form10q.htm
 
 
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________
 
FORM 10-Q

 
 
 
For the quarterly period ended June 30, 2009
 
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 Holdings Corporation has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding twelve months and has been subject to such filing requirements for the past ninety days.  CompuCredit Holdings Corporation is not yet required to file Interactive Data Files.
 
CompuCredit Holdings Corporation is an accelerated filer and is not a shell company.
 
As of July 31, 2009, 47,732,253 shares of Common Stock, no par value, of CompuCredit Holdings Corporation were outstanding. (This excludes 3,651,069 loaned shares to be returned.)

 
 











 
 

 

COMPUCREDIT HOLDINGS CORPORATION
FORM 10-Q
TABLE OF CONTENTS

 
         
     
Page
 
PART I. FINANCIAL INFORMATION
 
         
Item 1.
Financial Statements (Unaudited)
     
      1  
      2  
      3  
      4  
      5  
      6  
Item 2.
    30  
Item 3.
    55  
Item 4.
    57  
   
PART II. OTHER INFORMATION
 
           
Item 1.
    58  
Item 1A.
    59  
Item 4.
    72  
Item 6.
    73  
      73  






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

   
June 30,
 2009
   
December 31,
 2008
 
         
(as adjusted)
 
Assets
           
Cash and cash equivalents (including restricted cash of $17,741 at June 30, 2009 and $19,913 at December 31, 2008)
  $ 102,639     $ 94,428  
Securitized earning assets
    471,366       813,793  
Non-securitized earning assets, net:
               
Loans and fees receivable, net (of $22,810 and $24,757 in deferred revenue and $56,735 and $55,753 in allowances for uncollectible loans and fees receivable at June 30, 2009 and December 31, 2008, respectively)
    309,231       340,734  
Investments in previously charged-off receivables
    59,271       47,676  
Investments in securities
    3,598       4,678  
Deferred costs, net
    5,509       6,161  
Property at cost, net of depreciation
    39,292       48,297  
Investments in equity-method investees
    22,002       53,093  
Intangibles, net
    3,344       4,547  
Goodwill
    44,302       59,129  
Prepaid expenses and other assets
    43,870       52,575  
Assets of discontinued operations
    1,931       —   
Total assets
  $ 1,106,355     $ 1,525,111  
Liabilities
               
Accounts payable and accrued expenses
  $ 96,900     $ 120,235  
Notes payable and other borrowings
    161,631       199,939  
Convertible senior notes (Note 9)
    304,572       299,834  
Deferred revenue primarily from forward flow agreement
    23,261       23,492  
Current and deferred income tax liabilities
    24,681       134,754  
Liabilities related to discontinued operations
    2,372        
Total liabilities
    613,417       778,254  
                 
Commitments and contingencies (Note 11)
               
                 
Equity
               
Common stock, no par value, 150,000,000 shares authorized: 60,042,482  shares issued and 51,383,322 shares outstanding at June 30, 2009 (including 3,651,069 loaned shares to be returned); and 59,947,301 shares issued and 51,213,385 shares outstanding at December 31, 2008 (including 3,651,069 loaned shares to be returned)
           
Additional paid-in capital
    522,053       522,571  
Treasury stock, at cost, 8,659,160 and 8,733,916 shares at June 30, 2009 and December 31, 2008,  respectively
    (220,429 )     (222,310 )
Accumulated other comprehensive loss
    (30,089 )     (31,431 )
Retained earnings
    206,288       453,149  
Total shareholders’ equity (Note 2)
    477,823       721,979  
Noncontrolling interests (Note 2)
    15,115       24,878  
Total equity
    492,938       746,857  
Total liabilities and equity (Note 2)
  $ 1,106,355     $ 1,525,111  
 
See accompanying notes.


 
CompuCredit Holdings Corporation and Subsidiaries
Condensed 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,
 
   
2009
   
2008
   
2009
   
2008
 
         
(as adjusted)
         
(as adjusted)
 
Interest income:
                       
Consumer loans, including past due fees
  $ 18,967     $ 24,866     $ 38,768     $ 47,782  
Other
    252       1,390       581       3,473  
Total interest income
    19,219       26,256       39,349       51,255  
Interest expense
    (10,018 )     (12,949 )     (20,210 )     (26,939 )
Net interest income before fees and related income on non-securitized earning assets and provision for loan losses
    9,201       13,307       19,139       24,316  
Fees and related income on non-securitized earning assets
    40,926       49,775       83,572       104,151  
Provision for loan losses
    (18,555 )     (15,704 )     (30,808 )     (35,885 )
Net interest income, fees and related income on non-securitized earning assets
    31,572       47,378       71,903       92,582  
Other operating (loss) income:
                               
Loss on securitized earning assets
    (161,688 )     (60,661 )     (313,714 )     (18,068 )
Servicing income
    31,470       44,868       70,874       93,154  
Ancillary and interchange revenues
    5,229       15,710       11,227       31,131  
Gain on repurchase of convertible senior notes
          13,728       160       13,728  
Gain on buy-out of equity-method investee members
    20,990             20,990        
Equity in (loss) income of equity-method investees
    (7,833 )     6,982       (10,015 )     15,456  
Total other operating (loss) income
    (111,832 )     20,627       (220,478 )     135,401  
Other operating expense:
                               
Salaries and benefits
    13,843       17,908       28,075       36,687  
Card and loan servicing
    53,121       70,251       110,750       147,113  
Marketing and solicitation
    3,908       17,053       8,054       32,899  
Depreciation
    5,314       7,359       11,641       17,270  
Goodwill Impairment
    20,000             20,000        
Other
    25,309       35,815       50,503       64,497  
Total other operating expense
    121,495       148,386       229,023       298,466  
Loss from continuing operations before income taxes
    (201,755 )     (80,381 )     (377,598 )     (70,483 )
Income tax benefit
    59,951       26,195       120,590       21,889  
Loss from continuing operations
    (141,804 )     (54,186 )     (257,008 )     (48,594 )
Discontinued operations:
                               
Loss from discontinued operations before income taxes
    (6,750 )     (3,098 )     (6,599 )     (7,176 )
Income tax benefit
    2,363       1,084       2,310       2,512  
Loss from discontinued operations
    (4,387 )     (2,014 )     (4,289 )     (4,664 )
Net loss
    (146,191 )     (56,200 )     (261,297 )     (53,258 )
Net loss (income) attributable to noncontrolling interests
    11,847       518       14,436       (1,501 )
Net loss attributable to controlling interests
  $ (134,344 )   $ (55,682 )   $ (246,861 )   $ (54,759 )
Loss from continuing operations attributable to controlling interests per common share—basic
  $ (2.72 )   $ (1.13 )   $ (5.09 )   $ (1.05 )
Loss from continuing operations attributable to controlling interests per common share—diluted
  $ (2.72 )   $ (1.13 )   $ (5.09 )   $ (1.05 )
Loss from discontinued operations attributable to controlling interests per common share—basic
  $ (0.09 )   $ (0.04 )   $ (0.09 )   $ (0.10 )
Loss from discontinued operations attributable to controlling interests per common share—diluted
  $ (0.09 )   $ (0.04 )   $ (0.09 )   $ (0.10 )
Net loss attributable to controlling interests per common share—basic
  $ (2.81 )   $ (1.17 )   $ (5.18 )   $ (1.15 )
Net loss attributable to controlling interests per common share—diluted
  $ (2.81 )   $ (1.17 )   $ (5.18 )   $ (1.15 )
See accompanying notes.


