_______________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended March 31, 2011
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, 2011, 22,716,447 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.)
FORM 10-Q
TABLE OF CONTENTS
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Page
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PART I. FINANCIAL INFORMATION
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Item 1.
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|||||
| 1 | |||||
| 2 | |||||
| 3 | |||||
| 4 | |||||
| 5 | |||||
| 6 | |||||
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Item 2.
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28 | ||||
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Item 3.
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52 | ||||
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Item 4.
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52 | ||||
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PART II. OTHER INFORMATION
|
|||||
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Item 1.
|
53 | ||||
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Item 1A.
|
53 | ||||
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Item 5.
|
66 | ||||
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Item 6.
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66 | ||||
| 67 | |||||
Consolidated Balance Sheets
(Dollars in thousands)
|
March 31,
2011
|
December 31,
2010
|
|||||||
|
Assets
|
(unaudited) | |||||||
|
Unrestricted cash and cash equivalents
|
$ | 106,521 | $ | 68,931 | ||||
|
Restricted cash and cash equivalents
|
40,276 | 36,023 | ||||||
|
Loans and fees receivable:
|
||||||||
|
Loans and fees receivable, net (of $5,372 and $4,591 in deferred revenue and $7,903 and $9,282 in allowances for uncollectible loans and fees receivable at March 31, 2011 and December 31, 2010, respectively)
|
42,804 | 50,805 | ||||||
|
Loans and fees receivable pledged as collateral under structured financings, net (of $13,453 and $15,912 in deferred revenue and $20,272 and $28,340 in allowances for uncollectible loans and fees receivable at March 31, 2011 and December 31, 2010, respectively)
|
99,047 | 118,801 | ||||||
|
Loans and fees receivable, at fair value
|
8,953 | 12,437 | ||||||
|
Loans and fees receivable pledged as collateral under structured financings, at fair value
|
415,078 | 373,155 | ||||||
|
Investments in previously charged-off receivables
|
22,882 | 29,889 | ||||||
|
Investments in securities
|
9,516 | 64,317 | ||||||
|
Deferred costs, net
|
2,937 | 3,151 | ||||||
|
Property at cost, net of depreciation
|
10,431 | 15,893 | ||||||
|
Investments in equity-method investees
|
56,287 | 8,279 | ||||||
|
Intangibles, net
|
2,312 | 2,378 | ||||||
|
Prepaid expenses and other assets
|
19,082 | 16,591 | ||||||
|
Assets held for sale
|
71,261 | 80,259 | ||||||
|
Total assets
|
$ | 907,387 | $ | 880,909 | ||||
|
Liabilities
|
||||||||
|
Accounts payable and accrued expenses
|
$ | 46,419 | $ | 50,861 | ||||
|
Notes payable associated with structured financings, at face value
|
80,910 | 96,905 | ||||||
|
Notes payable associated with structured financings, at fair value
|
399,256 | 370,544 | ||||||
|
Convertible senior notes (Note 9)
|
219,064 | 229,844 | ||||||
|
Deferred revenue
|
1,298 | 1,413 | ||||||
|
Income tax liability
|
60,787 | 60,411 | ||||||
|
Liabilities related to assets held for sale
|
8,727 | 9,114 | ||||||
|
Total liabilities
|
816,461 | 819,092 | ||||||
|
Commitments and contingencies (Note 10)
|
||||||||
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Equity
|
||||||||
|
Common stock, no par value, 150,000,000 shares authorized: 45,982,313 shares issued and 38,093,835 shares outstanding at March 31, 2011 (including 2,252,388 loaned shares to be returned); and 46,217,050 shares issued and 37,997,708 shares outstanding at December 31, 2010 (including 2,252,388 loaned shares to be returned)
|
— | — | ||||||
|
Additional paid-in capital
|
412,223 | 408,751 | ||||||
|
Treasury stock, at cost, 7,888,478 and 8,219,342 shares at March 31, 2011 and December 31, 2010, respectively
|
(194,355 | ) | (208,696 | ) | ||||
|
Accumulated other comprehensive loss
|
(3,748 | ) | (5,608 | ) | ||||
|
Retained deficit
|
(134,885 | ) | (151,609 | ) | ||||
|
Total shareholders’ equity (Note 2)
|
79,235 | 42,838 | ||||||
|
Noncontrolling interests (Note 2)
|
11,691 | 18,979 | ||||||
|
Total equity
|
90,926 | 61,817 | ||||||
|
Total liabilities and equity (Note 2)
|
$ | 907,387 | $ | 880,909 | ||||
See accompanying notes.
Consolidated Statements of Operations (Unaudited)
(Dollars in thousands, except per share data)
|
For the Three Months Ended March 31,
|
||||||||
|
2011
|
2010
|
|||||||
|
Interest income:
|
(unaudited)
|
|||||||
|
Consumer loans, including past due fees
|
$ | 42,624 | $ | 84,188 | ||||
|
Other
|
322 | 22 | ||||||
|
Total interest income
|
42,946 | 84,210 | ||||||
|
Interest expense
|
(11,951 | ) | (17,633 | ) | ||||
|
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable
|
30,995 | 66,577 | ||||||
|
Fees and related income on earning assets
|
76,408 | 107,921 | ||||||
|
Losses upon charge off of loans and fees receivable recorded at fair value
|
(52,848 | ) | (152,047 | ) | ||||
|
Provision for losses on loans and fees receivable recorded at net realizable value
|
(3,963 | ) | (16,349 | ) | ||||
|
Net interest income, fees and related income on earning assets
|
50,592 | 6,102 | ||||||
|
Other operating income (loss):
|
||||||||
|
Servicing income
|
966 | 2,019 | ||||||
|
Ancillary and interchange revenues
|
2,502 | 3,231 | ||||||
|
Gain on repurchase of convertible senior notes
|
268 | 13,896 | ||||||
|
Gain on buy-out of equity-method investee members
|
619 | — | ||||||
|
Equity in income (loss) of equity-method investees
|
18,304 | (280 | ) | |||||
|
Total other operating income
|
22,659 | 18,866 | ||||||
|
Other operating expense:
|
||||||||
|
Salaries and benefits
|
6,562 | 10,687 | ||||||
|
Card and loan servicing
|
27,011 | 39,128 | ||||||
|
Marketing and solicitation
|
1,061 | 1,499 | ||||||
|
Depreciation
|
2,219 | 3,167 | ||||||
|
Other
|
11,403 | 15,652 | ||||||
|
Total other operating expense
|
48,256 | 70,133 | ||||||
|
Income (loss) from continuing operations before income taxes
|
24,995 | (45,165 | ) | |||||
|
Income tax (expense) benefit
|
(274 | ) | 255 | |||||
|
Income (loss) from continuing operations
|
24,721 | (44,910 | ) | |||||
|
Discontinued operations:
|
||||||||
|
Income from discontinued operations before income taxes
|
7,344 | 5,094 | ||||||
|
Income tax expense
|
(2,312 | ) | (1,314 | ) | ||||
|
Income from discontinued operations
|
5,032 | 3,780 | ||||||
|
Net income (loss)
|
29,753 | (41,130 | ) | |||||
|
Net income attributable to noncontrolling interests (including $1,131 and $737 of income associated with noncontrolling interests in discontinued operations in 2011 and 2010, respectively)
|
(1,298 | ) | (1,651 | ) | ||||
|
Net income (loss) attributable to controlling interests
|
$ | 28,455 | $ | (42,781 | ) | |||
|
Income (loss) from continuing operations attributable to controlling interests per common share—basic
|
$ | 0.69 | $ | (0.95 | ) | |||
|
Income (loss) from continuing operations attributable to controlling interests per common share—diluted
|
$ | 0.68 | $ | (0.95 | ) | |||
|
Income from discontinued operations attributable to controlling interests per common share—basic
|
$ | 0.11 | $ | 0.06 | ||||
|
Income from discontinued operations attributable to controlling interests per common share—diluted
|
$ | 0.11 | $ | 0.06 | ||||
|
Net income (loss) attributable to controlling interests per common share—basic
|
$ | 0.80 | $ | (0.89 | ) | |||
|
Net income (loss) attributable to controlling interests per common share—diluted
|
$ | 0.79 | $ | (0.89 | ) | |||
See accompanying notes.
