attributable to controlling interests per
common share (for the nine months ended September 30, 2008)—basic
(1)
|
$ | (1.45 | ) | $ | (0.29 | ) | $ | — | $ | (1.74 | ) | |||||
|
Loss
from continuing operations attributable to controlling interests per
common share (for the nine months ended September 30, 2008)—diluted
(1)
|
$ | (1.45 | ) | $ | (0.29 | ) | $ | — | $ | (1.74 | ) | |||||
|
Net
loss attributable to controlling interests per common share (for the nine
months ended September 30, 2008)—basic
|
$ | (1.57 | ) | $ | (0.29 | ) | $ | — | $ | (1.86 | ) | |||||
|
Net
loss attributable to controlling interests per common share (for the nine
months ended September 30, 2008)—diluted
|
$ | (1.57 | ) | $ | (0.29 | ) | $ | — | $ | (1.86 | ) | |||||
(1) Prior
period “As originally reported” amounts have been restated to report the impact
of discontinued operations.
3. Discontinued
Operations
In May 2009, we discontinued our Retail
Micro-Loans segment’s Arkansas operations based on regulatory opposition we
faced within that state; as such, our Arkansas retail micro-loan results of
operations have been classified as discontinued operations for all periods
presented. Reflecting both our discontinued Arkansas operations, as well as
those of other Retail Micro-Loan segment states that we discontinued in prior
reporting periods, the components (in thousands) of our discontinued operations
are as follows:
|
For
the Three Months Ended September 30,
|
For
the Nine Months Ended September 30,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Net
interest income, fees and related income on non-securitized earning
assets
|
$ | — | $ | 3,886 | $ | 1,684 | $ | 11,533 | ||||||||
|
Other
operating expense
|
— | 5,811 | 2,021 | 18,731 | ||||||||||||
|
Loss
upon closure/sale
|
— | — | 2,779 | 771 | ||||||||||||
|
Goodwill
impairment
|
— | — | 3,483 | 1,132 | ||||||||||||
|
Loss
before income taxes
|
— | (1,925 | ) | (6,599 | ) | (9,101 | ) | |||||||||
|
Income
tax benefit
|
— | 674 | 2,310 | 3,186 | ||||||||||||
|
Net
loss
|
$ | — | $ | (1,251 | ) | $ | ( 4,289 | ) | $ | (5,915 | ) | |||||
4. Segment Reporting
We
operate primarily within one industry consisting of five reportable segments by
which we manage our business. Our five reportable segments
are: Credit Cards; Investments in Previously Charged-Off Receivables;
Retail Micro-Loans; Auto Finance; and Other. We measure the profitability of our
reportable segments based on their income after allocation of specific costs and
corporate overhead. Overhead costs are allocated based on headcounts and other
applicable measures to better align costs with the associated revenues, and
there are no charges against segment operations for the internal (i.e.,
non-third-party) costs of capital that we have allocated to the segments.
Summary operating segment information (in thousands) is as follows:
|
Three Months
Ended September 30, 2009
|
Credit Cards
|
Investments in
Previously
Charged-Off
Receivables
|
Retail
Micro-Loans
|
Auto Finance
|
Other
|
Total
|
||||||||||||||||||
|
Net
interest income, fees and related income (loss) on non-securitized earning
assets
|
$ | (7,268 | ) | $ | 16,585 | $ | 17,311 | $ | 11,132 | $ | 13,265 | $ | 51,025 | |||||||||||
|
Total
other operating (loss) income
|
$ | (192,727 | ) | $ | 83 | $ | — | $ | 85 | $ | — | $ | (192,559 | ) | ||||||||||
|
(Loss)
income from continuing operations before income taxes
|
$ | (254,564 | ) | $ | 7,041 | $ | 4,369 | $ | (1,518 | ) | $ | 3,248 | $ | (241,424 | ) | |||||||||
|
Loss
from discontinued operations before income taxes
|
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
