form10q.htm
_________________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended March 31, 2010
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’s common stock, no par value per share, is registered pursuant to Section 12(b) of the Securities Exchange Act of 1934 (the “Act”).
CompuCredit (1) is required to file reports pursuant to Section 13 or Section 15(d) of the Act, (2) has filed all reports required to be filed by Section 13 or 15(d) of the Act during the preceding 12 months and (3) 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 is a smaller reporting company and is not a shell company.
As of April 30, 2010, 47,915,117 shares of common stock, no par value, of the registrant were outstanding. (This excludes 2,252,388 loaned shares to be returned as of that date.)
COMPUCREDIT HOLDINGS CORPORATION
FORM 10-Q
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PART I. FINANCIAL INFORMATION
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Item 1.
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1 |
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2 |
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3 |
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4 |
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5 |
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6 |
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Item 2.
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23 |
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Item 3.
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43 |
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Item 4.
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43 |
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PART II. OTHER INFORMATION
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Item 1.
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44 |
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Item 1A.
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44 |
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Item 6.
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59 |
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60 |
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Condensed Consolidated Balance Sheets
(Dollars in thousands)
|
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(Unaudited) |
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Assets
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Cash and cash equivalents (including restricted cash of $56,347 at March 31, 2010 and $5,636 at December 31, 2009)
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$ |
249,286 |
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$ |
190,655 |
|
Securitized earning assets
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|
— |
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36,514 |
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Loans and fees receivable:
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Loans and fees receivable, net (of $5,909 and $7,030 in deferred revenue and $14,096 and $15,030 in allowances for uncollectible loans and fees receivable at March 31, 2010 and December 31, 2009, respectively)
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64,413 |
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70,928 |
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Loans and fees receivable pledged as collateral under structured financings, net (of $29,619 and $33,864 in deferred revenue and $36,660 and $38,414 in allowances for uncollectible loans and fees receivable at March 31, 2010 and December 31, 2009, respectively)
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185,263 |
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|
214,439 |
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Loans and fees receivable, at fair value
|
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24,702 |
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|
42,299 |
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Loans and fees receivable pledged as collateral under structured financings, at fair value
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657,215 |
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— |
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Investments in previously charged-off receivables
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25,985 |
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29,669 |
|
Investments in securities
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77,367 |
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2,629 |
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Deferred costs, net
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4,073 |
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4,432 |
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Property at cost, net of depreciation
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28,242 |
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|
32,263 |
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Investments in equity-method investees
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22,137 |
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13,517 |
|
Intangibles, net
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|
2,698 |
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|
2,816 |
|
Goodwill
|
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|
42,148 |
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43,422 |
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Income tax asset, net
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— |
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32,695 |
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Prepaid expenses and other assets
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24,374 |
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32,554 |
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Total assets
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$ |
1,407,903 |
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$ |
748,832 |
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Liabilities
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Accounts payable and accrued expenses
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$ |
70,642 |
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$ |
67,295 |
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Notes payable associated with structured financings, at face value
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144,847 |
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164,368 |
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Notes payable associated with structured financings, at fair value
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650,670 |
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— |
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Convertible senior notes (Note 10)
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277,784 |
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307,573 |
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Deferred revenue
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1,760 |
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|
1,875 |
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Income tax liability
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66,980 |
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— |
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Total liabilities
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1,212,683 |
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541,111 |
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Commitments and contingencies (Note 11)
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Equity
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Common stock, no par value, 150,000,000 shares authorized: 58,505,477 shares issued and 50,173,232 shares outstanding at March 31, 2010 (including 2,252,388 loaned shares to be returned); and 58,596,545 shares issued and 49,970,111 shares outstanding at December 31, 2009 (including 2,252,388 loaned shares to be returned)
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— |
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— |
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Additional paid-in capital
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491,824 |
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500,064 |
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Treasury stock, at cost, 8,332,245 and 8,626,434 shares at March 31, 2010 and December 31, 2009, respectively
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(213,830 |
) |
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(219,714 |
) |
Accumulated other comprehensive loss
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(5,638 |
) |
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(3,293 |
) |
Retained deficit
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(96,072 |
) |
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(87,740 |
) |
Total shareholders’ equity (Note 2)
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176,284 |
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189,317 |
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Noncontrolling interests (Note 2)
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18,936 |
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18,404 |
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Total equity
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195,220 |
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207,721 |
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Total liabilities and equity (Note 2)
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$ |
1,407,903 |
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$ |
748,832 |
|
See accompanying notes.
Condensed Consolidated Statements of Operations (Unaudited)
(Dollars in thousands, except per share data)
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For the Three Months Ended
March 31,
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Interest income:
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Consumer loans, including past due fees
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$ |
84,188 |
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$ |
19,801 |
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Other
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26 |
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|
329 |
|
Total interest income
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84,214 |
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20,130 |
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Interest expense
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(17,633 |
) |
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(10,192 |
) |
Net interest income before fees and related income on earning assets and provision for loan losses
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66,581 |
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9,938 |
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Fees and related income on earning assets
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126,894 |
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|
42,646 |
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Provision for loan losses
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(173,414 |
) |
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(12,253 |
) |
Net interest income, fees and related income on earning assets
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20,061 |
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|
40,331 |
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Other operating income (loss):
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Loss on securitized earning assets
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— |
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(152,026 |
) |
Servicing income
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|
2,019 |
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|
39,404 |
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Ancillary and interchange revenues
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3,231 |
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5,998 |
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Gain on repurchase of convertible senior notes
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13,896 |
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160 |
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Equity in loss of equity-method investees
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(280 |
) |
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(2,182 |
) |
Total other operating income (loss)
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18,866 |
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(108,646 |
) |
Other operating expense:
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Salaries and benefits
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10,838 |
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14,232 |
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Card and loan servicing
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41,535 |
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57,629 |
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Marketing and solicitation
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5,363 |
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4,146 |
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Depreciation
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3,492 |
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|
6,327 |
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Other
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17,770 |
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|
25,194 |
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Total other operating expense
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78,998 |
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|
107,528 |
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Loss from continuing operations before income taxes
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|
(40,071 |
) |
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|
(175,843 |
) |
Income tax (expense) benefit
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|
(1,059 |
) |
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|
60,639 |
|
Loss from continuing operations
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|
(41,130 |
) |
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|
(115,204 |
) |
Discontinued operations:
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|
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Income from discontinued operations before income taxes
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|
— |
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|
151 |
|
Income tax expense
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|
— |
|
|
|
(53 |
) |
Income from discontinued operations
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|
|
— |
|
|
|
98 |
|
Net loss
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|
(41,130 |
) |
|
|
(115,106 |
) |
Net (income) loss attributable to noncontrolling interests
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|
(1,651 |
) |
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|
2,589 |
|
Net loss attributable to controlling interests
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$ |
(42,781 |
) |
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$ |
(112,517 |
) |
Loss from continuing operations attributable to controlling interests per common share—basic
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$ |
(0.89 |
) |
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$ |
(2.37 |
) |
Loss from continuing operations attributable to controlling interests per common share—diluted
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|
$ |
(0.89 |
) |
|
$ |
(2.37 |
) |
Income from discontinued operations attributable to controlling interests per common share—basic
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|
$ |
— |
|
|
$ |
— |
|
Income from discontinued operations attributable to controlling interests per common share—diluted
|
|
$ |
— |
|
|
$ |
— |
|
Net loss attributable to controlling interests per common share—basic
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|
$ |
(0.89 |
) |
|
$ |
(2.37 |
) |
Net loss attributable to controlling interests per common share—diluted
|
|
$ |
(0.89 |
) |
|
$ |
(2.37 |
) |
See accompanying notes.
Condensed Consolidated Statements of Shareholders’ Equity
For the Three Months Ended March 31, 2010 (Unaudited)
(Dollars in thousands)
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|
|
|
|
|
|
|
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|
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|
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|
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Additional Paid-In Capital
|
|
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|
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Accumulated Other Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
58,596,545 |
|
|
$ |
— |
|
|
$ |
500,064 |
|
|
$ |
(219,714 |
) |
|
$ |
(3,293 |
) |
|
$ |
(87,740 |
) |
|
$ |
18,404 |
|
|
|
|
|
$ |
207,721 |
|
Cumulative effect of accounting pronouncement adoption (see Note 2)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
34,449 |
|
|
|
3,231 |
|
|
|
|
|
|
37,680 |
|
Use of treasury stock for stock-based compensation plans
|
|
|
(266,811 |
) |
|
|
— |
|
|
|
(6,275 |
) |
|
|
6,275 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
Issuance of restricted stock
|
|
|
175,743 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
Amortization of deferred stock-based compensation costs
|
|
|
— |
|
|
|
— |
|
|
|
3,442 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
3,442 |
|
Purchase of treasury stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(391 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
(391 |
) |
Tax effects of stock-based compensation plans
|
|
|
— |
|
|
|
— |
|
|
|
(1,991 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
(1,991 |
) |
Repurchase of noncontrolling interests
|
|
|
— |
|
|
|
— |
|
|
|
(3,416 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4,119 |
) |
|
|
|
|
|
(7,535 |
) |
Distributions to owners of noncontrolling interests
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(231 |
) |
|
|
|
|
|
(231 |
) |
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(42,781 |
) |
|
|
1,651 |
|
|
$ |
(41,130 |
) |
|
|
(41,130 |
) |
Foreign currency translation adjustment, net of tax
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,345 |
) |
|
|
— |
|
|
|
— |
|
|
|
(2,345 |
) |
|
|
(2,345 |
) |
Comprehensive loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
(43,475 |
) |
|
|
— |
|
Balance at March 31, 2010
|
|
|
58,505,477 |
|
|
$ |
— |
|
|
$ |
491,824 |
|
|
$ |
(213,830 |
) |
|
$ |
(5,638 |
) |
|
$ |
(96,072 |
) |
|
$ |
18,936 |
|
|
|
|
|
|
$ |
195,220 |
|
See accompanying notes.
Condensed Consolidated Statements of Comprehensive Loss (Unaudited)
(Dollars in thousands)
|
|
For the Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Net loss
|
|
$ |
(41,130 |
) |
|
$ |
(115,106 |
) |
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(2,348 |
) |
|
|
(1,828 |
) |
Income tax benefit related to other comprehensive loss
|
|
|
3 |
|
|
|
440 |
|
Comprehensive loss
|
|
|
(43,475 |
) |
|
|
(116,494 |
) |
Comprehensive (income) loss attributable to noncontrolling interests
|
|
|
(1,651 |
) |
|
|
2,636 |
|
Comprehensive loss attributable to controlling interests
|
|
$ |
(45,126 |
) |
|
$ |
(113,858 |
) |
See accompanying notes.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
|
|
For the Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Operating activities
|
|
|
|
|
|
|
Net loss
|
|
$ |
(41,130 |
) |
|
$ |
(115,106 |
) |
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
3,492 |
|
|
|
6,357 |
|
Provision for loan losses
|
|
|
173,414 |
|
|
|
12,763 |
|
Amortization of intangibles
|
|
|
119 |
|
|
|
507 |
|
Accretion of deferred revenue
|
|
|
(115 |
) |
|
|
(115 |
) |
Accretion of discount on convertible senior notes
|
|
|
2,689 |
|
|
|
2,467 |
|
Stock-based compensation expense
|
|
|
3,442 |
|
|
|
2,100 |
|
Retained interests adjustments, net
|
|
|
— |
|
|
|
220,794 |
|
Unrealized gain on loans and fees receivable and underlying notes payable held at fair value
|
|
|
(73,506 |
) |
|
|
— |
|
Unrealized gain on trading securities
|
|
|
(60 |
) |
|
|
(77 |
) |
Gain on repurchase of convertible senior notes
|
|
|
(13,896 |
) |
|
|
(160 |
) |
Loss on equity-method investments
|
|
|
1,389 |
|
|
|
— |
|
Changes in assets and liabilities, exclusive of business acquisitions:
|
|
|
|
|
|
|
|
|
Decrease in uncollected fees on loans receivable
|
|
|
1,167 |
|
|
|
5,902 |
|
Decrease in deferred costs
|
|
|
292 |
|
|
|
328 |
|
Increase (decrease) in income tax liability
|
|
|
97,879 |
|
|
|
(61,166 |
) |
Decrease in prepaid expenses
|
|
|
4,933 |
|
|
|
5,720 |
|
Increase (decrease) in accounts payable and accrued expenses
|
|
|
1,900 |
|
|
|
(31,616 |
) |
Other
|
|
|
3,782 |
|
|
|
922 |
|
Net cash provided by operating activities
|
|
|
165,791 |
|
|
|
49,620 |
|
Investing activities
|
|
|
|
|
|
|
|
|
(Increase) decrease in restricted cash |
|
|
(36,629 |
) |
|
|
1,558 |
|
Proceeds from equity-method investees
|
|
|
761 |
|
|
|
8,319 |
|
Investments in securitized earning assets
|
|
|
— |
|
|
|
(113,379 |
) |
Proceeds from securitized earning assets
|
|
|
— |
|
|
|
84,022 |
|
Investments in earning assets
|
|
|
(292,600 |
) |
|
|
(227,168 |
) |
Proceeds from earning assets
|
|
|
317,733 |
|
|
|
222,031 |
|
Acquisitions of assets
|
|
|
— |
|
|
|
(628 |
) |
Purchases and development of property, net of disposals
|
|
|
307 |
|
|
|
(1,211 |
) |
Net cash used in investing activities
|
|
|
(10,428 |
) |
|
|
(26,456 |
) |
Financing activities
|
|
|
|
|
|
|
|
|
Noncontrolling interests distributions, net
|
|
|
(231 |
) |
|
|
(632 |
) |
Purchases of treasury stock
|
|
|
(391 |
) |
|
|
(107 |
) |
Purchases of noncontrolling interests
|
|
|
(7,535 |
) |
|
|
(1,096 |
) |
Proceeds from borrowings
|
|
|
1,186 |
|
|
|
23,919 |
|
Repayments of borrowings
|
|
|
(139,194 |
) |
|
|
(41,622 |
) |
Net cash used in financing activities
|
|
|
(146,165 |
) |
|
|
(19,538 |
) |
Effect of exchange rate changes on cash
|
|
|
(1,278 |
) |
|
|
(67 |
) |
Net increase in unrestricted cash
|
|
|
7,920 |
|
|
|
3,559 |
|
Unrestricted cash and cash equivalents at beginning of period
|
|
|
185,019 |
|
|
|
74,515 |
|
Unrestricted cash and cash equivalents at end of period
|
|
$ |
192,939 |
|
|
$ |
78,074 |
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
Effect of adoption of accounting pronouncements on restricted cash |
|
$ |
14,082 |
|
|
$ |
— |
|
Cash paid for interest
|
|
$ |
15,512 |
|
|
$ |
8,823 |
|
Net cash income tax (refunds) payments
|
|
$ |
(96,824 |
) |
|
$ |
592 |
|
Supplemental non-cash information
|
|
|
|
|
|
|
|
|
Notes payable associated with capital leases
|
|
$ |
856 |
|
|
$ |
2,291 |
|
Issuance of stock options and restricted stock
|
|
$ |
1,127 |
|
|
$ |
1,129 |
|
See accompanying notes.