 
CompuCredit Holdings Corporation and Subsidiaries
Condensed Consolidated Statement of Equity (Unaudited)
For the Six months ended June 30, 2009
(Dollars in thousands)
 
   
Common Stock
                                           
   
Shares Issued
   
Amount
   
Additional Paid-In Capital
   
Treasury Stock
   
Accumulated Other Comprehensive Income
   
Retained Earnings
   
Noncontrolling Interests
   
Comprehensive Loss
   
Total Equity
 
Balance at December 31, 2008 (as adjusted)
    59,947,301     $     $ 522,571     $ (222,310 )   $ (31,431 )   $ 453,149     $ 24,878     $     $ 746,857  
Use of treasury stock for stock-based compensation plans
    (111,644 )           (1,996 )     1,996                                
Issuance of restricted stock
    206,825                                                  
Amortization of deferred stock-based compensation costs
                4,387                                     4,387  
Purchase of treasury stock
                      (115 )                             (115 )
Tax effects of stock-based compensation plans
                (1,317 )                                   (1,317 )
Settlement of contingent earn-out as referenced in Note 10, “Goodwill and Intangible Assets”
                (1,592 )                        5,431             3,839  
Distributions to owners of noncontrolling interests
                                        (756 )           (756 )
Comprehensive loss:
                                                                       
Net loss
                                  (246,861 )     (14,436 )     (261,297 )     (261,297 )
Foreign currency translation adjustment, net of tax
                            1,342             (2 )     1,340       1,340  
Comprehensive loss
                                            $ (259,957 )      
Balance at June 30, 2009
    60,042,482     $     $ 522,053     $ (220,429 )   $ (30,089 )   $ 206,288     $ 15,115             $ 492,938  
 
See accompanying notes.
 


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

   
For the Three Months Ended
 June 30,
   
For the Six Months Ended
June 30,
 
   
2009
   
2008
   
2009
   
2008
 
         
(as adjusted)
         
(as adjusted)
 
Net loss
  $ (146,191 )   $ (56,200 )   $ (261,297 )   $ (53,258 )
    Other comprehensive loss:
                               
Foreign currency translation adjustment
    15,075       33       13,247       (279 )
Income tax (expense) benefit related to other comprehensive loss
    (12,347 )           (11,907 )     96  
    Comprehensive loss
    (143,463 )     (56,167 )     (259,957 )     (53,441 )
Comprehensive loss (income) attributable to noncontrolling interests
    11,802       518       14,438       (1,505 )
Comprehensive loss attributable to controlling interests
  $ (131,661 )   $ (55,649 )   $ (245,519 )   $ (54,946 )

 
See accompanying notes.
 


CompuCredit Holdings Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
   
For the Six Months Ended
 June 30,
 
   
2009
   
2008
 
         
(as adjusted)
 
Operating activities
           
Net loss
  $ (261,297 )   $ (53,258 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Depreciation expense
    11,682       17,359  
Impairment of goodwill
    23,483       1,132  
Provision for loan losses
    31,500       36,509  
Amortization and impairment of intangibles
    1,203       1,250  
Accretion of deferred revenue
    (230 )     (11,467 )
Stock-based compensation expense
    4,387       4,844  
Retained interests adjustments, net
    526,832       303,191  
Unrealized loss on debt and equity securities classified as trading securities
          1,950  
Gain on repurchase of convertible senior notes
    (160 )     (13,728 )
Interest expense accreted on convertible senior notes
    4,991       5,090  
Gain on buy-out of equity-method investee members
    (20,990 )      
Income in excess of distributions from equity-method investments
          (2,055 )
Changes in assets and liabilities, exclusive of business acquisitions:
               
Net (increase) decrease in valuation of debt, equity and U.S. government securities classified as trading securities
    (163 )     17,939  
Decrease in uncollected fees on non-securitized earning assets
    6,508       3,823  
Decrease in deferred costs
    652       1,290  
(Decrease) increase in income tax liability
    (123,513 )     62,699  
Increase in deferred revenue
          1,914  
Decrease (increase) in prepaid expenses
    4,845       (23,186 )
Decrease in accounts payable and accrued expenses
    (20,445 )     (22,357 )
Other
    4,527       10,542  
Net cash provided by operating activities
    193,812       343,481  
Investing activities
               
Purchase of third-party interest in equity-method investee
    (19,542 )      
Proceeds from equity-method investees
    50,633       5,314  
Investments in securitized earning assets
    (340,818 )     (924,331 )
Proceeds from securitized earning assets
    186,844       701,806  
Investments in non-securitized earning assets
    (461,191 )     (642,251 )
Proceeds from non-securitized earning assets
    443,739       564,392  
Acquisition of assets
    (621 )      
Purchases and development of buildings, software, furniture, fixtures and equipment, net of disposals
    (2,084 )     (8,895 )
Net cash used in investing activities
    (143,040 )     (303,965 )
Financing activities
               
Noncontrolling interests distributions, net
    (756 )     (3,468 )
Proceeds from exercise of stock options
          74  
Purchase of treasury stock
    (115 )     (515 )
Purchase of noncontrolling interest
    (1,096 )      
Proceeds from borrowings
    41,351       60,735  
Repayment of borrowings
    (83,044 )     (80,942 )
Net cash used in financing activities
    (43,660 )     (24,116 )
Effect of exchange rate changes on cash
    1,099       (79 )
Net increase in cash
    8,211       15,321  
Cash and cash equivalents at beginning of period
    94,428       137,526  
Cash and cash equivalents at end of period
  $ 102,639     $ 152,847  
Supplemental cash flow information
               
Cash paid for interest
  $ 16,116     $ 22,699  
Net cash paid for (refunds of) income taxes
  $ 613     $ (87,094 )
Supplemental non-cash information
               
Notes payable associated with capital leases
  $ 1,385     $ 6,839  
Notes payable associated with investments in securities
  $     $  
Issuance of stock options and restricted stock
  $ 1,129     $ 6,989  
See accompanying notes.


 
CompuCredit Holdings Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
June 30, 2009
 
1.
Basis of Presentation
 
We have prepared our condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Securities and Exchange Commission (“SEC”) Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete consolidated financial statements. In the opinion of management, all normal recurring adjustments considered necessary to fairly state the results for the interim periods presented have been included. The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of our condensed consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Certain estimates, such as credit losses, payment rates, costs of funds, discount rates and the yields earned on securitized receivables, significantly affect our reported loss on retained interests in credit card receivables securitized (which is a component of loss on securitized earning assets on our condensed consolidated statements of operations) and the reported value of securitized earning assets on our condensed consolidated balance sheets. Additionally, estimates of future credit losses on our non-securitized loans and fees receivable have a significant effect on the provision for loan losses within our condensed consolidated statements of operations and loans and fees receivable, net, which is a component of non-securitized earning assets, net on our condensed consolidated balance sheets. Operating results for the three and six months ended June 30, 2009 are not necessarily indicative of what our results will be for the year ending December 31, 2009.
 
We have reclassified certain amounts in our prior period condensed consolidated financial statements to conform to current period presentation, and we have eliminated all significant intercompany balances and transactions for financial reporting purposes.
 
Our prior year reclassifications include those required for the retrospective application of two new accounting pronouncements that are first effective for us under GAAP in our 2009 consolidated financial statements—specifically, a pronouncement that resulted in the reclassification of our prior liability for minority interests to a new noncontrolling interests component of total equity, and a pronouncement that resulted in reclassifications of consolidated balance sheet balances from deferred loan costs and convertible senior notes to additional paid-in capital and in associated reclassifications among retained earnings and deferred tax liabilities. Retrospective application of this latter pronouncement also had the effect of increasing interest expense and, accordingly, decreasing net income within our condensed consolidated statements of operations for the three and six months ended June 30, 2008.
 
On June 30, 2009, we completed a reorganization through which CompuCredit Corporation, our former parent company, became a wholly owned subsidiary of CompuCredit Holdings Corporation. We effected this reorganization through a merger pursuant to an Agreement and Plan of Merger, dated as of June 2, 2009, by and among CompuCredit Corporation, CompuCredit Holdings Corporation and CompuCredit Merger Sub, Inc., and as a result of the reorganization, each outstanding share of CompuCredit Corporation common stock was automatically converted into one share of CompuCredit Holdings Corporation common stock.
 
As a result of the reorganization, CompuCredit Corporation common stock is no longer publicly traded, and CompuCredit Holdings Corporation common stock commenced trading on the NASDAQ Global Select Market on July 1, 2009 under the symbol “CCRT,” the same symbol under which CompuCredit Corporation common stock was previously listed and traded.
 
The post-reorganization condensed consolidated financial statements presented herein are presented on the same basis as and can be compared to the condensed consolidated financial statements reported in CompuCredit Corporation’s prior quarterly and annual reports filed with the SEC. The accompanying condensed consolidated balance sheet as of December 31, 2008 has been derived from and should be read in connection with the audited consolidated financial statements included in CompuCredit Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008; likewise, it should be read in conjunction with management’s discussion and analysis of financial condition and results of operations also contained in that Annual Report.
 