Consolidated Statement of Shareholders’ Equity
For the Three Months Ended March 31, 2011 (Unaudited)
(Dollars in thousands)
|
Common Stock
|
||||||||||||||||||||||||||||||||||||
|
Shares Issued
|
Amount
|
Additional Paid-In Capital
|
Treasury Stock
|
Accumulated Other Comprehensive Loss
|
Retained Deficit
|
Noncontrolling Interests
|
Comprehensive Income
|
Total Equity
|
||||||||||||||||||||||||||||
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Balance at December 31, 2010
|
46,217,050 | $ | — | $ | 408,751 | $ | (208,696 | ) | $ | (5,608 | ) | $ | (151,609 | ) | $ | 18,979 | $ | 61,817 | ||||||||||||||||||
|
Use of treasury stock for stock-based compensation plans
|
(270,414 | ) | — | (3,386 | ) | 15,117 | — | (11,731 | ) | — | — | |||||||||||||||||||||||||
|
Issuance of restricted stock
|
35,677 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||
|
Amortization of deferred stock-based compensation costs
|
— | — | 1,682 | — | — | — | — | 1,682 | ||||||||||||||||||||||||||||
|
Purchase of treasury stock
|
— | — | — | (776 | ) | — | — | — | (776 | ) | ||||||||||||||||||||||||||
|
Repurchase of noncontrolling interests
|
— | — | 5,209 | — | — | — | (9,186 | ) | (3,977 | ) | ||||||||||||||||||||||||||
|
Contributions by owners of noncontrolling interests
|
— | — | — | — | — | — | 600 | 600 | ||||||||||||||||||||||||||||
|
Net income
|
— | — | — | — | — | 28,455 | 1,298 | $ | 29,753 | 29,753 | ||||||||||||||||||||||||||
|
Foreign currency translation adjustment, net of tax
|
— | — | (33 | ) | — | 1,860 | — | — | 1,860 | 1,827 | ||||||||||||||||||||||||||
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Comprehensive income
|
— | — | — | — | — | — | — | $ | 31,613 | — | ||||||||||||||||||||||||||
|
Balance at March 31, 2011
|
45,982,313 | $ | — | $ | 412,223 | $ | (194,355 | ) | $ | (3,748 | ) | $ | (134,885 | ) | $ | 11,691 | $ | 90,926 | ||||||||||||||||||
See accompanying notes.
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(Dollars in thousands)
|
For the Three Months Ended March 31,
|
||||||||
|
2011
|
2010
|
|||||||
|
Net income (loss)
|
$ | 29,753 | $ | (41,130 | ) | |||
|
Other comprehensive income (loss):
|
||||||||
|
Foreign currency translation adjustment
|
1,905 | (2,348 | ) | |||||
|
Income tax (expense) benefit related to other comprehensive income
|
(45 | ) | 3 | |||||
|
Comprehensive income (loss)
|
31,613 | (43,475 | ) | |||||
|
Comprehensive income attributable to noncontrolling interests
|
(1,298 | ) | (1,651 | ) | ||||
|
Comprehensive income (loss) attributable to controlling interests
|
$ | 30,315 | $ | (45,126 | ) | |||
See accompanying notes.
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
|
For the Three Months Ended March 31,
|
||||||||
|
2011
|
2010
|
|||||||
|
Operating activities
|
||||||||
|
Net income (loss)
|
$ | 29,753 | $ | (41,130 | ) | |||
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
||||||||
|
Depreciation, amortization and accretion, net
|
2,768 | 3,496 | ||||||
|
Losses upon charge off of loans and fees receivable recorded at fair value
|
48,090 | 152,047 | ||||||
|
Provision for losses on loans and fees receivable
|
15,356 | 21,367 | ||||||
|
Accretion of discount on convertible senior notes
|
1,835 | 2,689 | ||||||
|
Stock-based compensation expense
|
1,682 | 3,442 | ||||||
|
Unrealized gain on loans and fees receivable and underlying notes payable held at fair value
|
(48,659 | ) | (73,506 | ) | ||||
|
Unrealized loss (gain) on trading securities
|
192 | (60 | ) | |||||
|
Gain on repurchase of convertible senior notes
|
(268 | ) | (13,896 | ) | ||||
|
Income (loss) on equity-method investments
|
(18,304 | ) | 280 | |||||
|
Gain on buy-out of equity-method investee members
|
(619 | ) | — | |||||
|
Changes in assets and liabilities, exclusive of business acquisitions:
|
||||||||
|
(Increase) decrease in uncollected fees on non-securitized earning assets
|
(2,985 | ) | 1,167 | |||||
|
Decrease in JRAS auto loans receivable
|
4,549 | 8,689 | ||||||
|
(Decrease) increase in tax liability
|
(2,206 | ) | 97,879 | |||||
|
Decrease in prepaid expenses
|
3 | 4,933 | ||||||
|
(Decrease) increase in accounts payable and accrued expenses
|
(623 | ) | 1,900 | |||||
|
Other
|
(2,209 | ) | 4,074 | |||||
|
Net cash provided by operating activities
|
28,355 | 173,371 | ||||||
|
Investing activities
|
||||||||
|
Increase in restricted cash
|
(2,765 | ) | (36,629 | ) | ||||
|
Investment in equity-method investees
|
(34,336 | ) | — | |||||
|
Proceeds from equity-method investees
|
4,002 | 1,870 | ||||||
|
Investments in earning assets
|
(235,863 | ) | (286,902 | ) | ||||
|
Proceeds from earning assets
|
370,044 | 303,346 | ||||||
|
Net cash associated with newly acquired consolidated subsidiaries
|
2,781 | — | ||||||
|
Purchases and development of property, net of disposals
|
(533 | ) | 307 | |||||
|
Net cash provided by (used in) investing activities
|
103,330 | (18,008 | ) | |||||
|
Financing activities
|
||||||||
|
Noncontrolling interests contributions (distributions), net
|
600 | (231 | ) | |||||
|
Purchase of treasury stock
|
(776 | ) | (391 | ) | ||||
|
Purchases of noncontrolling interests
|
(4,042 | ) | (7,535 | ) | ||||
|
Proceeds from borrowings
|
9,697 | 1,186 | ||||||
|
Repayment of borrowings
|
(109,820 | ) | (139,194 | ) | ||||
|
Net cash used in financing activities
|
(104,341 | ) | (146,165 | ) | ||||
|
Effect of exchange rate changes on cash
|
1,171 | (1,278 | ) | |||||
|
Net increase in unrestricted cash
|
28,515 | 7,920 | ||||||
|
Unrestricted cash and cash equivalents at beginning of period
|
85,350 | 185,019 | ||||||
|
Unrestricted cash and cash equivalents at end of period
|
$ | 113,865 | $ | 192,939 | ||||
|
Supplemental cash flow information
|
||||||||
|
Effect of adoption of accounting pronouncements on restricted cash
|
$ | — | $ | (14,082 | ) | |||
|
Unrestricted cash included in assets held for sale
|
$ | 7,344 | $ | — | ||||
|
Cash paid for interest
|
$ | 11,079 | $ | 15,512 | ||||
|
Net cash income tax payments (refunds)
|
$ | 4,832 | $ | (96,824 | ) | |||
|
Supplemental non-cash information
|
||||||||
|
Notes payable associated with capital leases
|
$ | — | $ | 856 | ||||
|
Issuance of stock options and restricted stock
|
$ | 303 | $ | 1,127 | ||||
See accompanying notes.
