form10q.htm
_________________________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------------------------
FORM 10-Q
For the quarterly period ended June 30, 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 July 31, 2010, 35,793,965 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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Page
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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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32 |
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Item 3.
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67 |
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Item 4.
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67 |
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PART II. OTHER INFORMATION
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Item 1.
|
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68 |
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Item 1A.
|
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68 |
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Item 6.
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90 |
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|
|
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Condensed Consolidated Balance Sheets
(Dollars in thousands)
|
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|
|
|
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|
|
|
(Unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Cash and cash equivalents (including restricted cash of $41,580 at June 30, 2010 and $5,636 at December 31, 2009)
|
|
$ |
109,865 |
|
|
$ |
190,655 |
|
Securitized earning assets
|
|
|
— |
|
|
|
36,514 |
|
Loans and fees receivable:
|
|
|
|
|
|
|
|
|
Loans and fees receivable, net (of $6,836 and $7,030 in deferred revenue and $15,459 and $15,030 in allowances for uncollectible loans and fees receivable at June 30, 2010 and December 31, 2009, respectively)
|
|
|
71,663 |
|
|
|
70,928 |
|
Loans and fees receivable pledged as collateral under structured financings, net (of $23,789 and $33,864 in deferred revenue and $33,083 and $38,414 in allowances for uncollectible loans and fees receivable at June 30, 2010 and December 31, 2009, respectively)
|
|
|
163,698 |
|
|
|
214,439 |
|
Loans and fees receivable, at fair value
|
|
|
19,277 |
|
|
|
42,299 |
|
Loans and fees receivable pledged as collateral under structured financings, at fair value
|
|
|
530,334 |
|
|
|
— |
|
Investments in previously charged-off receivables
|
|
|
33,297 |
|
|
|
29,669 |
|
Investments in securities
|
|
|
78,583 |
|
|
|
2,629 |
|
Deferred costs, net
|
|
|
3,672 |
|
|
|
4,432 |
|
Property at cost, net of depreciation
|
|
|
25,532 |
|
|
|
32,263 |
|
Investments in equity-method investees
|
|
|
11,092 |
|
|
|
13,517 |
|
Intangibles, net
|
|
|
2,599 |
|
|
|
2,816 |
|
Goodwill
|
|
|
42,147 |
|
|
|
43,422 |
|
Income tax asset, net
|
|
|
— |
|
|
|
32,695 |
|
Prepaid expenses and other assets
|
|
|
25,107 |
|
|
|
32,554 |
|
Total assets
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$ |
1,116,866 |
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$ |
748,832 |
|
Liabilities
|
|
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|
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Accounts payable and accrued expenses
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$ |
69,268 |
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$ |
67,295 |
|
Notes payable associated with structured financings, at face value
|
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|
131,846 |
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|
164,368 |
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Notes payable associated with structured financings, at fair value
|
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|
516,510 |
|
|
|
— |
|
Convertible senior notes (Note 10)
|
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|
253,345 |
|
|
|
307,573 |
|
Deferred revenue
|
|
|
1,644 |
|
|
|
1,875 |
|
Income tax liability
|
|
|
63,123 |
|
|
|
— |
|
Total liabilities
|
|
|
1,035,736 |
|
|
|
541,111 |
|
|
|
|
|
|
|
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Commitments and contingencies (Note 11)
|
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|
|
|
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Equity
|
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Common stock, no par value, 150,000,000 shares authorized: 46,291,997 shares issued and 38,047,750 shares outstanding at June 30, 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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405,084 |
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|
500,064 |
|
Treasury stock, at cost, 8,244,247 and 8,626,434 shares at June 30, 2010 and December 31, 2009, respectively
|
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|
(209,852 |
) |
|
|
(219,714 |
) |
Accumulated other comprehensive loss
|
|
|
(6,969 |
) |
|
|
(3,293 |
) |
Retained deficit
|
|
|
(125,190 |
) |
|
|
(87,740 |
) |
Total shareholders’ equity (Note 2)
|
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|
63,073 |
|
|
|
189,317 |
|
Noncontrolling interests (Note 2)
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|
18,057 |
|
|
|
18,404 |
|
Total equity
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|
81,130 |
|
|
|
207,721 |
|
Total liabilities and equity (Note 2)
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$ |
1,116,866 |
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$ |
748,832 |
|
See accompanying notes.
Condensed Consolidated Statements of Operations (Unaudited)
(Dollars in thousands, except per share data)
|
|
For the Three Months Ended June 30,
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|
For the Six Months Ended June 30,
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Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
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Consumer loans, including past due fees
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|
$ |
69,179 |
|
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$ |
18,967 |
|
|
$ |
153,367 |
|
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$ |
38,768 |
|
Other
|
|
|
343 |
|
|
|
252 |
|
|
|
369 |
|
|
|
581 |
|
Total interest income
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|
69,522 |
|
|
|
19,219 |
|
|
|
153,736 |
|
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|
39,349 |
|
Interest expense
|
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|
(16,202 |
) |
|
|
(10,018 |
) |
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|
(33,835 |
) |
|
|
(20,210 |
) |