2.
Summary of Significant Accounting Policies and Condensed Consolidated Financial Statement Components

    The following is a summary of significant accounting policies we follow in preparing our consolidated financial statements, as well as a description of significant components of our consolidated financial statements.
 
Restricted Cash
 
Restricted cash as of June 30, 2009 includes (1) $8.7 million of escrowed gross proceeds (including interest earned thereon) associated with a forward flow contract between one of our subsidiaries and a subsidiary of Encore Capital Group, Inc. (collectively with all other subsidiaries or affiliates of Encore Capital Group, Inc. to which we refer, “Encore”), (2) certain collections on receivables within our Auto Finance segment, the cash balances of which are required to be distributed to noteholders under our debt facilities, and (3) cash collateral balances underlying standby letters of credit that have been issued in favor of certain regulators in connection with our retail micro-loan activities.
 
On July 10, 2008, Encore did not purchase certain accounts as contemplated by the forward flow contract, alleging that we breached certain representations and warranties set forth in the contract (based upon then-outstanding allegations made by the Federal Trade Commission (“FTC”) as discussed further in Note 11, “Commitments and Contingencies”). Subsequently, both our subsidiary and Encore advised one another that they were in default of various obligations under the contract and various related agreements among them, and the parties currently are endeavoring to resolve these disputes through arbitration. Notwithstanding our settlement in December 2008 of all outstanding matters with the FTC, because of these ongoing disputes with Encore, we have not recognized subsequent to July 10, 2008 any income representing escrowed funds classified within restricted cash that we believe we have earned after that date but that Encore has not released from the escrowed funds.
 
Non-Securitized Earning Assets, Net
 
The components of non-securitized earning assets, net, on our consolidated balance sheets include loans and fees receivable, net, investments in previously charged-off receivables and investments in securities.
 
Loans and Fees Receivable, Net.  Loans and fees receivable, net, currently consist principally of receivables associated with our retail and Internet micro-loan activities and our auto finance business.
 
As applicable, we show loans and fees receivable net of both an allowance for uncollectible loans and fees receivable and unearned fees (or “deferred revenue”) in accordance with applicable accounting rules.
 
 We account for the loans and fees receivable associated with our acquisition of a $189.0 million auto loan portfolio from Patelco Credit Union (“Patelco”) under accounting rules that limit the yield that may be accreted (accretable yield) to the excess of our estimate of undiscounted expected principal, interest, and other cash flows (including the effects of prepayments) expected to be collected on the date of acquisition over our initial investment in the loans and fees receivable. The excess of contractual cash flows over cash flows expected to be collected (nonaccretable difference) is not recognized as an adjustment of yield, loss accrual or valuation allowance. The following tables show (in thousands) a roll-forward of accretable yield for our loans for which we apply these rules, as well as the carrying amounts of and gross loans and fees receivable balances of our loans for which we apply these rules.
 
   
For the Three Months Ended
 June 30,
   
For the Six Months Ended
June 30,
   
   
2009
   
2008
   
2009
   
2008
 
Roll-forward of accretable yield:
                       
Balance at beginning of period
  $ (13,067 )   $ (24,314 )   $ (15,934 )   $ (28,737 )
Impairment of accretable yield
    (404           (404      
Accretion of yield
    2,548       3,951       5,415       8,374  
Balance at end of period
  $ (10,923 )   $ (20,363 )   $ (10,923 )   $ (20,363 )
 
Acquired loans and fees receivable subject to accretable yield accounting rules:
     
Carrying amount of loans and fees receivable at acquisition date
  $ 160,592  
Carrying amount of loans and fees receivable at June 30, 2009
  $ 48,541  
Gross loans and fees receivable balance at acquisition date
  $ 191,976  
Gross loans and fees receivable balance at June 30, 2009
  $ 57,182  
 



 
 A roll-forward of the components of loans and fees receivable, net (in millions) between our December 31, 2008 and June 30, 2009 consolidated balance sheet dates is as follows:
 
   
Balance at
December 31,
2008
   
Additions
   
Subtractions
   
Balance at
June 30,
2009
 
Loans and fees receivable, gross
  $ 421.3     $ 487.8     $ (520.4 )   $ 388.7  
Deferred revenue
    (24.8 )     (32.5 )     34.5       (22.8 )
Allowance for uncollectible loans and fees receivable
    (55.8 )     (30.8 )     29.9       (56.7 )
Loans and fees receivable, net
  $ 340.7     $ 424.5     $ (456.0 )   $ 309.2  
 
As of June 30, 2009, the weighted average remaining accretion period for the $22.8 million of deferred revenue reflected in the above table was 24.4 months.
 
A roll-forward of our allowance for uncollectible loans and fees receivable (in millions) during each of the three and six months ended June 30, 2009 and 2008, respectively, is as follows:
 
   
For the Three Months Ended
June 30,
   
For the Six Months Ended
June 30,
 
   
2009
   
2008
   
2009
   
2008
 
Balance at beginning of period
  $ (53.5 )   $ (54.5 )   $ (55.8 )   $ (51.5 )
Provision for loan losses
    (18.6 )     (15.7 )     (30.8 )     (35.9 )
Charge offs
    16.7       16.8       32.8       36.7  
Recoveries
    (1.3 )     (2.3 )     (2.9 )     (5.0 )
Balance at end of period
  $ (56.7 )   $ (55.7 )   $ (56.7 )   $ (55.7 )
 
Investments in Previously Charged-Off Receivables. The following table shows (in thousands) a roll-forward of our investments in previously charged-off receivables activities:
 
   
For the Three Months
Ended
June 30, 2009
   
For the Six Months
Ended
June 30, 2009
 
Unrecovered balance at beginning of period
  $ 55,488     $ 47,676  
Acquisitions of defaulted accounts
    14,278       31,651  
Cash collections
    (14,341 )     (28,221 )
Cost-recovery method income recognized on defaulted accounts (included within fees and related income on non-securitized earning assets on our consolidated statements of operations)
    3,846       8,165  
Unrecovered balance at end of period
  $ 59,271     $ 59,271  
Estimated remaining collections (“ERC”)
  $ 125,844     $ 125,844  
 
 Our previously charged-off receivables consist of amounts associated with normal delinquency charged-off accounts, accounts for which debtors have filed for bankruptcy protection under Chapter 13 of the United States Bankruptcy Code (“Chapter 13 Bankruptcies”) and accounts participating in or acquired in connection with our balance transfer program prior to such time as we issue credit cards relating to the accounts.
 
We estimate the life of each pool of previously charged-off receivables acquired by us generally to be between twenty-four and thirty-six months for normal delinquency charged-off accounts and approximately sixty months for Chapter 13 Bankruptcies. We anticipate collecting 45.2% of the ERC of the existing accounts over the next twelve months, with the balance to be collected thereafter.

 
Investments in Securities. We periodically have invested in debt and equity securities. We generally have classified our purchased debt and equity securities as trading securities and included realized and unrealized gains and losses in earnings in accordance with applicable accounting rules. Additionally, we occasionally have received distributions of debt securities from our equity-method investees, and we have classified such distributed debt securities as held to maturity. The carrying values (in thousands) of our investments in debt and equity securities are as follows:
   
As of
June 30, 2009
   
As of
 December 31, 2008
 
Held to maturity:
           
Investments in debt securities of equity-method investees
  $ 3,142     $ 4,385  
Trading:
               
Investments in equity securities
    456       293  
Total investments in securities
  $ 3,598     $ 4,678  
 
Prepaid Expenses and Other Assets
 
Prepaid expenses and other assets include amounts paid to third parties for marketing and other services. We expense these amounts once services have been performed or marketing efforts have been undertaken. Also included are (1) various deposits (totaling $22.4 million as of June 30, 2009) required to be maintained with our third-party issuing bank partners and retail electronic payment network providers (including $7.1 million as of June 30, 2009 associated with our ongoing servicing efforts in the United Kingdom) and (2) vehicle inventory held by our buy-here, pay-here auto dealerships that we expense as cost of goods sold (within fees and related income on non-securitized earning assets on our consolidated statements of operations) as we earn associated sales revenues.
 