Notes to Condensed Consolidated Financial Statements
March 31, 2010
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 credit card receivables significantly affect the reported amount of two categories of credit card receivables that we report at fair value and our notes payable associated with structured financings, at fair value, as reported on our condensed consolidated balance sheet at March 31, 2010, as well as the reported fair value of our securitized earning assets on our consolidated balance sheet at December 31, 2009; these same estimates likewise affect our changes in fair value of loans and fees receivable recorded at fair value and changes in fair value of notes payable associated with structured financings recorded at fair value categories within our fees and related income on earning assets line item on our condensed consolidated statement of operations for the three months ended March 31, 2010, as well as 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 statement of operations for the three months ended March 31, 2009. Additionally, estimates of future credit losses on our loans and fees receivable that we report at net realizable value, rather than fair value, have a significant effect on two categories of such loans and fees receivable, net, that we show on our condensed consolidated balance sheets, as well as on the provision for loan losses within our condensed consolidated statements of operations. Operating results for the three months ended March 31, 2010 are not necessarily indicative of what our results will be for the year ending December 31, 2010.
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.
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 consolidated financial statements reported in CompuCredit Corporation’s prior quarterly and annual reports filed with the SEC. In connection with our consideration of a potential spin-off our U.S. and U.K. micro-loan businesses, one of our subsidiaries, Purpose Financial Holdings, Inc. (“Purpose Financial”), filed a Form 10 Registration Statement and a related Information Statement with the SEC on January 4, 2010 and amended the Form 10 Registration Statement and related Information Statement in response to SEC comments on March 29, 2010. The spin-off remains subject to a number of conditions, including, among others:
·
|
approval from our management;
|
·
|
approval from our Board of Directors;
|
·
|
the SEC’s declaration of Purpose Financial’s registration statement on Form 10, to be effective;
|
·
|
our and Purpose Financial’s receipt of all permits, registrations and consents required under the securities or blue sky laws of states or other political subdivisions of the U.S. or of foreign jurisdictions in connection with the spin-off;
|
·
|
the private letter ruling that we received from the Internal Revenue Service not being revoked or modified in any material respect; and
|
·
|
NASDAQ’s approval for listing of Purpose Financial’s common stock, subject to official notice of issuance.
|
We cannot assure you that any or all of these conditions will be met.
2.
|
Significant Accounting Policies and Condensed Consolidated Financial Statement Components
|
The following is a summary of significant accounting policies we follow in preparing our condensed consolidated financial statements, as well as a description of significant components of our condensed consolidated financial statements.
Restricted Cash
Restricted cash includes (1) certain collections on receivables within our Credit Cards segment (as of the March 31, 2010 condensed consolidated balance sheet date only pursuant to the accounting rules changes described in “Asset Securitization” below) and Auto Finance segment, the cash balances of which are required to be distributed to note holders 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.
Asset Securitization
At December 31, 2009, most of our credit card receivables were held by off-balance-sheet securitization trusts. In June 2009, however, the Financial Accounting Standards Board (the “FASB”) issued new accounting rules that resulted in the consolidation of our securitization trusts onto our condensed consolidated balance sheet effective as of January 1, 2010. As a result of these new accounting rules, cash and credit card receivables held by our securitization trusts and debt issued from those entities are presented as assets and liabilities on our condensed consolidated balance sheet as of March 31, 2010. Throughout the notes to our condensed consolidated financial statements, we use the term “securitizations” to refer to pre-2010 activities of our then-categorized off-balance-sheet securitization trusts (qualifying special purposes entities, or “QSPEs”). In contrast, we use the term “structured financings” to refer to non-recourse, asset-backed, on-balance-sheet debt financings either undertaken prior to 2010 or as accounted for under new accounting guidance effective as of January 1, 2010.
Loans and Fees Receivable
Our loans and fees receivable include: 1) loans and fees receivable, net; 2) loans and fees receivable pledged as collateral under structured financings, net; 3) loans and fees receivable, at fair value; and 4) loans and fees receivable pledged as collateral under structured financings, at fair value.
Loans and Fees Receivable, at Fair Value. Our loans and fees receivable, at fair value, represent our de-securitized and reconsolidated lower-tier credit card receivables that are valued at fair value in our condensed consolidated financial statements, while our loans and fees receivable pledged as collateral under structured financings, at fair value, represent the receivables underlying our remaining credit card securitization trusts that were consolidated pursuant to accounting rules changes on January 1, 2010. Further details concerning our loans and fees receivable held at fair value are presented within Note 9, “Fair Value of Assets and Liabilities.”
Loans and Fees Receivable, Net. Our two categories of loans and fees receivable, net, currently consist of receivables carried at net realizable value 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 also divide our loans and fees receivable, net, into two separate categories on our condensed consolidated balance sheet: (1) those that are unencumbered by asset-backed debt; and (2) those that are pledged as collateral for non-recourse asset-backed debt facilities.
The components of our aggregated categories of loans and fees receivable carried at net realizable value (in millions) as of the date of each of our condensed consolidated balance sheets are as follows:
|
|
Balance at
December 31,
2009
|
|
|
Additions
|
|
|
Subtractions
|
|
|
Balance at
March 31,
2010
|
|
Loans and fees receivable, gross
|
|
$ |
379.7 |
|
|
$ |
245.1 |
|
|
$ |
(288.8 |
) |
|
$ |
336.0 |
|
Deferred revenue
|
|
|
(40.9 |
) |
|
|
(27.6 |
) |
|
|
33.0 |
|
|
|
(35.5 |
) |
Allowance for uncollectible loans and fees receivable
|
|
|
(53.4 |
) |
|
|
(20.0 |
) |
|
|
22.6 |
|
|
|
(50.8 |
) |
Loans and fees receivable, net
|
|
$ |
285.4 |
|
|
$ |
197.5 |
|
|
$ |
(233.2 |
) |
|
$ |
249.7 |
|
As of March 31, 2010, the weighted average remaining accretion periods for the $35.5 million of deferred revenue reflected in the above tables was 24.0 months.
A roll-forward of our allowance for uncollectible loans and fees receivable (in millions) is as follows:
|
|
For the Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Balance at beginning of period
|
|
$ |
(53.4 |
) |
|
$ |
(55.8 |
) |
Provision for loan losses
|
|
|
(20.0 |
) |
|
|
(12.2 |
) |
Charge offs
|
|
|
24.9 |
|
|
|
16.1 |
|
Recoveries
|
|
|
(2.3 |
) |
|
|
(1.6 |
) |
Balance at end of period
|
|
$ |
(50.8 |
) |
|
$ |
(53.5 |
) |
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 March 31,
|
|
|
|
|
|
|
|
|
Unrecovered balance at beginning of period
|
|
$ |
29,669 |
|
|
$ |
47,676 |
|
Acquisitions of defaulted accounts
|
|
|
3,597 |
|
|
|
17,373 |
|
Cash collections
|
|
|
(14,581 |
) |
|
|
(13,880 |
) |
Cost-recovery method income recognized on defaulted accounts (included as a component of fees and related income on earning assets on our condensed consolidated statements of operations)
|
|
|
7,300 |
|
|
|
4,319 |
|
Unrecovered balance at end of period
|
|
$ |
25,985 |
|
|
$ |
55,488 |
|
Estimated remaining collections (“ERC”) (1)
|
|
$ |
90,410 |
|
|
$ |
124,636 |
|
(1)
|
We anticipate collecting 43.9% of the ERC of the existing accounts over the next 12 months, with the balance to be collected thereafter.
|
We estimate the life of each pool of previously charged-off receivables acquired by us generally to be between 24 and 36 months for normal delinquency charged-off accounts and approximately 60 months for Chapter 13 Bankruptcy-related debt.
Comparisons of data as of and for the three months ended March 31, 2010 with data as of and for the three months ended March 31, 2009 are affected by a 2005 forward flow contract into which our Investment in Previously Charged-off Receivables segment had entered to sell previously charged-off receivables to Encore Capital Group, Inc. (“Encore”)—a forward flow contract that subsequently terminated in the third quarter of 2009. In that quarter, we resolved disputes that had arisen with Encore under the contract, thereby resulting in the recognition of $21.2 million in then-deferred revenue in the third quarter of 2009 and a corresponding release of $8.7 million in escrowed 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 that had built up on our consolidate balance sheet throughout the latter half of 2008 and through September 2009) 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 pre-tax gain of $11.0 million on our consolidated statement of operations for three months ended September 30, 2009.
Investments in Securities
We periodically invest in debt and equity securities, some of which we classify as trading securities and with respect to which we include realized and unrealized gains and losses in earnings, and some of which we classify as held to maturity. Additionally, we occasionally have received distributions of debt securities from our equity-method investees ($1.1 million held at March 31, 2010), and we have classified such distributed debt securities as held to maturity. As appropriate, we may invest in securities we believe provide returns in excess of those realized in our cash accounts. Such was the case in the first quarter of 2010 during which we invested $75.0 million in publicly traded bond funds whose investment objectives are to invest in highly rated, investment-grade securities. The carrying values (in thousands) of our investments in debt and equity securities are as follows:
|
|
As of
|
|
|
|
March 31,
2010
|
|
|
December 31, 2009
|
|
Held to maturity:
|
|
|
|
|
|
|
Investments in debt securities
|
|
$ |
1,078 |
|
|
$ |
2,060 |
|
Trading:
|
|
|
|
|
|
|
|
|
Investments in debt securities
|
|
|
75,000 |
|
|
|
— |
|
Investments in equity securities
|
|
|
1,289 |
|
|
|
569 |
|
Total investments in debt and equity securities
|
|
$ |
77,367 |
|
|
$ |
2,629 |
|
Prepaid Expenses and Other Assets
Prepaid expenses and other assets include amounts paid to third parties for marketing and other services. Also included are (1) various deposits (totaling $11.1 million and $16.2 million as of March 31, 2010 and December 31, 2009, respectively) required to be maintained with our third-party issuing bank partners and retail electronic payment network providers (including $0.4 million and $4.9 million as of March 31, 2010 and December 31, 2009, respectively, associated with our ongoing servicing efforts in the U.K.), (2) vehicle inventory ($1.0 million and $4.1 million as of March 31, 2010 and December 31, 2009, respectively) held by our buy-here, pay-here auto dealerships that we expense as cost of goods sold (within fees and related income on earning assets on our condensed 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 pending 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 our deferred costs historically have been unamortized costs associated with our (1) issuances of convertible senior notes and other debt facilities and (2) receivables origination activities. 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. See Note 10, “Convertible Senior Notes and Notes Payable,” 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 U.S., the U.K., 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 and 2008 tax years. Although the audits have not been concluded, we do not expect any material changes to our reported tax positions in those years.
We recognize potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. We recognized $0.6 million and $0.7 million in potential interest and penalties associated with uncertain tax positions during the three months ended March 31, 2010 and 2009, 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 experienced no such reductions during the three months ended March 31, 2010 and 2009.
Our overall effective tax rates (computed considering results for both continuing and discontinued operations before income taxes in the aggregate) were -2.6% and 34.5% for three months ended March 31, 2010 and 2009, respectively. We have experienced no material changes in effective tax benefit rates associated with differences in filing jurisdictions between these periods, and the variations in effective tax benefit rates between these periods are substantially related to the effects of $12.3 million in valuation allowances provided against income statement-oriented U.S. federal, foreign and state deferred tax assets during the three months ended March 31, 2010. There were no corresponding valuation allowances during the three months ended March 31, 2009. As computed without regard to the effects of all U.S. federal, foreign, state, and local tax valuation allowances taken against income statement-oriented deferred tax assets, our effective tax benefit rates would more likely than not have been 28.0% and 34.5% for the three months ended March 31, 2010 and 2009, respectively. Our negative effective tax benefit rate during the three months ended March 31, 2010 results from (1) U.K. tax expense associated with our profitable MEM operations and (2) interest accruals on unrecognized tax benefits, both such expense categories being set against a backdrop of full valuation allowances which offset the tax benefits of our more significant U.S. losses from operations.