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable
|
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|
53,320 |
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|
9,201 |
|
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|
119,901 |
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|
19,139 |
|
Fees and related income on earning assets
|
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|
154,599 |
|
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|
40,926 |
|
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|
281,493 |
|
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|
83,572 |
|
Provision for losses on loans and fees receivable
|
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|
(167,213 |
) |
|
|
(18,555 |
) |
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|
(340,627 |
) |
|
|
(30,808 |
) |
Net interest income, fees and related income on earning assets
|
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|
40,706 |
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|
31,572 |
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|
60,767 |
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|
71,903 |
|
Other operating income (loss):
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|
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|
|
|
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|
|
|
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|
|
|
|
Loss on securitized earning assets
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|
— |
|
|
|
(161,688 |
) |
|
|
— |
|
|
|
(313,714 |
) |
Servicing income
|
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|
1,807 |
|
|
|
31,470 |
|
|
|
3,826 |
|
|
|
70,874 |
|
Ancillary and interchange revenues
|
|
|
2,763 |
|
|
|
5,229 |
|
|
|
5,994 |
|
|
|
11,227 |
|
Gain on repurchase of convertible senior notes
|
|
|
8,797 |
|
|
|
— |
|
|
|
22,693 |
|
|
|
160 |
|
Gain on buy-out of equity-method investee members
|
|
|
— |
|
|
|
20,990 |
|
|
|
— |
|
|
|
20,990 |
|
Equity in loss of equity-method investees
|
|
|
(9,391 |
) |
|
|
(7,833 |
) |
|
|
(9,671 |
) |
|
|
(10,015 |
) |
Total other operating income (loss)
|
|
|
3,976 |
|
|
|
(111,832 |
) |
|
|
22,842 |
|
|
|
(220,478 |
) |
Other operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
8,522 |
|
|
|
13,843 |
|
|
|
19,360 |
|
|
|
28,075 |
|
Card and loan servicing
|
|
|
34,701 |
|
|
|
53,121 |
|
|
|
76,236 |
|
|
|
110,750 |
|
Marketing and solicitation
|
|
|
5,780 |
|
|
|
3,908 |
|
|
|
11,143 |
|
|
|
8,054 |
|
Depreciation
|
|
|
3,624 |
|
|
|
5,314 |
|
|
|
7,116 |
|
|
|
11,641 |
|
Goodwill impairment
|
|
|
— |
|
|
|
20,000 |
|
|
|
— |
|
|
|
20,000 |
|
Other
|
|
|
21,623 |
|
|
|
25,309 |
|
|
|
39,393 |
|
|
|
50,503 |
|
Total other operating expense
|
|
|
74,250 |
|
|
|
121,495 |
|
|
|
153,248 |
|
|
|
229,023 |
|
Loss from continuing operations before income taxes
|
|
|
(29,568 |
) |
|
|
(201,755 |
) |
|
|
(69,639 |
) |
|
|
(377,598 |
) |
Income tax (expense) benefit
|
|
|
(41 |
) |
|
|
59,951 |
|
|
|
(1,100 |
) |
|
|
120,590 |
|
Loss from continuing operations
|
|
|
(29,609 |
) |
|
|
(141,804 |
) |
|
|
(70,739 |
) |
|
|
(257,008 |
) |
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on discontinued operations before income taxes
|
|
|
— |
|
|
|
(6,750 |
) |
|
|
— |
|
|
|
(6,599 |
) |
Income tax benefit
|
|
|
— |
|
|
|
2,363 |
|
|
|
— |
|
|
|
2,310 |
|
Loss on discontinued operations
|
|
|
— |
|
|
|
(4,387 |
) |
|
|
— |
|
|
|
(4,289 |
) |
Net loss
|
|
|
(29,609 |
) |
|
|
(146,191 |
) |
|
|
(70,739 |
) |
|
|
(261,297 |
) |
Net loss (income) attributable to noncontrolling interests
|
|
|
650 |
|
|
|
11,847 |
|
|
|
(1,001 |
) |
|
|
14,436 |
|
Net loss attributable to controlling interests
|
|
$ |
(28,959 |
) |
|
$ |
(134,344 |
) |
|
$ |
(71,740 |
) |
|
$ |
(246,861 |
) |
Loss from continuing operations attributable to controlling interests per common share—basic
|
|
$ |
(0.73 |
) |
|
$ |
(2.72 |
) |
|
$ |
(1.64 |
) |
|
$ |
(5.09 |
) |
Loss from continuing operations attributable to controlling interests per common share—diluted
|
|
$ |
(0.73 |
) |
|
$ |
(2.72 |
) |
|
$ |
(1.64 |
) |
|
$ |
(5.09 |
) |
Loss on discontinued operations attributable to controlling interests per common share—basic
|
|
$ |
— |
|
|
$ |
(0.09 |
) |
|
$ |
— |
|
|
$ |
(0.09 |
) |
Loss on discontinued operations attributable to controlling interests per common share—diluted
|
|
$ |
— |
|
|
$ |
(0.09 |
) |
|
$ |
— |
|
|
$ |
(0.09 |
) |
Net loss attributable to controlling interests per common share—basic
|
|
$ |
(0.73 |
) |
|
$ |
(2.81 |
) |
|
$ |
(1.64 |
) |
|
$ |
(5.18 |
) |
Net loss attributable to controlling interests per common share—diluted
|
|
$ |
(0.73 |
) |
|
$ |
(2.81 |
) |
|
$ |
(1.64 |
) |
|
$ |
(5.18 |
) |
See accompanying notes.
Condensed Consolidated Statements of Shareholders’ Equity
For the Six Months Ended June 30, 2010 (Unaudited)
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Paid-In Capital
|
|
|
|
|
|
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 |
|
Retirement of shares
|
|
|
(12,180,604 |
) |
|
|
|
|
|
|
(85,264 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
(85,264 |
) |
Use of treasury stock for stock-based compensation plans
|
|
|
(299,687 |
) |
|
|
— |
|
|
|
(10,325 |
) |
|
|
10,484 |
|
|
|
— |
|
|
|
(159 |
) |
|
|
— |
|
|
|
|
|
|
— |
|
Issuance of restricted stock
|
|
|
175,743 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
Amortization of deferred stock-based compensation costs
|
|
|
— |
|
|
|
— |
|
|
|
5,470 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
5,470 |
|
Purchase of treasury stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(622 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
(622 |
) |
Tax effects of stock-based compensation plans
|
|
|
— |
|
|
|
— |
|
|
|
(1,443 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
(1,443 |
) |
Repurchase of noncontrolling interests
|
|
|
— |
|
|
|
— |
|
|
|
(3,418 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4,119 |
) |
|
|
|
|
|
(7,537 |
) |
Distributions to owners of noncontrolling interests
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(460 |
) |
|
|
|
|
|
(460 |
) |
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(71,740 |
) |
|
|
1,001 |
|
|
$ |
(70,739 |
) |
|
|
(70,739 |
) |
Foreign currency translation adjustment, net of tax
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3,676 |
) |
|
|
— |
|
|
|
— |
|
|
|
(3,676 |
) |
|
|
(3,676 |
) |
Comprehensive loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
(74,415 |
) |
|
|
— |
|
Balance at June 30, 2010
|
|
|
46,291,997 |
|
|
$ |
— |
|
|
$ |
405,084 |
|
|
$ |
(209,852 |
) |
|
$ |
(6,969 |
) |
|
$ |
(125,190 |
) |
|
$ |
18,057 |
|
|
|
|
|
|
$ |
81,130 |
|
See accompanying notes.