Deferred Costs
 
The principal components of deferred costs include unamortized costs associated with our (1) receivables origination activities and (2) issuances of convertible senior notes and other debt. We defer direct receivables origination costs for our credit card receivables and amortize them against credit card fee income on a straight-line basis over the privilege period, which is typically one year. We generally amortize deferred costs associated with our convertible senior notes into interest expense over the expected life of the instruments; however, we accelerate the recovery of an appropriate pro-rata portion of these costs against gains on repurchases of our convertible senior notes. On January 1, 2009, we were required to adopt a GAAP pronouncement that resulted in the reclassification of $4.8 million of deferred loan costs associated with our convertible senior notes as a reduction to equity, and as required, we have retrospectively applied this pronouncement within prior period consolidated financial statements as if the accounting pronouncement had applied in financial reporting periods prior to its January 1, 2009 effective date. See Note 9, “Convertible Senior Notes, Notes Payable and Other Borrowings,” for additional effects of our adoption of this pronouncement.
 
Income Taxes
 
We account for income taxes based on the liability method required by applicable accounting rules. Under the liability method, deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Additionally, we assess the probability that a tax position we have taken may not ultimately be sustained on audit, and we reevaluate our uncertain tax positions on a quarterly basis. We base these reevaluations on factors including, but not limited to, changes in facts and circumstances, changes in tax law, effectively settled issues under audit, and new audit activity.  A change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to tax expense. The accounting rules also require that we assess the need to establish a valuation allowance against deferred tax assets by evaluating available evidence to determine whether it is more likely than not that some or all of the deferred tax assets will be realized in the future.  To the extent there is insufficient positive evidence to support the realization of the deferred tax assets, we establish a valuation allowance.
 
We conduct business globally, and as a result, one or more of our subsidiaries files U.S. federal, state and/or foreign income tax returns. In the normal course of business we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as the United States, the United Kingdom, and the Netherlands. With a few exceptions, we are no longer subject to U.S. federal, state, local, or foreign income tax examinations for years prior to 2005. Currently, we are under audit by various jurisdictions for various years, including the Internal Revenue Service for the 2007 tax year. Although the audits have not been concluded, we do not expect any changes to the tax liabilities reported in those years. If any such changes arise, however, we do not expect them to be material.
 


 
We recognize potential accrued interest and penalties related to unrecognized tax benefits in income tax expense.  We recognized $0.7 million and $1.4 million in potential interest and penalties associated with uncertain tax positions during the three and six months ended June 30, 2009 and June 30, 2008.  To the extent such interest and penalties are not assessed as a result of a resolution of the underlying tax position, amounts accrued will be reduced and reflected as a reduction of income tax expense.
 
Our overall effective tax rates (computed considering results for both continuing and discontinued operations before income taxes in the aggregate) were 29.9% and 31.9% for the three and six months ended June 30, 2009, compared to 32.8% and 31.5% for the three and six months ended June 30, 2008. We have experienced no material changes in effective tax rates associated with differences in filing jurisdictions and changes in law between these periods, and the variations in effective tax rates between these periods are substantially related to the effects of a $10.7 million valuation allowance against income statement-oriented U.S. federal deferred tax assets during the three months ended June 30, 2009. As computed without regard to the effects of all U.S. federal, state, local and foreign tax valuation allowances taken against income statement-oriented deferred tax assets, our effective tax rates would have been 35.0% and 33.7% for the three and six months ended June 30, 2009, respectively, and 35.5% and 35.3% for the three and six months ended June 30, 2008, respectively.
 
In addition to the U.S. federal, state, local and foreign tax valuation allowances taken against income statement-oriented deferred tax assets in the three months ended June 30, 2009, we provided a $9.0 million valuation allowance against U.S. federal deferred tax assets related to the accumulated other comprehensive loss component within consolidated shareholders’ equity in the three months ended June 30, 2009.
 
Fees and Related Income on Non-Securitized Earning Assets
 
Fees and related income on non-securitized earning assets primarily include:  (1) lending fees associated with our retail and Internet micro-loan activities; (2) fees associated with our lower-tier credit card receivables during periods in which we have held them on balance sheet; (3) income associated with our investments in previously charged-off receivables; (4) gains and losses associated with our investments in securities; and (5) gross profits from auto sales within our Auto Finance segment.
 
The components (in thousands) of our fees and related income on non-securitized earning assets are as follows:
 
   
For the Three Months Ended
June 30,
   
For the Six Months Ended
June 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Retail micro-loan fees
  $ 16,566     $ 16,546     $ 33,242     $ 35,207  
Internet micro-loan fees
    15,104       10,052       26,892       17,770  
Fees on lower-tier credit card receivables while held on balance sheet
          2,761             5,403  
Income on investments in previously charged-off receivables
    3,846       11,029       8,165       29,826  
Gross profit on auto sales
    5,138       8,909       13,609       18,007  
Gains (losses) on investments in securities
    86       (1,090 )     163       (6,251 )
Other
    186       1,568       1,501       4,189  
Total fees and related income on non-securitized earning assets
  $ 40,926     $ 49,775     $ 83,572     $ 104,151  
 
Loss on Securitized Earning Assets
 
Loss on securitized earning assets is the net of (1) losses on retained interests in credit card receivables securitized and (2) returned-check, cash advance and certain other fees associated with our securitized credit card receivables, both of which are detailed (in thousands) in the following table.

   
For the Three Months Ended June 30,
   
For the Six Months Ended June 30,
 
   
2009
   
2008
   
2009
   
2008
 
Loss on retained interests in credit card receivables securitized
  $ (165,579 )   $ (68,160 )   $ (323,834 )   $ (33,838 )
Fees on securitized receivables
    3,891       7,499       10,120       15,770  
Total loss on securitized earning assets
  $ (161,688 )   $ (60,661 )   $ (313,714 )   $ (18,068 )


Recent Accounting Pronouncements
 
In June 2009, the Financial Accounting Standards Board (the “FASB”) issued new accounting rules that, in addition to requiring certain new securitization and structured financing-related disclosures that have been incorporated into our condensed consolidated financial statements as of and for the three and six months ended June 30, 2009, are expected to result in the consolidation of our securitization trusts onto our consolidated balance sheet effective as of January 1, 2010. As a result, cash and credit card receivables held by our securitization trusts and debt issued from those entities will be presented as assets and liabilities on our consolidated balance sheet effective on that date. Initial adoption of these new accounting rules is expected to have a material impact on our reported financial condition. However, because we have not yet decided whether to exercise an available option under these rules under which we would be required to value both the credit card receivables and debt outstanding within our securitization trusts at fair value, we are uncertain whether our adoption of the new rules will result in materially favorable or adverse effects on our reported financial condition. If we exercise the fair value option permitted under the new rules, we expect favorable effects on our reported financial condition; whereas, if we do not exercise the fair value option, we expect adverse effects on our reported financial condition. Moreover, after adoption of these new rules, we will no longer reflect our securitization trusts’ results of operations within losses on retained interests in credit card receivables securitized, but will instead report interest income and provisions for loan losses (as well as gains and/or losses associated with fair value changes should we exercise the fair value option) with respect to the credit card receivables held within our securitization trusts; similarly, we will begin to separately report interest expense (as well as gains and/or losses associated with fair value changes should we exercise the fair value option) with respect to the debt issued from the securitization trusts. Lastly, because we will account for our securitization transactions under these new accounting rules as secured borrowings rather than asset sales, we will begin to present the cash flows from these transactions as cash flows from financing activities, rather than as cash flows from investing activities.
 
In April 2009, the FASB issued new other-than-temporary impairment accounting rules for debt securities, indicating that a company should continue to assess its intent and ability to hold a security to maturity and to assess whether the fair value of a debt security is less than its amortized cost basis. If the fair value is determined to be less than the amortized cost basis, the company should make the determination of whether the impairment is other-than-temporary. The new rules also call for additional disclosure and are effective for periods ending after June 15, 2009. As of June 30, 2009, our investments in securities totaled only $3.6 million, and our adoption of these rules did not have a material impact on our condensed consolidated financial statements.
 