|
Loans
and fees receivable, gross
|
$ | 15,698 | $ | — | $ | 37,350 | $ | 300,551 | $ | 30,290 | $ | 383,889 | ||||||||||||
|
Loans
and fees receivable, net
|
$ | 12,277 | $ | — | $ | 32,007 | $ | 242,221 | $ | 20,604 | $ | 307,109 | ||||||||||||
|
Total
assets
|
$ | 298,351 | $ | 31,700 | $ | 68,747 | $ | 268,179 | $ | 62,495 | $ | 729,472 | ||||||||||||
|
Three Months
Ended September 30, 2008
|
Credit Cards
|
Investments in
Previously
Charged-Off
Receivables
|
Retail
Micro-Loans
|
Auto Finance
|
Other
|
Total
|
||||||||||||||||||
|
Net
interest income, fees and related income (loss) on non-securitized earning
assets
|
$ | (6,546 | ) | $ | 4,927 | $ | 12,735 | $ | 18,054 | $ | 8,516 | $ | 37,686 | |||||||||||
|
Total
other operating income
|
$ | 64,686 | $ | 64 | $ | — | $ | 100 | $ | — | $ | 64,850 | ||||||||||||
|
(Loss)
income from continuing operations before income taxes
|
$ | (23,072 | ) | $ | (781 | ) | $ | 9 | $ | (30,529 | ) | $ | 1,245 | $ | (53,128 | ) | ||||||||
|
Loss
from discontinued operations before income taxes
|
$ | — | $ | — | $ | (1,628 | ) | $ | — | $ | (297 | ) | $ | (1,925 | ) | |||||||||
|
Loans
and fees receivable, gross
|
$ | 4,189 | $ | — | $ | 35,858 | $ | 380,920 | $ | 20,797 | $ | 441,764 | ||||||||||||
|
Loans
and fees receivable, net
|
$ | 4,022 | $ | — | $ | 29,809 | $ | 311,843 | $ | 14,957 | $ | 360,631 | ||||||||||||
|
Total
assets
|
$ | 1,124,687 | $ | 46,705 | $ | 97,507 | $ | 359,762 | $ | 70,064 | $ | 1,698,725 | ||||||||||||
|
Nine
Months Ended September 30, 2009
|
Credit Cards
|
Investments in
Previously
Charged-Off
Receivables
|
Retail
Micro-Loans
|
Auto Finance
|
Other
|
Total
|
||||||||||||||||||
|
Net
interest income, fees and related income (loss) on non-securitized earning
assets
|
$ | (19,152 | ) | $ | 24,533 | $ | 45,803 | $ | 39,130 | $ | 32,614 | $ | 122,928 | |||||||||||
|
Total
other operating (loss) income
|
$ | (413,664 | ) | $ | 138 | $ | — | $ | 488 | $ | 1 | $ | (413,037 | ) | ||||||||||
|
(Loss)
income from continuing operations before income taxes
|
$ | (609,354 | ) | $ | (2,336 | ) | $ | (13,258 | ) | $ | (5,653 | ) | $ | 11,579 | $ | (619,022 | ) | |||||||
|
Loss
from discontinued operations before income taxes
|
$ | — | $ | — | $ | (6,599 | ) | $ | — | $ | — | $ | (6,599 | ) | ||||||||||
|
Loans
and fees receivable, gross
|
$ | 15,698 | $ | — | $ | 37,350 | $ | 300,551 | $ | 30,290 | $ | 383,889 | ||||||||||||
|
Loans
and fees receivable, net
|
$ | 12,277 | $ | — | $ | 32,007 | $ | 242,221 | $ | 20,604 | $ | 307,109 | ||||||||||||
|
Total
assets
|
$ | 298,351 | $ | 31,700 | $ | 68,747 | $ | 268,179 | $ | 62,495 | $ | 729,472 | ||||||||||||
|
Nine
Months Ended September 30, 2008
|
Credit Cards
|
Investments in
Previously
Charged-Off
Receivables
|
Retail
Micro-Loans
|
Auto Finance
|
Other
|
Total
|
||||||||||||||||||
|
Net
interest income, fees and related income (loss) on non-securitized earning
assets
|
$ | (19,802 | ) | $ | 34,958 | $ | 43,660 | $ | 53,723 | $ | 17,729 | $ | 130,268 | |||||||||||
|
Total
other operating income
|
$ | 199,453 | $ | 502 | $ | — | $ | 296 | $ | — | $ | 200,251 | ||||||||||||
|
(Loss)
income from continuing operations before income taxes
|
$ | (111,051 | ) | $ | 18,509 | $ | 6,417 | $ | (35,051 | ) | $ | (2,435 | ) | $ | (123,611 | ) | ||||||||
|
Loss
from discontinued operations before income taxes
|
$ | — | $ | — | $ | (7,855 | ) | $ | — | $ | (1,246 | ) | $ | (9,101 | ) | |||||||||
|
Loans
and fees receivable, gross
|
$ | 4,189 | $ | — | $ | 35,858 | $ | 380,920 | $ | 20,797 | $ | 441,764 | ||||||||||||
|
Loans
and fees receivable, net
|
