Business context and reporting period
CompuCredit Holdings Corporation (the registrant named in this filing) filed this unaudited Form 10-Q for the quarter ended September 30, 2012. The company served financially underserved, subprime consumers through credit-card and other credit products and auto finance. Its two continuing reportable segments were Credit Cards and Other Investments and Auto Finance. The filing does not identify the registrant as Atlanticus Holdings Corp.
In August 2012, the company sold its Investments in Previously Charged-Off Receivables segment, including balance-transfer card operations, and presented the sold businesses’ results as discontinued operations.
Financial performance and position
Amounts below are in millions of dollars unless otherwise stated. Net income includes discontinued operations, including the 2012 sale gain.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Interest income | $20.4 | $35.1 | $68.8 | $115.4 |
| Net interest, fees and related income on earning assets, after charge-offs and provision | $2.5 | $11.4 | $15.7 | $47.5 |
| Loss from continuing operations | $(11.9) | $(4.7) | $(26.1) | $3.4 |
| Income from discontinued operations | $44.8 | $6.1 | $48.6 | $128.6 |
| Net income attributable to controlling interests | $33.2 | $1.7 | $23.0 | $130.9 |
| Basic earnings per share attributable to controlling interests | $1.72 | $0.08 | $1.09 | $4.85 |
The Q3 2012 discontinued-operations result included a $49.6 million after-expense gain on the sale. The filing does not provide a conventional consolidated profit-margin measure.
- Cash flow, nine months: Operating cash flow was $26.6 million (down from $93.2 million); investing activities provided $162.2 million (down from $344.2 million); financing activities used $286.0 million (versus $406.6 million used). Unrestricted cash fell $97.0 million to $47.9 million.
- Liquidity and balance sheet, September 30: Unrestricted cash was $47.9 million and restricted cash $12.9 million, versus $144.9 million and $23.8 million, respectively, at December 31, 2011. Total assets were $406.6 million, liabilities $389.1 million and total equity $17.5 million.
- Debt: The balance sheet reported $20.2 million of notes payable at face value, $7.4 million of structured-financing notes at face value, $167.5 million of structured-financing notes at fair value and $95.2 million of convertible notes at carrying value. The company repaid $83.5 million face amount of 3.625% convertible notes in May 2012; $139.5 million face amount of 5.875% notes remained.
- Portfolio and credit indicators: Managed credit-card receivables were $326.6 million at quarter-end, down from $540.0 million a year earlier; managed auto-finance receivables were $67.9 million, down from $99.2 million. Credit-card managed receivables 30-or-more-days delinquent were 11.0%, compared with 12.6% a year earlier; the auto-finance rate was 13.3%, compared with 11.9%.
Material changes versus the prior comparable period
- Interest income and net interest, fees and related income declined substantially, which management attributed mainly to continuing liquidation of credit-card and auto-finance receivables.
- Continuing operations reported losses in Q3 and the first nine months of 2012, versus a smaller Q3 loss and nine-month income in 2011. The reported 2012 net profit was driven by discontinued operations and, especially, the charged-off receivables business sale gain.
- Interest expense declined as receivables-backed debt amortized and convertible notes were repurchased or repaid. Operating expenses also declined, reflecting reduced staffing, servicing, marketing and other costs, though management said fixed overhead remained difficult to reduce in line with shrinking portfolios.
- Equity in income of equity-method investees fell to $0.4 million in Q3 and $9.9 million for the nine months, from $6.6 million and $28.8 million, respectively, in 2011. Management cited a large one-time gain recognized by an investee in 2011 and expected further gradual declines absent new investment.
- Total assets fell from $647.9 million at year-end 2011 to $406.6 million at September 30, 2012. In September, the company repurchased and retired 8.25 million shares for $82.5 million, or $10 per share.
Outlook, commentary and risks
- No numerical earnings or revenue guidance was provided. Management expected interest income and receivables to continue declining absent portfolio acquisitions, and anticipated that credit-card and auto-finance portfolios would keep liquidating. It described CAR auto-finance operations as performing well, while legacy ACC and JRAS portfolios were expected to modestly weigh on segment results.
- Management said liquidity markets remained difficult and that it was managing on the assumption that they would not return to traditional levels in the near term. The company was focused on reducing overhead, de-leveraging and maximizing shareholder value; it might pursue acquisitions, investments, debt or share repurchases, or dividends if terms were attractive and liquidity allowed.
- After quarter-end, the company received $10.0 million as compensation for excess servicing costs; management said it would report the payment as Q4 2012 servicing income.
- The $130.5 million charged-off receivables sale price included $106.7 million cash and a $13.0 million note at closing, subject to escrow and indemnification provisions, plus up to $10.8 million contingent consideration tied to performance targets through December 31, 2014. The contingent amount was not recognized as income at filing.
- Key risks include subprime borrower credit performance, portfolio contraction, limited and costly financing, dependence on bank and servicing relationships, regulatory and litigation exposure, uncertain fair-value estimates, and the ability to reduce fixed costs. Fair values rely on Level 3 assumptions about yields, payment rates, credit losses, servicing costs and discount rates.
- A North Carolina purported class action related to former payday-lending operations remained pending; the court denied a motion to compel arbitration and granted class certification in January 2012. Plaintiffs sought damages of up to $75,000 per class member plus attorneys’ fees; the company said it was vigorously defending the case.
- Other exposures include a $12.0 million potential penalty for early termination of its U.S. processing agreement and unresolved tax positions, including IRS audits of prior-year net operating-loss carrybacks. Management said it did not currently expect contingent commitments to require material payments.
Important facts for investors to verify
- Confirm the registrant identity and any corporate name history: this filing is for CompuCredit Holdings Corporation, notwithstanding the request metadata’s Atlanticus Holdings Corp. name.
- Separate continuing operating performance from discontinued operations: the 2012 reported profit included the $49.6 million sale gain, while continuing operations remained loss-making.
- Review cash availability and subsidiary-level restrictions, particularly as unrestricted cash declined and the company continued to repay debt and repurchase shares.
- Assess the realizability of Level 3 receivable fair values and the sensitivity of earnings and equity to changes in collection, loss, payment and discount-rate assumptions.
- Track the charged-off receivables sale escrow, indemnity obligations and contingent consideration, along with the class-action case and uncertain tax positions.