Fees and Related Income on Earning Assets
Fees and related income on earning assets primarily include: (1) lending fees associated with our retail and Internet micro-loan activities; (2) fees associated with our credit card receivables during periods in which we hold them on balance sheet; (3) changes in the fair value of loans and fees receivable recorded at fair value; (4) changes in fair value of notes payable associated with structured financings recorded at fair value; (5) income on our investments in previously charged-off receivables; (6) gross profits and losses from auto sales within our Auto Finance segment; and (7) gains associated with our investments in securities.
The components (in thousands) of our fees and related income on earning assets are as follows:
|
|
For the Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Retail micro-loan fees
|
|
$ |
18,187 |
|
|
$ |
16,676 |
|
Internet micro-loan fees
|
|
|
19,242 |
|
|
|
11,788 |
|
Fees on credit card receivables held on balance sheet
|
|
|
9,590 |
|
|
|
— |
|
Changes in fair value of loans and fees receivable recorded at fair value
|
|
|
40,910 |
|
|
|
— |
|
Changes in fair value of notes payable associated with structured financings recorded at fair value
|
|
|
32,596 |
|
|
|
— |
|
Income on investments in previously charged-off receivables
|
|
|
7,300 |
|
|
|
4,319 |
|
Gross (loss) profit on auto sales
|
|
|
(1,522 |
) |
|
|
8,471 |
|
Gains on investments in securities
|
|
|
60 |
|
|
|
77 |
|
Other
|
|
|
531 |
|
|
|
1,315 |
|
Total fees and related income on earning assets
|
|
$ |
126,894 |
|
|
$ |
42,646 |
|
Loss on Securitized Earning Assets
Loss on securitized earning assets is the net of (1) securitization gains, (2) loss 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, all of which are detailed (in thousands) in the following table. This category on our condensed consolidated statement of operations is not applicable in 2010 given our consolidation of all of our former off-balance-sheet securitization trusts as required by accounting rules changes effective at the beginning of 2010.
|
|
For the Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Securitization gains
|
|
$ |
— |
|
|
$ |
— |
|
Loss on retained interests in credit card receivables securitized
|
|
|
— |
|
|
|
(158,255 |
) |
Fees on securitized receivables
|
|
|
— |
|
|
|
6,229 |
|
Total loss on securitized earning assets
|
|
$ |
— |
|
|
$ |
(152,026 |
) |
Recent Accounting Pronouncements
In January 2010, the FASB issued new rules concerning fair value measurement disclosures. The new disclosures require that we discuss the valuation techniques and inputs used to develop our fair value measurements and the effect that unobservable inputs may have on those measurements. Additional disclosure enhancements include disclosures of transfers in and/or out of Level 1, 2 or 3 and the reasons for those transfers. The enhanced disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements, which are effective for interim and annual reporting periods beginning after December 15, 2010. The adoption of these new disclosure requirements that are effective for us in 2010 are reflected in our accompanying notes to the condensed consolidated financial statements.
In October 2009, 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 is required to 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 and apply to loaned shares issued in connection with our November 2005 convertible senior notes. Our implementation of these new rules had no effect on our consolidated financial statements during any period presented.
In June 2009, the FASB issued new accounting rules that, in addition to requiring certain new securitization and structured financing-related disclosures that we have incorporated into our condensed consolidated financial statements, resulted in the consolidation of our securitization trusts onto our condensed consolidated balance sheet effective as of January 1, 2010. As a result of these new accounting rules, cash and credit card receivables held by our securitization trusts and debt issued from those entities are presented as assets and liabilities on our condensed consolidated balance sheet effective on that date. Moreover, after adoption of these new accounting rules, we no longer reflect our securitization trusts’ results of operations within losses on retained interests in credit card receivables securitized, but instead report interest income and provisions for loan losses (as well as gains and/or losses associated with fair value changes) with respect to the credit card receivables held within our securitization trusts; similarly, we separately report interest expense (as well as gains and/or losses associated with fair value changes) with respect to the debt issued from the securitization trusts. Lastly, because we account for our securitization transactions under the new rules as secured borrowings rather than asset sales, we present the cash flows from these transactions as cash flows from financing activities, rather than as cash flows from investing activities. As noted on our condensed consolidated statement of equity for the three months ended March 31, 2010, our January 1, 2010 adoption of these rules resulted in an increase in total equity of $37.7 million.
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 total equity of $56.1 million.
Subsequent Events
We evaluate subsequent events that occur after our condensed consolidated balance sheet date but before our condensed consolidated financial statements are issued. There are two types of subsequent events: (1) recognized, or those that provide additional evidence with respect to conditions that existed at the balance sheet date, including the estimates inherent in the process of preparing financial statements; and (2) nonrecognized, or those that provide evidence with respect to conditions that did not exist at the balance sheet date but arose subsequent to that date. We have evaluated subsequent events, and based on our evaluation, we did not identify any recognized or nonrecognized subsequent events that would have required adjustments to our condensed consolidated financial statements.
As of the date of this filing, we have an outstanding April 14, 2010 tender offer to use $100.0 million of our cash to repurchase first our 3.625% convertible senior notes due 2025 at prices between $550 and $600 per $1,000 principal amount of the notes, and then to use any remainder of the $100.0 million available after purchasing any tendered notes to repurchase our stock at $7.00 per share.
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. 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 March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Net interest income, fees and related income on earning assets
|
|
$ |
— |
|
|
$ |
1,309 |
|
Other operating expense
|
|
|
— |
|
|
|
1,158 |
|
Income before income taxes
|
|
|
— |
|
|
|
151 |
|
Income tax expense
|
|
|
— |
|
|
|
(53 |
) |
Net income
|
|
$ |
— |
|
|
$ |
98 |
|
There were no discontinued assets held for sale on our condensed consolidated balance sheets as of March 31, 2010 and December 31, 2009.
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 Internet Micro-Loans. In March 2010, we acquired noncontrolling interests representing 6% of MEM (within our Internet Micro-Loans segment) for £4.3 million ($6.6 million), thereby reducing outstanding noncontrolling interests in MEM from 24% at December 31, 2009 to 18% as of March 31, 2010. Also in March 2010, we acquired all of the noncontrolling interests in our Investments in Previously Charged-Off Receivables segment for $1.0 million, such that we now own 100% of this segment.
Summary operating segment information (in thousands) is as follows:
Three Months Ended March 31, 2010
|
|
Credit Cards
|
|
|
Investments in
Previously
Charged-Off
Receivables
|
|
|
Retail
Micro-Loans
|
|
|
Auto Finance
|
|
|
Internet Micro-Loans
|
|
|
Total
|
|
Net interest income, fees and related income (loss) on earning assets
|
|
$ |
(12,689 |
) |
|
$ |
7,160 |
|
|
$ |
15,733 |
|
|
$ |
(4,274 |
) |
|
$ |
14,131 |
|
|
$ |
20,061 |
|
Total other operating income
|
|
$ |
18,357 |
|
|
$ |
379 |
|
|
$ |
— |
|
|
$ |
130 |
|
|
$ |
— |
|
|
$ |
18,866 |
|
(Loss) income from continuing operations before income taxes
|
|
$ |
(33,801 |
) |
|
$ |
981 |
|
|
$ |
2,316 |
|
|
$ |
(14,527 |
) |
|
$ |
4,960 |
|
|
$ |
(40,071 |
) |
Income from discontinued operations before income taxes
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Loans and fees receivable, gross
|
|
$ |
17,730 |
|
|
$ |
— |
|
|
$ |
33,207 |
|
|
$ |
251,542 |
|
|
$ |
33,481 |
|
|
$ |
335,960 |
|
Loans and fees receivable, net
|
|
$ |
13,143 |
|
|
$ |
— |
|
|
$ |
27,631 |
|
|
$ |
185,263 |
|
|
$ |
23,639 |
|
|
$ |
249,676 |
|
Loans and fees receivable held at fair value
|
|
$ |
681,917 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
681,917 |
|
Total assets
|
|
$ |
1,043,573 |
|
|
$ |
30,571 |
|
|
$ |
61,850 |
|
|
$ |
208,875 |
|
|
$ |
63,034 |
|
|
$ |
1,407,903 |
|
Three Months Ended March 31, 2009
|
|
Credit Cards
|
|
|
Investments in
Previously
Charged-Off
Receivables
|
|
|
Retail
Micro-Loans
|
|
|
Auto Finance
|
|
|
Internet Micro-Loans
|
|
|
Total
|
|
Net interest income, fees and related income (loss) on earning assets
|
|
$ |
(5,616 |
) |
|
$ |
4,205 |
|
|
$ |
14,374 |
|
|
$ |
18,584 |
|
|
$ |
8,784 |
|
|
$ |
40,331 |
|
Total other operating (loss) income
|
|
$ |
(108,987 |
) |
|
$ |
28 |
|
|
$ |
— |
|
|
$ |
313 |
|
|
$ |
— |
|
|
$ |
(108,646 |
) |
(Loss) income from continuing operations before income taxes
|
|
$ |
(178,025 |
) |
|
$ |
(2,328 |
) |
|
$ |
(1,078 |
) |
|
$ |
2,030 |
|
|
$ |
3,558 |
|
|
$ |
(175,843 |
) |
Income from discontinued operations before income taxes
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
151 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
151 |
|
Loans and fees receivable, gross
|
|
$ |
1,064 |
|
|
$ |
— |
|
|
$ |
32,870 |
|
|
$ |
340,548 |
|
|
$ |
20,985 |
|
|
$ |
395,467 |
|
Loans and fees receivable, net
|
|
$ |
797 |
|
|
$ |
— |
|
|
$ |
26,898 |
|
|
$ |
276,726 |
|
|
$ |
14,931 |
|
|
$ |
319,352 |
|
Loans and fees receivable held at fair value
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Total assets
|
|
$ |
796,490 |
|
|
$ |
65,100 |
|
|
$ |
41,670 |
|
|
$ |
329,713 |
|
|
$ |
71,904 |
|
|
$ |
1,304,877 |
|
Retired Shares
In 2009, 1,398,681 of previously lent shares were returned to us. All returned shares are excluded from our outstanding share counts. As of March 31, 2010, we had 2,252,388 loaned shares outstanding.
Treasury Stock
At our discretion, we use treasury shares to satisfy option exercises and restricted stock vestings, and we use the cost approach when accounting for the repurchase and reissuance of our treasury stock. We reissued treasury shares totaling 383,476 and 108,206 during the three months ended March 31, 2010 and 2009, respectively, at gross costs of $6.3 million and $1.9 million, respectively, in satisfaction of restricted share and restricted share unit vestings. We also effectively purchased shares totaling 89,287 and 33,949 during the three months ended March 31, 2010 and 2009, respectively, at gross costs of $0.4 million and $0.1 million, respectively, by having employees who were exercising options or vesting in their restricted stock grants exchange a portion of their stock for our payment of required 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 (including results of operations data for the three months ended March 31, 2009 associated with CSG while we held it in equity-method investee form prior to our May 2009 buy-out of its other members):
|
|
As of
March 31, 2010
|
|
|
As of
December 31, 2009
|
|
Securitized earning assets
|
|
$ |
— |
|
|
$ |
35,844 |
|
Loans and fees receivable pledged as collateral under structured financings, at fair value
|
|
$ |
210,456 |
|
|
$ |
— |
|
Total assets
|
|
$ |
224,559 |
|
|
$ |
38,332 |
|
Notes payable associated with structured financings, at fair value
|
|
$ |
156,579 |
|
|
$ |
— |
|
Total liabilities
|
|
$ |
166,287 |
|
|
$ |
1,319 |
|
Members’ capital
|
|
$ |
58,272 |
|
|
$ |
37,013 |
|
|
|
For the Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Net interest income, fees and related income on earning assets
|
|
$ |
390 |
|
|
$ |
— |
|
Fees and related loss on securitized earning assets
|
|
$ |
— |
|
|
$ |
(8,170 |
) |
Total other operating income (loss)
|
|
$ |
1,419 |
|
|
$ |
(6,860 |
) |
Net loss
|
|
$ |
(2,447 |
) |
|
$ |
(7,641 |
) |
Reflected in the above 2010 results are the impacts of new accounting rules that resulted in the consolidation of the equity-method investees’ securitization trusts (including their cash, receivables and underlying debt) onto their balance sheets at fair value effective January 1, 2010. They experienced a cumulative effect adjustment to opening retained earnings of $25.5 million associated with this change.
7.
|
Goodwill and Intangible Assets
|
Goodwill
Goodwill represents the excess of the purchase price and related costs over the value assigned to net tangible and identifiable intangible assets acquired and accounted for under the purchase method. Under applicable accounting rules, we are required to assess the fair value of all acquisition-related goodwill on a reporting unit basis. We review the recorded value of goodwill for impairment at least annually at the beginning of the fourth quarter of each year, or earlier if events or changes in circumstances indicate that the carrying amount may exceed fair value.