$ | 4,022 | $ | — | $ | 29,809 | $ | 311,843 | $ | 14,957 | $ | 360,631 | ||||||||||||
|
Total
assets
|
$ | 1,124,687 | $ | 46,705 | $ | 97,507 | $ | 359,762 | $ | 70,064 | $ | 1,698,725 | ||||||||||||
5. Treasury
Stock Transactions
At our
discretion, we use treasury shares to satisfy option exercises and restricted
stock vesting, and we use the cost approach when accounting for the repurchase
and reissuance of our treasury stock. We reissued treasury shares totaling 3,254
and 114,898 during the three and nine months ended September 30, 2009 at gross
costs of $0.06 million and $2.1 million, respectively, in satisfaction of
restricted stock vestings. We also effectively purchased shares totaling 786 and
37,674 during the three and nine months ended September 30, 2009 at a gross cost
of $3,875 and $118,895, respectively, by having employees who were vesting in
their restricted stock grants exchange a portion of their stock for our payment
of required minimum tax withholdings.
6. Investments
in Equity-Method Investees
In the
following tables, we summarize (in thousands) combined balance sheet and results
of operations data for our equity-method investees:
|
As of
September 30, 2009
|
As of December
31, 2008
|
|||||||
|
Securitized
earning assets
|
$ | 51,937 | $ | 116,510 | ||||
|
Total
assets
|
$ | 54,449 | $ | 118,962 | ||||
|
Total
liabilities
|
$ | 1,449 | $ | 1,967 | ||||
|
Members’
capital
|
$ | 53,000 | $ | 116,995 | ||||
|
For
the Three Months
Ended
September 30,
|
For
the Nine Months
Ended
September 30,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Net
interest income, fees and related income on non-securitized earning
assets
|
$ | — | $ | — | $ | — | $ | 1 | ||||||||
|
Fees
and related (loss) income on securitized earning assets
|
$ | (6,230 | ) | $ | 835 | $ | (37,241 | ) | $ | 34,066 | ||||||
|
Total
other operating (loss) income
|
$ | (5,315 | ) | $ | 2,973 | $ | (33,920 | ) | $ | 40,839 | ||||||
|
Net
(loss) income
|
$ | (5,892 | ) | $ | 2,418 | $ | (28,892 | ) | $ | 38,067 | ||||||
In May
2009, we recognized a gain of $21.0 million that is separately classified on our
condensed consolidated statement of operations associated with our buy-out of
all other members of our then-longest standing equity-method investee.
Subsequent to this buy-out event, we have included the operations of this former
equity-method investee and its underlying assets and liabilities within our
consolidated results of operations and condensed consolidated balance sheet
items, as opposed to the income from equity-method investees and investment in
equity-method investee categories.
7.
Securitizations and Structured Financings
As of
September 30, 2009, substantially all of our credit card receivables had been
sold to securitization trusts. Within this Report, we refer to such transfers of
financial assets to off-balance-sheet securitization trusts as
“securitizations,” as contrasted with our use of the term “structured
financings” to refer to non-recourse, on-balance-sheet debt
financings.
Securitizations
Our
credit card receivables securitization transactions do not affect the
relationship we have with our customers, and we continue to service the
securitized credit card receivables. Our ownership of retained interests in our
securitized credit card receivables, the guarantee and note purchase agreements
with respect to securitizations of acquired credit card receivables portfolios
as described in Note 11, “Commitments and Contingencies,” and our obligation to
service securitized receivables represent our only continuing involvement with
our securitized credit card receivables.
