form10q.htm

 
_________________________________________________________________________________________________
 
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 10-Q
 
For the quarterly period ended June 30, 2012
 
 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 has submitted electronically and posted on its corporate Web site, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months.
 
CompuCredit is a smaller reporting company and is not a shell company.
 
As of July 31, 2012, there were 21,996,523 shares of common stock, no par value, of the registrant outstanding. (This excludes 1,672,656 loaned shares to be returned.)

 
 

 

COMPUCREDIT HOLDINGS CORPORATION
FORM 10-Q
TABLE OF CONTENTS

Page
PART I. FINANCIAL INFORMATION
 
Item 1.
Financial Statements (Unaudited)                                                                                                                   
 
   
Consolidated Balance Sheets                                                                                                                   
1
   
Consolidated Statements of Operations                                                                                                                   
2
   
Consolidated Statements of Comprehensive (Loss) Income                                                                                                                   
3
   
Consolidated Statement of Shareholders’ Equity                                                                                                                   
4
   
Consolidated Statements of Cash Flows                                                                                                                   
5
   
Notes to Consolidated Financial Statements                                                                                                                   
6
 
Item 2.
24
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk                                                                                                                   
37
 
Item 4.
Controls and Procedures                                                                                                                   
37
 
PART II. OTHER INFORMATION
       
 
Item 1.
Legal Proceedings                                                                                                                   
38
 
Item 1A.
Risk Factors                                                                                                                   
38
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                                   
44
 
Item 4.
 
 
Item 5.
Other Information                                                                                                                   
44
 
Item 6.
Exhibits                                                                                                                   
44
   
Signatures                                                                                                                   
45





 
 


CompuCredit Holdings Corporation and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)

   
June 30,
   
December 31,
 
   
2012
   
2011
 
   
(unaudited)
       
Assets
           
Unrestricted cash and cash equivalents
  $ 51,282     $ 144,913  
Restricted cash and cash equivalents
    17,954       23,759  
Loans and fees receivable:
               
Loans and fees receivable, net (of $8,406 and $7,480 in deferred revenue and $13,041 and $7,156 in allowances for uncollectible loans and fees receivable at June 30, 2012 and December 31, 2011, respectively)
    68,772       64,721  
Loans and fees receivable pledged as collateral under structured financings, net (of $115 and $511 in deferred revenue and $4,000 and $7,537 in allowances for uncollectible loans and fees receivable at June 30, 2012 and December 31, 2011, respectively)
    18,232       31,902  
Loans and fees receivable, at fair value
    20,846       28,226  
Loans and fees receivable pledged as collateral under structured financings, at fair value
    186,206       238,763  
Investments in previously charged-off receivables
    59,489       37,110  
Investments in securities
    6,107       6,203  
Deferred costs, net
    2,706       3,033  
Property at cost, net of depreciation
    8,375       8,098  
Investments in equity-method investees
    45,189       49,862  
Prepaid expenses and other assets
    10,135       11,317  
Total assets
  $ 495,293     $ 647,907  
Liabilities
               
Accounts payable and accrued expenses
  $ 42,793     $ 47,140  
Notes payable, at face value
    38,600       23,765  
Notes payable associated with structured financings, at face value
    9,653       23,151  
Notes payable associated with structured financings, at fair value
    182,750       241,755  
Convertible senior notes (Note 8)
    95,056       176,400  
Income tax liability
    60,239       59,368  
Total liabilities
    429,091       571,579  
                 
Commitments and contingencies (Note 9)
               
                 
Equity
               
Common stock, no par value, 150,000,000 shares authorized: 23,669,179 shares issued and 23,669,179 shares outstanding (including 1,672,656 loaned shares to be returned) at June 30, 2012; and 31,997,581 shares issued and 23,559,402 shares outstanding  (including 1,672,656 loaned shares to be returned) at December 31, 2011
    -       -  
Additional paid-in capital
    293,472       294,246  
Treasury stock, at cost, 0 and 8,438,179 shares at June 30, 2012 and December 31, 2011, respectively
    -       (187,615 )
Accumulated other comprehensive loss
    (1,895 )     (2,257 )
Retained deficit
    (225,301 )     (28,257 )
Total shareholders’ equity
    66,276       76,117  
Noncontrolling interests
    (74 )     211  
Total equity
    66,202       76,328  
Total liabilities and equity
  $ 495,293     $ 647,907  

See accompanying notes.


 
1


CompuCredit Holdings Corporation and Subsidiaries
Consolidated Statements of Operations (Unaudited)
(Dollars in thousands, except per share data)
 

 

   
For the Three Months Ended June 30,
   
For the Six Months Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Interest income:
                       
Consumer loans, including past due fees
  $ 23,907     $ 38,855     $ 49,993     $ 81,479  
Other
    206       452       408       774  
Total interest income
    24,113       39,307       50,401       82,253  
Interest expense
    (7,429 )     (11,355 )     (18,326 )     (23,306 )
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable
    16,684       27,952       32,075       58,947  
Fees and related income on earning assets
    29,152       32,532       93,506       91,754  
Losses upon charge off of loans and fees receivable recorded at fair value
    (17,021 )     (36,342 )     (72,649 )     (89,190 )
Provision for losses on loans and fees receivable recorded at net realizable value
    (7,437 )     82       (10,318 )     (758 )
Net interest income, fees and related income on earning assets
    21,378       24,224       42,614       60,753  
Other operating income:
                               