Condensed Consolidated Statements of Comprehensive Loss (Unaudited)
(Dollars in thousands)
|
|
For the Three Months Ended June 30,
|
|
|
For the Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(29,609 |
) |
|
$ |
(146,191 |
) |
|
$ |
(70,739 |
) |
|
$ |
(261,297 |
) |
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(1,329 |
) |
|
|
15,075 |
|
|
|
(3,677 |
) |
|
|
13,247 |
|
Income tax (expense) benefit related to other comprehensive loss
|
|
|
(2 |
) |
|
|
(12,347 |
) |
|
|
1 |
|
|
|
(11,907 |
) |
Comprehensive loss
|
|
|
(30,940 |
) |
|
|
(143,463 |
) |
|
|
(74,415 |
) |
|
|
(259,957 |
) |
Comprehensive loss (income) attributable to noncontrolling interests
|
|
|
650 |
|
|
|
11,802 |
|
|
|
(1,001 |
) |
|
|
14,438 |
|
Comprehensive loss attributable to controlling interests
|
|
$ |
(30,290 |
) |
|
$ |
(131,661 |
) |
|
$ |
(75,416 |
) |
|
$ |
(245,519 |
) |
See accompanying notes.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
|
|
For the Six Months Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
Operating activities
|
|
|
|
|
|
|
Net loss
|
|
$ |
(70,739 |
) |
|
$ |
(261,297 |
) |
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
7,116 |
|
|
|
11,682 |
|
Impairment of goodwill
|
|
|
— |
|
|
|
23,483 |
|
Provision for losses on loans and fees receivable
|
|
|
340,627 |
|
|
|
31,500 |
|
Amortization and impairment of intangibles
|
|
|
217 |
|
|
|
1,203 |
|
Accretion of deferred revenue
|
|
|
(231 |
) |
|
|
(230 |
) |
Accretion of discount on convertible senior notes
|
|
|
5,051 |
|
|
|
4,991 |
|
Stock-based compensation expense
|
|
|
5,470 |
|
|
|
4,387 |
|
Retained interests adjustments, net
|
|
|
— |
|
|
|
526,832 |
|
Unrealized gain on loans and fees receivable and underlying notes payable held at fair value
|
|
|
(175,857 |
) |
|
|
— |
|
Unrealized gain on trading securities
|
|
|
(148 |
) |
|
|
(163 |
) |
Gain on repurchase of convertible senior notes
|
|
|
(22,693 |
) |
|
|
(160 |
) |
Loss on equity-method investments
|
|
|
9,671 |
|
|
|
— |
|
Gain on buy-out of equity-method investee members
|
|
|
— |
|
|
|
(20,990 |
) |
Changes in assets and liabilities, exclusive of business acquisitions:
|
|
|
|
|
|
|
|
|
Decrease in uncollected fees on loans receivable
|
|
|
6,794 |
|
|
|
6,508 |
|
Decrease (increase) in JRAS auto loans receivable
|
|
|
22,071 |
|
|
|
(16,176 |
) |
Decrease in deferred costs
|
|
|
504 |
|
|
|
652 |
|
Increase (decrease) in income tax liability
|
|
|
94,511 |
|
|
|
(123,513 |
) |
Decrease in prepaid expenses
|
|
|
4,313 |
|
|
|
4,845 |
|
Increase (decrease) in accounts payable and accrued expenses
|
|
|
394 |
|
|
|
(20,445 |
) |
Other
|
|
|
4,961 |
|
|
|
4,527 |
|
Net cash provided by operating activities
|
|
|
232,032 |
|
|
|
177,636 |
|
Investing activities
|
|
|
|
|
|
|
|
|
Purchase of third-party interest in equity-method investee
|
|
|
— |
|
|
|
(19,542 |
) |
(Increase) decrease in restricted cash
|
|
|
(21,862 |
) |
|
|
2,172 |
|
Proceeds from equity-method investees
|
|
|
3,524 |
|
|
|
50,633 |
|
Investments in securitized earning assets
|
|
|
— |
|
|
|
(340,818 |
) |
Proceeds from securitized earning assets
|
|
|
— |
|
|
|
186,844 |
|
Investments in earning assets
|
|
|
(520,558 |
) |
|
|
(426,809 |
) |
Proceeds from earning assets
|
|
|
575,216 |
|
|
|
425,533 |
|
Acquisitions of assets
|
|
|
— |
|
|
|
(621 |
) |
Purchases and development of property, net of disposals
|
|
|
(594 |
) |
|
|
(2,084 |
) |
Net cash provided by (used in) investing activities
|
|
|
35,726 |
|
|
|
(124,692 |
) |
Financing activities
|
|
|
|
|
|
|
|
|
Noncontrolling interests distributions, net
|
|
|
(460 |
) |
|
|
(756 |
) |
Purchases of treasury stock
|
|
|
(622 |
) |
|
|
(115 |
) |
Purchases of noncontrolling interests
|
|
|
(7,537 |
) |
|
|
(1,096 |
) |
Purchase of outstanding stock subject to tender offer
|
|
|
(85,264 |
) |
|
|
— |
|
Proceeds from borrowings
|
|
|
6,397 |
|
|
|
41,351 |
|
Repayments of borrowings
|
|
|
(295,795 |
) |
|
|
(83,044 |
) |
Net cash used in financing activities
|
|
|
(383,281 |
) |
|
|
(43,660 |
) |
Effect of exchange rate changes on cash
|
|
|
(1,211 |
) |
|
|
1,099 |
|
Net (decrease) increase in unrestricted cash
|
|
|
(116,734 |
) |
|
|
10,383 |
|
Unrestricted cash and cash equivalents at beginning of period
|
|
|
185,019 |
|
|
|
74,515 |
|
Unrestricted cash and cash equivalents at end of period
|
|
$ |
68,285 |
|
|
$ |
84,898 |
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
Effect of adoption of accounting pronouncements on restricted cash
|
|
$ |
(14,082 |
) |
|
|
— |
|
Cash paid for interest
|
|
$ |
29,472 |
|
|
$ |
16,116 |
|
Net cash income tax (refunds) payments
|
|
$ |
(93,456 |
) |
|
$ |
613 |
|
Supplemental non-cash information
|
|
|
|
|
|
|
|
|
Notes payable associated with capital leases
|
|
$ |
811 |
|
|
$ |
1,385 |
|
Issuance of stock options and restricted stock
|
|
$ |
1,127 |
|
|
$ |
1,129 |
|
See accompanying notes.
Notes to Condensed Consolidated Financial Statements
June 30, 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 June 30, 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 and six months ended June 30, 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 and six months ended June 30, 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 losses on loans and fees receivable within our condensed consolidated statements of operations. Operating results for the three and six months ended June 30, 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.
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 most recently on May 28, 2010. The spin-off remains subject to a number of conditions, including, among others:
·
|
a recommendation by our management to our Board of Directors to approve the spin-off;
|
·
|
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 any required 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 continued effectiveness of the private letter ruling that we received from the Internal Revenue Service;
|
·
|
NASDAQ’s approval for listing of Purpose Financial’s common stock, subject to official notice of issuance;
|
·
|
the transfer of our micro-loan businesses, and the associated licenses and registrations relating to these businesses, to Purpose Financial;
|
·
|
the execution by the parties of separation and distribution agreements, transition services agreements, services agreements, employee matters agreements, tax sharing agreements, sublease and other appropriate agreements; and
|
·
|
the lack of any effective order, injunction or decree issued by any court of competent jurisdiction or other legal restraint or prohibition preventing consummation of the spin-off or any of the transactions related thereto, including the transfers of assets and liabilities contemplated by the separation and distribution agreement.
|
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 (only as of the June 30, 2010 condensed consolidated balance sheet date 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 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 June 30, 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, at fair value; (2) loans and fees receivable pledged as collateral under structured financings, at fair value; (3) loans and fees receivable, net; and (4) loans and fees receivable pledged as collateral under structured financings, net;.