In March 2009, the Emerging Issues Task Force (the “EITF”) reached a consensus-for-exposure stating that at the date of issuance, a share-lending arrangement entered into on an entity's own shares in contemplation of a convertible debt offering or other financing is required to be measured at fair value and recognized as a debt issuance cost in the financial statements of the entity. The debt issuance cost shall be amortized using the effective interest method over the life of the financing arrangement as interest cost.  The EITF also reached a consensus-for-exposure that the loaned shares are excluded from basic and diluted earnings per share unless default of the share-lending arrangement occurs, at which time the loaned shares would be included in the common and diluted earnings per share calculations.  The EITF reached a consensus-for-exposure that this guidance would be effective for fiscal years, and interim periods within those years, beginning after December 15, 2009 and would be applied retrospectively to all arrangements outstanding on the date the issue becomes effective.  The consensus-for-exposure has been ratified by the FASB, the comment period has passed and the FASB is currently considering comments received on the draft. We currently are assessing the impact of this development on our convertible senior notes.

In June 2008, the FASB ratified a consensus reached by the EITF on the determination of whether an equity-linked financial instrument (or embedded feature) is indexed to an entity's own stock. After considering these new rules, we re-affirmed our conclusion reached in 2005 that we are not required to bifurcate and separately account for any of the embedded features within our convertible senior notes.
 
Also in June 2008, the FASB issued new rules addressing whether unvested equity-based awards are participating securities and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method described in previously issued accounting rules.  These new rules were effective for us January 1, 2009, and all prior period earnings per share data presented in financial statements have been adjusted retrospectively to conform to the new rules.  See Note 12, “Net Income Attributable to Controlling Interests Per Common Share,” for further information regarding the computation of earnings per share.
 
In May 2008, the FASB issued new rules addressing convertible instruments that may be settled in cash upon conversion (including partial cash settlement). These rules address instruments commonly referred to as Instrument C type instruments. Those instruments essentially require the issuer to settle the principal amount in cash and the conversion spread in cash or net shares at the issuer’s option.


 
These rules are effective for fiscal periods beginning after December 15, 2008, did not permit early application, and are required to be applied retrospectively to all periods presented. Our January 1, 2009 adoption of these rules resulted in an increase in shareholders’ equity of $56.1 million.  See the table below for a roll-forward of the impacts of our adoption of these rules.
 
 In December 2007, the FASB issued new accounting rules that significantly changed the accounting for business combinations. Under these rules, an acquiring entity is required, with limited exceptions, to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value. The rules change the accounting treatment for certain specific items, including:
 
 
Acquisition costs generally are expensed as incurred;
 
 
Noncontrolling interests (formerly known as minority interests) are valued at fair value at the acquisition date;
 
 
Acquired contingent liabilities are recorded at fair value at the acquisition date and subsequently measured at either the higher of such amount or the amount determined under previously existing rules for non-acquired contingencies;
 
 
In-process research and development is recorded at fair value as an indefinite-lived intangible asset at the acquisition date;
 
 
Restructuring costs associated with a business combination are generally expensed subsequent to the acquisition date; and
 
 
Changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally affect income tax expense.
 
The new rules also include a substantial number of new disclosure requirements. They apply prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, and earlier adoption was prohibited. While the new rules significantly affect the way that we will account for future acquisitions, we adopted them on January 1, 2009 with no material effects on our consolidated results of operations, financial position or cash flows.
 
Also in December 2007, the FASB issued new accounting requirements that establish new accounting and reporting standards for the noncontrolling interests in a subsidiary and for the deconsolidation of a subsidiary. Specifically, these rules require the recognition of any noncontrolling interests (minority interests) as equity in the consolidated financial statements and separate from the parent's equity. The amount of net income attributable to the noncontrolling interests is included in consolidated net income on the face of the income statement. The rules also clarify that changes in a parent's ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, the rules require that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss is measured using the fair value of the noncontrolling equity investment on the deconsolidation date. The rules also include expanded disclosure requirements regarding the interests of the parent and its noncontrolling interests. These new rules are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, and earlier adoption was prohibited. We adopted these rules on January 1, 2009 with no material effects (other than the effects of reclassification of our noncontrolling interests as a component of equity) on our consolidated results of operations, financial position or cash flows.


 
The following details (in thousands, except per share data) the effects of retrospective application of the new accounting rules concerning Instrument C convertible debt and noncontrolling interests:
 
   
As originally reported
   
Retrospective application of Instrument C convertible debt rules
   
Retrospective application of noncontrolling interests rules
   
As adjusted
 
Additional paid-in capital (as of December 31, 2008)
  $ 413,857     $ 108,714     $     $ 522,571  
Retained earnings (as of December 31, 2008)
  $ 505,728     $ (52,579 )   $     $ 453,149  
Total equity (as of December 31,2008)
  $ 665,844     $ 56,135     $ 24,878     $ 746,857  
Loss from continuing operations (for the three months ended June 30, 2008) (1)
  $ (42,906 )   $ (10,762 )   $ (518 )   $ (54,186 )
Net loss (for the three months ended June 30, 2008)
  $ (44,920 )   $ (10,762 )   $ (518 )   $ (56,200 )
Loss from continuing operations attributable to controlling interests per common share (for the three months ended June 30, 2008)—basic (1)
  $ (0.92 )   $ (0.21 )   $     $ (1.13 )
Loss from continuing operations attributable to controlling interests per common share (for the three months ended June 30, 2008)—diluted (1)
  $ (0.92 )   $ (0.21 )   $     $ (1.13 )
Net loss attributable to controlling interests per common share (for the three months ended June 30, 2008)—basic
  $ (0.96 )   $ (0.21 )   $     $ (1.17 )
Net loss attributable to controlling interests per common share (for the three months ended June 30, 2008)—diluted
  $ (0.96 )   $ (0.21 )   $     $ (1.17 )
Loss from continuing operations (for the six months ended June 30, 2008) (1)
  $ (37,788 )   $ (12,307 )   $ 1,501     $ (48,594 )
Net loss (for the six months ended June 30, 2008)
  $ (42,452 )   $ (12,307 )   $ 1,501     $ (53,258 )
Loss from continuing operations attributable to controlling interests per common share (for the six months ended June 30, 2008)—basic (1)
  $ (0.81 )   $ (0.24 )   $     $ (1.05 )
Loss from continuing operations attributable to controlling interests per common share (for the six months ended June 30, 2008)—diluted (1)
  $ (0.81 )   $ (0.24 )   $     $ (1.05 )
Net loss attributable to controlling interests per common share (for the six months ended June 30, 2008)—basic
  $ (0.91 )   $ (0.24 )   $     $ (1.15 )
 Net loss attributable to controlling interests per common share(for the six months ended June 30, 2008)—diluted
  $ (0.91 )   $ (0.24 )   $     $ (1.15 )
 
(1) Prior period “As originally reported” amounts have been restated to report the impact of discontinued operations.
 
3.      Discontinued Operations
 
In the May 2009, we discontinued our Retail Micro-Loans segment’s Arkansas operations based on ongoing regulatory opposition that we faced within that state; as such, our Arkansas retail micro-loan results of operations have been classified as discontinued operations for all periods presented and the remaining assets (principally net loans and fees receivable upon which we are collecting) and liabilities of these operations are identified as discontinued assets and liabilities on our condensed consolidated balance sheet. Reflecting both our discontinued Arkansas operations, as well as those of other Retail Micro-Loan segment states that we discontinued in prior reporting periods, the components (in thousands) of our discontinued operations are as follows:
 
         



   
For the Three Months Ended June 30,
   
For the Six Months Ended June 30,
 
   
2009
   
2008
   
2009
   
2008
 
Net interest income, fees and related income on non-securitized earning assets
  $ 375     $ 3,353     $ 1,684     $ 7,647  
Other operating expense
    863       5,680       2,021       12,920  
Estimated loss upon sale
    2,779       771       2,779       771  
Goodwill impairment
    3,483       —        3,483       1,132  
Loss before income taxes
    (6,750 )     (3,098 )     (6,599 )     (7,176 )
Income tax benefit
    2,363       1,084       2,310       2,512  
Net loss
  $ ( 4,387 )   $ (2,014 )   $ ( 4,289 )   $ (4,664 )
 
4.
Segment Reporting
 
We operate primarily within one industry consisting of five reportable segments by which we manage our business. Our five reportable segments are:  Credit Cards; Investments in Previously Charged-Off Receivables; Retail Micro-Loans; Auto Finance; and Other. We measure the profitability of our reportable segments based on their income after allocation of specific costs and corporate overhead. Overhead costs are allocated based on headcounts and other applicable measures to better align costs with the associated revenues, and there are no charges against segment operations for the internal (i.e., non-third-party) costs of capital that we have allocated to the segments. Summary operating segment information (in thousands) is as follows:
 