Servicing income
    968       860       2,232       1,826  
Ancillary and interchange revenues
    1,413       2,463       3,357       4,965  
Gain on repurchase of convertible senior notes
    -       201       -       469  
Gain on buy-out of equity-method investee members
    -       -       -       619  
Equity in income of equity-method investees
    3,539       3,823       9,556       22,127  
Total other operating income
    5,920       7,347       15,145       30,006  
Other operating expense:
                               
Salaries and benefits
    4,844       6,277       10,721       12,830  
Card and loan servicing
    20,037       18,387       39,989       38,207  
Marketing and solicitation
    630       768       1,446       1,205  
Depreciation
    393       1,785       865       3,783  
Other
    6,761       7,172       14,271       14,136  
Total other operating expense
    32,665       34,389       67,292       70,161  
(Loss on) income from continuing operations before income taxes
    (5,367 )     (2,818 )     (9,533 )     20,598  
Income tax expense
    (589 )     (850 )     (929 )     (1,124 )
(Loss on) income from continuing operations
    (5,956 )     (3,668 )     (10,462 )     19,474  
Discontinued operations:
                               
Income from discontinued operations before income taxes
    -       106,214       -       115,137  
Income tax expense
    -       (1,788 )     -       (4,100 )
Income from discontinued operations
    -       104,426       -       111,037  
Net (loss) income
    (5,956 )     100,758       (10,462 )     130,511  
Net loss (income) attributable to noncontrolling interests (including $0, $0, $0 and $1,131 of income associated with noncontrolling interests in discontinued operations in the three and six months ended June 30, 2012 and 2011, respectively)
    211       8       285       (1,290 )
Net (loss) income attributable to controlling interests
  $ (5,745 )   $ 100,766     $ (10,177 )   $ 129,221  
(Loss on) income from continuing operations attributable to controlling interests per common share—basic
  $ (0.26 )   $ (0.16 )   $ (0.46 )   $ 0.66  
(Loss on) income from continuing operations attributable to controlling interests per common share—diluted
  $ (0.26 )   $ (0.16 )   $ (0.46 )   $ 0.66  
Income from discontinued operations attributable to controlling interests per common share—basic
  $ -     $ 4.61     $ -     $ 3.76  
Income from discontinued operations attributable to controlling interests per common share—diluted
  $ -     $ 4.59     $ -     $ 3.74  
Net (loss) income attributable to controlling interests per common share—basic
  $ (0.26 )   $ 4.45     $ (0.46 )   $ 4.42  
Net (loss) income attributable to controlling interests per common share—diluted
  $ (0.26 )   $ 4.43     $ (0.46 )   $ 4.40  
 

 
See accompanying notes.

 
2


 

CompuCredit Holdings Corporation and Subsidiaries
Consolidated Statements of Comprehensive (Loss) Income (Unaudited)
(Dollars in thousands)



   
For the Three Months Ended June 30,
   
For the Six Months Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Net (loss) income
  $ (5,956 )   $ 100,758     $ (10,462 )   $ 130,511  
Other comprehensive (loss) income:
                               
Foreign currency translation adjustment
    (665 )     488       345       2,393  
Reclassifications of foreign currency translation adjustment to consolidated statements of operations
    -       2,301       -       2,301  
Income tax related to other comprehensive income
    85       (1 )     17       (46 )
Comprehensive (loss) income
    (6,536 )     103,546       (10,100 )     135,159  
Comprehensive loss (income) attributable to noncontrolling interests
    211       8       285       (1,290 )
Comprehensive (loss) income attributable to controlling interests
  $ (6,325 )   $ 103,554     $ (9,815 )   $ 133,869  

See accompanying notes.
 

 
3


CompuCredit Holdings Corporation and Subsidiaries
Consolidated Statement of Shareholders’ Equity
For the Six Months Ended June 30, 2012 (Unaudited)
(Dollars in thousands)


   
Common Stock
                                     
   
Shares Issued
   
Amount
   
Additional Paid-In Capital
   
Treasury Stock
   
Accumulated Other Comprehensive Loss
   
Retained Deficit
   
Noncontrolling Interests
   
Total Equity
 
Balance at December 31, 2011
    31,997,581     $ -     $ 294,246     $ (187,615 )   $ (2,257 )   $ (28,257 )   $ 211     $ 76,328  
Use of treasury stock for stock-based compensation plans
    (118,277 )     -       (944 )     5,169       -       (4,225 )     -       -  
Compensatory stock issuances
    109,777       -       -       -       -       -       -       -  
Amortization of deferred stock-based compensation costs
    -       -       170       -       -       -       -       170  
Purchase of treasury stock
    -       -       -       (196 )     -       -       -       (196 )
Redemption and retirement of shares
    (8,319,902 )     -       -       182,642       -       (182,642 )     -       -  
Net loss
    -       -       -       -       -       (10,177 )     (285 )     (10,462 )
Foreign currency translation adjustment, net of tax
    -       -       -       -       362       -       -       362  
Balance at June 30, 2012
    23,669,179     $ -     $ 293,472     $ -     $ (1,895 )   $ (225,301 )   $ (74 )   $ 66,202  


See accompanying notes.