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. This latter category of balance transfer program receivables is included as a component of our Credit Card segment data and aggregated $14.5 million (net of allowances for uncollectible loans and fees receivable and deferred revenue) or 1.8% of our consolidated loans and fees receivable (net or at fair value) as of June 30, 2010.
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, net (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
June 30, 2010
|
|
Loans and fees receivable, gross
|
|
$ |
379.7 |
|
|
$ |
526.7 |
|
|
$ |
(591.9 |
) |
|
$ |
314.5 |
|
Deferred revenue
|
|
|
(40.9 |
) |
|
|
(25.5 |
) |
|
|
35.8 |
|
|
|
(30.6 |
) |
Allowance for uncollectible loans and fees receivable
|
|
|
(53.4 |
) |
|
|
(36.0 |
) |
|
|
40.9 |
|
|
|
(48.5 |
) |
Loans and fees receivable, net
|
|
$ |
285.4 |
|
|
$ |
465.2 |
|
|
$ |
(515.2 |
) |
|
$ |
235.4 |
|
As of June 30, 2010, the weighted average remaining accretion period for the $30.6 million of deferred revenue reflected in the above tables is 20 months.
A roll-forward of our allowance for uncollectible loans and fees receivable, net (in millions) is as follows:
|
|
For the Three Months Ended June 30,
|
|
|
For the Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$ |
(50.8 |
) |
|
$ |
(53.5 |
) |
|
$ |
(53.4 |
) |
|
$ |
(55.8 |
) |
Provision for losses on loans and fees receivable
|
|
|
(16.0 |
) |
|
|
(18.6 |
) |
|
|
(36.0 |
) |
|
|
(30.8 |
) |
Charge offs
|
|
|
21.3 |
|
|
|
16.7 |
|
|
|
46.2 |
|
|
|
32.8 |
|
Recoveries
|
|
|
(3.0 |
) |
|
|
(1.3 |
) |
|
|
(5.3 |
) |
|
|
(2.9 |
) |
Balance at end of period
|
|
$ |
(48.5 |
) |
|
$ |
(56.7 |
) |
|
$ |
(48.5 |
) |
|
$ |
(56.7 |
) |
Investments in Previously Charged-Off Receivables
The following table shows (in thousands) a roll-forward of our investments in previously charged-off receivables activities:
|
|
For the Three Months Ended June 30,
|
|
|
For the Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecovered balance at beginning of period
|
|
$ |
25,985 |
|
|
$ |
55,488 |
|
|
$ |
29,669 |
|
|
$ |
47,676 |
|
Acquisitions of defaulted accounts
|
|
|
12,973 |
|
|
|
14,278 |
|
|
|
16,570 |
|
|
|
31,651 |
|
Cash collections
|
|
|
(14,119 |
) |
|
|
(14,341 |
) |
|
|
(28,700 |
) |
|
|
(28,221 |
) |
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)
|
|
|
8,458 |
|
|
|
3,846 |
|
|
|
15,758 |
|
|
|
8,165 |
|
Unrecovered balance at end of period
|
|
$ |
33,297 |
|
|
$ |
59,271 |
|
|
$ |
33,297 |
|
|
$ |
59,271 |
|
Estimated remaining collections (“ERC”) (1)
|
|
$ |
102,913 |
|
|
$ |
125,844 |
|
|
$ |
102,913 |
|
|
$ |
125,844 |
|
(1)
|
We anticipate collecting 43.8% 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.
Previously charged-off receivables held as of June 30, 2010 are comprised principally of: normal delinquency charged-off accounts; charged-off accounts associated with Chapter 13 Bankruptcy-related debt; and charged-off accounts acquired through our Investments in Previously Charged-Off Receivables segment’s balance transfer program prior to such time as credit cards are issued relating to the program’s underlying accounts. At June 30, 2010, $10.9 million of our investments in previously charged-off receivables balance was comprised of previously charged-off receivables that our Investments in Previously Charged-Off Receivables segment purchased from our other consolidated subsidiaries, and in determining our net income or loss as reflected on our consolidated statements of operations, we eliminate all material intercompany profits that are associated with these transactions.
Comparisons of data as of and for the three months ended June 30, 2010 with data as of and for the three months ended June 30, 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 consolidated 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 or available for sale. Additionally, we occasionally have received distributions of debt securities from our equity-method investees ($1.0 million held at June 30, 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
|
|
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
Held to maturity:
|
|
|
|
|
|
|
Investments in debt securities
|
|
$ |
1,009 |
|
|
$ |
2,060 |
|
Available for sale:
|
|
|
|
|
|
|
|
|
Investments in equity securities
|
|
|
1,707 |
|
|
|
— |
|
Trading:
|
|
|
|
|
|
|
|
|
Investments in debt securities
|
|
|
75,108 |
|
|
|
— |
|
Investments in equity securities
|
|
|
759 |
|
|
|
569 |
|
Total investments in debt and equity securities
|
|
$ |
78,583 |
|
|
$ |
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 $1.1 million and $6.2 million as of June 30, 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 June 30, 2010 and December 31, 2009, respectively, associated with our ongoing servicing efforts in the U.K.), (2) vehicle inventory ($0.9 million and $4.1 million as of June 30, 2010 and December 31, 2009, respectively) held by our buy-here, pay-here auto operations 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) that 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 laws, 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 by the Internal Revenue Service for the 2007 and 2008 tax years. Although the audits have not been concluded, we do not expect any changes to our reported tax positions in those years that would have a material effect on our consolidated financial statements.
We recognize potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. We recognized $0.6 million and $1.2 million in potential interest and penalties associated with uncertain tax positions during the three and six months ended June 30, 2010, respectively, compared to $.7 million and $1.4 million during the three and six months ended June 30 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 June 30, 2010 and 2009.