Notes to Consolidated Financial Statements
March 31, 2011
|
1.
|
Basis of Presentation
|
We have prepared our 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 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 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 consolidated balance sheets; these 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 consolidated statements of operations. 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 consolidated balance sheets, as well as on the provision for losses on loans and fees receivable within our consolidated statements of operations. Operating results for the three months ended March 31, 2011 are not indicative of what our results will be for the year ending December 31, 2011.
We have reclassified certain amounts in our prior period consolidated financial statements to conform to current period presentation, and we have eliminated all significant intercompany balances and transactions for financial reporting purposes.
In accordance with applicable accounting literature, we have classified the net assets and liabilities of our Month End Money (“MEM”) business operations as held for sale in our consolidated balance sheets and as discontinued operations within our consolidated statements of operations. On April 1, 2011, we completed the planned sale of these operations to Dollar Financial Corp for $195.0 million. We received net pre-tax proceeds of $170.7 million after the purchase of minority shares and other transaction-related expenditures, and inclusive of MEM’s excess working capital that was returned to us prior to completion of the transaction under the terms of the sales contract.
In connection with our consideration of a potential spin-off of our United States (“U.S.”) and United Kingdom (“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 November 30, 2010. On April 13, 2011, we formally requested the withdrawal of this registration statement due to the completion of our MEM sale.
|
2.
|
Significant Accounting Policies and Consolidated Financial Statement Components
|
The following is a summary of significant accounting policies we follow in preparing our consolidated financial statements, as well as a description of significant components of our consolidated financial statements.
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 U.S. retail and Internet micro-loan activities, credit card accounts opened under our Investment in Previously Charged-off Receivables segment’s balance transfer program, and our current and former auto finance businesses (the receivables of our auto finance businesses being separately categorized as pledged as collateral for non-recourse asset-backed structured financing facilities). Our balance transfer program receivables are included as a component of our Credit Card segment data and aggregated $14.1 million (net of allowances for uncollectible loans and fees receivable and deferred revenue) or 2.5% of our
consolidated loans and fees receivable (net or at fair value) as of March 31, 2011. Our loans and fees receivable generally are unsecured; however, our auto finance loans are secured by the underlying automobiles in which we hold the vehicle title.
The components of our aggregated categories of loans and fees receivable, net (in millions) for reporting periods relevant to this Report are as follows:
|
Balance at
December 31,
2010
|
Additions
|
Subtractions
|
Balance at
March 31,
2011
|
|||||||||||||
|
Loans and fees receivable, gross
|
$ | 227.7 | $ | 143.4 | $ | (182.2 | ) | $ | 188.9 | |||||||
|
Deferred revenue
|
(20.5 | ) | (16.7 | ) | 18.4 | (18.8 | ) | |||||||||
|
Allowance for uncollectible loans and fees receivable
|
(37.6 | ) | (4.0 | ) | 13.4 | (28.2 | ) | |||||||||
|
Loans and fees receivable, net
|
$ | 169.6 | $ | 122.7 | $ | (150.4 | ) | $ | 141.9 | |||||||
|
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, 2011 and 2010, the weighted average remaining accretion periods for the $18.8 million and $35.5 million, respectively, of deferred revenue reflected in the above tables were 13.5 and 24.0 months, respectively.
A roll-forward of our allowance for uncollectible loans and fees receivable, net (in millions) is as follows:
|
For the Three Months Ended March 31, 2011
|
Credit Cards
|
Micro-Loans
|
Auto Finance
|
Other
|
Total
|
|||||||||||||||
|
Allowance for uncollectible loans and fees receivable:
|
||||||||||||||||||||
|
Balance at beginning of period
|
$ | (4.0 | ) | $ | (5.2 | ) | $ | (28.3 | ) | $ | (0.1 | ) | $ | (37.6 | ) | |||||
|
Provision for loan losses
|
(0.3 | ) | (3.5 | ) | (0.1 | ) | (0.1 | ) | (4.0 | ) | ||||||||||
|
Charge offs
|
1.6 | 4.2 | 9.0 | — | 14.8 | |||||||||||||||
|
Recoveries
|
(0.3 | ) | (0.2 | ) | (1.6 | ) | — | (2.1 | ) | |||||||||||
|
Sale of assets
|
— | — | 0.7 | — | 0.7 | |||||||||||||||
|
Balance at end of period
|
$ | (3.0 | ) | $ | (4.7 | ) | $ | (20.3 | ) | $ | (0.2 | ) | $ | (28.2 | ) | |||||
|
Balance at end of period individually evaluated for impairment
|
$ | — | $ | — | $ | (0.4 | ) | $ | — | $ | (0.4 | ) | ||||||||
|
Balance at end of period collectively evaluated for impairment
|
$ | (3.0 | ) | $ | (4.7 | ) | $ | (19.9 | ) | $ | (0.2 | ) | $ | (27.8 | ) | |||||
|
Loans and fees receivable:
|
||||||||||||||||||||
|
Loans and fees receivable, gross
|
$ | 17.2 | $ | 38.1 | $ | 132.8 | $ | 0.8 | $ | 188.9 | ||||||||||
|
Loans and fees receivable individually evaluated for impairment
|
$ | — | $ | — | $ | 1.1 | $ | — | $ | 1.1 | ||||||||||
|
Loans and fees receivable collectively evaluated for impairment
|
$ | 17.2 | $ | 38.1 | $ | 131.7 | $ | 0.8 | $ | 187.8 | ||||||||||
|
For the Three Months Ended March 31, 2010
|
Credit Cards
|
Micro-Loans
|
Auto Finance
|
Other
|
Total
|
|||||||||||||||
|
Allowance for uncollectible loans and fees receivable:
|
||||||||||||||||||||
|
Balance at beginning of period
|
$ | (5.0 | ) | $ | (10.0 | ) | $ | (38.4 | ) | $ | — | $ | (53.4 | ) | ||||||
|
Provision for loan losses
|
(1.0 | ) | (7.4 | ) | (11.6 | ) | — | (20.0 | ) | |||||||||||
|
Charge offs
|
1.9 | 8.2 | 15.1 | — | 25.2 | |||||||||||||||
|
Recoveries
|
(0.5 | ) | (0.3 | ) | (1.8 | ) | — | (2.6 | ) | |||||||||||
|
Balance at end of period
|
$ | (4.6 | ) | $ | (9.5 | ) | $ | (36.7 | ) | $ | — | $ | (50.8 | ) | ||||||
|
Balance at end of period individually evaluated for impairment
|
$ | — | $ | — | $ | (2.0 | ) | $ | — | $ | (2.0 | ) | ||||||||
|
Balance at end of period collectively evaluated for impairment
|
$ | (4.6 | ) | $ | (9.5 | ) | $ | (34.7 | ) | $ | — | $ | (48.8 | ) | ||||||
|
Loans and fees receivable:
|
||||||||||||||||||||
|
Loans and fees receivable, gross
|
$ | 17.8 | $ | 66.7 | $ | 251.5 | $ | — | $ | 336.0 | ||||||||||
|
Loans and fees receivable individually evaluated for impairment