 
4


CompuCredit Holdings Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)

 
 
   
For the Six Months Ended June 30,
 
   
2012
   
2011
 
Operating activities
           
Net (loss) income
  $ (10,462 )   $ 130,511  
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
               
Depreciation, anortization and accretion, net
    730       4,821  
Losses upon charge off of loans and fees receivable recorded at fair value
    72,649       89,190  
Provision for losses on loans and fees receivable
    10,318       12,575  
Accretion of discount on convertible senior notes
    2,149       3,577  
Stock-based compensation expense
    170       2,151  
Unrealized gain on loans and fees receivable and underlying notes payable held at fair value
    (57,481 )     (66,549 )
Unrealized loss on trading securities
    287       255  
Gain on repurchase of convertible senior notes
    -       (469 )
Income from equity-method investments
    (9,556 )     (22,127 )
Gain on buy-out of equity-method investee members
    -       (619 )
Net gain on sale of subsidiary
    -       (101,359 )
Changes in assets and liabilities, exclusive of business acquisitions:
               
Decrease (increase) in uncollected fees on earning assets
    16,268       (6,867 )
Decrease in JRAS auto loans receivable
    2,931       7,835  
Decrease in deferred costs
    329       -  
Increase (decrease) in income tax liability
    886       (112 )
Decrease in prepaid expenses
    4       7,605  
Decrease in accounts payable and accrued expenses
    (846 )     (4,575 )
Other
    2,458       2,298  
Net cash provided by operating activities
    30,834       58,141  
Investing activities
               
Decrease in restricted cash
    5,805       8,270  
Investment in equity-method investees
    (1,354 )     (34,336 )
Proceeds from equity-method investees
    16,042       10,860  
Investments in earning assets
    (138,090 )     (388,088 )
Proceeds from earning assets
    167,227       558,179  
Investments in subsidiaries
    (3,514 )     -  
Net cash associated with newly acquired consolidated subsidiaries
    -       1,025  
Proceeds from sale of subsidiary
    -       147,449  
Purchases and development of property, net of disposals
    (1,139 )     (1,116 )
Net cash provided by investing activities
    44,977       302,243  
Financing activities
               
Noncontrolling interests contributions, net
    -       600  
Purchase of outstanding stock subject to tender offer
    -       (105,000 )
Purchase of treasury stock
    (196 )     (1,107 )
Purchases of noncontrolling interests
    -       (4,067 )
Proceeds from borrowings
    15,365       9,697  
Repayment of borrowings
    (184,605 )     (212,266 )
Net cash used in financing activities
    (169,436 )     (312,143 )
Effect of exchange rate changes on cash
    (6 )     1,194  
Net (decrease) increase in unrestricted cash
    (93,631 )     49,435  
Unrestricted cash and cash equivalents at beginning of period
    144,913       85,350  
Unrestricted cash and cash equivalents at end of period
  $ 51,282     $ 134,785  
Supplemental cash flow information
               
Unrestricted cash included in assets held for sale
  $ -     $ 8,230  
Cash paid for interest
  $ 16,265     $ 19,849  
Net cash income tax payments
  $ 43     $ 5,383  
Supplemental non-cash information
               
Notes payable associated with capital leases
  $ 268     $ -  


See accompanying notes.

 
5


 CompuCredit Holdings Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2012
 
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. They do include, however, all normal recurring adjustments we consider necessary to fairly state our results for the interim periods.
 
The preparation of consolidated financial statements in conformity with GAAP requires us 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 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, significantly affect two categories of such loans and fees receivable, net, that we show on our consolidated balance sheets, as well as the provision for losses on loans and fees receivable within our consolidated statements of operations. Operating results for the three and six months ended June 30, 2012 are not indicative of what our results will be for the year ending December 31, 2012.
 
We have reclassified certain amounts in our prior period consolidated financial statements related to the classification of our Retail Micro-Loans segment as discontinued operations to conform to current period presentation, and we have eliminated all significant intercompany balances and transactions for financial reporting purposes.
 
2.  
Significant Accounting Policies and Consolidated Financial Statement Components
 
The following is a summary of significant accounting policies we use to prepare 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 (1) associated with (a) U.K. credit card and U.S. private label merchant and other credit products currently being marketed within our Credit Cards and Other Investments segment, (b) credit card accounts opened under our Investments in Previously Charged-off Receivables segment’s balance transfer program, and (c) our Auto Finance segment’s CAR operations (all the aforementioned being labeled in loans and fees receivable, net), and (2) associated with our former ACC and JRAS auto finance businesses, which are separately labeled 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 Cards and Other Investments segment data and aggregated $14.7 million (net of allowances for uncollectible loans and fees receivable and deferred revenue) or 5.0% of our consolidated loans and fees receivable (net or at fair value) as of June 30, 2012.  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, 2011
   
Additions
   
Subtractions
   
Balance at June 30, 2012
       
Loans and fees receivable, gross
  $ 119.3     $ 95.7     $ (102.5 )   $ 112.5        
Deferred revenue
    (8.0 )     (13.3 )     12.8       (8.5 )      
Allowance for uncollectible loans and fees receivable
    (14.7 )     (10.3 )     8.0       (17.0 )      
Loans and fees receivable, net
  $ 96.6     $ 72.1     $ (81.7 )   $ 87.0        
                                       
   
Balance at December 31, 2010
   
Additions
   
Subtractions
   
Transfer to Assets Held for Sale
   
Balance at June 30, 2011
 
Loans and fees receivable, gross
  $ 227.7     $ 296.7     $ (343.5 )   $ (42.3 )   $ 138.6  
Deferred revenue
    (20.5 )     (32.3 )     35.3       5.8       (11.7 )
Allowance for uncollectible loans and fees receivable
    (37.6 )     (5.9 )     20.7       3.8       (19.0 )
Loans and fees receivable, net
  $ 169.6     $ 258.5     $ (287.5 )   $ (32.7 )   $ 107.9  
 
 
As of June 30, 2012 and 2011, the weighted average remaining accretion periods for the $8.5 million and $11.7 million, respectively, of deferred revenue reflected in the above tables were 13.1 and 17.1 months, respectively.
 