                                     
Three Months Ended June 30, 2009
 
Credit Cards
   
Investments in
Previously
Charged-Off
Receivables
   
Retail
Micro-Loans
   
Auto Finance
   
Other
   
Total
 
Net interest income, fees and related income (loss) on non-securitized earning assets
  $ (6,268 )   $ 3,743     $ 14,118     $ 9,414     $ 10,565     $ 31,572  
Total other operating (loss) income
  $ (111,950 )   $ 27     $     $ 90     $ 1     $ (111,832 )
(Loss) income from continuing operations before income taxes
  $ (176,765 )   $ (7,049 )   $ (16,549 )   $ (6,165 )   $ 4,773     $ (201,755 )
Loss from discontinued operations before income taxes
  $     $     $ (6,750 )   $     $     $ (6,750 )
Loans and fees receivable, gross
  $ 1,385     $     $ 33,492     $ 325,854     $ 28,045     $ 388,776  
Loans and fees receivable, net
  $ 1,039     $     $ 27,811     $ 260,968     $ 19,413     $ 309,231  
Total assets
  $ 609,806     $ 68,386     $ 66,793     $ 300,349     $ 61,021     $ 1,106,355  
                                                 
                                                 
Three Months Ended June 30, 2008
 
Credit Cards
   
Investments in
Previously
Charged-Off
Receivables
   
Retail
Micro-Loans
   
Auto Finance
   
Other
   
Total
 
Net interest income, fees and related income (loss) on non-securitized earning assets
  $ (5,353 )   $ 11,094     $ 14,728     $ 19,857     $ 7,052     $ 47,378  
Total other operating income
  $ 20,402     $ 225     $     $     $     $ 20,627  
Income (loss) from continuing operations before income taxes
  $ (88,038 )   $ 5,717     $ 2,583     $ (762 )   $ 119     $ (80,381 )
Loss from discontinued operations before income taxes
  $     $     $ (2,649 )   $     $ (449 )   $ (3,098 )
Loans and fees receivable, gross
  $ 30,842     $     $ 31,912     $ 387,137     $ 18,981     $ 468,872  
Loans and fees receivable, net
  $ 25,668     $     $ 26,934     $ 317,153     $ 13,673     $ 383,428  
Total assets
  $ 1,208,792     $ 38,299     $ 97,902     $ 395,595     $ 65,345     $ 1,805,933  
 

             



Six Months Ended June 30, 2009
 
Credit Cards
   
Investments in
Previously
Charged-Off
Receivables
   
Retail
Micro-Loans
   
Auto Finance
   
Other
   
Total
 
Net interest income, fees and related income (loss) on non-securitized earning assets
  $ (11,884 )   $ 7,948     $ 28,492     $ 27,998     $ 19,349     $ 71,903  
Total other operating (loss) income
  $ (220,937 )   $ 55     $     $ 403     $ 1     $ (220,478 )
(Loss) income from continuing operations before income taxes
  $ (354,790 )   $ (9,377 )   $ (17,627 )   $ (4,135 )   $ 8,331     $ (377,598 )
Loss from discontinued operations before income taxes
  $     $     $ (6,599 )   $     $     $ (6,599 )
Loans and fees receivable, gross
  $ 1,385     $     $ 33,492     $ 325,854     $ 28,045     $ 388,776  
Loans and fees receivable, net
  $ 1,039     $     $ 27,811     $ 260,968     $ 19,413     $ 309,231  
Total assets
  $ 609,806     $ 68,386     $ 66,793     $ 300,349     $ 61,021     $ 1,106,355  
                                                 
 

Six Months Ended June 30, 2008
 
Credit Cards
   
Investments in
Previously
Charged-Off
Receivables
   
Retail
Micro-Loans
   
Auto Finance
   
Other
   
Total
 
Net interest income, fees and related income (loss) on non-securitized earning assets
  $ (13,256 )   $ 30,031     $ 30,925     $ 35,669     $ 9,213     $ 92,582  
Total other operating income
  $ 134,767     $ 438     $     $ 196     $     $ 135,401  
Income (loss) from continuing operations before income taxes
  $ (87,979 )   $ 19,290     $ 6,408     $ (4,522 )   $ (3,680 )   $ (70,483 )
Loss from discontinued operations before income taxes
  $     $     $ (6,227 )   $     $ (949 )   $ (7,176 )
Loans and fees receivable, gross
  $ 30,842     $     $ 31,912     $ 387,137     $ 18,981     $ 468,872  
Loans and fees receivable, net
  $ 25,668     $     $ 26,934     $ 317,153     $ 13,673     $ 383,428  
Total assets
  $ 1,208,792     $ 38,299     $ 97,902     $ 395,595     $ 65,345     $ 1,805,933  
 
5.    Treasury Stock Transactions
 
At our discretion, we use treasury shares to satisfy option exercises and restricted stock vesting, and we use the cost approach when accounting for the repurchase and reissuance of our treasury stock. We reissued treasury shares totaling 8,006 and 111,644 during the three and six months ended June 30, 2009 at gross costs of $0.1 million and $2.0 million, respectively, in satisfaction of restricted stock vestings. We also effectively purchased shares totaling 2,939 and 36,888 during the three and six months ended June 30, 2009 at a gross cost of $0.01 million and $0.11 million, respectively, by having employees who were vesting in their restricted stock grants exchange a portion of their stock for our payment of required minimum tax withholdings.
 
6.    Investments in Equity-Method Investees
 
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, 2009
   
As of December 31, 2008
 
Securitized earning assets
  $ 60,819     $ 116,510  
Total assets
  $ 62,345     $ 118,962  
Total liabilities
  $ 1,565     $ 1,967  
Members’ capital
  $ 60,779     $ 116,995  




   
For the Three Months Ended June 30,
   
For the Six Months Ended June 30,
 
   
2009
   
2008
   
2009
   
2008
 
Net interest income, fees and related income on non-securitized earning assets
  $     $     $     $ 1  
Fees and related (loss) income on securitized earning assets
  $ (22,841 )   $ 15,929     $ (31,011 )   $ 33,231  
Total other operating (loss) income
  $ (21,745 )   $ 18,210     $ (28,605 )   $ 37,866  
Net (loss) income
  $ (15,359 )   $ 17,055     $ (23,000 )   $ 35,649  
 
In May 2009, we recognized a gain of $21.0 million that is separately classified on our condensed consolidated statement of operations associated with our buy-out of all other members of our then-longest standing equity-method investee. Subsequent to this buy-out event, we have included the operations of this former equity-method investee and its underlying assets and liabilities within our consolidated results of operations and condensed consolidated balance sheet items, as opposed to the income from equity-method investees and investment in equity-method investee categories.
 
7.     Securitizations and Structured Financings
 
As of June 30, 2009, substantially all of our credit card receivables had been sold to securitization trusts. Within this Report, we refer to such transfers of financial assets to off-balance-sheet securitization trusts as “securitizations,” as contrasted with our use of the term “structured financings” to refer to non-recourse, on-balance-sheet debt financings.
 
 Securitizations
 
Our credit card receivables securitization transactions do not affect the relationship we have with our customers, and we continue to service the securitized credit card receivables. Our ownership of retained interests in our securitized credit card receivables, the guarantee and note purchase agreements with respect to securitizations of acquired credit card receivables portfolios as described in Note 11, “Commitments and Contingencies,” and our obligation to service securitized receivables represent our only continuing involvement with our securitized credit card receivables.
 
The table below summarizes (in thousands) our securitization activities for the periods presented. As with other tables included herein, it does not include the securitization activities of our equity-method investees:
 
   
For the Three Months Ended June 30,
   
For the Six Months Ended June 30,
 
   
2009
   
2008
   
2009
   
2008
 
Gross amount of receivables securitized at period end
  $ 1,984,497     $ 3,002,547     $ 1,984,497     $ 3,002,547  
Proceeds from new transfers of financial assets to securitization trusts
  $ 213,102     $ 362,939     $ 304,728     $ 749,926  
Proceeds from collections reinvested in revolving-period securitizations
  $ 148,443     $ 371,482     $ 275,462     $ 789,899  
Excess cash flows received on retained interests
  $ 24,826     $ 37,172     $ 55,484     $ 89,834  
Loss on retained interests in credit card receivables securitized
  $ (165,579 )   $ (68,160 )   $ (323,834 )   $ (33,838 )
Fees on securitized receivables
    3,891       7,499       10,120       15,770  
Total loss on securitized earning assets
  $ (161,688 )   $ (60,661 )   $ (313,714 )   $ (18,068 )
 
The investors in our securitization transactions have no recourse against us for our customers’ failure to pay their credit card receivables. However, most of our retained interests are subordinated to the investors’ interests until the investors have been fully paid.
 