|
$ | — | $ | — | $ | 12.9 | $ | — | $ | 12.9 | ||||||||||
|
Loans and fees receivable collectively evaluated for impairment
|
$ | 17.8 | $ | 66.7 | $ | 238.6 | $ | — | $ | 323.1 | ||||||||||
The components (in millions) of loans and fees receivable, net as of the date of each of our consolidated balance sheets are as follows:
|
For the Period Ended
|
||||||||
|
March 31, 2011
|
December 31, 2010
|
|||||||
|
Current loans receivable
|
$ | 160.3 | $ | 189.9 | ||||
|
Current fees receivable
|
7.6 | 7.7 | ||||||
|
Delinquent loans and fees receivable
|
21.0 | 30.1 | ||||||
|
Loans and fees receivable, gross
|
$ | 188.9 | $ | 227.7 | ||||
Delinquent loans and fees receivable reflect the principal, fee and interest components of loans that we did not collect on the contractual due date. Amounts we believe we will not ultimately collect are included as a component in our overall allowance for uncollectible loans and fees receivable and typically are charged off 90 days from the point they become delinquent for our micro-loan receivables, 180 days from the point they become delinquent for our auto finance and credit card receivables, or sooner if facts and circumstances earlier indicate non-collectability. Recoveries on accounts previously charged off effectively offset our provision for loan losses in our accompanying consolidated statements of operations.
An aging of our delinquent loans and fees receivable, gross (in millions) as of March 31, 2011 and December 31, 2010 is as follows:
|
As of March 31, 2011
|
Credit Cards
|
Micro-Loans
|
Auto Finance
|
Other
|
Total
|
|||||||||||||||
|
0-30 days past due
|
$ | 0.4 | $ | 3.6 | $ | 6.4 | $ | — | $ | 10.4 | ||||||||||
|
31-60 days past due
|
0.4 | 2.6 | 2.7 | — | 5.7 | |||||||||||||||
|
61-90 days past due
|
1.4 | 1.6 | 1.9 | — | 4.9 | |||||||||||||||
|
Delinquent loans and fees receivable, gross
|
$ | 2.2 | $ | 7.8 | $ | 11.0 | $ | — | $ | 21.0 | ||||||||||
|
Current loans and fees receivable, gross
|
15.0 | 30.3 | 121.8 | 0.8 | 167.9 | |||||||||||||||
|
Total loans and fees receivable, gross
|
$ | 17.2 | $ | 38.1 | $ | 132.8 | $ | 0.8 | $ | 188.9 | ||||||||||
|
Balance of loans greater than 90-days delinquent still accruing interest and fees
|
$ | — | $ | — | $ | 1.3 | $ | — | $ | 1.3 | ||||||||||
|
As of December 31, 2010
|
Credit Cards
|
Micro-Loans
|
Auto Finance
|
Other
|
Total
|
|||||||||||||||
|
0-30 days past due
|
$ | 0.8 | $ | 3.6 | $ | 11.6 | $ | — | $ | 16.0 | ||||||||||
|
31-60 days past due
|
0.7 | 2.2 | 4.3 | — | 7.2 | |||||||||||||||
|
61-90 days past due
|
1.8 | 1.4 | 3.7 | — | 6.9 | |||||||||||||||
|
Delinquent loans and fees receivable, gross
|
$ | 3.3 | $ | 7.2 | $ | 19.6 | $ | — | $ | 30.1 | ||||||||||
|
Current loans and fees receivable, gross
|
15.4 | 38.4 | 143.5 | 0.3 | 197.6 | |||||||||||||||
|
Total loans and fees receivable, gross
|
$ | 18.7 | $ | 45.6 | $ | 163.1 | $ | 0.3 | $ | 227.7 | ||||||||||
|
Balance of loans greater than 90-days delinquent still accruing interest and fees
|
$ | — | $ | — | $ | 2.7 | $ | — | $ | 2.7 | ||||||||||
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 March 31,
|
||||||||
|
2011
|
2010
|
|||||||
|
Unrecovered balance at beginning of period
|
$ | 29,889 | $ | 29,669 | ||||
|
Acquisitions of defaulted accounts
|
3,024 | 3,597 | ||||||
|
Cash collections
|
(20,628 | ) | (14,581 | ) | ||||
|
Cost-recovery method income recognized on defaulted accounts (included as a component of fees and related income on non-securitized earning assets on our consolidated statements of operations)
|
10,597 | 7,300 | ||||||
|
Unrecovered balance at end of period
|
$ | 22,882 | $ | 25,985 | ||||
Previously charged-off receivables held as of March 31, 2011 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 March 31, 2011, $7.1 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. Although we eliminate all intercompany profits associated with these purchases, we do not eliminate the corresponding purchases from our consolidated balance sheet categories so as to better reflect the ongoing business operations of each of our reportable segments and because the amounts represent just 0.8% of our consolidated total assets.
We estimate the life of each pool of previously charged-off receivables acquired by us generally to be between 60 months for normal delinquency charged-off accounts and approximately 84 months for Chapter 13 Bankruptcies. Our estimated remaining collections on the $22.9 million unrecovered balance of our investments in previously charged-off receivables as of March 31, 2011 amount to $127.5 million, of which we expect to collect 43.5% over the next 12 months, with the balance to be collected thereafter.
Investments in Securities
The carrying values (in thousands) of our investments in debt and equity securities are as follows:
|
As of
|
||||||||
|
March 31, 2011
|
December 31, 2010
|
|||||||
|
Held to maturity:
|
||||||||
|
Investments in non-marketable debt securities
|
$ | 2,482 | $ | 2,414 | ||||
|
Available for sale:
|
||||||||
|
Investments in non-marketable debt securities
|
4,942 | 4,087 | ||||||
|
Investments in non-marketable equity securities
|
1,500 | 1,500 | ||||||
|
Trading:
|
||||||||
|
Investments in marketable debt securities
|
250 | 55,770 | ||||||
|
Investments in marketable equity securities
|
342 | 546 | ||||||
|
Total investments in securities
|
$ | 9,516 | $ | 64,317 | ||||
Investments in Equity-Method Investees
We account for investments using the equity method of accounting if we have the ability to exercise significant influence, but not control, over the investees. Significant influence is generally deemed to exist if we have an ownership interest in the voting stock of an incorporated investee of between 20% and 50%, although other factors, such as representation on an investee’s board of managers, specific voting and veto rights held by each investor and the effects of commercial arrangements, are considered in determining whether equity method accounting is appropriate. We use the equity method for our investment in a 33.3%-owned limited liability company made during the fourth quarter of 2004. We also use the equity method to account for our March 2011 investment to acquire a 50.0% interest in a joint venture that purchased all of the outstanding notes issued out of our structured financing trust underlying our U.K. portfolio of credit card receivables (the “U.K. Portfolio”). We record our respective interests in the income or losses of our equity-method investees within the equity in loss of equity-method investees category on our consolidated statements of operations. The carrying amount of our equity-method investments is recorded on our consolidated balance sheets as investments in equity-method investees.