In April 2007, we acquired 95% of the outstanding shares of MEM, our U.K.-based, Internet, micro-loan operations, for £11.6 million ($22.3 million) in cash. Under the original purchase agreement, a contingent performance-related earn-out could have been payable to the sellers on achievement of certain earnings measurements for the years ended 2007, 2008 and 2009. The maximum amount payable under this earn-out was £120.0 million. The MEM acquisition agreement was amended in the first quarter of 2009 to remove the sellers’ earn-out rights and in exchange grant the sellers a 22.5% ownership interest in the entity. The settlement of the contingent earn-out resulted in a re-measurement of the carrying value of our investment in MEM and additional goodwill of $5.6 million.
Our December 31, 2009 Retail Micro-Loans goodwill balance in the table below reflects impairment write-downs associated with our May 2009 decision to discontinue our Arkansas retail micro-loan operations, which resulted in a $3.5 million impairment loss that we reported within loss from discontinued operations in the second quarter of 2009 and a $20.0 million impairment loss that we reported within continuing operations in the second quarter of 2009. Relative to respective December 31 balances, changes (in thousands) in the carrying amount of goodwill for the three months ended March 31, 2009 and 2010, respectively, by reportable segment are as follows:
|
|
Retail Micro-
Loans
|
|
|
Internet Micro-Loans
|
|
|
Consolidated
|
|
Balance as of December 31, 2008
|
|
$ |
43,214 |
|
|
$ |
15,915 |
|
|
$ |
59,129 |
|
Goodwill related to settlement of contingent performance-related earn-out
|
|
|
— |
|
|
|
5,553 |
|
|
|
5,553 |
|
Foreign currency translation
|
|
|
— |
|
|
|
(327 |
) |
|
|
(327 |
) |
Balance as of March 31, 2009
|
|
$ |
43,214 |
|
|
$ |
21,141 |
|
|
$ |
64,355 |
|
Balance as of December 31, 2009
|
|
$ |
19,731 |
|
|
$ |
23,691 |
|
|
$ |
43,422 |
|
Foreign currency translation
|
|
|
— |
|
|
|
(1,274 |
) |
|
|
(1,274 |
) |
Balance as of March 31, 2010
|
|
$ |
19,731 |
|
|
$ |
22,417 |
|
|
$ |
42,148 |
|
Intangible Assets
We had $2.1 million of remaining intangible assets that we determined had an indefinite benefit period as of March 31, 2010 and December 31, 2009. The net unamortized carrying amount of intangible assets subject to amortization was $0.6 million and $0.7 million as of March 31, 2010 and December 31, 2009, respectively. Intangible asset-related amortization expense was $0.1 million and $0.5 million for the three months ended March 31, 2010 and 2009, respectively.
This note provides historical off-balance-sheet credit card receivables “securitizations” data relative to our December 31, 2009 condensed consolidated balance sheet and our condensed consolidated statement of operations for the three months ended March 31, 2009. As noted previously in this report, the FASB issued new accounting rules that resulted in the consolidation of our securitization trusts (including their cash, receivables and underlying debt) onto our condensed consolidated balance sheet effective as of January 1, 2010. As such, our 2010 condensed consolidated financial statements contain no comparable balances to the historical securitized earnings assets category, and associated income and loss categories, as shown in our condensed consolidated 2009 financial statements.
The table below summarizes (in thousands) our securitization facility activities for the period prior to consolidation of our securitization trust. As with other tables included herein, it does not include the securitization activities of our equity-method investees:
|
|
As of and for the Three Months Ended March 31, 2009
|
|
Gross amount of receivables securitized at period end
|
|
$ |
2,228,896 |
|
Proceeds from new transfers of financial assets to securitization trusts
|
|
$ |
91,626 |
|
Proceeds from collections reinvested in revolving-period securitizations
|
|
$ |
97,566 |
|
Excess cash flows received on retained interests
|
|
$ |
30,658 |
|
Loss on retained interests in credit card receivables securitized
|
|
$ |
(158,255 |
) |
Fees on securitized receivables
|
|
|
6,229 |
|
Total loss on securitized earning assets
|
|
$ |
(152,026 |
) |
Our retained interests in credit card receivables securitized (labeled as securitized earning assets on our condensed consolidated balance sheets) include the following (in thousands) at December 31, 2009. Amounts are not shown for 2010 due to the consolidation of these receivables on January 1, 2010:
|
|
As of December 31, 2009
|
|
I/O strip
|
|
$ |
— |
|
Accrued interest and fees
|
|
|
— |
|
Net servicing liability
|
|
|
(15,458 |
) |
Amounts due from securitization
|
|
|
1,570 |
|
Fair value of retained interests
|
|
|
52,396 |
|
Issuing bank partner continuing interests
|
|
|
(1,994 |
) |
Securitized earning assets
|
|
$ |
36,514 |
|
Reflected within servicing income on our condensed consolidated statement of operations for the three months ended March 31, 2009 were $39.4 million of servicing income (fees) we received from our securitization trusts in that period. Changes in our net servicing liability for the three months ended March 31, 2009 are summarized (in millions) in the following table.
|
|
For the Three Months Ended March 31, 2009
|
|
Net servicing liability at beginning of period
|
|
$ |
10.7 |
|
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
|
|
|
3.0 |
|
Balance at end of period
|
|
$ |
13.7 |
|
Other key assumptions we used to estimate the fair value of our retained interests in the credit card receivables securitized are presented (as weighted averages) below:
|
|
As of
December 31, 2009
|
|
Net collected yield (annualized)
|
|
|
31.3 |
% |
Principal payment rate (monthly)
|
|
|
2.2 |
% |
Expected principal credit loss rate (annualized)
|
|
|
27.2 |
% |
Residual cash flows discount rate
|
|
|
18.8 |
% |
Servicing liability discount rate
|
|
|
14.0 |
% |
Life (in months) of securitized credit card receivables
|
|
|
45.4 |
|
Our managed receivables portfolio underlying our securitizations (including only those of our consolidated subsidiaries) as of March 31, 2009 was comprised of credit card receivables that we securitized and other investors’ shares of those securitized receivables. The following table summarizes (in thousands) the balances included within, and certain operating statistics associated with, our managed receivables portfolio underlying both the outside investors’ shares of and our retained interests in our credit card receivables securitizations as of March 31, 2009. These figures include the results of our lower-tier credit cards prior to their re-consolidation in the fourth quarter of 2009.
|
|
As of and for the Three Months Ended
March 31, 2009
|
|
Total managed principal balance
|
|
$ |
1,853,322 |
|
Total managed finance charge and fee balance
|
|
|
375,574 |
|
Total managed receivables
|
|
|
2,228,896 |
|
Cash collateral at trust and amounts due from QSPEs
|
|
|
302,799 |
|
Total assets held by QSPEs
|
|
|
2,531,695 |
|
QSPE-issued notes to which we are subordinated
|
|
|
(1,709,094 |
) |
Face amount of residual interests in securitizations
|
|
$ |
822,601 |
|
Receivables delinquent—60 or more days
|
|
$ |
418,665 |
|
Net charge offs during the three months ended March 31, 2009
|
|
$ |
125,499 |
|
Data in the above table are aggregated from the various QSPEs supporting our securitizations as of March 31, 2009.
9.
|
Fair Values of Assets and Liabilities
|
In February 2007, the FASB issued new accounting guidance that allows companies to elect to carry the vast majority of financial assets and liabilities at fair value, with changes in fair value recorded into earnings. The new accounting guidance was effective for fiscal years beginning after November 15, 2007, and we adopted this statement with respect to our securitized earning assets (and their underlying credit card receivables) effective January 1, 2008. Because of our earlier expressed election and desire to account for the credit card receivables underlying our securitization trusts at fair value, accounting rules that required the consolidation of our securitization trusts effective January 1, 2010 also required that we account for any debt underlying our formerly securitized credit card receivables at fair value effective as of January 1, 2010.
In January 2008, we adopted accounting guidance that defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The guidance applies under other accounting pronouncements that require or permit fair value measurements, except accounting pronouncements that address share-based payment transactions and their related interpretive accounting pronouncements, and does not eliminate the practicability exceptions to fair value measurements in accounting pronouncements within the scope of the Statement. In general, fair values determined by Level 1 inputs use quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access. Fair values determined by Level 2 inputs use inputs 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. Where inputs used to measure fair value may fall into different levels of the fair value hierarchy, the level in the fair value hierarchy within which the fair value measurement in its entirety has been determined is based on the lowest level input that is significant to the fair value measurement in its entirety.
Valuations and Techniques for Assets Measured at Fair Value on a Recurring Basis
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. For our assets measured on a recurring basis at fair value, the table below summarizes (in thousands) fair values as of March 31, 2010 by fair value hierarchy:
Assets
|
|
Quoted Prices in Active Markets for Identical
|
|
|
Significant Other
Observable Inputs
|
|
|
|
|
|
Total Assets
Measured at Fair
|
|
Investment securities—trading
|
|
$ |
75,629 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
75,629 |
|
Loans and fees receivable, at fair value
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
24,702 |
|
|
$ |
24,702 |
|
Loans and fees receivable pledged as collateral under structured financings, at fair value
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
657,215 |
|
|
$ |
657,215 |
|
For Level 3 assets measured at fair value on a recurring basis using significant unobservable inputs, the following table presents (in thousands) a reconciliation of the beginning and ending balances for the three months ended March 31, 2010:
|
|
Loans and Fees Receivable, at Fair Value
|
|
|
Loans and Fees Receivable Pledged as Collateral under Structured Financings, at Fair Value
|
|
|
Securitized Earning Assets
|
|
|
|
|
Beginning balance
|
|
$ |
42,299 |
|
|
$ |
— |
|
|
$ |
36,514 |
|
|
$ |
78,813 |
|
Transfers in due to adoption of new accounting guidance
|
|
|
— |
|
|
|
836,346 |
|
|
|
(36,514 |
) |
|
|
799,832 |
|
Total gains (losses)—realized/unrealized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revaluations of/additions to loans and fees receivable pledged as collateral under structured financings, at fair value
|
|
|
— |
|
|
|
(1,380 |
) |
|
|
— |
|
|
|
(1,380 |
) |
Net revaluations of loans and fees receivable, at fair value
|
|
|
42,290 |
|
|
|
— |
|
|
|
— |
|
|
|
42,290 |
|
Purchases, issuances, and settlements, net
|
|
|
(59,887 |
) |
|
|
(177,816 |
) |
|
|
|
|
|
|
(237,703 |
) |
Impact of foreign currency translation gain
|
|
|
— |
|
|
|
65 |
|
|
|
— |
|
|
|
65 |
|
Net transfers in and/or out of Level 3
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Ending balance
|
|
$ |
24,702 |
|
|
$ |
657,215 |
|
|
$ |
— |
|
|
$ |
681,917 |
|
The unrealized gains and losses for assets within the Level 3 category presented in the tables above include changes in fair value that are attributable to both observable and unobservable inputs. We provide below a brief description of the valuation techniques used for Level 3 assets.
Net Revaluation of Loans and Fees Receivable. We record the net revaluation of loans and fees receivable (including those pledged as collateral) in the fees and related income on earning assets category in our condensed consolidated statements of operations, specifically as changes in fair value of loans and fees receivable recorded at fair value. The net revaluation of loans and fees receivable is based on the present value of future cash flows using a valuation model of expected cash flows and the estimated cost to service and collect those cash flows. We estimate the present value of these future cash flows using a valuation model consisting of internally developed estimates of assumptions third-party market participants would use in determining fair value, including estimates of net collected yield, principal payment rates, expected principal credit loss rates, costs of funds and discount rates.
Valuations and Techniques for Liabilities Measured at Fair Value on a Recurring Basis
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 liability. For our liabilities measured on a recurring basis at fair value, the table below summarizes (in thousands) fair values as of March 31, 2010 by fair value hierarchy:
Liabilities
|
|
Quoted Prices in Active Markets for Identical
|
|
|
Significant Other
Observable Inputs
|
|
|
|
|
|
Total Liabilities
Measured at Fair
|
|
Notes payable associated with structured financings, at fair value
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
650,670 |
|
|
$ |
650,670 |
|
For Level 3 liabilities measured at fair value on a recurring basis using significant unobservable inputs, the following table presents (in thousands) a reconciliation of the beginning and ending balances for the three months ended March 31, 2010:
|
|
Notes Payable Associated with Structured Financings, at Fair Value
|
|
Beginning balance
|
|
$ |
— |
|
Transfers in due to adoption of new accounting guidance
|
|
|
772,615 |
|
Total gains (losses)—realized/unrealized:
|
|
|
|
|
Net revaluations of notes payable associated with structured financings, at fair value
|
|
|
(32,596 |
) |
Repayments on outstanding notes payable, net
|
|
|
(89,167 |
) |
Impact of foreign currency translation gain
|
|
|
(182 |
) |
Net transfers in and/or out of Level 3
|
|
|
— |
|
Ending balance
|
|
$ |
650,670 |
|
Net Revaluation of Notes Payable Associated with Structured Financings, at Fair Value. We record the net revaluation of notes payable associated with structured financings, at fair value, in the changes in fair value of notes payable associated with structured financings line item within the fees and related income on earning assets category of our consolidated statements of operations. The net revaluation of these notes is based on the present value of future cash flows utilized in repayment of the outstanding principal and interest under the facilities using a valuation model of expected cash flows net of the contractual service expenses within the facilities. We estimate the present value of these future cash flows using a valuation model consisting of internally developed estimates of assumptions third-party market participants would use in determining fair value, including: estimates of net collected yield, principal payment rates and expected principal credit loss rates on the credit card receivables that secure the non recourse notes payable; costs of funds and discount rates.
