Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2009, for CompuCredit Holdings Corporation (formerly CompuCredit Corporation). On June 30, 2009, the company completed a reorganization where CompuCredit Corporation became a wholly-owned subsidiary of the new holding company. The company operates in the financially underserved consumer credit market, offering credit cards, micro-loans, auto finance, and debt collection services. The reporting period was significantly impacted by the global economic downturn, liquidity market dislocations, and the company's strategic decision to curtail marketing and reduce credit lines to preserve capital.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2009 | Six Months Ended June 30, 2009 | Three Months Ended June 30, 2008 | Six Months Ended June 30, 2008 |
|---|---|---|---|---|
| Net Loss (Attributable to Controlling Interests) | $(134.3) million | $(246.9) million | $(55.7) million | $(54.8) million |
| Loss Per Share (Diluted) | $(2.81) | $(5.18) | $(1.17) | $(1.15) |
| Total Interest Income | $19.2 million | $39.3 million | $26.3 million | $51.3 million |
| Fees and Related Income (Non-Securitized) | $40.9 million | $83.6 million | $49.8 million | $104.2 million |
| Loss on Securitized Earning Assets | $(161.7) million | $(313.7) million | $(60.7) million | $(18.1) million |
| Provision for Loan Losses | $18.6 million | $30.8 million | $15.7 million | $35.9 million |
| Cash and Cash Equivalents (End of Period) | $102.6 million | $102.6 million | $152.8 million | $152.8 million |
| Total Assets | $1,106.4 million | $1,106.4 million | $1,805.9 million | $1,805.9 million |
| Total Liabilities | $613.4 million | $613.4 million | $1,059.0 million (approx) | $1,059.0 million (approx) |
| Shareholders' Equity | $477.8 million | $477.8 million | $722.0 million | $722.0 million |
Note: Prior period figures have been adjusted for discontinued operations and new accounting pronouncements.
Material Changes vs. Prior Period
- Significant Increase in Losses: Net loss attributable to controlling interests increased by approximately 141% for the three months and 350% for the six months compared to the prior year periods. This is primarily driven by a massive increase in the "Loss on securitized earning assets."
- Loss on Securitized Assets: The loss on retained interests in credit card receivables securitized surged to $165.6 million (Q2 2009) from $68.2 million (Q2 2008). This was caused by adverse changes in valuation assumptions (higher discount rates, lower payment rates), account closures, and credit line reductions.
- Goodwill Impairment: The company recorded a $20.0 million goodwill impairment charge in Q2 2009 related to the Retail Micro-Loans segment, following the decision to discontinue operations in Arkansas.
- Revenue Decline: Total interest income and fees on non-securitized assets declined due to the liquidation of receivables portfolios, reduced marketing, and the cessation of new account originations.
- Asset Base Contraction: Total assets decreased by approximately $419 million from December 31, 2008, to June 30, 2009, reflecting the liquidation of securitized and non-securitized earning assets.
Guidance, Outlook, and Risks
- Liquidity Constraints: Management emphasizes that the global liquidity crisis has severely restricted access to capital. The company is managing liquidity by marketing only at test levels, reducing credit lines, and closing accounts. There is uncertainty regarding the renewal of Auto Finance facilities maturing in September 2009.
- Accounting Changes (2010): New FASB rules effective January 1, 2010, will require the consolidation of securitization trusts. Management is uncertain if this will have favorable or adverse effects depending on whether they exercise the fair value option, but it will materially impact reported financial condition.
- Discontinued Operations: The Arkansas retail micro-loan operations were discontinued in Q2 2009 due to a hostile regulatory environment. Results are now reported as discontinued operations.
- Legal Proceedings: Significant ongoing litigation includes a class action regarding payday lending practices in North Carolina, a dispute with Columbus Bank and Trust regarding rebates and account management, and a securities class action alleging false statements. Additionally, an arbitration dispute with Encore Capital Group regarding a forward flow contract for charged-off receivables remains unresolved.
- Outlook: The company expects continued net liquidations in credit card receivables and modest further GAAP losses in the Auto Finance segment for the remainder of 2009. Profitability is expected to be pressured by fixed costs that cannot be reduced as rapidly as the contracting receivables base.
Key Facts for Investor Verification
- Reorganization Status: Verify the completion of the holding company reorganization on June 30, 2009, and the subsequent trading of stock under the symbol "CCRT."
- Securitization Valuation Sensitivity: Review the sensitivity analysis in Note 7 regarding retained interests. A 10% adverse change in net collected yield would reduce the fair value of retained interests by approximately $44.2 million.
- Encore Dispute Impact: Assess the financial impact of the dispute with Encore Capital Group, which has halted the purchase of charged-off receivables, forcing the company to hold these assets and recognize income on a cost-recovery basis, delaying profitability.
- Debt Maturities: Confirm the status of Auto Finance facilities maturing in September 2009 ($89.0 million) and the company's ability to refinance them given current market conditions.
- Goodwill Impairment: Verify the $20.0 million impairment charge related to the Retail Micro-Loans segment and the potential for further impairments if the regulatory environment worsens in other states.