We generally do not provide for income taxes on the undistributed earnings of our U.K. Internet micro-loan subsidiaries because we intend to reinvest these earnings indefinitely to finance foreign activities. Because this treatment is premised on our future plans and expectations of future events, the possibility exists that amounts we declare as indefinitely reinvested offshore may ultimately be repatriated. For instance, the actual cash needs of our U.S. entities may exceed our current expectations, or the actual cash needs of our foreign entities may be less than our current expectations. These additional foreign earnings could be subject to additional tax if remitted, or deemed remitted, as a dividend, in the year in which we determine that amounts are no longer intended to be indefinitely reinvested offshore. Such a deemed remittance occurred in the three and six months ended June 30, 2010 due to expiration of a long-standing U.S. income tax deferral provision which historically had shielded active finance company income earned in foreign jurisdictions from U.S. income tax. Although the active finance company income provisions expired for taxable years beginning on or after January 1, 2010, the U.S. Congress currently is working on legislation that would retroactively extend the active finance company income exception and permit retroactive and ongoing deferral of such income. Our specific foreign income source that previously had been protected from U.S. income taxation by reason of the active finance company income exception is the income earned by our U.K. Internet micro-loan operations. Although we cannot and did not assume enactment of laws to extend the active finance company income exception, the expiration of the exception had no effect on our effective tax rate during the three and six months ended June 30, 2010 due to the effects of valuation allowances that we maintain against net deferred tax assets. The expiration did, however, affect our computation (in the paragraph that follows) of what our effective tax rates as determined before the effects of valuation allowance changes would more likely than not have been for the three and six months ended June 30, 2010.
Our overall effective tax rates (computed considering results for both continuing and discontinued operations before income taxes in the aggregate) were -0.1% and -1.6% for three and six months ended June 30, 2010, respectively, compared to 29.9% and 31.9% for the three and six months ended June 30, 2009, respectively. We have experienced no material changes in effective tax rates associated with differences in filing jurisdictions between these periods, and the variations in effective tax rates between these periods are substantially related to the effects of changes in valuation allowances provided against income statement-oriented U.S. federal, foreign and state deferred tax assets ($5.7 million and $18.0 million increases in valuation allowances, respectively, during the three and six months ended June 30, 2010, versus a corresponding $10.7 million increase in valuation allowances during the three and six months ended June 30, 2009). As computed without regard to the effects of all changes in U.S. federal, foreign, state, and local tax valuation allowances taken against income statement-oriented deferred tax assets, our effective tax rates would more likely than not have been 19.3% and 24.3% for the three and six months ended June 30, 2010, respectively, compared to 35% and 33.7% for the three and six months ended June 30, 2009, respectively.
Our negative effective tax rate during the three and six months ended June 30, 2010 results from the fact that we incurred net losses during such periods, while at the same time we incurred (1) U.K. tax expense associated with our profitable MEM operations (such U.K. tax expenses exceeding the recognized tax benefits (after valuation allowances) on our U.S. losses) and (2) interest accruals on unrecognized tax benefits.
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 June 30,
|
|
|
For the Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail micro-loan fees
|
|
$ |
17,079 |
|
|
$ |
16,566 |
|
|
$ |
35,266 |
|
|
$ |
33,242 |
|
Internet micro-loan fees
|
|
|
20,813 |
|
|
|
15,104 |
|
|
|
40,055 |
|
|
|
26,892 |
|
Fees on credit card receivables held on balance sheet
|
|
|
6,269 |
|
|
|
— |
|
|
|
15,859 |
|
|
|
— |
|
Changes in fair value of loans and fees receivable recorded at fair value(1)
|
|
|
84,753 |
|
|
|
— |
|
|
|
125,663 |
|
|
|
— |
|
Changes in fair value of notes payable associated with structured financings recorded at fair value
|
|
|
17,598 |
|
|
|
— |
|
|
|
50,194 |
|
|
|
— |
|
Income on investments in previously charged-off receivables
|
|
|
8,458 |
|
|
|
3,846 |
|
|
|
15,758 |
|
|
|
8,165 |
|
Gross (loss) profit on auto sales
|
|
|
(127 |
) |
|
|
5,138 |
|
|
|
(1,649 |
) |
|
|
13,609 |
|
Gains on investments in securities
|
|
|
88 |
|
|
|
86 |
|
|
|
148 |
|
|
|
163 |
|
Other
|
|
|
(332 |
) |
|
|
186 |
|
|
|
199 |
|
|
|
1,501 |
|
Total fees and related income on earning assets
|
|
$ |
154,599 |
|
|
$ |
40,926 |
|
|
$ |
281,493 |
|
|
$ |
83,572 |
|
(1)
|
The above changes in fair value of loans and fees receivable recorded at fair value excludes the impact of charge-offs associated with these receivables which are separately included as a component of our provision for losses on loans and fees receivable. See Note 9, “Fair Values of Assets and Liabilities,” for further discussion of these receivables and their effects on our condensed consolidated statements of operations.
|
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 June 30, 2009
|
|
|
For the Six Months
Ended June 30, 2009
|
|
Loss on retained interests in credit card receivables securitized
|
|
$ |
(165,579 |
) |
|
$ |
(323,834 |
) |
Fees on securitized receivables
|
|
|
3,891 |
|
|
|
10,120 |
|
Total loss on securitized earning assets
|
|
$ |
(161,688 |
) |
|
$ |
(313,714 |
) |
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 June 30, 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 events that occur subsequent to 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 review, we did not identify any recognized or nonrecognized subsequent events that would have required adjustments to or disclosures in our condensed consolidated financial statements.