In January 2011, we acquired an additional 47.5% interest in a 47.5% equity-method investee which we had historically accounted for under the equity method of accounting, thereby bringing our aggregate interest in this entity to a 95.0% ownership threshold and leading us to conclude that the assets and liabilities of this entity should now be consolidated within our consolidated balance sheets.
Income Taxes
Our overall effective tax rates (computed considering results for only continuing operations before income taxes) were 1.1% (expense) and 0.6% (benefit) in the three months ended March 31, 2011 and 2010, respectively. We have experienced no material changes in effective tax rates associated with differences in filing jurisdictions, and the variations in our effective tax rates between the periods principally bear the effects of decreased valuation allowances against income statement-oriented federal, foreign and state deferred tax assets. Computed without regard to the effects of the valuation allowance changes, it is more likely than not that our effective tax rates would have been 38.3% and 33.9% in the three months ended March 31, 2011 and 2010, respectively.
We recognize potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. We recognized $0.5 million and $0.6 million in potential interest and penalties associated with uncertain tax positions during the three months ended March 31, 2011 and 2010, 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 reduction in either of the three months ended March 31, 2011 and 2010.
Fees and Related Income on Earning Assets
The components (in thousands) of our fees and related income on earning assets are as follows:
|
For the Three Months Ended March 31,
|
||||||||
|
2011
|
2010
|
|||||||
|
Retail micro-loan fees
|
$ | 17,186 | $ | 18,187 | ||||
|
Internet micro-loan fees
|
552 | 269 | ||||||
|
Fees on credit card receivables held on balance sheet
|
3,208 | 9,590 | ||||||
|
Changes in fair value of loans and fees receivable recorded at fair value (1)
|
130,003 | 40,910 | ||||||
|
Changes in fair value of notes payable associated with structured financings recorded at fair value
|
(81,344 | ) | 32,596 | |||||
|
Income on investments in previously charged-off receivables
|
10,597 | 7,300 | ||||||
|
Gross loss on auto sales
|
(125 | ) | (1,522 | ) | ||||
|
Gains on investments in securities
|
132 | 60 | ||||||
|
Loss on sale of JRAS assets
|
(4,648 | ) | — | |||||
|
Other
|
847 | 531 | ||||||
|
Total fees and related income on earning assets
|
$ | 76,408 | $ | 107,921 | ||||
|
|
(1)
|
The above changes in fair value of loans and fees receivable recorded at fair value category excludes the impact of charge offs associated with these receivables which are separately stated on our consolidated statements of operations. See Note 9, “Fair values of Assets and Liabilities,” for further discussion of these receivables and their effects on our consolidated statements of operations.
|
Subsequent Events
We evaluate subsequent events that have occurred after our consolidated balance sheet date but before our 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 date of the balance sheet, 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 date of the balance sheet 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 consolidated financial statements.
On December 31, 2010, we entered into an agreement to sell our subsidiary with a controlling interest in MEM. The transaction closed in April 2011.
Pursuant to the closing of a tender offer in April 2011, we repurchased 13,125,000 shares of our common stock at a purchase price of $8.00 per share for an aggregate cost of $105.0 million. These shares were subsequently retired.
|
3.
|
Discontinued Operations
|
On December 31, 2010, we entered into an agreement to sell our subsidiary with a controlling interest in MEM. The transaction closed in April 2011. In accordance with applicable accounting literature, we have classified MEM’s net assets as held for sale on our consolidated balance sheets and have reflected its operating results as discontinued operations for all periods presented.
The following tables reflect (in thousands) the components of our discontinued operations:
|
For the Three Months Ended March 31,
|
||||||||
|
2011
|
2010
|
|||||||
|
Net interest income, fees and related income on non-securitized earning assets
|
$ | 20,793 | $ | 13,959 | ||||
|
Other operating expense
|
13,449 | 8,865 | ||||||
|
Income before income taxes
|
7,344 | 5,094 | ||||||
|
Income tax expense
|
(2,312 | ) | (1,314 | ) | ||||
|
Net income
|
$ | 5,032 | $ | 3,780 | ||||
|
Net income attributable to noncontrolling interests
|
$ | 1,131 | $ | 737 | ||||
The table below presents the components (in thousands) of our consolidated balance sheet accounts classified as assets held for sale and liabilities related to assets held for sale:
| As of | ||||||||
|
March 31, 2011
|
December 31, 2010
|
|||||||
|
Assets held for sale:
|
||||||||
|
Unrestricted cash and cash equivalents
|
$ | 7,344 | $ | 16,419 | ||||
|
Loans and fees receivable, net (of $5,272 and $5,218 in deferred revenue and $8,776 and $8,465 of allowances for uncollectible loans and fees receivable as of March 31, 2011 and December 31, 2010, respectively)
|
33,253 | 32,786 | ||||||
|
Property at cost, net of depreciation
|
6,062 | 6,506 | ||||||
|
Prepaid expenses and other assets
|
756 | 1,537 | ||||||
|
Goodwill
|
23,846 | 23,011 | ||||||
|
Total assets held for sale
|
$ | 71,261 | $ | 80,259 | ||||
|
Liabilities related to assets held for sale:
|
||||||||
|
Accounts payable and accrued expenses
|
$ | 5,293 | $ | 2,348 | ||||
|
Income tax liability
|
3,434 | 6,766 | ||||||
|
Total liabilities related to assets held for sale
|
$ | 8,727 | $ | 9,114 | ||||
|
4.
|
Segment Reporting
|
We operate primarily within one industry consisting of five reportable segments by which we manage our business. Our five reportable segments are: Credit Cards; Investments in Previously Charged-Off Receivables; Retail Micro-Loans; Auto Finance; and Internet Micro-Loans. 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. Similarly, in February 2011, we purchased substantially all of the noncontrolling interests in our Credit Cards segment majority-owned subsidiaries for $4.1 million.