Valuations and Techniques for Assets Measured at Fair Value on a Non-Recurring Basis
We also have assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets include those associated with acquired businesses, including goodwill and other intangible assets. For these assets, measurement at fair value in periods subsequent to their initial recognition is applicable if one or more of these assets is determined to be impaired.
For our assets measured on a non-recurring basis at fair value, the table below summarizes (in thousands) fair values as of March 31, 2010 by fair value hierarchy:
|
|
Quoted Prices in Active Markets for Identical
|
|
|
Significant Other
Observable Inputs
|
|
|
|
|
|
Total Assets
Measured at Fair
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
42,148 |
|
|
$ |
42,148 |
|
Intangibles, net
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
2,698 |
|
|
$ |
2,698 |
|
10.
|
Convertible Senior Notes and Notes Payable
|
Convertible Senior Notes
In May 2005, we issued $250.0 million aggregate principal amount of 3.625% convertible senior notes due 2025, and in November of that same year, we issued $300.0 million aggregate principal amount of 5.875% convertible senior notes due 2035. These notes (net of repurchases since the issuance dates) are reflected within convertible senior notes on our condensed consolidated balance sheets.
Upon our January 1, 2009 required adoption of new accounting rules for Instrument C convertible notes (a classification applicable to our convertible senior notes), we (1) reclassified a portion of our outstanding convertible senior notes to additional paid-in capital, (2) established a discount to the face amount of the notes as previously reflected on our condensed consolidated balance sheets, (3) created a deferred tax liability related to the discount on the notes, and (4) reclassified out of our originally reported deferred loan costs and into additional paid-in capital the portion of those costs considered under the new rules to have been associated with the equity component of the convertible senior notes issuances. We are amortizing the discount to the face amount of the notes to interest expense over the expected life of the notes, and this will result in a corresponding release of our associated deferred tax liability. Total amortization for the three months ended March 31, 2010 and 2009, respectively, totaled $2.7 million and $2.5 million, respectively. We will amortize the remaining discount at March 31, 2010 to interest expense over the expected term of the convertible senior notes (currently expected to be May 2012 and October 2035 for the 3.625% and 5.875% notes, respectively). The weighted average effective interest rate for the 3.625% and 5.875% notes was 9.2% for all periods presented.
The following summarizes (in thousands) components of our condensed consolidated balance sheets associated with our convertible senior notes after giving effect to both our required adoption of the new Instrument C rules upon their January 1, 2009 effective date and our retrospective application of the rules to prior presented financial reporting periods:
|
|
As of
March 31, 2010
|
|
|
As of
December 31, 2009
|
|
Face amount of outstanding convertible senior notes
|
|
$ |
346,280 |
|
|
$ |
386,551 |
|
Discount
|
|
|
(68,496 |
) |
|
|
(78,978 |
) |
Net carrying value
|
|
$ |
277,784 |
|
|
$ |
307,573 |
|
Carrying amount of equity component included in additional paid-in capital
|
|
$ |
108,714 |
|
|
$ |
108,714 |
|
Excess of instruments’ if-converted values over face principal amounts
|
|
$ |
— |
|
|
$ |
— |
|
Under the terms of a tender offer for the repurchase of both series of our convertible senior notes, in March 2010 we repurchased $24.7 million in face amount of our 3.625% notes and $15.6 million in face amount of our 5.875% notes for $12.8 million and $5.7 million, respectively, both amounts being inclusive of transactions costs and accrued interest through the date of our repurchase of the notes. The repurchase resulted in an aggregate gain of $13.9 million (net of the notes’ applicable share of deferred costs and debt discount, which were recovered in connection with the purchase).
In January 2009, we repurchased $300,000 in face amount of our 3.625% notes. The January 2009 purchase price for these notes totaled $90,000 (including accrued interest) and resulted in an aggregate gain of $160,000 (net of the notes’ applicable share of deferred costs and debt discount, which were recovered in connection with the purchase).
Notes Payable (Associated with Structured Financings, at Fair Value)
Upon the consolidation of our securitization trusts effective January 1, 2010 in accordance with new accounting requirements, we present for the first time on our consolidated balance sheet certain non-recourse, asset-backed structured financing debt facilities that are secured by credit card receivables held within such trusts. Given our decision to elect the fair value option for reporting the credit card receivables held within the trusts, accounting rules require that we report the underlying debt facilities at fair value as well. We are required to consolidate the assets (credit card receivables, which are presented as loans and fees receivable pledged as collateral under structured financings, at fair value, on our condensed consolidated balance sheets) and debt (classified as notes payable associated with structured financings, at fair value, on our condensed consolidated balance sheets) associated with these structured financings on our consolidated balance sheets because the transactions do not meet the criteria for de-recognition and because we are the primary beneficiary of the structured financing transactions.
As of March 31, 2010, (1) the carrying amounts of structured financing notes secured by our credit card receivables and reported at fair value, (2) the outstanding face amounts of structured financing notes secured by our credit card receivables and reported at fair value, and (3) the carrying amounts of the credit card receivables that provide the exclusive means of repayment for the notes (i.e., lenders have recourse only to the specific credit card receivables underlying each respective facility and cannot look to our general credit for repayment) are scheduled (in millions) as follows:
|
|
Carrying Amounts at Fair Value as of March 31, 2010
|
|
Amortizing securitization facility issued out of our upper-tier originated portfolio master trust—outstanding face amount of $679.5 million bearing interest at a weighted average 1.9% interest rate, which is secured by credit card receivables and restricted cash aggregating $545.0 million in carrying amount (1)
|
|
$ |
524.1 |
|
Multi-year variable funding securitization facility (expiring September 2014), outstanding face amount of $6.2 million bearing interest at a weighted average 3.7% interest rate, which is secured by credit card receivables and restricted cash aggregating $14.0 million in carrying amount (2)
|
|
|
6.1 |
|
Amortizing term securitization facility (denominated and referenced in U.K. sterling and expiring April 2014) issued out of our U.K. Portfolio securitization trust, outstanding face amount of $213.4 million bearing interest at a weighted average 2.5% interest rate, which is secured by credit card receivables and restricted cash aggregating $97.6 million in carrying amount (3)
|
|
|
97.6 |
|
Ten-year amortizing term securitization facility issued out of a trust underlying one of our portfolio acquisitions (expiring January 2014), outstanding face amount of $31.8 million bearing interest at a weighted average 2.9% interest rate, which is secured by credit card receivables and restricted cash aggregating $49.3 million in carrying amount
|
|
|
22.9 |
|
Total structured financing notes reported at fair value that are secured by credit card receivables and to which we are subordinated
|
|
$ |
650.7 |
|
(1)
|
As this facility entered into early amortization in January 2010 before its scheduled expiration, the terms of the facility do not allow for the funding of purchases. Under early amortization, all excess cash (i.e., cash collected from cardholders, less servicing costs and debt service costs) is applied toward amortizing repayment of the outstanding note within the facility with the ultimate timing and amount of amortizing repayments limited to the available residual cash flows.
|
(2)
|
Represents the conduit notes associated with our 75.1% membership interest in our majority-owned subsidiary that securitized the $92.0 million (face amount) of receivables it acquired in the third quarter of 2004 and the $72.1 million (face amount) of receivables it acquired in the first quarter of 2005.
|
(3)
|
In April 2007, we completed an amortizing securitization facility in connection with our U.K. Portfolio acquisition; this facility is denominated in U.K. sterling.
|
Contractual payment allocations within these credit cards receivable structured financings provide for a priority distribution of cash flows to us to service the credit card receivables (cash flows that we consider adequate to meet our variable costs of servicing these assets), a distribution of cash flows to pay interest and principal due on the notes, and a distribution of all excess cash flows (if any) to us. Each of the structured financing facilities in the above table is amortizing down along with collections of the underlying receivables and there are no provisions within the debt agreements that allow for acceleration or bullet repayment of the facilities. As such, for all intents and purposes, there is no practical risk of equity loss associated with lender seizure of assets under the facilities. Nevertheless, the aggregate carrying amount of the credit card receivables and restricted cash that provide security for the $650.7 million in fair value of structured financing notes in the above table is $705.9 million, which means that our maximum aggregate exposure to pre-tax equity loss associated with the above structured financing arrangements is $55.2 million.
Beyond our role as servicer of the underlying assets within the credit card receivable structured financings, we have provided no other financial or other support to the structures, and we have no explicit or implicit arrangements that could require us to provide financial support to the structures.
Notes Payable Associated with Structured Financings, at Face Value
Beyond the credit card receivables structured financings held at fair value mentioned above, we have entered into certain other non-recourse, asset-backed structured financing transactions within our businesses. We consolidate onto our condensed consolidated balance sheets both the assets (Auto Finance segment receivables, which are presented as loans and fees receivable pledged as collateral under structured financings, net, on our condensed consolidated balance sheets, Auto Finance segment inventories, investments in previously charged-off receivables, and other equipment) and debt (classified within notes payable associated with structured financings, at face value, on our condensed consolidated balance sheets) associated with these structured financings because the transactions do not meet the criteria for de-recognition and because we are the primary beneficiary of the structured financing transactions. As of March 31, 2010 and December 31, 2009, (1) the structured financing notes outstanding and (2) the carrying amounts of the assets that provide the exclusive means of repayment for the notes (i.e., lenders have recourse only to the specific assets underlying each respective facility and cannot look to our general credit for repayment) are scheduled (in millions) as follows:
|
|
As of March 31,
2010
|
|
|
As of December 31,
2009
|
|
Asset-Backed Structured Financing Facilities
|
|
|
|
|
|
|
Amortizing debt facility of ACC Auto Finance segment receivables, stated rate of 15.0% (effective rate of 18.9%) at March 31, 2010, which is secured by auto receivables and restricted cash with an aggregate carrying amount of $100.4 million at March 31, 2010 (1)
|
|
$ |
88.4 |
|
|
$ |
99.2 |
|
Revolving line of credit of CAR Auto Finance segment receivables, rate of 4.8% at March 31, 2010, which is secured by auto receivables and restricted cash with an aggregate carrying amount of $49.3 million at March 31, 2010 and is payable over a six-month amortization period beginning June 2011
|
|
|
30.2 |
|
|
|
31.0 |
|
Financing of JRAS Auto Finance segment receivables, rate of 10.5%, which is secured by auto receivables and restricted cash with an aggregate carrying amount of $36.1 million at March 31, 2010 and which has expired and is currently callable
|
|
|
20.4 |
|
|
|
26.8 |
|
Financing of JRAS Auto Finance segment inventory, average rate of 24.0%, which is secured by inventory with an aggregate carrying amount of $1.0 million at March 31, 2010 and which is currently payable
|
|
|
0.6 |
|
|
|
1.4 |
|
Vendor-financed software and equipment acquisitions, average rate of 5.5% at March 31, 2010, secured by certain equipment with an aggregate carrying amount of $0.1 million at March 31, 2010, payable to 2010 through 2013
|
|
|
0.8 |
|
|
|
1.1 |
|
Investment in Previously Charged-Off Receivables segment’s asset-backed financing, rate of 12%, secured by certain investments in previously charged-off receivables with an aggregate carrying amount of $2.6 million at March 31, 2010, payable through 2012
|
|
|
4.4 |
|
|
|
4.9 |
|
Total asset-backed structured financing notes outstanding (which are secured by assets with carrying amounts aggregating $189.5 million at March 31, 2010)
|
|
$ |
144.8 |
|
|
$ |
164.4 |
|
|
(1) The terms of this lending agreement provide for the application of all excess cash flows (above and beyond interest costs and contractual servicing compensation to our outsourced third-party servicer) to reduce outstanding debt balances. After repayment of the debt facility, 37.5% of the remaining excess cash flows will be allocated to the note holders as additional compensation for the use of their capital. Reflecting this arrangement, we have estimated all available cash flows to all parties and have reflected the results of such estimates in our determination of a contingent interest rate and contingent interest expense associated with this amortizing debt facility.
|
Similar to our credit cards receivable structured financings, the structured financing facilities secured by the assets scheduled above (with the exception of the vendor-financed software and equipment and inventory lending arrangements) generally provide for a priority distribution of cash flows to us to service any underlying pledged receivables (cash flows that we consider adequate to meet our costs of servicing these receivables), a distribution of cash flows to pay interest and principal due on the notes, and a distribution of all excess cash flows to us. The receivables-backed structured financing facilities in the above table are amortizing down along with collections of the underlying receivables and, except as provided in the following paragraph with respect to the CAR facility and the JRAS facility, there are no provisions within the debt agreements that allow for acceleration or bullet repayment of the facilities. As such, for all intents and purposes, there is no practical risk of equity loss associated with lender seizure of assets under all of the facilities other than the CAR facility and the JRAS facility. Nevertheless, the aggregate carrying amount of the receivables that provide security for the $144.8 million of structured financing notes in the above table at March 31, 2010 is $189.5 million, which means that our maximum aggregate exposure to pre-tax equity loss associated with the above structured financing arrangements is $44.7 million.