 
6

A roll-forward of our allowance for uncollectible loans and fees receivable, net (in millions) by category of loans and fees receivable is as follows:
 
For the Three Months Ended June 30, 2012
 
Credit Cards
   
Micro-Loans
   
Auto Finance
   
Other
   
Total
 
Allowance for uncollectible loans and fees receivable:
                             
Balance at beginning of period
  $ (4.5 )   $ (0.5 )   $ (6.1 )   $ (1.4 )   $ (12.5 )
Provision for loan losses
    (7.1 )     (0.4 )     0.7       (0.6 )     (7.4 )
Charge offs
    1.4       0.7       1.8       0.2       4.1  
Recoveries
    (0.3 )     -       (0.9 )     -       (1.2 )
Balance at end of period
  $ (10.5 )   $ (0.2 )   $ (4.5 )   $ (1.8 )   $ (17.0 )
Balance at end of period individually evaluated for impairment
  $ -     $ -     $ -     $ -     $ -  
Balance at end of period collectively evaluated for impairment
  $ (10.5 )   $ (0.2 )   $ (4.5 )   $ (1.8 )   $ (17.0 )
Loans and fees receivable:
                                       
Loans and fees receivable, gross
  $ 27.9     $ 0.7     $ 73.4     $ 10.5     $ 112.5  
Loans and fees receivable individually evaluated for impairment
  $ -     $ -     $ 0.1     $ -     $ 0.1  
Loans and fees receivable collectively evaluated for impairment
  $ 27.9     $ 0.7     $ 73.3     $ 10.5     $ 112.4  
                                         
For the Six Months Ended June 30, 2012
 
Credit Cards
   
Micro-Loans
   
Auto Finance
   
Other
   
Total
 
Allowance for uncollectible loans and fees receivable:
                                       
Balance at beginning of period
  $ (4.0 )   $ (1.1 )   $ (8.4 )   $ (1.2 )   $ (14.7 )
Provision for loan losses
    (8.9 )     (1.8 )     1.3       (0.9 )     (10.3 )
Charge offs
    3.0       2.7       4.7       0.3       10.7  
Recoveries
    (0.6 )     -       (2.1 )     -       (2.7 )
Balance at end of period
  $ (10.5 )   $ (0.2 )   $ (4.5 )   $ (1.8 )   $ (17.0 )
Balance at end of period individually evaluated for impairment
  $ -     $ -     $ -     $ -     $ -  
Balance at end of period collectively evaluated for impairment
  $ (10.5 )   $ (0.2 )   $ (4.5 )   $ (1.8 )   $ (17.0 )
Loans and fees receivable:
                                       
Loans and fees receivable, gross
  $ 27.9     $ 0.7     $ 73.4     $ 10.5     $ 112.5  
Loans and fees receivable individually evaluated for impairment
  $ -     $ -     $ 0.1     $ -     $ 0.1  
Loans and fees receivable collectively evaluated for impairment
  $ 27.9     $ 0.7     $ 73.3     $ 10.5     $ 112.4  
 
 
 
7

 
For the Three Months Ended June 30, 2011
 
Credit Cards
   
Micro-Loans
   
Auto Finance
   
Other
   
Total
 
Allowance for uncollectible loans and fees receivable:
                             
Balance at beginning of period
  $ (3.0 )   $ (4.7 )   $ (20.3 )   $ (0.2 )   $ (28.2 )
Provision for loan losses (includes $2.0 million of provision netted within income from discontinued operations)
    (0.9 )     (2.7 )     1.9       (0.2 )     (1.9 )
Charge offs
    1.4       3.0       5.5       -       9.9  
Recoveries
    (0.3 )     (0.2 )     (2.1 )     -       (2.6 )
Transfer to assets held for sale
    -       3.8       -               3.8  
Sale of assets
    -       -       -       -       -  
Balance at end of period
  $ (2.8 )   $ (0.8 )   $ (15.0 )   $ (0.4 )   $ (19.0 )
Balance at end of period individually evaluated for impairment
  $ -     $ -     $ (0.4 )   $ -     $ (0.4 )
Balance at end of period collectively evaluated for impairment
  $ (2.8 )   $ (0.8 )   $ (14.6 )   $ (0.4 )   $ (18.6 )
Loans and fees receivable:
                                       
Loans and fees receivable, gross
  $ 18.0     $ 1.6     $ 117.7     $ 1.3     $ 138.6  
Loans and fees receivable individually evaluated for impairment
  $ -     $ -     $ 0.9     $ -     $ 0.9  
Loans and fees receivable collectively evaluated for impairment
  $ 18.0     $ 1.6     $ 116.8     $ 1.3     $ 137.7  
                                         
For the Six Months Ended June 30, 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 (includes $5.1 million of provision netted within income from discontinued operations)
    (1.2 )     (6.2 )     1.8       (0.3 )     (5.9 )
Charge offs
    3.0       7.2       14.5       -       24.7  
Recoveries
    (0.6 )     (0.4 )     (3.7 )     -       (4.7 )
Transfer to assets held for sale
    -       3.8       -       -       3.8  
Sale of assets
    -       -       0.7       -       0.7  
Balance at end of period
  $ (2.8 )   $ (0.8 )   $ (15.0 )   $ (0.4 )   $ (19.0 )
Balance at end of period individually evaluated for impairment
  $ -     $ -     $ (0.4 )   $ -     $ (0.4 )
Balance at end of period collectively evaluated for impairment
  $ (2.8 )   $ (0.8 )   $ (14.6 )   $ (0.4 )   $ (18.6 )
Loans and fees receivable:
                                       
Loans and fees receivable, gross
  $ 18.0     $ 1.6     $ 117.7     $ 1.3     $ 138.6  
Loans and fees receivable individually evaluated for impairment
  $ -     $ -     $ 0.9     $ -     $ 0.9  
Loans and fees receivable collectively evaluated for impairment
  $ 18.0     $ 1.6     $ 116.8     $ 1.3     $ 137.7  

The components (in millions) of loans and fees receivable, net as of the date of each of our consolidated balance sheets are as follows: 

   
As of
 
   
June 30,
   
December 31,
 
   
2012
   
2011
 
Current loans receivable
  $ 95.9     $ 100.9  
Current fees receivable
    1.4       1.9  
Delinquent loans and fees receivable
    15.2       16.5  
Loans and fees receivable, gross
  $ 112.5     $ 119.3  

 
 
8

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 180 days from the point they become delinquent for our auto finance, credit card and private label merchant credit receivables, or sooner if facts and circumstances earlier indicate non-collectability.  Recoveries on accounts previously charged off are credited to the allowance for uncollectible loans and fees receivable and 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 June 30, 2012 and December 31, 2011 is as follows:

 
As of June 30, 2012
 
Credit Cards
   
Micro-Loans
   
Auto Finance
   
Other
   
Total
 
30-59 days past due
  $ 2.2     $ -     $ 5.2     $ -     $ 7.4  
60-89 days past due
    1.7       -       1.8       -       3.5  
Greater than 90 days past due
    3.6       (0.1 )     0.8       -       4.3  
Delinquent loans and fees receivable, gross
    7.5       (0.1 )     7.8       -       15.2  
Current loans and fees receivable, gross
    20.4       0.8       65.6       10.5       97.3  
Total loans and fees receivable, gross
  $ 27.9     $ 0.7     $ 73.4     $ 10.5     $ 112.5  
Balance of loans greater than 90-days delinquent still accruing interest and fees
  $ -     $ -     $ 0.4     $ -     $ 0.4  
                                         
As of December 31, 2011
 
Credit Cards
   
Micro-Loans
   
Auto Finance
   
Other
   
Total
 
30-59 days past due
  $ 0.8     $ 0.7     $ 6.9     $ -     $ 8.4  
60-89 days past due
    0.7       0.6       2.5       -       3.8  
Greater than 90 days past due
    1.5       0.9       1.9       -       4.3  
Delinquent loans and fees receivable, gross
    3.0       2.2       11.3       -       16.5  
Current loans and fees receivable, gross
    17.5       0.9       80.2       4.2       102.8  
Total loans and fees receivable, gross
  $ 20.5     $ 3.1     $ 91.5     $ 4.2     $ 119.3  
Balance of loans greater than 90-days delinquent still accruing interest and fees
  $ -     $ -     $ 1.3     $ -     $ 1.3  
 
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,
 
   
2012
   
2011
   
2012
   
2011
 
Unrecovered balance at beginning of period
  $ 36,795     $ 22,882     $ 37,110     $ 29,889  
Acquisitions of defaulted accounts
    34,902       16,460       46,700       19,484  
Cash collections
    (26,553 )     (19,228 )     (52,638 )     (39,856 )
Cost-recovery method income recognized on defaulted accounts (included as a component of fees and related income on earning assets on our consolidated statements of operations)
    14,345       11,166       28,317       21,763  
Unrecovered balance at end of period
  $ 59,489     $ 31,280     $ 59,489     $ 31,280  


 
9

 
Previously charged-off receivables held as of June 30, 2012 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, 2012, $6.0 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 material 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 1.2% of our consolidated total assets.
 
We record each static pool at cost and account for each pool as a single unit for payment application and income recognition purposes, thereby applying the cost recovery method on a portfolio-by-portfolio basis. Under the cost recovery method, we do not recognize income associated with a particular portfolio until cash collections have exceeded the investment.  Once cash collections exceed each particular static pool investment, we include them in revenue as we receive them.  These revenues are included in our fees and related income on earning assets in the accompanying statement of operations.
 
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 (including balance transfer program accounts) and approximately 84 months for Chapter 13 Bankruptcies.
 
Investments in Securities
 
The carrying values (in thousands) of our investments in debt and equity securities (excluding those investments for which we use equity-method accounting) are as follows:

   
As of
 
   
June 30, 2012
   
December 31, 2011
 
Held to maturity:
           
Investments in non-marketable debt securities
  $ 70     $ 93  
Available for sale:
               
Investments in non-marketable equity securities
    1,941       2,075  
Investments in non-marketable debt securities
    4,096       3,884  
Trading:
               
Investments in marketable equity securities
    -       151  
Total investments in securities
  $ 6,107     $ 6,203  

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 investments in a limited liability company formed in 2004 to acquire a portfolio of credit card receivables. We also use the equity method to account for our March 2011 investment to acquire a 50.0% interest in a joint venture with an unrelated third party that purchased all ($164.0 million in face amount) of the outstanding notes issued out of the structured financing trust underlying our U.K. portfolio of credit card receivables (the “U.K. Portfolio”) for a discounted purchase price of $64.5 million in cash, a price that the joint venture partners determined to be attractive based on a discounted cash flow analysis of the remaining expected payments on the notes (all of which were allocable to the class “A” portion of the outstanding notes given that no payments were expected associated with the class “B” portion of the outstanding notes thereby rendering them worthless). At the time of their acquisition by the joint venture, we carried the notes as a liability on our consolidated balance sheet at their fair value of $98.7 million. The 50.0%-owned joint venture elected 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) in the three months ended March 31, 2011 equal to the excess of the fair value of the notes at that date over the joint venture’s discounted purchase price of the notes.  We record our respective interests in the income of our equity-method investees within the equity in income of equity-method investees category on our consolidated statements of operations.
 
Income Taxes
 
Computed considering results for only our continuing operations before income taxes, our effective income tax benefit rate was a negative 11.0% and a negative 9.8% for the three and six months ended June 30, 2012, respectively, versus our negative effective income tax benefit rate of 30.2% for the three months ended June 30, 2011 and our positive effective income tax expense rate of 5.5% for the six months ended June 30, 2011. 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 (1) changes in valuation allowances against income statement-oriented federal, foreign and state deferred tax assets and (2) variations in the level of our pre-tax income among the different reporting periods relative to the level of our permanent differences within such periods. 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 a positive 27.4% and a positive 26.8% benefit rate in the three and six months ended June 30, 2012, respectively, compared to a positive 15.3% benefit rate and a positive 45.9% expense rate, in the three and six months ended June 30, 2011, respectively.
 
We recognize potential accrued interest and penalties related to unrecognized tax benefits in income tax expense.  We recognized $0.5 million and $0.9 million in potential interest and penalties associated with uncertain tax positions during the three and six months ended June 30, 2012, respectively, compared to $0.6 million and $1.1 million during the three and six months ended June 30, 2011, respectively. To the extent such interest and penalties are not assessed as a result of a resolution of the underlying tax position, amounts accrued are reduced and reflected as a reduction of income tax expense. We recognized no such reductions in the three and six months ended June 30, 2012 and 2011, respectively.

 
10

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 June,
   
For the Six Months Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Fees on credit products
  $ 4,407     $ 3,475     $ 7,885     $ 7,235  
Changes in fair value of loans and fees receivable recorded at fair value (1)
    26,942       (10,485 )     82,871       119,518  
Changes in fair value of notes payable associated with structured financings recorded at fair value
    (16,073 )     28,375       (25,390 )     (52,969 )
Income on investments in previously charged-off receivables
    14,345       11,166       28,317       21,763  
Gross loss on auto sales
    -       -       -       (111 )
(Losses) gains on investments in securities
    6       9       (236 )     141  
Loss on sale of JRAS assets
    -       -       -       (4,648 )
Other
    (475 )     (8 )     59       825  
Total fees and related income on earning assets
  $ 29,152     $ 32,532     $ 93,506     $ 91,754  
 
(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 7, “Fair values of Assets and Liabilities,” for further discussion of these receivables and their effects on our consolidated statements of operations.
 
Recent Accounting Pronouncements
 
In December 2011, the Financial Accounting Standards Board (“FASB”) issued guidance that defers the required changes to the presentation of comprehensive income that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income. This temporary deferral will allow the Board time to redeliberate the presentation requirements for reclassifications out of accumulated other comprehensive income for annual and interim financial statements for public, private, and non-profit entities. See below for the other requirements for the presentation of comprehensive income.
 
In December 2011, the FASB issued guidance requiring entities to disclose information about offsetting and related arrangements to enable users of financial statements to understand the effect of those arrangements on an entity's financial position. The amendments require enhanced disclosures by requiring improved information about financial instruments and derivative instruments that are either (1) offset in accordance with current literature or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with current literature. The guidance is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. This standard will become effective for us beginning March 2013, and the disclosures are to be applied retrospectively for all comparative periods presented. We currently are evaluating the impact of this new guidance.
 
In June 2011, the FASB issued new accounting guidance that revises the manner in which comprehensive income is required to be presented in financial statements. The new guidance requires companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. The guidance eliminates the option to present components of other comprehensive income in the statement of changes in stockholders’ equity. It does not change the items which must be reported in other comprehensive income, how such items are measured or when they must be reclassified from other comprehensive income to net income. The guidance requires retrospective application and is effective for interim and annual periods beginning on or after December 15, 2011. We adopted the presentation guidance as of December 31, 2011, and it has no effect on our financial condition, results of operations or liquidity since it impacts presentation only.
 
In May 2011, the FASB issued amended guidance on fair value that is intended to provide a converged fair value framework for U.S. GAAP and IFRS. The amended guidance results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and IFRS. While the amended guidance continues to define fair value as an exit price, it changes some fair value measurement principles and expands the existing disclosure requirements for fair value measurements. The amended guidance is effective for public entities for interim and annual periods beginning on or after December 15, 2011, with early adoption prohibited. The new guidance requires prospective application and disclosure in the period of adoption of the change, if any, in valuation techniques and related inputs resulting from application of the amendments and quantification of the total effect, if practicable. We adopted the amended guidance in the first quarter of 2012 which had no material impacts on our consolidated statements of operations.
 
Subsequent Events
 
We evaluate subsequent events that occur 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 occurring after June 30, 2012, and based on our evaluation, we did not identify any recognized or nonrecognized subsequent events that would have required further adjustments to our consolidated financial statements.
 
Divestiture of Investments in Previously Charged-Off Receivables Segment
 
On August 3, 2012, we completed a transaction to sell to Flexpoint Fund II, L.P. for $130.5 million our Investments in Previously Charged-Off Receivables segment, including its balance transfer card operations, the credit card receivables (and underlying activities) of which are reflected within our Credit Cards and Other Investments segment. The sales price includes $119.7 million (cash of $106.7 million and a note receivable of $13.0 million) at closing, of which $5.4 will be held in escrow for 12 months following the closing date of the transaction to satisfying certain indemnification provisions, and an additional $10.8 million in cash if certain performance targets are met through December 31, 2014. The $10.8 million of additional contingent consideration will be recognized into income upon the achievement of the performance targets. As of June 30, 2012, our basis in the net assets that were included in the sale was $64.4 million.
 
 
11

 
3.
Discontinued Operations
 
In April, 2011 and October, 2011, respectively, we sold our U.K. Internet micro-loan subsidiaries and our retail micro-loans subsidiaries; accordingly, their results of operations are shown as discontinued operations within our consolidated statements of operations for all periods presented. Key components of discontinued operations on our consolidated statements of operations are as follows:
 
   
For the Three Months Ended June 30,
   
For the Six Months Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Net interest income, fees and related income on earning assets
  $ -     $ 14,935     $ -     $ 49,791  
Gain on sale of assets
            103,706               103,706  
Other operating expense
    -       12,427       -       38,360  
Income before income taxes
    -       106,214       -       115,137  
Income tax expense
    -       (1,788 )     -       (4,100 )
Net income
  $ -     $ 104,426     $ -     $ 111,037  
Net income attributable to noncontrolling interests
  $ -     $ 1,131     $ -     $ -  

There were no assets held for sale on either our June 30, 2012 or December 31, 2011 consolidated balance sheets.
 
4.
Segment Reporting
 
We operate primarily within one industry consisting of three reportable segments by which we manage our business. Our three reportable segments are:  Credit Cards and Other Investments; Investments in Previously Charged-Off Receivables; and Auto Finance. Due to the 2011 sales of our Retail and U.K.-based Internet micro-loans operations, we have eliminated segment reporting for our former Retail Micro-Loans and Internet Micro-Loans segments.  Additionally, we have renamed our Credit Card segment as the Credit Cards and Other Investments segment to encompass ancillary investments and product offerings that are largely start-up in nature and do not qualify for separate segment reporting.  All prior period data have been reclassified to this new current period presentation.
 
Summary operating segment information (in thousands) is as follows:
 
         
Investments in
             
   
Credit Cards
   
Previously
             
   
and Other
   
Charged-Off
   
Auto
       
Three Months Ended June 30, 2012
 
Investments
   
Receivables
   
Finance
   
Total
 
Net interest income, fees and related income on earning assets
  $ 192     $ 14,242     $ 6,944     $ 21,378  
Total other operating income
  $ 4,869     $ 886     $ 165     $ 5,920  
(Loss) income from continuing operations before income taxes
  $ (12,798 )   $ 4,880     $ 2,551     $ (5,367 )
Loans and fees receivable, gross
  $ 39,152     $ -     $ 73,415     $ 112,567  
Loans and fees receivable, net
  $ 25,014     $ -     $ 61,990     $ 87,004  
Loans and fees receivable held at fair value
  $ 207,052     $ -     $ -     $ 207,052  
Total assets
  $ 351,585     $ 69,360     $ 74,348     $ 495,293  
                                 
           
Investments in
                 
   
Credit Cards
   
Previously
                 
   
and Other
   
Charged-Off
   
Auto
         
Three Months Ended June 30, 2011
 
Investments
   
Receivables
   
Finance
   
Total
 
Net interest income, fees and related income on earning assets
  $ 4,431     $ 11,109     $ 8,684     $ 24,224  
Total other operating income
  $ 6,458     $ 762     $ 127     $ 7,347  
(Loss) income from continuing operations before income taxes
  $ (10,528 )   $ 4,612     $ 3,098     $ (2,818 )
Loans and fees receivable, gross
  $ 20,854     $ -     $ 117,724     $ 138,578  
Loans and fees receivable, net
  $ 16,752     $ -     $ 91,166     $ 107,918  
Loans and fees receivable held at fair value
  $ 332,615     $ -     $ -     $ 332,615  
Total assets
  $ 619,057     $ 36,106     $ 100,721     $ 755,884  
 
 
 
12

 
         
Investments in
             
   
Credit Cards
   
Previously
             
   
and Other
   
Charged-Off
   
Auto
       
Six Months Ended June 30, 2012
 
Investments
   
Receivables
   
Finance
   
Total
 
Net interest income, fees and related income on earning assets
  $ 3,230     $ 28,168     $ 11,216     $ 42,614  
Total other operating income
  $ 12,948     $ 1,891     $ 306     $ 15,145  
(Loss) income from continuing operations before income taxes
  $ (19,472 )   $ 8,990     $ 949     $ (9,533 )
Loans and fees receivable, gross
  $ 39,152     $ -     $ 73,415     $ 112,567  
Loans and fees receivable, net
  $ 25,014     $ -     $ 61,990     $ 87,004  
Loans and fees receivable held at fair value
  $ 207,052     $ -     $ -     $ 207,052  
Total assets
  $ 351,585     $ 69,360     $ 74,348     $ 495,293  
                                 
           
Investments in
                 
   
Credit Cards
   
Previously
                 
   
and Other
   
Charged-Off
   
Auto
         
Six Months Ended June 30, 2011
 
Investments
   
Receivables
   
Finance
   
Total
 
Net interest income, fees and related income on earning assets
  $ 27,557     $ 21,624     $ 11,572     $ 60,753  
Total other operating income
  $ 28,282     $ 1,468     $ 256     $ 30,006  
Income (loss) from continuing operations before income taxes
  $ 13,055     $ 8,011     $ (468 )   $ 20,598  
Loans and fees receivable, gross
  $ 20,854     $ -     $ 117,724     $ 138,578  
Loans and fees receivable, net
  $ 16,752     $ -     $ 91,166     $ 107,918  
Loans and fees receivable held at fair value
  $ 332,615     $ -     $ -     $ 332,615  
Total assets
  $ 619,057     $ 36,106     $ 100,721     $ 755,884  

 
5.
Shareholders’ Equity
 
During the three months ended March 31, 2012, we retired all of our common shares held in treasury, thereby resulting in a $182.6 million charge to retained earnings in that period. Additionally, 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, and those shares were retired. We exclude all retired shares from our outstanding share counts.
 
Prior to the retirement of common shares held in treasury during the three months ended March 31, 2012, we periodically reissued such shares to satisfy exercised options and vested restricted stock.  We reissued 154,815 of such shares at gross costs of $5.2 million during the three months ended March 31, 2012, and we reissued 270,000 and 722,567 of such shares for the three and six months ended June 30, 2011, respectively, at gross costs of $8.4 million and $23.5 million, respectively.  Also prior to the retirement of common shares held in treasury during the three months ended March 31, 2012, we effectively repurchased treasury shares by having employees who were exercising options or vesting in their restricted stock grants exchange a portion of their stock for payment of required minimum tax withholdings. Such repurchases totaled 36,538 during the three months ended March 31, 2012 at gross costs of $0.2 million, and this compares to such repurchases of 81,556 and 203,259 for the three and six months ended June 30, 2011, respectively, at gross costs of $0.3 million and $1.1 million, respectively.
 
We had 1,672,656 loaned shares outstanding at June 30, 2012, which were originally lent in coordination with our December 2005 issuance of convertible senior notes. 
 
6.
Investments in Equity-Method Investees
 
Our equity-method investments outstanding at June 30, 2012 consist of our interests (aggregating 50%) in a joint venture that was formed in 2004 to purchase a credit card receivables portfolio and our 50.0% interest in a joint venture that purchased in March 2011 the outstanding notes issued out of our U.K. Portfolio structured financing trust. The latter 50%-owned joint venture elected 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) in the three months ended March 31, 2011 equal to the excess of the fair value of the notes at that date 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 and leading us to conclude that we should consolidate the assets and liabilities of this entity within our consolidated balance sheets. Additionally, we acquired the remaining 5.0% noncontrolling interest in this entity in April 2011 to bring our total ownership to 100%.
 
 
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In the following tables, we summarize (in thousands) combined balance sheet and results of operations data for our equity-method investees:
 
   
As of
 
   
June 30, 2012
   
December 31, 2011
 
Loans and fees receivable pledged as collateral under structured financings, at fair value
  $ 68,805     $ 78,413  
Investments in non-marketable debt securities, at fair value
  $ 58,466     $ 81,639  
Total assets
  $ 144,082     $ 167,898  
Notes payable associated with structured financings, at fair value
  $ 43,280     $ 59,515  
Total liabilities
  $ 43,605     $ 59,909  
Members’ capital
  $ 100,477     $ 107,989  
 
 
   
For the Three Months Ended June 30,
   
For the Six Months Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Net interest income, fees and related income on earning assets
  $ 7,084     $ 6,526     $ 21,371     $ 44,201  
Total other operating income
  $ 846     $ 60     $ 929     $ 147  
Net income
  $ 7,214     $ 5,363     $ 20,704     $ 41,625  
 
As noted above, the above tables include our aforementioned 50.0% interest in the joint venture that purchased in March 2011 the outstanding notes issued out of our U.K. Portfolio structured financing trust.  Separate financial data for this entity are as follows:

   
As of
             
   
June 30, 2012
   
December 31, 2011
             
Investments in non-marketable debt securities, at fair value
  $ 58,466     $ 81,639              
Total assets
  $ 59,675     $ 83,210              
Total liabilities
  $ -     $ -              
Members’ capital
  $ 59,675     $ 83,210              
                             
                             
   
For the Three Months Ended June 30,
   
For the Six Months Ended June 30,
 
      2012       2011       2012       2011  
Net interest income, fees and related income on earning assets
  $ 4,010     $ 10,034     $ 4,557     $ 44,443  
Net income
  $ 3,998     $ 10,025     $ 4,524     $ 44,328  
                                 


As noted in Note 8, Convertible Senior Notes and Notes Payable, notes payable with a fair value of $58.5 million correspond with the $58.5 million investment in non-marketable debt securities, at fair value held by our equity-method investee as noted in the above table.
 
 
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7.
Fair Values of Assets and Liabilities