The table
below summarizes (in thousands) our securitization activities for the periods
presented. As with other tables included herein, it does not include the
securitization activities of our equity-method investees:
|
For
the Three Months Ended September 30,
|
For
the Nine Months Ended September 30,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Gross
amount of receivables securitized at period end
|
$ | 1,671,930 | $ | 2,912,102 | $ | 1,671,930 | $ | 2,912,102 | ||||||||
|
Proceeds
from new transfers of financial assets to securitization
trusts
|
$ | 90,601 | $ | 384,827 | $ | 395,330 | $ | 1,134,754 | ||||||||
|
Proceeds
from collections reinvested in revolving-period
securitizations
|
$ | 106,872 | $ | 341,817 | $ | 382,334 | $ | 1,131,716 | ||||||||
|
Excess
cash flows received on retained interests
|
$ | 24,893 | $ | 49,951 | $ | 80,377 | $ | 139,785 | ||||||||
|
Securitization
gain
|
$ | 113,961 | $ | — | $ | 113,961 | $ | — | ||||||||
|
Loss
on retained interests in credit card receivables
securitized
|
(334,035 | ) | (3,571 | ) | (657,869 | ) | (37,409 | ) | ||||||||
|
Fees
on securitized receivables
|
3,658 | 7,809 | 13,778 | 23,579 | ||||||||||||
|
Total
(loss) income on securitized earning assets
|
$ | (216,416 | ) | $ | 4,238 | $ | (530,130 | ) | $ | (13,830 | ) | |||||
The
$114.0 million securitization gain in the above table results from our purchase
of $264.0 million of securitization facility notes for $150.0 million (including
associated transaction costs) and their subsequent cancellation.
The
investors in our securitization transactions have no recourse against us for our
customers’ failure to pay their credit card receivables. However, most of our
retained interests are subordinated to the investors’ interests until the
investors have been fully paid.
Generally, we include all
collections received from the cardholders underlying each securitization in our
securitization cash flows. This includes collections from the cardholders for
interest, fees and other charges on the accounts and collections from those
cardholders repaying the principal portion of their account
balances.
In
general, absent an early amortization event, the cash flows are then distributed
to us as servicer in the amounts of our contractually negotiated servicing fees,
to the investors as interest on their outstanding notes, to the investors to
repay any portion of their outstanding notes that becomes due and payable, and
to us as the seller to fund new purchases. Any
collections
from cardholders remaining each month after making the various payments noted
above generally are paid to us on our retained interests.
In the
event of early amortization of the facilities within a securitization trust, the
cash flows generally are distributed to the servicer in the amounts of its
contractually negotiated servicing fees, to the investors as interest on their
outstanding notes and to the investors to repay their outstanding notes. As
such, upon early amortization of securitization facilities, a holder of residual
interests in a securitization trust does not receive cash flows from the
securitization trust to fund new cardholder purchases or as payments on its
retained interests. In the third quarter of 2009, we concluded, based on
worsening collections on the receivables underlying our upper and lower-tier
originated portfolio master trusts, that a buyer of our residual interests in
the securitization trusts would likely discount the price that they would pay
for the residual interests to reflect the risk that the securitization
facilities could soon enter early amortization status. Accordingly, our
September 30, 2009 calculations of the fair value of our retained interests in
these securitization trusts reflect this early amortization assumption, under
which our receipt of cash flows would be delayed materially until the underlying
securitization facilities were completely repaid. Our use of this early
amortization assumption in our fair value computations (especially when coupled
with worsening cardholder payment performance expectations) caused a material
decline in the fair value of our retained interests in credit card receivables
securitized in the third quarter of 2009.
As
suggested above, we carry the retained interests associated with the credit card
receivables we have securitized at estimated fair market value within the
securitized earning assets category on our consolidated balance sheets, and
because we classify them as trading securities and have made a fair value
election with respect to them, we include any changes in fair value in income.
Because quoted market prices for our retained interests generally are not
available, we estimate fair value based on the estimated present value of future
cash flows using our best estimates of key assumptions (including, for example,
the early amortization assumption mentioned above).
The
measurements of retained interests associated with our securitizations are
dependent upon our estimate of future cash flows using the cash-out method.
Under the cash-out method, we record the future cash flows at a discounted
value. We discount the cash flows based on the timing of when we expect to
receive the cash flows. We base the discount rates on our estimates of returns
that would be required by investors in investments with similar terms and credit
quality. We estimate yields on the credit card receivables based on stated
annual percentage rates and applicable terms and conditions governing fees as
set forth in the credit card agreements, and we base estimated default and
payment rates on historical results, adjusted for expected changes based on our
credit risk models. We typically charge off credit card receivables when the
receivables become 180 days past due, although earlier charge offs may
occur specifically related to accounts of bankrupt or deceased customers. We
generally charge off bankrupt and deceased customers’ accounts within
30 days of verification.