The $20.4 million JRAS facility scheduled above matured in January 2010, and we are in active discussions with the lender to provide for a modification of the covenants underlying the facility and to extend the payment terms of the facility. Notwithstanding these efforts, the loan is currently callable and there can be no assurance that we will not be required to repay the facility in the near term; if the lender decides to subject this loan to immediate repayment, we would be required to repay the outstanding loan balance in full or could be forced to surrender the loan and fee receivables serving as collateral for the loan. As of March 31, 2010, the maximum exposure to pre-tax loss of equity under this structured financing was $15.7 million. The CAR facility begins to amortize down in June 2011 over a six-month period. In the event we are unable to secure either an extension of this facility or a replacement facility, the maximum exposure to pre-tax loss of equity under this CAR structured financing is $19.1 million as measured as of March 31, 2010.
Beyond our role as servicer of the underlying assets within the above-scheduled structured financings, we have provided no other financial or other support to the structures, and we have no explicit or implicit arrangements that could require us to provide financial support to the structures. Moreover, with the exception of our JRAS facility mentioned above, we are in compliance with the covenants underlying our various notes payable.
11.
|
Commitments and Contingencies
|
General
In the normal course of business through the origination of unsecured credit card receivables, we incur off-balance-sheet risks. These risks include one of our subsidiary’s (i.e., CompuCredit Corporation’s) commitments of $77.1 million at March 31, 2010 to purchase receivables associated with cardholders who have the right to borrow in excess of their current balances up to the maximum credit limit on their credit card accounts. These commitments involve, to varying degrees, elements of credit risks in excess of amounts we can fund through our securitization facilities. We have not experienced a situation in which all of our customers have exercised their entire available line of credit at any given point in time, nor do we anticipate this will ever occur in the future. Moreover, there would be a concurrent increase in assets should there be any exercise of these lines of credit. We also have the effective right to reduce or cancel these available lines of credit at any time, which we have now done with respect to substantially all of our outstanding cardholder accounts.
For various receivables portfolio investments we have made through our subsidiaries and equity-method investees, CompuCredit Corporation has entered into guarantee agreements and/or note purchase agreements whereby CompuCredit Corporation has agreed to guarantee the purchase of or purchase directly additional interests in portfolios of credit card receivables owned by trusts, the retained interests in which are owned by its subsidiaries and equity-method investees, should there be net new growth in the receivables or should collections not be available to fund new cardholder purchases. As of March 31, 2010, neither CompuCredit Corporation nor any of its subsidiaries or equity-method investees had purchased or been required to purchase any additional notes under the note purchase agreements. CompuCredit Corporation’s guarantee is limited to its respective ownership percentages in the various subsidiaries and equity-method investees multiplied by the total amount of the notes that each of the subsidiaries and equity-method investees could be required to purchase. As of March 31, 2010, the maximum aggregate amount of CompuCredit Corporation’s collective guarantees and direct purchase obligations related to all of its subsidiaries and equity-method investees was $68.9 million—a decrease from $72.0 million at December 31, 2009 as a result of declines in our liquidating credit card receivables portfolios. In general, this aggregate contingency amount will decline in the absence of portfolio acquisitions as the aggregate amounts of credit available to cardholders for future purchases decline along with our liquidation of the purchased portfolios and a corresponding reduction in the number of open cardholder accounts. The acquired credit card receivables portfolios of all of CompuCredit Corporation’s affected subsidiaries and equity-method investees have declined with each passing quarter since acquisition and we expect them to continue to decline because we expect combined payments and charge offs to exceed new purchases each month. We currently do not have any liability recorded with respect to these guarantees or direct purchase obligations, but we will record one if events occur that make payment probable under the guarantees or direct purchase obligations. The fair value of these guarantees and direct purchase obligations is not material. Moreover, should we ever be required to fund any of the guarantees, there would be a concurrent increase in the underlying assets.
CompuCredit Corporation’s third-party originating financial institution relationships require security for its purchases of their credit card receivables, and CompuCredit Corporation has pledged $1.0 million in collateral as such security as of March 31, 2010. In addition, in connection with our U.K. Portfolio acquisition, CompuCredit Corporation guarantees certain obligations of its subsidiaries and its third-party originating financial institution to one of the European payment systems ($0.2 million as of March 31, 2010). Those obligations include, among other things, compliance with one of the European payment system’s operating regulations and by-laws. CompuCredit Corporation also guarantees certain performance obligations of its servicer subsidiary to the indenture trustee and the trust created under the securitization relating to our U.K. Portfolio.
Also, under the agreements with third-party originating financial institutions, CompuCredit Corporation has agreed to indemnify the financial institutions for certain costs associated with the financial institutions’ card issuance and other lending activities on our behalf. Indemnification obligations generally are limited to instances in which we either (1) have been afforded the opportunity to defend against any potentially indemnifiable claims or (2) have reached agreement with the financial institutions regarding settlement of potentially indemnifiable claims.
Total System Services, Inc. provides certain services to CompuCredit Corporation as a system of record provider under an agreement that extends through May 2015. Were CompuCredit Corporation to terminate its U.S. relationship with Total System Services, Inc. prior to the contractual termination period, it would incur significant penalties ($19.8 million as of March 31, 2010).
Litigation
We are involved in various legal proceedings that are incidental to the conduct of our business. The most significant of these are described below.
CompuCredit Corporation and five other subsidiaries are defendants in a purported class action lawsuit entitled Knox, et al., vs. First Southern Cash Advance, et al., No. 5 CV 0445, filed in the Superior Court of New Hanover County, North Carolina, on February 8, 2005. The plaintiffs allege that in conducting a so-called “payday lending” business, certain of our Retail Micro-Loans segment subsidiaries violated various laws governing consumer finance, lending, check cashing, trade practices and loan brokering. The plaintiffs further allege that CompuCredit Corporation is the alter ego of our subsidiaries and is liable for their actions. The plaintiffs are seeking damages of up to $75,000 per class member, and attorney’s fees. We are vigorously defending this lawsuit. These claims are similar to those that have been asserted against several other market participants in transactions involving small balance, short-term loans made to consumers in North Carolina.
On May 23, 2008, CompuCredit Corporation and one of our other subsidiaries filed a complaint against CB&T in the Georgia State Court, Fulton County, (subsequently transferred to the Georgia Superior Court, Fulton County) in an action entitled CompuCredit Corporation et al. vs. CB&T et al., Civil Action No. 08-EV-004730-F. Among other things, the complaint as now amended alleges that CB&T, in violation of its contractual obligations, failed to provide us rebates, marketing fees, revenues or other fees or discounts that were paid or granted by Visa®, MasterCard®, or other card associations with respect to or apportionable to accounts covered by CB&T’s agreements with us and other consideration due to us. The complaint also alleges that CB&T refused to approve changes requested by us to the terms of the credit card accounts and refused to permit certain marketing, all in violation of the agreements among the parties. Also in this litigation, CB&T has asserted claims against CompuCredit Corporation for alleged failure to follow certain account management guidelines and for reimbursement of certain legal fees that it has incurred associated with CompuCredit Corporation’s contractual relationship with CB&T. Settlement discussions are at an advanced stage, but CompuCredit cannot provide any assurances regarding their outcome.
On July 14, 2008, CompuCredit Corporation and four of our officers, David G. Hanna, Richard R. House, Jr., Richard W. Gilbert and J. Paul Whitehead III, were named as defendants in a purported class action securities case filed in the U.S. District Court for the Northern District of Georgia entitled Waterford Township General Employees Retirement System vs. CompuCredit Corporation, et al., Civil Action No. 08-CV-2270. On August 22, 2008, a virtually identical case was filed entitled Steinke vs. CompuCredit Corporation et al., Civil Action No. 08-CV-2687. In general, the complaints alleged that we made false and misleading statements (or concealed information) regarding the nature of our assets, accounting for loan losses, marketing and collection practices, exposure to sub-prime losses, ability to lend funds, and expected future performance. The complaints were consolidated, and a consolidated complaint was filed. We filed a motion to dismiss, which the court granted on December 4, 2009. In its order, the court allowed the plaintiff to amend its complaint, but the plaintiff failed to do so timely. On January 13, 2010, the court entered final judgment, with prejudice, in favor of all defendants. The appeal period for the court’s final judgment expired on February 12, 2010.
CompuCredit Corporation received a demand dated August 25, 2008, from a shareholder, Ms. Sue An, that CompuCredit Corporation take action against all of its directors and two of its officers for alleged breaches of fiduciary duty. In general, the alleged breaches are the same as the actions that were the subject of the class action securities case prior to its dismissal. Our Board of Directors appointed a special litigation committee to investigate the allegations; that investigation concluded that the claims asserted were without merit; and we communicated that conclusion to Ms. Sue An’s legal counsel. Ms. An has filed suit against our directors, which is in the early stages. We will vigorously contest the allegations in that complaint.
On December 21, 2009, certain holders of our 3.625% Convertible Senior Notes Due 2025 and 5.875% Convertible Senior Notes Due 2035 filed a lawsuit in the U.S. District Court for the District of Minnesota seeking, among other things, to enjoin our December 31, 2009 cash distribution to shareholders and a potential future spin-off of our micro-loan businesses. We prevailed in court at a December 29, 2009 hearing concerning the plaintiffs’ motion for a temporary restraining order against our December 31, 2009 cash distribution to shareholders, and that distribution was made as originally contemplated on that date. On March 19, 2010, the U.S. District Court for the District of Minnesota transferred venue to the U.S. District Court for the Northern District of Georgia, and on April 6, 2010, we filed a Renewed Motion to Dismiss. The plaintiffs have sought leave to amend their complaint, to add new claims and certain of our officers as defendants, and have challenged our pending tender offer. The plaintiffs recently sought temporary injunctive relief against our currently pending tender offer. The litigation remains pending and we do not know when the court will rule on our motion to dismiss or the other relief requested. Consequently, should our Board of Directors ultimately approve a spin-off of our micro-loan businesses, it is possible that the spin-off ultimately might be delayed or enjoined by court order. Likewise, the pending tender offer may be impacted by the plaintiffs’ claims.
12.
|
Net Loss Attributable to Controlling Interests Per Common Share
|
We compute earnings per share (“EPS”) attributable to our common shareholders by dividing income or loss attributable to controlling interests by the weighted-average common shares outstanding including participating securities outstanding during the period, as discussed below. Diluted EPS reflects the potential dilution beyond shares for basic EPS that could occur if securities or other contracts to issue common stock were exercised, were converted into common stock or were to result in the issuance of common stock that would share in our earnings.
On January 1, 2009, we adopted new accounting rules that require us to include all unvested stock awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, in the number of shares outstanding in our basic and diluted EPS calculations. Common stock and unvested share-based payment awards earn dividends equally, and we have included all outstanding restricted stock awards in our calculation of basic and diluted EPS for current and prior periods.
The following table sets forth the computation of net income per common share (in thousands, except per share data):
|
|
For the Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Numerator:
|
|
|
|
|
|
|
Loss from continuing operations attributable to controlling interests
|
|
$ |
(42,781 |
) |
|
$ |
(112,615 |
) |
Income from discontinued operations attributable to controlling interests
|
|
$ |
— |
|
|
$ |
98 |
|
Loss attributable to controlling interests
|
|
$ |
(42,781 |
) |
|
$ |
(112,517 |
) |
Denominator:
|
|
|
|
|
|
|
|
|
Basic (including unvested share-based payment awards) (1)
|
|
|
47,834 |
|
|
|
47,546 |
|
Effect of dilutive stock options and warrants (2)
|
|
|
178 |
|
|
|
— |
|
Diluted (including unvested share-based payment awards) (1)
|
|
|
48,012 |
|
|
|
47,546 |
|
Loss from continuing operations attributable to controlling interests per common share—basic
|
|
$ |
(0.89 |
) |
|
$ |
(2.37 |
) |
Loss from continuing operations attributable to controlling interests per common share—diluted
|
|
$ |
(0.89 |
) |
|
$ |
(2.37 |
) |
|
|
|
|
|
|
|
|
|
Income from discontinued operations attributable to controlling interests per common share—basic
|
|
$ |
— |
|
|
$ |
— |
|
Income from discontinued operations attributable to controlling interests per common share—diluted
|
|
$ |
— |
|
|
$ |
— |
|
Net loss attributable to controlling interests per common share—basic
|
|
$ |
(0.89 |
) |
|
$ |
(2.37 |
) |
Net loss attributable to controlling interests per common share—diluted
|
|
$ |
(0.89 |
) |
|
$ |
(2.37 |
) |
(1)
|
Shares related to unvested share-based payment awards that we included in our basic and diluted share counts are as follows: 723,778 and 680,626 shares for the three months ended March 31, 2010 and 2009, respectively.
|
(2)
|
The effect of dilutive options is shown for informational purposes only. As we were in a net loss position for all periods presented, the effect of including outstanding options would be anti-dilutive, and they are thus excluded from all calculations.
|
For the three months ended March 31, 2010 and 2009, there were no shares potentially issuable and thus includible in the diluted net income per common share calculation under our 3.625% convertible senior notes due 2025 issued in May 2005 and 5.875% convertible senior notes due 2035 issued in November 2005. However, in future reporting periods during which our closing stock price is above the respective $37.16 and $45.22 conversion prices for the May 2005 and November 2005 convertible senior notes, and depending on the closing stock price at conversion, the maximum potential dilution under the conversion provisions of the May 2005 and November 2005 convertible senior notes is approximately 5.5 million and 3.1 million shares, respectively, which could be included in diluted share counts in net income per common share calculations. See Note 10, “Convertible Senior Notes and Notes Payable,” for a further discussion of these convertible securities.