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-Loans 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 June 30,
|
|
|
For the Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income, fees and related income on earning assets
|
|
$ |
— |
|
|
$ |
375 |
|
|
$ |
— |
|
|
$ |
1,684 |
|
Other operating expense
|
|
|
— |
|
|
|
863 |
|
|
|
— |
|
|
|
2,021 |
|
Estimated loss upon sale
|
|
|
— |
|
|
|
2,779 |
|
|
|
— |
|
|
|
2,779 |
|
Goodwill impairment
|
|
|
— |
|
|
|
3,483 |
|
|
|
— |
|
|
|
3,483 |
|
Loss before income taxes
|
|
|
— |
|
|
|
(6,750 |
) |
|
|
— |
|
|
|
(6,599 |
) |
Income tax benefit
|
|
|
— |
|
|
|
2,363 |
|
|
|
— |
|
|
|
2,310 |
|
Net loss
|
|
$ |
— |
|
|
$ |
(4,387 |
) |
|
$ |
— |
|
|
$ |
(4,289 |
) |
There were no discontinued assets held for sale on our condensed consolidated balance sheets as of June 30, 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 June 30, 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 June 30, 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 on earning assets
|
|
$ |
2,237 |
|
|
$ |
8,329 |
|
|
$ |
14,201 |
|
|
$ |
2,010 |
|
|
$ |
13,929 |
|
|
$ |
40,706 |
|
Total other operating income
|
|
$ |
3,564 |
|
|
$ |
275 |
|
|
$ |
— |
|
|
$ |
137 |
|
|
$ |
— |
|
|
$ |
3,976 |
|
(Loss) income from continuing operations before income taxes
|
|
$ |
(29,625 |
) |
|
$ |
1,776 |
|
|
$ |
1,501 |
|
|
$ |
(6,752 |
) |
|
$ |
3,532 |
|
|
$ |
(29,568 |
) |
Loss on discontinued operations before income taxes
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Loans and fees receivable, gross
|
|
$ |
18,452 |
|
|
$ |
— |
|
|
$ |
37,038 |
|
|
$ |
220,572 |
|
|
$ |
38,466 |
|
|
$ |
314,528 |
|
Loans and fees receivable, net
|
|
$ |
14,475 |
|
|
$ |
— |
|
|
$ |
30,754 |
|
|
$ |
163,698 |
|
|
$ |
26,434 |
|
|
$ |
235,361 |
|
Loans and fees receivable held at fair value
|
|
$ |
549,611 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
549,611 |
|
Total assets
|
|
$ |
764,731 |
|
|
$ |
42,913 |
|
|
$ |
64,280 |
|
|
$ |
181,087 |
|
|
$ |
63,855 |
|
|
$ |
1,116,866 |
|
Three Months Ended June 30, 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
|
|
$ |
(6,268 |
) |
|
$ |
3,743 |
|
|
$ |
14,118 |
|
|
$ |
9,414 |
|
|
$ |
10,565 |
|
|
$ |
31,572 |
|
Total other operating (loss) income
|
|
$ |
(111,950 |
) |
|
$ |
27 |
|
|
$ |
— |
|
|
$ |
90 |
|
|
$ |
1 |
|
|
$ |
(111,832 |
) |
(Loss) income from continuing operations before income taxes
|
|
$ |
(176,765 |
) |
|
$ |
(7,049 |
) |
|
$ |
(16,549 |
) |
|
$ |
(6,165 |
) |
|
$ |
4,773 |
|
|
$ |
(201,755 |
) |
Loss on discontinued operations before income taxes
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(6,750 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(6,750 |
) |
Loans and fees receivable, gross
|
|
$ |
1,385 |
|
|
$ |
— |
|
|
$ |
33,492 |
|
|
$ |
325,854 |
|
|
$ |
28,045 |
|
|
$ |
388,776 |
|
Loans and fees receivable, net
|
|
$ |
1,039 |
|
|
$ |
— |
|
|
$ |
27,811 |
|
|
$ |
260,968 |
|
|
$ |
19,413 |
|
|
$ |
309,231 |
|
Loans and fees receivable held at fair value
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Total assets
|
|
$ |
609,806 |
|
|
$ |
68,386 |
|
|
$ |
66,793 |
|
|
$ |
300,349 |
|
|
$ |
61,021 |
|
|
$ |
1,106,355 |
|
Six Months Ended June 30, 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
|
|
$ |
(10,452 |
) |
|
$ |
15,489 |
|
|
$ |
29,934 |
|
|
$ |
(2,264 |
) |
|
$ |
28,060 |
|
|
$ |
60,767 |
|
Total other operating income
|
|
$ |
21,921 |
|
|
$ |
654 |
|
|
$ |
— |
|
|
$ |
267 |
|
|
$ |
— |
|
|
$ |
22,842 |
|
(Loss) income from continuing operations before income taxes
|
|
$ |
(63,426 |
) |
|
$ |
2,757 |
|
|
$ |
3,817 |
|
|
$ |
(21,279 |
) |
|
$ |
8,492 |
|
|
$ |
(69,639 |
) |
Loss on discontinued operations before income taxes
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Loans and fees receivable, gross
|
|
$ |
18,452 |
|
|
$ |
— |
|
|
$ |
37,038 |
|
|
$ |
220,572 |
|
|
$ |
38,466 |
|
|
$ |
314,528 |
|
Loans and fees receivable, net
|
|
$ |
14,475 |
|
|
$ |
— |
|
|
$ |
30,754 |
|
|
$ |
163,698 |
|
|
$ |
26,434 |
|
|
$ |
235,361 |
|
Loans and fees receivable held at fair value
|
|
$ |
549,611 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
549,611 |
|
Total assets
|
|
$ |
764,731 |
|
|
$ |
42,913 |
|
|
$ |
64,280 |
|
|
$ |
181,087 |
|
|
$ |
63,855 |
|
|
$ |
1,116,866 |
|
Six Months Ended June 30, 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
|
|
$ |
(11,884 |
) |
|
$ |
7,948 |
|
|
$ |
28,492 |
|
|
$ |
27,998 |
|
|
$ |
19,349 |
|
|
$ |
71,903 |
|
Total other operating (loss) income
|
|
$ |
(220,937 |
) |
|
$ |
55 |
|
|
$ |
— |
|
|
$ |
403 |
|
|
$ |
1 |
|
|
$ |
(220,478 |
) |
(Loss) income from continuing operations before income taxes
|
|
$ |
(354,790 |
) |
|
$ |
(9,377 |
) |
|
$ |
(17,627 |
) |
|
$ |
(4,135 |
) |
|
$ |
8,331 |
|
|
$ |
(377,598 |
) |
Loss on discontinued operations before income taxes
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(6,599 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(6,599 |
) |
Loans and fees receivable, gross
|
|
$ |
1,385 |
|
|
$ |
— |
|
|
$ |
33,492 |
|
|
$ |
325,854 |
|
|
$ |
28,045 |
|
|
$ |
388,776 |
|
Loans and fees receivable, net
|
|
$ |
1,039 |
|
|
$ |
— |
|
|
$ |
27,811 |
|
|
$ |
260,968 |
|
|
$ |
19,413 |
|
|
$ |
309,231 |
|
Loans and fees receivable held at fair value
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Total assets
|
|
$ |
609,806 |
|
|
$ |
68,386 |
|
|
$ |
66,793 |
|
|
$ |
300,349 |
|
|
$ |
61,021 |
|
|
$ |
1,106,355 |
|
5. Shareholders’ Equity
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 June 30, 2010, we had 2,252,388 loaned shares outstanding.
Additionally, pursuant to the closing of a tender offer in May 2010, we repurchased 12,180,604 shares of our common stock at a purchase price of $7.00 per share for an aggregate cost of $85.3 million. These shares subsequently were retired.
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 131,210 and 514,686 at gross costs of $4.2 million and $10.5 million during three and six months ended June 30, 2010, respectively, in satisfaction of restricted share and restricted share unit vestings; this compares to our reissuance of shares for these purposes of 8,006 and 111,644 at gross costs of $0.1 million and $2.0 million during the three and six months ended June 30, 2009, respectively. Additionally, 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, we also effectively purchased shares totaling 43,212 and 132,499 at gross costs of $0.2 million and $0.6 million during the three and six months ended June 30, 2010, respectively, compared to our effective purchase of 2,939 and 36,888 shares at gross costs of $0.01 million and $0.11 million, respectively, during the three and six months ended June 30, 2009, respectively.