Summary operating segment information (in thousands) is as follows:
|
Three Months Ended March 31, 2011
|
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
|
$ | 22,893 | $ | 10,515 | $ | 14,063 | $ | 2,888 | $ | 233 | $ | 50,592 | ||||||||||||
|
Total other operating income
|
$ | 21,824 | $ | 706 | $ | — | $ | 129 | $ | — | $ | 22,659 | ||||||||||||
|
Income (loss) from continuing operations before income taxes
|
$ | 24,533 | $ | 3,399 | $ | 1,533 | $ | (3,566 | ) | $ | (904 | ) | $ | 24,995 | ||||||||||
|
Income on discontinued operations before income taxes
|
$ | — | $ | — | $ | — | $ | — | $ | 7,344 | $ | 7,344 | ||||||||||||
|
Loans and fees receivable, gross
|
$ | 17,998 | $ | — | $ | 36,887 | $ | 132,772 | $ | 1,194 | $ | 188,851 | ||||||||||||
|
Loans and fees receivable, net
|
$ | 14,708 | $ | — | $ | 27,379 | $ | 99,047 | $ | 717 | $ | 141,851 | ||||||||||||
|
Loans and fees receivable held at fair value
|
$ | 424,031 | $ | — | $ | — | $ | — | $ | — | $ | 424,031 | ||||||||||||
|
Total assets
|
$ | 664,489 | $ | 37,493 | $ | 42,109 | $ | 87,607 | $ | 75,689 | $ | 907,387 | ||||||||||||
|
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 | ) | $ | 172 | $ | 6,102 | ||||||||||
|
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 | ) | $ | (134 | ) | $ | (45,165 | ) | ||||||||
|
Income on discontinued operations before income taxes
|
$ | — | $ | — | $ | — | $ | — | $ | 5,094 | $ | 5,094 | ||||||||||||
|
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 | ||||||||||||
|
5.
|
Shareholders' Equity
|
Retired Shares
Pursuant to the closing of a tender offer in April 2011, we repurchased 13,125,000 shares of our common stock at a purchase price of $8.00 per share for an aggregate cost of $105.0 million. These shares were subsequently retired.
We exclude all retired shares from our outstanding share counts. Also, 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 and restricted stock units vesting, and we use the cost approach when accounting for the repurchase and reissuance of our treasury stock. We reissued treasury shares totaling 452,567 during the three months ended March 31, 2011 and 383,476 during the three months ended March 31, 2010 at gross costs of $15.1 million and $6.3 million, respectively, in satisfaction of option exercises and vested restricted stock. We also effectively purchased shares totaling 121,703 during the three months ended March 31, 2011 and 89,287 during the three months ended March 31, 2010 at gross costs of $0.8 million and $0.4 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 minimum tax withholdings.
|
6.
|
Investments in Equity-Method Investees
|
Our equity-method investments outstanding at March 31, 2011 consist of our fourth quarter 2004 purchase of a 33.3% interest in a joint venture (“Transistor”) and our March 2011 investment in a 50.0%-owned joint venture that purchased the outstanding notes issued out of our U.K. Portfolio structured financing trust. The 50%-owned joint venture elected under the fair value option to account for its investment in the U.K. Portfolio structured financing notes at their fair value, and it recognized a $34.2 million gain (of which our 50% share represented $17.1 million) equal to the excess of the fair value of the notes at March 31, 2011 over the joint venture’s discounted purchase price of the notes.
In January 2011, we acquired an additional 47.5% interest in a 47.5% equity-method investee which we had historically accounted for under the equity method of accounting, thereby bringing our aggregate interest in this entity to a 95.0% ownership threshold, thereby leading us to conclude that we should consolidate the assets and liabilities of this entity within our consolidated balance sheets.
In the following tables, we summarize (in thousands) combined balance sheet and results of operations data for our equity-method investees (including 2010 results of operations data for the above-mentioned 47.5% interest while we held it in equity-method investee form prior to our January 2011 purchase of a controlling interest):
|
As of
|
||||||||
|
March 31,
2011
|
December 31,
2010
|
|||||||
|
Loans and fees receivable pledged as collateral under structured financings, at fair value
|
$ | 103,924 | $ | 130,171 | ||||
|
Investments in non-marketable debt securities, at fair value
|
$ | 93,302 | $ | — | ||||
|
Total assets
|
$ | 211,605 | $ | 143,110 | ||||
|
Notes payable associated with structured financings, at fair value
|
$ | 92,264 | $ | 118,057 | ||||
|
Total liabilities
|
$ | 92,911 | $ | 118,941 | ||||
|
Members’ capital
|
$ | 118,694 | $ | 24,169 | ||||
|
For the Three Months Ended March 31,
|
||||||||
|
2011
|
2010
|
|||||||
|
Net interest income, fees and related income on earning assets
|
$ | 37,675 | $ | 390 | ||||
|
Fees and related loss on securitized earning assets
|
$ | — | $ | — | ||||
|
Total other operating income
|
$ | 87 | $ | 1,419 | ||||
|
Net income (loss)
|
$ | 36,272 | $ | (2,447 | ) | |||
Included in the above tables is our aforementioned March 2011 investment in a 50.0%-owned joint venture that purchased the outstanding notes issued out of our U.K. Portfolio structured financing trust. Separate financial data for this entity are as follows:
|
As of
March 31, 2011
|
||||
|
Investments in non-marketable debt securities, at fair value
|
$ | 93,302 | ||
|
Total assets
|
$ | 98,069 | ||
|
Total liabilities
|
$ | 105 | ||
|
Members’ capital
|
$ | 97,964 | ||
|
For the Three Months Ended
March 31, 2011
|
||||
|
Net interest income, fees and related income on earning assets
|
$ | 34,409 | ||
|
Net income
|
$ | 34,303 | ||
|
7.
|
Goodwill and Intangible Assets
|
Goodwill
As of both March 31, 2011 and December 31, 2010, we showed no goodwill balances on our consolidated balance sheets. Goodwill amounts attributable to our MEM discontinued operations are included within assets held for sale on our consolidated balance sheets, and as noted previously, we completed our sale of MEM’s discontinued operations on April 1, 2011.
Intangible Assets
We had $2.1 million of remaining intangible assets that we determined had an indefinite benefit period as of both March 31, 2011 and December 31, 2010. The net unamortized carrying amount of intangible assets subject to amortization was $0.2 million and $0.3 million as of March 31, 2011 and December 31, 2010, respectively. Intangible asset-related amortization expense was $0.1 million for both the three months ended March 31, 2011 and 2010.
|
8.
|
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 and secured by our formerly securitized credit card receivables at fair value effective as of January 1, 2010.
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, 2011 and December 31, 2010 by fair value hierarchy:
|
Assets – As of March 31, 2011
|
Quoted Prices in Active Markets for Identical
Assets (Level 1)
|
Significant Other
Observable Inputs
(Level 2)
|
Significant
Unobservable
Inputs (Level 3)
|
Total Assets
Measured at Fair
Value
|
||||||||||||
|
Investment securities—trading
|
$ | 592 | $ | — | $ | — | $ | 592 | ||||||||
|
Loans and fees receivable, at fair value
|
$ | — | $ | — | $ | 8,953 | $ | 8,953 | ||||||||
|
Loans and fees receivable pledged as collateral under structured financings, at fair value
|
$ | — | $ | — | $ | 415,078 | $ | 415,078 | ||||||||
|
Assets – As of December 31, 2010
|
Quoted Prices in Active Markets for Identical
Assets (Level 1)
|
Significant Other
Observable Inputs
(Level 2)
|
Significant
Unobservable
Inputs (Level 3)
|
Total Assets
Measured at Fair
Value
|
||||||||||||
|
Investment securities—trading
|
$ | 56,316 | $ | — | $ | — | $ | 56,316 | ||||||||
|
Loans and fees receivable, at fair value
|
$ | — | $ | — | $ | 12,437 | $ | 12,437 | ||||||||
|
Securitized earning assets
|
$ | — | $ | — | $ | 373,155 | $ | 373,155 | ||||||||
Gains and losses associated with fair value changes for the above asset classes are detailed on our fees and related income on earning assets table within Note 2, “Significant Accounting Policies and Consolidated Financial Statement Components.” For our Level 1 assets in the above table, total realized net gains were $0.4 million and $0.0 million for the three months ended March 31, 2011 and 2010, respectively, all of which are included as a component of fees and related income on earning assets on our consolidated statements of operations. For our loans and fees receivable included in the above table, which represent liquidating portfolios closed to any possible re-pricing, we assess the fair value of these assets based on our estimate of future cash flows net of servicing costs, and to the extent that such cash flow estimates change from period to period, any such changes are considered to be attributable to changes in instrument-specific credit risk.