13.
|
Stock-Based Compensation
|
In connection with our holding company reorganization and pursuant to an Assumption Agreement dated as of June 30, 2009, we assumed CompuCredit Corporation’s equity incentive plans and Employee Stock Purchase Plan (the “ESPP”). This allows us to grant equity awards under the CompuCredit Corporation 2008 Equity Incentive Plan (the “2008 Plan”) and will permit our eligible employees to participate in the ESPP. The number of shares authorized for issuance under the 2008 Plan and the ESPP was not increased as a result of the reorganization. Outstanding awards under all of CompuCredit Corporation’s equity incentive plans will continue in effect in accordance with the terms and conditions of the applicable plan and award, except that CompuCredit Holdings Corporation common stock has been substituted for CompuCredit Corporation common stock.
The 2008 Plan provides for grants of stock options, stock appreciation rights, restricted stock awards, restricted stock units and incentive awards. The maximum aggregate number of shares of common stock that may be issued under this plan and to which awards may relate is 2,000,000 shares, and 1,113,058 shares remained available for grant under this plan as of March 31, 2010. Exercises and vestings under our stock-based employee compensation plans resulted in our recognition of an income tax-related charge to additional paid-in capital of $2.0 million and $1.2 million, respectively, for the three months ended March 31, 2010 and 2009, respectively.
Stock Options
Our 2008 Plan and its predecessor plans provide that we may grant options on or shares of our common stock to members of the Board of Directors, employees, consultants and advisors. The exercise price per share of the options may be less than, equal to or greater than the market price on the date the option is granted. The option period may not exceed 10 years from the date of grant. The vesting requirements for options granted by us range from immediate to 5 years. During the three months ended March 31, 2010 and 2009, we expensed stock-option-related compensation costs of $0.4 million and $0.5 million, respectively. We recognize stock-option-related compensation expense for any awards with graded vesting on a straight-line basis over the vesting period for the entire award. Information related to options outstanding is as follows:
|
|
For the Three Months Ended March 31, 2010
|
|
|
|
Number of
Shares
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Weighted-
Average of Remaining
Contractual Life
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at January 1, 2010
|
|
|
790,000 |
|
|
$ |
31.75 |
|
|
|
|
|
|
|
Cancelled/Forfeited
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
Outstanding at March 31, 2010
|
|
|
790,000 |
|
|
$ |
31.75 |
|
|
|
2.9 |
|
|
$ |
— |
|
Exercisable at March 31, 2010
|
|
|
290,000 |
|
|
$ |
15.81 |
|
|
|
2.6 |
|
|
$ |
— |
|
As of March 31, 2010, our unamortized deferred compensation costs associated with non-vested stock options were $1.8 million. There were no stock option exercises during the three months ended March 31, 2010.
Restricted Stock and Restricted Stock Unit Awards
During the three months ended March 31, 2010 and 2009, we granted 253,107 and 206,825 shares of aggregate restricted stock and restricted stock units, respectively, with aggregate grant date fair values of $1.1 million and $1.1 million, respectively. When we grant restricted shares, we defer the grant date value of the restricted shares and amortize the grant date values of these shares (net of anticipated forfeitures) as compensation expense with an offsetting entry to the additional paid-in capital component of our consolidated shareholders’ equity. Our issued restricted shares generally vest over a range of twenty-four to sixty months and are being amortized to salaries and benefits expense ratably over the respective vesting periods. As of March 31, 2010, our unamortized deferred compensation costs associated with non-vested restricted stock awards were $4.9 million with a weighted-average remaining amortization period of 1.0 years.
Occasionally, we issue or sell stock in our subsidiaries to certain members of the subsidiaries’ management teams. The terms of these awards vary but generally include vesting periods comparable to those of stock issued under our restricted stock plan. Generally, these shares can be converted to cash or our stock at our discretion after the specified vesting period or the occurrence of other contractual events. Ownership in these shares constitutes noncontrolling interests in the subsidiaries. We are amortizing these compensation costs commensurate with the applicable vesting period. The weighted-average remaining vesting period for stock still subject to restrictions was 1.1 years as of March 31, 2010.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The following discussion should be read in conjunction with our condensed consolidated financial statements and the related notes included herein and our Annual Report on Form 10-K for the year ended December 31, 2009, where certain terms (including trust, subsidiary and other entity names and financial, operating and statistical measures) have been defined.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes forward-looking statements. We have based these forward-looking statements on our current plans, expectations and beliefs about future events. Actual results could differ materially, however, because of a number of factors, including the factors discussed in “Risk Factors” in Part II, Item 1A and elsewhere in this report.
OVERVIEW
We are a provider of various credit and related financial services and products to or associated with the financially underserved consumer credit market—a market represented by credit risks that regulators classify as “sub-prime.” We traditionally have served this market principally through our marketing and solicitation of credit card accounts and other credit products and our servicing of various receivables. We contracted with third-party financial institutions pursuant to which the financial institutions have issued general purpose consumer credit cards and we have purchased the receivables relating to such accounts on a daily basis. Today we manage the portfolios that we previously originated or acquired and are not currently offering new credit cards on a broad basis.
Our product and service offerings also include small-balance, short-term cash advance loans—generally less than $500 (or the equivalent thereof in the British pound for pound-denominated loans) for 30 days or less and to which we refer as “micro-loans;” installment loan and other credit products; and money transfer and other financial services. We market these loans and products through retail branch locations in Alabama, Colorado, Kentucky, Mississippi, Ohio, Oklahoma, South Carolina, Tennessee, and Wisconsin and over the Internet in the U.S. and U.K.
We also are servicing a portfolio of auto finance receivables that we previously originated through franchised and independent auto dealers, purchasing and/or servicing auto loans from or for a pre-qualified network of dealers in the buy-here, pay-here used car business and selling used automobiles through our own buy-here, pay-here lot.
Lastly, our debt collections subsidiary purchases and collects previously charged-off receivables from us, our equity method investees and third parties.
The most significant changes to our business during the three months ended March 31, 2010 were:
·
|
Our adoption of new accounting pronouncements which resulted in the consolidation of our securitization trusts onto our condensed consolidated balance sheet effective as of January 1, 2010. As a result of these new accounting rules, we present cash and credit card receivables held by our securitization trusts and debt issued from those entities as assets and liabilities on our condensed consolidated balance sheet as of March 31, 2010, and we adjusted our opening balance of total equity by $37.7 million reflecting the impact of adoption of the new accounting rules;
|
·
|
Our March 2010 acquisition of noncontrolling interests representing 6% of MEM (within our Internet Micro-Loans segment) for £4.3 million ($6.6 million), thereby reducing outstanding noncontrolling interests in MEM from 24% at December 31, 2009 to 18% as of March 31, 2010;
|
·
|
Our issuance of planned termination notices to affected U.S. call center employees to better leverage our global infrastructure, thereby outsourcing portions of our U.S. credit card customer service and collections operations; and
|
·
|
Our March 2010 repurchase pursuant to tender offer of $24.7 million in face amount of our 3.625% convertible senior notes due 2025 and $15.6 million in face amount of our 5.875% convertible senior notes due 2035 for $12.8 million and $5.7 million, respectively, both amounts being inclusive of transactions costs and accrued interest through the date of our repurchase of the notes, thereby resulting in an aggregate gain of $13.9 million (net of the notes’ applicable share of deferred costs and debt discount, which were recovered in connection with the purchase) as reflected within our condensed consolidated statement of operations for the three months ended March 31, 2010.
|
As is customary in our industry, we historically have financed most of our credit card receivables through the asset-backed securitization markets—markets that worsened significantly in 2008 and have not sufficiently recovered to facilitate growth for us thus far. We are concerned that the traditional securitization markets may not return to any degree of efficient and effective functionality in the near term, and even if they were available, the current regulatory and economic environment and our current liquidity position are not attractive enough for us to want to originate new credit card receivables (other than through our Investment in Previously Charged-Off Receivables segment’s balance transfer program).
In the current environment, wherein the only material cash flows we are receiving within our Credit Cards segment are those associated with servicing compensation until our securitization facilities are fully repaid, we are closely monitoring and managing our liquidity position, reducing our overhead infrastructure (which was built to accommodate higher account originations and managed receivables levels) and further leveraging our global infrastructure in order to maximize returns to shareholders on existing assets. Some of these actions, while prudent to maximize cash returns on existing assets, have the effect of reducing our potential for profitability both in the near term and over the long term. Our belief is that our reductions in personnel, overhead and other costs (through increased outsourcing) to levels that our Credit Cards segment can support with servicing compensation as its only cash inflow will not cause further impairments in the fair values of our credit card receivables; however, this outcome cannot be assured.
Our credit card and other operations are heavily regulated, and over time we change how we conduct our operations either in response to regulation or in keeping with our goals of continuing to lead the industry in the application of consumer-friendly credit card practices. We have made several significant changes to our practices over the past several years, and because our account management practices are evolutionary and dynamic, it is possible that we may make further changes to these practices, some of which may produce positive, and others of which may produce adverse, effects on our operating results and financial position.
Subject to the availability of growth capital at attractive terms and pricing, which is difficult to obtain in the current market, our shareholders should expect us to continue to evaluate and pursue (1) the acquisition of additional credit card receivables portfolios, and potentially other financial assets that are complementary to our financially underserved credit card business, (2) modest investments in other assets or businesses that are not necessarily financial services assets or businesses, and (3) additional opportunities to repurchase our convertible senior notes and other debt or our outstanding common stock. Absent the availability of investment alternatives (in other portfolios, other non-financial assets or businesses, or our own debt) at prices necessary to provide attractive returns for our shareholders, we will continue to look to maximize shareholder value through the distribution of excess cash to shareholders (as was done at December 31, 2009 and currently is in process through a tender offer) or through a potential spin-off of our micro-loan businesses. Additionally, given that financing for growth and acquisitions currently is constrained, our shareholders should expect us to pursue less capital intensive activities, like servicing credit card receivables and other assets for third parties (and in which we have limited or no equity interests), that allow us to leverage our expertise and infrastructure until we can finance and complete any potential acquisitions.
Potential Spin-Off of Micro-Loan Businesses
On November 5, 2009, our Board of Directors authorized management to review and evaluate the merits of a proposal to spin-off our U.S. and U.K. micro-loan businesses into a separate, publicly traded company called Purpose Financial Holdings, Inc. Once management completes its review and evaluation and makes a recommendation, if any, to the Board, the Board will consider the merits of the proposal.
In connection with management’s review of the proposal to spin-off our U.S. and U.K. micro-loan businesses; Purpose Financial filed a Form 10 Registration Statement and a related Information Statement with the SEC on January 4, 2010, amended the registration statement in response to SEC comments on March 29, 2010, and continues to work on the transactional documents and further registration amendments in response to a second round of SEC comments. The spin-off remains subject to a number of conditions, including, among others:
·
|
approval from our management;
|
·
|
approval from our Board of Directors;
|
·
|
the SEC’s declaration of Purpose Financial’s registration statement on Form 10, to be effective;
|
·
|
our and Purpose Financial’s receipt of all permits, registrations and consents required under the securities or blue sky laws of states or other political subdivisions of the U.S. or of foreign jurisdictions in connection with the spin-off;
|
·
|
the private letter ruling that we received from the Internal Revenue Service (“IRS”) not being revoked or modified in any material respect; and
|
·
|
NASDAQ’s approval for listing of Purpose Financial’s common stock, subject to official notice of issuance.
|
We cannot assure you that any or all of these conditions will be met.