 Generally, we include all collections received from the cardholders underlying each securitization in our securitization cash flows. This includes collections from the cardholders for interest, fees and other charges on the accounts and collections from those cardholders repaying the principal portion of their account balances. In general, the cash flows are then distributed to us as servicer in the amounts of our contractually negotiated servicing fees, to the investors as interest on their outstanding notes, to the investors to repay any portion of their outstanding notes that becomes due and payable, and to us as the seller to fund new purchases. Any collections from cardholders remaining each month after making the various payments noted above generally are paid to us on our retained interests.
 
We carry the retained interests associated with the credit card receivables we have securitized at estimated fair market value within the securitized earning assets category on our consolidated balance sheets, and because we classify them as trading securities and have made a fair value election with respect to them, we include any changes in fair value in income. Because


quoted market prices for our retained interests generally are not available, we estimate fair value based on the estimated present value of future cash flows using our best estimates of key assumptions.
 
The measurements of retained interests associated with our securitizations are dependent upon our estimate of future cash flows using the cash-out method. Under the cash-out method, we record the future cash flows at a discounted value. We discount the cash flows based on the timing of when we expect to receive the cash flows. We base the discount rates on our estimates of returns that would be required by investors in investments with similar terms and credit quality. We estimate yields on the credit card receivables based on stated annual percentage rates and applicable terms and conditions governing fees as set forth in the credit card agreements, and we base estimated default and payment rates on historical results, adjusted for expected changes based on our credit risk models. We typically charge off credit card receivables when the receivables become 180 days past due, although earlier charge offs may occur specifically related to accounts of bankrupt or deceased customers. We generally charge off bankrupt and deceased customers’ accounts within 30 days of verification.
 
Our retained interests in credit card receivables securitized (labeled as securitized earning assets on our consolidated balance sheets) include the following (in thousands):
 
   
June 30,
2009
   
December 31,
2008
 
I/O strip
  $ 134,384     $ 132,360  
Accrued interest and fees
    13,887       22,723  
Net servicing liability
    (23,008 )     (10,670 )
Amounts due from securitization
    54,929       12,369  
Fair value of retained interests
    292,641       659,156  
Issuing bank partner continuing interests
    (1,467 )     (2,145 )
Securitized earning assets
  $ 471,366     $ 813,793  
 
The I/O strip reflects the fair value of our rights to future income from securitizations arranged by us and includes certain credit enhancements. Accrued interest and fees represent the estimated collectible portion of fees earned but not billed to the cardholders underlying the credit card receivables portfolios we have securitized. Amounts due from securitization represent cash flows that are distributable to us from the prior month’s cash flows within each securitization trust; we generally expect to receive these amounts within 30 days from the close of each respective month. Lastly, we measure retained interests at fair value as set forth within the fair value of retained interests category in the above table.
 
 The net servicing liability in the above table reflects on a net basis, for those securitization structures for which servicing compensation is not adequate, the fair value of the net costs to service the receivables above and beyond the net servicing income we expect to receive from the securitizations. We initially record a servicing asset or a servicing liability associated with a securitization structure when the servicing fees we expect to receive do not represent adequate compensation for servicing the receivables. We record these initial servicing assets and servicing liabilities at estimated fair market value, and then we evaluate and update our servicing asset and servicing liability fair value estimates at the end of each financial reporting period. We present the net of our servicing assets and liabilities (i.e., a net servicing liability) in the above table, and we include changes in net servicing liability fair values within loss on securitized earning assets on our consolidated statements of operations (and more specifically as a component of loss on retained interests in credit card receivables securitized). Because quoted market prices generally are not available for our servicing liabilities, we estimate fair values based on the estimated present value of future cash flows.
 
The primary risk inherent within the determination of our net servicing liability is our ability to control our servicing costs relative to the servicing revenues we receive from our securitization trusts. We do not consider our servicing revenue stream to be a particularly significant risk because, with respect to a substantial majority of the receivables we service, even in the event of early amortization of our securitization facilities, we will continue to receive servicing revenues through the securitization waterfalls in the same manner and in no lower rate of compensation than we do currently. We have no instruments that we use to mitigate the income statement effects of changes in the fair value of our net servicing liability.
 
Reflected within servicing income on our consolidated statements of operations are servicing income (fees) we have received from both our securitization trusts and equity-method investees that have contracted with us to service their assets. The servicing fees received exclusively from our securitization trusts were $31.5 million, $44.9 million, $70.9 million and $93.2 million for the three and six months ended June 30, 2009 and 2008, respectively. Changes in our net servicing liability for each financial reporting period presented are summarized (in millions) in the following table:

 

   
For the Three Months Ended
 
   
June 30,
2009
   
December 31,
2008
   
June 30,
2008
 
Net servicing liability at beginning of period
  $ 13.7     $ 6.4     $ 21.3  
Changes in fair value of net servicing liability due to changes in valuations inputs (including receivables levels within securitization trusts, length of servicing period, and servicing costs)
    9.3       4.3       (2.7 )
Balance at end of period
  $ 23.0     $ 10.7     $ 18.6  
 
Changes in any of the assumptions used to value our retained interests in our securitizations could affect our fair value estimates. The weighted-average key assumptions we used to estimate the fair value of our retained interests in the receivables we have securitized are presented below:

   
As of
June 30,
2009
   
As of
December 31,
2008
   
As of
June 30,
2008
 
Net collected yield (annualized)
    31.7 %     38.7 %     36.5 %
Principal payment rate (monthly)
    4.2 %     4.2 %     5.2 %
Expected principal credit loss rate (annualized)
    17.6 %     20.8 %     16.1 %
Residual cash flows discount rate
    30.5 %     22.6 %     23.7 %
Servicing liability discount rate
    14.0 %     14.0 %     14.0 %
Life (in months) of securitized credit card receivables
    23.8       23.8       19.2  
 
The trending decrease in our net collected yield and principal payment rates is a product of both (1) a general decline in payments being made by consumers and the expectation that this trend will continue and (2) a reduction in the relative mix of our lower-tier credit card receivables, which have higher yields and charge offs and lower payment rates than our more traditionally securitized upper-tier credit card receivables. Also contributing to trending lower net collected yield assumptions are (1) the adverse effects of recent account closure actions on annual, monthly maintenance and certain other recurring types of credit card fees associated with open credit card accounts and (2) fee credit programs we have used at increasing levels to encourage consumers to make payments at higher levels within a distressed economy and elevated late stage delinquencies and the expectation that these delinquencies will continue (i.e., as we do not assess fees and finance charge billings for credit card receivables in the later stages of delinquency). The modest reduction in the expected principal credit loss rate at June 30, 2009 relative to December 31, 2008 reflects charge offs in the six months ended June 30, 2009 of a significant number of accounts closed in the fall of 2008 (i.e., customers who have chosen not to pay because we closed their accounts in the fall of 2008 charged off fairly rapidly as anticipated leaving a mix at June 30, 2009 of better quality account relationships).
 
The increase in the June 30, 2009 residual cash flows discount rate relative to December 31, 2008 and June 30, 2008 reflects a decline in our overall collateral enhancement levels, which has resulted from a change in mix of the managed receivables underlying our securitization trusts toward receivables that serve as collateral to support draws that have been made against our highest advance rate securitization facility within our upper-tier originated portfolio master trust. Also adversely affecting our June 30, 2009 residual cash flows discount rate is an assumption that investors within certain of our securitization trusts will require higher returns (i.e., wider spreads above the one-month LIBOR interest rate index applicable in most of our securitizations) based on second quarter 2009 credit rating agency downgrades of several of our securitization trust bonds (in the case of certain of our securitization trusts to below investment grade for every tranche of the trusts’ outstanding bonds). Our retained interests valuation models recognize in computing the residual cash flows discount rate that variations in collateral enhancement levels affect the returns that investors require on residual interests within securitization structures; specifically, with lower levels of collateral enhancement (and hence greater investment risk), investors in securitization structure residual interests will require higher investment returns, and with higher levels of collateral enhancement (and hence lower investment risk), investors in securitization structure residual interests will require lower investment returns.
 