6. Investments in Equity-Method Investees
In May 2009, we recognized a gain of $21.0 million that is separately classified on our consolidated statement of operations associated with our buy-out of the remaining members of our then-longest standing equity-method investee, CSG (which was formed in July 2002 to acquire retained interests in a securitization that included $1.2 billion in credit card receivables originated by Providian Financial Corporation). Subsequent to this buy-out event, we have included the operations of this former equity-method investee and its underlying assets and liabilities within our consolidated results of operations and consolidated balance sheet categories, as opposed to the income from equity-method investees and investment in equity-method investee categories.
In the following tables, we summarize (in thousands) combined balance sheet and results of operations data for our equity-method investees (including 2009 results of operations data for CSG while we held it in equity-method investee form prior to our May 2009 buy-out of its other members):
|
|
As of
June 30, 2010
|
|
|
As of
December 31, 2009
|
|
Securitized earning assets
|
|
$ |
— |
|
|
$ |
35,844 |
|
Loans and fees receivable pledged as collateral under structured financings, at fair value
|
|
$ |
164,615 |
|
|
$ |
— |
|
Total assets
|
|
$ |
175,988 |
|
|
$ |
38,332 |
|
Notes payable associated with structured financings, at fair value
|
|
$ |
145,877 |
|
|
$ |
— |
|
Total liabilities
|
|
$ |
147,009 |
|
|
$ |
1,319 |
|
Members’ capital
|
|
$ |
28,979 |
|
|
$ |
37,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income, fees and related loss on earning assets
|
|
$ |
(25,303 |
) |
|
$ |
— |
|
|
$ |
(24,913 |
) |
|
$ |
— |
|
Fees and related loss on securitized earning assets
|
|
$ |
— |
|
|
$ |
(22,841 |
) |
|
$ |
— |
|
|
$ |
(31,011 |
) |
Total other operating income (loss)
|
|
$ |
1,064 |
|
|
$ |
(21,745 |
) |
|
$ |
2,483 |
|
|
$ |
(28,605 |
) |
Net loss
|
|
$ |
(27,891 |
) |
|
$ |
(15,359 |
) |
|
$ |
(30,339 |
) |
|
$ |
(23,000 |
) |
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 connection with our May 2009 decision to discontinue our Arkansas retail micro-loan operations, we allocated goodwill between our retained Retail Micro-Loans segment operations and our discontinued Arkansas operations, thereby resulting in a $3.5 million impairment loss that is reported within loss on discontinued operations for the three and six months ended June 30, 2009. In connection with this reallocation, we performed a valuation analysis with respect to the remaining goodwill associated with our continuing Retail Micro-Loans segment operations based on internal projections of residual cash flows and market data supporting valuation prices of similar companies at the time; this analysis yielded an additional $20.0 million goodwill impairment charge associated with continuing operations that is reflected within our consolidated statement of operations for the three and six months ended June 30, 2009.
In April 2007, one of our then-majority-owned subsidiaries (in which we now hold a 100% interest as of December 31, 2009) acquired 95% of the outstanding shares of MEM, our U.K.-based, Internet, micro-loan operations, for £11.6 million ($22.9 million) in cash as part of our underlying diversification efforts and to establish a micro-loan presence in the U.K. 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, although none of the earn-out performance conditions was satisfied for 2007 and 2008. The MEM acquisition agreement was amended in the first quarter of 2009 to remove the sellers’ earn-out rights in exchange for a net 22.5% continuing minority ownership interest in MEM and a cash payment of £434,000 ($621,000), the aggregate value of which reflected the estimated fair value of the earn-out arrangement as of December 31, 2009. The settlement of the earn-out resulted in a re-measurement of the carrying value of our investment in MEM in accordance with applicable accounting standards and additional goodwill of $5.6 million.
Relative to respective December 31 balances, changes (in thousands) in the carrying amount of goodwill for the six months ended June 30, 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 |
|
Impairment loss
|
|
|
(23,483 |
) |
|
|
— |
|
|
|
(23,483 |
) |
Foreign currency translation
|
|
|
— |
|
|
|
3,103 |
|
|
|
3,103 |
|
Balance as of June 30, 2009
|
|
$ |
19,731 |
|
|
$ |
24,571 |
|
|
$ |
44,302 |
|
Balance as of December 31, 2009
|
|
$ |
19,731 |
|
|
$ |
23,691 |
|
|
$ |
43,422 |
|
Foreign currency translation
|
|
|
— |
|
|
|
(1,275 |
) |
|
|
(1,275 |
) |
Balance as of June 30, 2010
|
|
$ |
19,731 |
|
|
$ |
22,416 |
|
|
$ |
42,147 |
|
Intangible Assets
In connection with our May 2009 decision to discontinue our Arkansas retail micro-loans operations, we allocated intangible assets that we determined had an indefinite benefit period between our retained Retail Micro-Loans segment operations and our discontinued Arkansas operations, thereby resulting in a $0.2 million impairment loss that is reported within loss on discontinued operations in for the three and six months ended June 30, 2009. This valuation analysis was based on internal projections of residual cash flows and market data supporting valuation prices of similar companies at the time.
We had $2.1 million of remaining intangible assets that we determined had an indefinite benefit period as of June 30, 2010 and December 31, 2009. The net unamortized carrying amount of intangible assets subject to amortization was $0.5 million and $0.7 million as of June 30, 2010 and December 31, 2009, respectively. Intangible asset-related amortization expense was $0.1 million and $0.2 million for the three and six months ended June 30, 2010, respectively, and $0.5 million and $1.0 million for the three and six months ended June 30, 2009, respectively.
8. Securitizations
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 and six months ended June 30, 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 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
June 30, 2009
|
|
|
As of and for the Six Months Ended
June 30, 2009
|
|
Gross amount of receivables securitized at period end
|
|
$ |
1,984,497 |
|
|
$ |
1,984,497 |
|
Proceeds from new transfers of financial assets to securitization trusts
|
|
$ |
213,102 |
|
|
$ |
304,728 |
|
Proceeds from collections reinvested in revolving-period securitizations
|
|
$ |
148,443 |
|
|
$ |
275,462 |
|
Excess cash flows received on retained interests
|
|
$ |
24,826 |
|
|
$ |
55,484 |
|
Loss on retained interests in credit card receivables securitized
|
|
$ |
(165,579 |
) |
|
$ |
(323,834 |
) |
Fees on securitized receivables
|
|
|
3,891 |
|
|
|
10,120 |
|
Total loss on securitized earning assets
|
|
$ |
(161,688 |
) |
|
$ |
(313,714 |
) |
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 and six months ended June 30, 2009 were $31.5 million and $70.9 million, respectively of servicing income (fees) we received from our securitization trusts in that period. Changes in our net servicing liability for the six months ended June 30, 2009 are summarized (in millions) in the following table.