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-month periods ended March 31, 2011 and 2010:
|
Loans and Fees Receivable, at Fair Value
|
Loans and Fees Receivable Pledged as Collateral under Structured Financings, at Fair Value
|
Securitized Earning Assets
|
Total
|
|||||||||||||
|
Balance at December 31, 2009
|
$ | 42,299 | $ | — | $ | 36,514 | $ | 78,813 | ||||||||
|
Transfers in due to adoption of new accounting guidance
|
— | 836,346 | (36,514 | ) | 799,832 | |||||||||||
|
Total gains—realized/unrealized:
|
||||||||||||||||
|
Net revaluations of 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
|
— | — | — | — | ||||||||||||
|
Balance at March 31, 2010
|
$ | 24,702 | $ | 657,215 | $ | — | $ | 681,917 | ||||||||
|
Balance at December 31, 2010
|
$ | 12,437 | $ | 373,155 | $ | — | $ | 385,592 | ||||||||
|
Transfers in due to consolidation of equity-method investees
|
— | 14,587 | — | 14,587 | ||||||||||||
|
Total gains—realized/unrealized:
|
||||||||||||||||
|
Net revaluations of loans and fees receivable pledged as collateral under structured financings, at fair value
|
— | 126,586 | — | 126,586 | ||||||||||||
|
Net revaluations of loans and fees receivable, at fair value
|
3,417 | — | — | 3,417 | ||||||||||||
|
Purchases, issuances, and settlements, net
|
(6,901 | ) | (102,601 | ) | — | (109,502 | ) | |||||||||
|
Impact of foreign currency translation
|
— | 3,351 | — | 3,351 | ||||||||||||
|
Net transfers in and/or out of Level 3
|
— | — | — | — | ||||||||||||
|
Balance at March 31, 2011
|
$ | 8,953 | $ | 415,078 | $ | — | $ | 424,031 | ||||||||
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 and liabilities.
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 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 March 31, 2011 and December 31, 2010 by fair value hierarchy:
|
Liabilities
|
Quoted Prices in Active Markets for Identical
Assets (Level 1)
|
Significant Other
Observable Inputs
(Level 2)
|
Significant
Unobservable
Inputs (Level 3)
|
Total Liabilities
Measured at Fair
Value
|
||||||||||||
|
Notes payable associated with structured financings, at fair value as of March 31, 2011
|
$ | — | $ | — | $ | 399,256 | $ | 399,256 | ||||||||
|
Notes payable associated with structured financings, at fair value as of December 31, 2010
|
$ | — | $ | — | $ | 370,544 | $ | 370,544 | ||||||||
Gains and losses associated with fair value changes for the above liability class are detailed on our fees and related income on earning assets table within Note 2, “Significant Accounting Policies and Consolidated Financial Statement Components.” For our liabilities included in the above table, which represent notes payable associated with our structured financings of liquidating portfolios of credit card receivables, we assess the fair value of these liabilities based on our estimate of future cash flows generated from their underlying credit card receivables collateral, net of servicing compensation required under the note facilities, and to the extent that such cash flow estimates change from period to period, any such changes are considered to be attributable to changes in instrument-specific credit risk.
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-month periods ended March 31, 2011 and 2010:
|
Notes Payable Associated with Structured Financings, at Fair Value
|
||||||||
|
2011
|
2010
|
|||||||
|
Beginning balance January 1
|
$ | 370,544 | $ | — | ||||
|
Transfers in due to adoption of new accounting guidance
|
— | 772,615 | ||||||
|
Transfers in due to consolidation of equity-method investees
|
15,537 | — | ||||||
|
Total (gains) losses—realized/unrealized:
|
||||||||
|
Net revaluations of notes payable associated with structured financings, at fair value
|
81,344 | (32,596 | ) | |||||
|
Repayments on outstanding notes payable, net
|
(71,689 | ) | (89,167 | ) | ||||
|
Impact of foreign currency translation
|
3,520 | (182 | ) | |||||
|
Net transfers in and/or out of Level 3
|
— | — | ||||||
|
Ending balance, March 31
|
$ | 399,256 | $ | 650,670 | ||||
Net Revaluation of Notes Payable Associated with Structured Financings, at Fair Value. We record the net revaluations 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 as part of required annual impairment valuations or earlier impairment valuations if one or more of these assets is determined to be impaired.
We were required to make such a determination of the fair value of goodwill and intangible assets associated with our Retail Micro-Loans segment in the fourth quarter of 2010 as part of our annual impairment testing, and based on that testing, we wrote off the remaining balance of goodwill associated with that segment in the fourth quarter of 2010. Considering this goodwill write off coupled with our April 1, 2011 subsequent event under which we completed the sale of our MEM operations, we no longer have any goodwill represented within our consolidated balance sheets. (We note that we had no separately stated goodwill balance on our March 31, 2011 and December 31, 2010 consolidated balance sheets given that goodwill associated with our MEM operations was classified within assets held for sale on those consolidated balance sheets.)
With the above-discussed goodwill asset write offs and disposals, intangibles represent the only other assets that we have that are measured on a non-recurring basis at fair value. The table below summarizes (in thousands) intangibles fair values as of March 31, 2011 and December 31, 2010 by fair value hierarchy:
|
Quoted Prices in Active Markets for Identical
Assets (Level 1)
|
Significant Other
Observable Inputs
(Level 2)
|
Significant
Unobservable
Inputs (Level 3)
|
Total Assets
Measured at Fair
Value
|
|||||||||||||
|
Assets – As of March 31, 2011
|
||||||||||||||||
|
Intangibles
|
$ | — | $ | — | $ | 2,113 | $ | 2,113 | ||||||||
|
Quoted Prices in Active Markets for Identical
Assets (Level 1)
|
Significant Other
Observable Inputs
(Level 2)
|
Significant
Unobservable
Inputs (Level 3)
|
Total Assets
Measured at Fair
Value
|
|||||||||||||
|
Assets – As of December 31, 2010
|
||||||||||||||||
|
Intangibles
|
$ | — | $ | — | $ | 2,113 | $ | 2,113 | ||||||||
Other Relevant Data
Other relevant data (in thousands) as of March 31, 2011 and December 31, 2010 concerning our assets and liabilities measured at fair value are as follows:
|
As of March 31, 2011
|
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
|
$ | 16,152 | $ | 578,035 | ||||
|
Aggregate fair value of loans and fees receivable that are reported at fair value
|
$ | 8,953 | $ | 415,078 | ||||
|
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)
|
$ | 88 | $ | 1,707 | ||||
|
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
|
$ | 2,495 | $ | 40,886 | ||||
|
As of December 31, 2010
|
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
|
$ | 21,925 | $ | 647,924 | ||||
|
Aggregate fair value of loans and fees receivable that are reported at fair value
|
$ | 12,437 | $ | 373,155 | ||||
|
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)
|
$ | 137 | $ | 2,792 | ||||
|
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
|
$ | 4,842 | $ | 57,076 | ||||
|
Notes Payable
|
Notes Payable Associated with Structured Financings, at Fair Value as of
March 31, 2011
|
Notes Payable Associated with Structured Financings, at Fair Value as of
December 31, 2011
|
||||||
|
Aggregate unpaid principal balance of notes payable
|
$ | 599,768 | $ | 648,210 | ||||
|
Aggregate fair value of notes payable
|
$ | 399,256 | $ | 370,544 | ||||
|
9.
|
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 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 consolidated balance sheets.