CONSOLIDATED RESULTS OF OPERATIONS
|
|
For the Three Months Ended March 31,
|
|
|
Income Increases (Decreases) from
|
|
(In thousands)
|
|
2010
|
|
|
2009
|
|
|
2010 to 2009
|
|
Earnings:
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
$ |
84,214 |
|
|
$ |
20,130 |
|
|
$ |
64,084 |
|
Interest expense
|
|
|
(17,633 |
) |
|
|
(10,192 |
) |
|
|
(7,441 |
) |
Fees and related income on earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail micro-loan fees
|
|
|
18,187 |
|
|
|
16,676 |
|
|
|
1,511 |
|
Internet micro-loan fees
|
|
|
19,242 |
|
|
|
11,788 |
|
|
|
7,454 |
|
Fees on credit card receivables held on balance sheet
|
|
|
9,590 |
|
|
|
— |
|
|
|
9,590 |
|
Changes in fair value of loans and fees receivable recorded at fair value
|
|
|
40,910 |
|
|
|
— |
|
|
|
40,910 |
|
Changes in fair value of notes payable associated with structured financings recorded at fair value
|
|
|
32,596 |
|
|
|
— |
|
|
|
32,596 |
|
Income on investments in previously charged-off receivables
|
|
|
7,300 |
|
|
|
4,319 |
|
|
|
2,981 |
|
Gross (loss) profit on auto sales
|
|
|
(1,522 |
) |
|
|
8,471 |
|
|
|
(9,993 |
) |
Gains on investments in securities
|
|
|
60 |
|
|
|
77 |
|
|
|
(17 |
) |
Other
|
|
|
531 |
|
|
|
1,315 |
|
|
|
(784 |
) |
Other operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on retained interest in credit card receivables securitized
|
|
|
— |
|
|
|
(158,255 |
) |
|
|
158,255 |
|
Fees on securitized receivables
|
|
|
— |
|
|
|
6,229 |
|
|
|
(6,229 |
) |
Servicing income
|
|
|
2,019 |
|
|
|
39,404 |
|
|
|
(37,385 |
) |
Ancillary and interchange revenues
|
|
|
3,231 |
|
|
|
5,998 |
|
|
|
(2,767 |
) |
Gain on repurchase of convertible senior notes
|
|
|
13,896 |
|
|
|
160 |
|
|
|
13,736 |
|
Equity in loss of equity-method investees
|
|
|
(280 |
) |
|
|
(2,182 |
) |
|
|
1,902 |
|
Total
|
|
$ |
212,341 |
|
|
$ |
(56,062 |
) |
|
$ |
268,403 |
|
Provision for loan losses
|
|
|
173,414 |
|
|
|
12,253 |
|
|
|
(161,161 |
) |
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
10,838 |
|
|
|
14,232 |
|
|
|
3,394 |
|
Card and loan servicing
|
|
|
41,535 |
|
|
|
57,629 |
|
|
|
16,094 |
|
Marketing and solicitation
|
|
|
5,363 |
|
|
|
4,146 |
|
|
|
(1,217 |
) |
Depreciation
|
|
|
3,492 |
|
|
|
6,327 |
|
|
|
2,835 |
|
Other
|
|
|
17,770 |
|
|
|
25,194 |
|
|
|
7,424 |
|
Noncontrolling interests
|
|
|
(1,651 |
) |
|
|
2,589 |
|
|
|
(4,240 |
) |
Three Months Ended March 31, 2010, Compared to Three Months Ended March 31, 2009
Total interest income. In the three months ended March 31, 2010, total interest income consists primarily of finance charges and late fees earned on our credit card and auto finance receivables. The significant increase over the three months ended March 31, 2009 exclusively results from changes in accounting rules which required us to consolidate our previously off-balance-sheet securitized credit card receivables onto our balance sheet effective on January 1, 2010. As such, our first quarter 2010 total interest income includes the finance charges and late fee billings associated with these receivables; whereas, such finance charges and late fee billings on these receivables were not included within total interest income in 2009. But for the effects of this accounting change, we would have experienced declining total interest income in the three months ended March 31, 2010 as compared with the three months ended March 31, 2009 due to net liquidations of our auto finance receivables over the past year. Moreover, absent the effects of possible portfolio acquisitions, we expect our ongoing total interest income to decline in subsequent quarters along with continuing expected net liquidations of our credit card and auto finance receivables.
Also included within total interest income (under the other category on our consolidated statements of operations) is interest income we earn on our various investments in debt securities, including interest earned on bond investments, on bonds distributed to us from our equity-method investees and prior to January 1, 2010 accounting changes on a subordinated, certificated interest in a securitization trust owned by one of our majority-owned subsidiaries. Principal amortization has caused a reduction in interest income levels associated with some of these investments. However, it is possible that we may experience some growth in this category in the future associated with further investments we recently made and may maintain in debt securities.
Interest expense. The increases are primarily due to our previously mentioned January 1, 2010 consolidation of debt facilities underlying our formerly off-balance-sheet credit card receivables securitizations, as well as increased pricing on debt facilities within our Auto Finance segment (with ACC’s $103.5 million amortizing debt facility entered into in the fourth quarter of 2009). But for these two factors, and consistent with our expectations for interest expense in the future, we would have experienced declines in interest expense because our debt facilities are being repaid commensurate with net liquidations of the underlying credit card receivables and auto finance receivables that serve as collateral for the facilities. Similarly, the de-levering of our MEM operations in 2009 and its repayment of its outstanding debt by the end of 2009 also served to offset the credit card receivables accounting change’s impact on our interest expense levels.
Moreover, notwithstanding the effects of our convertible senior notes issuance discount accretion in increasing monthly interest expense amounts in the future, we expect our February 2010 repurchase of $24.7 million in face amount of our 3.625% convertible senior notes and $15.6 million in face amount of our 5.875% convertible senior notes to result in lower interest expense in future quarters. Other potential purchases of these notes would have a similar effect in reducing our future interest expenses levels.
Fees and related income on earning assets. The significant factors affecting our levels of fees and related income on earning assets include:
·
|
changes in accounting rules that required us to consolidate our formerly off-balance-sheet securitized credit card receivables (and their related debt) onto our balance sheet at fair value effective January 1, 2010, and our recording of changes in the fair value of these assets and related debt on two separate line items within this consolidated statement of operations category—such changes in fair value line items representing an ongoing source of potential volatility in the level of our fees and related income on earning assets;
|
·
|
our December 2009 reconsolidation of the credit card receivables previously held off-balance sheet within our lower-tier originated portfolio master trust given our December 2009 repayment (with investor consent) of the remaining outstanding debt within that trust;
|
·
|
increases in Internet micro-loan fees, reflecting the organic growth of our MEM operations;
|
·
|
increases in 2010 income within our Investments in Previously Charged-Off Receivables segment, principally reflecting the growth within this segment subsequent to the termination of its forward flow arrangement with Encore and the adverse effects of the disputes with Encore that existed in the three months ended March 31, 2009 prior to our favorable settlement of the disputes in the three months ended September 30, 2009; and
|
·
|
gross losses in 2010 (versus profits in 2009) on automotive vehicle sales relating to our suspension of operations in all but one lot and our minimization of additional inventory purchases within our JRAS operations while those operations continue to amortize their financing facility.
|
We expect Auto Finance segment gross profits to be lower throughout the remaining quarters of 2010 than we experienced in 2009 given our decision to suspend operations at all but one JRAS lot and minimize additional purchases of inventory by JRAS as it continues to amortize its financing facility.
Similarly, given expected net liquidations in our credit card receivables (absent possible portfolio acquisitions) throughout 2010, we expect to experience declining levels of fee income on credit card receivables throughout 2010. For the same reason, we also expect our change in fair value of credit card receivables recorded at fair value and our change in fair value of notes payable associated with structured financings recorded at fair value amounts to gradually diminish (absent significant changes in the assumptions used to determine these fair values) throughout 2010. These amounts, however, are subject to potentially high levels of volatility if we experience changes in the quality of our credit card receivables or if there are significant changes in market valuation factors (e.g., interest rates and spreads) during 2010. Such volatility will be muted somewhat, however, by the offsetting nature of the receivables and underlying debt being recorded at fair value and with the expected reductions in the face amounts of such outstanding receivables and debt as we experience further credit card receivables liquidations and associated debt amortizing repayments.
Additionally, because of its settlement with Encore, prospects for profits and revenue growth within our Investments in Previously Charged-off Receivables segment are now enhanced. This segment continues to purchase pools of charged-off receivables at favorable pricing that reflects an oversupply of charged-off paper in the marketplace. Moreover, this segment continues to seek and obtain third-party financing for future purchases. Nevertheless, the economic downturn’s impact on the segment’s ability to collect certain pools of previously charged-off paper at sufficient levels to earn its desired returns and corporate-level liquidity constraints on the amount of capital that we are willing and able to allocate to this segment for its purchase of previously charged-off paper at its desired levels could prevent this segment from growing as rapidly as desired.
Lastly, we currently expect continued growth in fees from our U.K.-based, Internet, micro-loan operations within MEM as this entity continues to execute on its growth plans. Moreover, we expect increased retail micro-loan fees as well as continued and higher profitability for the Retail Micro-Loans segment for the remainder of 2010.
Loss on securitized earning assets. As applicable only in the three months ended March 31, 2009, loss on securitized earning assets is the net of (1) securitization gains, (2) loss on retained interests in credit card receivables securitized and (3) returned-check, cash advance and other fees associated with our securitized credit card receivables.
Given new accounting rules that required the consolidation of all of our off-balance-sheet securitization trusts effective January 1, 2010, we will not experience any further income items within this category as the underlying items are now included within total interest income and fees and related income on earning assets.
In the Credit Cards Segment section below, we provide further details concerning delinquency and credit quality trends, which have affected the levels of our loss on retained interests in credit card receivables securitized and fees on securitized receivables in 2009 and prior periods and which affect our total interest income, provision for loan losses, and fees and related income on earnings assets consolidated statement of operations categories (including the change in fair value of credit card receivables recorded at fair value and change in fair value of notes payable associated with structured financings recorded at fair value line items within our fees and related income on earnings assets category) throughout 2010 and future periods.
Servicing income. With the 2010 consolidation of our formerly off-balance-sheet credit card securitizations, we now eliminate that portion of securitization income received from the securitization trusts against the corresponding securitization trust expense. As such, our servicing income has declined sharply from 2009 levels, which included servicing income received from then non-consolidated securitization trusts. Going forward, our reported servicing income will be comprised of only that portion of servicing paid to us by our equity method investees and any other third parties. Moreover, we expect declines in such income absent possible future success in our efforts to obtain contracts to service portfolios for new equity method investees or other third parties.
Ancillary and interchange revenues. During periods, unlike our current period, in which we are actively originating credit card accounts or in which credit card accounts are open to cardholder purchases, we market to cardholders other ancillary products, including credit and identity theft monitoring, health discount programs, shopping discount programs, debt waivers and life insurance. The significant decline in our ancillary revenues associated with these activities and our interchange revenues corresponds with our account closure actions and the net liquidations we experienced in all of our credit card receivables portfolios throughout 2009. Absent portfolio acquisitions, we expect only immaterial amounts of ancillary and interchange revenues in the future.
Gain on repurchase of convertible senior notes. In the three months ended March 31, 2010 and under the terms of a tender offer for the repurchase of both series of our convertible senior notes, we repurchased $24.7 million in face amount of our 3.625% convertible senior notes due 2025 and $15.6 million in face amount of our 5.875% convertible senior notes due 2035 for $12.8 million and $5.7 million, respectively, both amounts being inclusive of transactions costs and accrued interest through the date of our repurchase of the notes. The repurchases resulted in an aggregate gain of $13.9 million (net of the notes’ applicable share of deferred costs and debt discount, which were recovered in connection with the purchase). Similarly, in the three months ended March 31, 2009, we repurchased $300,000 in face amount of our 3.625% notes. The purchase price for these notes totaled $90,000 (including transaction costs and accrued interest) and resulted in a gain of $160,000 (net of the notes’ applicable share of deferred costs and debt discount, which were recovered in connection with the purchase). We are actively pursuing repurchases of our convertible senior notes in 2010, which would result in additional as of yet unknown gains upon such repurchases.
Equity in loss of equity-method investees. The continued adverse results with respect to our equity-method investees reflect the effects of poor economic conditions on the performance of our equity-method investees’ credit card receivables portfolios. Absent possible investments in new equity-method investees in the future, we expect gradually declining effects our equity-method investments on our operating results. We expect to see continued liquidations in the credit card receivables portfolios held by our equity-method investees for the foreseeable future, and we expect future results (whether loss or income) from our current equity-method investees that will not be material to our financial condition or operating results.
Provision for loan losses. Our provision for loan losses covers aggregate loss exposures on (1) principal receivable balances, (2) finance charges and late fees receivable underlying income amounts included within our total interest income category, and (3) other fees receivable. The increase in the provision for loan losses is almost exclusively due to the consolidation of our formerly off-balance-sheet credit card receivables securitizations onto our consolidated balance sheet pursuant to accounting rules changes effective as of January 1, 2010. Absent the consolidation of our credit card receivables in connection with required accounting changes, our provision for loan losses would have marginally increased between the three months ended March 31, 2009 and 2010 primarily due to growth within our MEM operations and increased provisions related to the closure of several of our JRAS sales and servicing locations and the corresponding impact on expected charge offs, these increases being offset slightly by net liquidations in our auto finance receivables.
Similarly, we expect continued reductions in our provision for loan losses from the level experienced in the three months ended March 31, 2010 attributable to expected net contractions in our credit card and auto finance receivables with the gradual net liquidation of these portfolios. The level of contraction in these receivables is expected to outpace growth in receivables within our Retail Micro-Loans and Internet Micro-Loans segments. Moreover, we do not expect any significant deviations in our credit risks, delinquencies and loss rates in 2010 versus 2009 (other than potential improvements if and as the economy improves); such improvements could further contribute to expected reductions in our provision for loan losses.
Further details concerning credit loss trends and expectations by segment are provided throughout our forthcoming discussion and analysis of each segment.
Total other operating expense. Total other operating expense decreased, reflecting the following:
·
|
diminished salaries and benefits costs resulting from our ongoing cost-cutting efforts as we continue to adjust our internal operations to reflect the declining size of our existing portfolios;
|
·
|
decreases within card and loan servicing expenses, primarily as a result of credit card and auto finance receivables portfolio liquidations—such decreases being partially offset by increased costs associated with MEM given its significant expansion throughout 2009 and into the three months ended March 31, 2010;
|
·
|
decreases in depreciation due to cost containment measures, specifically a diminished level of capital investments by us; and
|
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lower other expenses (which include, for example, rent and other occupancy costs, legal and professional fees, transportation and travel costs, telecom and data processing costs, insurance premiums, and other overhead cost categories) as we continue to adjust our associated internal costs based on the declining size of our existing portfolios;
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offset, however, by: