Edgar Filing: CompuCredit Holdings Corp

form10q.htm

_________________________________________________________________________________________________

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2012

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.

During the preceding 12 months, 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.

CompuCredit is a smaller reporting company and is not a shell company.

As of October 31, 2012, there were 13,746,523 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 Income	3
	Consolidated Statement of Shareholders’ Equity	4
	Consolidated Statements of Cash Flows	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48
Item 4.	Controls and Procedures	48

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	49
Item 1A.	Risk Factors	49
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	61
Item 4.	Mine Safety Disclosures	61
Item 5.	Other Information	61
Item 6.	Exhibits	61
	Signatures	61

Table of Contents

CompuCredit Holdings Corporation and Subsidiaries

Consolidated Balance Sheets

(Dollars in thousands)

	September 30,			December 31,
	2012			2011
	(unaudited)
Assets
Unrestricted cash and cash equivalents	$	47,925		$	144,913
Restricted cash and cash equivalents		12,930			23,759
Loans and fees receivable:
Loans and fees receivable, net (of $8,502 and $7,480 in deferred revenue and $11,276 and $7,156 in allowances for uncollectible loans and fees receivable at September 30, 2012 and December 31, 2011, respectively)		56,569			64,721
Loans and fees receivable pledged as collateral under structured financings, net (of $60 and $511 in deferred revenue and $3,510 and $7,537 in allowances for uncollectible loans and fees receivable at September 30, 2012 and December 31, 2011, respectively)		12,598			31,902
Loans and fees receivable, at fair value		19,285			28,226
Loans and fees receivable pledged as collateral under structured financings, at fair value		168,407			238,763
Investments in previously charged-off receivables		-			37,110
Investments in securities		6,215			6,203
Deferred costs, net		2,100			3,033
Property at cost, net of depreciation		7,363			8,098
Investments in equity-method investees		41,914			49,862
Note receivable from sale of Investments in Previously Charged-Off Receivables segment		13,033			-
Prepaid expenses and other assets		18,273			11,317
Total assets	$	406,612		$	647,907
Liabilities
Accounts payable and accrued expenses	$	37,173		$	47,140
Notes payable, at face value		20,184			23,765
Notes payable associated with structured financings, at face value		7,366			23,151
Notes payable associated with structured financings, at fair value		167,521			241,755
Convertible senior notes (Note 8)		95,194			176,400
Income tax liability		61,683			59,368
Total liabilities		389,121			571,579

Commitments and contingencies (Note 9)

Equity
Common stock, no par value, 150,000,000 shares authorized: 15,419,179 shares issued and outstanding (including 1,672,656 loaned shares to be returned) at September 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		211,037			294,246
Treasury stock, at cost, 0 and 8,438,179 shares at September 30, 2012 and December 31, 2011, respectively		-			(187,615	)
Accumulated other comprehensive loss		(1,095	)		(2,257	)
Retained deficit		(192,090	)		(28,257	)
Total shareholders’ equity		17,852			76,117
Noncontrolling interests		(361	)		211
Total equity		17,491			76,328
Total liabilities and equity	$	406,612		$	647,907

See accompanying notes.

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CompuCredit Holdings Corporation and Subsidiaries

Consolidated Statements of Operations (Unaudited)

(Dollars in thousands, except per share data)

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2012			2011			2012			2011
Interest income:
Consumer loans, including past due fees	$	20,054		$	34,833		$	68,037		$	114,543
Other		323			240			731			829
Total interest income		20,377			35,073			68,768			115,372
Interest expense		(7,406	)		(10,282	)		(25,582	)		(33,262	)
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable		12,971			24,791			43,186			82,110
Fees and related income on earning assets		3,703			14,755			68,001			82,277
Losses upon charge off of loans and fees receivable recorded at fair value		(8,790	)		(28,019	)		(81,693	)		(117,209	)
Provision for losses on loans and fees receivable recorded at net realizable value		(5,373	)		(96	)		(13,828	)		325
Net interest income, fees and related income on earning assets		2,511			11,431			15,666			47,503
Other operating income:
Servicing income		1,002			767			3,234			2,593
Ancillary and interchange revenues		570			1,429			2,021			4,670
Gain on repurchase of convertible senior notes		-			138			-			607
Gain on buy-out of equity-method investee members		-			-			-			619
Equity in income of equity-method investees		356			6,630			9,912			28,757
Total other operating income		1,928			8,964			15,167			37,246
Other operating expense:
Salaries and benefits		2,523			4,520			12,990			16,545
Card and loan servicing		10,428			11,043			31,618			36,018
Marketing and solicitation		223			1,181			1,669			2,386
Depreciation		1,518			504			2,294			4,232
Other		5,557			7,231			18,755			20,450
Total other operating expense		20,249			24,479			67,326			79,631
(Loss on) income from continuing operations before income taxes		(15,810	)		(4,084	)		(36,493	)		5,118
Income tax benefit (expense)		3,936			(619	)		10,391			(1,743	)
(Loss on) income from continuing operations		(11,874	)		(4,703	)		(26,102	)		3,375
Discontinued operations:
Income from discontinued operations before income taxes		50,151			6,167			61,301			132,700
Income tax expense		(5,353	)		(42	)		(12,737	)		(4,142	)
Income from discontinued operations		44,798			6,125			48,564			128,558
Net income		32,924			1,422			22,462			131,933
Net loss (income) attributable to noncontrolling interests (including $1,131 of income associated with noncontrolling interests in discontinued operations during the nine months ended September 30, 2011)		287			277			572			(1,013	)
Net income attributable to controlling interests	$	33,211		$	1,699		$	23,034		$	130,920
(Loss on) income from continuing operations attributable to controlling interests per common share—basic	$	(0.60	)	$	(0.19	)	$	(1.21	)	$	0.13
(Loss on) income from continuing operations attributable to controlling interests per common share—diluted	$	(0.60	)	$	(0.19	)	$	(1.21	)	$	0.13
Income from discontinued operations attributable to controlling interests per common share—basic	$	2.32		$	0.27		$	2.30		$	4.72
Income from discontinued operations attributable to controlling interests per common share—diluted	$	2.32		$	0.27		$	2.30		$	4.70
Net income attributable to controlling interests per common share—basic	$	1.72		$	0.08		$	1.09		$	4.85
Net income attributable to controlling interests per common share—diluted	$	1.72		$	0.08		$	1.09		$	4.83

See accompanying notes.

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CompuCredit Holdings Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Unaudited)

(Dollars in thousands)

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2012			2011			2012			2011
Net income	$	32,924		$	1,422		$	22,462		$	131,933
Other comprehensive income:
Foreign currency translation adjustment		867			(314	)		1,212			2,079
Reclassifications of foreign currency translation adjustment to consolidated statements of operations		(19	)		-			(19	)		2,301
Income tax (expense) benefit related to other comprehensive income		(48	)		91			(31	)		45
Comprehensive income		33,724			1,199			23,624			136,358
Comprehensive loss (income) attributable to noncontrolling interests		287			277			572			(1,013	)
Comprehensive income attributable to controlling interests	$	34,011		$	1,476		$	24,196		$	135,345

See accompanying notes.

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CompuCredit Holdings Corporation and Subsidiaries

Consolidated Statement of Shareholders’ Equity

For the Nine Months Ended September 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		-			-		235			-			-			-			-			235
Purchase of treasury stock		-			-		-			(196	)		-			-			-			(196	)
Redemption and retirement of shares		(16,569,902	)		-		(82,500	)		182,642			-			(182,642	)		-			(82,500	)
Net income		-			-		-			-			-			23,034			(572	)		22,462
Foreign currency translation adjustment, net of tax		-			-		-			-			1,162			-			-			1,162
Balance at September 30, 2012		15,419,179		$	-	$	211,037		$	-		$	(1,095	)	$	(192,090	)	$	(361	)	$	17,491

See accompanying notes.

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CompuCredit Holdings Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

	For the Nine Months Ended September 30,
	2012			2011
Operating activities
Net income	$	22,462		$	131,933
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion, net		2,193			5,698
Losses upon charge off of loans and fees receivable recorded at fair value		81,693			117,209
Provision for losses on loans and fees receivable		16,402			17,550
Accretion of discount on convertible senior notes		2,287			5,112
Stock-based compensation expense		235			2,337
Unrealized gain on loans and fees receivable and underlying notes payable held at fair value		(57,754	)		(83,657	)
Other-than-temporary declines in investments in non-marketable debt securities		-			5,330
Unrealized loss on securities		287			358
Gain on repurchase of convertible senior notes		-			(607	)
Income from equity-method investments		(9,912	)		(28,757	)
Gain on buy-out of equity-method investee members		-			(619	)
Net gain on sale of subsidiary operations		(49,579	)		(101,359	)
Changes in assets and liabilities, exclusive of business acquisitions:
Decrease (increase) in uncollected fees on earning assets		15,905			(9,862	)
Decrease in JRAS auto loans receivable		3,481			10,702
Decrease in deferred costs		409			-
Increase in income tax liability		2,294			39
Decrease in prepaid expenses		606			8,058
(Decrease) increase in accounts payable and accrued expenses		(5,087	)		14,017
Other		707			(278	)
Net cash provided by operating activities		26,629			93,204
Investing activities
Decrease in restricted cash		9,602			12,349
Investment in equity-method investees		(1,354	)		(34,336	)
Proceeds from equity-method investees		20,310			17,553
Investments in earning assets		(190,141	)		(562,253	)
Proceeds from earning assets		230,177			763,819
Investments in subsidiaries		(3,514	)		-
Net cash associated with newly acquired consolidated subsidiaries		-			1,025
Proceeds from sale of subsidiary operations		99,029			147,449
Purchases and development of property, net of disposals		(1,909	)		(1,390	)
Net cash provided by investing activities		162,200			344,216
Financing activities
Noncontrolling interests contributions, net		-			600
Purchase of outstanding stock subject to tender offer		(82,500	)		(105,000	)
Purchase of treasury stock		(196	)		(1,714	)
Purchases of noncontrolling interests		-			(4,067	)
Proceeds from borrowings		18,578			9,697
Repayment of borrowings		(221,914	)		(306,127	)
Net cash used in financing activities		(286,032	)		(406,611	)
Effect of exchange rate changes on cash		215			986
Net (decrease) increase in unrestricted cash		(96,988	)		31,795
Unrestricted cash and cash equivalents at beginning of period		144,913			85,350
Unrestricted cash and cash equivalents at end of period	$	47,925		$	117,145
Supplemental cash flow information
Unrestricted cash included in assets held for sale	$	-		$	11,149
Cash paid for interest	$	25,596		$	29,894
Net cash income tax payments	$	52		$	5,891
Supplemental non-cash information
Notes payable associated with capital leases	$	218		$	-

See accompanying notes.

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CompuCredit Holdings Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 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 nine months ended September 30, 2012 are not indicative of what our results will be for the year ending December 31, 2012.

We also 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 and (b) our Auto Finance segment’s CAR and JRAS operations (all the aforementioned being labeled in loans and fees receivable, net), and (2) associated with our former ACC auto finance business, which is separately labeled as pledged as collateral for a non-recourse asset-backed structured financing facility. 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.

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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			Assets Sold			Balance at September 30, 2012
Loans and fees receivable, gross	$	119.3		$	137.9		$	(146.0	)	$	(18.6	)	$	92.6
Deferred revenue		(8.0	)		(20.0	)		19.4		$	-			(8.6	)
Allowance for uncollectible loans and fees receivable		(14.7	)		(16.4	)		12.7		$	3.6			(14.8	)
Loans and fees receivable, net	$	96.6		$	101.5		$	(113.9	)	$	(15.0	)	$	69.2

	Balance at December 31, 2010			Additions			Subtractions			Transfer to Assets Held for Sale			Balance at September 30, 2011
Loans and fees receivable, gross	$	227.7		$	317.5		$	(376.2	)	$	(42.3	)	$	126.7
Deferred revenue		(20.5	)		(33.3	)		38.2			5.8			(9.8	)
Allowance for uncollectible loans and fees receivable		(37.6	)		(7.1	)		24.5			4.0			(16.2	)
Loans and fees receivable, net	$	169.6		$	277.1		$	(313.5	)	$	(32.5	)	$	100.7

As of September 30, 2012 and 2011, the weighted average remaining accretion periods for the $8.6 million and $9.8 million, respectively, of deferred revenue reflected in the above tables were 12.6 and 15.5 months, respectively.

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 September 30, 2012	Credit Cards			Micro-Loans			Auto Finance			Other			Total
Allowance for uncollectible loans and fees receivable:
Balance at beginning of period	$	(10.5	)	$	(0.2	)	$	(4.5	)	$	(1.8	)	$	(17.0	)
Provision for loan losses (includes $0.7 million of provision netted within income from discontinued operations)		(4.1	)		(0.5	)		(0.3	)		(1.2	)		(6.1	)
Charge offs		3.4			0.3			1.4			0.4			5.5
Recoveries		(0.1	)		-			(0.7	)		-			(0.8	)
Sale of Assets		3.6			-			-			-			3.6
Balance at end of period	$	(7.7	)	$	(0.4	)	$	(4.1	)	$	(2.6	)	$	(14.8	)

For the Nine Months Ended September 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 (includes $2.6 million of provision netted within income from discontinued operations)		(13.0	)		(2.3	)		1.0			(2.1	)		(16.4	)
Charge offs		6.4			3.0			6.1			0.7			16.2
Recoveries		(0.7	)		-			(2.8	)		-			(3.5	)
Sale of Assets		3.6			-			-			-			3.6
Balance at end of period	$	(7.7	)	$	(0.4	)	$	(4.1	)	$	(2.6	)	$	(14.8	)
Balance at end of period individually evaluated for impairment	$	-		$	-		$	-		$	-		$	-
Balance at end of period collectively evaluated for impairment	$	(7.7	)	$	(0.4	)	$	(4.1	)	$	(2.6	)	$	(14.8	)
Loans and fees receivable:
Loans and fees receivable, gross	$	9.9		$	1.2		$	68.4		$	13.1		$	92.6
Loans and fees receivable individually evaluated for impairment	$	-		$	-		$	0.1		$	-		$	0.1
Loans and fees receivable collectively evaluated for impairment	$	9.9		$	1.2		$	68.3		$	13.1		$	92.5

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For the Three Months Ended September 30, 2011	Credit Cards			Micro-Loans			Auto Finance			Other			Total
Allowance for uncollectible loans and fees receivable:
Balance at beginning of period	$	(2.8	)	$	(0.8	)	$	(15.0	)	$	(0.4	)	$	(19.0	)
Provision for loan losses (includes $1.1 million of provision netted within income from discontinued operations)		(1.3	)		(0.9	)		1.2			(0.2	)		(1.2	)
Charge offs		0.8			0.9			4.1			-			5.8
Recoveries		(0.2	)		-			(1.6	)		-			(1.8	)
Transfer to assets held for sale		-			-			-			-			-
Sale of assets		-			-			-			-			-
Balance at end of period	$	(3.5	)	$	(0.8	)	$	(11.3	)	$	(0.6	)	$	(16.2	)

For the Nine Months Ended September 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 $7.4 million of provision netted within income from discontinued operations)		(2.5	)		(7.1	)		3.0			(0.5	)		(7.1	)
Charge offs		3.8			7.9			18.6			-			30.3
Recoveries		(0.8	)		(0.4	)		(5.3	)		-			(6.5	)
Transfer to assets held for sale		-			4.0			-			-			4.0
Sale of assets		-			-			0.7			-			0.7
Balance at end of period	$	(3.5	)	$	(0.8	)	$	(11.3	)	$	(0.6	)	$	(16.2	)
Balance at end of period individually evaluated for impairment	$	-		$	-		$	(0.3	)	$	-		$	(0.3	)
Balance at end of period collectively evaluated for impairment	$	(3.5	)	$	(0.8	)	$	(11.0	)	$	(0.6	)	$	(15.9	)
Loans and fees receivable:
Loans and fees receivable, gross	$	18.6		$	2.2		$	103.5		$	2.4		$	126.7
Loans and fees receivable individually evaluated for impairment	$	-		$	-		$	0.6		$	-		$	0.6
Loans and fees receivable collectively evaluated for impairment	$	18.6		$	2.2		$	102.9		$	2.4		$	126.1

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

	As of
	September 30,		December 31,
	2012		2011
Current loans receivable	$	74.3	$	100.9
Current fees receivable		1.4		1.9
Delinquent loans and fees receivable		16.9		16.5
Loans and fees receivable, gross	$	92.6	$	119.3

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.

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An aging of our delinquent loans and fees receivable, gross (in millions) as of September 30, 2012 and December 31, 2011 is as follows:

As of September 30, 2012	Credit Cards		Micro-Loans		Auto Finance		Other		Total
30-59 days past due	$	0.7	$	0.1	$	5.4	$	0.5	$	6.7
60-89 days past due		1.0		0.2		2.0		0.3		3.5
Greater than 90 days past due		4.2		0.2		1.6		0.7		6.7
Delinquent loans and fees receivable, gross		5.9		0.5		9.0		1.5		16.9
Current loans and fees receivable, gross		4.0		0.7		59.4		11.6		75.7
Total loans and fees receivable, gross	$	9.9	$	1.2	$	68.4	$	13.1	$	92.6
Balance of loans greater than 90-days delinquent still accruing interest and fees	$	-	$	-	$	0.5	$	-	$	0.5

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 September 30,						For the Nine Months Ended September 30,
	2012			2011			2012			2011
Unrecovered balance at beginning of period	$	59,489		$	31,280		$	37,110		$	29,889
Acquisitions of defaulted accounts		1,258			19,191			47,958			38,675
Cash collections		(9,976	)		(20,948	)		(62,614	)		(60,804	)
Cost-recovery method income recognized on defaulted accounts (included as a component of discontinued operations on our consolidated statements of operations)		4,833			10,295			33,150			32,058
Sale of unrecovered balance		(55,604	)		-			(55,604	)		-
Unrecovered balance at end of period	$	-		$	39,818		$	-		$	39,818

In August 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 were historically reflected within our Credit Cards and Other Investments segment. The sales price included (1) $119.7 million (cash of $106.7 million and a note receivable of $13.0 million) at closing, of which $5.4 million in cash and up to an additional $4.6 million in potential repayments of the note receivable or proceeds from any potential sale of the note receivable will be held in escrow for 12 months following the closing date of the transaction to satisfy certain indemnification provisions, and (2) an additional $10.8 million in cash that we may receive if certain performance targets are met by December 31, 2014. The $10.8 million of additional contingent consideration will be recognized into income upon the achievement of the performance targets. Our basis in the net assets that were included in the sale was $67.0 million resulting in a gain on sale (after related expenses) of $49.6 million, which is reported within our income from discontinued operations category on our consolidated statements of operations.

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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
	September 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		4,204		3,884
Trading:
Investments in marketable equity securities		-		151
Total investments in securities	$	6,215	$	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 25.5% and 28.8% for the three and nine months ended September 30, 2012, respectively, versus our negative effective income tax benefit rate of 15.2% for the three months ended September 30, 2011 and our positive effective income tax expense rate of 34.1% for the nine months ended September 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, (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, and (3) the effects on our interim financial reporting results of intra-period tax allocations associated with our discontinued operations as required under GAAP. Computed without regard to the effects of the valuation allowance changes, our effective tax rates would have been a positive 24.8% and a positive 28.5% benefit rate in the three and nine months ended September 30, 2012, respectively, compared to a positive 9.5% benefit rate and a positive 99.1% expense rate, in the three and nine months ended September 30, 2011, respectively.

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We recognize potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. We recognized $0.6 million and $1.5 million in potential interest and penalties associated with uncertain tax positions during the three and nine months ended September 30, 2012, respectively, compared to $0.6 million and $1.7 million during the three and nine months ended September 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 nine months ended September 30, 2012 and 2011, respectively.

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 September 30,						For the Nine Months September 30,
	2012			2011			2012			2011
Fees on credit products	$	5,316		$	2,566		$	12,310		$	7,332
Changes in fair value of loans and fees receivable recorded at fair value (1)		10,742			46,646			93,613			166,164
Changes in fair value of notes payable associated with structured financings recorded at fair value		(10,469	)		(29,538	)		(35,859	)		(82,507	)
Gains on investments in securities		285			(5,418	)		49			(5,277	)
Loss on sale of JRAS assets		-			-			-			(4,648	)
Other		(2,171	)		499			(2,112	)		1,213
Total fees and related income on earning assets	$	3,703		$	14,755		$	68,001		$	82,277

(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 August 2012, the Financial Accounting Standards Board (“FASB”) issued proposed guidance that requires enhanced disclosures for reclassification adjustments out of accumulated other comprehensive income (“AOCI”). The proposed disclosures would require an entity to break the current period changes in the accumulated balances for each component of other comprehensive income into two categories—amounts reclassified out of AOCI, and everything else. Additional disclosures would be required displaying significant items reclassified out of each component of AOCI, including (1) the line items impacted for those items being reclassified into earnings and (2) a cross-reference to the financial statement notes where further discussion is contained for those items not reclassified into earnings. A final rule is expected prior to year end.

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.

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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 September 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.

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; additionally, in August 2012 we sold our Investments in Previously Charged-Off receivables segment along with our balance transfer card operations. 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 September 30,						For the Nine Months September 30,
	2012			2011			2012			2011
Net interest income, fees and related income on earning assets	$	5,772		$	27,363		$	37,137		$	103,559
Gain on sale of assets	$	49,579			-		$	49,579			103,706
Other operating expense		5,200			21,196			25,415			74,565
Income before income taxes		50,151			6,167			61,301			132,700
Income tax expense		(5,353	)		(42	)		(12,737	)		(4,142	)
Net income	$	44,798		$	6,125		$	48,564		$	128,558
Net income attributable to noncontrolling interests	$	-		$	-		$	-		$	1,131

There were no assets held for sale on either our September 30, 2012 or December 31, 2011 consolidated balance sheets.

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4.	Segment Reporting

We operate primarily within one industry consisting of two reportable segments by which we manage our business. Our two reportable segments are: Credit Cards and Other Investments and Auto Finance. Due to the 2011 sales of our Retail and U.K.-based Internet micro-loans operations and our August 2012 sale of our Investments in Previously Charged-Off Receivables segment, we have eliminated segment reporting for our former Retail Micro-Loans, Internet Micro-Loans and Investments in Previously Charged-Off Receivables 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:

	Credit Cards
	and Other			Auto
Three Months Ended September 30, 2012	Investments			Finance			Total
Net interest income, fees and related income on earning assets	$	(1,490	)	$	4,001		$	2,511
Total other operating income	$	1,784		$	144		$	1,928
(Loss) income from continuing operations before income taxes	$	(15,660	)	$	(150	)	$	(15,810	)
Loans and fees receivable, gross	$	24,143		$	68,372		$	92,515
Loans and fees receivable, net	$	11,645		$	57,522		$	69,167
Loans and fees receivable held at fair value	$	187,692		$	-		$	187,692
Total assets	$	340,106		$	66,506		$	406,612

	Credit Cards
	and Other			Auto
Three Months Ended September 30, 2011	Investments			Finance			Total
Net interest income, fees and related income on earning assets	$	3,131		$	8,300		$	11,431
Total other operating income	$	8,834		$	130		$	8,964
(Loss) income from continuing operations before income taxes	$	(7,293	)	$	3,209		$	(4,084	)
Loans and fees receivable, gross	$	23,172		$	103,548		$	126,720
Loans and fees receivable, net	$	18,079		$	82,629		$	100,708
Loans and fees receivable held at fair value	$	310,815		$	-		$	310,815
Total assets	$	618,566		$	92,272		$	710,838

	Credit Cards
	and Other			Auto
Nine Months Ended September 30, 2012	Investments			Finance		Total
Net interest income, fees and related income on earning assets	$	449		$	15,217	$	15,666
Total other operating income	$	14,717		$	450	$	15,167
(Loss) income from continuing operations before income taxes	$	(37,292	)	$	799	$	(36,493	)

	Credit Cards
	and Other			Auto
Nine Months Ended September 30, 2011	Investments			Finance		Total
Net interest income, fees and related income on earning assets	$	27,631		$	19,872	$	47,503
Total other operating income	$	36,860		$	386	$	37,246
(Loss) income from continuing operations before income taxes	$	2,377		$	2,741	$	5,118

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5.	Shareholders’ Equity

Pursuant to the closing of a tender offer in September 2012, we repurchased 8,250,000 shares of our common stock at a purchase price of $10.00 per share for an aggregate cost of $82.5 million. These shares were retired contemporaneously with the repurchase transaction. Additionally, 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 deficit in that period. Lastly, 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 10,000 and 732,567 of such shares for the three and nine months ended September 30, 2011, respectively, at gross costs of $0.3 million and $24.5 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 shares during the three months ended March 31, 2012 at gross costs of $0.2 million, and this compares to such repurchases of 3,245 and 206,504 shares for the three and nine months ended September 30, 2011, respectively, at gross costs of $0.008 million and $1.1 million, respectively.

We had 1,672,656 loaned shares outstanding at September 30, 2012, which were originally lent in connection with our December 2005 issuance of convertible senior notes.