We are amortizing the discount to the face amount of the notes into interest expense over the expected life of the notes, and this will result in a corresponding release of associated deferred tax liability. Total amortization for the three months ended March 31, 2011 and 2010 totaled $1.8 million and $2.7 million, respectively. Actual incurred interest (based on the contractual interest rates within the two convertible senior notes series) totaled $3.3 million and $4.3 million for the three months ended March 31, 2011 and 2010, respectively. We will amortize the discount remaining at March 31, 2011 into 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 consolidated balance sheets associated with our convertible senior notes:
|
As of March 31, 2011
|
As of December 31, 2010
|
|||||||
|
Face amount of 3.625% convertible senior notes due 2025
|
$ | 132,470 | $ | 145,970 | ||||
|
Face amount of 5.875% convertible senior notes due 2035
|
140,467 | 140,467 | ||||||
|
Discount
|
(53,873 | ) | (56,593 | ) | ||||
|
Net carrying value
|
$ | 219,064 | $ | 229,844 | ||||
|
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
|
$ | — | $ | — | ||||
In open market transactions during the three months ended March 31, 2011, we repurchased $13.5 million in face amount of our 3.625% notes for $12.4 million (inclusive of transaction costs and accrued interest through the date of our repurchase of the notes), thereby resulting in the recognition of an aggregate gain during the three months ended March 31, 2011 of $0.3 million (net of the notes’ applicable share of deferred costs and debt discount, which were recovered in connection with the purchases).
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).
Notes Payable Associated with Structured Financings, at Fair Value
As of March 31, 2011, (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 and restricted cash that provide the exclusive means of repayment for the notes (i.e., lenders have recourse only to the specific credit card receivables and restricted cash 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, 2011
|
December 31, 2010
|
|||||||
|
Amortizing structured financing facility issued out of our upper-tier originated portfolio master trust—outstanding face amount of $412.3 million as of March 31, 2011, bearing interest at a weighted average 2.4% interest rate, which is secured by credit card receivables and restricted cash aggregating $284.5 million in carrying amount (1)
|
$ | 282.1 | $ | 273.2 | ||||
|
Multi-year variable funding structured financing facility (expiring September 2014), outstanding face amount of $1.1 million as of March 31, 2011, bearing interest at a weighted average 3.8% interest rate, which is secured by credit card receivables and restricted cash aggregating $6.2 million in carrying amount (2)
|
1.1 | 2.1 | ||||||
|
Amortizing term structured financing facility (denominated and referenced in U.K. sterling and expiring April 2014) issued out of our U.K. Portfolio structured financing trust, outstanding face amount of $159.1 million as of March 31, 2011, bearing interest at a weighted average 3.3% interest rate, which is secured by credit card receivables and restricted cash aggregating $105.8 million in carrying amount (3)
|
97.8 | 87.2 | ||||||
|
Amortizing term structured financing facility (expiring January 2015) issued out of a trust underlying a portfolio acquisition by one of our former equity investees, the controlling interests in which we acquired in February 2011, such facility having an outstanding face amount of $14.3 million as of March 31, 2011, bearing interest at a weighted average 2.0% interest rate and being secured by credit card receivables and restricted cash aggregating $16.9 million in carrying amount
|
13.6 | — | ||||||
|
Ten-year amortizing term structured financing facility issued out of a trust underlying one of our portfolio acquisitions (expiring January 2014), outstanding face amount of $13.0 million as of March 31, 2011, bearing interest at a weighted average 5.4% interest rate, which is secured by credit card receivables and restricted cash aggregating $27.6 million in carrying amount
|
4.7 | 8.0 | ||||||
|
Total structured financing notes reported at fair value that are secured by credit card receivables and to which we are subordinated
|
$ | 399.3 | $ | 370.5 | ||||
|
|
(1)
|
Because 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 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 structured financing 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 $399.3 million in fair value of structured financing notes in the above table is $441.0 million, which means that our maximum aggregate exposure to pre-tax equity loss associated with the above structured financing arrangements is $41.7 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
|
The principal amount of the structured financing notes outstanding and 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,
2011
|
As of December 31,
2010
|
|||||||
|
Amortizing debt facility of ACC Auto Finance segment receivables, rate of 15.0% at March 31, 2011, which is secured by auto finance receivables and restricted cash with an aggregate carrying amount of $48.0 million and $58.1 million at March 31, 2011 and December 31, 2010, respectively (1)
|
$ | 44.3 | $ | 54.4 | ||||
|
Revolving line of credit of CAR Auto Finance segment receivables, rate of 4.8% at March 31, 2011, which is secured by auto finance receivables and restricted cash with an aggregate carrying amount of $43.1 million and $49.1 million at March 31, 2011 and December 31, 2010, respectively and is payable over an amortization period of not more than six months beginning June 2011
|
27.7 | 31.4 | ||||||
|
Financing of JRAS Auto Finance segment receivables, which is secured by auto finance receivables, land and restricted cash with an aggregate carrying amount of $14.1 million at December 31, 2010 (2)
|
— | 8.1 | ||||||
|
Amortizing debt facility against JRAS Auto Finance segment receivables originated while we owned JRAS, rate of 12.3% at March 31, 2011, which is secured by auto finance receivables and restricted cash with an aggregate carrying amount of $7.9 million at March 31, 2011 (2)
|
7.8 | — | ||||||
|
Financing of JRAS Auto Finance segment inventory, which is secured by inventory with an aggregate carrying amount of $0.6 million at December 31, 2010
|
— | 0.3 | ||||||
|
Vendor-financed software and equipment acquisitions, secured by certain equipment with an aggregate carrying amount of $0.03 at December 31, 2010
|
— | 0.5 | ||||||
|
Investment in Previously Charged-Off Receivables segment’s asset-backed financing, rate of 12% at March 31, 2011, secured by certain investments in previously charged-off receivables with an aggregate carrying of $1.0 million and $1.4 million at March 31, 2011 and December 31, 2010, respectively, payable through 2012
|
1.1 | 2.2 | ||||||
|
Total asset-backed structured financing notes outstanding (which are secured by assets with carrying amounts aggregating $100.0 million at March 31, 2011)
|
$ | 80.9 | $ | 96.9 | ||||