The following illustrates the hypothetical effect on the June 30, 2009 value of our retained interests in credit card receivables securitized (dollars in thousands) of an adverse 10 and 20 percent change in our key valuation assumptions:

 

   
Assumptions
and valuation
effects of
changes
thereto
 
Net collected yield (annualized)
    31.7 %
Impact on fair value of 10% adverse change
  $ (44,158 )
Impact on fair value of 20% adverse change
  $ (88,345 )
Payment rate (monthly)
    4.2 %
Impact on fair value of 10% adverse change
  $ (15,334 )
Impact on fair value of 20% adverse change
  $ (32,019 )
Expected principal credit loss rate (annualized)
    17.6 %
Impact on fair value of 10% adverse change
  $ (25,311 )
Impact on fair value of 20% adverse change
  $ (50,624 )
Residual cash flows discount rate
    30.5 %
Impact on fair value of 10% adverse change
  $ (10,523 )
Impact on fair value of 20% adverse change
  $ (20,330 )
Servicing liability discount rate
    14.0 %
Impact on fair value of 10% adverse change
  $ (1,331 )
Impact on fair value of 20% adverse change
  $ (1,975 )
 
    These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10% and a 20% variation in assumptions generally cannot be extrapolated because the relationship of a change in assumption to the change in fair value of our retained interests in credit card receivables securitized may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the retained interests is calculated without changing any other assumptions; in reality, changes in one assumption may result in changes in another. For example, increases in market interest rates may result in lower prepayments and increased credit losses, which could magnify or counteract the sensitivities.
 
Our managed receivables portfolio underlying our securitizations (including only those of our consolidated subsidiaries) is comprised of our retained interests in the credit card receivables we have securitized and other investors’ shares of these securitized receivables. The investors’ shares of securitized credit card receivables are not our assets. The following table summarizes (in thousands) the balances included within, and certain operating statistics associated with, our managed receivables portfolio underlying both the outside investors’ shares of and our retained interests in our credit card receivables securitizations.
 
   
June 30,
2009
   
December 31,
2008
 
Total managed principal balance
  $ 1,745,827     $ 2,157,626  
Total managed finance charge and fee balance
    238,670       485,453  
Total managed receivables
    1,984,497       2,643,079  
Cash collateral at trust and amounts due from QSPEs
    482,606       125,051  
Total assets held by QSPEs
    2,467,103       2,768,130  
QSPE-issued notes to which we are subordinated (1)
    (1,790,376 )     (1,728,996 )
Face amount of residual interests in securitizations
  $ 676,727     $ 1,039,134  
Receivables delinquent—60 or more days
  $ 313,493     $ 458,795  
Net charge offs during each respective three-month period ending
  $ 159,015     $ 102,113  
 
1) Includes Class B notes issued out of our Embarcadero Trust owned by one of our consolidated subsidiaries and a third party that holds a noncontrolling interest in one of our subsidiaries.
 

    Data in the above table are aggregated from the various QSPEs that underlie our securitizations. QSPE-issued notes (in millions) to which we are subordinated within our various securitization structures are our most significant source of liquidity and include the following:
 
   
June 30,
 2009
   
December 31, 2008
 
Six-year term securitization facility (expiring October 2010) issued out of our upper-tier originated portfolio master trust (1)
  $ 264.0     $ 264.0  
Two-year variable funding securitization facility with renewal options (expiring January 2010) issued out of our upper-tier originated portfolio master trust
    650.0       370.0  
Five-year term securitization facility (expiring October 2009) issued out of our upper-tier originated portfolio master trust
    286.6       286.6  
Two-year variable funding securitization facility (expiring October 2010) issued out of our lower-tier originated portfolio master trust
    154.5       260.5  
Two-year amortizing securitization facility (expiring December 2009) issued out of our lower-tier originated portfolio master trust
    62.5       137.5  
Multi-year variable funding securitization facility (expiring September 2014) issued out of the trust associated with our securitization of $92.0 million and $72.1 million (face amount) in credit card receivables acquired in 2004 and 2005, respectively
    11.0       16.4  
Amortizing term securitization facility (denominated and referenced in U.K. sterling and expiring April 2014) issued out of our U.K. Portfolio securitization trust
    312.2       310.3  
Ten-year amortizing term securitization facility issued out of our Embarcadero Trust, including our subsidiary’s ownership in the Class B notes (expiring January 2014)
    49.6       83.7  
Total QSPE-issued notes to which we are subordinated
  $ 1,790.4     $ 1,729.0  
 
(1) On July 1, 2009, we purchased at a significant discount from face amount all of the notes associated with our six-year term securitization facility that had been issued to a third party out of our upper-tier originated portfolio master trust. This six-year term securitization facility series was subsequently cancelled. We currently are evaluating the effects of this transaction on our financial position and results of operations as of and for the period ending September 30, 2009.
 
Because we hold residual retained interests in our securitization trusts, we remain subject to largely the same types and levels of risks to which we would be subject if we did not transfer our credit card receivables to our securitization trusts. These risks include:  interest rate risks; payment, default and charge-off risks; regulatory risks related to the origination and servicing of the receivables; credit card fraud risks; risks associated with employment base and infrastructure that we maintain for servicing the receivables; and risks associated with the availability and cost of funding the securitizations.  Adverse developments in one or more of the factors underlying these risks could result in an early amortization of one or more of the outstanding series of notes issued by our securitization trusts. Moreover, as these notes mature, there can be no assurance that we will be able to renew or replace them, or if renewed or replaced, that the terms will be as favorable as the terms that currently exist.
 
Except as described below or as set forth in Note 11, “Commitments and Contingencies,” concerning guarantee agreements and note purchase agreements associated with our securitization of certain acquired credit card receivables portfolios, we have no explicit or implicit arrangements under which we have provided or could be called upon to provide financial support to our securitization trusts or their beneficiaries, and there are no events or circumstances that could expose us to losses in excess of the carrying amounts of our retained interests. However, as servicer for the receivables held in our securitization trusts, we have significant continuing involvement in overseeing the receivables and their collection, and we perform a variety of functions that benefit our securitization trusts (and their beneficiaries, including our transferor subsidiaries). We incur significant costs associated with this continuing involvement (costs that are reflected in the determination of our net servicing liability in cases where we do not receive adequate compensation for our servicing obligations).
 
As servicer, we provide call center customer support and collections services on behalf of the securitization trusts. The objective of the collections process is to maximize the amount collected in the most cost effective and customer-friendly manner possible. To fulfill this objective, on behalf of the securitization trusts (and their beneficiaries, including our transferor subsidiaries), we employ the traditional cross-section of letters and telephone calls to encourage payment, and we exercise broad discretion under our credit card servicing guidelines to apply customer payments to finance charges or principal; to waive interest and fees or otherwise provide promotional or matching payments and other credits (including principal credits) to avoid negative amortization and to encourage prompter and larger payments; to send out mailings for promotional marketing-oriented collection programs or to facilitate balance transfer marketing programs on behalf of our bank partners; and to re-age customer accounts that


meet applicable regulatory qualifications for re-aging or otherwise adjust billing cycles and practices to reflect operational objectives. These and other collection-oriented techniques and practices have varying effects on the statistical performance of the receivables held by our securitization trusts and thereby have varying effects on the beneficiaries of the securitization trusts, including our transferor subsidiaries.
 
Structured Financings
 
Beyond the securitizations discussed above, we have entered into certain non-recourse, asset-backed structured financing transactions within our Auto Finance segment. We consolidate the assets (auto finance receivables, which are a subset of loans and fees receivable, net on our consolidated balance sheets) and debt (classified within notes payable and other borrowings on our consolidated balance sheets) associated with these structured financings on our balance sheet because the transactions do not meet the legal isolation and other off-balance sheet securitization criteria for de-recognition and because we are the primary beneficiary of the structured financing transactions. Structured financing notes outstanding, the carrying amount of the auto finance receivables that provide the exclusive means of repayment for the notes (i.e., lenders have reco