6.	Investments in Equity-Method Investees

Our equity-method investments outstanding at September 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 then 47.5%-owned 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%.

In the following tables, we summarize (in thousands) combined balance sheet and results of operations data for our equity-method investees:

	As of
	September 30, 2012		December 31, 2011
Loans and fees receivable pledged as collateral under structured financings, at fair value	$	58,406	$	78,413
Investments in non-marketable debt securities, at fair value	$	55,967	$	81,639
Total assets	$	128,598	$	167,898
Notes payable associated with structured financings, at fair value	$	35,513	$	59,515
Total liabilities	$	35,811	$	59,909
Members’ capital	$	92,787	$	107,989

	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2012			2011		2012		2011
Net interest income, fees and related income on earning assets	$	695		$	15,331	$	22,066	$	59,532
Total other operating income	$	(618	)	$	119	$	311	$	266
Net (loss) income	$	(569	)	$	14,517	$	20,135	$	56,142

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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
	September 30, 2012		December 31, 2011
Investments in non-marketable debt securities, at fair value	$	55,967	$	81,639
Total assets	$	56,490	$	83,210
Total liabilities	$	-	$	-
Members’ capital	$	56,490	$	83,210

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
		2012		2011		2012		2011
Net interest income, fees and related income on earning assets	$	2,081	$	8,761	$	6,638	$	53,203
Net income	$	2,069	$	8,787	$	6,593	$	53,115

As noted in Note 8, “Convertible Senior Notes and Notes Payable,” notes payable with a fair value of $56.0 million correspond with the $56.0 million investment in non-marketable debt securities, at fair value held by our equity-method investee as noted in the above table.

7.	Fair Values of Assets and Liabilities

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 and carrying amounts as of September 30, 2012 and December 31, 2011 by fair value hierarchy:

	Quoted Prices in Active		Significant Other		Significant		Carrying Amount of Assets
	Markets for Identical		Observable Inputs		Unobservable		Measured at Fair
Assets – As of September 30, 2012	Assets (Level 1)		(Level 2)		Inputs (Level 3)		Value
Investment securities—trading	$	-	$	-	$	-	$	-
Loans and fees receivable, at fair value	$	-	$	-	$	19,285	$	19,285
Loans and fees receivable pledged as collateral under structured financings, at fair value	$	-	$	-	$	168,407	$	168,407

							Carrying Amount
	Quoted Prices in Active		Significant Other		Significant		of Assets
	Markets for Identical		Observable Inputs		Unobservable		Measured at Fair
Assets – As of December 31, 2011	Assets (Level 1)		(Level 2)		Inputs (Level 3)		Value
Investment securities—trading	$	151	$	-	$	-	$	151
Loans and fees receivable, at fair value	$	-	$	-	$	28,226	$	28,226
Loans and fees receivable pledged as collateral under structured financings, at fair value	$	-	$	-	$	238,763	$	238,763

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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.” Total realized net losses on our investment securities—trading were $0.6 million for both three and nine months ended September 30, 2012, compared to $0.0 million and $0.5 million for the three and nine months ended September 30, 2011, 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 our 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 nine-month periods ended September 30, 2012 and 2011:

				Receivable Pledged as
				Collateral under
	Loans and Fees			Structured
	Receivable, at			Financings, at Fair
	Fair Value			Value			Total
Balance at January 1, 2011	$	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		-			154,811			154,811
Net revaluations of loans and fees receivable, at fair value		11,353			-			11,353
Settlements, net		(18,095	)		(238,378	)		(256,473	)
Impact of foreign currency translation		-			945			945
Net transfers between categories		29,305			(29,305	)		-
Net transfers in and/or out of Level 3		-			-			-
Balance at September 30, 2011	$	35,000		$	275,815		$	310,815
Balance at January 1, 2012	$	28,226		$	238,763		$	266,989
Transfers in due to consolidation of equity-method investees		-			-			-
Total gains—realized/unrealized:
Net revaluations of loans and fees receivable pledged as collateral under structured financings, at fair value		-			83,041			83,041
Net revaluations of loans and fees receivable, at fair value		10,572			-			10,572
Settlements, net		(19,513	)		(156,730	)		(176,243	)
Impact of foreign currency translation		-			3,333			3,333
Net transfers in and/or out of Level 3		-			-			-
Balance at September 30, 2012	$	19,285		$	168,407