|
|
For the Six Months Ended June 30, 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
|
|
|
12.3 |
|
Balance at end of period
|
|
$ |
23.0 |
|
Other key assumptions we used to estimate the fair value of our retained interests in the credit card receivables securitized as of December 31, 2009 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 June 30, 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 June 30, 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
June 30, 2009
|
|
Total managed principal balance
|
|
$ |
1,745,827 |
|
Total managed finance charge and fee balance
|
|
|
238,670 |
|
Total managed receivables
|
|
|
1,984,497 |
|
Cash collateral at trust and amounts due from QSPEs
|
|
|
482,606 |
|
Total assets held by QSPEs
|
|
|
2,467,103 |
|
QSPE-issued notes to which we are subordinated
|
|
|
(1,790,376 |
) |
Face amount of residual interests in securitizations
|
|
$ |
676,727 |
|
Receivables delinquent—60 or more days
|
|
$ |
313,493 |
|
Net charge offs during the three months ended June 30, 2009
|
|
$ |
159,015 |
|
Data in the above table are aggregated from the various QSPEs supporting our securitizations as of June 30, 2009.
9. Fair Values of Assets and Liabilities
Because we account for the credit card receivables underlying our formerly off-balance-sheet securitization trusts at fair value, accounting rules that required the consolidation of these 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.
We elected the fair value option with respect to our investments in equity securities as well as our investments in loans and fees receivable associated with our credit card portfolios. With respect to our equity securities, we decided to measure these assets at fair value due to our intent to invest and redeem these investments with expected frequency. For our credit card loans and fees receivable and the notes payable that are secured by those receivables, both of which were contained in off-balance-sheet securitization trusts in either certain or all periods prior to January 1, 2010, we elected the fair value option because, in contrast to substantially all other assets on our consolidated balance sheets, we had significant experiences in determining the fair value of these assets and liabilities based on our models previously used to determine the fair value of residual interests in underlying off-balance-sheet securitization trusts prior to their consolidation in our financial statements effective no later than January 1, 2010.
We account for certain financial assets and liabilities at fair value base upon a three-tiered valuation system. 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 June 30, 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
|
|
$ |
75,867 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
75,867 |
|
Loans and fees receivable, at fair value
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
19,277 |
|
|
$ |
19,277 |
|
Loans and fees receivable pledged as collateral under structured financings, at fair value
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
530,334 |
|
|
$ |
530,334 |
|
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 six months ended June 30, 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
|
|
|
— |
|
|
|
(103,982 |
) |
|
|
— |
|
|
|
(103,982 |
) |
Net revaluations of loans and fees receivable, at fair value
|
|
|
(10,145 |
) |
|
|
— |
|
|
|
— |
|
|
|
(10,145 |
) |
Purchases, issuances, and settlements, net
|
|
|
(12,877 |
) |
|
|
(203,017 |
) |
|
|
|
|
|
|
(215,894 |
) |
Impact of foreign currency translation gain
|
|
|
— |
|
|
|
987 |
|
|
|
— |
|
|
|
987 |
|
Net transfers in and/or out of Level 3
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Ending balance
|
|
$ |
19,277 |
|
|
$ |
530,334 |
|
|
$ |
— |
|
|
$ |
549,611 |
|
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, discount rates and servicing costs.
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 June 30, 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
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
516,510 |
|
|
$ |
516,510 |
|
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 six months ended June 30, 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
|
|
|
(50,194 |
) |
Repayments on outstanding notes payable, net
|
|
|
(205,317 |
) |
Impact of foreign currency translation gain
|
|
|
(594 |
) |
Net transfers in and/or out of Level 3
|
|
|
— |
|
Ending balance
|
|
$ |
516,510 |
|
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; discount rates; and contractual servicing fees.
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 June 30, 2010 by fair value hierarchy:
|
|
Quoted Prices in Active Markets for Identical
|
|
|
Significant Other
Observable Inputs
|
|
|
|
|
|
Total Assets
Measured at Fair
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
42,147 |
|
|
$ |
42,147 |
|
Intangibles, net
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
2,136 |
|
|
$ |
2,136 |
|
Other relevant data (in thousands) as of June 30, 2010 concerning our assets and liabilities measured at fair value are as follows:
|
|
Loans and Fees Receivable, at Fair Value
|
|
|
Loans and Fees Receivable Pledged as Collateral under Structured Financings, at Fair Value
|
|
Aggregate unpaid principal balance within loans and fees receivable that are reported at fair value
|
|
$ |
38,642 |
|
|
$ |
569,835 |
|
Aggregate fair value of loans and fees receivable that are reported at fair value
|
|
$ |
19,277 |
|
|
$ |
530,334 |
|
Aggregate fair value of receivables carried at fair value that are 90 days or more past due (which also coincides with finance charge and fee non-accrual policies)
|
|
$ |
352 |
|
|
$ |
2,644 |
|
Aggregate excess of balance of unpaid principal receivables within loans and fees receivable that are reported at fair value and are 90 days or more past due (which also coincides with finance charge and fee non-accrual policies) over the fair value of such loans and fees receivable
|
|
$ |
8,006 |
|
|
$ |
92,356 |
|
|
|
|
|
|
|
Notes Payable Associated with Structured Financings, at Fair Value
|
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Aggregate unpaid principal balance of notes payable
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|
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$ |
810,462 |
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Aggregate fair value of notes payable
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$ |
516,510 |
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10.
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Convertible Senior Notes and Notes Payable
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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 2005, 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 and six months ended June 30, 2010 totaled $2.4 million and $5.1 million, respectively, compared to total amortization of $2.5 million and $5.0 million for the three and six months ended June 30, 2009, respectively. Actual incurred interest (based on the contractual interest rates within the two convertible senior notes series) totaled $3.8 million and $8.1 million for the three and six months ended June 30, 2010, respectively, versus, $4.4 million and $8.9 million for the three and six months ended June 30, 2009, respectively. We will amortize the discount remaining at June 30, 2010 to interest expense over the expected terms of the convertible senior notes (currently expected to be May 2012 and October 2035 for the 3.625% and 5.875% notes, respectively). The weighted average effective interest rate for the 3.625% and 5.875% notes was 9.2% for all periods presented.
The following summarizes (in thousands) components of our condensed consolidated balance sheets associated with our convertible senior notes after giving effect to both our required adoption of the new Instrument C rules upon their January 1, 2009 effective date and our retrospective application of the rules to prior presented financial reporting periods:
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Face amount of outstanding convertible senior notes
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$ |
316,514 |
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$ |
386,551 |
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Discount
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