Our
retained interests in credit card receivables securitized (labeled as
securitized earning assets on our consolidated balance sheets) include the
following (in thousands):
|
September
30,
2009
|
June
30,
2009
|
December
31,
2008
|
||||||||||
|
I/O
strip
|
$ | 43,142 | $ | 134,384 | $ | 132,360 | ||||||
|
Accrued
interest and fees
|
16,978 | 13,887 | 22,723 | |||||||||
|
Net
servicing liability
|
(48,347 | ) | (23,008 | ) | (10,670 | ) | ||||||
|
Amounts
due from securitization
|
5,999 | 54,929 | 12,369 | |||||||||
|
Fair
value of retained interests
|
106,120 | 292,641 | 659,156 | |||||||||
|
Issuing
bank partner continuing interests
|
(1,785 | ) | (1,467 | ) | (2,145 | ) | ||||||
|
Securitized
earning assets
|
$ | 122,107 | $ | 471,366 | $ | 813,793 | ||||||
The I/O
strip reflects the fair value of our rights to future income from
securitizations arranged by us and includes certain credit enhancements. Accrued
interest and fees represent the estimated collectible portion of fees earned but
not billed to the cardholders underlying the credit card receivables portfolios
we have securitized. Amounts due from securitization represent cash flows that
are distributable to us from the prior month’s cash flows within each
securitization trust; we generally expect to receive these amounts within 30
days from the close of each respective month. Lastly, we measure retained
interests at fair value as set forth within the fair value of retained interests
category in the above table.
The
net servicing liability in the above table reflects on a net basis, for those
securitization structures for which servicing compensation is not adequate, the
fair value of the net costs to service the receivables above and beyond the net
servicing income we expect to receive from the securitizations. We initially
record a servicing asset or a servicing liability associated with a
securitization structure when the servicing fees we expect to receive do not
represent adequate compensation for servicing the receivables. We record these
initial servicing assets and servicing liabilities at estimated fair market
value, and then we evaluate and update our servicing asset and servicing
liability fair value estimates at the end of
each
financial reporting period. We present the net of our servicing assets and
liabilities (i.e., a net servicing liability) in the above table, and we include
changes in net servicing liability fair values within loss on securitized
earning assets on our consolidated statements of operations (and more
specifically as a component of loss on retained interests in credit card
receivables securitized). Because quoted market prices generally are not
available for our servicing liabilities, we estimate fair values based on the
estimated present value of future cash flows.
The
primary risk inherent within the determination of our net servicing liability is
our ability to control our servicing costs relative to the servicing revenues we
receive from our securitization trusts. We do not consider our servicing revenue
stream to be a particularly significant risk because, with respect to a
substantial majority of the receivables we service, even in the event of early
amortization of our securitization facilities, we will continue to receive
servicing revenues through the securitization waterfalls in the same manner and
in no lower rate of compensation than we do currently. We have no instruments
that we use to mitigate the income statement effects of changes in the fair
value of our net servicing liability.
Reflected
within servicing income on our consolidated statements of operations are
servicing income (fees) we have received from both our securitization trusts and
equity-method investees that have contracted with us to service their assets.
The servicing fees received exclusively from our securitization trusts were
$17.9 million and $78.8 million for the three and nine months ended September
30, 2009, respectively, and $38.7 million, and $119.0 million for the three and
nine months ended September 30, 2008, respectively. Changes in our net servicing
liability for each financial reporting period presented are summarized (in
millions) in the following table:
|
For
the Three Months Ended
|
||||||||||||
|
September
30,
2009
|
December
31,
2008
|
September
30,
2008
|
||||||||||
|
Net
servicing liability at beginning of period
|
$ | 23.0 | $ | 6.4 | $ | 18.6 | ||||||
|
Changes
in fair value of net servicing liability due to changes in valuations
inputs, including receivables levels within securitization trusts, length
of servicing period, servicing costs and changes in servicing compensation
rates (including an assumed 0.0% servicing compensation rate once debt
holders have been repaid in an early amortization scenario that we first
used in our retained interests fair value computations in the three months
ended September 30, 2009)
|
25.3 | 4.3 | (12.1 | ) | ||||||||
|
Balance
at end of period
|
$ | 48.3 | ||||||||||